Indian banking landscape has evolved over the years. Last few decades have brought in unprecedented developments, in the way a customer conducts financial transactions. Increased internet penetration, processing speed, telecom revolution bringing mobile phones in everybody’s hands and data availability have given a huge boost to financial innovation in the last two decades. But the business model of banks remains the same – accepting deposits on one hand and lend as well as invest on the other. What has changed is the channel and speed of delivery and price of the products. How this will transform in the future is an interesting watch.
The main focus of banking will continue to be the same. The competition induced by foreign and private banks side by side with the government controlled public sector banks, has shaped the way banks go about doing their business. Machines dispensing money (ATMs) was seen as a magic, few decades back. Today a majority of bank customers have stopped visiting ATMs – forget visiting the branches, or using cards or plastic money; they use only their smartphones to carry out all financial and investment transactions.
Click-and-forget banking
Millennials have never even visited bank branches. Phone banking and Internet banking have become the order of the day, especially after the pandemic. Brick and mortar bank is giving way to click-and-forget-bank scenario. As we move away from cash-based economy, the cost of running a bank has reduced but to adapt digital transformation, huge capex has been spent.
When we crystal-ball gaze into the future of banking, not too far, say over the next decade or two, some major challenges stare at the banking industry. These are competition from fintechs, digital transformation, cyber security, regulatory compliance pressure, changing business model, customer expectations and rising demands and lastly the issue of customer retention.
Fintech threat is significant
Fintechs are taking away several profitable areas of banking business from traditional banks. They render customer service faster, more efficiently and in a cost-effective manner. New and innovative technologies help with this and their threat is really significant. These have succeeded in providing simple and intuitive customer experience. To remain competitive, traditional banks must learn from them and have to either acquire or collaborate with them. This will be the most important challenge. ‘If you can’t beat them, join them,’ has to be the policy!
Digital transformation and tech upgrade
A survey in 2017 concluded, over 50 per cent of financial services CIOs believed that a greater portion of business will come through digital channels and digital initiatives will generate more revenue and value. Banks need to innovate, in which technology plays a significant role, to optimise existing processes for maximum efficiency. The rapid innovations in the fintech area and digital products throw open new opportunities as well as risks. These may affect financial intermediation, payment systems, cyber security and consumer protection, in the immediate future.
By leveraging cutting-edge technologies like data analytics, banks can reduce costs. Cloud computing, bots and AI also offer significant advantages while improving customer satisfaction and revenues. Cloud computing via software as a service enable firms with legacy systems to simplify and standardise IT infrastructure.
Studies show that the majority of consumers prefer virtual assistance for timely issue resolution. Bots are being used as the first line of customer interaction; these help increase customer engagement without incurring additional costs. Today, bots can engage naturally, conversationally and contextually. Using sentiment analysis, bots can recognise emotional cues and quickly evaluate, escalate and route complex issues to staffs.
Artificial intelligence helps understanding customer behaviour and to tailor make right products and services in a need-based manner. AI can also provide key organisational insights required to identify operational opportunities and quickly launch products. Success in banking business requires insight, agility, rich client relationships and continuous tech innovation. Innovation will be a key differentiator and it stems from insights discovered through customer interactions and analysis. It is vital that banks pivot when necessary to address market demands while improving upon the customer experience. Only those banks that happily adapt digital transformation will survive and succeed in business.
Cyber security
Cyber security is one of the leading challenges, as well as a major concern for customers. Banks need to be more secure, and able to guard against security breaches to protect customers’ sensitive data. The assurance of safety will alleviate the fear of the customer. This aspect will assume greater significance as banking becomes more data driven and a storehouse of personal and privileged data of customers. Just as people keep cash, in future, data will be kept with banks and with consent it would be shared with whosoever the customer directs to. More advanced authentication methods will be implemented to prevent identity thefts and frauds. As data breaches become prevalent and privacy concerns intensify, regulatory and compliance requirements can turn more restrictive. Cyber risk has been identified as the foremost in top ten operational risks for 2023 based on a global survey of financial institutions. Given the extensive level of outsourcing – especially in the IT area, appropriate risk management practices have to be put in place.
Regulatory compliance
Regulatory compliance has become one of the biggest challenges for the banking industry. Compliance can significantly increase cost of operations of banks and generally calls for external help. Both internal and external controls will become necessities if the compliance to regulations has to be effective and fool-proof. Failure on this score would invite regulator’s wrath and penalties, and cause reputational damage.
Overcoming this, requires banks to foster a culture of compliance within the organisation, in the senior management and board, as well as implement institution-wide structures and systems. Technology can help standardise processes and ensure procedures are followed correctly and consistently. It also can help in collecting and mining data, performing in-depth data analysis and providing insightful MIS/reporting. This is especially valuable for identifying and minimising compliance risk.
Fast changing business models
Cost of compliance management is an important aspect that will force banks to change the way they do business. Increasing cost of capital, sustained low-interest rates till recently, and decreasing return on equity, put pressure on traditional sources of banking profitability. However, shareholders/investors expect continued high profits and dividends. Such factors have led many institutions to create new competitive service offerings, rationalise business lines and seek sustainable improvements in operational efficiencies to maintain profitability.
Competition itself forces banks to have a re-look at the way they conduct business and bring about drastic changes where necessary. Banks will have to rediscover the wheel in view of, what fintechs have brought to the table. Traditional bank service will have to lend itself to new and evolving distribution channels, like social media, VR/AR, etc. They must address this question: What is needed – change of distribution channels only or products and services themselves? This will be a strategic decision, the senior management has to ponder over, in the immediate future.
M&A in the banking industry is a continuous development. Smaller banks will either voluntarily or be forced to merge with bigger ones, so we may have only few large banking institutions. Some of the government owned banks would be merged or privatised. Bank branches would become leaner with few people aided by gadgets and less crowded by customers.
Customer expectations and raising demands
Customers expect shorter turnaround time to get their banking issues resolved; they want solutions now! Else, they go to another bank which offers them the same. They also want access to their banking resource 24/7. The young consumer is smarter, tech-savvy and more informed than the previous two decades’ and expects a high degree of personalisation and convenience. In a survey, it was found that 80 percent of millennials prefer to interact via social media; they form the largest percentage of mobile banking users. Youth want to have full control of what they do with the banks. The elderly clientele desire more human interaction. Catering to these varied customers, at the same time will be a big challenge. Hybrid banking model that integrates digital experiences into traditional bank branches will be the approach in the coming decade.
Customer Retention
Customer retention is going to be a key challenge in view of intense competition from institutions adopting technology faster. By knowing the customer and engaging with them, banks can optimise interactions, leading to more business/income and a healthier customer retention. Good customer service only, makes customers loyal. For customer loyalty and retention, banks need to implement the ongoing customer-centric approach.
Future banks
Customers are going to be more demanding in the future. They would expect financial transactions to be done in a jiffy. The entire banking service will have to become data driven, meaning things like cash flow based loan assessment or tax return based appraisal/limit fixing, etc may become the norm for sanction of loan to a borrower, as opposed to the present time consuming bulky paperwork. The customer may not be required to visit a bank except perhaps for signing contractual agreements like locker or loan register/documents. Bio-metric based authentication would help customers interact seamlessly with the bank staff for all their transactions.
Recently AU Small Finance Bank has introduced, round the clock video calling facility through bio-metric authentication to interact with the bank. In short, customer footfalls to branches will not be encouraged. They would become sales and service point only for customer acquisition and to help them when technology fails.
Just as we have driverless cars today, tomorrow’s banks would be staff-less. In the future, banks will be a self-service station with latest gadgets where customers can access information and services, interact with chatbots for routine queries and even schedule an appointment with bank’s advisors. The advisor may set them up with a mobile AI assistant that would provide additional recommendations based on their behaviour. This set up might meet and exceed rising customer expectations. In an increasingly customer-centric world, satisfied customers are the key to sustained business success. Happier the customers are, the higher the return on capital and happier the bank investors will be.
Wonderful piece of article. May be a decade is enough to see the reality of all what’s visualised here.