Digital Banking in Digital India

Sudhakar Ramasubramanian

CEO – Wealth & Online Business, Aditya Birla Financial Services Ltd.

MD – Aditya Birla Money Ltd

18 April 2016
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 Large & growing base of online/mobile users with rapid adoption of
financial services digitally
Largest Millennial population(1) (# mn) 2nd largest Internet user base*, with 60% And fastest growing Internet user base (2014
mobile internet users (# mn) (2) additions - # mn)(3)
USA 77
USA ~280 USA 12
China 328 India Expected to ~340
double in 4 years China 31

India 340 China ~650 India 73

- 100 200 300 400 - 200 400 600 800 - 10 20 30 40 50 60 70 80

Increasing Penetration of Digital Banking in India

(% of Bank Accounts)(4)
60% 52%
* Based on latest available data . Source : (1) Data on Millennial population from
41% Citi Report on Digital Finance in Asia, (2) Data on internet user population from
40%
the following sources – India –Economic Times article dated, Sep 3, 2015; China –
15% 19% Wall Street Journal article dated Nov 17, 2015; USA – Calculated on the basis of
20% total population and internet penetration for USA in 2014 as per World Bank data.
Mobile internet usage in India from article in Economic Times dated Sep 3, 2015(3)
0% Data on internet user addition based on – China : CNN article dated February
2014 2015E 2020E 2022E 4,2015; USA – calculated based on population and internet penetration data from
World Bank; India – Economic times article dated Sep 3, 2015(4) Data on Digital
banking penetration based on MXV Analysis

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 But we remain a Cash based economy – For Now

Retail banking revenue pool by product category (%) The persistence of cash in consumer transactions
100 98 96 94
2 90
16 10 86 85
22 21 27
28 Cash as %
12 of Volume
15 52 Investment 65
25 of
59 insurance 55 Consumer
28
48 Payments
59
CASA
72 69 68 Cash as %
63
54 57 of Value of
46 44 47 45 43
31 Loans 38 Consumer
20
Payments
14 14 11

l
esia ndia xico rica hina pan razi ralia US
A UK
I f Ja
d on e
M th A C B
u st
In u A
S o

Source: McKinsey’s “Building a digital banking business” Source: PWC’s “Disrupting cash: Accelerating electronic payments in India”

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 An under-served nation and with low financial inclusion

 In 2015, with the Financial Inclusion Plan, 390,387 villages were covered with 14,207 branches

 The number of ATMs per million population expected to increase to about 300 in 2017 from 105 in 2012

 41% of Indian population remains unbanked

• 40% remains unbanked in urban areas
• 61% remains unbanked in rural areas

 Only 14% of adult population have loan accounts

• 9.5% in rural areas
• 14% in urban areas

260 million households in India

• 70% households in rural areas
– 73% have no access to formal sources of credit

Share of non-institutional rural credit is as high as 44%, out of which moneylenders account for 34%

Source: Bank of India’s “Financial Inclusion” & RBI

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 Traditional Banking all the way

 Branch banking is more expensive than Digital, but is considered the “Core Channel”

 Digital is easier to scale and cost effective, but remains an “alternate channel” for most Banks

 Limited innovation till date to bring down cost of transactions by Banks

 We remain a country that transacts on cheques for free while paying for NEFT / RTGS

 New age payment mechanisms and digital only businesses have grown far faster than traditional
Banks

 But many of our Banks are yet to go digital

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 India is Changing

 Demographic dividend is likely to create a large digital savvy customer segment

• India’s demographic dividend well suited to switch to digital behavior
• Median age to be 29 years by 2020, with 900 million in the age group of 15-60 years by 2025

 Un-penetrated or financially excluded, along with GoI initiatives, offer natural growth opportunities
• 50% of unbanked population aggressively targeted to be brought under the Banking umbrella
• ~200 million accounts opened under PMJDY
• Rs 50,000 Crores targeted to be transferred under DBT

 Increasing mobile penetration and smartphone usage

• 1 billion mobile subscriber base (42% in Rural), with a tele-density of 79 (Rural - 48.6 & Urban - 148)
• Mobile penetration of 90% to drive financial literacy & inclusion, as players bet on mobile-based financial services
• Smartphone proliferation of 50% by 2020 & falling handset costs to increase acceptance, better servicing & security

 Consumer behavior is changing towards rapid adoption of digitization

• Markets exposed to innovative & disruptive digital-based services (e-commerce players and e-governance services)
• Changing client preferences to move from pricing (discounts) to convenience and service

Source: KPMG’s “Role of digital banking in furthering financial inclusion”

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 Emerging paradigms that will get stronger over next 5 years

Current Paradigms Emerging Paradigms

Deposits business… Payments service… deposit is a
Offer payments for free by-product that follows

Financing is a serious activity needing Financing is invisible service,

engagement and paperwork available on tap, on the spot

Digital Channels are alternate, Branches are alternate,

Branches are core for specialized roles only

Customer decides to buy something, then we Prompt customer what to buy;

help him/her pay, finance it be “shopping window”

Face to Face for rich discussion; electronic media Richer discussion with
for transactional interactions digital channel possible

Source: BCG analysis “Productivity in Indian Banking 2014- Digital Banking”

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 Globally, Banks are making the efforts
Some of the digital trends observed globally to cater to ever-changing business dynamics and customer preferences are:
• Banks have increased capital expenditure on social, mobile, analytics and cloud (SMAC) technologies
• Banks are looking at phasing out legacy systems that are not agile but ensuring that core banking systems are not impacted
• Big data technology capability is being nurtured and boosted to successfully tap large customer data
• Investments in analytics is a focus area for most Banks as it allows a deep understanding of customer behavior, improves
fraud and risk management capabilities, ensures greater compliance and enhances productivity

Global players have adopted varied direct Banking Channels to better serve clients and gain competitive edge
ING Direct First Direct RaboDirect
ING Direct is a Branchless Direct Bank with First Direct is a telephone and internet based RaboDirect Digital Bank offering by Rabobank
operations in over 40 countries. It offers retail bank part of HSBC Bank. Direct bank in Europe and Australia
services over web, phone, ATM and by mall has operations in UK and Scotland

Orange Everyday Banking- Free ATM usage, Text message based banking Savings product- Range of products to suit
cash back, zero monthly fee, etc different saving needs
First Directory- Additional services that can
payWave- Quick & convenient way for be added to current account holders service Financial Health Barometer - Targeted at
payments by just waving card in front of for insurance, loans, broking, etc Gen Y, promoting investment products
payWave reader through social media

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 And, many others too trying out different features within their Core-
Banking platform
Personal Financial Management Online Cheque Deposit Secure Chat and Messaging, E-mail
alerts, single sign-on, multi-lingual
(Eg- My Money Map from Wells (Eg- Services from Bank of America support
Fargo) & Citibank)

E-vault Services Online Advice Tools Peer-to-Peer Fund Transfer

(Eg- Wells Fargo’s vSafe service) (Eg- Barclaycard’s “My Money (Eg- Services from Bank of America,
Steps”, NAB’s “Online Assistant”) Wells Fargo)

Online Tools E-Transfers and Electronic Bill Personalization

Payments
(Eg- Bank of America Home Loan’s (Eg- BBVA)
“online home loan guide”) (Eg- Wells Fargo)

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 But still remain disrupted by Non-Bank players
Global Players
Apple Pay  Allows fast, contactless payment through one touch to pay with Touch ID
 Provides increased security from tokenisation and fingerprint authentication technology

   

Samsung Paypal  Enables wireless payments through wearable devices e.g. Samsung SmartWatch
 Allows immediate, contactless payments to be made with enhanced security e.g.
fingerprint authentication technology

   

Alipay  Alibaba’s Ant Financial in China grew into a $20bn business in 2 years; illustrating the
value of bank/e-commerce union
 Alipay now accounts for 65%* of all digital payments in China

*Source: http://www.nfcworld.com/2016/01/25/341561/alipay-reports-65-share-of-chinas-online-payments-market/”

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 Indian Banks in digital space
HDFC Bank’s “PAYZAPP” HDFC Bank’s “chillr” ICICI Bank’s “pockets”

• Digital payment solution • Money Transfer within contact list • Money Transfer
• Buy movie tickets, music and groceries • Request Money and Bill sharing with • Request Money and Bill sharing with
• Travel Bookings friends friends
• Online Shopping • Utility Bills • Utility Bills
• Money Transfer within contact list • Pay at Online or Offline Stores • Buy movie tickets, music and groceries
• Utility Bills • Shop online
• Gift physical/e-vouchers

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 Cash has to go

 Multiple studies show that more transactions through Banking System leads to more savings by
the customers. Cash in hand loses value and reduces savings

 The more the money in the bank, the more the transactions

 The more the banking system usage, the more the trail of money

 Traditional payment and remittances are time consuming and inconvenient

We have moved from Barter to Cash many centuries ago….

Its time to move from Cash to Digital Payments!

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 And costs should come down substantially

Cost per transaction in banking (Rs)

50

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4 1.5
Branch ATM Internet Mobile Source: Deloitte’s “Telecom: Enabling growth and serving the masses”

Required Upfront Capex (USD mn) IT Opex & Depreciation (USD mn)
100
18 Opex Depreciation

5
22
15
25-45
Traditional Digital Traditional Digital
Source: McKinsey’s “Building a digital banking business”

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 Plethora of Policy Changes favoring Inclusion and Innovation

 Payment and Small Service Bank Licenses

Opening the way for innovation in the Banking space

 Aadhar enabled Bank KYC

With over 1 billion Aadhar cards, KYC becomes simple

 KYC Central Agency for Data Sharing

Any Bank KYC can be used for opening new Bank accounts

 Unified Payments Interface

Aims to leverage over 900 million mobile phones in India for easy transactions
Takes network effect to the next level

 RuPay Debit Cards

Low cost transaction handling with our own clearance mechanism

 DBT through Bank Accounts

To lead to significant financial inclusion by adding balances to PMJDY accounts

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Industry should respond with “Customer inwards”
and not “Product outwards”

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 Amazonizing Finance - Case Study: MyUniverse Mutual Fund
Platform
Within 10 months of launch (Feb. 2015), ZipSIP is the 7 th largest MF SIP distributor in India, getting 3% market share

Product Overview : One-Click Paperless Execution of SIPs

Risk profile Customized portfolio One-click execution

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 What the customer wants

 Money Demystified
 Trust and Security
 Convenience and Simplicity
 Ubiquity and Safety
 Seamlessness across all interfaces
 On-Demand Service
 “At the moment” usability
 Service “my need first” not “yours”

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 Future is Bright

Indian households by income distribution (mn) No. of mobile subscribers (mn)

290 million Household
households income 1200
221 million Rs'000 per
households 18 annum
20 1000
4 50
6 >1000
22
500- 584
75 120 1000
200-500

114 90-200 166

82
<90

2010 2020 F 2007 2010 2016 E 2020 F

Source: FICCI’s ”Indian Banking 2020”

• Increase in household income will lead to increased savings and hence the need for Banking services

• Banking services will be offered via digital platform, as both, mobile subscriber base as well as internet
penetration will increase substantially
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 Smartphones to become primary banking channel in 5 years
No. of smartphones to equal active bank accounts by FY20 (figs in mn)
Smartphone as a % of bankable population- 70%
700
625 629
600 577
525 550
500 477 467
434
400 388 389 387 364 386
343 332
304 291
300 243
224
195
200 162
100
0
FY14 FY15 FY16 FY17 FY18 FY19 FY20

No. of non-smartphone users No. of smartphone users No. of active bank accounts
*Bankable population is population with age > 18 years

Source: BCG analysis “Productivity in Indian Banking 2014- Digital Banking”

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Banking is needed by all but the Banks are not!

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THANK YOU

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