A wake-up callfor banks

My millennial friend recently closed his three-in-one account with a leading private sector bank as he was not happy with the high brokerage that the bank was charging for the transactions done on his trading account. He opened an account with a leading online zero brokerage company and is happy he is saving a substantial amount on brokerage. Like him, many customers are not happy with the various charges that banks are charging for their services.

As charges for non-maintenance of minimum balance, 21 public sector banks (PSB) and three private banks collected nearly Rs 11,500 crore from their customers during 2017-18. The State Bank of India (SBI) alone collected a whopping Rs 5,000 crore or nearly 50% of the amount collected by all the 24 banks put together!

The banks were levying these charges based on a July 2015 RBI circular which permitted them to levy charges on various services. SBI has reduced the charges since then in response to the flak it received from customers and media. The public perception was that banks were ruthless in collecting penalty from ordinary customers but were liberal while lending huge loans to big corporates, which have become non-performing assets today.

In fact, levying penalties and charging other fees is exactly what banks should not be doing at a time when mutual funds, small and payment banks and micro-finance companies are chipping away at their business. Banks must realise that disruption is already happening in the industry and is coming from Fintech (financial technology) companies and non-financial services companies like Google and Apple. Imagine the millions of rupees lying in e-wallets like Paytm, Mobikwik or PhonePe that would have otherwise been parked in savings bank accounts of banks.

Banks, in general, and PSBs, in particular, seem to be losing the trust of the public due to the negative developments in the last few years, like the mounting NPAs associated with big corporates and the recent frauds involving Nirav Modi and Mehul Choksi. The younger generation feels that banks cannot be trusted and that their money is not safe. Many of them are also not too happy visiting the branch due to the lackadaisical attitude of staff.

Equipped with smartphones, the youth are comfortable using them for receiving and making payments, doing research and making investments. All these transactions can be done with the touch of a finger without even going to the bank branch or engaging with any individual in a bank. Even as youngsters today are more open to embracing technology, they are quite uncomfortable with traditional banking.

Other than the millennials, who make up nearly 40% of the population, the other stakeholders like regulators and shareholders are also not happy with banks. The RBI has expressed its displeasure to the banks on many issues ranging from solvency to compliance. It has placed 11 PSBs under the Prompt Corrective Action (PCA). On issues of compliance, RBI has not been happy with a few leading private sector banks about the divergence in NPA reporting by them.

It is a fact that banks have offered technology to customers by way of internet banking, mobile banking and mobile apps. Banks are, in fact, helping the customers migrate to these alternative channels as it cuts transaction costs drastically. Offering them these facilities without changing the fee structure for services that they render is what the current generation is questioning. Banks are not able to reduce fees as they are struggling to come out of their legacy systems and bureaucratic set-up.

Day of reckoning?

Disruption that is happening in the banking industry is both an opportunity and a threat for banks. Those banks that feel that the disruption is an opportunity will adapt themselves and will survive. In the US, disruption is already happening. Online banking start-ups like Chime, Empower and Aspiration — called Challenger Banks — have been cashing in on the millennials’ distrust of traditional banks and their role in the financial crisis of 2008, and offer basic banking services.

The online start-up Chime offers checking and savings accounts with a debit card and a mobile app and does not charge any fee. Even as Chime is opening 1,50,000 accounts every month, it actually does not hold the money on behalf of its customers. Its deposits are held with FDIC insured banking partner Bancorp.

The Challenger Banks are exempt from the Dodd-Frank regulations of 2010. It’s more of collaborating with big banks instead of “challenging them”. In contrast, in the UK, Challenger Banks have taken off in a big way in the ecosystem. The revenues of Challenger Banks come from the interchange fees they charge on debit cards.

Will the Chime moment come to India soon? This may be a drop in the ocean, but the threat cannot be ignored. Also, the Chime model of banking is not the same as branchless banking experimented through business correspondents in 2006 by RBI to ensure greater financial inclusion.

(The writer is with Manipal Aca­demy of Banking, Bengaluru)