Rewind: Banking on change

 In the new era of regulation dominated by technology, expect the unexpected… for the good!

By S Ganesh Kumar

India is one of the few countries which has been witnessing clouds of growth in an otherwise gloomy economic world of the day. The financial sector in general and the banking sector in particular have been playing the role of a catalyst in facilitating all sections of the economy and the common citizen in the metamorphosis of our country.

India is also the world’s largest country where innovation in the financial sector has benefitted its millions of citizens. And at the heart of this metamorphosis is the role played by the regulator and ably supported by the fintech sector. To understand this better, let’s backtrack by a couple of decades.

Mobile handset manufacturer Nokia, which once ruled the world, slipped into oblivion due to the absence of agility and failure to come out with better and smarter features

The day was March 12, 1993. A series of bomb blasts ripped the financial capital of the country. Then, 15 years later, in 2008, the city was again under siege on 26/11. Much has been said and written about these blasts, but suffice to state that the financial city did not sleep on both these dates. Cheque clearing — operated by the Reserve Bank of India (RBI) — was concluded on both these days. While this was the main mode of funds settlements in 1993, the year 2008 had more technology-based payment systems, including the Real Time Gross Settlement System (RTGS) and National Electronic Funds Transfer (NEFT), which continued to operate with no disruption, thanks to a large level of technology implanted into these systems.

Fast forward to today where there is a bouquet of retail payment systems for the common man. And today despite a largely used retail payment mode not being available, the payment systems of the country are continuing to serve the requirements of the masses very well.

The death of floppy drives, CDs moving into oblivion, Sony Walkman making way for headsets connected via WiFi and Bluetooth point to short life cycles of IT systems

Emerging Fintechs  

The common thread — apart from the ‘never die’ spirit of the country and its citizens —  is the role played by fintechs and supported by the facilitation-oriented regulator. For more than three decades, the RBI has been providing an invisible but definitive supportive role for large-scale technology-based financial sector innovations.

It all started with computerisation in banks. Can one imagine branches of banks still using bulky ledger books and manual account maintenance? Computers changed the game. Then came networking-based computer operations. From a customer being attached to a branch in the days of yore, today a customer can conclude his banking transaction from anywhere and at any time, so much so that one can predict that very soon, a customer will be a customer of the banking system as a whole.

In their journey of transformation, the role of fintechs has slowly but steadily gained ground. Today, many fintechs collaborate with banks and other financial institutions and this healthy union has resulted in millions of happy smiles. The uninterrupted availability of banking services during the pandemic is but proof of the silent role played by fintechs and banks who functioned to smooth harmonious tones.

When many people moved away temporarily from major cities during the pandemic, they also took portions of digital and fintech-supported banking and financial services with them to the hinterland, and proliferated their usage from almost all parts of the country. The large-scale adoption of the QR Code-based small value payments a few years earlier made this easier with a large fintech player becoming a major player in this space.

Initial electronic payment systems of just a decade ago— Electronic Clearing Service introduced in 1994 to RTGS in 2004— have now been replaced by later versions of more efficient ones including the ubiquitous Unified Payments Interface (UPI)  for retail payments and NG-RTGS (Next Gen RTGS) respectively

Catching up with Technology

In the wonderland of information technology (IT), obsolescence is rather quick and lifecycles of IT systems tend to be rather short. We have all witnessed the death of floppy drives and Compact Discs (CDs) have more or less moved into oblivion. The Sony Walkman — an icon in the sphere of music in motion — has now made way for headsets connected via Wi-Fi and Bluetooth technologies for accessing music on the cloud to be enjoyed anywhere and everywhere.

In the banking world, cheques have ceased to command any significance in the payment systems space and the mechanised processing of cheques has become history. The initial electronic payment systems of just a decade ago have now been replaced by later versions of more efficient ones including the ubiquitous Unified Payments Interface (UPI) and citizens are embracing these with relative ease.

At the base of all these innovations are two keywords — safety and security. These are two pillars that need to be maintained with great vigil so that the trust of millions in both banks and fintechs does not get eroded. It is gratifying to note that every disruption has brought enhancements in the security postures of systems that continue to exist. The mobile banking systems of today are better equipped with the latest security technologies and enhanced authentication features are being incorporated. The migration to newer and alternative means consequent upon the recent developments has also heralded both innovation and growth.

Regulatory Reach 

At the epicentre is the role played by the various regulatory institutions of the country — the Reserve Bank of India (RBI), the Securities and Exchange Board of India (SEBI), the Insurance Regulatory and Development Authority of India (IRDAI) and the Pension Fund Regulatory and Development Authority of India (PFRDA) — which have all been fostering innovation and facilitating the orderly development of fintech based systems under their respective jurisdictions. While each sectoral regulator takes care of the institutions under its ambit, the role played by the RBI stands out prominently not only because it is the oldest financial sector regulator but also because its regulatory reach covers almost all the financial activities taking place in the country.

The banking sector is like the heart of a human body and the economy keeps ticking thanks to the various roles played by banks for many centuries. And, at the heart of banks is the set of main functions of banks — which is acceptance of deposits for the purpose of lending. In India, banks discharge these functions effectively and under the regulation and supervision of the RBI. It may be of interest to note that the common citizen does not think twice before keeping his money — rather savings to be more precise — in a bank. This is because of the trust reposed by them in banks, trust gained by years of witnessing the growth of banks; trust so assiduously built by the RBI in ensuring that no depositor loses his money deposited in a bank; trust brought about by the role played by banks in everybody’s day to day life in the form of extension of loans whenever required, safe funds transfers, effective custodial services, extension of foreign exchange whenever and wherever required, and even secure locker facilities.

Restrictions on Paytm Payments Bank, a subsidiary of Paytm, which showed increased risk perceptions will not have a major disruptive impact, as better, more convenient replacements will soon permeate the country

Reassurance for Customer

What can customers expect from these developments? At the base of the change is the reassurance for the customer on the levels of safety and security in banks. This is largely regulator-driven and monitored by the RBI aimed at enhancing customers’ confidence levels in the functioning of banks in India.

Another perceptible change pertains to the availability of more products and services with most of them tailored to meet the specific requirements of the customer.

The customer can also look forward to more personalised services made available based on AI and ML at almost negligible charges. The customer can be more discerning and demanding as well. Predicting customer preferences will take a big leap and proactive availability of tailor-made products and services will realise the customer’s dream of targeted and enhanced customer service.

In all these the common thread will be the invisible role of the RBI—firm, resolute, focused, data-driven, professional and forward-looking regulatory and supervisory approaches towards banks. Thus, the recent restrictions on certain systems with increased risk perceptions will not have a major disruptive impact, and better, more convenient and comfortable replacements will soon permeate the nook and cranny of the country. The end result is expected to be the normalisation of stable, agile, efficient and convenient newer systems acceptable for easy usage by most of the citizens of the country, all under the watchful eyes of the regulator.

Welcome to the new era of regulation characterised by expecting the unexpected!

Regulated entities : Sailing smoothly in the new ocean of technology-enabled and data-based regulation : 10 Mantras

• The first mantra is ‘compliance’. Comply fully; comply quickly; and comply always’ is the best approach to be adopted, which will result in comfort for the RBI coupled with confidence on the part of the regulator.
• The second mantra is ‘transparency’. Embracing transparency with the regulator, being transparent with constituents and concluding deals with a high level of openness are some of the key aspects that will achieve good results.
• The third mantra is ‘collaboration’. From the days of being unique self-centric organisations, banks now need to collaborate with many other entities. They need to collaborate with service providers, contractors, facilitators, correspondents, fintech service providers, governments, and even competitors so that there is organic and mutual growth of all the entities in the chain.
• The fourth mantra is ‘innovation’. In this age of tech-enabled service delivery where expectations by customers not only keep changing fast but also become more complex and intertwined, it is essential that banks innovate in providing newer products and services, especially to the Gen-Z which gets bored very quickly.
• The fifth mantra is ‘agility’. It has been proven that only agile business entities can survive in this complex world of today. The moving away to oblivion of a large mobile handset manufacturer which once ruled the world was on account of the absence of agility in a fast-changing world of mobile phones with better and smarter features.
• The sixth mantra is ‘customer centricity’. While every organisation focuses well on its customer, banks need to ascribe higher levels of attention to the customer. A bank with an effective grievance redress system coupled with quick redress time levels garners the confidence of the regulator.
• The seventh mantra is ‘data’. Data exists everywhere and in many forms. Successful banks will be those which can differentiate between data and information. More importantly, this can also be a source of comfort for the RBI when timely and accurate data-based reporting is resorted to by banks.
• The eighth mantra is ‘governance’. In today’s business world, professionally managed banks alone will not stand out; banks which are governed well are those that are appreciated by the regulator apart from bringing in high and professional standards of work, in designing policies and processes, and ultimately in reassuring customers in terms of better confidence levels.
• The ninth mantra is ‘efficiency’. Cost reduction has a direct relevance to profit maximisation in a highly competitive world. This can be achieved by means of efficiency in operations which can be accomplished by a judicious mix of technology and systems aimed at customer convenience, coupled with process optimisation and reducing friction in the operations undertaken by customers.
• The last mantra is ‘reinvention’. A high level of reinvention along with value-added services will improve the bottom line of banks, differentiate each bank from one another and attract customers.

(The author is former Executive Director of the Reserve Bank of India)