The union of financial services and information technology, or for short FinTech, has been breaking the barrier between financial traditionalism and the future of financial technology. Developments in communications technology and processing technologies for financial services transformed banks from being “brick and mortar” entities to “digital fortresses”.
In sharp contrast to what was existing, the appearance of new banking channels transformed the very concept of bank branches. 24X7 banking has become a reality. The digitization journey of Indian banks has been fascinating, to say the least.
Any time money?
Worldwide, the first Automated Teller Machine, or ATM as we know it, was introduced as early as 1967. However, it took another twenty years for the ATM to arrive in India. The first ATM in India was set up in 1987 by HSBC in Mumbai. But, it was only in 2003 that the Institute for Development and Research in Banking Technology (IDRBT), the subsidiary of RBI, announced that it would be creating the National Financial Switch (NFS) to link together all the ATMs in the country in a single network. By December 2009, the network had grown to connect 49,880 ATMs of 37 banks and by the end of 2016, the number of ATMs under NFS (now under the control of National Payments Corporation of India) had grown to 2,30,000 ATMs, comprising 745 members including commercial banks, RRBs and White Label ATM operators.
Starting as dispensers of money, ATMs have over the years graduated to provide a host of services like withdrawal of cash, the deposit of cash, mini statement, card to card fund transfer, cheque book request etc. More than any other innovation, ATMs have transformed the very face of banking by providing Any Time Money.
Core Banking Solution
Reserve Bank of India had to adopt a carrot-and-stick policy to computerize the banking services in India amidst opposition from bank employees’ unions. In 1983, bank managements were allowed to introduce Advanced Ledger Posting Machines (ALPM) at branches, minicomputers at Regional and Zonal Offices and one Main Frame computer for each bank.
Over the years, a crying need was felt for full-fledged computerization and inter-connectivity of all the branches and the momentum gained with the globalization of Indian economy in 1991-92. Rising competition from private and foreign players forced Public Sector Banks in India also to go for modernization and computerization in a big way.
What started as a reluctant exercise gathered momentum and private and foreign banks helped usher global banking standards to Indian banking customers. Strong initiatives were taken by RBI in strengthening the Payments and Settlement Systems in banks by introducing RTGS, NEFT, IMPS etc., and the launch of Unified Payments Interface (UPI) by NPCI has revolutionized the Indian banking system.
Introduction of Cheque Truncation System (CTS) in 2008 by RBI has also revolutionized cheque clearing between banks across the country, by obviating the need for moving physical cheques across bank branches and also eliminating the associated cost of movement, thus providing significant cost savings to the banking industry.
Emerging technology in the banking industry
While the initiatives taken by RBI and NPCI have ushered in a new era in banking as far as the liabilities side of the banking business is concerned, processing of loans has not improved dramatically. For one, sanctioning of loans to the right persons/entities involves understanding the character and capacity of the borrowers, collaterals offered and this means in-depth analysis of the borrowers.
Based on the recommendations of Siddiqui Committee, RBI permitted setting up of Credit Information Companies (CIC) in India and thus, was born Credit Information Bureau (India) Limited, or CIBIL. There are three more CICs in India now, which together provide information about the financial character of individuals and commercial organizations. While CICs have simplified the lives of bankers to a great extent, banks continue to rely on field visits and due diligence by in-house personnel or third parties for carrying out background checks on the intended borrowers.
The age of solely-digital banking is also approaching. Many of the private banks use tablets for opening accounts, KYC verification etc. In fact, the Development Bank of Singapore (DBS) is offering solely digital banking to its customers in India. Banks are also using Digital 5 Forces — Social, Mobile, Analytics, Cloud and Internet of Things (IoT) for creating new and valuable sources of business information.
The future of FinTech in 2020 is also intimately tied to the blockchain technology, and the main reasons are transparency and trust it guarantees, significantly decreasing the time needed for transactions and improving the cash flow.
Banks are also adopting Robotic Process Automation (RPA). This uses software robots or ‘chatbots’ to impersonate human activity thus having the potential to interact with customers like real human executives on a real-time basis (for example SIA by SBI, I Pal by ICICI Bank and HDFC Bank’s EVA).
Artificial Intelligence (AI) solutions are being used to automate repetitive processes in the banks and improve customer experience. With the automation of banking processes, AI can delve into customers’ data and provide information about their interests and preferences. This has given rise to custom-made services, focused around resolving customers’ problems and providing them with the best possible solutions in real-time. AI uses technology for voice recognition, predictive analytics, logical reasoning etc. AI can also be used for digitising the KYC process, thereby eliminating the need for physical submission and verification of documents. Apart from customer service, fraud prevention and detection, compliance, risk management, decision-making in respect of loans are all areas, where AI can be used in banks.
Blockchain technology is another area which holds much promise. RBI has successfully tested blockchain technology and the potential of blockchain technology to automate trade settlements and transactions can prove to be a huge cost saver for Indian banks. Blockchain is shared distributed ledger which stores business transaction to a permanent unbreakable chain which can be viewed by the parties in a transaction.
It has the potential to disrupt the ﬁnancial business applications as it provides permanent and tamper-proof recording of transactions in a distributed network. Some of the private banks like ICICI and Axis Bank have already entered into partnerships with foreign players to develop applications for transactions within closed groups, trade finance and cross-border payment services over the distributed ledger.
Cloud computing is another area which would help banks reduce their cost of infrastructure and provide increased business agility and enhanced level of data security.
The advent of FinTech players
FinTech is a term for the segment at the juncture of the financial services and digital technology. This basically prompts the use of digital technology that is focused on start-ups and new market entrants pushing to innovate products and services.
FinTech can be used to describe any innovation that relates to how businesses seek to improve the process, delivery, and use of financial services. FinTech is thus gaining significant momentum in the industry and causing disruption to the traditional value chain.
The role of Micro, Small and Medium Enterprises (MSMEs) in India’s economic performance need not be overemphasized. However, most of the Indian banks find financing MSMEs a daunting task due to their informal nature of operations, non-adherence to formal accounting methods, lack of historical cash flow data etc., according to a November 2019 report by PwC and FICCI.
This is an area where FinTech companies can collaborate with banks to provide digital solutions to apparently risky low-income individuals and small businesses. The usage of alternative data rather than traditional asset-based data to determine the creditworthiness of an individual/business is the underpinning advantage of FinTech.
Some of the leading private banks like ICICI have already tied up with FinTech companies to help determine the creditworthiness of individuals and small companies. FinTech companies use cash flow-based data and other surrogate data from sources such as telecom, utility and social media, combined with psychometric analysis to evaluate the ability and willingness to pay, rather than relying on traditional asset-based data.
Going forward, the key innovations that will shape the future of banking in the next few years are artificial intelligence, blockchain technology, robotics process automation and cybersecurity. Both banks and FinTech companies have realized that there is merit in partnership than competing with each other. Thus, it is hoped that there would be a successful union of banks and FinTech companies which would be mutually beneficial.
Manipal Academy of BFSI in collaboration with Axis Bank has come up with a School of FinTech to prepare the engineering graduate to be the future bankers in the Financial Technology industry. The expert-led program will give hands-on training on all the above-mentioned technology and its integration with financial services. The School also ensures the placement for all the participants with a competitive salary.
About the Author
Rajan Sundaram is a banker with more than 3 decades of experience with Canara Bank. Earlier, he was a faculty with Canara Bank, specializing in the area of Credit, Risk Management and Legal & Recovery. He has also been AVP (Credit Analyst) with Wells Fargo.
A holder of MBA (Finance) and PG Diploma in Human Resources Management from IGNOU, Rajan Sundaram has been Academic counsellor for the MBA Program at IGNOU and guided students for their MBA projects. He has taught papers on Statistics for Management and HR for IGNOU. Sundaram has also taught papers on Trade Finance and Quality Management at B Schools. Apart from academic teachings, he is a freelance trainer on credit and soft skills programs.
Furthermore, he contributed articles to Canara Bank House Magazine and Vinimaya a publication from NIBM Pune. He has presented research papers at Management Development Institute (MDI), Gurgaon and other colleges. Currently, he is serving as a faculty of Banking in Manipal Global Academy of BFSI.