The banking, financial services and insurance (BFSI) sector is in the midst of a major transformation. According to the Economic Survey 2022-23, India has the highest fintech adoption rate at 87 per cent, as against the global average of 64 per cent. The emergence of digital banking and automated applications has created a demand for convenient and hyper-personalised financial solutions. The use of technology has also led to the emergence of new players in the financial sector, such as fintech start-ups and digital banks, which are disrupting traditional business models. Simultaneously, the regulatory environment for BFSI has become increasingly complex and demanding. To this end, leading financial institutions are adopting a digital-first approach, harnessing cutting-edge technologies to enhance operational efficiency, stay ahead of the competition and explore new opportunities.
A look at the key technology trends redefining the financial landscape…
AI branches out
Artificial intelligence (AI) is transforming the banking industry by automating processes and providing insights into customer behaviour. One of the key branches of AI that is witnessing mainstream adoption is machine learning (ML). AI/ML helps organisations process large volumes of data and predict the latest market trends. Advanced ML techniques analyse market sentiments and suggest investment options. Its algorithms can identify fraudulent activities, track loopholes in their systems, minimise risks, and improve the overall security of digital finance. Enterprises are also increasingly incorporating AI/ML-based systems in the consumer lending segment. These systems can analyse customer behaviour and patterns to assess their creditworthiness. It also sends warnings about specific behaviours that may lead to default. Another popular AI application is chatbots. Companies can ensure round-the-clock availability of customer service by integrating chatbots with their user apps. Chatbots offer personalised customer support, reduce workload on e-mailing and other channels, and recommend suitable financial products. Other common use cases of AI in the BFSI industry include predictive analytics and general-purpose semantic and natural language processing.
The Reserve Bank of India (RBI) recently proposed an innovative payment mode called “conversational payments” on the Unified Payments Interface. The solution will enable users to engage in conversation with an AI-powered system to initiate and complete transactions in a safe and secure environment. Meanwhile, DBS Bank India has launched “digiPortfolio”, which employs AI and advanced technologies to create a set of investment options that match the risk preferences of different investors. Last year, ICICI Lombard General Insurance Company Limited launched an AI-powered digital voice agent to assist customers with the status of their insurance claims.
The BFSI industry is the biggest adopter of blockchain technology. Blockchain provides smart contract-based automation across various processes, such as the execution and recordkeeping of financial transactions, leading to significant operational cost savings. It enables financial document management by providing end-to-end traceability and transparency of storage and sharing. It can dramatically boost cross-border settlement speed and reduce its cost by eliminating intermediaries such as commercial banks and clearing houses. Blockchain’s tamper-resistant nature can yield high value in maintaining know-your-customer (KYC)/anti-money laundering compliance. Smart contract-enabled automation of compliance checks eliminates the need for manual verification of customer identity.
In 2022, RBI introduced its central bank digital currency in phases, launching pilots for the digital rupee in the wholesale and retail segments. In the retail segment, the currency incorporates blockchain technology. In June 2023, JPMorgan Chase and Company collaborated with six banks in India, namely HDFC Bank Limited, ICICI Bank Limited, Axis Bank Limited, Yes Bank Limited, IndusInd Bank Limited and JPMorgan’s own banking division at GIFT City, to launch a blockchain-backed platform for US dollar settlements. Last year, Axis Bank executed an industry-first blockchain-enabled domestic trade transaction on Secured Logistics Document Exchange, a government-backed platform.
Banking on cloud
Cloud computing is critical for leveraging new-age technologies such as AI, blockchain, 5G and edge computing. The technology is proven to reduce costs, increase storage capabilities and improve scalability. The flexibility of cloud-based operating models allows for shorter development cycles of new products for financial institutions. A significant benefit of transitioning to the cloud is its robust disaster recovery with integrated redundancies. Migration to the cloud is gathering momentum, with financial institutions in India adopting cloud-first strategies. Leading enterprises such as HDFC Bank, Axis Bank, Tata AIG General Insurance Company Limited and State Bank of India are transitioning their operations to the cloud.
RPA and hyper-automation
Robotic process automation (RPA) algorithms increase operational efficiency and accuracy and reduce costs by automating time-consuming, repetitive tasks. This also allows users to focus on more complex processes that require human involvement. A key area where RPA can significantly impact and change the banking sector is manual data entry. All BFSI enterprises deal with voluminous amounts of data daily. RPA can quickly extract and process this data with high accuracy. Other use cases of this technology include KYC, mortgage processing, general ledger, fraud detection and compliance.
Meanwhile, hyper-automation integrates advanced technologies such as AI, ML, RPA and low-code and no-code to automate complex tasks. Financial institutions can automate functions such as account opening, loan processing, fraud detection, and risk assessment. It can analyse vast amounts of financial data in real time, enabling faster and more accurate decision-making. JP Morgan employs an AI-powered system called Contract Intelligence (COiN) to automate its contract review processes. COiN can review documents such as loan agreements and identify key terms and clauses. Kotak Mahindra Bank Limited has also automated its partner payments process through Hyperform, Act21 Software’s end-to-end payout solution.
Open banking is a recent practice that provides third-party financial service providers with open access to consumer banking, transactions, and other financial data from banks and non-bank financial companies (NBFCs) through the use of application programming interfaces (APIs). This embedded banking allows NBFCs to integrate banking functionality into their apps and services to accelerate customer verification. Moreover, open banking enables banking-as-a-service, allowing banks to reach new customers through third parties. With easy data sharing and compliance policies, open banking promotes enhanced customer experience, improved process efficiency, and API governance architecture for compliance and security.
The RBI has proposed a “public tech platform for frictionless credit” to consolidate the data required for credit appraisals from various sources, including government bodies, account aggregators, banks, credit information companies, and digital identity authorities. This will enable rule-based lending through an open API where all financial sector players can connect seamlessly in a plug-and-play model. The pilot will include credit card loans; dairy loans; loans to micro, small and medium-sized enterprises without collateral; and personal and home loans.
BFSI companies collect and process highly sensitive financial data. Any failure in digital systems or processes can have significant consequences, including data breaches, financial losses, and reputational damage. Digital assurance is pivotal in mitigating these risks. Organisations in the industry have invested heavily in cybersecurity to balance innovation and risk management.
To mitigate these cybersecurity risks, banks are implementing advanced cybersecurity technologies such as multi-factor authentication, encryption, real-time transaction monitoring, and file integrity monitoring. Biometric technologies, such as facial recognition and iris scanning, are replacing traditional passwords and personal identification numbers. Banks are also educating their customers on cybersecurity measures and providing regular updates on any new security threats or vulnerabilities.
The regulatory environment in which financial institutions operate has become highly complex and demanding. Compliance with regulations is critical to maintain customer and investor trust and avoid costly regulatory penalties and reputational damage. However, current legacy solutions used by financial institutions are ill-fitted to meet the stringent regulatory requirements. The dynamic nature of business models warrants the adoption of agile solutions to optimally address these issues. Regulatory technology (RegTech) offers organisations a seamless method to meet these requirements, without the need for entirely overhauling their existing models. Most of these RegTech solutions are available for utilisation through open APIs and software-as-a-service models. This technology is poised to play a crucial role in facilitating compliance management and minimising regulatory risks.
Digital transformation in the BFSI industry is expected to be hindered by challenges such as regulatory compliance, legacy systems, cybersecurity, and a risk of losing personal touch in banking as more transactions move online. However, financial institutions are coming up with innovative solutions to overcome these issues. Going forward, the key focus areas for banks will include ensuring reliability, enhancing security, optimising customer experience, and fostering technological innovation. Further, the emergence of new technologies such as 5G and the internet of things will transform the industry even further.