A New Era of Banking: Digital-Only Banks
Among other provisions of the monetary policy 2022/23, I found the central bank’s one particular provision very open and futuristic. Clause 125 of the monetary policy mentions a point about establishing Digital-Only Banks, also popularly known as Neo Banks or Challenger Banks with no legacy of branch distribution.
Even in India digital banking licenses are not yet open but a new wave of neo banks is collaborating with legacy banks and acting as one of the most effective distribution channels. In this context, Nepal moving in that direction is really welcoming.
This is the need of the hour. Those who only believe in legacy banking never buy this and I have had good and interesting interactions quite a few times with those legacy believers. But I strongly believe that almost all existing footprints-based distribution, especially in the retail segment will be swept away in 10 years. I think a maximum of 10 years because it can happen way ahead. Yes, the product development part might still be there with legacy banks but distribution will be completely different and legacy banks can never compete with digital-only banks. So the best way forward is to pass on the baton to new digital-only banks. If the current legacy banks do not invest massively in alternate distribution channels through separate entities, they will surely land in the state of Nokia. Just a matter of time. Trust this.
Why Separate Entities?
Very simple, the reason is that legacy banks do not drive the level and intensity of change that is required. The current structure with legacy banks can never support complete digital banking for thousands of reasons. One has to completely think and start from scratch. Only if we can think from the first principle design approach which involves forgetting the past completely and building the system with a future mindset.
Why 10 years?
The first reason is obviously the pace of technological innovation and advancement that we have already seen. The second is that in 10 years, the oldest millennials will turn 50 and Gen Z will turn 35, the largest demographic in the world. By then a maximum of the world’s wealth will shift to this set of people and they will want a frictionless experience through digital-only platforms.
The Way Forward
I think that the way forward for legacy banks is to think about the future and start working from today. The current digital banking concept is limited to an understanding that customers should be allowed to do transactions through mobile applications. However, the focal point should be providing frictionless customer service through digital platforms at each interaction.
For all good reasons, to establish a digital-only distribution system, every bank must have its own technology. Yes, it comes with a lot of challenges as bankers might think that technology is not their cup of tea. They might as well think that they are not developers or programmers, only fine bankers with soft skills. But future bankers are those who can provide frictionless customer experience with digital-only platforms and as such future bankers are engineers and coders for sure. So the question is, do you have such people in your bank? Or have you started to hire those people or are you completely relying on outsourcing? If you are outsourcing only, you are not outsourcing the support function, you are outsourcing the most important function on which your survivability depends in the long run. While outsourcing is good but you still need to keep the key to your vault with you. This should not be outsourced.
The State of Digital-Only Banks in India
Neo banking or digital-only banking is evolving in India despite the lack of licensing regulation. Neo banking is a completely digital bank with no branches. Currently, digital-only banks in India are collaborating with legacy banks and acting as distribution channels but the interesting thing is, that they offer legacy banking products with added services.
Some of the neo banks are catering to SMEs, while some are specializing in payroll management and some in tailored insurance products. There are 16 Neo Banks in India and the major players are Niyo, Razorpay and Open among others. They expect their transaction value to reach USD 48 billion by the end of 2022 and expected growth is 21%.
When neo banks offer payroll solutions, they not only offer debits and credits but also a lot of other solutions like loan management, financial management, payables and receivables, invoice generation, etcetera. Open has come up with solutions for startups and SMEs, and they offer among others, expense management tools, bookkeeping, startup credit card, developer-friendly APIs, International payments, etcetera.
These solutions are available through digital platforms only. So we can understand where it is heading. Also, the Reserve Bank of India is preparing to allow complete digital banking licenses and we can imagine how this is going to disrupt the industry when they can have their own products and take deposits as well as provide loans. This should be an eye-opening factor for legacy banks to act upon.
Conclusion
To conclude, change is the only way forward. When your central bank thinks ahead of you, what do you want? I think that the central bank should come up with separate regulations for digital-only banks. We must move towards this road sooner. Sooner the better.
