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Business News/ Opinion / A wake up call for the banks
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A wake up call for the banks

Banks are sitting on a powder keg. Their business models are likely to be blown to bits if they choose to wait out for the digital disruption to gather steam.

Photo: iStockPremium
Photo: iStock

If you work in a bank, you should probably read this.

Banks are in grave danger.

Especially so in India. A 4x5-inch screen is going to eat your business. If you don’t move. Now.

Except for a couple of big banks, most of you seem to be sitting at ease, waiting for this tsunami to hit.

Everything looks fine today. Your stock price is rising. You have millions of accounts, thousands of ATMs and more employees than even you can count. Your balance sheets are large and growing. Profits are rolling.

But the walls that protect you are being taken out brick by brick. Millions are being poured into businesses that are aiming to be quicker and better at serving the financial needs of customers.

Once venture capitalists (VCs) have overcome their fascination with pouring billions into e-commerce firms that want to deliver mouthwash to my house in Mumbai all the way from Bhiwandi on the city’s outskirts, even though my bania is just round the corner, their next attack will be on the bedrock of all these markets, the business that you are in. The business of money.

The challengers are coming

A VC-funded wallet founder claims he’s got 100 million users. A leading telco, armed with a payments bank licence, is talking about 300 million active users. Whereas most banks have less than five million downloads on their mobile app. Even more unbelievable, some banks are still investing in bricks-and-mortar branches and ATMs in tier I and II markets.

In every part of the world, there is a bunch of 25-year-olds working on disrupting your archaic business model. They know that banks make too much profits compared with the real value they add. They make money on the float, on the fees—it’s a lucrative business. It is ripe for disruption.

These new babies won’t have the drag of regulations. Even the regulator believes that the rent you charge and the profits you make from other people’s money is too much. Slowly but surely, the Reserve Bank of India (RBI) is opening the door to the big bad world of competition.

You opened the door

You opened the door to them—you stood by when credit card usage went down due to two-factor authentication in 2009; you looked the other way when cash on delivery drove 80% of e-commerce transactions.

I wonder how many of you could have stood together and lobbied at RBI to do away with authentication for sub- 2,000 transactions. I wonder how much fraud-risk did we really face—you could have used location, SMS and many other features to ensure against it. Lubricating the payments ecosystem was your responsibility, not RBI’s.

It was your job to assess the trade-off between fraud-risk and convenience. Today, you’ve got to win back the consumer who is hankering for convenience. It’s his money, yet why is it so difficult for him to spend it?

Zero-fee banking is coming. And coming fast. Whereas you are wasting time negotiating with RBI on how to charge me for accessing my own money at the ATM.

Smell the coffee

Even the poorest can afford a second-hand smartphone. There. That’s your branch. It has just shrunk to a 4x5-inch screen. It can do pretty much everything your physical branch can.

If you add Aadhaar verification and digital signature to your app, it can do more than your branch can. People can create their virtual and secure identities on your platform; you can become my single-point locker for everything.

More changes round the corner

While RBI is handing out more licences, the fact is that the number of banks needs to shrink. With technology, each bank employee can handle 100x the transactions and there is no need to have so many banks and branches. Consolidation is inevitable.

It’s even worse if you are a small or regional bank—you need to be “acquirable". And if you are not a technology-led bank, then no one will acquire you. They’ll bypass you and get your customers, and you will be left to die. Slowly.

Banks have utterly failed at getting the credit and debit cards economy going. The race is on for the mobile economy—don’t miss it. Your nice little profits will evaporate, and with them your future.

You are not a bank any more

Ten years from now, you will look back and marvel at the amount of bricks and mortar you created.

In hindsight, you will realize that at the core a bank is nothing but a glorified and secure data centre, supported by people and processes—applying their rules and risk-management processes, which haven’t changed much for the last 100 years. Despite all the governance, the biggest problems banks have faced is when they have let human beings apply discretion, whether they did CDOs (collateralized debt obligations), Libor fixing or rogue-trader bets.

Your secure data centre is actually better off running with algorithms. Over 99% of the transactions on your systems don’t need human intervention. Computers don’t make discretionary calls, don’t give bad loans. Banks will eventually direct their people to run the front-end of the business—where it matters—facing consumers.

And most consumers won’t need this servicing. Customers now want to be able to do things themselves; they only want a simple interface to manage and monitor their money.

Here’s how a consumer sees you: You are simply a secure storehouse for my transactions. You trade in bits and bytes of information about me. I don’t want to do anything more with you. I don’t have to see you, meet you, or touch you. Your existence is now limited to my phone screen and your job is to be the least intrusive layer between me and my money. I should be able to visualize it; I should be able to “swipe" it.

Banking is not a services business any more. It’s time that you thought of yourselves as product companies with sliced-up micro-SKUs (stock-keeping units). Easy to interpret and easy to enable.

And there is no excuse. We’ve all seen the smartphone revolution coming for over five years now. These ideas need to come off the PowerPoints in board meetings into every single element of your business.

Changing the viewpoint

The heart of the problem is that banks internally work in ossified silos.

I am not a credit card customer, nor a debit card one, nor a savings bank customer. Oh, you called me a home loan customer. Wait, you labelled me as a private banking customer. Customers don’t want to deal with your internal divisions. I am simply a customer, ready to buy one of your products.

Incentives are not aligned. The credit card team does not talk to the debit card team, does not talk to the home loan team, does not talk to the savings bank team, does not talk to the assurance team, does not talk to the mutual fund team, does not talk to…

Remove your silos and think of me as one.

Imagine the opportunity if your bank were to become the single mobile window for every transaction. Your bank presently captures commissions on only a fraction of what your consumer spends.

Every transaction can become a commission-earning transaction. A 100% cashless system will ensure that 100% of transactions with merchants will earn commissions for you. You can make billions in commission income by enabling friction-less and low-value transactions compared with all the financial engineering you do to earn that sliver of net interest margin and juggling with arbitrage in your treasuries.

How to do it?

First, see where you stand. Download your bank app on your phone. If it takes more than 20 seconds for your existing customer to get on board, you are in trouble.

Second, ask your entire team to go cashless for a month. That’s how every 25-year-old is going to be in the next two years.

Rethink your entire strategy around the branch-on-the-phone. Create a vernacular voice-enabled system. Create apps in languages. Run TV ads that educate the illiterate. Make sure that you can enable every purchase at a small kirana shop. You can transform India. Your next 100 million customers are just a smartphone screen away—backed by the same servers, team, systems.

Make your interface intuitive. When I pay on an app, most Netbanking pages are NOT designed for mobile usage. Why? It won’t hurt to integrate a Web-chat client in case I am getting stuck in a transaction.

Personalize. Personalize. Personalize. You have a track of what kind of transactions I’ve carried out in my last 100 visits to your website. But you still treat me like a newbie.

Not a second has been spent on thinking through what a consumer wants to accomplish. Personalization may actually reduce the load on your systems. A little extra cost upfront in development of a personalized screen for me, behind which all your 200-odd service offerings can stay. Also, hire a global designer who will ensure that I don’t struggle with your little off-placed buttons each time I transact.

Banks don’t even need to launch wallets; they already have everything they need—my money, my identity and my account. The mobile has to become a seamless extension of your branch. Just mobile-enable my debit card as a first step.

The good news

It’s not too late—you have the brand, you have the customers, you know their language and you have the people. You can re-train them—and embrace the digital age. Arm every employee with technology so they can service thousands of customers. Aim to improve your customer-per-employee ratio by 10x first and then 100x.

I hear that one of your brethren is doing huge advertising and paying merchants to adopt its wallet to acquire new customers. You don’t need to do that. Just do a marvellous job with your current customers and the word will spread. Most “bribed" wallet customers never transact again. Most wallet firms have less than 20% active wallets, and have balances of less than 150. Don’t get carried away by the hype.

You will do a world of good by creating a cashless economy. A cashless India is a black-money-free India. Imagine getting all the black money participating in our economy—you alone can drive an extra point of GDP growth every year, if not more.

As I sign off, I see your margins slipping as fixed-fee remittances, direct-to-consumer mutual funds and insurance comparison sites start weaning away your customers. You simply can’t afford to lose this battle. Get going now. You can become the single-stop-shop for me. Yes, your returns may drop, but again imagine: all these consumers paying fees on each transaction. That’s a lottery.

So go off on a retreat, take your whole team, strip them of their designations and labels, and come back as a new bank.

You have a few years to shift the gears, but shouldn’t the mind-set shift happen tonight?

PS: You won’t give those big loans to the big, bad corporates any more, will you?

Read an unabridged version on www.foundingfuel.com

Haresh Chawla was founding chief executive of Network18. He joined the firm in 1999 when it had a revenue of 15 crore. When he moved out in 2012, he had built it into a 3,000 crore media conglomerate. He is now partner at India Value Fund, and mentors several start-ups.

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Published: 20 Oct 2015, 12:36 AM IST
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