Incumbent Vs. Challengers

"Banking is necessary, but banks are not," Bill Gates said in 1994. Niti Aayog CEO Amitabh Kant commented in 2018 that physical banks in India would be irrelevant in the next three years as data consumption growth and data analytics are likely to boost financial inclusion further.?

Contrarily, banks have further grown in size since those statements, at least on the domestic side, with more branches, deeper market penetration, more assets, and a wider customer base than ever before. Leaving aside other financial sector players, the offices of commercial banks alone grew from 151341 in December 2018 to 157887 in December 2022, as per RBI. Surprisingly, that was when the Fintech disruption was at its most evident phase.?

The incumbents, i.e., the banks, were good at helping customers to make payments, save and invest money, and give loans. The challengers, the Fintechs, disrupted the ecosystem with their innovative, data-driven, easy to access platforms and fast processes. If the banks could do well, the Fintechs could do better. The game was on.

So, where do you place the comments of Bill Gates and Amitabh Kant? The answer to this question lies in digging into the philosophy vis-à-vis psychology of banking.

Psychology deals with behavior in a specific context. Process, culture, and addressing people's basic needs all play a role. The banking context is more transaction-oriented, which entails maximizing profit, lowering risk, analyzing collateral security, examining branch location and growth needs, etc. The physical distribution of paper or money in a localized network of infrastructure and people is the focus of this business model. It rarely makes sense through a world of digital data distribution in a global network centered on software and servers. Banks were designed for the industrial revolution, using cheques, cash, and passbooks as payment methods. These are the origins of banking psychology.

The essential component of banking philosophy, on the other hand, is trust, which is the most crucial anchorage for banks because they manage people's money. This is where the rubber hits the road.?

For decades, banks have been regulated, making them an essential part of any economy, and governments have backed them up, giving a sense of security. This aspect of security and trust is embedded in the heart of banking philosophy.

Banking is a business anchored on customer relationships. That makes banking philosophy cognitive, based on in-depth observations, experiences, and learnings from the environment and recognizing and correcting errors to establish the truth about the relationship. And the new entrants in the sector have rightly focused on that.? FinTech and TechFin solutions specializing in payments, savings, and investments recognize and adopt this banking philosophy. These unicorns, who have disrupted these domains, are owned by young Millennials and Zillennials, which is interesting. It's possible because they know how to code, but more importantly, they desire to transform their present reality. They want to change the system that governs financial services. Rather than merely offering products or services, they are passionate about adding delightful and enthusiastic solutions. Goalsetter, a FinTech start-up, provides a banking experience centered on education for young children. They do so by providing financial literacy to children since they have never been taught about money in school. The founders' philosophy was that children should spend money, learn to save it, and become financially literate. The approach is crucial because it impacts how people live when they graduate from high school. Those that are desperate and frustrated are often the ones who are in the most severe financial trouble. Examining their spending habits, aiding them in overcoming these problems, and giving early financial wellness contribute to mental health.

To put it another way, FinTechs attempt to provide solutions, focusing on the "moment of truth" for customers whenever a specific aspect of one's financial life is unpleasant (for example, applying for a loan with a traditional lender) or feel like something wasn't quite right. Fintechs are also working to protect society's most vulnerable people, such as parents and grandparents, against fraudsters and scammers, giving them an envelope of safety. Traditional banks hesitate to engage in this primarily because they are bogged down by loads of work and possibly do not believe it is worthwhile or financially feasible.

Banks and Fintechs continue their incessant furrowing, one in the traditional way with an occasional peep into the future and the other firmly embedded in the emerging ecosystem. With their respective strengths, the potential for collaboration is also unraveling. The situation is like the parent-child relationship, with incumbent banks as the parent seeking resilience, stability, security, and technology. On the other hand, the challenger (Fintechs) as the child wants to challenge everything, change the future, and design a whole new world. The challengers are continuously disrupting the business models, prompting incumbents, the banks to employ technology in a big way, re-invent their products and processes, be more digital, and challenge them. The race then starts again with the Fintechs bringing in further innovation and banks, with their deep pockets, catching up and forging ahead. It may appear that banks can't disrupt with their centuries of inherited diminished responsiveness to change. However, the impact made by the challengers necessitated a significant mental shift. Banks have begun to move in the right direction. The banking products, processes, and infrastructure have undergone a paradigm shift to meet the challenges. However, the Fintechs are not keeping quiet. They bring in surprises now and then to propel the industry forward, reiterating and rewriting the adage that the customer is not the king now but the true emperor.

To summarize, while challengers appear to have disrupted incumbents as of now, incumbents will catch up soon, as they have the much-needed reach, scale, and capital to drive the banking philosophy of trust and safety, now married with improved agility and personal connect.?

The jostling for space between incumbents and challengers will continue, and the beneficiary out there, the customer, is smiling.