The bulk of the new banking consumers are digital natives and don’t think of branches as an interface for financial transactions
What is a bank in the 21st century? Is it a commercial space with swanky interiors in the ground floor of a high-street location, with brand signage that proudly says ‘bank’? Or is it cluttered with sales promotion posters once you walk in? Or is it filled with staff with a lackadaisical attitude, unless you are there to buy some products that they force-sell? Does a bank denote cash counters and ATMs and crowded consumers?
The reality of Indian banking today is a mixture of all of these and much more. But the unsaid fact is that since the consumer adoption of data services in India, banking (and non-banking financial services) is more of what’s seen and experienced on consumer phone handsets—in the form of online banking or apps.
The very concept of branches that we have used to push for unsolved financial inclusion is seemingly a larger and awkward question mark. Does pushing for rural branches solve for better credit access to our fellow citizens in those geographies? With more of the finance sector poised to be disrupted (further) by ‘data-decision’-ing and technologies to provide consumer access to financial solutions, we should ready ourselves—as a consumer market and with proactive regulations—for a stable tomorrow, and not by the past mounds of sectoral licenses that we have hoarded in our quest for financial inclusion. Financial inclusion has not necessarily meant socioeconomic impact. In any case, the Indian banking sector has a challenge of another kind—corporates that, in most of the other economies, borrow from the bond market, end up lapping up bank disbursals at the cost of retail and smaller businesses. Call it lazy banking, if you will, but such is the nature of our debt/bond markets.
Winds of universal banking
Just because of the word ‘universal’, there is a common misconception that entities under the universal banking licence should have large balance sheets, be geographically wider in distribution reach, and scattered amongst many consumer segments. This is a classic case that has shown many of our banks in poor light, despite many intellectual minds—from the best of schools—giving the final shape to the strategies of these entities. The common strategy (blasé) is wanting to be a bigger bank, with better CASA and pan-India presence. Most of them end up chasing the same consumer segments and lose business margins. And yet, they offer little product innovation or customer convenience, until the fintechs shook them up. Youngsters who had no clue about banking and other financial services businesses started providing solutions to consumer needs.
The moment regulators start regulating fintechs and non-banks with a heavier touch, this unfair chasm will disappear.
Of course, shallow debt markets do help banks. In addition, banks have the regulatory moat as a business strategy to hold onto business valuation. The moment regulators start regulating fintechs and non-banks with a heavier touch, this unfair chasm will disappear. Consumers will benefit. Probably that would happen when the talent pool expands in the regulatory space, alongside deeper operating understanding of current digital technologies. This might allow for fair access of finance-as-business to fintechs, away from the current hierarchy of regulated entities. Without any casteism imputed, we can probably paraphrase that banks (however weak or meek they are) have the advantage in this banking-Brahmin hierarchy.
There are sufficient examples of well-run smaller regional banks in India that are profitable and value-accretive. They have stayed away from chasing pan-India asset gathering and instead have focused on consumer segments and geographies that they understand deeply. There is no need to compete for real estate space to justify a Mumbai or New Delhi headquarters when a smaller town can still attract qualified and competent talent. Familiar? No wonder we see that banks with vintage goals still struggle with basic operational issues and business survival needs.
Growth drivers for smaller banks
There has been an increase in finance consumption with the nuclearisation of families and growth of access to the internet. Millennials have a different attitude towards finance and banking as well. By being a niche and regional banking brand, banks can utilise the loyal consumer base and build sustainable profitability by developing value-accretive product and service offerings to the identified consumer-affinity groups. The identification of consumer affinity groups and products to be delivered to them can also enhance the revenue per consumer as well as revenue per employee. Bringing the bank’s technological and digital capabilities on par with other banks cannot be postponed.
These banks should look at aspects of collaboration across asset co-generation, increasing FD drive, mapping new consumer groups to serve, and selling other non-banking financial products for increased fee income. The bulk of newer banking consumers are younger and digital-first. They are digital natives and don’t think of branches as a mode of making financial transactions. They want one-touch solutions on their phone. We have pages and pages of rules and regulations that were drafted in the pre-digital-thinking era. Hence, mere wordsmithing by banks in saying “let’s be agile” or “we shall be nimble to serve client needs” doesn’t convince others—especially the street! Financial services should quickly learn how newer digital modes of interaction affect socialisation habits in general. These have impact on consumption of products and services and, consequently, business models of finance.
The banks that build consumer traction have demonstrated concern and respect for their customers’ needs. Successful smaller banks have proven this many times.
Legacy doesn’t matter. Try telling a younger consumer about your bank being around for 70 years. It does not give any comfort to the consumer. Try offering a product suitable to such a consumer instead—with digital convenience, and you have won over that consumer. Banks use the phrase “relationship banking” when much is desired to showcase that they take that relationship seriously. The RM role is used as a sales push, rather than caring for customers. The banks that build consumer traction have demonstrated concern and respect for their customers’ needs. Successful smaller banks have proven this many times.
Niches can be a safety-net
A bank could target specific segments of the populace, like millennials, Gen Z, middle-aged, etc. Similarly, a bank could offer its product mix to meet the needs of select industries, with a deep focus on those consumers. A bank could also build up its products to address specific communities—for example, servicing unbanked and underbanked people. Niche banking is not meant as a comment on feasibility, or the lack of it, of current banking license categories. After all, the consumers and capital markets are a better judge of it. But niche banking can be profitable for all stakeholders.
This commentary originally appeared in Financial Express.
The views expressed above belong to the author(s).
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