Wednesday, May 03, 2017

How Automation will change the face of Indian Banks

Today, I had to visit a SBI branch near my house. I had three banking tasks: Deposit a cheque - which was a payment received from a Postal Savings account to the bank account; Transfer funds from the bank account to Public Provident Fund Account and update the passbook to know the bank balance.

This task in a public sector bank branch took nearly 60 minutes of my time, and I had to interact with 3 clerks and one service manager!

This experience made me think on how the upcoming digital transformation will change the face of Indian Banks. As an example, the same task that took me an hour today could be done in few minutes on a digital platform and without any human intervention!

Indian banks operating in conventional systems use tedious human oriented process. I need to fill out a form - where all information is filled out twice - one copy for the bank, one for me! The form is then verified by a clerk and then re-verified by a service manager, and then it takes 3-5 working days for money to move from one account to another!

With automation, 60% of jobs in bank branches can be eliminated. Traditional jobs like passbook updating, cash deposit, verification of know-your-customer details, salary uploads are also going digital increasing job redundancies. Most of the work done at branches will be done by IT systems, and Indian banks are at the inflection point where technology will rapidly improve efficiency and replace humans from performing mundane clerical jobs.

Banking sector was among the big job creators in recent years, but in next 3 years, Banking sector in India will see a decline in number of jobs. Just like ATMs that eliminated the need for bank tellers, new banking apps will eliminate most of the clerical jobs in any bank.

Not all Branch Jobs will be Lost

While I was at the bank, I two elderly gentlemen who wanted my help in getting a "service token!" These long time users of bank accounts are still not comfortable with using digital technologies. Even simple 'self service token generation' is a tough task for them.

India as a society is still not ready for a 100% digital banking. Lots of Indians are digitally illiterate, and the complex banking rules and forms intimidate them. Therefore these users still prefer to sit across the table with a bank employee and get their banking tasks accomplished.

Size of this customer segment is still substantial, but will decline rapidly. This implies that Indian banks will operate branches for a long time to come, but for banks to be relevant and profitable, the total value of transactions per employee will have to increase. This implies that a lot of back end jobs will have to be automated, and moving customers to digital platforms.

The nature of Indian customers has slowed down the transition from people-driven to IT driven processes. However, technological development has not slowed down and constant innovation in technology has made online banking easier. This has also led to a slowdown in the hiring of  branch staff at banks, though banks are hiring people with IT skills to drive automation.

HDFC bank for example, saw staff strength fall from 90,421 in December 2016 to 84,325 in the quarter ended March 2017. At the same time, it has expanded its network to 4,715 branches, from 4,520 a year earlier, ATMs to 12,260 from 12,000.

Hire Younger Talent

As banks brace for the digital revolution, Banks will have to infuse their workforce with a lot of younger talent - who are more comfortable in embracing new FinTech solutions. Large public sector banks will be forced to re-balance their workforce by offering voluntary retirement scheme for older staff and usher in a younger, digitally savvy talent pool.

Major Savings is in Backend Processing

Banks can save lot of costs by automating high cost operations such as loan processing. Today with high speed data analytics & AI tools almost 95% of loan requests can be processed automatically, thus eliminating expensive human labor - which also aids in speeding up loan approvals - which inturn helps improve productivity.

A team of 400-500 programmers can automate house loan approval process & that will eliminate 10000's of jobs at banks. Artificial intelligence & data analytics can replace loan underwriters, the IT systems can underwrite loans on the spot. This increases employee productivity in a big way, while reducing operational costs.

Similarly, routine tasks like salary processing will get automated. In fact all low-end back office jobs in banking sector will be automated.

This transformation means all the low skilled workers do not have a bright future! They will have to re-skill or perish!

Impact on Real Estate Costs

After labor costs, rentals on bank branches form the next highest costs for Indian banks. With Automation, the need for a large number of branches will reduce substantially. Some banks do not need as many branches as they have today.

Global banks like Citi, HSBC, etc have already consolidated the number of branches. Looking at the trend in US & Europe, where number of bank branches have shrunk by 20% in last 5 years, I expect a similar trend in India - but with a difference. The reduction of bank branches will be limited to urban areas only, while Indian banks will still add new branches in non-urban areas and the size of branches will reduce rapidly. Overall, I expect the total square footage of branch space will reduce 20-25% in next 5 years, while the total number of bank branches will increase.

Even in rural areas, Branches will need smaller footprints - and the focus in these branches will be to train customers to use digital online platforms. The branch staff will help customers learn and use digital systems - i.e., marry digital technology with human touch.

Changing face of Indian Banks

New banks like small finance banks like Au Financiers, Equitas or Ujjivan will use an army of  people to expand in rural areas, but this army of people will not sit & operate in a typical branch. Instead, they will be like foot soldiers, traveling to customer locations and providing banking services via mobile platforms.

Just like micro-finance companies & cell-phone companies that changed how people borrow, these newer small finance banks will change how people will use banking services. These banks can leverage a large army of small business owners in rural areas to offer human touch to rural customers - with digital platforms.  Customers can walk to any member of this rural service army and get their banking services.

Customers will now recognize the bank by the mobile apps, rather than the physical branches or the employees.

Closing Thoughts 

Banking sector in India will thrive in next 10-20 years and will employ millions. But it will not be the same way as today. Banks will expand branches and increase the reach of its distribution network, but it will be aided in a big way by IT.

New, exciting, & high paying jobs in Banks will be in IT as Banks transform to be a IT driven, software based banking services company.

The new face of the bank will be the mobile app - from which the entire banking transactions can be completed.

Also see: 

Disruptive influence of FinTech on Indian Banks

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