Banking technology innovation

future trends in financial services and current trends and development in banking
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Nataliebarry,New Zealand,Researcher
Published Date:13-07-2017
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Project Blue: Assessing the future trends for financial services in India www.pwc.com/projectblueIntroduction and government. We believe that effectively in different markets. This Project Blue will help financial is particularly the case with respect to Welcome to Project Blue: services businesses as they deal India, which offers huge opportunities Assessing the future trends with the impact of new technology, for growth. Thus we have developed a demographics, social changes and unique framework for India, keeping for financial services in mounting pressures on the world’s in mind the regulatory, fiscal and India. most critical natural resources. political environment. The Project Blue framework for India is represented in Although the Project Blue global Figure 1. framework is all encompassing, we realise that this framework needs to be customised to function As the financial services industry Figure 1: Project Blue Framework for India continues to recover from the economic crisis, it is critical that financial institutions deal with the longer term trends that are transforming the market and Regulatory environment Fiscal pressure Political / social instability competitive environment. It is of utmost importance, market players in the industry identify risks and threats Rise & interconnectivity to their business and capitalise on of Emerging Markets • Population – the opportunities presented by the (SAAAME) Indian diaspora continuously evolving landscape. To help financial services businesses develop effective strategies to respond to these changes, we have developed Social & a global framework, called Project behavioral change Blue (refer to appendix). Project • Saving and investment Blue sets the forward looking agenda for leaders of financial institutions, regulators and policy makers. • Digital and mobile This framework can be used to • Technological and scientific R&D and innovation systematically and comprehensively identify the issues that should be addressed related to such areas • Food, water, land & energy • Key commodities as market strategy, organisation, operating models and risk. State-directed capitalism Our development of Project Blue drew on our interactions with various players in the financial services sector: customers, businesses, regulators 4 PwCRather than offering one single way forward, the Project Blue framework is flexible enough to be applicable to the many different organisations within the financial services sector for their strategic assessments Figure 1: Project Blue Framework for India and is adaptable to the unique challenges faced by all organisations Using the Project Blue framework will In this document we will discuss We hope you find this document help your business to target investment, the challenges and opportunitites insightful and useful and we would identify talent requirements and by expanding upon each of the be pleased to discuss this framework develop the necessary operational individual components of the Project in more detail as the Indian economy capabilities needed to make the most of Blue framework. continues to evolve. your competitive potential. Project Blue 5 Adapting to challenges and opportunities Against the backdrop of a complex reshaping the economy and transforming traditional risk methodologies and has and uncertain economic environment, the behaviour of consumers, businesses the potential to disrupt commercial financial service institutions in India are and regulators. The India growth story, models and organisational structures. struggling to retain their competitiveness although impacted to a great extent by The immediate challenge for your and to align their business models to international factors, is equally driven business is how to anticipate and adapt the rapidly changing circumstances. by domestic factors, like changing to uncertainty, rather than simply react Forward-looking organisations are consumer behaviour, falling investment, to events. seeing the shake-up as a once in a the increasing trade gap and current generation opportunity to redefine their account deficit. In view of the growing Regulatory environment strategies and business models, when the integration with global markets, India Regulatory change will be a way of life competitive structure of their industries needs to have a strong regulatory for the foreseeable future, driven by are relatively open to change. framework to prevent and protect the requirement to better manage risk against external threats. Being a hugely in the financial system. The multiple The Project Blue framework has been under-penetrated financial market, India changes taking place in the financial designed to help industry executives presents immense opportunities to tap services domain are resulting in greater organise their assessment of a world in investors’ savings and channel them uncertainty and complexity, with the flux, debate the implications for their into the financial markets. However, prospect of further industry restructuring business, rethink their strategies and, if regulatory changes, fiscal pressures ahead. While the reforms are still in the necessary, reinvent their organisation. and political and social instability all early stages of development, they will Seeing the future clearly, being first mean India’s is a complex business come to redefine the role of financial to adapt strategies and business environment. institutions and with it, their strategies models, and breeding a culture that and business models. It’s vital to look shapes, rather than reacts to, the These complexities in the Indian beyond compliance to understand how changing business environment will business environment make the future these developments will affect product be the building blocks of sustainable of financial services difficult to predict. and business portfolios, how they will competitive advantage in the future. They also mean that a significant amount determine the allowable cost structure of management time is consumed in a of your organisation and ultimately how The Project Blue framework for India focus on short-term optimisation, and they will influence the fundamental draws on the experience of the PwC in some cases survival, at the expense design and strategy of your organisation. global network and has been developed of long-term strategy and execution. considering the major trends that are The unstable environment challenges 6 PwC “The global community of regulators – as well as the political classes – are keen on ensuring the stability of the financial system. And that implies a completely new order, a new set of rules to play by. In these cases, it’s not uncommon to wind up in a situation of regulatory overreach” Piyush Gupta CEO & Director, DBS Group 16th Annual CEO Survey, PwC India Regulatory change will challenge you to identify which areas of your business offer the greatest potential and to identify the core attributes on which to establish sustainable competitive advantage. Globally, a regulatory reform agenda has derivative market reforms to mention a opportunity in the banking sector, has taken a definitive shape, and efforts are few. Also, the need to maintain higher been the issuing of new banking licenses now being made to standardise these capital standards under Basel III, which to corporate houses. measures across countries, so that there aims to ensure better financial stability, Regulatory change is aimed at bringing is no window of regulatory arbitrage. are affecting investment strategies, about uniformity in regulatory reform, A strong regulatory framework entails while increasing the regulatory burden minimising regulatory overlap and strengthening liquidity conditions, for banks and other financial services developing new markets. In recent years, enhancing risk coverage, reducing institutions. advances in technology, innovations in leverage, recognising systemic risk and In India also, the regulatory landscape processes and the need to manage the rise maintaining financial stability. Across is undergoing a shift, as a result of in flow of capital have led to a need for the US and Europe the regulatory global reforms related to Basel III, OTC a stronger and more resilient regulatory developments which CEOs are derivative reforms, and the development framework. Indian regulators are playing responding to include Foreign Account of an effective anti money laundering a key role in the region, and learning from Tax Compliance Act (FATCA), Dodd- (AML) framework, amongst others. their counterparts in other parts of the Frank, Alternative Investment Fund One of the most recent regulatory world, in continuing to strengthen the Managers Directive (AIFMD) , the developments, which presents huge regulatory framework in India. Volcker rule and Over the Counter (OTC) Project Blue 7 Fiscal pressures “I think the level of external The Indian economy is in need of fiscal consolidation to boost capital threats has increased with expenditure. Fiscal reforms have every passing decade. And been undertaken, aimed at cutting down spending on subsidies and as the pace of change has increasing revenues. increased, organisations like ours have to be a lot more flexible than we might have Figure 2 been in the past.” India’s fiscal deficit and savings rate has been worsening Shikha Sharma MD & CEO, Axis Bank 16th Annual CEO Survey, PwC India Not just net tax revenue, but overall revenue receipts have been lower than expenditure Source: Economic Survey 2012, Planning Commission 8 PwCReducing India’s deficit is proving The goal of controlling the fiscal deficit Political and social difficult in the face of low tax receipts has not deterred the Finance Ministry instability and subsidies in areas such as petrol and from increasing overall expenditure The political and social scenario has cooking fuel. Tax receipts as a percentage while trying to rein in certain subsidies. become increasingly unstable in recent of GDP were 9.6% in India in 2011, the The Budget made provisions for a 16% years. Factors ranging from corruption lowest level of any major economy (the increase in overall expenditure, up and citizen activism to fiscal austerity, 1 world average was 29.5% ) (See Figure from 10% and 9% in the previous two unemployment and rising food prices are 2). This low level of tax revenue and financial years. Revenue targets, on the igniting ever-more frequent social and the parallel economy that underpins it other hand, remain high. political unrest. In addition, the advent depletes the funds available for much Defining his efforts to contain the of social media is making it easier to needed infrastructure investment and fiscal deficit through rationalising communicate information, circumvent broader economic development. expenditure, the Finance Minister said: censorship and coordinate action. The government announced an “We took a dose of bitter medicine. It 2 The 16th Lok Sabha elections which will ambitious Union Budget in February seems to be working.” The dose has be held in 2014 may lead to instability, 2013 in an effort to control the rising certainly evoked positive sentiments given the high rates of inflation, sluggish fiscal deficit. It set a target of a fiscal among ratings agencies. Moody’s for growth and conservative policies deficit of 4.8% of GDP in financial year instance, called the Budget ‘credit which were laid down by India’s 3 2013-14; an improvement from 5.1 positive’ , being convinced by its efforts United Progressive Alliance (“UPA”) and 5.7% in the previous two years. for modest fiscal consolidation. However, government. The projection for a lower fiscal deficit it is only with time that we will know is based on the encouraging forecast if the government will meet its food On the social welfare front, there is a for growth between 6.2 and 6.7% and fuel subsidy targets successfully, need to boost the pension market to during the same year. Increased growth generates enough earnings from make up for the inadequacies of social is a prerequisite for higher revenue divestment and telecom fees and if the welfare and help support an increasingly collections. economy will grow enough to fill the longer lived and growing population. government’s coffers with additional There is a lack of tax incentives to help revenues from income tax. spur higher take-up of pensions. India has the second largest population of people over 60 in the world, and this number is expected to touch 173 million 4 in 2026, from 71 million in 2001 . It is “We ensure that we are prepared for potential adverse clearly imperative that this segment is adequately covered under some kind of scenarios by making sure that we are well capitalised, pension or other social welfare scheme. that we are watching our risk processes and that we have The government has taken a huge step a fairly diversified portfolio in terms of the risks that can forward with the UID (Aadhaar) project come and hit us. And that immunises us a bit from some which provides a unique identitification to all residents across the nation. This is of these threats.” used primarily as the basis for efficient delivery of welfare services. Shikha Sharma Like other businesses, financial services MD & CEO, Axis Bank companies will need to navigate the challenges presented by social and political instability. The Project Blue framework can help businesses address these challenges and identify opportunities to pursue further growth. 1 CIA World Factbook 2011 estimates 2 Economic Times, 28.02.13 3 Reuters, 04.03.13 4 Report of the Technical Group on Population Projections Constituted by the National Commission of Population, May 2006 Project Blue 9 Planning for transformation The rise and Figure 3 interconnectivity of emerging markets Imports have continued to outpace exports, leading to a trade deficit India’s drive to boost exports and address its continuing current account deficit (See Figure 3) builds on its historic ties and strong trading relationships, both regionally and globally. One clearly emerging opportunity is tapping into the rapid expansion and increasing interconnectivity of the fast-growth markets of South America, Asia, Africa and the Middle East (together forming what PwC terms ‘SAAAME’). Trade between the SAAAME markets already accounts for around 30% of global commerce and this intra-SAAAME trade is growing at around 20% a year (see Figure 4). This is much faster than trade between developed-to-developed As a consequence, the current account deficit has also worsened and developed-to-emerging markets. Eventually, we predict that SAAAME trade will be the dominant trade activity in the world. Source: Economic survey, Planning commission 10 PwCFigure 4 South America, Africa, Asia and the Middle East (SAAAME) are emerging as an increasingly important network for International Trade Source: WTO, PwC Analysis 6 7 The growth in India’s economy since economic superpower. While remaining a growth rate of 4.9% (IMF) or 5.0% the advent of liberalisation in the strong in comparison to most developed (RBI) in 2012-13, reflecting continuing early 1990s (an average growth of and SAAAME economies (see Figure 5), uncertainty over the Eurozone sovereign 5 8% a year over the past ten years ) growth in India has, however, recently debt crisis and other impediments to has transformed the country into an slowed. India is estimated to achieve global economic prospects. 5 Economist online statistics, updated 27.09.12 6 International Monetary Fund (IMF) World Economic Outlook, October 2012 7 The RBI, 2012 Project Blue 11 The UAE has recently emerged Figure 5 as India’s largest trading partner, pushing China to second position. India’s GDP versus GDP of other emerging markets and India had a trade deficit of only 2,113 advanced economies million USD with the UAE, while with China the figure was 31,492 million USD. Out of India’s top ten trading partners, seven were from the SAAAME market (UAE, China, Saudi Arabia, Iraq, Singapore, Indonesia 8 and Hong Kong) . Source: IMF, World Economic Outlook (October 2012) 8 Department of Commerce, Government of India, 21.03.13 12 PwCIndia’s longer term economic prospects Figure 6: Changing global economic rankings are strong. Our latest projections anticipate that the size of India’s economy will be similar to that of the US 2011 2030 2050 by 2050 (see Figure 6). PPP rank Country GDP at PPP Country Projected GDP Country Projected GDP Country (2011 at PPP Country at PPP Country India’s ability to serve all time zones USbn) (2011 USbn) (2011 USbn) and longstanding trading and cultural 1 US 15,094 China 30,634 China 53,856 ties with markets around the world 2 China 11,347 US 23,376 US 37,998 have provided a strong foundation 3 India 4,531 India 13,716 India 34,704 for its growing place at the centre 4 Japan 4,381 Japan 5,842 Brazil 8,825 of intra-SAAAME and wider global commerce. One of India’s fastest- 5 Germany 3,221 Russia 5,308 Japan 8,065 growing investment relationships is Source: World in 2050 by PwC, January 2011 update with Japan, with India and Japan seeing each other as economic and political counterweights to an increasingly powerful China. From a westward-looking perspective, the colonial legacies of India’s common law, wide use of the English language and a British-influenced education system have helped to provide a familiar environment for inbound investors from the UK, UK and wider EU, and to open the way for Indian businesses to establish 9 strong presences in these markets . In turn, the Indian diaspora in both SAAAME and non-SAAAME markets have provided a useful bridgehead for trading ties and business development. 9 In relation to the UK, for example, India is the third largest investor in the UK and the largest market for British goods outside the EU (BBC News, 09.11.12) Project Blue 13 Another aspect to note is that although region (see Figure 7). Much of this will have a strong impact on financial the strength of the SAAAME markets is SAAAME capital is still managed in the markets and other businesses that increasing, there is a huge amount of west. These anomalies are unlikely to operate within them. credit flow from the west to the SAAAME endure and the eventual re-balancing Figure 7: Foreign Direct investment Sources: The Financial Times and PwC analysis Notes: 2011 data is year to date, available as of 7 December 2011 14 PwCOur latest research anticipates that domestic credit in China could overtake the US by 2023 and India will become the third largest domestic banking sector after China and the US by 2050 The primary focus for most financial While Singapore and Hong Kong are It is therefore going to be important for services institutions in India will now home to a significant number of financial services organisations to take remain the domestic market. But an overseas Indian banking offices (second a forward-looking view, liaising with international presence may still be and third on the list of overseas offices clients on their long-term ambitions needed to support their domestic clients’ respectively), Indian institutions are and ensuring that the necessary finance overseas expansion plans. Finnacial less well represented in Africa and Latin and advice are available on the ground. services institutions are under particular America. (The UK still has the largest Indian institutions can’t be everywhere, pressure to extend their reach into number of overseas Indian banking so reciprocal arrangements with domestic 10 Africa, Latin America and other parts offices) . Indian banking offices in the partners that provide services for Indian of Asia, to keep pace with the growth UK are currently facing challenges as businesses in return for support for their in intra-SAAAME commerce and to regulation continues to tighten, making clients here in India are going to be an make up for the slowdown in western it more expensive to do business. Further important element of this development. economies. As many US and EU banks, development of overseas presence may India’s large and increasingly affluent insurers and asset managers continue be especially important in supporting millennial generation is changing the to scale back their overseas holdings mid-size companies that do not have outlook and opportunities for financial and operations, there could be openings access to the capital market and foreign services businesses in the country. A key for Indian institutions to move in and bank funding enjoyed by their larger opportunity is developing investment fill the gap, creating new relationships counterparts. An outbound banking products for a generation that may in SAAAME markets for investment model that has primarily focused on be prepared to take more risk than opportunities in India. deposits and remittances may also their older and more conservative need to be extended to take in more counterparts. The challenge is how to acquisition and trade support. make sure that pursuit of these 10 Economic Times, 03.11.12 Project Blue 15 opportunities doesn’t lead to mis-selling, or risk, creating a market bubble. This What you need to think about will require both effective regulatory controls and a more mature distribution structure led by a well-supported • Do you need to rethink your global strategy independent financial adviser network. to tap into the increasing strength of the The underlying requirement is for a deeper and broader-based capital SAAAME markets? market, with a robust governance architecture encouraging retail investors • Will you need to adapt your operating to access these markets. model to the different SAAAME business Further opportunities could lie in the environments? development of Mumbai and other major Indian cities as international financial centres (“IFCs”). The potential benefits • How can primarily domestically focused include providing a focus for innovation, groups develop or acquire the necessary a broader and more sophisticated range of financial services advice and services for capabilities including talent, strategic agility Indian corporations and the ability to turn and deep cultural understanding to operate financial services into a significant source of export earnings over the long-term. But effectively across multiple territories ? an IFC cannot be created as an isolated offshore entity reliant on outside capital • How can financial institutions in India make and expatriate personnel. To deliver inroads into intra- SAAAME trade flows? benefits for the country, an IFC needs to be rooted in, and a mechanism needs to What can they offer in the SAAAME region be created for developing the capabilities that their competitors can’t? within the domestic financial services market. This will require talent, capital, • What is the best model of governance to world class infrastructure and regulatory best practice. follow in each SAAAME market? 16 PwCDemographic change Customers and their demands are While much has been made of the impact changing. Population growth in of ageing in the western world, the different countries, combined with most dramatic changes will be seen in an ageing population around the emerging markets as birth rates and life world, will create a markedly different expectancy around the world begin to consumer market by 2050. converge (see Figures 8 and 9). Figure 8: Asia – Total Population against mortality & fertility rates 2000-2050 Source: United Nations Population Division Project Blue 17 Figure 9: The impact of demographic change will be felt in every region, but in different ways Sources: United Nations Population Division; PwC analysis Notes: World population and median age based on UN population figures for 2010 and medium variant projection for 2050 Figure 10: Comparison of working age population (16 to 65) Source: Population Division, DESA, United Nations: World Population Ageing 1950-2050; Note: All population figures in million 18 PwCOne of India’s great economic number of nuclear families on the rise. preferences and trends, for instance, advantages is its demographic dividend, According to the census conducted in the evolution in media and technology though it will face competition for 2011, 56% of households in urban India has set a higher bar of expectation investment and development from the have four members or fewer, whereas for customer experience. Enhancing even more swiftly expanding population ten years ago the median household customer experience can eventually in Africa. size in urban India averaged four to translate into incremental revenue from five members. Even in rural India, the improvement in retention of customers. Figure 10 shows the rapid increase median household size is closer to four Hence, businesses need to continuously in India’s working age population, as members. This strongly indicates a shift adapt and evolve their strategy to cater compared to other countries like China, in the needs and preferences of the to their customer base. US and Brazil. Indian middle-class family. Social and behavioural In India, the family structure is also The shift in India’s demographics has change undergoing a transformation, with the led to significant changes in customer Social and behavioural change is occurring at a faster pace than at any time in history. Consumers are more informed and empowered than ever before, and old notions of value and loyalty are Have you considered this? breaking down as digital technology allows consumers to both compare value • How can you capitalise upon India’s demographic and expand their choices. Continuing dividend? digital transformation is also changing the way people interact, share ideas and access products and services, with social • How can the savings of the young working age networking now accounting for one in population of India be directed to the capital 11 every six minutes spent online . market for increased investment and growth? One of the classic examples of how social and behavioural change is being brought • How do your operating models and products about is influencing of buying behaviour. India is characteristic of having a need to evolve to cater to the rising and diverse consistently high level of savings and consumption needs of the Indian population? investment (See Figure 11), but most of the savings of the household sector is going into buying gold and real estate. These savings need to be channelled into the capital market, providing attractive investment options to the investor. 11 comScore report, 2011 Project Blue 19 Figure 11: Gross domestic savings and investment as a percentage of GDP Source: Economic Survey 2012-13, 2012-13 data is Planning Commission data Reaching out to customers with no account, helping them access a wide In emerging markets, increasing savings, pension or other engagement variety of financial products and services. affluence and urbanisation are with financial services is a key focus creating new and expanding markets How financial services institutions of the government’s ‘inclusive growth for financial institutions (see Figure respond to these social and behavioural agenda’. Bringing a larger number of 12). City dwellers’ average wealth and changes could define their market people under the financial services net demand for financial products and position for decades to come. If they in the rural compared to urban areas is services are generally much higher than judge the implications of the current a priority for the government. Looking their rural counterparts. Indeed, some moment correctly, financial services ahead, the rural segment will emerge observers now see the real distinction institutions might be facing a once-in- as a green field for businesses, with in the financial services sector as being a-generation opportunity to put a clear expected burgeoning demand from this not between emerging and developed distance between themselves and their segment. With fewer bank branches, markets, but rather between city and rivals. If they do not,they may face a insurance and mutual fund agents than rural areas. The rural market in India mortal threat. The key differentiator will urban areas, the rural market is also far opens up a whole new window of be an organisation’s ability to anticipate more open to competition. opportunity to the financial services where the market is going on the back sector, as the market is under-penetrated The government’s ‘Aadhaar’ initiative of these changes and to get ahead of its to a great extent and there is scope will help reduce the percentage of the competitors. to introduce an array of savings and population which does not hold a bank investment products to this segment. 20 PwCFigure 12: Forecast size of middle class, by region, 2010-2050 (in millions) Source: European Environment Agency; OECD Development Centre; PwC analysis Underlying all these demographic The emerging potential includes creating developments is the need for smarter affordable products for what we call the By 2030, Asia will and more differentiated customer global emerging middle (“GEM”). With account for 66% of segmentation as financial services more than two billion consumers, the businesses seek to make sure that global emerging middle (income 996 - the global middle- products are structured and targeted 3,945) sits just below the conventional class population and for the differing needs of a fast evolving middle class ( 3,946 - 12,195) in society. Technology, education and income terms. But its aspirations for 59% of middle-class mobility have not only raised the living the quality and performance of its consumption standards of these customers but also products are in sync with higher-earning their expectations and aspirations. They segments. Globally, we estimate that this are price-conscious but also switched-on will be a 6 trillion market by 2020. to quality, service and desirability. Project Blue 21 Figure 13: The market potential of India’s emerging middle Source: PwC Analysis, NCAER (National Centre for Applied Economic Research), CMI Purchasing Power Parity (PPP) India’s working-age population, in the among the first and, in some cases, 12 age bracket of 15-59 years , accounts the most successful in creating value The combined market for 57% of the overall population. This for and from India’s emerging middle potential of India’s means they are more open to media class, especially in the challenging influence and rising expectations. rural markets. ‘emerging middle’ is However, the population is still Financial services businesses will need expected to cross the predominantly rural (over two-thirds), to anticipate these developments and with all the challenges that entails 1 trillion threshold by bring products and services in line for sales, marketing and distribution with the changing customer base in 2021 as its ranks swell strategies. Indeed, many of India’s large the markets they serve. domestic companies and home-grown to 570 million, from multinational corporations have been 470 million in 2010 (see Figure 13) 12 Census of India 22 PwC

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