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Indian fintechs may need a new pitch 🗣️

If fintechs thought they were alternatives to banks, India’s central bank has news for them.

This is edition 380 of Beyond The First Order, a premium daily newsletter that demystifies the hidden models, incentives and consequences of the most significant events across India and Southeast Asia

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Good morning,

The Reserve Bank of India is not buying fintechs’ tall claims. And even the most ardent believers of the Zomato story cannot ignore the impact of its workers’ demand to be paid more. Finally, the terrible air in many Indian cities will now seem even worse, thanks to WHO’s new standards for air quality.

The tempering of fintechs’ disintermediation dreams

Fintechs who thought they were in competition with banks, and were going to disintermediate banks, should reassess their position. Because the regulator has spoken, quite literally. In a speech given at the Global Fintech Fest, the Reserve Bank of India’s deputy governor T Rabi Sankar defined the roles and the relationship between fintechs and banks.

“It is easier to see why financial tech cannot replace the core nature of financial intermediation. It can bridge the spatial gap because of their reach, but not the temporal gap,” he said.

A temporal gap in RBI parlance is when the needs of the borrower and the lender arise at different points in time—the borrower needs money after a month, but the saver has money now. And this type of gap is something that only banks can service as they make credit available and thereby act as liquidity providers to the economy. 

But, in a way, it also shows that the regulator sees a broad difference in the values and attitudes of banks and fintechs. The former is all about trust and safety while the latter is focused on consumer ease and reach. 

Also, it looks like fintechs have already read the room when it comes to collaboration. 

“Competition for banks comes not from fintech firms but from other banks which leverage fintech better,” Sankar said. There have been a spate of partnerships in the recent months. Be it ICICI Bank with Amazon or HDFC Bank with Paytm*. These were all fintechs once pitted to be competition to banks, but now they are seen as allies for distributing bank products. For instance Paytm said it is going to be distributing its point of sale machines to HDFC Bank’s merchants. For a payments company that already has over 20 million merchants, this is a curious step.

If the role of fintechs in the financial services ecosystem was not clear, the deputy governor made it clear by saying this: “Any fintech entity that provides such liquidity services (like credit and deposits) is effectively functioning as a bank and therefore should be subjected to the same legal/regulatory/supervisory regime that a bank is subjected to.”

This is an indication of how a closer look is imminent in sectors like peer-to-peer lending, which handles deposits from people and helps issue interest on those deposits. 

So, the next time a fintech startup makes a pitch to a VC about disintermediating banks, it would be wise to keep in mind the deputy governor’s words.

*Paytm’s founder Vijay Shekar Sharma is an investor in The Ken. 

The bitter pill Zomato investors may have to swallow

On Monday, American investment bank Morgan Stanley cut Amazon’s share price target over concerns that the e-commerce giant’s profits could come under pressure from rising wages and headcount.

The share price target was lowered from US$4,300 to US$4,100, which is still more than 20% of the current share price. Two weeks ago, the company announced an increase in its average starting wage—from US$17 to US$18. The company also announced that it is offering to pay college tuition and the cost of books for more than 750,000 of its frontline employees in the US. 

There is increasing pressure in India as well for its tech companies to offer better terms to their gig workers. Last week, a gig workers’ union appealed the Supreme Court for social security benefits from the likes of Swiggy, Zomato, Ola, and Uber.

Zomato’s IPO in July was seen as a roaring success, with its shares almost doubling from the issue price of Rs 76 (US$1). Even today, many known brokerage firms are betting on Zomato’s prospects, with Jeffries and Goldman Sachs predicting a 2x rise in the share price. Zomato’s shares closed just a shade under Rs 140 (US$1.9) on Tuesday.

But since the IPO, there has been growing media interest in the plight of gig workers, especially in food delivery. Zomato is relying on these workers for its next phase of growth. 

Kotak Institutional Equities, which has a more moderate price target of Rs 175 (US$2.4), said that regulatory scrutiny on delivery charges earned by food delivery companies is a key risk. Higher driver wages if mandated by labour law changes could also be a negative, while higher competitive intensity and value destructive acquisitions are also risks, the brokerage added.

There is more. JP Morgan is among the sceptics, stating that the company’s premium valuation is not justified. The firm says that Zomato’s valuation is 21x its sales, and that is 4x higher than the average valuation of global food tech giants.

“We believe the premium is not justified as we don’t see significant levers- marketshare or average order value expansion,” it said. “We believe with a slew of internet IPOs lined up the supply premium should vanish and the stock could correct given the absence of material stock drivers.” 

Consensus on Zomato’s prospects is elusive, and its delivery personnels’ demand to be paid more might even make the optimists reassess their position. 

Clear the air

The WHO released a new standard on air quality levels for the first time in 15 years. The index is supposed to tell us human beings about what the acceptable levels of particulate matter are—like PM 2.5, PM 10, NO, CO2—in the air around us.

Air quality levels, especially in mid-to-low income countries, were already bad in 2005. But the new standards will push most cities over the red line. WHO has tightened the noose further.

Source: Factly

WHO stated that, in 2019, more than 90% of the world’s population lived in places where air quality levels exceed WHO’s 2005 air quality guidelines for annual mean PM2.5 concentration. Since the new guidelines are more rigid, a greater quantum of the population would be living in areas where these standards are not met. The implementation of the new guidelines will also be challenging for countries that adopt these recommendations.

India created its own standard called the National Ambient Air Quality Standards in 1981—as a homegrown benchmark—to track just how polluted the country’s air is. NAAQS, which was last revised in 2009, is a more liberal cousin to the WHO guidelines, because NAAQS’ levels are more relaxed than WHO’s 2005 guidelines. So you can just imagine how badly India will fail to match up to the new benchmarks.

Air pollution reduction is a constantly shifting target. NAAQS needs a revision in its standards. A stricter standard could help India accelerate its air pollution control policies and interventions. After all, NAAQS directly impacts the steps taken by the pan-India National Clean Air Programme (NCAP), set up in 2019. Here’s the tricky bit: Even if India managed a 20-30% reduction in particulate matter, as envisaged by the NCAP, it still won’t come close to matching the newly revised WHO standards.

And while Indian standards play a game of international catch-up with WHO, it is Indians who will suffer the devastating fallout of breathing non-breathable air. It’s a wake up call we will unfortunately sleep through, unless there’s a drastic revision in standards.

That’s all for today. We’ll be back tomorrow.

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