Banking on changes
The Indian players are bullish on the retail business and this is not totally unfounded. The face of the Indian consumer is changing and this is reflected in a change in the urban household income pattern. The direct fallout of such change is on the consumption pattern and hence on the banking habits of Indians, which is now skewed towards retail products. Increasingly affluent and bulging middle class, youngest population in the world, increasing literacy levels, higher adaptability to technology, continuing trend in urbanisation, increasing contributions of MSME segments towards the GDP and increasing consumption mindset of Indians are some of changing consumer demographics that have led to the need for expansion of retail banking activities in India.
According to Accenture Strategy research, 66 per cent of customers execute half of their banking transactions online and 71 per cent are open to automated support. Bank branches won’t disappear completely, as customers will still need to visit physical stores for complicated transactions and to make complaints face-to-face. But counter transactions are disappearing quickly. The challenge now is to try and get to that right mix of branches and digital offerings as quickly as possible. That means the sound of the shutters coming down permanently may become deafening in the coming years. Digital first will mean fewer bank branches. Just as travel agencies are quickly becoming a thing of the past, digital banking will continue to shrink the number of global bank branches by four per cent to five per cent every year. Why bank in person when you can do it online?
Every bank is working hard to update its legacy systems and looking to technology to improve operating effectiveness and thus the customer experience. To do so, banks will need significantly deeper and broader technology expertise than they have today. Banks need leaders who understand the kinds of transformation that are possible and can manage change effectively. Emerging technology applications, particularly intelligent automation, are already changing the workforce and are expected to have an increasingly profound impact in the near future.
Technologies such as robotic process automation, machine learning, and adaptive intelligence are already beginning to have a significant impact on compliance, payments, and retail services, among other banking functions. Banks need employees with the skills to understand how these technologies can be effectively applied, and they need agile and adaptive workforces to navigate these changes.
A recent report estimated that, over the next two to three years, machines will be capable of performing approximately 30 per cent of the work currently done at banks. Machines are especially effective at compiling and sifting through enormous swathes of data and analysing contracts. Because of the scaling challenges and complications inherent in large, complex financial institutions, some participants have not yet seen a significant decline in head count or major improvements to efficiency. Yet many analysts predict that a rapid increase in adoption and impact is coming. Banks have long employed technology to automate aspects of their operations, but today machines or bots can observe how employees work and learn from them, often enabling computers to fully automate job functions in a matter of weeks.
Tier II and tier III cities are witnessing a significant surge in borrowing for consumption. Banks, especially private ones, will have to pay more attention to the high demand for money in tier II and tier III cities. Besides a push from the Reserve Bank of India to expand the banking network to the hinterland, there is a strong business case now. The RBI’s mandate that one-fourth of new branches must be opened in rural and semi-urban unbanked regions means increasing demand for loans will now come from smaller towns as well. These cities will be the main drivers of retail loans in India. Despite the difference in volumes, higher profit margins can make smaller towns as attractive as metro cities. Cities like Coimbatore, Ludhiana, Madurai, Lucknow, Bhopal, Nagpur, Nasik and Rajkot, among others, make up for 15 per cent of the total retail loan demand in India.
In some of these cities growth prospects are so strong that the car loan demand might grow at 20 per cent for the next couple of years against an expected Indian average of 13 per cent. We have already seen how luxury cars from makers like Audi and BMW are finding buyers in places like Ludhiana and Nashik. Gold loans are expected to grow at 50 per cent rate, mainly driven by smaller towns. Banks would have to be careful though, about the asset quality which could be a chief concern for choosing the right cities. In terms of the competitive scenario, the largest players are seen to have a strong grip over total demand for affordable home loans and loans against property.
Retail loans have grown significantly; new loan disbursals also went up in Q1 FY 18. Affordable home loans growth has been phenomenal. Demography and rising wages are helping the growth in retail credit though interest rates. The youth is ready to borrow to prosper and second-rung cities are contributing meaningfully to this growth. People there are shifting to organised bankers from unorganised lenders.
Banks also have realised that retail segment will drive growth and even though the cost for the banks rise because of the small ticket size of such loans, there is less impact they have on balance sheet on account of the non-performing loans. Even as the quantum of household debt has increased over the years, it remains low as a proportion of the gross domestic product. Household debt comprises home, vehicle, education loans and credit cards. Home loans comprise the largest chunk of 53 per cent of total household loans.
India’s retail banking sector is also one of the fastest-growing among emerging market assets, with banks’ retail loan book expanding at a compound annual growth rate of 16 per cent in dollar terms in the past three years. As banking sector penetration takes place, more people are expected to make use of the formal sources of finance to purchase homes, vehicles and to study via education loans.
With push towards financial inclusion and increased digitisation, we could continue to see strong growth in household debt over the next five to10 years. The quantum and proportion of household debt will go up as lower interest rates spur credit demand for purchase of homes and cars. Interest rates had come down by over 100 bps in the past FY after demonetisation of Rs 500 and Rs 1,000 notes. This also led to banks being flush with huge deposits.
Banks are hungry for growth, and finding new customers is the first response of a good product banker. However, banks also recognise the need to deepen their customer relationships and focus more on specific customer outcomes. Hence, enhancing customer service is the number one investment priority for banks, globally.
The impact of complying with growing and changing regulation remains a top challenge – indeed the number one challenge. Bankers should stop seeing regulation as a burden and start weaving regulatory compliance into the fabric of their operations. Since India is a rapidly developing emerging market, some report that attracting talent and retaining existing customers in face of fierce competition and new market entrants are also top challenges. R&D, innovation and new product development are the top investment priorities. Ultimately, “execution, execution, execution” is the mantra. The pace of change is increasing and banks need to do even more to ensure they are well-positioned to succeed in the future. As per the research and insights from PWC, six priorities for success are: developing a customer-centric business model, optimising distribution, simplifying business and operating models, obtaining an information advantage, enabling innovation and the capabilities required to foster it and proactively managing risk, regulations and capital
Artifical intelligence, Big Data, machine learning and robotics have a wide range of uses in financial services. However, their potential has not been fully realised. On the upside, though, financial services giants and FinTech firms have joined hands on proof-of-concept initiatives centred on the use of artificial intelligence and machine learning to automate and streamline workflows in institutions. This include the use of chatbots to facilitate automated conversational flows and efficient customer service, intelligent agents such as robo-advisors for personalised financial planning and advanced algorithms to facilitate fraud detection and prevention of money laundering.
Large financial bodies handle billions of transactions each day. Advanced analytical techniques and machine learning algorithms, combined with human expertise allow institutions to flag transactions as potentially fraudulent at the time of occurrence and hence contain the damage as early as possible. The advent of intelligent technologies comes at a time when the government is pushing towards financial inclusion across the Indian economy by introducing schemes. The importance of artificial intelligence systems for drawing insights from large volumes of data and ensuring transparency, speed and efficiency and regulatory compliance cannot be overstated. In addition, automated workflows and algorithmic risk scoring in can further reduce incidents of breaches in compliance arising from malpractices, lapses in human judgment and low visibility on financial exposure to certain counterparties and more. This would be expressly valuable to the lending segment which has recently come under the microscope with respect to the risk assessment techniques used.
Aritificial intelligence, machine learning and robotics can potentially revolutionise customer experience, especially at the ‘last mile’, by providing more personalised services and improving the back-office efficiencies at financial institutions. The financial services sector is critical to economic stability and the possible implications of data privacy and security concerns are significantly high in this sector.
Banks have a tendency to push what they believe customers want, rather than allowing customers to select their preferences or utilise customer data to offer appropriate products and services. Banks will have to consider a customer’s particular stage in life and offer value-added banking and non-banking products and services targeted to that stage. The priorities of an individual will change as they progress in life and so do their financial and non-financial needs.
Customers typically fall into three categories – those who prefer banks to recommend a set of products or services that will benefit them, those who want to choose what they want, when they want it, and have the ability to change their choices whenever there is a need to and those who will use the bank for basic needs, such as savings or loans.
Banks can capitalise by mixing banking and non-banking product and service offerings for their customers in an easy, convenient and efficient manner. Product bundling is a concept that has been applied successfully by various industries for many years. Recently, it has begun to catch interest of the banking world. A bundle is a group of two or more products or services offered to a customer from which a customer derives better value than if the products were purchased individually. Product bundling is the concept of tying products together to create an appealing package for customers. These products do not have to belong to the same line of business and can introduce customers to additional businesses and ideas that they otherwise might not have been exposed to.
It’s time for banks to move towards the next level of customised offerings and services. For banks to differentiate themselves and move forward, they need to allow customers and relationship managers to dynamically bundle products and services based on their preferences. The value should vary based on utilisation of each of the product or service within the bundle. By allowing customers to customise their experiences through various channels, and by allowing banks to offer suitable products and services based on customer data, banks can increase their wallet share, generate additional revenues and create customer stickiness and retention.
For 2018 and beyond, banks must contend with multiple challenges tied to regulations, legacy systems, disruptive models and technologies, new competitors, and a restive customer base while pursuing new strategies for sustainable growth. The years beyond 2018 could be a pivotal in accelerating the transformation into more strategically focused, technologically modern, and operationally agile institutions, so that they may remain dominant in a rapidly evolving ecosystem.
The challenges most banks face in balancing the need to restructure their foundations for the long-term with finding near-term growth are customer centricity, regulatory recalibration, technology management, mitigating cyber risk, fintechs and domain-techs and reimagining the workforce.
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