The outbreak of the Pandemic and it’s continuing effect, has brought several significant technology driven changes across industries and the BFSI sector is no different. While digital inclination is not new to the banking & financial sector, a sudden acceleration in the digital transformation, is definitely witnessed across the globe. Research reports suggest that Digital Transformation in BFSI Market to Reach $164.08 Bn, globally, by 2027. In a bid to understand how technology is going to help reinvent the BFSI sector and what new trends and innovations are likely to approach the client industry, Rashi Aditi Ghosh of Elets News Network (ENN) had an exclusive interaction with Dr Amitabh Rajan, Chairman, Reserve Bank of India Services Board.
Q. How should we conceptualise the BFSI Sector in an economy? In what way is the sector an integrated whole?
A. Structurally, as well as functionally, BFSI comprises a wide range of activity. When you look closer, you are struck by the enormity of the institutional-web before you, as well as the associated qualitative depth in its evolution-process. You then realize that the term people use (BFSI) to highlight the grouping of banking, financial services and insurance together, actually conveys only a bit of entrepreneurial anguish for excellence and risk at work.
For the State and Society, the concept of BFSI is useful; it allows them to take focused decisions on three crucial ethical concerns:
(i) consumer protection
(ii) firm-level integrity, and
(iii) fair competition.
This concept also helps governments to take evidence-based policy-view on strengths, weaknesses, opportunities and threats within an important segment of the nation’s entrepreneurial activity. It allows them to comprehend market cycles in a deeper manner.
Q. Do you believe that the conceptualisation of ‘disruptive innovation’ is adequate enough to comprehend contemporary reality?
Disruptive Innovation is a concept that helps us comprehend entrepreneurial unfoldings in contemporary tech-markets. The Schumpeterian vision of ‘creative destruction’ already existed. Books of Clayton M. Christensen published in the years 1997 [The Innovator’s Dilemma : When New Technologies Cause Great Firms to Fail] , 2003 [The Innovator’s Solution : Creating and Sustaining Successful Growth] and 2013 [The Innovator’s DNA : Mastering The Five Skills of Disruptive Innovation]delved deeper into the dynamics of ‘disruptive innovation’, and provide sharp and much-needed conceptual clarity.
Q. Which technologies will play a significant role in disrupting the BFSI Sector?
Depends on the market an entrepreneur targets to creatively disrupt. However, a broader ambit of the Fourth Industrial Revolution exists and sectoral trends of market experience can also be discerned as a growth path. This, in other words, means prospects of:
(i) Big Data Analytics, Artificial Intelligence and Machine Learning
(ii) Cloud Computing Capability Building
(iv) Blockchain Technology for Systemic Efficiency Gain-and Risk Reduction
(v) Internet of Things for Card Payment Tokenisation Facilities, and
(vi) Robotic Process Automation for Mortgage Processing and Report Generation.
Q. Any thoughts on frameworks for rethinking business and operating models?
‘Rethinking’, for business today has to take cognisance of the overarching fact that IR 4.0 is at an initial stage of prospects and processes that the revolution has set in through numerous disruptions and fusions. Acquiring and maintaining the competitive-edge for the firms, therefore, requires not merely ethics of prudence, but also the requisite agility to infuse new knowledge, skills, funds and networks. The landscape of disruptions and fusions is remarkably sifting even in the BFSI sector ; There is a need for nations to act with a sense of urgency.
Besides businesses rethinking frameworks, the BFSI Sector also needs advanced operating models to attain requisite agility, scalability, analytical rigour and behavioural responsiveness within its systems. There is now a consensus within the sector to envision the post-2008 tectonic shifts in technology and finance as historic opportunities, opportunities that shall be fatally missed if operating models remain in status-quo. When algorithms and networks run the world, operating constraints have to be removed with a vision of history.
Q. What can be done to help the innovative FinTech entities grow with sustenance and expand with resilience?
FinTech has proven its revolutionary potential to increase service efficiency and reduce transaction cost. However, regulatory oversight is needed to comprehend new risks, and in certain cases, amplified versions of prevailing risks. FinTech covers a wide range of critical social activities relating to a customer’s trust (money transfers, payment processing and infrastructure, business loans, small business servicing, mortgage lending, alternative lending, stock trading, credit reporting, financial security, and insurance are examples). An architecture of regulation has to be legally crafted to ensure that there is no breach of trust anywhere.
Though revolutionary in service potential, FinTech firms deal with day-to-day operational challenges. They innovatively handle them to the extent they can, but need governmental protection to survive structural adversities. It is needed because exponential unfolding of IR 4.0 has to be nationally nurtured in public-service interest and functional aberrations in the economic growth-path have to be channeled with utmost caution. The Global Covid-19 FinTech Market Rapid Assessment Study (2020) has attempted to study some of these aspects with methodological rigour; We need ethics-conscious Entrepreneurial States.
Q. How does Blockchain Technology embed trust into insurance transactions and contracts?
Blockchain is a technology whose time has come — even for the insurance industry, in terms of transactions and contracts. Within underwriting, the technology can transformatively help reduce costs and sharpen risk assessment. It also has, by now, a proven potential to radically enhance client onboarding, fundamentally alter claims submission processes, and promptly detect frauds. In combination with the Internet of Things and Artificial Intelligence, Blockchain technology further strengthens automation of insurance processes to emerge as a proposition for a paradigm shift in the sector.
The Blockchain innovation landscape has grown from bitcoin to smart contracts to proof-of-stake systems in just ten years. Technologically, these are structural changes of business significance for the insurance sector. They must reach stakeholders as inputs for timely interdisciplinary decisions on stability and growth. Blockchain-induced smart contacts, too, are an active creative zone for consideration these days. They increase business value in the chain-management context, but are written in software code that creates a skill-gap for lawyers who do not code and coders who do not draft. Agile interdisciplinary teams, therefore, are required to perform with a respect for evidence-based cross-disciplinary feedback.
Q. Are there insights from contemporary Regulatory Theory to help regulate the BFSI Sector adequately?
The dominant global policy-advice till the year 2008 was the neoliberal-premise [Fredrich Hayak (economic philosophy), James M. Buchanan (constitutional economics), Richard Posner (legal theory) and Milton Friedman (monetary economics)] that viewed the market as a ‘self-corrective’ ‘spontaneous order’ needing no regulatory intervention. Global Financial Crisis 2008 exposed all such arguments premised on ‘market fundamentalism’, and regulation came to be strengthened as a ‘lesson learnt’ in all sectors and nations.
Post-2008 regulatory-reform measures taken for the growth of the BFSI Sector of India assume significance in the regulatory theory thinking domain. We can highlight here
(i) the quality of the legal-texts passed during this period
(ii) the degree of trust reposed in agencies by widening their powers of supervision and regulation, and
(iii) crafting of structured spaces within systems for adequate multi-stakeholder expert discourse.
As far as the sector itself is concerned, it has business-cycle resilience; It requires adding IR 4.0 capabilities without further loss of time.