Technology has always been a keystone to the evolution of the banking and financial services sector, as it continuously revolutionized the way the financial services were conceptualized, regulated, disseminated, and consumed. However, the last few years witnessed technology emerging from the backroom and taking center-stage alongside financial services. The convergence gave birth to the ‘FinTech’ movement, and digital payments have been one of its primary drivers.
Over the years, the emerging FinTechs have evolved from disruptive threats to enabling partners, offering technological innovations and newer opportunities that expand well beyond the realm of traditional financial services. As we continue our ‘Digital India’ journey in 2020, it is imperative to build stronger infrastructure, innovate continuously, and develop a policy framework that fuels the acceptance and adoption of digital payments. Technology will continue to influence financial services enterprises’ focus on customer-centricity and impact the initiatives pertaining to trust, privacy, and security. All, while enabling game-changing insights from the core currency: the data.
The Hyper-Connected World
As technologies like 5G roll out, lightning-fast connectivity will become more commonplace – though not ubiquitous. Businesses outside the traditional retail system will be able to take advantage of this by selling services and products to customers, near instantly, from anywhere. From an India perspective, the framework for 5G is underway, and is expected to help businesses investing in AI, data and 5G to run simultaneous processes and transactions all at once. Furthermore, the internet of things (IoT) could become a dominate force in micro-payments by transforming connected devices into payment channels.
Indian Banking Will Experience Significant Disruption with Consolidations
Two major factors – UPI and banking consolidation – have begun to remarkably impact the Indian banking this year and would continue well into the year 2020. Come April 1st, we will witness the birth of mammoth banking entities, with mergers of three public sector banks – Union Bank of India, Andhra Bank, and Corporation Bank. Earlier this year, State Bank of India merged its five associate banks and Bharatiya Mahila Bank. Bank of Baroda later joined the fray by merging Dena Bank and Vijaya Bank with itself. With the advent of these mega banking entities, the rise in dominance of NBFCs among retail and small business credit, the explosion of digital payment methods led by UPI, and the pressure to continuously optimize operations, Indian banks would need to significantly invest in building digital capabilities to sustain and develop core differentiators.
To pave way for growth in 2020, Indian banks would need to optimize and upgrade their core technologies to adopt the concepts of open banking. Banks would continue to leverage open APIs to create horizontal stack with fintech partners for customer interface, product & services, and infrastructure to cater to the burgeoning digital payments demand. BCG suggests that by FY22-25 UPI will account for 59% of the market share for payments in the country, up from 17% this year. The quantum of opportunity can be gauged by the fact that only 10% of the UPI transactions in FY19 were accounted for by banks. The rest were initiated by consumer-facing fintech apps.
The Digital Disruption of POS – The Impact of eCommerce
The state of merchant POS is an interesting story in India. Industry pundits suggest that while there are about 80-odd million MSME merchants, only about 5 million POS machines are in operation. Though the POS ecosystem in the country seems to have doubled over the last five years – to about 4 million in FY19, and the Reserve Bank of India expects the number to cross 5 million by the end of 2021, the penetration of traditional POS remains weak in terms of availability and viability. Moreover, according to reports, the POS share may dip from 20% of the current payments market to about 14% in FY22-25. Banks are also witnessing a sharp decline in the usage of cards at conventional POS terminals and ATMs.
Interestingly, digital payments in India seem to grow at a CAGR of 12.7% as per KPMG and may jump to Rs. 4,055 trillion in FY24 with a five-year CAGR of 20% according to CRISIL Research. POS is undoubtedly experiencing disruption with digital payments. The year 2020 will see an explosion of the digital POS ecosystem in the country, especially among the MSME segment. Many industry experts from large private and public sector banks in the country believe in FY19, more than 70% of POS registrations came from online-only merchants. Digital POS (based on NFC, RFID and QR code) will continue to grow phenomenally. In fact, with e-Commerce, digital POS may also impact the Cash-on-Delivery model and replace it with digital transactions. What may be even more interesting is that while there seems to be a decline of debit card issuance and usage, the contactless method of digital POS may result in an increased acceptance of cards (credit, debit and PPI) across smaller centres in the country.
Regulators Will Turn Digital
Indian banking and financial regulatory bodies and industry enablers are increasingly adopting a wide range of AI, data gathering and analytical tools to create transparency and safety frameworks. We can already see this happening with the Reserve Bank of India (RBI) having formed a new unit to strengthen its own frameworks in the face of emerging disruptive trends like cryptocurrency, blockchain and AI. This will help businesses and banks to monitor overall systemic activity and predict potential challenges – and avert them before they become a threat.
Cybersecurity and RPA Will Focus Primarily on Fraud Prevention & Detection
As digital payments go mainstream, financial institutions are straining hard to continuously reduce their exposure to financial crimes and be compliant with evolving regulations. Customer data breaches, lack of professional cybersecurity talent, deployment of security automation and its integration with current systems will continue to plague banks and financial services firms. The rise of ‘digital’ in the financial sector will see more calls for robust cyber protection, which will be heavily influenced by cybersecurity innovations. Enhancing cybersecurity and fraud mitigation is poised to be one of the most crucial trends in 2020.
Moreover, Robotic Process Automations will continue to impact migration activities, data security & governance, and compliance management, especially in the wake of the recent and ensuing PSU bank consolidations. The prime application of RPA in the coming year will be in the field of data governance and fraud detection & management. Banks and payment players would like to drive intelligent automation with RPAs by incorporating AI, ML, and adaptive analytics to enable risk managers to create real-time fraud detection systems that will be reacting and adapting to new fraud signals, driving fast decision-making and responses to emerging fraud threats. RPAs-led intelligent automation in the field of financial fraud will gain grounds in helping banks and digital payments firms to earn consumer trust.