Banking will survive… Banks may not!
A typical bank is an entity that is changing its shape rapidly. A brick-and-mortar structure comes to mind when you think of a “Bank”, but the long queues, hefty documents, and complicated processes are disappearing from the dominant perception of the term “Banking”.
The banking sector in India has undergone significant transformation in recent years. Traditional Banks particularly mid-tier and small banks have faced unprecedented challenges in terms of distribution, speed, cost efficiency, and loan life cycle efficiencies. Governance deficits in private, public, and cooperative banks have also led to skepticism among people. With the rise of Fintech and Paytech Unicorns and Decacorns, mid-tier banks must adapt to stay competitive.
Currently, approx 150+ banks in India are involved in lending, deposits, and clearing transactions. These include nationalized and private banks, foreign banks, small finance banks, and other commercial sector private banks. However, apart from the top nationalized/ private/ and foreign banks, other commercial banks run the risk of losing their edge and relevance. Primarily because Fintech innovations have transformed the Indian banking sector to a great extent. Would mid-tier (including smaller banks) in India be able to survive in the ever-expanding and digitalizing banking sector? Let’s dissect…
Transformation of Banking in India
By the beginning of the 21st century, the banking process shifted from analog to digital. Credit Cards, ATMs, and Computers became part of the Indian Financial Ecosystem. However, brick-and-mortar Banks were still an integral part of the Indian life. Going to a bank was an experience everyone had to go through once in a while.
However, a shift happened in the last 2 decades in particular. With the mass market penetration of smartphones and access to the Internet, and UIDAI introduced Aadhar, the online/digital banking picked up. Along with the internal processes, the interactions with outsiders and retail customers became fully digitized and online.
The online movement of banks has been fast-tracked after the pandemic which propelled internet banking, digital lending, and innovation by NPCI and other payment apps/ Pay-techs.
The focus is inter alia on digital operations and contactless services instead of planting physical branches/offices.
Meanwhile, Paytech and Neobanking Unicorns developed solutions that outpaced the growth of physical banking infrastructures in India. Paytm became the first Fintech unicorn in 2015 albeit, within new age norms of valuation of a company. Since then, new players like Policy Bazaar, PhonePay and Digit Insurance, and several other Unicorns and Soonicorns have emerged. On May 11, 2022, Open became India’s 100th unicorn and the first neo-banking startup to attain that status.
BaaS (Banking-as-a-Service) is the approach that allows these Paytechs, NeoBanks, and other new-age financial services entities to connect with any bank’s system through APIs. It’s fueling the aspiration of many Fintech startups to disrupt and even replace banks. The government’s push for digital financial products and services and the existing Fintech regulatory regime which is still in the nascent stages have also promoted new players in the banking world. Mid-tier and small banks must adopt modern tech stacks and transform their future strategy to remain relevant in the evolving banking landscape. Without this cultural and strategic shift, their survival could be at risk.
How can Banks stay relevant?
Mid-tier banks (including smaller banks) need to make critical changes in their cultural and strategic approaches to stay relevant in the changing landscape of banking. The Internet penetration in India stood at 49% in 2022, with an estimated 659 Mn smartphone users. So it’s no surprise that digital banking would be the preferred choice for Indians, and banks need to embrace digital transformation to adapt to their customers’ needs. Here’s how banks can persist and thrive in the evolved banking sector.
Transformation of core capabilities
Banks need to transform their core capabilities to be able to launch customer-centric products and services to survive. This involves revamping their legacy core banking systems. Outdated legacy systems for core banking inhibit banks’ ability to deliver new products and services that meet customers’ expectations. New core systems are digital by design and include benefits like dynamic pricing, reduced paperwork, and enhanced customer experience. Processes like account opening, transaction processing, loan processing, and other core banking services also develop transparency and fairness in customer dealings. Hence, updating core capabilities would be critical for mid-tier banks to gain back the trust of new-age customers.
New-age servicing models
With the rapid digital transformation, customers expect convenience, speed, personalization, and a lot more from banking services institutions. A growing lot of urban customers now expect sophisticated and personalized services that meet their specific banking needs. These may include instant loan approvals and hyper-personalization of product offerings whilst taking care of customer privacy and data. UPI and Payment apps have also impacted the banking behavior of tier 2 and tier 3 cities. Having access to physical branches of the banks is not enough, customers expect banking from anywhere and at any time. Hence, banks need to develop new aforementioned servicing models catering to the new-age need. AI, machine and cognitive learning, and advanced analytics can be used for gathering data insights to build efficient operations and human-centric designs for digital products.
Digital Agility
Keeping pace with rapidly changing customer expectations and competitors’ innovations requires banks to not just transform, but also to do it at speed. This involves building and piloting Minimum Viable Products (MVPs) and refining them based on customer input, rearchitecting for the cloud, and developing digital skills. Many banks adopt agile techniques in their transformation programs whereby work is conducted in sprint cycles. It may sound counterintuitive, but making mistakes is an important part of this process (ie. the need to fail fast in order to succeed ) and is necessary to outpace competitors. Therefore, to stay afloat, banks need to deploy digital skills that can enable data-driven agile movements. The benefits include faster time to market, digital resiliency, and the ability to scale exponentially.
Collaborate with Fintechs and Paytechs
Indian customers are increasingly drawn to Fintech platforms for their convenience, fast turnaround time, and other advantages. UPI and Paytm have played a special role in the transformation of banking in India. As banking becomes accessible with instant money transfers and digital wallet payments, banks need to adopt an omnichannel approach with a mix of digital and offline banking to make their products and services appeal to the masses. However, Banks and Fintech startups should not be seen as rivals vying for the larger market share, because they actually rely on each other to a great extent. Today we see large banks incubate Fintech startups. These startups collaborate with Banks as well as insurance and back-office partners to deliver their core products. Meanwhile, investing in and acquiring startups helps the banks as well, since they can take advantage of innovative technology to enhance their current operations and services.
The bottom line
Fintech startups continue to drive innovation in the future of financial services, and banks cannot afford to be too late to change. The need for greater accessibility, speed, and cost efficiency has driven the transformation of banking in India. It has become obligatory for mid-tier banks to adopt digital transformation to stay competitive and ensure business continuity. Updating core systems, adopting new-age servicing models with agility, and collaborating with fintech enterprises can enable them to deliver products and experiences crucial to survive and thrive in the transformed Indian banking sector. Otherwise, banking will exist, but only inside the premises of a few top/large Banks and a select few savvy NBFCs and other Fintechs that are always at the top of their game.
