The environment for businesses is witnessing continuous transformation, and the banking sector is no exception to this reality. Digitisation, changing consumer preferences, growing competition, emergence of new players and evolving regulations are bringing structural changes in the sector. Moreover, access to information and new ways of using data are giving rise to new business models across the spectrum. Indian consumers are embracing technology rapidly, and with the requisite enablers in place a vibrant digital ecosystem is being created. Today, India is not just a young and growing market, but has a population that is digitally connected.
India is witnessing a wave of innovation from the banking and financial services industry and from a growing number of fintech firms. In an environment driven by increased competition and evolving customer preferences, financial institutions are focusing on providing an integrated experience through a portfolio of products and services to customers instead of providing a single product/service. This has enhanced the customer experience and convenience, while managing costs effectively through migration of transactions from physical to digital channels.
The dramatic transformation towards a more digitised economy encompasses five key themes:
- Consumer payments: these are being rapidly digitised through initiatives from the banking system, the regulator, the government and the evolution of fintech. Initiatives such as the Unified Payments Interface are simplifying payments and lowering transaction costs.
- Digital lending: An increase in digital transaction records is creating huge potential to expand the availability of credit. Banks and financial institutions are leveraging this data using business intelligence, analytics and machine learning to target potential customers. This will not only expand the borrower base substantially, but banks will be able to provide credit more efficiently at a lower operating cost and with less documentation. The vast pool of information on online transaction data, provides an immense opportunity to utilise it for the improvement of interaction of banks with their customers. This data leads to more accurate credit assessment of customers and in turn build credit models suitable for their specific needs, thus enabling customer retention.
- Internal transformation: Process automation, robotics, machine learning and other such tools are transforming the internal structures and activities of banks. The upside of incorporating these tools in the day-to-day workings of the organisations will be seen in quantitative terms (reduced costs, increased speed and greater accuracy) as well as qualitative terms (improved employee motivation as they focus on value added activities).
- Evolution of financial inclusion into greater economic inclusion: Over the past few years, banks have made a concerted effort towards financial inclusion. The government and policy makers are creating enablers for the financial development of rural and semi-urban India. Moreover, the growing trends of digitisation and mobility are helping banks to expand their services to under-banked populations in a more efficient manner. Since the start of the Pradhan Mantri Jan Dhan Yojana, around 300 million bank accounts have been opened across India with around 60% accounts in rural/semi-urban areas. The outstanding balance in these accounts was around Rs. 660 billion (USD 10 billion)at the end of FY2017. This scheme was followed by life insurance, accident insurance and pension schemes for the lower income groups. ICICI Bank takes a holistic approach in its Digital Villages where opening a bank account is just one part. Each Digital Village is supported by a skilling programme and other initiatives that along with the bank account contribute to a greater economic and digital inclusion of the village.
- Collaboration between banks and fintech: Technology-led innovation in financial services is being brought about not just by banks but also by fintech companies. Banks are seeking to expand the ways in which they reach customers, enable transactions and use data for business growth as well as risk management. Fintech companies are developing new tools for various parts of the banking value chain – from payments to lending. This is leading to collaboration between banks – with their extensive physical reach, large customer base and comprehensive product & service portfolio – and fintech players that are developing new solutions. Fintech companies are providing transaction history and assisting banks to bridge information gaps, thus enabling banks to provide suitable products to customers. Banks can gain an edge on the technology front and fintech companies can become solution providers to banks, dissolving traditional boundaries and creating nontraditional synergies.
As we move ahead on this path, there are two important aspects that we have to keep in mind.
- With the growing scale of financial transactions in the digital era with higher volumes, higher value and an increasingly diverse set of constituents participating in digital transactions there is an even greater need to focus on the associated risks and build in mitigants in the process. With the change of the world economy to a digital form, more and more data is being generated by individuals as well as firms. This data is a gold mine in the digital world and all companies are trying to leverage the data for better products and services. While corporates use this data with consent to make life better for their customers, the same data is also at risk of being accessed by other individuals or entities. The risk of inadequate cybersecurity has always been a serious argument against information sharing since the inception of the internet. But the latest trend, and the fact that without a digital footprint it is difficult to live in society, raises questions about the vulnerability of data. Data theft and fraud impact not only individuals but corporates too. Although there has been an increase in the quality of security measures being adopted, but in the ever dynamic tech environment, cyber security will need to remain a continuing area of focus.
- Internalising technology in the business model also requires engaging the employees and adapting the entire organisation and its culture to the dynamic nature of technology. Technology not only brings in efficiencies, but also creates new opportunities for bank employees by freeing them from repetitive mundane tasks, thus enabling them to focus on more value-added and creative work. The technology-led transformation of banking is creating a wide range of new job positions in banks, from innovation to design to building partnerships with other players to developing new analytics-driven business models.
Disruptions in the financial sector are not new and there have always been unknowns that eventually enabled the sector to evolve. The technological evolution is yet another impetus to creating new paradigms and opportunities. Big data and the advent of the digital age have now enabled banks to shift from traditional banking to digital banking from anywhere. It has expanded the scope of financial offerings and is creating new experiences for customers. It is giving rise to new players, including non-banks, to participate and add value to the suite of financial offerings. It will be important to remain vigilant and firewall the unknown risks that technology brings along. Organisations will have to prepare their human resources to fully leverage the opportunities created by technology.
Chanda Kochhar, MD & CEO, ICICI Bank, writes this piece for FICCI’s FIBAC 2017 Knowledge Paper.