Role of Technology, Psychology, and Human Capital in Financial Deepening

Macro-economists measure a nation’s financial deepening by comparing the size of its financial system to the size of its economy. Common measures of financial deepening include ratios of a nation’s financial asset base to its gross domestic product. Unfortunately, such ratios or indices do not provide any actionable guidance at the microeconomic level to individual financial institutions on how to go about the act of financial deepening. A quick glance at the dictionary definition of ‘deepener’ is illustrative – a deepener is one who, or that which, deepens. This article is an informal attempt to highlight a set of diverse concepts that can be used by individual financial institutions to proactively drive financial deepening.

For financial institutions, there are two dimensions along which deepening can occur (see Figure). One dimension is simply reach; which effectively measures the number of new customers that are being added. Naturally, more the number of customers, greater the likelihood that previously unbanked customers will receive benefits the financial system has to offer. This dimension of deepening has caught the imagination of our policy makers in the form of financial inclusion.

The other dimension of deepening is penetration; which measures the average number of products and services per customer. How a particular institution drives its financial deepening is a matter of choice and business strategy. Many public sector banks, with their mantra of inclusivity, seem to have prioritised reach over penetration. On the other hand, many foreign and private banks, with their exclusive pursuit of high net worth clients, seem to have prioritised penetration over reach. Clearly, for holistic and sustainable progress, financial institutions must aspire to deepen along both dimensions.

A powerful (yet unsung) deepener for any financial institution is the positive psychology of its existing customers.

What are some of the most effective deepeners? Branchless banking technology is a deepener as it improves reach and opens up access to new classes of previously unbanked customers. The two common ways of conducting branchless banking are smart cards and mobile banking. Indian policy makers and regulators have demonstrated a marked preference for a bank-led model based on a smart card infrastructure aided by an army of fieldbased business correspondents and business facilitators. Internationally, branchless banking models based on mobile phones such as the M-PESA in Kenya and GCASH in Philippines have also done exceedingly well. Either way, branchless banking models have proven to be extremely good at delivering services such as cash in cash out, bill payments, and person to person money transfers.

Customer Relationship Management technology (CRM) is another technology deepener that can improve penetration by creating a unified view of every customer. In turn this can improve customer care, help identify valuable customers, lead to consistent customer messaging, and ultimately lead to richer and wider customer relationships that are constantly fertilised by cross-selling and up-selling opportunities. In short, CRM technology can transform customers into clients; instead of engaging in a stream of shallow transactions, financial institutions can cultivate deep and profitable relationships.

A powerful (yet unsung) deepener for any financial institution is the positive psychology of its existing customers. In his classic book The Ultimate Question, Fred Reichheld argues that the best leading indicator of future profitable growth is current word of mouth power. Reichheld provides a scientific measure for word of mouth power called the Net Promoter Score (NPS). According to Reichheld, the ultimate question that all organisations must ask its customers is simply this; on scale of 0-10, how likely are you to recommend us to a friend or a colleague? All responses rated 9 or 10 are counted as promoters, all responses rated 0 through 6 are counted as detractors, while all responses rated 7 or 8 are counted as passives. NPS is simply the percentage of promoters minus the percentage of detractors (passives are ignored). For example, in a sample survey of 100 customers, if 60 are promoters, 10 are passives, and 30 are detractors, NPS is 30 (60 minus 30). On the other hand, if 50 are promoters and 50 are detractors, NPS is 0 (50 minus 50). Reichheld demonstrates that the higher (or lower) the NPS of an organisation, the faster (or slower) is its future profitable growth. The NPS framework suggests that financial institutions that maniacally focus on improving their customer intimacy are likely to experience faster growth and greater deepening in a shorter time frame.

A significant challenge that stands in the way of financial deepening is the necessity of creating talent and improving human capital at all levels. At the entrylevel, there is a massive yet unmet need to produce skilled and certified talent that can serve as business facilitators and business correspondents. At the middle levels, there is a great need to educate and sensitise managers and staff about the critical need for customer centricity and intimacy. At the senior most levels, an exodus is expected in the coming years as financial institutions, especially public sector banks, lose more than 30% of their senior management talent to retirements and attrition. Without progressive and aggressive policies for recruiting and retaining talent, succession planning, and leadership development, any attempt to deepen the financial system is likely to run into serious headwinds.

In conclusion, the goal of any financial institution is to expand its footprint in the marketplace by expanding its customer base as well as increasing the average number of products and services per customer. Technology deepeners such as smart card and mobile banking systems can improve reach, while customer relationship management systems can improve penetration. At the same time, psychological deepeners such as positive word of mouth power, captured as Net Promoter Score, can have a dramatically beneficial impact on reach and penetration. Last but not the least, a radical overhaul in the quality of human capital at all levels of financial institutions – from entry level to senior management – can serve as a powerful catalyst for accelerated financial deepening.