Banking in the Digital World: A Preview

The new millennium has just arrived. Standing on its threshold many are predicting that the startling breakthroughs in Information Technology will simply alter every aspect of the way we live and work, including Banking. Many are presuming that Internet and underlying technologies will change and transform not just banking alone but all aspects of finance and commerce. Interestingly, service providers and e-commerce companies are already tying up with banks to harness enabling technology to deliver innovative services. Netizens are foreseeing that with such interdisciplinary collaborations, banking would no more remain as what it is today.

Traditional bankers are however not attaching much importance to these popular assumptions. They, looking at the history of banking, observe that banking process has changed little over time and proclaim that banking would remain so.

In examining these assumptions, we may do well to recall what Aldous Huxley said in one of his fascinating essays—“Wanted a New Pleasure”. He observed that in the self-proclaimed age of 19^th century inventions, “nobody has succeeded in inventing a new pleasure”. He says that so far as pleasures are concerned we are no better off than the Romans or Egyptians of Bronze Age. Despite inventions like Movies, Talkies, Gramophones, Radios, etc., our pleasures are no way different from the diversions which consuls offered to the Roman plebes or Indian courtesans offered to Rajas and the Maharajas of yore. These new inventions are no doubt modern and nothing like them has existed before. But because machines are modern it does not follow that the entertainments, which they reproduce and broadcast, are also modern. All that these new machines did is, by positioning themselves as ‘go-between,’ made the drama, pantomime, music and the like, which have from time immemorial amused the leisures of humanity, accessible to a larger public, perhaps at a cheaper price.

These reflections of Huxley on new pleasure are perhaps subtly reminding us that the worldwide web platform and its related technology would simply end up as a “mechanical interposition” between the bank and its clients. Does it mean banking per se would not change from what it is today? Perhaps, yes—but one thing is for sure—the style of transacting banking business and its management will change in the new millennium. A preview of such a shift may look like –

A move from ‘management’ to ‘governance’

Banks would be moving towards “Corporate Governance.” They would aim at becoming both a powerful economic entity and important social institutions that use their economic power to add value to society generally and to people’s lives individually. Through this new moral contract between banks, individuals manning it, stakeholders owning it and society, banks would be aiming at transforming themselves as value-creating institutions. Competent professionals sitting on Boards would be enjoying full and effective control over the banks and monitor the executive management. The directors would be playing the dual role of appreciating issues put forward by the management and honestly discharging responsibility towards the banks’ shareholders and depositors. They would be fostering effective decisions and reverse the failed-policies by creating a sense of shared ambition and bond of collective identity.

Banks would be maintaining utmost transparency and fairness in their dealings with external environment. Annual reports would make more meaningful disclosure of information to shareholders. They will be having an active role in shaping the future of the banks through intelligent, judicious and discreet use of their voting rights.

A move from ‘financial-intermediation’ to ‘knowledge-intermediation’

A gradual decline in the banks’ basic role of “Deposit taking” and “Fund giving” has already been set in motion. The share of bank deposits in the total resource mobilization is reported to have fallen from 89.7% in 1980-81 to 58.6% by 1996-97.Similarly non-food credit of banks to total resources has dipped to 27.4% in 1996-97 from 41.4% in 1995-96.

This is perhaps the beginning of a newbanking scenario that would compel banks to exploit the potential for business payoffs from ‘knowledge’ exchange between banks and customers. This drives banks to become “integrators”—of being able to see beyond the obvious differences but locate common thread between the conflicting demands of customers; “Diplomats”—who resolve conflicts and influence customers to see the logic in the market demands and “cross- fertilizers”—in being able to bring the best practices of one place to another.

This transformation helps banks in acquiring knowledge of markets, market players and interplay of the market forces both in domestic and international markets and assume the role of a financial counselor to the corporates. Simply put, knowledge will not only become the working fund of the banks but also the ‘differentiator’ of banks. Driven by “Knowledge-Fund”, banks would simply become providers of financial services like derivative products, corporate risk management strategies/packages, counseling for supply chain management, etc. 

A move from ‘brick & mortar banking’ to ‘Net banking’ 

Banks will install e-banking as a “go-between” to service customers. A client in need of say housing/car/PC loan may simply login into the website of a bank and key in his personal and financial data, social status and other required information that will be processed online and credit decision communicated. Similarly, while servicing the debt the customer may login to the payment system network of the bank and order for transferring installment amount to the credit of his loan account. A plethora of services like stockbroking/lending, management of D-mate shares, transfer of funds, etc. would be offered on Internet. 

A move from ‘financial leverage’ to ‘operational leverage’ 

Banks are highly geared entities; the ratio of owned funds to liabilities being hardly 10 to 12%. All along, financial leverage has been the hallmark of bank profitability. This may no more be feasible in a market-driven economy where the ‘spreads’ are becoming thinner and thinner. To sustain profitability, banks would leverage on their built-in branch network by undertaking varied activities like selling insurance services, portfolio management, depository services, etc. 

A move from ‘expansion’ to ‘contraction’ 

With mounting competition from national and international players, banks would find no interest in expanding their branch network. Rather they would work towards its compression for rationalizing the costs. There is a great possibility of loss-making rural branches getting merged. One-man managed electronic kiosks will replace these branches on the countryside. With the employment of e-banking, urban banking is also likely to see merger of small branches with main branch at the respective centers. ATMs and Telebanking would replace the urban branch network. 

A move from ‘big-ticketing’ to ‘retail banking’ 

With the opening of international financial markets to Indian corporates, blue chip companies are freely moving in and out of domestic markets to garner price advantage. This would compel banks to shift to mid-cap growing companies and high net worth individuals. In this context, retail banking will take over the present place of wholesale financing. 

A move from ‘administered-social-compulsions’ to ‘concern for society’

With the spread of visual media across the country, awareness levels of common man have gone up. This gave a boost to their expectations, aspirations and in turn disillusion. These societal developments compel banks to be conscious of “community embeddedness” in their functioning. They would start caring for the aspirations of local people. Their marketing strategies would address these aspirations through matching products/services. The result would be waning of ‘owner-driven compulsions’ like targeted-lending, etc. and their replacement by the bank’s own concern for social obligations.

Community service activities and partnerships with non-profit organizations would assume strategic importance. Resultantly, ‘cause-related-marketing’ would be practiced to acquire customer and public goodwill that is essential to sell even other services/products.

A move from ‘mechanically oft repeated service delivery’ to ‘creative customization’

When new technologies and the competitors are rocking the industry, banks cannot remain satiate with their present array of products and services. Secondly, free markets encourage unexpected competitors who don’t care about the ‘rules’ and the ‘understanding’ the industry has hither to following. This results in fierce competition in the industry. Hence, banks would foster an atmosphere that encourages innovation and creativity in the organization. Employees would be encouraged to innovate new products/new delivery mechanism that suits the growing needs of sophisticated customers. In fact, innovations will become the hallmark of success in making and retaining relationships.

For the most part, it’s the young people who would be churning out huge amount of grassroots innovation in organizations. Leaders of tomorrow will empower more people at more levels to break existing rules in search of new ideas that lead to dramatic breakthroughs. They would be striving towards sharing and innovation fostered by ‘knowledge’ management from top-down to channel it towards banks’ growth. 

A move of trade unions from ‘protectionism’ to ‘professionalism’ 

The ‘mindset’ of unions/associations would change from offering ‘protectionism’ to their members to demanding performance from the management. They would become more and more aware of the fact that their welfare lies in the ultimate growth of banks. In the process, they may even on their own volition, recommend/demand to hive-off some functions that warrant high level of specialization, into independent units to build up core competency and thereby edge out competition. One such move could be, to hive-off the branches opened recently by many banks in the metropolitan cities to exclusively cater to the corporate clientele as separate units or the rural branches into a subsidiary.

A move from ‘fat and multi-layered’ organizational structure to ‘lean and mean’ structure

The fierce competition and the resultant shrinkage in ‘spreads’, is sure to force banks to consciously work towards reduction of staff and also to compress the hierarchical levels. With the amount of capital investment being made on technology, banks cannot afford to remain oblivion of the fact of a great chunk of jobs becoming redundant. VRS/Golden shakes would thus become common. Compression in the hierarchy would also be forced to reduce banks ‘response- time’ to customer demands. In the process old jobs would disappear and new jobs will be created as a function of the business strategies. 

A move from ‘creeping-growth’ to ‘bullet-growth’ 

The pressure of ongoing reforms, disintermediation and mounting competition from the newly entered private sector/foreign banks will further compress the spreads. Unless volumes are increased, organizations cannot afford to survive with such wrapper- thin spreads. Thus “size” of the balance sheet will become very critical in the days to come. But growth in balance sheet would ask for growth in owned-funds too. Admittedly, this takes a longer time to build up the necessary reserves/mobilize additional capital. To obviate the problem, acquisitions and mergers would become the in thing of future banking.

A move from ‘branch managers’ to ‘proprietors’

In today’s banking scenario, management stability at branch level is alarmingly absent owing to high turnover of managers. Such weaknesses obviously would affect the service quality and in turn profits. In tomorrow’s banking, managers will be retained in the same job for at least 5 to 6 years. There is no wonder even if they are labeled as proprietors of the branches and asked to take ownership of problems and the opportunities. This move would also ensure empowerment of people that enables leaders at operating unit level to motivate an army of talented people to march towards the goal set by corporate office.

A move from ‘executive’ to ‘leader’

Executives in the new millennium would simply metamorphose into leaders. They no more would be guided by the rulebook. They would simply get people want to do what needs to be done through their impressionistic articulation. They would shift from ‘pushing’ to ‘pulling’ of people towards organizational goals. They get actively engaged in creating a ‘vision’, communicating a direction and aligning the people behind the ‘vision’ and motivating and inspiring them to stay put with it. There will be a clear shift from ‘command model’ of management to ‘persuasive model’ of leading people towards the bank’s goals.

Secondly, conceding the degree of complexity in the emerging business environment, organizational goals will be pursued through the combined intellect of senior executives who share a commitment to the common good of the organization. The future growth of banks is no more dependent on the independent actions of disaggregated individuals but on the closely knitted competent executive teams. The principle of collaborative problem solving would be added to the corporate charter. This would enhance the scope for the leaders to break through the “Knowledge-doing-gap” syndrome, and transform awareness of best practice into a realization of best performance. 

A move from ‘knowledge accumulation’ to ‘knowledge sharing’ 

Accumulation of knowledge among individuals would no more remain valid. Banks would strive to network the islands of excellence within the organizations and pool these individual experiences of excellence into a repository of knowledge that is freely accessible by all the employees. Twentieth Century organizations would become not only learning but also teaching organizations. The middle level managers, besides becoming leaders, would also undertake the job of a trainer to build up operational competency among the frontline staff facing customers directly.

A move from ‘state of comfort with the status quo’ to a ‘state of healthy-discomfort’

If banks have to grow in asset creation and profit generation they have to not only have good cost controls but also set newer and higher objectives and plateaus. The leadership would therefore purposefully create discomfort in the organization with the “status- quo” so as to keep the organizational transformation dynamic. Raising standards by constantly creating new services/products and penetrating new markets would be the modus operandi of growth.

Conclusion

It appears that in the future there is going to be a paradigm shift in the style of banking. Each bit of that shift will serve as a human resources challenge to the banks. To sum up, banks’ management would be required to display quite an ‘unimaginable intellectual interest’ to steer through the uncharted waters, more so when the future is ‘always ultimately unknowable’. 

Courtesy: IBA Bulletin, Vol XXI, No.3, March, 2000.