HDFC Bank plans big digital play even as it strives to come out of RBI ban

“Is HDFCB building a digital-native bank within the bank? This is what it seems like from public posts of a startup called Zeta (private). Zeta’s pitch is to be the cloud-native 'Omni-Stack' for banks – a single software solution for cards, loans, deposits with customizable web and mobile interfaces.” Berstein Research said.

It said the planned entity would be first targeted at digital-first users that would gradually evolve into a scalable platform for the entire retail franchise of HDFC Bank.

Bernstein referred to a fundraising announcement by Zeta that talked about a partnership with HDFC Bank to "re-define banking in India."

Here comes Plutus

On its website, Zeta has posted job positions for a project called Plutus. The job postings describe Plutus as a strategic partnership between Zeta and HDFC Bank to build a digital bank from scratch. Plutus. according to the plan, will serve HDFC Bank's above 25 million customers and help drive customer acquisition, using Tachyon, a cloud-native integrated core banking, processing, and payments software-as-a-service (SaaS) platform.

Plutus will be responsible for creating a digital bank from scratch, the Bernstein report said. "The partnership aims to deliver a digital bank and payments offering initially targeted towards India's young and digitally-savvy and help the bank expand the customer franchise," it said.

HDFC Bank has, according to its annual report, a total of 56 million customers, which would include individuals, small and medium enterprises and corporate entities. “The 25 million customer base quoted by Plutus suggests it may be a retail/individual-focused solution,” the report said.

Digital 2.0

Already, HDFC Bank has drawn up a digital expansion road map--what it calls a Digital 2.0.  The bank has a number of digital launches planned across various business verticals under the initiative including the launch of an auto portal, which the bank calls a one-stop shop for all vehicle loans. The bank describes Digital 2.0 as “the next phase of our digitisation journey.”

Other initiatives include My Account My Choice where current account, savings account (CASA) customers can choose any account number of their choice when they sign on as an HDFC client. It will offer card-less cash withdrawals, WhatsApp Banking and smart slips that enable customers to fill in cash deposit, withdrawal and cheque deposit slips through NetBanking, using a reference ID, and complete the transaction at a banking outlet. Some of these services have already been launched.

HDFC Bank is one of the biggest card issuers in the country with 15 million credit cards and 33.8 million debit cards as of December-end.  HDFC Bank’s retail portfolio had grown by around 7% in the year ended March. Within the retail franchise, HDFC Bank expanded its credit cards business by 12% and home loans by around 10%.

HDFCB could first launch Plutus for a digital-first audience and subsequently scale this for its entire retail bank operation, Bernstein Research said. “Digital banks in emerging markets offer interesting case studies in customer acquisition and growth– Banco Inter (covered by Autonomous' Geoffrey Elliott), NuBank (private). Building a digital bank within a bank could be a smart way to build within Indian regulatory constraints,” the report said.

RBI ban is a hurdle

RBI clamped down on the bank in December last year, prohibiting it from proceeding with any new digital launches in the backdrop of a series of glitches in its digital channels over a period of two years. An RBI-appointed third party-audit of the bank's IT infrastructure is currently underway. Sashidhar Jagdishan, Aditya Puri’s successor at HDFC Bank, inherited the leadership with legacy problems on the technology front.

Until HDFC Bank can convince the regulator that it indeed has the digital capabilities to serve existing customers, the RBI ban will stay, an analyst said on condition of anonymity. “Till they don’t set right their systems, the instructions are likely to be in place. Their issues have been dragging on for a long time,” the analyst said.

The ban has presumably benefitted its rivals, including ICICI Bank Ltd, by offering them an opportunity to gain customers. ICICI Bank has aggressively pushed new digital initiatives including IMobilepay, a mobile banking app that provides payments and banking services to customers of any bank. In the March quarter, ICICI Bank’s cardholder base grew by 672,911; HDFC Bank’s portfolio contracted by 322,999 in the same period, Livemint reported  on 21 May citing data from the central bank.

HDFC Bank's new leadership team led by Jagdishan will have to try harder. Jagdishan has assured customers and employees that HDFC Bank is working on long-term solutions to put the technology challenges behind it. In a recent letter to employees, Jagdishan said the bank was working with the regulator to resolve the technology issues. “While we execute this Technology Transformation agenda, there will sometimes be pain and outages beyond our control,” he cautioned.

HDFC Bank has embarked on several digital transformation initiatives, Jagdishan said. “We have invested heavily in the scale up of our infrastructure to handle any potential load that we will encounter for the next 3/5 years. We are also in the process of accelerating our cloud strategy to be on the cutting edge, leveraging best in class cloud service providers,” the CEO wrote.