I was having dinner with an entrepreneur in the Indian payments space earlier today. The emerging business models and evolving consumer adoption trends in banking & financial services, soon overshadowed the culinary delights that had adorned the table!
A silent revolution is unfolding on the ground, which otherwise appear frequently on business plans and venture capital pitches. Retail outlets, appointed by Business Correspondents (BCs) are now permitted to open bank accounts, accept deposits, facilitate withdrawals, take bill payments and enable fund transfers. This bodes well for retailers as they find discover new revenue streams but also have a great proposition to drive walk ins into their outlets. Now, this is rather well known and has been the norm for several countries that have successfully adopted the BC model and driven the financial inclusion agenda effectively.
An interesting development is however, that non-banking customers can now walk into a BC appointed retailer and deposit cash into third party bank accounts, and see their funds get transferred in real time! Hence a labourer toiling on the roads of New Delhi can ensure that his wife, thousands of miles away, in a village in Tamil Nadu can receive funds into her account in a couple of seconds. This effectively bridges the banked with the unbanked, converts cash into an electronic format and provides an instant transfer experience. All critical aspects for building confidence and driving usage of formal banking, payment and transfer mechanisms and eventually leading to the belief in the need for a bank account and financial inclusion.
The key point to be noted is that the neighbourhood retailer has earned the ‘Trust’ of the consumers accessing this suite of services. Banks have invested billions of dollars in building their brands and providing assurance to customers that their money is safe with them. Now, the retailer with his social equity, appears to have cracked the code!
Now, for most people reading this post, the process and experience of banking, having the comfort of a branch nearby (which may never be visited) is well ingrained and considered the only method of storing and accessing funds. However for billions of people worldwide, their circle of trust extends to their immediate social circle of neighbours and retailers, whom they can see and meet, at their convenience. A bank can be an ‘alien’ institution, an inanimate object that they cannot relate to as easily. MFIs with self-help groups have amply demonstrated this!
Which takes us to the second inflection point. Banking services have been rolled out by some companies, wherein the retailer requires just a mobile phone to accept deposits, enable withdrawals and fund transfers! No POS machines. No ATM machines. No Internet Banking terminals! No technology intensive kioks! No card plastic! No card readers! And a ton of other no’s as well, which would give shudders to most professionals who have grown enamored (and possibly addicted) to these devices and technologies.
Hence the question that is quite clearly staring us in the face today. Where do we go from here? How does one increase financial inclusion, banking access penetration and electronic payments usage.
The current access metrics in India are at predictably low levels of 66.3 branches per 1 million persons* and 16.3 ATMs per million persons (Source : Report on Trends and Progress of Banking in India 2009-10, RBI). For North America those ratios stand at 260 branches per 1 million persons and 1340 ATMs per million persons. Taking into consideration the income distribution and growth levels, the geographic spread and infrastructure challenges, traditional expansion models would still target a 3x growth in number of branches and 20x growth for ATMs to achieve reasonable levels of financial access. And with over 300,000 POS terminals, the growth factor opportunity for this segment can only be exponential.
This would of course incur capital investments, exceeding the GDP of several countries. But the question remains.
Which would be a more economical and successful method of banking and electronic payments growth?
There could be three approaches
Leverage new to banking & payments channels: The business correspondent and retail networks, appearing to be the primary choice.
Leverage new to payments devices : Enable payment processing via devices such as the mobile phone. Square could be a good point of reference on this dimension. I have in my earlier report, outlined the recommendations of the Inter Ministerial Panel, which has outlined a framework for mobile based acceptance network development. It has set out norms for a different approach to ATMs as well. Hence the thought is in place and the initial designs as well.
Follow the traditional branch + ATM expansion model
The Shifting Point!
The question that one ponders on now. The business correspondent / retailer models referred above have been primarily designed with a perspective of addressing the requirements of clients at the bottom of the pyramid, in both the urban rural markets.
Can these models be similarly applied to address the needs of the mass affluent and affluent audiences as well, in both urban and rural markets?
It’s been ages since I’ve visited my bank branch. Net banking and ATMs address my needs sufficiently. Hence the only leg that remains is that served by the ATM for dispensing cash.
Then, why do we need two models of expansion? The first catering to the affluent, and the second catering to the not too affluent.
A high end supermarket chain is just as hungry for business and walk-ins as your local neighbourhood grocer, a fundamental premise that drives retailers to participate in transaction processing.
Would I mind walking across to the cashier at the supermarket till to withdraw cash as I pick up groceries? Possibly not!
Would I mind depositing cash at a computer peripherals store as I purchase anti-virus software? Possibly not, again.
Would I mind if my pizza delivery guy swipes my card on a device like square instead of a fancy high end POS device? Nope!
Would I prefer a smiling attendant behind the cash till to an automated voice urging me to take my cash quickly? Yes! And she doesn’t have to be in a bank costume.
What would influence banks, regulators and processors to evaluate this radical shift in thinking? Isn’t there a sufficient economic value migration opportunity, for shifting the savings in capital and operating expenditure incurred in managing branches & ATM channels to the retail channel partner?
Would then, banks still need to invest in branches? Can a virtual bank complemented by a payment networks brand operating on a retailing layer operate in a scalable and efficient manner? Or, would in fact, retailers actually be willing to pass back value to banks for leading customers to them? Or would this perhaps lead to drastic reduction in costs across the value chain resulting in higher earnings for customers on their savings and lower lending rates possibly?
Can a model be evolved, where a ‘bank’ branch may be primarly designed for customer enrolment and loan disbursals, with currency disbursement, fund transfers and other services be completely migrated to their retailing partners? With new customer acquisition mostly occurring at third party locations, the branch could even play a administrative supervisory and customer support role in a hub and spoke model, wherein a single branch oversees the operations of hundreds of retailers and ATMs in its hinterland!
With mobile devices having achieved over 100% penetration levels in the mass affluent segments, the mobile could effectively act as the access and authentication device. This in turn could restrict the need for POS or ATM devices as we know them today. This makes it even easier for retailers to participate in the payments processing domain.
This potentially ‘outrageous’ approach is open for debate and would welcome your views.