Innovation is among the most powerful forces that continue to shape human society. The advances in the material standard of living enjoyed by most (though not all) human beings are largely due to innovation. One of the principal arguments for free-market capitalism is that it is the economic system that encourages innovation most, because it allows innovators to capture a significant part of the remunerations of their work.
Financial services industry is no different. The accelerating rate of technological change, combined with shifting customer preferences and an evolving regulatory landscape, have dramatic implications for the ways in which financial services are designed, delivered and disbursed today.
Technology is overturning workflows and processes in the financial services industry. Tasks once handled with paper money, bulky computers, and human interaction are now being completed seamlessly entirely on digital interfaces. Almost every type of financial activity – from banking to payments to wealth management and more – is being re-imagined by some tech savvy banking incumbents as well as by startups. Meanwhile, the old guard is trying to solve a puzzle presented by the digital revolution: How can they benefit from the rise of digital, and how can they stay relevant?
Banking today has become Easy & On-The Go
Gone are the days when banking was a chore, a frustrating activity which in many cases needed you to take a day-off to accomplish the task. Technology (Internet and Mobile phone) has virtually enabled banks to be where the customer is; enabling her to connect to the bank at a time and place convenient to her. Today we are closer to year 2030 than to year 2000. Imagine if we told you in year 2000 that you would be able to bank from your phone 24X7 and accomplish most of your banking transaction in less than a minute? Not many would have believed us! But mobile banking is a reality today with more than 100 million transactions a month. By the year 2030 most of today’s technology will be redundant and will be replaced by other more evolved modes.
Mobile phones especially smart phones have created more opportunities to the common man than any other technology in the recent past. Today mobile banking and mobile wallets are the two fastest growing segments in the payments industry. Evolution of mobile banking on the back of mobile phone revolution in India has helped clients make faster and secure banking transaction on the move. For banks mobile banking is the most cost efficient mode of offering banking services. It is a win-win situation for both banks and clients.
Future is Increasingly Digital
Digital business is an overarching trend covering how the blurring of the physical and virtual worlds is transforming business designs, industries, markets and organizations. Major business and technology advancements, such as the Internet of Things, 3D printing, and machine learning combine to disrupt existing business models and create an opportunity for entirely new ones. Digital technologies build on each other with wave after wave of innovation.
Customer expectations for banking services (both offline and online) are being reset by the experiences being provided by retailers and online providers, elsewhere. Thanks to companies like Google, Amazon, Apple, Uber and our very own e-commerce firms; customers now expect every organization to deliver products and services swiftly, with a seamless user experience. New digital attackers care definitely changing the rules and disrupting traditional value chains in many industries. The same could happen to financial services industry as well. Fintech startups are already accelerating innovation in financial markets by leveraging technology. But it will also be naïve to believe that technological advancement in banking will only be done by Fintech firms.
Over the next couple of years you will notice that a lot of financial innovation will be spear headed by incumbent banks – either independently or in partnership with new Fintech firms. You will increasingly see a trend where incumbents will be as good as Fintech firms at innovation. Today a lot of banks are partnering with Fintech firms for mutual benefits. Some of the traditional players in banking have been very agile in experimenting with new age technologies such as Artificial Intelligence and Block-chain. Banks and non-banks are innovating and Indian ecosystem as a whole is gearing up for digital.
Technologies of Future
Two very important developments have the potential to herald a new age of digital payments – the rapidly growing smartphone penetration and the proliferation of bank accounts. India has over a billion mobile connections with around 240 million smartphone users and is expected to grow to 520 million by 2020 as per a report on Digital Payments by BCG and Google. The National Optical Fiber Network initiative under Digital India will connect 250,000 gram panchayats across rural India and increase adoption of data services. The Pradhan Mantri Jan Dhan Yojana (PMJDY), through 282 million accounts and 220 million cards (as on 29 Mar’17), has provided the infrastructure for universal access to banking.
The issuing infrastructure is largely in place and with the launch of Unified Payment Interface (UPI) will provide a significant fillip in the proliferation of low cost acquisition infrastructure by allowing smartphones to substitute costlier PoS devices. UPI will be a game changer in way that it is a unique interface which works 24×7 across the banking system and is instant, safe, secure, cost effective and convenient to use. UPI allows payments to different merchants without the hassle of typing one’s card details, or net-banking password. UPI is built on top of the IMPS, which we have used to instantly transfer money between accounts with different banks. All money transfers with UPI are secured with the two factor authentications as mandated by RBI – the first factor being your phone and the Mobile PIN as the second. UPI is likely to benefit overall payments ecosystem as the payments service can be provided by banks to the merchant with an entry level smartphone and there is no need to install POS machine at the place of business.
Blockchain is another such new technology that combines a number of mathematical, cryptographic and economic principles in order to maintain a database between multiple participants (lenders & borrowers) without the need for any third party intermediary or reconciliation. In simple terms, it is a secure and distributed ledger/database, hardened against tampering, against which anyone can verify the validity of transactions. A block is the ‘current’ part of a blockchain which records some or all of the recent transactions, and once completed goes into the blockchain as permanent database. Blockchain represents the next evolutionary jump in business process optimisation technology.
With the advance of Smartwatch, banking is already slated to experience shift from your pockets to your wrists. Wearable banking will help banks roll out contextual notifications to its clients, which means that actionable promotional content can be delivered at just the right time. The future lies in ultimate personalized, contextual engagement. However, smart watches are not the ultimate frontier of wearable technology. As the technology extends beyond Smart Watches to include Smarteyewear, gesture-controlled devices and other connected products in the larger IoT (Internet of Things); we envisage an exciting world of ‘Predictive Banking’ to emerge.
All the data you generate across your daily life can be captured (with your due permission of course), connected and analysed – from sensors embedded in everything from your wearables to your cooking utensils to your car. The area is unbound for exploration and as we explore further a billion possibilities can emerge. You can expect your bank to create products that shall connect with you on a deeper level but in a non-intrusive manner. Banks and financial institutions will be a part of an invisible layer around your daily activities. For example, by linking to your fitness band, we would like to encourage your fitness goals by rewarding you on your achievements.
We can track your health data (pulse rate, sleeping habits, daily physical exercise, calorie intake, etc.) and create customized insurance plans for you at lowest possible annual premiums by partnering with various health providers. Artificial Intelligence (AI) & Machine Learning is another important technology that combines natural language queries, predictive analytics, and self-evolving cyber security systems.
Artificial Intelligence is the future & has already started to be part of our everyday lives. Machine learning is an approach to achieve artificial intelligence & machine is “trained” using large amount of data & algorithms that give it ability to learn how to perform the task. Another emerging technological advancement is cloud computing the practice of using a network of remote servers hosted on the internet to store, manage, and process data, rather than a local server or a personal computer. The big benefits of the cloud are cut costs, improve flexibility & scalability, increase efficiency, serve client faster.
The combination of higher spending power and a freer adaption of technological adoption mean that banks and other financial institutions have an entire market of willing and able customers to offer better financial products/services at lower costs. The fact that unbanked population in India halved from 577 million to 233 million speaks volume about the advancement of financial inclusion efforts. Technology is the biggest enabler and equalizer today. As we connect one-on-one in real time, it has created massive new flows of trade for markets that were underserved or overlooked. Cell phone subscription in India has crossed one billion. So the first massive change in the network effect of financial inclusion is that millions of people who previously had zero access to digital services are now on the network and are connected for good.
It is also very encouraging that we have a central bank that is equally enthusiastic about promoting innovations and technology. The Reserve Bank in its continued efforts towards building robust and secure payment and settlement systems for achieving a less-cash society published Vision 2018 which highlights the need for making regulations more responsive to technological developments and innovations in the payments space. India now has the best digital infrastructure for financial universalization and the fact that we have the Jan-Dhan, Aadhaar and Mobile (JAM) layer, we have an indigenous Indian stack that is propelling us from being data poor nation to a data rich nation. Add to this the data available through GST Network, under which companies will upload nearly three billion invoices every month and government will effectively have real-time economic data 24X7.
Digital adoption and moving away from cash would not be without complications. Some objections can be easily addressed, such as a claim expressed by a fifth of a sample of respondents, who said in a recent survey that they like the feel of carrying cash. But other problems will be harder to ignore. The most intractable is the risk that parts of society will be left out of the financial system, in a world where smartphones and plastic become the only ways to pay. In a near cashless world vulnerable groups, such as the poor, the elderly and migrants, could become further marginalised, and those who are especially cash-dependent for income, such as street vendors, small traders, charities and the homeless, would fear to see a drop in their incomes.
Today banking is a complex business delivered through multiple channels. The challenge is to offer consistent omni-channel experience. Each channel should promote other channels and should be seamlessly integrated. For example, when interacting with a branch employee, the customer may be assisted in how to use mobile banking. When calling the call-centre, the customer may get help with online banking. Today, far too many banks create silos for each channel – including separate reporting lines and separate sales goals. This has to quickly change because in the customer’s mind, all channels merge together to form the aggregate customer experience.
When customers are given choices on how to do business, and those choices are relevant and the experience is consistent, they are much more satisfied. Finally it is customer preference which will drive business models. Customers with new expectations and the need to build trusted relationships are forcing incumbents seek value propositions where experience, transaction efficiency and transparency are key elements. As self-directed solutions emerge among competitors, the ability to differentiate will be a challenge. In addition to social changes, the driving force behind innovation in financial services can largely be attributed to technological advances outside the financial services sector that will bring new opportunities to understand and manage the risk (e.g. telematics, wearables, connected homes, industrial sensors, medical advances, etc.). While it will be fairly easy to replicate technology, the critical aspect will be building a culture of innovation and the ability to leverage insights to build solutions that will determine who will be able to maximize the opportunities and emerge as a winner.
Rajiv Anand, Executive Director & Head – Retail Banking, Axis Bank writes this piece for the April 2017 edition of our Financial Foresights.