In 1994, predicting that technology would transform even the stodgy banking sector protected by regulation and incumbency, Bill Gates had said, “We need banking, but we don’t need banks any more.” Globally, banks have, however, proven to be resilient. So, Gates’ quote was forgotten — until the recent frenzy over ‘fintech’ startups. A combination of technological advances, the pervasiveness of smartphones and venture capital-backed entrepreneurs is finally beginning to threaten opaque, multi-layered and transaction cost-laden financial systems.
In theory, depositors and borrowers will get more direct, more immediate and cheaper access to each other, cutting into the margins of the banks that are today in the middle. Just one digital settlement technology called Blockchain is estimated to save lenders more than $20 billion a year in costs. The big risk for traditional banks is not erosion of margins, but customers fleeing from them.
In India, the dynamics are even more interesting. The existence of foundational building blocks like Aadhaar and eKYC, financial inclusion programmes like the Jan Dhan Yojana, and techsavvy entrepreneurs may cause India to once again leapfrog the rest of the world to pole position. This poses a huge risk to India’s banking, still dominated by public sector banks (PSBs). Even the best PSBs in the world are struggling with this disruption. This is because banks are designed to be risk-averse with cultures that are unsuited to rapid change and unable to attract the best technological talent. In India, the challenge is profoundly greater as our PSBs are facing an existential crisis of weak balance-sheets and huge non-performing assets.
They are also hamstrung by the limitations of government ownership. Their only shield, regulation, is also coming down as the RBI is permitting the entry of new competitors. The risk for our PSBs is that they become sitting ducks as new competitors nibble away at their best customers and most lucrative part of their business. This could severely cripple the government’s priority sector lending ability and the nation’s development. Banks, however, shouldn’t be underestimated. Their greatest strength is their customer franchise and hardwon reputation for trustworthiness and stability.
Banks also have considerable expertise in regulatory compliance and risk management. Finally, banks have capital. They have the capacity to invest and the staying power to weather intense competition. It turns out that fintech startups and banks have exactly complimentary strengths. These new breed of companies are entrepreneurial, nimble and can attract the smartest minds. But they have a voracious appetite for capital as they grow. They also have yet to build strong brands based on trust, and they lack a sophisticated understanding of regulatory compliance and risk management. So, the most promising future scenario is partnerships and coopetition between the new disrupters and incumbent banks.
There are two responses to disruption today. One, to shut one’s eyes and hope the threat goes away — or at least materialises on someone else’s watch. Two, to blindly mimic what the startups are doing. Witness the number of banks offering mobile wallets, apps and building concept digital branches. The latter are necessary learning experiments, but far from sufficient. What could be more successful is a disciplined three-pronged approach. First, use technology to radically simplify the customer experience. Think Uber or Amazon and use them as benchmarks for simplicity. Second, get teams to work on radically simplifying and speeding up internal processes.
Think about a 95% reduction in the time to approve a loan or open a new account. When it comes to new business models, it is hard to predict what or who will succeed. The best approach may be corporate venturing, than in-house innovation, where banks get into strategic partnerships in promising startups, thereby creating valuable options for the future. It is famously said that culture trumps strategy. This is never more true than in the conservative world of banking. So, executing such strategies, while conceptually simple, poses a severe cultural challenge.
Banks will have to find a creative way to create an organisationally distinct unit that has the ability to bring in outside talent where essential, free from the constraints of the procurement process and with the mindset and ability to partner with startups. For this, strong personal leadership from the CEO and unambiguous support from the board becomes imperative. It is crucial that the RBI and the finance ministry support the creation of such ambidextrous structures by at least a few of the largest PSBs.
DISCLAIMER : Views expressed above are the author's own.
