India’s Evolving Banking Technologies – Trends and Risks

Banking Technologies

This is the fifth and final part of a multi-part series demystifying the recent developments and trends in the banking and financial services sector. Find a link to the fourth part here- India’s Evolving Banking Technologies – General Purpose Technologies

When we put together all the innovations about India’s evolving banking technologies, examined in detail in the previous parts, there are certain trends that are visible. There is a continuous endeavour towards system improvement or process improvement. Banks are trying to provide better services while also reducing costs. FinTech companies are trying to provide a wide variety of services while disintermediating ‘monopolized’ services. The government is also pushing for innovation, financial inclusion and improvement. All these developments point in the direction of making the entire financial system in the country more robust and vibrant with a wide range of services and products that are secure and regulated. We are in a time of transition. Various ill intended schemes by individuals were allowed to happen because of flaws in the system as well as the incentive structures at banks and other institutions. Technology helps bridge these gaps and ensures a greater degree of rule based or law compatible behaviour. Hence, it is important that we continue on this path of progress.

So, what does this progress look like? It is client/customer centric product and services, faster and more efficient system, reduced friction and ease of transaction, disintermediation, and democratization of financial services. The direction is towards greater inclusiveness with products and services which are friendlier.

Managing day to day pressures while also keeping in mind the long-term benefit of the organization is difficult. This is where the regulator comes in. The RBI has been open to the use of new technologies and is in favour of making the banking system more robust. Regulators at the RBI have had the foresight to start exploring various use cases early on. Some of the committees have come up with really insightful recommendations to improve the system. The first Rangarajan committee recommended the adoption of ‘core banking’ (albeit in a slightly different manner, given its position in history). There have been various other committees looking into evolutions in the technology landscape and how India can adopt these new technologies. Once every three years, the RBI comes out with a policy document outlining their vision on the improvement in payment system in the country. ‘Payment and Settlement Systems in India: Vision-2018’ was released in 2016 with the view of moving towards a ‘less-cash’ society and improve the payment system making it faster, more secure, robust and efficient. Even in areas such as Blockchain, the regulator started tracking evolutions in the area as early as 2015. They have also been a part of many initiatives to explore use cases.

While these initiatives are a welcome move, they also carry with them many risks. There is a risk while migrating to the new platform or architecture. Technologies such as Blockchain are energy intensive. There are privacy concerns surrounding Aadhaar. The overall cyber security threat also increases. John Chambers, the CEO of Cisco Systems once said “There are two types of companies: those that have been hacked, and those who don’t know they have been hacked.”  When we live in such an environment, it is important to ensure there is a developed and sophisticated support structure to help deal with such risks. It is also important that we improve law enforcement and the judicial system.

As we move deeper into the virtual world, it is important we don’t forget the possibilities and risks in the real world. The temptation to violate contracts and indulge in frauds is higher as the incentive structure is skewed. The reward from frauds will seem to be greater than the cost if the law enforcement system isn’t strict and proactive. This is the case in e-commerce fraud. Thus, while paying full attention to the benefits that accrue out of these innovations, it is important for us to also be mindful of the risks and deal with them.

– Contributed by Bhargav

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