Future themes for banking in emerging Indian economy

Reported by: |Updated: February 20, 2018

A.R. Akhileshwaran

India’s banking industry is registering a high growth trajectory owing to the improved economic fundamentals, which is a combined result of government reforms, investments and sound policy decisions. Indian households are finally starting to save like the rest of the world by putting a bigger share of their savings into financial assets, rather than old favorites like land and gold. The share of financial instruments rose to 34.4% in 2015-16 from 31.3% in 2014-15 of gross savings in the economy.

Demonetization further catalyzed this trend and mutual funds grew by an astounding 155% for the year 2016-17, making it the highest contributory factor for increased savings in financial assets. The government initiatives around Jan-Dhan Yojana, DBT, less cash and enhanced digital proliferation too will channel more money into the formal financial sector.


Only a small fraction of India’s population (less than 20%) is well banked with access for regular and credit needs. A large part of the low-ticket size lending for consumers and micro business segments comes from consumer lending, microfinance institutions, non-banking finance companies, credit societies etc, which have helped establish credit culture, and also taken out predatory local lenders.

Microfinance institutions have built robust last mile distribution network and brought in practices such as self-help groups (SHG) which have significantly enhanced customer intimacy which a large or formal banking system cannot offer. MFIs do not generate any deposits of their own as their business model is heavily dependent on sound credit management. For making lending decisions, they are or soon will be heavily reliant on insights from advanced analytics from various sources.

The new payments banks are bringing in another shift. These are not universal banks as they cannot offer credit but only make income from payments services. However, the payments banks need to scale their distribution and strengthen customer relationship and must invent a differentiated business model like the fintechs to survive in the highly competitive market.


As we ponder over the competitiveness of payment banks and small finance banks, we need to reflect on moats and what should be the differentiating strategy for these early entrants. The term moat – popularized by Warren Buffet – refers to a business’s ability to maintain competitive advantages over its competitors in order to protect its long-term profits and market share from competing firms. As we approach a highly competitive market in India, traditional moats are disappearing, and new ones are being created. One of the most enduring source of a moat is the brand that companies develop and nurture. Once fully developed, a new entrant cannot eat into a brand’s sales easily. Moats are defined by one of the many characteristics listed below

Superior technology: This relies on the company’s technological superiority to drive revenues and fortunes. Well-known examples include Microsoft Windows who have captured so large a market share in PCs worldwide, that they keep clocking revenue by regularly offering fixes and upgrades that customers usually have no option other than to buy.

Network: The value of the system increases more, with the increasing number of people using the service.  One of the good examples is Tripadvisor. Checking reviews on Tripadvisor.com is increasingly becoming common among internet-savvy travelers in India. The better the rating and the reviews about a hotel, the greater the confidence for potential guests. TripAdvisor has thus developed a service that has only limited competition.

High switching costs: Sometimes a product becomes so mainstream that it’s very difficult to adapt to a new system, even at a lower price. Such products are said to have a high switching cost. Eg a frequent stayer program offered by Starwood

Low costs: Companies that offer products and services at prices that competitors cannot match. A number of India’s pharma companies are amongst the lowest-cost producers of drugs in the world.

High entry barriers: There is a set of companies that operate in industries with high entry barriers, in some cases enabled by government. Coal India and ONGC are the largest coal miner and oil-exploration companies in the country by virtue of regulation.

Amazon’s moat has widened because of an extreme focus on customer service and satisfaction to the point that it influences the company’s business model. It allowed third parties to sell their own goods on its marketplace (Amazon.com), which puts these sellers in direct competition with Amazon’s own inventory. This worked out extremely well for customers and what followed was a growing revenue stream for both the third-party sellers and Amazon, which clips off a commission for each sale. Following the success of the marketplace, Amazon also gave competitors access to its cloud computing infrastructure, its call centers, warehouses, and very soon, competitors will be using excess space on Amazon’s trucks and planes. Basically, Amazon has turned its largest cost centers – cloud computing, warehousing, and shipping – into sources of revenue.


This is not just a brilliant strategy, it’s also one that is extremely difficult for competitors to replicate.

Competitors will struggle offering third party services because they lack the customer-oriented culture and experience in selling excess capacity like Amazon. A key factor is that Amazon keeps itself lean and mean by marketing ITS services (and in turn expenses) to third parties. This avoids various divisions getting fat, because now the company has customers to serve in these areas. Bloated costs and overpriced services won’t sell because some competitor will do it cheaper. So, Amazon is forced to stay focused.

 A Bezos Moat is premised on the idea that the customer is willingly and frequently entering into a commercial transaction with the company because the customer is deriving more value from the transaction than he or she is paying for.

A Buffett Moat is where a particular company will be the only one (or one of a few) available in a commercial landscape, so that the customer is, in effect, forced to transact with these companies (i.e. only bridge, only newspaper, only soft drink option).

Way forward in banking

There’s a huge movement on lending-based transaction statement as compared to older ways of looking at collaterals. Lending is changing from uniform pricing to individual pricing of risk based on digital footprints ie data from social media, credit bureau. Using cognitive solutions will dramatically reduce the credit appraisal time to minutes and help banks to develop moats.

Moving from high value low volume transactions to low value high volume transactions will propel financial inclusion through our biometric and digital payment infrastructure. Increased adoption of smartphones and deeper internet penetration in rural and semi urban India is fueling the use of online marketplaces to access products such as personal loans, Aadhaar based authentication, KYC etc. Banks can scale up and acquire more borrowers from across the rural hinterland and lending marketplaces can play a pivotal role in acquiring customers.

Traditional fee-based income will be redundant due to data proliferation. For example, Microsoft sells licenses while Google is free and generates revenue through advertisements when users search for data. Similarly, while banks charge for services to generate fees, fintechs will render services free and use the data generated to make new products or monetize that data. Machine learning algorithms can be used to analyze data and provide customer insights, suggest cross sells/upsells and even create customized products in real time.

On account of MFIs and fintechs taking over the informal low-ticket lending market, interest rates will converge downward. This will propel economic efficiencies and lowering of overall lending rates. A unique advantage of MFIs is the last mile distribution which nobody else can match. Once they become a bank, they can graduate their client from 15-20k to 1-2 lakh capacity. Due to this last mile network, many of the MFI can hope to get acquired by universal banks also.

In the end, who will be the Amazon of Indian banking?

A.R. Akhileshwaran is Partner and Industry leader for Banking Client Innovation Center India, IBM ISA