Innovate or Die – the Truth About India’s Banking Industry

The banking landscape in India has undergone a profound shift in the last few decades and, more importantly, in recent years. Once dominated by traditional public sector banks (PSBs), the sector has evolved to accommodate numerous private players, foreign banks, and even non-banking financial companies (NBFCs).

With over 130 banks vying for customer attention, competition has skyrocketed, forcing traditional and new companies to innovate or risk losing their customers to their peers. The days when PSBs monopolised the market are over; today, both private banks and NBFCs are continuously rolling out advanced financial services, posing a formidable challenge to the incumbent businesses.

• The Indian banking industry is evolving rapidly, driven by intense competition and technological innovation.
• Cost innovation using AI, blockchain, and automation reduces operational costs for banks.
• Revenue innovation involves customised financial products for diverse customer segments, like rural farmers.
• Digital banking adoption, especially UPI, is revolutionising consumer payment behaviours and financial inclusion.

Today, India's banking system comprises 12 PSBs, 21 private sector banks, and 44 foreign banks. In addition, there are 12 small finance banks that have revolutionised the financial inclusion agenda. As of April 2024, there were over 17 lakh micro-ATMs across the country, offering banking services even in once-disconnected rural areas. On top of that, digital penetration has improved, with nearly 100% of rural account openings now completed digitally.

While the total assets of India's public sector banks stood at Rs. 1,41,485 billion in 2023, private sector banks stood close at Rs. 85,225.38 billion. However, the dominance of public banks, which accounted for over 58% of total banking assets, is slowly being challenged by private sector growth, fuelled largely by digital and customised product offerings.

With over 141 crore people to serve, the Indian banking system is increasingly under pressure to innovate. Institutions have two major cards to play in this regard—cost innovation and revenue innovation.

• Cost innovation: It focuses on reducing operational costs by adopting advanced technologies like artificial intelligence (AI), blockchain, and machine learning (ML). For example, banks using AI and ML to automate routine processes like customer service or fraud detection can significantly cut down on human resource costs. Blockchain, which eliminates the need for intermediaries, offers the potential for massive savings, particularly in trade finance. HSBC, for instance, has already used blockchain to streamline trade transactions for major corporations.

• Revenue innovation: Revenue innovation is based on creating new financial products that meet the diverse needs of customers. Financial institutions are now tailoring loans, credit products, and investment options to fit specific customer segments, such as rural farmers or students pursuing higher education. Banks are also exploring niche products like "pocket-size loans" with simplified terms to cater to low-income individuals, which expands their client base without adding undue risk.

New product development

Banks are placing an increasing focus on the development of customised financial products to cater to the diverse needs of their customer base. This shift stems from the realisation that traditional, one-size-fits-all banking products do not address the varying needs of different demographics.

One of the key areas of focus has been the rural market, which has historically been underserved by conventional banking services. For instance, banks have introduced small-ticket loans that are specifically designed for rural customers.

Unlike urban-focused loans, which often have stringent requirements and complex approval processes, these rural-specific products emphasise ease of access, quick disbursal, and flexible repayment options, making financial services more inclusive.

Additionally, banks are now exploring micro-insurance products for rural areas, further expanding the range of tailored financial solutions available.

Technological advancements

The adoption of cutting-edge technologies like artificial intelligence (AI), blockchain, and cloud computing has fundamentally transformed the way banks operate. AI, for example, is playing a critical role in enhancing customer experiences by analysing behavioural patterns, spending habits, and customer feedback to offer personalised recommendations. This level of customisation helps banks cross-sell and upsell products, ensuring that customers are offered services that meet their specific financial goals.

Blockchain technology, on the other hand, is revolutionising the security and transparency of transactions. This has drastically reduced transaction processing times and lowered costs, benefiting both banks and customers.

Cloud computing is another key technology, enabling banks to store vast amounts of data securely while maintaining high levels of scalability and flexibility. The cloud-based infrastructure allows banks to launch new digital services without the need for expensive hardware investments.

Digital banking

Digital banking has gained significant popularity in the new banking landscape, driven by consumer demand for convenience and speed. In this regard, Unified Payments Interface (UPI) and mobile wallets have fundamentally altered the way consumers and businesses interact with their banks.

UPI, in particular, has seen massive adoption, with over 27 billion transactions recorded in FY24 alone, demonstrating the scale of digital payment penetration.

The launch of India’s first UPI-ATM by Hitachi Payment Services in 2023 represents a significant leap forward in the integration of digital and traditional banking services. This innovation allows customers to withdraw cash using UPI, merging the convenience of mobile payments with the familiarity of ATMs. This hybrid model serves as an example of how digital banking is evolving to meet the needs of both tech-savvy urban customers and those in rural areas who may still rely on cash for daily transactions.

Enhanced customer services

Innovation within the banking sector extends beyond product development to the realm of customer service. Today’s customers want fast, efficient, and seamless service across channels, and banks are leveraging technology to meet these expectations. AI-powered chatbots, for example, are now a common feature on leading banking websites and mobile apps.

These chatbots are capable of handling a wide range of customer queries, from account balance inquiries to complex issues like loan eligibility checks. By providing instant responses, chatbots have significantly reduced customer wait times, thereby improving satisfaction and engagement.

Additionally, 24/7 access to banking services through digital platforms has become the norm. Customers no longer need to visit branches for everyday transactions, as most services—such as fund transfers, bill payments, and even loan applications—can be handled online.

WhatsApp banking, introduced by India Post Payments Bank (IPPB), is another example of how banks are utilising popular digital platforms to provide better customer experiences. This service allows customers to manage their accounts, check balances, and perform transactions via simple messages.

The Indian banking sector is at a critical juncture. With the above innovations underway, banks are being compelled to innovate as rapidly as technology becomes available to them. This has spurred intense competition in a rich and diverse industry of hundreds of private and public players, each vying to win more consumer mindshare.

In the future, only those who are able to innovate and keep up with the velocity of change will stay relevant in the market. Veteran investors will seek these players to entrust with their capital, triggering a formidable innovation machinery that will invigorate the Indian banking system.

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