Banking beyond tomorrow; how the face of banking is changing

1 Aug 2022 , 09:28 AM

Even intuitively, most of us know that the face of banking has changed like never before. With the advent of ATMs, we stopped visiting branches. With the advent of digital money and UPI, we have even stopped visiting ATMs. Amidst all these shifts, the biggest competition for banking is not coming from other banks or NBFCs but technology companies that offer Fintech services.

Banks have a special place in the financial system, but at times their role is also unenviable. Since banks represent the trust of depositors, they have to be seen as permanent institutions. However, this does become challenging in an environment where the dynamics are changing on a daily basis. Banking is substantially about managing risks, perhaps much more than any other industry. That makes banking rather unique.

In an incisive speech at the “Banking Beyond Tomorrow” conference, organized by Bank of Baroda, the RBI governor spoke at length about how the landscape of Indian banking had changed, was changing and will continue to change. Das also dwelt at length on the new business models that were emerging in banking and its larger implication for the banking industry in general and banks in particular.

How banking for tomorrow is changing?

There are several changes happening in banking, that could redefine the contours in a big way. Banks need to adopt emerging technologies and automation, but also need to be stable institutions. Banks need to compete with Fintechs, but that is largely an uneven playing field as the banks are tightly regulated. Banks have to be open to social media and connectivity, but cybersecurity poses a major risk to banking.

Here are some mega trends that are likely to change banking and here is why banks need to adapt quickly.

1)      Increased digitization poses one of the biggest challenges and opportunities to Indian banking. The rapid acceptance of UPI may have reduced the pressure on banking but now banking is increasingly happening outside the ambit of traditional banking. Wallets are changing the market place and UPI has made transfers much simpler, especially for smaller denominations.

2)      Competition from Fintechs is inevitable. Today banks face competition from Google Pay, Phone Pe, Paytm, WhatsApp and the list can go on. There is no rebutting this trend. The future lies in banks embracing this trend and collaborating with Fintechs. Obviously, there are many technologically smart things that Fintechs can handle better than the traditional banks and that is best left to them.

3)      Taking banking to the customers, especially the more tech savvy millennial customers, needs a lot of customization, ability to mine customer data etc. Obviously, Indian banks are not equipped to do these on their own. That is where a closer collaboration with investment portals, payment gateways and wallets can go a long way.

4)      The world is moving towards open banking and India cannot lag behind. UPI is a classic example of how you can transfer money from one bank to another with just a simple @-separated id. Open banking is also about application programming interfaces (APIs) that even permit interoperability among banks and Fintechs.

5)      Another aspect of open banking is the implementation of the account aggregator (AA) framework which makes banking more fluid by definition. India is already witnessing an emergence of new business models. For instance, an increasing number of banks are opening up for collaboration with new age service providers. This will not only allow them to acquire more banking customers but also enable the offering of a wider range of investment and advisory services through such collaborations.

6)      India had moved from physical banking to internet banking about 2 decades back but in the last few years the big shift has been towards app based mobile banking. The mobile phone virtually acts as your bank. But there is a lot more to app based banking and the biggest challenge is about recreating the personal touch of physical banking even in digital banking. That would include robotic banking, chatbots and a host of other simplified customer navigation interfaces.

7)      For a long time it was presumed that inclusive banking was not a viable proposition. The value at the bottom of the pyramid was thought to be more illusory. However, the JAM effort by the Indian government made it possible to open millions of zero balance accounts and extend banking services to all parts of the country. Today, remittances are much quicker to the remotest parts and that is largely thanks to the explosion in bank accounts. The challenges of inclusive banking also imply making timely and seamless credit available to agriculture and MSME sectors.

8)      The use of social media in banking has been a controversial subject. However, it is a trend that is right upon us and hence there is denying the reality. Today social media reaches out to millions of Indians via Facebook, Twitter, Instagram and WhatsApp. Indians are known to spend around 2-3 hours on an average on social media. For banks, therefore, the social media has the potential to review customer segmentation, nurture customer sets, engage in customer acquisition etc. Smart use of social media can help in appropriate and timely customer grievance redressal for positive impact.

9)      Smarter connectivity, greater focus on digital banking and open banking will raise one important issue and that is, Cybersecurity. The increasing use of IT systems by banks, remote working, adoption of digital banking services, reliance on third parties for specific services etc would all pose cyber risks to the banks. As we have seen in the past, even the best of banks have not been too far away from attacks on their customer databases. A robust cybersecurity framework would be the key to the future of banking.

10)  The ESG framework is likely to be increasingly relevant for banking in the coming years. Most stakeholders already consider environmental, social and governance (ESG) as a key measure of strength. That means, banks must be environmentally conscious, socially responsible and ensure highest standards of governance. This is expected to be one of the key value drivers for banks in the coming years.

What are the key takeaways for the future of banking in India? Going ahead, banking will be more competitive but also more collaborative. Banks will be differentiated by the extent of innovation and customization they offer. Traditional banking may be gradually changing and the onus is on the banks to latch on to new trends. It will be the fittest that will survive!