Trends and challenges in financial

services
Ashok Thampy
IIMB
Relationship?

• Traditionally, customers chose a bank based on proximity to office or

home.
• Increasingly, customers shop for best rates/services
• Visit to bank branch is required for only few transactions – rest can
be done online
IT enhanced delivery channels

• ATMs
• Internet banking
• Phone banking
• Mobile app based banking
Sweden: Cash and Swish
Cost of payments

Source: Payments in Sweden, Riksbank, 2019

India and China: Digital Payments
India and China : Digital Payments
India: Unified Payment Interface
Transactions
Year (millions) Value (Rs, Billion) Value (USD, billion)
2016-17 18 70 1
2017-18 915 1098 16
2018-19 5392 8770 125
2019-20 12519 21317 305

UPI is an interface that connects customer bank accounts

across different banks. Payment services such as GooglePay,
AmazonPay, WhatsappPay and other Indian payment service
providers use the UPI to enable Payment transactions
between customers.
 Digital Challenge
• Cost of information - significant decline
• The level of competition is increasing
because of the internet.
• Internet makes it easier for customers to
shop for the best rates both for deposits
and loans.
– Aggregators helps borrowers find the best
rates available.
 Digital Challenge
• New financial intermediaries - infomediaries
• Aggregate information on competing
products
• Sell products of competing banks and
insurance companies
• P2P lending
• Earn a commission
• Example: E-loan.com; apnaloan.com,
policybazaar.com
 Digital Payments

• Payments getting disrupted

through technology
• Banks fee income for payment
services to be affected
• Regulation of payment
providers?
• What happens if they default?

“What keeps me awake at night

is the possibility of players such
as Google, Facebook, Alibaba
and others taking away the
business.” Uday Kotak in 2014
Walter Wriston, CEO/Chair, Citibank, 1967–1984:

• “Information about money • Today, the value of money is

has become almost as hooked to nothing other than
important as money the information that flows
through it. If your currency
itself.” becomes worthless, the world
knows about it very quickly. If
your economic policies are
lousy, the market will punish
you instantly.
https://www.business-standard.com/article/finance/how-google-s-push-into-indian-retail-banking-challenges-traditional-lenders-121083000043_1.html
Convergence in Financial Services

Insurance Co. Re-insurance

Commercial
Banks

Asset
Management Investment Banks
(Mutual Funds) (Merchant Banks)
 Will universal banks be the norm?

• Universal banks are banks that provide a wide range of financial

services such as retail, corporate and investment banking.
• One stop financial stop?
• Emergence of specialised producers and universal distributors?
• Market power – with producers or distributors
• Can financial product distributors do a Walmart?
• Charles Schwab and Fidelity – who blinked?
Social banking

• How to provide banking services in rural areas cost effectively?

• How to control for NPAs in priority sector lending?
• Microfinance
• Financial inclusion
• RBI approval for business correspondent model
Financial inclusion- business correspondent
(BC) model
• 6 lakh villages in India, ~ 1 lakh have population of 2000
• BC - engaged by a bank to provide services to a specific or group of
villages
• Executes small value transactions– deposit & withdrawal, benefit
payments
• Customer identified by biometric authentication
• Works on commission basis (not employee)
Financial inclusion – use of technology

• In Nigeria, the National ID card with electronic chips on the

new cards store details of the holder’s iris and fingerprints,
boosting security. But with the backing of MasterCard,
these are also payment cards.
• In Mexico, BBVA, the Spanish bank operates in Mexico
through a network of 30,000 agents — local shops,
pharmacies and post offices to reach a broader spread of
customers.
• Vodafone’s M-Pesa service, a low-tech money-transfer
scheme launched in 2007 using mobile phones and on-the-
ground agents, dominates in Kenya and Tanzania.
Digital is key with transactions moving away
from branches
What we look out for is customers and capabilities, not physical
branches. When I say I have 1600 branches, I think it would be a
liability if I had 10,000 branches. And that's very clear because I think
the digital and technology change is going to make the density of
branch network requirements more even for current account
customers, for savings account customers 94% of the transactions have
moved outside the branches.

Uday Kotak, 2021

What are concerns with digitalization of
financial services?
 New York 5th Avenue

1913

1900
Cryptocurrencies: high volatility

Central banks are considering introducing on digital

currency. What could be the implications?
 0
0.05
0.1
0.15
0.2
0.25
0.3
0.35
0.4
1962-63
1963-64
1964-65
1965-66
1966-67
1967-68
1968-69
1969-70
1970-71
1971-72
1972-73
1973-74
1974-75
1975-76
1976-77
1977-78
1978-79
Business Cycles

1979-80
1980-81
1981-82
1982-83
1983-84
1984-85
1985-86
1986-87
1987-88
1988-89
1989-90
1990-91
1991-92
1992-93
1993-94
1994-95
1995-96
1996-97
1997-98
Credit growth (%)

1998-99
1999-00
2000-01
2001-02
2002-03
2003-04
2004-05
2005-06
2006-07
2007-08
2008-09
2009-10
2010-11
2011-12
2012-13
2013-14
2014-15
2015-16
2016-17
2017-18
 Valuation : cyclicality upto 2020
50 18

45 2000 16
1981
40 14
Price-Earnings Ratio (CAPE, P/E10)

Long-Term Interest Rates

35
1929 12
30 Price-Earnings 30.07
10
25 1901 1966
8
20
6
15

10 4

5 Long-Term 2
1921
0 0
1860 1880 1900 1920 1940 1960 1980 2000 2020 2040
Prof. Ashok Thampy IIMB
Source: http://www.econ.yale.edu/~shiller/data.htm
 Valuation : cyclicality upto 2021

Source: http://www.econ.yale.edu/~shiller/data.htm
 Nikkei index : 1949 to 2021

https://www.macrotrends.net/2593/nikkei-225-index-historical-chart-data
Shanghai Composite Stock Market Index
 Ethical Issues
• Moral issues and economic issues
• The cost of non-ethical business practice
• Banker’s to Enron – Citigroup and J.P.Morgan Chase –
fined by SEC for their active help in helping Enron to
hide information.
• Bank’s sued by investors in Enron
• Their “inequitable conduct” has made their claim low in
priority in settling the Enron bankruptcy case.
• Dot.com
• Sub-prime mess, LIBOR scandal
 Ethical issues
• Conflicts of interest
• Ex. Goldman Sachs sells CDOs to customers and shorts the CDOs at the
same time. Goldman profits from the decline in value of CDO while
customers bear the brunt.
• Credit rating agencies
• Conflicts of interest and governance – Chanda Kochar/ICICI Bank
• Decisions driven by targets and bonuses:
• Will customer’s interest be priority?
• Whose interest is served?
 Cost of non-ethical business

• Higher regulation and oversight

• Public losing trust in the financial
system
• Social unrest – Occupy Wall Street
 Major trends
•Convergence - financial conglomerates
•Production, distribution, or both
•New intermediaries and competitors
•Fintech - applications and greater reach of financial
services
•Basle 3 will require enormous increase in bank
capital – perhaps the banking model will change to
conserve capital-higher cost to consumers
•Don’t forget business and market cycles
All the very best!