Launched at the height of the lockdown, HatchX is Sri Lanka’s first fin-tech accelerator. The initiative by Hatch is carried out in partnership with the Lankan Angel Network and the Ford Foundation. Its goals are to make financial services more accessible across South Asia. The programme has accepted 7 fintech startups as its first cohort. These startups are Fipbox, Helios P2P, DirectPay, Ogo pay, MAML by Algoredge, iLoan, and Digital Lanka Insurance.
Over the course of 4 months, the programme will offer these startups access to banks, financial institutions, and other networks alongside tailored advisory from industry experts. Every week, HatchX hosts a speaker session inviting industry experts to share their insights with the selected startups.
A recent session featured the COO of Cargills Bank, Rohan Muttiah. From a beginning in tourism, Rohan moved to Information Technology where his first job was as a Trainee Computer Operator. Rohan’s career took him across 4 countries including 18 years in Australia. Returning to Sri Lanka in 2003 he became the CIO of John Keells Group and in 2008 entered banking as the CIO of Commercial Bank of Ceylon. After a 12 month stint as COO of NDB Bank, he is now COO of Cargills Bank. Along the way, he was Chairman Lanka SWIFT User Group, Chairman SWIFT APAC User Group Meeting, Director Lanka Financial Services Bureau, Chairman Banks’ CIO Forum, Alternate Director CRIB, Chairman CBSL Blockchain Working Committee, and Chairman SLCERT.
Lessons from a career spanning tourism and banking
Opening his talk, Rohan shared some valuable experiences gained over the course of his career. Prior to Banking and technology, he had his foundation in the tourism industry, joining Walkers Tours as a Trainee Executive after his London A/Ls.
“It was 1980 and tourism was booming. For an 18 year old fresh out of school, it was like heaven. While most of my colleagues and I were from middle-class families, attended big schools, and spoke very good English, none of these mattered in the workplace. We were quickly cut down to size but in a way that we ultimately appreciated, and that continues to be a source of fond nostalgia. We also learned very quickly that the customer was king/queen and there was no compromise when ensuring their needs were met” he reminisced.
“Unlike today, there was an acute undersupply of hotel rooms, transport, and infrastructure and participants in the tourism industry had to form strong and respectful relationships, a practice that has stood the test of time. Murphy’s Law was the norm and everything that could go wrong, often did go wrong so “you had to plan well ahead with project management, risk management, and contingency planning all being applied before these became commonly known disciplines” said Rohan.
Recalling a lesson in humility and inspired leadership, Rohan recalled an occasion when there was a strike by baggage handlers at the airport. The Managing Director of Walkers Tours at the time who would eventually become the Chairman of John Keells simply rolled up his sleeves and started carrying bags so a tour group would not be inconvenienced. On seeing this, everyone else also followed his example. This left an indelible mark and set a lifelong determination to do whatever it takes to get the job done.
Analysing the inner workings of the banking world
Having shared the fundamentals of success, Rohan offered pragmatic advice to the HatchX startups paired with real-world examples. His opening revelation was that some leading banks in Sri Lanka do not yet have a CIO and therefore fintech start-ups needed to identify the right person with whom to interact. Acknowledging the potential of fintech to exponentially improve banking, Rohan advised the fintech startups to engage with banks by first understanding the business of banking.
Peeling back the layers he revealed that profitability of banks is linked to the cost: income ratio showing the bank’s cost in relation to its income. For example, assuming a bank has a cost-income of 40% means it spends 40 cents for every rupee of revenue.
Having a low cost: income ratio is highly desirable. Cost Drivers of the ratio vary between industries. In banking, Rohan shared 4 drivers that affect the ratio, namely the cost of funds, staff, branch networks, and technology. By understanding these drivers, fintech startups can calibrate how they engage with banks to generate mutual value.
The cost of funds, credit scoring, and technology
The first driver of the cost: income ratio for banks is the actual cost of funds that will subsequently be used for lending. Primarily this cost is made up of interest paid on deposits. Fintech can be used to source deposits with a lower acquiring cost compared to traditional channels.
Another example is the use of analytics to help improve credit scores, thereby making credit more accessible. This has a flow-on effect for startups, given difficulties in accessing capital. While most banks have a conservative approach to credit, lending is what drives bank profits and will likely overcome this conservatism where Fintech can demonstrate superior analytics that can be applied in real life.
Banks are mandated to protect the hard-earned money of depositors and there are consequences to bank staff in the event of poor credit decisions. Therefore, startups should consider a model where the risk is shared to an extent, and demonstrate self-belief in their product.
When technology redefines the branch
Digital Banking is built on the promise of minimising visits to a bank branch. In theory, it would make our lives easier by avoiding waiting in long queues, liberating us from fixed banking hours, and making financial services available anytime and anywhere.
Yet in practice, this has rarely been the case, with Digital Banking struggling to gain traction. Cheques and Cash remain the most popular forms of payment. Despite approximately 23 million debit cards in circulation, only 20.6 million transactions were performed using these during Q4 of 2019. For context, Sri Lanka has a population of 21 million. So, while almost everyone has a debit card, it is not their preferred form of payment.
This trend directly affects the adoption of digital banking services. Conventional wisdom would state this is because people are wary of such services given the security risks. Rohan suggested there was an underlying factor acting as a barrier to this adoption and that was the prevalence of large branch networks that banks have developed over the years. “We’re spoilt for choice. Cash is readily available. Walk to the top of the road and an ATM or a branch is a few blocks away,” he explained.
Strengthening his argument, he pointed out that digital banking saw a spike in adoption during the recent Covid-19 lockdown when access to physical branches was not possible. Recognising that adoption of Digital Banking remains a challenge, he said that only a concerted and coordinated effort by a majority of banks to reduce their branch networks would accelerate a change in consumer behaviour. However, several social implications needed to be considered.
“The branch network is a source of employment both within a branch as well as the surrounding area supplying food, transport, consumer goods, etc. Reducing a branch network is likely to have an appreciable impact on livelihoods and the economy unless spread over a period of time. The disruption caused by a sudden widespread adoption of digital banking would not be socially and economically sustainable”, he said.
Nevertheless, Rohan remains optimistic about the role fintech companies can play. He shared with the HatchX startups that by utilizing technology, they can empower the staff at branches to do more. Rather than eliminate the branch, they can help reshape the concept of what can be done at a bank branch. Some local banks have already begun exploring this idea where digital banking services are used for transactions with the staff serving as investment and planning advisors for customers.
Buyer Behaviour
By understanding the cost-income ratio and its drivers, fintech startups can create products meeting the needs of banks. Without this match, even a very good product might not find a market. Rohan asked the HatchX startups to share what they believed affected consumer spending and they responded as follows:
- Affordability
- Knowledge
- Ease of access
- Trends
- Availability of alternatives
Based on this Rohan advised the founders to, “explore how your technology can address these areas. Understand the customer, serve their needs, and you’ll naturally generate revenue”. Rohan then asked the HatchX startups to share what they believed affected corporate spending and they responded as follows:
- Price
- Trust
- Knowledge
- Speed of delivery
- Influencers
Rohan emphasised the importance of influencers stating that their backing could go a long way towards a bank taking the time to evaluate products of a fintech startup.
The drive to adopt fintech and other technologies at banks largely depend on the risk appetite of its leaders. From his experience, Rohan shared that banks aren’t necessarily focused on the cost of adopting technologies. Rather, their focus will be on the potential revenue they would generate. “Some banks are risk-averse. But often you’ll find many are open as long as they see the revenue a solution can generate,” he explained.
Rohan recommended that startups familiarise themselves with areas of marketing including AIDA – attention, interest, desire, and action; as they cover the cognitive stages a person goes through before buying a product. He also asked the startups to apply Porter’s Five Forces model. to plan their products and prepare their marketing message. He emphasised the importance of these saying, “always find something that makes your product indispensable to your customer”.
Exploring the promising potential of fintech
In closing, Rohan commended the Central Bank of Sri Lanka for being a progressive regulator, and for declaring 2020 as the year of digital payments. With the launching of the fintech regulatory sandbox “it is possible to demonstrate new concepts to CBSL so the opportunities, implications, and risks can be assessed with a view towards accelerating the adoption of fintech”, he said.
Looking toward the future, Rohan believes that a fully digital bank is on the horizon. He acknowledged that legacy banking still works, and profits posted by local banks serve as proof of this. However, if digital Know Your Customer (KYC) becomes a reality, it would create many new opportunities for fintech to exponentially improve the banking experience.
Seeing these trends, Rohan encouraged the HatchX startups to pay close attention to the cost-income ratio, reminding them to find ways to improve it through the use of technology. Rohan also suggested that given the mix of fintech talent that is part of HatchX startups, they should consider a primary role as a Digital Bank.