The Reserve Bank of India fee;s that banks will have to transition from a sectoral approach to an ecosystem approach and that the era of exclusiveness of providing banking services by banks are over.
In the newer paradigm, markets are likely to become the central point for intermediation where banks may become but one amongst the host of other entities interacting in the marketplace. The traditional banking business model needs to pivot to address this evolving paradigm, RBI deputy governor M. Rajeshwar Rao said addressing the FIBAC 2023 conference organised jointly by FICCI and IBA.
The business models of the banks have evolved depending on the roles they have played throughout the history, with the current focus being on the intermediation paradigm i.e., acceptance of deposits and credit creation.
“However, this approach needs to change with newer players entering the financial service space and disrupting the traditional rules of the game,” he said.
“The oft-repeated pitch is that all the banks of future will actually be technology companies also undertaking business of banking. While it’s difficult to be certain that this will indeed be the case, it is likely that the era of exclusiveness of providing banking services by banks are over,” he said.
With Banking-as-a-Service (BaaS) model making steady and silent inroads, the banks have to operate as a part of the larger ecosystem with good number and varieties of non-bank players in the mix, he said. A lot of these transformations are already becoming visible. Banks and NBFCs are partnering with FinTechs to deliver financial products and services by deploying innovative methods and technological solutions.
Hyper-personalistion of banks
Second, the banking of the future is going to be hyper-personalised, and banks may have to shift from isolated service provisions to hyper-personalised embedded banking. “In future, probably banking may cease to be a separate service. Instead, banking would be embedded in all the products and services which consumers are expected to avail. Embedded finance is the integration of financial services or tools within the products or services of a non-financial organisation. So, in future, customer may not have to visit a bank branch to avail a home loan, he said. “For example, when you log-in on the builder’s app to book a flat, the app could be integrated to the bank’s app or to a fintech’s platform and when you enter your KYC identifier, the loan eligibility would be automatically calculated using your consent to pull your financial and non-financial information through account aggregator/ Digi Locker and loan would get disbursed. All this would take place within few minutes if not seconds,” he said.
Technological solutions would allow banks to offer prices that could continuously adjust to customer behaviour and preferences while responding to supply and demand position, margin requirements, and competition. All this hyper-personalisation would become possible as we increase our digital footprints and banks, or their partnering digital companies learn how to get AI/ML based decision outputs from this data.
Customer preference-based verticals
The current form of business segmentation may give way to customer preferences-based verticals. “The focus of tomorrow’s banks has to go beyond just its business to better meet customer’s needs. Hence the segmentation will be based on homogenous customer groups and all products would be designed to serve these segments. Hence, the core strength of the successful banks would be customer segment specific,” Rao said. Even now, some banks, often in partnership with fintechs, are trying to target some specific segments such as MSMEs, Women, Senior Citizens, millennials, etc. “We already have examples elsewhere, that where the traditional banks have failed to innovate and adapt to the new needs of the customers, disruptors such as Nu Bank in Brazil have come in and captured the market, filling the vacuum and offering products and services that were demanded by the customers,” Rao said.
Asset-liability breakup
Finally, the traditional break-up of assets and liabilities may likely undergo drastic changes. Currently, the balance sheet of Indian Banks is dominated by loans on the assets side and deposits in liabilities side. “We could expect transformation of composition of bank balance sheets during the forthcoming decade, driven by the natural progression of the Indian economy. This transformation will be further propelled by the widespread integration of technology into business operations and decision-making,” he said.
It is possible that customer preferences in future may shift from passive saving products like a fixed deposit to more esoteric and market linked investment products. Alternate avenues will compete to tap the depositors’ money on account of better returns and convenience of a finance super app to meet all financial needs may become the norm. Tokenisation of assets and liabilities using the power of DLT may change the way bank balance sheet is structured. All these changes would mean adjustments to the traditional asset-liability structure of banks, he said.
