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Indian Banking - In a Time For Change - Nandan Nilekani


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Increasing penetration of smartphones, Aadhaar-linked bank accounts and a host of powerful open and programmable capabilities is set to create the ‘WhatsApp moment’ for Indian banking.

Published in: Government & Nonprofit

Indian Banking - In a Time For Change - Nandan Nilekani

  1. 1. Nandan Nilekani, 2016 Indian Banking in a time of change 1
  2. 2. Nandan Nilekani, 2016 2 12 Trends that will shape the future of banking
  3. 3. 1 Transactions: Low Volume, High Value, High Cost to High Volume, Low Value, Low Cost
  4. 4. Nandan Nilekani, 2016 4 Average transaction sizes Cheque: Rs 75,000 ECS: Rs 7,500 IMPS: Rs 8000 Credit Card Usage at POS: Rs 3000 Debit Card Usage at POS: Rs 1200 Mobile Wallet Usage: Rs 300-500 Mobile recharge: Rs 30 Source: Analysis of data from, conversations
  5. 5. Nandan Nilekani, 2016 Electronic clearing has surpassed paper clearing! Electronic clearing (ECS, NACH, IMPS, etc.) is growing at 50% per year. In Q1 2015, it surpassed paper clearing (Cheques). Source: Analysis of data from 5 RsTrillionPerQuarter
  6. 6. Nandan Nilekani, 2016 IMPS volumes are higher than debit cards! Source: Analysis of data from 6 RsBillionPerQuarter
  7. 7. Nandan Nilekani, 2016 7 The move from High Value Low Volume transactions to Low Value High Volume transactions will be accompanied by lower transactions costs, and will align market forces (customer acquisition) with social purpose (inclusion). 7
  8. 8. 2 Credentials: From proprietary to open
  9. 9. Nandan Nilekani, 2016 9 Credentials moving from ‘proprietary’ (card + PIN both managed by bank) to ‘public’( Mobile phone + Aadhaar authentication ) The phone will replace the card as the ‘What you Have’ authentication factor Nandan Nilekani, 2016
  10. 10. Nandan Nilekani, 2016 10 Smartphones with integrated Aadhaar compliant Iris recognition available for commercial use! Biometric smart phones enable 1-click 2-factor authentication Nandan Nilekani, 2016
  11. 11. 3 Switching costs are going down!
  12. 12. 12Nandan Nilekani, 2016 80% of telephones have a dual sim There is no user cost for switching a sim Only 1 in 20new connections sold results in a new user! The rest is churn!
  13. 13. 13 Churn will Increase Deposits can be moved easily Deposits Liabilities Payments it should be possible to switch my loan with a click. Payments are interoperable Nandan Nilekani, 2016 Lower Onboarding, Transaction Costs No Switch Costs to User
  14. 14. 4Lending: from uniform lending rates to individual pricing of risk
  15. 15. Nandan Nilekani, 2016 15Nandan Nilekani, 2016 Lending changing from uniform lending ratesto individual pricing of risk based on digital footprints. With data from credit bureaubeing enhanced with data from social media, mobile, web, and other sourcesthat have more data points than a thin credit report.
  16. 16. Nandan Nilekani, 2016 From secured lending against assets to lending against flowswhich lead to a better risk assessment, based on a complete pictureof the business, Lending basis Transaction data and Bank statement analysis Enables a transition from informal assets into the formal economy. 16Nandan Nilekani, 2016
  17. 17. 5Business: From fee income to data
  18. 18. Nandan Nilekani, 2016 18 Changing business models Google’s software is free, they use data to sell Ads. Microsoft Sold Software
  19. 19. Nandan Nilekani, 2016 19 Changing business models Fintech companies will go to Free, using the data generated to add value to their operations. Banks rely on Fee income.
  20. 20. 6PSU Banks - Shrinking Market Share
  21. 21. Nandan Nilekani, 2016 Telecom PSUs lost 70% market share in 12 years 21 Telecom PSUs unable to retain market share with introduction of new technology (Mobile telephones) PSUMarketShare(%) Source: Analysis of data from
  22. 22. Nandan Nilekani, 2016 National airlines loss in market share 22 National Carriers lost 25%market share in 4 years NationalCarrier MarketShare(%) Source: Analysis of data from
  23. 23. Nandan Nilekani, 2016 PSU Banks are already losing market share 23 Source: Will the change in banking landscape accelerate this decline?
  24. 24. Nandan Nilekani, 2016 Top 4 Pvt. BanksSBI Market Capitalization - Also shrinking 24 180K Cr170K Cr All Other PSU Banks Bajaj Finance Bajaj Finance 40K Cr > Any non-SBI PSU bank Source:, as of 23rd June 2016 700K Cr HDFC 300K Cr
  25. 25. Nandan Nilekani, 2016 Shrinking public sector market share is de facto privatization - Govt. losing opportunity to make billions of dollars of market capitalization. 25
  26. 26. 7Merchant Models: Ready for Disruption
  27. 27. Nandan Nilekani, 2016 27 Current merchant model (Cards, POS, high interest on unpaid balance, MDR for merchants ,limited outlets) will be completely disrupted Nandan Nilekani, 2016
  28. 28. Nandan Nilekani, 2016 28 Cards will go as with mobile payments Smartphones on both sides will replace POS and card Merchant on boarding will be self-service Universal Payment is a tipping point. New Customer / Merchant Bundles will be created Transaction fees will tend downwards to zero Informal economy supplier credit will unbundle
  29. 29. 8Cashless changes everything
  30. 30. Nandan Nilekani, 2016 30 Bank Branches Cash Withdrawal Formalization of the Economy Old assets Tax collections Cash collection centers become less valuable. Merchant current account balances may be impacted. Everyone is an ATM! The smartphone is the bank Self service is the norm Benefit and convenience of being in the formal system outweighs the alternative. Customer ownership based on branches, ATMs, will be replaced by New assets - phone, platforms, data, algorithms, etc. Tax collections etc. will go up Cashless implications
  31. 31. 9Interest Rates Will Converge
  32. 32. Nandan Nilekani, 2016 25% 400-5000% annually 1-5% per day Interest rates will converge 32 Today it may vary from some 9% annually for some loans to 5% a day from a money lender. Easier access to formal credit will eliminate the 'informal' systems leading to massive economic efficiencies. 9% 9-25% per day InformalBanks MFI Nandan Nilekani, 2016
  33. 33. 10 Jan Dhan - Aadhaar - Mobile
  34. 34. Pradhan Mantri Jan Dhan Yojana BANKING FOR ALL 34Source: As on 2 Aug 2016,
  35. 35. 1 Billion in 5½ Years Source: Data from 35 950 M 600 M 300 M 100 M 50 M 1038 M A Ubiquitous Digital Identity Infrastructure for a digital desh. The Aadhaar system can authenticate 100 M transactions per day, in real time!
  36. 36. The rise of smartphones Current sales about 25M smartphones per quarter Source: Ericsson Mobility Report 36Nandan Nilekani, 2016
  37. 37. 1969 1980 1993 2001 2014 2015 2016 Ushering in a new ERA of DIFFERENTIATED BANKING +2149 Years, 14 New Banks BANK NATIONALIZATION New Banks On Tap Banking Licenses +14 +6 +10 +2 +2 Accelerated by regulatory innovation 2nd Aug 2016
  38. 38. 11The Emergence of the India Stack
  39. 39. Evolution of the India Stack - Built on JAM 39 2010 2011 2012 2013 2014 2015 2016 950 M 1005 M 190 M Aadhaar Mobile JDY 2009 944 M 600 M 100 M Source: Ericsson Mobility Report, PMJDY, Aadhaar Web Sites AEPS APB Aadhaar Authentication Aadhaar eKyc eSign UPI Consent Architecture Digilocker 1+ B 1+ B 250+ M
  40. 40. 40 PRESENCE-LESS LAYER Aadhaar Authentication Unique digital biometric identity with open access of nearly a Billion users CONSENT LAYER Open Personal Data Store Provides a modern privacy data sharing framework PAPERLESS LAYER Aadhaar e-KYC, E-sign, Digital Locker Rapidly growing base of paperless systems with billions of artifacts CASHLESS LAYER IMPS, AEPS, APB, and UPI Game changing electronic payment systems and transition to cashless economy COMMERCE (GSTn) CREDIT (RBI) INVESTMENTS (SEBI) OTHERS INDIASTACK SKILLS JAM Jan Dhan, Aadhaar, Mobile
  41. 41. Aligns market goals with social goals No physical presence required (reduces more costs) Increases trust - allows a new business architecture to emerge Broad based, ubiquitous, inclusive platform Cuts Onboarding Costs Cuts Transaction Costs Allows Innovation Why is the India Stack disruptive? 41
  42. 42. 12India Will Be Data Rich
  43. 43. 43 Mobile phones are the first 'Universal' product 5.2 Billion people have a mobile phone Source: Nandan Nilekani, 2016
  44. 44. Internet penetration is increasing! 44 With 331Minternet users, India is now the second largest internet market, ahead of the USA! Source: Internetusers(per100people) Nandan Nilekani, 2016
  45. 45. With smartphones, the country is going digital! 45
  46. 46. 46 Digital usage leave footprints, which feed new age services, ... Over 30 data sources available to any app through the Android permission system Personalized services such as news feeds, search, commerce, etc.
  47. 47. 47 Machine learning algorithms are improving!
  48. 48. Nandan Nilekani, 2016 48 India will go from data poor to data rich nation in 5 Years! Digital Identity Paperless Process Commerce Payment Social Machine Learning & Algorithms
  49. 49. Data flows tracked digitally, providing traceability Quickly identify fraud, take early action. Reduced data leakage, improved security and privacy Allows more data sources to be used for lending decisions Stronger underwriting, less likelihood for loan defaults Consent tokens are shared, not credentials Reduced potential for misuse, leading to improved security and privacy Real Identity is verified in the process Reduces potential fraud, and improves the effectiveness of credit bureaus. Purely digital process Instant monitoring, and reporting, improved transparency. Regulator can monitor defaults, risks, fraud Electronic consent architecture will boost data economy 49
  50. 50. Nandan Nilekani, 2016 Impact of Trends 50
  51. 51. Bank As A Platform 51
  52. 52. The Bank as a new age digital platform Customers Platform Service Providers 52 Product Providers Vendors Partners Bank provides a platform for financial transactions Platform services include Customer Profile Ledger / Book Keeping Personal Finance Management Advisory Services Wealth Management Bouquet of Financial products Own Partners Transactions leave digital footprints, which enrich the customer profile!
  53. 53. Initial Onboarding Simple, Compliant, Paperless Digitize Transactions Enrich Customer Profile Offer the right product Yours, or a Partner's 53 Targeting Basic research for target customer Know Your Customer - Really!
  54. 54. Every transaction gives the platform more data about the customer, allowing him to be served better. This will increase stickiness, and avoid churn 54
  55. 55. Alternate Savings Products 55
  56. 56. Savings - The changing scenario 56 Previously Pool of cheap capital Now Competition Will Lead to CASA used to get a large pool of cheap capital Accounts are easier to open, and to move money Interest rate deregulated Banks competing to raise deposits Bank account churn
  57. 57. What Is Alternate Savings Low Risk Customer cannot lose money on a savings product Marked to Market Higher Interest Rate Lower opex, Innovation - backed by liquid mutual funds Highly Liquid Products (Not always) People can move money in and out easily No lock in ₹ 57
  58. 58. Alternate Savings Products 58 Grounded in behavior. Gamified Products Life events - marriage, children's education A vehicle purchase A house purchase Goal Directed Savings Hybrid products Custom Credit / Savings product based on a farmer's annual financial journey
  59. 59. More Alternate Savings Products 59 Retirement Plans Annuities Insurance Long Term Products Save as little as a few rupees a day Micro Pensions Investment Products (May have risk)
  60. 60. Alternate Lending Products 60
  61. 61. India faces a massive credit gap 61 Most households cannot borrow easily Over 20 trillion credit gap for MSMEs Source: World Bank Findex, IFC/Intellecap
  62. 62. No Credible Data Servicing Cost Sales Cost In today’s model, Rajni can never get a loan! Customers with the lowest default rates have the highest interest rates
  63. 63. 63 Surge in alternate FinTech lenders # of new alt lenders, by founding year
  64. 64. Alt Lender Traditional lender Origination & Underwriting Expected additional savings of 60% Risk costs Limited savings as original savings from data analytics Loan Servicing 15% of overall costs Expected savings of 50% Collection Over 10% of overall costs Expected savings of 30% Alternate lenders - dramatically lower costs! Costs New Entrant on India Stack
  65. 65. Consumer Loans Business Loans Alternate Lending POINT OF SALE B2C MARKETPLACE P2P MARKETPLACE RECEIVABLES LOAN TERM LOANS LINE OF CREDIT New entrants bring point solutions
  66. 66. Nandan Nilekani, 2016 Lending has grown at 15% CAGR in last 7 years. Expected to grow 5x in next 10 years. 66 Lending is set to grow FY09 FY16 FY26E 15% CAGR 5x in 10 years Source: Company data, Credit Suisse Estimates
  67. 67. Owning The Payments Inbox 67
  68. 68. Validation & Assurance Virtual Payment Address Minimal Issuer/Acquirer Cost Ubiquitous - Bank accounts Easy Immediate Payments Timely Notification UPI - Unbundling payments Push & Pull Payments @Every one with a bank account can send money to any bank account in India! Real-time posting Funds are not locked! Immediate notifications of the payment made Payments can be initiated by payer or payee. Real-time validation of the account and balance No need to disclose account information. Allows account portability, enhances privacy. Smartphone replaces card and PoS machine!! 68
  69. 69. Merchant enablement 69 Use India Stack for paperless, self-service merchant on-boarding Merchant can initiate both PULL and PUSH transactions Merchants with a UPI enabled app can accept ALL customers Low transaction costs 69 Proximity payments using ANY transmission protocol including dynamic/static QR codes
  70. 70. Disruption waiting to happen 70
  71. 71. Nandan Nilekani, 2016 CustomerEngagement Profitability Cash Management Remittance Insurance Distribution Fixed Deposits Bill Payment Savings Account POS Terminals Current Account Credit Cards Source: Company data, Credit Suisse Estimates MFs All banking products will be disrupted
  72. 72. Massive market cap potential 72 $127Bn $600Bn Private Banks NBFCs Fintech Total Market Cap FY 2016 FY 2026 $41 Bn $2 Bn Asset CAGR of 18% and MCAP to asset ratio of 25% Source: Company data, Credit Suisse Estimates
  73. 73. Banking in India is going through a significant change This is your game! 73