Apart from slashing costs, the big money has to come from selling loans/products to customers that only banks have.
Uday Kotak never shoots his mouth off and he’s not given to exaggeration. Not for him the bragging of a start-up founder.
Even his ambitions are calibrated, which is clear from the fact that Kotak Mahindra Bank (KMB) hasn’t grown at any breathtaking pace. And in all these years, there’s been one big acquisition. Which is why one in inclined to believe Kotak when he says KMB will double its customer base to 16 million in the next one-and-a-half years. That’s an ambitious target because in the 14 years since it became a bank, KMB has acquired less than 10 million customers. But the environment has changed, and is changing, dramatically, and the private sector lender is hoping to cash in on the digital wave. It has come up with a product catering exclusively for those willing to transact on a mobile phone, offering a savings account that will pay 6% but not punish anyone for leaving it empty.
A year ago, KMB might have been indecisive about whether it was going to disrupt or defend. Now, there’s no doubt about which one it is going to be. The timing is just right and the strategy makes sense for KMB because its branch network is relatively smaller than those of its peers. There is little point in adding too many branches at a time when most people below 40 are willing to use a mobile phone, if for nothing else, at least to make payments.
The Aadhaar platform is in place and e-KYC is now much easier. More banks are on the Unified Payments Interface (UPI), and thanks to the availability of relatively inexpensive smart phones, digital transactions are on the rise. This is precisely what fin-techs are hoping to cash in on.
But in the midst of all these digital innovations, what will make the difference—or separate the men from the boys, as they say—are the apps or products. These need to be easy-to-use, upgradeable and, of course, safe—only then can they be appealing enough. By all accounts, KMB has got off to a good start with JiFi, essentially a digital-plus-social-banking account, KayPay—a bank agnostic payments platform—and Message money, much like the UPI which allows users to send money to a contact on their phone book without knowing the bank account number or the IFSC code. It is already among the top ten in terms of mobile transactions.
As many experts have pointed out, disruptions are usually bottom-up in nature whereas banks typically tend to follow a top-down approach. KMB appears to be eyeing customers who might have otherwise preferred to bank with a state-owned lender but being young and therefore, tech savvy, and more importantly aspirational, would be eager to bank with a KMB. Had he needed to walk into a KMB branch, he might have been intimidated by the thought but the option to transact via a smartphone makes it easier.
In fact, KMB would have been reluctant to serve such customers at its branches because the costs can be very high, and to justify those costs, the bank would need to start generating revenues almost immediately. Dealing digitally brings down costs by about 75-80%; that’s a big saving because customer acquisition costs range anywhere between `1,000 and `6,000, depending on the services being offered. That’s not to say it will not tap the ‘mass affluent’ but to scale up, KMB needs to focus on a bigger universe.
Since the customer acquisition costs are low, KMB can afford to fork out a 6% interest on the savings account, and that’s a good bait. But, it is the zero-balance one that’s a winner because it could pinch youngsters, who are not so well-off to leave a couple of thousand rupees lying around.
Given the universe is fairly large—essentially, anyone owning a smartphone—KMB is likely to hit its target of 8 million customers. That, however, is the easy part. Transactions can only be one piece of the business for a bank and a very small piece at that. Given how spoilt customers have become, they are unwilling to pay for most things. The real challenge will be to get customers to do more than simply transfer money and shop. They must be coaxed to invest in financial products. Again, while there is probably plenty of money to be made from charges, the competition will ensure fees remain low. At some point, therefore, KMB will need to focus on the bread-and-butter business of lending.
While there hasn’t been too much action in the digital-loan market yet, there are a host of fin-techs trying their luck. The big disadvantage that fin-techs currently suffer from is that they don’t have access to retail deposits, or any deposits for that matter—unless they are a non bank financial company (NBFC). Therefore, they need to team up with an NBFC or banks to source funds. In most instances, it is the bank or NBFC that’s the ultimate lender with the exposure sitting on its books and the fin-tech is earning a fee for having sourced the client and for offering other services. Given that most loans are barely a year, or even less, old, it is hard to tell how good the appraisal mechanism—much of it is based on algorithms—has been. And while the growth numbers may seem exciting on a minuscule base, scaling up the business will not be easy. Should delinquencies rise beyond a point, the sources of funding could dry up.
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In contrast, a bank with a strong customer franchise has access to retail savings that it can use to fund the loan-book. Moreover, while it can, and will, use technology to assess risk, there is an established loan appraisal mechanism embedded in the system that will come in handy. In any case, the pace of loans given doesn’t need to keep up with the pace of savings accounts created digitally since the costs aren’t prohibitive. If KMB does manage to win over 8 million savers—even if that takes longer than 18 months to do so—it would be no mean achievement. In the process, it would have trampled over the plans of many a payments bank and many a fin-tech too. But that’s how the big boys play.