Apart from redesigning the framework, the BFSI sector needs advanced operating models: Dr. Amitabh Rajan, Chairman, RBI Services Board
The outbreak of the pandemic and its ongoing effects have brought about several significant technological shifts across industries and the BFSI sector is no different. While the digital inclination is nothing new in the banking and finance industry, a sudden acceleration of digital transformation is certainly being seen around the world. Research reports suggest that digital transformation in the BFSI market will reach $164.08 billion, globally, by 2027. With the aim of understanding how technology is going to help reinvent the BFSI industry and what new trends and innovations are likely to approach the client industry, Rashi Aditi Ghosh of Elets Information Network (ENN) had exclusive interaction with Dr. Amitabh Rajan, Chairman, Reserve Bank of India Service Board.
Excerpts from the interaction:
Q. How should we conceptualize the BFSI sector in an economy? How is the sector an integrated whole?
A. Structurally, as well as functionally, BFSI includes a wide range of activities. When you look closer, you are struck by the enormity of the institutional web before you, as well as the associated qualitative depth in its evolutionary process. You then realize that the term people use (BFSI) to highlight the bundling of banking, financial and insurance services, actually only conveys a bit of entrepreneurial angst for excellence and risk at work .
For the State and Society, the concept of BFSI is useful; it allows them to make targeted decisions on three crucial ethical concerns:
(i) consumer protection
(ii) corporate-level integrity, and
(iii) fair competition.
This concept also helps governments take an evidence-based policy view regarding the strengths, weaknesses, opportunities and threats within a significant segment of the country’s entrepreneurial activity. This allows them to understand market cycles in greater depth.
Q. Do you believe that the conceptualization of “disruptive innovation” is adequate enough to understand contemporary reality?
Disruptive innovation is a concept that helps us understand entrepreneurial developments in contemporary technology markets. The Schumpeterian vision of “creative destruction” already existed. Books by Clayton M. Christensen published in the years 1997 [The Innovator’s Dilemma : When New Technologies Cause Great Firms to Fail] 2003 [The Innovator’s Solution : Creating and Sustaining Successful Growth] and 2013 [The Innovator’s DNA : Mastering The Five Skills of Disruptive Innovation]deepened the dynamics of “disruptive innovation” and provided sharp and much-needed conceptual clarity.
Q. What technologies will play a significant role in disrupting the BFSI sector?
It depends on the market an entrepreneur aims to creatively disrupt. However, there is a broader scope of the fourth industrial revolution, and industry trends in market experience can also be seen as a path for growth. This, in other words, means prospects of:
(i) Big Data Analytics, Artificial Intelligence and Machine Learning
(ii) Building Cloud Computing Capabilities
(iv) Blockchain technology for systemic efficiency gain and risk reduction
(v) Internet of Things for card payment tokenization facilities, and
(vi) Automation of robotic processes for mortgage loan processing and reporting.
Q. Do you have any ideas on frameworks for rethinking business and operating models?
“Rethink” because businesses today need to realize the overriding fact that IR 4.0 is at an early stage of the insights and processes that the revolution has put in place through many disruptions and mergers. Gaining and maintaining competitive advantage for businesses therefore requires not only an ethic of prudence, but also the agility required to infuse new knowledge, skills, funds and networks. The landscape of breakups and mergers is remarkably subdued even in the BFSI sector; Nations need to act with a sense of urgency.
In addition to businesses rethinking frameworks, the BFSI industry also requires advanced operating models to achieve the required agility, scalability, analytical rigor, and behavioral responsiveness within its systems. There is now a consensus within the industry to view the post-2008 tectonic shifts in technology and finance as historic opportunities, opportunities that will be fatally missed if operating models remain business as usual. When algorithms and networks rule the world, operating constraints must be removed with a vision of history.
Q. What can be done to help innovative FinTech entities grow sustainably and grow resiliently?
FinTech has proven its revolutionary potential to increase service efficiency and reduce transaction costs. However, regulatory oversight is needed to understand new risks and, in some cases, amplified versions of current risks. FinTech covers a wide range of critical social activities related to a customer’s trust (money transfers, payment processing and infrastructure, business lending, small business services, mortgages, examples are alternative lending, stock trading, credit reporting, financial security and insurance) . A regulatory architecture must be developed legally to ensure that there is no breach of trust anywhere.
Although revolutionary in terms of service potential, FinTech companies face daily operational challenges. They manage them innovatively to the extent they can, but need government protection to survive structural adversities. It is necessary because the exponential deployment of IR 4.0 must be nurtured at the national level in the interest of public service and functional aberrations in the path of economic growth must be channeled with the utmost caution. The Global Covid-19 FinTech Market Rapid Assessment Study (2020) attempted to investigate some of these aspects with methodological rigour; We need ethically conscious entrepreneurial states.
Q. How does Blockchain technology embed trust in transactions and insurance contracts?
Blockchain is a technology whose time has come, even for the insurance industry, in terms of transactions and contracts. Within underwriting, technology can help in transformative ways to reduce costs and refine risk assessment. It also now has proven potential to radically improve customer onboarding, fundamentally change claims submission processes, and detect fraud early. In combination with the Internet of Things and Artificial Intelligence, Blockchain technology further enhances the automation of insurance processes to emerge as a paradigm shifting proposition in the industry.
The Blockchain innovation landscape has grown from bitcoin to smart contracts to proof-of-stake systems in just ten years. From a technology perspective, these are structural changes of commercial importance to the insurance industry. They should reach stakeholders as inputs for timely cross-disciplinary decisions on stability and growth. Blockchain-driven smart contacts are also an active creative area to consider these days. They increase business value in the context of chain management, but are written in software code that creates a skills gap for non-coding lawyers and non-drafting coders. Agile interdisciplinary teams must therefore operate with respect for evidence-based interdisciplinary feedback.
Q. Are there insights from contemporary regulatory theory to help regulate the BFSI sector appropriately?
The dominant global political council until 2008 was the neoliberal premise [Fredrich Hayak (economic philosophy), James M. Buchanan (constitutional economics), Richard Posner (legal theory) and Milton Friedman (monetary economics)] who viewed the market as a “self-correcting” “spontaneous order” requiring no regulatory intervention. The 2008 global financial crisis exposed all of these arguments based on “market fundamentalism”, and regulation was reinforced as a “lesson learned” in all sectors and all nations.
The post-2008 regulatory reform measures taken for the growth of India’s BFSI sector are of importance in the field of regulatory theory. We can point out here
(i) the quality of the legal texts adopted during this period
(ii) the degree of confidence placed in the agencies by expanding their powers of supervision and regulation, and
(iii) creating structured spaces within systems for adequate multi-stakeholder expert discourse.
As for the sector itself, it has business cycle resilience; It requires the addition of IR 4.0 capabilities without wasting additional time.