The retail exit of Citibank across multiple jurisdictions including profitable territories like India, is a sign of disruptions to come. Although the US regulatory ultimatum to overhaul operational risk deficiencies necessitating huge capital investments in systems and processes is the apparent trigger, the furious change in technological landscape impacting banking business has also contributed to the challenge.
Closer home, the regulator barred new credit card issuances by HDFC Bank after repeated tech systems outages that’s since been revoked and also placed temporary restrictions on MasterCard and Amex for violation of data localisation norms. With increasing regulatory demands like automated audit reports certifying compliance and system generated provision reporting, banks can’t afford to shy away from investing in technology.
Development in payment technology and banking as a service (BaaS) model has also increased the clout of non-bank fintech firms. Fintech platforms can leverage data to ramp up business by computing a borrower’s creditworthiness and substituting traditional measures banks use like credit history, revenue/tax statements and collateral security. With fintechs today using their platforms to encroach upon banks’ regular business like payment transfers and retail loans, consumer banks need to shift focus from credit cards and other traditional products to card-less buy now-pay later (BNPL) and newer point of sale solutions.
But fintech enterprises may not be able to undertake everything a bank does due to dearth of balance sheet liabilities. Conversely while banks can exploit deposits, they may not always know whom to lend or play it safe in absence of data on good lending opportunities. Yet, hi-tech fintechs could utilise client data to dispense with collateral backed banking practices and analytically judge if borrowers shall repay loans much better than the retail and commercial banks, precipitating massive disruption in the banking space.
While private banks fare somewhat better, most government banks are technology laggards with shortage of skilled tech resources a major handicap.
So, how can domestic banks adapt?
(i) Domestic banks need to rework the architecture of legacy systems and design web services on top, that can talk to newer cloud technologies through APIs. Cloud CRM and data analytics need not just be used for cost-cutting but should also be seen as mechanisms to improve sales growth, internal reporting, risk management and customer wallet share.
(ii) Closely collaborate with agile Fintechs and BaaS providers for KYC, documentation application program interfaces, BNPL instalment finance and leverage current/proposed payment networks, to develop a hybrid financing model. Credit penetration can be enhanced by complementing geographic footprint of banks with Fintech’s cheaper disruptive innovation capabilities.
(iii) Core banking systems can leverage evolving blockchain distributed ledger technology (DLT) to increase transaction processing speeds bypassing intermediaries and quicken reconciliations. DLT will also facilitate faster, cheaper and secure financial trade settlements whenever banks are permitted to hold digital currency for clients.
(iv) Investing in skilled technical manpower is important especially for government banks. A dedicated pool of tech professionals, even if housed under a central organisation, could work with managements for upgrading archaic networks and will help smoothen integration whenever some government banks are privatised.
(v) Bank managements should proactively embrace newer digital concepts and regard technology costs not as an expendable expense but as a critical investment to navigate high technology challenges hovering over the horizon.
The writer is a Certified Treasury Manager and veteran Corporate Banker