Digital Banking in Digital India Sudhakar Ramasubramanian CEO

Digital Banking in Digital India Sudhakar Ramasubramanian CEO – Wealth & Online Business, Aditya Birla Financial Services Ltd. MD – Aditya Birla Money Ltd 18 April 2016 1

Large & growing base of online/mobile users with rapid adoption of financial services digitally 2 nd largest Internet user base*, with 60% mobile internet users (# mn) (2) Largest Millennial population(1) (# mn) USA 77 USA China 328 India - 100 200 300 ~280 USA Expected to ~340 double in 4 years India 340 ~650 - 200 400 12 China 400 And fastest growing Internet user base (2014 additions - # mn)(3) 600 31 India 800 73 - 20 40 60 80 Increasing Penetration of Digital Banking in India (% of Bank Accounts)(4) 52% 60% 41% 40% 20% 15% 19% 2014 2015 E 0% 2020 E 2022 E * Based on latest available data. Source : (1) Data on Millennial population from Citi Report on Digital Finance in Asia, (2) Data on internet user population from the following sources – India –Economic Times article dated, Sep 3, 2015; China – Wall Street Journal article dated Nov 17, 2015; USA – Calculated on the basis of total population and internet penetration for USA in 2014 as per World Bank data. Mobile internet usage in India from article in Economic Times dated Sep 3, 2015(3) Data on internet user addition based on – China : CNN article dated February 4, 2015; USA – calculated based on population and internet penetration data from World Bank; India – Economic times article dated Sep 3, 2015(4) Data on Digital banking penetration based on MXV Analysis 2

But we remain a Cash based economy – For Now The persistence of cash in consumer transactions Retail banking revenue pool by product category (%) 100 2 27 28 52 Investment insurance 46 44 55 48 CASA Loans 31 68 57 47 45 43 20 do ne sia In di a M So exic ut o h Af ric a Ch in a Ja pa n Br a Au zil st ra lia 14 11 In in a Ch di a In an iw Ta ne s ia n In do pa Ja lia ra e Au st po r Sin ga Cash as % of Value of Consumer Payments 38 14 Source: Mc. Kinsey’s “Building a digital banking business” Cash as % of Volume of Consumer Payments 65 69 54 85 59 59 63 86 UK 25 28 72 90 A 12 15 94 10 21 22 96 US 16 98 Source: PWC’s “Disrupting cash: Accelerating electronic payments in India” 3

An under-served nation and with low financial inclusion Ø In 2015, with the Financial Inclusion Plan, 390, 387 villages were covered with 14, 207 branches Ø The number of ATMs per million population expected to increase to about 300 in 2017 from 105 in 2012 Ø 41% of Indian population remains unbanked • 40% remains unbanked in urban areas • 61% remains unbanked in rural areas Ø Only 14% of adult population have loan accounts • 9. 5% in rural areas • 14% in urban areas Ø 260 million households in India • 70% households in rural areas – 73% have no access to formal sources of credit Ø Share of non-institutional rural credit is as high as 44%, out of which moneylenders account for 34% Source: Bank of India’s “Financial Inclusion” & RBI 4

Traditional Banking all the way Ø Branch banking is more expensive than Digital, but is considered the “Core Channel” Ø Digital is easier to scale and cost effective, but remains an “alternate channel” for most Banks Ø Limited innovation till date to bring down cost of transactions by Banks Ø We remain a country that transacts on cheques for free while paying for NEFT / RTGS Ø New age payment mechanisms and digital only businesses have grown far faster than traditional Banks Ø But many of our Banks are yet to go digital 5

India is Changing Ø Demographic dividend is likely to create a large digital savvy customer segment • India’s demographic dividend well suited to switch to digital behavior • Median age to be 29 years by 2020, with 900 million in the age group of 15 -60 years by 2025 Ø Un-penetrated or financially excluded, along with Go. I initiatives, offer natural growth opportunities • 50% of unbanked population aggressively targeted to be brought under the Banking umbrella • ~200 million accounts opened under PMJDY • Rs 50, 000 Crores targeted to be transferred under DBT Ø Increasing mobile penetration and smartphone usage • 1 billion mobile subscriber base (42% in Rural), with a tele-density of 79 (Rural - 48. 6 & Urban - 148) • Mobile penetration of 90% to drive financial literacy & inclusion, as players bet on mobile-based financial services • Smartphone proliferation of 50% by 2020 & falling handset costs to increase acceptance, better servicing & security Ø Consumer behavior is changing towards rapid adoption of digitization • Markets exposed to innovative & disruptive digital-based services (e-commerce players and e-governance services) • Changing client preferences to move from pricing (discounts) to convenience and service Source: KPMG’s “Role of digital banking in furthering financial inclusion” 6

Emerging paradigms that will get stronger over next 5 years Current Paradigms Emerging Paradigms Deposits business… Offer payments for free Payments service… deposit is a by-product that follows Financing is a serious activity needing engagement and paperwork Financing is invisible service, available on tap, on the spot Digital Channels are alternate, Branches are core Branches are alternate, for specialized roles only Customer decides to buy something, then we help him/her pay, finance it Prompt customer what to buy; be “shopping window” Face to Face for rich discussion; electronic media for transactional interactions Richer discussion with digital channel possible Source: BCG analysis “Productivity in Indian Banking 2014 - Digital Banking” 7

Globally, Banks are making the efforts Some of the digital trends observed globally to cater to ever-changing business dynamics and customer preferences are: • Banks have increased capital expenditure on social, mobile, analytics and cloud (SMAC) technologies • Banks are looking at phasing out legacy systems that are not agile but ensuring that core banking systems are not impacted • Big data technology capability is being nurtured and boosted to successfully tap large customer data • Investments in analytics is a focus area for most Banks as it allows a deep understanding of customer behavior, improves fraud and risk management capabilities, ensures greater compliance and enhances productivity Global players have adopted varied direct Banking Channels to better serve clients and gain competitive edge ING Direct First Direct ING Direct is a Branchless Direct Bank with operations in over 40 countries. It offers services over web, phone, ATM and by mall First Direct is a telephone and internet based Rabo. Direct Digital Bank offering by Rabobank retail bank part of HSBC Bank. Direct bank in Europe and Australia has operations in UK and Scotland Orange Everyday Banking- Free ATM usage, cash back, zero monthly fee, etc Text message based banking pay. Wave- Quick & convenient way for payments by just waving card in front of pay. Wave reader First Directory- Additional services that can be added to current account holders service for insurance, loans, broking, etc Rabo. Direct Savings product- Range of products to suit different saving needs Financial Health Barometer - Targeted at Gen Y, promoting investment products through social media 8

And, many others too trying out different features within their Core. Banking platform Personal Financial Management Online Cheque Deposit (Eg- My Money Map from Wells Fargo) (Eg- Services from Bank of America & Citibank) E-vault Services Online Advice Tools Peer-to-Peer Fund Transfer (Eg- Wells Fargo’s v. Safe service) (Eg- Barclaycard’s “My Money Steps”, NAB’s “Online Assistant”) (Eg- Services from Bank of America, Wells Fargo) Online Tools E-Transfers and Electronic Bill Payments Personalization (Eg- Bank of America Home Loan’s “online home loan guide”) (Eg- Wells Fargo) Secure Chat and Messaging, E-mail alerts, single sign-on, multi-lingual support (Eg- BBVA) 9

But still remain disrupted by Non-Bank players Global Players Apple Pay Samsung Paypal Alipay Allows fast, contactless payment through one touch to pay with Touch ID Provides increased security from tokenisation and fingerprint authentication technology Enables wireless payments through wearable devices e. g. Samsung Smart. Watch Allows immediate, contactless payments to be made with enhanced security e. g. fingerprint authentication technology Alibaba’s Ant Financial in China grew into a $20 bn business in 2 years; illustrating the value of bank/e-commerce union Alipay now accounts for 65%* of all digital payments in China *Source: http: //www. nfcworld. com/2016/01/25/341561/alipay-reports-65 -share-of-chinas-online-payments-market/” 10

Indian Banks in digital space HDFC Bank’s “PAYZAPP” • • • Digital payment solution Buy movie tickets, music and groceries Travel Bookings Online Shopping Money Transfer within contact list Utility Bills HDFC Bank’s “chillr” • • Money Transfer within contact list Request Money and Bill sharing with friends Utility Bills Pay at Online or Offline Stores ICICI Bank’s “pockets” • • • Money Transfer Request Money and Bill sharing with friends Utility Bills Buy movie tickets, music and groceries Shop online Gift physical/e-vouchers 11

Cash has to go Ø Multiple studies show that more transactions through Banking System leads to more savings by the customers. Cash in hand loses value and reduces savings Ø The more the money in the bank, the more the transactions Ø The more the banking system usage, the more the trail of money Ø Traditional payment and remittances are time consuming and inconvenient We have moved from Barter to Cash many centuries ago…. Its time to move from Cash to Digital Payments! 12

And costs should come down substantially 50 Cost per transaction in banking (Rs) 15 Branch ATM Required Upfront Capex (USD mn) 4 1. 5 Internet Mobile Source: Deloitte’s “Telecom: Enabling growth and serving the masses” IT Opex & Depreciation (USD mn) 100 Opex Depreciation 18 25 -45 Traditional Digital 22 5 15 Traditional Digital Source: Mc. Kinsey’s “Building a digital banking business” 13

Plethora of Policy Changes favoring Inclusion and Innovation Ø Payment and Small Service Bank Licenses Opening the way for innovation in the Banking space Ø Aadhar enabled Bank KYC With over 1 billion Aadhar cards, KYC becomes simple Ø KYC Central Agency for Data Sharing Any Bank KYC can be used for opening new Bank accounts Ø Unified Payments Interface Aims to leverage over 900 million mobile phones in India for easy transactions Takes network effect to the next level Ø Ru. Pay Debit Cards Low cost transaction handling with our own clearance mechanism Ø DBT through Bank Accounts To lead to significant financial inclusion by adding balances to PMJDY accounts 14

Industry should respond with “Customer inwards” and not “Product outwards” 15

Amazonizing Finance - Case Study: My. Universe Mutual Fund Platform Within 10 months of launch (Feb. 2015), Zip. SIP is the 7 th largest MF SIP distributor in India, getting 3% market share Product Overview : One-Click Paperless Execution of SIPs Risk profile Customized portfolio One-click execution 16

What the customer wants Ø Money Demystified Ø Trust and Security Ø Convenience and Simplicity Ø Ubiquity and Safety Ø Seamlessness across all interfaces Ø On-Demand Service Ø “At the moment” usability Ø Service “my need first” not “yours” 17

Future is Bright No. of mobile subscribers (mn) Indian households by income distribution (mn) 290 million households 18 20 221 million household 4 22 75 6 50 120 Household income Rs'000 per annum 1200 1000 >1000 584 500 -1000 200 -500 114 82 90 -200 166 <90 2010 2020 F 2007 2010 2016 E 2020 F Source: FICCI’s ”Indian Banking 2020” • Increase in household income will lead to increased savings and hence the need for Banking services • Banking services will be offered via digital platform, as both, mobile subscriber base as well as internet penetration will increase substantially 18

Smartphones to become primary banking channel in 5 years No. of smartphones to equal active bank accounts by FY 20 (figs in mn) Smartphone as a % of bankable population- 70% 700 600 500 400 388 343 300 200 162 389 387 477 434 364 332 304 467 550 525 629 577 386 291 224 243 195 100 0 FY 14 FY 15 FY 16 No. of non-smartphone users FY 17 No. of smartphone users FY 18 FY 19 FY 20 No. of active bank accounts *Bankable population is population with age > 18 years Source: BCG analysis “Productivity in Indian Banking 2014 - Digital Banking” 19

Banking is needed by all but the Banks are not! 20

THANK YOU 21