The Future of Banking in India

The Union Finance Minister, Shri Arun Jaitley in his Budget Speech for FY 2016-17 emphasized the importance of a strong and well-functioning banking system as a vital cog in the financial sector. Stressed assets in public sector banks have plagued the banking sector since long. It is in this context that growth in the banking sector can be envisaged through consolidation of weaker entities with strong players in the market. The government has already put in action ‘Plan For Revamping of Public Sector Banks’, INDRADHANUSH, under implementation. Not to mention, technology will play a major role in the future banking aspects. In this constantly changing trend, let us look at how the future banking in India would unveil itself in the years to come.

I. Introduction

• The entry barriers to traditional Banks have been disrupted with new specialized entrants and emerging business models which have blurred the lines between business and technology.

• The Financial Inclusion agenda has led to several types of banking models–small banks, payment banks, and on tap license for new banks.

• Banking on the future : "Vision 2020” select key changes that banks need to make in their go-to market approach, starting with shortening their strategy cycles to months instead of years, getting better at reading signals of change in this disruptive environment, and becoming tactically focused on being operationally lean and agile in response to market conditions.

II. Innovation driving the growth opportunities

We will focus on key innovations for 2020 that are most likely to impact the banking sector in India.

1. Artificial Intelligence & Cognitive opportunities

2. Blockchain & Distributed Ledger Technology

3. Robotic Process Automation

4. Cyber Security

III. Artificial Intelligence and Cognitive opportunities

• With the dawn of cognitive computing, customers can now get quick, personalized services.

• Cognitive systems unlock the power of unstructured data (industry  reports, financial news) using deep text and/or image/ video understanding.

• They offer personalized engagement between banks and their customers by dealing with each customer and focusing on their requirements.

A. Examples of its Implementation

• Royal Bank of Scotland has trialled “Luvo” AI customer service assistance to interact with staff and potentially serve customers in the future.

• UBS used the help of artificial intelligence when delivering personalized advice to the bank’s wealthy clients by modeling 85 million Singaporean individual’s behavioral patterns.

• HDFC Bank has identified five startups whose services it plans to offer to its customers, in its bid to further boost its digital banking operations.

• ICICI Bank created “Technology and Digital Group” (TDG) that it hopes will help it develop its digital services in commercial, retail and wholesale banking.

IV. Blockchain and Distributed Ledger Technology (DLT)

• A ‘distributed ledger’ is an architecture under which all users who participated as ‘nodes’ in the network had a copy of the entire ledger.

• All participants had complete visibility of all the transactions at all points in time.

• Any updates to the contents of the ledger could happen by consensus of participants and any such addition would be in the form of an encrypted new ‘block’ in an existing ‘chain’ of all such prior blocks.

A. Considerations for a wider adoption

• Security Concerns

• Collaboration between banks, regulators and government

• Fragmented experimentation by many on Blockchain has led to a scenario where there is no standard protocol yet.

• Like Banks, most Regulators too are on a learning curve and it will take due time for a clear point of view to emerge.

B. Applications

• Cross Border Payments without any transaction fees.

• Blockchain-based service to issue pre-IPO shares of companies.

• Banks can offer loyalty points every time consumers use their credit card enabled by blockchain.

• Low cost micro-payments in rural areas. This solution aims to drastically bring down the cost of moving money in different areas.

C. Examples of its implementation

• Santander bank successfully completed the first cross border fund transfer using Blockchain technology.

• NASDAQ has been one of the earliest adopters of Blockchain technology. Following NASDAQ’s success, other exchanges like Australian Securities Exchange, CME Group, and Deutsche Börse are also experimenting with Blockchain based applications.

• Royal Bank of Canada (RBC) is currently experimenting with a Blockchain based customer loyalty application.

V. Robotic Process Automation (RPA)

• A technology that mimics the actions of a human performing simple rule-based processes.

• It interacts at the application/interface layer of any application and performs the exact steps just like anyone working across multiple applications.

• RPA is best suited for processes that are repetitive and deterministic, have minimum level of ambiguity, and very few exceptions.

A. Challenges in adoption

• Change in mindset

• Disruptive technology would bring job losses on a large scale.

• To build an RPA Business Case and Operating Model is difficult.

B. Examples of its Implementation

• Insurance Firms: RPA has helped enhance customer experience by reducing inbound calls and “indexing” turnarounds with digital interactions.

• Financial Services: Complex manual processes pose quality issue and RPA has helped reduce such errors and significantly improve quality.

• Pharma Company: RPA implementation significantly improved operational efficiency and helped in overall reduction of operational costs.

VI. Cyber Security

• Banking industry in India is rapidly evolving facilitated by mobile and internet penetration in the country and technological innovations disrupting the established processes.

• Questions arise if technologies like Digital Wallets, EMV Chip-based Cards, and two factor authentication via SMS-based One Time Password (OTP) are really secure.

• Threats like Phishing frauds, sniffing, misconduct, cyber attack, intrusion risks that can not be sidelined during a mobile based payment.

A. Chip Based Cards

• As per guidelines issued by Reserve Bank of India, banks have started issuing EMV chip-based cards.

• EMV chip-based cards make it more difficult for criminals to commit credit card fraud by copying a magnetic strip.

• Even though known vulnerabilities in EMV chip-based cards may have been fixed, it is only a matter of time before new vulnerabilities are identified and exploited.

B. SMS based OTP

• SMS-based one-time password (OTP) is an extremely popular and one of the most widely used form of two factor authentication (2FA) in India.

• OTPs make it difficult for attackers to gain unauthorized access to restricted resources, like bank accounts or databases with sensitive information.

• However SMS-based OTP has been declared insecure by National Institute of Standards and Technology (NIST) and is only a stop gap solution at best.

• Risks: SMS redirection, VoIP based mobile numbers can be hijacked, lost/stolen phone, OTP based mobile number update.

• While the use of SMS-based OTP is being deprecated, secure mobile device is still a viable alternative to SMS-based OTP.

VII. Conclusion

• “Banking on the future in India call for various key changes that banks need to make in their go-to market approach, starting with shortening their strategies.

• Technology has democratized businesses by creating access across all levels and by creating a level playing field.

• New technologies are going to bring a revolution in the banking landscape in the next few years. The future banking in India is going to be very different from the traditional ways.