Video KYC
Last quarter, a bank’s boardroom erupted in cheers over record-breaking account openings. But here’s the uncomfortable truth: while the numbers looked great on paper, the bank’s foundation was quietly weakening.
Credit growth surged 13.7% YoY in July 2024, outpacing deposit growth, which stood at just 10.6% - a widening gap that signals rising liquidity risks. A sustained mismatch like this can strain the bank’s ability to fund loans efficiently, increasing reliance on expensive borrowings.
Meanwhile, the 2024 CASA ratio dropped by 2.4% compared to 2023, reflecting a shift away from low-cost deposits. This decline suggests growing customer preference for other alternatives to CASA accounts, further squeezing net interest margins and endangering profitability.
So while the bank celebrated quantity, its balance sheet was telling a different story. Are we truly winning, or simply hiding a deeper problem?
CASA, once the backbone of Indian banking, is rapidly deteriorating - with each percentage point drop, banks lose crucial low-cost funding that powers their entire lending ecosystem. As we examine this crisis, one question emerges: Are banks tracking meaningful growth indicators, or simply celebrating flashy numbers while undermining long-term financial stability?
Why Your Account Opening Celebrations Are Premature
"We've opened more accounts in the last quarter than ever before," proudly declared the CEO of a leading private sector bank recently. But is this metric telling the whole story? The banking industry's fixation with new account numbers masks a more complex challenge: The quality of these acquisitions and their long-term sustainability.
What's particularly concerning is the industry's collective reluctance to address this growing disparity between quantity and quality. In conversations with banking leaders across the country, a common theme emerges: While everyone acknowledges the problem privately, few are willing to be the first to shift their focus from volume to value metrics.
The Triple Threat: Why This Crisis Demands Immediate Attention
The implications of this trend extend far beyond mere statistics. Banks face a triple threat that could fundamentally reshape their operational dynamics and profitability models:
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First, there's the cost spiral. Every inactive account represents not just a lost opportunity but also an actual expense. Banks spend substantial amounts in maintaining a dormant account. This cost, multiplied by hundreds of thousands of inactive accounts, has a staggering impact on their’ bottom line. These dormant accounts aren't just costing banks money, they're also consuming operational resources through systems that need maintenance, generating statements, and managing compliance for accounts that bring zero value.
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Second, banks face increasing vulnerability to interest rate fluctuations, a challenge that becomes more acute as the deposit base becomes less stable. As State Bank of India's Chairman noted in a recent interview, "The stability that CASA deposits traditionally provided is becoming increasingly volatile in today's dynamic rate environment”. This volatility is particularly concerning given the current global economic uncertainties and the rapid evolution of alternative investment options.
In other words, your competitors aren't just other banks anymore. Every fintech is nibbling at your deposit base. They're offering higher yields, better user experience, and seamless integration with investment platforms. And your customers are noticing.
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Third, and most importantly, the declining CASA ratio is creating a serious liquidity challenge that threatens the core banking model. Over the past two years, private sector banks have seen a steady drop in their average CASA ratio, putting increasing pressure on treasury operations and asset-liability management. This isn’t just a numbers game - it’s weakening the banks' primary funding base.
Understanding the Perfect Storm: Four Root Causes
The current situation didn't develop overnight. Four distinct factors have converged to create this perfect storm, each demanding careful attention and strategic response. Understanding these root causes is crucial for developing effective countermeasures.
The Investment Paradigm Shift: Your customers have more options now. They're not just saving - they're investing. Today's customers, particularly in urban areas, are increasingly gravitating toward mutual funds and other investment options. This shift isn't merely cyclical – it represents a fundamental change in consumer behavior and financial literacy. The democratization of investment options through digital platforms has accelerated this trend, making it easier than ever for customers to move their savings away from traditional bank deposits.
The Data Deficit: Banks have abundant data but can't see the full picture of an individual customer. Despite the digital advances, many banks still have major blind spots when onboarding new customers. For example, they can't predict how accounts will be used because they're not connecting the dots between different information sources. This leads to wasted resources and missed chances to better serve customers. If banks could link together things like transaction patterns, existing loans, and business details, they could offer products that truly fit customer needs instead of generic solutions.
Unfortunately, many continue making decisions based on partial information rather than the complete customer story. This Data Deficit keeps banks from making smart choices about who to bring on as customers and how to keep them engaged.
The Yawning Engagement Gap: Traditional banking engagement models are failing to connect with modern customers. A recent McKinsey study recommended that deepening customer engagement can significantly build a trusted relationship between the bank and the customer, urging them to move beyond using banks as mere pipelines to move their money around. The problem is compounded by the fact that most banks' engagement strategies remain transaction-focused rather than relationship-oriented.
Banks continue prioritizing metrics like number of transactions or account balances while missing opportunities to understand customers' financial goals, life events, and broader needs. For example, when a customer establishes a recurring payment pattern, banks typically see only the transaction rather than recognizing potential life stages where relevant financial services could be offered with proper consent and timing. This narrow approach leaves customers feeling like account numbers rather than valued partners in their financial journey.
The 90-Day Money Drain: The "90-Day Money Drain" describes how newly opened accounts that don't establish meaningful transaction patterns within the first quarter often become dormant or maintain only minimal balances, effectively draining banks’ resources.
Yet most banks' activation strategies don't begin until day 45 or later - a missed opportunity. The first three months represent a crucial period for establishing customer habits, but many banks continue to treat this period as a routine operational phase rather than a strategic opportunity.
During these formative weeks, customers are evaluating their banking choice and determining how they'll utilize their accounts. Without proper engagement, customers may never integrate the account into their financial routines, resulting in the account becoming a cost center rather than a revenue generator. Banks that recognize and address this vulnerability can significantly improve account profitability and longevity.
The Blueprint for Success: Reimagining Customer Activation
Time for some good news: there's a way forward and the solution lies in a fundamental reimagining of customer activation strategies, using modern technology and data-driven insights. Let's break down what's working for banks that are getting it right.
The Underwriting Revolution: Start thinking like a credit underwriter - but for savings accounts.Banks that want to be progressive are moving beyond traditional KYC and are beginning to apply underwriting principles to savings accounts. By analyzing factors such as income patterns, spending behavior, and digital footprint, banks can better predict account potential at the acquisition stage. This gives them the ability to identify high-potential customers early and allocate resources accordingly.
Day-Zero Activation Strategy: These progressive banks are moving away from post-facto activation attempts to day-zero engagement. As the CEO of a leading neo-bank observed, "The first hour of the customer relationship is more crucial than the first month." This approach requires a complete rethinking of the onboarding process, supported by real-time data analytics and personalised engagement triggers.
The Data-First Revolution: Data isn't just for compliance anymore. Modern banking requires a multi-source data triangulation approach that goes beyond traditional customer information. Successful institutions are combining traditional KYC data with alternative data sources to create more nuanced customer profiles and engagement strategies.
However, this expanded data utilization must be balanced with robust privacy frameworks and transparent consent mechanisms. Banks must clearly communicate to customers what data is being collected, how it will be used, and provide straightforward options to opt in or out of specific data-driven services.
This consent-based approach not only satisfies regulatory requirements but builds customer trust. Banks that excel in this space view privacy not as a constraint but as a competitive advantage, demonstrating to customers that their data sovereignty is respected while still delivering personalized value through carefully these data insights.
The Engagement Engine: Banks should focus on making engagement personal and purposeful. According to a PwC report on Fintech Innovation in India , enhancing customer experience and engagement during onboarding is the primary innovation initiative financial institutions are focusing on. This prioritization reflects a growing recognition that mechanical, transactional onboarding fails to establish the foundation for lasting relationships.
Effective engagement requires contextual understanding of customer needs, delivering value beyond the immediate transaction, and creating moments of delight that transform routine banking into meaningful experiences. Banks that excel in engagement are moving beyond generic welcome emails and standardized follow-ups to create dynamic interaction models that respond to individual customer behaviors and preferences.
These institutions recognize that engagement isn't a one-time event but an ongoing conversation that evolves alongside the customer's financial journey. The most successful engagement strategies bridge digital efficiency with human empathy, creating systems that feel both non-intrusive and genuinely attentive to customer needs.
The Path Forward: Taking Action
For banking leaders ready to address the CASA challenge, the implementation roadmap must balance immediate actions with long-term strategic initiatives. Success requires a coordinated approach across multiple organizational dimensions.
The immediate priority should be implementing predictive analytics at the acquisition stage. This involves developing sophisticated scoring models that can assess account potential before opening, allowing for more targeted resource allocation. Banks must integrate multiple data sources, including traditional financial information, digital footprint analysis, and behavioral indicators, to create a comprehensive evaluation framework.
The transformation of onboarding processes represents another crucial step. Banks need to move beyond traditional documentation-focused onboarding to create an experience that immediately demonstrates value to the customer. This includes instant account activation, immediate access to digital services, and personalized welcome journeys based on customer segments and needs.
Looking at longer-term strategic considerations, banks must invest in building robust data analytics capabilities that can drive real-time decision-making. This includes developing the infrastructure to collect, process, and analyze customer data across multiple touchpoints, as well as the capability to turn these insights into actionable engagement strategies.
The development of alternative engagement channels and value-added services becomes crucial for maintaining customer relationships. These services should go beyond traditional banking products to address broader financial needs, creating multiple touchpoints that encourage regular account activity and deeper engagement.
The Time for Action is Now
The CASA crisis facing Indian banks isn't just another operational challenge – it's a fundamental threat to the traditional banking model. However, it also presents an opportunity for forward-thinking institutions to differentiate themselves and build stronger, more sustainable customer relationships.
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