Missing Link

Two years ago, Bank of Baroda (BoB) announced over half-a-dozen tie-ups with financial technology companies or fintechs. Start-ups like CreditMantri, FundsTiger, Probe42, Power2SME, IndiaLends, KredX and Fisdom came on board, bringing expertise in areas like SME lending, algorithmic lending, bill discounting, retail lending and wealth management. Such wide-ranging partnerships with private sector technology players are rare in the public sector bank, or PSB, space. Apart from BoB, State Bank of India (SBI) is the only other PSB which is seriously digitising its processes and working with fintech players to bring efficiency in various parts of the value chain. The PSBs - which together control more than two-thirds of the banking system in terms of deposits and advances - are in general way behind their counterparts in the private sector in use of technology. Fintech players often complain that they find it difficult to get an audience from top bosses of many PSBs. These include many value-added services, or VAS, providers, which offer services such as credit scoring, reading unstructured bank statements, analysis/interpretation of a transaction in real time, data analytics and fraud detection.

Are PSB' legacy IT systems coming in the way? Or are PSBs too worried, even paranoid, about privacy and security issues? Or is it just lack of strategic direction?

The Missing Vision

"We don't see a sense of urgency as they are busy with other pressing issues such as asset quality and consolidation. I am sure PSBs will wake up to the realisation sooner than later," says Ajay Adiseshann, Founder & Managing Director of PayMate India, a fintech player that works with SBI as one of the partners for B2B payment automation in enterprises and SMEs. "The visionary leadership is missing. They are not able to see the fast changing future of banking globally," says an expert.

The role of the top deck is the key here. For instance, when Arundhati Bhattacharya was the chairperson of SBI, the bank took several technology initiatives such as launching fully digital branches and wallet buddy, apart from other digital offerings. Similarly, the credit for fintech engagement at BoB goes to its MD & CEO, P.S. Jayakumar, who was part of a group of outside professionals hired by some PSBs. He had co-founded a company in the housing sector, was with Citibank in India and Singapore for over two decades and has worked extensively in the retail banking space. It is such leadership that the PSB pack is missing.

Apart from this, for many PSB CEOs, the last three-four years have been an extremely challenging period, as they have been fire-fighting the problem of deteriorating asset quality that is threatening their very existence. "The last three-four years have been difficult due to Jan Dhan Yojana, Mudra loan targets, demonetisation, and falling asset quality and credit growth," says a senior PSB executive. There have also been too many changes at the leadership level.

There is also the issue of attracting fresh talent in the digital space. Most senior management people in PSBs are associated with the legacy side of things. "There is a dearth of talent when it comes to future technologies," says Adiseshann of Paymate India. "The understanding to navigate the shift to newer technologies through partnerships is also not there," says the CEO of another fintech company.

Some say the biggest issue is the will. "Massive investments have already gone into the core banking platform. Developing API (application programme interface) layers to engage with fintechs does not require major investments," says a technology player. Fear of cyber security threats also prevents PSBs from taking a call on engaging with external fintech players or developers. "From the security standpoint, many PSBs are not ready with API layers. They have this mindset of hosting everything in-house and running everything in their data centre. This won't work. Everything is connected and cloud-based today," says Adiseshann.

The Digitisation Preparation

The PSBs should follow their private sector counterparts or SBI. There are quite a few large private sector banks that have been quite aggressive in organising Appathon, Hackathon and fintech accelerator programmes. Axis Bank, for instance, has set up an in-house incubator where a dozen bank employees work on creating prototype solutions. SBI, too, is setting up a 15,000 sq. ft. centre at Belapur to house fintech start-ups as well as regtechs, which specialise in regulatory issues arising from the emergence of new technologies like blockchain. Many says there is a lot of work that fintechs - VAS providers such as Perfios, Creditvidya and Happay - are doing with private sector banks that the PSBs can replicate.

Banks also need a technology clean-up. API, which involves fintechs plugging into banks' systems, is already taking off in a big way. APIs are like pipes where banks core banking systems get connected with fintechs.

The PSBs also need to use big data. This will facilitate faster processing of a large volume of structured/unstructured data and advanced analytics to gain insights for business decision making and development of new products. Finally, the PSBs should also explore tying up with aggregators and use them as the front end. Under this model, banks will have to provide a plug-in (through APIs) to aggregators such as Bankbazaar, which is already helping many banks get new clients. Many PSBs have already experimenting with by selling credit cards and unsecured loans such as personal loans through these aggregators. "That's one way they could possibly survive," says Adiseshann.

Shyam Sundar Banik, General Manager (Alternate Delivery Channel), Bank of India, however, says PSBs are catching up fast. Before demonetisation, every PSB was working on its own. This has changed due to government push. "The entire digitisation progress is now being supervised directly by the government. There is weekly evaluation by the department of financial services. We also have the Indian Banks Association for discussing issues and knowledge sharing," says Banik of Bank of India.

The cost of not doing anything

The cost of not doing anything will be huge for PSBs. First and foremost, they will lose new technology-savvy customers in the digital era, where customers are moving to mobile, tablet and kiosk interfaces. What is probably saving them is customers who are older and those living in rural and semi-urban areas where people still prefer branch banking.

The opportunity cost would be even bigger as big data and analytics can be used to improve operational efficiencies. The use of artificial intelligence, or AI, machine learning and software robotics is already helping banks in faster decision making. ICICI Bank and a few others are already using software robotics for improving operational efficiencies. SBI, too, is using risk analytics for appraisal of fresh applications and monitoring the loan portfolio. "Analytics-driven, pre-qualified lending programmes launched in 2016 have generated significant business while reducing the cost of acquisition," says an SBI report.

The challenge is not from digitisation alone but also from newer technology infrastructure like blockchain, the next revolutionary wave, which is already being adopted in the financial services space.

Still, many see PSBs losing customers and market share gradually. "PSBs are very strong in terms of relationship with customers. But whenever the shift happens, it will happen quickly," says a banking industry consultant. If the government has to take the economy towards cashless, it has no option but to nudge the PSBs to go hi-tech.