Banking on simplicity and fairness

Banking regulations don’t allow easy entry and, therefore, much competition. And any business that is protected against competitive forces turns anti-consumer. A media report has mentioned that banks have collected Rs 50 billion as penalties from depositors. Banks have a great time imposing excessive and arbitrary charges, penalties, non-financial restrictions and mis-selling products, which fetch them commissions and inflict losses on consumers. It offers a real-life example of Raghuram Rajan’s classic insight: Very often it is the incumbent capitalists who find ways to defeat capitalism (the central theme of his 2003 co-authored book Saving Capitalism from Capitalists).

Now, academics rarely manage to implement what they recommend. But, by a stroke of luck, Mr Rajan became governor of the Reserve Bank of India. One had hoped that he would apply his insights and we would get many new banks in the country. But the RBI initially licensed just one new universal bank, IDFC Bank — a strange choice. A certain deputy governor then pointed out that licensing only one bank would seem questionable, so Bandhan Bank turned lucky and was green signalled. This means, we have just two new banks since the early 2000s, when Kotak Mahindra and Yes Bank were allowed. At this rate, we may get two more banks in 2024, while six major associates of State Bank of India (SBI) have merged into the parent, drastically reducing competition and options. The RBI has also licensed small finance banks (allowing microfinance companies to become banks) and payments banks, which have not taken off — as I had predicted in a November 2014 article, when the payments bank rules were announced. 

Meanwhile, in various parts of the world, financial firms are experimenting with something that have lowered costs, improved reach and delivered better service in many areas of our lives — technology. Earlier this year, there was a lot of buzz when Amazon was rumoured to be launching a co-branded product like a checking-account to be initially targeted at young American adults. It already has a co-branded credit card from Chase, while Amazon Cash/Pay (e-wallets) allows customers to deposit cash directly in their Amazon accounts. Amazon has also loaned more than $1 billion in the past year to small merchants selling online. US consulting company Bain & Co surveyed nearly 135,000 consumers in 22 countries and found that more than half the respondents in the US said they would buy a financial services product from a tech firm.

A much bigger change is happening closer home. “More than 620 million people use Alipay … Once people’s money moves from conventional bank accounts into their virtual wallets, much of it doesn’t return,” reports Wall Street Journal. Alipay is part of the Alibaba group, which includes Ant Financial, which runs the world’s largest money market fund, has issued close to $100 billion in loans in five years, and has started an online bank, which approves loans instantly using the data drawn from the users’ transaction history with Alibaba. According to Bain, customers sent $1.7 trillion in total payments through Alipay in 2017, five times the volume that flowed through PayPal. “Japan’s main e-commerce giant, Rakuten, operates the country’s largest Internet bank and third-largest credit card company by transaction value,” according to Bain. Financial services now account for nearly 40 per cent of Rakuten’s revenue.

But these are examples of e-commerce companies using customer data to get some easier parts of banking done. One of the most inspiring experiments in new-age tech banking was a 2009 start-up called Simple, which offers its customers free checking accounts and data-rich analysis of their transactions. As happens with many consumer-facing start-ups, Simple’s founder Joshua Reich’s motivation to start the organisation (with Shamir Karkal) was his personal experience of high and arbitrary overdraft fees of a big bank and the frustrating interaction with customer service. Reich wrote in his blog “brand apathy is rampant in retail financial services”. The number one sales channel is the branch. That expensive, increasingly empty, retail space is how banks sell new products to customers. “Is there anything else that I can help you with today” is the alpha and omega of retail bank marketing, with a small epsilon for banners of smiling families plastered inside branches.

Reich went on to describe how when he logs on to his American Express account, “a small portion of the screen is stuff I care about…the bulk of the page is dedicated to selling me stuff. How about this? Make understanding and working with my money easier - make me happier, and then I’ll be far more receptive to upsells. But if you can’t even get basic information and interaction right, then I’m too busy worrying about my current state of affairs to consider new fangled products and the incremental complexity they entail.”

To combat this, Simple was launched with a few principles: “We’ll never profit from customer confusion, we’ll design for how people think rather than how banks work, we’ll compete via customer experience rather than fees or rates, and that all that we do is in support of our mission to help people feel confident with money.” Simple is free from charges. It makes money from interest and interchange charges from other banks. What a far cry from the attitude of existing banks all over the world! If we need want to improve customer experience and make banking fair and transparent, our policymakers need to allow digital banks in India now, based on the same principles articulated by Reich. 
/> The writer is the editor of www.moneylife.in
Twitter: @Moneylifers

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