Existing banks run helter-skelter to retain customer as small banks enter the fray
What haunts them is the fear of the unknown in the form of the new payments banks that the RBI is set to license in the next few weeks.
It is not that these banks are working overtime to transform the way the consumer enjoys banking. What haunts them is the fear of the unknown in the form of the new payments banks that the Reserve Bank of India is set to license in the next few weeks.
At least 42 applicants are the payments bank queue, backed by men and women who have the capability to disrupt the industry with their unconventionality, rather than money power. The biggest threat is offering an interest rate that is 300 basis points higher than what banks do on savings bank accounts with an option to move funds online at will.
"It is an exciting, different world; what I call a fast-forward world," says KV Kamath, chairman, ICICI Bank. "In the next three years, technology is going to evolve further and it will be difficult to forecast what all we could do with it. That’s when you need to step back and ask how many of us as banks are capable of understanding this change and driving it.’’ The ‘fast-forward world’ opens up opportunities for a whole new bunch of entrepreneurs, but at the same time a threat for existing ones who have been lethargic, or tinkering with services to silence customer complaints.
"All the research we have done suggests that customers have an uncomfortable relationship with their banks," says Rajiv Lall, chairman, IDFC, which is turning into a bank. "There is an opportunity to raise the service bar. It is simple but at the same time very complicated because even if we have a service proposition to offer, customers will begin to test us."
It is this reality of unhappy customers, and the threat of nimble-footed, tech-driven banks of the future that has led to the likes of HDFC Bank, State Bank of India, Axis Bank, and ICICI Bank coming up with new products in the past few months, both aimed at creating new customers and retaining the old ones.
‘Pockets’ from ICICI Bank, for instance, is a digital bank that helps to transfer money, pay bills and book movie tickets. ‘Chillar’ from HDFC Bank helps with instant money transfer to anyone in your phonebook, while ‘Jiffy’ from Kotak Mahindra Bank is a zero-balance digital account linked to your Facebook and Twitter. PingPay from Axis Bank is a multi social payment app.
One click on the ‘Smartbuy’ icon on HDFC Bank’s website will make you wonder whether you are on Flipkart’s website. The bank has started an e-mall for customers to pay utility bills, shop for grocery, clothes, shoes and other lifestyle products. It has tied up with e-tailers such as Snapdeal, Flipkart and Amazon.
Ecommerce spends grew 34% annually from 2009 to 2014 to touch $16.4 billion, estimates consultant PwC. It may climb to $22 billion by the end of this year. "The increase in e-tailing doesn’t matter to banks," said Ashvin Parekh, managing partner, Ashvin Parekh Advisory Services. "They want these transactions to be executed through their website so they get the fee income. Banks like ICICI Bank, HDFC Bank and Axis Bank want to ensure transactions are not routed to a third-party website.’’ The growth of digital transactions among existing clients is promising. "We get a lot more existing customers using (the) digital (medium),’’ says Uday Kotak, vice chairman and managing director, Kotak Mahindra Bank. "But it’s much tougher to get new customers this way. New customer acquisition is still coming from the real world partly because of KYC guidelines.’’
Transactions worth Rs 69,440 crore were conducted through m-wallets at the end of March 2015, up by 220.05% from Rs 21,696 crore last year, according to RBI data. Banking transactions worth Rs 10,80,640 crore were done through mobile banking as compared to Rs 16,448 crore in March 2014, says the RBI data.
"Two years ago we set out to build a fullfledged digital bank — it was popular as banking on alternate channels," says Nitin Chugh, head of digital banking at HDFC Bank. "We are trying to digitise all businesses in the bank." Axis Bank has formed a group of people less than 30 years of age to work on innovative products for the young generation. It is also hiring from the premier Indian Institutes of Technology and St Xavier’s College in Mumbai to come up with ideas.
But that may not be enough to face the onslaught of competition from new payments banks, which can manoeuvre technology to their advantage by keeping costs low.
What if payments banks begin to offer an interest rate just 50 basis points lower than yields on government securities, in which they mandatorily have to invest? Customers could be given the option of keeping their existing bank account, but move a big chunk of their deposits online to payments banks, which could put existing banks at a disadvantage."I would think there are 250 million people who are connecting to the internet using handheld devices, and are going to be taking this option," says ICICI’s Kamath. "It is an exciting field, and it will be very interesting to see how existing banks compete with this."
Whatever the challenges, existing banks believe it may not be that easy for new entrants to grab their share of the wallet even though online transactions cost just Rs 1. The cost of servicing retail customers who deal at banks and automated teller machines is high, and the new ones may not be able to sustain high interest rates for long.
"To attract customers, these players could offer a higher savings deposit interest rate. That would put pressure on existing players,’’ says Rajeev Anand, group executive, retail bank at Axis Bank. "It would, however, not be sustainable in the long term." The cost of a transaction in a branch is estimated to be around Rs 35, and to transact on an ATM it is Rs 15.
If new banks are indeed a threat, why can’t existing banks do by themselves what the others will offer to do? "What stops us from building a payments bank within the bank?" asks Kotak. "The trouble is the mindset, which is excessively short to medium term revenue-focussed. Think like technology companies: Customers, usage and users.
You want to make sure that as an institution for the future, you think about the 80% (clients who don’t provide high profits)," he says. Normally, he adds, the thought is, these are unprofitable customers.
"On a long tail, a small delta change has a dramatic revenue impact. And technology can make it happen."