Moving the financial system forward: Equitas-Google merger will target unprofitable customers for traditional banking services
At first glance, this is just a symbiotic relationship with gains for both partners. But the ramifications of the Equitas Small Finance Bank (SFB) and GooglePay merger could be greater. We may not know for some time. For now, other lenders will take note of Equitas’ decision to collect deposits on the commercial section of Google Pay through Google’s Unified Payment Interface (UPI), for a fee. It’s not as if banks and other middlemen haven’t collected deposits through markets and aggregators.
Equitas clearly uses the broad reach of Google Pay; Although there is no official data on the number of users of the platform in India, it accounts for 35% of UPI transaction volumes and few others can match that. More importantly, GPay is used by young people – in the odd-job economy, for example – and others who may not have large fixed deposits. A large part of them could be these workers, still untouched by the traditional financial system which has found the unitary economy of reaching out to them unsustainable. The ease of setting up the deposit and the relatively high interest rate can be a winning combination.
For lenders like Equitas who have struggled to build a deposit franchise, Google Pay’s Spot platform is a way to get deposits from a whole new set of customers that would otherwise have been unattainable. And it’s not just the supply of deposits that Spot facilitates. In a recent blog post, Google India said that financial industry products and services have found Spot particularly useful, with lenders like CashE and Zest Money, investment platforms like Groww, and brokers like 5paisa seeing significant engagement. Google Pay users.
There is no immediate threat to traditional banks because while it is true that the customer segments that traditional banks and their new age challengers cater to are different, there are also significant overlaps. For example, today’s “buy now, pay later” (BNPL) consumer could be the credit card user of the future and the hairdresser accepting UPI payments could be a potential car loan borrower. The fact that some traditional lenders have designed some form of EMI BNPL or debit card shows that they are eager not to lose. Still, many traditional banks might find it difficult to keep pace with the nifty new lenders, especially their less regulated competitors, while innovating with products or marketing solutions. They can’t rely on regulation indefinitely to stay relevant in certain segments of the digital space, such as the UPI platform, and need to spruce up their product and service suites.
But it is more than likely that the Reserve Bank of India (RBI) will soon insist on increased regulatory oversight for a whole range of new era lenders. This universe should include fintechs of all kinds, given their growing presence in the financial system and, more importantly, their links with existing players. While pure digital lenders are only a fraction of total lending, they are growing and regulation must come sooner rather than later. In addition, the links between BigTech and lenders could worry the regulator. Google may not have visibility into the products that customers choose on merchant platforms and the responsibility for deposits rests with the lender. To that extent, it is only a platform, not more. Nonetheless, RBI would like to keep a close eye; he wouldn’t want BigTech to become too big in the Indian financial system.