The digital edge

Nov 10 2012, 02:33 IST
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SummaryIn a rapidly evolving digital era, financial institutions must transform their business models to keep pace with the fast-changing behaviour and preferences of customers.

Ease of access to the internet is changing consumer behaviour in India. The country already has 122 million internet users (the third-largest digital population worldwide) and growing. Among them, over 27 million are “digital high-value consumers” who represent a disproportionately high volume of internet use—over 9 hours online a week. These customers account for nearly one-third of the overall household savings pool of all online users, influencing the growth of digital financial services in India.

By 2015, the user base is likely to touch 350 million, thanks to cheaper technology and increased investment in 3G and 4G infrastructure. Digital high-value consumers will number nearly 70 million. They will drive up the opportunities for financial institutions, whose revenue pool will likely grow at 20-30% CAGR—$60 billion to $70 billion by 2020. This is twice as fast as financial institutions’ overall revenue pools, and estimated to account for approximately 20% of incremental growth until 2020. FIs cannot, however, expect to satisfy changing customer preferences through simply adjusting existing business and service models. They can only create value and increase operating profits through innovation and change.

Less than 0.5% of internet users searching for financial services actually progress online through the various stages of research, product selection, purchase and online activation. Three factors drive customer drop-offs: poor virtual experience, lack of a differentiated product proposition, and customers’ security concerns. Recognising and addressing these challenges can help FIs to better serve online customers and capture the digital opportunity.

For success in the digital environment, FIs need to adopt one of three strategic postures:

A digital, client-centric model: FIs offer primarily branch-based banking but also open up direct channels to sell to and serve customers, capturing a higher market-share in the tech-savvy segment, enabling more cross-selling, improving productivity, and all at a lower cost-to-serve. This is a powerful strategy for large incumbent FIs and has the potential to increase operating profits per targeted customer by 50-70% over the next 5 years.

Digital-centric multi-channel model: FIs offer low-cost comprehensive service through digital processes to fill the service gaps of competitors and drive customer acquisition. This model delivers a high quality, multi-channel experience for customers and could be an ideal posture for more sophisticated FIs.

“FI 2.0” model: This market-shaping strategy requires FIs to target offerings heavily through mobile and online channels. They must constantly innovate, enabling digitised payments and even going beyond financial services to capture customers. It is a suitable posture

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