ICT-based Financial Inclusion –
Carving a New path through
Innovation* K. C. Chakrabarty
Shri N. Chandrasekaran, Chairman-CII BANKing
TECH Summit 2012 and CEO & Managing Director, Tata
Consultancy Services Ltd; Shri Pratip Chaudhuri,
Chairman, State Bank of India; Shri Pradeep Bhargava,
Chairman – CII Western Region; Shri Manoj K. Kashyap,
Executive Director, Pricewaterhouse Coopers Pvt. Ltd.;
Shri Dev Ranjan Mukherjee, Director, CII; distinguished
guests, ladies and gentlemen.
2. When the financial sector is going through perhaps
the most chequered phase of its history and the
usefulness of financial innovation is itself under
extensive debate globally, it is heartening to be
participating in a seminar which is endeavouring to
carve a new path for Indian banking through innovations.
Congratulations to the organisers for choosing this
contemporary but forward looking topic.
3. Let me begin by referring to a recent report by the
World Economic Forum titled ‘Rethinking Negative
Innovation – Reducing Negative Outcomes while
Retaining the Benefits’. The report attempts to answer
certain fundamental questions:
a. Is financial innovation needed?
b. There is a thin line of demarcation between
innovation and violation.
c. What is needed to ensure that financial
innovation better emphasises the positive
outcomes and reduces adverse consequences?
4. After the financial crisis, while it has become
fashionable to condemn financial innovation in toto,
we must recognise that without continued financial
innovation, the financial markets in both developed and developing nations will perform below their
potential. But for financial innovation to result in
Benefits, it needs to focus not on the treasury incomes
but must, instead, have customer orientation. When
innovations have focused on better alignment of
interests between the bank and its customers, they
have always resulted in win-win situations. I can say
that most of the innovations in payment and settlement
systems, particularly those which deal with one-time
customer interface, had this customer focus. The results
are visible across the globe. The only segment of the
financial markets that came out unscathed during the
crisis has been the payment and settlement system.
However, the financial sector has not succeeded in
innovating to bring in efficiency in products that engage
customers on a life-cycle basis. Finally, it has to be
remembered that financial innovation cannot outpace
the innovations in the real sector.
Customer-centric Technology
5. You have assembled here to chart a new path for
innovation. However, let us bear in mind that for
innovation to be successful, it has to necessarily be
customer focussed. In a country like India, where access
to financial services remains an issue. Innovation
should particularly focus on financial inclusion and on
the small and marginalised, but viable sections of the
society. What makes innovations feasible at a rapid pace
today vis-a-vis say, the last century? Undoubtedly, it is
the advent of technology. But, as I have said in the past
also, in the financial sector, for technology and
innovation to be of true value to the customers, it must
lead to better customer service in three ways (a) faster
and hassle-free (b) safer and error-free, and most
importantly (c) easier access but cheaper. Have these
happened? If asked to vote, I may cast a half vote to (a)
abstain from vote to (b) and cast a negative vote to (c).
Let me amplify.
6. What is the most important prerequisite of a
computer or an electronic device from the customer’s
perspective and from an inclusion perspective? To me
it is the standardisation. Has it happened across
banking services? Let me start with what is termed as
the best financial innovation of the recent times – the
ATMs. Do they result in faster dispensation of cash? A
definite ‘yes’. Is it hassle free? To me, ‘No’. What are
the problems faced by the aam admi? The problem
starts with the standardisation of ATMs. Some swallow
your card, some require only swiping, some reckon
paise when you key in the amount, some do not, some
drop the cash on to a tray, some do not, some retract
the cash if you are not prompt, some require keys to
be pressed, others have a touch-screen. All these are
confusing to the man on the street. Why do we not
think of standardisation even in this basic product?
When this is the case with the most basic of the
products, issues arising from lack of standardisation
are more serious in case of other products. There is no
standardisation of even the account numbering
convention across the banking system. One Core
Banking System of a bank is so different from another
that a customer changing a bank will have to de-learn
and re-learn banking operations all over again.
7. Coming to (b), the attention paid by the banks to
database migration has been so casual that the full
Benefits of computerisation and technology are yet to
be reaped. Is it not an irony for the banks to claim that
Non-Performimg Assets (NPA) levels in a particular
period went up as they moved over to ‘system
generated’ NPA computation? As far as the customer is
concerned, the systems fail at the most inappropriate
time. Let us go back to ATMs. Even today, we continue
to receive a large number of complaints on account of
malfunctioning of ATMs. Is the incubation period for
the ATMs installed by banks not yet over? Should the
system continue to run based on fear of penalties for
in Efficient customer service? Or would white label
ATMs, for which the Reserve Bank has recently issued
exhaustive guidelines, provide encouraging solutions
to these issues?
Technology and Consumer Protection
8. One developing concern is the increasing number
of frauds in our electronic banking payment scenario. As the banking and payment space becomes increasingly
ubiquitous, the challenge is to maintain the quality of
security at the highest level in the financial sector. In
the recent survey conducted by the Bank for International
Settlements, 55 per cent of the financial market
infrastructures surveyed indicated that cyber attacks
are increasing on account of phishing, weaker
credentials/passwords, trusted insiders, denial of
service attacks, etc. Technology should result in
reduction in risk, not otherwise. This situation warrants
huge investments in IT security and I would urge the
banks and the IT companies to work together in this
regard.
9. Another angle to this issue is the protection that
a customer has to be assured in the electronic banking
scenario. The Reserve Bank expects banks to put in
place checks and balances that provide confidence and
protection to a genuine customer against frauds.
Otherwise, the credibility of the entire system will
come under scrutiny. The customer should be afforded
the same kind of protection in an electronic transaction
that he now gets in a paper-based transaction. The
customer is not held liable if a signature is forged,
whereas he is held responsible when a fraudulent
transaction takes place electronically and the onus rests
on the customer to prove that it was so. Is this fair?
Will such a scenario encourage electronic transactions?
We need to find a solution which provides a near-zero
liability to the customer.
10. Let me now turn to the issue of technology and
cost. Before I speak my mind on the issue, let me make
it very clear that the Reserve Bank does not support
the argument that cash transactions in this country will
disappear rapidly or that all paper-based transactions
would turn electronic if the financial sector was to offer
electronic transactions free of cost. In fact, we firmly
believe that anything that is offered free of charge can
never be scaled up and that it cannot become robust
and Efficient unless it offers commercial viability to
those who offer the product/service. Having said that,
I also do not support the principle, ostensibly being
followed by some of the institutions, to recover a large
part of technology expenses from the customers. I was
amused at the action of banks deciding to waive charges on ‘inter-core’ transactions hitting headlines in the
media. It should have never happened in the first place.
In fact, such charges, rather than their removal, should
have hogged the limelight. Further, in an electronic
banking scenario, ad valorem charge to customers is an
issue which needs to be relooked. In fact, in a country
like ours, part of the cost efficiencies achieved through
technology must be passed on to the smaller customers.
This calls for a rejig in the way in which banks approach
technology. In a technology-led financial sector,
collaboration among all stakeholders, including
competitors, could prove to be the big cost saver. With
rapid strides in security standards and capabilities, such
a collaboration and sharing of IT infrastructure is
feasible on a much larger scale than is happening today.
11. It is always perceived by the industry that the
handholding/intervening by the Reserve Bank is
necessary for the systems to be operational in an
efficient manner. I am unable to understand why
collaborative approach cannot be the guiding force for
success in adoption of shared IT infrastructure. The
Reserve Bank has contributed to the fostering of
innovative methods to improve access to financial
services through mobile and opened up and clarified
the issue of Business Correspondent (BC) interoperability.
Leveraging Technology for Making
Financial Inclusion Possible and a
Success
12. Prior to the enablement of BC interoperability, the
banks and technology providers had made a case that
it was the lack of interoperability, that was a deterrent
for financial inclusion and, hence, much headway had
not been achieved. According to the technology
providers, investment in a non-interoperable technology
would be a costly proposition and they did not see a
business case to offer financial services at low cost. But
now, with the Reserve Bank permitting/clarifying
interoperability, why is it that the transactions at BCs
are not picking up, which ultimately, if increased,
would change the cost and access equation, making it
economically viable for financial service providers to
reach poor and isolated individuals and communities?
Banks have to make more investments in technology
and work together with BCs for fast-tracking initiatives
under financial innovation. More importantly, focus of all innovations need to be the customer, not process,
system or employees. It must be recognised that only
the customer can bring business to the banks and
contribute to their bottom lines. All other constituents
such as technology, employees, BCs, etc only act as
enablers to the process.
13. Recently, I came across the report submitted by
Consultative Group to Assist the Poor (CGAP) and
ACCESS based on the ‘Retreat on the Business
Correspondent (BC) model’ which was jointly organised
by the College of Agricultural Banking (CAB), Reserve
Bank of India and ACCESS. The report spells out the
challenges faced by both banks and BCs in extending
facilities to the recently financially included and to the
financially excluded. The findings indicate that the
banks have to ensure that the BC model finds space in
the business strategies of the banks and not in the
footnotes of their annual reports and that the banks
should make client acquisition under this model a
business proposition; and not treat it as a CSR activity.
An important observation indeed!
14. Further, it has become imperative for the banks
to have full control and exercise due diligence,
especially when the front-end customer contact points
are not regulated entities. While the customer has some
relief at point of sales when a card is swiped in his
presence, the uncertainty of a transaction going through
in an e-Commerce transaction is very high. Given the
constraints of lack of control with respect to internet
connectivity while doing such a transaction, banks have
to step in to protect a customer when the transaction
fails and ensure that the refund process is quick. Why
is it that when a website like IRCTC can give the
assurance to the customer through its terms and
conditions that the refund will take place on such a
day, other websites are not able to have similar Efficient
and transparent processes? Financial service providers
should disclose key information clearly, at appropriate
points before, during, and after a transaction is
completed. Of course, some of the responsibility lies
with consumers too – to make sound financial decisions
to the best of their ability. However, inexperienced or
low-income customers with lower levels of formal
education or literacy can be particularly vulnerable to
unscrupulous conduct.
Innovation through Technology – Creating
a Favourable Ecosystem
15. Technology provides the opportunity to innovate
at a much faster pace and to create products that are
closely linked to the needs of the consumer. There is
a need to create an enabling ecosystem which will
encourage and foster innovation by leveraging the best
available technological platforms. Here, I would like to
highlight some of the essential prerequisites that would
help in creating this enabling ecosystem:
i. Access to suitable and cost effective technology
which can support multi-channel delivery
system, particularly for low – income groups.
ii. Standardised systems, structures, products
and processes, at least for the small and
marginalised customers.
iii. Efficient Business Models: viable but not
exploitative.
iv. Efficient Delivery Models: having integrity,
speed and low cost.
v. Comprehensive MIS capable of meeting all
management information requirement and
which is reliable and fast: Integrity of
information.
vi. Information literacy at all levels, more
particularly, for senior management and for
all sections of the society including customers,
technology vendors, banks, regulators,
policymakers, etc.
Way forward
16. Stepping into the shoes of a regulator, you would
appreciate that the principal challenge for regulators is to strike an appropriate balance between financial
openness that supports growth-enhancing innovation
while at the same time implementing regulations and
effective supervision that limits the potential risk of
financial instability. Further, there can often be a thin
line of difference between innovation and violation of
regulation. This poses challenges on regulatory
resources. In respect of payment systems, having
reached a critical mass, attempt has to be made by the
stakeholders to provide a canvas for safe, Efficient,
interoperable, inclusive electronic payment systems.
The banks will have to firm up the business model with
appropriate technology and definite plan of action,
attract more and more customers through reduced
charges, introduce a time-line for post-launch
management, give top priority to downstream variants
and conduct electronic banking financial literacy drives.
All these require charting a totally new path through
innovation.
17. We have an opportunity, like never before, to
harness technology for the benefit of the masses.
Responsible innovation is the key. We have to ensure
that financial innovation is customer-focussed and
results in faster, safer and cheaper access to financial
services, particularly for the large sections of our
population that are still excluded from the formal
financial system. Each one of us has a positive role to
play in this process, including, banks, technology
partners, customers, civil society, policymakers,
regulators, etc. This alone can ensure financial and
economic stability across the globe.
I wish the deliberations at the summit great
success. Thank you.
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