Demonetisation may have been their finest hour in the service of the aam aadmi, but it is also likely to speed up the disruption of the banking sector for which PSU banks are under-prepared, if not unprepared altogether.
Public sector banks made heroic efforts to meet the cash rush after Prime Minister Narendra Modi demonetised Rs 500 and Rs 1,000 notes on 8 November. It was their finest hour, as bankers put in extra-long hours to meet the demand for the exchange and deposit of old notes.
Unfortunately, it is likely to be their last hurrah. Demonetisation may have been their finest hour in the service of the aam aadmi, but it is also likely to speed up the disruption of the banking sector for which public sector (PSU) banks are under-prepared, if not unprepared altogether. Outside the State Bank Group (SBI plus five subsidiaries that will be merged into the parent), there are 19 other nationalised banks. It is doubtful if even 10 of them will survive the next decade.
There will be only 10-12 public sector banks that can survive the coming disruption, where technology is facilitating the creation of new, lean banks like payments banks at a time when PSU banks are overladen with bad debts and encumbered with excess overheads in terms of brick-and-mortar branches and manpower.
Demonetisation has given a new spur to digital cash and payments, as seen by the huge spike in e-wallet company PayTM’s daily transactions, which have risen three-fold in a matter of days. Yesterday (23 November) we also saw Airtel launch its own payments bank on a pilot basis in Rajasthan, using its own mobile phone network to service customers. It will incur very little additional costs in creating full-fledged branches. Accounts for mobile customers will be opened with a minimum of fuss, with Airtel numbers becoming bank account numbers and eKYC being done electronically. Cash can be transferred free between any two Airtel numbers, and there are 250 million of them. Cash can be deposited and withdrawn at Airtel retail outfit. And deposits are going to fetch a decent 7.25 per cent, higher than any savings bank return in any regular bank (read the Mint report on Airtel here).
It is difficult to see how PSU banks, with their excess manning and falling deposit rates, can compete with this lean and mean outfit that already has the customer base to cross-sell banking services to.
As Nandan Nilekani, former chairman of Infosys and the man behind the Aadhaar Unique ID, which enables this rapid transformation, noted in a presentation (see the full presentation here), the banking industry is set for 12 disruptions. At least six of them are major ones, for which some of the weaker PSU banks are simply unprepared.
The following are the major disruptions indicated by Nilekani – and as noted by us in Swarajya a few months ago.
#1: Low-volume, high-value transactions are passe; the shift is towards low-value, high-volume transactions. The average value of a cheque transaction is currently around Rs 75,000, but the average value of e-wallet payments is Rs 300-500, and Rs 30 for a mobile recharge. Banks cannot expect to make their moolah from high-margin businesses in the future. Electronic money transfers already top cheque payments, and IMPS payments (immediate payment systems) have crossed debit card volumes. The future of payments banking is no longer with PSU banks.
#2: Credentials have moved from banks’ proprietary sphere to open spaces. When a bank gives you a credit card or a PIN number, it owns both; when transactions shift to mobile phones, the authentication factor moves to a third party beyond the bank. Effectively, you are in control.
#3: Switching costs are going down. Today, it is difficult for customers to change banks for various reasons. But with two SIM cards, mobile users can switch service providers with a simple click. As customers get wooed by multiple banks, customers can shop for the best rates from any bank using mobile interfaces. Whether it is a loan or an insurance policy or even a deposit product, switching will be easier in the future. Banks will have to compete harder for business. Easy money from current and savings accounts will shrink.
#4: Lending rates will be priced individually. Credit risk can be gauged not only from your individual credit score but from multiple records, including e-wallet and mobile payment behaviour. Credit will thus be offered on the basis of expected default risks. So rates will be individual-specific. Interest rate divergence will also narrow, as the market becomes more efficient. Currently, there is no rationale for giving the richest customers credit at throwaway rates while fleecing rural borrowers and small businesses through moneylenders or informal lenders. PSU banks, despite owning tonnes of data, are still to leverage their knowledge of customers’ spending habits. Payments banks and tech-savvy private banks like HDFC Bank, ICICI Bank, Axis Bank and Kotak Mahindra (which is partnering Airtel) will run away with this advantage.
Second generation mass disintermediation is here; in the first stage, the banking industry’s best customers raised money directly from investors; in stage two, all bank customers will be able to shop around for the best borrowing and lending rates from any player, whether it’s the bank or a financial company. Banks themselves could become faceless intermediaries, entirely dispensable.
#5: Business models are changing from fee-based to data-based. Microsoft still sells its software for a fee; Google uses its data to give you services free while charging advertisers for delivering the right customer to them. This model will impact banking too. They have to learn to use their data to build alternate revenue streams. But for PSU banks, which still derive most of their incomes from lending and deposit spreads, the danger is greater. They will lose all fees currently accruing from basic services like issuing cheque books or drafts, not to speak of ATM charges. With the smartphone becoming the new bank, the entire range of products, from credit and debit cards to ATMs, will become less capable of generating fee incomes.
#6: PSU banks are losing both market share and market value. Occupying over 90 per cent of the banking market some 15 years ago, their share is now dipping below 70 per cent, thanks to an overload of bad loans. Their market valuation has taken a beating, with HDFC Bank alone exceeding the values of all public sector banks put together. SBI is valued as much as the rest of the public sector banks put together.
In 2015, for example, the SBI and public sector banks had more than 8.5 lakh employees on their rolls; the new mobile banking players will run with barely a few thousand employees.
We will say it again: By 2025, barely half the public sector banks will survive. Demonetisation has brought the day of reckoning closer.