Indian Banking — $inmdb

Banking is a government sanctioned oligopoly. Just few banks represent bulk of the Indian banking market, holding few trillion dollars in assets. A huge regulatory moat limits competition.

As a result banking is obscenely profitable. Most banks - and especially the big ones - have bloated cost structures yet consistently deliver 20-25% net margins. Their share prices do not reflect the opportunity because of the looming bad loans crisis.

High margins & regulatory moats breed complacency.

My grandfather’s banking experience in 1960s or 70s wasn’t fundamentally different from yours today, except you’ve got a debit card and an app which most likely sucks. He worked as a manager in State Bank of Travancore and would have hated what the banks have become. Previous generations used trusted bankers to handle their business.

The underlying products and fee structures are mostly the same.

Not only have banking products not changed, they’ve also remained siloed. Banks treat each financial product (salary accounts, gold loans, car loan, housing loan etc.) as a separate business with its own profit goals and almost no sharing of data or bundling discounts.

In short the whole system is optimized for bank profitability, not customer experience or to increase shareholder value. The processes, the fee structures, the tech stack, everything.

Neobanks

Now we’re in the midst of a fintech/neobank explosion. But behind every fintech is a bank “sponsor”. These sponsorships allow fintechs to innovate at the top of the stack with UI and data but it’s mostly lipstick on the pig. The underlying banking products haven’t changed

Don’t get me wrong - many fintechs will be wildly successful and are forcing much needed innovation in banking. But to date fintech success is more of a statement on how bad traditional banks are than how great neobank alternatives are.

Let me tell a personal story. I opened my South Indian Bank account in 2009 when I joined Christ University. In the 11 years since, SIB has seen every Rupee I’ve ever received. From parents, employers or friends. They know every beer, burger, bourgeoisie payment I’ve ever made. 10’s of thousands of transactions and lakhs of rupees have flowed through that account but I receive exactly the same service as a college kid with a new account and a Rs.1000 balance.

I’m not making an elitist argument that I deserve better service because I spend more money. But as a practical matter I have more sophisticated needs - I might be a power user! But if I were to apply for a loan today with SIB - let’s say a mortgage - I would literally start with a blank loan application and receive the same treatment as a random person off the street. Same process, same underwriting, same pricing. Insane. Again, my point is not that wealthy people deserve better service or pricing - it’s that *we all* deserve better service and pricing. Because technology.

Cost efficiency and better UX are one opportunity but an equally important disruption will come through the *specialization* of banking. Today’s banking market - especially on the consumer side - is a sea of sameness, with generic brands and products. It’s like medicine if every doctor was a general practitioner. But just as our health needs vary wildly, the needs and desires of banking customers vary wildly. We conducted a customer research to identify some niche bank concepts, and ideate highly differentiated signature features for each. (Bear in mind that a tiny niche in banking, 0.1% of the market, is a billion dollar business.) Here’s one example of a niche concept: A bank brand built from the ground up to serve the 1 million doctors in India. This bank might Underwrite based on unique characteristics (and unique knowledge) of the medical profession- Partner with equipment manufacturers to make leasing/purchase easier- Provide free SaaS to automate the back office (a virtual CFO)- Provide benchmarking and business advice

Modern Banks and Bitcoin

Imagine if features like these were bundled with basic banking services and wrapped in a beautiful brand crafted just for doctors. You can imagine that many might choose this bank, especially if they’d save Rs.10000’s vs. a traditional generic/siloed banks.

This bank could circumvent current regulatory environment by being universal and use Bitcoin. I am not talking about a dark web wallet used by banksters and corrupt politicians. It should be compliant without breaking the privacy of its users.

This level of specialization might create a moat that is more powerful than regulation, one based on *customer value*. Highly specialized consumer banks might become the ‘no brainer’ choice and could slowly (or quickly) eat away at big bank market share.

To be clear, this example is not one I’m considering but it illustrates my thesis. This type of bank is probably borne of a bank and fintech operate as one team (the opposite of today’s plain vanilla, arms-length, somewhat adversarial bank sponsorships).