Contemporary Banking, Payment and Insurance PDF

Contemporary Banking, Payment and Insurance  Unit-I: Introduction to Financial Institutions COURSE CONTENT Unit-II: BankingTech Unit-III: PayTech Unit-IV: LendingTech Unit-V: InsurTech ...

Contemporary Banking, Payment and Insurance  Unit-I: Introduction to Financial Institutions COURSE CONTENT Unit-II: BankingTech Unit-III: PayTech Unit-IV: LendingTech Unit-V: InsurTech  Unit-II BankingTech ▪ Overview of BankingTech- Digital journey ▪ India’s changing banking dynamics ▪ Various BankingTech Products & Services ▪ Evolution of BankingTech Industry (Retail Banking, Core Banking System, CRM, Digital Banking Platform, BAAS, Metaverse banking, Quantum Banking. Neo Banking, Rural Banking, Microfinance Institutions )  BankingTech is a term used for the technology used in banking. From the core banking solutions to high-end customer service robots, Meaning of everything is a part of the bankTech. BankingTech BankingTech is the tech solution for the banking industry that includes software, hardware, and Tech-enabled services.  Tec h nology in Bank ing - Th e Pas t P r o b lems w i t h t h i s t ec h n o lo g y Tec h no lo gy i n Bank i ng - Th e P r es ent Fr au ds i n P r es ent Tec h no lo gy Env i r o nment Tec h no lo gy i n Bank i ng - Th e F u tu r e  Key Statistics On Digital Banking 86% of customers will pay more for a great customer experience (Source: Forbes) 78% of millennials want banking apps that anticipate their needs (Source: Accenture 2023 Global Consumer Pulse Survey) >2/3rds companies are already competing on customer experience because their offerings are so similar (such as banks or telcos) (Source: Forbes) Banks using AI-powered hyper-personalization see a 9% increase in customer satisfaction (Source: Capgemini Financial Services Report 2023) Generative AI could boost banking productivity by 2.8% to 4.7%, translating to an extra $200-340 billion annually (Source: Mckinsey) By 2024, organizations will reduce operational costs by 30% by combining hyper-automation technologies with redesigned operational processes (Source: Gartner) Current generative AI and other technologies have the potential to automate work activities that absorb 60 to 70% of employees’ time today (Source: Mckinsey)  Notable Trends in the Banking Industry Sector I. Improved risk management practices In Union Budget 2023, the KYC process has been streamlined using a ‘risk-based’ strategy rather than a ‘one size fits all’ approach. Indian banks are increasingly focused on adopting an integrated approach to risk management. A draft MD providing a consolidated and updated IT governance and risk management framework for regulated entities (REs) has been placed on the Reserve Bank’s website in October 2022 for public comments. As of August 2022, Notably, public sector banks (PSBs) stumbled in achieving greater compliance with the dimensions of board effectiveness, risk management, and audit functions. II. Focus on financial inclusion The emergence and expansion of fintech, has played a crucial role in enhancing financial inclusion. The National Strategy for Financial Inclusion (NSFI) 2019-24 sets forth the vision and key objectives of financial inclusion policies in India, with an emphasis on enhancing digital financial inclusion, promoting financial literacy and strengthening the grievance redressal mechanism in the country.  Notable Trends in the Banking Industry Sector III. Technological innovations On August 10, 2023, as part of the Statement on Developmental and Regulatory Policies, the Reserve Bank of India (RBI) announced the creation of a Public Tech Platform for seamless credit. This Platform is being developed by the Reserve Bank Innovation Hub (RBIH), a fully-owned subsidiary of RBI, The platform facilitates smooth credit delivery by sharing digital information. Digitalization of Agri-finance was conceptualized jointly by the Reserve Bank and the Reserve Bank Innovation Hub (RBIH). This will enable the delivery of Kisan Credit Card (KCC) loans in a fully digital and hassle-free manner. In November 2022, RBI launched a pilot project on central bank digital currency (CBDC). As on April 2024, there were 581 banks actively using UPI. The total number of Digital transactions as on December 2023, amounted to 15.08 billion, with a total value of Rs. 2.1 trillion (US$ 25.27 billion).  Notable Trends in the Banking Industry Sector IV. Focus on Jan Dhan Yojana PMJDY account holders receive direct benefit transfer (DBT) from the Government under various schemes. Amounting to Rs. 2,28,057 crore ($27.32 billion) 52.30 crore total beneficiaries banked till May 2024. Within 10 days of the nationwide lockdown due to COVID-19, over 20 crore women’s PMJDY accounts were credited with ex gratia. It provides an avenue for the poor to bring their savings into the formal financial system, an avenue to remit money to their families in villages besides taking them out of the clutches of the usurious money lenders. V. Consolidation Banks increasingly consolidation to derive greater benefits such as enhanced synergy, cost take-outs from economies of scale, organizational efficiency and diversification of risks. After consolidating for the last two years, Indian banks took off this year, lifted by falling NPAs, higher credit growth and rising digitalization.  Notable Trends in the Banking Industry Sector VI. Wide usability of RTGS, NEFT, and IMPS NEFT & RTGS payment system has been included by the Securities Exchange Board of India (SEBI) in the existing methods list that a company can use for dividend payments or other cash benefits to their shareholders & investors. Round-the-clock availability. The number of transactions through IMPS has further increased. The number of transactions through Real Time Gross Settlement (RTGS) increased by 13.1% YoY and National Electronic Funds Transfer (NEFT) increased by 43.4% YoY in January 2024. VII. Know Your Client RBI mandated the Know Your Customer (KYC) Standards, wherein, all banks are required to put in place to a comprehensive policy framework to avoid money laundering activities. The KYC policy is now compulsory for opening an account or making any investments.  Notable Trends in the Banking Industry Sector VIII. RBI Retail Direct Scheme RBI Retail Direct Scheme is a one-stop solution to facilitate investment in Government Securities by Individual Investors. Non-resident Indians (NRIs) have the opportunity to directly invest in government securities (G-Secs), state development loans (SDLs), and treasury bills (T-bills) through the Reserve Bank of India's retail direct platform. However, sovereign gold bonds (SGBs) and floating rate bonds cannot be accessed through this channel. The following additional services are proposed to be made available to the Retail Direct Investor on the RBI Retail Direct Portal: Nomination Gifting Pledge/Lien/Transfer IX. Global Hackathon In November 2023, ICode Foundation marks the conclusion of the 7th Global Hackathon, bringing together over 3 million students from 70+ countries. This year's event witnessed an exceptional turnout with over 3 million students from 70+ countries and 10,000+ schools worldwide taking part. Status of Online Banking In India Statista 2024  Digital Banking Products & Services Statista 2024  How banks are using technology? Financial advice: Banks can train chatbots to provide investment information and guidance. Users then receive recommendations and make more informed decisions regarding their investments, fostering financial literacy. Loan applications: Chatbots can assist customers in the loan application process, guide users through the necessary steps, and ensure that loan applications are completed correctly and efficiently. Money transfers: Through chatbots, users can potentially initiate fund transfers to other accounts or make payments to merchants seamlessly. This simplifies the process of conducting financial transactions and ensures that users can manage their money effortlessly. Credit score monitoring: Help users monitor their credit scores and offer valuable insights on improving them. This empowers individuals to take proactive steps to enhance their financial health.  How banks are using technology? Insurance claims: Banks can develop AI bots to handle insurance claims, guiding users through the submission process and providing information on the status of their claims. This simplifies insurance-related interactions. Account inquiries: Banking customers can utilize AI to conveniently check their account balances, review transaction history, and access other account-related information. This offers users quick and easy access to their financial data, enhancing their banking experience. Account management: AI models can be trained to assist users with various account management tasks, such as setting up automatic payments, updating personal information, and managing account preferences. This streamlines the account management process for customers.  How banks are using technology? Fraud prevention: By leveraging AI, banks can enhance security measures by continuously monitoring user transactions for any unusual or suspicious activity. This proactive approach helps in preventing fraud and safeguarding users' accounts. Customer service: Chatbots can serve as efficient customer service representatives, promptly addressing common inquiries and resolving straightforward issues. This provides customers with a hassle-free way to obtain assistance and support. Financial planning: AI can aid users in financial planning activities, including budgeting and goal setting. They can offer personalized advice and recommendations to help individuals achieve their financial objectives more effectively. Open Banking increases the effectiveness of these models by aggregating data from many accounts in one place. Strategies Adopted in Banking Industry  Growth Drivers of Indian Banking Industry  Growth Drivers of Indian Banking Industry Schemes by Government Schemes by Government ebankIT Omnichannel Digital Banking Platform  Difference Between Mobile Banking and Internet Banking Basis for Mobile Banking Internet Banking Comparison Services Offers basic banking services such as Provides a wider range of services, checking account balances, transferring including applying for loans, investment funds, and bill payments management, and accessing detailed financial statements User Interface Utilizes mobile apps or mobile-optimized Relies on internet browsers with various websites for a user-friendly interface banking websites, which may have different interfaces Security Requires secure authentication methods Relies on usernames, passwords, and such as PIN, biometrics, or two-factor additional security measures like one-time authentication passwords or security tokens Transaction Limits May have lower transaction limits Typically offers higher transaction limits, compared to internet banking depending on the bank's policies Additional Features May include additional features like Offers features like online shopping, contactless payments, QR code scanning payment gateways, and integration with third-party services Key Statistics  It was a two-tiered banking phase ruled by central banks that relied Traditional on one-on-one interactions with customers in a physical space. The Banking stage was known for being paper-based and heavily manual, with an absence of financial product customizations and personalization. Digitalization of the banking industry came into full force in the last Internet decade. It was divided into two categories – one where the existing processes were digitalized to be accessed through mobile and the Banking internet and the second stage was where new customer journeys were made to address the digital-first demand of customers.  In the last three to five years, the banking industry has opened itself to be connected with third-party services via APIs. This has led to a Open number of neo-banks, cross-industry marketplace offers by banks (for Banking example: health services, buy and sell automotives, energy services, etc.) coming into existence. With the advent of Web3, blockchain has given birth to a new secure, Digitalized borderless, and fast banking economy. A huge role in this is played by Finance Banking NFTs and cryptos, which have added entirely new assets to the financial market, like art, gaming, and real estate. In the last one-two years, the metaverse has gained massive traction Metaverse in the among a range of industries, with banking being one of them. With virtual banking experience taking center stage, the industry is set for Banking Sector another massive revolution.  NEO BANKS A Neo bank is a kind of digital bank without any branches. Rather than being physically present at a specific location, neo-banking is entirely online. Neobanks are financial institutions that give customers a cheaper alternative to traditional banks. They leverage technology and artificial intelligence to offer personalized services to customers while minimizing operating costs. Neo banks entered the financial system with the tag of 'challenger banks' because they challenged the complex infrastructure and client onboarding process of traditional banks. In India, these firms don't have a bank license of their own but rely on bank partners to offer licensed services. That’s because the RBI doesn’t allow banks to be 100% digital yet. The RBI remains resolute in prioritizing banks’ physical presence and has spoken about the need for digital banking service providers to have some physical presence as well. RazorpayX, Jupiter, Niyo, Open,etc are the examples of top Neobanks of India.  Meta Verse Banking The term “Metaverse” was first coined by author Neal Stephenson in his science fiction novel Snow Crash in the year 1992. It is a virtual reality platform where people may engage socially and professionally, invest in property, create digital assets, take classes, work, and even travel in 3-D virtual reality using their avatars. Similar to real world, Metaverse will require an infrastructure with the help of which people can transact, own, sell, or create a digital asset. The term “Banking in Metaverse” can be construed as the mechanism, wherein the banks with the help of AR, VR and cryptocurrency can manage of financial transaction such as lending, withdrawal, payment, etc., in virtual environment.  STATISTICS OF THE METAVERSE The metaverse isn’t just a whimsical concept; it’s a burgeoning reality with impressive statistics: The metaverse market is projected to reach a staggering $800 billion by 2024. It’s not just a niche; it’s a thriving industry. According to a study by Metaversed, the metaverse will reach 400 million daily active users (DAUs) in 2022. According to Bloomberg, the global Metaverse revenue opportunity could approach $800 billion in 2024, up from around $500 billion in 2020. Metaverse Market Size in India Average Metaverse Market Size Per User in India  HOW BANKING IN METAVERSE WILL WORK: THE BANKING PERSPECTIVE With the help of AR and VR technology, banks will be able to provide virtual cash, non-fungible tokens, service of payments, insurance, loans against virtual real estate in the expanding metaverse economy. The Bank will be able to leverage the AR and VR technology to create innovative customer interaction such as, the Banks can also initiate and put together virtual client interactions like cash transactions from virtual ATMs thereby simulating virtual client interactions like cash withdrawals from such virtual ATMs. The banks with the help of AR and VR technology will be able to invent innovative financial products such as – i. Digital payments: Banks will be able to provide secure wallet functionality and payment rails for metaverse products, services and economies. ii. Digital assets: Banks can extend their role as custodians of customers’ assets by securing, insuring and lending against cryptocurrency, NFTs and virtual real estate. iii. Digital twins: Banks can re-create a virtual infrastructure of a property to provide a virtual tour of the same a person might be interested in buying rather than simply browsing 2D photos and video.  HOW BANKING IN METAVERSE WILL WORK: THE CONSUMER PERSPECTIVE With the onset of ATMs that came along with the introduction of debit and credit cards, obliviating the requirement to withdraw and carry cash. With the development of technology, electronic payments came into picture, which obliviated the use of physical card. However, the digital banking is functionally independent, it was often construed as emotionally detached. Metaverse will allow the consumer to have a more engaging experience as it brings human touch to the digital experience and virtual interactions conducted in the Metaverse. Apart from that, the Banking in Metaverse offers to put the humanity back in banking and restore the dialogue and human interaction, which got lost in the digital world. It will be manifested based on technologies like Augmented Reality (“AR”), Virtual Reality (“VR”), and blockchain, which will enable people to virtually meet and interact with banks. Therefore, Metaverse for banking could mean transforming the present-day online banking experience to a virtual space that would render an experience of walking into a bank physically.  THE CURRENT SCENERIO JP Morgan In 2022, JP Morgan acquired a virtual commercial space in Decentraland, which is a browser-based platform for 3D virtual worlds. By using the MANA cryptocurrency, it operates on the Ethereum blockchain, users can purchase virtual land parcels on the platform in the form of Non-Fungible Tokens (hereinafter abbreviated as “NFTs”) Further, in the future, JP Morgan plans to bring business opportunities worth more than $1,000 billion to the metaverse. JP Morgan has been one of the major proponents of blockchain and its uses in banking system. Thus, the corporate giant while initiating the said development into the metaverse was very obvious. HSBC Bank In 2022 itself, the bank has acquired a virtual land in the Sandbox. At present, the said virtual space only shows a video that mentions about HSBC occupying the land. Standard Chartered Bank This year, Standard Chartered Bank announced that it has invested in a virtual land on Decentraland as well.  THE CURRENT SCENERIO Union Bank of India The state-led Union Bank of India recently on 8th July, 2022 have launched a Metaverse-based virtual lounge, where it will showcase its products to customers virtually, it is the first Indian Bank to open a virtual lounge. The Union Bank of India vide its “Uni-verse”, the Metaverse virtual lounge, plans to deliver a unique experience of banking to its customers who can roam around the lounge, get information of the bank’s deposits, loans, government welfare schemes, and digital initiatives as if they are experiencing the real world. Further, the Union Bank of India intends to showcase the Metaverse lounge through the newly- built Digital Banking Units (“DBU”). The DBU is a specialized fixed point business unit or hub that houses specific basic digital infrastructure for offering digital banking products and services and servicing current financial products and services in self-service mode at any time. Click on https://metaverse.unionbankofindia.co.in/WebGL/  Benefits of Metaverse in the Banking industry Secure Virtual Banking Virtual Reality Authentication Branches Banking Virtual Financial Virtual Financial Education Consultations Digital Asset Blockchain Gaming and Management Based NFT Integration Transactions Interactive Financial Customer Inclusion Support  Advancements in Digital Banking for Rural India Government Initiatives: The Indian government’s unwavering commitment to digital banking initiatives in India has been instrumental in its progress. Programs like Digital India and BharatNet focus on expanding internet connectivity and digital literacy in rural areas. The 2023 report from the Reserve Bank of India (RBI) predicts a significant increase in internet subscribers in rural areas, creating a fertile ground for the adoption of digital banking services. Revolution of Mobile Banking: Mobile banking has revolutionized digital banking in rural India, eliminating the need for long trips to bank branches. With user-friendly apps in local languages, rural residents can now access their accounts, transfer money, and pay bills easily. A 2022 study by Assocham and PwC found that mobile banking transactions in rural India have surged by over 200% in the past three years. Fintech Partnerships: Digital banking is witnessing a surge in collaborations between traditional banks and fintech (financial technology) companies. Fintech startups are developing innovative solutions like micro-loans, micro-insurance, and USSD (Unstructured Supplementary Service Data) based banking for feature phones, catering specifically to the needs of the rural population.  Advancements in Digital Banking for Rural India Focus on Financial Literacy: Realizing the importance of financial literacy for successful adoption of digital banking services, various parties are implementing campaigns. These campaigns educate rural residents on topics such as good banking practices, fraud detection, and maximizing the value of digital financial tools. Persistent challenges in digital banking in rural areas. Poor Internet connectivity: Despite progress, Internet connectivity is still a major barrier in many rural areas. This restricts access to online banking, limiting the potential of full digital banking. Digital literacy rate: Although digital literacy is increasing, a large segment of the rural population still lacks the skills to navigate the digital banking system with confidence. This can lead to reluctance to accept these services. Language barriers: Access to user interfaces and customer support in local languages is still limited for some digital banking applications. This creates a barrier for those who are not fluent in English or Hindi. Internet concerns: The growth of digital commerce has also led to concerns about Internet threats. Rural residents, who may not be familiar with online security measures, may be more vulnerable to phishing scams and malware attacks.  Future Perspective of Digital Banking for Rural India Offline to Online Integration: A hybrid model that combines offline channels (such as postal banking) and online banking can bridge the digital divide. country. Artificial Intelligence (AI) and Big Data: Leveraging AI and big data collection can streamline the digital banking experience for rural customers, offering them customized financial products and services. Focus on local languages: Increased focus on providing digital banking space and customer support in local languages will increase accessibility and user confidence. Blockchain Technology: The adoption of blockchain technology can improve the security and transparency of digital transactions, thus solving cybersecurity concerns in the countryside. Official Plans and Reports of Digital Banking for Rural India Reserve Bank of India (RBI) India Banking Sector Trends and Progress Report (Latest Edition) This report, published annually by the RBI, provides an overview of India’s banking sector, including an overview of the progress of digital banking in rural areas. You can find the latest publication on the RBI website: [https://www.rbi.org.in/] Starting Financial Literacy: The RBI website has a dedicated section on financial literacy, providing tutorials and information on promoting good digital banking practices: [https://www.rbi.org.in/financialeducation/] Ministry of Finance (MoF) Investment Sector: The Ministry of Finance website has a dedicated section on investment and digital banking resources and initiatives and their impact on rural areas: [https://financialservices.gov.in/beta/] World Bank India’s Digital Payments Revolution: A Participatory Story? (2023): This report examines the government’s efforts to expand digital infrastructure and literacy programs to drive adoption of digital payments in rural India: [https://genderdata.worldbank.org/]