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Digital banking: The ‘fail-safe’ for banks in the face of rising costs and changing demographics

By Sreedhar Vegesna and Nitin Jain

“Times have changed….”

How often we hear this in conversations and in different contexts, but what could be truer than this statement in current times?

Over 80% of Indians have banking relationships, and this number is considered healthy in the global banking landscape. At the same time, with over 48% of these accounts being dormant, India’s engaged banked population continues to be limited. Moreover, a critical demographic-related fact is that nearly half of the country’s population is under the age of 25 years. This clearly indicates that ‘Gen alpha’s’ expectations will drive the Banking sector’s evolution in the coming decade.

The nation-wide lock-down, followed by many employers’ work-from-home mandates, has resulted in access to banking moving from physical to digital means.

Until 2018-19, the expectations of Gen Z and Gen alpha customers were shaped by insta-digi-services, but 2020 saw an exponential increase in customer segments adopting digi-services owing to the Covid-19 pandemic. In an era where a laptop or high-end camera is delivered in a day via e-commerce platforms, groceries reach customers in hours and meals in minutes, some banks taking two or three days to provide their account holders a cheque book seems an unacceptable level of service. It is clear that the weight of multi-layered decision-making, dispersed operations and legacy systems are slowing banks down significantly.

Customers expect three key service deliveries from their banks:

  1. A key trend is that nearly a third of the account holders of banks have begun placing ease of transaction as their primary driver of choice in this last one year. The nation-wide lockdown, followed by the work-from-home practices of many employers, has resulted in access to banking moving from the physical to the digital mode. The cost-to-income ratios of banks were subjected to tremendous stress at the beginning of the year due to the increased cost of operations and reduced incomes. Therefore, to keep the growth engine chugging, banks began powering their digital (no-touch) acquisitions as well. In this environment, it is heartening to see the industry opening its arms to complementary service providers including NBFCs and FinTech players.

In an era where a laptop or a high-end camera is delivered in a day, groceries in hours and meals in minutes, some  banks providing their customers cheque books in two to three days seems an unacceptable level of service.

2. Quality service from the lens of a customer has two key components. The first and widely acknowledged one is customer service, which is true of all industries, but more so for banking. The second emerging component is unrealised need fulfilment. This indicates whether banks are listening to their customers and are able to offer them relevant customised solutions to meet their needs. This means many things in a traditional bank. In this scenario, a deep connect, provision of an omnichannel experience, regular collection of customers’ feedback and pro-active ‘solutioning’ at the customer level are key to banks’ managing the expectations of their customers.

3. Today, products and services are standardised to a large extent and are transparent in the Banking industry. However, the shift in demographics towards Gen Z and Gen alpha users, who tend to be price-sensitive, means that the market will be dominated by players with either best in class pricing for their value-driven customers or those who are able to offer best in class services for their quality-driven patrons. A strategic choice is consequently difficult for banks to make because along with segments that are price-sensitive, there are also customers that are tech-savvy and very well informed.

Investments on a digital platform are often viewed myopically from behind an RoI lens, whereas they constitute an essential part of the survival toolkit every financial institution needs.

In this scenario, banks have been investing in digital assets and capabilities in a bid to serve their customers significantly better than in the past. The digital banking space is led by some private players, NBFCs and FinTech organisations (the latest being Neobanks). The sector has been witnessing a rapid change and for banks to keep up requires them to make a dedicated effort to upgrade their digital strategies.

Some critical aspects that banks need to keep in mind on their digital journey:

  1. All customers’ ability to adopt digital changes is not the same. Moreover, the need for adoption of digital technology is not equal across all customer segments. Therefore, digital assets need to be designed by keeping in mind a target segment’s needs and experience-related expectations.
  2. Digital assets should be supported by digital operations to ensure that the customer experience is seamless. These assets should be able to able to act as service centres for customers. AI-, ML- and RPA-powered solutions can make this a reality.
  3. API-powered partnerships are moving to the fore front of the digital revolution. An investment in time will therefore save banks not only their costs but also their market share.
  4. A customer needs digital servicing as much as the presence of a physical branch close by. Moreover, banks require innovative physical and digital strategies to complement each other.
  5. Most importantly, digital innovations must include an underlying premise of customisation, to maintain the depth of banks’ relationships with their customers.

In conclusion, it is evident that the power of digitization lies in the hands of banking institutions to leverage as they chart their growth trajectory. Investments in this sphere are often viewed myopically from behind an RoI lens, whereas these are a part of the essential survival toolkit every financial institution needs. Today, cost efficiency is key to profitability and what banks have realised is that digital pursuits are catalysts of this change.

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