Banking Trends, Tech Utilisation: My Encounter With Stephen's Alum Piyush Gupta
Recently, I attended St. Stephen's second MRF Distinguished Annual Lecture featuring Piyush Gupta, Chief Executive Officer (CEO) of DBS Group. His insightful discussion on the 21st-century evolution of the global banking system was truly captivating. I attended this talk and learnt enormously from a Columban, Stephenian and an alumnus of IIM-Ahmedabad like me.
With his sound grip on banking, Gupta enlightened the audience with his erudition on all aspects of banking. I heard the functions of a bank in a different context such as intermediate risk management or assessment of the creditworthiness of a creditor, intermediate financing or gap financing and creation of money by leveraging the reserves.
Gupta was candid enough to say that the fundamental weakness of banking lies in the financial stress caused during a liquidity crisis. He cited the example of the collapse of Lehman Brothers which was USD 600 billion in debt and folded up in four days, indicating how a liquidity trap can extinguish a bank. After this crisis, the US government made reforms to tighten the regulations and now the banking system is better capitalised with greater liquidity and controlled funding.
He also explained the debacle of six regional banks in the US last year and attributed this to poor banking practices and a lack of trust in the clients. The fever of tanking of six banks spread across the Atlantic, and plummeted the shares of Credit Suisse, to the extent that UBS, the largest bank in Switzerland, had to bail it out.
He then mentioned a fundamental shift that has taken place in risk, from regulated to non-regulated banking sector, quoting figures of non-regulated funds rising from USD 100 trillion in 2008 to USD 239 trillion in 2023, as per estimates of FSB. This is a huge setback to the entire banking system, as unregulated banks can cause havoc to their clients, if and when a liquidity crisis springs up.
The unintended consequences of the above phenomenon are that mutual funds (MFs) and hedge funds have catapulted into significance, and their liquidity risk is no less, as was experienced through early redemption during Covid when many MFs had to shut down. Another example he quoted was the shadow banks, which are more than 5,000 in China and 90 per cent of them failed as assessment of Risk was not done. Luxembourg had a similar bad experience.
According to him, in the last 20 years, Private Equity has become the best source of funding as it has fewer regulatory hurdles. Private debt funds with a size of USD 1.5 trillion in the US are also in the same category of unregulated entities.
This leaves us with government bonds and treasury bonds which are the safest instruments to hold, but for the MSME sector and those requiring project finance, infrastructure finance and green finance, government financing is not available. Hence large, unregulated players have emerged since the 1980s. The consequence is that the formal banking sector is today less than half the total banking system globally.
Coming to the current status of banking, Gupta focused in detail on digitisation, as the world rapidly moves to the digital domain, with changes in expectations, availability of immediate Google responses, convenience of anywhere-anytime banking and need for e-commerce and quick commerce. The challenge today, according to him, is to customise experiences, to cater to a variety of clients who have 24x7 expectations. In this context, he highlighted his meeting with Jack Ma, who was the pioneer of raising money digitally, lending it the same way, doing insurance digitally and transferring data digitally.
Based on this experience, Gupta embarked on the digital transformation of DBS, taking four major steps:
He stated that technology is the answer today for expansion, unlike in the past, where customer acquisition depended on expanding bank branches. Now customers have to be fetched digitally to expand your reach over a large geographical spread. The challenge is to keep this cost of acquisition to a minimum.
Seamless, paperless transactions and authorisation of money transfers without signatures, is another huge development necessitating massive changes in traditional banking, to usher in the digital era.
Contextual marketing, according to him, is based on the “Theory of Cross-Sell”, which means you sell more products to your existing customers to enlarge your turnover. Big technology enables you to give more choices to customers, like Amazon Prime, deepening the market with a wide variety of options offered. The moot point that he highlighted was that banking today has to be in context, all the time. Only then can it be in tune with reality.
Another concept he introduced was embedded finance, where you acquire customers by providing customised funding solutions to meet their needs. DBS does this seamlessly by accessing funds in China, India and Indonesia and partnering with digital companies accordingly.
Building Ecosystems For Digital Finance:
In the home buying sector, instead of tying the loan after the client has finalised the premises, the bank takes a proactive lead to look for an appropriate home depending on the needs of the client, and on his acceptance, funds the same. This means a continuous engagement with the customer to facilitate his home-buying experience.
The other option is to create a payment platform, which DBS has done, and which has been downloaded by 3.5 million people in Singapore. Through this mechanism, the bank gets embedded into the daily lives of the citizens. To gauge customer behaviour, DBS under Mr Piyush Gupta, has created Design Teams to understand buyer behaviour and cater to it efficiently and effectively.
Moving on to the impact of AI in today’s world, DBS started AI labs in 2015 and AI company’s chatbot in 2016-17. He hopes to master the use of AI in banking in the next three to four years. For this purpose, he has hired data scientists to access large volumes of data and centralise the data to derive insights from it.
Last year, 800 AI models were created and 1000 people were employed for this purpose. So far DBS already has 400 use cases, which probably would be the largest in the banking sector globally. AI is used in DBS to hire people by doing the first round of interviews. AI handles calls through the chatbot. AI is also used for marketing, risk management, compliance and cash flow management.
Reading unstructured data was a big problem in the past, which DBS is trying to solve through improved AI models, which can handle such data. His final intention is to use AI for wealth management purposes, by getting all the records of an individual in one place, and AI advising on what to do in terms of locational dining, locational travel etc.
The diversity of experiences of Gupta was reflected in the fact that he had even thought of how to create better banking facilities for startups. During Covid times, several start-ups had failed but now Fintech is becoming a dominant force to reckon with and an efficient funding mechanism is required. According to him, 272 fintechs have become unicorns globally, with a market cap of USD 900 billion.
Realising the negatives of AI, Gupta feels that an appropriate balance is necessary because the risks of redemption are far greater in a digital world of banking than in a manual system. Hence, the liquidity risk has enhanced manifold and so has cybercrime. Ransom attacks are the most common where the digital system gets flooded with inconvenient traffic.
The issue of ethical AI is assuming enormous proportions and DBS is in the process of hiring philosophers who can advise the bank on purposeful, respectful, uncompromising and explainable principles of effective data use.
Trust economy, Biggest Economy
Another interesting concept he introduced with the mightiest mileage, is the issue of a trust economy, becoming the biggest economy in future. Therefore, banks, as trustworthy as they can be, will always be relevant, and as long as they care about the customer’s interest, they will always be important.
Looking at the future, he felt that 97 to 98 per cent of the banking business would depend on bits and bytes. Blockchain technology can have a profound impact, although the crypto world is not favoured, due to its various blunders.
The advantage of blockchain is that it keeps an authenticated record of all transfers and that a ledger is available with all the participants. Unlike the hub and spoke model, blockchain reimagines the way you work and can create smart contracts which are a part of the ledger. But there are fears of money laundering, KYC and other compliances, and hence adequate counter measures would be required.
The revolution that he sees in Blockchain technology and tokenisation is that all digital tokens will fractionalise value. The payment architecture will change completely as blockchain works in tokens, in real time.
Coming to the future of money as his last element of banking innovations, he strongly felt that cryptocurrencies, especially bitcoin which has a market cap of USD 2 to 3 trillion, are essentially private money, and hence difficult to be trusted. It may be a unit of account, but can’t be an effective medium of exchange for the majority.
As a store of value, it will remain volatile and hence not readily acceptable. The alternative that most governments are thinking about is a central bank-created digital currency (CBDC), and many countries like India have launched it. It would have both a retail and a wholesale component, where the wholesale part will take care of cross-border settlements.
In his contemplation on the future of currency, considering the rapid pace of global transformation, Piyush Gupta outlined seven key elements. He emphasised the potential for individuals to engage in private money contracts using Blockchain technology, effectively bypassing government-backed currencies. This shift could lead to a scenario where the money supply operates beyond governmental influence.
However, Gupta highlighted the reluctance of nation-states to relinquish control over monetary systems, recognising it as a significant source of power in finance. Furthermore, the proliferation of private money raises questions about the necessity of traditional banking institutions. Gupta noted that while banking functions persist, evolving technologies and data requirements necessitate a restructuring of business models to prioritise enhanced convenience and holistic consumer experiences.
His conclusion, therefore, was that in a trust-based economy, banks have an enormous role to play provided they are willing to adopt latest technologies and equip themselves to be nimble and agile, to become relevant and effective.
