During demonetisation, microfinance institutions (MFIs) and small finance banks were forced to disburse loans by depositing the amount directly in bank accounts of borrowers, instead of the then usual practice of handing out cash on the site. The result: Within a few months, disbursals switched completely to bank accounts.
After three-and-a-half years, the financial services sector is staring at a similar transformation on the loan collection (EMI) front. "EMI collection numbers through digital channels have surprised us during the lockdown months," says Baskar Babu Ramachandran, Managing Director and Chief Executive Officer, Suryoday Small Finance Bank. So, while not every borrower is tech-savvy, friends and relatives are often stepping in to fill the digital gap through Google Pay, Paytm and other channels.
And this is just the beginning of the journey towards 100 per cent EMI collection through bank accounts for banks, non-banking financial companies (NBFCs) and fintechs serving the micro-borrower community.
Even big, high-street banks are witnessing a change in customer behaviour. "Lot of customers are now willing to go through journeys in an unassisted manner. There is now a pull factor from customers," says Anjani Rathor, Chief Digital Officer, HDFC Bank.
Pressing The Pedal
For financial institutions, the technology was there even pre-Covid. But for customers, privacy concerns remained. "Many of these myths were broken during the lockdown," says one banker. For banks and NBFCs, the virus outbreak pushed them to test every technology available to connect with employees, customers and other stakeholders to continue operations. "We will use this opportunity to leverage our digital assets to offer differentiated customer experience and enable our employees to engage with customers effectively," says V.V. Balaji, Head, Business Technology Group, ICICI Bank.
"Business model changes do not happen overnight. It is a journey for all of us," says the CEO of a public sector bank. In fact, the first big change started happening after the global financial crisis, when fintechs emerged as disrupters. Over the next decade, the industry saw emergence of a partnership model where financial institutions and fintechs collaborated in lending, payments and value-added services. The next phase will see large banks and institutions working with technology companies to deliver more services digitally.
Banking services have gone digital in every possible way during the lockdown. Be it opening accounts online, digital lending, payments, transactions, back office or remote working, digital has been the key. In fact, adoption of new technologies and business model changes have spread into newer areas.
or instance, customer interactions/engagements at bank branches are switching to digital modes. Private banks have integrated their artificial intelligence (AI)-powered chatbots or customer service platforms with voice assistants like Google Assistant or Amazon's Alexa for checking bank balance, credit card transactions, etc. Banks are also integrating their services with WhatsApp due to the latter's wide reach. Customers today have a range of choices to use the social media to reach out to the bank.
ICICI Bank was one of the first to leverage technology platforms such as robotic process automation and cognitive tools. "The bank will scale it up further. This will also help us handle increased transaction volumes without manual intervention," says Balaji.
Another new area is video KYC. Until a few years ago, bankers were apprehensive that KYC regulations for account opening cannot be met through digital channels due to money laundering and other issues. The Reserve Bank of India (RBI) has allowed video KYC. Banks used it proactively during the lockdown period to increase their customer base. For new customers locked in their homes, banks, including Kotak Mahindra Bank, RBL, IndusInd and IDFC First, among others, launched the video KYC facility. Kotak Bank recently came out with its zero-contact video-based savings account. Hinduja group-owned IndusInd Bank launched an app which allows opening of current accounts digitally for self-employed, partnerships or even public and private companies. Banks are using application programming interfaces (APIs) for validation of KYC documents from sources such as GST filings, MCA records and Aadhaar database.
IT infrastructure of a small private bank is flexible, but for a large private sector lender, a complete shift to digital can be challenging. The rigidity of rules makes it even harder for public sector banks. "Core banking technology in Indian banks, including the public sector, is very matured today, but the challenge is to get the infrastructure ready for video KYC, which involves storing heavy video data and complex security encryption, among other things," says Ankit Ratan, Co-founder of Signzy, a customer on-boarding solutions provider.
The benefits are huge, though. Video KYC has reduced the account opening time from a week to just a few minutes. In terms of overheads, costs for banks have fallen to Rs 10-15 from Rs 400-500 per account.
anks now plan to use videos for collection and recovery as well. Small finance banks, fintechs and new-age NBFCs engaged in micro lending are setting up infrastructure for virtual meetings. "Currently, we go to areas where dozens of borrowers converge at one place. This can be done on a virtual platform with technology," says the CEO of a small finance bank.
The proof of the pudding is in the eating. The encouraging digital numbers are pushing banks to invest more in new technologies. Kotak Bank opened almost 74 per cent of its savings account through tab banking in the March quarter. In addition, digital channels contributed to opening of 66 per cent fixed deposits and 53 per cent new mutual fund systematic investment plans. The bank sourced 48 per cent of personal loans and 41 per cent of credit cards digitally during the quarter. The story is no different in other private sector banks.
Work from home is the new normal for the industry, and so is remote banking. "We have enabled it through collaborative platforms and scaling up of the IT infrastructure. We have also enabled our customer care officials to operate from home, so that customer service is not impacted in any way," says ICICI Bank's Balaji.
The financial services industry has always been rigid about information security and anything remotely related to the potential compromise of customer data. "The current lockdown has forced everyone to relook at those earlier stances. They are now revisiting every available technology that may be used to plug existing holes," says Harish Prasad, Head of Banking at FIS India. There are a number of remote working technologies or collaboration tools that global organisations with large businesses in multiple countries use to interact with one another. Rathor of HDFC Bank says there are platforms that would get a good amount of flip from the application side, especially contact centres, customer channels, and sales productivity and sales optimisation units. "These applications can take place from multiple locations like office, home, or even on the move," says head of technology of a private sector bank.
Similarly, the Cloud is ripe for adoption. In the last few years, the entire banking industry was gradually moving its applications on the Cloud. Covid-19 has expedited the process. A lot of applications will now go on the Cloud. A lot of institution will migrate to Sovereign Clouds. "Cloud-based architecture will be the key enabler for overall strategy of the bank. Information security will be a key area with increased focus on digital channels, work from home and Cloud-based solutions," says Balaji of ICICI Bank.
"All those perception issues like risks or loss of control have started to change," adds Prasad of FIS India. New start-ups or companies that have emerged over the last several years are driving the change. "They are looking beyond the traditional ways of working," says Prasad. In fact, today, one can encrypt customer data while using the Cloud.
Digitisation is already changing the financial services landscape by bringing in more people under the banking net. Small finance banks, for example, are reaching out to customers in far-flung areas and offering loans at much cheaper rates under the microfinance model than MFIs under the NBFC model. Similarly, fintechs catering to the urban poor have brought a large number of people under the credit net. New-age NBFCs, which are geography-specific or product-specific (like SME, micro loans, consumer loans), are innovating to cater to a new class of borrowers on faster technology platforms.
The RBI has also been taking initiatives, like granting licences to peer-to-peer players, payments banks and UPI payment providers.
The shift to digital banking is, therefore, inevitable. The only question is the pace at which the transformation will take place.