In an exclusive interview with Moneycontrol, Sukand Ramachandran, Managing Director and Senior Partner at BCG, discusses the importance of making payments a self-sustaining business rather than one reliant on incentives. Elaborating on why India is lagging behind its counterparts, globally on technology spending, he says India will increase the tech spending over time due to reasons of scale, demand from customers and shrinking boundaries of operations.
Banks in India frequently argue that there is insufficient incentive to invest heavily in technology, as these investments have not yet yielded tangible returns. Do you see these as real constraints?
International banks often spend tech just to get the balance right between the cost of human capital versus the cost of technology. The US isn’t just one market. There are about 3,500 regional banks and community banks. There are 300 million people eligible for accounts, and even if you assume they have two accounts, that's 600 million accounts. State Bank of India caters to more than that. When you're operating at that scale, you can’t handle that with human labour only. There is a need for technology. India is leapfrogging on payments. There is an expectation set in a whole bunch of commercial transactions. From an international perspective, India inherently thinks about resilience.
Technology is complex. It is not always in-house, from a corporate point of view. You can borrow capability if it’s temporal. But if it is ephemeral and persistent, you need to have the capability in-house.
Jamie Dimon from JP Morgan has famously said that banks have more tech experts than bankers. In India, we are not quite at that level. How do you propose we strike a balance?
Many banks have evolved either through organic growth or acquisitions over time. India is slightly different. We had public sector banks, where technology was the digitisation of a physical ledger to allow for aggregation or reporting. If you think about private sector banks, they have adopted technology as a core. People are very comfortable with the fact that we've got great technology majors who have the technology capability to source from. But at some point in time, they have to ask: do we keep it, or do we give it to somebody else?
This is what now the regulator is also asking banks to do – do it yourself on technology…
Fundamentally, they (regulators globally) are all broad line and talk to each other. There are some very specific nuances like risk mitigation. RBI wants a stable financial system. They want all capability in the banking system to be resilient.
I'll go back to what has started on banks not having an incentive to invest in technology. We are still a country where an average citizen’s telecom bills may be higher than banking charges and yet there are complaints about how much banks charge…
In UK for instance, banking is free on the transaction account. There are charges for sophisticated products, and even selling a mutual fund is a sophisticated product because it is an investment decision. A mortgage is an investment decision, which is charged. Every geography has some trade-offs. Now, to your question, this is where technology has a role to play. If I have to make like 100 million debits and credits, I need some technology capability which can take the 100 million debits and credits at a very low marginal cost. It's a scale play. In the context of India and India stack, it is a growing skill which is slightly rich and different. NPCI is doing a whole bunch of stuff. The question is how much is it being subsidised at the moment? Personally, in the long term, we should move away from subsidies. You need to make it economically viable.
How do you see India bridging the gap with developed markets on the tech side?
Compared to a developed western market, India is a bit lower than that on tech spending. The second thing is that the number fluctuates across cycles. When you're building new digital capabilities, the number shoots up; possibly spending 30% of their operating expenses towards tech. That would have tapered off once they've gone through the maturity level. Indian banks are spending less today. We expect that number to go up because of three things. India operates at a very different scale, and you cannot achieve scale without technology. Second, as progressively India reduces its internal boundaries and reduces the friction in banking across the state and nations, and with UPI being accessible internationally we need technology to support that human capital. The third one is one of the biggest shifts which has happened in the last 10 years. Any new technology went to the enterprise level and then came to consumers. Technology matured, and then over time, it got democratized. Now for good or bad, consumer expectations changed radically and this is creating pull from your employees and consumers.
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