Banking On Success

<div>As I was looking to pick up a book on dinosaurs for my daughter, I heard the financial channel playing in the background announcing the latest quarterly results for the top Indian banks.&nbsp; India is a land of big numbers: 1.2-billion population with roughly 500 million unbanked and an even larger number of people under the age of 30 &ndash; known as the demographic dividend. The roughly 700 million that are banked have on average 1-2 trade lines versus an average of 4-5 in developed markets and&nbsp; the top 10 banks account for a majority share of total credit in the country. <br /><br />The case for growth in the Indian banking sector over the next decade can be a more nuanced discussion but to the laymen it is as simple as not having enough banks to cater to a very large unbanked population.&nbsp; Furthermore, for the banked population, the lack of relevant and differentiated products limit the amount of household income people put to work in their bank, especially when you consider the high rates of inflation the government has been tackling in recent times.<br /><br />Indian banks need to focus on profitably acquiring the unbanked and under-banked while enhancing the level of service to existing customers by developing relevant products to increase interest and service revenue.&nbsp; That seems simple enough given the large unbanked population and the number of young people joining the work force every year.&nbsp; So why shouldn&rsquo;t we expect strong double digit growth from the same top 10 banks over the next decade?<br /><br />Well, have you recently called customer service at your bank to close an account or change your mailing address or order a replacement debit card? Have you recently tried to use your bank&rsquo;s mobile banking or internet banking solution to pay bills or order a tax statement?&nbsp; I have done just that at a number of banks and the experience has left me underwhelmed. Banks in India have not fully exploited the power of these channels to differentiate and provide the level of exemplary service they simply cannot afford to do at a branch.<br /><br />However, the path to an evolved and all inclusive banking environment is not going to be one without challenges. Technology, as in most industries, is leveling the playing field (and fast) by allowing smaller and newer banks to stand shoulder to shoulder with their larger and more established competitors.&nbsp; The smaller banks have consciously focused on core banking activities to keep total cost of operations low versus debating how to better utilize large data centers.&nbsp; That said, these banks continue to measure their success by how well they do against their peer set in India versus a more global sample which may give them a false sense of security. <br /><br />Competition will intensify as the RBI issues more banking licenses. Non-banking financial companies (NBFCs) are aggressively developing differentiated retail banking products which are more in tune with aspiring consumer needs (i.e. individual car leasing plans). Sebi will soon pass additional guidelines on the role of the investment advisor, this should help increase household allocations into different assets classes that provide better returns versus CASA or fixed deposits.<br /><br />Banks who want to stay competitive as the landscape evolves will need to look at their existing product portfolio and figure out ways to increase customer utilisation and enhance revenue. For example, given the new regulations on debit merchant rates, banks will need to reduce their reliance on debit card loyalty programmes as the primary solution to increase card utilisation at POS. Banks currently subsidising their merchant acquiring businesses with CASA accounts will realise, if they haven&rsquo;t already, that those models are not sustainable.&nbsp; The same applies to currency management; banks need to look at solutions that will increase the efficiency of currency in circulation.&nbsp; There are cash and logistics solutions that can help Banks manage ATMs and Branch currency needs without having to constantly draw down and top up currency chests around the country.<br /><br />Finally, banks need to understand that mobile and online channels should be an opportunity to delight their customers through a differentiated offering which is hard to do when everyone is using the same basic solutions.&nbsp; One internet banking application I used recently allowed me to pay bills but then I had to log out and then log back in to complete an NEFT transaction.&nbsp; This is not delighting your customer and it causes customers to question how the bank actually thinks through other products and services.&nbsp; Ideally, the transaction set a customer is exposed to online should be the same across all channels (i.e mobile, IVR, etc.).&nbsp; When banks use disparate solutions the experience is disjointed and inconsistent often leading to customer dissatisfaction.<br /><br />I do believe the Indian Banking sector is headed towards new heights over the next decade but I also believe that the banks on top of the league tables today, like the dinosaurs, will find themselves lower down on the food chain if they do not adapt to the changing landscape.<br /><br /><br /><em>Sunil Sachdev, Managing Director, International Payments Group and India Business Development&nbsp; &ndash; India Markets, Fiserv.</em></div>