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Banking In A Fintech World

Banks need to find new ways to keep the value intact for their customers through convenience, distribution strength, understanding of segment, service or bringing value through partners

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The banking industry has entered a new epoch as fintechs are disrupting the value chain through innovative business models. Over the last few years, fintechs have been attacking business areas and chunks of banking profit pools that generate highest RoE with low capital deployment. Two of the key areas disrupted so far are payments and lending, which together form almost 72 per cent of retail banking revenues globally, and 85-90 per cent in India.

Fintech players have so far mostly focused on sales and the origination part of the value chain, though they have also begun to extend into balance-sheet-based lending as well, such as instant credit at the checkout and also in areas such as SME lending using PoS platforms. These strategies are backed by lower risk, limited capital, but higher profitability/RoE business model, where almost 3x of balance sheet provision is required in case of on-books lending.

Banks would need to adopt truly differentiated strategies to compete in this changing landscape. With stricter capital and liquidity requirements, banks will have to make a key strategic choice around where and how to play in the customer engagement spectrum. For example, focus on segments through targeted product leadership or play on distribution and customer relationships in partnership with other banks or non-bank entities. And they would need to walk transformative strides along these strategic choices if they want to continue to create value for their shareholders and stay relevant for their customers. Here are some of the key strategies that banks have adopted as a response to fintech disruptions.

Differentiated Acquisition Model
Customer acquisition is an area where banks can learn from fintechs, who have built low-cost models that can scale up rapidly through creative execution.

•Enabling fully digital acquisition with a customised base product and meticulous cross-sell strategy. In India some banks such as Kotak and DBS have recently built such products
•Scaling up rapidly on the back of existing network of partner players (e.g. Paytm).
•Embedding products such as convenient financing options in purchase process 
•Acquiring customers through social banking application: BBVA Spain, CIMB Malaysia, and
•Fitting seamlessly into customer value chain: Alipay with seller financing.

Banks in India are also tying up with fintech players and running their own pilots, but are still at a nascent stage of creating an integrated digital model for customer acquisition in multiple segments.

Revamp Cost Structure
Automation, AI and other tech tools available today have opened up opportunities to create a radically different cost structure in banks, allowing them to target new mass segments with much lower cost to serve. This is different from incremental improvements in cost base as it entails transformation of entire cost ratios through large scale delayering of mid office (straight through processing), significant share of digital acquisitions at lower CPA, reduced cost to serve through digital channels and rethinking branch distribution with efficient formats and lean staffing.

Use Data Creatively
The explosion of data in the last few years has again provided banks with an opportunity to leverage data analytics extensively in areas such as alternative credit scoring, contextual marketing and predictive customer engagement. Banks need to build lifestyle patterns and integrate into financial needs of customers with deep profiling of customer transaction data. They need to partner with data analytics players including alternate credit scoring model providers (Credit Mantri, EFL, etc.) to supplement the traditional data sources and find new ways to harness the existing transactional information in innovative ways.

Build Segment-Specific Propositions
Another area where fintechs (and NBFCs in India) have been successful is in targeting niche profitable segments effectively through carefully crafted value proposition, customised based on segment behaviours.

Specifically, three segments, millennials, SMEs and the underbanked, have traditionally been underserved by banks in India. Banks can build low-cost service models specifically for these segments, leveraging technology and partnerships extensively.

Play In Wider Eco-system
In the new interconnected digital world, no player can succeed operating in silos. Moreover, customers are looking at one stop solutions to their needs. So banks need to develop a wider eco-system beyond the financial platform that can be used as a tool for customer acquisition. For example, Ping An in China developed a new “one stop” platform for used cars that attracts clients for their core need (could be non-financial) and then financial services are bolted on in a convenient fashion.

Conclusion
While short-term gains can be created by incremental improvements such as higher staff productivity, cost controls, for sustainable long-term advantage in the market, banks need transformation through step-function changes as highlighted above.

The new fintech/digital world is disrupting the incumbents by creating more value for customers than for banks through unbundling profitable product value chains thus allowing customers to buy only what they need, rendering distribution intermediary roles obsolete in many cases with more choice and higher price transparency. Moreover, digital offerings can be reproduced and scaled up rapidly at a very low cost, driving marginal costs to zero.

Banks need to find new ways to keep the value intact for their customers through convenience, distribution strength, understanding of segment, service or bringing value through partners. In the coming decade, banks in India can win by owning a category (“most efficient bank”, “best customer experience”) and/or segments (“SME friendly”, “Millennial oriented”) while they continue to serve all, but they would need to create a space for themselves in a disaggregated digital world.

Disclaimer: The views expressed in the article above are those of the authors' and do not necessarily represent or reflect the views of this publishing house. Unless otherwise noted, the author is writing in his/her personal capacity. They are not intended and should not be thought to represent official ideas, attitudes, or policies of any agency or institution.


Hemant Jhajhria

The author is partner, Financial Services, PwC (India)

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