Existing banks and new challengers would increasingly engage, target and segment consumers on the new battleground – transactions, says a research report
With the Reserve Bank of India (RBI) issuing differentiated licenses, the competitive landscape for incumbent banks is changing like never before. The two biggest classic competitive advantages for incumbent banks that acted as entry barriers for challengers are redundant. Just as Uber with zero-ownership of cabs emerged as a global leader in ‘cab sharing’, it is now possible for challenger 'banks' to compete with incumbents without capital, like peer-to-peer (P2P) lending or without physical presence payment technologies. The ‘Uber’ moment for Indian banks is upon us says Motilal Oswal Securities Ltd (MOSL) wondering if the incumbents are ready for this.
The brokerage in a research note says, "From a near-term perspective, we believe that the Cabinet approval for promotion of payments through digital means could accelerate the pace of digitization. We believe that digitization of government payments (G2B and G2C) is a near-term catalyst, which alongside the launch of the Bharat Bill Payment System (BBPS) can also potentially disrupt the flow of working capital funds from banks to corporate India. P2P lending could also emerge as a potential game-changer for banks on both sides of the balance sheet."
With just over 50% of Indians having a bank account, India suffers from one of the lowest penetration rates for banking products and services. This has driven the demand for relatively more accessible and affordable 'banking' solutions to address the vast unbanked about 50% of the population and under-banked population, the report added.
There is no doubt about the immediate near-term focus on Indian banks’ asset quality challenges both known and unknown, there is a larger force at play that impact the very existence and survival of Indian banks as we know them. While challengers like payment banks and contenders have been focused on acquiring customers through cashback offers and freebies, incumbent banks have been focused on enabling and facilitating transactions. However, analytics-based cross selling of financial products remains the Holy Grail for all service providers. "We believe that technology-enabled cross-sell is the only way for banks to clock non-linear growth in customer profitability when revenue per customer will see a disproportionate rise compared to the cost per customer," the report added.
According to MOSL, forces at play are likely to reduce cash intensity in Indian economy. "While the Indian economy continues to be dominated by cash (12% of India’s GDP and 70% of consumer payments by value), a combination of policy and consumer behaviour is seeking to reduce the economy’s dependence on cash. Given the RBI’s stated intention of reducing the share of cash transactions in the economy (policy push factor) and the consumer’s need for convenience (customer pull factor), the cash intensity of the Indian economy is expected to reduce to 40% of consumer payments in value terms by 2019." it added.
Digitally-enabled consumers are looking to complete the awareness-to-purchase loop on digital platforms, which is the reason for mushrooming of multiple payment systems, MOSL says, adding, with smartphone penetration in India at about 17% and rising at an exponential 45% CAGR, the digitally-enabled Indian consumer is increasingly looking to fulfil the decision-making loop on the digital platform itself.
An increasing proportion of the consumer’s decision-making process, beginning with awareness followed by research, comparison, choice and ending with the eventual purchase, is beginning to migrate to the digital world. Consequently, the payments ecosystem in India has witnessed frenzied activity over the past year, with two-three digital banking apps or mobile wallets being launched every other month.
With increasing digitization of financial services, MOSL feels that transactions of small and medium enterprises (SMEs) would be the new battle ground in the new game, where transaction market share will determine deposit market share. It says, "Our analysis suggests a strong positive correlation between the number of non-bank transactions from a savings account, and the average balances maintained in such accounts. As this behaviour entrenches itself further, we expect incumbent banks and challengers to increasingly engage, target and segment consumers on the new battleground – transactions. We also expect 'mid-sized businesses' to be a hotly-contested segment, as banks look to build a protective 'network effect'."
According to MOSL, while all banks are launching their own digital platforms, non-linear benefits will only accrue to banks that are able to build superior cross-sell capabilities to monetize their customers better. "We expect the top-quartile banks to generate a RoA alpha of around 100 basis points (bp) from the current levels of 80bp over the sector average at an operating profit level over the next five years. Nearly all of this return on assets (ROA) alpha will be driven by cross-sell fee income and higher customer profitability," it added.
The brokerage says it has developed an industry-first, proprietary Motilal Oswal Digital Quotient (MODQ) score to identify early movers across three key categories, scale, transaction activity and product capabilities. As per MODQ analysis of 10 largest banks, Kotak Mahindra Bank, HDFC Bank among the private banks and State Bank of India (SBI) among public sector banks (PSBs) as best positioned plays on digital banking.
It says, "The private sector banks have been far more successful in encouraging transaction activity levels and float, which is crucial for revenue generating opportunities. In general, we believe that the eventual winners in digital banking will be entities that master the 'small value, high volume' transactions war".
The evolution of the quasi-corporate private sector lenders is also worth highlighting, MOSL feels. "Axis Bank has been prolific in adding merchants but there is a lot more groundwork that needs to be done in terms of raising activity levels and digital maturity levels of its individual customers. ICICI Bank offers a host of digital choices to customers that are high on recall and customer convenience - the bank now needs to find a way to monetize these digital offerings. Yes Bank, despite being a late convert to the utility of a retail franchise, has been commendable in its pace of merchant acquisition and its use of business correspondents - however, the bank appears to be in an investment phase since activity levels are sporadic at best,” it concluded.