Emergence of Flexible Distribution Channels for Financial Products: Electronic Banking as Competitive Strategy for Banks in India

Global Journal of Flexible Systems Management, Jul-Sep 2001 by De Sarkar, Partha, Yadav, Surendra S, Banwet, D K

Abstract

In India, with competition heating up in the banking industry and the increase in the number of private and foreign banks in the post liberalization era, all players in this market are gearing up their supply chain management processes for better customer acquisition and retention. Most of these new private sector banks and the foreign banks are handicapped by the lack of a strong branch network as compared to their public sector counterparts to distribute their products or services. In the absence of such a network, the market place has seen the emergence of a lot of innovative services by the players to increase their market share and reduce their cost of service delivery through direct distribution strategies of Non-Branch Delivery. All these are using "homebanking" as a the key "pull" factor to wean customers away from the well-entrenched public sector bank.

Technology is enabling banks to provide the convenience of "anytime-anywhere" banking to increasingly demanding customers. Banks are now reengineering the way in which their services can be "distributed" to their customers. The earlier brick-and-mortar branch is no longer sufficient, technology is now taking banks to the homes and offices, 24 hours a day, 365 days a year through ATMs, phone banking and PC banking. Therefore, the financial supply chain is undergoing a fundamental strategic change. In this paper, the four major category of players, in the Indian banking sector, i.e. Public Sector Banks, Private Sector Banks, Financial Institutions like ICICI and IDBI, and Foreign Banks have been studied to identify competitive strategies followed by each to get into the Non-Branch Delivery Business. Developmental Banks, Rural Banks and Co-operative Banks have been left out of the scope of this study, since this is not their area of focus.

Keywords: electronic banking, financial products, flexible distribution channels

Introduction

In India, from the early I990's, electronic banking is gaining in popularity as an important distribution channel to provide banking services. This direction is being taken by the batiks to differentiate their services to the consumers to gain their loyalty. The strat�gies adopted by the Indian banks to survive the increased competition is the focus of this study.

Technology is enabling banks to provide the convenience of anytime-anywhere-banking. Banks are now reengineering the way in which their services can be reached to their customers by bringing in flexibility in their "distribution channels". The earlier brick-and-monar branch is no longer sufficient; technology is now taking banks to the homes or offices, 24 hours a day, 365 days a year through ATMs, phone banking and PC banking. The financial supply chain is undergoing a fundamental strategic change.

What is Non-Branch-Banking

Traditionally, consumers could do their banking only by coming to the bank branch. The brick-and-mortar building of the bank branch defined the periphery of service delivery of banking products.

The trend of Non-Branch-Service Delivery in banking started with the growing popularity of electronic payment services. It started with Electronic Funds Transfers (EFT). Then came credit cards. ATMs and smart cards were next in the evolutionary history. Gradually, with the advance of computing technology, telephone banking and Computer Telephony Integration (CTI) became a powerful medium of delivering banking services. The latest product is Internet banking, where the technology and other issues are still under evolution.

These new technologies have broken the paradigm of branch banking. Customers, whether individual consumers or business corporales, no longer have to go to the bank to do their business. It can be done from home, using the PC or the telephone, or at the shopping markets, using plastic money.

Some banks have now also started door to door delivery of services. As a result, it is now possible to order cash or demand drafts to be delivered at home. Consumers wishing to open accounts with banks or to apply for durable loans can call up Direct Sales Associates (DSAs) of banks and their representatives will complete the necessary documentation at the customer's convenience, at his desired place und time. These are the elements of the new flexible financial supply chain.

Objective, Scope and Methodology

The objective of this paper is to identify competitive supply chain management practices that are being used by the banking industry in India. More specifically, the paper attempts to answer the following questions:

* Why are banks in India adopting non-branuh-banking?

* What are the differences in their approach to harness the technology?

* What are the issues that the Banking Industry faces in implementing non-branch-banking - legal issues, techno-managerial issues, consumer behavior issues etc.?

This paper presents the competitive behavior across the commercial banks in India, i.e. the Public sector Banks, the Private Sector Banks, the Financial Institutions like IDBI and ICICI and the Foreign Banks operating in India to identify innovative technology strategies employed by them to acquire and service their customers in a flexible mode.