The Future of Financial Services – the Indian perspective

I’m writing at the Vision 2020 Financial Services Sector conference in Mumbai where I’m giving the keynote speech. I’ll post a review of my presentation later, and here will post notes from the interesting speakers and my conversations on the day, combined with my own reflections.
The conference is organized by NDTV Convergence and Wipro. NDTV runs all of the online operations of NDTV, a diversified media company centered on its business TV channel. Wipro is one of the top three IT services companies in India – for each of Wipro, TCS, and Infosys financial services is their largest client sector.
Public sector banks and transformation to a true market economy
India has 23 public sector banks, which means they are owned at least 51% by the government. In most cases these are listed companies with a wide variety of investors. While it is now well over a decade since India began its transition from a largely nationalized economy, there is still a long way to go. There is unlikely to be large scale privatization for the foreseeable future, and in many sectors other than banking there remains major shifts required to move to open market attitudes and competitiveness.

Tied IT services in India
BNP Paribas’ tied IT operations in India employs 1500 people in several locations across the country, providing technology services to the institution globally. Many major financial institutions prefer to run their own Indian IT operations rather than outsourcing, as it gives them a greater degree of control.
Tapping the bottom of the pyramid
One of the key themes in India is bringing those 65% of the population who live at ‘the bottom of the pyramid’, essentially at subsistence levels, into the economy. Most of them do not use financial services. Possibilities to access this market includes using mobiles, the telcos’ extremely broad distribution networks, and battery-powered biometric ATMs. Any technologies need to address limited literacy, for example by using purely graphical interfaces.
Financial inclusion
The Deputy Governor at the Reserve Bank spoke specifically about financial inclusion. Globally 2 billion people do not have access to financial services. Bank credit has only be used by 4% of the 58 million micro businesses in the country. Saving accounts, including post office deposits, has increased to 82% from 72%. Challenges include not just illiteracy but also the diversity of local languages, geographical access in the country’s massive land mass, and simply the cost dynamics of providing services. ‘No-Frills’ accounts have grown from 500,000 to 16 million in the last two years. Microfinance borrowers grew from 1.1 million to 7 million from 2003 to 2007. Technology will be essential to give greater access. In addition to the obvious issues of connectivity, one of the most fundamental issues is building credit profiles. Once people have a credit history, they can get greater access to financial services. .
2020: Customer perspective
An all-star line-up for this panel, including Vikram Akula, Founder of SKS Microfinance (an institution I greatly admire – I wrote about it in 2005 when Omidyar Networks invested in it), and the CEO of Bombay Stock Exchange. There are changing mental models for money in India, shifting from one of transience to one of energy. For affluent people, the increasing complexity of choice is an issue, requiring broader financial education.
Microfinance and financial apartheid
Vikram talked about ‘financial apartheid’ – much of the nation are shackled by the lack of ability to engage with the financial system. However there is a deep entrepreneurial drive across rural India that can be unleashed. Basic needs include food and shelter, which move on to aspirational education for children and household appliances. Vikram believes that the opportunity at the bottom of the pyramid is as large as that at the top, and what will drive India’s growth. Moreover, he says, if India does not get financial inclusion soon, there will be a revolt. Microfinance is arguably more financially viable than mainstream banking, with average return on investment in the high 20s. While recent legislation has allowed banks to lend to microfinance institutions, the Reserve Bank still does not allow non-bank financial institutions to lend to microfinance, maintaining financial apartheid. Mobiles will be critical, since 80% of the poorest people do not have access to a bank branch.
India’s demographics
Everyone here is aware of India’s ‘demographic advantage’ which means that 50% of the population will be under 25. There is a big contrast with other highly populous nations, with China’s one child policy leading to a rapidly ageing population. Over the decades India’s demographic profile will advantage it more and more.
Unstructured economy
Just one fifth of the working population in India works in the ‘structured employment’ sector, which means formal companies that are registered, follow employment guidelines, and pay tax. The other 80% of employees work for companies that are outside the formal system . This leads to real challenges for banks wanting to lend to the unstructured sector, including in fulfilling their regulatory requirements.
Banking in 2020
A panel of the chief executives of India’s largest banks, including State Bank of India, Standard Chartered, ICICI Prudential etc. There are already 300 million mobile phones in India. State Bank has 16,000 branches, but that’s not enough. StanChart has 90 branches, which is the most of any foreign bank in the country. Banks need to balance the demands of two segments: the tech-savvy, and those who are new to banking. In the next 12 years 500 million people will enter the workforce, including 300 million aged 21-29. Balancing the desire for human contact and the need to use technology to extend distribution and reach. There are currently no program trading or quant investment fund products in India, but there is scope for that.