“We are witnessing the creative destruction of financial services, rearranging itself around the consumer. Who does this in the most relevant, exciting way using data and digital wins!” – Arvind Sankaran, digital investor and advisor.
In the last two decades, financial services have been influenced by several factors, the most prominent being digital transformation, the emergence and development of fintech, and regulatory reforms and changes. However, digital reforms are not new to the banking sector; the world has seen a rapid embrace of technology over the past few decades.
India started its technological journey with the introduction of computerisation in banking in the late 1980s, when there was a need to enhance customer service, bookkeeping and MIS reporting. A committee was formed in 1988 by the Reserve Bank of India (RBI) headed by Dr C Rangarajan to review the situation of computerisation in India. Then came the era of liberalisation, privatisation and globalisation, or LPG policy reform, which provided an accelerated momentum in the fintech journey, and momentum to the digital journey and the entry of private and foreign banks in India.
The banking system has taken a giant step towards digitisation with the introduction of e-banking in 1996-98. The Government of India, through the enactment of the Information Technology Act, also provided impetus towards electronic transactions and e-commerce, and the Act provided a platform for further digitisation. The digitisation process got flipped with the introduction of ATMs, telebanking, electronic transfer systems, RTGS, UPI, and tokenisation; all are conduits of the digitisation drive of the banking sector.
The Covid-19 pandemic also led to the digitisation of products and services in finance. Tech innovations have spurred digitisation in finance. All key financial activities, including lending, deposit taking, insurance underwriting, investing, and trading, are witnessing non-traditional manifestations. New and enhanced products driven through fintech are helping bring down costs, creating innovative products and services, and improving customer experience.
The top concern of all banks is digitisation. All over the world, banks are striving to digitise to provide their clients with the best products and services. However, all this digitisation poses risks as well; further negative externality of these innovations may lead to scenarios where the innovations themselves may affect public trust in the financial system.
The banking system exists based on trust, traditionally, banking is all about customer relationships. With the advent of new technologies, the stickiness of the bank-customer relationship may have the potential to dim. With the growing familiarity of digital tech solutions, digitally savvy customers may be empowered to buy the services they need in an unbundled manner which offers the best terms in the most convenient way and on an increasingly global scale.
The banks need to take the lead and harness the opportunities provided by the digital world to keep in sync with modern times. Simultaneously, we should be cognisant that advances in financial tech bring more significant risks to banks’ operational and cyber resilience. Breaches in such areas could weaken the fabric of trust. Thankfully, customers still prefer banks over tech service providers to protect their financial and reliable personal data gatekeeping records. This bedrock of trust gives them an advantage over tech platforms they can leverage to remain relevant in the future.
Looking at the current progress in digitisation, the development of digital public goods and the India Stack has improved the adoption of the digital ecosystem and catalysed the digitisation process. Launching Central Bank Digital Currency could pave the way to provide impetus to digital financial inclusion. By leveraging the latest tech, the RBI can safeguard the finality of transactions like digital cash and ensure data security.
The establishment of a Digital Banking Unit will also provide a positive conduit to the digitisation journey. The RBI has encouraged higher usage of technology for rendering financial services. Some major areas include regulatory guidelines for certain emerging fintech activities such as payment banks, account aggregators, video-based KYC, mobile wallets, prepaid instruments, peer-to-peer lending, digital money, NBFC, and with the introduction of a regulatory sandbox to foster responsible innovation in financial services.
Taking forward the digitisation drive, the RBI and RBI Innovation Hub had ideated the digitisation of Agri finance in India. The idea was to enable seamless delivery of Kisan credit card loans in a paperless and hassle-free manner, reduce the turnaround time, and avoid multiple registered bank branches. Eventually, we desire to develop and operationalise an integrated and standardised technology platform to facilitate frictionless credit to all segments of society for the whole country, wherever rule-based lending is possible, with particular emphasis on rural and agricultural credit.
Financial activities carry certain inherent risks, including data privacy and security risks that are heightened with the introduction of technology that relies on capturing, analysing and storing large quantities of data to provide improved services leading to a concern of data protection and risk of misuse, especially in the context of data-driven business models.
Tech advances may also lead to greater outsourcing to specialised service providers such as cloud and analytics, leading to concentration risks and excessive dependency, indicating third-party reliance risk. The cyber security risk incidental to the digitisation phenomenon has the potential and warrants strict oversight to ensure customer protection.
The financial system needs to address all risks and concerns while ensuring that innovations are responsible and their adoption meets the core principles of governance and customer-centricity. The existence of a financial growth nexus and digitisation growth relationship is already established in academic literature. The RBI is mindful of the fact that innovation has enormous potential to make finance more inclusive and make the financial system more competitive and healthier, as well as make financial regulation more effective and efficient. However, it may create some problems as it solves old ones.
A balance needs to be struck between encouraging innovation to reap the potential benefits of lower costs, improved transparency, and higher consumer engagement, providing space for the evolution of business models, ensuring customer protection, and providing a level playing field for the sustainable development of the banking, financial services and insurance (BFSI) segment.
I would like to flag certain important aspects for your consideration:
- Banks should upgrade their core banking solutions in a manner that allows them to easily integrate the bouquet of services using advanced technologies such as APIs and meet the growing tech demand on the system. They should also be able to align themselves to the evolving ecosystem, be future-ready, flexible, and available to customers with a multitude of services.
- Many of the industry participants are focusing on the prospect of collaborating with fintech players for the efficient delivery of financial services. The role of fintech can also be seen in all customer-facing applications, alternate data models. However, while outsourcing any such roles to third parties, it is important that adequate safeguards are established to protect the institutions and the financial systems. In line with the outsourcing guidelines issued by the RBI, the board and senior management must ensure that at no point are the core activities of the bank outsourced. The industry must ensure that no concentration risk is established, which may risk the stability of the entire system.
- Going digital is the new buzzword in all sectors. The banking sector globally is shifting towards digitisation and is in the process of digitising various aspects of their operations. Digitisation is transforming the definition of banking, but it is happening in silos across products, services, and operations. It is important for the banking sector to ensure complete digitisation. In the same context, there is also a need to tweak the bank’s loan originating system to ensure the seamless integration of different processes.
- In all scenarios, customers should always be central to any innovations. It may be said that being the more informed party, the weight of the responsibility of customer protection falls on the banking industry and the participants to ensure that all key information is enclosed in a clear and timely manner to customers. The impact of cyber incidents on customers ranges from mere inconvenience to monetary loss. Therefore, true customer-centricity requires that technology deployed by you remains reliable and protected at all points of time.
- When it comes to the use of new technology, it is also important that we must explore the use of effective regulation and related compliance. Regtech applies innovative capabilities and techniques to help financial institutions improve their regulatory governance, reporting, compliance, and risk management. Being at the forefront of adoption of technology in banking, Indian banks should also explore multiple solutions in this regard.
- It is necessary that any automated business model that relies on decision-making models takes care of the requirements of fairness through additional processor controls and safeguards, both in the development and deployment of models and also in the final decision-making.
- Finally, I would like to emphasise the need for robust governance systems and practices that can keep everything together and ensure fairness, and help achieve all organisational objectives.
In conclusion, the most recent landscape of the world is characterised by intensive use of technology, which has transformed almost all aspects of life to a certain extent in a disruptive way. The success of digital transformation of the economy substantiates the fact that innovation is the key enabler for societal change and should be treated as a public good.
Considering the host of issues plaguing the digital ecosystem such as digital fraud, identity theft, and data piracy, it becomes paramount that we should all strive for digital transformation, and must be cognisant of the fact that agility, customer-centricity, and governance are central to our orientation.
I end by quoting Mr David M. Brear, CEO and Co-founder of 11FS Foundry who said, “Technological innovations will be the heart and blood of the banking industry for many more years to come and if big banks don’t make the most of it, the new players from the fintech and large technology companies surely will.”