Honey I shrunk your bank branch

[Photograph: Mobile payment terminal, in Fornebu, Norway by HLundgaard under Creative Commons]

The future has a way of arriving unannounced - George Will

If you work in a bank, you should probably read this.

Banks are in grave danger.

Especially so in India. A 4x5-inch screen is going to eat your business. Or at least most of it. If you don’t move. Now. 

Except for a couple of big banks, most of you seem to be sitting at ease, waiting for this tsunami to hit.

Everything looks fine today. Your stock price is rising. You have millions of accounts, thousands of ATMs and more employees than even you can count. Every corner has a hoarding with your smiling brand ambassadors exhorting me to buy a new car or a new home. And your TV ads showcase how your bank is changing people’s lives and bringing happiness to millions. Your balance sheets are large and growing. Profits are rolling. Of course, I speak of the banks that haven’t given loans to celebrity CEOs (especially the ones who handpick their charming employees).

But the walls that protect you are being taken out brick by brick. Millions are being poured into businesses that are aiming to be quicker and better at serving the financial needs of customers.

And rightfully so. Once venture capitalists (VCs) have overcome their fascination with pouring billions into ecommerce players who want to deliver mouthwash to my house in Mumbai all the way from Bhiwandi on the outskirts of the city, even though my bania is just round the corner, their next attack will be on the bedrock of all these markets, the lubricant for all transactions, the business that you are in. The business of money. 

The challengers are coming

A VC-funded wallet founder claims he’s got a 100 million users. A leading telco, armed with a payment bank licence, is talking about 300 million active users. Whereas most banks have less than 5 million downloads on their own mobile app. Even more unbelievable, some banks are still investing in bricks and mortar branches and ATMs in tier 1 and 2 markets.

In every part of the world, there is a bunch of 25-year-olds working on disrupting your archaic business model and cost structure. They know that banks make too much profits compared to the real value they add. They make money on the float, on the fees—it’s a lucrative business. It is ripe for disruption. 

And these new babies won’t have the drag of regulations. You’ve been sheltered for so many years, now you have to pay the price. And even the regulator believes that the rent you charge and the profits you make from other people’s money is too much. Slowly but surely, RBI is opening the door to the big bad world of competition and saying “Let the best man win”.

Before you know it, millions of customers will move their transactions to the challengers. 

Most bankers don’t realise that the moat around them is getting filled. Fast. And the challengers have nuclear-grade weapons. 

It’s time to smell the coffee. Times have changed. 

You opened the door

You opened the door to them—you stood by when credit card usage went down due to two-factor authentication in 2009; you looked the other way when cash on delivery (COD) drove 80% of ecommerce transactions—you were the mighty bank, how did a few transactions matter, right?

I wonder how many of you could have stood together and lobbied at RBI to do away with authentication for sub Rs 2,000 transactions. I wonder how much fraud-risk did we really face—you could have used location, SMS, and many other features to ensure against it. Lubricating the payments ecosystem was your responsibility, not RBI’s.

It was your job to assess the trade-off between fraud-risk and convenience. Today, you’ve got to win back the consumer who is hankering for convenience. It’s his money, yet why is it so difficult for him to spend it?

The fee economy is vanishing. Zero-fee banking is coming. And coming fast. Whereas you are wasting time negotiating with RBI on how to charge me for accessing my own money at the ATM. 

Don’t be like the telcos who’ve squandered away their mega customer bases and have done so little to enable payments on smartphones. Spectrum to them is like bank licences to you. Everyone loves their moat, don’t they?

Smell the coffee

Even the poorest can afford a second-hand smartphone. There. That’s your branch, right there in a mobile. Your branch has just shrunk to a 4x5-inch screen. It can talk, it can interact, it can speak any language. It can do pretty much everything your physical branch can.  

If you add in Aadhar verification and digital signature into your app, it can do more than even your branch can. People can create their virtual and secure identities on your platform; you can become my single-point locker for everything.

Realise that each of your consumers has a computing device that’s more powerful than most PCs in your branches. You can help them do more – you just need to open your mind.

More changes round the corner

While RBI is handing out more licences, the fact is that the number of banks needs to shrink. With technology each bank employee can handle 100x the transactions and there is no need to have so many banks and branches. Consolidation is inevitable, whether our regulators like it or not.

It’s even worse if you are a small or regional bank—you need to be “acquirable”. Geographical reach or community banking as a differentiator will not help you survive. Your geographic footprint is now a disadvantage. Do you want to be the winner or the vanquished? And if you are not a technology-led bank, then no one will even acquire you. They’ll bypass you and get your customers, and you will be left to die. Slowly. (Someone should ask the government, why recapitalise the ailing banks? Just merge them and kill the overheads. These banks won’t be able to afford them in a few years anyway.)

Banks have utterly failed at getting the credit and debit card economy going. The race is on for the mobile economy—don’t miss it. Your nice little profits will evaporate, and with them your future. 

You are not a bank anymore

Ten years from now when you look back you will marvel at the amount of bricks and mortar you had created.

In hindsight you’ll realise that at the core a bank is nothing but a glorified and secure data centre, supported by people and process—applying their rules and risk-management processes which haven’t changed much for the last 100 years. Despite all the governance, the biggest problems banks have faced is when they have let human beings apply discretion, whether they did CDOs (collateralized debt obligations), or Libor fixing or the rogue-trader bets that hurt them every few years. 

If you think about it, your secure data centre is actually better off running with algorithms. Over 99% of the transactions on your systems don’t need human intervention. Computers don't make discretionary calls, don't give bad loans. Banks will eventually direct their people to run the front-end of the business—where it matters—facing consumers.

And most consumers won't need this servicing. Customers now want to be able to do thing themselves; they only want a simple interface to manage and monitor their money. 

Here’s how a consumer sees you: You are simply a secure storehouse for my transactions. That’s it. You trade in bits and bytes of information about me. I don’t want to do anything more with you. I don’t have to see you, meet you, or touch you. Your existence is now limited to my phone screen and your job is to be the least intrusive layer between me and my money. You are here to do my bidding. I should be able to visualise it; I should be able to literally “swipe” it. I should have full control over it, like I do over my Candy Crush. 

Banking is not a services business anymore. It’s time that you thought of yourselves as product companies with sliced-up micro-SKUs (stock keeping units). Easy to interpret and easy to enable.  

And there is no excuse. We’ve all seen the smartphone revolution coming for over five years now. These ideas need to come off the PowerPoints in board meetings into every single element of your business. Bank CEOs have no excuses if they fail in the mobile payment economy. 

Changing the viewpoint

The heart of the problem is that banks internally work in ossified silos. 

I am not a credit card customer, nor a debit card one, nor a savings bank customer. Oh, you called me a home loan customer. Wait, you labelled me as a private banking customer. Customers don’t want to deal with your internal divisions. I am simply a customer, ready to buy one of your products.

Incentives in banks are not aligned. The credit card team does not talk to the debit card team does not talk to the home loan team does not talk to the savings bank team does not talk to assurance team does not talk to the mutual fund team does not talk to….

Remove your silos and think of me as one. 

Imagine the opportunity if your bank were to become the single mobile window for every transaction. Your bank presently captures commissions on only a fraction of what your consumer spends. 

But each and every transaction can become a commission-earning transaction. A 100% cashless system will ensure that a 100% of transactions with merchants will earn commissions for you. You can make billions in commission income by enabling frictionless and low value transactions compared to all the financial engineering you do to earn that sliver of net interest margin and juggling with arbitrage in your treasuries.

How to do it? 

First, see where you stand. Download your bank app on your phone. If it takes more than 20 seconds for your existing customer to get on-boarded, you are in trouble. 

Second, ask your entire team to go cashless for a month. That’s how every 25-year-old is going to be in the next two years, like it or not.

Rethink your entire strategy around the branch-on-the-phone. Create a vernacular voice-enabled system. Create apps in languages. Run TV ads which educate the illiterate. Make sure that you can enable every purchase at a small kirana shop. You can transform India. Your next 100 million customers are just a smartphone screen away—backed by the same servers, the same team, the same systems. You need to believe in it. Your leverage is infinite. 

Make your interface intuitive. Even today when I pay on an app, most netbanking pages are NOT designed for mobile usage. Why? Does your team have any explanation? (You know which bank I am talking about.) And hey, it won’t hurt to integrate a web-chat client in case I am getting stuck in a transaction—I will be happy to be redirected by a bank-robot than just be stranded and helpless.  

Personalise. Personalise. Personalise. You have a track of what kind of transactions I’ve carried out in my last 100 visits to your website. But you still treat me like a newbie. It’s like starting a new relationship each time.

Not a second has been spent on thinking through what a consumer wants to accomplish. In fact, personalisation may actually reduce the load on your systems. A little extra cost upfront in development of a personalised screen for me, behind which all your 200-odd service offerings can stay. Also while you are at it, try and hire a global designer who will ensure that I don’t struggle with your little off-placed buttons each time I transact. I am assuming that you won’t need a committee to be set up to approve their hiring. Even your ATM vendor has personalised his dinosauric machine and it remembers my favourite withdrawal amount.

Banks don’t even need to launch wallets; they already have everything they need—my money, my identity and my account. The mobile has to become a seamless extension of your branch. Just mobile-enable my debit card as a first step. It’s that S.I.M.P.L.E. 

The good news

It’s not too late—you have the brand, you have the customers, you know their language and you have the people. You can re-train them—and embrace the digital age. Arm every employee with technology so they can service thousands of customers. Aim to improve your customer per employee ratio by 10x first and then 100x.

I hear that one of your brethren is doing huge advertising and paying merchants to adopt their wallets to acquire new customers. You don't need to do that. Just do a marvellous job with your current customers and the word will spread. Most “bribed” wallet customers never transact again. Most wallet players have less than 20% active wallets, and have balances of less than Rs 150. Don’t get carried away by the hype. 

And you will do a world of good by creating a cashless economy. Brokers hated it when India moved from those little green forms to the most demat-ed and sophisticated stock market in the world. Similarly, politicians and some bureaucrats hate Aadhar and its potential for transparency and they will hate the economy going cashless. But you, sir, can drive this change in three years.

A cashless India is a black-money-free India. Imagine getting all the black money participating in our economy—you alone can drive an extra point of GDP growth every year, if not more.

And what if you decide to make even gold fungible and electronic? You will herald the acche din before Narendra Modi can say Swacch Bharat. 

Two points finally: as I was writing this, I saw a conversation on my Twitter feed between two young men, already dreaming of a day when they can simply chat with their bank and give instructions over a messenger app. It’s all doable, right here, right now. Just get in some sharp engineers and they’ll write you a NLP (natural language processing) bot—and you can make this happen in weeks.

Then there is another tsunami coming in the next few years. It’s called Bitcoin.

In simple terms, it can do what Napster and Torrent did to music and video piracy, except with the exact opposite effect. They were designed to remove traceability; Bitcoin will make it completely secure and traceable. Bitcoin doesn’t need the banks. Banks need Bitcoin. Risk management as we knew it will change. Currently the bank has a role as a counter-party in most transactions. That will go away. Transactions will get squared off without ever hitting your systems. So you can join the revolution or be swept by it. Maybe I am oversimplifying it—one leg of your business is to manage risk, the other liquidity and third return. Liquidity is going to change with customers’ control over their money and risk will change with Bitcoin, leaving you to hunt for return.

As I sign off, I see your margins slipping as fixed-fee remittances, direct-to-consumer mutual funds and insurance comparison sites start weaning away your customers. You simply can’t afford to lose this battle. Get going now. It’s all fix-able, and you can become the single-stop-shop for me. Yes, your returns may drop, but again imagine: all these consumers paying fees on each transaction. That’s a lottery, sir.

So go off on a retreat, take your whole team, strip them of their designations and labels and come back as a new-bank.

You have a few years to shift the gears, but shouldn’t the mind-set shift happen tonight?

Dar ke aage jeet hai.

PS: You won’t give those big loans to the big, bad corporates anymore, will you?