Technology can only provide solutions for improving delivery for the future but it cannot solve the self-inflicted woes of the Indian banking system that has deep-rooted rot.
“In future, banks will become technology companies with a banking licence" proclaimed Ravneet Gill, chief executive of Yes Bank, amid news that the private sector lender is close to securing fresh capital from investors, including a technology company – a non-conventional investor in banking space. The bank bringing in a tech investor affirms Gill’s statement, with the move described as 'transformational capital’ – capital that will bring capabilities along with it.
In his statement, Gill, hinted at the popular trend of 'future of banking’, with banks courting technology companies to build partnership or allowing ownership in order to address challenges the banking sector faces. The trend is based on assumption that technology may help alleviate the sector’s problems. This stems from the fact that technology companies have delivered exponential growth in traditional sectors, from real estate to urban transportation to commerce, and have successfully overcome many challenges that these sectors faced.
The only problem with the argument is that it assumes that variables of the equation--technology transformation, exponential growth, and mitigating risks and challenges--are related in a linear fashion: change one variable and it will have a predictable impact on the other. Unfortunately, the world is more non-linear than what most of us tend to believe.
Nicolas Nassim Taleb, in his famed book The Black Swan, has said “nonlinear relationships are ubiquitous in life. Linear relationships are truly the exceptional, we only focus on them in classrooms and textbooks because they are easier to understand." And in a nonlinear world, Taleb adds, expecting a linear result is useless.
Watch - Mint Insight | Yes Bank Deal: High Hopes on 'Transformational Capital'
And yet, increasingly banks and financial services companies are linking technology to absolution. There have been many deals in this space.
Chinese e-commerce giant, Alibaba, acquired sizeable shareholding in China International Capital Corp (CICC) to become the second largest shareholder, backed by Tencent. CICC is banking on the two tech behemoths to gain access to user data and advanced technology to explore new growth areas. In 2016, South African tech firm, Net 1, acquired a minority stake in Bank Frick, and UK Fintech company Jaja acquired Bank of Ireland’s credit card business.
But, the larger question remains. Will the new technology investor be a panacea for Yes Bank’s woes, and by extension for the Indian banking sector?
On deeper thought, not really. Technology can only provide solutions for improving delivery for the future but it cannot solve the self-inflicted woes of the Indian banking system that has deep-rooted rot.
Over the last 15 years, banks have achieved a stable 8.5% growth in assets, relying on a steady increase in deposits and credit. Business has been easy, savings rate in India as a proportion of GDP, that has fallen in the last few years to 30.5%, is still one of the highest in the world. And yet, innovations such as payments bank, digital wallets have been steadily eating away the banks’ share of deposits.
Deposits grew at 17.8% per annum between FY06 to FY12, and at 5.6% per annum between FY12 to FY19, and there is a strong desire among banks to append the playbook of stable growth and look towards exponential growth. It is one of the areas that technology has delivered across industries: from mobility to real estate to financial services.
However, the challenges in the banking sector are systemic - Yes Bank, for example, is plagued with a host of challenges: rise in non-performing assets, low provision coverage, trust deficit, quality of loan book, and subdued growth in credit. Many challenges are a sector-wide issue, for example, NPAs in scheduled commercial banks touched Rs. 17.56 trillion in FY19, 9.2% of India’s GDP, while credit growth declined to $1.291 trillion in FY19 from $1.347 trillion in FY18. Banking scams, such as one involving PMC Bank in recent weeks, has widened the trust deficit between banking institutions and depositors. Many of these challenges are a legacy of the past.
And while technology may help overcome challenges in future, banks need to carry and resolve the past mistakes and missteps. In the latest episode of Mint Insight, Ajay Shah, partner, Investment Advisory, Financial Services & TMT, EY India, concurred, “If there are NPAs or assets that have gone bad, there is very little technology can do to solve these, technology is more futuristic."
In fact, a look at some of the overhyped technology startups that aimed to alleviate ‘world problems’ show that they have faltered in the validation process, not because the technology was bad or obsolete, but because, as Taleb describes, variables (including outcomes) in real world do not behave in a linear fashion – technology as an input does not guarantee automatic success as an output.
Perhaps, it is too soon to say "yes" to technology to wish away all problems.