Banking on a systems upgrade: What more could we expect going ahead

The cautionary tale from the Block Inc debacle is that increasing digitisation of retail financial services in India has raised the threat levels of frauds

Hindenburg Research has trained its guns on Jack Dorsey’s Block Inc alleging that it had overstated its user counts, and downplayed customer acquisition costs through its Cash App platform. That Block had reported “a pandemic surge” in its user counts and revenue; and ignored “widespread fraudulent accounts and payments”. The veracity of Hindenburg’s charges against Block is yet to be proven, but back home the “Report on Digital Lending through Online Platforms and Mobile Apps” released on November 18, 2021, was disconcerting. It said there were approximately 1,100 lending apps available for Indian Android users across 80-plus application stores (from January 1, 2021, to February 28, 2021).

In other words, the underbelly of digital lending is showing. And this, even as the Supreme Court on Monday held that a borrower must be accorded a hearing before an account is classified as “fraud” and a reasoned order must follow if such an action is taken.

Last week, Reserve Bank of India (RBI) Governor Shaktikanta Das put the spotlight on the many new-age tech firms entering the payments ecosystem with some under its regulatory ambit for the first time. “At times, some display unwillingness to comply with regulatory instructions, citing various reasons like cost of carrying out system-level changes.”

Das stressed the necessity to constantly upgrade systems to remain relevant and increase efficiency. “While any system may be presumed to be resilient and safe, a single bad experience of the customer with digital payments may drive him away to other channels or modes of payments. PSOs (payment system operators) have a big responsibility here,” he said.

What about banks? The “Report on Trend and Progress of Banking in India” (2022) had it that private banks reported more frauds than state-run banks in FY22 — for the second consecutive year. However, in terms of the amount involved, the former had a lower share of it at 59.4 per cent compared to the latter’s 66.7 per cent.

Even insurance firms have reported a spike in frauds. Deloitte’s Insurance Fraud Survey 2023 said that nearly 60 per cent of the respondents (in India) believed that there has been a significant rise in fraud, while further 10 per cent experienced a marginal increase. Yet, only 60 per cent of respondents intended to increase their budgets marginally and the remaining investments would remain at the same level as the past year. Even as 40 per cent of them — across both life and health insurance — indicated fraud mitigation as one of the most important priorities for the Board and management with the rest stating it as one of the several key priorities.

The irony is that the top factors contributing to frauds were increased digitisation (34 per cent), remote working (22 per cent) post-pandemic, and weakened controls (22 per cent). Data-related sensitivities have amplified within the sector. Seventy per cent of the respondents indicated data-quality issues as a common challenge amongst life and health insurance frauds; 60 per cent faced challenges related to data protection and privacy.

Maybe it’s time to do away with the distinction between legacy and new-age players when it comes to digital frauds — the truth involves them all. And their businesses sit adjacent — be it payments to customer acquisition or beyond. An executive summary of an RBI working group (WG) paper was prescient when it had observed that the larger issue here is protecting customers from widespread unethical practices and ensuring orderly growth. As has been seen during the pandemic-led growth of digital lending, unbridled extension of financial services to retail individuals is susceptible to a host of conduct and governance issues. Mushrooming growth of technology companies extending and aiding financial services has made the regulatory role more challenging. “In view of the ease of scalability, anonymity and velocity provided by technology, it has become imperative to address the existing and potential risks in the digital lending ecosystem without stifling innovation,” it said.

It brings us to a related aspect — the complaints redress mechanism. In FY22, the RBI integrated the ombudsman scheme (RB-IOS), 2021 with the three erstwhile Ombudsman Schemes and brought the non-scheduled urban cooperative banks with deposit size above ~50 crore under its ambit. The Annual Report on Ombudsman Schemes (2021-22) is of the view that 60.09 per cent of the respondents (who had lodged a complaint both under one of the erstwhile Ombudsman Schemes and the current RB-IOS) felt that the overall process has improved, including registration, handling of complaint and resolution time; 64.06 per cent felt that they were provided with necessary, relevant, correct information when they had approached the contact centre; the overall satisfaction level of respondents with all the offices of the RB-IOS stood at 59.55 per cent; and 83.26 per cent agreed to have received acknowledgement promptly.

What more could we expect going ahead? The RBI may get moving on a few critical WG suggestions — that it should conduct bi-monthly coordination meetings with all the stakeholders, region-wise regarding financial frauds and measures to prevent them; with the police; provide wide publicity about emerging financial frauds and cyber crime in the media. Plus, appoint nodal officers to coordinate with all agencies including law enforcement agencies. And forward complaints to the law enforcing agencies of states concerned; to all the commissionerates to take preempt measures’ and that industry bodies maintain a central registry of recognised lending apps and agents.

Fraud report

·         The “Report on Digital Lending through Online Platforms and Mobile Apps” noted approximately 1,100 lending apps available for Indian Android users across 80-plus application stores (from Jan 1, 2021, to Feb 28, 2021)

·         The Report on Trend and Progress of Banking in India (2022) said private banks reported more frauds than state-run banks in FY22 — for the second consecutive year. But in terms of the amount involved, the former had a lower share of it, at 59.4% compared to the latter’s 66.7%

·         Deloitte’s Insurance Fraud Survey 2023 said that nearly 60% of survey respondents (in India) believed that there has been a significant rise in fraud, while further 10% experienced a marginal increase

·         The Annual Report of Ombudsman Schemes (2021-22) is of the view that 60.09% of the respondents felt that the overall process has improved