Why haven't tech companies swept aside legacy firms as India digitizes? - Part 2

"It is just so much easier to get budget for business development initiatives for FASTAG issuance, than say for any retail customer acquisition drive via our digital channels. For FASTAG, it is still relatively easier to know where to get your customers - vehicle dealerships, and it is slightly easier on risk assessment. That is why even though we are not so savvy on tech right now, we will eventually devote more resources and manpower to succeed in this vertical." These were the words of a business development manager. He was looking at smart city and infrastructure related use cases for banking, at a leading listed bank in India (not my current employer).

In the first part of this essay, I had discussed how markets had evolved following the digitization of payments in India - tech companies (PhonePe, GPay and PayTM) had pushed UPI apps of traditional banks into extinction.

In this part, I will discuss the case of NETC-FASTAG - which is digitizing payments at the vehicular level (toll collections, parking fees) and why traditional banks and non-fintech tech companies have not just stayed relevant but also dominated the market for collections.

Toll collection: Banks turn the tables on digital natives

First, let us look at how the playing field has been shaping up for electronic toll payments. 

In the above chart, Non-fintechs include logistics or parking apps (Blackbuck, Park+, etc.) who have an exclusive agreement with banks -IDFC First and Axis Bank- to issue FASTAG sticker linked virtual wallets for storing and paying toll related sums. Other Fintechs include PayTM and Airtel Payments bank. Banks include all licensed commercial banks that issue FASTAG sticker linked virtual wallets. 

Two things jump out for me here.

The first, the second-largest players in the ecosystem for NETC toll enablement, which is owning the touchpoints for fleet owners the way PhonePe and GPay have done for UPI payments, are not fintech companies. They are  logistics aggregators or parking operators.

Blackbuck’s move into issuing FASTAGs and hence aiming for an entry into the lending tech space by standing as an intermediary between fleet owners within its ecosystem and banks that it partners with, is a good recent example of a company successfully transitioning into a theoretical adjacency. That said, Blackbuck is still not profitable. Unless lending tech helps it pad its bottom-line into the black, the jury on the success of this adjacent move will still be out. 

The other thing is that banks still hold the greatest share in this market (especially, SBI, ICICI, HDFC and Kotak) maintaining a 45% share in the market, notwithstanding the disruptors. Why have they not been blown away as in payments? Or rather, why have they dug in?

In my view, when it comes to the lending value pool associated with electronic toll collection, banks have a lower hanging and less risky fruit to target. 

First, there are economies of scope. Based on the conversations I have had with bankers in this space, it doesn’t make sense for all large, well diversified banks to tie up with tech firms to reach out to vehicle owners. Individual car owners as well as large/mid-sized fleet operators are already likely to have an existing banking relationship with aforementioned market leaders in banking. For these banks then, expanding into FASTAG issuance is simply issuing a FASTAG/NETC enabled wallet to an existing customer.

Anecdotal evidence suggests that FASTAG wallets are a fairly commoditized product - wallets by one bank aren't very different from another in UI/UX sense. This also means that if you are being issued a FASTAG sticker by the bank you are with, there is a fairly low likelihood that you’d want a replacement. In fact, for most large banks, FASTAG isn’t an on-ramp to borrower acquisition, it is just an add-on feature. 

Second, even for non-top tier banks in this business,  there are fewer trucks, CVs and cars in this country than people owning a UPI-linked bank account, even today. Spending marketing dollars on this smaller TAM, can counter-intuitively, actually be more beneficial. This makes it slightly easier to acquire customers from large banks with aforementioned economies of scope, without getting into exorbitantly pricey fee sharing agreements with tech firms (~70-80 percent share is taken by them).

Especially considering the case of UPI, where millions out of those new customers are  from low income cohorts, with a very low chance of applying for a large loan through formal channels. Less loss leading burns in this space then. 

Finally, unlike the opportunity in unsecured personal loans being offered in the UPI-based payments domain (even if you sweeten that with fund management and investing opportunities), those for lending in the electronic toll collection world are less riskier. Working capital and vehicular finance to small fleet owners with a verifiable identity makes credit checks less expensive. Their assets can also be collateralized. Much less of a “pie in the sky” then.

A more proximate, less attritional and less riskier opportunity in the toll collection space might have caused the legacy players in banking space to take FASTAG issuance and virtual wallet linkages to it more seriously, leading to a very different - and possibly less oligopolistic market structure. 

In the last part of this essay, I will talk about Invest-Tech and Digital brokerage and how that market looks like after the entry of digital-first brokers.

Finally, a request.

I don't know how LinkedIn will evolve this year. But I suspect that deeper, original writing is more likely to get lost in the mass produced content from creators on this platform too.

I have a day job, which pays me good enough. And a work life balance that gives me time to reflect. My motivation to write is to become a better thinker. If you like these pieces, consider subscribing to my Substack here.