Retail Banking in India: The Disruption Cusp

Retail Banking 01

I wrote this piece originally for LinkedIn

A couple of weeks ago it was made public the names – and partnership combinations – that applied for payment bank licenses in India. The list makes fascinating reading. There are corporate behemoths with interest in organized retail, there are telcos, the department of posts and of course banks, with the last mentioned playing the role of a partner in more than one combination. To my mind this is the first step in a wave of disruption that is likely to hit the Indian banking sector in the short and medium term future – starting with retail banking. There are four immediate things that comes to mind

The battle for float

Retail banking was in a large part contributor to the float that banks found attractive. As a customer I was not unhappy with the float because – one, it earned me interest (albeit paltry) and also the liquidity allowed me to make transactions. And the banks were the only institution offering this convenience to me at scale. No longer so – the old order has changeth yielding place to new lest one good custom should corrupt the world. Now there shall emerge a slew of payment service providers (PSP) each innovating with payment products and services to wean the float away from traditional banking pools. Think of it this way – the venue of float is moving closer to where the customer is most likely to use it. Earlier banks would hold the float and sell financial products around it. But a consumer’s use of the money is mostly in non-financial products (the stuff you buy at Reliance Retail for example). And that’s why Reliance as a payment bank wants to hold that float for you and facilitate payment against a purchase by a mere accounting entry in its back-end systems. In the process, Reliance will see a drastic drop in customer acquisition costs and be able to cross/upsell a much wider variety of products to the customer with a small incremental effort. As payment banks flourish, traditional banks that were CASA centric in structure will struggle to maintain profitability. Retail banking business models will have to come back to the drawing boards

Aside: I am surprised why Flipkart did not make the big, hairy, audacious move to apply for a payment bank license. There is a pretty strong case for e-commerce giants in a country as large as ours to participate in the banking system. This line of thought merits a whole post by itself – so let me hold the thought

Micro-targeted products

To give credit where due, Indian retail banks have come a long way in creating product portfolios that caters to different needs and to some extent they have kept pace with their customer’s aspirations. With the upcoming big shift, product innovation will assume blink-and-you-miss proportions. The retail industry, free from the traditional encumbrances of banks, has been way ahead and innovative in segmenting customers and in general understanding them in the context of their businesses much better than other entities. It is this knowledge that will help them in creating products that are micro-structured. A lot of the products will be banking products – like loans for example – but for the banks there will be far more co-creation of products alongwith partners. This is not lost on the banks and that is why their names feature prominently in some of the combination of organizations that have applied for licenses. But the question remains – will banks finally be just left with lending their brand names to products created, distributed and serviced by others? And how does that regime impact bank profitability?

Redefining Distribution

Distribution expansion strategy in gone-by days for retail banks would mean opening up branches. That is well past us. In fact, sometime in the future banks with large branch networks will start considering that position a liability and not much of an asset. Re-purposing branches to pure advisory touchpoints will alleviate some of the pain. Product and service distribution however will assume totally different proportions. The lady at the till of your departmental store will pitch you a customized product at checkout. Self checkout kiosks will pop you an offer different from that the previous person in the queue received. Banks will find many many more possible distribution channels than they could have imagined five years ago. This presents an opportunity for increasing rural participation in consumption of financial products as the lines between Business Correspondents and other last mile human interaction (think e-commerce delivery executives) start blurring. I am hoping some of the retail giants (like Reliance, Future Group and Aditya Birla Nuvo) shall use their existing supply chain relationships to bring into the folds of banking several millions from the un/under banked rural population. Counterintuitive as it may be – technology is rural India’s best bet for financial inclusion.

Pervasive Data Science

Retailers, Telecom service providers and retail banks counted themselves amongst the more sophisticated and heavier users of data science. The business summation impact of these industries (in how they have come forward to enter the payments space) will be far larger than the algebraic sum of their capabilities to do stuff with data. Interdisciplinary learning, already a very important cornerstone in data sciences, will become the driving force behind a holistic understanding the customer and her behavior across products (financial and non-financial), channels, geographies, environment and other key dimensions. Banking will learn from retail, retail will learn from payments, payments will learn from telecom – creating great incentives to share and co-create. For example, churn models, risk-rating models will become richer from aggregating multi-venue data and in general add much greater insight into customer behavior than the existing single-disciplinary siloed approach. The old order – of understanding a person from a relationship perspective shall give way to the new order –understanding a person as a bundle of intelligent, interconnected data points

It is hard not to be excited about these changes sweeping the banking industry and the opportunity it presents to different businesses. A quick analogy to end the piece is in order. India, as everyone knows by now, skipped a generation in the evolution of internet adoption (in non consulting speak, vast number of Indians went from no-internet directly to wireless internet on mobile devices thanks to the vast penetration of internet enabled mobile handsets). It is entirely likely, if the early trends are an indicator, that India shall skip a generation as well in its evolution to a modern digital banking environment