The New Face Of Banking

Among the various challenges that Arbind Singh faced, the one that plagued him every month was transferring money to his hometown. As a migrant labourer from Odisha working in Surat, Gujarat, sending cash to his family entailed losing half a day's wages, as he would have to travel to his bank on a working day. His other option was to rely on informal channels, which always turned out to be an expensive proposition. Recently, Singh discovered a neighbourhood store that acts as a branch and allows him to transfer money without missing work.

All it involved was registering his mobile number and the beneficiary's account, without any other paperwork. Singh has discovered the power of digital technology. With the rise in use of technology and the coming of niche banks, it is likely that your nearest grocery shop may soon become a one-stop shop for depositing and withdrawing money as well.

For the consumer, the technological revolution has made banking easier and more accessible than before, whether it is online or mobile banking, or new products like wallets. Transferring funds, paying bills, or buying insurance - all of this can be done in a few slides of the thumb on the smartphone while you finish a cup of coffee. (BANKING DATABASE)

Digital cash or mobile wallets such as Paytm, MobiKwik and Oxigen have met with great success too. In 2014-15, the number of transactions via mobile wallets stood at 255 million, compared to 172 million banking transactions on mobile phones. However, in value terms mobile banking continues to exceed wallets as it involves fund transfers and other large value transactions as well.

Singh's transaction took place through payments solution provider Fino PayTech, bypassing the banking channel. Many a bank CEO is worried about how the banking landscape is changing.

Apart from the rise of digital cash, the year 2015 has also seen the birth of two new types of banks, as the Reserve Bank of India issued licences to 11 payments banks and 10 small finance banks (SFBs) to facilitate financial inclusion. Also, two new private sector banks - IDFC Bank and Bandhan Bank - opened in 2015.

Arundhati Bhattacharya, chairman of State Bank of India, the country's largest bank, had earlier stated, "I'm really apprehensive about the new banks, as they are an unknown entity. And unknown is always a reason to fear, especially if they are ready to burn capital, which most of the incumbent players can't do."

Thus, competition in the banking industry will only intensify. Existing banks, on their part, are leaving no stone unturned as board rooms discuss user experience, design of their mobile apps and the launch of near-field communication-enabled contactless debit cards. While private sector banks like ICICI Bank and HDFC Bank have taken the lead in being cutting edge, public sector banks and old private sector banks are also trying to keep up. It is possible to make over 100 types of transactions on ICICI Bank's mobile app. State Bank of India has partnered with Reliance Industries to start a payments bank.

At a time when the mobile wallet player Paytm had crossed the 100-million consumer mark in August 2015, there were only a couple of banks offering wallet services. Since then, all major banks offer wallet services or will introduce them soon either with their technology or by partnering with wallet players. Besides launching its wallet SBI Buddy, the country's largest bank has also entered into strategic partnerships with online players such as Amazon, Paypal, Snapdeal and OlaCabs.

Union Bank of India's chairman and managing director, Arun Tiwari, says digital will be among the top three differentiators for the bank. The bank has built technology capabilities so that Tiwari can monitor the performance of a branch thousands of kilometres away at the click of a button on his tablet. The bank will also launch digital branches that will be unmanned.

Banks are also going slow on physical branch expansion. SBI opened 1,053 branches in 2013-14, but a mere 464 in 2014-15. It will be more selective in opening branches, choosing to focus instead on improving access for customers through the digital platform and electronics channels.

The technological revolution that the banking sector has been witnessing in the past two years has become critical for banking operations in 2015. Bankers, across foreign, private and public sector banks, are taking technology seriously. (Read the Business Standard Banking Technology Round Table on page 34.)

"Digital has become extremely important for all financial institutions, as this is what customers are asking for. Leveraging the digital play is important for consumer convenience and that is why it has become central to things," says Pralay Mondal, senior group president-retail & business banking, Yes Bank.

In wallets, even as banks seem to be playing catch-up with pure-play wallet players, neither set believes that it is going to lose. "As banks, wallet is one of the several digital services that we offer, and therefore it will be easier to attract customers. Moreover, we already have a ready customer base that can be tapped into. Another reason that works in our favour is that customers trust banks and therefore it will be easy for them to adopt a bank's wallet," said K A Babu, head-retail business, Federal Bank. The lender is in the process of launching a mobile wallet soon.

Despite intensifying competition, non-bank wallet players remain unfazed. "We want to be a substitute for cash and that is the biggest problem. We have managed a consumer base of more than 120 million and over 20,000 merchants accept payment via Paytm. So, the market is big and the more use-cases you generate, the more people will come on board," said Shankar Nath, senior vice president, Paytm.

Payments banks are a new category of banks that RBI introduced to further financial inclusion by providing small savings (up to Rs 1 lakh) and payment/remittance services to migrant workers and low-income households. Bharti Airtel, Vodafone, Reliance Industries, Paytm and Fino PayTech are among the companies that won payments bank licences. These banks can issue debit cards and offer internet banking, but they are not allowed to lend or issue credit cards. Three-quarters of the deposits they get will have to be invested in government securities, while the rest will need to be deposited in a scheduled commercial bank (for easy liquidity).

The second category of new banks - the SFBs - will be similar to existing commercial lenders, and will undertake basic banking activities, such as accepting deposits and lending to sections that are either not served or under-served by traditional banking. Their loan size and investment limit exposure to single and group obligators cannot be more than 10 per cent and 15 per cent of their capital, respectively. Also, at least 50 per cent of their loan portfolio has to include loans and advances of up to Rs 25 lakh.

Only the future will reveal whether these banks will turn out to be a game-changer as envisioned by the banking regulator or not. But experts believe that it will definitely increase competition, creating a win-win situation for consumers. "The new players in the payments banks space are the ones with deep pockets and they can easily disrupt the market by offering higher interest rates. In that scenario all the other banks will face stiff competition in terms of CASA (current account and savings account) deposits," said a public sector banker.

As payments banks will come enabled with technology, their operational costs will be lower, and it is very likely that they will pass on the cost benefits to customers by way of lower fees.

Shinjini Kumar, leader (banking and capital markets) at PwC India, believes that the new niche banks will be more complementary in nature. "There have been global trends in financial technology disruption that we have seen. But it may not be the same scenario here, because of the various limitations on payments banks in terms of lending and limit on deposit collection. Similarly, for SFBs it will take them a long time to achieve capital efficiency and get their cost of funds down before they begin to compete. Therefore, they will need to be symbiotic with the existing universal banks."

In SFBs, eight microfinance players, one non banking financial institution and one local area bank have won the ten licences. But banks are not too worried about this category of new banks. Experts believe that these players have already been engaged in lending and deposit activities, and banks do not expect a disruption in the space. However, the inclusion of these players in a formal banking set-up will enable these players to reach out to more consumers in the hinterland.

"In our view, this is a giant leap towards financial inclusion, as these small banks will be able to serve the underserved within the ambit of stable regulatory framework. Moreover, in due course, these applicants would be considered for universal banking licence if they are successfully able to build a profitable business model and achieve the desired objectives," Motilal Oswal Securities said in a report.

For the consumer - whether urban and rural, rich or poor - banking is surely going to become easy. For bankers, it isn't going to be an easy journey as competitive intensity spikes. Among existing players, private sector lenders are ahead of the curve, while public sector banks will have to work that much harder. SBI's Bhattacharya had said earlier that the new players would not have any legacy issues like the current players, as they would come with agile systems and delivery models and that they've not been held hostage by industry-level agreements and wage limits. Her forecast for the new environment: "It is going to be a dog-eat-dog world."

DIFFERENT TYPES OF WALLETS

• Closed wallet: This is typically issued by an e-commerce player and allows the consumer to use the wallet only for that company/website (for example, Bookmyshow)
  
  
• Semi-closed wallet: With the use of this wallet consumers can shop or pay at even other merchants/sites, but they cannot withdraw money (for example, Paytm)
  
  
• Open wallet: This allows you to shop at any merchant of your choice and also permits withdrawal of money. These wallets can only be issued by banks or in association with banks (for example, Axis Bank)