Will Commercial Banks Be Swept Away By Future Technologies?

India ranks among the top seven economies with a GDP of US$ 273 trillion in 2018. The fast technological growth owing to the breakthrough of digitization methods, artificial intelligence, blockchain and automation, AR and VR along with the rapid increase in the number of bank account holders has culminated into a scenario where digital and automated mechanisms are ready to mop up existing traditional methods. 

As per Union Budget of 2019-2020, the government has proposed fully ‘automated’ GST refund module and an electronic invoice system. State Bank of India has created SBI Digi Bank, which has a financial superstore, an online market place and a digital bank for end to end digitisation for all products and services. In March 2019, India’s eleven largest banks including ICICI Bank, Kotak Mahindra Bank, HDFC Bank, Yes Bank, Standard Chartered Bank, RBL Bank, South Indian Bank, and Axis Bank have launched the first ever blockchain-linked loan system in the country. 

Digital influence in the Indian banking sector has been growing faster due to the rising digital footprint. In India, verifiable information and documents captured through initiatives like the Digilocker, GSTN and Aadhaar data stack are globally unprecedented as an enabler to ‘presence-less and paperless’ banking. Digital banking penetration has doubled, and the frequency of digital channel usage has increased fourfold in the last three years. India’s digital lending stood at US$ 75 billion in FY18 which means 85% of all Indian banking customers use digital banking services in their personal lives. In such scenario if someone has to choose between commuting all the way to the bank to spend hours waiting in a long queue or rather getting the same task done with a few clicks of mouse, the answer is pretty obvious.

According to the Annual Report of Reserve Bank of India, the retail electronic payment transactions increased by 59 per cent to 23.3 billion during the financial year 2018-19 from 14.6 billion in the previous year, resulting in an increase in the share of electronic transactions in the total volume of retail payments to 95.4 per cent during the year from 92.6 per cent in the previous year. 

The Report on Benchmarking India’s Payment Systems (June 2019) shows India’s leading strong position vis-à-vis peer countries in terms of several parameters pertaining to digital transactions, technology infrastructure, and payment and settlement laws and regulations. 

This evolving digitization scenario brings us to wonder if the commercial banks shall vaporize completely in the decades to follow.

Recent Upheavals in Banking Sector

Following are the new areas explored by the Banking Industry today which pave a path towards extinction of their physical presence.

1. Mobile banking - During 2018-19, Prepaid Payment Instruments (PPIs) recorded a volume of about 4.6 billion transactions valued at ₹2,129 billion.  In June 2019, 61 banks were granted approval to issue PPIs, while 490 banks were permitted to provide mobile banking services. As of September 2018, Department of Financial Services (DFS), Ministry of Finance and National Informatics Centre (NIC) launched Jan Dhan Darshak as a part of financial inclusion initiative. It is a mobile app to help people locate financial services in India. Banks, telecom providers & RBI are making efforts to make inroads into the un-banked rural India through mobile banking solutions which allows customers to avail banking services on the move through their mobile phones. This growth of mobile banking could impact the banking sector significantly.
2. Adoption of ISO - The Reserve Bank is examining the feasibility to adopt the ISO 20022 standard in the Structured Financial Messaging System (SFMS) for NEFT as well which is so forth used by the Next generation RTGS. This will enhance resilience by building necessary capability to process NEFT transactions in the RTGS system, and vice versa.
3. Tele Banking - Banks have started providing a number of services over the telephone. Chatbots are used for a number of queries and phone banking executives handle the rest of the queries.
4. Point of Sale (POS) terminals - These terminals scan a magnetically encoded card (debit/credit card) to enable a fund transfer from the customer to the business. A number of digital wallets are also now available which enable a customer to electronically debit a certain amount from his account and credit it to the business’ account. PayPal, PayTM, MobiKwik, PhonePe, and other such e-wallets are becoming increasingly common, especially as the government is encouraging cashless transactions. In July 2019, transactions through Unified Payments Interface (UPI) stood at 189.2 million whereas Paytm Bank reported the largest number of mobile banking transactions.
5. Automatic Teller Machines - ATMs are perhaps the most widely used aspect of digital banking which, these days not only allow a person to withdraw cash at any time of the day, but also allow an individual to pay their utility bills, and even transfer funds between accounts, besides offering other services.

Preview to the Future of Indian Banking Sector

Following the curve of the existing trend, the future banks maybe projected to encapsulate following features:

1. Lesser number of branches but more points of presence - Physical branches cannot alone reach the dispersed geography of India and serve customers well as much as the remote authentication and paperless services, supported by regulation. Banks of the Future shall penetrate through apps, websites or stores to allow easy transactions and personalized financial-services products at the point of purchase with instant fulfillment. Debit card transactions, for instance shall be accompanied by letting the customers view the merchant name, logo, as well as location in a map on the mobile app without needing the customers to step out of their homes. 
2. Big-data and AI-based information management ecosystem - At present, there are only a few thousand models in banks out of which less than 10% are artificial intelligence (AI) based. But with the streamlining of backend processes, there might be 95% of the financial models based on AI as the most precious asset for delivering valuable insights to clients to improve their financial health. The processing of high volume structured and unstructured data with machine learning (ML) and AI will also be possible due to the implementation of the Centralized Information Management System (CIMS) during the year. The banks will have Data Science Lab, Granular Data Access Lab (GDAL), a centralized analytical layer and automation of data flow from the regulated entities.
3. Blockchain Technology - More and more banks will adopt blockchain technology which means that the account details of a customer will be maintained in real-time across banks while eliminating the risk of hacking by criminals. Financial transactions become encrypted packets called blocks and get added to an encrypted chain, much like an email chain.
4. Open banking through APIs – Application Programming Interfaces (APIs) which facilitate use of third party technology will enable account holders to effectively monitor their cash flows, manage their funds better and avail fast credit without any paperwork. Countries like Singapore, Hong Kong, Japan, Australia and Canada have already made progress to establish their own version of open banking. 
5. E-Payables – Invoice terms, purchase orders and printed cheques shall be substituted by payment cards making them a useful tool, not only to enhance a company’s working capital positions, but also to improve traceability, security and the level of control that can be placed on business spend.
6. Expense Management Systems (EMS) – Real-time reconciliation and approvals for bank related processes and policies shall likely be possibly by embodying expense policies into the technology and separate transactional management software. 
7. Shift in payment channels - The digital payments system in India has evolved the most among 25 countries, including UK, China and Japan. In 2018, India stepped up to 28th position on the government's adoption of e-payments ranking. By 2022, digital assistants, social media and third-party channels are projected to act as primary channels for banking. Digital lending is estimated to reach US$ 1 trillion by FY 2023 driven by the five-fold increase in the digital disbursements. 
8. Shift in the skill set of bank employees - Traditional bank employees shall be outnumbered by data scientists, product engineers, solution architects, design experts, automation engineers and digital marketers. The functional leaders shall be only responsible for coaching and evaluating functional performance of the colleagues with those skill sets, rather than driving day-to-day operations. The chief security officer of the bank shall no longer be someone who oversees security guards, but rather someone who protects the bank from external attacks and breaches. 
9. Networked ecosystems - Historically, consumers have been served by disconnected services, with different accounts and using different platforms. In the networked era, they can have myriad of distinct services on a single platform, as part of a larger ecosystem. Cohesive ecosystems include messaging providers, telecom companies, retail and e-commerce platforms. 
10.  Personalized Service - Digital banking will help customize the screens for customers based on their usage history. It will also allow for automatically filling in certain information required on online forms. This will ensure a much better user experience.

Challenges

Banking in India is at the crossroads now. New competitors are constantly emerging. Players in new categories like small finance banks and payments banks are challenging traditional banks to think beyond merely acting as a ledger of financial transactions and processing payments. They need to play an advisory role, enabling customers to manage budgets, control spending and improve savings with innovative products and offerings. Advice should be data driven, insightful, timely and contextual for every individual account holder.

Adapting to this new world of digitization and automation requires a lot more in terms of machines and technology. This new level of dependence introduces new risks particularly in the cyber world. The architecture of the bank’s IT systems will need to strengthen the confidence in the payment systems, monitor the types of frauds and maintain a balance between ease-of-use, ease-of-access, and the level of security.

Conclusion
When the digitization in banking industry becomes mature, banks will lose their individual identity and physical presence because they will condense into an interconnected ecosystem and provide all their services online. No more physical trips to the bank, no more bank counters, and so on. Instead customers will access all banking services and do all their banking activities over the internet, in the comfort of their homes or offices. Rest of the banks who will not be able to make such transition will drift towards embracing “invisibility" by providing reliable back-office services and balance sheets. Whereas the existing successful banks shall be the ones with robust core strengths, including capabilities in areas such as customer acquisition, underwriting, financing, servicing and optimized operating models.

Bharti Jain

Guest Author The author is an Electronics and Communication Engineer, graduated from Amity School of Engineering and Technology, GGSIPU, Delhi in 2011 who started her career as a Digital Signal Processing Firmware Engineer in Azcom Info solutions Pvt. Ltd, Delhi-NCR. She has worked on Physical Layer of LTE in MATLAB and C for over two years, delivering the TI emulators to French army for LTE-based communication. Presently, she is a PMP Certified Project manager in RITES Ltd, Ministry of Railways. With an immense experience of management of Signaling and Telecommunication projects for Indian Railways and energy sectors across the country such as Chhattisgarh, Allahabad, Vishakhapatnam, Jaipur, etc, she is also working on Semi High Speed Rail projects. During her academic period and professional journey, she has received training in several technical courses such as ‘TPWS’ from IRISET, ‘Automatic Fare Collection System’ and ‘Basic Signalling Course’ from DMRC, and Project Management Professional Course as the member of the global Project Management Institute, USA. She has also received various accolades from the company for her innovative efforts and technical publications. Apart from that, she is an ISO 9001:2015 qualified Lead Auditor