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Circa 2007: Aditi is a typical new age banking
customer. She transacts mostly through her 'friendly device' that
allows her to conduct her bank transactions, trade on the stock
exchange, buy her groceries, pay her children's school fees and
taxes to the government through a click of a button. She chooses
her account, through her 'friendly device', from one of the multiple
banks that she has a relationship with for making the payments.
While travelling to anywhere within India or overseas, besides her
'friendly device', Aditi also has the option to access her bank(s)
or conduct transactions at any of the multiple self-service or serviced
outlets that have been setup by her bank(s) or other service providers.
With a strong automated payment infrastructure and a nationwide
credit bureau in place, banks have invested in sophisticated customer
intelligence systems and adopted a combination of in-sourced and
outsourced business models, to provide a single-window access to
their customers. This enables them to provide 'tailored' services
to customers like Aditi to meet their lifestyle requirements, investment
management, asset acquisition, financial planning and manage their
relationship with the government. Despite all this, Aditi still
visits her financial services provider regularly to meet her relationship
officer for a conversation on contemporary art, while also understanding
how to plan her financials and discuss new investment opportunities.
Welcome to banking in 2007.
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Important structural
changes and major policy initiatives over the last few years have
resulted in a new financial architecture that consists of two well-developed
wholesale and retail markets. The new financial landscape has presented
customers with greater opportunities and bargaining power -- redefining
how banks and non-banks approach the marketplace and each other.
Today, customers obtain customised solutions, choose modes of access
and define the way they want to conduct business -- often getting
banks and non-banks to collaborate and form new value networks to
service them. They actively seek new opportunities arising out of
market developments and reforms. More recently, they have attempted
to use capital account liberalisation to explore new possibilities
-- be it deposits, investments in capital and money markets, or
capital transfers in local and global markets.
At the turn of the century, there were over a hundred scheduled
commercial banks, several hundred more cooperative banks, Non-Banking
Financial Companies (NBFCs), and other financial institutions in
India. Most of these organisations were seen to be offering vanilla
banking services with minimal differentiation. A few years ago,
the banking industry could be classified into specific categories
like public sector, private sector, foreign banks, etc. Barely half
a decade later the scenario could not be more different. Far from
the earlier days, where too many banks attempted to operate in both
markets, only a few large players have been able to sustain servicing
a broad range of customers, providing the entire range of services
across both wholesale and retail markets.
Other players have limited their activities to one-market
alone or focussed on specific opportunities across both markets,
due to a combination of market and regulatory pressures. Marginal
players have been forced to reduce their range of activities, sell
branches and assets, and in some cases, transform themselves to
become service providers to banks. Some players, existing and new,
have opted to become financial consolidators, offering a single
window access to multiple financial products, managing customer
relationships and experience. As a result, the banking industry
today, can easily be divided among a few large full-service banks,
which are competing for market dominance, and the rest, which include
some niche players specialising in product categories and customer
segments, and a group of survivors who manage customer access and/or
service other financial intermediaries.
The indicators of this transformation have been visible for the
past few years.
1. Financial sector reform: The
central regulator took a series of steps over the last few years,
including adopting international accounting standards, strengthening
the financial system and improving supervision and governance. In
a bid to promote India as a regional financial centre, 'special
licences' or 'restricted licences' were permitted. These licences
attempted to move away from the one-size-fits-all banking licence
towards offering licences to carry out specific activities such
as investment banking, debt restructuring, offshore banking and
credit card issuance. This enabled banks and non-banks to build
a portfolio of activities around their competence and choice rather
than attempt broad market participation, as was the case before.
| BANKS, TODAY. TOMMORROW? |
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2. Raising the sustenance barrier:
Strong prudential and supervisory norms along with new Basel
Committee guidelines required many Indian banks to bring in additional
capital, and conform to rising regulatory standards. Through a series
of market driven actions and regulator interventions, the banks
had to merge, reduce scope and scale of operations or transform
themselves to adopt new roles.
3. Government Divestment:
The government's decision to divest its stake in most public
sector banks (PSBs), either through the capital markets or through
strategic sales, forced most public sector banks to develop a business
case for their existence. Some PSBs had foreseen the impending changes
and had taken initiatives to build upon their core strengths of
reach and a large customer base. They invested in technology and
changed the way they were doing business to emerge stronger and
more efficient. A few PSBs that had not reacted quickly to these
changes, found business unsustainable and had to divest operations
i.e., branches and portfolios selectively, or in some cases, merged
their operations with stronger banks.
4. Globalisation: Implementation
of the wto accord and the subsequent liberalisation of rules for
foreign banks have had a significant impact on the banking sector.
Although not too many new banks entered the market, the existing
foreign banks grew bigger by purchasing market share wherever they
perceived value. The new banks were mostly specialists, which focused
on particular segments using special licenses as their entry vehicles.
Some foreign banks exited India as part of their global rationalisation
and decision to concentrate on their core competence or local markets.
5. Co-operative Bank Reform: A
series of scams and the subsequent erosion of public confidence,
a few years ago, affected the co-operative banking sector. Relief
came when the government enacted the 'Demutualisation of Cooperatives
Act'. Financial incentives were given to banks that converted their
ownership structure into a limited company structure. A small number
of banks were able to demutualise and follow through with an ipo.
Some cooperative banks were forced to close down while others were
taken over by more efficient banks.
New Business Models
Specialisation And Leveraged Sourcing The new financial landscape
has been a key impetus for banks to start looking at new business
models to survive. Over the last few years, the increasing need
to enhance fee-based income, improve quality of service and reduce
cost of operations has forced most banks to rethink their business
models. They have had to focus on core competence, collaborate with
other players to offer products and services to customers and partner
with a new breed of service providers to perform non-core activities
ranging from processing to technology management.
Some banks have adopted the model of being specialist service providers
to other banks in India and abroad. The range of these services
is seen to include regular transaction processing, trade finance,
credit documentation, etc. In addition to the above, a few non-banks
have also entered the domain of providing other services like provision
of infrastructure e.g., shared ATM networks, POS terminals, cheque
processing centres and print shops. Few banks made investments in
shared technology and infrastructure, which, in due course, they
used to offer a range of ASP services to other banks, which lacked
scale or investment appetite.
Some of the leading financial brands, instead of providing their
own products, opted to source third party products for their customers.
They primarily focus on managing customer relationships and are
a single point interface for multiple financial needs, often sourced
from other market participants.
Another business model that is being used by some niche banks involves
selling down loans or securitisation of assets (including good loans
and/or restructured bad loans). With growing investor acceptance
and procedural ease, securitisation volumes have seen a significant
increase. Most of the leading banks including the 'Big Banks' are
increasingly sustaining their businesses though management of relationships
and origination of loans, the focus being on increasing the churn
rate of assets and fee income. The loans of these banks are packaged
as securitised assets or passed on to other banks, typically the
smaller banks, through the local and global syndication market.
Management Of Operations
The leading banks now are increasingly focusing on differentiating
their product offering by allowing customers to build products and
creating 'brands'. Preferred customers of the bank have the ability
to create product variants to suit their individual needs, often
requiring banks to collaborate with other players. Most of the banks
have invested in sophisticated touch points (both self-serviced
and human interaction) that are either owned, shared or sourced
through a third party service provider. All these touch points have
the ability to capture and use customer intelligence for marketing
efforts and for adhering to service standards to ensure customer
stickiness.
| THE OUTSOURCING MODEL |
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The customer strategies adopted by the successful
players are focused on retaining profitable customers, while also
developing specific marketing initiatives to attract customers from
other banks with incentive schemes, packaged services and competitive
service standards. In addition, the search for profitable customers
by the banks has taken them beyond the traditional metro and urban
areas, with the rural sector being viewed as a serious market, and
not just a priority sector commitment.
During the last few years, banks have shifted their risk management
focus from crisis response and compliance to proactive evaluation
of risks in order to improve shareholder value. Banks have started
using risk management to understand the true risk adjusted performance
of portfolios and businesses. This enables them to make informed
strategic and tactical decisions including capital allocation, and
business, customer and product focus.
Conclusion
The banking scenario in 2007 could be similar to the one presented
above, which requires banks to be proactive and adopt a range of
measures to shape their future:
1. Anticipate and prepare for regulatory change
2. Focus on identifying core competence and migrate to a
business model of choice
3. Build an optimal operating model by understanding which
activities to retain, collaborate and outsource
4. Go beyond compliance to use risk management as a critical
decision support tool
5. Create and sustain customer, investor and regulator confidence
by adopting international accounting standards and improving corporate
governance.
Atul Pradhan and S. Mahesh are Managing Director
and Associate Director of KPMG Consulting, respectively. The views
expressed in the article are the personal views of the authors and
do not reflect the views of KPMG.
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