India’s demographic and economic growth – overtaking China to become the country with the largest population in the world in 2023, with GDP likely exceeding that of Japan and Germany by 2027 – is creating significant opportunities for its banking sector.

Boosted by the success of the country’s national-level investments in fundamental digital transformation, India’s banks are in a strong position to innovate in three key areas: scalable, personalized wealth management; the next wave of instant payments and embedded finance; and the provision of improved banking services to a wider set of micro, small and medium-sized entities (MSMEs).

India is generating ever larger numbers of wealthy and affluent individuals, who are increasingly open to new wealth management options and investment strategies. While most attention has focused on increasing numbers of ultra-high net worth individuals, the growth of HNW and affluent investor segments and rising wealth in India’s smaller cities are also opportunities to expand wealth management services. A key part of the challenge is to shift the focus of clients from traditional havens (cash, gold, real estate) towards financial products and a wider range of approaches to investment and wealth management.

'Glocalized’ wealth management models – bringing together the best of global products/solutions with localized shaping and delivery – could help India’s banks grow and diversify their business lines. However, designing scalable wealth management business models that can service India’s diverse wealth management market is a tough challenge. Key considerations as plans develop over 2024 will include:

• How to grow the wealth customer base while keeping ‘positive jaws’, i.e. revenue growth exceeding cost growth. Banks should be wary about first growing customer numbers and hoping to optimize the model afterwards. They need to design a model which combines scalability and disciplined cost control from the start.
  
  
• Evolving customer attitudes are an opportunity, not a problem. As wealth in India continues to grow, fresh waves of newly-minted wealth management customers represent a chance to shape customer attitudes, preferences and behaviors. The challenge here is to develop clients’ financial literacy and awareness of structured ways to make their money work harder. Banks need a balanced approach that can build client trust, impart financial knowledge and advice, and enable an ecosystem of RMs/digital channels to drive the right investment outcomes for their customers.
  
  
• Hyper-customization and personalization. Given India’s cultural and linguistic diversity, and different attitudes to wealth and investment, successful approaches will need to be customized and personalized towards specific segments. Is the bank looking to serve high-salaried staff in Tier 1 cities, a new generation of established business owners in Tier 2/3 cities, or soon-to-be wealthy young tech entrepreneurs across the country? This argues for a greater role for digital channels that can be hyper-customized at relatively low cost.
  
  
• Redefining the role of RMs in the light of digitalization. One of the key challenges of wealth management in India is building a trusted RM-based approach, given high rates of attrition in RM teams and lack of good talent compared to the demand. Building trust with clients depends on the quality of advice and continuity with a dependable RM. Hence, banks may need to revisit the approach of incessantly hiring large numbers of rookie RMs to drive wealth management expansion. The right approach should be shaped around the key needs of target segments, with new digital channels and tools helping to limit the required number of RMs, leverage their talents and improve retention.

With India arguably now the largest hub of technology skills in the world, many global banks and fintechs are harnessing the country's technology resources to develop new approaches to wealth management. In addition, India’s consumers are fast latching on to digital platforms given the wide access, increasing internet connectivity and governmental push for digitialization to drive financial inclusion. India's banks should take advantage of this to build scalable, flexible models of wealth management that can be tested out in India itself – one of the world’s fastest-emerging wealth management markets.

The extraordinary growth of instant digital payments in India has already changed the face of the country’s payments industry, particularly for small-ticket transactions between merchants and their customers. However, banks must prepare for a second wave of disruption as both instant payments and embedded finance begin to revolutionize other kinds of financial services and customer journeys.

The rest of the world is still catching up with the rate of change in India, where a biometric identity scheme launched in 2009 propelled country-wide financial inclusion and the 2016 launch of the revolutionary Unified Payments Interface. Set up by the National Payments Corporation of India (NPCI),¹ UPI allows mobile phone users to make instant, fee-free payments and transfers by scanning QR codes. UPI monthly transactions hit 11 billion in October 2023,² up from a few hundred million in early 2018, significantly displacing cash across the country at outlets including kiosks and street traders. 

With UPI now linking hundreds of banks and digital payments providers to around 50 million merchants and 300 million customers, banks need to take the initiative in the next wave of change. UPI is set to become a more important platform beyond just person-to-person payments – a UPI credit line offering was launched in September 2023.³ Meanwhile, financial services are likely to be embedded across an ever-widening range of customer journeys, e.g. NPCI has rolled out a program of vehicle-in-motion toll collection across India’s road network using radio frequency identification technology (NETC FASTag).

Through 2024 and beyond, embedded finance initiatives may begin to introduce click-free consumer payment across activities such as the weekly shopping trip, eating out and drive-thru restaurants, travel, and entertainment. Consumers could soon be activating usage-based financial services such as insurance and currency exchange automatically as they cross borders. 

By some estimates, embedded finance markets in India will achieve 36.3% annual growth (CAGR) over the next few years.⁴ However, as the race to cut the number of clicks in a customer journey becomes a race to remove clicks altogether, banks must innovate to remain relevant.

Key considerations include taking risk into fuller account as well as:

• Thinking harder about the customer’s fundamental goal – rarely a financial service – and their end-to-end customer journey, rather than focusing on simply easing financial transactions. Understanding the entire customer journey is the only way to make sure that the bank embeds financial services in the right place and in the right way.
  
  
• Building an ecosystem approach and partnering with other players to help drive the customer journey, rather than simply offering a payment service to support it. Getting this right could be essential if banks are to remain connected to customers.
  
  
• A radical change of thinking, as banks realize that technology is not just an enabler but now the core product in which the service is embedded. Keeping this service seamless and invisible while ensuring customer security will be the key.

Micro, small and medium-sized entities (MSMEs) generate over a quarter of India’s GDP and up to half its exports, as well as being critical to the future growth of the economy.⁵ However, India’s MSMEs urgently need better routes to finance their expansion, with less than 15% of MSME credit demand so far met through the formal lending sector, by some estimates.⁶

Addressing MSME needs is both a national priority and an opportunity for banks to build a pipeline of future large corporate customers and wealth management clients. However, the MSME sector is comprised of numerous small entities that depend on the quality of individual owners and managers – generating both higher costs of servicing and higher risks compared to large corporations.

That combination can lead to low margins unless banks find the right model to target and deliver MSME services such as working capital (e.g. invoice-based financing), longer-term financing, payroll and other value-added services such as risk mitigation. With the MSME sector covering such a wide range of entities and needs, the potential risks and servicing costs mean banks must focus on:

• Careful segmentation through smart analytics so that each bank can identify and serve those customers that are aligned to the bank's strategy and risk appetite, and that have the highest potential of future revenue.
  
  
• Leveraging startup ecosystems including government programs so that banks can both identify the right customers and find cost-effective ways to share financial knowledge. 
  
  
• Using digital channels to keep servicing costs low, combined with enhanced AI/ML-based credit decisioning and financial monitoring models. These models will need to process unconventional data in addition to traditional credit data, e.g. a wider range of personal and business data and data sources. In the micro segment, they will need to exploit the India Stack⁷ and fintechs when assessing financial profiles for the unbanked and speeding up KYC routines.⁸  Meanwhile, the Reserve Bank of India is exploring the feasibility of setting up a public technology platform to promote frictionless credit, which would use APIs to connect banks to a broad set of MSME credit information.⁹

CONTACT
Gaurav Mehra, APAC Partner and Regional Head of Transformation, Capco

References

¹ An umbrella organization initiated by India’s central bank.
² 'Up, Up and Growing!’ UPI Transactions at an All-time High in October, November 2, Mint. Link. 
³ RBI Governor Launches Key Digital Payment Initiatives at Global Fintech Fest 2023. Link.
⁴ India Embedded Finance Business and Investment Opportunities Databook, Q1 2023 Update. Link.
⁵ Underscoring Contribution of MSME Sector to Economic Growth of India, Dr Prashant Prabhakar Deshpande, August 2023. Link.
⁶ Banks, NBFCs Meet Less than 15% of MSME Credit Demand, Saurav Anand, December 2022, Mint, Link.
⁷ The long-term project to promote financial inclusion through open APIs and digital public goods, including biometric digital IDs. Link.
⁸ 'Digital Wonder of the World’, The Economic Times, January 2024. Link.
⁹ RBI Launches Innovative Program to Revolutionize Credit Access for MSMEs. Link.