Technology discontinuities such as the mobile Internet, cloud storage, automation of knowledge work, digital identity verification and digital payments provide tremendous opportunity to reinvent financial services. Photo: Sneha Srivastava/Mint
Technology discontinuities such as the mobile Internet, cloud storage, automation of knowledge work, digital identity verification and digital payments provide tremendous opportunity to reinvent financial services. Photo: Sneha Srivastava/Mint

Approaching a perfect storm in financial services?

In the use of digital technologies, financial services in India lags behind domestic categories such as travel, communication and entertainment

Imagine if you could do all your banking business simply by using a smartphone app. Swipe once to transfer money to a friend or business associate. Click a photograph of a cheque and tap it to deposit it into your bank account. Simple, a US-based technology application supported at the back end by a licensed bank insured by the Federal Deposit Insurance Corp., is already making this happen. Such ease of use will delight banking customers. But the massive economic potential of technology as it transforms financial services in the coming decade will be even more striking.

In the use of digital technologies, financial services in India lags behind domestic categories such as travel, communication and entertainment. Internationally, it lags financial services in other parts of Asia. Recent McKinsey research across Asia showed digital and online banking penetration in India is half that of countries in emerging Asia, including China, Malaysia and Vietnam, and a fifth of that in developed Asian countries such as Japan, South Korea, Singapore and Taiwan. Almost 10 times as many Internet users in India use e-commerce as those who purchase banking products online. However, this will change. A perfect storm may soon come and enable technology-led disruption at a far greater scale, leading to better outcomes for customers and innovators.

Technology discontinuities such as the mobile Internet, cloud storage, automation of knowledge work, digital identity verification and digital payments provide tremendous opportunity to reinvent financial services. At the same time, regulatory changes are supporting new business models. The upcoming licensing of a new class of small banks and payment banks by the Reserve Bank of India could be a pathbreaking attempt to attract tech-enabled telecom companies, retailers and cooperatives to the business of collecting deposits and providing remittance services. Significant improvement in the infrastructure for customer identity, credit bureaus, and payment systems are making remote delivery models possible. Rapidly evolving consumer behaviour, influenced by e-commerce and social media, is resetting customer expectations. New technology-enabled ecosystems created by these forces could completely disrupt the current order in financial services.

According to estimates by McKinsey Global Institute, the economic impact of applying technology to financial services in India could be $32-140 billion per year in 2025, due to improved productivity and higher incomes as well as lower costs and leakage in financial transfers and payments. The scale of the opportunity is driven by the massive underbanked population and inefficiencies in financial-services delivery that India faces today. Only 36% of rural Indians have bank accounts, and even those with bank accounts often do not have access to any other financial service such as credit to buy farm equipment or fund a small business. Of some 170 million rural households in India, just 45-50 million have access to formal credit, and one-third of them also borrow from informal sources at punishingly high rates of interest. The high number of unbanked borrowers has made benefit transfer cash- or kind-based and more prone to leakage and inefficiency.

The Pradhan Mantri Jan Dhan Yojana (Prime Minister Narendra Modi’s programme for universal financial inclusion, which provides basic bank accounts, overdrafts and insurance to the poor) is an attempt to bridge the gap. In the past, a key barrier has been the prohibitive cost of serving low-value customers through traditional channels. Technology will dramatically reduce the cost of service, improving the efficiency of all sorts of financial intermediation. As new business models make financial inclusion commercially viable, they can also completely disrupt existing businesses in mainstream banking.

Four core technology applications—universal electronic bank accounts, technology-enabled business correspondents, mobile money and digital government transfers and payments—have the potential to advance financial inclusion in India, using combinations of the mobile Internet, digital payments, verifiable digital identity and automation of knowledge-work technologies. They can also be combined to create paperless and nearly instantaneous account-opening processes, and a network of banking correspondents armed with smartphones and micro-ATMs, whose costs could be less than 1% of that of a typical bank branch. The massive reach of mobile phones even in rural India (where there are an estimated 350 million subscribers) makes mobile money an obvious platform for financial inclusion. In Kenya, some 43% of national GDP is transacted through M-Pesa’s mobile platform. In India, more than $100 billion of government direct benefits can be routed through technology-enabled correspondents and mobile wallets over the next two to four years.

Advanced credit underwriting applications will be enabled by Big Data and analytics technologies that look at a customer’s financial data (or even just her phone bills) and draw inferences about her financial status and creditworthiness. Non-traditional data is already being used to target unserved customer segments elsewhere in the world—Oi, a Brazilian telecom company, has generated credit scores for 2.7 million prepaid mobile customers in one of the poorest regions of Brazil. Complete digitization of banking processes will yield enormous cost savings and productivity improvements. One bank, for example, brought the mortgage-approval time down from as much as 10 days to 15 minutes and reduced the bank’s cost by 70%. Low-cost 3-D printing will allow customers to print personalized ATM and credit cards at their homes.

Other technology-based applications such as enhanced customer experience and digitization of sales and fulfilment will transform how the financial sector acquires, engages, and serves customers—both poor and rich. Around the world, banks are making the customer experience simple, fun, convenient, and user-friendly with the help of smartphones. From private, secure chats with virtual agents to smartphone apps that enable potential mortgage customers to take a picture of a property and see its sales history, banks are using technology to reach new levels of simplicity, personalization and customer engagement.

It is very plausible that the next generation of winners in financial services will focus on just three parts of the value chain: owning and delighting the customer, managing risk and ensuring compliance. Other elements of the business system may be automated, outsourced or redesigned, using technology to achieve significantly lower cost and far greater nimbleness. Regulations that allow seamless, efficient, and customer-centric financial services are a critical prerequisite if the potential of technology is to be realized. But with the right policies in place, technology can revolutionize the business of banking and bring massive economic value to more than 300 million underserved Indians and ease friction and transaction costs for customers across the spectrum.

Anu Madgavkar is a senior fellow at the McKinsey Global Institute and is based in McKinsey’s Mumbai office, where Renny Thomas is a director.

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