In an interview with this newspaper last week, Rajiv Lall, vice-chairman and managing director of IDFC Bank Ltd, which is awaiting the banking regulator’s final nod to start operations in October, said: “The way the world is moving, branches are becoming less relevant for a connect with customers. The goal is really to use technology intelligently in a way that it builds a trusted relationship with customers at scale and at lower cost.”
IDFC Bank will have five branches in Mumbai and Delhi and 15 for its so-called Bharat banking operations in Madhya Pradesh. The primary focus of the new bank will be on corporate business even as its Bharat bank wing plans to give micro loans to people who do not have access to formal banking services.
While Lall believes that technology is the key to success in the new banking landscape in India and branches are losing their relevance, India Post, expected to get the Reserve Bank of India (RBI) approval for a payments bank, tells a different story. India Post has the largest postal network in the world—at least 155,015 post offices, of which 139,144 (89.76%) are in rural areas, much larger than the entire branch network of Indian banks. Clearly, India Post’s biggest strength will be its branch network. Ravi Shankar Prasad, minister of communications and IT, expects the RBI licence by August.
What role do the branches play in the success of a bank? In the last week of June, Atom Bank, the online-only bank, got the approval of the banking regulator in the UK. It plans to launch operations in the December quarter. Atom Bank will not have any branch or even a website initially and operate only though a mobile app; its customers will be able to open accounts and carry out all banking transactions from their smartphone. Going by newspaper reports, the company plans to use 3D visualisations and gaming technology for its app, and integrate cutting-edge biometric security with face and voice recognition.
Its chief executive officer, Mark Mullen, has been quoted in the media as saying: “We’ve set about designing a banking app that’s in tune with how people think about their money. Taking an app-based approach allows us to use all the features of your mobile device to provide a slick and highly personalised experience.” He was previously heading Hong Kong and Shanghai Banking Corp. Ltd’s (HSBC) telephone banking division First Direct.
Indeed, there had been branch-less online banks such as Egg (set up in 1998, a wing of Prudential Plc), Smile (another UK Internet bank, set up in 1999), First-e (Dublin-based European online bank which operated on a licence from French bank Banque d’Escompte) and Cahoot (Internet division of Santander UK Plc, launched in June 2000), but Atom is the first bank focused on a mobile app to gain a licence, according to Bank of England.
Referring to recent figures from the British Bankers’ Association, a Financial Times report says mobile has overtaken branches in the UK as the most popular way to bank. It has also quoted Mullen saying, Atom customers will “have a bank in their pocket that is ready whenever and wherever they need it”.
Atom Bank plans to adopt Apple Pay, the US technology company’s contactless payment system being launched this month in UK, even as many banks in the UK, including HSBC, Nationwide Bank, Royal Bank of Scotland and Santander are readying to tie up with Apple Pay. The objective is to enable their customers to make purchases with their mobile device. Anthony Thomson, chairman of Atom Bank, sees no long-term future for the branch as a transaction centre as “mobile has gone from nothing to bigger than branches, Internet and telephone” in less than two years. Durham-based Atom Bank now employs 40 people and plans to ramp up employee strength to 500 in due course.
By the time Atom Bank starts operations, the world’s first pure Internet bank, Fidor Bank AG of Germany, will probably have larger acceptance in the UK. Founded in Germany in 2009, the highly innovative Fidor Bank, which has disrupted the traditional banking industry, made a small beginning in Britain in April.
It communicates with its customers through social media. It has 300,000 customers in Germany but only 34 employees; in 2014, its number of customers grew by 24% and for little more than one-third of them, Fidor Bank is the first bank.
Its customers and employees discuss its services in an open forum—a community site—and it adjusts its lending and savings rates based on the number of Facebook “likes” it receives. As its technology allows its customers open access to its systems, the software developers can create their own interfaces and apps. I am told that a Fidor customer can complete any business transaction, including a loan approval, within 60 seconds.
Fidor had sought the banking licence in 2007 and got it two years later; since then, it has expanded into Russia via a joint venture. After the UK, it plans to expand into the US by the end of the year.
Fidor, Atom and other such banks are the so-called challenger banks which will force the high street banks to take a relook at their business model.
In the absence of branches and technology-heavy and employee-intensive back offices, they can offer higher interest rates to savers and competitive rates to borrowers as their operating cost is low. India, which has more mobile connections than bank accounts, will have two new so-called universal banks by October and probably a dozen small finance banks and payments banks by January 2017.
I hope at least a few of them will challenge the established banks, disrupt the system, and benefit the customers more. Fidor Bank’s website says, “Banking is fun, not fear.” Let the banking customers in India have some fun; far too long, they have lived in awe of bankers.