With all necessary shareholder and regulatory permissions, the fintech firm Slice, based in Bengaluru, has successfully merged with North East Small Finance Bank (NESFB) as of October 27. Slice stated in a letter released on 28th October 2024 that the merger will combine the two companies’ activities, assets, and brand identities into a single banking organisation.
In addition to growing operations, strengthening risk management frameworks, and increasing customer experience, the business said in a statement that the combination will contribute to the development of a technology-driven bank.
Merger Aims at Expanding Footprints in the North East Region
The newly formed organisation will concentrate on regional economic development and expand its footprint in the country’s northeast region.
To make this merger a reality, the teams at Slice and NESFB have been working nonstop for more than a year. The chief executive officer of Slice, Rajan Bajaj, expressed gratitude to the regulatory bodies, particularly the RBI and the Government of Assam, for entrusting the company with this revolutionary journey. He noted that the merger is particularly dedicated to fortifying its ties in the Northeast and working to increase the number of persons enrolled in the official banking system.
In October 2023, Slice was given the go-ahead by the Reserve Bank of India to combine with the struggling NESFB. The Competition Commission of India and the National Company Law Tribunal also gave their consent later.
How Merger Will Help Both the Entities?
Slice noted that the merger will make it possible for the amalgamated business to make use of cutting-edge technology and profound community awareness, which will ultimately lead to increased financial inclusion across the country. Customers may anticipate an increased selection of products, improved omnichannel offers, and a banking experience that is more streamlined.
The scheme of arrangement and amalgamation that involves Garagepreneurs Internet Private Limited, Quadrillion Finance Private Limited, Intergalactory Foundry Private Limited, RGVN (North East) Microfinance Limited, and North East Small Finance Bank Limited has been approved by the National Company Law Tribunal (NCLT).
Slice’s Financial Report Card
The most recent valuation of Slice was above $1.5 billion, which occurred at the Series C round in November 2021. To date, Slice has raised a total of $340 million. According to the data intelligence platform TheKredible, Rajan Bajaj, who held the position of CEO and co-founder of the company, owned 8.21% of the ownership.
While Slice’s losses increased by 59.8% to a total of INR 406 crore, the company’s revenue increased by a factor of three, reaching INR 843 crore in the fiscal year 2023. The Bengaluru-based company was able to scale during the fiscal year 23, despite the disruption it experienced as a result of the Reserve Bank of India’s change in rules for card issuers. It has not yet submitted its annual financial reports for the fiscal year 2024.
With just over four months to go until the deadline, industry insiders have expressed doubts about the proposed 30% market share cap in the Unified Payments Interface (UPI) category, according to multiple media sources. Multiple newcomers to UPI have been informed, informally, that the limit is not going to be implemented. As a result, they have begun to reassess their growth and investment strategies, according to those briefed on the situation.
According to earlier media reports, new players in the UPI industry are holding off on making large expenditures until they have a better understanding of the market share rule. UPI payments are dominated by PhonePe and Google Pay.
Reportedly, the regulator is of the opinion that new entrants have not been able to reduce the dominance of the top two UPI services, therefore it is left with few choices regarding the implementation of the December 31st deadline.
In response to enquiries, neither NPCI nor the ministry of electronics and IT provided any information. Implementing this law (market cap) will require significant planning, according to several experts. It cannot be done in a day due to the disruptive nature of the process.
The Growth Trajectory
Both the government and NPCI are deeply committed to the expansion of UPI, which reached 14 billion monthly transactions in May. If people keep using the same two or three platforms, what options do we have? So many new entrants are able to set up shop, but they haven’t made a dent just yet.
In July, out of the 14.4 billion UPI transactions, more than 85% were processed through Walmart’s PhonePe and Google Pay. Google Wallet had 5.3 billion transactions, whereas PhonePe had 6.9 billion. With 1.1 billion UPI transactions, Paytm (One 97 Communications) came in third, and Cred (142 million payments) came in fourth.
The Reserve Bank of India (RBI) placed restrictions on Paytm Payments Bank in February, making arguments about the market share ceiling more prominent. Paytm is the third largest UPI operator. On February 5, a prominent media outlet said that Paytm’s problems will cause users and businesses to switch to the two most popular applications.
Why the Cap Cannot Be Implemented?
To prevent the UPI ecosystem from becoming overly dependent on only one or two platforms, NPCI first proposed a market share cap. In December 2022, NPCI delayed implementation for two years following multiple rounds of negotiations and requests from key corporations operating such apps.
Some industry executives and specialists in the field have voiced concerns that imposing a market share cap might cause systemic disruption and be technically challenging to achieve.
Conversely, NPCI has been facilitating the development of UPI solutions by numerous consumer internet platforms with huge user bases, enabling them to become third-party application providers.
Flipkart, the e-commerce platform that was once PhonePe’s parent company, Groww, Slice, and the Tata Neu superapp are all part of this group. Another company that has introduced its UPI offering through the plug-in channel is Swiggy, a food and grocery delivery firm that has partnered with banks. Similarly, Ola Consumer is in the process of planning a same system.
Slice, a unicorn in the financial technology industry, has been granted permission by the National Company Law Tribunal (NCLT) to merge with North East Small Finance Bank (NESFB).
Both businesses made the announcement that they would be merging in October of 2023. In March of the previous year, Slice paid around $3.42 million to purchase a five percent ownership in a bank with its headquarters in Guwahati.
How Merger Will Help Both the Entities?
In a news release, Slice noted that the merger will make it possible for the merged business to make use of cutting-edge technology and profound community awareness, which will ultimately lead to increased financial inclusion across the country.
Customers may anticipate an increased selection of products, improved omnichannel offers, and a banking experience that is more streamlined.
The scheme of arrangement and amalgamation that involves Garagepreneurs Internet Private Limited, Quadrillion Finance Private Limited, Intergalactory Foundry Private Limited, RGVN (North East) Microfinance Limited, and North East Small Finance Bank Limited has been approved by the National Company Law Tribunal (NCLT).
The Competition Commission of India (CCI) and the Registrar of Companies (RoC) have both given their thumbs up to Slice and NESFB respective applications.
In addition, the Reserve Bank of India (RBI) and the Income Tax Department also issued certificates stating that they did not have any objections to the transaction.
Slice’s Financial Report Card
Shortly after the conclusion of Slice’s debt round of thirty million dollars, this new development has taken place. The most recent valuation of Slice was above $1.5 billion, which occurred at the Series C round in November 2021. To date, Slice has raised a total of $340 million.
According to the data intelligence platform TheKredible, Rajan Bajaj, who held the position of CEO and co-founder of the company, owned 8.21% of the ownership.
While Slice’s losses increased by 59.8% to a total of INR 406 crore, the company’s revenue increased by a factor of three, reaching INR 843 crore in the fiscal year 2023.
The Bengaluru-based company was able to scale during the fiscal year 23, despite the disruption it experienced as a result of the Reserve Bank of India’s change in rules for card issuers. It has not yet submitted its annual financial reports for the fiscal year 2024.
About Slice Card
Slice is a digital lending platform that, in partnership with non-bank financial companies (NBFCs), provides a credit card. The Slice card is intended for individuals who are new to the concept of credit, as well as students and young professionals who have their finances limited.
There is no requirement for a credit score, and the eligibility requirements are more lenient. There is also no annual charge or membership cost associated with the card.
Diwali festivities seem to have started a wee bit early within the fintech ecosystem. Spirits are high after the tough taskmaster and India’s banking regulator Reserve Bank of India gave a no-objection certificate to what is being touted as a rare merger.
Digital payments app company–Slice Pay–merging with the lesser-known Guwahati-based North East Small Finance Bank has certainly piqued the interest of stakeholders. This move effectively gives Slice the power to raise deposits, and lend and offer their own unique products to customers of NESFB.
Slice began operations in 2016 and was essentially a prepaid card with a credit line. According to data tracking platform Tracxn, the Bengaluru-based unicorn fintech company was valued at $1.8 billion as of March 2023. Meanwhile, NESFB’s valuation has been pegged at around $72.4 million.
For financial technology companies, this move comes as a lifeline as it opens up another avenue for scaling up operations.
In this article, we explore how fintech companies can lay the foundation and prepare for a probable merger-like scenario with a bank in the future.
Getting a banking license in India is a big deal. RBI scrutinizes applications under a microscope. Earlier this year in July, the RBI rejected three applications for small finance bank licenses, maintaining its reputation for being a taskmaster. In 2022, the regulator had rejected 6 licenses as it found it unsuitable.
One exception was the central bank’s green signal in 2021 to Resilient Innovations Pvt. Ltd (owned by fintech unicorn BharatPe) to buy a 49% stake in Unity Small Finance Bank. But, then this was a distress sale, where RBI was doing its job of safeguarding the deposit holders’ interest.
PwC’s 2021 report on neobanks in India delved into the ambiguity surrounding regulations for smaller digital financial institutions. Neobanks is a term used for financial institutions or fintech companies that operate digitally, without a physical presence. “Currently, unlike neobanks, the regulatory regime does not envisage a completely digital method of offering financial products. It is extremely critical that the current indirect regulations are relooked at in light of the digital offerings of neobanks and their relationship with financial entities.”
Transaction Value in the Neobanking Market
For a fintech company, opting to go through the due diligence of getting a bank license and following regulatory norms can prove to be a headache. At present, RBI rules state that a payments bank or an NBFC with a successful track record of 10 years is eligible to apply for a bank license. This may seem like a long wait for a fintech company as it may take years for some companies to even break even.
A fintech company usually has three options when it comes to the renewal of its license. One, it either applies for a non-banking finance company license with the RBI. Two, it can choose to join hands with another fintech company. And three, taking the heartbreaking decision of shutting shop in case they don’t rake in enough value. The option of merging with a small finance bank as a business objective was never really given much thought, until now.
Meanwhile, for a small finance bank, merging with a fintech company is a shortcut to upgrading its technology, staying relevant to the youth, and paring its losses to some extent. North East Small Finance Bank reported losses for the third straight year with losses widening to ₹288 crores in 2022-23. Its net worth dropped to ₹60 crore, much lower than RBI norms of maintaining a net worth of ₹200 crore. A section of the media has raised eyebrows over the shelf-life of this collaboration, given the losses on both sides and the contrasting cultures in both organizations.
However, the Slice-NESFB merger seems to be a well-planned strategy and not a spur-of-the-moment decision. In March, Slice acquired a 5% stake in NESFB, to get “comfort”. Media reports have also quoted an unnamed source from the company claiming that Slice had been following through with due diligence over the past 15 months to get the deal through.
True to their nature, startups, and fintech companies prefer to see this merger as a window of opportunity rather than view the deal with scepticism.
Before celebrations begin within the fintech space, it is time for companies to ponder over making the most of this development. How can they be the next in line as far as envisioning their banking ambitions are concerned? Taking cues from this new-age merger, we enlist a few parameters on which fintech companies can buckle up and chart a similar route to growth:
Self-regulate Prudently
Fintech companies have long borne the ‘bad boy’ image in the eyes of the regulator.
In 2022, RBI barred non-banking entities from embedding credit lines in their loading PPIs (prepaid payment instruments) such as prepaid cards or mobile wallets. This decision had hit Slice itself which then applied for a PPI license and received it by the end of 2022.
Recently RBI Governor Shaktikanta Das asked fintech companies to form a self-regulatory organization. In RBI’s view, such an organization would help to evolve best practices, protect privacy and data norms, avoid mis-selling, and promote ethical business practices.
“You need to think you are already a small finance bank and create those kinds of capabilities within the organization before the regulator would even consider something like this,” said Yogi Sadana, Founder and CEO of Zype Loan App. He added, “Unlike an NBFC, the amount of opportunities and liabilities that rests on a bank which a banking license allows taking customer deposits, to open bank accounts, that’s a completely different ball game altogether as compared with an NBFC which was not taking customer deposits, in terms of governance standards, in terms of operating stats, cheques, and balances, more importantly, the management. “
It’s only a matter of time before RBI comes cracking the whip on those who fail to comply, which could in turn tarnish the company’s image.
“Eventually they (fintechs) should be ready to come under regulation…the framework for regulation may come. RBI does not leave any stone unturned to leave anybody out of their purview,” said Jaslene Bawa, from Flame University who has worked as a financial market researcher in the corporate sector.
Bawa also said that having rigid mechanisms, assessing credit profiles, regular audits, keeping an easy cash flow, and creating a robust board can help a fintech or an NBFC get bank-ready.
Play to Your Strengths
Setting up an intricate financial technology infrastructure for a mid-sized or a small bank is an exhaustive process. In such a scenario, merging with a fintech company is akin to adding a bit of zing to their portfolio. In addition, fintech apps are a popular choice among the youth, giving ready access to a younger customer base, albeit small to begin with.
“Strategic plan for a fintech should be how nimbly can they set this (technology) up. Can they set it up internally or do they need to acquire an existing company with skill sets and reputation which can marry their reputation, culture, and ethos so that integration of both is seamless and easier,” said Badrinarayan Vedanthan, a banker with 26 years experience across MNCs, SME and MSME/Rural Finance business sectors. Vedanthan, now an independent financial consultant, also previously served as the head of strategy at Suryoday Small Finance Bank.
Slice’s main target has been the Gen Z and millennial crowd. In a media interview in 2021, Rajan Bajaj, founder of Slice emphasized how they would continue to target the young segment, despite their high-risk profile. “The average age of slice’s customers is 23-24, which differentiates us from the rest. We understand the risk and demand profile of this young customer and know how to help them navigate through their finances. At present, there is no other solution at a slice’s scale in the market that can cater to the needs of this generation in a transparent and scalable manner.”
Fintech companies should play to their strengths as far as their technological reach is concerned. Digital payments have revolutionized the way Indian banks and organizations have managed to get millions of unbanked individuals into the purview. RBI’s Das acknowledged this feat in his speech at the G20 summit held in September.
Just a month before the Slice-North East Small Finance Bank merger was announced, RBI Deputy Governor Rabi Sankar took note of the upper hand that fintech companies possess. Sankar said, “An arrangement of financial institutions buying services of fintech companies was “functional” adding, …fintech entities can perform functions where they have a competitive advantage and banks focusing on areas of their expertise. While customers benefit from an improved experience with curated products and services at competitive prices…”.
Customer is King
A customer-service-oriented approach will help a financial technology company deepen its stronghold and make it an attractive proposition for merging.
“Banking is not just a business, it’s a responsible service, so if they wish to merge with any such entity, they have to make sure that the customer is well taken care of,” said former banker and head of department – finance at Lexicon MILE, Dr Manju Chopra. “Secondly, they (fintech companies) can go slow on the entire due diligence, the valuation study. Don’t hurry into valuing or finding these banks, ensure that synergies are very very high,” she added.
The segment and geographies where a fintech company operates could also end up being their USP (unique selling point). Deepening that stronghold could turn fintech into an attractive proposition.
RBI’s Das has himself stressed the three key aspects that will make fintech “future-ready”.
“…key issues which are critical for the Fintech ecosystem to be stable and future ready. In this context, three critical issues, viz., customer centricity, governance, and self-regulation merit attention.”
On the surface, this merger seems like a foot in the door for financial technology companies’ growth, but it has raised many eyebrows for its “unusual marriage” of two contrasts.
It’s indeed an uphill task for both entities to find a middle ground as far as expanding their customer base, scaling up technology, and customer data sharing are concerned. Only time will tell if these opposites, who have attracted themselves to each other, will result in a honeymoon period for customers.
Unarguably, the merger has set the ball rolling for a number of possibilities for fintech companies and small finance banks to stay afloat. In the meantime, it only makes sense for these smaller players to clean up their image and books so that they are not caught by surprise when the RBI comes knocking at the door.
Nitin Konde
