Changing Dynamics of Banking

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Changing Dynamics of Banking

Focusing on value proposition has become important for Nepali bankers to take banking to the next level.
In his 2012 book Bank 3.0: Why Banking is No Longer Somewhere you Go, But Something You Do, Brett King has beautifully explained how the face of banking is changing. Probably, the imagery of brick and mortar infrastructure with big branding comes to our mind. But this is now changing. 
So is the revenue pattern of banks. Globally, bankers have realised that over dependence on interest income could be unsustainable. They have started to invest massively on products and propositions to generate more non-interest income. There is no doubt that Nepal’s banking sector is heavily reliant on interest income.  No matter how hard bankers try, fee based income of banks is not going to have any significant contribution at least for the short term. I think the question is not about how much are we earning today. It should rather be what our situation would be like in five years down the line if we do not invest today. We should not be driven by the analysis that banks will always have interest income as a major source of revenue. The point is whether we have started to invest in areas that will give us the edge to increase non-funded income (NFI) over a period of time. If we have not started to invest in such areas, probably we are missing out on one of the most prominent strategic moves that we should have made.
The crux is a realisation and acceptance that there is much to do. Leaders should come out of a BAU (Business As Usual) mentality and think beyond what they have been doing for ages or probably ponder upon how they can do things differently. The first part of realisation is: “As a leader, I have very less information. I do not know everything and I should borrow ideas from experts and young minds if I really want to adapt with changing landscape.”
Shifting from Mono-product to Multi-product Culture
Banking is moving into a phase where banks have to sell propositions and not the products. At present, clients are least bothered about the products banks offer. Clients look into what they care about the most and whether they can get value out of a bank’s propositions or not.  Bankers rarely talk about products from the global banking perspective. What they talk about is how to offer unique and tailor-made value propositions to their clients so as to increase the share of the wallet. 
An individual wants multiple financial products. If we focus too much on products, he/she will just buy products and not the value proposition. So, what is the difference between the two? If you are selling a value proposition, you must first try to understand the client, his/her family tree, income source, existing banking products, and so on. You must try to understand his needs and when you understand this you will realise he will not only need one product but multiple products. Then you have to design a value proposition based on what that client wants. 
For example, a client who wants a home loan might need other things like credit cards, a child’s education plan or a retirement plan. Now you will need to not only offer a home loan but design a proposition to make him interested in these other products. If you can do this, your share of the wallet will increase and the client will also benefit. The client later may want these other products and may go to another bank to get them. This is not really a win-win proposition as it will inconvenience the client as well. If he/she can get everything from a single window, it will be a win-win deal. It is a proven fact that on boarding new clients is more expensive than selling products to the existing clients. And for clients, there is no need to visit multiple banks to satisfy their multiple needs. 
Bring Wealth Management (WM) into the Picture
In the global context, the wealth proposition of banks has significant contribution on their revenue pool. In Nepal’s context, we may not have a full-fledged wealth setup because of various limitations, but we can always bring this concept into the picture. Generally, wealth proposition is targeted for high net worth individuals (HNIs). We can also replicate this proposition for our priority clients at least to start with. It starts from understanding their gamut of needs. Quality conversation with clients is the backbone of the WM culture. It helps banks to know their clients’ overall financial position, family tree, short-term and long- term financial goals, risk profiles and existing exposures.
Six areas where we can help clients to manage their wealth prudently:
The journey of wealth management always starts from wealth protection. It includes providing financial support to a family in case of eventuality, and protecting from long term disability, planning for critical illness, health plans and accidental compensations. 
Once you plan for wealth protection, now you have to think of wealth maintenance. This is the second pillar of wealth analysis of clients’ general financial health such as cash flow and debt position. A net positive cash flow with no over-committed liabilities is considered healthy. We can guide clients to effectively manage their cash flow and suggest ways to reduce, or avoid, unnecessary borrowings.
The third area where we can advise and help clients is in wealth accumulation. It drives clients towards meeting their long-term financial objectives. In Nepal, the two most common needs are retirement funding and education funding for children. For banks, it is not only about making clients highly leveraged. Bankers should also educate their clients so that they can develop a realistic and achievable programme to meet their future needs.
Wealth enhancement is the fourth area. We should help clients maximise the growth potential of their assets. We can then develop an investment programme which is appropriate to their unique situation. With the help of proprietary tools, clients stand a better chance of enhancing their investment return, thereby fulfilling their long-term financial dreams. This is a much more critical part of wealth management as we still do not have proper investment banking in Nepal and investment instruments are very limited because of the fact that our capital market is at a nascent stage. 
But we can still give advice on the investment climate and help clients understand their own risk profile. But we should avoid giving closed ended advice to clients. A risk averse client might be happy with moderate growth on his/her wealth, while a client who is willing to take risks might expect fast growth. It totally depends on the client’s risk profile and investment vehicles available in the market. Nepal’s capital market is at an early stage and we do not have investment banking in a true sense. So, providing closed-ended advice to clients might be contagious and carries a great amount of risk. As a wealth advisor, we can try to make them understand the principles of investment by talking about the broader aspects of wealth enhancement, such as alternatives to wealth enhancement.
Now the final stage is wealth distribution. This fifth pillar of wealth looks at preserving and distributing a client’s estate. The only certainty in life is that it will not last forever. As wealth advisors, we can help clients develop an effective and efficient plan so that their legacy will be well preserved and distributed according to their wishes. In developing and developed markets where banks offer complete wealth propositions, wealth distribution is one of the major components where banks assist clients manage and decide on how they want to distribute their wealth after death. This is called estate planning. In Nepal, we follow traditional ways of estate planning. Legal heirs inherit property (mostly land and building, bank balance, cars, stocks) from their antecedents. In the modern age, we have much smarter ways of transferring wealth such as by purchasing good amounts of insurance policies. It can transfer a person’s actual wealth in the case of eventuality in the form of liquid assets unlike fixed property; the salability of which will totally depend upon future demand and supply.
To sum up in short, we should focus on value and not on products. If we focus on the latter, we might lose both. But if we focus on relationships and value, it will be a win-win situation. Also, value proposition is essential to keep client loyalty. When we sell value or the needs of the clients, we will be selling multiple products.The average product per customer (PPC) in the Nepali banking sector is not more than 2. Some banks might have a slightly higher PPC, but the industry average hovers between 1.5 to 2. It signifies that customers are going to different banks for different products. As banks, we are not providing that one-stop solution for all their financial needs. It is a proven fact that selling to existing-to-bank clients (ETB) is always profitable than selling to new-to-bank clients (NTB). 
No matter what kind of proposition we have, in the end, everything boils down to customer experience. 
Focus on Customer Experience
You might forget what people say to you; but you will never forget how they make you feel. Customer service should not be a department, it has to be an attitude. Banking is not rocket science and if we think we can really differentiate in terms of products, we might be brutally wrong; products are prone to be replicated. Customer Experience is the key. Exceeding customer expectation is going to be the only differentiator eventually. 
To put it short, in this ever changing and dynamic environment, we really need to do things differently. Driving client behavior positively should be the focal objective of any business, be it banking, insurance or fintech. Providing one-stop solutions for all financial products is the need of the hour.Clients will like it that way, if we can drive their behaviour. It is all about creating new opportunities and harnessing the untapped potential.
The author of the article is the Deputy CEO of Reliance Life Insurance.

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