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Beware of the undercurrent!

There are many forces, visible & invisible, that is guiding & shaping the significant transformations happening in the Indian banking marketplace. Some of them are like big waves, the force & strength are visible enough for everyone to look out & notice but a few are only like undercurrents, miss them & you can lose your footing! Truly speaking it is this set of undercurrent forces that should worry this industry the most.

To drive home the point, let us consider the 3 forces that I feel stands out as of today:

  1. Gen Y and their digital ecosystem
  2. Technological innovations creating new opportunities
  3. Blurring of the border between banking & shadow financing

The force1 (if I may call it!), is like a big wave. The change in customer demography, primarily in shape of decreasing median age of customer and digital shaping their ecosystem, is now well understood. Though how to go about it and what do about it is still probably not so clearly understood even today. We will touch upon this in more details in my next article.

Force2 is actually turning upside down the normal ways of organizational strategy building. Typically organizations will evaluate their performance and the market at the end of quarter 3 and start planning for the next year, setting the business strategy, goals & objectives and then laying down the more detailed plan of changes/ transformations in structure, people, process & policies along with the technology that needs to be brought in to support the shift. But technology innovations have brought in opportunities (or challenges) that banks may need to do reverse thinking to see how best to leverage these opportunities and how it opens up new frontiers. Examples are galore but you have to wait a little for that.

The force3 is the undercurrent that is slowly but surely surfacing now as far as Indian banking is considered. We had known of examples of the like of lendingclub.com of UK who provides peer2peer lending (P2P) outside the banking environment and have been successful as well. Coming back to India, RBI has recently released a discussion paper on P2P financing. Now a lot depends on how that shapes up but for banks it means a transformative impact on its competitive landscape. What it was earlier between public & private banks and maybe between banks and a few strong NBFCs (nobody much worried on the MFI as banks were hardly interested in that segment), now is laid bare open to anyone who can provide such services e.g. lending between peers taking away the intermediary ‘the bank’. It does not mean that banks will have an immediate challenge, they will have time to react but they have to sit up & notice that the border guarding there ecosystem is slowly becoming more soft & invisible. From a decade perspective, I will be worried more on this front. The same restrictive regulation is ready to make a few experiments, courtesy technology innovations that are making things simpler.

Now apply the potential of blockchain technology to a P2P financing ecosystem! What does the bank do as an intermediary? Other than bringing in the pooling effect, it provides a trust. Now blockchain technology is supposedly able to provide that without an external intermediary and is based on distributed trust system. The immediate impact is that the ‘cost of intermediation’ will come down significantly and this makes the financial system more efficient. What it will also do additionally is that will also crush the TAT (turnaround time) for the business process. So it does open up a lot more possibilities & opportunities but for time being banks has a breather. The RBI whitepaper indicates that the P2P platform may not be allowed to do the actual monetary transaction. But the breather will be short….It does not need a great IQ to understand that this is just a start, one step forward and it is up to the banks whether to plan with finishing line in sight or just want to play catch up all the time!

PS: There are already Indian fintech players who are actively looking at this potential of blockchain in P2P financing ecosystem.

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