Opinion

Banks must be ready to handle disruption

Rita McGrath / M Muneer | Updated on September 08, 2019 Published on September 03, 2019

Bankers must develop the skills to read the signals from time-zero events — ones that have high impact on business — and take corrective action

The Indian banking sector has witnessed rapidly increasing stress in the last couple of years with NPAs (non-performing assets) leapfrogging from 3 per cent to 14 per cent of total assets. The resultant erosion in capital base, after providing for NPAs, has crippled banks from processing new advances.

Analysts believe the Indian banking sector poses the biggest challenge for the economy when the government is trying hard to boost employment, investment and growth. Analysts also argue that the government should either privatise public sector banks or give them full independence.

But they all miss the point. By doing do, banks will only become less competitive than before. Loans and NPAs are only one part of the problem. If they don’t take cognisance of events that are predictors of future, they would end up seeking bailouts.

No one can precisely predict the future, but preparing for eventual disruption is something everyone should do. Ability to detect early warning signals is a skill that even public sector bankers can acquire.

There are a few time-zero events — ones that will have high impact on a business — taking place globally. Bankers must develop the skill to read the warning signals from these events and decide on what to do next.

Time-zero events

More than 50 per cent consumers find traditional consumer banking irrelevant: Imagine an autonomous, financial life — a money-enabled life — with your personal financial advisor accessible wherever and whenever you want through screen-based (mobiles/tablets) and voice-enabled (Amazon Echo/Google Home) technologies.

As a result, banks will not be needed any more for traditional consumer banking. There will be almost no bank branches because mobile-phone apps and online account management take their place.

New fintech solutions to consumer banking services (a combination of bank and financial advisor applications) with the convergence of technology will allow companies such as Amazon to be able to access bank accounts and buy products for you without your having to think about it (frequently-bought items for daily consumption), or buying other products through voice-enabled technology.

Meanwhile, crowd-lending platforms and fintechs will become so powerful in credit-default prediction that they become the cheapest and easiest platform for lending. Add to that the new developments in blockchain.

Artificial Intelligence (AI) creates transparency across 50 per cent of business: AI-enabled financial advisors can help you manage your money. Such systems will tell you it’s time to move your utility provider base on your usage and expenditure patterns. It could tell you that it is time to change your credit card to save on interest and what the least expensive way is to send money overseas.

While customers trust banks to hold their money and personal data, they are sceptical about banks cross-selling products and services without keeping customers’ interest in mind. AI in banking can help build customer trust by providing contextual and timely advice that keeps customers’ interests in mind. It may cannibalise their existing revenue streams but will bring in radical transparency hitherto unknown.

If banks fail to use digital technology to replicate the banking intimacy in remote villages, then a disruptor will do it and make banks irrelevant. Will we see any bank using AI to literally put customers first, at the risk of short-term losses?

Technology companies capture 25 per cent of traditional banking revenue: Non-bank tech giants (Google, Apple, Alibaba) and fintech companies compete with banks in payments, lending, and foreign exchange services. These new competitors will open up entirely new kinds of services and enjoy substantial growth, while revenue pools will be constantly shrinking for traditional banks.

An Amazon bank account offering lending and deposit services as well as easy payment solutions when ordering from its site could attract lots of customers from incumbent banks.

More and more fintechs are mushrooming, fulfilling customers’ needs of simplicity, convenience, availability, speed, transparency, and reliability, by offering banking products such as online-only bank accounts. Some of these challengers have already obtained a banking licence and are also able to run business models with free bank accounts and payments globally. Customers will opt for better experiences.

Open banking arrives and more than 50 per cent of customers give their permission to share their data with third parties: Whether customers like it or not, the government has made it mandatory to provide Aadhaar to even relatively new players who don’t have good privacy policies; neither did the government prescribe any privacy norms.

In 2018, the UK put into place the PSD2 (Second Payment Services Directive) to require its nine largest banks to share information outside their walls in a secure, standardised format. This initiative was motivated by several perceptions among regulators: that there was insufficient competition, that customers were overpaying for things like overdraft fees, and that money was just sitting in accounts failing to reward the consumer with interest on savings.

While it is not clear yet what services will be developed as a result of the move toward open banking, the potential to completely rewire the banking sector is significant. As an analogy, who could have predicted that Google’s mapping project would facilitate the founding and growth of geo-location-dependent services such as Uber and its copycats elsewhere?

Open banking has the potential to create a massive shift of power to consumers, as their data is no longer locked away in legacy transaction systems. Data that would support giving loans to people with “thin files” of conventional information could potentially open up entirely new customer segments for related services. (Open banking is a collaborative model in which data is shared through APIs between two or more unaffiliated parties to deliver enhanced capabilities to the marketplace).

Among the practices that open banking is likely to change is the current model employed by many fintech firms of “screen scraping,” in which users provide their actual log-on credentials to a third party, which gives them far broader access to user information than is necessary, and creates a major security risk.

Once such time-zero events are identified, bankers can start to work backward: What would have to be true six months before time-zero for that to occur? Twelve months before? Eighteen months? Bankers can thus gather relevant data and create a bigger picture.

If you’re right about these time-zero events and you’re able to see around corners before others, you will have an edge to take your business to the next level.

Rita McGrath is disruptive innovation guru and professor at Columbia University, US; and M Muneer is Co-Founder and Chief Evangelist at Medici Institute.

Published on September 03, 2019
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