Transformation Series 2015 - Case

INNOVATION or INNOVATION
PRELUDE
Business history has many examples of companies redefining the boundaries of business through
break-through innovation, there are also those who made the tragic mistake of missing gamechanging innovations in their industry thereby ending up with inexorable commercial disasters.
In each case, the disaster occurred, as the Wall Street Journal, points out, not because of bad
management, but because they followed the dictates of good management. They listened closely to their
customers. They carefully studied market trends. They allocated capital to the innovations that
promised the largest returns. And in the process, they missed disruptive innovations that opened
up new customers and markets for lower-margin, blockbuster products.
The threat of disruption, on many an occasion, isnt perceived as a threat! The disruptor appears to
the incumbent to be doing the incumbent a favor by relieving the incumbent of its least valuable
customers. In due course, the disruptor moves upstream and relieves the incumbent of its most
valuable customers.
Seemingly, no industry is spared: steel, computers, telephony, photography, stock markets; the list
goes on. Will it be Banks next? Burdened with legacy systems, infrastructure cost and increasingly
complex security issues, banks are dealing with a double whammy: grappling with intense
regulatory scrutiny as a result of a prior missteps, while a generation of disruptors is eating
away their current business. Can banks as we know them survive? Clayton Christensen, a leading
management guru, sets the alarm bells ringing when he says, Banks, many of them, wont exist
ten years from now. Their functionality will be taken over by IT companies who dont have the
same assets and income statement challenges
The Unbanked & the Under-Banked:
Around 40% of Indias population is statistically banked (i.e., have bank accounts), and as
expected this ratio is worse in rural India. However, this statistic does not reflect that
-

Only 1/7th of these account holders have access to credit, or

Billions of transactions happen in cash even today, or
Out of 26 million enterprises, only 5-7% use the banking channel.

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Whether its product penetration or usage of modern channels (like mobile banking), India remains
as a grossly under banked nation. Indian banking customers hold an average of 6.7 products with
3.6 institutions. The number of relationships peaks when customers are in their early 30s, with this
age group holding 4.5 relationships on average, before decreasing among older customers. Despite
the Indian economy growing in part through domestic consumer consumption, credit products
are much less common (in comparison to other markets in Asia) with 64% of Indian retail banking
customers accessing credit products with credit card being most commonly held (52%).
Domestic credit provided by banking sector (as a % of GDP) in India was last measured at 74.12 in
2011, according to the World Bank. Exhibit 1a, 1b showcases comparative data for Product
penetration in retail customers and Domestic credit provided by Financial sector (as a % of GDP) across
BRICS as well as few of the developed economies.
There have been attempts by successive governments to bring policy changes, regulatory
frameworks, technology platforms and physical infrastructure to support formalization of
financial behavior, by creating an enabling environment for Banks to provide easily accessible,
affordable and suitable financial products. Aadhaar enabled Payment Bridge, Business
Correspondent model, Jan Dhan Yojana, differentiated licensing are a few such initiatives with
more expected to come over the next few years. However, none of these models are disruptive in
nature; they will at best be incremental!
Innovation requires an understanding of customers and anticipating market evolutions besides
attracting and retaining skilled individuals and prioritizing longer-term innovation goals over
shorter-term financial objectives. There is also a need for banks to focus on increasing Financial
Literacy in the unbanked & underbanked population, to underline the utility of banking to them.
With a clear need to serve the unbanked & under banked sections of the society, say industry
experts, innovations in Indian banking will largely be through effective & efficient use of
technology.

PROFESSIONALS BANK OF INDIA (PBoI)- BACKGROUND & PATH FORWARD

In a relatively short span of 10 years, PBoI has emerged from being the #1 Mid Sized Bank in the
country to becoming one of the Top 4 Private sector banks in the Indian Banking space. In a
relatively commoditized and highly competitive market, PBoI has created a unique differentiated
positioning through Knowledge banking driven relationship oriented strategy, focusing on the
emerging sectors of economy. As a full service Commercial bank, PBoI combines the strengths of
its Relationship teams, Knowledge Bankers and Product experts (across Transaction Banking,
Corporate Finance, Financial Markets, Investment Banking) to provide customized financial
solutions to its clients.
PBoI strongly believes in the B2B2C model of Business Development. Through this model, it
enables financial transactions for thousands of corporate customers & consequently millions of
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individual customers across the country through various channels. Since inception, PBoI has
invested in innovative business processes and technology platforms and has many firsts to its
credit. This competitive advantage has enabled the Bank to provide consistent customer service,
while continuing to grow rapidly.
PBoI has grown over the years through consistent increase in a pan-India branch network. Table
below showcases the growth in critical parameters over the last 5 years.

PBoI

FY 10 FY 11 FY 12 FY 13 FY 14

Deposits (In Rs. Bn)

310

450

500

650

750

CASA %

9%

12%

15%

19%

22%

# branches

110

215

330

445

560

# ATMs

220

430

550

780

1020

Known for its Knowledge & Innovation led business growth; PBoI has over the years been the
recipient of many awards & accolades showcasing its Institutional Excellence, Human Capital,
Innovation & Unparalleled service.
PBoI recognizes the changing economic conditions in India and the evolving regulatory
environment and intends to rejuvenate its ability to bring in Innovation in banking space to
deliver business value to its stakeholders.

GROWTH IN INDIAN BANKING- OVER THE YEARS

Historically, banks have played an increasingly important role in the financial intermediation
process by mobilizing savings in the form of deposits. Large branch expansion by commercial
banks in the 1970s following the nationalization of banks in 1969 had a significant impact on the
deposit growth of banks in India. The number of scheduled commercial bank branches in rural
and semi-urban areas increased from 1,443 and 3,337 respectively, in 1969 to 30,185 and 9,816
respectively, in 1985 to 26,493 and 25,009 respectively, in 2013. Consequent to the large branch
expansion, outreach of the banking system expanded as reflected in the population per office,
which declined from 65,000 in 1969 to around 14,000 in 1985 and has remained broadly stable
thereafter (Exhibit 2).

NEXT WAVE OF GROWTH- EVOLVING REGULATORY FRAMEWORKS

In November of 2014, the Reserve Bank of India issued guidelines on Small & Payment Banks in
India to give fillip to Government of Indias thrust to enhance Financial Inclusion. While this
augurs well for the overall economy, this evolution in the central banks stand in allowing private

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participation into the domain of traditional banking poses substantial competition to players in
the Indian Banking space, including PBoI, over the years to come.
1. Payments Bank: Prime objective will be to increase financial inclusion by providing small
savings accounts, payment/remittance services by enabling high volume-low value
transactions in deposits and payments/remittance services in a secured technology-driven
environment.
2. Small Bank: The purpose of small banks will be to provide a whole suite of basic banking
products such as deposits and supply of credit, but in a limited area of operation to the
under-served and un-served sections of the population.
This apart, the capital and liquidity requirements imposed by Basel III will change the
competitive dynamics of the industry. Innovation in the business models of banking should
therefore carefully consider aforementioned changes in industry landscape coupled with stringent
risk frameworks.
PBoI ROADMAP FOR INNOVATION:
Until now, one of the fundamental means to enable the reach of banking facilities to the masses
has been the physical presence of branch. While it will continue to be one of the primary modes of
reach, the improvements in technology today, enables these facilities to be rendered through
alternative channels as well.
At PBoI, banking is fundamentally about 3 core activities which cater to the basic needs:
1. Enabling customers to receive and save money more conveniently
2. Facilitating investments/ expansion by making money (or credit) available
3. Ensuring safer, faster & more convenient transit of money through the banking system
Experts believe that banks tend to channel much of their focus on risks & regulations and
consequently have rendered themselves as being slow innovators, who have failed to think out of
the box! Broadly, there is consensus that the next wave of growth in Banking would largely be
Innovation driven, most possibly disruptive to current models of banking. The spirit of
Opportunity in Adversity has always been the underlying philosophy at PBoI. To embark on this
journey, PBoI has institutionalized an Innovation Management group within the bank, led by
Chief Innovation officer- who reports directly to MD & CEO. The bank has proactively focused on
DIGICAL(digital and physical) innovations, combining the benefits digital and physical banking.
This team is evaluating across 3 pillars for innovation, which can prepare the bank to
Moonshot in the coming years:
1. Payments Enabling customers to receive & pay money conveniently
Traditionally, Cash & cheque based payments have dominated the Indian payments market. Even
today, 63% of all payments in India are still made in cash. However, the Reserve Bank of India is
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doing its best to encourage alternative methods of payments which will bring security and
efficiency to the payments system and make the whole process easier for banks & its customers.
The Indian banking sector has been growing successfully, innovating and trying to adopt and
implement electronic payments to enhance the banking system.
The Payment and Settlement Systems Act, 2007 was a major step in this direction. It enables the
RBI to regulate, supervise and lay down policies involving payment and settlement space in India. Apart
from some basic instructions to banks as to the personal and confidential nature of customer
payments, supervising the timely payment and settlement of all transactions, the RBI has actively
encouraged all banks and consumers to embrace e-payments.
Globally, payments landscape is less regulated. PayPal has been the # 1 online payment method
in some countries, and start-up companies like Square and Stripe are commanding multi-billion
dollar valuations. Retailers are also moving in as well: with nearly one-third of Starbucks revenues
in the USA being paid through its own loyalty cards. Non-banks are also edging into other core
areas like checking and savings as well.
-

Google recently introduced a plastic debit card for its Google Wallet.
T-Mobile launched a new checking service with a smartphone app and ATM card.
Walmart teamed up with American Express to launch a prepaid card that functions like a
debit account; it captured more than a million customers in less than a year.

With Payments Banks coming to India, the day is not too far for digitally enabled transactions
for small and micro payments across India, which is today at the cusp of Internet & Mobile boomas noted in an article by a leading business magazine (Exhibit 3). It is not unfathomable that
payment banks may be allowed to offer payment services to regular customers in the future, once
they establish the business model.
2. Financing- Facilitating investments/ expansion by making money (or credit) available
At PBoI, access to affordable financing is broadly addressed in two legs:
a. Personal Financing:
The Prime Minister of India, in his Independence address on August 15, 2014 remarked- The
average Indian takes a loan from a money lender that he cannot return and dies. For his daughter's
marriage, a poor man takes a loan from the money lender that he cannot return- which reflects the
current state of affairs regarding access to bank finance. Nearly 500 million Indians today are
at the mercy of money lenders who charge extortionate interest. Even though India has grown
to become Asia's third-largest economy, thousands of poor farmers commit suicide every year
because they cannot repay loans. While MFIs have addressed this need for affordable
financing to an extent, the search for an innovative & viable model to make available credit to
facilitate transactions continues.
b. SME Financing:

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Transformation Series 2015 - Case

Indian SME sector has grown multifold over the last decade, with over 50 million SMEs in the
country today. They contribute more than 45% of Indias industrial output, 40% of countrys
total exports and create over a million jobs every year. However, SMEs operate in a rather
challenging atmosphere (Exhibit 4).
As is evident from the figure below, banks/ NBFCs in the country are catering to less than
50% of the qualified demand in the Indian SME financing space. This provides for an
interesting market in the digital financing space where not many banks/ financial institutions
have yet adopted/ excelled this model.

Total Debt Demand from SMEs in India

Funded by
Banks &
NBFCs
27%

Ineligible for
Financing
35%
Rs. 26
Trillion

Unmet
Demand
38%

Critics believe traditional lending to the SME sector in India can best be described as One Size
Fits All Approach- with Risk management techniques invariably more suited for medium and
large corporate entities. The same set of rules when inadvertently applied to small and earlystage enterprises result in a faulty output, i.e. a systemic rejection of most SME loan
applications. Given the intense nature of competition in the lending industry today, the
consequence is that too many banks and financial institutions end up chasing the same set of
good customers, leaving aside a much larger untapped segment of SMEs in the process.
3. Big Data & Analytics driven customer relationship management
By 2020, the average age of India will be 29 years. This new age customer base is tech savvy,
always connected and looking for a personalized, contextual experience with real time online
information. Cell phone penetration has grown multifold in the last decade and the rise of
middle class has increased the number of households with internet connectivity. PBoIs
recognized and acknowledged these changes through investments in technology and is in the
process of rolling out online, mobile and social banking extensions to its core offerings, in an
effort to respond to this changing consumer demographic.
These investments in generating new channels of interactions with the bank shall create a mine
of digital data within the contours of its infrastructure. Making sense of the explosion of
information has created significant opportunities and challenges for Indian banks. What
differentiates the leaders from the laggards will be how well they leverage this information within
and outside their enterprise for business benefit. Largely Indian private sector banks have made
investments in Business Intelligence (BI)- primarily around the consumer/retail segment of
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customers & not so much focused on corporate customers. Ensuring safer, faster & more
convenient transit of money through the banking system

CUSTOMER EXPERIENCE PHILOSOPHY OF PBoI:

Customer Experience is a key aspect which has propelled the growth of PBoI over the last decade.
A research2 by a leading consulting firm reveals that a vast majority of customers referred to
purchase additional financial service products from their primary bank rather than any other
source (Exhibit 5). This underscores the importance of achieving primacy (the position of being
the preferred and main bank for a customer) in a relationship, as it leads to a greater share of
wallet for banks. Thus, a new value model is required, based upon securing customer relationship
primacy, through efforts to regain trust and build customer engagement.
PBoI has proactively addressed this by using digital tools to deepen its existing relationship with
customers and gaining primacy. While the preference for digital can be seen across all segments
and markets, it is especially important for those customers who form part of Generation Y, now at
the point of choosing their main banking provider. As Generation Y grows up with digital, it will
be more important for banks to match their digital expectations.
Globally, many banks have evolved from being a traditional player to embracing improvements
in technology in order to better serve their customers. Below are some of the use cases which
exemplifies the mantra banks have to use in order to succeed in an otherwise cluttered spaceEmpower customers by equipping them with better information through Technology!
a. Garanti, one of Turkeys largest banks, offers a free mobile app that gives customers
personalized offers and advice based on their location and past spending. It uses GPS and
Foursquare to tell them if they are close to a store with a special offer, provides saving
suggestions, and estimates how much customers will have in their account for the rest of the
month based on past spending.
b. Bank of America analyzes transaction data to give customers cash back on transactions at
frequently used merchants. Customers click a button below a previous transaction on their
online statement to accept an offer. The next time they shop at that merchant, cash is
automatically added to their bank account. The bank has given $17 million in cash back to
customers using Cardlytics technology.
c. Commonwealth Bank of Australia offers a mobile app that uses augmented reality
technology to help with home-buying. House hunters simply point their smartphone camera
at a residence to bring up extensive property detail, alongside monthly payment estimates on
mortgages and insurance. The app covers 95 percent of all residential properties in Australia
and generates 20,000 property searches per week.
d. BBVA has long made available to its US customers information on the actual selling price of
cars (as opposed to list prices) based on TrueCar data to give them an advantage in their car
negotiations, while promoting their auto loans and insurance. The banks innovation lab has
envisioned even going a step further in other countries and providing auto specialists armed
with such data to negotiate directly with car sellers on their customers behalf.
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Transformation Series 2015 - Case

e. Alior Bank: The new age Polish Bank revolutionized the forex trading experience for its
corporate clients through a single-bank foreign exchange trading platform. While this is
unique for the Polish market, this will help to achieve advantage in e-trading on the local
market. This system is used to configure and manage FX rates that are sent to Alior Bank's FX
platforms.
With customers demanding anytime & anywhere access to their money and financial
information, banks have no option but to implement wireless solutions in device- independent
and network agnostic ways. On the user side, rapid progression of mobile technologies means
banks must increasingly adapt their own infrastructure to the client side needs. On the flip side,
unlike PCs, mobile phones are small, and are easily lost or stolen, making them more vulnerable to
fraudulent transactions which calls for greater security measures combined with powerful
regulation.
Overall, there is no denying that there is both challenge & opportunity for banks in enriching
customer experience arising from the numerous use case scenarios of powerful smart phones
operating wirelessly. By ensuring ease, comfort, safety and seamlessness of such operations, banks
can be assured of remaining in business.

EXPECTATIONS FROM YOU:

1. Innovation is ingrained in the DNA of PBoI, hence PBoI management has tasked its innovation
team under the Chief Innovation Officer, to comprehensively study the competitor landscape in the
Payments and Financing space, and recommend an innovation roadmap for PBoI in this space. As
the CIO of PBoI, you and your team need to share this recommendation with the management.
2. PBoI seeks to increase wallet share from existing customers and tap into new un-banked/underbanked customer segments through innovative service delivery and customer acquisition models.
You are required to recommend innovative models and practices to achieve this twin-fold objective
by conducting competition / market landscaping across the BFSI and other related industries in
India and internationally.
Answers should be within 1000 words in Book Antiqua font size 12. For details please check submission
guidelines. Also enclose a 200 word Executive Summary (exclusive of the above).
Your submission should not exceed 8 pages

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Transformation Series 2015 - Case

Exhibit 1a: Product penetration in retail customers

Avg Products per main bank
customer

Avg Products/ customer (in # of

institutions)

UK

2.90

7.6 (in 4.3)

Hong Kong

4.00

9.2 (in 4.4)

India

2.60

6.7 (in 3.6)

China

3.10

7.7 (in 3.6)

Malaysia

2.90

8.5 (in 4.4)

Singapore

2.80

9.0 (in 4.9)

Australia
3.00
*Main Bank is a customers preferred banking partner

6.2 (in 3.2)

Exhibit 1b: Domestic credit provided by Financial sector (as a % of GDP)

Country

2010

2011

2012

2013

Australia

154.4

152.1

152.8

158.8

Brazil

96.3

100.5

110.8

110.1

China

146.3

145.4

155.1

163

Germany

126.9

119.9

118.8

113.5

India

71.9

73.8

75.9

77.1

Japan

328.5

338.1

348

366.5

Russia

37.7

39.6

42.7

48.3

South Africa

190.6

176.9

187.8

190.2

United Kingdom

209.1

199.3

195.6

184.1

United States

227.1

227.2

232.4

240.5

Exhibit 2: Growth in Branch Network over the decades

Year

Rural

Semi-Urban

Urban

Metro-politan

Total

Mar 1969

1,443

3,337

1,911

1,496

8,187

Mar 1970

4,817

4,401

2,504

1,900

13,622

Mar 1975

6,807

5,598

3,489

2,836

18,730

Mar 1980

15,105

8,122

5,178

4,014

32,419

Mar 1985

30,185

9,816

6,578

4,806

51,385

Mar 1990

34,791

11,324

8,042

5,595

59,752

Mar 1995

33,004

13,341

8,868

7,154

62,367

Mar 2000

32,734

14,407

10,052

8,219

65,412

Mar 2005

32,082

15,403

11,500

9,370

68,355

Mar 2007

30,551

16,361

12,970

11,957

71,839

Mar 2013

26,493

25,009

19,027

18,033

88,562

Source: http://rbi.org.in/scripts/publicationsview.aspx?id=10488; http://www.rbi.org.in/scripts/PublicationsView.aspx?id=15449

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Transformation Series 2015 - Case

Exhibit 3:: Article in a leading Business Magazine on the Mobile & Internet boom in India:
By June 2014 we will have 185* million mobile internet users. Separately there are already 431** million
internet capable devices in the hands of consumers today. We believe 2014 will be the tipping point for
mobile internet on the back of improved regulation, increasing investments by operators in data, increasing
consumer adoption and businesses embracing 'mobile' as a central piece of their strategy to eng
engage
customers. The first mobile revolution led by 'voice' transformed how people connected and communicated.
The second led by 'data' is transforming how people consume infotainment and services, share their lives
and gain knowledge. It is disrupting tradi
traditional
tional business models and creating new business opportunities
that is location agnostic. This shift is monumental and one that is good for the country.
country.
Exhibit 4: Challenges faced by SMEs

Exhibit 5:: PWC research shows customer prefers primary bank for additional banking needs

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Transformation Series 2015 - Case

References:
1. http://www.fiercefinanceit.com/story/what-banks-need-learn-alibaba/2014-09-02
2. http://www.forbes.com/sites/anaswanson/2014/09/23/what-india-could-learn-fromalibaba/
3. http://firstbiz.firstpost.com/sme-report/pdf/Analysing-Indian-SME-perceptions-aroundUnion-Budget-2014-15_Final-new.pdf
4. The new digital tipping point- PWC article
5. http://www.ey.com/Publication/vwLUAssets/EY-Banking-on-Technology/$File/EYBanking-on-Technology.pdf
6. http://spice.fsi.stanford.edu/docs/european_answers_to_the_financial_crisis_social_bank
ing_and_social_finance
7. http://www.capitalfloat.com/
8. http://www.emc.com/collateral/industry-overview/rsa-strategic-security-wo-mountainprint.pdf
9. http://www.rfintelligence.com/downloads/FINAL%20RFi%20Global%20Retail%20Banki
ng%20Report%20(Online).pdf

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