Digital Divide and its impact on Banking

If you had recently read an article or book around banking, you would have noticed a message about the Armageddon that is going to hit the banking sector specifically traditional banks and how the days are numbered for those in that industry. The intent of those authors may be to give a wake up call to the industry, so it is worth exploring those views - why and where are they coming from and what are the key concerns that need attention. 

Brett King’s latest book Bank 4.0 - Banking everywhere, never at a bank will be an excellent place to start. In Bank 4.0, King puts forward that the future of banking, in fact, will arise from a developing economy and not from an established incumbent sphere. He quotes the changes around payments, micro-lending and savings in China, India and Kenya to support this view. A very valid perspective concerning those three markets and it is not easy to understand what is going on in those three markets if you have not traveled or lived there. The rise of Alipay, PayTM and m-Pesa as financial service providers from the mobile phone that are connected with the customer’s daily lives, made these names and platform a big success. These technology first players made significant impact and inroad in markets that had sizable unbanked population. 

While the traditional financial institutions have not gone out of business because of the changes brought by these players, the traditional banks are feeling the pinch regarding lost deposits and related revenue in China. The traditional players are quickly reacting with higher interest promotion and adapting to the mobile model by making their services available either as standalone or in the marketplace built by these new tech players. A quick view on the three payment players’ journey will show that the opportunity concerning unbanked population was large enough for new and traditional players to coexist in t markets and that may not be the case in a small market or market with a highly banked population.

• PayTM in India secured a restricted ‘payments bank’ license and managed to secure 320 million registered users, 1 billion in transactions per quarter, $20 Billion annualised gross transaction value (GTV) and 7 million offline merchant base. Payment Bank license was made possible by the regulators push to issue payments banks license that is essentially a new model of banking that can accept a restricted deposit of up to $1,533 per customer but barred from issuing loans and credit cards. The payments banks are allowed to operate both current and savings accounts and services such as debit cards, mobile wallet, ATM cards and net-banking. PayTM Payment Bank is a mobile-first Bank with zero balance, zero fees on all online transactions and allows customers to transfer the excess money above daily limit of $1533 from their account to a fixed deposit (FD) that is created automatically by a partner bank, an innovative approach that allows customers to earn higher interest on floating money in savings account. While it is too early to measure its profitability as a business model, it aims to become the largest digital bank in the world with 500 million accounts and provide wealth management, credit cards and stock trading over with partner network.
• Ant Financial’s Alipay has 620 million users, handled $8 trillion in transactions made $2 billion pretax profits and $20 billion in revenue. It operates the world’s biggest money market fund by providing the users of Alipay with yields several points higher than short-term bank deposits. Its success was a major blow for banks as it deprived them of savings deposits. While the recent regulatory curbs on payment service providers being asked to place escrow funds in non-interest-bearing bank accounts may make a dent on Ant’s revenues, as a financial service provider it is still highly preferred by the vast majority of the customers.
• The Kenya specific data provided by King supports the view that a partnership between such new age tech providers and traditional banks will benefit the industry as Kenya commercial bank grew from 2 million to 8 million customers in 2 years by building a savings and credit function linked to m-pesa. It is interesting to note that it took 122 years for the bank to reach the first 2 million customer base. Another Kenyan bank CBA also has similar success and grew to 12 million customers.

These three markets and the rapid digital disruption that they are going through serves as a template for other markets and regulators today. While banking was dull for a while after the financial crisis, it has changed tack in recent times due to this development especially impacting commercial banking and related services. If we set aside institutional banking and private banking for this conversation, as they are unique and focused on corporations and high-net-worth individual, the commercial bank is where the majority of the population will come into contact with a financial institution. They provide essential banking services like savings, personal, commercial and mortgage loans, credit cards, debit cards, checkbooks and investment products such as mutual funds. 

IMF and World Bank data shows that there are 2277 commercial bank accounts in Singapore per 1000 adults, 1213 in Thailand, 1087 in Poland, 863 in Indonesia, 839 in UAE, 822 in Malaysia, 542 in the Philippines, 509 in Thailand, 197 in India and 40 in China. While these numbers may vary a bit based on the year and source of the report, they provide a perspective on the unbanked population in China and India, the gap that the new entrants are filling in the two most populated top 5 economies with the sizable, growing middle class in the world. 

With 26% of 7.6 billion global population under the age of 15 and born with a liking to mobile and internet, the designing for digital generation becomes a crucial aspect from a customer experience perspective. With 75% of the 7.6 billion population in Asia (4.5 billion, 24% below 15) and Africa (1.25 billion, 41% below 15), the two continents with most unbanked population present an opportunity for banks in that region. Gallup and World Bank recent data show that 3.8 billion adults have bank accounts and 1.7 billion adults don’t have an account, but one billion of those unbanked have a mobile phone. That’s a sizable population to go after for any national or regional bank aiming to serve that sector. Though a sizable portion of this population is yet to get access to smartphones or high speed, high-quality internet connections, it is essential for national banks to enable banking facility for all as part of financial inclusion focus that is essential to eradicate poverty. There is a need to customize the vital services required for this segment of customers, the regulators and commercial banks can learn from the experience of Ant, PayTM and m-Pesa journey and create models that are sustainable in the markets. 

The effect of digital disruption may vary between markets with a highly banked and unbanked population as well as based on digital savvy community. IMF data shows that 69.3% of millennials used mobile banking as compared to 24 %of Baby boomers. While it is essential to design for the future banking generation, banks shouldn’t forget the fact that only 24% of baby boomers are comfortable with digital channels, but they hold a sizable portion of the wealth. A Credit Suisse report talks about ‘millennial disadvantage’, as they have been dealt with a series of blows including high unemployment, tighter mortgage rules, increased income inequality and reduced or no pensions. The report highlights that the baby boomers are holding most of the top jobs and much of the housing. Whereas, millennials are doing less well especially concerning income, home ownership and other dimensions of well-being. A report from American Bankers Association projects millennials to make 40% of the workforce by 2022 overtaking Gen X (31%) and Baby boomers (12.5%), and they are expected to inherit $30 trillion over the next 30 years. A majority of them (61%) believe mobile has made tracking and spending money better and a sizable portion of them (67%) wants mobile payments, budgeting tools, mobile banking and wealth management services from their banks. World economic forum rave reviews provide some vital fact about Gen Z. 89% of them feel empowered by planning for the financial future, and they start researching at an average age of 13. They already own savings account (60%), checking account (54%), health insurance (33%), credit card (32%) and unlike millennial (40%), who overspent and gone into debt, Gen Z (47%) use their phones and family & friends to check prices and tend to avoid overspending. 35% of them already own their own business, and 77% earn extra money through freelance work or a part-time job. They are much focused on stable careers and work on ways to secure well-paying jobs and grow their savings. 

OECD reports show global wealth is worth $280 trillion and that 42 million (0.6%) ultra-high net worth and upper-middle-class people in the world hold 39.3% of world wealth followed by 311 million (4.4%) people with 32.2% of world health and remaining 95% hold rest 28.4% world wealth. Credit Suisse, Research Institute's Global Wealth Databook shows that India has 767 million adults of which 0.3% has $100,000 or above wealth, and China has 998 million adults with 2.5% in that range. At the other end of the spectrum, the world’s 3.5 billion poorest adults (70% of the world’s working age population) each have assets of less than $10,000, account for just 2.7% of global wealth.

Given the above facts on demographics and generation diversity, it is going to be a challenge for the banks to cater to four different generation (baby boomers (1940-60), Gen X (1960-80), Millennial (1980-2000), Gen Z (2000-YTD) needs at the same time. Especially, with each market at the varying level of maturity on wealth and banking needs. It is also going to be interesting to see the incumbent approach to retaining their existing base and the new entrants' approach to growing their base at a level that was never seen before with innovative strategies. To give a perspective on what is at stake, the enclosed table will provide a view on the top 28 incumbents’ customer base and their mobile-savvy customers’ numbers. 

One thing very clear from the above information is that the strategy for future needs to take into account the geography and generation demographics specific in addition to the competitive landscape, regulatory drivers, market insights and institutions mission/vision and focus segment before deciding on the transformation path that needs investment. Once the organisation chooses to on transformation approach, the First Principles design thinking shared in the Bank 4.0 will come in handy. Instead of analogy based design (template based or based on what others are doing), first principles design is based on a most fundamental truth. It’s about designing a bank from scratch using all current technologies capabilities available and providing banking services wherever and whenever customers need money solution, in real time, tailored to customers unique behaviors. First Principles design thinking is something very crucial for any financial institution to take into account when designing a transformation journey. As suggested by King, Bank’s leadership team should be critical about the usage of legacy systems, products and processes and refitting them as-is into mobile and Internet as part of the digital initiative. That’s a recipe for disaster that King is alerting the organisations to be mindful about as they redesign their systems and banking functions. More important, banks need to figure out which segment they want to serve (42 million who owns 112 Trillion or 311 million who holds 90 Trillion or the rest or all) and what is the customer experience they want to create for each of those segment Baby Boomers, Gen X, Y and Z customers. It is still not a one size fits all world, and as much as there is complexity, there is also commonality that will serve as the guiding light in deciding the step change.