Playing catch-up

As digital-born-and-bred payment companies gain traction, banks put up a brave fight by reconfiguring their payments ecosystem

In March 2012, American Express launched a Twitter sync feature for customers to get discount deals by tweeting offer hashtags and in the next year, the card company went on to integrate payment into Twitter. The 1998-founded PayPal is known to have revolutionised digital payments, currently processing around 11.5 million payments per day across 203 markets globally. Add to that internet giants like Amazon Payments and Google Wallet, and the mobile payments plot gets thicker.

Closer home, companies in the mobile payments space have mushroomed all over India; there are about a dozen mobile wallet firms, including Paytm, with 20 million active users (more than the cumulative number of credit cards in India), and others like MobiKwik, Oxigen, ZipCash and Citrus, which allow users to digitally store cash (under a cap of Rs 10,000) typically for low-value mobile and online transactions.

Why are all these companies important? Because digital-first companies, by setting the tone for new paradigms in payments, have forced traditional bankers to sit up and take notice. The fear? That digital-savvy customers will migrate to slick, new technologies and fast-track convenience, veering away from old-fashioned banking payment instruments.

Consider these facts: 64 per cent of Indians are willing to make purchases on smartphones this year, compared to 2014 (source: Dyn). SMS-based payments have the ability to reach out to the unbanked sector. Over 40 per cent of digital wallet users hail from tier-II and tier-III towns. What's more, competitive lines are blurring with telecom companies entering the arena, an example being Vodafone's M-Pesa mobile wallet designed to reach out to the under-banked or unbanked population. With 943 million mobile connections in India (source: TRAI), ignoring the mobile boom can prove fatal for a financial institution.

Banks, regarded as custodians of wealth, need to be prepared to face non-bank attackers or digital natives like Paytm, if they are to compete in the digital game for the customer's share of wallet. Domain expertise is where niche digital players have the lead. Having said that, banks are not blind to the advantages of going digital, particularly in a core area like payments. A whole host of players, including behemoths like ICICI Bank, Kotak Mahindra Bank and even State Bank of India have launched a slew of products to address the evolved needs of digital-savvy customers. But a product is just a battle strategy - if the war has to be won, the traditional banking ecosystem has to undergo a metamorphosis and organisations have to reorient themselves around digitisation.

Being late movers, how are the banking giants gearing up to compete with digital payment companies? What are the clear returns in going digital? And most important, how prepared are they for the host of challenges in their way?

  A change from within
"Banks have limitations in terms of the number of branches they have. It is in a bank's interest to digitise processes," says N Jambunathan, DMD and CIO, State Bank of India. And digitisation, much like charity, begins at home, or in this case, at the organisation. SBI lets its teams make use of tablets for field inspection and customer doorstep services. Or take ICICI. While digital ideas can come from anyone, ICICI has a special innovation team of 15-20 people comprising a mix of business development, technology and operations people. Resources are hired not just from banking, but also digital arenas like credit card companies and e-commerce companies. "We have embedded a youth team in the retail bank, as most mobile payments are youth-led and we need to know how young people think," says Rajiv Sabharwal, executive director, ICICI Bank. The average age of employees is 30. Several hires below the age of 25 are made from IITs and IIMs.

Ideas, before being taken to production, are taken to the cross-functional innovation team to check feasibility. Teams not only scout new trends on the internet, but are also sent overseas to ascertain which international products can be tailored for India. Investments are being made in big data, CRM software, and multi-channel retail. Usually, when one talks of digitisation, it is associated with customer facing teams only, but an internal subliminal digital culture is crucial. ICICI, Kotak Mahindra and SBI have internal apps for employees which serve as HR dashboards.

Kotak Mahindra embarked on the digital journey two years back with a mobile banking app to grow the customer base beyond the branch footprint. The bank had the right distribution footprint: targeting the mass-affluent, digitally savvy customer in markets in which mobile and internet penetration was high. Emphasis was laid on choosing which customer problems need solving, bettering salesforce productivity, transaction convenience, reducing overall customer acquisition costs and addressing pain points for channel partners. Kotak Mahindra works with tech innovators, billing partners etc to build a collaborative digital network ecosystem.

When banks go social
India's social media adoption has been phenomenal, as the second largest market for Facebook, third largest for Twitter and the largest for WhatsApp. Banking on social media almost seems like natural progression, with Kotak Mahindra and ICICI both taking to the hashtag banking concept. "Twitter is not a financial instrument medium; it can be a social layer on top of it," says Arvinder Gujral, director, business development, Twitter India and South East Asia.

Used as a grievance redressal medium thus far, Twitter is now a platform for novel banking services like finding the nearest ATM, recharging your DTH or prepaid card etc. To transfer money, for instance, linking of Twitter and bank accounts is required, and a direct message on Twitter to the bank does the trick. Social banking addresses security concerns as no social media platform stores bank account data, and a second factor authentication (possibly a one-time password) is a prerequisite for final transacting. The financial transaction happens at the banks' back-end, digitally; all Twitter does is facilitate the conversation. Ditto for Facebook banking, where one can pay bills, ask for a cheque-book, transfer money etc.

Hacking on social media accounts cannot lead to hacking of bank accounts. Take Kotak Mahindra's KayPay offering, which rides on the IMPS (Immediate Payment Service) platform of NPCI (National Payments Corporation of India) - an attempt to woo even non-Kotak customers. It allows for payment transfers via Facebook without knowing a recipient's bank account details. Data crunching reveals more than 50 per cent of Kotak Mahindra's customers are on Facebook, which is why the bank launched its Jifi products with the blogger community in key cities for better marketing.

Addressing concerns and challenges
Research data is the cornerstone for a bank's digital strategy. Customers tend to use cash for low value payments, and cards for high value payments.

When ICICI examined why this is so, it found the reason to be the lengthy duration to finish a credit/debit card transaction. Through NFC technology and contactless cards, ICICI worked with a regulator for low-value transactions, like auto-recharging metro travel cards.

Similarly in the payments space, all banks offer people to people (P2P) transfers by way of adding beneficiaries, which is great for repeat or high-value payments but cumbersome for one-time transfers or low-value payments - an area of expertise for digital-first companies. "When we compared the internet journey with mobile, some felt let's bring the same offering on mobile or let's have a stripped-down version of the internet on mobile," says Deepak Sharma, EV-P, digital initiatives, Kotak Mahindra Bank. "We chose none."

As mobile is an on-the-go device used when people are pressed for time, the key payment issue here is tedious beneficiary registration on a small screen. The Kotak mobile app hopes to address that with a one-time funds transfer feature including a search bar in case of multiple recipients, device authentication for personalising widgets without app log-in, and facilities to integrate multiple bank accounts on the same app. For low value-payments like to grocers, vendors etc, Kotak has options to 'Mail Money' (for internet banking) and 'Message Money' (for mobile phones), where a mobile number and an email id are sufficient for the bank to send links to make transfers and authenticate the transaction.

The merchant payments space is one where digital natives have a firm foothold, with a flurry of tie-ups with e-commerce, travel, food and other portals. Here, banks have had to introspect and understand the problems faced on a banking interface while purchasing on digital media.

The first big issue is transaction failure: on the web, almost 30 per cent of transactions fail at the checkout page while transaction failure rate is as high as 50 per cent on mobile apps. Add to that, most merchants today drive shopping through mobile, going by customer preferences. "Fifty per cent is too high a failure rate in this space for those looking to make transactions on the move!" exclaims Sharma. Kotak Mahindra decided to target travel, where one needs to make a sure-shot payment for booking, unlike other categories which offer cash on delivery facilities. On Kotak Mahindra's m-store, which has a tie-up with Goibibo, customers can choose flights and hotels, checkout, and complete transactions without remembering card details.

On the back of these benefits on their m-services - security, zero failure rates, direct integration and no card data inputs - bankers are counting on customer acquisition and customer delight. It is a paradox to see banks trying to do things which are bank-agnostic. What do they have to offer which digital companies don't? "People love technology, but not at the cost of trust, and research shows that people trust banks most with their money," says Sharma of Kotak Mahindra. "When we researched customers on where they would place their bet - convenience or security, more than 80 per cent chose the latter." For small value transactions, they may prefer convenience, but won't risk large sums - a clear advantage area for banks.

Interestingly, banks do not earn additional revenue as they are not levying transaction fees for m-services, unlike digital wallet providers, which charge 1-5 per cent for various transactions. The attempt is clear: every bank brand wants to become a customer's primary banker on the back of increased transactions. Two, the ball-play of payments should largely remain with the bank. The incremental benefits involve customer retention/stickiness.

Furthermore, automated digital processes by default spells lower cost of services and transactions. The advantage of the digital world is having a very thin back-end as compared to what it would be in the physical world.

Banks are also countering the varied promotional offers given by digital wallet providers, by flagging offers of their own. Transacting on banking mobile apps can now win you cars and even give you discounts on flights or entertainment tickets. But while this will induce trials, the larger attempt is to get consumers hooked onto the convenience and security of being on a bank's mobile platform without having to remember cumbersome bank or card details, much akin to other mobile wallets.

"We think we can precede most of these things in the market," says ICICI's Sabharwal, on comparing ICICI's digital bank (called pockets) or its remittance services, with the likes of PayPal and Paytm. Pockets is a full credit bank offering all products, whether liabilities or assets, or insurance, completely in the digital space. "Banks have the capability to offer much stronger, more comprehensive propositions." A physical branch network - a bank's forte - can also aid in sorting last mile issues, as opposed to a purely virtual presence that digital natives have.

Another important competitive advantage banks are relying on is their ability to not only allow customers to make payments from their wallets, but also absorb unused wallet money into term deposits, so that it brings more returns to customers as opposed to lying idle in a non-bank company's digital wallet provision. Further, banks have the ability to roll out other services like credit and loans, on the back of m-services.

"Digital service providers obviously do not have the same clout as banks do in India," says Jambunathan of SBI. "One must consider that such wallets also need to be accepted by merchants. Banks have such a large network that as usage of our wallets increases, acceptance will grow." And services such as in-app purchases of movie tickets, food and even payment of electricity bills are only set to proliferate.

Having said that, competition in the m-payments space is only going to get racier, as telecom companies along with digital wallet providers eye payment bank licences.

EXPERT TAKE: Shinjini Kumar

No easy task

In India, there is just enough disruption for banks to initiate an honest digital dialogue. As unlikely partners come together to forward the digital agenda, India's payments banks will be an experiment to watch out for. It is important to better understand the digital entrants, so that in the new paradigm, each can bring in their advantage rather than be saddled with the other's disadvantage.

• The ability of technology companies to app their way is impressive. Once you get hooked to your shopping, restaurant, travel or movie app, such companies unassumingly make their presence felt alongside netbanking. Tech companies simply latch on to new habits being formed by pampering providers of other services on the back of social information, transparency and differentiation.
   
• For the financially excluded, leapfrogging is working in favour of technology companies. Being young, mobile-abled and bank un-abled, this customer is quick to see the benefit of signing up with someone who is available, flexible and respects her time.
   
• The absence of entry barriers in the technology arena drives efficiency and constantly puts downward pressure on cost of delivery. On the other hand, banking has suffered from high entry barriers, driving service quality down to a low common denominator around regulatory minimum and preventing differentiation.
   
• Banks are weighed down by legacy systems and partners. Their customer proposition is essentially multi-product, which gives them lasting market power, but also makes it harder to focus their data mining efforts.
   
• Armed with digital advantage to detect fraud, digital companies confidently open doors to all. Given the dynamic nature of population and economy, there are substantial benefits to this universality.
   
• The proposition of technology companies is built on consumer choice, thus specialising in targeting behaviours. Banks believe that every customer will choose a bank because it is 'safer', which may only bear out for savings. Banks, however, will continue to dominate India's financial landscape. Some of them will succeed in bringing about fundamental shift in behaviour and become digital banks with a full-service offering. The regulatory framework will enable others to collaborate and co-opt. Non-bank providers will be constrained by pre-funding and no-cash-out and will judiciously get co-opted. The ball will be in the court of regulators to ensure that flexibility, open entry and quick buyouts, that make the technology sector agile, are somehow incorporated in the new framework to prevent 'new banks' from quickly racing to the bottom.

Shinjini Kumar
Partner and leader, banking and capital markets, PricewaterhouseCoopers