As we saw yesterday, the banking sector is going through revolutionary changes led by privatization initiatives of the Government. Among other changes, privatization will lead to faster technology adoption for banks. And technology is something that will differentiate banks going ahead.
Till recently, physical presence (through branches or agents) was the key for banks to perform their activities. One with the largest physical presence dominated. Customers had to reach out to banks. That was true for an extremely under-banked India prior to two decades. While we are still under-banked, the gap is reducing. Banks are reaching out to customers and are finding new ways to reach out.
In a country as under-banked and geographically vast as India, technology can only be the way forward for enhancing banking presence. Let us take a look at what are the technology trends till now:
- Migration of off-line transactions to online – Several functions such as payments, fund transfers, loan disbursal, and passbook updates are done without stepping into a branch.
- Online KYC – KYC verification is done online by submitting scanned copies of key documents.
- Spoilt for choices – Previously, the choice of a bank was decided by how close by the branch is. With digital banking, proximity is no longer a constraint, especially in urban areas. The choice of a bank is decided by speed, the accuracy of services, and customer relationship management.
- Bank credit growth – The right emphasis on banking penetration, easy money policies by the government and RBI, and readiness of consumers to avail bank credit has led to the growth of the sector. Bank credit to the private sector has grown from just 8% of GDP in 1960 to 50% of GDP in 2020, according to data from World Bank.
- Tie-ups with Fin-Tech – Banks are increasingly tying up with FinTech’s to serve a particular need of their customers. For FinTech’s, it opens up a new avenue for growth by getting access to a ready pool of customers.
For banks, it gives them a new way of serving customers without investing too much into the concerned technology and letting the specialists do the job. Fin-Techs essentially build on top of what banks are already doing. Some banks even buy a stake in some of the start-ups to hasten their growth. Some challenges remain such as tech stack integration, data field matching, API matching, revenue/profit sharing, etc. With faster technology adoption, these wrinkles could get ironed out in the coming years, as both parties realize that collaboration is the way ahead.
An illustration – Bank of Baroda’s various Fin-Tech tie-ups
Source: Bank of Baroda Website
- Competitive rates – Technology adoption has helped banks to save operating expenses, allowing them to pass on rates to their customers. Banks have become extremely aggressive in acquiring clients from competitors by luring them with lower (loan) or higher (deposit) rates. Online loan market places such as Bank Bazaar help customers compare loan rates so that they can make the appropriate choice. The same is true of deposits.
- Client Segmentation – Data analytics helps banks to identify and segment clients according to their age, risk profile, credit profile, profession, etc. This helps them to pitch products tailor-made for each category of customers, leading to better conversions. For instance, Google Pay is an India-centric initiative that does not exist in the USA.
These are the existing ways in which banks have used technology to do business in a better way. However, the future holds even bigger and more exciting opportunities for banks.
Some of the ways in which future banking could use technology are as follows. Some of these categories could overlap and we might see a combination of two or more technologies being used:
- Completely Virtual Banks – According to the Bill and Melinda Gates Foundation, by 2030, more than 2 billion people will have digital banking accounts. New age banks that come up could be completely virtual, eliminating the need for physical presence or keeping it to a bare minimum. An example is Atom Bank based in the UK. It is UK’s first bank built for smartphones or tablets, without any branches, and the first digital-only challenger bank to be granted a full UK regulatory license. In 2016, DBS became India’s first mobile-only bank, through DigiBank.
- Data Analytics –Based on data collected from your digital presence, banks could collate your shopping habits, your travel and spending habits and map it with your social media interactions to provide exclusive tailor-made services. Loans and services will be available in real-time without the need for a banking executive.
Artificial Intelligence – AI can handle a whole set of functions in banking. From robo advisors which can suggest the right financial products tailor-made for you to helping the banking management itself to make decisions. Some popular ways in which AI can be leveraged for making decisions and serving customers are as follows:
- Predictive analysis can be used for comparing the possible revenue for a bank from opening its branch at allocation “X” vs location “Y”.
- How to sub-group customers based on certain patterns in their shopping / traveling behavior to launch targeted marketing campaigns
- The banking interface could be operated through voice commands, as the software can learn the voice of the customer.
Source: CB Insights
- Modification in the way we pay – Few years down the line, cash will no longer be the king, cards could become obsolete and payments could be done through mobile phones, wearables, or even through face recognition. This reduces the hassle of carrying cash or a card, just your mobile phone will be the only required arsenal for your banking and spending needs.
Payment through wearables has already started
Facial recognition could be next ….
Source: Allied Market Research
- Block-chain technology in banking – If you thought blockchain was only for crypto-currencies, you are mistaken. Blockchain technology offers a secure, fast, and low-cost technology for carrying out transactions. Transactions that took days or weeks can be done in real-time due to the removal of intermediaries.
A consortium of India’s eleven largest banks including ICICI Bank, Kotak Mahindra Bank, HDFC Bank, Yes Bank, Standard Chartered Bank, RBL Bank, South Indian Bank, and Axis Bank have launched the first-ever blockchain-linked loan system in the country.
Some global banks have gone a step forward and introduced their own crypto-currencies – Citibank, Bank of New York Mellon, Goldman Sachs, and JP Morgan Chase.
Source: Tier 3 Silicon Valley
Summing it up,
So it looks like banks are in for a thrilling journey over the next decade or two. Banks of the future could become invisible or less visible, but they would be more intertwined with the lives of their customers than ever before.
Banking will be in the palm of customers’ hands or operable through voice. The currency could become digitized or “crypto-fied”. International money transfer will become easier, cheaper, and instantaneous.
Products will be pitched not just by segmenting customers across categories, but for a given customer. Advisory for products or stocks will be automated through bots and AI and will be personalized.
Traditional banks who get left behind will find it difficult to grow and prosper. No doubt, India still has several years of physical banking ahead of itself. While that will strengthen their presence across the length and breadth of the country, strides in digital banking and technology will help them get more from each customer.
Billionaire and Microsoft co-founder Bill Gates summarized the whole idea very beautifully-