Banks of the future are not really Banks
What is a bank?
If you were to google this phrase, the most common answer you may find is that a Bank is a financial institution that accepts deposits and simultaneously lends money to customers. However, we all know that it's not that simple. To accumulate sufficient capital for lending activities, banks have to borrow, and often the cheapest way is in the form of deposits from the masses, which brings challenges right from customer acquisition, risk management to customer servicing. In addition to being safe-keepers of your money, banks perform several related activities like lending, payments, and transfers, issuing negotiable instruments like cheques, etc. Supplementing these core activities there are other functions such as Marketing, IT & Systems, Governance, Risk, and Compliance performing their role-specific tasks.
Banks of the Past
A typical customer journey used to look something like this: Customers deposit their additional savings in the local branch of a preferred bank, withdrew them whenever required by visiting the branch via a bank teller. Traditionally, this was the preferred method of distribution, and banks have relied on a network of branches across the country. The customer’s relationship with the bank primarily revolved around a physical branch. ATMs were launched in the late 80s and took off a decade later, these presented a low-cost alternative to the branch performing certain transactional activties, however, they come with the inherent limitation of one-way communication and don't present any cross-selling opportunities. Technology-enabled facilities like electronic payments, transfers, and net banking were accessible only to the educated, technologically savvy individuals, which were few here and there.
Smartphone and Internet’s explosive growth over the last decade has been a boon to the technology-enabled services sector as the target market has increased to monumental levels. At the beginning of the last decade, there were just 9 crore individuals with internet access, and only 2.75% of the population with a smartphone. In 2021, these numbers stand at 84.5 crore individuals with internet access and 54% with smartphone access. Mind you, even today’s feature phones are far more advanced and come with limited browsing and internet capabilities. This growth had cascading effects on every business sector and every aspect of our life, and banking is no exception. Albeit slow in the adoption and implementation due to persisting security concerns, banks have started launching a few technology products and services, starting with a mobile app to Whatsapp Banking to Voice-enabled banking through smart devices. However, most of these services are janky with annoying levels of load times, unintuitive user interfaces, and overall a poor experience. In terms of usability and experience, even the best banking apps are way behind apps built for other sectors, say commerce(like Flipkart), media (Disney+ Hotstar), and communication (Whatsapp). Why you may ask? It’s simple — banks are not tech companies, neither is technology their core function. If we are honest, banks are not even the best at customer relationship management. As a customer you never know whom to approach for your queries, cumbersome and complicated processes, customer care services barely work, online portals function subpar at best, and overall a frustrating experience to interact with for most purposes. The obvious question is how can banks improve their technology and develop better customer relationships? But the question very few dares to ask is, should they?
Let's circle back to the definition of banking — deposits, and lending! Banks make money on the net difference of interests from lending & borrowing, commonly referred to as net interest margin. Customer Relationship management is something that has evolved over the years, partly due to the necessity and partly due to cross-selling opportunities. In this smartphone age, to adequately address customer management, a bank at a minimum should have a decent mobile app, message banking (SMS and chat services), and well-equipped net banking facility on top of branch services, ATMs, card services, negotiable instruments (cheques, demand drafts, etc), payments & transfers. All of them, in theory, are overheads to banking businesses eating up the profit margin. If you want to build a truly customer-centric bank, which some leading banks are attempting to, you need to shell out more of the margin. Inspired by the superapps of South East Asia — leading banks are investing heavily in building ecosystems that will theoretically allow you to book your flight tickets and accommodation for your travel, reserve a table in a restaurant, shop in e-commerce, buy a car, in addition to financial services like cards, loans, insurance, and everything else under one single app. While this DIY approach might look attractive, many small and mid-sized banks simply cannot afford it. On one hand, betting on this yet-to-be-proven model is expensive but turning a blind eye to the trend will prove costly in terms of lost potential or customers, and worst case, both. So what should banks do? Well, the answer lies in this emerging asset-light outsourcing model for customer relationship management, widely misrepresented under the broad term — Neobanks.
Neobank: New? Yes, Bank? No!
“Neo”/niːəʊ/ is a Greek prefix and means “new”. Neobanks are literally new banks, the commonly accepted definition is a completely digital bank with no physical branches. However, in common parlance, this term also encompasses FinTechs which operate customer management services for traditional banks via outsourcing and often co-branding agreements. These FinTechs do not have a banking license and RBI does not regulate them directly (few central banks like those of Singapore’s and UK’s recognize Neobanks, but the business model is essentially the same). Though banks are not allowed to outsource core functions such as governance, risk, and compliance, etc., customer management can be outsourced. So naturally, I’d prefer to call them Customer Management Platforms, which connects banks and their customers, but Neobanks sounds more marketable, hence let's stick to that.
For our purposes, the definition is that
a Neobank is a technology company in partnership with one or more RBI-licensed banks and/or financial institutions, performing customer management activities on behalf of these partnered entities.
Customer Management is focused on acquisition, service, and retention, its activities include but are not limited to marketing, application processing, pre-origination for lending, issuing cards & related services, offers & rewards, etc.
This business model is still in its infancy, so we can observe several startups taking their own approach to solving the problems in this space. I’ve summarized some of them here —
Flush with VC money, new startups are popping up faster than Marvel’s superhero movies. There are neobank fintechs for MSMEs, for blue-collar workers, for farmers, for families, for freelancers, for teenagers, and more. If you can find a segment without a neobank’s presence, congrats, you’ve got the universe’s signal to start one.
In case you’ve skimmed through the above poorly designed table, I’ll just illustrate a couple of features that customers wouldn’t have dreamt of even a few years back.
- Several of these startups utilize online forums to build communities where customers and developers engage and discuss what features take priority in implementation, what services are to be offered, what partner rewards and offers do customers prefer, etc. These are open forums encouraging discussion among customers and with the developers and act as a platform for feedback and prioritization creating a win-win for both parties.
- Managing all your cards and their related activities is possible through the mobile app. From changing PIN to setting up limits, enabling/disabling cards for specific payment methods, say you want to have a POS limit of Rs. 1 Lakh, online transactions limit of Rs. 50K, disable ATM withdrawals and contactless — you can do that few clicks on easily navigable interfaces.
- And the most important one — intuitive, responsive, and user-friendly mobile applications for an average user to navigate and perform actions without annoying pop-up messages or server errors.
Completely paperless onboarding in few minutes, 24x7 chat support, jargon-free FAQs, transaction & spend analytics, and mouth-watering rewards are just the icing on the cake.
The implications of this model taking off can be truly disrupting with certain pros and cons for everyone. For customers, the neobank model promises a more fulfilling experience in their financial journey, however, they pose a risk of credibility and sustainability. When the VC money dries up, these fintechs have to look for sources of sustainable revenue, which will more likely be some kind of fees on services in this model, and I’m sure that the average Indian user will not appreciate such fees.
Regulators are not entirely sure of what to do either. The FinTechs themselves do not pose much of a risk to the depositor's money as the ownership of deposit lies with partnered regulated banks. However, the lack of oversight might lead to unruly onboarding behaviors with compromise in KYC norms. Moreover, bank’s risk management capabilities might be hindered if their access to information is limited.
For Banks, it’s a mixed bag of winners and losers. Smaller Banks have a better chance of competing against the larger ones. Without the need for physical branches and in-house product development, they can expand to more geographies and customer segments at minimal costs. Large Banks have two problems. Adopting this model means losing the ownership of the customer, and thereby opportunity to cross-sell, which is a major threat to their bottomline. Today’s banks rely on cross-selling revenue more than ever, being green in financing profit is a thing of the past for many of them. Moreover, they risk dilution of the brand value and increased competition from smaller players which may offer highly personalized products & services for niche segments that will eat away market share. If they choose not to adopt this model, then the in-house IT will need a bigger budget to keep up and to stay relevant. For the overall industry, Banking will be reduced to a commodity business offering financial products at price competition. This will eventually force them to tidy up their risk practices and focus on net interest margin growth. In a way, this not necessarily a bad thing, banks can focus on building healthier balance sheets and customers can get superior experience.
FinTech will be one of the most fascinating spaces to watch in this decade, and it is exciting to see that customer relationship management is finally getting its fair share of the limelight.
(Disclaimer: The author is a Business Consultant for Banking, Financial Services, and Insurance domain at Tata Consultancy Services Ltd.)
References
- Statista for statistics on smartphones users in India https://www.statista.com/statistics/467163/forecast-of-smartphone-users-in-india/
- Statista for statistics on internet users in Indiahttps://www.statista.com/statistics/255146/number-of-internet-users-in-india/
- https://www.mckinsey.com/industries/financial-services/our-insights/keep-it-simple-aditya-puri-on-hdfc-banks-path-to-market-leadership
- https://www.icicibank.com/managed-assets/docs/investor/investor-presentations/2021/2021-02-ecosystems-for-growth.pdf
- https://www.livemint.com/money/personal-finance/does-a-neobank-have-an-edge-over-a-regular-bank-11629997037318.html
