Purpose driven financial services operations for post-COVID cost rationalization

Conservation of cash, lower leverage and cost reduction are key to emerge as winner post-COVID-19. Banks, NBFCs and financial market institutes can re-emerge stronger by controlling the controllable costs, while focusing on its purpose than traditions to build financial institutions of the future.

In the foregone decade, music predominantly used to be delivered through magnetic tape cassettes or other physical means. All millennials have in their lifetime visited a shop to buy a cassette and which was later followed by CD, DVD and Blu-ray. To get my hands on few specialised regional music albums, I have waited months to travel to hometown to fetch them. The music industry which was USD 21.5B in 2000 precipitously dropped over last two decades to a mere USD 6.9B and now again showing an upswing driven by music licensing, ad-support and paid streaming (Source: Visual Capitalist).

Today, the entire consumption of music is on a where-is basis – transitioned from a trip-based purchase of a vinyl record/ cassette/ CD. Post the era of concerts, for decades the purpose remained the same - make music available to the consumers wherever they are, now without even any locational barrier. Further, a cherry on top is that unless you are looking for exceptional quality music, all music is cost-free. If digitalization can bring such a revolution to the music industry by making existing industry competencies obsolete, then what is stopping the financial services sector from embracing it. Can we not make financial services driven only by purpose through a transformation of the business model and value chain, all this to sustain and flourish in the COVID-19 era and beyond!

The purpose - Primary role of financial services institutions, what changed with the emergence of the internet and now with Covid-19?

If we look way back, financial services institutions came into existence to provide financial support to emerging businesses and over a period ventured into other activities like retail banking, investments, insurance to retail as well as business consumers

Bank’s engagement with consumers at the outlets was mainly to act as information consultants, to sell new services, conduct transfers on behalf of the customer who did not have the infrastructure or knowledge to conduct it themselves, reduce fraudulent enrolments, maintain documentation and other admin tasks like sharing bank statements, attestation of account details, etc. Banks could only give these services when customer physically visited the branch to open an account where his details in terms of photo, identity and address proof which were taken as attested hardcopies. The hardcopies became redundant with emergence of internet and identity documents were centrally available and centrally verified however banks continued on the old path of branch visits till the pandemic environment brought the physical visit to a near halt.

Consumers benefitted by information/knowledge/assistance provided by the bank and visiting a branch for them is the correct choice. Consumers are incentivized with a risk-free authentic service by bank employees at a registered bank outlet which significantly reduced their risk of fraudulent services.

COVID-19 has instilled a new risk in consumers – ‘the risk of life’. The consumer now is weighing ‘life risk’ against the ‘risk of fraudulent services’. Both risks are non-negotiable but is there a mid-path to make the best of the situation with internet/digitization as a facilitator!

How do we achieve the same purpose of financial services institutions post Covid-19 in a cost-efficient way: Covid-19 has made all participants in the Financial Services Sector to look at two aspects very closely – Touch-free and Cost-free

Touch-free Banking:

Moving forward to a touch-free banking with social distancing norms in place, the banks will have to embrace a new way of doing business embarking on a culture change with heightened resistance by existing practices.

The transition to touch-free banking had taken place to an extent where deposits, transfers and many other activities were done by internet-savvy customers. However, we cannot ignore the fact that internet literacy and penetration is very different from mobile penetration of the country. And the numbers are still very less when it comes to understanding safe banking aspects and consumer resistance is high due to the fraudulent phishing practices.

Zero touch KYC: The purpose of KYC is to know the identity, the address during account opening and during the lifecycle of the relationship. KYC and documents to be completely done online with flexibility to choose from various identification documents already available with the customer – that could be passport, national identity cards e.g. Aadhar card in India, MyKad in Malaysia or National Identity Number in Nigeria, driving license, company verification, mobility data, video discussion, positional data which can be availed and verified online. Now several KYC programs are in place where individuals are identified by several authorized identification documents, fingerprints and biometrics, transactions are mostly authorized by OTP’s on personal mail ids or phone numbers.

To make account opening as easy as opening an account on Amazon, PayTM etc. where account can be opened in less than 2 minutes while the complete KYC can take more time. Meanwhile, the person gets an identification number and is enabled to conduct certain monetary transactions with a cap.

Branchless Banking: The purpose of the bank branches is to provide a safe place to meet and conduct transactions and register it in the bank’s ledger. Business needs customers and when customers cannot reach bank branches, large number of physical banks cannot be justified. Today the ledger is available directly with the customer to write through internet banking safely. Banks can hire workspaces with 2-3 employees to manage information asymmetry. No hard copies, no physical form filling or applications, all managed by digital environment. The massive cost saving to be channelized towards research and development/online training/ knowledge sharing/ marketing/ advertising. Dispensing, collecting including exchange of multi-currencies to be moved completely to ATMs. TDBank, Capital One, Ally bank, Alliant bank, Simple Bank, Kotak 811 app, SBI Yono app, Toss Bank (South Korea) who started pre-Covid-19 would be leading this journey. This model will further augment borderless banking once it is able to comply with the regulations of various home and host countries.

Neighbourhood Banking: Rural branches mainly are knowledge/information centers to increase familiarity of its products and services. Its main task is also to act as a trustworthy partner to the rural customers understand their needs and be right by their side to complete any transaction by them. Though complete person less banking may not be a reality in the near future in many developing and even developed economies, however, some handpicked erudite people of a locality can become a facilitator to some of the banking systems to overcome the KYC hurdle from banks side and take care of authenticity & risk-free banking, which is a requirement from customer’s side. These enabling people are to be incentivized not for the value or volume of transactions but for their role in number of clients to become self-sufficient. All transactions later to be overlooked by an AI/ML algorithm in real-time after initial introduction from both sides to avoid any errors.

Cost-free banking:

All the touch-free operations, once done right, is very well set for the era of cost-free banking. The banks should not do digital transformation for digitization, optimisation or rationalisation of existing operations. They should build it by keeping the purpose of banking in mind and the available solutions today and possible in the future. This can reduce the cost-to-income ratio or expense ratio by half. I would like to break the cost into two major components – cost for customer and cost of operations. While the two are linked, I would propose to redefine them distinctly through

• Minimize cost for the customer through customer retention and
• Optimize the cost of operation through the Uberization of banking services.

Focus on Customer retention: Cost per customer is an aggregation of cost to acquire, cost to nurture and cost to transact.

• Post Covid-19, it is prudent to focus on customer retention as that would convert into immediate benefit without incurring significant cost of customer acquisition which is around INR 2,000 – 3,000 per customer. The cost to acquire is typically higher due to the advertising and promotions that are run in the digital landscape. However, a low-cost operating model would allow to pass on the benefits as promotions for acquiring the customers.
• Unlike eCommerce, for financial services, once the customer is acquired it is possible to keep them transacting by giving the right impetus. However, in the digital world, cost per transaction should be zero and any value above that should be scrutinized strongly. With zero cost to transact, customers should rather be encouraged to transact more at zero fees. FinTechs like PayTm, Yuebao have continuously encouraged the customers to transact with zero fees. This ‘zero cost – zero fee’ transaction has helped them to understand the customer, their behaviour, their wallet size and today they have greater insights into underlying trends that drive their customer behaviour.
• For customer retention, it is extremely important to understand and nurture the customers. The customer lifetime value (CLTV) from nurturing customers with the above approach is much higher at a much lower cost. The retention in the Covid-19 period to be hinged on empathy with operational simplicity (e.g. moratorium enablement at a click of a button). This will enable winning back the customer for other services e.g. all payment transactions, broking transactions by the organisation that has enabled both support during troubled times and transactional simplicity.

Uberization of Banking services to build a low-cost banking operating model: Uberization teaches us three key aspects i.e. simplify, variabalize and leverage word of mouth.

• Simplification would enable a significant lowering of cost which today is incurred due to reconciliation, mid-office risk management or manual exception handling. Immediate service fulfilment through a simplified automated workflow would increase client satisfaction and what FinTechs are doing today. The lower cost with better user experience is allowing them to attract net new customer base by passing the benefits through better pricing.
• Lowering of fixed cost leading to variablization can happen through asset-light model. Financial institutes can become asset-light by reducing their in-house technology and start processing debt through partnerships. Partnerships allow variablization of cost, limited lock-in and quick time to market. Partnerships, however, should be seamless i.e. the boundaries between the two organizations should be minimal be it process, data or technology. This is possible with proper use of technologies like Blockchain, APIs and Identity & Access Management.
• Leveraging word of mouth is possible only if each word of mouth is positive. Hence, it is extremely important to have a world-class service and pay special attention to customer delight especially for initial set of clients. To do the same, doing the simple things in the best possible way becomes critical. This also keeps the burn rate to minimum, allows to experiment, sharpens the initial services and makes scale-up possible quickly. A low cost – scaled up model due to demand pull (due to positive word of mouth) enables growth without sacrificing profitability.

The imminent economic challenges of our changing world will spearhead the financial sector to embrace technological advancement enabling safe virtual interactions and as an effect reduce significant cost. Moving ahead with pandemic’s omnipresence, the financial institutions must recuperate and regain purpose-driven relevance as a provider of financial services (saving & borrowing) to help the economy to restore momentum. In this journey, the financial institutes can reinvent themselves to a low cost highly valuable change agent of the new world.

By Siddhartha K Ghosh, Cluster Leader, NBFC and Financial Markets, IBM, India/South Asia

(The author has consulted many leading enterprises in BFSI, eCommerce and FinTechs in India and abroad. All viewpoints expressed are completely personal).