A Digital Revolution

How has the technology in banking evolved over the last decade?
A decade is a long time. Just in the last 3-5 years, things have evolved too rapidly. With arrival of Indiastack and UPI, for example, we can transfer money from one bank to another instantly. In other words, clearing is electronic and instant. It’s revolutionary. The value of UPI crossed Rs 1.4 lakh crore in April, as compared to Rs 27,000 crore a year ago.

Also, the issue is not about banking technology evolution. It’s the technology around banking that’s evolving so rapidly across industries. For example, social media evolved for social connecting needs. Google evolved for search needs. Amazon evolved for shopping needs. Now they are all riding on the UPI and other platform technologies. So banking too is riding on this ecosystem and creating new solutions.

But banking is more protected as compared to other industries…
Regulations were traditionally the biggest protections for banks because others couldn’t do banking. Now with the evolution of technology which cuts across industries, the new financial services ecosystem regulations are no longer a protection. Because other industries are mixing and matching different parts of the financial services ecosystem and creating new solutions that can address new markets. Even a telecom company is giving credit through postpaid; retailers are giving credit – they are issuing pre-paid cards. Paytm is giving payment solutions to 200 million people; there are 100 wallet companies in India, 50 from banks and 55 stand alone; apps are doing investment advice and so on. So protection through regulation is going away. Only deposit taking was the protected area. That too, pre-paid cards do! So regulations cannot be protection for banks from competition anymore because it is not clear as to what is competition. Banks are also setting up shopping sites with their customer base, all large banks have done this; others are following.

How worried are you about this?
I think for the country’s people and the under-banked consumer first. From that point of view, it is a great thing. For example, while banks were traditionally giving loans to people as per a set of criteria say income tax returns, technology has enabled lending on a different set of criteria altogether, say, phone usage behaviour or salary credits as seen on SMS, and that has opened new markets which did not exist before. Then they become the banking systems’ customer for home loans, car loans, and business loans. So when a telecom company lends money or a retailer gives credit, they are all adding to the ecosystem, they are not only competition. If the credit market grows from Rs 100 trillion to say Rs 200 trillion in, say, 5-6 years, don’t all players benefit and grow?

Amazon and their kinds are also demolishing Toys R Us and the Macy’s because that is a case of physical stores being clunky…inadequate choice…parking problems. But banking is evolving faster and keeping pace.

So what are the concerns for banks in the new digital age?
Well, the concern people talk about is whether banks will become utility companies and the front end will shift to the more natural digital interface points like social apps or messaging apps which customers anyway have in their lives. But why banking is still relevant is because it has the power to offer a balance sheet, and leverage it with 10 times of net worth. So when a telecom offers credit, they are using their working capital, and they don’t have the power to leverage their net worth. A bank’s leverage at 8x is considered normal, while a 2x for a telecom will be seen as too high, for example. Banking has access to the public’s savings. But that does not mean it is not competitive. The experience of the customer in the interface with their social media app, for example, is so slick, which is why more banks are now doing social media banking.

How has the customer changed in the process?
Customer no longer goes to the railway station to buy a railway ticket. He no longer goes to a movie hall to buy a movie ticket. So naturally we can’t expect them to come to a bank. For example, if we can give great experience only with the branch providing the customer great experience then obviously we can’t go far. Every branch visit may take an hour or so -- 20 minutes for driving in, may be a 20-minute experience and another 20 minutes to go back to your workplace or home. So they visit a bank only once or twice a year, but digitally they are accessing the bank many times a day.

What are the implications of all this for banking?
It will change everything. To take one dimension of non-food credit, today the credit to agri is Rs 11 lakh crore, consumer and housing credit is Rs 22 lakh crore, credit to services is Rs 23 lakh crore and credit to industry is Rs 28 lakh crore. There is no reason why consumer and housing credit should not be at least 2.5x of these numbers as India becomes a $5-trillion economy in 2025. With the new technologies, costs could be lower, experience higher, and business more profitable.