The last few years have been transformational for the Indian banking sector, characterized by a surge in online banking, and the movement of the payment sector from cash to digital, primarily driven by factors like rapid technology transformation, demonetization of the Indian economy and the onset of the pandemic.
The advent of the COVID-19 pandemic has fueled a drastic shift in banking business models from ‘Physical’ to ‘Digital’ and has ushered a wave pushing different segments, to digitally transform the way they operate. The journey of innovation has been characterized with words such as ‘internet banking’ and ‘digital payments’, which have now expanded to ‘digital lending’, ‘wealth-tech’, ‘invest-tech solutions’, along with the advent of niche players like ‘neo-banking’ and ‘banking-as-a-service’ platform providers. A riveting evolution of digitization through technological transformation such as the use of blockchain and adoption of open banking, along with higher focus on core process innovation, are driving the banks in the Indian economy to evolve to cater to the growing customer needs.
Digital transformation in the banking industry and the expected outlook for the financial services
With the pandemic acting as the ‘Chief Digital Officer’ across companies in different sectors, customer experience is gaining centricity and innovation of core services will act as the key driving force for digital transformation in the banking industry. The COVID-19 pandemic has played an unprecedented role in evolving the customer demand to expect a truly unique experience within the financial services sector. Customers give higher significance to superlative digital experience, making digital synonymous with banking in current times, and making it accessible to hinterlands and non-banked/underbanked population.
New platforms on wealthtechs and neo banking are being adopted for enhanced customer experience as well as for customer acquisition. Banks around the country are strategizing to rebuild their position viz-a-viz their competition, regarding their existing technology stacks, business models and processes, along with the structuration of their customer-related platforms.
India’s banking landscape, has seen an array of innovations recently, linking customer experience directly with the changing model of product and service delivery. Innovations in the product design, whether for new products or the existing ones, and of the overall digital delivery are shaping the way of future banking business models.
While banks have been increasingly adopting innovative approaches in digital processes, adoption of open banking, leveraging technologies such as blockchain, could define digital innovation for the sector. To cater to digital sourcing models, banks should focus on addressing the myths associated with digital innovation and bring out products and services which could improve customer experience and the front-line productivity, along with a special focus on analyzing end-to-end process optimization.
The futuristic vision for the banks in the digital world would primarily revolve around their strategy to build differentiation in a tangible manner, to have positive unit economics, through public-infrastructure driven framework. A digital-only bank or any financial institution needs to ensure they stay ahead of the curve and their competitors to create distinguished services, drawn from consumer needs to drive their revenue stream.
Another element driving the growth of digitally transformed banks would be the workforce, to enforce the commitment of keeping the customer at the forefront of any strategy and enabling an agile infrastructure.
On the other hand, it is also imperative for the banks to be cognizant of the cyber concerns related to customer data and the consequent apprehensions of the users, especially in Tier II and III cities towards digital banking services.
Neobanks: Disrupting the financial services industry
The innovative operating models, servicing the new-age customers, with an additional flexibility and agility has evolved the neo banking landscape in India. Neo banks offer swift and seamless workflows, with non-traditional and proactive ways of risk management, and provide value-added services to consumers that will be crucial in shaping the sector over the next decade.
Neo banks can be characterized by the ability to service emerging customer expectations, making round-the-clock customer service a reality, replacing the need for a physical presence, and ‘one size fit all’ solutions with services that are customized, seamless, and simplified.
The onset of digitization has also led to a spur in the demand for the improving product innovation cycle, such as enabling hyper-personalization, i.e., offering the customers exactly what they need. Within the Indian banking landscape, certain key factors like – the growing size of the younger population, improved financial literacy, the rising need for technology-backed products, increased mobile and internet penetration, and the limitations faced by the traditional banks – are rapidly paving the way for the growth of the neo banks.
The next big thing for the neobanks would be to achieve the unit economics, attract investors, as well as customers, while operating within an ecosystem that exists in cohabitation with the traditional banking system.
To summarize:
As traditional banks gear up to offer robust, seamless, and digital offerings to existing and potential customers, they need to also keep customer-centricity as a major highlight of their future strategy, with a focus on cyber security, smarter and adept workforce, agile infrastructure, and a vision to achieve unit economics. Neo banks could act as the next best thing in the banking landscape, especially within the lending landscape, if the right regulatory support is available at the right time.
Sanjay Doshi is the Partner & Head, Financial Services Advisory, KPMG in India.
