2016 is a crucial year of this decade as it will decide the pace of development for India Inc. It will also decide whether India can transition into the digital phase smoothly by 2020. Financial services too doesn’t want to be left behind. 2016 will be earmarked by financial services for major business and technology changes to set a steady pace of growth in the coming years.
SMAC technologies will be central to the story. As the industry becomes customer-centric, data management and analytics will be the key to transformation. New banks, licensed by RBIs will seek support from hosted platforms.
Payment banks will be a new revolution in the industry. By bringing in partnership with e-commerce, payment banks will lead to greater engagement in the industry, which was missing in the last decade.
Growth in the industry
FY16 will bring good tidings. Growth across the sector—globally, in India, public and private sector—will be positive. “One of the areas, the biggest growth will happen is the lending area. If you consider investments and securities the growth is positive, though the numbers are different for different geographies,” says Mahesh Makhija, partner-Advisory, Financial Services, EY.
According to India Brand Equity Foundation, Gross national savings in India is expected to reach USD 1, 272 billion by the end of 2019. India’s HNWIs (high net worth individual) wealth is also likely to expand at a CAGR of 19.7 percent and reach around USD 3 trillion by 2020. Thus, promoting further saving and investment among the Indian households, leading to greater engagement.
The average investment by retail investors in stock market in India is 2 percent as stated in the IBEF report. The government aims to increase this to 10–15 per cent by 2025. Brokerage firms will also benefit from the expanding Indian equity market in terms of number of listed companies and market cap.
“There is inflation debts cooling and lending rates are higher so people aren’t investing in real estate. So there is disposable income, leading to increased appetite for financial products,” says Krishnakant Gaitonde, head-IT, Avantha Ergo Life Insurance.
Above all, growing financial awareness will encourage major percentage of the population to participate in this market.
Emerging technologies — transforming the industry
Technology in financial services industry is getting dramatically transformed. And there are several drivers for that change to happen. Also, the way consumers have started to use the technology for financial service usage is also a major catalyst of change.
“Mobility has become a way of life for many consumers-urban and rural,” says Makhija. Cellphone penetration in India is one of the highest in the world. Government and other players will bank upon this development to reduce dependence on cash in the economy.
Mobile money was talked about much in 2015. But for the last two years, the adoption has been low. But the trend can be turned around in FY16 with efforts from government, Telco and consumers. If consumers and merchants are incentivized to use it, mobile money can be a game changer for the industry.
In 2015, government licensed payment banks, which will transform the whole financial services industry. “Mobility is the key for these players to run their customer engagement. Be it in terms of customer activation, business correspondent network, micro ATMs for financial inclusion, mobility will become a key driver,” says Makhija.
Data management and analytics is another key area of transformation in the industry. Major players in the sector are now looking to use data to understand their customer behavior patterns and needs. Data is also used to segment the customers and make relevant offers. “Enriching customer experience will be the focus area in technology spending in FY16. Therefore, customer analytics would be important to find new areas of investment from the data bank and manage risk,” Goutam Datta, VP-Technology, ICICI Lombard.
Cloud is relatively less adopted in the financial services industry. This is because it is strongly regulated and other requirements like the cloud should be hosted in India. “The cloud adoption for core systems isn’t much in financial services. However less-critical applications like HR systems or development and testing environments are being hosted on the cloud,” says Joydeep Dutta, Group CTO, CDSL. RBI licensed smaller banks have to make their model viable and they have to go with hosted platforms and cloud platforms.
Also consumers are doing their research well. This has led to an increase in buying insurances online. “Even our sales team try and get their leads online than going out on the field. Now, this trend will lead to more focus on analytics and constantly reviving the company’s website to reflect our brand image,” says Gaitonde. Also Gaitonde believes that Web content management and Web conferencing has to be major focus areas for insurance companies to be in the race in FY16.
Payment banks: A new revolution
In August of 2015, RBI granted licenses to 11 new payment banks. This marked a new revolution in the country’s financial services sector. The move was to boost financial inclusion and up the ante of mobile revolution in the industry.
“The whole payment banking model will transform the way conventional banks approach customers. The threat to conventional, traditional banks right now is that the payment banks will run the entire transaction and customer engagement parallel. Therefore, banks will become more of a product,” says Makhija.
Smita Aggarwal, senior program director, Centre for Advanced Financial Research and Learning, in her article in Livemint states that with the introduction of payment banks, the focus of the banks is shifting from the stock of balances in accounts to the flow and velocity of payments by customers.
Second, with new kinds of entities in the financial sector, there is now partnership between payment banks and other traditional banks and e-commerce players. This leads to greater engagement in the industry.
Another advantage is that payment banks will trap the potential customer base in rural India and those in tier 2 and tier 3 cities. The whole idea of introducing payment banks was to put financial inclusion at the forefront. Payment banks will double up the customer base by penetrating into areas untouched by the already existing, traditional banking systems. This will be achieved by mobile technology. Payment banks will also ease the system of banking without its two-factor authentication system. This will promote its usage across all the customer bases.
Other game changers
Financial inclusion is being brought center stage with initiatives by the government and major players in the industry. New age fintech companies have come forward to promote financial inclusion. Peer-to-peer lending sites and crowd funding sites have actually helped people outside the formal banking circumference access banking facilities.
The government too has been involved in a big way. “Connecting all the village panchayats to national optic fiber network, through BharatNet project is a huge revolution in itself. It expands the market for financial services,” says Makhija. 2.5 lakh panchayats will be connected by mid-2016.
SMEs are thing to look out for as they will be gaining ground in FY16. SMEs play a major role in the development of economy and providing employment in developing countries. A study by Christopher N. Sutton and Beth Jenkins states that SMEs with fewer than 50 employees constitute 95 percent of all businesses in developing countries. SMEs contribute 33 percent to the GDP in developing economies. As the bottlenecks have been lifted, SME sector could experience growth and development. It offers new and expanded markets for financial services firms.
And as RBI gives permissions for small banks to be established, micro finance institutions and non-banking financial companies and local area banks will take over these areas.
Financial services industry has a lot of opportunities in FY16 to up its game. Technology will underline most of its strategies. Be it financial inclusion, improving SMEs or using mobile money to reduce cash dependence, the industry will have to rely on emerging technologies to gain results. It will be worth the wait to see how 2016 redefines the financial services industry.