Decoding the digital bank of the future for India

By Vinay Bagri, NiYO

The Indian banking industry has become a poster child having taken rapid strides over the past decade or so.

Once playing catch-up with leading global practices, the industry cut in half the number of unbanked individuals in India between 2011-2015, adding almost 300 million first time bank account holders.

Cut to 2018, and the game has moved rapidly into the world of digital. The digital revolution has swept across industries, and the financial services space has seen the winds of change blow into it.

Financial services companies are operating almost in a marketplace under siege, a new paradigm where the fundamental definition of how customers experience and interact with a bank is being challenged and redefined.

Customer expectations are being defined by their experiences elsewhere. From online e-commerce, to taxi-hailing services, to food delivery, to social networking, even to online dating, quick product and service delivery combined with seamless user experience is the new normal. Why should banking services, just as important as any of the other services listed above, be left behind?

The answer may lie in the archaic business models and cost structures of traditional banksthat are more suited to the old economy and the slow pace of the industry to embrace newer technologies and engagement modes.

Consider this for a moment. Apart from mobile phone apps and online banking services, there are hardly any innovations that banks have introduced over the past decade despite the overwhelming case of right market conditions.

India has over a billion mobile phone connections and the smartphone user base is expected to grow to 520 million users by 2020, according to a report on Digital Paymentsby BCG and Google.

Add to that the proliferation of bank accounts, higher spending power and favourable demographics, where over half the population is under the age of 30 and is technologically savvy and willing to experiment with new products & services that offer them more.

Further, Digital India, which seeks to transform the country into a digitally empowered society, supports rapid digitization of India’s financial services. Evidence of this is IndiaStack, an API platform initiative through which every Indian citizen is tagged with unique digital identifiers.

Traditional banks operate on a brick and mortar model with multiple layers of hierarchy, huge staff and equipment costs, utilities and other costs which are passed on to the consumer to keep the former’s profit margins intact. To justify these cost structures, banks either do not service sectors where margins are thin or where they can, price products at inflated costs.

This explains why penetration beyond urban pockets had stayed low until recently (with the exception of state-run banks that were directed to service customers beyond the profitable catchment areas).

What if it were possible to turn this model on its head? To let the market decide the best price and tailoring your product or solution according to the price. Digital banks are showing that it is possible to offer customised, premium products and solutions at low prices.

They are also paving the way to a whole new level of customised personal banking. Imagine a situation where every customer has a dedicated wealth manager cum banker at his disposal 24×7.

Digital banks are making this a reality by turning the technology.

Supported by Natural Language Processing skills and Artificial Intelligence (AI), chatbots and virtual agents are able to give Level 1 support at costs impossible for traditional banks to meet.

And this is just the beginning. AI-based chatbots can be assigned to every single customer, customising engagement through its ability to continually exploit deeper insights, contextual understanding and real-time learning, while still operating at far lower costs.

No wonder then, that an IBM Institute for Business Value (IBV) survey of 2,000 banking leaders across 31 countries, including 150 from India, reveal that as many as 43% of respondents expect banking functions to become highly commoditized in the near future.

We are not far off from the day when a digital bank would not only offer payments through cryptocurrencies but also offer a range of cross-platform services to every single customer. Unlike traditional banks, digital banks are free from the legacies of the past and can design their operations, processes and strategies keeping the customer at the center.

India has already seen the emergence of digital banks like 811 (from Kotak Mahindra) and Digi Bank (from DBS), which together today have a miniscule market share, but the adoption curve for such services is only steep at the beginning. We are not far from the day when consumer banking will be dominated by digital banks.

Does this mean that all is lost for traditional banks and financial services firms? As the current digital banks have shown, it is possible for legacy banks to unshackle themselves if they stop looking at fintech startups as competition and look at collaborating with them instead.

To be sure, most traditional banks want to have these competencies and go digital, but their approach seems to be muddled. While some approach digital banking purely from a technology standpoint, others perceive it as a new way of engaging with customers or a new way of doing business.

Digital banking is about all this but also much more. It calls for a complete change of mindset among bankers, but the clock has already begun ticking for them. Fintech startups have already begun eating away at their markets from the bottom. They can either stand in the way of this digital revolution in financial services, or join in.

(The author is CEO and Cofounder, NiYO. Views expressed above are his own)