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Innovation in Technologies and Transformation of Banking Services

  • Md. Latiful Islam
  • 13th April, 2022 05:06:54 PM
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Since long past banking system has been playing an important role in the economy. Primary function of the Bank is to manage fund flow in the economy by keeping deposits from the surplus units and lending it to the deficit units i.e. industry, business and individual. They contribute to the industry and trade as catalyst through providing fund flow for optimum production that ensures smooth supply chain in the businesses to meet human’s requirements. They also protect security of the depositors’ money and give them a source of passive income. In short we can say that banking is the main enabler of the financial ecosystem.

Initially, banking sector mainly managed these financial services. Later on, some leasing companies and finance companies known as Non-Banking Financial Institutions came in the market to provide these services. Then bank was not within reach of the mass people. Post Office did some limited financial services of keeping deposits and fund transfer known as Money Gram. Usually, rural people used to keep their surplus money in a hidden place within their home. People borrowed money from these people having surplus money as short term hand loan. Some people know as ‘Mohajon’ did the business of lending money to the needy groups at very higher rate of interest keeping land, gold or valuable as security. Sometimes these so called Mohajon took bond from the borrowers in stamp paper. This group of people was unbanked and the process of financial activities was done through informal channel. That time, percentage of unbanked people was much higher which gradually reduced due to availability of banking channels at the remote areas.

Banking services was not limited within keeping deposits and lending money. They did the activities of international and local trades, treasury functions and did some ancillary services like fund transfer (Telegraphic Transfer, Demand Draft, Pay Order), buying & selling foreign currencies, selling government bonds/certificates etc. Due to advancement of technologies, list of banking products and service bundles has now increased through different channels.

Earlier, banks maintained their financial records in the paper based ledgers. After invention of computers, few banks started keeping account transactions in the computer system. At that stage, computer was not robust to perform critical calculation according to the product features. It only managed debit-credit transactions of the accounts. Later on few banks implemented semi-automated standalone system to automate customers’ transactions and general ledger accounts. Then customers of one branch were not allowed to do transactions at other branches of the same bank directly. After 2002, some banks started using core banking system having centralized database when customers got facilities of doing any branch banking. Now almost all the Banks are using core banking systems with various online facilities to their customers. Meantime, Bangladesh Bank completed different automations to ease interbank transactions reducing significant turnaround time. Now, conventional banks are focusing on providing digital services through alternate channels, implementing different advanced applications.

We come into the industrial revolution 4.0 where banks are using Artificial Intelligence (AI) for Robotic Process Automation (RPA) in providing their services. First, we need to be clear about AI to know the status of our banking industry. AI refers when machines/computers apply cognitive intelligence to perform a job as like as the way a human does. For that, machine uses a set of machine learning algorithm and deep learning algorithm. Machine learning is completely different than application software where machine is trained in using input data and probable output data to develop the system to predict output against given input; whereas, deep learning algorithm uses multiple layers of neural network to process data like functions of human brain. So, AI is completely data driven technology where output depends on the quality of data. Data of our banks are silo based and quality is not good enough to implement AI based systems or RPA. We are at the preparatory stage of implementing technologies of Industry 4.0 although many countries are taking advantages of these innovations.

Due to advancement of technologies, we hear many buzzwords in banking like Neo Banking, Virtual Banking, Agent Banking, Digital Banking, FinTech, Mobile Banking, Open Banking etc that are changing concepts of traditional banking and giving new customers’ experiences. The spectrum of financial services is adding many new avenues and some more parties are coming forward as service providers to be the stakeholder of this financial market. Let us see in brief the new terms used in the banking services and how these are transforming the whole systems.

Many of us talk about Neo Bank, Virtual Bank and Digital Bank. Neo Banks are FinTech Company that provides financial services through online applications without any physical office. This is a digital bank or in other words Neo Bank is a Virtual Bank. However, many conventional banks offer digital services as an alternate channel along with their physical outlets. Neo Bank is getting popular as it is simple, faster, convenient and cost saving. Bangladesh Bank is considering for giving permission for Neo Bank/ Virtual Bank in our country.

Operations of Agent Banking started in Bangladesh in 2013. An agent under a valid agency agreement on behalf of a particular bank provides limited scale of banking and financial services to the underserved population. Agent banking is done through comparatively small office for cash transactions, funds transfer, bills collections, account opening and processing small loans. According to Bangladesh Bank report as on end of December 2021, total 29 banks are operating agent banking through their 13,952 agents having 19,247 outlets. Total number of accounts is 14,047,491 where around 43% are female accounts and 86% of total accounts are maintained with the rural based outlets. All the outlets of agent banking maintained Tk. 8,317 crore of deposits, disbursed loan of Tk. 3,454 crore and received inward remittance of Tk. 82,343 crore whereas Mobile Banking also provides limited scale of banking services through mobile app. There may be confusion between mobile app as an online banking channel and mobile banking. Some banks implemented mobile app to provide banking services along with their other channels. But, mobile banking is completely a separate entity which provides financial services through their retailer outlets using their app. People can withdraw cash, funds transfer, shopping, utility bills payment etc. through mobile banking account. However, coverage of mobile banking services are increasing gradually. bKash, Rocket, Nagad and Upay are well known mobile banking companies operating in Bangladesh. Mobile banking also took a significant stake to bring unprivileged unbanked population in the financial system.

The word FinTech is the short form of Financial Technology which helps to improve and automate the usage and supply of financial services. Globally, FinTech brings radical changes in the traditional financial services including banking, payments, insurance, personal finance, lending, investments, and wealth management. However, in Bangladesh, FinTech is yet to cover all the prospective areas and here Mobile Financial Service (MFS) providers, Payment System Operators (PSO) and Payment Service Providers (PSP) are the main players in the FinTech market. More than 100 FinTech companies including some startups are working in collaborations with banks, insurance, finance and other stakeholders.

Open banking allows third-party financial service providers to access customers’ information, transactional data and other data with the banks’ systems through application programming interfaces (APIs). Banks maintain two types of APIs; private API and public API. Through public API, third party companies including FinTech get connected with the bank to contribute in the financial activities under a control mechanism. Major benefits of open banking are convenience, cost reduction, personalization and improved decision-making in banking services. In Bangladesh, regulatory frame work of open banking is yet to be structured. However, there are many developed countries like the USA, the US, South Korea, Japan, Australia, Singapore, Canada and some more countries where open banking is operating. Open banking in collaboration with FinTech companies may contribute in bringing more unbaked people in the banking channel.

More interesting is that many MarketPlace companies are entering lending services in different forms. Amazon provides business financing solutions through Amazon Lending and third-party partners to eligible small and medium-sized businesses without doing paperwork and within a short time. In the same way, Alibaba provides trade financing on its platform. ShopUp, a startup company in Bangladesh started lending to the online businesses. They do credit assessment through machine learning algorithm based credit scoring model to approve loan. Pathao is offering ‘Pay Later’ facilities to its customers which is a small credit that consumer can pay on later date after enjoying their services. So, globally many marketplace companies are indirectly sharing pie of the financial activities which banks used to do.

Since inception, non-government organisations (NGO) have been working in the microcredit sectors mainly in the rural area. We sometime see many club societies also engaged in the financial activities. Both collect subscription from their members and lend money. The main function of insurance companies was to provide different risk coverage. However, due to technological advancement, they are offering many tailor made deposit schemes along with their risk policy. Capital market is now a strong platform of financial activities. Using modern technologies, capital market is offering many online services and varieties of securities to attract the investors. So, this market already became a strong competitor of managing fund flow among investors, corporate and government. We sometime hear a term Crowd Funding. This is a way of raising money from a large number of people through online platform to finance projects and businesses. In future, it may also be a legal platform of financial management.

In Bangladesh, there are 61 scheduled banks, 5 non-scheduled banks and 34 non-banking financial institutions (NBFI) to provide financial services. Apart from financial strength, technological platform is not strong enough in all the banks and NBFI. Bangladesh Bank has given guidelines on minimum features of core banking systems which is yet to be fully complied by all the banks. In the market, there are few banks that are able to provide modern digital services to some extent. Others are still lagging behind in comparison to global evolution in the technologies. Most of the banks are having silo based database and integration layer of their banking application platform is not secured and compatible to implement AI based technologies. Now, time has come to invest and give priority to technological development more than business to sustain in the competitive financial market along with the growing FinTech companies and other parties who are entering in the financial services. 

Disruptive innovation in the technologies always replaces the old fashioned systems. There were many giant brands in the world like Kodak, Nokia, Xerox, BlockBuster which are now history as they failed to innovate in time. I am not going to explain the quotation of Bill Gates ‘Banking is necessary, but banks are not.’ that he said in 1994. But, my understanding is that FinTech companies are not competitors of the banks; rather they may be the collaborative partners. For that, banks need to change according to the modern innovation in the technologies to meet the customers’ requirements. Then partnering of banks and FinTech companies may bring more and more customers including unbanked people in the strong financial ecosystem that will positively impact on the country’s economy.

The writer is the Chairman, FinPro Consultants Limited

 

Source: Sun Editorial