The evolution of banking channels in India – II

In my last post, I briefly discussed the historic evolution of non-branch banking channels in the Indian context. Almost every channel has a tremendous potential for growth, albeit from a small base. Going forward, banks will have to focus as much on the distinct financial needs of vast swathes of the population as on technology and innovation in order to accelerate the uptake of alternative and digital channels.
One of the biggest challenges and opportunities for the Indian banking sector, which is still predominantly focused on the urban customer, is the vast numbers of un- and under-banked in the country. Government and regulatory mandates on financial inclusion coupled with the increasing saturation of urban centers is already compelling banks to look at rural markets where banking penetration is still sorely lacking. Even today, approximately 40 percent of adult Indians do not have access to even basic banking services. Though a strategic combination of banking correspondents, kiosks, low cost ATMs, and even mobile/ tablet banking has made some inroads, bringing underserved markets into the mainstream will be an important facet of the sector’s overall channel development strategy.
In terms of innovation, the pace and intensity of automation will be accelerated driven by the demands of an increasingly discerning and digital customer. Mobile apps, for instance, will move beyond enabling transactions to empowering holistic financial management. Next generation ATMs will come with a broader range of automated possibilities, like dispensing demand drafts.
As channels evolve, in terms of type and sophistication, the omnichannel experience will become a key competitive differentiator among banks. Banking customers across the globe – and India is not an exception – use multiple channels often even for a single transaction. This trend is also fueling customer expectations that transcend transactions into the realm of experience. Customers expect a banking experience that is seamless, consistent and contextually and personally relevant.
If Indian banks are to empower their customers with an omnichannel experience, they will have to start with the right multichannel framework as the foundation. They need to find an enterprise class solution that acts as a conduit between their core banking platform and all their channels. More importantly, the solution should be capable of reducing time-to-market for channels and new products and services, and generate insights into customer preferences and behaviors that will help banks individualize the experience.

The evolution of banking channels in India – I

The banking sector’s first ATM debuted in the late sixties, nearly five-and-a-half centuries after the world’s first modern bank. From there, the pace of automated customer interfaces really stepped up – online banking in the mid-nineties, mobile banking in the early aughts and social media access in 2012. Today, banks are already in a race to conquer the wearables market even though the concept itself is yet to completely break free of the proof-of-concept stage.
In India, the ATM made its first appearance in the 1980s and though the subsequent growth has been prolific, penetration, at 110 units per million inhabitants or 1/8th that in other emerging markets, still remains far from adequate. Nevertheless, the impact of ATMs cannot be understated as they helped transition Indian customers from an ingrained culture of assisted banking to automated, self-service banking.
The advent of the millennium launched India’s ongoing digital channel revolution. According to 2011 figures, a mere 7 percent of Indian customers used Internet banking. Mobile banking has also been on a low-volume high-growth trajectory – the user base in 2013 was 22 million, up 74 percent over the previous year, though transaction value grew 228.9 percent over the same period. But some banks are bucking that broad trend with, ICICI Bank, for instance, hosting approximately 85 percent of transactions in non-branch channels.
The channel banking landscape in India today is more heterogeneous than ever before with fully assisted (e.g. branch), partly assisted (e.g. virtual tellers, videoconferencing) and self-service (Internet, mobile banking, e-lobbies) options. Apart from delivering unfettered access and convenience to customers, these new channels have also helped banks optimize cost-per-transaction metrics and delivered significant gains in both share of market and wallet.
The regulatory environment is also evolving rapidly with the RBI laying out stringent guidelines on issues such as ATM security, fund transfer, prevention of money laundering & fraud etc.
It is almost inevitable that alternative channels will account for a lion’s share of Indian banking transactions in the years to come. So, what then will drive the growth of channel banking in India? Read about that in my next post.

IT Solutions Moving Forward

IT vendors assisting banks in front- and back end processes and accounting either through a branch- or centralized core database developed several software solutions. They also built compliant solutions enabling banks to follow regulations and processes, reduce manual labor, errors and omissions and increase automation. These solutions were mostly utilized for streamlining operations and improving customer service. This set of solutions may be treated as first generation IT in the banking and financial sector.
A second generation of IT solutions was developed in order to meet more comprehensive business requirements and take functionality to the end customer. This included internet banking, mobile banking, mobile applications etc. These solutions enabled the customer to log in and enjoy predefined services, which were configured within. A few of the services, such as payment transaction, could be effected online whereas requests for check book or fixed deposit had to be taken offline and routed to a relationship- or account manager for further processing. A few corporate banking solution providers developed solutions for trade finance and cash management, enabling requests to be processed through a web-enabled front end.
The next generation of IT solutions development revolved around applications either available to the customer online or loaded in handheld devices, enabling transactions on the go. This allowed the customer to access banking transactions and services without internet banking, and independent of a specific workstation or location. These solutions were completely customer driven and designed based on market requirements. While there were a few interactions with a back end solution for accounting and transaction, the solutions were designed to complete the entire processing in a streamlined manner.
Today, many of the large corporations are using ERP systems with end-to-end management of purchasing, sales, inventory, production, financials and reporting. These solutions are tailored to serve customer needs and are integrated with corporate e-banking and a core banking back end to enable straight through processing. Further, IT vendors are developing lighter ERP systems to focus on small and medium enterprises, partnership- and proprietorship firms.
Then there are several popular payment and e-commerce sites whose transaction processes are enabled by connecting to multiple back end systems and payment gateways.
Technology advancement is paving the way for further revolution, where customers need not depend on a single bank, channel, website or application for processing transactions. Their mobile or handheld device provides an option to download an application of choice and transact at their convenience. The data storage capacity, processing speed and usability of downloaded mobile applications will determine growth in mobile usage. Most of these software and mobile applications are targeted at Generation Y who are habitual mobile users for a variety of purposes – chat, voice communication, text, payment, transaction etc. They also use social media to understand and decide about banking transactions.
To conclude, it is difficult to predict the nature of IT solutions, which will be in demand in the banking market. However, what is certain is that the solutions will be driven by customer needs surrounding usage, convenience and functionality. They could be employed on mobile, internet, social media or any other unforeseen channel. Security, data communication and integration are among the key factors, which should be taken into account when designing such solutions. The solutions could fall within the realm of data analytics or predictive analytics, or offer advice on a range of issues at different life-stages; they would also need to have transaction processing capability. The solutions could cater to customers of all ages. Their data on customer traits and behavior could be analyzed to understand:

  • Spending pattern and retirement plan
  • Preferred bank for account opening
  • Investment appropriate to life stage – for example, real estate versus equity versus bank deposit etc.

Non- Financial

  • Shopping pattern
  • Preferred holiday destination
  • Vehicle preference

(This is just an indicative list)
IT solution providers need to think carefully while designing a solution for the future, which can cater to the end customer, offer suggestions based on personal traits, behavior and other factors, and also enable transactions. When customized products and services are available for high net worth customers based on their personal preferences, it shouldn’t be hard to use analytics to offer contextually relevant products to all other classes of customers. This will bind their loyalty to the bank as a source of transaction as well as financial guidance.