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Truly Open Platform (TOP) Banking & Finance

Are these stakeholders ready to encourage digital finance through progressive regulations that encourage the participation as formal licensed players in the industry ?

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Imagine you are at an airport; in its departures terminal, are many rows of check-in counters, which have demarcated zones for different airlines. All those counters are leased by the airport operator to the airlines.

In fact, most of those counter staff could even be outsourced to an external staffing or aviation services agency, which runs those operations, based on the particular airline’s Standard Operating Procedure (SOP). Most passengers won’t know any different, as long as the airline branding is proper, the expected customer service behaviour is adequate and the digital backbone of the ticketing & checkin process enables this to be a seamless movement. Each of the counter has its digital linkage to the specific airline and hence the data confidentiality and data security is also assured, even though the global reservation system of airlines has various airlines as its members. This is the open-platform method of services.

Imagine the same being applicable to the concept of banking & finance!

The Idea

Imagine a 3000 sqft of “bank” or “finance company” branch with multiple counters, with each counter having a different finance-brand available inside the “branch”. And the same branch also having safety lockers, that the current banks charge scarcity premium from.

The customer can go to the particular brand counter and transact their BFSI need, depending on the brand belonging to the category of banking / NBFC / HFC / MFI / Insurance / AMC.

This sharing of physical space as well as availability of multiple financial services brands, stitched together with the digital capabilities and linked to strict regulatory supervision under one roof, can help solve many a consumer problems.

The Indian e-comm market has seen meaningful integration between physical and online adaption. This has enabled digital platforms to offer personalisation of services & products with physical-digital integration. This concept of “Phygital” delivery of services has been hastened and stress-tested by the Covid compulsions.

This idea could be an impactful financial-inclusion solution; that could reduce consumer access costs, (which are anyways loaded onto the consumers) as well as solve for reducing last-mile connectivity pain until India (& it’s deep interiors and smaller geographic units) moves to full-digital-transaction.

This “ Phygital, multi-brand, multi - BFSI” (PMMBFSI) branch can solve for many gaps in the financial services distribution system today.

Imagine every pincode in India having atleast one such multi-brand branch. Ofcourse, the physical size of such a branch can also be smaller or larger, to suit the need of the population in the area. Over a point in time, some of these multi-brand branches might become redundant as the adaption & usage of digital to transact increases substantially. Anyways the trend of physical branch banking has been well-disrupted by the challenger fintechs which solve for consumer issues.

This usage of the Digital India backbone can increase the reach of banking entities and other financial services companies across BFSI. With constantly evolving technology solutions, both the need and the solutions around data security and cyber security are evolving. Any of the nay-sayers around digital risk management can draw comfort that despite usage of physical-locks and background-checked staff, thefts and frauds cases do happen in BFSI.

Regulatory outlook & experience so far :

Regulators have the best interests of the consumers in mind. Hence anything that can help consumers benefit from wider range of products, with simplicity to comprehend the products, and to have wider & cheaper distribution is a much-sought-after wishlist.

In today’s technology & digital era, the regulators have access to the digital records & servers of the financial institutions and can further add a layer of predictive risk management measures from their end ! Of course the regulators will have to constantly build capabailities and bench-strength of talent in their institutions, to use digital tools to even remotely-supervise the financial entities. Proactive regulatory supervision using digital capabilities could add heft in maintaining the fiscal stability, which in turn can create additional time and resource bandwidth for the regulators in proactive development of the financial markets, as India seeks to be a globally significant economic power.

As of March 2019, India had more than 120,000 bank branches & a little over 2 lakh ATMs, data showed. Of which just over 35,000 branches are in the rural belt. In 2017, the RBI had allowed the opening of mini-branches or banking outlets without the need for prior permission on a case to case basis. This was mooted as a way of increasing banking-services access to the remote locations across the country.

The regulators along with the industry players can bring in a common code of conduct and minimum standards for consumer-facing roles to enable better and friendlier consumer service. This can also be used to generate local employment on the consumer facing roles. After all, to have a sustainable and healthy competition in the financial services space, it is important to attract good quality investors with ability to infuse long-term patient-capital. And in that endeavour, the regulators have to allow the viability of the business model to be capitalistic in nature and to regulate policies with that intent, while balancing the need for inclusive-finance.

Concept and role of JAM :

The Bill & Melinda Gates Foundation’s annual report 2019 titled “Goalkeepers : Examining Inequality”, tracked the global progress in meeting the UN’s Sustainable Development Goals (SDGs) by 2030. It mentioned that “Geography and gender are the biggest drivers of inequality, which can be addressed with smart policies built around digital technology that improves both the quality and reach of government services”.

The report also showcased the wonderful architecture that India has put together - the “JAM trinity” - ‘Jan Dhan Yojana’ to open bank accounts for the underprivileged , ‘Aadhaar’ to provide every Indian with a biometric-authenticated unique identity number, and mobile phones that enabled increased the reach of services. Pradhan Mantri Jan-Dhan Yojana is India's National Mission for Financial Inclusion to ensure access to financial services, namely banking savings and deposit accounts, remittance, credit, insurance and pension in an affordable manner. It has over 40 crore beneficiaries so far. It also uses the services of over 1.2 lakh “Bank-mitras” delivering branchless banking services.

Digital-age banking & finance:

Financial services has traditionally been a distribution-led business with dominant physical presence. High cost of fixed assets in traditional banking and other financial services sectors, and licensing norms make the entry into the sector a tough one.

Digital finance firms carry no legacy baggage or cost and use data as gospel truth - the basis of finance decisioning anyway. Combining data science with technology and their quick decision-making, they are in a great position to question the status-quo and be responsible mainstream participants in the overall financial system. And not be in the periphery, as the current “social hierarchy” in the financial industry pushes it to. It also puts them in a spot, as regulators usually are uncomfortable licensing someone without a prior experience in banking.

Challenger banks, as seen in many markets globally, leverage technology to streamline the banking process. They offer the digital solutions while even maintaining physical branch presence where required. In that sense, they are different from the neobanks. Neobanks provide a platform that not only has a current account, but also offers additional features such as payroll, expense management and automated accounting services.  They also allow APIs to integrate business workflows with banking requirements. However, neobanks do not hold a banking license; hence rely on a partner-bank to offer banking services. This type of partnership is not a sustainable one, as over time, either of the parties would learn more about the other’s business.

Customer centricity vs historical brand loyalty :

Customer centricity, is an area where new age fintechs have an edge ; most of the digital finance business model is built with customers as the purpose of existence, and the traditional banking & financial institutions are having difficulty pivoting to match the offerings of these new platforms.

However the traditional banks and financial institutions have the brand loyalty and name recognition advantage until now. This is true in any industry seeing disruption.

One of the worries that conventional banks might have with fintechs being allowed into banking space is that of valuation and fintechs’ deep-tech ability to understand the consumers.

Currently one of the biggest arbitrage that banks have against non-banks is that of “perceived safety net” in securing debt pools. There is no empirical evidence of correlation of such category of lending Institution improving credit access to consumers. Even in the aspect of regulations being followed well and compliance in the spirit of the rules is not a wow-factor yet.

Acceptance of the digital reality would also solve for the stable non-banks & digital lenders to be looked at differently (and with respect) for getting them into formal banking licence. The old school philosophy that only few banks should have the licence can change with issuing “Digital challenger banks” licence, and can improve quality of finance by breaking up the “old boys network”.

Are our financial services regulators ready to work amongst themselves, in looking at new ideas to improve “access to finance” ? Will they override their institutional biases and perceived hierarchies amongst them ?

Are these stakeholders ready to encourage digital finance through progressive regulations that encourage the participation as formal licensed players in the industry ?

In that step, probably start with the PMMBFSI (“ Phygital, multi-brand, multi - BFSI” ) branch concept unlike the current stifling “single finance brand, single branch” concept ?

It’s all in the mind - Regulators’ mind ! And the committees that might look into these ideas and public comments, if at all. To move an idea into executable-policy and then into motion.

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.

Srinath Sridharan

The author is Independent Markets Commentator

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