Faced with high growth in traffic, banks to ramp up digital capabilities

They will soon take a call on tech spending

Banks may have to review their digital capabilities given the exponential growth in this mode of transactions. And symptomatic of this are the outages in State Bank of India’s YONO and HDFC Bank’s digital platforms, even as it puts the spotlight on chief technology officers (CTOs).

“Within open-architecture systems, glitches are bound to happen. Heavy traffic systems such as Twitter and WhatsApp have encountered outages,” says Mahesh Ramamoorthy, managing director for banking solutions at FIS. Over the next 18 months, banks can be expected to take a call on technology spends, as also on the nature of the relationship between CTOs and chief marketing officers.

“The relationship has transformed from being a service provider to being a partner. Technologists are expected to understand business trends and bankers are becoming much more tech-savvy. Emerging technology around predictive analytics has placed data at the front and centre of all that we do,” says Dilip Khandelwal, global head of technology centres at Deutsche Bank.

A 2019 Accenture report noted that globally, banks invested $1 trillion over the past three years in technology, but these have not yet delivered the anticipated revenue growth. Half the banks achieved higher profitability and returns on equity (RoE), driven by greater operating leverage, but not differential revenue growth.

While digital maturity is associated with high market valuations and a better RoE, only 12 per cent appear to be fully committed to a digital-first strategy; 38 per cent are in the midst of transformation, though their digital strategies lack coherence. The remainder have not made much visible progress in this area and investors are showing a lack of confidence.

Bridging the disconnect

In India, there are no studies in the public domain on banks’ technology spends. They still work in silos. And with brick-and-mortar stores yet to recover footfall and online platforms remaining the choice of purchase, the pandemic may have aggravated the disconnect between scalability and the ability to handle higher customer loads.

“Banks need robust and agile security systems. The question today is to decide how much to invest, when to invest and, how to align with compliance issues,” explains Prasad Rai, vice-president (strategic clients group) at Oracle (India). That would mean adopting technologies such as artificial intelligence and machine learning, which are scalable and flexible, for predicting transaction volumes any time.

“We do regular audits and checks on our digital capacities. Now, we have started conducting out-of-turn audits,” says Sameer Shetty, executive vice president  and head, digital banking and transformation, at Axis Bank. He adds that the bank is also working on reducing redundancy rates and a backup plan in case of such outages. “When an area is seeing a sign of scale, we need to invest ahead of the scale.” At a recent analyst meet, ICICI Bank emphasised disaster management to quickly resolve the impact of digital outages. 

Information technology (IT) spends are at 10-13 per cent of annual revenues for large banks. “What may have happened is that, in the midst of the pandemic and organisations going on a cost cutting mode, it’s possible that banks may have reduced their IT budgets for the year,” adds Ramamoorthy. 

Technology issues apart, the central bank’s growing discomfort on bundling of offers — including cashbacks on credit-card swipes on consumer loans — also needs to be factored in. According to a source, the first regulatory frown came in 2018: “Some of the large private banks were partnering with Flipkart and Amazon to offer discounts and this did not go down well with the central bank.” The latter’s view is that while this business carries little capital weight, its impact on the books can be just as significant as any other loan.

It is also pertinent to take note of the RBI’s moves from the point of RegTech. The Report on Trend and Progress of Banking India (2019-20), released last week, observes:  Notwithstanding its many advantages in terms of data and privacy protection, cyber risks are a major challenge in technology adoption.

The RBI plans to undertake a broad-based survey on RegTech adoption and based on the findings, broad principles to encourage adoption of these tools will be developed.” The central bank is also using state-of-the-art data visualisation techniques to identify risk areas and entities.

Whichever way you look at it, the digital story may undergo a change — for the better.