The fastest growing financial services market in the world is India, not China. Admittedly, the size of the revenue pool is modest, but at the rate it is growing, it will soon be significant. Players across the world are increasingly aware of this, and are actively targeting India. However, players in India need to be careful. Though their market is growing very quickly, its nature is changing. Those who do not appreciate this carefully will not be able to benefit from this growth. I believe some segments will hurt more than others if they do not change quickly. The changes are being driven by three main factors?demographics, globalisation and technology. Let me explain.
Today, 50% of the Indian population is under the age of 25. This means that there are around 550 million people in India younger than 25. By 2012, we estimate that at every age between 20 and 29, there will be about 27 million people. Thus, there will be about 270 million people in the 20-29 age bracket. This large group of consumers is not homogeneous in terms of income or education, of course, but the age factor will determine some of its product and channel choices. In the upper-income segments, there will be growing demand for retail assets to support their consumption needs?housing, cars, personal loans and what have you. This group will also seek better wealth management services than is currently available in the market.
But there will be another group that will emerge in this age group that will belong to what BCG calls the ?next billion consumers?, earning between Rs 40,000 and Rs 180,000 per year and largely living in rural and semi-urban areas. Serving this large group of emerging consumers will require players to collaborate across industry boundaries and experiment with new business models.
The other big change is being driven by globalisation, especially in the corporate segment. The number of $1 billion- revenue Indian companies has grown from 25 to 75 in the past seven years. These companies are the new challengers in the global arena. They?re growing fast and harbour high ambitions. These companies can access capital quite freely now from across the world, and are very active in the global field of M&As. They would like their bankers to be able to advise them on raising funds from across the world and give them advice on M&As. They are seeking traditional loans and cash management services less and less.
Finally, advances in technology are commoditising some priced services and changing consumer revenue pools. Thus, the size of the cash management services profit pool and that for demand drafts and telegraphic transfers is likely to drop quite sharply in the near future. Customers are also likely to demand increased channel choices and conveniences.
Future demand will be for products and services that not all players are good at. The current shape of the banking sector is largely a legacy of how regulation has evolved in India. Foreign banks, with their limited branch networks, for example, opted for corporate banking and premium-end retail banking. They also used all the alternative channels that technology could facilitate. Today, their overseas distribution supports the shift in corporate banking demand. Also, the emergence of India?s new private sector banks coincided with the opening up of the retail asset market. Many of them have devised models ideally suited to current market conditions. Among all, it is the public sector banks that need to undergo the most transformation to stay competitive. They need to move their corporate banking capabilities away from plain vanilla lending and develop new ways to appeal to India?s emerging young consumers. Thus, while the market at home may be exploding, taking advantage of it will require new technology, new processes, and most importantly, new and expensive human capabilities. This is where the government must help.
Janmejaya K Sinha is managing director, The Boston Consulting Group, India. These are his personal views