Uday Kotak is a risk-taker and a fighter but not the kind to go swinging blindly. Which is why although he’s a recent convert to “the digital way of growing our future in banking and finance,” the veteran banker is mindful that the driving point has to be the consumer and not technology-obsession. In this Outliers podcast with Pankaj Mishra from last year, the managing director and chief executive of Kotak Mahindra Bank explains why he’s convinced that technology will be the biggest changer for financial services and why “once you have conviction you need to move fast.” While he has his hands full with a court case against the Reserve Bank of India and the IL&FS rescue, Kotak’s sharply focused on his bank finding “ways of getting plugged into the future ecosystem or creating one of our own.” There are several important lessons and nuggets to be gleaned from this conversation — thanks to Kanika Berry for transcription — including Kotak’s ‘Phygital’ approach to technology and why he thinks the ideal cryptocurrency is gold. Read on.

Pankaj: Welcome to the Outliers podcast with Uday Kotak. I recently started picking up about you and your bank and how you are digital savvy and spend time understanding new technologies. Uday, take us through your entrepreneurial journey. Why and how did you decide to do what you are doing now?

Uday: It really is a journey about being born and brought up in Mumbai. I was fortunate to be born in a very traditional joint family with 60 people living under one roof and one kitchen. Here was a family in the business of agricultural commodities. The core business of the family was effectively capitalism at work, socialism within the family, so it was a unique mix of concepts. As I completed my studies and went for my MBA in Mumbai, there came a time when I had to take a call on what to do. I was a little concerned about joining the family business because I felt, ‘Will I get my identity or not and will I run the risk of losing identity?’ There was a possible job offer from Hindustan Lever immediately after my MBA. That’s when in a chat with my father I came to the view that I wanted to start something entrepreneurial and that’s when the journey of financial services started.

These were very early days, well before technology had made any significant progress. This was 1983-84 actually. I decided to start a business on bill discounting because in those days banks used to lend money to customers at 17% and take deposits at 6%. We started doing bill discounting, arbitraging between these two, and effectively buying and selling bills of exchange, essentially lending at 16% and borrowing at 12% for companies like Tatas, Mahindras. Till 1989, Indians could not get financing for a car and there was a six-month waiting period for a Maruti. So we started booking Maruti cars, 5,000, 10,000 cars, and made it available for customers for immediate delivery provided they took it on financing from us.

Pankaj: You would do bulk.

Uday: Yes. That’s how the car financing business was built. In the 1990s, I realized that India was a little bit like a well, so I reached out to Goldman Sachs and did a joint venture in investment banking and securities with them. Before that, Anand Mahindra decided to take an equity stake in 1986, which is why we changed the name to Kotak Mahindra. In the mid-90s, Ford Credit or Ford Motor Company wanted to do a tie-up with Anand, and that’s why we got into the car finance joint venture with Ford Credit. These joint ventures were the key theme of the 1990s and enabled us to learn a lot on how the finance business globally worked, whether it was brokerage, investment banking, research, car finance, technology.

We began to get a flavour of technology in both our joint ventures because they were ahead of technology. I remember one of the things in our joint venture with Ford was a system they would bring for the car finance business for us. So this was still mid to late 90s. Then we got into the asset management or the mutual fund business in 1998. Life insurance opened up in India for the first time, so the private sector was allowed to get into life insurance. We got into the life insurance business. Then banking opened up and we applied for a banking licence and became a full-fledged bank in 2003.

The whole journey of building different pieces, in a way, reached its key crucial point in 2003. I remember some of my friends from Goldman Sachs, New York, telling me, ‘Hey Uday, why are you getting into low ROE (return on equity) business like banking? Returns on securities and investment banking are much higher.’ However, I am glad we did that. Thereafter, we built our business step-by-step. We were about three employees in 1986, we are now more than 50,000 employees as a group, and we add about 6,000 new employees in a year. That is important because even now we are creating new jobs in the economy. We continue to see growth and on a net basis are creating new jobs in India.

Pankaj: What was the tipping point for you when it comes to the role that technology could play in your business?

Uday: On digital and technology I have a comparison, which is, think about God. If somebody asked me, ‘Do you believe in God?’, I say ‘Yes.’ If there is a God, of course, I am fine, and if I have said ‘yes’ and there is no God, even then I am fine. But if I say ‘no’ and there is a God, then I am in trouble. I think technology and digital are like that. Believe in it and while you don’t get carried away, there is no question in my mind, technology is changing lives. I have seen how television has changed lives. In the 90s, we were among the first to see the change because of mobile phones. We had a relationship with Hutchison, which is now Vodafone India, for many years in the late 90s and up to 2005-06 So we have seen how dramatically mobile has changed lives since 1990s. We have consistently seen the changes.

The biggest tipping point for me was November 2016. Thanks to demonetisation, within a week, an unknown brand became among the best-known in India. Within one week. And here, we were trying to build the brand for so many years. We were suddenly finding that we were not at the cutting-edge. Before that, we had seen the advent of Aadhaar but we really grasped the whole Aadhaar phenomenon post November 2016. By March 2017, we launched our unique digital account opening product based on Aadhaar. My real full faith in technology as being the biggest changer of how financial services will be done in the future, therefore, is a more recent phenomenon.

Once you have conviction you need to move fast and I do have the conviction that the future of financial services is going through a massive change. There will be a physical world but there will be a much faster-growing digital world. Our entire approach to technology is what I call ‘Phygital’ — Physical plus Digital.

Pankaj: The lines between a technology company and a bank seem to be blurring very fast. How are you building a bank for the future? What are the building blocks?

Uday: I completely embrace the digital way of growing our future in banking and finance. Having said that, there are two or three things we must keep in mind. Number one is, the core of banking and finance is also risk management. Banks normally don’t fail on anything else but primarily on managing risk. Because as you embrace technology, there are three key areas which we have to keep an eye on. Number one is security, and I keep awake every night wondering whether I will ever bank the next morning because is it possible through technology, somebody has taken away all our customers’ money, and how are we protecting that future for our customers? So, technology has a great plus but comes with its challenges and security is a big one.

Second, we are seeing the big debate around privacy and it’s another big area that we need to think about.

And last is, thanks to technology, we now have a huge number of models and models will enable us to take even risk decisions based on that modeling. What we have to be careful is not about technology but the assumptions in the modeling. Because if your assumptions in the models are wrong, we should not blame technology for what may be a huge issue on risk management.

Pankaj: How are you ensuring that?

Uday: The first job in finance that we have to keep at all points of time as our base is trust. Everything that we do has to be tested in the context of customers’ trust. Because as we increase the pace at which we absorb what is good for the customer and customer convenience, we have to keep on fortifying ourselves on protecting his/her money and his/her future.

Pankaj: How do you learn new things? How do you keep at the cutting-edge?

Uday: I don’t think about technology, I think about consumer and customer. What is increasing the convenience of the customer? How is the customer thinking? How is the consumer behaving? That’s my driver for what I need to do. Not what technology can do for me but what I can do for the consumer and how technology enables me to do that better. So the driving point is the end consumer rather than getting obsessed with the technology route.

Pankaj: What is your science fiction view of banking like in a decade?

Uday: The cost of serving customers will dramatically drop. The current high cost base of banks, thanks to protection, will go away. Banks of the future will have to work at cost levels that are a fourth or a fifth of the current cost levels. The cost of intermediation will be dramatically lower. The whole concept of the relationship model will change. Re-imagining the future is to think about financial services as one pot where customers will be served across a whole host of financial products. Also, whether this translates into an ecosystem from finance rather than as a part of an ecosystem of which finance is a part. The Indian opportunity is how do customers owned by banking and finance leapfrog into an ecosystem around it.

Pankaj: What do you make of crypto, blockchain?

Uday: Cryptocurrency has a very big battle with nation states. The ideal cryptocurrency actually is gold because it’s not owned by any nation state, it is the most trusted and established thing. The problem with gold is it is physical. A cryptocurrency is non-physical but to build that kind of trust across nation states is not easy, especially in a world that is paranoid with slush money, illicit trade and terror. Therefore, cryptocurrency faces huge headwinds from nation states.

Pankaj: And things like blockchain?

Uday: Blockchain is a technology ledger which will be a part of our lives and is getting to be more and more a part of our lives as distinct from currency.

Pankaj: Can you give examples of things you do as a bank today, you will not do in the future, or things that will happen in future. Can you illustrate some of these?

Uday: You know, most of us have huge back offices. I think they will get significantly pruned or eliminated because it will all become straight through. And that is one very big part of the change we will see. Number two, we are already seeing that future treasuries will not be with traders, will be with machines. Number three, we will see our banking and finance become some part of growing into an ecosystem.

Pankaj: How do you mean that?

Uday: For example, if an Apple can use Alexa to reach out to consumers for a variety of things, we have to find our ways of getting plugged into the future ecosystem or creating one of our own, when I look at five to 10 years. So in India, it will be reverse, it will not be an ecosystem player into finance alone. That could also happen but a finance player overtime going into ecosystem.

Pankaj: In your entrepreneurial journey, what are the key learnings for you when you look at the ways of building companies?

Uday: I am a believer that we need to have a vision for customers across the board, which is what wholesale, retail and ownership of the customer is at the core of who we are. What I would have liked to see Bangalore companies do more over the last 15 to 20 years is move beyond service delivery into products. I don’t see any reason why some of our Bangalore businesses could not have created our own Facebook or Google or any of these new things because we were very good at service delivery, we probably need to make the transition to full ownership of the customer. And that’s how I think about our business. I think about our business as end game as customer ownership, not only B2B but also as B2C.

Pankaj: If you look at the failures on the journey for you or even the critiques, how do you cope with criticism?

Uday: When the global financial crisis hit, we went into a shell and we criticized ourselves for reading The Financial Times than being grounded in Indian reality. Because that influences our mind, that the world’s coming apart. That is a time when we should have really spread our journey in terms of building our customer franchise. Not necessarily lending but really going out and building our customer franchise faster. So that is one of the times when we were slow. We should have really grasped that opportunity to grow faster.

Pankaj: When you are building for the future, how do you hire people? What you look for in people when you hire?

Uday: I am a great believer in a partnership culture and that’s where, whether it is my joint family mindset or my Goldman Sachs joint venture, which used to be a partnership firm when we did the joint venture. I am a believer that create a culture of partnership and at least act your leadership levels. It has to be not hierarchical, the ability of people to really be free with each other, and a strong middle-class mindset.

Pankaj: I think it shows. What does wealth mean to you personally? And what does failure mean to you?

Uday: It’s the joy of the journey. If what you create does not outlive you, then you have failed. It goes back to the 80s and 90s when I made my first trip to the US and I saw a JP Morgan, a Morgan Stanley, a Goldman Sachs, huge financial institutions that were started by families and individuals once upon a time and they’ve become global institutions. The question in my mind is, why could India and Indian institutions not build something like that? So the whole drive is to create institutions and businesses that outlive individuals.

Pankaj: It’s a very important point you make as an entrepreneur, at a time when the other model is to build, sell, and move on.

Uday: Yes. It is an institutional model to really create institutions that will make India proud.

(Kanika Berry has a Masters in Business Administration and has been a communications specialist for over eight years.)

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