As part of the FinTales Interview Series, we speak to a fintech entrepreneur or executive every month. For the February 2022 edition of FinTales, we spoke to Avinash Godkhindi, CEO of Zaggle, a neo-banking and SaaS company.
What can fintech platforms learn from TikTok’s run-away success in small-towns and villages? Turns out a lot. This was one of the many aha moments in our conversation with Avinash Godkhindi, CEO of Zaggle. You can hear the full interview here and read on for highlights from our conversation.
The India/Bharat Dichotomy
There are 6.3 crore MSMEs in India, but many remain excluded from ‘digital India’. This is where Avinash believes fintech and SaaS companies can make a difference. But to do this, they need to tailor their products and processes to suit the needs of Bharat, and not just the urban elite. He goes on to cite the example of TikTok which gave Indians space to experiment and express themselves. The lesson here, he insists, is that tech platforms must not intimidate first-time users. “How many banking apps have a good Hindi interface?” Avinash asks. His solution: products which are simple, vernacular friendly and mobile-first. Concerns about data privacy and customer poaching are also hindering tech adoption by MSMEs, Avinash adds. But he hopes that the upcoming data protection bill will address these fears. According to Avinash, building for Bharat is where the most potential lies. Fintech, according to him, can’t cater only to India’s California users (hat-tip to the Ken for adding this to our vocabulary).
The Search for Profitability
Regardless of which demographic you are targeting, building a fintech business in India isn’t easy. With the government’s zero MDR policy and intense competition, the scope for monetisation is limited. And many fintech companies incur high customer acquisition costs, doling out discounts and cashbacks. Which is why for so many fintech companies, all paths to profitability lead to ‘lending’. But Avinash remains sceptical of business models which rely on lending as a path to monetisation. Especially when lending to segments which are untested and not fully understood. According to him, while it’s possible to make money by lending to these borrowers in the short-run, NPAs will spike when the credit cycle turns. Instead, Avinash suggests, businesses must figure out alternative revenue streams like transaction fees, float income, advertising revenue or subscriptions. Even if the business model is cross-selling, he believes there are opportunities beyond lending like insurance, investments, and other value-added services. To effectively cross-sell, he emphasises that the entrepreneur must understand the customer and her needs. He also cautions against accepting high customer acquisition costs as the norm because this can pressurise fintech companies to make short-sighted decisions.
Betting on Cards
Burning cash to achieve scale and lending as the default strategy are not the only issues where Avinash disagrees with conventional industry hype. When asked about products that he is most bullish on, he has a surprising answer: cards (virtual or plastic). He argues that the average Indian understands and trusts cards, especially after debit cards were distributed to millions of Indians through the Jan Dhan program. People already know the risks associated with credit cards and there are regulatory guardrails present to protect borrowers, he explains. He contrasts credit cards with new-age products like BNPL which may be more convenient but lack clarity about consequences of late payment and protective regulation. “For credit cards, you must give at least 15 days to cardholders to re-pay before charging interest. There is a very clear RBI directive. But what’s there for BNPL? I can offer BNPL with a repayment period of 8 hours,” he quips. He emphasises that BNPL is fundamentally a lending product and regulation is inevitable. He points out that monthly credit card spends crossed Rs.1 trillion last year and he expects this figure to rise. His wish-list for 2022 features NBFCs being allowed to issue credit cards. Till now, this product category has been the monopoly of banks. Avinash’s wish may be granted soon. The RBI reportedly plans to allow large NBFCs to issue credit cards subject to net worth, liquidity, and cyber-security requirements.
A Clean Slate
Besides credit cards, Avinash is long on neo-banks. As a former software consultant for banks, he has a deep understanding of where the bottlenecks lie. “There are 600 platforms talking to each other through archaic flat-files and main-frames. Systems are not built for APIs. There is no micro-services architecture. It’s all AS/400, iSeries and Cobol running in the background. If that’s your backbone, RBI will not wait for you to update your architecture to ensure compliance,” Avinash explains. He believes a licensed neo-bank can engage with the regulator and industry veterans to build a modern tech stack which makes compliance easy and preserves agility. When asked about how these new entrants will build trust, Avinash points out that banks are trusted because they are RBI regulated entities. He also draws a parallel with e-wallets which show that customers are willing to trust new entrants if the RBI recognises them. For the customer, he argues, the value proposition of a licensed neo-bank is that it’s not bogged down by outdated technology, NPAs and history of fines. This clean slate, he emphasises, is valuable because neo-banks won’t have a chequered legacy which constantly needs to be managed. We can’t help but be optimistic about Avinash’s vision for neo-banks. After all, who doesn’t want the opportunity to turn over a new leaf?
(This post has been authored by the fintech team at Ikigai Law.)