2 Ways the Pandemic Affected Banking Innovation

Satyajit Kanekar

Banking innovation is always considered a flourishing business that can potentially change the face of the economy. For instance, the timely introduction of UPI in the Indian digital payment system proved to be a colossal success during the pandemic. The number of UPI transactions grew to 1.23 billion in May 2020, with Rs 2,18,391.6 crore transacted. Unified Payment Interface (UPI) saw an increase of 23.5% in the total transaction volumes between April and May 2020, according to data published by the National Payments Corporation of India (NPCI).

As the competition is growing steadily in the banking sector, enhancing customer experience further is the key to a healthy economic growth. At the same time, financial products also attract many threats. This is why the industry needs to upgrade regulations to accommodate innovation and mitigate risks to keep up with the changing times.

World became Silent

COVID-19 silenced the ever-buzzing world, affected the world economy, and impacted the market’s supply and demand. According to a report by CRISIL, the banking sector in the past decade grew by 2% CAGR global transaction revenue pool, having increased by $400 billion in 2018 and 2019. In 2020, they expected the revenue pool to dip by 6% on a year-over-year basis.

In addition, as per the report, the pandemic paralysed the backbone of Indian economy, the collective demand came down because of the lockdown, and the supply was also affected as factories came to a screeching halt. The world economy was predicted to contract by almost 3% in 2020, which was eventually a contraction by 4.9% by the end of 2020. This is bigger than the losses created by the 2008 financial crisis that was a worldwide phenomenon as well.

Also Read: NPCI unveils unified payment interface

During the lockdown, governments were also caught on the wrong foot when deciding if the economy needs to be prioritized over people or people need to be prioritized over the economy – It was a Catch-22 situation for everyone. A series of unpredictable conditions led to the industry sectors holding back on research and development as well.

There’s a flip side to the story as well! Although the pandemic is touted as the major reason for slowing down banking innovation, the industry used the pause to strengthen the core banking functions further and bridge gaps in infrastructure. In this article, we discuss the internal and external impact of the pandemic on the banking industry.

Internal Impact

  1. Remote Work

Financial institutions have always shied away from the concept of remote work due to security reasons, preferring face-to-face interactions. As social distancing was mandatory, banks were also forced to adapt smart working and digital conferencing tools.

This sudden need for everyone to be online posed certain challenges:

● Risk of network crashes due to increase in access requests

● Legacy systems that cannot be integrated with current technology

● Loopholes in remote security as banks always have had on-premise systems

An immediate effect of this shift was seen in the form of 38% rise of cyber attacks reported worldwide, according to Carbon Black.

Financial institutions are, thus, rushing to acquire more devices, increase network bandwidth and secure networks before implementing a fully-remote setup. This change may be a welcome relief for management and operational employees, but has been a challenge for certain job profiles such as cashiers and branch workers.

Thus, although banks have adopted MS Teams, Zoom and Slack that leave a few loopholes, it is a positive step towards adapting remote work in an industry where it was frowned upon.

2. Enhanced Data Security

Financial institutions are 300 times more vulnerable than other sectors according to Boston Consulting Group. Banks need to safeguard their highly sensitive data, which mostly consist of PII – personal identification information, including cryptocurrency portfolios.

What’s more, 95% of cybersecurity breaches are caused by human error (Cybint). Considering this fact along with the chaos caused by the pandemic, financial institutions realised the need to train employees for additional sophisticated threats and have a cybersecurity plan in place as employees connect to the internet using different connections and security protocols.

3. Risk Management

In addition to cyber risks, the pandemic also unveiled certain other major risks. There is a need for more sophisticated data and enhancing the capabilities of the legacy systems to handle the huge amount of data that new technologies will bring. Next, as banks face a wave of credit defaults, AI-driven credit risk modelling could help credit institutions detect potential defaults before they happen, allowing them to mitigate credit risk by negotiating different terms to avoid losses. This type of financial innovation was already in the pipeline – the pandemic has simply expedited the process.

4. External Impact

In the past few years, the banking sector became innovative, keeping up with the modern times to offer better customer experience. Digital payments, online banking, and open banking through API are some of the sector’s innovations. These developments empowered the average customers to make better decisions, which propels the economy ahead as well.

The most exciting features in the anvil are:

● Branchless Banking

● Electronic Documentation

● Digital ID Verification

5. Branchless Banking

Branchless banking is a very significant move as India is vast – in the geographical sense and population. Branchless banking provides the services outside conventional banking through agents and applications. According to a World Bank Report, India still has 190 million unbanked population among the adults next to China. It is pragmatic to focus more on branchless banks for a country like India to ensure financial inclusion and literacy, which has its own set of advantages.

Even though branchless banking was introduced in 2006, it is yet to reach far and wide. The agents or banking correspondents help the masses in the rural area perform day-to-day tasks like opening a bank account, manage monthly savings, and carry withdrawals on the behalf of the account holder. With the advent of 4G, a vast section of the population got access to smartphones – particularly the educated in smaller towns and villages who can operate the banking facilities, and in turn, also educate the underprivileged to access banking service. Although these features are fast catching up, India still has a long way to go after recovering from the after-effects of the lockdown. This is one of the key areas where the banking system has taken a hit. The banks need to strengthen their reach and adoption through innovation to expand the reach of banking to every household.

Also Read: NPCI unveils UPI AutoPay for Auto-Debit option on Recurring Payments

6. Electronic Documentation

Documents form a major part of the banking system. Every activity is documented for both reference and audit purposes. In recent years, banks are moving towards going paperless. E-Docs had been one of the most exciting innovations that were taking shape in the banking sector. The new norm of COVID-19 pushes us further to implement this innovative method, as social distancing is the new norm. But for security purposes, e-signatures and e-documents cannot be fully carried through. A certain amount of authentication is the need of the hour to execute it. More research needs to be done to make it feasible at all levels.

Further, in businesses where physical transactions like gold trading occur, electronic transactions are carried out to avoid logistic issues. It requires coordination between banks to housing them in their vaults. Hence a lot of regulations should be formulated to avoid thefts or mishandling of funds. If the banks can work around these issues and use e-documentation as a norm, then geographical limitations could be resolved. There had been a lot of research regarding this, but the pandemic slowed down further involvement in this area.

7. Digital ID Verification

Digital banks had the infrastructure to onboard new customers during the pandemic. They already had non-physical ID verification capabilities, be it as simple as updating KYC by taking photographs of the required documents and uploading them on the banking portal for approval. Traditional banks, on the other hand, had to race to improve their onboarding processes to maintain their flow of customers during and after the lockdowns. A combination of biometrics, video conferencing and more, according to PYMNTS, will prepare traditional banks for ID verification in a COVID and post-COVID battleground.

In conclusion

According to a report published by Wipro, the government had decided to increase the investment towards R&D to 2% of the GDP by 2022, before the pandemic. There are many challenges in allocating funds during these times, where the decision-makers are expected to invest more in life sciences. To achieve sustainable development, it is a pragmatic approach to invest in an ecosystem of innovations.

In addition to the above mentioned impacts, the pandemic has also urged customers to expect better remote service and quick product delivery. In such a scenario, banks need to consider building on top of legacy systems, integrate with cloud solutions and partner with FinTechs. A cyber overhaul, although not a piece of cake, is much needed to tackle emergencies such as the pandemic.

Digital acceleration is the most significant impact of the pandemic – an unprecedented one. To be on board with the digital acceleration bandwagon, banks must adopt better digital strategies, partnerships and risk management. In other words, it is high time banks and other financial institutions adopted open banking to pave the way for new technology that is not an hindrance to development, rather is an aid.

All things considered, the financial industry was not so far behind in the face of the pandemic – contactless payments, mobile banking, eDocuments, eKYC was in place and in use to some extent. Nonetheless, the banking industry and financial services had to undergo a learning curve, which may lay the foundation for a widespread and long lasting digital adoption. For now, we can only wait and watch as new strategies and technologies unfold.

Views expressed in this article are the personal opinion of Satyajit Kanekar, CEO & Founder, Mobileware Technologies.

 

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