Ankur Arora, Director - Digital Transformation & Innovation, Sodexo India
Digital transformation, a term more than just a buzzword now is becoming more important than ever with a seismic shift in the way organisations operate—by not just using technology to break free from traditional approaches of working but utilizing it to essentially change the work that gets done. The rise of digital has upended and devastated goliaths in industries from Hospitality and Transportation to Media and Financial Services. Banks face an unprecedented pressure due to an intense regulatory environment and rapidly changing consumer preferences. The wave of technological innovation has unsettled one of the most traditional industries in the world and brought longstanding incumbents under competitive siege. The confluence of sophisticated technology, ubiquitous computing power, cybersecurity, advanced Analytical tools and burgeoning entrepreneurial ecosystem backed by strong governmental policies to encourage Financial Inclusion across the country has sweeped the FS including banking and payments in India and set the stage for a new generation of business models.
The banking and payments ecosystem in India have exhibited the transformative potential of adoption of Open Banking. The ambitious governmental UIDAI and Digital India initiative on driving India towards a cashless economy provided an impetus to transform the nation into a digitally empowered society. This was further boosted with Demonetization in 2016 to invalidate high-value bank notes in circulation in order to combat untaxed and unaccounted wealth, counterfeit currency and terror financing. A number of initiatives from Pradhan Mantri Jan Dhan Yojna—a country wide financial Inclusion scheme to setting up of the National Payments Corporation of India (NCPI)—an umbrella organisation for all retail transactions in India have paved a way to encourage citizenry to digital payments in the country. Several initiatives such as Bharat Bill Payment System (BBPS) to ease out bill payment, Micro ATMs, Bharat Interface for Money mobile app (BHIM) have further facilitated digital payments. To ease out fund transfer and empower consumers to compare product offerings in order to create a banking experience that best meets each user’s needs in the most economical way, GOI has initiated a move towards Open Banking with the Unified Payments Interface (UPI).
Investopedia defines Open Banking as “A system that provides a user with a network of financial institutions’ data through the use of application programming interfaces (APIs). The Open Banking Standard defines how financial data should be created, shared and accessed.” Open Banking aids consumers to transact their financial data with other financial institutions over the secure network. UPI—a payment system developed by NCPI consolidates multiple bank accounts into a single mobile app of any participating bank, integrating numerous banking features, seamless fund routing and merchant payments into one hood.
Several banks in India have already initiated to upload their UPI enabled apps on the Google Play Store.
The pace of digital change in retail banking is accelerating exponentially as the technology has moved banking out of the branch onto mobile devices with advanced data analytics allowing creation of personalised offerings/services. The bargaining power of customers has increased, and they demand ever higher levels of service and value. Along with the convergence of web and mobile, the introduction of open banking will change the customer experience. It will allow users greater control of their finances and increased benefit from competition.
A survey by UBS concluded that digital banking has now overtaken branch banking as the primary transaction medium for customers. The emergence of FinTechs has changed how financial services are structured and consumed. Customers’ willingness to switch from incumbent banks has largely been overestimated. Emergence of non-traditional players such as Fintech start-ups and big Tech companies such as Facebook, Amazon and Google into the payments landscape is challenging the established order. By demonstrating customer-centric innovation and agility that long-established financial institutions are finding a challenge to compete with, these firms pose more of a competitive threat to banks.
The banking and payments ecosystem in India have exhibited the transformative potential of adoption of Open Banking
Open banking draws its momentum from the technological innovation, breakthrough in advanced analytics, APIs, encouraging governmental policies, regulation, market traction of non-bank firms, and changing consumer patterns. For instance, the directive Open Baking aka PSD2 came into force in the UK in January 2018, forcing the UK’s nine biggest banks— RBS, Bank of Ireland, HSBC, Santander, Allied Irish Bank, Barclays, Danske, Lloyds and Nationwide—to open their banking platforms to external third parties and expose the consumer banking data with permission in a secure and standardized form. The data democracy will help the organisations redefine their business strategy and develop innovative products to achieve deeper levels of personalization by providing bespoke services to the clients. The adoption of Open Banking standards and API based technology models presents an opportunity for financial institutions to tap into the vast non-financial ecosystem and cultivate alternative revenue streams by crafting sustainable business models around open digital economy.
With all four forces of technology, government, emergence of innovative entrepreneurial ventures and initiatives taken by the RBI to regulate the payments banks, India has an ecosystem in which all these forces are working in collaboration with customer expectations. However, with several stakeholders involved, concerns regarding the accountability of data, its protection and ownership are critical. With several Aadhar identity thefts and privacy breaches reported, the digital innovation also exposes the critical consumer personal data and system to novel cyber vulnerabilities. The data democracy poses the threat of predation by the private sector. There is definitely an urgent need for stringent regulation to enforce the data protection law and impose heavy penalties on violation. With Srikrishna Committee’s Personal data protection bill, 2018, India is one step closer to having its own data protection legislation on data security for the citizens of the country.
Thus, the introduction of a digital identity system and an open-API economy not only promises to revolutionise India’s payments ecosystem and provide enriching consumer experience but also make customers custodians of their personal data. Open banking opens the plethora of opportunities for the banks while at the same time posing several risks as well. Banks will have to decipher the DNA of open banking, reshape their business models and nurture Fintech partnerships to cultivate innovative new work methods and processes by applying Open Innovation principles. A paradigm shift in outlook is fundamental for the accomplishment of Open Banking of an organisation. Currently, the traditional philosophy and legacy systems are the barricades to Open Banking. It is essential to break free from the siloed approach and embrace collaborative practices and open culture.