The culture of the bank – with legacy systems and an inability to move fast – and the rise of fintechs exposing gaps in the bank’s business were triggers for the bank’s decision to build financial tech of its own. “By building internally, we can react faster to consumer preferences and change,” says Madhivanan.
Setting up the innovation labs
Globally, banks have taken to innovation labs. Wells Fargo, Citigroup, JP Morgan, Deutsche Bank have all set up innovation labs over the last three years. However, these ventures have met with mixed success, as it has proven notoriously hard to integrate solutions developed in labs into the main business. Given this, analysts think that banks’ primary motivation behind these moves is digital positioning. This could well be the case with Indian banks as well, given that they command some of the highest valuations among banks globally.
“Indian banks are being constantly asked about their digital plans to see if they deserve the valuations they command. If in the next five years the equivalent of Ant Financial comes up in India, then they don’t deserve that valuation. Hence banks have to show they are modern and constantly innovating,” says Singapore-based Gautam Chhugani, an analyst at brokerage firm Sanford C. Bernstein, in reference to China’s biggest online payment platform, Alipay. Alipay and its competitor WeChat have cornered more than 90% of China’s $5.5 trillion mobile payments market between them.
ICICI Bank, though, is taking steps to ensure their Labs venture ends up being more than just a token gesture.
A set of the etiquettes
Fully knowing that trying to build fintechs internally will have its share of challenges, ICICI Bank has laid out a set of rules in order to ensure success:
1. Culture: ICICI Labs is keeping its distance from ICICI Bank itself, and has a separate office. This is so that it isn’t affected by the bank’s existing tech and its way of doing things. Bureaucracy, delays in decision making, and maintaining the status quo are hallmarks of large organizations. Madhivanan knows this, and this is why the Labs is embracing startup mottos like “make bold bets” and “fail fast.”
2. People: Angrish is building an initial team with 25 people. It includes data scientists, coders, as well as founders of series-B funded companies who have had experience in building and scaling products. Angrish wants to expand to a team of 50 in a year’s time.
3. Salaries: Can banks be as competitive as startups with salaries? Angrish says its salaries are comparable to those offered by startups.
4.Technology: It gets to have an open internet connection, unlike the bank. The Labs team will also not depend on the bank’s data centers to build tech. As a bonus, it will even get access to the bank’s entire library of 450 application interfaces (APIs) to build upon.
5. Processes: The Labs will come up with its own processes for disbursing loans or opening digital bank accounts, and design them based on what is relevant to the business.
6. Profitability: Unlike fintechs that are not necessarily profit-driven, the products built here need to be cost-efficient so that it can add to the bottom line of the business being built.
7. Autonomy: While new ideas for products could come from the bank, it is up to the Labs to decide if it wants to build a business around it, says Angrish.
8. Capital: Unlike lending startups that raise capital at high costs from VCs, the Labs team will have access to the bank’s capital, lowering its cost of funds and making digital lending competitive.
In fact, the first product the team is building is a lending platform that can be used for small-ticket lending across different use cases. Almost like an AWS (Amazon Web Services, a cloud computing platform that can be used by any kind of company) for lending, says Angrish.
Today, HDFC Bank has about a 40% market share when it comes to unsecured lending to the salaried class, while ICICI Bank’s market share is second with about 12-15%. It is closely followed by Bajaj Finserv, said a senior executive working with an online digital lending platform that partners with these banks.