New Paradigms in Retail Banking
Introduction
The concept of Retail Banking is not new to banks but is now viewed as an important and attractive market segment that offers opportunities for growth and profits. Retail Banking is a concept which allows households sector to meet their financial needs for various purposes through banking system. Retail banking encompasses retail lending and retail deposits. Retail banking and retail lending are often used as synonyms but in fact, the later is just the part of retail banking. In retail banking all the needs of individual customers are taken care of in a well integrated manner. The main objective of retail banking is to provide low cost banking services across customer’s life cycle , in line with their changing needs , by offering standardized products, simplifying sales process through provision of multiple delivery channels. The typical products offered in Indian retail banking segment are housing loans , consumption loans for purchase of durable , auto loans , credit cards and educational loans. From business perspective, retail banking contributes significantly to the bank’s overall strategy of improving product mix , expanding revenue streams , enhancing profitability ,ensuring better liquidity ,and risk management. The higher growth of retail lending in emerging economies can be attributed to the rapid growth of personal wealth, favorable demographic profile, rapid development in information technology, the conducive macroeconomic environment, financial market reforms etc. The next decade in banking will see both evolution and revolution. The industry has historically changed slowly — evolutionary, incremental change. While the changes envisioned are less, the pace of change is intensifying rapidly. Advancement in technology continue to transform the lives of banking customers .As a result , direct channels such as mobile and the internet are becoming increasingly important in retail banking. The digital disruption and the ensuing change in customer behavior is causing paradigm shift in the way banking itself is thought about. The retail banking strategies of banks are undergoing a major transformation. Powerful forces are reshaping the banking industry. Customer expectations, technological capabilities, regulatory requirements, demographics and economics are creating an imperative to change. This article discusses about the emerging trend in Retail banking and the imperative need for the banks to respond dynamically and to adjust themselves in the emerging digital banking paradigm to drive more productive businesses and relationships.
Transformation of Retail Banking in India
The banking industry had undergone a lot of transformation over the last three decades. In the initial phase of evolution of banking, the government focused on productive sectors and hence bank credit had flown to these sectors . But over time, due to the emergence of middle class having substantial purchasing power in India , the regulators have become more accommodating in allowing the banks to lend even for consumption purposes. The banks have become a virtual marketplace offering among others, various non-banking financial products and services to the customers. The high proportion of 79 % of the population below 35 years of age , has offered to the Indian banking system, a ready market, for mobilization and deployment of their funds in the last one decade or so . Besides, the technological innovations relating to increasing use of credit / debit cards, ATMs, direct debits and phone banking, etc has contributed to the growth of retail banking in India. In addition, the decline in interest rates has also augmented the growth of retail credit by generating demand for such credit. Retail banking has also received a thrust from the policymakers’ push for inclusive growth in the wake of the global financial crisis, towards achievement of universal financial inclusion. Retail banking business has also met the bank’s quest for new sources of revenue and new channels for profit. Across the globe ,retail lending has been a spectacular innovation in the commercial banking sector in recent years .India too experience a surge and a paradigm shift in retail banking .Retail banking received momentum nearly a decade ago when a few Indian Banks replicated the retail banking model of developed countries .In the course of time other banks also fell in line . Retail loan is estimated to have accounted for nearly one-fifth of all bank credit .The retail loan market has decisively got transformed from seller’s market to a buyer’s market .All these emphasize the momentum that retail lending is experiencing in the Indian economy in recent years . Retail Banking as a business model is adopted by all the banks in India on account of multiple comfort factors for the banks viz. acquisition of a huge customer base, multiple product offerings, better pricing and profitability. The retail banking , where customer value is at the core operations , creating and nurturing long term relationships with the customer is the key to maximizing wallet share. The Indian government’s ambitious vision for a digitally savvy Indian consumer ,is emerging across urban as well as rural markets .As depicted , by 2020 , the number of smart phone users to equal the number of active bank accounts in the country and cover 70-80 % of the eligible population. It is possible to envisage that almost all eligible customers will be on boarded on to the mobile phone-based digital payment and saving platform in next five years .A similar revolution is conceivable on the lending side .
Retail Banking Business Trend
Bank deposits on April 3, 2015 stood at Rs 91.5 trillions, which is 12.6 % over the deposit base of Rs 81.2 trillions as on April 4, 2014 .As per the ICE360 Survey 2014 , gross savings of the Indian household constitutes 29.27 % of the gross household income in the year 2013-14. Of the total gross savings , 51.8 % emanated from rural areas comprising 179.5 million households with a share of 55.4 % of total income of Indian households. Rising levels of mean savings and income witnessed in households with improved education status . Growth in total retail loans has picked up after slowing in 2009 to 2011 .While certain segment such as credit card loans have remained stagnant , some other categories like housing loans have grown steadily(Table- 1 & Graph -1).
Table- 1 : Growth in Retail Lending and Changing Mix
(Rs Billion )
| Year | Total Retail loan | Housing Loan | Consumer Durable loan | Vehicle loan | Educational loan | Credit card loan | Other Personal loan |
| 2010 | 5588.9 | 3063.1 | 57.6 | 446.3 | 383.8 | 218.1 | 1420.0 |
| 2011 | 6701.3 | 3459.3 | 65.6 | 657.2 | 469.9 | 206.8 | 1842.6 |
| 2012 | 7501.5 | 3787.4 | 73.5 | 703.7 | 520.0 | 221.8 | 2195.1 |
| 2013 | 8712.9 | 4647.1 | 82.1 | 816.2 | 550.4 | 254.5 | 2362.6 |
| 2014 | 10171.0 | 5306.1 | 127.5 | 979.9 | 541.1 | 300.5 | 2915.9 |
| 2015 | 11663.4 | 6285.3 | 153.2 | 1246.1 | 633.2 | 304.6 | 3041.0 |
| 2016 | 13922.2 | 7467.8 | 177.5 | 1529.1 | 682.3 | 376.8 | 3688.7 |
(Source : RBI)
Growth in Retail Lending and Changing Mix
The bank credit as on March 2016 stood at Rs 65.47 trillions up from Rs 60.03 trillions as of previous year .The growth in bank credit has been largely on the back of retail lending. Retail lending has risen from 5 %of bank advances in FY90 to 21.3% in FY16 and is expected to rise because of the growing economy, urbanization and favourable demography. As per data available ,the fastest growing segment was consumer durables at about 17 %,followed by vehicle loans at 14.7% and housing loans at 14.5%.Credit to industry , which accounts for bulk of bank lending , grew by 3.5 % while personal loans ( home, auto and consumer loans among others ) grew by over 13.5 % .By registering one of the highest growth rate in two years , reinforcing the belief that consumer sentiment is stronger than corporate investment outlook. Indian savers have more confident in India today than the Private Indian Producer . According to Credit Information Bureau ( India ) , retail NPAs have dipped to their historical lows with delinquencies on home loans and other retail loans showing as significant fall. The delinquency in home loans dropped to 0.5 % of total advances at the end of December 2014 , down from 1.06 % at the end of 2010.Defaults on the unsecured portfolios such as credit cards were also down to 1.19 % from a peak of 3.27 %, while defaults on the personal loans dropped to 1.01 % from a peak of 2.65 % of total advances earlier .Coupled with low delinquency rate in retail lending , the more demand for consumer products from on line channel which are fast picking up , will drive the retail lending sector at a faster pace . The digital revolution is upon us in its full glory .Technology is advancing by the day. Affordable an smart phones and high bandwidth access will reach an unprecedented number of Indian consumers in the coming years . Digital credit is the next step towards a cash-lite economy. E-commerce firms such as Flipkart, Snapdeal, Paytm are aggressively looking to provide credit digitally to its vendors . The retail banking industry will be driven by increasing consumer demands combined with continued competition from outside the industry.
New Paradigm in Indian Retail Banking
Post crisis, the buying pattern of a banking consumer has changed. There is growing affinity towards simpler retail banking products , greater functionality, transparency and convenience. So much so, that the customer is willing to change the service provider for better quality service and efficient self serving channels .The expectations of customers from Retail Banking are bound to increase . Some of the long standing paradigms in banking and financial services may need to be revisited.
| Current Paradigms | Emerging Paradigms |
| “Brick and Mortar” presence is core to building trust and confidence | “Click and Mortar” presence .Positive customer experience and excellent service quality builds trust and confidence |
| Multi-channel delivery-interfacing -inconsistent service experience | Omni-channel –integration -consistent service experience |
| Financial services is a serious business and needs direct contact and documentation | Financial services are a virtual product and can be offered remotely |
| E-Banking ( Electronic banking ) | M-Banking ( Mobile banking) |
| “Mass” Banking | “Class” Banking |
| Meeting customer requirements | Assessing and meeting the customer needs through data analytics on real time basis |
| Get the customer to come to the bank (defined channels) for what they need | Be available wherever the customer is |
| Focus on the “stock” of deposit and loan balances | Focus on the “flow” of transactions and payments |
| All products – savings, credit, investments, payment services, should be offered by a single provider | Each provider may choose to effectively focus on certain products and services only |
| Bank Participants | Bank and Non Bank Participants |
| Anytime/Any where banking | Everywhere banking |
It is a challenge for the financial service industry to accelerate their share in Retail banking by adopting customer focused strategies. As predicted by experts ,two of the most omnipresent trends in Retail banking will be 1) the heightened use of customer insight for the delivery of services and an enhanced customer experience, and 2) the continued development of digital channels and associated digital services
1)Heightened use of Customer insight
In the present competitive banking world particularly in retail banking business , enhanced customer experience is more important to retain and increase the share of retail banking business. To offer this , deep customer insight is required and therefore , banks will use various following tools/techniques to assess the same.
Customer Analytics(Big data Analytics),Customer Insight and Customer experiences
According to Capgemini’s 2014 World Retail Banking Report (WRBR), less than 40% of customers globally reported positive customer experiences with their financial institution. With upcoming generations of consumers fully embedded in mobile, digital, and social media as a way of life, interaction expectations are changing. To monetize their growing digital channels, financial service industry will focus on how to use the immense amount of structured data they have about the consumer. With the large amount of computing resources available in the form of Cloud, Mobile Devices, Internet of Things (IoTs) and variety of the data in terms of interactions on social media channels, transactions, Big Data has opportunities for cross selling and understanding customer needs better. The focus moves towards heightened use of richer analytic driven customer insight for the delivery of services and an enhanced customer experience. Banks have to effectively use analytics to enhance customer value and maximize wallet share. Trend will emerge to use of predictive data to drive demand and understand the marketplace in a more timely manner . By using real-time analytics and current customer information, banks will offer new products and services to their customers.
Digital channels and associated digital services
The retail banking future business will be driven by digital delivery channels and associated digital services. It is believed that more customers of traditional banks will move to new and completely digital players if they do not react . The battle for the digital customer will only increase in intensity. The increasing pace of digital adoption will see more innovation from banks in their digital strategy .
Mobile Banking and Mobile payments /commerce
Retail banking products are offered across multiple channels and at multiple places (branch, internet, ATM, Mobile etc). Over the past decade, internet banking has grown to become the preferred method of banking for consumers in most countries, taking both transactions and sales volume from branches and call centers. In future , Mobile banking will capture the retail banking space and will drive the retail banking business in the country with ever changing trends and constant introduction of new technologies. This has emerged as dominant channels for financial interactions beyond the traditional checking of balance, transfer of funds, or paying bills and friends through your phone. It is believed that leading banks will use mobile design strategies as the foundation for all customer touch points, and when expansion of capabilities will provide digital differentiation.The growth of mobile banking in the last couple of years has been exponential with smart phones and data getting cheaper. Mobility is already transforming e-commerce by enabling comparison shopping in stores and delivery of personalized offers based on shoppers’ location and preferences. In India, there are 881 million mobile subscriptions,450 million bank accounts and only 67 million mobile connections are linked to bank accounts and an even smaller percent of that are active users. The mobile banking transactions has gone up from 95 million to 172 million during 2014-15.
Mobile Banking Transactions
The rapid growth of mobile usage , combined with advancement of technology and facilitative regulation for expanding the reach of financial services have created tremendous opportunity for transformational innovation through mobile and agent networks to reach out to underserved customers, introduce new products, deepen customer relationships, explore new sources of revenue, rationalise costs and most importantly digitize the economy.
Social Media Banking
Social media is becoming an increasingly an important mode of communication and influence. New capabilities are allowing customers to access banking services through Facebook, Twitter , enabling person-to-person lending schemes, with the bank acting as custodian and permitting banks to take social networking potential into account when evaluating credit requirement .
Concluding Remarks
Retail Banking in India has fast emerged as one of the major drivers of the overall banking industry and has witnessed enormous growth in the recent past. The next decade in banking will see both evolution and revolution . Advancement in technology continue to transform the lives of retail banking customers and in coming years , seamless customer experience through multi-channel optimization of service delivery will become imperative. There will be shift to anticipate customer expectations as well in advance and offer an interactive and consistent online banking experience coupled with high-quality branch banking service. The number of customers who prefer to perform daily banking activities on an anytime/anywhere basis will be on increasing trend towards banks and banks will be looking for scenarios, options and intelligence to drive more productive businesses and relationships. Given the country’s demography, the bulk of customers in retail banking business in coming years will be from among the upwardly mobile, tech savvy young. To win their attention and as also to improve operational efficiency, there will be a “big push” towards increased digitization, installing state-of–the–art technology and intensification of digital banking features and usage, digital payments, usage of data and analytics to drive engagement and an improved customer experience, competitive disruption, and increased branch/channel rationalization. Banks will also recognize that technology only is not sufficient to singularly drive revenue growth and real customer engagement . In today’s retail banking world , growth , customer loyalty ,cost , disruptive new technologies and risk are challenges and banks will focus more on these challenges to manage simultaneously. Lastly ,Mobile banking will be the very face of banking in future .Mobile banking will outpace net banking because of the spread of smart phones and the cheque book will not find too many fans . Cheque books may soon become redundant and “cheque” will “check out”. Mobile will drive the retail banking business .In sum , in a volatile and uncertain world , customers need a sense of permanency and security and hence the opportunities for banks remain bright if they keep pace with the dynamic environment ,adopt quickly the emerging trends in retail banking and adjust themselves to the digital banking paradigm to offer the experience of “Lifestyle Banking” to the customers , by integrating the banking services seamlessly in to customer’s lives.
References
- What, Why and How of Retail (Mass) Banking: Issues and Challenges (Inaugural address by Dr. K. C. Chakrabarty, Deputy Governor, Reserve Bank of India at the Bank CEOs Roundtable organised by CAFRAL in Udaipur on October 2, 2013)
- CAFRAL – Mobile and Agency Banking Round Table – October 17-18, 2014 Hyderabad, India
- Top 10 Retail Banking Trends and predictions for 2015-The Financial Brand dated December 2015
- Omni-Channel Banking , A win-win Proposition –Anjani Kumar , Infosys , 2014
- RBI – Handbook of Statistics on Indian Economy
About the Author
M.Ramamoorthy
BE( Mechanical), CAIIB , MBA ( Banking &Finance ) , F.I.V Senior Manager ( Faculty)
Union Bank of India ,Staff College , Bannerghatta Road, Bangalore-560083
9739638517 | [email protected]