DIGITAL expectations, book keeping and MIS reporting.
DIGITALEVOLUTION IN THE INDIAN BANKING SYSTEMWith nearly 47Million internet users and a GDP rate of 6-7 per cent, India represents adigital economy.
India has proved to be the biggest market potential for globalplayers. This digital revolution is expected to generate new market growthopportunities, jobs and become the biggest business opportunity for businessesin the next 20 to 30 years.There was anardent need for this digital transformation in the Indian Banking System duringthe late 1980s. Digitalisation was mandatory in order to meet customerexpectations, book keeping and MIS reporting. To fulfil the need of the hour, a committee was formed by the ReserveBank of India to introduce digitalisation in the banks headed by Dr.
C.Rangarajan, during the year 1988. The banks haveneeded to adopt disruptive technologies to improve customer service and ensureunparalleled efficiency and service at all times. Banks have been adoptingface-to-face interactions with the customers to provide meaningful financialservices to the individuals and the businesses. However, this one to oneinterface has changed since the emergence of new technology to meet theevolving demands of the customers. Thus, branch banking changed to bankbanking. Core Banking Solution (CBS) enabled banks to increase the comfortfeature thereby delivering a promising step towards enhancing customer convenience.Different Core banking platforms such as Finacle designed by Infosys, BaNCS byTCS, gained popularity.
Core banking systemsand digitisation of important services are necessary requirements for banks toprovide innovative services. Digitisation has helped developments not only inthe operational systems of the bank or customer services, but also the newcapabilities and services that are provided to customers these days.The onset of theWorld Wide Web, truly revolutionised the banking sector and financialinstitutions to think out-of-the-box in meeting their customers’ needs. Thisled many banks to invest extensively in internet services and provide servicesover and above those offered at branches.
A major driver for this change wasthe increasing competition among the private and commercial banks that startedto digitalise their processes so as to improve their efficiency and customerservice, thereby meeting the current pace of digitalisation. Banks have benefitted in several ways by adoptingtechnological advancements. E-banking has resulted in reducing costsdrastically and has generated revenue through various channels. The customerbase has also increased because of the convenience in ‘Anywhere Banking’.Digitization has reduced human error. It is possible to access any data anytimefrom any nook and corner of the world. As per The Avaya Banking Survey 2017, 51% ofIndians use online banking channels and 26% of Indian customers preferto access services via their bank’s website, and the same number would preferto use a mobile app rather than talk to a human agent. RBI is the guidingforce for the banks in forming regulations and giving recommendations.
CommercialBanks in India have adopted technology by way of Bank Mechanization andAutomation with the introduction to MICR based cheque processing, ElectronicFunds transfer, Inter-connectivity among bank Branches. The implementation ofATM (Automated Teller Machine) Channel has resulted in the convenience ofAnytime banking. Strong initiatives have been taken by the Reserve Bank ofIndia in strengthening the Payment and Settlement systems in banks.According to recentsurveys, today’s customers prefer to maintain multi-platform interactions withtheir banks. The number of times one visits the branch has reducedsubstantially and most of the transactions are done online, bills are paidonline, cheques are deposited via mobile banking, etc. One of the majorinnovations that had transformed the Indian Banking System was the evolution ofthe smart phones era.
This has helped transforming the traditional bankingsystem by the introduction of apps that are used for transactions and otherfacilities. Indian Governmentis actively promoting digital transactions. The launch of United PaymentsInterface (UPI) and Bharat Interface for Money (BHIM) by National PaymentsCorporation of India (NPCI) are significant steps for innovation in the PaymentSystems domain. UPI is a mobile interface where people can make instant fundtransfers between accounts in different banks.
Today banks aim to provide fast, accurate and quality banking experience totheir customers. Today, the topmost priority for all the banks in India isdigitization. Accordingto the RBI Report in 2016-17, there are 2,22,475 Automated Teller Machines(ATMs) and 25,29,141 Point of Sale devices (POS). Implementation ofelectronic payment system such as NEFT (National Electronic Fund Transfer), ECS(Electronic Clearing Service), RTGS (Real Time Gross Settlement), ChequeTruncation System, Mobile banking system, Debit cards, Credit Cards, Prepaidcards have all gained wide acceptance in Indian banks.
These are all landmarksin the digital revolution in the banking sector. Online banking has changed theface of banking and brought about a remarkable transformation in the bankingoperations. Source: Banking onTechnology, Perspectives on the Indian banking IndustryNationalElectronic Funds Transfer (NEFT) is the most commonly used electronic paymentmethod for transferring money from any bank branch to another bank in India. Atpresent there are 23 settlements. RealTime Gross Settlement (RTGS) is primarily used for high-value transactionswhich are based on ‘real time’. The minimum amount to be remitted through RTGSis Two Lakhs. There is no upper limit. ImmediatePayment Service (IMPS) is an instant electronic funds transfer facility offeredby National Payments Corporation of India (NPCI) which is available anytime andanywhere.
Theusage of Prepaid payment instruments (PPIs) for purchase of goods and funds transfers has increased substantially. The value oftransactions through PPI Cards, which include mobile prepaid instruments, giftcards, foreign travel cards & corporate cards & mobile wallets havejumped tremendously from Rs.105 billion and Rs. 82 billion respectively in2014-15 to Rs. 277 billion and Rs. 532 billion respectively in 2016-17. This isa remarkable development in the process digitisation in the Indian BankingSystem.
Source: RBI Data and Dun and BradsheetResearchThese increase in thenumber of online transactions and mobile apps’ usages clearly show the responseof the customers to the rapid digitisation process. According to surveys, Indiansprefer a digital approach to banking, and will not hesitate to protest poorservice. As far as the numbers are concerned, 37% of Indian respondentswill change banks if they had a bad experience. With a larger population in thesocial media, the customers readily share their experience and ensure thateveryone is aware of what is happening with the digitisation process. Today’s young andaffluent customers are not only looking for smart banking services, but alsofor ethical investments that will go a long way in ensuring returns. This alsoensures the holistic development of the community at large.
Like every otherservice and sector today, the rapid advances of technology are set to takehumongous leaps in the banking sectors as well leading into various prospectivedomains in the imminent future. The Indian Banking system is the early adoptersof disruptive technology. This will help us go a long way to ensure that banksseamlessly manage this change and stay relevant and efficient in this dynamicphase of development.
In this era of digitalisation, banks are increasingly becoming themarket places and each event is becoming a prospective opportunity. With aplethora of channels for bringing together customers and the banks, the need ofthe hour is to provide an integrated system of managing the customer lifecycle. According to a CII report, the IndianBanking System is currently worth INR 81 trillion, and is expected to becomethe fifth largest in the world by 2020.
The BFSI sector contributes about 40% of the revenuefor major IT companies. As digital technologies evolve around the concept ofdata sharing over public networks on a number of devices, ensuring privacy andsecurity related with banks are the major concerns at all levels. Many initiatives adopted by Indian banks are withinthe social, mobility, analytics and cloud (SMAC) framework.Social: Indian banks are offering real time money transfers apart fromimproving customer interactions and personal branding. Banks such as KotakMahindra (KayPay on Facebook) and ICICI (Icicibankpay on Twitter and Pockets byICICI Bank on Facebook) have enabled a number of banking services such as fundtransfers, account balance and transaction checking, and even rechargingprepaid mobile phones.Mobility: Banks in India are considering the mobile first approach forlaunching new application, as more than half of the total transactions thathappened in 2017 were on mobile phones.
With the emergence of E-Commerce,theirs is awareness among the public regarding the mobile applications. Analytics: With advancement in technology and reduction in cost of itsapplication, man power, computing and analysis, banks are trying to integratehigh end analytics tools to the existing big data warehouse. This would helpbanks to generate revenue and also lower the risk of being exposed tofraudulent activities.Cloud: Banks in India are using public cloud to move applications such aslead management, email services, and human capital management which tend tofluctuate in volume. Though public cloud platforms provide the advantagesconcerns of security, regulations and interoperability are preventing banksfrom adopting public cloud platforms for mission critical applications.
Source: Frost and Sullivan ReportThe major challenge of the hour is that the adoptionof digital technologies will impact the core processes of a bank at a muchdeeper level. Security and privacy issues are the major barriers for digitaltechnology adoption in banks. Banks fear insecure application programinterface, confidential data leakage, and malicious attacks. The lack of propermechanism that decides on issues of ownership, accountability, and risks isalso acting as a major barrier.
Banks are also exposed to internal risksespecially frauds by employees / employees in collusion with customers. Thefear of losing money in the online transaction which is highly prevalent in thefinancial illiterate and the rural poor is a barrier to usage of e-banking.Lack of adequate knowledge among the employees as well as the customers is alsoa major setback which is preventing things from moving forward. These are fewchallenges that the Indian Banking System needs to improve and thus would helptake things forward. As we move forward, business analytics and ArtificialIntelligence (AI) has a potential to bring a major change. Robotics, enabled byAI, is expected to be the future game changer in the banks. Many private banksare planning to deploy Robots for customer service, investment advisory andcredit-approval process to improve the services and be cost effective in thelong run.
Digital Banking will be the most preferred form of banking in the forth-comingyears. DIGITAL FINANCIAL SERVICES AND RISKMANAGEMENTDigital financial services (DFS) are the expansion ofthe delivery of basic financial services to the poor through innovativetechnologies like mobile-phone-enabled solutions and digital payment platforms.Digital channels can help drive down costs for customers and financialinstitutions drastically. Financial regulators have realized the tremendouspotential of the DFS, by playing a crucial role in the financial inclusion andby creating enabling environments for digital financial services.The Reserve Bank of India (RBI) published its firstguideline on mobile banking in 2008, as soon as UIDAI was established theAadhaar numbers were integrated with bank account numbers and the mobilenumbers were also integrated sooner. It was post-2010 that there was a rapidgrowth of the e-commerce sector in India. This led to the massive developmentof the digital financial services and intermediaries. Eventually the mobilebanking and online transactions rose rapidly thereby helping the digitalisationof the Indian Banking system.
The advent of newtechnology usually leads to innovation in industry. Irrespective of the sector,technological innovations are always adopted to make tasks easier and moreefficient. The introduction of creditcards and ATMs has changed the process of Banking and Financial aspects of theNation. For the past few years there have been major innovations in thefinancial sector, thereby leading to a tremendous shift in the way peopleinteract with the Indian financial system. Pursuant to the same, the ReserveBank of India has responded to these advancements to make sure that they do notgo unchecked.Digital payments havealready made it easier to manage money. The next evolution is driving financialinclusion and improving financial health with digital technology.
The digitalpayments are making financial services more affordable, accessible and they havethe opportunity to drive financial inclusion and financial health for thepopulation worldwide. The digitisation of money, therapid expansion of internet access, and the adoption of mobile phones, havecreated the perfect conditions to make financial transactions easier, secureand affordable to save, spend, give and borrow. The RBI clearly recognised the potential for atremendous increase in mobile banking and the opportunity of increasingfinancial inclusion in the country, and made recommendations for “addressingthe consumer acquisition challenges and also the technical aspects”.Recommendations for alternate channels of mobile registration such as ATMs,uniformity in the mobile registration process across banks, and standardisationand simplification of the MPIN generation process were made by the RBI.
The twomajor challenges identified are the customer enrolment related issues andtechnical issues, even after the potential of mobile banking to improve thefinancial services. The RBI identified three major ways of mobile bankingutilised by most banks as SMS, USSD, and application based banking. Theproblems the RBI identified with the SMS method were that the service is notencrypted, and that it may become inconvenient for customers to remember thesyntax required for the commands. The RBI conceded that application basedmobile banking is the best way to offer the service both in terms of userfriendliness as well as security, but stated that developing these applicationsrequires a large amount of research and development.The introduction of technology such as cloud computing,mobile telephony, and an increasing popularity of the virtual world would leadto significant changes in the way payments would be made in the future,according to RBI. This would also enhance the possibility of the movement awayfrom cash transactions to electronic transactions, leading a ‘less-cash economy’.The RBI held that its regulatory stance would be to promote innovation toachieve the inclusion, accessibility, and affordability, while remainingtechnology neutral.
The introduction of online wallets has providedconsumers with a simpler and more efficient method to complete onlinetransactions. A circular was issued by the RBI in December 2014, outlining theguidelines that these wallets must follow. In the circular, RBI defined threetypes of payment instruments or wallets -· Closed wallets can beissued by a company to a consumer for buying goods exclusively from thatcompany, such as Flipkart or Amazon. They do not need any sort of permission orregulation from the RBI as they do not permit cash withdrawal or redemption,and hence are not classified as payment systems. · Semi-closed wallets can beused to purchase goods and services at clearly identified merchant locationswhich have a specific contract with the issuer to accept the paymentinstrument. NBFCs can issue semi-closed wallets which need to be authorised bythe RBI. The most commonly known online wallets (such as Paytm and Mobikwik) fallunder this category.
· Open wallets can beused for the purchase of goods and services (including financial services) atany card accepting merchant terminal and can also be used for cash withdrawalat ATMs. However, these can only be issued by banks with approval from the RBI.Source: cis-india.orgRISK MANAGEMENT Risk Management practices is relatively newer in theIndian Financial Sector.
But with the introduction of risk management theefficiency of the services has increased substantially. With the increasedregulatory systems and the divergent technologies, the risk managementpractices have changed dramatically and will further keep changing. Digitalpayments and digital financial services will introduce new complexities withthe new entrants in the sector. Most common and harmful risk includes System andtechnology risk, agents lacking liquidity, transaction data security,fraudulence, theft and robbery and unsafe fund transactions. Most of the risksin the Indian Financial services are operational and have serious implications.
There are further few risks that the financial services should address in orderto become more dynamic and capable of responding. These are as follows –· Strategic risks should beidentified and cautious measures are to be taken to address them. Strategicrisks include – geopolitical, Fintech and other non-traditional competitors. · Leverage emergenttechnologies to increase efficiency and effectiveness of risk management. · Enhance risk managementcapabilities to address newer nonfinancial risks and challenges of regulatoryfragmentation.· Manage capital andliquidity strategically. There are risk management tools developed to identifyand generate solutions to address the uncertainty and prioritising theactivities thereby tracking risks.
There are two distinct types of risk tools: Two areidentified by their approach, Capital asset pricing model(CAP-M) and Probabilistic risk assessment(PRA), is the mainstay of project risk management.These are classified by the quality and fidelity of information required fortheir calculations. Market-Level tools use market forces to make risk decisionsbetween securities. System-Level tools use project constraints to make riskdecisions between projects.
Component-Level tools use the functionsof probability and impact of individual risks to make decisions betweenresource allocations.It is important to maintain the risk managementpractices to enhance the efficiency of the digital financial services and alsoprovide and build trust among the customers. This would help take the digitaltransformation in the financial services a long way. Source: 1. blog.microsave.net2.
www2.deloitte.com
