Accelerated digital transformation and rapidly changing business environments have been redefining the banking, financial services and insurance (BFSI) sector. The Covid-19 crisis led to a tectonic shift in the practices of enterprises in the sector. Further, the ever-rising consumer expectations, complemented by increased competition and tightening regulatory restrictions, are propelling digitalisation in the sector.
A plethora of technology trends have emerged in the BFSI industry. A look at how some of these technologies are revolutionising the sector…
Artificial intelligence (AI) is transforming the BFSI ecosystem by supporting decision-making, improving operational efficiency through automation and enhancing customer service with virtual assistants and chatbots. AI-powered technology such as optical character recognition enables auto-filling user details during customer onboarding. Most financial enterprises in India are still in the process of expanding their AI adoption. In addition, machine learning (ML) algorithms are facilitating data processing at a faster rate, thus supporting compliance management, profiling credit risk and detecting fraud. Together, AI and ML save time by crunching enormous volumes of data, personalising the client experience and accelerating revenue growth.
As per industry reports, the global market size of AI in BFSI surpassed $15 billion in 2021 and is forecast to grow at a compound annual growth rate (CAGR) of over 35 per cent between 2022 and 2028. Meanwhile, a 2022 survey by PwC in collaboration with FICCI revealed that India’s banking sector is leading in the adoption of all emerging AI use cases. As per the survey, nearly 83 per cent of respondents cited enhancing customer experience as the biggest business driver for AI implementation in the sector. About 80 per cent of the respondents reported having deployed chatbots to make customer service easy.
Blockchain is one of the most notable disruptors in the BFSI industry. It has tremendous potential to enable more secure transactions and consistently plug data leakages. It provides a platform that allows simultaneous access to an unalterable digital ledger of records to multiple parties from different geographical locations. In order to prevent tampering, the database is cryptographically secured or encrypted. The technology enables enterprises to streamline operations and infrastructure while cutting fraud, creating transparency, speeding up core processes and enhancing security. According to KPMG, blockchain can reduce errors by up to 95 per cent, enhance efficiency by 40 per cent and decrease capital consumption by up to 75 per cent.
Today, enterprises in the financial sector are looking for ways to implement blockchain technology to reduce costs and improve the quality of products. A notable application of it is in cross-border settlements as it can create a highly cost efficient and transparent global network. Other use cases include automation of claims, streamlining of know-your-customer (KYC) procedures, seamless peer-to-peer payments, asset management, tokenisation of securities and easy payments. As per market reports, the market size of blockchain in the BFSI sector was valued at $277.1 million in 2018 and is expected to reach $22.46 billion by 2026, growing at a CAGR of 73.8 per cent between 2019 and 2026. The Reserve Bank of India (RBI) has described it as a promising technology and intends to integrate it into its core banking system. It is looking to develop a proof-of-concept blockchain-based pilot project centred on trade financing, along with private banks such as HDFC Bank, ICICI Bank and State Bank of India.
Application programming interfaces (APIs) are a set of protocols that enable easy and secure data transfer between two applications. Banks have opened their APIs, allowing third parties to access the bank’s core system to execute banking functions, innovate, and offer new products. Through this, core banking services such as lending, account opening, funds transfers and card issuance can be provided by third parties. At present, three main types of APIs are being deployed in the BFSI space. These include private APIs, which are only accessible within the financial institution to improve internal processes; partner APIs which can be accessed by the bank’s preferred third-party partners; and open/public APIs, which make business data available to third parties.
According to a report by Capgemini, nearly 89 per cent of banks globally leverage APIs to collaborate with fintechs. The launch of unified payments interface (UPI) by the RBI in 2016 played a pivotal role in the rise of banking APIs in India. For instance, businesses such as Zerodha and Swiggy use multiple APIs to collect funds for processing customer orders and provide users with real-time updates. The advent of banking API has opened up further avenues such as open banking and banking-as-a-service in the financial space.
Cloud is the core technology in the digital transformation process of the BFSI sector as it provides an infrastructure fabric for other technologies such as AI, blockchain and automation. Cloud technologies such as platform-as-a-service, infrastructure-as-a-service and virtualisation enable enterprises to synchronise operations across finance, risk, customer support and other verticals. Applications such as risk profiling systems, non-performing asset monitoring and early warning systems using predictive analytics can be built on cloud-based infrastructure. It also helps enhance security with frequently updated software.
The evolution of cloud computing has led to what is called the “cloud-first” strategy. According to Gartner, more than 85 per cent of businesses will employ a cloud-first strategy by 2025. Despite challenges including security concerns, legacy architectures, regulations and management of the complex transition, cloud adoption in the BFSI sector is set to accelerate. As per reports, the market size of the global hybrid cloud in BFSIs is expected to reach $36.15 billion by 2030 from $7.98 billion in 2020 at a CAGR of 14.2 per cent between 2021 and 2030.
Robotic process automation (RPA) emulates human actions to procure data and navigate digital systems faster. It takes on high volume and mundane tasks such as documentation, filing and data extraction, along with automating workflow and reducing errors. According to Capgemini, RPA can generate 25-50 per cent cost saving by automating tasks.
RPA has numerous promising use cases in the BFSI sector. It smoothens the customer onboarding process for banks by verifying customer details from disparate systems. Other applications of the technology can be found in mortgage processing, report automation, credit card processing, etc. According to reports, RPA in the financial sector is expected to reach $1.12 billion by 2025. A survey by PwC shows that 30 per cent of the respondents were not only experimenting with RPA but were also in the process of implementing it across enterprises.
Big data enables enterprises in the financial sector to deliver personalised recommendations to users, strengthen security, open up revenue opportunities by analysing spending patterns and social media activities of customers, and boost competitive advantage. Growth in the adoption of big data analytics is mainly attributed to an astronomical increase in unstructured data.
The adoption rate of data analytics among the largest banking firms in India stood at 74.5 per cent as of 2021. Industry reports predict that the market for big data analytics in banking will post a CAGR of 22.97 per cent from 2021 to 2026.
Cognitive analytics integrates technologies including ML, deep learning, semantics, AI algorithms and predictive analytics to generate valuable insights and draw inferences from unstructured data. Essentially, this technology imitates human brains to perform certain tasks and helps businesses to arrive at critical decisions based on data.
Cognitive analytics is a boon in the data-driven financial sector to aggregate insights from various sources and improve compliance while reducing risks. It can collate customers’ data and analyse load needs based on their financial transactions, queries and much more, thus simplifying the management of loans and customer portfolios. Several insurance companies have begun to leverage cognitive analytics.
The bottom line
New-age technologies have brought about a paradigm shift in the BFSI sector. Modernising banking infrastructure has become imperative for players to have an edge in this highly competitive industry. Forward-thinking banks and financial institutions are embracing and enforcing these technologies to cut down costs, increase efficiency, enhance data security and improve customer experience. Consumers, too, are actively adopting these technologies to avail services, thus creating more opportunities for innovation and strategic solutions in the space. However, there still lies immense potential for enterprises to fill the gaps and accelerate their digital transformation journey.
Despite challenges such as data theft and cyberattacks as well as high implementation and maintenance costs of digital technology, the global market size of digital transformation in BFSI is projected to reach $164.08 billion by 2027, growing at a CAGR of 15.4 per cent between 2020 and 2027. Going forward, technology and data will play key roles in the industry regardless of the size or location of the enterprise. With digital adoption facilitating seamless transactions and opening up endless opportunities, the Indian BFSI industry is heading towards a bright future.