“Banking is necessary, but banks are not”,
I am quoting here Bill Gates, what he said
as Chairman, Microsoft, way back in 1994.
Today, after twenty two years, has his prediction
or forewarning come true?
I intend to explore this in today’s discussion
with you.
2.
It is usual for many of us who lecture others
to say ‘We are at cross roads’, ‘The
Paradigm shifts that are staring us’ etc.
That’s because it takes time to discern
the trends that are taking place in any sector
and unless we pause to look carefully, the
emerging patterns are easy to be missed, at
great cost to many stakeholders.
And when we do pause and observe, we can’t
but say ‘We are at cross roads’, ‘The
Paradigm Shifts that are staring us’ etc.
3.
In the PWC Report in July 2014 on “The future
shape of banking - Time for reformation of
banking and banks?” they said that at the
macro level, they had identified five global
‘megatrends’ whose impacts, intersections
and collisions are re-shaping the business
world.
While these all are relevant to banking, they
pointed out the most influential of the trends
to be “the demographic and social change,
creating new customer demands and stakeholder
expectations; and technological breakthroughs
changing everything from customer relationships
to business models”.
4.
A Willis’ research report published in Resilience
in April 2015 said that the financial institutions
industry – including banks, asset managers
and financial technology companies – is
currently faced with a paradigm shift caused
by a number of key mega trends.
It identified the regulatory capital requirements,
digitalisation and technological advances,
new market participants, demographic and behavioural
changes in the new generation of customers
as some of these trends.
5.
A Report on “Connecting the Dots of the
New Paradigm Shift in Banking: Where Are We
Now?” by Scope Ratings said in June 2016
“Looking at the current trends, we view
the crossroads for banks being laid rather
precariously at the intersection of three
powerful winds of change: Technology, Regulations
and Macro developments (mainly sluggish growth
and low-for-long rates)”.
6.
So what’s common among all these researches?
It is the emerging trends in technology, regulatory
changes and consumer behaviour and expectations
which are redefining banking and banks’
role and even endangering banks' existence.
Why do I say redefining banks’ existence?
That’s because, as PWC did put it, if the
banks were to not take full account of these
trends and developments, they would risk emerging
from the financial crisis ‘recapitalised,
restructured, reformed …. but irrelevant’.
That’s a profound statement in my opinion.
Technology, Consumers and Regulation
7.
Banks today are forced to make rapid and irreversible
changes due to the developments in technology,
customer behaviour and regulation.
Let us explore a bit more on these developments.
Technology
8.
Channels - FinTechs - Apps-social media, are
the buzz words.
9.
Technological developments are changing the
way the banks and their customers interact.
These developments have created opportunities
for new entrants, not necessarily new bankers,
to disrupt traditional business models and
penetrate new markets.
The plethora of technological products and
services, such as the World Wide Web, mobile
phones and Apps, have helped emergence of
FinTech companies who offer lower cost services
for traditional services, such as e-payments
and online trading.
Social media companies such as Facebook, Twitter
and Google have a huge customer following
and are entering into the financial sector,
bringing new sources of competition.
Consumers
10.
Millennials- instant gratification - No loyalty,
these are the buzz words.
11.
There is a new generation of young people
(known as millennials).
They have different expectations and their
ways of interacting with banks are also different.
They prefer not to come to banks for banking
services.
Rather they would prefer to avail the services
through online and social media based platforms.
They are using social media not just to connect
and communicate among themselves, but also
connect and communicate with banks.
Even to complain, they prefer online and social
media and they do not have traditional customer
loyalties.
If Millenials behave this way, the Mature
customers and Older / Retirees are demanding
improved returns from investments and demand
greater transparency.
Regulation
12.
Standards - Consumer protection - Ring fencing
– Capital, are the buzz words.
13.
Since the financial crisis, regulatory emphasis
have focussed more on capital.
This has led many banks to divest themselves
of 'risky' or capital intensive assets, businesses
and even markets; this has also brought a
sea change in bankers' attitude towards risk
and clearly marked the boundary between retail
and wholesale banking.
Banks have also been investing and recruiting
heavily in compliance to meet new regulatory
requirements.
14.
Another offshoot of the stricter enforcement
of regulations, is the increasing business
and growth of non-banking financial institutions,
the shadow banks that are not subjected to
the same degree of intense regulation; they
are offering competing services to bank clients,
establishing specific funds or offering private
equity.
15.
Thus you will all readily agree that these
three trends have clearly redefined banking
and banks.
Banking and Banks - Redefinition
16.
I also said these emerging trends are endangering
banks' existence.
Am I echoing Bill Gates?
17.
From the time the concept of money was understood,
the concepts of lending and borrowing came
into existence.
But the concept of banking wasn't there.
However, the organized way of lending and
borrowing happened when the prototypes of
modern banks were established some 700 years
ago.
Banks undertook another service i.e. the remittance
service.
Thus, what the banks did viz., borrowing,
lending and remittances, came to be known
as banking.
Banking is what a bank does.
Or banks are those who do banking.
Our Banking Regulation Act says so.
18.
The mega trends that we discussed have redefined
banking and banks.
Actually it is not redefinition, but de-definition.
Banking is no longer what a bank does; it
is also what a non-bank does.
Banks are no longer those entities who do
banking exclusively; now others, the non-banks
also do banking.
19.
Chunking of banking is the norm; and for undertaking
each of these chunks, there are some specialist
entities who undertake only those chunks.
Payment service providers, P2P services, P2B
services, (SME financing), consumer retail
financing, disintermediation, crowd funding,
open ended mutual funds, money market mutual
funds, deposit alternatives, trade financing,
invoice financing, bill discounters, bill
collectors, credit referrals, account aggregators,
interest free products, syndicators, investment
bankers, MFIs, co-ops, HFCs and credit raters
are some of the entities who chipped away
chunk after chunk of banking.
Is there an element of banking that remains
the exclusive privilege of banks?
Sadly no.
That's why Bill Gates said what he said - “Banking
is necessary, but banks are not”.
20.
How this happened?
Admittedly, it is the technology and the customer
expectations which chunked away or which enabled
chunking away the different elements of banking.
Will banks really cease to exist?
21.
That's a moot point.
At least, as the PWC research report says
"While we are not looking at the end of banking,
we are surely looking at the end of banking
and banks as we currently know them".
22.
The chunking away of banking from the banks
have given enormous business and growth for
these non-banks.
With their specialization and focussed service
rendering, they are able to offer that chosen
service at greatest efficiency, speed and
at very affordable cost to the consumers.
This has stumbled the growth of banks today
and has every potential to lead to de-growth
and ultimately the decimation of banks in
future.
23.
As we know, unconventional policies are rampant
in the world.
First it was low interest; then it was near
zero or zero interest.
People thought that zero is the lower bound
and one cannot breach it.
Now the lower bound has been breached and
negative interest has come on the scene.
Jurisdiction after jurisdiction is ushering
in negative interest rate regime.
Is there any lower bound for negative interest?
Can banks survive if this trend persists?
24.
Another set of questions are about the justification
for banks to exist.
Why the society should accord the privilege
of banking to banks i.e. why should there
be a licensing for undertaking 
banking activity?
Let us recall that the West no longer officially
designate anybody as a bank; they have only
a depository institution or a credit institution.
Our FSLRC recommended Indian Financial Code
also reflects similar thinking.
The other day, Shri Mohandas Pai asked me,
given the way the non-banks do banking, what
is the justification for the banks to impose
a cost in the form of the Net Interest Margin
of 3% on 
the society.
In what way rendering banking services under
one umbrella is relevant any longer?
25.
Yet another challenge for the banks' existence
is the reaction by the society to the financial
crisis - the consumer distrust in banks.
Remember the movement against Wall Street?
The Dodd-Frank Act?
The Liikanen and Vickers Reports?
The ring fencing of wholesale and retail banking?
Faced with the challenge of dramatically decreased
consumer trust in the post-crisis financial
services market, financial institutions are
increasingly acknowledging the need for new
perspectives and paradigms in financial services.
26.
One more onslaught on banks existence is the
net effect of regulatory requirements on capital
and leverage and market and public expectations
on their capability to leverage their capital.
Banks by definition, as we know of all these
days, are the highly levered institutions.
However, if we go by these factors about which
just now I mentioned - viz., regulatory capital,
market and public expectations - we should
be dropping the definition of banks being
'highly levered' institutions.
If we add the capital requirement as per TLAC
prescriptions, bankers' usual cautionary additional
capital, yet another add on as per the public
expectation as a fallout of stress test assessments,
I am afraid, we will end up banks having a
debt equity ratio of about 4:1, which is not
too different from highly levered corporates.
That's one of the reasons why we are very
cautious and hesitant about supporting TLAC
whole hog.
27.
Therefore, the clear prognosis is that either
the banks will be dead or at least the banks
of the future are not going to be the banks
of yesterdays and todays.
What to do?
28.
I regret that at the very end of these two
days deliberations on future of banks, I have
to paint such a dismal future for your existence
as banks.
My point is we have to recognize the realities
of the day, the compulsions of the new driving
forces that demand a new paradigm in banking
and reflect on future course of action.
29.
There are hopes.
First is to take full advantage of the technological
developments and enmesh in them to meet the
customer expectations.
The new consumer is addicted to connectivity,
convenience and freedom.
They want not just Value Added Services, but
such services Anytime Anywhere Anyhow - so
nicely said by Derrydean Dadzie the Chief
Doer of DreamOval Ltd.
30.
Another prescription by some like Hennie Bester,
Jeremy Gray and David Saunders suggests that
while banks may have the urgent need to identify
new avenues for growth and the need to embrace
new information-based technologies, what is
of paramount importance is a positive shift
towards increased recognition of the social
responsibility of the financial services providers.
They argue that, ultimately, balancing profitability
with customer benefit must remain at the heart
of any new paradigm.
31.
Can you hear some ringing in the bell?
The Priority Sector concept?
The much touted, the much despised, the much
maligned, yet rising like the Phoenix?
May be yes.
But I would think that this time around it
is with a much larger perspective.
In Financial Inclusion, Green financing, AML
/ CFT and even in anti-tax avoidance efforts,
banks can play a much larger socially relevant
role than any of the chunked away entities.
32.
One big area, you vacated and / or let others
to occupy by your lackluster attitude is there
for your rightful reclaim, if only you make
concerted and conscious effort.
That is SME financing.
Small and medium sized enterprises (SMEs)
are a major, yet often overlooked sector by
formal financial institutions.
The SMEs reportedly account for more than
half of the world’s gross domestic product
(GDP) and employ almost two-thirds of the
global work force.
However, they are the neglected lot world
over.
As reported by the International Financial
Corporation (IFC), a “funding gap” of
more than $2 trillion exists for small businesses
in emerging markets alone.
I am not going into the reasons for this state
of affair.
33.
In recent years, the FinTech companies and
the market place lending have entered into
this vacuum and have become immensely and
instantly successful and have become a powerful
trend.
This trend has the potential to become a game
changer for small businesses.
Because FinTech solutions are efficient and
effective, the FinTech’s disruptive power
is good display.
If only the banks can change their current
reluctant attitude towards SME financing,
they can be a good antidote for these risks
and therefore will display their socially
relevant role, which in turn can justify their
existence for the future.
34.
I can only conclude with the idea that if
you make yourself socially relevant, not just
relevant in economic sense alone, you can
have hopes to exist.
35.
Thank you for your patient attention.
