Retail Banking – Challenges & Way forward (India)Retail Banking has been the prime contributor to the high growth (CAGR of 30% +) for lastdecade or so for most of the Big names in the Indian Banking industry, but post 2008 financialcrisis Banks in India are also showing signs of tiring down and many analysts are casting seriousdoubts on Banks ability to showcase similar growth in the coming years. In this context it isimportant to analyse and discuss various factors plaguing the growth along with few solutionsthat can bring back Indian Banks back to the high growth trajectory. Below article is an attemptat identifying the challenges & bottlenecks along with few solutions.Retail Banking – MeaningRetail Banking denotes banking products and services for Individuals and includes segments likeAssociations, Trust, Clubs, Foundations, Small business with Proprietary / PartnershipConstitutions. Broadly all the non corporate segments (Non Manufacturers and non limitedcompanies) come under Retail Banking.India -ExperienceRetail banking came in to focus around last few years of 19thcentury , where every bank startedto feel the importance of diversifying their business from few big corporate to mass retailsegment and as a result post liberalization the biggest reforms on ground happened in the RetailBanking segment , which has grown at a fast pace over the years, where major brands have beendelivering a CAGR in excess of 30 % over a decade along with diversifying risks.Retail Banking in India has been focused on 2 major activities; 1.Transaction banking 2.CreditProducts and Banks have improved their capabilities by leaps & bounds in ensuring the bestpossible products with respect to both the activities. If you click through any product details ofbanks like Wells Fargo or Citi Bank, you will realize that in India we have not just similarproducts but even better products.Seeing the success of new generation Banks, even the State Banks and Nationalized banks toochipped in and now offers best in class Retail Banking services across their branches and this hashelped Retail Banking to grow geographically from Metros to Tier 1, 2, 3 cities and Towns
successfully and now it will be hard to find an individual at these markets without a Debit Cardof Bank or a Bank account. Thus in the last decade or so India has truly been a major successstory in Retail Banking.Challenges:-Retail Banking Business model implementation meant higher number of human resource, higherinvestments in technology, Infrastructure and ultimately higher costs. Against these high coststhe Income streams primarily came from NIM (Difference between Interest charged and given),Fees & Charges. Let’s analyze both in detail. NIM ( Net Interest Margin):-NIMs ( Difference between Interest earned & paid) has been under pressure for each and everybank in the last few years, specifically after 2008 global financial crisis, and in India Interestrates have increased as RBI has been tightening the interest regime for controlling ever growinginflation worries. Higher interests have impacted cost of borrowing heavily and it has adverselyimpacted the credit off take and higher interest rates with slowing down of business meant risingNPAs and adding to the pressure, high interest on deposits and de regulation of savings interestrates has increased the cost of borrowing for all the banks and resulted in shrinking of NIMsacross the board and thus affecting profitability. Commissions & Charges: - Commissions are earned on sales of third party products andon activities like Issuance of BG /LC, Discounting of Bills etc and Charges are applied onnon maintenance of requisite balances (AMB/AQB etc) and on maintenance of accounts,high cash transactions, high ATM usage, branch visits etc and these varies from Bank toBank and customer to customer.Over all slow down in business and investments have impacted the revenue streams of the banksand in order to retain good customers in the fold most of the banks are now offering most of theproducts and services free of charges. As a result revenues from Commission & Charges are nowmoving southwards impacting the profitability. Ever growing Operating Cost: - Against the shrinking NIMs and Commission &Charges, Operating cost has been rising alarmingly, whether it’s the compensation,Infrastructure or the technological investments and maintenance cost which are fixed innature and are hard to control.All the above parameters have led to a situation where cost to income ratio is all set to drainbanks profitability in the short – term and sustainability in the long term.Bottle-necks:-Now along with the above parameters let’s analyze the bottle necks, which are impacting theprofitability of banks.
Saturation at Urban & Semi-Urban centers on acquisition of new customers and lowprofitability of customers in the Rural markets:-Most of the individuals in urban and Semi-Urban centers now have at least one bank account andit will be hard to find a person without a debit card in his pocket. Hence acquisition of newcustomers at Urban and semi urban centers is all about switching customers from one bank toanother than acquiring and this has impacted the free flow on Casa float by way of largeacquisition for banks over the last few years. And most of the banks are not keen on going torural markets as the scope of business not justifying the cost of operation. Large chunk of inoperative accounts:-On one side the acquisition numbers have dropped drastically and on the other side large chunkof data base is filled with in operative accounts, who are either dormant or once in a blue mooncustomer and majority of customers preferring multiple accounts.For each bank this is a big loss on their investments as every customer acquired has been aninvestment for banks and when say more than 50 % of customers remain non productive it meansan investment loss to the tune of respective percentages, which is huge. And banks have beentaking solace in management mantras like 20:80, whereby 20 % provides business of 80% andvice a versa. But that logic no more looks practical as free flow of casa from new acquisition isdrying up every day and no new customer is willing to open an account at an additional cost forthem rather new accounts which are switch from other banks are acquired at a higher cost nowby adding many free bees.Hence every inoperative account is eating in to banks investments and thus profitability. Low levels of customer loyalty resulting in switching of banks:-Customer loyalty is something Banks in India has failed to attract, notwithstanding the higheracquisition and maintenance cost compared to pre globalization era. Reason can be attributed toavailability of same set of product and services across banks with no difference whats so everand inability of the banks to differentiate and highlight their service standards which meanscustomers generally rate services of banks based on the staff at each branch and there is noguarantee of certain level of service with X brand or Y brand. Hence customer doesn’t feel anyloyalty to any banks and wherever they see lower charges and fees or lower interest rates, preferto switch their account. The logic of hooking the customer with multiple products will act asforced loyalty for the bank but with concepts like account portability coming in, Banks will findit difficult to retain their customers resulting high volatility of portfolios and impactingprofitability. Competition from non banking entities:-Nowadays NBFCs , Mobile operators and Retail chains like Wall mart are providing variouspayment products like Credit Cards , Mobile payment services etc to customers with littlerequirements compared to Banks and similarly Investment advisory services offered by various
NBFCs have diminished Banks role as the IAS provider and further Gold Loan NBFCs , Microfinance companies and other NBFCs providing credit have succeeded in providing easy andquick finances to customers compared to the Banks resulting in erosion of potential business forBanks and if the trend continues, banks will struggle to retain customers and loose them to otherbusinesses offering banking products & services at a better price and pace.Even the White label ATMS (Private ATMs) around, will attract many customers to use nonBank ATMS which will further add the cost of running Banks and dent their profitability.Way forward:-Keeping these risks as the base, one needs to explore future opportunities in Retail Banking,which shall help Banks to attract more and more customers along with an active existingcustomer base who will stick with Banks with high level of loyalty.Let us explore opportunities available and draw way forward plan for Retail Banking in India.Primary Function of Banks:-While analyzing opportunities, it is important to analyze the roots and understand how Banksmakes money and what is the primary role that Banks are expected to do.Banks deals in money and money is something which grows by circulation and the channelenabling the circulation is Banks.And primary function of Banks has been accepting deposits from the suppliers of money andlending money to the buyers of money.The Gap between money bought and sold is the bread and butter revenue for the Banks.Along with the primary function banks have been specializing in distribution of own products aswell as third party products and bank earns on these services by ways of fees and commissions. Opportunities & New business initiativesKeeping these basics in mind, let us explore opportunities & new business initiatives to addressvarious challenges & bottle-necks discussed above.Transaction Banking Products & Credit Products has been the highlight of Retail Banking inIndia and presently products & services available in India are as good or even better compared toGlobal Banks.Hence first opportunity is identified in improving the delivery and experience of TransactionBanking Products & Services and Credit Products, let’s discuss various means by which we canbring in improvements and make Bank more relevant to customers.
Improving the Delivery & ExperienceVarious surveys conducted on Customers, have pointed to the fact that Customer is interested toconduct his or her basic requirements at their convenience than testing various techno savvy andcomplexed products.Hence in order to improve the delivery & experience, Banks are suggested to implement fewinitiatives as mentioned below:-1. Relationship Pricing & TAT for all products based on Relationship valueEven though few banks have grouped their customers, based on account level profitability andhas been offering priority services to better set of customers. But going forward Banks needs tocome out with a transparent method of account level profitability and offer products and servicesat better price and at pre-defined TAT ( Turn round time).As various surveys points out, Customer is more interested in being serviced fast and notessentially serviced lot.Customers should be classified in to Tier one, two, three etc and Best customers of the bankshould be able to access entire Products & Services of the Bank within ½ hrs TAT.Similarly Tier Two customers should be able to access 80 % of Products & Services within ½ hrsand remaining 20 % say within a TAT of 2 hrs etc and so on.Such an initiative will add a purpose in customer with respect to deal with a single Bank wherehe can get the best Banding and thus products & services at best prices and within a pre-definedTAT unlike the present situation where everybody gets everything everywhere, impacting thelogic of customer loyalty.2. 24*7 Services, whereby Customer can avail any product & services of the Bank atany time.Banking cannot afford to remain within 9 am to 4 pm service any more, as competition provideservices similar to Banks provide and customer doesn’t have any incentive in buying Bankproducts compared to products offered by NBFCs and others, hence Banks needs to havetechnological platforms which will enable 24*7 services for all products and not just Transactionbanking products or few other products.Banks can upgrade phone banking, Mobile banking, Internet banking products & services toinclude all kinds of Banking Products & Services to be available 24*7 and 365 days.24*7 Initiatives will give an advantage to Banks over non banking competition and unlike Banksnon banking entities will always have restrictions in offering Banking products & services withrespect to Products & Services as well as time, which will give an edge for Banks over these nonbanking competitions.
3.Solution Provider services to Complaint resolution services.As an extension to the above Initiatives, one major area of concern for customers is theComplaint resolution by Banks, many times customer doesn’t get instant solutions due to onereason or the other. For example customer fails to complete ATM transactions but account showsdebit and customer rings up Complaint cell numbers where answer is not immediate but we shallget back to you. For a customer it is a big nuisance and he has to wait for his complaint to beresolved and next time around customer doesn’t take ATM granted as any time money.Similarly many complaints take its sweet time in getting resolved, testing patience and anxiety ofcustomers.Hence Banks needs to take up another initiative of Solution provider services to Complaintmanagement services. Whereby customer’s problems are addressed with immediate solutionsand not by lengthy process of existing complaint management.Such initiatives are practiced by NBFC & Others where customer is still the King and Banksneeds to follow the suit to win over large number of potential customers from non bankingcompetition.4.Loyalty programs for Customers based on their relationship years with the Bank.As discussed earlier many survey points out to low levels of loyalty compared to the satisfactionwith respect to products & services. And we have identified the reason as lack of differentiationin products & services offered by various banks in India.Now even though various banks have been offering various free bees to customers as part ofLoyalty programs , none of it seems adding any loyalty factor for customers , there has beenMonsoon offers where Banks have been offering Umbrellas , offering Movie Tickets , Foreigntrips etc , which are free bees without adding any improvement to the goal of developingcustomer loyalty.Hence banks need to undertake loyalty programs, which will directly influence customer’sloyalty towards the bank.Initiative like rewarding customer for the long number of years of relationship with Bank by wayof Banding him higher ,allowing him or her access to Best products & services at best prices andhaving programs availing which a customer feel privileged not just in the Bank branch premisesbut even outside, like an access to executive launches like some credit cards offers in India ,Immediate appointments at designated hospitals , special bookings , discounts , preference indelivery of products & services at designated Multiplexes , Hotels, Restaurants , Giant retailshops etc.Loyalty programs should reward the number of years of relationship and it should also act as aprivilege not just within Banks but to the outside world. This will influence and improvecustomer’s loyalty towards the bank.
5.Branch less banking business model for taping large rural markets profitably.Since urban and Semi-urban centers are well banked in India, the next stage of growth prospectslies in rural India but Banks are finding it difficult to operate in rural markets due to adverse costto income ratio.Here Banks needs to introduce cost effective banking model than sticking to the traditionalbranch banking model. As business prospects at rural centers are in low volumes and it will notadd sense in servicing these low value customers incurring the same high value business model.Hence Banks will have to develop a branch less business model, which can be a combination ofBC( Banking Correspondence & work from home concepts of IT industry) where transactionsbanking products should be made available through setting up more and more solar based ATMsas well as implementing latest technologies like instant credit of cash & cheque in to account viaATM as launched internationally by Common wealth Bank of Australia.Mobile banking services should be used extensively in this initiative and payments, ATMwithdrawals should be possible even without issuance of dr-cards.Similarly Banks will have to explore the possibility of tie ups with Post offices, Village offices,Primary health centers etc to offer various Deposit, Credit, Investment products to the ruralcustomers.A system where one officer for few villages and 1 BC per village kind of business model shouldbe worked out to service the mass low volume market in India. And banks should explore theopportunity of earning commission by way of selling GOI products as well as various schemesand services.A profitable entry to rural markets will mean getting in to sea of opportunity for bankers wherecriteria’s of business will be different along with style of business , hence bankers shouldunderstand the difference and develop a new business model.6. Improving the scope of Investment Advisory ServicesPresent scenario:-Every bank has IAS ( Investment Advisory Services ) being offered to the customers andproducts ranges from Mutual Funds (existing) , Insurance , E-Broking accounts , ETFs, Bonds ,NFOs , General Insurance , Structured products specifically designed for Customer etc.There are two channels through which Banks sells these products to customers; 1. PrivateBanking Group (For HNW Customers) and Cross Sell Initiatives for ordinary customers.
Now Banks role in all these sales is that of a Distributor, who earns a commission on productssold and Bank personnel’s provides advisory information on all these products to customers, soas to enable them to make decision on investments.Problem faced by customers:-Now since it is a distribution process, once the selling is done the Risk of the investmentssquarely falls on the customer. If product doesn’t yield the results expected customer got toblame himself and not Bank’s advice. This is the main reason for many non banking privateplayers in Investment Advisory business and even though none of them owns up for the materiallosses but yes owns up the quality of advice as well as they also promises a return based on theirpast record to the clients.Redefining scope of IASBanks needs to re work the entire IAS strategy. Objective of in house research should be directadvice to the customers and show them specific products to be invested according to their riskappetite and financial goals than showing them bouquet of products and putting the onus ofselection on themselves.Banks research should highlight the success ratio of their predictions in the past, enablingcustomers to take the decision on whether to buy an advice from X bank or Y bank thanfollowing the present method of selecting products based on their understanding orunderstanding of few individuals sitting in the branches.Once Banks research ability becomes the center point in IAS, there will be more credibility tothe IAS services and thus more customers and business for the Banks.Now under IAS, presently we are dealing only in financial products and Precious metal likeGold, Silver and Art works.Probably time has come for IAS to include Real estate, Entire gamut of precious metals and Art,which may not be sold from Bank premises rather it can be done by way of referral model.IAS should be known for its quality of advice and hence performance of IAS should be certifiedwith historical data. Customers should be able to decide whether X bank or Y bank is providingbetter returns historically, before seeking advice and deciding on the product.How it is going to help the Banks:-Today very reason why various NBFCs has been doing extremely well on IAS business is basedon their quality of investment advisory services and Banks with their size and expertise are muchwell prepared to offer quality IAS to its client base and since Banks are having their ownTreasury and Economic research cells along with in house investments research teams thecompetency factor will always be better than small scale NBFCs. Hence banks should utilisethier inherent strength in advising and attract all those potential customers now serviced by
NBFCs along with having 100% share of exisiting customers IAS requirements.This will helpbanks in not just perking up fresh revenues but more hooks and loyalty on customer.7. Introduction of Outflow Management ServicesOutflow or Expenses is a subject which is important to all types of customers, hence in order tobe more relevant to customers, Banks needs to introduce a new set of services with respect tomanagement of outflows.Let’s analyse various out flows or expenses that we incur in a month.Expenses types: - Monthly grocery expenses / Utility Bills / EMIs on Loans / ChildrenEducation / Magazines & News Papers / Entertainment expenses / Fuel / Payment to essentialservices like monthly maintenance and other support activities /Payments done for parents upkeep / payments done for charity/Expenses on Garments and accessories /Expenses on vehiclemaintenance / Expenses on Purchase of vehicle / Expenses on purchase of luxury items /Expenses on modification & repairing etc.Bank’s role is, in between the customer and service provider, where Bank can help customer ingetting the best product and services at the best prices and at the right time.Banks will have to work on tie-ups with various service providers and should be able to bargainand get best products & services at best prices for its customers.And for customer , Bank will the point of quality check and guarantor of services and thusbecoming more relevant in the customers day to day life.And for Banks, it will be great opportunity to showcase their service quality and advertise italong with acting as a linkage between consumer / buyer and the seller which further creates anopportunity to earn commission, fees etc for the services from both the parties.Hence such initiatives will be novel as well as more relevant to the customers along with it beinga win win situation for Banks, Customers and the various service providers. And every Bankshould do feasibility study on introduction of OMS (Outflow management services) and launch itas an additional service.8. Meaningful customer engagements, targeting customer education on new developmentsin Banking and benefits.Banks have been competing with each other, on introduction of various products and services forservicing the ever growing customer requirements but seldom check whether customers areaware of these launches and whether they are appreciating these efforts or not.The answer is big NO.
Here is where, every Bank must work on setting up a dedicated Customer Experience researchteam, who will not just do dip checks and run feedback campaigns but who will create variousinteraction points between bankers and customers. It may be through social media, it may bethrough door to door campaign model of FMCGs, it may be through advertisements or eventhrough customer meets.But it is important that Banks must meaningfully engage with customers on educating aboutBanks products & services , various way & means to bank , loyalty programs etc and theseefforts should be the PUSH efforts towards customers than the present trend of pushing productsat the customers and once knowledge is pushed through one way or the other , there will be anunderstanding on products & services available with Banks and customer will be able to matchhis requirements with the Bank and thus business will be more of a PULL nature to the presentPUSH.Hence Customer Experience research teams envisage to bring in customers to the bank forproducts & services than bank pushing around products & services at customers often creatingirritation than delight.Conclusion:-Retail banking has huge growth opportunities in India and it has to conquer many more heightsbefore getting exhausted like its counter parts in developed markets like US and Europe. Hence itis important to understand challenges & bottlenecks faced, along with offering and implementingright solutions. Above article is an attempt at highlighting the vast opportunities and variousavailable solutions that can be applied for reviving the animal spirits of Retail Banking in India.Most valued comment I recieved on the above artilce is from Mr.Romesh Sobti ( MD &CEO-INDUSIND BANK), who is considered amongst the best Bankers in India at present.From: Romesh Sobti <Romesh.Sobti@indusind.com>To: vijay menon <email@example.com>Sent: Friday, February 15, 2013 10:34 AMSubject: RE: Article on " Retail Banking - Challenges & Wayforward "Thank you ; interesting takes on retailing , especially on expense outgo management.Regards,Romesh SobtiFrom: vijay menon [mailto:firstname.lastname@example.org]Sent: 15 February 2013 11:20To: Romesh SobtiSubject: Article on " Retail Banking - Challenges & Wayforward "