Fintales Issue 17: April 2022 – Technology

UPI is the poster child for what fintech can achieve in India.
It made headlines again last month for crossing $1 trillion
transaction value in FY21-22. NPCI’s COO attributed this feat to the collective
efforts of banks, fintechs and users.

But what is UPI’s recipe for success? In hindsight, it
seems as simple as making a cup of tea. Take 313 banks as the familiar, ubiquitous, and
all-important tea leaves. Let users pick their flavor from more
than 65 apps – like picking ginger,
tulsi, cinnamon or chamomile. Make sure no flavour is
‘dominant’ – not more than 30% of the whole. And finally, heap
on two spoonsful of zero merchant-fees to make it extra sweet
(albeit unsustainable). Now we have all the right
ingredients. But, is it enough?  As chef Thomas Keller
once said “A recipe has no soul, you, as
the cook, must bring soul to the recipe” . Which is why we
have NPCI as the chef bringing all the ingredients together. And
there you have it. Made to serve 1.1 billion.

Now that we’ve had our tea, let’s start with the
four-course FinTales menu.

Appetizers:  snackable updates about recent
fintech developments.

Main-course:  a meaty story about newly launched
Digital Banking Units. And our conversation with Vipul Sharma,
founder, and CEO, Chqbook, about building fintech products for
small businesses.

Palate cleanser:  a musical break.

Dessert:  sweet news about mapping of payments
infrastructure.

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Appetizers 🍟

💳 No card, no
problem

RBI will soon enable cardless cash withdrawal at ATMs
through UPI. It has done this to make cash withdrawal easier and
less susceptible to fraud. Especially because card related frauds
are rising. It has been reported that fraudsters attach cloning devices to ATMs to steal card
data and gain unauthorised access to bank accounts. Cards are
inherently prone to higher risk of fraud. Which is why enabling
cardless withdrawal through UPI is a welcome relief.

📉 Crypto-exchanges left in
a lurch

Recently, several crypto-exchanges had to disable UPI payments after the NPCI
claimed it was not aware of any crypto-exchange using UPI. Even
though there is no law prohibiting use of UPI by crypto-exchanges,
NPCI’s statement seems to have spooked payment service
providers. With payment aggregators and wallet providers distancing
themselves from crypto-exchanges, there has been a huge drop in trading volumes. But this
begs the question, can your bank or payment service provider pull
the plug, anytime? Yes, yes it can.

🛍️ Easier
international shopping? Count us in.

RBI believes it is time to ‘simplify and
rationalise’ the guidelines for international e-commerce
payments. It is planning to overhaul the existing Online Payment Gateway Service Provider (OPGSP)
Guidelines. For starters, OPGSPs are now Online Export-Import
Facilitators (OEIF). On the plus side, permitted
transaction value for both imports and exports might rise. You can
read the draft guidelines here. And share your comments with the RBI (by
24 April 2022) here.

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Main-course  🍱

🏦 DBUs are banks’
evolutionary future

Brian Solis, a digital analyst popularised ‘Digital
Darwinism’ – an era where society and technology evolve
faster than businesses can adapt to. So, will banks – one of
the oldest creatures of the financial services ecosystem –
survive this era? They lack knack for disruptive technology and
ability to design bespoke financial products. They are also
burdened by their legacy infrastructure. To survive, banks must
evolve.

RBI has, fortunately, charted a path for banks’ evolution
by introducing the Digital Banking Unit
(DBU) framework. DBUs are brick-and-mortar retail
banking outlets like bank branches, but with digital
infrastructure. DBUs, unlike neo-banks, will not solely focus on
financial services distribution through online modes. They will
adopt a hybrid approach. First, DBUs will provide banking services
exclusively through paperless digital channels (remotely through
apps, or at DBUs). For instance, DBUs will house automatic card
issuance devices, facility to conduct digital and remote KYC etc.
Second, DBUs will focus on improving availability of digital
banking infrastructure. Third, DBUs will deliver banking services
through self-serve or assisted self-serve digital modes (bank
officials will assist customers in the second mode). This is
RBI’s first attempt to create a banking segment with
‘digital-first’ approach.

RBI wants banks to avoid mixing DBUs with traditional
banking. It requires DBUs to be housed separately from existing
banking outlets. They can’t even have the same entry and exit
points. It asks for a logical separation between the back-end
infrastructure of traditional banking products and DBUs. RBI also
wants bespoke management for DBUs. And each DBU will be headed by
an experienced COO. RBI has, in the framework, also envisioned
DBU’s further evolution. In addition to standard banking
products, RBI wants DBUs to offer tailored and futuristic financial
products. All in all, the DBUs seek to inherit the favourable
traits of banks as well as fintechs. And may evolve into a strong
specie in the financial services ecosystem.

DBUs are free to adopt outsourced model for their
offerings. This will bring-in several benefits for neo-banks.
Neo-banks are unregulated and don’t have any physical
presence. They offer financial services through apps (in
partnership with regulated entities). Banks can partner with
neo-banks to set up DBUs. This will help neo-banks build better
use-cases, utility, and adoption for their offerings. The DBUs are
also a precursor to stand-alone neo-banking licenses. RBI is likely
to use the DBU as a test case to develop the right regulatory
approach for these licenses.

🏪 The playbook for small
business focused neo-banks

We spoke to Vipul Sharma last week. He is the founder and CEO
of Chqbook, a neo-bank catering to small
businesses. The interview throws light on a new target segment that
some fintechs are starting to bet on – small businesses.
These B2B fintechs don’t always follow the same playbook as
their B2C counter-parts. You can watch the full interview here. And read on for highlights from our
conversation.

The Kirana Economy

The small business segment is difficult to define, Vipul admits.
It covers every local business we encounter in our daily life. Like
our local grocer and chemist. It’s a fast-growing segment
with 8 crore customers and 17% year-on-year growth. But despite its
size and potential, it’s an underserved segment. He calls it
the ‘missing middle’ with salaried employees and
corporates on one side. And the working-class poor on the other.
According to him, white collar employees and big companies are
already well served by traditional banks. On the other hand,
farmers and blue-collar workers receive support from the government
through schemes like Jan Dhan and direct benefit
transfers. But self-employed small business owners have nowhere
to go for their financial needs. That’s the gap in the
fintech market Vipul wants to go after.

As someone who has worked in the banking industry, Vipul
believes that banks can lend to small businesses. But they lack the
incentive to do so. He explains that banks can earn profits and
grow by just focusing on salaried employees and corporates. And
giving loans to small businesses is cumbersome for banks. Because
quite often, these businesses don’t have formal financial
records. If small business owners can’t get loans from banks,
they’ve little incentive to even keep their money with banks.
This is where Vipul believes fintechs can create a win-win
situation. Fintechs can reduce financing costs for small businesses
and earn revenue by bringing them into the formal credit
system. “Small business owners can repay loans. They
also have a high drive to make their business successful.
It’s not like they’re in a job that they can quit if
they don’t like the job or aren’t performing well. They
don’t have that luxury. So, they work very hard. When we
offer them loans at 24% interest per annum, they’re happy
because it allows them to be more profitable and grow
faster,” he adds – rooting for his
entrepreneurial customers.

The Secret Sauce

But how do you build a fintech product for a segment this large
and diverse? Vipul thinks it must start with understanding your
customers and their needs. “Our app is available in 7
languages. It makes a difference in how people perceive your
product and whether they see you as someone who is listening to
them. We’re catering to a community which is largely not on
social media like LinkedIn or Twitter. But they’re helping
and feeding the people on LinkedIn and Twitter”. But
it’s not just about rolling out a product feature. The devil
lies in how the feature is implemented. Take the example of
language translation for fintech apps. Vipul goes on to explain
that Chqbook doesn’t use artificial intelligence (AI) for
translations. “We don’t use AI for
translations. We use hard coded language packs that we make
ourselves. Because AI hasn’t cracked language changes in
financial services. If you ask for an account statement, what is it
called in Hindi, Telugu, Marathi, or Gujarati? AI may not give you
the right results. So, we do the heavy-duty exercise of translating
content and getting it vetted. We spend more time on product than
just UI/UX”,  he elaborates.

The Big Picture

Vipul is optimistic about the future of Indian fintech. With
rise in per capita income, he hopes that Indian fintechs will
witness a golden era. “This is the fintech ecosystem
when per capita income is so less. The minute it goes to $4000 (in
2 years) and then $6000, you’ll have an inflection point.
Then people will not mind paying Rs.10 for convenience. The
ecosystem will be bigger than any other country on the
planet”,  he predicts. For now, Vipul advises that
fintechs should be more revenue-focused. He cites the example of
rolling out lending and insurance at Chqbook first because these
are revenue generating products. “Indians love free
stuff. People will use your free product, but if you start charging
for it, they’ll delete the app. So, if customers are willing
to pay you, it’s a validation that you’ve built
something useful”, he concludes.

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Palate cleanser 🍧

The news of UPI crossing $1 trillion in annual transaction value
is music to our ears. But India in Pixels has made music out of UPI
transactions quite literally. Even PM Modi was impressed by the effort. Check out the
track here.

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Dessert 🍰

🌏 Putting pins (and PoS)
on the map!

Let’s say you are an ice cream seller who wants to sell
ice cream in all parts of the country. First, you will figure out
where ice cream is already available. Then, you could put those
exact locations on a map. You can use this map to sell ice cream in
places bereft of ice cream. Clear? Okay.

Now, imagine the RBI is the ice cream seller and payment
acceptance infrastructure, the ice cream. How will the RBI collect
all this data? It won’t. Under the recently announced framework on geo-tagging, banks and
payment system operators will collect it. And share it with the
RBI. The RBI plans to collate geo-tagging data under two broad
categories: Points of Sale (PoS) terminals (like mobile and desktop
PoS) and paper-based/soft QR Codes (like UPI QR).  

Geo-tagging of critical infrastructure isn’t new. The
Indian government has been experimenting with geo-tagging warehouses
and cold storages to help farmers locate them. If done
successfully, this data will help RBI avoid blind spots. Plus, just
like accurate data helps with personalised advertising, geo-tagging
data can help the RBI create localised solutions (for expanding the
reach of digital payments). For example, geo-tags will help RBI see
that a certain village in Bihar lags in adoption of digital
payments. And address it with greater precision. But collecting
this data is a mammoth task. Just take a stroll outside to count
every QR code you see and you’ll realise why. Yet,
we’re excited. We hope this takes
ice-cream…err…digital payments everywhere.
         

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That’s it from us.

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