BFSI (Banking Financial Services & Insurance) has been touted amongst the fastest growing sectors not only in India but also in South East Asia and Africa. But before hoping onto the bandwagon of Fintech and Financial Services startups, one must understand the key drivers along with associated key levers and challenges. However, prior to everything else we must acknowledge and understand the underlying challenges that have germinated technology solutions empowering BFSI.
Financial Service businesses have razor thin margins and thrive on volumes. And according to the efficient market theory – as markets approach perfection – transaction costs become negligible, if not zero. Furthermore, market forces from rising competition also induce price pressures to drive market-wide efficiencies, leading to lower prices and thinner margins. For instance, Zerodha – cost leader in capital markets brokerage – shifted the status quo of brokerage fee driving market-wide efficiency through competitive pressures. This necessitates efficiencies in servicing.
Furthermore efficiency must be achieved while increasing revenue by capturing the fast growing market share. Hence, the cost of on-boarding and servicing must be reduced. This is where tech comes into play, as with manual intervention and physical touch-points, the cost of on-boarding and servicing millions customers while enabling billions of daily transactions will result in huge costs that cannot be supported by razor thin margins. Technology helps to overcoming this challenge (or perhaps structural limitation) by becoming an enabler.
Technology empowers customers by delivering service at the convenience of finger tips, via either a mobile application or web services. This eliminates the cost of maintaining physical touch points and reduces manpower costs. Furthermore, automation using predefined workflows or AI (Artificial Intelligence) engines reduce servicing costs. This is known as digitization of customer journey in financial products and services. Although there are confounding factors such as mobile hardware and internet, these are well established in today’s scenario – you can read this to understand how
Technology Adoption Drivers in Indian BFSI
Now that we understand the challenge with margins, let us move to volumes. Simultaneous growth of top-line (revenues) and bottom-line (profits) is considered utopian as they are usually competing objectives. However, as the economies mature, more people participate in the organized sector and become a part of this formal financial system including financial services such as banking, stock brokerage; and also demand financial products such as insurance or mutual funds.
Few decades ago, purchase of company stock was accompanied by issuance of a physical share certificate, resulting in transaction costs. However, as more people participated in capital markets and number of daily transactions increased – the logistics and costs of maintaining such physical certifications became exorbitantly high in comparison to razor thin margins. To overcome this challenge, demat – de-materialized – accounts were introduced to digitize capital markets participation – not only reducing transaction costs but also reducing settlement TAT.
Hence, not only the modality of the service but also the product itself needs to be digitized to eliminate transaction costs. For instance, as more people moved from a barter economy and adopted fiat currency, the central bank had to print more currency notes to ensure sufficient circulation; however, printing currency entails direct costs unlike issuance. Hence, today many Central Banks including RBI – Reserve Bank of India and USA’s Federal Reserve have proposed Digital Currencies – non-fungible tokens – powered by blockchain ledger managed by private exchanges unlike the public keys of Bitcoin and other Crypto currencies. Although blockchain revolution has been under incubation since a while, the advent of 4/5 nm chips along with renewable power sources and quantum computing may serve as catalysts.
Blockchain Revolution, awaiting the Power Plug;
Also read HBR on Blockchain
Summarizing the narrative, in the rapidly expanding economies of South East Asia and Africa, more individuals and businesses are participating in the formal economy, thus demanding services from BFSI companies. Furthermore, owing to competitive pressures, these service providers need to onboard and serve customers more efficiently. And to simultaneously achieve top-line (revenue) and bottom-line (profit) growth they require technology solutions.
Technology Solutions for BFSI that not only digitalize services but also digitize products
Feature Image Photo by Eduardo Soares on Unsplash
Savvy Munshi 