Financial institution Fino Payments Bank targets Security Fabric Bank (SFB) license for long-term viability and expansion

Financial institution Fino Payments Bank targets Security Fabric Bank (SFB) license for long-term viability and expansion

In the rapidly evolving Indian banking landscape, Fino Payments Bank has applied for a Small Finance Bank (SFB) license, seeking to expand its operations beyond its current role as a payments bank.

Currently, Fino Bank boasts a strong digital presence, with 49% of transactions being digital and UPI adoption among its base. This digital-first approach positions the bank well to offer digital credit products, a key advantage it hopes to leverage as an SFB.

If successful in its bid, Fino will be able to offer a broader range of banking services, including loans and credit products, fixed deposits, and savings and current accounts. This transition would enable the bank to evolve from a primarily transaction and deposit facilitation entity to a full-service bank with credit capabilities, thereby generating additional income through lending and deposits.

The ability to offer loans is particularly significant for Fino, as its customer base, particularly merchants and rural users, are actively seeking credit but are not currently authorized to lend. The bank's merchant network spans 95% of India's districts, providing a vast potential customer base for these new credit services.

As an SFB, Fino would also be able to accept larger deposits without the current restrictions, enabling it to mobilize more funds for lending and investment. This could potentially improve its profitability and market share, as it would be able to compete more directly with traditional banks.

Furthermore, SFBs are designed to serve underserved sections such as small businesses, unorganized sectors, low-income households, and migrant workers. Obtaining an SFB license would empower Fino to more comprehensively meet these clients' credit and deposit needs, strengthening its position in financial inclusion initiatives.

However, Fino's current revenue model is constrained to fee-based services and treasury margins. As an SFB, the bank would need to develop a strategy to generate income from lending activities, which could present a challenge.

India has achieved 89% financial account ownership, but inactivity remains a challenge, according to a World Bank report. Dormant accounts, limited credit access, and trust and tech barriers persist in Fino's user base. Overcoming these challenges will be crucial for Fino's success as an SFB.

The transition from a payments bank to an SFB would not be without its risks. Regulatory constraints prevent Fino from capitalizing on the digital shift fully, and surviving as a payments bank is becoming increasingly difficult for the bank. However, Fino is hopeful that the benefits of an SFB license will outweigh these challenges.

Meanwhile, the financial performance of traditional banks is also showing signs of strain. For instance, Axis Bank's Q1 profits dropped by 3.79%, and its Net Interest Income (NII) was Rs 13,560 crore. This could present an opportunity for Fino to carve out a niche in the market, particularly if it can successfully navigate the transition to an SFB.

With over 1.4 crore customers, Fino Payments Bank stands poised to make a significant impact in the Indian banking sector if it secures an SFB license. The bank's digital-first approach, vast merchant network, and focus on financial inclusion initiatives position it well to serve the needs of underserved sections of the population. However, the challenges of transitioning to an SFB and generating income from lending activities cannot be underestimated. The coming months will be crucial as Fino navigates this transformation.

1. As Fino Bank hopes to transition from a payments bank to a Small Finance Bank (SFB), it aims to expand its services to include loans, credit products, fixed deposits, and savings and current accounts, potentially generating additional income through lending and deposits.
2. The digital credit products that Fino Bank, with its strong digital presence and UPI adoption among its base, can offer as an SFB are key advantages that could position it well against both traditional banks and digital finance (decentralized finance or DeFi) competitors in the Indian market.
3. If successful in its transition to an SFB, Fino Bank would be able to accept larger deposits, enabling it to mobilize more funds for lending and investment, which could improve its profitability and market share, and help it compete more directly with traditional banks in the Indian banking landscape.

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