One of the key challenges that the banking sector faces is that it operates on a ‘supply paradigm’, where banks have dominated the ecosystem and not allowed consumers to ask for what they would like as product or service offering. Of course, there are some outlier brands in specific segments where some of the banks do good value additions.
It is time bankers look at consumer needs, wants and market trends to create newer products and services. Banks would benefit from looking at ‘demand’ and shaping the industry like what a Hindustan Unilever or Britannia has done in fast moving consumer goods. This is where new-age digital finance firms score a big advantage over traditional banks, no matter what the banking industry experts might claim.
For far too long, banking industry has hidden behind numbers, literally and metaphorically. A simple activity of lending has been made to look like an achievement of a few, expensive hires from MBA colleges helping to create the myth.
Understanding consumer experience is important. It comes with deep passion for understanding consumption, grass-root intelligence, an ability to be empathetic and putting the consumer as the focal point of banking existence. Some of the classic bankers who have decades of experience in working with grass-root clients have this rich ability; however such a native intelligence does not get captured into the institutional framework of bank brands.
How digital finance firms stack up
The new-age digital finance firms do not carry any baggage of legacy, and more importantly, do not have any hang ups about what will or won’t work. They are ready to learn as they serve consumers. It puts them in a spot as regulators usually are uncomfortable licensing someone without a prior experience in banking.
Financial service has been a distribution-led business with physical presence. High cost of fixed assets in traditional banking and licensing hurdles make entry into the sector a tough one. Digital finance firms carry no legacy cost and use data as gospel, the basis of finance anyway. Combining data science with technology and their quick decision-making, they are in a great position to disturb the status quo and dominate in the new economy as long as they carry frugality in their DNA.
What traditional banks did better
Customer relationship is something that traditional bank managers have handled very well. Their physical presence in the branches scattered across length and breadth of the country brought in touch points. But in the past decade or so, the quality of these aspects has dropped. Traditional banks, but for a few outliers, have been focused on themselves and been slow on innovation.
Branch banking network with a physical signboard acts as a branding reminder as well as reassurance to clients with deposits in the banks. But these are not sustainable advantages that will hold to the test of time with changing consumer expectations.
Current regulations are more focused towards sustaining traditional banks than fintech firms. But this could change into newer forms of regulations as authorities develop and employ more insight to assess consumers’ financial needs. Regulators cannot ignore the digital finance firms’ ability to deliver better products.
Few banks in India have taken initiative to build a digital interface. Mere tinkering with front-end does not help. It is the entire consumer experience that needs transformation. Now with access to vast amounts of data that banks have access to, they need to reimagine ways to engage with consumers proactively.
Many a time, it has been a tick box approach. As many a fintech founders would admit offline, the said ‘partnership’ has been one-sided, in favour of the traditional bank. As they see it, the biggest barrier to bank/fintech partnerships is the way fintechs have to convince each of the banks’ vendor management / procurement / legal / IT / compliance departments, without active hands-on support from the banking bosses.
The other human side challenge perceived by digital firms is the pecking order -- banks are seen as being on top of the hierarchy; and this reflects in digital firms being treated as part of supply chain rather than a critical partner. It is not uncommon to hear bankers boast that they have more years of experience than the age of the digital finance entrepreneurs.
Banks have the resources to identify potential partnerships but their organisation structures make it difficult for these partnerships to materialise into meaningful impact for consumers. The current corporate culture and unsaid hierarchical outlook does not make it easier for digital firms to partner with banks.
Fintechs should no longer be seen as competitors but as organisations that can help financial institutions with the best of technology and customer insight.
A word of pragmatism
Some of the digital finance firms have branded themselves as outliers and want to stay away from the scanner of the regulators. They have to quickly learn that regulations bring in a sense of comfort for all stakeholders – the firms themselves as well as consumers, vendors, suppliers or any other partner in the ecosystem.
Banking needs patient capital, focused leadership, and stress-tested strategic invetsors. There is a lot of equity capital that banks need to sustain their growth. To this effect, learning what consumers want and delivering it profitably would make the banks sustain the long haul growth journey.
And if digital firms think they can buy their way into the banking world with big valuations and large capital infusion, regulators may force them to do a reality check. This could be in the form of asking them to bring in adequate financial management expertise and assessing them on ‘fit and proper’ basis for ownership strength and legality, governance parameters and prudent licensing compliance for consumer protection.
For next few years, with diverse consumer segments, our market might have a combination of brick and mortar banking distribution along with digital banking. Advances in telecom and technology industries, higher Internet access and reduced cost will create more keypad-literate and digitally-literate Indians. That would ensure that it is a matter of few years before the banking industry’s ‘digital only’ credo gives way to ‘digital first’.
Srinath Sridharan is an independent markets commentator. The views here are his own.