It is widely believed that coming decade will see acceleration of digital trends including the ascent of a whole new form of internet called Web 3.0. Banking, as the primary lubricant of economy, needs to be early adopter of the new paradigm to be an effective catalyst. I would like to see a budget that gives a credible incentive to the banking industry to boldly digitize and lead the change in Indian economy. There are four arguments that are worthy of the government to consider:
Vibrant tech led banking has direct benefits for small business finance. Small business finance is the biggest gap in our banking. Credit and other services to small business and self-employed on it come easy. And vast majority of India is self-employed and unorganized. Small business lending is high risk business and traditional banking models fail miserably. Technology is needed to break the compromise by leveraging data to manage lending risk at scale. By incentivizing banks to invest in advanced data and tech, government will be paving the way for better flow of credit to small business. Tax breaks against digital investments of banks has a direct impact on an important national economic priority.
Digital investments by banks have same characteristics as R&D in an industrial/pharma company. Investments are large. Chances of failure are high, and it is accepted that all projects cannot succeed. Actually, it is appreciated that some projects will fail and are allowed to fail fast. Some projects can be started only with long term capacity building in mind and the business case struggles on quarterly performance demands. There are very few plug and play solutions. Banks have to build internal capabilities and most often customize the solutions to their unique customer needs or business context. In case of small business in India, the solutions have to be developed and iterated to suit the unique inefficiencies of Indian business contexts. It is for such characteristics that R&D has tax incentives the world over.
Digitization of banking can spur a vibrant local talent ecosystem for broader industry. Large scale tech transformation in banks can lead to creation of ecosystem that can be seamlessly leveraged by other industries in India to digitize their operations, supply chains and internal ways of working. India has given various tax incentives to its tech sector to grow, and the dividends are here for all to see. In a few years, banking and technology will not be distinguishable. Banks compete for resources from tech companies. They are primary consumers of tech platforms. They have to maintain the highest standards of quality, security and resilience – much more than many other internet companies. Adoption of advanced use cases of technology in Indian industry can be role modelled by banks.
Banks are competing with tech giants who enjoy tax advantages on their R&D spends. Given the embrace of public digital platforms and open banking, our banks are directly competing with giant tech companies. Open banking paradigm is exposing data from banks to fintech competitors giving them an edge in competing against banks. While this is a welcome step for spurring innovation, the tech companies come with much more deeper pockets for investments in R&D than what banks can afford. US tech giants invest a lot in R&D and receive federal tax advantages for such investments too. It is high time we have level playing field.
(Saurabh Tripathi is Senior Partner in BCG and Chairs FICCI’s Fintech Committee)
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