Tech Giants - A Challenge to the Banking System of India?

Indian economy has emerged as one of the digitally advanced nation in the last few years. Government’s “Digital India” initiative in 2015 along with growth of high-speed connectivity, massive use of smartphones, rationalizing regulations to improving infrastructure made India second largest digital adopter among 17 major digital economies according to Mckinsey report ‘Digital India: Technology to transform a connected nation’. Mckinsey’s Country Digital Adoption Index showed India’s score rose by 90% between 2014 to 2017 (See chart) The index covers digital foundation (cost, speed, and reliability of internet service); digital reach (number of mobile devices, app downloads, and data consumption), and digital value, (how much consumers engage online by chatting, tweeting, shopping, or streaming). While the growth was impressive, India scores 32 on a scale of 100—so there remains ample room to grow as per the Mckinsey report.   

Source: Mckinsey report ‘Digital India: Technology to transform a connected nation’

With digital growth gaining pace in India, many technology (tech) giants like Google, Mi Credit, and Phonepe presence is also strengthening in the country. These giants offer wide range of the digital financial services including money transfer, bill payments, instant loan and credit cards etc.  Online services are boon to citizens as they can conduct financial transactions in a quick and hassle-free manner. With the penetration of the tech giants and internet connectivity in the remote locations, individuals can now transact from any part of the country with the click of the button helping to reduce the rural-urban divide. This can be beneficial to expand the financial inclusion in the country. (See chart)

Benefits of presence of tech giants

For illustrative purpose only

The comfort and merits of digitalization are many as seen above and the surge in the online transaction and payment mechanism amid the pandemic also showed people are also making optimum use of it. Another key area in the digital landscape which has huge potential is India’s digital loan market. Digital lending is expected to treble to $350 billion by 2023 and reach a total of $1 trillion in the five years since 2019, according to estimates from the Boston Consulting Group. Currently, many tech companies are already offering instant and easy credit to people. Like for instance, Alphabet Inc.’s Google through its Google pay app offers instant pre-approved loan to its customers. Google Pay is a facilitator between individual and the lending partners i.e., banks. Customers get customised loan amount from their banks with minimal paperwork. After the acceptance of the bank’s terms and conditions, the loan amount is instantly credited to individuals bank account. In addition, Facebook recently concluded $100M in cash grants and ad credits to help small businesses across over 30 countries through our Small Business Grants Program. Xiaomi via Mi Credit offers instant personal loans with easy application process. The company also offers gold loan, gift card loans (shop online with low-cost EMI), SME loans and credit line cards. Xiaomi has partnered with many big brands such as Aditya Birla capital, creditvidya, early salary, Experian, Equifax among others to offer these services.   

While the presence of the tech giants gave easy access to credit but it also increased competition for the traditional lenders. It also compelled banks to spend more on technology, build their technological capabilities and at the same time hire people with the skills needed to start and accelerate a digital transformation. The same was emphasised by the Reserve Bank of India (RBI) in its half yearly financial stability report, July 2021. RBI said that while the presence of tech giants can support financial inclusion there are concerns about a level playing field with banks, operational risk, too-big-to-fail issues, challenges for antitrust rules, cyber security and data privacy.  Bank frauds were down 25% in fiscal 2021 at Rs 1.38 trillion compared to Rs 1.85 trillion in fiscal 2020 according to RBI. However, most frauds are occurring in the loan portfolio of financial institutions. In 2020-21, the loan portfolio saw 47.5% of the frauds in terms of number and 99% in terms of the amount involved. Such frauds call for a need to develop more robust and stringent regulation and governance structure. In addition, some of the other challenges of the big tech giants to banking system are as follows:

• Tech giants offer many different (non-financial) lines of business with sometimes opaque overarching governance structures
• Tech giants have the potential to become dominant players in financial services
• Big techs are generally able to overcome limits to scale in financial services provision by exploiting network effects

In addition, although big techs are offering faster credit; several lenders in India have turned risk averse particularly after the pandemic as they don’t want “compromise” on asset quality to achieve targets. This risk aversion by the banks can be biggest obstacle to economic recovery and continue to be one of key challenges to the banks as it will make way to tech giants to increase their presence in the loan market. The dominance of the tech giants also causes risk to financial stability. Note, financial stability is one of the key objectives of the RBI and hence earlier this year the central bank constituted a Working Group on digital lending including lending through online platforms and mobile apps. This group will study all aspects of digital lending activities in the regulated financial sector as well as by unregulated players so that an appropriate regulatory approach can be put in place. In addition, RBI also emphasised the need to pursue entity-based prudential regulation of the big techs wherein operations of each big tech firm are scrutinised independently against a set of predetermined standards. An activity-based approach is already applied in areas such as anti-money laundering [AML] /combating the financing of terrorism [CFT]. An activity-based approach is the provision of cloud services, where minimising operational and in particular, cyber risk is paramount). Further, with the expansion of the digital economy across borders, the central bank said that international coordination of rules and standards is crucial.   

Summing up

Indian banking system have been reeling under the pressure of lower credit offtake as consumer sentiment was badly hit due to pandemic worries resulting in delayed spending. Lack of investments from the private sector along with the bad debts are some of the other concerns for the Indian banking system. The emergence of the tech giants and their strong footprint is the yet another major challenge in the banking system. However, digital transformation is inevitable and banking system have already ramp up their systems, became more tech savvy to offer convenient and quick services to customers. The central bank along with government also need to frame and implement more strict rules and regulations which can protect the banking system and also ensure financial stability and safeguard the economy against any potential threats from the big techs.