The coming revolution in Indian banking

Increasing penetration of smartphones, Aadhaar-linked bank accounts and a host of powerful open and programmable capabilities is set to create the ‘WhatsApp moment’ for Indian banking

Written by Nandan Nilekani | Published:July 20, 2016 12:23 am
aadhar card, uid india, aadhar card india, whatsapp banking, smart banking, net banking, banking future india, india news Illustration: CR Sasikumar

Once in a while a major disruption or discontinuity happens which has huge consequences. In 2007, the internet and the mobile phone came together in a whole new product called the smartphone. This phone, with its own operating system, such as the iOS or Android, could support over the top (OTT) applications. The messaging solution for the smartphone did not come from the giant telecom or internet companies. Instead, it came from WhatsApp, a start-up. WhatsApp does 30 billion messages a day, whereas all the telecom companies put together do 20 billion SMS messages per day. Such is the power of disruption!

Such a “WhatsApp moment” is now upon us in Indian banking. This discontinuity has been caused by several things coming together. Smartphones are growing dramatically and are expected to reach a penetration of 700 million by 2020. Over 1 billion Indian residents now have Aadhaar, an online biometric identity. The government promoting financial inclusion through the Jhan Dhan Yojana has led to over 200 million new bank accounts being opened. With the RBI giving licences to over 20 new banks, including small banks and payment banks, the competitive intensity of the sector is set to increase. One can visualise a future where every adult Indian has an Aadhaar number, a smartphone and a bank account. Already over 280 million Indian residents have an Aadhaar-linked bank account and around 1 billion direct benefit transfer (DBT) transactions have happened, whose value is in the billions of dollars.

On top of this, a set of powerful open and programmable capabilities, that are collectively referred to as the “India Stack” by the think-tank iSPIRT, has been created over the last seven years. Aadhaar provides online authentication using one’s fingerprint or iris, which can be done from anywhere. This can make transactions “presence less”. The e-KYC (know your customer) feature of Aadhaar enables a bank account to be opened instantly, just by using the Aadhaar number and one’s biometric. The e-sign feature enables online documents to be digitally signed with Aadhaar. The “digital locker” system enables the storage of such electronic documents safely and securely. All this can make the entire banking process “paperless”.

The final two layers of the “India Stack” have great relevance to the future of banking. The Unified Payment Interface (UPI) layer, a product built by the National Payment Corporation of India (NPCI), a non-profit company collectively owned by banks and set up in 2009, will revolutionise payments and accelerate the move towards a “cashless” economy. So “pushing” or “pulling” money from a smartphone will be as easy as sending or receiving an email. This product from NPCI is the latest in several payment systems that they have developed, from the National Financial Switch, National Automated Clearing House, and RuPay cards, to the Aadhaar Payment Bridge, the Aadhaar-enabled Payment System and IMPS, a real-time payment system.

The move to a “cashless” economy will be accelerated by the Aadhaar-enabled biometric smartphones. So credential checking in banking will move from “proprietary” approaches (debit card and PIN) to “open” approaches (mobile phone and Aadhaar authentication). As such, the holy grail of one-click two-factor authentication, now available only to giants like Apple, will be available to kids in a garage to develop innovative solutions.

Finally, as India goes from being a data-poor to a data-rich economy in the next two to three years, the electronic consent layer of the “India Stack” will enable consumers and businesses to harness the power of their own data to get fast, convenient and affordable credit. Such a use of digital footprints will bring millions of consumers and small businesses (who are in the informal sector) to join the formal economy to avail affordable and reliable credit.

As data becomes the new currency, financial institutions will be willing to forego transaction fees to get rich digital information on their customers. The elimination of these fees will further accelerate the move to a cashless economy as merchant payments will also become digital.

This will also shift the business models in banking from low-volume, high-value, high-cost, and high fees, to high-volume, low-value, low-cost, and no fees. This will lead to a dramatic upsurge in accessibility and affordability, and the market force of customer acquisition and the social purpose of mass inclusion will converge.

These gale winds of disruption and innovation brought upon by technology, regulations and government action, will fundamentally alter the banking industry. Payments, liabilities and assets will undergo a dramatic transformation as switching costs reduce and incumbents are threatened. As the insightful report from Credit-Suisse has so well explained, there is a $ 600 billion market capitalisation opportunity waiting to be created in the next 10 years. This will be shared between existing public and private banks, the new banks and new-age NBFCs. It may even go to non-banking platform players, which use the power of data to fine-tune credit risk and pricing, and make money from customer ownership and risk arbitrage.

The public sector banks, which occupy the commanding heights of the economy with a 70 per cent market share, will be particularly challenged. Even as they deal with the inheritance of their losses, they will have to cope with, and master, enormous digital disruption. This will require their owners, the government, to give them the autonomy and freedom to experiment and innovate.

To quote Shakespeare, “There is a tide in the affairs of men, which, taken at the flood, leads on to fortune”. The $ 600-billion opportunity is here. The WhatsApp revolution went unnoticed by incumbents. Normally such disruptive changes (like bubbles) are only recognised after they have happened. In this case, the forces of change are evident and can be anticipated. The opportunity for the banking sector has been called, and it is equally accessible to incumbents, both in the public and private sector, to the new banks, to the NBFCs and the tech companies. The future will belong to those who show speed, imagination and the boldness to embrace change.

The writer is ex-chairman of the Unique Identification Authority of India .This article was written as foreword to a Credit-Suisse report on the Indian banking sector

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  1. K
    K G
    Jul 20, 2016 at 10:00 am
    With great respect to the late Rajiv hi do you also know that he bankrupted India's economy in his five year rule that finally the Chandrasekhar government had to mortgage India's gold reserves. So while we can give credit for a few things to Rajiv hi but there are many other areas where his government did not fare too well.
    Reply
    1. C
      Curious
      Jul 20, 2016 at 6:33 am
      Bitcoin and other cryptocurrencies will further transform banking and ideny management.
      Reply
      1. S
        Sankaran Krishnan
        Jul 20, 2016 at 2:01 pm
        Yes I do agree revolution in the Banking Industry will blossom through Whatsapp across the State Capitals and Main cities across the Nation and will it be possible to enjoy the same with our Rural, Village and Illiterate's potion and is it possible for them to use these latest technologies is the BIG query
        Reply
        1. P
          praful dambal
          Jul 20, 2016 at 9:06 am
          Yes, the Late Pm and the Pms before him were pioneers in corruption too. which your honourable Pm isn't.
          Reply
          1. S
            sk
            Jul 20, 2016 at 5:54 am
            This shall be testing times for Psu banks, let's see how they rise to occasion
            Reply
            1. S
              Sawan
              Jul 20, 2016 at 1:14 pm
              So you would like to have the world believe. But, that is obviously a political necessity for you rather than the truth. The former PM did not dispense Jumla
              Reply
              1. S
                Sawan
                Jul 20, 2016 at 2:17 pm
                The Financial crisis of the 1990 happened because of three things. Rajiv hi dela going to the IMF because his tenure was ending in 1989, National Front supported by the BJP came to power and then finance secretary failed to advice him to go to the IMF because another supporter of the Government the Left Front opposed taking loan from the IMF, later Chandrrasekhar Govt. came and went and in the meantime, Gulf war happened which pushed all prices to go out of control. In retrospect it was all for the best because it helped liberalize Indian economy and the Rs was finally freed. But for the crisis, no Government could have freed Indian economy.
                Reply
                1. S
                  SP
                  Jul 20, 2016 at 9:15 am
                  Main currency in financial transactions is trust. Even today most people count on PSU banks compared to private banks. So new banks should gain the trust of people.
                  Reply
                  1. S
                    S ashok
                    Jul 20, 2016 at 8:00 am
                    All this sounds very Utopian. Would be great if we can achieve 60% utilisation of these disruptive technologies
                    Reply
                    1. S
                      Sri Vadrevu
                      Jul 20, 2016 at 5:59 am
                      Awesome and impressive developments!
                      Reply
                      1. P
                        Proud Bhakt
                        Jul 20, 2016 at 6:34 am
                        thanks to honorable PM Shri Modijee for all our progress.
                        Reply
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