Debrief from India: It’s all about DIGITAL

I’m on a plane over the Arabian Sea collecting my thoughts after a packed week in Trivandrum, Bangalore and Mumbai. The impetus for my trip was the honor of presenting at Suntec’s User Meet on the occasion of its 25th anniversary. The clients who attended were extraordinarily open about their stories and presented extremely compelling case studies. Learning about the pricing practices of Telcos showed how much opportunity is left for banks in this space. I spoke on Customer Experience Orchestration in a Digital World. It proved to be a perfect set up for the rest of the week, since the clients I met with – old, new and prospective – were extraordinarily consistent in their focus on a single concept: DIGITAL. Like Celent, many of the Indian service providers I visited have defined their vision of digital and begun the process of aligning their offerings to it. The best focused on a customer-oriented foundation (like Celent!) and then described how their combination of technical expertise, product / consulting delivery, and segment concentration combined to help their banking clients fulfill their digital vision. Innovation centers – spaces for client co-creation and brainstorming – continue to be hot: I saw two new ones this trip. Demos trump powerpoint every time, and there was a good focus on this. If you’d like to learn more about my impressions, please arrange for an Analyst Access call; I’d be happy to chat about them in more detail.

Islamic Banking in India : Stumbling at the Regulatory Block

Islamic banking has been on the rise in the Asia-Pacific region, accounting for 60% of the global Islamic banking market. However, despite its rise in the rest of the region, the penetration of Islamic banking in India has been low. This is especially surprising with India having approximately 154 million Muslims and being the second largest Muslim population of the world. As mentioned in the Celent report Rise of Islamic Banking in the Asia-Pacific Region, this is primarily due to a regulatory block which allows Islamic banking to operate only in the form of a Non-Banking Financial Corporation. An amendment in the Banking Regulation Act of India, 1949 is required to allow the Islamic banking system to operate in banks in India.

The primary reason for the regulation can be mainly attributed to the socio-religious nature of the Indian political scene. This is especially evident in the Raghuram Rajan Committee of Financial Sector Reforms report submitted to the Prime Minister of India last year. Although the report recommended principles based on Islamic banking, the term “Islamic banking” was deliberately replaced by “interest-free banking”. The committee recommended that measures be taken to permit the delivery of interest-free finance on a larger scale, including through the banking system. With this recommendation, the ball is in government’s court and it is up to them to come up with appropriate measures to introduce these products in the Indian banking sector. However, a rebranding of the various Islamic banking products must be done to achieve widespread acceptance and serve its foremost purpose of financial inclusion.

In addition to the regulations, some experts feel that the infrastructure for Islamic banking is not yet in place and steps must be taken in that regard. In fact, last week, Kerala State Industrial Development Corporation (KSIDC) announced setting up India’s first interest-free financial institution along Islamic banking principles in Kerala. It is beyond doubt that there exists a huge potential for Islamic banking in India. But, it will take strong policy decisions to tap the same.

The Need for Legacy Work Culture Transformation?

It has been quite some time since the core banking trend hit the Indian banking industry. Almost all the top banks in India have implemented the core banking makeover in their systems and moved towards “Anytime, Anywhere” banking. But, the obvious question arises. Have the banks really moved, in spite of their marketing campaigns saying so? I recollect an incident where my colleague wanted to apply for the online banking service from the bank in which he was maintaining his salary account. Despite being one of the largest banks in India and one of the first banks in India to start the core banking transformations, he was informed that he can apply only in the branch in which he had opened the account! If the bank was indeed centralized and had implemented the “Anywhere” banking concept as advertised, why would the specific branch matter?

The culprit is not in the IT systems implemented in the bank but among the people using it. IT transformation has been the buzzword in the banking industry in India. But, the transformation of the bank is not brought about by IT alone. Business processes, policies and more importantly the work culture of the bank matters the most. I remember reading an interview of a CEO of one of the banks in India, where he mentions that a major challenge that the bank is facing is in changing the work culture of the bank. The current work culture has been inherited from decades of protectionist regime that the nationalized banks have enjoyed. The systems and processes are indeed very bureaucratic. Performance-based work culture has yet to find its place within the nationalized banks.

Fortunately for the banking industry, the liberalization and the emergence of private and foreign banks have started changing the outlook of the bank employees. With even nationalized banks gearing for major rebranding exercises, maybe it is time for them to look into their internal policies and instill corporate culture as well. The true transformation happens only when the legacy processes and policies are changed along with legacy IT systems.

New ATM Rules on the Block

On April 1, India entered a new era in ATM banking. The Reserve Bank of India, central banking authority of India, brought about a proposal to allow the bank customers to withdraw money from ATMs of any other bank in India free of charge. Earlier, a fixed charge was levied on the customer by the banks for any cash withdrawals from their ATMs. The transaction fee was reduced to a maximum of Rs. 20 (around 50 cents) on March 31, 2008 and further made free of charge with effect from April 1, 2009. India has now joined countries like UK and France which doesn’t charge any usage fees on bank customers.

While this is a boon for customers, the banks will have to rethink their business strategies. Although the usage fees are not charged to the customer, the bank would extract the fees from the bank which maintains the account of the customer. This inter-change fee is not fixed and will be decided by mutual bilateral agreement between the banks. Thus, the strategies of banks would now revolve around these inter-change fee rates.

The strategy would vary depending on the size of the bank

  • The banks that would gain from this move are those with a large number of ATMs. As of December 31, 2008, State Bank group had the highest number of ATMs with 11,250 ATMs around the country, followed by ICICI bank at 4,600 ATMs and Axis Bank at 3,570 ATMs. According to initial reports, these banks are expecting a rise of 10-15% in inter-change transactions.
  • The banks with small number of ATMs will be rethinking their ATM expansion strategies. Setting up an ATM in India would cost about Rs. 6 lakhs and a maintenance cost of about Rs. 50,000 – Rs. 60000 per month. Hence, the smaller banks might be better off paying the inter-change fees than setting up and maintaining an ATM. However, initial reports suggest that there is no slowdown in the ATM expansion plans, as many banks expect an increased usage of ATMs and would want to capitalize on the trend.

Also, in addition to the banks making their moves, white-label ATMs are also being planned to be launched in India. The ATM market will be going through an interesting phase and it is worth a watch over the next few quarters.

Indian Banks : Safe and Sound in a Protected Economy

Indian banks enjoyed a competition-free era, operating under a protectionist regime, till 1991. The competition from private and foreign banks was hardly noticeable till the government liberalized the Indian economy in 1991. Ever since, the number of foreign banks has grown considerably and currently India has 29 foreign banks operating with around 277 branches and 1034 ATMs (as of March 2008). With the announcement of further liberalization on the cards, how has it affected the local banks?

In 2004, Reserve Bank of India, the central banking authority, announced the roadmap for the presence of foreign banks in the country. During the first phase, between March 2005 and March 2009, foreign banks will be permitted to establish presence by way of setting up a wholly owned banking subsidiary (WOS) or conversion of the existing branches into a WOS. At the end of the first phase, the government would conduct a review and decide on the further actions related to the extension of the national treatment to WOS and permission for mergers/acquisitions of any private sector banks in India by a foreign bank. In a way, this move has been a boon to the Indian banking system, as the local banks have vastly improved their banking processes and services in order to compete with the private and foreign banks. While it is unlikely that the foreign banks would compete in the rural and semi-urban segment, they have captured a good percentage of the urban customer base, from the public sector banks, with their customer-centric operations.

As of last year, many foreign banks were keen to open branches in India, including Royal Bank of Canada and Glitnir, an Icelandic bank. The public sector banks in India like Bank of Baroda and Canara Bank underwent rebranding exercises and image makeover, anticipating competition from foreign banks. However, one set of words played a spoilsport on all such plans : Global Financial Crisis.

As a result of the crisis, many foreign banks in India are reworking their strategy. Some of the banks, like Royal Bank of Scotland (ABN AMRO) and Citibank, are trying to sell off their India businesses. The Reserve Bank of India, which had proposed the review, may not ease the current norms, considering that it would open the financial system to the banks which have been faring badly in other countries. For the time being, the local banks can heave a sigh of relief and concentrate on their own expansion. With the General Elections happening in the next couple of months and a possible change in the government, the proposed liberalization policies may not see the light of the day in the near future.

Can the villagers spell A-T-M?

Gone are the days when only the rich withdrew money from ATMs in India. India has seen exponential growth in ATMs, with a cumulative annual growth of about 70% since 2000. During 2007-2008 alone, the number of ATMs grew by 28.4%. However, there has been a clear lack of symmetry in their spread. The ATMs in India are concentrated in urban areas, and penetration into the rural market has been slow and lethargic. Around 70% of India’s population, with a literacy rate of about 60%, lives in the rural regions. To access the unbanked population, banks are looking to expand into the rural and semi-urban areas. With many of the rural population unable to read or write, how are banks tackling the problem of making the ATMs accessible to them? The Celent Report The Dragon and Tiger of the ATM Markets: China and India touches upon the usage of innovative channels like Biometric ATMs (with authentication through face, iris, and fingerprint recognition technologies) and handheld PDAs. As an update to the report, State Bank of India, the largest public sector bank, announced that it will be installing 150 biometric ATMs in the country by the end of March 2009. Other banks have installed biometric ATMs as proofs of concept at different villages all over the country. Most of these biometric ATMs work on fingerprint technology as the means of authentication. NCR and Diebold are the major players providing biometric ATMs in India. Other products like Grammteller, a low-cost ATM developed by IIT-M TeNet group and Vortex, have also entered the market and promise to significantly reduce the cost of operations for the bank. Despite such advances, some issues remain for the banks to sort out.
  • Connectivity. Without proper broadband penetration, banks will have trouble setting up ATMs in remote villages.
  • Energy. With many villages receiving less than eight hours of electricity per day, uninterrupted power is something that the banks need to think about
  • Maintenance. Remote villages will lack technical expertise to handle ATMs.
  • Security. Both the network security and the physical security of the ATM booths need to be handled.
The silver lining is that the rural population has been showing technological affinity for mobile and e-commerce. The process would be slow, but the banks should be able to reap the benefits over a period of time. How long? We will be there to find it out.