Technology is changing everything, from the way we communicate to the way we innovate. The third industrial revolution propelled us into an era of technological evolution unlike anything seen before. The digitization revolution changed the way we functioned. It was the point where divergence between natural time and human time became more pronounced. It enabled us to transcend nature’s barriers; we could now communicate with someone on the opposite end of the world in a few seconds rather than waiting for weeks to receive their letters. As a result, the pace at which the human world operates has completely changed.
This technological revolution has had significant implications for the Indian banking sector. India has always been at the forefront of innovations in services that help banking reach the masses. There have been all sorts of innovations in the banking space, from post office savings to pigmy schemes. The advent of the digital age, albeit a little late, has marked a period of progress and innovation in the Indian banking sector.
In the late 1990s, only a few private sector banks had adopted the use of IT to provide non-branch banking services. As with any change, the new system of internet banking was viewed with a certain element of suspicion. However, with rapid increase in adoption of technology in all spheres and the growth of the Indian IT industry, the RBI and the banking sector realized the need of adopting technology in banking. India now has sophisticated technologies being deployed to provide banking to the 1.3 billion citizens.
In the past few decades, there have been some wide-ranging changes that have altered the very design of the banking system. There are debates surrounding the future of banks and whether these technological changes are making the banking business model obsolete. In this article, we look at some of the technological changes that have helped India’s labour-intensive banking sector transition to a digital economy.
What Is FinTech?
The term “FinTech” is an abbreviation for financial technology. It refers to the adoption of new technologies (predominantly by start ups) that are changing the access and delivery of services as well as the very nature of the services. It is a hypernym that encompasses technological innovation which have influence in the realm of financial services. Given its broad scope, agencies and regulators across the world are yet to arrive at a common definition. However, it is important to note that the essence of what they refer to is universally the same.
One definition of interest is that given by the Financial Stability Board (FSB), of the Bank for International Settlements (BIS). “FinTech is technologically enabled financial innovation that could result in new business models, applications, processes, or products with an associated material effect on financial markets and institutions and the provision of financial services”. This is an extremely broad definition that covers a wide range of technologies, services and situations.
Start-ups that provide such technological solutions challenge traditional business models adopted by traditional institutions such as banks and other financial intermediaries. They are able to do this for multiple reasons such as lower transaction costs, speed, convenience, etc. The most significant impact is the disintermediation of services, or the simplification of transactions. In many cases, these technologies are adopted by traditional institutions trying to adapt to a new environment. These technologies range from simple technologies such as crowd funding and mobile wallets, to complex services such as smart contracts, digital currencies and Robo advisors.
While looking at the scope of FinTech in India, the landscape can be divided into three broad categories: payments, financial products and services, and other general-purpose technologies.
Taking Innovation Forward…
Three key innovations have enabled a gamut of subsequent developments that we see around us today: Core Banking Solutions, Immediate Payment Service, and Aadhaar.
Core Banking Solutions
Before we begin with these technologies, it is important to understand the nodal systemic and architectural change that has enabled all these subsequent technological adoptions possible – Core Banking Solutions (CBS). The most profound change in the banking system was the introduction of core banking. CORE banking is the process where all information pertaining to transactions and accounts, and the business of the bank are hosted in a single centralized data base. From having branch level functioning of accounts, the system was integrated into a centralized account. It is the provisioning of banking services by the coming together of networked bank branches enabling customers access to their bank account at any member branch office. Earlier, one had to go to the specific branch in which the account was opened and maintained. The advent of core banking allowed an individual to operate his/her bank account in any branch of the bank in any part of the country/world. Core banking unleased numerous benefits. It automated large parts of the front-end and back-end processes of banks to achieve centralized and smooth processing. The biggest was the creation of space utility whereby a customer wasn’t bound to one particular branch, but could access his account from any branch. The convenience this provides and the ease of such a facility in helping transactions is phenomenal. Apart from there, there are benefits that are common to all technologies such as reduction in errors, increased efficiency, etc. It also standardized procedures and systems across branches of the bank.
Core banking was recommended in the 1984 Rangarajan Committee report on bank computerisation. Banks were slow and cautious while adopting core banking. In the 1990s, the new generation private sector banks were mandated to commence their operations in fully computerised environment. Core banking formed the basis for all subsequent technological innovations in banking such as ATM, Internet banking, mobile banking, fund transfers (NEFT, RTGS)
Immediate Payment Service (IMPS)
The IMPS or the Immediate Payment Service was developed and launched in 2010 by National Payments Corporation of India. It facilitates that immediate transfer of from one account to another. Before the launch of IMPS, fund transfers were subject to bank operation hours, settlement hours, national holidays, etc. This has enabled transactions to take place at ease. UPI is one of the products that is based on this infrastructure.
Aadhar is the national identity project to bring all citizens under a single identification system. This was envisioned as the foundation of numerous services by the government. As a part of the project, detailed information about individuals were collected, such as biometric details, residential details, banking data, etc. The aim was to interconnect all services availed by the individual through a common factor: Aadhar. In the banking and financial services space, Aadhaar is being used in multiple ways to promote financial inclusion and reduce the frictions in transacting.
*This is the first part of a multi-part series demystifying the recent developments and trends in the Banking and Financial services sector while focusing on technology and FinTech.*
– Contributed by Bhargav
Picture Credits: cnbc.com