India’s ambition to increase its GDP 10x by 2047 to reach $30 trillion will need 20x growth from the financial services sector, with banks playing a key role, according to the Banking for a Viksit Bharat report released by FICCI and IBA, in association with BCG, at FIBAC 2024. This might not be an unattainable goal, given that the outlook for the Indian banking sector is bright against the backdrop of strong economic growth.
However, capturing emerging opportunities will require banks to navigate certain challenges, not the least of which is the rapid pace of technological advancements. This is evident from the rise of Insurtech, which allows financial institutions to meet customer expectations and future-proof their offerings. Here’s a look at the top challenges that the banking sector in India will need to overcome to drive business growth.
The Regulatory Maze
While digitalisation has led to a new wave of regulatory guidelines, growing instances of cyberattacks and data privacy concerns have made the compliance landscape more complex. Reforms, such as Enhanced Access & Service Excellence (EASE), and regulations, such as Basel I, II and III, have significantly increased the compliance burden of financial institutions. Regulatory oversight of the banking sector in India is becoming increasingly stringent and non-compliance poses the risk of legal and financial penalties, or worse, reputational damage.
With digital banking channels gaining popularity, banks must prioritise compliance automation. Leveraging analytics to reduce non-performing assets and automating KYC and AML can accelerate banking processes while improving risk management. Employing cutting-edge technologies can also improve transparency in the system.
Market Differentiation
Most banks in India have run-of-the-mill product offerings. Today’s customers want hyper-personalised services with streamlined experiences. While digitisation has helped banks penetrate previously underserved and unserved markets, they still lack the agility to meet changing customer demands. This has paved the way for NBFCs to infiltrate the lending market via embedded solutions. Simultaneously, maintaining trust and retaining clients only through traditional channels is becoming increasingly challenging since a large segment of digital natives may never step into a physical branch. Banks must optimise customer journeys through digital channels to stay competitive.
Banks must also leverage embedded technologies to club their offerings to facilitate cross-selling and upselling. For instance, combining a vehicle loan with automobile insurance can be a game-changer. Insurtech solutions enable banks and insurance companies to propose integrated offerings, reducing customer acquisition time and costs while adding convenience to the customer journey. Insurtech companies in India offer revolutionary bancassurance solutions to achieve just this. The plug-and-play solutions can be seamlessly integrated to enable both organisations to diversify their revenue channels. This helps improve customer engagement and satisfaction. Banks usually operate in isolation and often with internal silos. This hinders them from effectively leveraging customer data. They require exceptional data consolidation capabilities to offer differentiated products. Leveraging data from diverse sources, via AI-powered data analytics tools offered by Insurtech solutions, can deliver meaningful insights for strategic decision-making.
Cyber Risks
In the last week of June 2024, the RBI warned banks of possible cyberattacks and advised them to proactively monitor all domestic and cross-border payment systems 24/7. Despite fortified surveillance and reinforced cyber-protection measures, a ransomware attack forced 300 small banks to temporarily shut down operations in July. This highlights the under-preparedness of the banking sector in India to mitigate cyber risks and maintain business continuity during an incident. While the attack impacted only 0.5% of the total payment volume in the country, it emphasised the need for tech adoption in the Indian BFSI sector, especially among smaller players.
Although there are regular employee training and specialised IT departments, the focus on the cybersecurity segment needs to be intensified. Banks need a broader approach and advanced technologies to protect themselves against the negative side of digitisation – cyberthreats. Indian banks’ expenditure on technology, especially the cybersecurity segment, is significantly lower than the global average. Banks need cybersecurity experts to enhance their security posture to navigate the rapidly evolving cyber threat landscape.
Insufficient Future-Readiness
The global banking space is rapidly expanding. With the increase in demand for cross-border transactions and the emergence of novel payment mechanisms, keeping pace with the developments in the banking sector is critical. Customers are looking for frictionless and low-cost ways to transact.
With real-time digital transactions becoming the new normal, facilitating effortless payments across diverse payment modes is non-negotiable for merchant and customer acquisition. There is an urgent need to eliminate intermediaries and be future-ready to support open-finance. Preparing the banking infrastructure for digital assets, such as cryptocurrencies and CBDCs, can instil future-readiness in the banking sector in India.
Talent Management
Employee cultures are changing worldwide. The desire for growth opportunities, better work-life balance and the changing talent needs of the BFSIs are some of the primary reasons for talent shortages in the sector. Along with this, the banking sector in India is in a talent churn mode, with an attrition rate of close to 35% for some top players. Skill-based hiring is on the rise to adapt to the digitalising banking ecosystem. With the increasing need for exceptional technical expertise, the industry has to compete with the technology-intensive sectors, such as AI, to secure talent.
The banking sector needs to offer more inclusive workplaces and work on increasing engagement rates. Taking initiatives that make employees feel valued and empowered can improve retention. This also requires transforming the work culture, which centres around mid- and upper-mid management levels. Identifying and eliminating the malpractices of the existing culture can help. Upgrading employee recognition and evaluation of resource planning is key. Banks must facilitate continuous learning to reskill and upskill employees and reduce competition with non-banking sectors. Embedding employee learning across the lifecycle from onboarding to career progression and superannuation requires instilling vision in the hiring and training processes.
Modernisation
About 66% of banks’ IT budget is spent on maintenance. Maintaining legacy infrastructure has several disadvantages. Along with draining the budget, it stifles innovation. Banks have joined the digitisation trend primarily by automating administrative tasks and making digital channels accessible. They are yet to tap into the massive potential of these channels. Certainly, modernising the technology framework and redesigning business processes to fit the needs of the current marketplace is risky as well as time- and effort-intensive. But the cost of staying with legacy infrastructure is much higher.
Banks need decision-makers who can think like technology companies. Do you know that Nvidia began as a gaming company and pivoted to become the largest AI chip supplier? While banks do not need a transformation of that level, the need to upgrade to agile and responsive operational models cannot be overstated. Simultaneously exploring newer revenue streams, tapping into the potential of data and leveraging mobility to your advantage opens diverse growth opportunities.
For instance, strategically collaborating with Insurtech companies in India to cross-sell insurance products can help banks leverage the insurance industry’s data to identify new opportunities for business expansion. Insurtech platforms from industry leaders seamlessly integrate banking and insurance business models at scale. Modular solutions with seamless underwriting, policy issuance and claims management, designed by technical experts, eliminate the need to maintain in-house technology teams.
Converting Challenges into Opportunities
The RBI has essentially rejuvenated the banking sector in India by improving regulation, credit systems and governance. The finance watchdog has also streamlined how regulation and oversight function. While these have increased regulatory pressures, the RBI’s efforts to streamline digital lending, green finance and consumer-centricity have opened multiple opportunities for the banking sector.
In the increasingly digitalised and unified financial ecosystem, having strong technology and cross-industry partnerships offer banks a competitive advantage. Partnering with Insurtech companies is a good starting point. This is because they have:
Exceptional technical expertise.
Deep understanding of banking and insurance functions.
Competitive advantage with exposure to multiple sectors.
Vision to facilitate deeper penetration of the banking industry and insurance pan-India.
The right partner can also empower banks to navigate regulatory and cybersecurity challenges. InsurTech companies can help banks foster an innovation mindset and a distinctive culture that supports financial institutions to grow and scale with agility. To capture a bigger share of the growth pie, banks must embark on the journey to turn challenges into opportunities immediately by leveraging Insurtech and other partnerships.
Bibliography: (Last accessed on September 10, 2024)
https://www.bcg.com/publications/2024/india-banking-for-a-viksit-bharat
https://economictimes.indiatimes.com/industry/banking/finance/banking/banks-told-to-stay-vigilant-amid-intel-on-cyberattack-threat/articleshow/111349558.cms
https://www.ibef.org/blogs/indian-banking-sector-navigating-reforms-and-npa-challenges
https://www.deccanherald.com/opinion/rbi-is-turning-around-indias-banking-system-2849219
