Banking originated around 15th century. Earlier sailors who required to store their savings in safe hands while they sailed on long journeys, availed the services of pawn brokers at ports for a charge. Subsequently, these pawn brokers discovered that this money could be put to use while it was being held for safe keeping through lending. Once money found a use, traders were willing to pay interest for the money borrowed from the pawn brokers, who held it for safe keeping as they were able to earn interest on the on-lent money. This was the basic business model which evolved over the years into what became banking.
As deposits started to flow in, Banks started to look for avenues to deploy the funds. Banks started to fund trade and commerce. As international trade picked up steam, in 1936 Incoterms were created by the International Chamber of Commerce (ICC) to define the responsibility of sellers and buyers for the delivery of goods under sales contracts. In 1960s as containerisation was introduced in shipping, international trade started to flourish as it helped in increasing the efficiency of loading and unloading goods at docks as well as to facilitate optimisation in stacking of goods on ships. This brought in tremendous efficiencies in shipping as the turnaround time for ships reduced dramatically. It became essential for commerce to find ways to facilitate quick inspection of goods and also to standardise ways by which Banks could release funds against good being traded. Here the Incoterms standardisation helped Banks in dealing with documents which represented the underlying trade. Banks agreed to release funds if the documents were as required under the trade contract. The buyers started insisting on preloading third party inspection with reports being sent along with the trade documents to evidence compliance.
With the increase in speed to international trade, banks felt the need to find ways to standardize the free messaging format by way of Telex which was in use then for settlement amongst banks. This platform was hampered by slow speed and also fraught with security concerns. There was a crying need to improve the speed and at the same time bring credibility amongst banks to deal in money. In 1973, Banks started establishing a network of correspondent banks to represent them in respective overseas markets to facilitate movement of funds. SWIFT network was born as a co-operative society by seven major international banks. This brought together banks across continents on a single financial messaging platform and put a network dedicated exclusively for remittances amongst member banks. It also made available the key financials of member banks and set protocols to identify sender, routing and recipient banks. It was the first B2B network which efficiently facilitated cross border movement of money.
While banks continued to evolve and brought in innovations in merchant banking, investment banking, treasury operation through bond trading, structuring through derivatives etc. all the action continued to centre around B2B space till the introduction of automation in customer servicing through Automated Teller Machines (ATMs) in 1970s. With this B2C innovation, banks could reach out to customers and make available money to them at places where they required it instead of having them to troop to banks and lug it around to spend. Similarly, another leap in B2C was the introduction of credit cards by banks in 1980s. With Credit cards, customers were provided with a rolling credit limit which not only authenticated the user while executing the transaction but also assured receipt of funds to the seller albeit at a small fee. This in one shot lead to the birth of consumerism across the world and a multi fold leap in banks’ retail lending business. Credit card payments at the point of sale till the 1990s used to require taking a manual imprint on a charge slip of the customer’s credit card and sending of the slips over to the acquiring banker for settlement. The acquiring banks in turn would maintain ledgers and settle the outstanding with the issuing bank over the card settlement network. Over the years, this manual process was transformed into electronic settlement. With the advent of electronic payments, online card payments started becoming possible. Electronic payments gave birth to payment gateways business which was the nursery for the likes of Peter Thiel, Elon Musk who got a taste of their first billion through Paypal.
After this the pace of transformation in digital banking space has picked up tremendously. A new category by the name neobanking has emerged. Disruptions by startups like Atom, Starling, Monzo, N26, Revolut has catapulted them into a new category called challenger banks. These Banks are using open banking platforms to scale up rapidly opting for the digital only route v/s the physical presence through branches route.
In India, the Reserve Bank of India (RBI) brought in the era of modern banking in mid 1990s with the issuance of private banking licenses to ICICI Bank, HDFC Bank etc. These banks disrupted PSU Banks’ monopoly and transformed the way banking was being done in India. Leveraging on their Instant Account opening kits( I-Kits) , these banks used technology coupled with their aggressive distribution strategy to through sales teams to invert the business model by reaching out to the customers instead of waiting for the customers to line up. They offered Doorstep Banking not only for lending products but also for deposit products by making access available through remote channels such as Net Banking, Telebanking, ATMs. Over the last 25 years, private sector banks now have close to 30% market share across deposits and advances. India jumped on the digital payment’s bandwagon only in 2008 after the launch of NPCI. NPCI has done tremendous work by launching groundbreaking initiatives in the payments infrastructure space in India and facilitating Go Digital initiatives like the payment of government subsidies through the AEPS or the launch of IMPS, UPI.
With the rise of Millennials, who are digitally native and mobile first, as a key customer segment, accounting for over 30% of the current population, new benchmarks have been set by the likes of Flipkart, Myntra, Amazon, Swiggy on customer expectations wrt service delivery. Leaving aside the pricing benefits, the online/ digital experience has got customers excited and customers are asking for more. This has brought to the fore once again an opportunity to bring in disruption in the Indian banking landscape. Facilitating environment has already been created by the Government through its Digital India initiative. Even RBI has introduced steps which make digital banking possible starting with account opening through eKYC and now even Video KYC. It has further increased the facilitation through Account Aggregator licenses. These baby steps have facilitated componentisation of banking and mushrooming of embedded finance through OLA Money, Uber Money Udaan as also launch of a host of neobanking startups such as Open, Niyo, MoneyTap, Jupiter Money, Lazy Pay, CRED, Groww, Zerodha. These neobank aspirants are starting by focusing on a specific problem to be solved for the customer – be it in current accounts or prepaid cards or consumer loans or savings or buy now pay later or investments/ wealth management and provide a whole new connected banking experience which is “Customer First”.
I strongly feel this is just the beginning of another disruption in banking in India which is just around the corner. Banking as such is likely to become more of a service and innovative business models which are more collaborative are bound to emerge. As someone has famously said, Banking is necessary, but Banks may not continue to be necessary. Cheers!
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