Are financial services getting commoditized

Have you recently received calls, emails, and/or text messages from banks and NBFCs offering a variety of products and services? If the name of the institution making the offer is removed, would you be able to differentiate which call, email, or message came from which institution? Do they all not look and sound the same?

·         They all offer credit cards with attractive cashback offers, discounts, access to airport lounges, flexible limits, and purchase protection.

·         A few years ago, Yes Bank started offering higher rates on saving accounts (with conditions). Many other banks like RBL, AU, Kotak, IDFC First etc. followed suit.

·         There is not much to differentiate between SME, Housing, and personal loan offerings of various banks and NBFCs.

·         Most banks have made retail/consumer business a priority and announced a strategy to increase the portion of retail credit in their overall credit slate.

·         They offer tech-driven solutions, claiming their platform to be the best in class; though there is not much to differentiate in the tech platforms of the top 15 banks, which account for about two-third of the total credit market.

This was not the case three decades ago, when the process of privatization of banks and liberalization of NBFCs started. The new-age banks came out with materially differentiated offerings.

ICICI Bank and IDBI Bank, due to their origins, were specialists in project finance. Kotak Bank, having graduated from a leasing NBFC, was considered a specialist in equipment financing. HDFC Bank was a pioneer in capital market business, corporate salary accounts etc., and housing finance. The large public sector banks were specialists in social and priority sector financing as well as funding of large infrastructure and industrial projects with long gestation and payback periods. Small PSU Banks would focus on consumer finance and personal loans. Foreign banks like CITI, Standard Chartered, HSBC etc. serviced large corporates, mostly with foreign trade linkages, MNCs, and HNIs. Private Banking (and credit card) was mostly a domain of foreign banks with CITI having a majority share. Now all banks offer all services. The share of foreign banks has gradually reduced.

Points to ponder over for investors are (i) When the financial and banking services become commoditized, Is there a case for a sharp valuation differential in banks and NBFCs? and (ii) Is there a strong case for the cyclical and commoditized Indian financial sector to trade at a significant premium to its global peers, especially the ones that are much larger and better capitalized?

Some may argue, these doubts are too premature and should be put to rest for at least another decade. I see some merit in this argument insofar as the valuation of Indian financials relative to the global peers is concerned. The Indian financial system and financial services may continue to grow at a much faster rate as a significant part of the population is still underpenetrated and underserved, and the segment of the population that lives from paycheck to paycheck and relies heavily on rolling credit is growing fast. However, insofar as the valuation differential of the top 15 banks is concerned, the question might need to be examined much earlier.