Synopsis–Banking transactions have grown exponentially over the past few years. Earlier, one transaction amounted to withdrawing Rs 30,000 in cash from an ATM. Now, consumers do dozens of transactions a day — from paying for coriander leaves at a roadside vegetable vendor to paying electricity bills online.
In 2013, when Arundhati Bhattacharya became chairman of State Bank of India, the industry was neck deep in bad loans. But Bhattacharya had to worry about something far more serious.
The fate of the 200-year-old bank was dependent on one key thing – technology. In an unprecedented move that shook the hierarchy-conscious public sector banking ecosystem, she proposed to hire a technology wizard from Barclays at a salary higher than hers. The result is there for all to see. SBI had done 67% of all transactions in the December quarter through digital platforms. Its mobile phone banking app Yono, which has over 35 million users, is speculated to be valued at more than $40 billion.
There is pride in the achievements, especially in a country where a vegetable vendor to an automobile dealer has adopted digital payments 24×7, which even many advanced countries can only envy. At the same time, cracks have begun to show. There is concern about the industry’s ability to cope with the explosion of digital transactions. Payments through digital platforms are beginning to fail. Complaints about lost money after transactions abound. Numerous instances of data breach have been reported. Above all, there is worry that these are going unreported and unnoticed, potentially causing harm to an economy aspiring to leapfrog into the digital world and pull its millions out of poverty.
As merchants and individuals rushed to complete transactions before March 31, the last day of the previous fiscal year, an estimated 450,000 transactions failed in just a few days, reflecting insufficient capacity and the unusual surge in activity.
“The outages in the past year have been more due to Covid-19 related increase in usage,” says R Gandhi, former deputy governor at RBI, who had oversight of banking technology. “Now, the transactions don’t originate in banks —they do in e-commerce platforms, merchant establishments and other fintech platforms. Banks are at the receiving end.”
Digital transactions have grown at a CAGR of 66.4% over the past five years to 40.1 billion transactions in FY20 from 3.1 billion transactions in 2015. The average daily transactions in 2021 were at 142.6 million, up from 8.6 million in 2015. This was triggered in two phases – firstly after demonetisation in 2016 and after the country went into a lockdown last year, crippling physical business activities.
Paying for infrastructure
Over the years, Indian banks have evolved to provide details of bank accounts at the tap of an App. Gone are the days of lugging black ledgers to figure out what was in an account. Banks have increased spending on technology to 2-5% of their revenues.
The coming decade will see an explosion of micro-electronic transactions as the Payment Infra Development Fund takes payments convenience to every corner, and the possible emergence of the central bank digital currency and the likelihood of tech giants such as Apple and Google encroaching on the lenders’ turf.
“We need serious investments into technology, cyber security by banks and fintechs operating in payment system,” says Dilip Asbe, CEO, National Payments Corp of India. Are banks equipped to face the onslaught on their systems?
“The industry’s current problems have nothing to do with the core banking systems handling the load,” says VV Balaji, Head–Business Technology Group at ICICI Bank. “We just started the IPL and in the last few days itself the volumes are up 25-30%. It is not about the volume surge, but it’s (being) bunched up between 7 and 9 in the evening. That is pretty high.”
Banking transactions have grown exponentially over the past few years. Earlier, one transaction amounted to withdrawing Rs 30,000 in cash from an ATM. Now, consumers do dozens of transactions a day — from paying for coriander leaves at a roadside vegetable vendor to paying electricity bills online. As consumers post-liberalisation got used to paying for services they use on highways, airports and public conveniences along city roads, banks and financial institutions faced hurdles in getting the fees for enabling these transactions. “Capacity creation involves investment,” says Gandhi.
“The question is how much you would invest. The biggest problem is that banks can’t charge for most of the transactions. Most charges have been abolished over the years, so very few banks are putting up ATMs now. That would be the case with digital infrastructure as well. We have lopsided pricing. It has to become fair.”
Past vs future
Few things change faster than technology. As institutions of public trust, banks have the duty to not only provide ease of doing business, but also to comply with a plethora of rules and regulations designed to safeguard customer money. The nature of business meant many had become leviathans with little scope to manoeuvre and adapt the latest technology even as nimbler startups were becoming user favourites. Indian banks operate on core banking platforms built by IT firms such as Infosys, TCS and Oracle, but a lack of regulatory clarity in adopting them has become a challenge. “Understanding the regulation is important,” says a former SBI chairman who did not wish to be identified. “Bankers don’t attempt to do things that are not prescribed. There’s a tendency to play it safe.”
Furthermore, banks across the world have been slow to adopt modern IT that would have enabled them to be nimbler and respond to challenges thrown by fintechs, which do not face the same regulations as banks.
“There are two challenges — the first is that a lot of investments have been focused on the front end – changing customer channels,” says Vivek Belgavi, leader, fintech at PwC. “The investment has to happen in backend infrastructure and platforms such as APIs. Most innovation in infrastructure tech has happened in the cloud. But because of the regulatory uncertainty and data localisation, the adoption is still slow.” It is only now that financial institutions are mulling deep cloud transformation.
Unlike a steel or aviation company that faces competition only from peers, banks are competing against not only fellow banks but also nimble unregulated fintech startups with little legacy and their unique policy roadmaps. Banks have to provide credit, raise deposits, manage their assets and liabilities, meet regulatory funding requirements, stay away from risk, and ensure that they do not fall on the wrong side of regulations with respect to money laundering.
However, a PayPal, Google Pay, Paytm or PhonePe do not have to worry much about these and can grab market share in payments, use customer data for analytics and earn money as well. Can banks compete with these nimble-footed giants?
These days, technology is widely available and anything that a fintech uses, a bank can also do. What is required though is a culture that thinks like a fintech. The reason why many banks lose out to fintechs is because they are working on 50-year-old technologies without realising that technology costs have actually come down. “A mistake that a lot of companies and banks have made is that they have not jumped on the technology bandwagon,” says Piyush Gupta, CEO, DBS, which recently bought Lakshmi Vilas Bank.
Technology giants such as Google, Amazon and Alibaba – through Paytm – have made strong beginnings in India. The RBI recently permitted customers to double their cash in electronic wallets, which could be a blow to banks. At the same time, regulators are conscious of the risks posed by the dominance of these giants as they do in the social arena.
“In India, the systems are interoperable so there’s no threat of dominance and NPCI shall continuously look at any misuse,” says Asbe of NPCI. “There’s no point in saying that the ecosystem is complex… we need to build capacity to face it. .
There’s a lot at stake. Digital payments in India are expected to grow to 71.7% of all payments by 2025, from 38.6% in 2020, according to ACI Worldwide.Lending, currency trading and deposit-taking – so far the exclusive preserve of banks and non-banks – may be opened up over the years to tech giants. For banks, investing in technology alone may not suffice. The choice matters.
“If I buy an iPhone 12 for my mother who doesn’t know anything other than WhatsApp, it’s not going to help,’’ says Balaji of ICICI Bank. “So it’s about what I get her… I will bring her a nice M21 or M31 which is 15,000 bucks. I will not give everyone an iPhone 12. What is relevant to the business matters.” If Indian banks don’t invest in the right technology, Microsoft founder Bill Gates’ prophecy – people may need banking, not banks – may come true.