Banking AnnualCOVER STORY

The new faceof banking

Technological disruption and new niche banks have changed the banking landscape forthe consumer. How are existing banks rising to the challenge?

NUPURANAND to rely on informal channels, which always turnedout to be an expensive proposition. Recently, Singhdiscovered a neighbourhood store that acts as abranch and allows him to transfer money withoutmissing work.

Allit involvedwas registering his mobile numberand the beneficiary's account, without any otherpaperwork. Singh has discovered the power of dig-ital technology. With the rise in use of technology

Among the various challenges that ArbindSingh faced, the one that plagued him everymonth was transferring money to his home-

town. As a migrant labourer from Odisha workingin Surat, Gujarat, sending cash to his family entailedlosing half a day's wages, as he would have to trav-el to his bank on aworking day.His other option was

It Business Standard JANUARY 2016

Banking AnnualCOVER STORY

A GIANT LEAP TOWARDS FINANCIAL INCLUSIONNEWPRIVATESECTORBANKS.IDFCBank• Bandhan Bank

PAYMENTSBANI(S

DIFFERENTlYPES OF WALLETSOosed wallet: This istypically issued by an e-commerce player andallows the consumer to use the walletonlyforthat company/website(for example, Bookmyshow)Semi-dosed wallet: With the use ofthis wallet consumers can shop orpay at even other merchants/sites, butthey cannot withdraw money(for example, Paytm)Open wallet: This allows you to shop at any merchant of your choiceand also permits withdrawal of money. Thesewallets can onlybeissued by banks or in association with banks (for example, Axis Bank)

"" 1-,

and the coming of niche banks, it is likely that yournearest grocery shop may soon become a one-stopshop for depositing and withdrawing money aswell.

For the consumer, the technological revolutionhas made banking easier and more accessible thanbefore, whether it is online or mobile banking, ornew products like wallets. Transferring funds, pay-ing bills, or buying insurance - all of this can bedone in a few slides of the thumb on the smart-phone while you finish a cup of coffee.

Digital cash or mobile wallets such as Paytm,MobiKwik and Oxigen have met with great successtoo. In 2014-15, the number of transactions viamobile wallets stood at 255 million, compared to172million banking transactions on mobile phones.However, in value terms mobile banking continuesto exceed wallets as it involves fund transfers andother large value transactions as well.

Singh's transaction took place through paymentssolution provider Fino PayTech, bypassing the bank-ing channel. Many a bank CEO is worried abouthow the banking landscape is changing.

• Aditya Birla Nuvo.Airtel M Commerce• Cholamandalam Distribution• Department of Posts• Fino PayTech• National SecuritiesDepository

limited• Reliance Industries.Tech Mahindra Limited.Vodafone m-pesa limited

• Dilip Shantilal Shanghvi.VijayShekharSharma (Paytm)

SMALLFINANCEBANI(SeAu Financiers.Capital LocalArea Bank• DishaMicrofin• Equitas Hold ings• ESAFMicrofinance andInvestments.Janalakshmi Financial Services• RGVN(North East)Microfinance.Suryoday Micro Finance• Ujjivan Financial Services• Utkarsh Micro Finance

Apart from the rise of digital cash, the year 2015has also seen the birth of two new types of banks, asthe Reserve Bank of India issued licences to 11pay-ments banks and 10 small finance banks (SFBs)tofacilitate financial inclusion. Also, two new privatesector banks - IDFCBank and Bandhan Bank-opened in 2015.

Arundhati Bhattacharya, chairman of StateBank ofIndia, the country's largest bank, had ear-lier stated, "I'm really apprehensive about the newbanks, as they are an unknown entity. Andunknown is always a reason to fear, especially ifthey are ready to burn capital, which most of theincumbent players can't do."

Thus, competition in the banking industry willonly intensify. Existing banks, on their part, areleaving no stone unturned as board rooms discussuser experience, design of their mobile apps and thelaunch of near-field communication-enabled con-tactless debit cards. While private sector banks likeICICIBank and HDFC Bank have taken the lead inbeing cutting edge, public sector banks and old pri-

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Banking AnnualCOVER STORY

'.All major banksnow offer walletservices or willintroduce themsoon, either ontheir own orwith partners

vate sector banks are also trying to keep up. It ispossible to make over 100 types of transactions onICICI Bank's mobile app. State Bank of India haspartnered with Reliance Industries to start a pay-

> ments bank.At a time when the mobile wallet

player Paytm had crossed the lOO-mil-lion consumer mark in August 2015,there were only a couple of banks offer-ing wallet services. Since then, all majorbanks offer wallet services or will intro-duce them soon either with their tech-nology or by partnering with wallet play-ers. Besides launching its wallet SBIBuddy, the country's largest bank hasalso entered into strategic partnershipswith online players such as Amazon,Paypal, Snapdeal and OlaCabs.

Union Bank ofIndia's chairman andmanaging director, Arun Tiwari, saysdigital will be among the top three dif-ferentiators for the bank. The bank hasbuilt technology capabilities so thatTiwari can monitor the performance ofa branch thousands of kilometres awayat the click of a button on his tablet.The bank will also launch digitalbranches that will be unmanned.

Banks are also going slow on physical branchexpansion. SBI opened 1,053branches in 2013-14,but a mere 464 in 2014-15.It will be more selectivein opening branches, choosing to focus instead onimproving access for customers through the digital

THE RISE AND RISE OF MOBILE WALLETSMOBILE BANI(ING

Number oftransactions Value

(million) (f crore)2012-13 53 6,000

I

2013-14 95 22,400 I2014-15 172 103,500 -MOBILE WALLETS

Numbe/' oftransactions

(million)Value

(f crore)33

1081,000 •2,900

2012-132013-14

8,200 _

----------------~-2014-15 255Source: RBI

platform and electronics channels.The technological revolution that the banking

sector has been witnessing in the past two years hasbecome critical for banking operations in 2015.Bankers, across foreign, private and public sector

banks, are taking technology serious-ly. (Read the Business StandardBanking Technology Round Table onpage 34.)

"Digital has become extremelyimportant for all financial institutions,as this is what customers are askingfor. Leveraging the digital play isimportant for consumer convenienceand that iswhy it has become centralto things," says Pralay Mondal, seniorgroup president-retail & businessbanking, YesBank.

In wallets, even as banks seem to beplaying catch-up with pure-playwal-let players, neither set believes that itis going to lose. "Asbanks, wallet isone of the several digital services thatwe offer, and therefore it will be easi-er to attract customers. Moreover, wealready have a ready customer basethat can be tapped into. Another rea-son that works in our favour is that

customers trust banks and therefore it will be easyfor them to adopt a bank's wallet," said KA Babu,head-retail business, Federal Bank. The lender is inthe process oflaunching a mobile wallet soon.

Despite intensifying competition, non-bankwallet players remain unfazed. "We want to be asubstitute for cash and that is the biggest problem.We have managed a consumer base of more than120 million and over 20,000 merchants acceptpayment via Paytm. So, the market is big and themore use-cases you generate, the more peoplewill come on board," said Shankar Nath, seniorvice president, Paytm,

Payments banks are a new category ofbanks thatREI introduced to further financial inclusion byproviding small savings (up to n lakh) and pay-ment/remittance services to migrant workers andlow-income households. Bharti Airtel, Vodafone,Reliance Industries, Paytm and Fino PayTech areamong the companies that won payments banklicences. These banks can issue debit cards andoffer internet banking, but they are not allowed tolend or issue credit cards. Three-quarters of thedeposits they get will have to be invested in gov-ernment securities, while the rest will need to be

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Banldng AnnualCOVER STORY

been global trends in finan-cial technology disruptionthat we have seen. But itmay not be the same sce-nario here, because of thevarious limitations on pay-ments banks in terms oflending and limit on depositcollection. Similarly, forSFBsit will take them a longtime to achieve capital effi-ciency and get their cost offunds down before theybegin to compete.Therefore, they will need tobe symbiotic with the exist-ing universal banks."

In SFBs, eight microfi-nance players, one nonbanking financial institu-

tion and one local area bank have wonthe ten licences. But banks are not tooworried about this category of newbanks. Experts believe that these play-ers have already been engaged in lend-ing and deposit activities, and banksdo not expect a disruption in the space.However, the inclusion of these playersin a formal banking set-up will enable

these players to reach out to more consumers inthe hinterland.

"In our view, this is a giant leap towards financialinclusion, as these small banks will be able to servethe underserved within the ambit of stable regula-tory framework. Moreover, in due course, theseapplicants would be considered for universal bank-ing licence if they are successfully able to build aprofitable business model and achieve the desiredobjectives,"Motilal OswalSecurities said in a report.

For the consumer - whether urban and rural,rich or poor - banking is surely going to becomeeasy. For bankers, it isn't going to be an easy jour-ney as competitive intensity spikes. Among exist-ing players, private sector lenders are ahead of thecurve, while public sector banks will have to workthat much harder. SBT'sBhattacharya had saidearlier that the new players would not have anylegacy issues like the current players, as theywould come with agile systems and delivery mod-els and that they've not been held hostage byindustry-level agreements and wage limits. Herforecast for the new environment: "It is going to bea dog-eat-dog world." •

Theinclusion ofsmall financebanks in a formalbanking set-upwill enable themto reach out tothe hinterland

deposited in a scheduled commercialbank (for easy liquidity).

The second category of new banks- the SFBs - will be similar to exist-ing commercial lenders, and willundertake basic banking activities,such as accepting deposits and lend-ing to sections that are either notserved or under-served by tradition-al banking. Their loan size and investment limitexposure to single and group obligators cannotbe more than 10 per cent and IS per cent of theircapital, respectively. Also, at least SO per cent oftheir loan portfolio has to include loans andadvances of up to US lakh.

Only the future will reveal whether these bankswill turn out to be a game-changer as envisioned bythe banking regulator or not. But experts believethat it will definitely increase competition, creatinga win-win situation for consumers. "The new play-ers in the payments banks space are the ones withdeep pockets and they can easily disrupt the mar-ket by offering higher interest rates. In that sce-nario all the other banks will face stiff competitionin terms of CASA (current account and savingsaccount) deposits," said a public sector banker.

Aspayments banks will come enabled with tech-nology, their operational costs will be lower, and itisvery likely that they will pass on the cost benefitsto customers by way of lower fees.

Shinjini Kumar, leader (banking and capital mar-kets) at PwCIndia, believes that the new niche bankswill be more complementary in nature. "There have

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