By Srinath Sridharan
Few centuries ago, the concept of a bank emerged—entrusted with the power to accept deposits from the public and utilise them to grant loans to third-parties. Naturally, the inherent risks associated with this arrangement led to stringent regulations, such as banking licences. Over time, banks expanded their services, encompassing payments, savings, investments, trading, foreign currency exchange, and much more. Naturally, customers began gravitating towards banks for all financial needs. Banks thus solidified their position in the financial services industry.
Over time, however, various banks faltered because of myriad reasons. Entrepreneurs and regulators, through intentional or coincidental actions, created an environment that facilitated non-banks’ entry into providing financial services. Lighter licensing frameworks emerged, tailored specifically for these non-banking entities. These establishments, free from the constraints of traditional banking licences, now offer financial solutions.
In the ever-evolving landscape of finance, traditional high-street banks find themselves at a crossroads. The digital revolution, coupled with the rapid rise of fintechs has left them contemplating their relevance in a world where customers are redefining how they prefer to manage their financial affairs. India’s digitally-savvy and younger population further adds to the banking sector’s conundrum.
For the traditional banking players, the luxury of the regulatory support from the Reserve Bank of India—despite, at times, poor behaviour by some—is a boon. No wonder, then, regulation has worked only when it comes to grievances and not when it comes to innovating to serve consumers’ need; this is despite consumer protection being the guiding regulatory principle. This has allowed complacency to set in. Consumer engagement, in most instances, has been an afterthought, with brick-and-mortar branches serving as the primary means of interaction. While there was a regulatory push to expand banking to rural and underserved areas, it did not result in significant improvement in financial inclusion. The incumbents focused on mass-products, rather than providing tailored solutions, which further alienated them from consumers. The concept of relationship banking became a poor and distasteful joke, particularly in the private sector where retail banking has been diluted over the past two decades.
To illustrate, lending to some sectors does exist, especially influenced by public policy narratives. But, as mere tokenism. Banking has been further stymied by the poor depth of India’s debt markets. Traditionally, banks have focused largely on corporate lending, accentuated by the fact that Indian corporates have stayed away from the bond markets. This has come at the cost of banking shying away from retail and smaller enterprises over the years.
However, there is hope. Banking in the 21st century is no longer confined to the traditional halls of financial institutions and their branch-based reach; it has transformed into an interconnected ecosystem where convenience, personalisation, and speed reign supreme. Fintechs have emerged as disruptors poised to change the very fabric of banking. Consumers now expect effortless ways of dealing with financial institutions, while financial regulators need assurances of prudential risk management and consumer protection from all industry participants.
The mobile-centric, customer-focused applications are disrupting risk-averse industries—a defining characteristic of modern fintech. The essence of fintech lies in data and accessibility. Fintechs are leveraging technologies such as artificial intelligence, machine learning, and blockchain to improve risk management, enhance user experiences, and unlock new avenues for financial inclusion. Through intuitive mobile applications, seamless digital onboarding, and personalised financial solutions, they have captured the attention and loyalty of a growing customer base, particularly among the tech-savvy younger generation. However, the question remains whether they can assure regulators of the stability and resilience of their systems.
To remain relevant in this new era, high-street banks must shed their inertia, reimagine their role and rediscover the essence of customer-centricity. Organisational culture in most banks hinders the ability to work with the younger talent as the expert talent. The old ways of hierarchy-led systems assume age as a criteria for success, leading to delayed outcomes in banks’ digital transformation journey. To thrive amidst these, fintech founders must comprehend the power dynamics and influence of established finance and techfin players, seeking opportunities to deliver added value. The question is whether the banks accept fintechs as partners, and even strategic-capital investors, or not.
A fundamental shift in mindset is necessary. Banks should view technology not as a threat but as an enabler. It is through the responsible use of data, strong cyber-security measures, and stringent compliance protocols that banks can build a bridge of confidence.
Collaborations and partnerships between traditional banks and fintechs can be the catalyst for this transformation. But, today, it is overshadowed by the snobbery of institutional-seniority that regulatory-arbitrage provides to banks.
From tech-aided personalised financial advice to seamless integration with third-party platforms, the possibilities are boundless. Banks must actively listen to their customers, harness the power of data, and deliver tailored solutions that align with their changing preferences. However, this requires banks to move away from peddling push-products to earn non-core, product-distribution income, which masks their true (in)ability to generate profits from core banking activities. The choice is clear: adapt or perish. By embracing innovation, forging strategic partnerships, and rediscovering their customer-centricity, banks can emerge stronger than ever.
Fintechs disrupting the ecosystem and banks struggling with their digital journey has added pressure on the banking industry, inducing players to urge the regulators to preserve their regulatory moat. Global financial regulators are concerned about fintechs’ non-traditional business models that fit awkwardly into existing regulatory frameworks, heightening the potential for misunderstanding. The Indian banks surely find themselves at a crossroads, compelled to adapt, innovate, and forge a new path forward in a world where customers are redefining how they manage their financial affairs. The future of finance is being rewritten, and banks must choose to either stand as vanguards of change or be swept away.
The writer is policy researcher and corporate advisor
Twitter : @ssmumbai