At Union Bank of India’s metaverse banking offering, you have three choices to select your avatar. Uni-verse, as the state-owned bank calls its hi-tech offering, logs you in directly outside the bank’s branch. Do keep in mind that you need to enter the branch via the proper gate. So if you’re doing this for the first time, navigating to the entry point alone will take you a few minutes. Once inside, you come across a massive virtual lobby with LED screens on both sides. There is an avatar of a branch manager sitting at the far corner. On the right, there are counters with screens for banking services and customer service. On the left, there are wealth management and digital lending counters. In case you are interested in understanding the journey of the bank, there is a screen to take you through its history since inception. While Union Bank’s initiative cannot be strictly called the metaverse, it is a scenario closer to reality, which enables customers to experiment and then choose a banking product. This is the first step banks are taking to create a virtual branch.
Without a doubt, technological advancements are driving customer behaviour, and banks—since it is an issue of survival for them—have no option but to quickly react to the changes. Shalini Warrier, Executive Director of Federal Bank, says there are three trends that will determine banking in the future. “Customers expect personalised banking services. The expectation of personalisation of banking services from banks will be at a much higher level,” she says. Today, Netflix or Spotify come very close in terms of personalisation. “The second is the role of artificial intelligence,” she says. Take, for instance, ChatGPT, which is making waves in search by providing customers with what they want in a more structured manner than traditional search engines like Google. “Finally, customers will also expect banks to be conscious of their role in environmental, social and governance issues. And banks that do a good job of that will command a premium with customers,” sums up Warrier.
Clearly, banks’ future initiatives will be largely driven by customer expectations. The threat from disruptors will also drive them to innovate and experiment with futuristic solutions. For instance, in the past decade, the entry of fintechs forced banks to change or partner with the disruptors to offer a better banking experience. Similarly, path-breaking innovations like Unified Payments Interface (UPI)—a first in the world—have brought a revolution of sorts in every nook and corner of the country with easy QR codes for instant payments. The UPI numbers show the massive adoption by people and small merchants. And non-bank entities like Google Pay and PhonePe have left behind traditional banks in terms of UPI market share.
Then there are millennial customers who already use tech like smart speakers and voice assistants extensively, give voice commands to get work (including financial transactions) done and also interact with banks over video for KYC and other purposes.
Globally, regulators, too, are staying ahead of the curve. In January, the central bank of Thailand issued licensing guidelines for the creation a new class of banks called ‘virtual banks’. Back home, the Reserve Bank of India (RBI) created a Regulatory Sandbox framework four years ago to allow testing of new banking products in a controlled environment for innovators. “The Reserve Bank Innovation Hub (RBIH) was set up to collaborate with financial sector institutions, the technology industry and academic institutions for the exchange of ideas and development of prototypes related to financial innovations,” explained RBI Governor Shaktikanta Das recently. Clearly, when regulators join in, innovations accelerate and the experience for customers is vastly enhanced. Are you ready for banking in 2047? Read on to know what’s in store.
Global consulting firm Gartner expects that by 2026, 25 per cent of people will spend at least one hour every day in the metaverse for work, shopping, education, socialising or entertainment. “The metaverse will impact every business that consumers interact with every day,” says Gartner in its report. Banking, then, will be impacted, as it is interaction-based, especially branch banking. “Banks are testing the waters in terms of the metaverse, but eventually the adoption of the metaverse will become an imperative for them to participate actively in the virtual world,” says Harish Prasad, Head of Banking-India, at FIS, a global firm in the financial services technology space. He adds that it is a question of being present and available in the metaverse. “The second and bigger element is the opportunity that the metaverse presents. The market for the metaverse is truly global. It will require the coming together of all banks and the network,” says Prasad.
Today, the metaverse is largely driven by exchange mechanisms such as using cryptocurrency to make payments. “We need to create an ecosystem of value for exchange. I don’t think any single institution can go and make that change,” says Prasad. He explains that the metaverse is by design highly decentralised, and payments are also decentralised using cryptocurrency. “So how do banks go in and establish a compliant and parallel mechanism to enable payments?” he asks. There is no easy answer. As Prasad says, there is no one institution that can make a difference in the metaverse; it would need the coming together of regulators, networks, banks and financial institutions. The RBI’s move to launch a central bank digital currency (CBDC) is very timely for the adoption of the metaverse by banks in the next decade, say experts. “Unless you have the mechanisms to participate in these kinds of economies, you will be left behind,” reasons a banking player. In fact, it becomes next to impossible for any bank or financial institution to partner without a digital currency. “It is expected that these digital currencies will form a good way of replacing what cryptocurrencies offer, at least in terms of exchange value,” says a fintech player.
“The metaverse combines Web 3.0 (decentralised, trust, etc.), immersive experiences (AR/VR, 2D, 3D) and digital assets management (crypto, NFT, blockchain),” says Sunil Rongala, Senior Vice President-Strategy, Innovation & Analytics at Worldline India, which offers payment services to banks and other players in the ecosystem. He says that CBDC is likely to play a big role in the metaverse. “Once all of these interoperable mechanisms are in place around the world, there may even be a global set of currencies that can be used to transact on the Web 3.0 economy and in the metaverse,” chips in Prasad of FIS. Clearly, the banks have a long way to go before they can provide a fully metaverse experience.
Core Banking: Refresh and Reload
The task for the banks is cut out. Not just metaverse banking, they need to put their technology infrastructure in order before they can offer a seamless experience. “They are already struggling with app-based banking,” says a consultant with one of the Big Four consultancy firms. The modernisation of core banking solutions, or CBS, is key. CBS is a backend system that links all branches of a bank and updates daily transactions. CBS facilitates transactions from any branch, as well as online banking, app-based banking, ATMs and kiosks. “You need to fix the backend before offering any immersive experience, data analytics with AI, personalisation, digital selling and other services,” says a banker.
The banks are already at various stages of updating their legacy systems. Some of the larger private sector lenders such as ICICI Bank and HDFC Bank, as well as public sector behemoth State Bank of India, have stolen a march over their peers. These banks have put in place a layer above the CBS where all experimentation and innovations take place. “The need to touch core banking will become more and more infrequent. CBS will only be a repository of data and information. This will provide banks with enormous flexibility and agility, as well as the ability to innovate in order to deliver services in shorter time frames, which is what customers expect,” says Warrier of Federal Bank.
Today, the building blocks of a fully digital bank are getting ready. Take, for instance, opening an account, which is fully digital via video KYC. Banks are increasingly putting many applications on the cloud for faster turnaround times. They are also launching digital products. For instance, HDFC Bank has created ZipDrive, a digital auto loan product that provides quick auto loan on-boarding for existing bank clients. The bank has signed up 1,000 dealers to provide end-to-end auto loans in less than half an hour. The product’s attractiveness is that it is fully paperless and digital. Similarly, ICICI Bank has unveiled its digital mortgage product called iLens. The digital journey for a mortgage product is something which no bank is able to solve because of physical land records and the high loan amount. This new solution is for all customers, including those who have never had a bank account with the private bank. The banks have, thus, already begun their digital journey to remain competitive and win over millennials.
The next big thing in 2047 could be open banking. There is now a new layer of open banking—the RBI made the first move by launching the Account Aggregator (AA) framework in 2021. AA puts power in the hands of customers to give consent to their banks to share personal as well as financial data with other institutions. This will help third-party lenders make better offers and provide attractive savings and investment products. “This is the biggest innovation that is taking shape,” says a public sector banker.
Globally, the AA framework has a few precedents. Some five years ago, the UK and Europe started with the Payment Services Directive, or PSD, which allowed the sharing of data by traditional financial institutions. The RBI’s AA framework also puts the power in the hands of the customer to leverage it to their advantage by getting a good deal. There are other information providers, like insurance companies and credit bureaus, joining the AA framework. GSTN has recently joined as a financial information provider under the AA framework.
The use cases of AA will be in the MSME segment, where the free flow of information, like scanned and encrypted copies of bank statements and KYC, etc., about a customer will strengthen cash-flow based lending. “Supply chain financing is in its infancy in India because it needs quality data, a better evaluation method for SMEs in the manufacturing and services sectors, and a digital framework to get quality data. The AA framework, along with discounting platforms, UPI and ONDC [Open Network for Digital Commerce], will connect the dots for a better model. These frameworks present an opportunity that is unimaginable,” says Niraj Hutheesing, Founder and MD of Cygnet Infotech, an IT solutions company.
And in this system, there are less chances of fraud because the data is encrypted and comes from a regulated source. “The encrypted data flows from the person who owns the data to the person who wants it, based on the customer’s permission,” says Hutheesing. More and more banks are being integrated into this new open banking ecosystem.
Over the years, banking has shifted from co-operative banks to public sector banks to private banks because of better service and more power in the hands of customers through ATMs, internet banking and mobile banking, say experts. Now, most of the banks are well on their way to becoming information repositories under the AA framework. “The real big change will come when banks begin to actively use this data and leverage it to offer better products and services,” says Prasad of FIS.
Credit within Reach
As for payments, P2P (person-to-person) and P2M (person-to-merchant) are growing like never before thanks to UPI, which has significantly disrupted the space. UPI is linked to the customer’s savings or current account. The next big expansion of UPI is going to happen in the credit space, especially in semi-urban and rural areas. Last year, the RBI allowed the linking of the government-backed RuPay card with UPI, which opens up a host of opportunities, as this frees up the card from being used only at POS terminals—the massive UPI-based QR code network will now be available for RuPay credit card customers. This is important because the current infrastructure of POS machines is limited because of the high cost of installation and transaction costs. Though the government-backed card is not the most widely used method of payment, the UPI-RuPay credit card link has opened new credit expansion opportunities for banks. It is only a matter of time before global card networks like Visa and Mastercard join the bandwagon. India’s credit to GDP ratio is still very low at 52 per cent; it is 216 per cent for the US and 182 per cent for China. Thus, there is ample headroom for growth.
RBI Deputy Governor M. Rajeshwar Rao recently said that increasing adoption of digital modes, GSTN, online shopping, P2P payments, QR code deployment, and everything else together will generate reams of customer data. “This data could be potentially used to chart customer needs, behaviour,and repayment capacity, and help in digital inclusion,” he said. Rao also highlighted that one specific area where digital lending has the potential to be a catalyst for economic growth is cash-flow based lending to MSMEs. MSMEs account for nearly 45 per cent of total exports and employ over 11.1 million people. “The provision of appropriate credit for MSMEs through seamless and digital cash-flow based lending will provide them with the much-needed impetus. It would enable lenders to leverage real time cash-flow data to reimagine the end-to-end lending process and the ‘sachetisation’ of products,” he said.
In addition, there is also a remittance market that is up for disruption. India receives more than $80 billion in annual remittances and sends another $20 billion overseas. The National Payments Corporation of India, the retail network provider that created UPI, is in talks with global regulators, network providers, banks and institutions to offer a cost-effective remittance platform. At the same time, blockchain technology is also finding its use in banking services where multiple parties are involved. This is in the area of imports and exports and trade finance. There are already over a dozen banks that have joined hands by forming a new company that will use blockchain technology for faster processing of inland letters of credit (LCs).
A decade ago, everybody was talking about how fintech would disrupt traditional banks. Today, the two are co-existing and partnering to offer the best solutions. But the last word is yet to be written. And, as a banker says with a chuckle, “Picture toh abhi baaki hai (The movie isn’t over yet).”
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