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SBI headquarters in Mumbai. Banks of the future will have more AI models than employees. More decisions would be made by machines than humans. Photo: Manjul Kumar/Wikimedia Commons
SBI headquarters in Mumbai. Banks of the future will have more AI models than employees. More decisions would be made by machines than humans. Photo: Manjul Kumar/Wikimedia Commons

2030: A banking odyssey

The state of banks may show us a gloomy picture today, but if tech disruptions continue, a decade would be enough for the new dawn

Consider this scenario—it is 2030. India has firmly established itself as the fastest growing large economy. Tech and Artificial Intelligence have been a force for good and have changed the face of several industries. Few sectors have changed as dramatically as the business of banking. India’s banks are much more profitable and are almost unrecognizable from even a decade ago. They are embedded in almost every aspect of a citizen’s life journey, and yet people no longer ‘go’ to a bank.

One doesn’t need to be too much of a futurist to read the signs emerging from the huge disruptions that banking is currently going through. The year-end is a good time to examine the biggest of these disruptions and extrapolate how they would pan out for India’s bank of the future.

Rocky times

Over the last few years, India’s banking sector has been going through what seem like never-ending challenges. Even as bad loans have paralyzed many banks, the performance and high valuations of many others reflects a profitable long-term growth opportunity. The dichotomy is indeed stark. India has some of the world’s best and worst performing banks—all in the same era.

Even as some banks struggle with non-performing assets, digital disruptions are already changing ground realities. The Aadhaar data stack is globally unprecedented as an enabler to ‘presence-less and paperless’ banking. India’s payments infrastructure has taken an enormous leap forward. Digital banking penetration has doubled, and the frequency of digital channel usage has increased fourfold in the last three years. Counter-intuitively, consumer research shows that the more the digital efforts and initiatives of existing banks, the less loyal the customers. In fact, more than half of the customers in such banks are not satisfied. It is no surprise that the business unit leaders at these banks harbour cynicism about digitization. They are often unable to find value from their digital efforts, even as their brick and mortar banking efforts continue to pay enormous dividends.

Meanwhile, new competitors are constantly emerging. Players in new categories like small finance banks and payments banks are challenging traditional banks. Players with large consumer ecosystems become important distributors of financial products given their customer reach and data. Fintechs create new, innovative business models to reach out with new financial service propositions. Regulations are enabling financial inclusion to extend the reach of affordable financial services through new licensing and initiatives like re-defining the ‘banking outlet’.

Given this dramatically shifting landscape, we did some time-travelling, and studied successful Indian banks from the future. Here is what we found.

The wormhole

India’s bank of the future is embedded in most interactions through the life-journey of a customer. This could be through the apps they use, websites or stores they visit. Though folks no longer go to a bank.The bank is simply everywhere—an SDK sitting inside the engagement layers of customer facing applications. This scenario takes the friction out of transactions and allows banks and their partners to offer personalized financial-services products at the point of purchase with instant fulfillment.

So, what is the implication of this scenario for banks?

Tighter integration with the daily lives of customers means that presence in the underlying payments transaction becomes key. It becomes a point of origination of customers and also banking product sales. It creates the data for making better decisions on income estimation, credit worthiness etc. The increased migration from cash to digital payments in hitherto unbanked segments in India open these segments for banking intermediation at lower costs. Payments by themselves do not make a lot of money; but become both a gateway and a source of stickiness in banking relationships. Banking products get reshaped to serve customer needs and become less siloed. For instance, the ability to provide flexible credit lines which change with seasonality, bundled with payments, with the option of sweeping of temporary surpluses seamlessly into money market instruments creates new value propositions for small business customers.

Banks move towards having very few branches of their own, and yet have far more points of presence. To use today’s terminology, the branches are Uberised. One data-point could bring out the difference sharply. For $1 billion in annual operating costs, large banks in the present, can put up roughly 6,000 branches. This feels like too many from an economics standpoint, however might not still be enough to fully reach the dispersed geography of India and serve customers well. Shared retail infrastructure enabled by advances in remote authentication and paperless services, supported by regulation enable a completely different physical distribution infrastructure. Banks of the future have morphed so they can cover up to 100,000 points, without having to own many branches. Customers are served better but banks have to spend less.

The similar phenomenon that unlocked ride sharing and is disrupting mobility through technology, enables superior asset sharing of physical banking infrastructure. Ongoing optimization of the partner distribution network to manage customer service and costs, therefore becomes key for the bank.

Managing this new world requires a lot more in terms of machines and technology. An explosion in machine readable data on customers opens up new possibilities. Verifiable information and documents including those from government departments captured through initiatives like the Digilocker, GSTN, and others open new horizons. Banks of the future have more Artificial Intelligence models than employees. More decisions are made by machines than humans. Banks manage over a 100,000 decision models with 95% of the models based on AI as their most precious asset, compared to a few thousand models in banks of the present, of which less than 10% are AI based.

For this dramatic change to have taken place, there is a huge shift in the nature and skills of bank executives. More than 50% of the profiles of employees are those that do not exist in the banks of the present. Data scientists, product engineers, solution architects, design experts, automation engineers, and digital marketers outnumber traditional bank employees. Obviously, the result is that the cultures in India’s banks of the future is dramatically different from the present. They no longer outsource their technology function, instead they in-source capability. The ability to manage partnerships is key.

On a practical level, to attract and retain the new talent, the bank is run very differently. The traditional siloed and hierarchical organization structure has gone! Most work happens in co-located agile cross-functional squads. Functional competence in areas like compliance, risk or finance continues to be driven by functional leaders. However, they remain responsible for coaching and evaluating functional performance of the colleagues with those skill sets, and no longer drive day-to-day operations. The squads become responsible for not just the everyday tasks but also for the customer outcomes, they are responsible for supporting.

This level of dependence on technology introduces new risks particularly in the cyber world. The chief security officer of the bank is no longer someone who oversees security guards, but rather someone who protects the bank from external attacks and breaches. The architecture of the bank’s IT systems becomes critical not just to enable flexibility, but also to protect the bank from risks.

Succeeding in the future

Our voices from the future clearly demonstrate that the structure of India’s banking industry would be dramatically different from the present. Even as you read this, the capabilities and capacity required to compete as an independent bank, are going up sharply. Some of the market leaders, could break through and become what we call ‘ecosystem orchestrators’. Large players who have been able to make the transition will be able to own the customer relationship and underlying data. 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. In the networked era, customers can have a plethora of distinct services on a single platform, as part of a larger ecosystem—this is the blurring of boundaries between consumer-facing business and emerging integrated ecosystems.

Our research shows that twelve consumer and institutional ecosystems are emerging in India, and these are expected to collectively address revenue pools of 1-2 trillion by 2022. Such ecosystems include messaging providers, telecom companies, retail and e-commerce platforms. Banks who can make the transition to being ecosystem orchestrators, will be able to embed their banking services in the non-banking journeys of their customers, making access to banking more convenient.In exchange, they would get a more comprehensive source of digital data to understand their customers better. This data can be used to develop a fuller understanding of customer needs.

Another category of successful banks, will remain strongly specialized and focused on segments and geographies where they have deep capabilities and customer relationships. Their distribution, customer connect and understanding of risks in specific segments in a diverse and geographically dispersed country like India, would keep them relevant for longer even as the broader trends continue. These would include both traditional players with strong customer franchises, and new technology led players disrupting niches in the market. SME- and mass-market focused players with a deep risk and collections capability who can keep themselves contemporary, will find themselves in a large and growing opportunity area with continued upside. Some of the players in this category would include the small finance banks. Further, new specialized models either driven by customer aggregation or through platforms in spaces like mortgages or supply chains might also create strong customer stickiness and pull.

Banks who are unable to make the transition will drift towards embracing “invisibility" by providing reliable back-office services and a strong balance sheet —key success factors will be cost and scale. They could begin to offer balance sheet for mortgages and corporate lending and manufactured products to wealth management. For banks already at scale, they become ‘white-labeled balance sheet utilities’ unable to command a consumer brand but acting as an enabler for other players.

Existing successful banks with strong customer franchises could try and stay competitive by optimizing and digitizing the traditional bank. The banks that succeed with this approach will have already robust core strengths, including capabilities in areas such as customer acquisition, underwriting, financing, and servicing. But they will need to build on those strengths and fundamentally optimize their operating models.

A sub category, could formally become government policy banks, enabling the government to execute important developmental aspects critical to a growing economy like India, but requiring continued government support.

Given this potential future, the intervening period could see a rise in market-driven strategic mergers and acquisitions. Investors in banks which appear to be in strategic ‘limbo’ might realize that they are better of hitching their banking platforms to winners of the future as those would create value. The days of spending on technology to play catch up, while largely staying as a traditional universal bank, could come to an end. Potential winners, despite the concerns of integration risks, would value the deposit franchises which come with these lower performing banks. These deposit franchises have proved to be slow in moving even in the face of enormous disruptions. Strategic partnerships between banks and ecosystems will rise.

We would see a very different banking sector in the future. Intermediation costs would fall sharply, driven by the successful banks. Margins would reduce, even as the successful banks would be profitable as operating costs get restructured.

Beyond returns to shareholders, customer experience becomes a key metric and defines the tenures of bank CEOs. Customers would fall in love with banks again!

Renny Thomas, senior partner, McKinsey and Co.

This is the third in a six-part year-end series to rethink work and life around us.

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