In Skating Over Thin Ice our Safety is in our Speed

It was in 1841 that American philosopher and poet Ralph Waldo Emerson famously coined the phrase above, but it has never been more relevant then today, when applied to the predicament currently faced by incumbent banks in India. The banking sector in the country is going through unprecedented turmoil, which encourages reflection on what went wrong but also presents great opportunity for fresh thinking and innovation.

The state of affairs noted in the latest Financial Stability Report published by the Reserve Bank of India (RBI) and the financial results recently announced by some of the country’s largest banks highlight the extent of stressed balance sheets — burdened by an excessive number of non-performing assets — and the huge need for additional capital to be pumped in. In addition, Indian banks now are grappling with the capital requirements needed to comply with Basle III guidelines. All of that while keeping an eye on the competition, which is expected to escalate as the 20 new Small Finance and Payments banks licensed by the RBI under the recent niche bank licensing framework kick off operations.

On the plus side, however, new opportunities are emerging driven by the rapid growth of the middle class, high mobile phone penetration, and strong adoption of the Aadhaar program — which has recently reached a staggering 1 billion users. Add in the overhaul of the country’s digital payments infrastructure and the launch of a number of initiatives to encourage entrepreneurs, such as the Start-up India Fund, and we have fertile ground to plant innovative ideas to expand banking beyond corporates and affluent individuals. The survival and future growth of the incumbent banks may well be determined by the speed with which they move to seize these opportunities and adapt to this new normal.

One logical way to start is to enter untapped customer segments, such as small and micro-enterprises, self-employed individuals, and rural communities. New technology-enabled business models can help lower the cost of acquiring low- and middle-income customers by using alternative data, such as mobile phone usage patterns, browsing history, and social media activity, to assess their creditworthiness.

In 2014, more than 400 million Indians borrowed money, but fewer than one in seven were approved for a formal loan and only one in five have a CIBIL score. New approaches to risk assessment can potentially bring between 100 and 160 million new customers to the consumer credit market, which would mean tripling the current addressable market for formal retail lenders in the country. Technology can not only reduce the cost of credit assessment and verification, but also improve monitoring and collections through use of customer’s digital footprints and geo-location.

India is the first country in the world to have in place an interoperable public service for real-time electronic payments. The recently launched Unified Payments Interface (UPI) makes “anyone to anyone” digital payments simple and convenient, setting up India to significantly accelerate the migration from cash to digital transactions — a crucial step as the majority of retail payments in the country are still conducted in cash.

From low ticket items purchases to domestic remittances, transportation, and school fees payments, digital payments can bring convenience to everyday transactions, eliminating the need for fumbling for exact change, a big hassle for consumers. By offering consumers easy-to-use payment tools, banks can take advantage of India’s new world-class payments infrastructure to on-board millions of first-time bank customers. Uptake of digital payments can significantly reduce costs for banks and provide a platform to build more fulfilling relationships with customers.

New technologies and approaches can also help with that. For example, a Silicon Valley company has created an interactive mobile messaging platform leveraging behavioral insights and machine learning to communicate with newly banked customers with low usage rates through text messages. The goal is to help consumers navigate their new financial services, create financial goals, and on ramp them to more sophisticated products, like savings and credit.

The future of banking lies in providing user-centric, individualized, technology-enabled retail financial services that create long-term, trust-based customer relationships and help people improve their lives. New entrants are already executing on this mandate. In the UK, two digital-first, mobile-only, full service banks were granted licenses by the Financial Conduct Authority. Their objective is to build lower cost models than incumbent banks, yet provide superior customer engagement to a wider pool of mass market customers.

It’s time to redefine the scope and vision for financial services. Established banks should actively seek partnerships with startups and innovators to infuse agility and fresh ideas in order to keep pace with trends and market demands. By embracing what is new, they might just get the speed needed to come out of the current thin ice.