The Banking War Ahead

BRITAIN and France were perpetually at war, in the latter part of the 17th century, the under pinnings of which can actually be traced back to the most significant revolution ever in the history of banking— that is, until Net banking came along! The War of 1689-97 was significant, for it went on to determine the fate of banking, as it were. King William set up the Bank of England as an alternative means of funding the war by borrowing from the public, rather than from London’s greedy goldsmiths. There by, he not only won the war, literally speaking— and otherwise— on England’s credit, but also went on to engineer the biggest ever commercial banking revolution in the history of the world, rather accidentally!

A complex web of forces is pushing hard to shape the very entrails of banking. These include the simple, yet powerful truth that banking has come to extend itself far beyond its conventional boundaries and is slowly transforming itself into a buyer’s market from what was a seller- dominated market not long ago. Further, technology and the rapid pace of trans-border financial transactions have made the market global. In other words, the bank of the future has to essentially be a marketing organisation that also sells banking products, rather than just a banking organisation also into marketing! The bank must acquire the ability to use technology to add value to every single bit of the customer chain, for it is no longer money which is the juice moving the world banking markets but information. Indeed, winners and losers are decided on the battleground of information rather than that of money. The most dramatic change Net banking shall bring will be in the means of access to banking ser-vices— from brick-and-mortar banks to many means of access like ATM kiosks, telebanking in the medium run, to virtual kiosks and full-service Net banking in the long run. The latter  will probably come to occupy a position of permanence as the de facto standard for banking in the new millennium.

Booz Allen & Hamilton, in one of the most comprehensive surveys of banking, compared the cost per transaction of different banking channels. Brick-and-mortar branches: $1.07; telephone: $0.54; ATM (full service): $0.27; PC bank-ing: $0.015; Internet banking: $ 0.01. The other powerful reason for going in for Net banking is that it entails a very small additional cost for the banks, as against other options.  Most advanced banks have some form of legacy systems in terms of PCs and/or telebanking systems that can be integrated into Net banking systems.

What makes Net banking most powerful is its ability to integrate and subsume any and every channel of banking into it through what are known as virtual kiosks. A virtual kiosk is the interface that is platform-independent, device-independent, synchronising all transactions. Thus, the customer can shed the shackles of the place where he banks from, the mode of banking he uses, the time of the day when he wants to bank— truly, anytime, anywhere, anyhow banking! Indeed, virtual banking shall help banks increase their spread and customer base, exponentially.

Happily for Net banking, the banking industry is caught in a whirlpool of conditions rapidly causing its spreads to diminish and overall profitability of Indian banks is rapidly (and silently) getting eroded.  These include: a depressed real economy, especially  real estate, equity and bullion markets, increased competition for Indian banks from multinational and private   banks, reduced floats due to superior electronic funds transfer systems, pressure from various multilateral bodies to liberalise existing— non-competitive and   opaque— regulations that artificially help Indian banks stay afloat, falling rates of interest, a global equalisation of spreads and rising pressure of establishment and wage costs.

THUS, Indian banks have to cut their spiralling establishment and wage costs and leverage information technology tools to compete in a market where the odds are rapidly building up against them. American Banker, in a recent comment, compared costs— an eye-opener for everyone. In the US, IT spending in the banking sector is close to $18 billion as against $70 billion on employee costs annually, while comparable figures for India are Rs 500 crore and Rs 11,136 crore, respectively. Thus, while US banks spend 20 per cent of all spending on IT, Indian banks spend a mere 4 per cent. Yet, they need to spend close to Rs 17,500 crore on recapitalisation, while their estimated non-performing assets are a whopping Rs 40,000 crore. There are independent studies which reveal that the total investment for a comprehensive IT strategy for Indian banks to put in place world-class infrastructure is in the region of Rs 19,000 crore, of which an estimated Rs 7,000 crore is for core banking alone.

In sum, as the contours of the banking industry change irrevocably, the power of information shall become its lifeblood rather than mere money, as it currently is. Indian banks, in the face of severe odds, can ignore this puissant truth only at their own peril. They must move away from the current ‘bonsai’ versions of Net banking to  exploiting the full power of the Internet, which is where the actual winners and losers shall be picked. Indeed, the    revolution waiting to happen in banking globally shall actually be the war which needs to be won. In comparison, even the War of 1689 and the banking reformation it heralded appear trivial.