Financial technology has been the cornerstone of delivering financial services for over a decade. What started as an attempt to link multiple branches through a single core banking system quickly evolved involved into a string of applications designed to improve customer service, centralize and streamline operations, manage risk efficiently, improve compliance and create new digital sales channels. For the longest time, these applications were anchored on automating existing banking processes and supporting the existing business model. The last few years have seen financial technology develop inspite of the existing banking model thereby challenging the business model itself. Payment systems, credit analytics and scoring tools, third-party product distribution platforms and customer self-service applications have created new and disruptive models that can operate independent of the existing banking technology infrastructure. This creates a unique situation where financial technology is disintermediating and disaggregating parts of the banking value chain.
Data and predictive analytics:
Over the years, banks have invested into building the technology infrastructure at different points in time. These disparate applications acquired to serve different purposes contain valuable data elements. The inability to aggregate this dataand convert it into actionable intelligence is making the business model vulnerable to newer financial technologies. Banks also continue to be held back due data quality issues in existing applications. Newer financial technology is predicated on the ability to provide actionable intelligence through analytics. Since most banking technology investments were traditionally directed at improve processing and operations, bankscontinue to come up short in the analytical, predictive and cognitive space. For banks to make the most of the Fintech wave without getting impacted by it, it is critical that the pace of data aggregation and cleansing is increased. It is also important to increase investments in analytics, early warning and predictive technologies to enhance speed to market and address potential macro and portfolio risks. The largest strength that banks have is existing customer data especially relating to behavioural patterns and transaction history. The ability or inability to use this data to offer on-demand fee based services andenhanced customer experience will determine whether banks are able to keep new players fuelled byfinancial technology at bay.
Product offering and dynamic pricing:
Banks have relied on traditional deposit and loan products to fuel their balance sheet growth. Until now, this growth has come at relatively stable net interest margins. However, fundamental changes in customer behaviour are fuelling a need fortransaction based services, short-term on-demand lending, electronic payments and a single-window sourcing of multiple third party financial products. The traditional banking model was geared towards a customer who engaged with a bank to park savings and planned ahead for potential loan needs. The model also envisaged that pricing would be relatively standard depending on a particular product or segment. Banks could take time to decide on approving loans and differential pricing based on a customer's risk profile. The financial technology wave has enabled on-demand small ticket borrowing and differential pricing based on a customer's risk profile. It has also allowed liquidity to become more mobile, transferable and accessible. Banks are no longer the only avenue for deploying surplus liquidity as financial technology has opened up quicker access to capital markets and a wider range of non-deposit oriented financial products. For banks to stay relevant to the new generation retail customer, the technology architecture has to focus on an on-demand, self-service, multi-product aggregation and single portal access model. This needs to be backed by risk management systems that take on-demand front line decisions. In reality, this would require a re-construction of the customer facing technology platforms. If banks are slow to adapt to this new realm, it will erode their traditional access to low cost liquidity andcut-off transaction based revenues.
Compliance, operations and turn-around time:
Banks continue to be heavily regulated entities and this reality is unlikely to change quickly. The need for compliance and documentation especially due to know-your customer and anti-money laundering regulations increases turn-around time and impacts customer experience. Financial technology gives banks the ability to mutualize their cost and effortsthrough industry utilities. This can potentially reduce documentation effort and significantly enhance customer experience. While cost mutualisation through creation of industry utilities has been a constant industry effort, banks still have some way to go to use the technology architecture to make the customer experience seamless by tapping to the mutualized infrastructure.
Leading financial inclusion and digitization of currency:
While payments banks, wallet companies and prepaid instrument issuers exposed a clear gap in the banking service offering, payment models are yet to fully evolve and operationalize. The banking technology architecture has a long way to go in tapping opportunities to digitize currency further in the areas of small remittances, low value transit payments and small retail. Inability of existing banking technology to quickly enrol and retain customers means that digital currency continues to build up outside the traditional banks. This digital currency is the key to future transaction income which will become increasingly important to sustain return on equity in light of strict regulatory capital measures.
Banks can choose to attempt to survive the Fintech wave by focusing on products that cannot be offered purely through financial technology. However, it is important to realize that even where financial technology cannot enable traditional product offerings, change in customer behaviour may render traditional products redundant. Adopting Fintech quickly is key to long-term growth for banks.
This requires a revamp of the existing technology architecture through a three-pronged approach -
- build a parallel technology infrastructure focused on new product offerings
- mutualize cost and technology infrastructure through industry utilities where technology purely serves a processing requirement
- Scale technology to aggregate and analyse existing data to improve risk management and customer servicing
by Muzammil Patel Partner and Ram Iyer Director Deloitte Touche Tohmatsu India LLP