Technology adoption across different set of incumbent players

Not all incumbent players are adopting technology at the same pace

CRISIL Research’s analysis indicates that the pace of digitalisation and the extent of collaboration with digital solution providers vary across incumbent players8 .

To arrive at this, we compared the impact on 12 identified cohorts of players in the financial services industry, as defined below:

12

The analysis for players in each cohort has been done through two distinct lens:

1. The business, operating efficiency and consumer lens, encompassing assessment of the extent to which digital transformation and partnerships10 have expanded the addressable market catered to, enhanced operating efficiency of businesses, enabled the launch of new products and more efficient cross-selling of existing products, and improved customer engagement and services

2. The financial inclusion lens, covering increasing reach in the unserved/underserved segment11, drop in

8 Refer to Annexure VI for more details on impact of digitalization across different cohorts of players

9Small and midsize NBFCs do not include fintechs and digital solution providers

10 Refer to Annexure II and Annexure IV for details of partnerships

11 Refer to Annexure III and Annexure V for more details ticket sizes, and lowering of costs for consumers at the lower end of the financial pyramid

Through the business lens: While financial service providers across the board have made distinct progress towards adopting technology and partnerships, our analysis indicates large private banks and, to some extent, large PSBs are significantly ahead of their counterparts in terms of impact on their business.

Large regulated financial institutions are at an obvious advantage their vast customer base and wide product range opening up huge business opportunities for both the parties. From the perspective of financial service providers, open architecture enabling easier API integration and striking relevant partnerships has become critical as it offers the opportunity to accelerate digital foray, shorten time to market, widen product suite, increase target customer base and enhance operating efficiency.

The large new private banks were the early adopters of digital transformation. They have not only adopted open architecture to foster collaborations with thirdparty platforms but also implemented digital processes to create operational efficiencies and made significant investments to develop in-house products for a superior customer experience.

Through collaborations with third-party platforms, these banks are providing services and products such as virtual accounts, corporate credit cards and unsecured business loans. Further, many have adopted tech in various processes, such as robotic process automation (RPA), to automate reconciliation processes; video KYC for onboarding customers; automated credit underwriting; and e-stamping and e-signing of loan agreements.

Large banks have also extensively leveraged AI and ML to cross-sell fee-income products through their digital platforms, as well as other loan products such as personal loans to their existing customers. For example, SBI through its digital platform (YONO) sells health insurance policies along with credit products such as personal loans.

Large insurance companies, too, have stepped up focus on digitalisation and collaborations. But given the nature of the business, the sheer number of products on offer and the low awareness of insurance in India, dependence on a large network of on-the-ground agents and banking partners to push the product as per its relevance to the consumer remains high, especially in the case of life and health insurance.

While small and midsize lenders (banks and NBFCs) have also ramped up their digital play, especially since the onset of the pandemic, there still remains significant scope for improvement. For example, most of them still do not have partnerships with thirdparty APIs to help them fetch bank account statements of loan applicants and standardise them for analysis and underwriting. SFBs, the newest set of banks to be licensed, have demonstrated fleetfootedness and agility to strike innovative partnerships to expand their business, but it may take a while for those to show results.

For smaller licensed service providers especially, partnerships and API integration for the right use cases, taking into account their target segment, would allow them to compete with larger players on a more even keel while reducing the need to have expensive branch networks.

Smaller players may look at all kinds of partnerships for this purpose, broadly grouped into three types: (i) technology partnerships, under which a third-party technology is deployed to enhance operational efficiency; (ii) customer-oriented partnerships, aimed at offering a wider suite of products to digital-savvy customers of the licensed service provider; and (iii) front-end partnerships, wherein a solution provider combines the service provider’s infrastructure with its technology to offer services through its digital platform or mobile application (neo-banks, for example). An SFB, for example, has collaborated with an digital service provider (a neo-bank) to provide savings account and mutual fund investment products through a digital platform/mobile application designed and managed by the latter.

Through the financial inclusion lens: On this front, CRISIL Research’s analysis indicates that players have only scratched the surface, despite significant uptake of innovative offerings such as BNPL in the personal loan segment. While small NBFCs have been addressing newer customer segments and have also gone down the ticket size spectrum, banks across cohorts and larger NBFCs have been slightly slow in this regard.

The turnaround time for customers has reduced, and payment solutions are aplenty, but the cost of financial products has not yet been optimised for lastmile customers. For example, the delta between the average yields for low-cost housing NBFCs12 and 10year G-sec yields remained stagnant at ~6.7% over fiscals 2017-21, indicating risk premium for these customers has not reduced meaningfully.

Among non-lenders, while mutual funds and brokerages have successfully leveraged technology and the increasing popularity of equity investments to expand their addressable market there were ~129 million retail mutual fund folios and ~89.7 million demat accounts as of March 2022 these numbers pale in relation to the number of savings bank accounts (~1.8 billion as of March 2021), indicating the headroom for offering more innovative products and solutions to the next rung of customers.

The front-end consumer applications developed on UPI-enabled open architecture is dominated by GooglePay and PhonePe. In fiscal 2022, third-party digital solution providers such as PhonePe, Google Pay and Paytm had a share of 46%, 34%, and 14% respectively in volume of UPI transactions, leaving incumbent banks with a meagre market share. Further, in the B2B segment space as well, players such as RazorPay, Pinelabs, PayMate have managed to establish a strong presence. Incumbent players have collaborated with digital solution providers in these segments to enhance their customer base; some of them have also become more aggressive in areas such as merchant acquisition by creating applications that can be used by merchants to collect payments across bank cards and multiple payment applications through a single merchant payment app.