Enabling banking technology infrastructure ride and survive the Fintech wave

Financial technology has been thecornerstone of delivering financial services for over a decade. What started asan attempt to link multiple branches through a single core banking systemquickly evolved involved into a string of applications designed to improvecustomer service, centralize and streamline operations, manage riskefficiently, improve compliance and create new digital sales channels. For thelongest time, these applications were anchored on automating existing bankingprocesses and supporting the existing business model. The last few years haveseen financial technology develop inspite of the existing banking model therebychallenging the business model itself. Payment systems, credit analytics andscoring tools, third-party product distribution platforms and customerself-service applications have created new and disruptive models that canoperate independent of the existing banking technology infrastructure. Thiscreates a unique situation where financial technology is disintermediating anddisaggregating parts of the banking value chain.

Data and predictive analytics:

Over the years, banks have invested intobuilding the technology infrastructure at different points in time. Thesedisparate applications acquired to serve different purposes contain valuabledata elements. The inability to aggregate this dataand convert it intoactionable intelligence is making the business model vulnerable to newerfinancial technologies. Banks also continue to be held back due data qualityissues in existing applications. Newer financial technology is predicated onthe ability to provide actionable intelligence through analytics. Since mostbanking technology investments were traditionally directed at improveprocessing and operations, bankscontinue to come up short in the analytical,predictive and cognitive space. For banks to make the most of the Fintech wavewithout getting impacted by it, it is critical that the pace of data aggregationand cleansing is increased. It is also important to increase investments inanalytics, early warning and predictive technologies to enhance speed to marketand address potential macro and portfolio risks. The largest strength thatbanks have is existing customer data especially relating to behaviouralpatterns and transaction history. The ability or inability to use this data tooffer on-demand fee based services andenhanced customer experience willdetermine whether banks are able to keep new players fuelled byfinancial technologyat bay.

Product offering and dynamic pricing:

Banks have relied on traditional depositand loan products to fuel their balance sheet growth. Until now, this growthhas come at relatively stable net interest margins. However, fundamentalchanges in customer behaviour are fuelling a need fortransaction basedservices, short-term on-demand lending, electronic payments and a single-windowsourcing of multiple third party financial products. The traditional bankingmodel was geared towards a customer who engaged with a bank to park savings andplanned ahead for potential loan needs. The model also envisaged that pricingwould be relatively standard depending on a particular product or segment. Bankscould take time to decide on approving loans and differential pricing based ona customer's risk profile. The financial technology wave has enabled on-demandsmall ticket borrowing and differential pricing based on a customer's riskprofile. It has also allowed liquidity to become more mobile, transferable andaccessible. Banks are no longer the only avenue for deploying surplus liquidityas financial technology has opened up quicker access to capital markets and awider range of non-deposit oriented financial products. For banks to stayrelevant to the new generation retail customer, the technology architecture hasto focus on an on-demand, self-service, multi-product aggregation and singleportal access model. This needs to be backed by risk management systems thattake on-demand front line decisions. In reality, this would require are-construction of the customer facing technology platforms. If banks are slowto adapt to this new realm, it will erode their traditional access to low costliquidity andcut-off transaction based revenues.

Compliance, operations and turn-around time:

Banks continue to be heavily regulatedentities and this reality is unlikely to change quickly. The need forcompliance and documentation especially due to know-your customer andanti-money laundering regulations increases turn-around time and impactscustomer experience. Financial technology gives banks the ability to mutualizetheir cost and effortsthrough industry utilities. This can potentially reducedocumentation effort and significantly enhance customer experience. While costmutualisation through creation of industry utilities has been a constantindustry effort, banks still have some way to go to use the technologyarchitecture to make the customer experience seamless by tapping to themutualized infrastructure.

Leading financial inclusion anddigitization of currency:

While payments banks, wallet companies andprepaid instrument issuers exposed a clear gap in the banking service offering,payment models are yet to fully evolve and operationalize. The bankingtechnology architecture has a long way to go in tapping opportunities todigitize currency further in the areas of small remittances, low value transitpayments and small retail. Inability of existing banking technology to quicklyenrol and retain customers means that digital currency continues to build upoutside the traditional banks. This digital currency is the key to future transactionincome which will become increasingly important to sustain return on equity inlight of strict regulatory capital measures.

Banks can choose to attempt to survive theFintech wave by focusing on products that cannot be offered purely throughfinancial technology. However, it is important to realize that even where financialtechnology cannot enable traditional product offerings, change in customerbehaviour may render traditional products redundant. Adopting Fintech quicklyis key to long-term growth for banks.

This requires a revamp of the existingtechnology architecture through a three-pronged approach -

1. build a paralleltechnology infrastructure focused on new product offerings
2. mutualize costand technology infrastructure through industry utilities where technologypurely serves a processing requirement
3. Scale technology to aggregate andanalyse existing data to improve risk management and customer servicing

by Muzammil Patel Partner and RamIyer Director Deloitte Touche Tohmatsu India LLP