Growth Challenges to Indian Banking Sector
With the current 26 public sector banks, 25 private sector banks, 43 foreign banks, 56 regional rural banks, 1,589 urban cooperative banks and 93,550 rural cooperative banks,1, India is poised to become world’s third largest domestic banking sector in the world by 20502. However, in the face of unprecedented shifts in consumer expectations and explosive growth of mobile technology cum ICT, traditional banks are grappling to attain the business basics - growth, profitability and market share. Ironically, demonetization, which some of us expected to be catalytic to growth of formal banking in India, laid bare its weaknesses instead - exposing its deepest vulnerabilities and weak-links.
The Demonetization Effect
Over INR 14 lakh crores worth of currency (accounting for 84% of the cash in circulation) had been withdrawn during demonetization.3 But when it came to reaping the benefits of a colossal cash-crunched economy, banks were overridden by e-wallets with flying colours. PayTM alone added millions of subscribers within a few days of the demonetization move. Villages and towns with populations below 100,000 now account for 20 percent of PayTM’s top line, as opposed to 2 percent earlier, thanks to demonetization. Nearly 200 million transactions worth ~ USD 750 mn were conducted through PayTM just in the month of January, 2017.4
New Competition - Arrival of Payment Banks
And then, with the Reserve Bank of India (RBI) granting in-principle approvals to 11 out of the 41 applicants for payments banks, we are staring at a tectonic shift in the way bankers survive and thrive against the heat of competition.5 What will be the key to reviving customer acquisition, retention and increasing the share of customer’s wallet by Indian banks? And how critical is analytics on that front? Let us explore.
Scope of Customer Acquisition in Indian Banking
It is not just in India - bankers across the world are struggling to answer the question - how to acquire the maximum possible customers at the minimum possible cost per acquisition? Customer acquisition by a company refers to the process of converting prospects and inquiries to new customers by persuading them to buy the company’s products and services. First of all, is there a room for expansive growth in customer acquisition in Indian banking? Let us look at customer acquisition in digital payments, for example. As of 2016, there are 616 mn6 unique mobile subscribers and 970 mn7 Aadhar Card holders in India. And yet, the digital payments sector has a paltry 60-80 mn8 user base - leaving a massive space for growth for banks in this domain!
‘New to Bank’ and NPA
According to a recent report, bringing the ‘new-to-bank’ category of population into the fold will be key to India’s customer acquisition spree in the banking sector.9 India’s current unbanked population is over 160 mn10 - most of whom reside in rural areas. Only 27 per cent11 of villages in India have a bank within a five km radius.
It is not just mindless acquisition that counts, however. India has a high account dormancy rate of 43 per cent (against 15 per cent globally). The non-performing assets (NPAs) of banks rose by over 56 per cent during the calendar year 2016.12
Fostering Data-Driven Customer Acquisition
In view of the above, it is imperative that Indian bankers streamline customer acquisition strategy using analytics and informed judgement. Firstly, for acquiring new adopters to modern technology such as digital payments and omni-channel banking, it will be pertinent to mine existing data to identify the barriers to such adoption. A recent example of a bank using analytics to formulate effective customer acquisition strategy is the launch of ‘811’ - a zero balance, zero charge account - by Kotak Mahindra Bank. The bank promises to set up an account for the customer digitally within five minutes, and bring down customer acquisition cost drastically.13
Secondly, to cut down the surge in account dormancy and NPAs, data-driven models could profile ‘profitable’ customers based on demographic and personal characteristics and enable targeted customer acquisition. Thirdly, to capture the ‘new to bank’ category, aspects such as relative importance of fungibility, factors causing insecurity while adoption, improved convenience through banking can be profiled using deep data analytics and used to advantage in proliferating customer acquisition.
Lastly, banks acquiring customers using multiple channels over a period of time can rationalize their channel strategy by identifying which channel is performing better and generating more attractive returns. For example, a KPMG LLP-UBS study shows that “the cost of effecting a transaction through a branch is 43 times higher than that of a mobile channel, and Internet banking is twice as expensive as that of the mobile channel. Consequently, the mobile channel seems to be the way forward.” 14
Customer Retention - Fixing the Leaking Pipe of Indian Banking
If you think that the plight of Indian bankers would be over with better customer acquisition, you are no further from truth. In fact, the customer leakage that banks face today is probably more worrisome than the acquisition challenges. Conceptually, customer retention envisages the activities undertaken to retain the maximum number of customers by securing customer loyalty towards the company / brand.
Customers are Spoilt for Choice
According to a recent report, users of digital channels are more likely to switch banks due to low customer loyalty.15 In fact, customer stickiness has become a wishful proposition specially for private sector banks who offer almost similar product benefits and user conveniences. It is not unusual for the urban account holder today to have multiple accounts. Leveraging relationship management to attain loyalties seem to work less and less as face-time between customers and relationship managers reduce in the digital age.
Analytics - Key to Securing Customer Loyalty
Creating a seamless experience for the customer in the banking value chain, launching products targeted to customer’s investment and credit behaviour, identifying the critical touch points in a customer’s lifecycle (education, marriage, family planning, retirement, etc.), effectiveness of third-party loyalty programmes like PAYBACK, and risk perceptions of different customer segments are some of the key parameters which can be conducive to analytics-driven customer loyalty for Indian banks.
Share of the Customer’s Wallet
Beating the Nexus Between e-Commerce and Payment Aggregators
Share of wallet (SOW) refers to the proportion of the customer's total spending that a business attains through its products and services. Nexus in the innovative payment space such as that of mobile money, e-wallets and payment aggregators with the burgeoning e-commerce segment are already eating away a sizeable pie of the cash flows and revenue streams of the traditional banker. A recent case in point is Amazon receiving approval for its much publicised e-wallet - Pay Balance - from the RBI. Pay Balance offers an easy and convenient one-click payment system as opposed to the two-step authentication system that is currently popular in India. Another example is MSwipe, which has given an alternative solution to point of sale (PoS) machines provided by banks.
Harnessing Customer Advocacy
The gaping divide between the large volume of transactions translating to only a small bite of the wallet share means that growth is often divorced from profitability. With actionable analytics on the optimum cross-selling strategy, coupled with garnering customer advocacy, a larger pie of the customer’s wallet can be targeted.
Deep data and credible information are now the drivers of growth and profitability in Indian banking more than ever. Given the information load that banks deal with everyday, generating sizeable analytics targeted to specific pain points should come handy for this industry. What remains to be seen is if our bankers are ready to take the plunge. In the next article, FORMCEPT will bring to you the various solutions that can help banks in alleviating challenges using analytics and informed decisions.