Indian Banks: Choices for competing in a challenging environment
The Indian banking sector has recently been in news due to the rising NPAs and the new licenses given out by RBI. It is no surprise that the sector is ripe for some competition. With the recent disruptive changes in FinTech, the challenges for the incumbents have increased. The threat of new entrants is now a reality. 23 new banking entities (including payment banks and small banks) have been given licenses by RBI. The rise of mobile wallets, and the new set of differentiated banks (payment banks and small banks) that RBI has provided licenses to, peer to peer lending and other such disruptive models, credibly raises the threat of substitutes. The only solace is that the tele density and internet penetration in India has increased, including in rural areas where banking penetration is still low (rural internet users grew 77% to 108 million in Oct 2015). Banking penetration usually lags online shopping by around 2 years
How do existing players then respond to these changes in the environment? There are a few things which are bare essentials like operational efficiency but that is more of a ‘stay in business’ move. Growing in a challenging environment will need some inductive thinking.
1. Get the basics absolutely right
- Target balance sheet efficiency: On the deposits side, ramp up customer relationship management programs to increase cross sell and develop new product lines. On the assets side, the portfolio needs to be re-evaluated from a risk, regulation and compliance perspective. Ensure that in the pursuit of growth, prudent underwriting standards are not sacrificed and asset quality is maintained. Utilize the strategic debt restructuring avenues available to clean up the current NPAs
- Optimize the branch and ATM network: Ensure right mix of full service, sales, transaction, and basic branches and staff appropriately. Leverage ATMs to do more than just serve as cash withdrawal machines
- Enhance digital channels: This will provide an enhanced customer experience by connecting with the customers where they are. In addition it will help streamline performance, and encourage use of customer self-service models. Maintain the end user experience via tracking of, and focus on, key customer oriented performance metrics though
2. Sharp focus on core functions
Leverage technology and data analytics.
Stable and secure technology platforms are table stakes. Focusing on the core activities of a bank and partnering with experts or market leaders on non-core activities while maintaining adequate oversight can enhance management focus on core competencies and help identify ways to create a differentiated position.
Utilize data and analytics to expand the customer life time value by providing relevant products based on life stage and other metrics. For e.g. some banks are leveraging customer spending data for specialized promotions and services.
3. Create a differentiated value proposition
Customer acquisition and retention in the face of commoditization of services is going to be a challenge. The play on net interest margins is now going to be limited. The new format banks, and digital wallets will eat away a share of the payments / transaction income. With the traditional businesses under squeeze, the choices would be to focus on a specialized area or target under-penetrated geographies and products or come up with some other differentiated business model
- Some Indian banks are cashing in on the eCommerce boom in an attempt to create a financial ecosystem, where the customer buys various non-banking products through the banking ecosystem. A lot of Chinese banks are already much ahead on the curve on this
- Bharat or rural India is an attractive target from a geography perspective with a large under-banked population, the governments’ focus on financial inclusion and the increasing penetration of internet and smart phones. However the Post Bank of India with its 155,000 post offices is expected to be a tough competitor for those going with a physical branch strategy. Microfinance institutions would be another competitor. Bandhan Bankrecently got a license for banking services. The online players are already a threat.
- Instead of taking an adversarial approach, partnering with some of the new players can be an opportunity. The payment banks and small banks haveseveral regulatory restrictions in terms of what they can and can’t do. Leveraging their customer base and reach to provide services not within the purview of a payments or small bank can potentially reap rewards. Some players have already initiated this. For e.g. Reliance and SBI tied-up for the payments bank. ICICI is partnering with Fino Paytech and various commercial banks are trying to partner with Post Bank of India
- Identify pockets or segments where you can provide the services better than everyone else or where there is little competition. For e.g. incumbents could focus on supply chain financing instead of competing in the payments space.Factoring in India is 1% of the global factoring market and maybe 0.5% of the working capital of Indian companies. Focus on infrastructure or maybe SMEs. On the retail side provide wealth management and other advisory services for the masses at a competitive price point using data analytics and so on.
- Tie-ups with start-ups developing innovative banking solutions. Alternatively, create small entrepreneurial teams within the larger banking organization to foster innovation
How exactly to create a differentiated position is what each bank will have to figure out based on its current competencies, access to capital, etc. But doing nothing is surely the way to extinction.
It will be interesting to see how the space evolves and the strategies adopted by various players