Digitalization-A Boon Or Bane For The Financial Services
As Banking and Financial Services Sector in India undergo rapid Digitalization, let's take a bird's eye view of where we stand, what Digitalization promises and at what cost.
In the grand schemes of things, our time has been indelibly marked by the digital revolution. This technological step has been nothing less than an evolutionary leap, affecting numerous fields, sectors, and industries, including Finance Services. This has been aptly named the Financial Technology or ‘FinTech’.
A number of start-ups have emerged in this new space, while the traditional players are arming themselves to keep relevant in the ever emerging new market spaces. From Banking to payments, from lending to Personal Finance, Digitalization has not only changed the look of the industry but has created a paradigm shift of the Business Models. Has it been a positive force, or are there unforeseen pitfalls and forces that have not been accounted for?
Digitalization is an essential technology that must be adopted by the banks for one crucial reason—Automation. Financial Services are facing an ever increasing volume of transactions and number of customers. Like all industries, Finance needs a robust model where the quick turnaround time for any Financial Service is quickly becoming the highest priority. The obvious answer to this rapid scaling is Automation through Digitalization.
However, the Financial Digitalization movement hasn't been without its critics and has faced at best, mixed responses from various Industry stakeholders. Broadly, there are three quantifiable criticisms that seem to have some merit. They are -
In the traditional financial sector, where there exist more than a hundred Banks and over a thousand NBFCs, the conventional players are struggling to catch up with the evolving trends. Disruptive digital technologies are paving the way to quick, automated processes that are leaving the traditional financial sector behind.
2. Regulatory Oversight
The technology enabled Disruptors in the financial industry do not face the similar level of regulations that their traditional counterparts do. This indeed provides them with a slight edge, but the disruptors already face myriads of other obstacles, the most prominent of which is the strong relationship of customers to their existing Brick-&-Mortar Banking institutions.
3. Incomplete Digital Penetration in Tier-2 and Tier-3 cities
In India, despite the prominence of the digital movement, we still lag behind when it comes to the infrastructure. Digitalization of Financial Services needs a parallel development in infrastructure to achieve the envisioned goals. For example, in India, the total number of internet users were predicted to reach over 400 mils by the year 2015. That was about 33% of the total population of the country. Two-third of the national population, remained as the untapped market due to lack of infrastructure.
There are marked indicators that point to a definite shift in trends. Following are some of the interesting trends and I am hopeful will result in some exciting opportunities.
a. Evolving the Consumer Behavior towards Digitalization
The disruptive digital services in the Indian market is gradually but definitely changing client preference from traditional banking to its digitalized ones. The Indian demographic is ideally suited to make the digital switch, as the median age of an Indian citizen is expected to reach 29 years by the end of 2020. And by the year 2025, over 900 million people from the population will make the age group of 15-60 years. People have already actively started adopting digital technology for banking transactions, the idea of more Financial Services such as Digital Loan Disbursements is set to become popular soon.
b. The Untapped Areas and Government Initiatives
Today close to 50% of the non-banked population is targeted. Government Initiatives such as Pradhan Mantri Jan Dhan Yojna (PMJDY) is helping improve the financial inclusion. This has favorably played with the Digitalization of the Financial Services, providing banks with both a tremendous technological infrastructure to cater the increasing volumes as well as access to fresh, previously untapped market.
c. Leveraging the Smartphone surge and Mobile penetration
Mobile phones, especially Smartphones are the tip of the spearhead in driving digital growth in India.
The expanding reach of the smartphones in India will provide a low-cost medium to disrupt the market and in turn extend the reach of banking and financial services. We must leverage this part of the technology as much as possible.
Path Ahead – The Silver Lining
The formal financial institutions will sooner or later, come to terms with the Digital boom in India. Digitalization is the way forward, not only for the new, technologically enabled businesses but for traditional financial institutions as well.
There is a huge potential of digital financial services in our country, but there is also a need for the industry stakeholders to take a holistic approach when attempting Digitalization. Digital is not a temporary fad, but a Paradigm shift in how business models and strategy is molded. The aim is to create a remarkable customer experience. And Digitalization might be the answer we seek.
Vipul has 14+ yrs of P&L, product & sales management experience at ICICI Prudential Life Insurance, Citibank, HDFC Bank & Indusind Bank. Previously, Product Head – Loan Against Property at IndusInd Bank & part of Management team at Bankbazaar - Built and led high ROA teams.