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What Banking is Not Product Mindset

What Banking is NOT-The Product Mindset

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Selling Pizza, the banker’s way

Imagine being at a famouspizza outlet. You are hungry and all you wish for is a good pizza, with all rich toppings except mushrooms (as you are allergic to it). Decoding the menu, with exotic names and preparation methods, is tougher than you thought. You seek help. The waiter gladly recommends their newly launched layered-pizzaand assures of customising it to your preference. He requests you to fill a simple form, to help them know your preferences better.
It’s a long wait. You remind the waiter, who in turn checks with the kitchen and informs it is almost ready. The ‘almost’ seems never-ending. You are edgy and about to snap but the sight of pizza arriving towards your table brings the relief.Finally, your 40-minute wait is over!
But the relief is short-lived. As you hungrily grab the first slice,large mushroom chunks reveal themselves, hidden under the layers of cheese!
You are furious and call the waiter. He checks with the kitchen and explains that while the toppings can be customised, the ‘insidings’ cannot be changed. He is apologetic.You persist. He is polite buthelpless and advises you to contact the central kitchen directly. He even sharesthe toll-free number and escalation matrix.
In your anguish you dial the number right there, only to be met with an IVR labyrinth- Press 1>>Press 2>>Press 1 again…..>>Finally 9. There is a pleasant voice at the other end but you soon realise it’s a recorded message. You are 30th in the queue,with wait-time of 10 minutes. Fur Elise plays in the backgroundto keep you entertained.
You are about to hang up when a pleasant voice greets you at the other end. It’s human, hopefully (in these times of Google Duplex, you can only hope)! She listens patiently but informs that as a policy ‘insidings’ cannot be customised and its clearly mentioned in the ‘form’ you submitted. You argue that there is no such word as ‘insidings’ but make no headway. She seems helpful and advises you to give a written request to the waiter and maybe they can take a call at the ‘local level’.
You leave the restaurantdistressed and hungry. The waiter does give you a sympathetic look, while the mushroom pizza stares at you. Beethoven, still ringing in your ears, never sounded so shrill.
Few days later, you get a call, informing you that your payment for pizza is pending. You explain the whole issue patiently. The caller understands and apologises.
Barely a couple of days have passed and you receive an early morning call,reminding you of the pending payment. You arelivid. Thecaller asks you to provide the copy of ‘dispute letter’ submitted to the restaurant, else the matter will be treated as ‘default’ and reported to the pizza bureau.
You roar ‘Go to hell’
‘Sir, You will never be served a pizza again, anywhere’!, says he, politely.
If you aren’t pulling your hair already, I infer you have a long experience in dealing with banks. I know, even the worst of restaurants do better than this.
Customisations, exclusions& inclusions to the menu are fairly common for service enterprises like a restaurants or even tailors. But Banks, unfortunately, seem to be stuck in a time warp of ‘Terms and Conditions’, with an unalterable ‘product feature’ list and complex ‘warranty’ terms!
It’s ironic that while the product companies, from automobiles to electronics, talked about customer experience, banks seeminglyregressed to 20th century product sales methodologies – ‘customer can have it painted any color, as long as it is black’.

Times, they are changing. Again.

              The scenario in 2030 may seem like fiction but the speed at which Artificial Intelligence (AI)is evolving, this may be a very simple use case. If you are paranoid about AI taking over the world, like Skynet in Terminator, a report by Stanford Universitytitled ‘Artificial Intelligence and Life in 2030’ allays some fears.

“Unlike in the movies, there is no race of superhuman robots on the horizon or probably even possible. And while the potential to abuse AI technologies must be acknowledged and addressed, their greater potential is, among other things, to make driving safer, help children learn, and extend and enhance people’s lives.”

AI technology may still be some distance from reaching such level of ‘consciousness’ to undertake large scale ‘manipulation’ of taking over the world. But that doesn’t mean AI comes as a clean package.

Selling Products isn’t banking

        Henry Ford’s belief of “as long as it is black’’ may have been apt for his time when mass production was the new-found business strategy. It was efficient to run large factories on standardised product configurations. Customisation meant higher downtime and increased costs.

Maybe, banks needed similar standardisation in their back-offices for efficient processing. One reason for adopting such an approach was increasing demand from banks to be transaction facilitators. But, beware! It is easy to confuse transaction facilitation as banking. It isn’t.

Banks neatly stacked theirproductson a shelf – Saving accounts, Current Accounts, Forex cards, Credit Cardsetc. Standard offerings and variants with standard features, just like a readymade suit. ‘Suit yourself. Sometimes it may fit’. They adopted a‘Product’ mindset.

Notefully, banking is much more nuanced and intangible than tailoring a suit. In mattersof money, foundations of relationship cannot be transactional alone.Just like taking measurements cannot be considered as tailoring, handling transaction is only about money movement. It would be erroneous to judgethe craftsmanship, unless its delivered, tailored to your fit.

Another interesting dimension to note is that In product selling, Sales and Service are separated. Every time your car gets an issue you don’t take it to the Car salesmen but to the Service Station. Unfortunately, banks seemed to have adopted similar model forBanking services. For most, Phone Banking seems to be the go-to service point while your RM seems helpless.

Thisproduct mentality has led banks tobuild aggressive sales culture.A bothersome Car Salesman and pestering Bank RM, appear to be no different. Banks prioritise spends on Sales teams over Customer service, with larger budgets for recruitment, retention and training. Best resources are placed in ‘front end’, a synonym for sales. Post-sales customer ‘handling’ is ‘Service’ team’s job, sadly,with amenial connotation.And yes, redesignating Sales Managers as Relationship Managers doesn’t solve the problem.

This product mindset is reflected in their measurement of success by “How many products sold?” instead of“How well are the customers serviced?”

Bespoke and Universal

         The key role of a banker is money management and advisory. The classical definition of taking deposits and providing loans is their raison d’être. Handling transactions is only a knock-on effect.Offering transaction facilitation, in a standard pack with balance maintenance, isn’t banking. Not until a bank has understood and customised it to the requirements of the customer. Each customer. But in reality today, it’s the customer who is adjusting to Bank  products, processes, documentation, cut-off timings and branch hours.

It may be moot whether this standardisation improves efficiency but it does bring rigidity in both servicing and providing solutions.

While it is given that any large structure would need guidelines to stay course, the absolute neglect of customisation, absence of advisory to customers at large and absence of customercentricity are the bane of banking. With the technology available, how difficult it is to provide, say, truly custom accounts to the customer?

Does that mean banks shouldn’t pursue commercial objectives? They should, absolutely.However, the key differentiator in service industrycannot be a big shelf of OTC productsor a large FOS team. Especially so, if the whole relationship is based on building trust.It requires a service mindset- deeper customer understanding, endeavour to providebetter service fit and orientation to deliversolutions at the moment of truth.

In the long run, it’s the service mindset that willcreate winners. Its all the more relevant in times when routine standardisations are increasingly being handled aptly by new age technologies. As the world moves away from handling cash and payments become commoditised, it’s the service and advisory that will differentiate banks.

Even a ‘good’ bank may get it all wrong if it relies oncustomer appreciation for faster transaction processing instead of evaluating if customers are indeed getting right advicefrom its employees. Thepremise of buildingretail as well as commercial banking only on TAT and Product features is flawed. It should be built on bespoke offering and sound advisory that is easily accessible to smallest of customers and not only on fast cheque clearing!

Its time banks stopped behaving like an assembly line. And well, I haven’t even talked about cross-sell.

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Payments banks in India

Payments Banks in India

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Building a Payments Bank – Challenges and Opportunities

Circa 2030.

Somewhere in Mumbai…

                    As Adam wakes up on Monday morning, he knowstoday is a special day. Adam has been training for thisfor 2 months now. He finally has access to Subbu’s account and within no time would make transfers before Subbu even realises.

An hour later whileSubbuis on his way to office in a driverless Tesla, listening to old Daft Punk classics, his Apple watch beeps. He scrolls through each notification and realises that Adam has already done transfers worth ₹600,000 from his account. But Subbuisn’t worried. He is relieved.

Adam,his Personal Assistant bot,finished themandated training of 60 days just yesterday and can now make bank transactions on his behalf – initiate remittances and investments on his behalf, make his bills and card payments and book tickets and hotels for the next family trip to Australia.

Times, they are changing. Again.

              The scenario in 2030 may seem like fiction but the speed at which Artificial Intelligence (AI)is evolving, this may be a very simple use case. If you are paranoid about AI taking over the world, like Skynet in Terminator, a report by Stanford Universitytitled ‘Artificial Intelligence and Life in 2030’ allays some fears.

“Unlike in the movies, there is no race of superhuman robots on the horizon or probably even possible. And while the potential to abuse AI technologies must be acknowledged and addressed, their greater potential is, among other things, to make driving safer, help children learn, and extend and enhance people’s lives.”

AI technology may still be some distance from reaching such level of ‘consciousness’ to undertake large scale ‘manipulation’ of taking over the world. But that doesn’t mean AI comes as a clean package.

Let’s get over with the bad news first

             Banks generate and consumelarge amount of data. AI relishes data.While AI may not make us slaves, one problem is imminent.

  1. Repetitive jobs in back office operations like screening standardisedforms and processing routine transactionswould be automated.
  2. Contact centres and IVRs would no longer be dumb and you needn’t have to wait for a human John or Arvind to answer. John and Arvind would need to look for a new job.
  3. Analysis of parameterised retail products like credit cards (in whatever form) and small ticket loans, are low hanging fruits for automation. Analyst jobs, Risk and Credit Middle offices may all be automated and the lone human supervisor handling these functions may be more techie than a bankie!
  4. And Branch staff. What branch??Jobloss is inevitable in banking and many other sectors.

    Another risk of AI,often articulated,is centralisation of power.Stephan Hawking and Elon Musk have been vocal about responsible use of AI. Would those who have access and controlof AI, become czars of the new world order?

    If not already worrying about it, Government think tanks should start mulling over the socio-economic impact of AI, in not so distant future.

    But these dark clouds may have some silver linings.

And the Good news...

                  Despite the apprehensions, AIis still a powerful tool to solve long-standing problems of humanity.It can improve access to medicine and diagnostic tools for theremotest parts of the world. Self-Driving cars can help prevent thousands of accidental deaths. And yes, it can simplify banking- relieve the pain ofredundantforms, cumbersome documents and slow processes and even manage investment portfolios. It can helpbanks be nimble, still offer wider range of services and at the fraction of a present cost.

All this culminates into efficient systems,better compliance, improved profitability and happier customers.AI may just be the golden ticket for the ‘Guilty Banker’ to redeem himself and bring ‘trust’ back in banking.

Here are some use-cases where AI is or will soon, transform banking.

1.Chatbots: Improved conversational ability

           With the improvement in Natural Language processingcapability, it would be possible to have meaningful and complex conversations with the Chatbots (computer programs which can interact in natural language with humans).

RBS has been experimenting with Luvo, its personal customer service assistant and DBS has launched its Digibank in India, supported by a 24 x7 digital assistant based on AI bot Kai byKasisto. There are others like IPsoft’s Amelia, which the company claims can “emulate human intelligence making her capable of completely natural interaction with people”, implying it would understand if you are angry on in a tearing hurry and respond accordingly.

Chatbotsare available 24×7, in any language andcan drastically reduce the cost of customer service infrastructure.

Apps likeMicrosoft Translatorcan translate between any two language and once they reach a level of finesse for real time spoken translation, can obviate the need to hire multilingual or resources with specific language skills. Banks may well hire all German speaking executives to handle Japanese customers!By extension, expert knowledge would not be bound by the language barrier and banks may access and offer expert advisory from any corner of the globe.

Improvement in Speech recognition and Reinforced learning can potentially change our interactions at bank branches. Empowered with conversational ability,Humanoid Robots would become mainstream and be able to go beyond saying ‘Namaste’.

2. Robo advisors : Manage money better

          With commoditisation of routine services like Payments, banks’ relationship with customers has become purely transactional in nature. The myopic view on profitabilityhas led banks to restrict their advisory services, for whatever it’s worth, to large ticket or HNI portfolios. For most people, the only advisory they ever got from banks is the push to buy third party products like insurance, while ignoring core products or services. It’s surprising that banks couldn’t offer as basic a service as expense management which Intuit’s Mint (and many others) now provide.

Now, with Robo-Advisors (an algorithm based online wealth management service) like Wealthfront and Betterment, the wealth and portfolio management services are becoming accessible, cost effective and democratised. Your investments may soon be managed by an AI Advisor, giving you flexibility and real time inputs minus the bias of wealth managers who push products to achieve their targets. And all this at a much lesser cost.While the current Robo-Advisor models are hybrid, requiring significant human intervention at backend, these are evolving very quickly to become fully automated.

3. Better Credit Risk Assessment

              With analytical tools evolving from statistical or rule-based modelsto cognitive learning, it is getting easier to automate parameterised or score based products like retail loans and credit cards. AI empowered systems would soon handle next level deviations in the parameters and approvals for small ticket lending may become a matter of seconds instead of days. These bank products are a low hanging fruits for AI implementation.

On the other hand, large ticket lending to Corporates or Small and Medium businesses requires a detailed analysis. The assessing credit officer uses his/her judgement to decipher complex deviation scenarios. For eg. if the financials show a decreasing trend in Tangible Net worth, the officer relates this to other factors like reduced cash profits, diversion of funds, high capex or abnormal increase in current assets. Heevaluatesthese multiple scenarios simultaneously, meets up with the customer andcorroborates with other available parameters like Current ratio performance, internal and external ratings and management’s ability to infuse capital, before arriving at the decision. The key skill of the Credit officer lies indetermining the materiality of each parameter, going beyond simple correlation and deciding on a more likely future scenario (aka projections).

The banks would call this ‘touch and feel’ of the large ticket credit. This approach is however fraught with miss-outs, inconsistency and unpredictability.

As AI evolves from job specific Artificial Narrow Intelligence or weak intelligence to more advanced Artificial General Intelligence (AGI), with human-like cognitive abilities, such scenario building wouldbecome automated too, bringing much more predictability, better reading of Early Warning Signals and reduced delinquencies.

Such ability to handle complexitywas demonstrated byAlphaGo, a Google ownedAI software, where deep neural networks and machine learning were used to decipher zillions of permutations and defeat a human champion in a complex Chinese game ‘Go’.

While it is still short of building the ‘intuitive’ judgement, it’s only a question of time before it reaches there

4. Anti-Money Laundering and Compliance

            Currently banks rely on AML tools likeThomson Reuters’World Check and Factiva, which are primarilydatabase checks to identify matches.There are other products which monitor large number of transactions andquickly identify anomalies, but most of these are rule based and still evolving. The further development in text analytics would make the unstructured data, spread across the web, being converted to usable information.

One use case which I believe can help AML initiative isbuilding a common pool of learnings of banks across the globe. Imagine a scenario where it is possible to find out total remittances made by a person, across banks to a sanction country like Syria.At present no bank would share an account level information with others, considering the data security and competitive considerations. But withHomomorphic encryptionit may be possible to build tools to share data in encrypted form and perform functionswithout the need to decrypt the data. In simpler language, it means it is possible for banks to share the data without revealing what that data contains and it would still be possible for the user or authorities to use the data for required checks.

5. Regulatory advisory and legal

         Banks operate in a increasingly dynamic regulatory environment. The constant fear of being on wrong side of the law is one reason why bankers have become over-prudent and avoid taking even logical calls. There is a whole ocean of circulars, statutes, laws and guidance that a bank and its customers need to be navigate.It’s even more relevant in a developing economy like India where both complexity of transactions and regulator’s response are evolving.

In my career as a banker, there have been numerous occasions where customers seek clarity on FDI (Foreign Direct Investment)or ODI (Overseas Direct Investment) norms, requiring approval, condonation or clarity from RBI (Reserve Bank of India). The moment such a grey area is encountered, the transactions are put on hold till the time regulators respond.

But AI would catch up in these complex use-cases as well. Ross Intelligence is an AI augmented legal advisor that makes it easy to search through legal literature. It is built using IBM Watson and can answer legal queries. Scanning banking laws and regulations may just be a simpler use for Ross.

Conclusion

“By the 2040s, non-biological intelligence will be a billion times more capable than biological intelligence” – Ray Kurzweil

        Hile AI is growing fast, the developmentis not linear or predictable. It may be difficult to pinpoint which scenarios would unfold first and to what extent– would it be chatbots becoming more human-like to make call centres redundantorRobo-advisors taking over the money management or Middle offices becoming automated or credit decisions becoming real time. Some complex use cases like corporate debt, large ticket lending, investment banking, stressed asset management may have some lead time, but it may be sooner than later before AI catches up.In fact, it already is. Investment bankers may want to see howNumerai, a crowdsourced Hedge Fund model is being built to have better predictions on asset returns or Alpha Sense, a search engine optimised for financial search can bring company information quickly.

We are very near an AI inflexion point and the effects are not limited to banking. It can potentially disrupt the way we live lives.

Banks cannot remain mute spectators or have a piecemeal approach to this. Theyneed to have a full-fledged team working on AI with large scale investments. Its time they have robots on their side.

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Banks Vs Fintechs

Bank Vs Fintechs

“We need Banking but we don’t need Banks” – Bill Gates

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Can Fintechs win the battle against Banks?

Circa 2030.

The Guilty Banker

                 I feel guilty. Despite having spent most of my worklifewith banks,I still can’t defend them.It isn’t easy to shield an intermediary who runs on legacy processes,continues to err on regulations and still has a tantrum or two up its sleeve!

They can delay remittances, demandredundant details and when you call, make you hear long promos and contorted IVRs. And that’s not all!

The bank critics can share umpteen stories ofgullible old men, looking to park pension funds in a term deposit but ending up investing inriskyequity-linked insurance or the naïve Small Business owner signing up for currency Swaps. All this because thebank showed them the shining, bright light at the end of the tunnel.The line between a car salesman and banker may seemblurry at times.

However, while you enjoy the bank bashing, these are only the symptoms of a more fundamental flaw.Much of this inefficiency and opaqueness can be attributed to thelack of innovation in banking.Whether it’s a deliberate strategy or sheer laziness, they are guilty all the same.

There could be some respite in sight though.

The Fintech Redeemer

It was only a question of time beforehefty bank fees, complex documentation and unreasonable TATs (Turn-around Time) were challenged.

Payments was crying for simplification andthe likes of Paytm, Stripeand numerous otherscame to reducefriction.

Basic services like account balance enquiryor tracking expenses or investmentswere undesirably exclusive and the likes ofMTrakr orHappay or Movenstarted offering real-time analytics.

The obscenely high interests, cumbersome documentation and monopoly on loanswas painful and the likes ofKickstarter,Lendingclub, Sofi, LendingKartetcchallenged the premise of underwriting and pricing. As they become mainstream,loans and overdrafts may no longer require a ‘favour’ from your friendly banker.

Lack of innovation in bankingis precisely the opportunity Fintechs are encashing.They are disrupting the way things have been for decades with ideas ranging fromcommon-sensicalsimplification to big paradigm shifts.But,can they be our redeemer?

The answer isn’t an easy one.

 

 

Let’s get over with the bad news first

             Banks generate and consumelarge amount of data. AI relishes data.While AI may not make us slaves, one problem is imminent.

  1. Repetitive jobs in back office operations like screening standardisedforms and processing routine transactionswould be automated.
  2. Contact centres and IVRs would no longer be dumb and you needn’t have to wait for a human John or Arvind to answer. John and Arvind would need to look for a new job.
  3. Analysis of parameterised retail products like credit cards (in whatever form) and small ticket loans, are low hanging fruits for automation. Analyst jobs, Risk and Credit Middle offices may all be automated and the lone human supervisor handling these functions may be more techie than a bankie!
  4. And Branch staff. What branch??Jobloss is inevitable in banking and many other sectors.

    Another risk of AI,often articulated,is centralisation of power.Stephan Hawking and Elon Musk have been vocal about responsible use of AI. Would those who have access and controlof AI, become czars of the new world order?

    If not already worrying about it, Government think tanks should start mulling over the socio-economic impact of AI, in not so distant future.

    But these dark clouds may have some silver linings.

Not an easy battle

In this Fintech v/s Banks scrimmage, everyone seems to have a view and it’s strongly skewed towards “Good riddance banks!”  However, a closer look gives a reality check.

Yes, fintechs might have won a few skirmishes but need more than an idea to win the battle. It’s a painful, long haul. While on the face of it the banks look vulnerable, in reality they do have enough arsenal to ward off the onslaught.

1. The shield of Central Banks

         The concept of Central Banking has evolved through many trials and errors over the last century.In his book titled‘Lords of Finance’, LiaquatAhamednarrates howthe sensibilities and prejudices of a few central bankers defined the monetary policy templates after the World War Iand gathered pace around the Great Depression in 1930s. That evolution is far from over.

Balancing growth and inflation is still a challenge and the jury is still out onwhether volatility of exchange rates or the socio-economic variableslike unemployment ratehavea causal relationship or are a mere correlation with the monetary policy actions.

The tools used by central bankers are,in essence, a hit and trial experimentation of controlling money supply.Byrationing bank licenses, they didend up creating‘systemically risky’institutions but presumably seem satisfied to have got better controlof money flows. The fintechs on the other hand are an untamed animal.

The very nature of a startup is to break traditionand put consumer needs, instead of the institutional constraints, at the forefront. Cryptocurrencies likeBitcoin, for example, can potentially make the money flow lassiez faire, making the monetary policytools irrelevant.

While there is some let up with licensing of Payments Banks in India or digital banks like Atom, Tandem and Number 26 or the PSD2 guidelines in Europe, Central Bankers are still a divided lot on how to manage fintechs. The regulatory views on P2P lending, Crowdfunding and Cryptocurrencies is still inconsistent and patchy. The regime is still to ‘regulate’.They may not be partisan, but till such time we don’thave new methods, the musical chairs of money supply with handpicked players would continue.

Adding to the fears are episodes of misuse, like the Dark web marketplace SilkRoad (now banned) where drugs were sold using Bitcoin or the exit of LendingClub CEO, following the poor governance and influence in loan approvals. The repercussions of unbridled access of financial technologies in wrong hands are real and serious.

It may, therefore, be too much of a perceived riskfor the traditionally trained central banker to junk their ‘stable’ templates, so painstakingly built over decades, despite the evident flaws.

Put shortly, for now, the blessings of ‘Lords’ is no less than a divine energy-shield protecting the Banks

2. The mine-field of Compliance and AML

As covered in my previous article, 9/11 and 2008 financial crisis led to a new paradigm of regulatory compliance and Anti-money laundering practices for banks.It’s no surprise that Governments wantclosemonitoring of money trails and corporate governance. AMLcompliance havebecome non-negotiable. The world continues to be insecure and in the current world dynamics, increased regulation clearly overshadows call forliberalisation.

This hasa twin impact- first, the costs of compliance havespiraled andsecond, bank documentation and reporting have become increasingly complex. Despite the growth in digital infrastructure, bank TATs continue to be unpredictable. In India, for example, banks still struggle to open business accounts in less than a week and that’s being optimist.

The legal and procedural compliance costs continue to rise as more and more geographies across the globe bring out new regulations. JP Morgan, for example, expanded its compliance team from 23,000 in 2011 to 43,000 in 2015.Atemplated business run froma centralized office in California or London or Bangalore would necessarily falter without a strong legal and compliance understanding of the local market.

Source:thomsonreuters.com

Even with best of intentions, it is some task for a technology startup to build efficient business in such a dynamic compliance environment, with the bar moving higher every day. If USD320 Billion compliance related penalties paid by banks is any indication, the road ahead for a fintech with a slightest compliance slip, may end in a cliff.

3. The Vantage point: Branches

Bank Branch is dead and the data coming from Europe seems to corroborate it very strongly.Major Banks in the UK have closed 1700 branches in last 5 years.In Spain,Banco Santanderclosed 450 branches last year while in the US, Bank of America alone closed 1400+ branches since financial crisis.The story is similar for many others.

 

This shouldn’t surprise us though. Considering digital screens are the window to the world for millennials and Gen Y, the face of financial intermediation is bound to change. But it may be wrong to infer that brick and mortar is an anti-thesis of digital.

If opening of Amazon Go Store, increasing number of Apple Stores and many players in Indian startup space augmenting their online presence with experience stores, is any indication, there is still much value in a physical distribution setup.

While Branch may largely become redundant to distribute standardised services, these may still be a competitive advantage for enhancing customer experience, confidence building and deeper reach.The branch closures are, therefore, only a recalibration of distribution.The branch will stay.

A large section of the socio-economic pyramid- senior citizens, less educated and disabled, may still depend onsome physical network in the medium term, especially in the emerging markets. It’s also a reassurance for the High NetworthIndividuals to have face to face interaction before they put their money in someone’s hands. Infact, all products that require subjective vetting, deviations or expert advisory would still need human presence.

The development of machine learning and Robo-advisorsis still some distance from reaching the level of human intelligence to vet creditdecisions, structure loans and complex derivatives and handle stressed assets.

It may be difficult for Fintechs to comprehend the need to build a physical presence and replicate it. The smarter lot amongst the banks, like BBVA and closer home HDFC Bank may ultimately build a significant digital presence while also leveraging the existing, albeit pruned, branch network.

Branches, though bashed and declared dead, still offer banks a vantage point to see much deeper than the fintechs.

4. The Productarmoury

         It’s exciting to see how fintechs have unbundled the bank products. But on closer look, many seems to have simplyleveraged the existing infrastructure, layeringtheir solutions over the availablebank products.Many of these are minor increments or transitional offerings, where the banks are catching up easily.

Take Wallets, for example. They still require a Bank account or Credit card and convenience they offer is only a temporary competitive advantage before new modes of authentication like biometrics become mainstream.

Source: cbinsights

The lending startups are still experimental and the resilience of their portfolios and analytics is yet to be vetted over a longer economic cycle.It isstill a long way before the fintech products become comprehensive and proven for scalability.

While the banks have faltered on delivery, there is no denying that they have had a long head-start to refine their offerings. Bank products have evolved over time to cover the needs over the customer lifecycle. Many of these- Checking accounts, deposits, Cards, Retail Loans et al, are interlinked and supported by a whole ecosystem. This wide product suite, though not necessarily the most efficient, is still essentialfor customer stickiness.

Interestingly, the smarter banks are building platforms and Open APIs, while simultaneously leveraging theirarmoury of traditional offerings.

The challenger fintechs may ultimately need to offera comprehensive product suite comprising of Payments, Investments, Loans and Forex to address all needs of the customers. Some are already trying to re-bundle products through bank tie-ups(like Number26, a digital bank in Europe,has attempted or Moven, a US based finserv, has tried by tying with CBW Bank) but theyare in danger of becoming a selling agent or service providers for banks.

This may be exact opposite of the premise they started with- reduce and streamline intermediation.

5. Regulatory advisory and legal

         Banks operate in a increasingly dynamic regulatory environment. The constant fear of being on wrong side of the law is one reason why bankers have become over-prudent and avoid taking even logical calls. There is a whole ocean of circulars, statutes, laws and guidance that a bank and its customers need to be navigate.It’s even more relevant in a developing economy like India where both complexity of transactions and regulator’s response are evolving.

In my career as a banker, there have been numerous occasions where customers seek clarity on FDI (Foreign Direct Investment)or ODI (Overseas Direct Investment) norms, requiring approval, condonation or clarity from RBI (Reserve Bank of India). The moment such a grey area is encountered, the transactions are put on hold till the time regulators respond.

But AI would catch up in these complex use-cases as well. Ross Intelligence is an AI augmented legal advisor that makes it easy to search through legal literature. It is built using IBM Watson and can answer legal queries. Scanning banking laws and regulations may just be a simpler use for Ross.

The End Game

Fintechs have demonstrated the use-cases where machine learning, algorithms, robo-advisors can vastly improve efficiency. Even the success ofmPesa in Kenya and Micro Finance Institutions in India have shown that financial inclusion can happen without the tantrums of banks.Whether the individual start-ups succeed or not, they have fundamentally changedfinancial intermediation.And till the time banks continue to pride in their legacy, fintechs will continue to find chinks in theirarmour.

But not all banks are sleeping. Some have learned the lessons the hard way and the smarter amongst them are emerging stronger and battle ready. Yes, there still are dumb ones (and there are many!) who would perish. But this may be their opportunity to convince their aging Boards to consider technology as an investment and not expense.

However, it’s the Regulators who walk the double-edged sword. The new age financial services require a ‘facilitator’ in central banks.Innovation cannot thrive with a tight clutch on experimentation and zero risk but technology can be dangerous in wrong hands. While I fear their ‘regulate’ mindset may just turn some fintechs into ‘banks’ too, I’mmore sanguine seeing some banks starting to behave like Fintechs.

Ultimately this is a battle against inefficiency, complacency and too much centralisation.

No matter who wins, it’s the customerwho wins the war anyways.