Technology Will Be the Deciding Factor

There is a good chance that 2021 will be remembered as the year the world picked itself up after Covid-19. In particular, the banking sector was forced to make years' worth of technology and business model changes in a matter of months.

In India, since the nationalisation of banks, the banking sector has evolved significantly. A strong banking sector has been instrumental in India's growth over the years. However, the sector has been laden with high NPA levels. The introduction of the Insolvency and Bankruptcy Code (IBC) helped create a better resolution mechanism for large NPA situations.

The retail banking sector, though less impacted by the non-performing loans situation, was hit by Covid-19 to some extent. However, relief packages and regulatory measures announced by the government did support the sector in a big way and gradually put it on the path to revival. If anything, Covid-19 has shifted the focus of the banking and financial services sector towards innovation, to prepare for a future that will be increasingly technology driven, characterised by instant payments, anytime-anywhere services, individualised products and virtual currencies.

Additionally, we have also seen banks increase their focus on Data Analytics and the Cloud, and most importantly, many have looked at optimising real estate and operating costs.

To use a scientific analogy, the pandemic saw the entire banking sector stretched like an elastic band, and there is always a desire to let the band relax and go back to "normal". But when you stretch an elastic band, you also create a kind of energy. In a moment's time that energy can be transformed into rapid forward motion. For the banking sector it meant a sustained burst of innovation and improvisation. The question they face now is where to let the elastic relax and ease the stress of 2020. and how to use the experience of last year to drive the institution forward.

A look at three trends that are most likely to affect the banking sector over the next 12 months:

Pivot To Digital

The pivot to digital is likely to provide opportunities for cost transformation in areas of sales, credit and operations. We could see increased focus on improving sales productivity with banks enabling their field force with digital enablers and digital sourcing of leads through the eco-system by developing business partnerships and effective lead management. These are likely to be the three key change-drivers. Digital is also likely to force banks to revisit the complete channel mix, acquisition mechanisms, and thereby aid sales cost transformation.

More and more banks are likely to re-wire the credit flow by leveraging digital workflows and business processes, using verified data sources from the ecosystem that will help in enabling credit processes. This will also lead to reduction in costs associated with credit functions such as data entry costs and manual credit assessments. Retail credit and business loan segment to MSMEs are two areas of immediate disruptions.

Operations processes also need to be aligned to customer journeys and experience. This provides an opportunity for banks to focus on customer centricity, moving away from a more product-centric business, thereby allowing optimisation of cost structure.

Consolidation, The Way Forward

The government has consolidated public sector banks, where the number of PSBs has reduced to 12 in 2020 from 27 in 2017. In the new landscape, the six consolidated PSBs will compete with large private banks in terms of technology, product range and consumer reach. This reaffirms the government's decision of owning a select few entities under the new privatisation policy.

Further, we have seen regulators having an open mind about resolving stressed bank situations as demonstrated by the recent sale of an old private sector bank to a Singapore-based foreign bank and a Canada-based holding company's acquisition of majority stake in an Indian private sector bank.

The report of the RBI's internal working group to review ownership guidelines and corporate structure for private banks has added an interesting dimension - large corporate/industrial houses may be permitted to promote banks after necessary amendments to the Banking Regulations Act, 1949. The RBI has also issued a discussion paper on January 22, 2021 on regulating NBFCs based on scale, which may also potentially lead to conversion of few NBFCs into banks. Final guidelines are awaited.

In addition, the following factors would accelerate consolidation in the banking sector:

• Growth aspirations of large banks and NBFCs to achieve scale
• Aspirations of Small Finance Banks and large NBFCs to convert into Universal banks
• Conversion of Payment Banks and Urban Co-operative Banks into Small Finance Banks.

HR Transformation To Lead The Way

After almost a year of navigating Covid-19, the banking sector saw the pandemic as an opportunity to reshape their workforce norms and culture to come out stronger than before. The sector was more prepared than others to manage the Covid-19 impact with targeted interventions according to KPMG in India's HR Practices Survey Report titled Cutting Though Crisis released in May 2020. Eighty five per cent of respondents from the banking and financial services sector rated their preparedness for managing people impacted by Covid-19 as high. The survey also highlighted that about 47 per cent of banking institutions saw a change in their hiring schedules, while as many as 89 per cent saw no change in fixed-pay impact.

Facilitation of business continuity during Covid-19 was an immediate imperative for the sector. A mark of this effort was the consolidation exercise across public sector banks in India. Leading banks made a conscious effort towards building and shaping the workforce of the future with more jobs shifting towards work from home and leveraging the concept of a gig workforce.

This transformation meant a fresh outlook with the core business model and ways of working within banks changing gradually. Below are some of the new imperatives that have emerged regarding managing the workforce through the pandemic:

• New ways of working - We have seen clustering of roles into new segments such as onsite, virtual, hybrid, flexi hours, GIG for Business as Usual (BAU) situation. This form of strategic workforce segmentation could go on to become a key differentiator when it comes to building cost resilience within banks.

• Emerging family of roles - Unique roles are no longer standard for site jobs. They are now classified as virtual, GIG, hybrid and on-site. It will be critical to understand its impact on the larger human resource and organisational landscape. Exploring and introducing flexi hours for seasonal or less-utilised roles, along with increasing virtual roles is an option that a lot of organisations could look at, including the ones in the banking sector.

• Reinventing productivity and performance - Measurement of productivity and performance are going to be different if banks are moving to a different operating model. Performance Management Systems (PMS) will move from 'effort based' to 'outcome based', as they might find it difficult to monitor employees in remote working. Banks could look at leveraging digital productivity assessment tools to track utilisation, manage redistribution and provide corrective action on employee behaviours. By employing such measures, banking institutions could revamp their operating models, cluster existing and evolving roles in different categories to support business continuity, relook productivity and performance and reward structure to align with evolving work paradigms and move towards enabling virtual working to support workforce with new ways of operating.

Resiliency & Risk Management

The banking sector has been a crucible for technology experiments, fostering several innovations. In fact, the precursor to the current "work from anywhere" concepts being adopted by organisations worldwide has its genesis in the banking sector, which gave to the world the convenience of anytime and anywhere banking through a series of initiatives. Once the pandemic set in, it was inevitable that banks roll out a series of measures which not only made banking services accessible and convenient, but also increased adoption of online services.

In the past couple of years, banks have been successful in incubating, developing and deploying 'use cases' by leveraging new-age technologies. For e.g. Robotics Process Automation (RPA) has been used by a number of banks to improve operational efficiency. A typical technology landscape of banks comprises core and new-age systems. Banks, which have been able to crack the code by creating a technology layer where both these categories of systems coexist and complement each other, have been typically ahead of the curve.

On the lending front, the initial phase of the digital journey has largely entailed around self-service credit applications and mobile apps for banking needs. At the back-end processing level, applications have increasingly focused on customer acquisition and risk-rating processes, including tools that aid risk-based pricing and lending decisions. The second phase has reinforced capabilities around AI & ML technologies traversing through both structured and unstructured data. This will result in smarter customer acquisition, improvement in real-time credit risk management (covering both model development and model validations), and reduction in operational costs.

On the market risk side, treasury desks have started imbibing the value of digitisation into their day-to-day functioning with analytics tools. These tools enable them to improve both time and cost of executing transactions and undertake better cash management and optimisation decisions. The new phase will see solutions around liquidity management and regulatory requirements such as the Basel Committee on Banking Supervision (BCBS) 248, Liquidity Coverage ratio (LCR), Net Stable Funding Ratio (NSFR) and the stipulations around Liquidity Stress Testing.

On the operational risk front, the recent surge in cyber incidents, large instances of fraudulent behaviour and transactions, or the complexity of today's systems and processes signify that operational risks and digital risks are increasingly intertwined as banking operations become more and more digitised.

With technological advancements happening in leaps and bounds, the future looks promising as well as exciting. The advent of 5G, development and increased adoption of Blockchain, unlocking benefits from AI and ML can open endless possibilities around use-cases such as platform-driven KYC, Blockchain-driven settlement, etc.

Lastly, it is clear that increased use of technology is the way forward for banks, but what is also true is that there are uncertainties about execution. We believe it's time for banking and financial institutions to redefine themselves as agile technology companies, not the other way around. That said banks will also need to examine the fundamentals sustaining their core operations as customer preferences, demographics and lifestyles change.

As banks today continue to cope with the developments, their ability to transform themselves with speed and agility to survive the next revolution, will determine the winners and losers in this technologically advanced future.

The writer is Partner and Head, Financial Services Advisory, KPMG in India;KPMG partners Amit Wagh, Vishalli Dongrie, Kunal Pande, Samrat Jha, and Chartered Accountant Minaar Malse contributed to the article