Banking 2.0

A recent BCG publication on Financial Inclusion in India deconstructed the financial services value chain into six fundamental pieces : product development, customer acquisition, risk management, funding, administration and collection. Now this got me thinking. ......Are banks as we know today at an existential risk? Is there a disaggregated approach to banking that is emerging wherein banks do not necessarily participate directly in the complete value chain but participate in some of the pieces and not all. Is it also possible that banks may even get dislodged from their core areas of receiving deposit and enabling funding by new players.

With over 135 million households that are financially “excluded” several banks have been pushing the envelope or in several cases been pushed out of the core areas of microfinance. Players such as BASIX and SKS have been leading forays into micro lending to retail entrepreneurs, whereas banks in most cases have been involved in providing finance to MFIs and in some cases administrative and technical support.

Over 500 million footfalls annually expected in India in organised retail environments including malls, and supermarkets, in the next couple of years, retail finance is not viewed as a nice to have but a critical ingredient to fuel retail purchases. Most large retailers are either building or taking financial stake in the creation and set up of retail financial services to fuel purchases within their storefronts. Spurred on by the successful financial services models of Casa Baha in Brazil or Tesco Finance, which have multi billion dollar asset bases, the newly established retail retail financial services arms of Reliance Retail and the Future Group view the delivery of financial services as an invaluable element in fueling demand and purchase.

The Safaricom venture of Vodafone has already acquired over one million customers participating in the fund transfer process and no bank in sight. Models in Philippines and other parts of africa too have emerged, wherein banks are being marginalisd from the transfer process. The increasing penetration and significance of the mobile phone has clearly provided telecom players the right foundation to construct a financial services model that can quite clearly address the aspect of secure payments and transfer. Whether they choose to play more enhanced roles in the areas of acquisition, collections and risk management is yet to be seen. Hence can we imagine a Bharti tying up with ICICI Bank to sign up millions of customers each month for mobile connections and bank accounts for the financially excluded? Why not! With the market getting competitive and retail finance having clearly become a critical ingredient for urban and retail households, the quest for low rates is on the rise.

Hence the growing phenomenon of peer to peer lending that is emerging in Europe and North America by Zopa, Prosper, Virgin Money and a host of other players. Yet again this model technically marginalises or even excludes conventional retail banking institutions in the consumer lending process. The concept of peer to peer lending has existed since time immemorial but has also presented to the fore a new point of discussion and debate in the aspect of social scoring / equity that an individual brings to the lending process. Zopa has recently published its results on the effect of social , wherein borrowers received lower rates when endorsed by family, friends and borrowers who had lent and received their money back in the past. Would banks be able to supplement their financial credit rating score with the the aspect of social “score” Increasingly social scores would play a greater role in enabling lending decisions and processes as noticed in the case of microlending, wherein the fear of social ostracization and associated stigma associated with non payment has typically resulted in lower default rates.

In the case of retailers such as Casa Baha, their direct connect with the customer and their ability to mesh successfully with the social fabric of their target audience has successfully resulted in the creation and adoption of new risk models. Recent rise in delinquencies has put banks and financial institutions under the scanner for their collection practices. Without delving deep into the “blame” game, there is an increasing need for disemmination of education. With the subprime and related consumer credit crises affecting banks and retail borrowers alike, there have emerged over the last couple of years of sites such as Wesabe, which are essentially online communities that allow retail borrowers to share tips as to how they could reduce their financing costs and best practices to be adopted to reduce their default and overspending patterns. Quite clearly a need for banks to enhance their “dialogue” and truly engage their current and prospective customers,

Even in the traditional transactional space, wherein banks have been quite often bogged down by legacy systems and huge transition barriers. With an increasing need for security and retailers seeking lower transactional costs, the Revolution Card was launched a couple of months back in North America by Steve Case of AOL fame, which offers credit cards issued instantly at kiosks and have no numbers embossed on them! Furthermore with the transaction rates almost halved vis a vis existing rates charged by Visa & MasterCard, maybe a new David has emerged in the world of Goliaths. Quite clearly banks need to question and take a new perspective on their strength areas in the value chain. The performance and adaptability of retail finance will have an increasing bearing on the performance of other key industries including retailing, telecom, insurance, consumer goods etc. Hence it would be quite natural to expect that these industry verticals may in the near future play a larger or even different role in the banking vertical. Going forward growth models for banks would emerge more from alliances and partnerships across the value chain with other industry verticals, and in some cases questioning or redefining the perceived core competencies of their organizational charters.

Banks should also be open to adopting multiple standards and methods, which has typically been a barrier in experimenting and participating in new payment mechanisms. Inconsistecny and non uniformity is the only reality that banks would face in the coming years in these new domains, hence an ever increasing need to experiment and faulter even more ( the sub-prime crisis apart). Adoption and implementation of subjects such as mobile technologies and new systems needs to move from board room poster boy status to serious business imperative status. Banks have been relying on the trust factor that customers associate with the custodians of their money as their fundamental lifeline and often protected by regulatory frameworks.

With rapid evolution of technologies including the Internet, and the regulator’s evolving views on the scope of financial institutions,the trust factor would be better enhanced by engaging in a dialogue with its customers, and this would be a science worth cracking and perhaps the true differentiator in the coming years. This is perhaps the time for banks to define the new playground for Banking 2.0