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

The Curious Case of State Economies in India

Data v OpinionThe political economy debate in India currently has all kinds of battle lines drawn. Market versus Social, Social versus Mixed, Central versus Federal – you name it and the combination of warring parties exist. Political leaders cutting across state and party lines never fail to exploit an opportunity to show how wonderful their corner is – often taking recourse to data (which is a good thing, as the opening quote for this piece clearly demonstrates). The trend for debates – and hopefully journalism too at some time – getting removed from passion and becoming increasingly data centric bodes very well for a vast and diverse country like India. However, for any conclusion drawn from data analysis to be worthwhile a sine-qua-non criteria is definitely acceptable data quality.  Toying around with public data released by various government and quasi government agencies in India, it is alarming to discover that several key indicators, indicators that routinely weave their way in our debates and more importantly – for shaping policy decisions, are rather suspect in data quality

Take a very basic indicator like GDP for instance. This is one bellwether that investors, policy makers, political guardians – everyone – loves to brandish (when the going is good) as a measure of achievement. It is not unusual for representatives from Indian states espousing how theirs grew at a faster clip than another – or for that matter grew faster than the country as a whole. How solid are these claims? Taking data from the Central Statistical Organization, a very rudimentary analysis shows what I’d like to call the curious case of Indian State GDP

Sum of state GDP value NEVER totals the India number. India level numbers are always higher. State GDP total varianceThere is some benevolent God amongst the 300 million worshipped in the country that makes good whatever is the shortfall is to our collective aspirations. The difference was showing a declining trend until the last year came about and created a record high!

And then there is the case with GDP growth rates too. Between 2004-05 to 2012-13, growth rates calculated by summing state GDP has been higher than the India growth rate on three occasions. However, looking at just the top ten states (by GDP size), in the same period the growth rate of at least five of the ten exceeded the overall growth rate of the country. In 2012-13, nine of the top ten reported higher growth rates that what India reported! As you can see from the graph below, other than in 2007 and 2008 when our statisticians got very efficient (or extraordinarily lucky), the difference between calculated GDP growth rate and that actually announced has been quite substantialState GDP growth variance

Other than structural inconsistency, there are wild swing in individual numbers as well. Consider Karnataka, my home state. After clocking a 7.11% growth in 2008-09 (India 6.72%) it plummeted to a mere 1.30% in 2009-10 (India 8.59%) only to rise like a phoenix and deliver a jaw dropping 10.15% in 2010-11 (India 8.91%). Amongst the top ten states Uttar Pradesh and West Bengal show the lowest standard deviation of the GDP growth numbers between 2004-05 to 2012-13

In conclusion we go back to the point we started with. A political or economic discourse, leave alone policy making, cannot be based on data that is this fragile. And this is just one set of cross verifiable data that I have looked at – heaven knows what lurks behind other datasets. As Indian polity becomes modern and policy making gets data-centric, it is imperative that the government increases the volume and velocity of open data and provides (possibly in partnership with the private sector) solid data toolsets for everyone to access, qualify and use the outcome to drive debates. Only through a process of many eyes looking at data, critiques on veracity and wider usage that the quality of information shall improve. Else, extending Jim Barksdale’s suggestion, we might as well go with the most handsome guy’s opinion

A Tale of Two Gadgets

Amazon_Kindle_PaperwhiteADD_2013_35827154_01For someone who’s an avid reader, I came into the world of ebook readers screaming and kicking. The smell of a book, transitioning from the crispness of the new to the musty of the aged, always had a special place in the hall-of-fame of my olfactory senses. Plus the physical action of turning a page, which to me is like a deliberate step forward in the acquisition of knowledge. Not to mention my habit of writing on the fly-leaf a note of where I bought the book (for example, the book Dark Sun, Making of the Hydrogen Bomb by Richard Rhodes has the ironical inscription – Borders, Pentagon City Mall, Arlington, Virginia, 2005). In a manner of speaking, I test drove the Kindle using the app on my iPad 1. The advantages were immediately obvious (no more half suitcase full of books from my US trips, for instance) but I finally decided to buy a Kindle Paperwhite to make it easier for me to read outdoors – a very important use case for me. And that – the Kindle Paperwhite – is my favorite gadget of 2014, largely because it has none of the advantages of a feature rich iPad. Let me explain.

In a world afflicted with almost incurable attention deficit disorders and gadgets making multi-tasking easier, the Kindle paperwhite’s single use-case focus is like the whiff of a new book bright ray of internal hope. The device does just one thing – downloads books over a Wi-Fi connection and presents the first chapter for you to start reading. That’s it. Get done most efficiently the stuff the user is looking to do and then get out of the way. Yes, the device steps in time to time, in a manner very unobtrusive, to adjust screen brightness, dictionary for words to look-up and highlight portions of text – and all these make that single use-case, reading, a much more enjoyable activity. But alas, there is no way to quickly check if that inconsequential email has arrived, if someone has posted a world changing 140 character tweet or if the first cousin’s daughter’s birthday pics have been uploaded onto Facebook. What a sense of liberation. Someone did mention that the Paperwhite carries an “experimental browser”. This is one experiment I’d be very happy to see fail. I have noticed that I fidget around apps much less on my phone after a longish stint of reading on the Kindle. That is the power of simple devices and software in changing user behavior for the better. This is also a great lesson for product designers who often get swayed by the SUV approach to design – pack so many features, bells and whistles that the user gets swayed by their shiny (albeit of little or no use) allusion only to have the core use cases suffer. Thank you Amazon for such a simple device – and yes, Kindle, I’ll get you the leather cover for Christmas – it is a long overdue gift of gratitude

Before I move to the next gadget a quick mention of a simple and (almost) single-use case service I use regularly. If you are into investing – minus the masochism that you are the world’s best fund manager – then check out scripbox. Their single focus in business is to make investing simple. They do all the non-simple work of asset-class identification, research and monitoring but hide it cleverly away from the user. Quick disclosure – the founders are known to me. And I, in my misplaced product management of hosepipe information systems exuberance have advocated several times numerous features and functions that the founders have patiently heard and politely ignored. They ask of every feature – “does this make investing easier?”. And if there isn’t an intuitive affirmative answer, they pass the idea. Try them – you’ll not be disappointed

GoqiiNow to the other device. I wanted to add a gadget to my fitness routine that was smarter than a pedometer. As I do with experimental devices, I was loathe to burn a lot of money for it. Just around Diwali I noticed GoQii was selling their devices on Amazon with a three month contract that brought the price down to my range. I bought one and my nightmare with the delivery started. Long story short, the consignment was delayed and finally arrived at a time when I was leaving town (and in-between I discovered how you can track on Amazon orders delivered but not those in transit). I vented my frustration on Twitter and immediately the COO of GoQii joined in the conversation. Right through the Diwali holiday week, a single customer support rep, aware of the details of the situation, kept touch with me. GoQii shipped an additional consignment to the address where I was about go even when the first was not delivered (the problem was actually with the delivery partner though GoQii never tried to disown the problem by apportioning blame, like Amazon did). When I finally got the gadget, they shipped me two premium straps absolutely free of cost – one each to the two delivery addresses. The product itself, I must confess, is quite buggy – flaky syncing of date/time sometimes, shows distance covered even when idle and the battery drains rather fast. Now all these bugs are fixable with firmware upgrades – and I am sure the company is working on it. But what sets this gadget apart is the exceptional customer centricity that comes bundled along with it. The company is quite famous now and it really could have ignored an irate dissatisfied customer buying the less than $70 device from a partner website. But they did not – their CEO left his personal email ID so I could get this resolved. I never had to use it (if a CEO has to resolve an issue then that to me is good enough indicator that the company is best avoided for business). The lesson in all this is simple – a product with bugs will be acceptable to users if there are other aspects of the relationship – things more permanent in nature than software bugs – that delight

Endnote: That’s it my dear readers – thanks for being with me in 2014. I wish you and your families the best for the season and may 2015 be healthy and prosperous for both the mind and soul. Take care.

Apple Pay: We Live In Interesting Times

apple0132After a long break, people following Apple are in a dilemma. Should they focus on the Watch (I hope this is how one should refer to the device) or Apple Pay. The Watch is interesting and has the potential to unravel a slew of use cases and apps for a new device but given that smartwatches have been around for a while makes the other announcement – Apple Pay – more fascinating. A lot has been written already about how it works, how PayPal should be worried and so on – and it is not my intention to add. Rather I think it is about time Apple stopped bothering about personal productivity apps (their Office clone – iWork) and focus on developing financial wellness/wealth management application suites

Think about this – if Apple Pay does take off, the company will cover almost all aspect of spending by its users and have real-time records of that. Not only can it account for these spends – it can weave them into magical apps where users get to know their financial well-being right there instantaneously. Physical well being on the Watch, financial well being on the phone. Think of how you thought of a phone and a watch last month and the pace of change hits you like a train. If I were Intuit ( actually) – I’d be a touch worried (actually more than just a touch). I am yet to fathom how Apple Pay can invade the Enterprise but if it does then I’d be really worried if I were Intuit. Accounting is a slap-on process atop the data that is created in the process of transactions – the real deal is, well, deals. And very soon Apple Pay will have a barrage of advertisers sucking data from Apple’s read-only APIs and pushing deals through to users mining dimensions of their transaction data. That is what spenders care about – deals that help them realize value. Apple Pay might have just started out two days back but it has the potential to disrupt a lot of things beyond just payments

As the <insert your favorite countrymen> say – “we live in interesting times”

Image from TechCrunch

Platforms & Openness

There is a rush currently underway in business to become a platform company – provider of an ecosystem. Platforms make intuitively good business sense. The openness of a platform attracts many more participants who either by their presence or their expertise (often both) enhance the base value of the platform. And the platform always gets paid for the facilitation. Consider the Kindle platform of Amazon for example – writers, publishers, readers using the platform pay Amazon for either end of the reading transaction (Kindle is not such an open platform really though writers can self publish on it – perhaps Salesforce is a better example. But you get the drift)

Primary and most significant cornerstone of a platform offering is its openness. That is what attracts participants and builds out the ecosystem at scale. Viewed differently, openness is also a culture. This unique intersection of culture and business model is what makes successful platform companies. If the internal culture of a company is that of opacity, parochialism and fights over turf it is very likely the company will bring the same behavior in the way they run the platform. This pisses off participants (like Facebook a few years back was alienating “partners” by building out on their core platform what the partners were bringing in to the ecosystem. This is – besides plagiarisation – a culture of turf build out, which leads to a culture where no one shares anything for the fear of the idea getting stolen). Once partners on a platform shy away, there is no way the firm can reap benefits of providing the platform at scale. The consequence is mostly a regression into becoming a product company earning one time license fees

Remember the saying – culture eats strategy for lunch? It is true. If you are aspire to becoming a platform company ensure the cultural revolution of being more open, collaborative and tolerant (even for disruptive ideas) starts happening closer home


Small and Medium Aspirations

Small and Medium Enterprises (SMEs) represent the vast middle earth in the Indian business ecosystem. And as I write this, a gruelling war is getting fought by a multitude of firms to win this middle earth. Win relationships, win mandates, win contracts, win engagements – all so that when these SMEs become adults, businesses who have won now have prominent seats at the table

In a way we think of SMEs as a different class of businesses altogether. During a requirement analysis phase – for building a product or a service – the trap is in hastening to believe that SMEs have very unique businesses issues and try solving them. Quite the contrary – SMEs most often have the same set of challenges that large established players have. So rather than focusing on the challenges of SMEs, a better approach is to focus on their aspirations. Every small and medium business wants to become like – and be treated like – the big guys. The last thing they want is a condescending salesperson turn up at their doorstep and explain how – almost out of pity – they put together a product or solution for them

If a business is serious about serving SMEs it needs to work to help the SME get rid of that very tag. Help the small business to become as competitive – if not more – than the big business. Help the medium sized business break through the growth ceiling. In short, do just two things – one, align to aspirations and, two, help the Davids beat the Goliath (yes, even if Goliath happens to be your client)

Why did we not start this company?

Acquisitive companies are where innovations come to die. Innovation is hard work. It means getting out to the streets. It means talking to people (many people), making notes (lots of notes) and then making sense of all those (loads of thinking). It means stopping for a minute and try piercing the fog to understand the future. And most of all it means taking a leap of faith – a chance – that the thing that gets put out there after all this will work. On the other hand acquisitive companies have it easy. Someone’s doled out the money for the boys to go shopping so why on earth should someone bake a cake (messy) when there is money to just buy the pastry (classy)? Jim Collins in “Good to Great” hands out a fair amount of sarcasm for such companies who acquire out of habit. “When the going gets tough, the ‘tough’ goes shopping”, he says obliquely to the M&A boys in these companies

Assuming at some point the sarcasm will sink through the skin, it is likely such companies will wake up and want to kick start their innovation engine (it’s not easy though, but a start is required). There is one simple way for the top management to wake up managers to the reality that the mindless acquisition music has started to stutter and will finally stop. Ask this question. “Why did we not start this company?” 

Think of the power of this question. It hits at the very heart of a moribund system and behooves a diagnostic look inside rather than at the shopping list M&A catalog. This soul searching is what a lot of companies know they’ll not be subjected to and hence try to buy their way through the business. It doesn’t work in the long term. Spending multiples to makeup for structural inefficiencies cannot be a perpetual engine of growth or efficient deployment of capital. Acquisitions create cultural mismatches, raise integration problems and confusion in go-to-market tactics. And all it takes for the cultural needle to shift is the simple question – “why did we not start this company?”

Let this though not be a rhetoric question, a smart quip. The query must be answered (probably made a mandatory section in the investment proposal). The answer can very well be anything ranging from “didn’t have the guts to disrupt our own market” to “we didn’t have the talent to get this going”. Whatever be the reasons – and these reasons will buildup over time – a lot about the company’s bottleneck to innovation can be understood from these reasons. The ones that show up with greater ffrequency are the ones with fires burning below them and needs correction expeditiously. The intent here is not to put a complete stop to acquisitions, which when done judiciously is an important vehicle of adjacent and futuristic growth, but to put a healthy disincentive in how management gets lazy in executing the core

Perhaps the greatest benefit from this exercise is that it is a bit like yoga. It doesn’t promise quick visible results but over a period of time it cleanses up entire systems and returns a company to holistic health