Page 29 - Banking Finance April 2019

ARTICLE

efficiency, transparency, financial inclusion, competition
and resilience of the financial system.

Technology and Digitization: Changing
the Rules of the Game

12. Use of technology in banking services is not a new
phenomenon. What is new though is the advancement
in technology that can be used in the banking for its
good. Magnitude of transactional data with the financial
sector can be managed only through big data analytics
and online transactional parsing. Digitization will further
help to transform the risk function - mitigating losses
from operational risk, managing ALM liquidity, risk stress could also be applied to small and medium-sized
testing, identifying emerging risks, and monitoring and enterprises (SMEs) that cannot provide audited financial
managing risk portfolios – through digitization. statements. In addition to proper identification of risks,
Leveraging technology in unusual and innovative ways this also help in better customer service. The bankers
is shaking the standard ways in which the systems are which used to find it difficult to process a loan
operated. One such disruptive innovation viz., the application in many days a decade back find it possible
blockchain technology (BCT). BCT provides tamper- to sanction loans in a much shorter time period. that
evident recording of the linked transaction history in a loans are granted just in matter of minutes.
distributed network and has the potential to disrupt the 15. The examples are many. Trade data can be used to issue
financial business applications.
letter of credit, transactions can be monitored
13. “Smart-contracts” are an advanced application of BCT automatically to detect diversion of funds in loans given
that can encode complex business workflows for by consortium of banks, faster settlements,
enforcing their conformance and enhances efficiency transparency in decision making, prevention of money
through event triggered mechanisms. Several BCT laundering, detection of frauds, automated trading,
platforms provide the necessary features to encode arbitrage etc. Few days back I was in a conference
“smart-contracts” in a simple and efficient manner. where a senior official from Insurance Sector informed
Smart contracts are pieces of software, that extend that they were able to unearth a fraud by analyzing
blockchains' utility from simply keeping a record of similar nature of claims in different parts of India by
financial transaction entries to automatically
using digital tools to learn that the insurance premium
implementing terms of multi-party agreements. “Smart- for all those policies was paid by the same credit card
contracts” can be used in insurance industry to price online.
the risks by analyzing various digital footprints of a
customer. The insurance premiums can be adjusted 16. The learning is simple; the conventional banking
based on the lifestyle being followed by the customer followed a hierarchical structure using a four-eye
and it will help in overcoming the problem of “adverse approach e.g., maker-checker/cross check/approval
selection” and “moral hazard”. processes. While this process helps the banks and FIs to
gain control on ownership of decisions, it delays in
14. Big tech lenders build a picture of their customers using decision making, leaves scope of human bias in decision
proprietary data from their online platforms and from
other sources, such as social media. Notably, decisions making and can lead to increased costs and lower
on whether or not to lend are based on predictive customer satisfaction. Technology has radically altered
algorithms and machine learning techniques. This gives the way such transactions are processed by banks and
big tech lenders a method of client scoring that in itself FIs today. For instance, various data points are checked
could give them an advantage over traditional banks, simultaneously transforming this data into information
which commonly rely more on human judgment to useful for taking decision instantaneously.
approve or reject credit applications. Moreover, this 17. Use of data resources in the process of economic

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