How financial services incumbents can keep up
Ernest Hemingway’s The Sun Also Rises has one character asking another how he went bankrupt. “Two ways,’’ is the response. “Gradually, then suddenly.” Years later, disruption in India’s financial services business could well follow a similar trajectory. Just as Uber and Airbnb have disrupted the transportation and hotel industry, a confluence of factors is creating the opportunity to disrupt India’s financial services. Incumbents who ignore these forces or are slow to react place themselves at significant risk.
Among the many reasons, foremost is rising customer expectations. Consumers are getting used to product and service standards provided by modern internet companies in every aspect of daily life, from buying groceries to booking movie tickets online, and expect these experiences to extend to other business transactions. Furthermore, falling costs of wireless data access and smartphones are unlocking access for millions of consumers every month. With over 200 million mobile data-subscribers in India, the smartphone is turning into a focal point for delivering a range of experiences while collecting granular information on user behaviour.
India’s new large-scale public digital infrastructure is yet another catalyst. Platforms like Aadhaar, DigiLocker, the Unified Payment Interface (UPI) and Bharat Interface for Money (BHIM) have allowed earlier paper-based cumbersome processes like account opening to become digital and remotely executable. Usage of this digital infrastructure is growing fast. Over 10 million Aadhaar identifications and four million eKYC verifications are being carried out daily. This sets the stage for the digital roll-out of more complex banking services like lending and wealth management.
Moreover, new Reserve Bank of India regulations have changed the definition of bank outlets to broadly include all types of branches and bank correspondent (BC) outlets, which can now open full-time or part-time. This can have wide-ranging implications; it is now possible for incumbents to deliver financial services by sharing the physical distribution networks of non-banking partners—helping spare full-scale investments in distribution infrastructure.
Perhaps the most subtle but potentially game-changing disruption we are seeing is the blurring of boundaries between customer-facing businesses and network-driven ecosystems. Historically, consumers have been served by dozens of parallel value chains, with different accounts and using different platforms. These were disconnected services with limited synergies. But in today’s networked era, customers can have a plethora of distinct services on a single platform, as part of a larger ecosystem. We have identified 12 retail and institutional ecosystems emerging in India, which are likely to address revenue pools of over Rs1-2 trillion by 2022. This is far higher than traditional (standalone) banking revenue pools.
An example of this phenomenon globally is the Chinese company Tencent, whose messaging platform WeChat, allows customers to communicate, book cabs, buy gifts, send money, book services and use basic banking services, all on a single service platform. Using this ecosystem approach, Tencent has created a cashless economy and a mine of user data. Such ecosystems are also emerging in India, for example, messaging providers introducing peer-to-peer payment options, and e-commerce platforms offering credit to retail customers and businesses. Incumbent financial services players have the opportunity to integrate with these networks to cross-sell services to an engaged customer base, and use the data generated to improve delivery of solutions.
Challenges for India’s banking sector incumbents are further exacerbated by their high-cost structures. Fixed costs are built into sales and distribution networks and legacy technology stacks and these make it difficult to introduce new products and features rapidly. The Fintech ecosystem, on the other hand, is evolving rapidly with over 400 start-ups in business. Some of these are attacking banking revenue streams in payments and unsecured lending.
All is not gloom and doom for incumbents. Trust and long-standing relationships have always been important pillars of the banking business. These relationships and the data troves with banks are a significant advantage. Ramping up efforts on three fronts could help them build on these strengths.
A change in strategic posture and business models to account for the impact of the new ecosystems and platforms could be a good starting point. Incumbents should assess how they can find the right ecosystems to tap into and embed their banking services, in order to acquire customers, and deliver relevant and convenient financial solutions seamlessly. Once established, ecosystems can serve as entry barriers for competition, and promote good financial behaviour among customers as defaulters risk being excluded from the ecosystem. Creating such ecosystems would require incumbents to stitch together partnerships with different players with complementary capabilities, customers or distribution networks.
Digitizing the “core” and adopting new digital operating models comes next. Digitization of banking journeys is acknowledged as a lever to enhance customer satisfaction, generate back-office efficiencies and enhance reach and scale, especially in remote areas.
India’s biggest banks currently spend over Rs5,000 crore on distribution-related costs. With new regulations allowing incumbents to leverage their non-banking partners’ distribution footprint, millions of retailers and shopkeepers across the country could potentially act as BC agents, allowing sharing of distribution costs and improving utilization of fixed assets.
Building capabilities on analytics, technology and delivery is another key dimension for incumbents. Taking on nimble attackers requires systems and processes that allow rapid experimentation and faster time-to-market for customer-facing services. This would need adoption of modern technology stacks and development practices. In addition, incumbents will also need to compete with consumer internet companies to hire the best talent.
The Indian banking sector is at crossroads. Traditional players are facing a huge disruption, while digital growth is driving change. The period of disruption presents tremendous growth opportunities. Incumbents will need to make bold moves and initiate major transformations to leverage these opportunities.
Aditya Sharma, Renny Thomas, Shwaitang Singh and Vinayak H.V. are, respectively, associate partner, senior partner, engagement manager and partner at McKinsey & Co.
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