Reimagining Technology-led Banking: One Algorithm at a time

For at least three decades, I have witnessed technology ever evolving across large-scale platform-based businesses. One consistent observation has been businesses' remarkable foresight and agility in leveraging changes to their advantage. As the Chief Transformation Officer in my current position, National Technology Day on May 11 (today), presents an ideal opportunity to delve into the technology-driven transformation unfolding in the banking sector and its implications for the industry.

For a country where banking plays a fundamental role in the growth of economy and growing prominence of digital money, India’s journey towards a cashless economy has been beyond exemplary. The rise and growth of the internet, alongside government initiatives like the Pradhan Mantri Jan Dhan Yojana, has accelerated the pace of financial inclusion in underserved/unserved rural communities. However, it is the emergence and widespread adoption of UPIs that marked the tipping point of digital innovation. UPIs have enabled the growth of micro-transactions and micro-payments, helping millions of individuals participate in the digital economy.

Despite the blistering pace of growth, these disruptive technologies are ever mindful of the timeless core paradigms that continue to govern the banking industry. The inner sanctum comprising trust, security, risk management and regulatory compliance remains intact, impregnable and non-negotiable, even as the banking sector embraces digital innovation to evolve its strategies. The hallmark of a successful technology-led transition is a seamless and secure banking ecosystem that harmonises technology with a profound grasp of enduring bank fundamentals.

As per industry data quoting U.S. analytics company FICO, it has been estimated that 40% of the 1.4 billion Indian population already use digital banking. The scale-up in digital transactions has prompted banks to invest in information technology (IT) and IT security to protect against fraud, provide business continuity in the event of a crisis and manage the robust and rising volumes.

Recent new guidelines on IT governance for regulated entities (REs) like banks, effective April 1, 2024, focus on key areas including strategic alignment, risk management, resource management, performance management and business continuity/ disaster recovery management. This keeps a close watch on a bank’s IT initiatives including IT equipment management, software updates, user access control, vendor risk management, and data security strategy.

This makes IT spending a recurring cost and the latest available data from Gartner shows that India's banking and investment services firms spent an estimated $11.3 billion on technology in 2023. It should be noted that regulatory compliance and prudent risk management practices have constituted the backbone of the Indian banking system, which has shown resilience amid the global banking turmoil. Strong financial metrics, including capital adequacy, asset quality, and profitability continue to highlight the superiority of the Indian banking system.

As part of transformation and future-ready initiatives, banks are heavily investing in Artificial Intelligence (AI), blockchain technologies and cloud computing to set the stage for the next phase of growth. AI spending towards lending and fraud management will be a key focus for 2024, says market intelligence provider IDC. Banks are likely to focus on AI models for supplementing legacy credit approval beyond credit scores and fraud detection decision-making. Superior outcomes can come out of investing in Generative AI, which according to McKinsey Global Institute, could unlock $200-340 billion in additional value annually for the global banking industry.

?Cloud computing will help banks scale operations with substantially lesser IT infrastructure investments in hardware and software, and drive significant cost reduction. Blockchain technology is a potential game-changer for the banking landscape given its decentralized and distributed ledger of transactions which reduces the risk of cyberattacks and fraud. Blockchain is also being explored as an enabler for quick and cost-effective cross-border payments, as well as its smart contracts for processes like lending and borrowing.

?To drive technological disruption and future value creation, ability of banks to think and innovate strategically with a focus on disruptive, customer-centric innovations alongside the ability to drive/leverage new partnerships with proactive planning for crisis preparedness and risk management are some of the critical factors that may shape technology-led growth for banks in future.

?Below are some guidelines to enable this transformation seamlessly:

·???????? Understand and outline your transformation goals. Transformation does not look alike for two people. So define what it means to you and your company.

·???????? Imbibe and implement the best practices in the industry. Draw insights from both successful and unsuccessful digital transformation journeys of other organizations.

·???????? Address internal skill gaps in digital capabilities by providing training opportunities for existing employees. Harness these skills to create a future-ready workforce that reaches its full potential, and an organisation that is keeping pace with the evolving times.

·???????? Place a strong emphasis on customer-centricity. By prioritizing the delivery of top-notch services to customers, digital transformation naturally becomes an integral part of the organization.

·???????? Emphasize Research and Development (R&D). It's essential for CXOs to fully embrace digital evolution at the product level by championing and prioritizing R&D efforts.

·???????? Lastly, foster a culture of innovation and curiosity amongst employees. This begins with the C-level and has a trickle-down effect. The mindset shift will enable employees to be agile, take risks and adapt to new systems swiftly.

I won’t be surprised if technology-led innovations enable banks to further redefine customer experience in banking, leading to increased customer satisfaction, and a win-win for both customers and banks.