“Banking is necessary, banks are not.” This statement by Bill Gates from 1994 has never rung truer than in today’s digital age where fintech and BigTech are upending established banking models.
India’s fintech firms now hold 36 per cent of the share of new-to-credit customers, compared to banks’ 22 per cent. Their market share in UPI transactions is also higher – 93 per cent against banks’ 7 per cent.
It’s a sign of things to come and a strong indicator of the shift in consumer preferences towards experience-led, contextual, and digital-first banking where the ‘service’ and ‘service provider’ are essentially decoupled.
The challenge for banks is to stay relevant amidst these shifts.
According to the State of the Fintech Union 2022 report, India’s fintech firms now hold 36 per cent of the share of new-to-credit customers, compared to banks’ which hold only 22 per cent. Their market share in UPI transactions is also higher – 93 per cent against banks’ 7 per cent. This is a sign of the things to come and a strong indicator of the shift in consumer preferences towards experience-led, contextual, and digital-first banking where the ‘service’ and ‘service provider’ are essentially decoupled.
The challenge for banks is to stay relevant amidst these shifts. As banks carve out their future, trust must be the bedrock on which new technologies, services, and ecosystems are built. While during the past two years, banks focused on a resurgence after Covid-19, this year banks will focus both inward and outward – doubling down on strategic execution, while also preparing for the challenges of a dynamic world. Fortunately, 72 per cent of Indian consumers still trust traditional banks. And as our research shows, trust becomes even more important in times of change. So, as banks carve out their future, trust must be the bedrock on which new technologies, services, and ecosystems are built.
Here are a few emerging trends that will shape the future of banking:
Financial inclusion will pick up steam
In 2021, The Reserve Bank of India’s Financial Inclusion Index, which gauges how easily the Indian population can access and afford financial products and services, rose to 56.4 in 2022 from 53.9 in 2021. This is the result of the financial inclusion initiatives that India has launched in recent years. For example, the Pradhan Mantri Jan-Dhan Yojana (PMJDY) aims to provide universal access to banking facilities such as savings and deposit accounts, credit, insurance, and pension, or the Kisan Credit Card (KCC) which offers a credit facility for farmers to purchase seeds, fertilizers, and pesticides.
Financial wellness: The new strategic imperative
Digital-first customers expect more from their banks. Our research demonstrates an opportunity for banks to use automation to collect more consistent and accurate customer data for more personalized experiences while driving efficiency. Banks can rise to the challenge by harnessing the power of AI/ML and analytics to draw out insights from customer data and offer personalized products and services that are more closely aligned with customer goals. A few new-age Indian banks like Kotak Mahindra Bank, Axis Bank, ICICI Bank, and HDFC Bank are offering financial well-being advice to customers based on their spending habits and income. This trend will pick up the pace, as more customers seek to improve their financial future.
Embedded banking: The next generation opportunity
Many non-banks are already using APIs to access and incorporate financial services from banks into their products or platforms. This offers consumers greater ease and convenience. For example, a consumer buying a car from an online marketplace can also get an auto loan or insurance policy without leaving the portal. Over time, more and more banking services will be integrated into the apps and platforms that consumers use every day – be it a ride-hailing service, a social media app, or an online grocery store. Banks that capitalize on these shifts, and bring financial services closer to customers will be better positioned to strengthen loyalty and revenue.
Banking with Gen Z: A paradigm shift
A new generation is entering the workforce – and their relationship with banks is very different. Gen Z in India is more likely to use digital banking platforms such as mobile apps and online banking websites to manage their finances. They are more concerned about the planet’s well-being, and more likely to choose a bank that demonstrates commitment towards the environment. They are more comfortable with technology and prone to comparing different providers before deciding. Hence, getting to know this demographic better will be a cornerstone strategy for banks heading into the new financial year.
Banking-as-a-Platform (BaaP): A win-win for everyone
When a traditional bank acts as a platform for other financial services providers to offer their products and services, all participants benefit. Banks can offer more services without having to build and maintain additional infrastructure. Fintech firms can expand their market. And customers can access a wider range of financial services from one platform. An early example of such open platform initiatives is InstaBIZ – a digital platform from ICICI Bank that allows small and medium-sized businesses (SMBs) to access banking solutions like instant settlements, quick collections with UPI, QR codes, and point-of-sale (POS) machines – even without an ICICI bank account.
Sustainable banking: Shaping a greener, more equitable world
Today’s banks are expected to incorporate environmental, social, and governance (ESG) considerations into their business operations and lending practices. Profitability goes hand-in-hand with sustainability and social responsibility. Sustainable banking practices like financing renewable energy and energy efficiency projects, supporting SMBs in underprivileged communities, and implementing sustainable lending practices – for example, avoiding financing projects that can cause environmental degradation or social harm.
Banking-as-a-Service (BaaS): Creating new revenue streams
A growing number of third parties like fintech startups and retailers are leveraging the capabilities of traditional banks to offer banking services such as account opening, deposit-taking, and payments processing – under their own brand name. BaaS benefits both banks and non-financial companies. Banks can use it to diversify their revenue streams, reach new customer segments, and create new partnerships. Meanwhile, non-financial companies can use it to offer new services to their customers, improve customer retention, and drive growth.
These seven trends are democratizing banking, and fostering a singular customer experience. The common denominator across all of them is technology. It’s my belief that AI-based hyper-personalization, customer data platforms, secure integration management, analytics, customer lifecycle management tools, and collaboration technologies will help banks scale and create an ecosystem that’s agile, transparent, open, and secure.
Views expressed by Himanshu Rajpal, Head Industry Strategy – Financial Services, Salesforce India
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