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Banking Vision – Uncovering Future
Vimal Jain Senior Business Specialist, Delivery Practice, Capital Market Services, Financial Services | July 24, 2020
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Since their inception, banks have experienced many changes and have come a long way. This is evident from just being a traditional bank (facilitating deposits and loans to customers) to revolutionizing the banking experience for customers. With the onset of digitalization in banking, online banking and mobile banking services have made people’s lives much easier and more flexible. As we enter 2020, banks are continuously innovating to withstand competition from other private banks as banking customers expect cutting-edge services. These include secured online transactions which build a trust factor among customers, user-friendly and powerful software to perform online transactions much faster, and helping clients to build a strong investment portfolio with the help of well-defined algorithms. In coming years, global clients will experience robust platform offerings from banks.

As we enter 2020, banks are continuously innovating to withstand competition from other private banks as banking customers expect cutting-edge services

The current blog post will throw light on some of the milestones banks have accomplished which is helping both individual and corporate clients in day-to-day life. Few services are still in an initial stage and banks are currently trying to build robust platform and leverage technology for better consumer experience.

BANKING AS A SERVICE

BANKING AS A SERVICE (BaaS)

In simple words, non-banking companies will offer banking as a service to customers using their offerings. This will help the companies attract new clients and refrain existing customers from switching to other service providers. Nowadays, we see most companies are offering banking as a service on their online portals. Using application programming interfaces, licensed banks services are integrated with online platforms of such companies. It’s a win-win situation for both banks and companies operating online. Banks will earn fees for exporting banking services to online business platforms whereas companies operating online will be able to attract and retain target consumers

Ex: During filing of IT returns, an individual can make the additional tax payment through the banking service accessible in income tax filing site. Another example is individuals making online payments in the IRCTC website and confirming their reservations. 

DIGITAL BANKS

Identifying themselves as digital banks will not have any physical existence. Unlike neo-banks which packages banking services through mobile application using application programming interface-enabled banking, digital banks will be standalone. Digital banks maintain their own ledgers and balance sheets by which they accept deposits and grant credit to customers

In India, digital banks are not yet allowed and also its implementation will not be an easy affair. It will take a good number of years for digital banks to be a reality in India, considering customers are more comfortable with the physical existence of banks while the trust factor will also play a major role.

Recently, Singapore has approved digital banking licenses for retail and wholesale banks. Point here to be noted is, digital banks can save on staff, area cost, and therefore will also have low operational and infrastructure costs.

ACCOUNT AGGREGATORS

Account aggregators (AAs) are centralized repository platforms which will be available for the public to store all relevant financial documents at one place. It will be a kind of digital vault for storing all important documents like bank statements, investment records, and other financial details.

As an example, whenever individuals are applying for a loan or any insurance product, they can simply give the lender/service provider access to all financial documents with the single click of a button which will allow access to the information stored with the aggregator. Introducing centralized aggregated systems will help eliminating improper storage of customer data.

Account aggregators’ services are still in the initial phase and there is no confirmation as to when this service will be available to clients. Once this service is available, many customers will start signing up for this service in upcoming years. The AA system will be of great help to the general public and corporate clients in terms of secure data access.

API BANKING

Application programming interfaces connect one software to another. In the information technology world, software is built and applications are developed based on backend application programming interfaces which helps collating and integrating data to frontend applications. Application programming interface (API) banking involves a bank allowing access to part of a software or functionality to a third-party vendor. These third parties will then offer services to customers built on the bank’s existing infrastructure.

For instance, customers are now able to pay online using third-party software like GPay and PhonePe by linking bank accounts with payment platforms. Almost every major bank including Yes Bank and ICICI bank have already launched API services. Banks have opened parts of their software offerings/application platforms for third-party vendors, so that new services can be built on the banks’ IT infrastructure.

Any third-party vendor supporting payments platforms can use the banks’ settlement systems through subscribed APIs and clear payments of their customers. Third-party business will save a lot of cash and time by using the banks’ existing infrastructure via an API model.

It should be noted that only third parties meeting banks’ standards and guidelines will be eligible to subscribe and access their API services.

SMART CONTRACTS

Smart contracts are stored electronically and controlled through a blockchain platform. Storing contracts electronically provides greater data security as no one can amend these contracts without the consent of other counterparties. As of now, smart contracts are predominantly used in trade execution and supply chain management. Smart contracts have worked well in the trade finance area, where in, the relevant party can view the status/progress of contract via block. Smart contracts help completing the trade finance cycle in one to two days, whereas in the past, it used to take weeks to execute trade finance deals.

Smart contracts are expected to gain acceptance in the insurance industry as well, where too many departments are involved. Smart contracts will bring all departments under one chain and therefore tracking and approval will be much faster. Recently few banks like HSBC and JPMorgan Chase have successfully executed trade settlements via blockchain. 

OPEN BANKING

Open banking and API banking functions through APIs and sounds similar, however both are completely different platforms. APIs supporting open banking platforms are configured on demand and customized so that this service is restricted to only few fintech companies that form partnerships with banks.

Open banking platforms have a specific target audience, such as small and medium enterprises. These target participants will subscribe to neo-banks’ (open banking fintech institutions are also referred to as neo-banks) API platforms to avail banking and payment services as part of their business model.

There have been instances of firms operating themselves as neo-banks in India. However, from the perspective of products and technology in banking, there are regulations and contract standardization which neo-banks should fulfill to become registered open banking fintech firms. The UK was one of the first places to create regulations for open banking.

FINTECH and IoT

By now, we are familiar with the Internet of things (IoT). IoT is registering its presence in the finance world at a fast pace. Fintech IoT solutions process multiple data sets (captured from inbuilt sensors) from individuals and merchants to terrain products and services. IoT provides real-time streaming of relevant data which is useful for customer and business stakeholders in decision-making and trend analysis.

IoT encourages machine-to-machine (M2M) communication and focuses on automating daily tasks and better monitoring of devices. However, there are few challenges being faced by IoT like security concerns, connectivity issues, passing government regulations, and most importantly, keeping the IoT application updated.

Listed above were some of the giant revolutions in the financial sector which will be further explored and talked upon in the coming years. Having said that, more complex fintech banking technologies will undoubtedly be introduced and researched in the coming years as well.

SUCCESS MANTRA- Technology in banking which can trim operational and infrastructure costs for companies and are able to provide value-driven benefits to end consumers will prove to be more efficient and effective in the long run.