Ravjot Sachdeva reporting from Colloquium 2017, the annual business conclave of IIM Indore organised by the Industry Interaction Cell, talking with Mr. Manish Jain, Partner-Banking & Financial Services, IBM about the future of Banking and Financial Services.
Ravjot: Sir, first of all, I have to say, it was a very insightful presentation.
Mr. Manish Jain: Thank You!
Ravjot: Sir, I would like to start by asking you about your experiences of working in various companies like ICICI, EY etc. How has banking evolved since then?
Mr. Manish Jain: I started my career with ICICI Bank and I had the opportunity to work with one of the most advanced banks of that era,technologically speaking.
Ravjot: It still is the number one private bank.
Mr. Manish Jain: Yes indeed. But back then technology had just started evolving. ATMs were offline. Then we moved to internet banking, mobile banking etc If you look at the era of 1992-94, when the private sector banks like ICICI, HDFC were granted new licences, the whole banking sector got disrupted for a while because of the new private sector banks. History is being repeated 25 years later, with the burgeoning of small payment banks, fintechs like PayTM etc which has again caused a similar disruption to the banking sector.
Ravjot: Sir, that actually brings me to my next question. You mentioned that the new payment banks have caused a disruption to the banking sector. I understand that these banks are less prone to regulation than traditional banks and are thus growing at an unprecedented pace, How can traditional banks match up to the kind of progress being shown by these payment banks?
Mr. Manish Jain: FinTechs can and are doing a fantastic job in a few areas. They are good at loan origination and data collection and evaluation. But what if they have to lend 1000 crores? How will they be able to lend such a large amount? What they are doing in terms of incorporating latest technology and data collection goes a long way in the process of creating a credit evaluation model. But they don’t have the money to lend yet. Somebody has to fund the loan after all. So, that is a bottleneck for such banks.
Ravjot: Sir, but what about the funding that these banks are able to raise from international firms? Would that help them lend larger amounts in the future?
Mr. Manish Jain: Yes, it’s true. These banks have been able to raise a lot of funding. But the moment you get into the business of getting funded, the ROI(Return on Investment) comes into the picture. One has to think about margins, ROE etc That’s because now other stakeholders are present. The small payment banks were doing well as long as they were in the micro-financing setup-they used to buy at a rate of 16-17% and used to lend at around 26-34%.Margins were high back then.The moment they got into the banking business, those margins shrunk. That’s because they not only had to think about their margins but also the equity. Traditional banks, on the other hand, don’t have to worry much about equity. Besides, they have deeper pockets and are able to lend more.
Ravjot: In his interview, Mr. Likhit Wagle (General Manager; Global Banking & Financial Markets; IBM) had talked about the possibility of collaboration between the traditional banks and these payment banks. What are your thoughts on the same, sir?
Mr. Manish Jain: Yes I agree. In fact, most of the banks like Yes Bank, ICICI,HDFC are looking forward to entering the payment banking area. Most of them have setup FinTech innovation centres. They are trying to come up with innovative solutions in the FinTech sector. In my slide I had mentioned how everyone is trying to plug in the latest technology and innovations into their own banking system. So yes, I feel that a lot of banks are already working on the payment banking area.
Ravjot: Sir IBM has developed its cognitive technology framework which has been taken up by banks like CitiBank. I read that in the US, only one-fifth of the total spending on the banking sector has been allocated to cognitive banking. Most banks want to invest less on something that will provide them benefits in the long run rather than providing short term gains. In such situations, how does IBM work on convincing banks regarding the feasibility of new technology ideas?
Mr. Manish Jain: Adopting cognitive technology is a journey, The journey will start with small initiatives. For example, a lot of banks currently use the Chat bot (to assist customers in online banking) . in time, we can make the Chat bot an intelligent one. Then a conversational one.Furthermore, it can become a transactional Chat bot. So that is how you slowly evolve a technology. You try different use cases and keep putting in the investment in smaller amounts for the evolution of the technology. Cognitive technology is not like CRM(Customer Relationship Management), it’s not a product. It’s a platform. It needs to be taught. Technologies like Artificial Intelligence need to be taught to the masses with the help of use cases. Then you start building around those use cases, collecting data. Once you collect the data, you come up with more use cases. Slowly, when you gather enough data, you can witness the whole Artificial Intelligence ecosystem evolving. It is not something to be installed in one go, nobody will invest in a new technology in one go. They can work on POCs(Proof of Concepts) and with the success of each POC they will see the kind of benefit cognitive learning brings to their bank.
Ravjot: In your presentation you talked about latest Banking solutions like Fidor Banking. I read that they have a license to operate in Germany which obviously provides an ease of operation advantage. Do you think such a system can be implemented in India, with rather stringent regulations?
Mr. Manish Jain: Implementing such a technology has two parts- one is experience and the other is Asset Liability Management. In India,you need to implement both.We already have a strong asset liability management system-a balance sheet system,debit,credit,lending,deposit system. So, one option is to get only into the deposit side or lending side. For example, there are small finance banks like AU finance bank which only operated as a lending bank. So later, they got a deposit and started operating as a lending as well as a deposit bank. We have yet not reached that stage where we can have an only deposits bank. So the process is slow. We have slowly evolved to the stage where we can have a payments bank. The process will continue from here. Soon we will have a deposits bank. Again, there is no lending bank in the country. Though, HDFC also does lending. Soon we will have corporate banks, which will do lending only above 200 crores or so. So, like we have moved to the model of small banks and payment banks, we will further move to other types of differentiated banking models. RBI is slowly opening up the possibility of having such banks in the near future. So, it’s not like a window is opened for getting such licenses. The licenses are provided on a tab.
Ravjot: SBI has launched it’s bank-chain initiative to implement the blockchain technology in the banking sector (tech behind BitCoins). In the future, do you see Indians transacting more using BitCoins such that it also falls under the purview of the government?
Mr. Manish Jain: As far as I know, everybody is working on the POC stage of developing the bitcoin technology. They have been thinking, trying different solutions. But there are only POCs as far as I know. Everyone wants to believe that they are almost there when it comes to implementing the BitCoin technology. But truth is, it still is in the nascent stage of development. It has tremendous applications in the trade finance and payments banking sector. A lot of use cases have been successful. So yes, it is going to be plugged into the system in the future, no doubts about that.
Ravjot: OK Sir. Thank You so much for your valuable time. It was a pleasure hearing you speak about the latest technology trends in the banking sector.
Manish Jain: You are most welcome.