How HDFC Bank’s Aditya Puri Overcame The Challenge of Innovator’s Dilemma

HDFC Bank 2.0: From Dawn to Digital. Tamal Bandyopadhyay. Jaico Publishing House. 452 pages. Rs 325.

Few bankers have understood the business banking as well Aditya Puri, Managing Director of HDFC Bank. For the last quarter century, Puri has delivered consistent growth in both topline and bottomline without a hiccup.

Few journalists understand banking as well as Tamal Bandyopadhyay. Which is why when he wrote his first book on India’s most successful bank ever (Bank for the Buck) in 2012, the world got an insider’s view on what went into the success.

Today, he has written a sequel, HDFC Bank 2.0: From Dawn to Digital, that tells us the story of what happens when a hugely successful bank is confronted with a new challenge – the challenge of technology disruption.

In just about seven years after Tamal published Bank for the Buck (Jaico Books, paperback, 344 pp), the world of banking has changed dramatically with the advent of digitalisation and new kinds of fintech firms we have not seen before.

Not only are there different kinds of banks – from payments banks to small finance banks to start-ups that use technology to bring lenders and borrowers directly in contact with one another without a bank playing middleman - but basic banking itself is changing beyond recognition. Banking is no longer limited to banks.

The idea of a bank, once associated with branches, ATMs, cheque-books, credit cards, et al, is no longer about physical products and physical presence, but about enabling a financial transaction without any of the visible support infrastructure. Ask yourself: how many Paytm Payments Bank branches have you ever seen? Paytm claims 260 million customers for its electronic wallet, and hopes to convert at least of third of them into banking customers.

While the business model of a payments bank is unclear – currently they can only invest in short-term government paper and not lend to customers - any entity doing banking with millions of customers without the associated overhead costs has something going for it.

When the mobile phone increasingly serves as the customer’s banking interface, incumbents with large physical overheads have their work cut out to stay relevant.

When a unified payments interface (UPI) can shift money directly from your bank to the bank of the person you want to pay, even cash will eventually find it tough to compete with digital money.

For hyper-successful banks like HDFC, this was the classic Innovator’s Dilemma, popularised by Harvard management guru Clayton Christensen in a book by the same name.

The core of the Innovator’s Dilemma is that when you are the market leader and making tonnes of money from existing products and businesses, you have less reason to innovate. And when new technology threatens to up-end your business model, you face a dilemma: should you invest in the new technology and disrupt your own business model, or hope that the new technology fall on its own sword and save you the trouble?

But the young upstarts had reckoned without Puri. An aggressive competitor who will not let grass grow under his feet, Puri saw the disruptions and their potential to damage his business very early. That is why he went to Silicon Valley as early as in September 2014 to understand what technology would do to HDFC Bank’s business model and profitability.

Despite the hype associated with new-fangled fintech firms which were threatening to reduce banks to mere pipes while they did the real customer-facing banking activities, Puri saw the reality for what it was. The new fintech firms were not really reinventing banking; what they were doing was ride the existing banking infrastructure to skim the cream of the business.

Just as Whatsapp rides the telecom infrastructure to become a platform for messaging, the fintech firms were planning to ride the banking system to become the banks that customers dealt with, leaving traditional and slow-moving bankers in the dust.

As Bandyopadhyay explains in his book, Puri had no intention of allowing upstarts to steal his business. Rather, he told his senior colleagues, we are going to disrupt ourselves.

Talking about his discoveries in Silicon Valley, Puri asked his senior executives simple questions, and the collective answers they came up with helped them reinvent the bank.

Tamal quotes Puri thus:

In finding answers to these questions, HDFC Bank not only transformed its existing bread-and-butter business of lending to retail and corporate borrowers, but also converted itself into a marketplace platform with its SmartBuy. The bank’s customers could not only do their financial business with it, but also buy products from hundreds of merchants on the SmartBuy platform.

Nandan Nilekani, Infosys Chairman and former head of the Aadhaar unique ID project, notes in his foreword to Tamal’s book that entire industries are being disrupted right now by tech: print media by digital advertising, physical retail by online retail, the movie industry by the subscription-driven OTT (over the top) platforms like Netflix and Amazon Prime, the automobile industry by electric and autonomous vehicles and ride-hailing apps like Uber and Ola, and banking by fintech.

But, notes Nilekani, “HDFC Bank has shown that with an agile leadership, which has foresight and flawless execution at speed and scale, even a giant bank can take on the nimblest of start-ups and become a market leader and pioneer.”

Aditya Puri has taught the elephant to dance.

The brilliance of Tamal Bandyopadhyay’s book is that it seamlessly stitches HDFC’s old success story as India’s most valuable bank with its new transformative phase in digital banking.

Books on banking are usually dry and boring, but not Tamal’s HDFC Bank 2.0. It is packed with anecdotes and stories, where even the non-banking reader will get a big bang for his buck. Tamal has reinvented Bank for the Buck without making it seem like old hat.

While the first four chapters are totally new, the next 11 are reworked from the earlier Bank for the Buck. The last two chapters bring in Puri’s unique legacy at HDFC Bank – the bank he helped imagine and reimagine.

It will be a huge loss when he leaves the bank in October 2020, at age 70. But probably that will be his toughest test: if the bank continues doing well after he hangs up his boots, that will be Puri’s final contribution to the bank.

Tamal will surely be there to tell you that story a few years down the line after 2020.