Future challenge of banks: Bringing digital banking to the last man standing

Banks are generally very traditional in nature even though all the banks and financial institutions are going digital. Traditional nature change is again a challenge. The lockdown has come as a blessing in disguise as the changeover to digital systems can now pick pace, as it  becomes the need of the day, writes Ashim Kumar Goswami for South Asia Monitor 

Ashim Kumar Goswami May 26, 2020
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The COVID-19 virus while attacking and wreaking havoc on the world economy, has also not spared the financial sectors. So naturally the Indian banking sector has witnessed the same disruption. And this came about just when bankers were getting goosebumps due to the imminent mergers of the banks which had just begun. (The Indian government has merged 27 scheduled commercial banks into 10). Add to this, the Government of India has also declared banks as essential services, thereby, making them continue providing services to their customers --- a sort of business continuity plan. This simply implied that banks were to function though with bare minimum operations (cash–credit and debit, remittances, clearing cheque and few more teller based functions). They were later on asked to function with 50 percent staff. 

But the point here arises is that these bankers were functioning in a very risky environment day in and day out and that too with inadequate protective gear such as provided to the health workers. But the directive of 50 percent staff meant duties were allotted in rotation.

The growing digitization in the COVID-19 period is set to deeply alter the way men work and relate to one another. Nothing like this has ever happened. But as India is trying to reverse this crisis into opportunity then, as per some industry experts predict, these efforts will take India to a different level.

This is the right time to also push Prime Minister Narendra Modi's vision of Digital India in the banking sector. To fulfill this vision, it is imperative to get total cooperation and highly relevant inputs from all stakeholders. The Indian government has already started by providing technological initiatives such as Digital India, Smart City, Start Up and Stand Up India and many others. The intention is clear as the Indian government is setting an example for other stakeholders to become proactive. The government is also helping in the innovation, implementation of digital progress in both private and public sectors.

The bank’s role in this scheme of things is to understand the needs of customers, who are the pivot on which the banks do business. The banks should highlight whatever they offer digitally for instance - payment, credit lines and loans. To avoid the customer visiting the branch is protecting him from exposure to COVID-19, thus ensuring social distancing, the most talked about way to fighting coronavirus. Banks then have the twin responsibility of taking care of the health of both the customers and the bank staff. 

As social distancing has to be made a norm in the premises of the bank, it can be successfully handled if customers do their banking from the safety of their homes. As everything is online even a majority of bank staff can work from home, thus avoiding personal contact. As a passing reference, it is important to mention that the Government of India is preparing guidelines/policies for staff of government offices to work from home in the aftermath of COVID-19. Even the World Health Organisation (WHO) has advised people to use contactless payment and avoid handling of banknotes as much as possible. This has made customers avoid doing even transactions in cash at the branch. All the more reason to remain at home and work. 

One must reconcile to the fact that this virus is going to be with us for quite some time so banks should leapfrog their digital initiatives to cent percent online. This goal would not be achieved if the banks are unable to overcome the operational and technological gap.

Banks are generally very traditional in nature even though all the banks and financial institutions are going digital. Traditional nature change is again a challenge. The lockdown has come as a blessing in disguise as the changeover to digital systems can now pick pace as it becomes the need of the day. An executive from an independent public sector bank commented that they are meeting around 90 percent of their customers needs via online. That is more or less the same situation in most of the public sector banks (PSBs). The COVID-19 crisis will now motivate banks to speed up completion of the remaining task so as to ensure that the customers need not leave his home as all the products would be available for the customers online. 

But the banker also pointed out that these online transactions will work for only a certain class of customers, and they would be in a minority. The majority of the people are those consumers who are beneficiary of some or other social initiatives of the government and they will not have the access to technology that is required to make it a 100 percent successful usage of the bank’s digital success story. This definitely is a challenge and all stakeholders must get together to find ways and means to bring digital banking to the last man standing. For instance, the government should try to make internet/wifi free or provide the same at a very nominal charge. The economies of scale would take care of the government’s income and the people should be given a little bit of time to understand the technology so that they could become computer literate.

End of physical banking?

Even Reserve Bank of India (RBI) governor Shaktikanta Das has asked customers to use digital banking facilities as far as possible. In the context of COVID-19, RBI and the government together are giving emphasis on encouraging digital payments. And over a period of time, various measures have already been taken to establish a safe, secure, stable and affordable retail payment system such as the National Electronic Fund Transfer (NEFT) and the Immediate Payment Services. 

The RBI governor, while speaking to the media, announced various measures to tackle the impact of the pandemic on Indian businesses and the economy. Financial tools will be imperative in easing the burden during this time. Customers not only have to continue paying bills and conducting their regular banking; they may also be more mindful of taking advantage of lower mortgage rates, refinancing, and more — and they’ll have to do it all via mobile or laptop/desktop. Many startups have got solutions for end to end loan digitization packs. They claim that this software takes total care of KYC, stamping, signatures and linking. Customers no longer have to pay a potentially stress-inducing visit to a physical branch to complete any number of transactions, from opening an account to applying for a loan.

With customers being isolated, banks need to shift further to emphasize their digital options and utilize social media and omni-channel outlets to proactively engage with clients. This is the right time to hit the iron when it is hot.  According to a Ministry of Electronics and IT report, the private sector lenders ICICI Bank and HDFC Bank were ranked first and second respectively with scores of 79 out of 100 for providing enabling digitization of the country's payment ecosystem. Fino Bank stood third with a score of 76. Oriental Bank and Axis Bank took fourth and fifth rank, closely followed by country’s largest lender State Bank of India bagging the sixth rank with a score of 72 on 100. This overall rating is based on multiple factors such as percentage of digital transactions achieved, Unified Payment Interface (UPI) and Aadhar Enabled Payment Systems activation (AePS) and the digitization of the respective merchant networks of these banks. 

A total of 14 banks who scored above 66 were deemed ‘good’ whereas 27 banks with scores between 47-64 were deemed ‘average’ and nine banks with scores below 44 were called out for being ‘unsatisfactory.' These scores assume significance more than ever, as the government and regulators have been pushing digital payments as a ‘safer’ payment option over cash for consumers to transact as the country attempts to reduce all forms of physical contact in its bid to reduce the infection rate.

IT Security for banks

RBI data reports that there were 59,826 frauds where losses were Rs. 67,432/20cr. (2018-2019). If we are talking about complete digitization then IT security for these banks automatically follows. To make digitization become truly effective, banks should have a very foolproof cybersecurity in place. Probably two or more levels of security would reassure customers while doing their online banking. Normally banks have what is called three-level security. This aspect of security will have further importance as the cloud concept for storing data comes into the picture. However, banks are hesitant to adopt the cloud concept in toto for their front office activities. This traditional type of security may not suffice and the banks need to go beyond. Security becomes critical as the back office system of corporate integrates with the front office of the bank. An alternate way would be the usage of Artificial Intelligence. The comprehensive type of security reassures the customer to use online banking without any apprehensions. To remove the doubts of their customers, the banks should hold interactions from time to time and clear doubts. FAQs on the bank’s site is also a help. There are also guides appointed by banks to clear doubts of their clientele.

AI or Artificial Intelligence has the ability to study complex relationships between normal and suspicious patterns of behavior of a customer transaction. AI can also use machine learning, Predictive Analytics and statistics to identify any wrongdoing in the transaction and thereby predict fraud even before it has occurred. The AI and Analytics can be deployed for autonomous decision making and then the best part - it can even give tailored and intelligent responses to customers. 

Banks have grown up in a security style which is handling frauds /irregularities once the incident has taken place. With AI the banks will have a defensive frame of security as they can detect very early a possible fraud or irregularity and take steps to preempt these frauds. However, bankers have still not been able to get over their apprehensions of using AI. This may be due to perception and experience which has seen irregularities in traditional cybersecurity structure. The same was the case in the earlier introduction of cloud computing. It was at that time felt that data residing in their premises with all traditional security features - firewall, etc. are safe and not in the cloud.

However AI has come here to stay as is COVID-19 and as we enter the next era of digital banking we have no way to avoid showing more than ordinary interest in understanding and implementation of AI.

So far cybersecurity strategies focused on reacting promptly to problems only after they occur. Banks now need to make their strategies to cybersecurity more defensive than reactive; after all, prevention is better than cure. Defences can be improved by implementing intelligence-driven measures like using artificial intelligence (AI), which is already applied in reinforcing authentication methods. The use of fingerprints to verify payments from digital wallets is a key example of this approach. India is moving towards a new era of rising fintech. More and more people are getting comfortable by using online payment through Paytm, Phonepe and other such apps. They provide the fluidity that traditional banks cannot. In such a scenario where are the banks heading post cent per digitization. Neo Banks are lately the buzzword in the fintech community. These Neo Banks are the ultimate in digital banking functioning without any branches. They are entirely online  and hence they would be the next major step towards the goal of Digital India for bankers. They can easily sustain themselves as overheads of branch building, maintenance, etc. is avoided.

The closure of physical bank locations has negative ramifications on the industry as a whole. But then it is also an opportunity for banks to show their various systems live on digital banking. With this type of digitization and converting/coming of Neo Banks as the next concrete step, it is just possible that as the story goes we are in for a bank like hereunder:

A  bank would have a machine, a dog and a man
The dog to look after the machine,  and
The man to look after the dog.

The tag line would then be “No concrete and big premises; only portals for banking from the safe confines of your home.”

(The writer is a retired chief manager (IT),  Bank of Maharashtra and ex-IT Consultant, National Board of Accreditation. The views expressed are personal. He can be contacted ashimkg@hotmail.com)

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