Special Issue FinTech & Digital Banking

3 8Special IssueFinTech & Digital Banking

ISSN: 2455-684X

TKM

INTERNATIONAL JOURNAL FOR RESEARCH IN

MANAGEMENT

____________________________________________________________________________

Special Issue: FinTech & Digital Banking

Volume 3| Issue1| 2018

TKM INSTITUTE OF MANAGEMENT

Kollam, Kerala, India

TKM


MANAGEMENT

EDITORIAL BOARD

EDITOR

Jb. T.K. Shahal Hassan Musaliar, President, T.K.M. College Trust

MANAGING EDITOR

Dr. Vinith Kumar Nair, Professor in Marketing and Associate Dean, External Affairs, TKMInstitute of Management, Kollam

ASSOCIATE EDITOR

Dr. Aravind.M, Assistant Professor in Finance, TKM Institute of Management, Kollam

EDITORIAL ADVISORY BOARD

Dr.Jayaram Nayar, Director, TKM Institute of Management, Kollam

Prof. T. Abdul Karim Musaliar, Executive Director, TKM Institute of Management, Kollam

Dr. A.Viswanathan, Dean, TKM Institute of Management, Kollam

Dr. Babu George, Associate Professor, Fort Hays University, USA

Dr. Dileep Kumar. M, University Institute for International and European Studies UNIES, Campusthe Netherlands

Mr A Nizamuddin Ahmed ,Deputy Dean and Registrar ,Secretary to the Board of Directors ,Caledonian College of Engineering, National university of Science & Technology, Oman

Dr. K.S. Chandrasekar, Dean, School of Business Management and Legal Studies, University ofKerala

Dr. K.P.V. Ramanakumar, Dean, Faculty of Management Studies, Sri ChandrasekharendraSaraswathi Viswa Mahavidyalaya, Kanchipuram

Dr. Santhosh. V.A, Professor in Human Resources and Associate Dean Operations, TKM Instituteof Management, Kollam

Dr. Manojkrishnan. C.G, Associate Professor in Human Resources, TKM Institute ofManagement, Kollam

TKM


MANAGEMENT

______________________________________________________________________________Special Issue: FinTech & Digital Banking ISSN: 2455-684XVolume 3| Issue1| 2018

CONTENTS

Page ArticleNo.1 Editorial

Jb.T.K.Shahal Hassan MusaliarEditor

2 FinTech and Digital Banking: An IntroductionR.Gandhi

Former Deputy Governor, Reserve Bank of India

7 Cyber Security at Centre StageR. Ravikumar and M. Venkateswaran

Officers of Reserve Bank of India

15 FinTech &Digital Banking-The Disruptive CombinationSalim Gangadharan

Chairman, The South Indian Bank Ltd

20 A Technological Outlook on FinTech & Digital BankingK.N.C. Nair

Group Chief Information Officer, The Muthoot Group

26 FinTech Redefining the Indian Financial Services Sector:An Insight into the Models of Peer-to-Peer Lending andCross Border Payments

Aparajita RoyAnalyst and Co-Founder at KornChain Limited & MSc Economic

Development and Policy Analysis, University of Nottingham, United Kingdom

TKM International Journal for Research In Management, Volume 3 | Issue 1 | 2018 1

The convergence of the digital and thefinancial realms is a megatrend that affectscontemporary business and management.Digital finance is seizing space at anaccelerated pace and is shortening the distancefor the customer to the financial world. Theseare the times of ‘smart contracts’ that can self-execute, self-enforce, self-verify, and self-constrain performance. These are times of e-aggregators who provide internet-based venuesfor retail customers to compare the prices andfeatures of a range of financial (and non-financial) products across institutions.

According to the Reserve Bank of India,around 400 Fintech companies are operationalin India and their investments are anticipatedto grow by 170% by 2020. As per NASSCOM,the Indian Fintech software market is projectedto touch USD 2.4 billion by 2020 from a currentUSD 1.2 billion. The business value for theIndian Fintech sector is estimated to beapproximately USD 33 billion in 2016 and isestimated to reach USD 73 billion in 2020. Thepenetration of internet and mobile telephones,high-speed computing, cryptography, andinnovations in machine learning and dataanalytics are some of the elements behind thelatest fintech wave. While technology-drivenchange is inevitable, it brings with it anenormous potential for disruption in bothstructure and tools. The final balance willdepend on, among other factors, how the

EDITORIAL

DIGITALIZING FINANCIAL THROUGHPUTJb.T.K.Shahal Hassan Musaliar

education sector reskills both at the domesticlevel and at the global level.

We at TIM believe that the technologicaltransformation in the financial landscapeunderlies the need for a new learning curvefor management studies. To stay relevant,management education has to be adaptive totechnological transformation. As suppliers ofskill to the financial industry, the managementinstitutions have to be ahead of the curve. Theimpact of changing technology on managementeducation is profound. Fintech changes call forbig data analytical abilities, predictive abilities,culling out insights from information, interpretingdata patterns abilities, simulative capabilities andoptimal solution suggestion givers.

We at TIM would endeavour to focus onfour essentials in this forceful change process:

First, to keep our participants up to date onthe dynamics of technological innovations intheir application to finance;

Second, to contribute capacity-buildingneeded to meet the challenges of the financialsector;

Third, to broaden our contents as ‘fit andproper’ as possible for fintech sector, financialfirms, as well as non-financial firms such astech companies and network operators;

Finally, to assimilate global trends whilemaintaining the national aspiration of financialinclusion.


Recent years have seen enormousgrowth of FinTech companies worldwide. Anadded flavor is that they are typically startups.This has attracted wide spread attention fromdifferent quarters including the investmentcommunity, the media, the financial regulatorsand the government.

I. What is FinTech

FinTech is the short form for FinancialTechnology and FinTech companies are thoseentities which apply technology in innovativeways for providing financial products andservices. Today, ‘Technology’for financialsector encompasses computer science,information technology, communicationtechnology, internet technology, data sciencetechnology, artificial intelligence andblockchain/ distributed ledger technology;further within the communication technologyarena, telephony, wireless, mobile, radiofrequency, vsat technologies and the like arecontributing immensely.

II. Evolution of FinTech

For many long years, the financial sectorentities have been operating under very broadumbrellas of a bank, a non-bank finance entity,securities and broking firm, a fund/trust entityor an insurance firm. Each of these typescarries out a distinct bouquet of financialservices and products as defined or groupedunder respective statutory and regulatoryframeworks. It had been the received wisdom

FINTECH AND DIGITAL BANKING:

AN INTRODUCTION1R.Gandhi

1Former Deputy Governor, Reserve Bank of India

that such respective bouquets of products andservices needed to be grouped and servedtogether for optimal efficiency, and to takeadvantage of scale.

Application of modern technologicaldevelopments has effectively been questioningthis received wisdom and the emergence ofFinTech has forcefully negated this wisdom.The situation was slowly evolving from 1950sand has gathered such a momentum in recentyears that it is now revolutionalising the financialsector.

It all started when computing technologymade its headway post World Wars into civilianarena. One of the early adopters of technologywas banking, as it was eminently suited to makegood use of technology. Banking has a naturalfit for application of computing technology asbanking operations really means handling anddealing with high frequency and large volumeof data with greatest accuracy and speed; largeof records needed to be maintained; customersneeded to be services in whichever way, timeand place; and these are the attributes whichare offered by computing technology. Thisbanking and finance on the one hand and thecomputing technology on the other hand becamemade for each other pair.

Based on such cozy relationship, thebanking and financial sector started demandingof the technology solutions for bringing ingreater efficiency in their operations in terms

Fintech & Digital Banking: An Introduction


of cost, time and resources. The technologysector rose to the occasion by applyingtechnological developments in innovative waysfor market share increase, customer retention,enhancing customer delight and even forregulatory compliance.

The technology companies who wereinitially just software developing entities grewto become integrated solution providers. Later,they turned into business process outsourcingperformers for carrying out routine, mundaneand repetitive operations of banks and financialinstitutions with the help of technology. In duecourse, with the emergence of sophisticatedtechnological aids for performing qualitative,research based knowledge offerings, thetechnology companies became KnowledgeProcess Outsourcing partners and startedperforming certain core functions of financialsector like the credit scoring, risk modeling andstress testing.

III. FinTech Revolution

In parallel moves, , there weredevelopments which resulted in ‘chunking’ ofbanking and financial services became thenorm; and for undertaking each of these chunks,there are some specialist entities who performonly those chunks.

The chunking away of banking from thebanks have given enormous business andgrowth for these non-banks. With theirspecialization and focused service rendering,they are able to offer that chosen service atgreater efficiency, speed and at very affordablecost. Though initially they were offering theseservices to the banks and financial institutions,slowly they started offering the services directlyto the ultimate consumers. It is these specializedentities, which make innovative use of ICT astheir business model, which tend to be calledthe FinTech companies.

Payment service providers, P2Pservices, P2B services, SME financing,consumer retail financing, disintermediation,crowd funding, open ended mutual funds,money market mutual funds, depositalternatives, trade financing, invoice financing,bill discounters, bill collectors, credit referrals,account aggregators, interest free products,syndicators, investment bankers, MFIs, co-ops,HFCs and credit raters are some of the entitieswho chipped away chunk after chunk ofbanking. Is there an element of banking orfinance that remains the exclusive privilege ofbanks or financial institutions?

When you add the aggregators, specialapps, P2P lending platforms, angel financing,algo trades, Robo advisers, internet banks,branchless banks to the chunking providers, onecan understand the magnitude of FinTechRevolution that is playing out these days.

IV. Implications of FinTech Revolution

The FinTech Revolution has implicationsfor very many financial sector players,regulators and as it has turned out, even forgovernments. First, the FinTech companies areproviding serious competition to the mainstreamfinancial service providers like banks and thefinancial institutions. The competition has beennot just from the perspective of emergence ofadditional and alternative financial sectorintermediaries; in fact, the FinTech companiesare actually dis-intermediating, i.e. linking theborrowers and lenders directly, the investorsand invested directly, the givers and receiversdirectly, thus eliminating the need for financialintermediation itself. This has led to eminentthinkers/ innovators like Bill Gates to say thatin future “while banking may be necessary,banks are not”. A recent survey among CTOs/CIOs bring out that 88% of them believe that



FinTech will eat away one fourth of bankingbusiness in five years.

V. Regulation of FinTechs

If the banks and other financial sectorparticipants are worried about the competitionthat the FinTechs pose to them, the financialsector regulators are also a worried lot. TheFinTechs are changing the way funds areraised, used, lent and borrowed, and remitted.It is impacting not just entrepreneurs andbusinesses, but also ordinary bank and financialcustomers. Therefore, the regulators across theworld are sitting up and closely monitoring thedevelopments with great interest. Standardsetting bodies like the Financial Stability Board,the Basle Committee on Banking Supervisionand others have formed special teams, workinggroups to examine the developments.

The debate has been whether theFinTechs should be regulated or not; and shouldregulation be needed, should it be light touch orintrusive. There is also a proposition that it isthe FinTechs who want to be regulated, eventhough the regulators do not want the FinTechsto be regulated.

The arguments for financial regulationhave been built on the premise that financialsector entities are dealing with public moneyand therefore they should be worthy of publictrust; they should be financially sound andprudentially managed; they should be of goodconduct - all these considerations, along withconsumer protection and competition concerns,need for systemic risks management etc. haveled to prudential, conduct, systemic andcompetition regulations.

The FinTech groups maintain thattechnological innovations bring in jobs,productivity enhancement and customerdelight; innovations should not be fettered.

Regulation typically hampers innovation; ergoregulation should not be there. Further,FinTechs do not offer the standard spectrumof financial services, and therefore they shouldnot be subject to costly and constrainingregulations.

A middle ground, balancing thesearguments, has been reached. Since theFinTechs offer financial service, but only aparticular aspect of financial service, not thestandard spectrum of financial services,they may be differentially regulated.Differential regulation is meant to be offeringFinTech certain exemptions from standard fullset of regulations, easy entry norms, relaxedstandards, allowing trial and error i.e. providinga Sandbox etc.

While the debate on whether theFinTechs should be regulated or not has beensettled the way explained above, quite a fewFinTechs have in fact been welcoming andcanvassing for regulation. They haveunderstood that certification in the form of aregulated entity provide them official recognitionwhich can help them gain public confidenceand trust; regulation also means assurance onstandards and of good conduct; it also accordsthe FinTechs facilities for accessing Data andAdvice from the regulators.

A specialized branch of FinTechs is beingrecognized of late. These groups of FinTechsapply Big Data technology, Stress Testing,Model building, Artificial Intelligence andMachine Learning in ways to help regulationitself and is being called as RegTech, short forRegulation Technology.

VI. FinTech Regulation and Facilitation

The world-wide approach of regulatorsto FinTech has been varied. Jurisdictions likethe United Kingdom, Singapore, Hong Kong,Switzerland and the like have taken extremely



favorable position vis-à-vis FinTech regulation.They believe that FinTech disruption in thefinancial sector has immense potential forcompetition and efficiency. Hence, thesejurisdictions have adopted the role of beingpromoters and facilitators of FinTechs. Slowlyother jurisdictions like Australia, New Zealand,Canada and the like are emulating this trend.Jurisdictions like the United States of America,China and India have taken a cautious approachand initiated actions to regulate FinTechs.

VII. FinTech Regulation – India

India has a long history of facilitatinginnovation in financial sector by applyingappropriate technology. In fact, India has coinedthe term Banking Technology, the precursor toFinTech way back in 1990s itself when itestablished a specialized research institution,the Institute for Development and Research inBanking Technology (IDRBT). India has beenoffering also the Sand Box, the now famousarrangement for FinTechs, all these years –the labs in IDRBT from 1996, in the NationalPayment Corporation of India Ltd(NPCI) from2009 and the Reserve Bank InformationTechnology Pvt Ltd (ReBIT) in 2016.

While explaining the Indian approach toinnovations in the financial sector, Dr.RaghuramRajan, the then Governor, ReserveBank had said in September 2015 “There is aChinese saying: ‘Cross the river by feeling thestones.’ We have tried to follow that path ofexperimentation and incremental liberalization.More generally, our philosophy is to allowinnovation in institutions, instruments andpractices so long as they do not present a clearand present danger. Once we understand thembetter, and they grow to a material size, wecan do a deeper analysis on how they shouldbe regulated”.

Following this approach, India has whilefacilitating and promoting application ofinformation and communication technology inareas like microfinance, Peer to Peer Lendingplatforms, e-wallets etc. in the initial years/phases brought them under proportionateregulation in due course.

VIII. Digital Banking Impact

Banking is generally defined as acceptingdeposits, withdrawable on demand, from thepublic for the purposes of lending. Thusacceptance of deposits, purveyance of creditand effecting payment and remittances formthe effective trinity of banking. Digital bankingmeans conducting these three primary activitiesof banking through digital means.

Among the various types of credit (viz.,Agriculture, Infrastructure & Corporate,MSME, Services, Retail & Personal and withinthe Retail & Personal segments the Housing,Vehicles, Education, Consumer and others),FinTechs are making serious inroads in theMSME sector, the Retail trade (e-Commerce)and personal segments. FinTechs havedecisively foraying into the hitherto unwanted,unmet and underserved segments of theMSME and Micro Finance; they focus onconversion of informal credit (of money lendingand daylight lending) into formal credit; theyare also creating credit demand in the case ofe-Commerce.

As regards deposits, will FinTechsencroach on Liabilities Business? No, FinTechsare not authorized to take deposits. Only bankscan do so. Under extant regulations eitherFinTechs do not deal in money or they have topark their collections into bank accounts byEOD. But, what if FinTechs become banks orhalf-banks? Say the Payment Banks and Walletofferers? There is a secular declining trend ofdemand deposits in Indian banking, whereas



the savings and term deposits are holding forth;banks’ borrowing has been increasing, whiletheir other liabilities have a declining trend. TheFinTech revolution is likely to be disrupting thesetrends – the time liabilities of banks are likelyto fly in search of direct and extra return;further the time liabilities will increasingly beshort-termed, as the FinTechs offer very nimbleways of managing one’s funds. CASA willincrease, but will be highly volatile and will seefast turnaround. As FinTechs help e-Commerce,Wallet Escrows will increase; banks’ borrowingwill face huge increase, as end of day balancesof E-Commerce, direct investment vehiclesetc. get parked in banks.

The real revolution will be in digitalpayments. The challenge by FinTechs viz., E-Wallets, e-Commerce, Payment Banks, P2Ps,Account aggregators etc. is so humungous that

payment banking will move away from4x5.5x245 (ie four hours a day, five and a halfa week by two hundred and forty five workingdays a year) to 24x7x365. While the banks willstill at end of day get back all the moneys thatwere paid or remitted, it is the volume,frequency and revenue per transaction of theFinTechs specializing in digital payment that willmake all the critical difference.

What these trends in FinTechs foretellthe banks? The banks’ profitability will be underserious stress. The new entrants i.e., theFinTechs will concentrate on high qualityservice, and will be more efficient; they willtarget the high NIM (Net Interest Margin)business and high volume fee business. Thuswhen the FinTechs remove the creamy layer,the normal banks will face the ultimatechallenge.



CYBER SECURITY AT CENTRE STAGE1R.Ravikumar and 2 M.Venkateswaran1,2Officers of the Reserve Bank of India

I. Introduction

Financial institutions, particularly banks,are considered to be posing higher risk by thevery nature of their business. Size and maturitytransformation functions of such entities requirethat these institutions mange theirs risks well.International standard setters as well asregulators have recognized this and traditionallycredit, market, liquidity and operational risks arethe major risks faced by the banks and over aperiod of time on the back of developments instatistical techniques, technology adoption andlessons learnt from various episodes of riskmaterialization, techniques for riskidentification, measurement, mitigation andmonitoring have evolved to an acceptable level.

As banks adopted technology in a majorway in the past few decades, the risks posedby the technology also was reckoned as partof the operational risk, which is defined as riskemanating from failed people, processes andtechnology. Developments in network andmobile technologies on the one hand andgrowing demand for ease of delivery of bankingservices on the other ensured that more andmore services of the banks are offeredelectronically, in so much so leading to settingup of ‘digital only’ banks.

Financial industry has always attractedthe attention of fraudsters on account of thelure for the money and with networked systemsoffering services to customers through theirdevices, the risk of abusing technology for

wrongful gains has increased materially.Financial institutions, being the core of theeconomy, are also prime targets for variousgroups like nation states, crime syndicates,hacktivists etc. so as to convey their messages.Hence attacks on the systems of banks facingthe public, in other words cyber space of banks,have increased manifold both in numbers aswell as in its impact. The sophistication of suchattacks have grown significantly in the recenttimes.

Cyber-attacks are a threat to the entirefinancial system, a fact that is underscored byrecent reports of significant and successfulattacks both within and outside the financialsector. The 2016 attack on the BangladeshBank resulted in atheft of $81 million, theWannaCry ransomware attack infected morethan 250,000 computer systems in150countries, and the recent Equifax hack isestimated to have resulted in the compromiseof personal information of up to 143 millionindividuals. The changing nature of cyber riskto financial institutions is driven by severalfactors, including evolving technology, whichcan lead to new or increased vulnerabilities;interconnections among financial institutionsand between financial institutions and externalparties, e.g. through cloud computing andFinTech providers who may be outside theregulatory perimeter; determined efforts bycyber criminals to find new methods to attackand compromise IT systems; and the continuingattractiveness of financial institutions as targets

Cyber Security at Centre Stage


for cyber criminals seeking illicit financial gain,irrespective of the method.

According to the IMF Working Papertitled ‘Cyber Risk, Market Failures, andFinancialStability’, the key characteristics ofCyber Risks are given as

Ø Cyber-attacks occur with increasingfrequency amid ever-decreasing costsof technology.

Ø Virtually everybody is exposed to cyberrisk in some form.

Ø Cyber-attacks evolve quickly and arehighly dynamic by nature, whichcomplicates risk assessment.

Ø The internet is largely anonymous, whichcomplicates the identification andattribution of cyber threats.

Ø There are structural difficulties inestimating the cost and likelihood ofcyber events.

II. Global Developments

Recognising the threat from cyber risksand the critical nature of enhancing financialinstitutions’ resilience to those risks, authoritiesacross the globe have taken regulatory andsupervisory initiatives designed to facilitate boththe mitigation of cyber risk by financialinstitutions, and their effective response to, andrecovery from, cyber-attacks.

In June 2016, the Committee onPayments and Market Infrastructures (CPMI)and the Board of the International Organizationof Securities Commissions (IOSCO) releasedthe Guidance on Cyber Resilience for FinancialMarket Infrastructures (“CyberGuidance”).This Cyber Guidance is the firstinternationally agreed guidance on cybersecurity for the financial industry. It has beendeveloped against the backdrop of a risingnumber of cyber- attacks against the financial

sector and in a context where attacks arebecoming increasingly sophisticated. Ahead ofits summit in Davos 2016, the World EconomicForum published its Global Risks Report 2016,in which it warned that most of the world’seconomies are underestimating the potentialeffect of cyber-attacks on businesses – andtheir economies. G7 CEG (Cyber ExpertGroup) published the G7 Fundamental Elementsfor CyberSecurity (G7 Fundamental Elements)in 2016. This guidance applies to both firmsand supervisory and regulatory authoritiesthroughout the financial sector, including FMIs,trading venues, banks, insurance companies,broker-dealers, asset managers and pensionfunds. The elements included as part of the G7fundamental elements are CybersecurityStrategy and Framework, Governance, Riskand Control Assessment, Monitoring, Response,Recovery, Information Sharing and ContinuousLearning. Subsequently, an assessmentframework has also been developed for theseelements. Financial Stability Board (FSB)published the stock-take on cyber securityregulations, guidance and supervisory practiceson 13 October 2017. The report includesinformation concerning jurisdictions’ self-reported existing publicly released regulations,guidance and supervisory practices; futureplans; and views regarding effective regulatoryand supervisory practices. Needless to add thatall major regulators have recognized the impactof cyber risk on their regulated entities and havestrategized their oversight in a nuanced mannerin the recent past. Cyber-Lexicon is beingdeveloped by the FSB to support the work ofthe FSB, standard-setting bodies, authorities andprivate sector participants, e.g. financialinstitutions and international standardsorganisations, to address cyber security andcyber resilience in the financial sector.



III. Cyber Risk Management

As per the above referred IMF paper,firms, including financial services institutions,have long viewed cyber risk mainly as aninternal, IT security problem. Over time, thisperspective has evolved to also includeoperational risks linked to the firm’s immediatebusiness partners—including counterpartiesand third parties to which certain cyber-securityactivities, like threat monitoring or data storing,have been outsourced. According to the IMF

Working Paper titled ‘Cyber Risk, MarketFailures, and Financial Stability’, the risksidentified, analyzed, and evaluated as part of athreat identification process need to be activelymanaged using largely common, riskmanagement techniques. Active managementis crucial to ensure that cyber security-relatedmeasures are appropriate for andcommensurate with the underlying risk. Thebasic options are risk avoidance, risk reduction,and risk transfer.

Figure 1: Cyber Risk Management

Source: IMF Working Paper: WP/17/185

Regulators, globally, require banks to rec-ognize cyber risk as one of the risks faced bythe institutions and managed as per the bestrisk management practices adopted while man-aging other major risks faced by them. How-ever, the knowledge and skills that are requiredto manage cyber risks are seldom availablewithin risk management vertical and as suchinstitutions have to make conscious efforts tobuild the expertise in this arena. All major regu-lators have issued specific guidelines to theirregulated entities on cyber risk in the recenttimes and are monitoring the developmentsclosely

IV. Cyber Security Regulations - IndianScenario

If the evolution and adoption ofInformation Technology by banks in India istraced, Rangarajan Committee onMechanisation in Banks (1984) could beconsidered as the harbinger of adoption oftechnology for Indian banks. Thereafter,various committees / working groups haverecommended gradual adoption of technologyand need for associated safeguards in the



sector. The journey basically commenced withthe advent of Ledger Posting Machines, movedto Total Branch Automation and then to CoreBanking Solution (CBS). In the 1990s, the newgeneration private sector banks were mandatedto commence their operations in fullycomputerised environment. As Gordon Moore’sprediction of doubling of overall processingpower of the computers every two years keptcoming true, more and more applications in thebanking space got pushed to the computerisedenvironment.

Reserve Bank of India also played avery pivotal role in developing the paymentmarket infrastructure and facilitating use oftechnology in the banking sector by setting upinstitutions like the IDRBT, NPCI, CCIL etc.Currently, these institutions provide the platformfor running mission-critical and securedpayment system applications like RTGS,Secured Financial Messaging System, andNegotiated Dealing Settlement System etc.

Information Technology Act enacted inthe year 2000 gave a further fillip to conductingof transactions in a computerised environmentby providing a legal underpinning. Internetpenetration gradually increased which led toincreasing use of internet as a channel fordelivery of banking products and services. Theexponential growth of mobile phone users inthe country also fast-tracked their usages as adelivery channel. The latest in the long line ofinnovations in the banking technology space isUnified Payment Interface (UPI), which haspushed the boundaries on remittances.

According to the BCG-Google reporttitled Digital Payments 2020- The making of a$500 Billion Ecosystem in India, the growth ofIndian digital payments is expected to be drivenby the following trends;

India going digital

Favorable regulatory environment

Emergence of NextGen Paymentservice providers

Enhanced customer experience.

India is rapidly evolving into a digitalbehemoth. Rising smart-phone penetration andinternet access have ensured that Indianconsumers stay constantly connected. Also, theIndian government has embarked on aprogramme to turn the country into a digitaleconomy. It has unveiled a series of initiatives—from introducing Digital Locker, whicheliminates the need for people to carry hardcopies of documents issued by the governmentand by providing various incentives to use digitalmedium for putting through transactions.

However, the development also poses abig challenge, that of cyber security. With themove towards a digital economy, increasingamount of consumer and citizen data will bestored digitally and a large number oftransactions will be carried out online, bycompanies, individuals as well as governmentdepartments. That makes India a huge digitalmarket on the one hand and a target for cyber-criminals and hackers on the other.

V. Existing Cyber securityStructure in India

Government of India has taken severalsteps to tackle the menace of cyber-attacksand important institutional arrangements havebeen made. Indian Computer EmergencyResponse Team (CERT-In) and NationalCritical Information Infrastructure ProtectionCentre (NCIIPC) are the national agencieswith latter taking all measures includingassociated research and development forprotected systems of Critical InformationInfrastructures in India. Indian ComputerEmergence Response Team (CERT-In)monitors Indian cyberspace and coordinates



alerts and warning of imminent attacks anddetection of malicious attacks among public andprivate cyber users and organisations in thecountry. Banks / Financial Institutions have beenidentified as critical infrastructure for thepurpose. National Critical Information

Infrastructure Protection Centre (“NCIIPC”)is an organisation under the administrativecontrol of National Technical Research,Organisation (“NTRO”) and is designated asthe National Nodal Agency in respect of CriticalInformation Infrastructure Protection (“CIIP”).

Figure 2



Cyber Swachhta Kendra (BotnetCleaning and Malware Analysis Centre) hasbeen launched by CERT-In on February 21,2017 for detection of compromised systems inIndia and to notify, enable cleaning andsecuring systems of end users to preventfurther malware infections. The Centre isworking in close coordination and collaborationwith Internet Service Providers, Academia andIndustry. The Centre is providing detection ofmalicious programs and free tools to removethe same for common users. A National CyberCoordination Centre has also been established.The Government of India has proposed toestablish a Computer Emergency Response

Team for the financial sector (CERT-Fin), towork in close coordination with all financialsector regulators and other stakeholders.

India has three schemes of regulations/guidance that address cyber security for thefinancial sector. The first, issued by the ReserveBank of India (RBI), covers banks. It istargeted to cyber security and/or IT risk. Thesecond scheme, issued by the Securities andExchange Board of India (SEBI), covers FMIsand trading venues. The third scheme, issuedby the Insurance Regulatory and DevelopmentAuthority of India (IRDAI), covers insurancecompanies.

Figure 3: Cyber security Framework in India

Governance and Oversight Baseline Controls

CYBER SECURITY FRAMEWORK – INDIA issued by RBI

Incident Reporting Education and Awareness

RBI has issued instructions on cybersecurity framework in banks in June, 2016.Among others, the framework expects banksto put in place a board approved cyber- securitypolicy, to prepare a cyber-crisis managementplan, to make arrangement for continuoussurveillance, to reckon the security aspectswhile procuring / connecting / implementinghardware, software, network devices etc., toensure protection of consumer information, toshare unusual cyber security incidents with RBI,to assess the gaps in cyber securitypreparedness on the basis of baselinerequirements articulated in the circular and toset up a Cyber Security Operations Centre. TheReserve Bank also had set up an Expert Panelon IT Examination and Cyber Security drawing

representatives from the industry as members.The Panel was providing assistance in ITexamination/cyber security initiatives of banks,review examination reports and suggestactionable items. Subsequently, in February2017, the Reserve Bank of India has set up anInter-disciplinary Standing Committee on CyberSecurity to, inter alia, review the threats inherentin the existing/emerging technology; studyadoption of various security standards/protocols;interface with stakeholders; and suggestappropriate policy interventions to strengthencyber security and resilience. RBI alsoestablished its IT subsidiary (the Reserve BankInformation Technology (ReBIT) Pvt Ltd. Themandate for ReBIT, among others, is to focuson issues around IT systems and cyber security



(including related research) of the financialsector and to also assist in the audit andassessment of the entities regulated by theReserve Bank. IDRBT (Institute forDevelopment & Research in BankingTechnology), a subsidiary of RBI, has releaseda comprehensive check-list on cyber securityprepared by a panel of experts drawn fromindustry and academia in July 2016. Thechecklist covers wide-ranging aspects of cybersecurity like enterprise control, IT infrastructuresecurity, Endpoint security, Security monitoringas also outsourcing security.

In August 2016, SEBI constituted a HighPowered Steering Committee on CyberSecurity (HPSCCS) to, among other things,oversee and provide overall guidance on cybersecurity initiatives for SEBI and for the entirecapital market, advise SEBI in developing andmaintaining cyber security and cyber resiliencerequirements aligned with global best practicesand industry standards and identify measuresto improve cyber resilience and related businesscontinuity and disaster recovery processes inthe Indian securities market.

In order to strengthen the existing cybersecurity framework and to put in place a morecomprehensive framework, IRDAI hasrecently constituted two working groups for lifeand general (including Health) insurancesectors involving Chief Information Officers(CIO) of all insurers to deliberate and decideon various issues related to cyber security. Theworking groups of CIOs met and decided onthe approach methodology for drafting ofproposed framework. The Guidelines onInformation and Cyber Security for insurerswas issued by IRDAI on 7th April 2017 underSub-section (1) of Section 14 of IRDA Act1999 with strict timelines for implementationof various aspects of the guideline document.

VI. Challenges and Way Forward

Technology adoption is seen at anincreased pace in the recent times and withvarious fintech companies jumping into providefinancial services, the pace is likely to increase.This brings in additional security considerationsto be addressed. Security is as good as itsweakest link and ensuring that all thestakeholders are carrying out their business ina cyber-safe manner is a challenge. Tone atthe top in the regulated entities has to changesignificantly to recognise the potential of cyberthreats to impact financial stability. Recentincidents across various countries are just a tipof the iceberg. Information sharing amongstakeholders has to become more voluntary.Collaboration among stakeholders to addressthis issue needs to become stronger.Information exchange among regulators onsuch matters needs to be elevated to desiredlevel. There are incidents where multiplecountries are involved in unwinding anunauthorized message sent through SWIFT orother payment channels. There is a need tohave an SOP among central banks to respondquickly to such requests so as to frustrate theperpetrators. Skill gap is an area wherecollaboration could help in a significant manner.Joint workshops on cyber security relatedaspects could help each other to learn fromthe best practices. Regular communicationbetween central banks on major developmentsin this important area would be useful. Settingup an emergency response SOP for requestsemanating from each other would help inaddressing any future incident in a befittingmanner.

Cyber-literacy is at its infancy now inIndia and some institutions are still not followingadequate cyber-hygiene. Cyber hygiene is areference to the practices and steps that users



of computers and other devices take tomaintain system health and improve onlinesecurity. These practices are often part of aroutine to ensure the safety of identity and otherdetails that could be stolen or corrupted. Muchlike physical hygiene, cyber hygiene is regularlyconducted to ward off natural deterioration andcommon threats. Therefore, the stakeholdersneed to proactively embrace cyber-hygiene onthe one hand and a formal and professionalapproach to prevent, monitor, detect, respondand recover from cyber-incidents, apart fromhaving a state of the art cyber securityinfrastructure, in financial institutions, on theother.

Commercial organisations includingfinancial sector institutions are primarily

REFERENCES

responsible to put in place a cyber-secure ecosystem in offering their services to variousstakeholders. Governance and oversight playsan important role in managing cyber risk. Thesecurity controls must be robust and to bereviewed periodically to recognize thedevelopments. It is important to share incidentsamong the peers so as to learn from each other.At a macro level, coordination among variousstakeholders is the key. Government– throughvarious ministries, sectoral regulators, lawenforcement agencies, academia and technicalorganisations need to work in coordinatedmanner to identity, protect, detect, respond andrecover from cyber incidents. As India emergesas a major digital marketplace, the securityneeds to be strengthened on a continuous basisto ensure that the stakeholders are able totransact safely.

IMF Working Paper titled ‘Cyber Risk,Market Failures, and FinancialStability’ prepared by EmanuelKopp,Lincoln Kaffenberger, andChristopher Wilson.

FSB, Stocktake of Publicly ReleasedCybersecurity Regulations, Guidanceand Supervisory Practices, 13October 2017.

Report of the Working Group for setting upof Computer Emergency ResponseTeam in the Financial Sector (CERT-Fin),FSDC Secretariat, Departmentof Economic Affairs Ministry ofFinance

https://digitalguardian.com/blog/what-cyber-hygiene-definition-cyber-

hygiene-benefits-best-practices-and-more.

https://www.itgovernance.co.uk/blog/wef-warns-that-most-countries-underestimate-risk-of-cyber-attack/

https://www.livemint.com/Opinion/ORfRrY3ecTFGlKOsJlrqAJ/Digital-India-needs-a-cybersecurity-reboot.html

https://www.iosco.org/news/pdf/IOSCONEWS433.pdf

https://www.mof.go.jp/english/international_policy/convention/g7/g7_161011_1.pdf

BCG-Google report titled Digital Payments2020- The making of a $ 500Billion Ecosystem in India.



FINTECH & DIGITAL – THE DISRUPTIVE COMBINATION1 Salim Gangadharan

1Chairman, The South Indian Bank Ltd

1. Introduction

Banking across the world is in ahyperbolic transformation phase. The adoptionof modern technology has revolutionised theway the banking products and services aredelivered to customers. In the long run up tomodern technology, technological start-upschallenging traditional banking and otherfinancial players, and offers several easy tooperate financial products and services, fromcrowd funding and P2P lending platforms,mobile solutions, international money transfers,bloc chain and distributed technology, crypto-currencies, to on-line portfolio managementservices, aggregators, etc. In this context, thefinancial institutions are partnering with and/orinvesting in the FinTech companies to retaintheir unique position in the financial sector.These companies are now capable of offeringdirectly financial intermediation and on-lineservices, which may be disruptive to theexclusive domain of the traditional players.Competition between banks and FinTech giveway to direct collaboration across the FinTechecosystem. Potential opportunities rangebetween product design and development bythe FinTech to the intermediation architectureof banks.

II. Era of Disruption

We live in a world where old businessmodels become irrelevant overnight. Thoseentities who fail to look beyond their immediatecompetitor have been wiped out, irrespectiveof their size, long existence, leadership positions.(e.g. Blackberry, Motorola, Nokia, Kodak,

Blockbuster etc.). They failed to identify trendsin other industries which had the potential tomake their own revenue streams stop abruptlyforcing them into oblivion.

III. Technology is the catalyst

It is true that even in the past, there havebeen businesses which were taken over bybetter competitors. However, the real reasonwhy disruption is happening so rapidly is thefact that today’s technology is leapfrogging ata furious pace due to the power of computingmultiplying exponentially. On thecommunication infrastructure, rapid changeshave already taken place with a very high datatransmission pipeline, which is only expectedto multiply in the years to come. This is thenleveraged using the humungous networkingcapabilities available on the social media.

iv. Fintech have pushed the door open

From being a simple portmanteaudefinition in the last few decades, FinTech hasbecome a force to reckon with. Financialtechnologies have catapulted themselves tohitherto unimaginable levels by combining greatcustomer centric ideas backed by technology.They have found active interest from Angelinvestors, Venture Capitalists and in some casesfrom Crowd funding. Budding entrepreneurswith bright idea are changing human lives indramatic ways.

V. Paranoid about customer experience

FinTech have ushered in a new culturewhere customer experience is the fulcrum onwhich the entire business model is created. All

Fintech & Digital- The Disruptive Combination


the other aspects, such as cash flow, revenuestream are often seen as afterthoughts. Nostone is left unturned when it comes to creatingbeautiful UI (User interface) culminating ingreat UX (User experience). The newgeneration of consumers, viz. the millennial, isknown for its impatience and short attentionspan. Any service provider has to realize thistruth while designing new offerings. An extraclick here or a small waiting period is all it takesto lose a mobile app customer.

VI. Low entry barriers

Unlike the past, where significant capitalwas required to set up a brick and mortar basedbusiness mode, the strength of utility computing,made possible by subscribing to the on the goinfrastructure (virtualized Hardware, Software,Network available as a cloud model) hasempowered young entrepreneurs to converttheir dream idea or project into reality withinno time. As the solutions are running on cloudinfrastructure, any sudden increase in customerbase is easily catered to, by on the tap capacityaugmentation.

VII. Aggregation is the new mantra

Various industries have seen FinTech leddisruptions, most of which have been based ona technology backed aggregation model. TheFinTech have been quick to identify thecustomer pain points; their demands and thenmatch it with unutilized supply at the providersend. As this is beneficial to the supply sideplayers, they pass on some of their profitmargins back to the aggregator. In the end,customer gets the double benefit of bestoffering at best price, which is furthersweetened by the added loyalty point rewards,discount coupons and cashbacks.

Commerce – e-com revolution (e.g.Amazon, Flipkart)

Food/Restaurant – Rendering of food atour doorstep through Zomato

Taxi Services– Uber, Ola

Hospitality – AirBnb, OYO

Travel – MakeMyTrip, ClearTrip

The most amazing fact is that most ofthese leaders do not hold even a single pieceof inventory themselves.

VIII. Digital Revolution

Globally, companies are moving toembrace digital strategies and capabilities. InIndia too, we have witnessed dramaticenhancements happening in digital space,especially when it comes to authentication andpayments. The India stack, which essentiallyis a platform that started with Aadhaarauthentication in 2010, followed by Aadhaarbased payment bridge (APB) which is thebackbone of Direct Benefit Fund Transfer tobank accounts. This was immediately followedby AEPS (Aadhaar Enabled Payment System),which paved the way for withdrawals fromBank account using Aadhaar authentication.Aadhaar based e-KYC experiments started in2012. In 2013, the much talked about JanDhanaccount, Aadhaar and Mobility factors weretaken as top priority by the Government andcalled it as JAM. 2015 saw the digilockerplatform being opened for all customers. Thefinal push came in the form of UPI (UnifiedPayment Interface) which is a globally uniqueconcept and platform, which combines Push& Pull payments in one go. It allows customersto instantly create Virtual Payment Addressesof his bank account, and then send money toanother VPA. The key aspect is that it alsosupports Collect Request, which opens up awhole lot of opportunities for FinTech, banksand businesses to come with exciting newpayment models. South Indian Bank, is on-boarded on all these platforms. We were thefirst bank to go live on UPI in India, aftercomplying with all NPCI mandates.



The latest entrant in this endeavour isQR (Quick Response) based paymentswherein customers can scan a QR codedisplayed at a merchant outlet. The QR can beeven dynamically generated in an app or thebilling system of the merchant, which willinclude all specific details for each paymentincluding billing amount. India is planning toemulate the China model, wherein lion’s shareof payment is done using the QR mode. SouthIndian Bank has this feature integrated in themobile app, Mirror+. We are also rolling outthis solution for our merchant establishmentsalong with BHIM Aadhaar. We are alsooffering customers the common bill paymentplatform called Bharat Bill Payments systemor BBPS. As a bank, we also offer ourcustomers RFID powered FASTAG whichallows for seamless driving through Toll boothsacross the country. The customer is definitelyspoiled for choice while making payments asthe traditional mode of debit and credit cardswill get slowly replaced by these advancedmodes.

ix. Other emerging technologies

The FinTech led digital revolution isbanking on exciting technology revolutions thatare happening around us.

a. Blockchain :Also known as DistributedLedger Technology or DLT, Blockchain hasbeen widely touted as the next bigtechnology which could remove the role ofintermediation and ledger keeping, whichused to be the classic stronghold oforganizations such as banks. This conceptof tamper proof transparency in a no trustenvironment is finding takers in variousindustries including banking. We as a bank,were one of the first to pilot a cross bordertransaction on Blockchain platform inpartnership with a leading exchange housein UAE and a FinTech in India. We are also

working on building a Blockchain basedtrade finance platform with a consortiumof 11 bankers and a technology company.

b. Analytics: We have extensively usedtechnology to assist us in decision makingusing data processing and reporting.However, the crucial ability of decisionmaking using native intelligence derivedfrom patterns in data hitherto unknown evento a trained eye, is now being made possibleusing Analytics and Machine Learning. Thedata models which were till now beingdeveloped by data scientists are nowoffered as a service on cloud platforms ona subscription model. Banks are investingan analytics in various domains such asCredit scoring, Risk modelling, Cross sellingand fraud detection to mention a few. Allthese initiatives are aimed towardsincreasing business, revenue on the one handwhile preventing losses

X. Artificial Intelligence and Robotics

Human being has leveraged the potentialof technology to ease their day to day life usingautomation aides and devices. However,various nuances of human communication andthe myriad complexities that are a part of humaninteractions have posed a big bottleneck forintroducing automation through robots orrobotics. Times have changed, and today AItools such as NLP (Natural LanguageProcessing) and NLG (Natural LanguageGeneration) have ensured that human beingscan not only hold meaningful conversation withsoftware based chatbots or full scale humanoidswhich combine the capacity of chatbots withmechanics of robots. We, at our bank haveintroduced a chatbot, named SONA (SIB’sOnline Assistant) which promptly answers allgeneral queries that a person has on our bank’sproducts and services. We are also workingon transactional features using chatbots.



Another interesting area of bot basedautomation is Robotic Process Automation(RPA). Bots, take over the role of humanbeings both in back office and front officeautomation. We have deployed RPA for datacentre process automation and STP (StraightThrough Processing) in the first phase. Fromnext fiscal, we are planning to introduce frontoffice RPA, which is expected to take overstructured process oriented works. We are alsoworking on algorithm based advisory for mutualfund investments. In all these engagements wehave partnered with FinTech.

XI. Virtual Reality & Augmented Reality

Our capability for imagination took a leapforward with the advent of Virtual Reality,wherein technology allowed us to be completelytransported to a new world. This has now beenfurther enhanced by concepts of AugmentedReality and Mixed Reality, wherein the virtualworld is seamlessly blended with the actualreality around us. There are numerous usecases being prototyped in diverse sectors suchas healthcare, aviation, modelling, etc.However, we believed that this new experiencecould become a crowd puller, if we werecapable of creating an immersive marketingexperience to promote our brand as a NextGeneration Bank. We created a unique 360degree video of the traditional snake boat racefully shot in a real life competition mode. Thiswas then subject to AR/VR tools which createdopportunities for introducing a virtual andaugmented reality for the viewers. This wasshowcased in major malls in Kerala, where itbecame a huge crowd-puller, enhancing ourbrand recall and acting as a good lead acquiringtool.

XII. Open API

On 13th January 2018, United Kingdomhas started managed roll out of a yet anotherrevolutionary concept in banking, viz. Open

Banking. In the next few months, all of UK’slargest banks and financial service will beforced to open up their accounts to newcompetition, which is expected to be fromFinTech and other innovators. Open Bankingwill run on a concept of API or ApplicationProgram Interfaces, which creates standardsfor accessing a bank’s customer data in asecure manner on a real time basis. Some banksin India have started testing API banking, whichonce set up will enable any legitimate entityauthorized by banks or regulator to plug in tobank data for business purposes. It can be awin-win situation, if banks proactively see thisas a FinTech-bank partnership, with bothparties benefiting from revenue generation andextending customer service beyond theirtraditional domains. A classic example in thiscase, would be the way in which the newFinTech payment companies such as e-complayers, mobile top up firms, etc. are nowgetting on the banking domain using the newdigital platforms. However, banks have nottaken a backseat. Instead, they are forayinginto the domain of FinTech, by going beyondthe domain of being financial supermarkets.South Indian Bank has started such an initiativenamed “Sibermart” which is an online compareand shop portal, where customers accessingour bank’s website can search for a product oftheir choice. We then plug in to all the major e-com players to get the list of products that thecustomer has requested, the result of which isshown on a single interface to our customers.More importantly, we are able to shareadditional cashbacks to customers who use ourportal. Thus he gets the best price andadditional rewards.

XIII. Challenges for FinTech

As has been proved beyond doubt, allentrepreneurial ventures do not end up beingsuccess stories. In fact, out of the large number



of FinTech companies only a few have beenable to make their presence felt or end up withUnicorn status of valuations. The unrealisticexpectation in valuation drives the companiesto scale up too quickly without havingwherewithal to service the customers. Moreimportantly, lot of seed capital is being spenton customer acquisitions using financialincentives, thus drying up the cash coffersrapidly. There are challenges on regulatoryfront, as many of the FinTech operate at theedge of new businesses which is soon boundto catch the attention of regulators andgovernment. Thus some of them might beforced to wind up and others may have tocough up large investments as cost ofcompliance. Lastly, the most important elementsof cyber security, privacy protection, denial ofservice etc. can create nightmares for thenewcomers.

XIV. Conclusion

India is on the verge of a huge digitaltransformation which is evidenced by thesefacts,

a. Total mobile customer base is around988 million as of Jan 2018.

b. Total number of Aadhaar cards issuedis 1200.45 million.

c. Total number of Aadhaar authenticationhappening daily is approximately. 5Crore.

d. Total Internet users in India is expectedto reach 50 Crore by June 2018.

e. The average age of an Indian is expectedto be 29 by 2020.

All these data point to the fact that thereis a huge digital disruption opportunity in ourcountry. Yes, there are challenges for banksand for FinTech entities. The most successfulmodels are the ones where the FinTech ispartnered by banks leveraging on digital

capabilities at both ends. Banks are able to lenda sense of stability and domain knowledgewhereas FinTech gives banks the nimblefootedness and fresh business opportunities.Any bank that fails to hop on this newopportunity is soon bound to end up at the wrongend of the bell curve. South Indian Bank hasbeen very quick in identifying this opportunityand has created an exclusive vertical for digitalbanking. We have fostered various FinTechinitiatives on one to one basis. We have alsorevived the FinTech environment in Kerala, byhosting monthly events through the platformtitled “Kitchen”. This has helped us to workwith enterprising FinTech. We have also beenable to bring in mentors and leaders who havegiven invaluable inputs to all the budding youngminds who aspire to change the world. Weeagerly look forward to continue embarking onall the new digital opportunities in the immediatefuture on our own and by partnering with moreFinTech in the days to come.



A TECHNOLOGICAL OUTLOOK ON FINTECH

& DIGITAL BANKING1K.N.C. Nair

1Group Chief Information Officer, The Muthoot Group

Banking and financial services beinghighly information driven, informationtechnology(IT) has been transforming thesector during the last few decades. Infusion ofIT in the early stages in the banking and financesector has been focusing on automation of thetransactions processing, back office andgeneration of necessary MIS reports requiredfor the management. This has greatly helpedthe financial organizations internally to achievemuch higher speed, accuracy, productivity andprofitability levels. With the emergence of theInternet, customer service could be brought tothe next level of convenience by providingbanking services anywhere, anytime throughvarious online digital channels such as MobileBanking, SMS Banking, Phone Banking, ATMsand Net Banking. Also, the new online paymentchannels boosted the e-commerce business andan array of online services such as ticketreservation, electronic bill payment etc.

I. Emergence of Fintech

Innovative use of technology in thefinancial services sector brought in new digitalservices by the Fintech ventures. As per theBIS, “FinTech is technologically enabledfinancial innovation that could result in newbusiness models, applications, processes, orproducts with an associated material effect onfinancial markets and institutions and theprovision of financial services”. The new formsof banking offered by these players are totally

different to the old form. The Fintech playersare basically technology companies havingspeed, reduced cost and are highly customercentric. In addition, they have the advantageof agility and innovative minds who can designtotally new digital products & services toachieve competitive edge over the incumbentbanks.

FinTech service firms are currentlyredefining the way companies and consumersconduct transactions on a daily basis. Theglobal FinTech software and services sector isestimated at USD 45 billion opportunity by2020, growing at a compounded annual growthrate of 7.1% as per NASSCOM. In India too,Fintech innovations, products and technologyis growing fast, leveraging on the large marketbase, innovation-driven startup culture andsupportive government and regulatory policies.The Fintech software market in India isestimated to touch USD 2.4 billion by 2020.Fintech may have the potential to bring indisruption in the banking and financial servicessector with far reaching impact. With acollaborative approach from all thestakeholders, viz., regulators, market playersand investors, the Indian banking and financialservices sector could be transformeddramatically.

Indian Fintech players started with thepayments segment initially introducing themobile wallets. Later innovations such as the

A Technological Outlook on Fintech & Digital Banking


Unified Payment Interface (UPI) platform andproliferation of smart-phones and mobileInternet exponentially increased the convenientmobile payments. Similarly, consumers optedfor insurance and bank aggregator sites forcomparison shopping. Peer-to-peer (P2P)platforms for high return investments sites arealso becoming increasingly popular.

Borrowing is also being transformedwith the new digital lenders offering consumerswith a simpler, less–paper borrowingexperience while leveraging alternate data toappraise creditworthiness of non-traditionalborrowers. Crowd funding is a way of raisingdebt or equity from multiple investors via anonline platform. The Fintechplatform matchesborrowers / issuers with savers/investors. Italso offer a range of information about thepotential borrowers/issuers, such as creditratings to lenders

II. Digital Disruption, Competition &Collaboration for Incumbents

Fintech firms are characterized by theircustomer focus, providing innovative and costeffective solutions to meet their needs in themost convenient way possible. Latesttechnology solutions and IT infrastructure formthe backbone of Fintech companies. Theyidentify appropriate segments to suit theirproducts & services such as Millennial, SME,unbanked etc. The new digital experiencebrought out to customers such as onlinecalculators, real-time alerts, knowledge portals,live chats, tracking application status, etc., arefeatures that helped increase awareness andconvenience for customers, thereby resultingin greater customer satisfaction. Innovationsdriven by technology helped the financialsystem to be more efficient and attractive withtheir convenient user interfaces. Also, theincreased competition led to greater choice of

providers and products cost-effectively tocustomers.

However, banks are often unable to liveup to the increasing expectations of thedemanding customers who are aware of theFintech products & services. Millennial andyounger segment of customers have almostabandoned visiting branches. They are lookingfor fully automated, simple to use, digitalproducts and services - an area where banksare found lacking - especially when comparedto the digital offerings of the new Fintechplayers. In this environment, the incumbentbanks and NBFCs should collaborate withFinTech firms rather than reinventing the wheelso as to improve their customer experience andachieve operational excellence.

On the other hand, Fintech firms havethe challenge of to scale up their customer baseto match the existing financial serviceproviders. While these companies can innovatequickly and create better customer experiences,by far they lack a bank’s data insights andbroad-based knowledge of complex globalfinancial markets, regulation, and high-securitynetworks. Meanwhile, banks have access to agoldmine of customer data. By analyzing andacting on their data, they can get a betterunderstanding of what types of services &products their customers really need and prefer.Banks have the advantage of large existingcustomer-baseready for offering their apps, andreach out with digital solutions that can meetcustomer needs. Needless to say, banks andFintech players both need the synergy tosucceed.

Some incumbents in banking have gonefor developing a whole new ecosystem of digitalbanking products and services built upon theirexisting infrastructure. To retain theircustomers, they have realized development of



innovative products and services through afocus on digital innovation are essential. Facedwith increasing disruption from FinTech, somebanks are making efforts to compete byinvesting in internal Fintech or partnering withFinTech startups. Some others find it easier tocollaborate with Fintech players and opt toserve as platforms, by unbundling the productionand distribution of banking products andservices. While they own the customer’sprimary account, extend access to their bankingplatform through open APIs, allowing the agilestartups to access customers’ financial accountsinformation / transactions and offer value-addedproducts and services.

III. Data is the New Gold forCollateral

Lack or inadequacy of reliable data,especially on the credit history of the customershas been a major impediment in extending creditto the large unbanked/under banked masses inIndia. This segment may be caught in a viciouscycle - one cannot get credit without a score,and cannot build one’s score without credithistory. Hardly 20 per cent of the Indianpopulation reportedly has a valid credit score,preventing them a loan from an NBFC or abank. Fintech lenders have innovated andidentified many alternate sources of data suchas data points obtained from social sites, devicedata, digital footprints, social media accounts,bank account statements etc. to enrich orreplace traditional sources. These non-traditional sources of data, coupled withadvanced analytics and artificial intelligence(AI), can be effectively used to assess thecreditworthiness of the large and unbankedcustomer segments. The underwriting decisionhere is taken by an algorithm-based decisionengine.

Developments in Big Data and ArtificialIntelligence (AI) and Machine Learning etc.tools areeffectively used by Fintech players forpersonalization and customization at a microlevel meeting individual needs by tailoredproducts. Big data layered with behaviour-based predictive analysis can generate targetedadvice at the point of need. This can enable aFintech provider to be more integrated with thecustomer’s decision making and purchasehistory and preference.

Increasingly, FinTech firms are tying upwith merchants and service providers to offeraffordable financing options at the point of sale.Unique financial products are being developedin collaboration with these merchants, utilizingcustomers’ transactions history and otheravailable data points to evaluate their creditworthiness. Also tie-ups for offering flexiblerepayment options to customers are madeavailable across aggregator websites, retailchains, e-commerce players and travel portals,targeting especially to customers without creditcards. SME is yet another segment who facechallenges in getting access to capital for avariety of reasons, including their informalnature of business, poor infrastructure andlimited assets. Fintechs have developedinnovative business models to cater to thismarket by capturing relevant data from alternatesources. These include partnering with e-commerce platforms such as Amazon, Snapdealand Flipkart and leveraging their data on sellersincluding trading history, returns ratio, customerratings et, to assess credit worthiness and offersuitable loans.

It has to be noted that the sources ofdata should be used based on its reliability forensuring predictability. Such data should be ableto provide futuristic insights into customerbehaviour, say in relation to likelihood of



repayment. Mobile and psychometric data havealso demonstrated greater predictability whencompared with other sources such as Internetdata owing to the more personal nature ofmobile phones.

Lenders have to keep in mind thatalternate sources of data form only one part ofthe credit scoring process and must assess thecompatibility of various such data sources withtheir existing credit underwriting mechanisms.This will help them get a more comprehensivepicture of their customers’ creditworthiness,thus reducing the default rate. NBFCs andbanks can enter into partnerships with multipleagencies both within and across industry sectorsfor more robust data capturing.

With the digital revolution steadilyprogressing in the country through Internet andMobile penetration along with Aadhar-basedauthentication and Digital India policies, thewide data gaps will be bridged in a reasonablespan of time. Perhaps it may be a matter oftime when even the traditional lenders who takegold as collateral for lending can rely on datainstead. This transformation of customer datainto a goldmine can enable extending credit tothe unbanked millions at much reduced interestrates as the operational overheads can comedown drastically on digitalization coupled withinnovation.

IV.Immense Scope for Fintech in India

Financial inclusion to provide at leastbasic banking services to the millions in the ruralareas of the country has seen limited successdue to the associated infrastructural constraintsand high operational overheads. However, thenew digital technology driven products andchannels coupled with the appropriateregulatory framework during the past decadehas finally come to the rescue of the large

financially excluded segment with access tobasic financial services. It is reported that Indiais presently next only to China in the adoptionof FinTech services across an array of industrysegments. It is expected that India will ascendto the top of the global FinTech league in thefuture.

The challenge still remains is how thesepoor families can actively use financial servicesto improve their standard of living. The key hereis cost reduction and improved data andprocess hygiene. This is where the trinity ofJAM(Jan Dhan accounts, the Aadhaar IDs andMobiles) with over a billion in each has thepotential to bring in unprecedentedopportunities. Already the billion memberAadhar database is enabling the customeronboarding process through e-KYC which ismuch faster and secure. Indian consumers arewaiting for new, simple and personalized digitalexperiences. The Big Data generated by theJan Dhan accounts transactions and the linkedmobiles on customer behaviour and preferencescan be used by Fintech to design innovativebusiness models that offer highly efficient,scalable and intelligent processes for customeracquisition, servicing, cross-selling and up-selling. The rapidly falling prices of smartphones and connectivity charges will triggerexponential usage mobile Apps designed forsimplicity targeting the millions so far notconnected digitally.

In the Indian context, Fintech companiescan be a boon in addressing its perennialproblems such as reaching the masses withsimple, hassle-free banking products &services with free or near-zero costs to them,leveraging the new digital technology tools andplatforms which can be highly scalable. It maybe interesting to note that consequent to theemergence of Internet banking two decadesago, it was expected that the new e-banks



would beat the incumbent banks based on theirmuch lower operational costs and passing onthe benefits through attractive interest rates toboth depositors and borrowers. However, whatturned out was that the incumbent banks, drivenby competition adapted new e-channels andproducts and faced the challenge effectively.The positive role played by the regulators inthis transformation In India has beenremarkable. Globally also the new digital avatarbanks could not grow significantly as the vitalcustomer trust factor in banking was favoringthe incumbents. Thus the IT1.0 round was wonby the banks hands down. In the IT 2.0, thegame has changed and it has to be seen whowill be the ultimate winner. In any case,ultimately it will be the customers who willbenefit.

V. Regulatory Policy Framework andSupport

The developments in Fintech and digitalbanking pause many regulatory and supervisorychallenges. For instance, financial technologyis increasing the channels for provision offinance through banks and non-banks. Alsotechnological innovations can impact theexisting bank business models, its businessstrategies and growth plans. Again, the rise ofFintech may lead to fundamentally different riskprofiles. The central bank has to proactivelyadopt best practices and principles for themanagement and supervision of risks arisingfrom Fintech and digital banking.

It is heartening to observe that theIndian Government and financial sectorregulators such as RBI, IRDAI, SEBIetc. havebeen encouraging the new Fintech and digitalbanking innovations as it is in tune with thelarger financial inclusion objective. Theregulators have been encouraging the use ofdigital modes of transaction for payments.Digital initiatives such as UPI, UnstructuredSupplementary Service Data (USSD), Bharat

Interface for Money (BHIM), Bharat QR,Aadhaar Enabled Payments System(AEPS),were brought through The NationalPayments Corporation of India (NPCI) whichwas set up jointly by the RBI and the IndianBanks Association (IBA).

RBI has liberalized the KYCrequirements for low-value wallets andcustomer authorization mechanism for retailpayments to make the process simple for users.Also in the recent past the RBI issued licensesto players from diverse areas such as wallets /pre-paid instruments, telecom players as wellas India Post, to democratize payments formass adoption. These new banks are expectedto integrate a large network of financialservices providers where Fintech couldpotentially play a large role. The much neededP2P guidelines have been issued by RBI inOctober 2017.

To ensure that regulations keep pace with thedevelopments in technology impacting thepayment space, the global developments intechnology such as distributed ledgers, blockchain, etc. will be monitored, and suitableregulatory framework will be put in place byRBI. Through the Institute for Developmentand Research in Banking Technology (IDRBT),RBI has taken many initiatives for adoption ofthe emerging technologies and digitaladvancements so as to recommend the mostappropriate ones for the Indian environment.

VI.Information Security & PrivacyConcerns

Fintech and digital banking are drivenby data and sharing of data with multipleplayers is the norm to take its advantages. Theshift in customer preferences driven by socialmedia, mobile computing, analytics/ big data,cloud computing, etc. have brought in newchallenges in terms of their utility/efficiency,complexity of products, deploymentarchitecture, interoperability of systems, etc.



along with increasing concerns over dataprotection through the digital channels.Interfaces and APIs that facilitate seamlessinteroperability with multiple applications maybe more vulnerable to cyber-attacks and otherthreats.

The propensity to adopt the latest toolsand technologies may not be commensuratewith the growth in understanding/awareness oftheir risks, by both customers and banks alike.To catch up with the Fintech players and toprovide innovative products and servicesthrough digital channels and reducing cost oftransactions/services/processes, banks areincreasingly resorting to outsourcing, quickerdevelopment and deployment cycle of products/services/processes without due emphasis/rigorin security design and testing. This is an areaof concern as much vulnerability might be leftfor attackers to exploit. To ensure adequatedata security and privacy, suitable systems andprocesses across the data/information lifecycleneed to be put in place by the FinTechs.

VII. Conclusion

Fintech is driving innovation in financeand digital banking to reduce cost of operationsand provide best customer experience, usinglatest technology tools & platforms to the hilt.India is blessed to have a large pool of talentsin both finance and IT domains. This synergyhas the potential to address some of the longpending structural issues afflicting the financialsector such as high intermediation cost, lack ofcredit availability for the poor and SMEsegment and low adoption of the digitalchannels in payment systems.

Some of the emerging technologies suchas Block Chain, Artificial Intelligence andInternet of Things (IoT) can profoundly

transform the Fintech and digital banking acrossits operations, leading to an order of magnitudeenhancement in efficiency, security, riskmanagement, and underwriting algorithm, evenon a real-time basis. Emerging technologiessuch as Block Chain has the potential to disruptthe very need for a trusted third party like bankfor conducting financial and other transactionssecurely. Two decades back Bill Gates madea controversial statement that ‘banking isnecessary, banks are not’ in the context of digitalrevolution. However, banks could embracetechnology and retained the dominant positionovercoming the pure digital players so far. Inthe new IT2.0 era with fierce completion anddisruptive technologies around, banks have toreinvent themselves taking cue from the Fintechplayers, embrace technology, reduce theiroperational overheads drastically, to becompetitive in the market so as to sustain itsgrowth, if not survive.



FINTECH REDEFINING THE INDIAN FINANCIAL SERVICESSECTOR: AN INSIGHT INTO THE MODELS OF PEER-TO-PEER

LENDING AND CROSS BORDER PAYMENTS

1Aparajita Roy1 Analyst and Co-Founder at KornChain Limited & MSc Economic Development and

Policy Analysis, University of Nottingham, United Kingdom

i. Executive Summary

Technology innovations are transformingthe Banking and Financial services industry. Itis evident that the two major technologyinnovation use cases in India; Peer-to-Peerlending and Cross-Border Payments, givenproper regulatory and policy support, can driveperformance and become pioneers in creditprovisioning.

In the last decade there has beenexponential progress particularly in areas of on-

demand computing infrastructure (cloudcomputing), Big Data, Artificial Intelligence,mobile and Block chain technologies.Advancement in technology brought cost-effective opportunities for start-ups to comeup with highly innovative industry solutions,particularly in the financial industry that gaverise to opportunities for Fintech start-ups. Thetransformative potential of new entrants andinnovative business models as a result of recenttechnological advancements have brought anarray of applications in financial services knownas Fintechs.

Figure: 1: The Fintech Landscape

Payment services are at the epicenterof Fintech innovations. PwC reports that over70 per cent of businesses in this area areconcerned about losing their market share tothe emerging models. The non-bank players aretaking parts of of the banking industry andtransforming it to a whole new level of customersatisfaction and involvement. The digitaltechnology is enabling new platforms to letcustomers interact directly to send/receivemoney. With this the concept of Peer-to-Peer

lending emerged, connecting lenders directlyto borrowers to provide loans.

Inefficiencies of sending remittances haveremained unaddressed for a long time. Therehave hardly been any technological changes atthe back end to enhance the whole experienceof money transfers across countries. Thedistributed ledger (Blockchain) technology hashuge potential that can drive cross-borderpayments. The report discusses the changing

Fintech Redefining Indian Financial Service Sector


dynamics of personal finance particularly thein lending business and payments acrosscountries in light of the prospects and risks theypose to the financial services sector.

II. Motivation

The report explores capabilities ofFintechs in the Indian Financial sector space.Amongst all sectors, the banking sector hasbeen going through the most prominenttransformation as a result of technologydisruptions. In India alone, consumer bankingsector is to transform by 80 per cent, fundtransfers and payments by 60 per cent (PwCreport, 2017). By opening up the bankingmarket to the non-bank players, regulators arecreating a collaborative environment betweenbanks and the new entrants to provide financialservices. While the banking and securitiesregulators around the world are encouragingfinancial innovations and trying to protect theinvestors and consumers, traditional banks aretrying best to cope with changing scenario.There is a constant attempt to dominate theconsumer banking and lending market betweenthe online start-ups and the incumbent banks,to best assist the consumers and take bankingto a whole new level.

The report focuses on two mostsignificant Fintech use-cases, the Peer-to-Peerlending and Cross Border Payments leveragingthe Blockchain technology, in the IndianFinancial sector space. The models of bothhave been explained in detail and have beencompared with traditional models. The reportconcludes with implications and prospects ofsuch transformation in the Indian paymentslandscape.

III. Fintech Trends

The world is fast embracing the concept ofInternet of Things1 to create Internet of Value2.

Availability of information became swift andextremely cheap with the increasing internetconnectivity. This directly addresses the needfor financial inclusion as more and more peopleare able to access sources to transact in waysthat are simpler and cost-effective.

Fintech is a dynamic segment at theintersection of the financial services andtechnology where technology-focused start-upsand new market entrants innovate the productsand services currently provided by thetraditional financial services industry.3 The year2017 records third-highest annual total of thedecade for Venture Capitalist investments inFintech innovations. During Q4’17, fintechfunding globally remained steady, with $8.7billion invested across 307 deals.4

UK Fintech investment reached a recordhigh of £1.34 billion in VC funding in 2017.UK’s Peer-to-Peer lending business saw thehighest growth as it emerged as internationalleader in this segment. Market opportunitieswith huge consumer market ready forinnovations, and government support, with thenew Payments and Services Directive (PSD2)5

and the General Data Protection Regulation(GDPR)6 to come into effect in early 2018 allover European Union, have created massivescope for new developments in the Fintechecosystem.

In the US, investments were in an all-time high until Q4’17 when it declined. The UScontinued to account for the vast majority offintech start-ups in the fourth quarter of 2017.Singapore emerged as a leader in SoutheastAsia after the slump in China’s Fintechsegment. Investment in Singapore reached overUSD 7 billion followed by Indonesia with USD4.6 billion. The Regulatory Sandbox7 introducedin the UK is widely being adopted in theSoutheast Asia. It is also being approached by



the Indian government. China led the Peer-to-Peer industry in Asia until 2016. However,cases of shadow banking increased with over2000 P2P platforms giving unsecured loans thatturned out to be fraudulent schemes. China

attracted heavy investment of USD 4.5 billionuntil 2016. In India, the Fintech industry grewby 282 per cent in 2013-2014, and reached USD450 million in 2015 and in 2017, Fintechinvestments have crossed $5 billion in India.8

Figure 2: Fintech Funding in billion USD

Reference Note:1 Internet of Things (IoT) is connecting device to device through internet. IoT is being

increasingly used in industries like manufacturing, transportation, smart city projects, retailand healthcare. IBM’s Watson IoT and Microsoft Azure are some of the industry examples.The analyst firm Gartner reported that by 2020 there will be over 26 billion connecteddevices.

2 Internet of Value is essentially leveraging internet to source and transact value in form ofassets (money, digital assets, bonds, property rights etc.)

3 PwC Global Fintech Report, 20164 KPMG, Pulse of Fintech, Q4 2017.\https://assets.kpmg.com/content/dam/ kpmg/xx/pdf/2018/

02/pulse_of_fintech_q4_2017.pdf5 PSD2 requires banks to open customer account and transaction data to third parties via

open APIs, to create open banking system all over Europe and the UK. (PwC report)6 GDPR defines “personal data”, and therefore protects, as any information relating to an

identified or identifiable natural person, who can be identified, directly or indirectly, includingby reference to an identifier such as a name, an identification number, location data, anonline identifier or other factors including the economic identity of that natural person, Deloittereport, https://www2.deloitte.com/lu/en/pages/banking-and-securities/articles/psd2-gdpr-friends-or-foes.html

7 Live or virtual testing of new products or services, in a (controlled) testing environment,with or without any ‘regulatory relief’ is termed a ‘sandbox’, RBI Working Group on Fintechand Digital Banking, 2018.

8 India emerging a hub for FinTech start-ups, Business Standard website, http://www.businessstandard.com/article/companies/indiaemerging-a-hub-for-FinTech-start-ups-116051700397_1.html



IV. Role of Fintech in reshaping theIndian banking system.

Iv.a. Current Scenario

The Fintech market in India has grownrapidly since the last three years and has broughtan array of products and services with newbusiness models while challenging the traditionalfinancial services sector in India. Support fromthe government and regulators, capitalinvestments flowing into the start-ups of thecountry and entrepreneurial initiatives driven bycutting edge technology has catalyzed furtherdevelopment of these new business models. Theareas of Big Data, Artificial Intelligence,Blockchain technology, and cyber-security arebeing constantly explored in the country. Forexample, Big Data analytics can help tounderstand customer’s spending behavior anddepending on that, banks can suggest suitableproducts and services. Artificial Intelligence canhelp banks to automate internal processes andreduce costs, for example mortgage and wealthadvice, loan processing, Know Your Customer(KYC), etc. Blockchain is widely being proposedfor areas like trade finance, syndicated loans,cross border payments. Recent advances incyber-security has made it nearly impossible forhackers to penetrate through the financialsystems.

A number of Fintech start-ups haveemerged in India since 2010 which have thepotential to transform into billion dollar industries

in five years. NASSCOM reports that by 2020,the Indian Fintech software market is expectedto grow up to $ 2.4billion.

Fintech investments is booming in Indiaand cross $5billion across over 400 deals as of2017 end9. Even the banks are encouragingfinancial technology changes by partnering withthe new start-ups or investing in them and thendirectly bringing those products into the Bank’suse cases. Few examples are those of the YesBank’s Innovation Programs on Fintech andDCB Bank’s Hachathon. Six start-ups joinedhands and secured pilot with State Bank of India,RBL Bank and ICICI Bank. The BankChaincommunity of 33 member banks at present areexploring opportunities by implementing theBlockchain technology on a number of projectson cross-border payments, corporate KYC,stressed assets, etc.10

Payments and lending sector has been oneof the segments undergoing a hugetransformation in terms of process andtechnology. There is inherent demand in theIndian market that creates scope for P2Pplatforms in the Indian Fintech space.On thesupply side, government’s push to support fastdigitization, growing internet penetration11, andinvestments in Fintech initiatives are all favoringthe growth of Fintech ventures. Indian start-upspromise the highest expected returns oninvestment (ROI) on Fintech projects. Whereas,the global average is 20 per cent, it stands at 29per cent in case of India.

Figure 3: The Expected Annual Returns on Investment on Fintech Start-ups

Source: Author’s calculation from Deloitte report, 2017



IV.B. Support from the government for theFintech innovations and financial inclusionThe government of India introduced policymeasures to support digital transformation andcreate favorable environment for financialtechnology innovations in the banking andfinance sector. The government has providedboost to support these innovations and alsolaunched certain projects. Initiatives by thegovernment

a. Unified Payments Interface was launchedin 2016 by the National Payments Corporationof India to promote a cashless India.12 Itprovides one mobile application solution to keepinformation of multiple bank accounts. Atpresent with 30 banks as the partners, easyintegration process and no charges to the banks,except for a minimal fee to the customers, itprovides quick and seamless fund transfer, upto a limit of INR 1 lac per transaction. TheBharat Interface for Money (BHIM), one moreplatform, enables cashless transfer of moneythrough mobile phones.b. India Stack is a government endeavor tosupport digital transformation in India. Itprovides a digital platform to the governments,start-ups and businesses where-in Application

Processing Interface is already provided andcompanies can leverage this infrastructure todevelop products to suit India’s requirementsin different sectors like finance, healthcare,education and services. It has four sub-stacksthat offer four functionalities13. The Start-upIndia and India Stack collectively broughtinvestments worth $ 1.5 million to support start-ups in India.c. The Pradhan Mantri Jan Dhan Yojana(PMJDY) was launched by the Indian PrimeMinister on 28th of August, 2014. It has been amajor drive to promote financial inclusion ofthe under banked and unbanked masses in Indiaand as a result more than 200 million peopleacross the country had opened their first bankaccounts.

d. AADHAAR implementation: UniqueIdentification Authority of India (UIDAI)launched the Aadhaar system that is a unique12 digit identification number registered to everyIndia citizen that provides a single quicklyverifiable source of KYC anywhere. The realAadhar System can authenticate 100 Mtransactions per day in real time and there havebeen 1 billion registrations in 5 and half years.

Reference Note:9. Moneycontrol.com10 http://www.bankchaintech.com/index.php11 Internet penetration was about 10% in 2017 in India, making it the second largestonline market with 460 million internet users, after China.11PwC-Fintech Trends Report 2017

Figure 4: the JAM initiative by the Indian Government



All these initiatives together established thebase for the fintech companies. Increasingnumber of people now had access to mobilebanking and internet banking, had a unique

identification number and could transfer moneywithout going to the branch physically. Largernumber of people now has access to credit ina way that is efficient and secure.

Reference Note:12 Unified Payments Interface (UPI) is a system that powers multiple bank accounts into a

single mobile application (of any participating bank), merging several banking features,seamless fund routing & merchant payments into one hood. (http://cashlessindia.gov.in/

upi.html )

13 What is India Stack and how is it set to change India? https://razorpay.com/blog/what-is-indiastack-and-how-is-it-set-to-change-india-2/

V. An analysis of the two major Fintechinnovations in India

V.A. 1. Peer to Peer (P2P) lendingmarketplace.

A direct realization of lending andborrowing activities between two unrelatedparties through online platform, without afinancial intermediary, where the platform actsto establish trust between participants throughcredit risk assessments and borrower’ssolvency, is known as Peer-to-Peer (P2P)lending. (Petrushenko, 2014).

Peer-to-Peer lending marketplace isformed by a group of P2P platforms thatprovide an online facility for the borrowers toseek loans and investors to invest funds. Theavailability of quick funds, affordability of theplatform’s fees, and ease of getting loans atattractive interest rates have attracted manyborrowers to such platforms. P2P platformshave gained a lot of investors’ confidence asinterest rate returns are high compared toreturns from other financial instruments. Theloan durations are normally short, starting fromthree months and can go up to thirty-six months.The investor can independently choose theloans he wants to fund and the amount of riskhe wants to take, depending on the model ofthe platform.

The platform is the sole intermediarythat charges a commission on providing riskassessments, matching borrowers to lendersand carrying out the whole process from loanapproval to repayment. Most of the loans areunsecured and funded to individual borrowersor SMEs. The platforms do not assume anyrisk of loss of credit as they act as a facilitatorand not guarantor. However, some platformsmaintain a fund that is like an insurance, toprotect a part of the investment.

The rapid growth of such platforms andlack of regulatory oversight for a long timeurged that these models are analyzed and theirpotential be explored. Over the period of time,some of the countries have accepted the modelof P2P lending and these are now beingregulated across the countries like the UK,USA, China, South Korea and India.

Peer to Peer lending market has beengrowing fast over the past few years. In India,the market is expected to grow into a $5 billionindustry by 2023 (PwC report). With i-Lend(launched in 2012) as the first P2P lendingcompany of India, today there are about 30platforms in the country that specialize inproviding unsecured loans. The market hasfavored growth of P2P lending platforms inIndia, driven by some key elements:



a. Technology enabling trust betweenstrangers: After the 2007-2008 global crisisthere arose a need for alternative financemodels. The phase of declining growth requiredinnovative use of technologies, etc. The trustbuilding mechanism took off as we moved moreand more towards a digitized world. With digitalconnectivity, people started relying increasinglyon reviews from completely unrelated peopleto make their own personal choices. Someindustry examples like e-Bay, Airbnb,TripAdvisor, Uber, Zip Car, Experian, socialmedia platforms like Facebook, reviews onAmazon, created a new sources of data. Thedata was now easily available and it wastrustworthy. This movement towards beingdata rich at low cost and in no time startedgaining confidence and slowly this trust factorenabled movement of finance between peers.There has been a rise of new players in themarket acting as alternatives to bank’s lendingbusiness. Peer-to-Peer lending is one suchalternative that has opened up new avenuesfor individuals and small businesses to acquireloans. Peer-to-Peer finance has its roots inPeer-to-Peer sharing of information that tookoff with the internet and its increasingavailability. The whole concept of Peer-to-Peerlending is built on the trust mechanism betweenstrangers, underpinned by technology- the keydriver behind these platforms.

b. New data sources enabling better creditassessment : Credit reporting is one of the mostessential requirements for improvinginefficiency of financial sector, increasing

private sector lending and reducing the risk offinancial crises.14 And as the traditional banker-customer relationships became more formaland system-driven, and the products becamemore complex and technology-based, it calledfor improved infrastructure for assessing qualityof information with the changing environmentin banking15. Traditionally banks relied heavilyon ‘soft’ data16. Credit bureaus were set up inAsia after the Asian crisis of 1997. CreditInformation Bureau in India’ was set up in 1999in India.17 In 2014, few new bureaus joined ata global level to like Experian Credit InformationCo. of India Pvt. Ltd and Equifax CreditInformation Services. These methods wereformulated so as to protect the lenders morethan to facilitate the borrowers. As for theCIBIL score, the benchmark is set at 750 pointsbut most Indians have a CIBIL score between640 and 690. People with less history oftransactions and borrowing did not have enoughinformation and hence, did not get the desiredloan. Access to information about a borrowershould ideally be available irrespective of theabsence or a low credit score. But there werehardly any other sources of data that couldinstill confidence in the investors and lenders.The bank’s underwriting processes and creditbureaus made it very difficult for smallbusinesses and individuals with a bad or nocredit history to access funds. Mills andMcCarthy commented in their paper that relyingonly on the credit score of an individual to fundhis/her business has proven to be a poorpredictor of the borrower’s repaymentperformance.18

Reference Note:14 https://www.transunion.com/docs/interstitial/TransUnion_WhitePaper_CreditScoring.pdf ,

The Importance of Credit Scoring for Economic Growth, TransUnion Whitepaper, 2007.15 https://rbi.org.in/scripts/PublicationReportDetails.aspx?UrlPage=&ID=763#11 RBI

publication, 2014



16 Peterson, Mitchell A. and Raghuram G. Rajan. “The Effect of Credit Market Competitionon Lending Relationships.” Working Paper No. 4921. Cambridge, MA: National Bureau ofEconomic Research. 1994.)

17 https://rbi.org.in/scripts/PublicationReportDetails.aspx?UrlPage=&ID=763#11. The CreditInformation Bureau (India) Ltd. (CIBIL) was incorporated in August 2000. CIBIL launchedits credit bureau operations in April 2004 and its commercial bureau operations in May 2006.

18 Mills K, McCarthy B. The State of Small Business Lending: Credit Access during theRecovery and How Technology May Change the Game. Harvard Business School GeneralManagement Unit Working Paper; 2014

Credit gap and access to credit remains amajor problem in most of the countries today andthere has been a huge credit supply gap in themedium and small scale enterprises in India,about INR 833,000 crores19. This has to beaddressed with the growing demands andchanging requirements of the people.

c. Operational advantages of P2P platformsover banks: These platforms are unique withtheir operational advantages that bring significantcost reduction and time efficiencies. Operatingcost is the most important factor explaininginterest margins in banking and banks pass ontheir operating costs to their depositors andlenders.20 Models of P2P platforms have beenable to address this through an online frictionlessplatform with faster online KYC. This has beenthe third most significant drivers of P2P lending.One of the major attributes of P2P lendingplatforms is their scalability. Through digitalcontacts and online KYC, there is low investmentcosts incurred by the platforms (hardly anyinfrastructure except computer system)21. Bankson the other hand have huge costs of operationswhich are passed down to the customers.

d. Lender and borrower benefits: Everyprocess in a P2P lending platform is carried outonline, without direct physical interactionbetween investors and borrowers. This means

less manual and fixed costs like infrastructuralcosts or payment to the employees. Becauseof which they can offer high interest returnsto the investors. and competitive interest ratesto the borrowers. Attractive rates have madeinvestments in these platforms very famousover the rest available investment options likeshares, bonds and securities. At present, it canbe said that investments in P2P companiesare increasing. Equity mutual funds’investments yield an average returns of 10-12 per cent and the minimum time ofinvestment to yield good returns is at leastthree years. Whereas P2P lenders can earngross returns of about 18-28 per cent perannum and the loan period can be as short asthree to six months and goes up to five years.22

There is also an ease of investment in P2Pplatforms. Both, P2P platform and equitymutual fund investments are fairly risky. Equityinvestments require knowledge of the marketand the stock prices of companies are highlyvolatile and the concept of P2P lending is newand requires careful judgment before makingany investment decisions. P2P investments arenot volatile and do not suffer from marketfluctuations. Returns in such platforms aremuch higher than bank fixed deposits. Forinstance, in India FD rates are at 4-6 per centand P2P returns are much more.

Reference Note:19 Deloitte report, July 2017

20 Maudos J, De Guevara JF,200421 With cloud computing, and facilities like Amazon cloud, it is extremely cheap to buy a

subscription and work on that sitting at your homes. This has drastically brought downinfrastructural costs.



22 https://economictimes.indiatimes.com/small-biz/sme-sector/how-ltcg-stung-investors-can-still-earn-high-returns-and-play-a-bigger-role/articleshow/62832430.cms

V.A.2. Business Model of P2P lending

Peer-to-Peer finance models originatedwith a need to directly connect the borrowersto the lenders and strike a personalized tradedeal between the two, without anyintermediary. This whole process is possibletoday with the emergence of the internet thatconnects person to person and everything isonline through an automated process. Thebusiness models vary from platform toplatform and from country to country. Eachplatform unique is in their ways of credit riskassessments and setting the interest rates, butthey all follow the model of pure matching.V.A.3. The Model of Pure Matching

The traditional model is based on theconcept of simple matching of a borrower or anumber of borrowers to a lender. Bothborrower and lender are registered on acommon platform. The borrower provides allinformation related to his loan requirements andcredit information. The P2P platform carriesout a credit risk analysis. Similarly, lenderprovides his intent of investment and the kindof risk he can take. On the basis of which, aborrower is assigned to that particular lender.Loan is passed between the two parties andfunds are provided. The borrower repays atthe agreed interest rate and time period that ismutually decided between the two. This isknown as the Pure Matching model.

The methods of credit risk assessmentare not very clear as these platforms have theirown in-house risk assessment models and theydo not disclose that. The platforms use datafrom various sources to arrive at a conclusionon the risk appetite of the lender and the creditrating of a borrower. Online e-commercewebsites provide huge amount of data to suchplatforms. For instance, LendBox, an Indian

P2P platform, leverages social media networks,past spending of the borrower on online storesand such similar non-traditional data sources.

In most cases, the investors’ funds areallocated between numbers of borrowers tomanage exposure. There are a number of waysin which the platforms operate to diversify theportfolio of lenders and minimize risk byincreasing the spread. For instance, in themodel of Funding circle (a UK based P2Pplatform that specializes in providing loans tosmall businesses), at one time an investorcarries only 0.5 per cent risk of default from asingle business. Their platform is built in sucha way that on a minimum investment of GBP2000, the money lent is diversified into at least100 different businesses.

Loans are personalized and there is Investor’schoice. This is the most attractive part of anyP2P lending platform over traditional methodsof acquiring loans and making investments.There are two models which work to matchborrowers with potential lenders as describedby Murphy (2016). The active P2P lendingmodel and the passive model. In the first one,the lenders choose loans that they would liketo finance, not knowing the borrowers directly.The loans can vary from individual requirements,both short and long term, to small scalebusinesses. In the passive model, the investorlooks at the risks of funding particular loansand takes a decision based on his interests andreturns expectations. In both models, theinvestor can also decide on the maturity andrepayment period. The P2P platform acts asa facilitator between all these processes. Theplatform itself is not exposed to any credit risk.The platform carries all credit risk assessment,creating a list of loans or a portfolio of loanswith assigned risk element to it.



Setting an interest rate is the most criticalpart and there are two ways to decide the rate.One is that the borrower intimates themaximum interest that he can pay on a loanamount in a given time. There is an onlineauction form, where lenders bid till the auctionclosing date. If sufficient bids are available, theinterest rate is fixed at the highest bid that issuccessful in the uniform rate auction.Whereas, if it is a mixed rate auction, differentinvestors get different rates depending on theirbid. The borrower gets one rate that iscalculated as the weighted average of the ratesof all its lenders. And the deal is finalized.However, if no sufficient bids are available,and there are less funds available to a loan bythe bid closing date, the loan is no longer placedon the platform. The borrower has to withdrawand might decide to set another request with adifferent interest rate, higher than the previousrate.

Another method is that of theproprietary based risk assessment model,where each loan or borrower is assigned agrade. There are criteria to determine lowestand highest interest rates on a particular grade.The third method is a simple accept or declineof an interest rate, where depending on theprevailing rate in the market, loan amountrequired, time of repayment and the creditrating of the borrower, an interest rate issuggested to the borrower by the platform.The borrower can agree or disagree to therate. Investors can choose a rate dependingon the market rate for different loan amountsand time of repayment. The critical part is to

analyze the rewards to risks payoff. The P2Pplatform then matches the appropriate investorto a list of borrowers.

While most of the loans are unsecured,some platforms have a model of providinginvestors a part of their lost credit in case ofdefaults. It can be a kind of contract to insurea part of the loaned amount or a guaranteedsecurity like in the countries of UK (Zopa),Australia, and Korea, and a few platforms inIndia (LenDenClub) where platforms keep aseparate fund in case of late repayment ordefaults by borrowers.V.A.4. Revenue Stream of a P2P LendingPlatform

Figure 5 depicts the model of revenuegeneration by a P2P lending platform. It showsthe various sources at each step, where theplatform charges a fee in return of the service.Consider an investor, Miss X in the Figure,wants to invest in a P2P lending platform. Shegets herself registered and her credit ratingverified for a fee. She fills a form to show herinterest of investment and gets listed in theplatform’s website. Now suppose a borrower,Mr. Y is in need of a loan for funding houserefurbishment. He registers on the sameplatform and gets his credit score for a fee.Both parties opt for an insurance at a nominalcharge. The lenders funds are passed downto the borrower for the agreed time periodand interest rate. Both pay a settlement fee atthe end of the contract. Most platforms chargea fee between 1-4 per cent. LendBox (India)charges a commission of 3-4 per cent fromboth the parties.

Reference Note:

22 https://economictimes.indiatimes.com/small-biz/sme-sector/how-ltcg-stung-investors-can-still-earn-high-returns-and-play-a-bigger-role/articleshow/62832430.cms



Figure 5: The Model of Revenue Generation by a P2P Lending Platform

V.A.5. Implications of P2P market on theIndian banking and financial sector:Prospects and Risks

The Reserve Bank recentlyintroduced the P2P lending market under theNon-Bank sector and set out guidelines fortheir operations within the country. It lays outscope of activities and the norms andregulations regarding maximum lending andborrowing limits, loan duration, fund transfersthrough an escrow account, to protect theinterests of the investors and borrowers. Theformalization of P2P lending market in Indiabrought more transparency and higherconfidence amongst people and moreplatforms are expected to enter the market,with currently over 50 operational in thecountry. Faircent being the first one,LenDenClub, Lendbox, i2iFunding, Monexo,Rupaiyaa Exchange, OMLP2P are few of theleading platforms in India.

Fintech lenders are taking away shareof lending business around the world. In India,informal lenders play a large role in SMElending. Several Indian players have emergedin the alternative finance sector to fund the SMEsector like Faircent, Loanzen, RupaiyaaExchange. Their volumes of lending isincreasing but cost of customer acquisition

remains high.23 Informal lending for personalloans has been growing since 2015 as themarket is developing and with the RBIguidelines released last October, more peopleare now confident to engage in these channels.This shift is significantly changing the waypeople borrow and lend money. This mightbe attractive in ways but also raises concerns.

V.A.6.Social Benefits and a Step towardsFinancial InclusionSome of the mostadvantageous factors in terms of costeffectiveness of alternative lenders, accordingto PwC report, 2017 are:



Saves up to 60 per cent in loanorigination and underwriting costs

Savings of almost 50 per cent in loanservicing costs

Overall 30 per cent savings in collectioncosts

Reduced settlement costs as everythingis online

Providing credit to the under-bankedsegment

Vast geographical reach

Financial inclusion’s current state inany country is critical to identify the areas offocus. Throughout the country, job creationthrough SMEs has been a key focus of thepolicy makers. The SMEs are known togenerate most of the new jobs but they facegrowth impediments and lack of funding. Asiahas the highest percentage of unbankedpopulation in the world and 47 per cent is inIndia. Financial institutions have not historicallyfocused on small businesses leaving a funding

gap in the market.24 There is an estimated

credit gap of INR 833,000 crores.25

In a speech delivered by Shri S. S.Mundra, Deputy Governor, RBI (2016), hementioned ‘Access and Availability’ of creditas the main component of financing MSMEsAs of then, there were 3000 public sector bankbranches, still it was not reaching the tier 3 andtier 4, that is, village and taluka levels forpersonal and business loans. And the largestbarrier to loan provisioning is insufficient data

on credit history and documents to verify it.26

Peer-to-Peer lending has subsequently beenable to address these pain points through theirinnovative use of data to generate credit history,cost efficient means of underwriting andservicing and greater reach with onlineplatforms that is accessible to people withinternet connectivity. The model of matchingborrowers and lenders have successfullyfinanced many individuals and SMEs withapproximately 30 per cent of total lending to

the SMEs and rest on personal loans.27

Reference Note:23 http://mapegroup.com/pdf/fintech-india-changing-landscape-sme-lending.pdf

24 https://www.pwc.com/sg/en/publications/assets/fintech-startupbootcamp-state-of-fintech-2017.pdf

25 Fintech in India Ready for breakout, Deloitte report, July 2017.

26 https://www.rbi.org.in/SCRIPTS/BS_SpeechesView.aspx?Id=1018

27 The average share of SME lending of few of the leading P2P companies likeLenDenClub, OMLP2P, Faircent, i2ifunding is between 20-45 per cent. Major share is topersonal loans



Figure 6: Credit Gap in India’s SME Sector

Note: Credit demand is calculated on the basis of revenue using appropriate multipliers.

Source: Deloitte report, July 2017

V.A.7. Risks associated with P2P lending

Peer-to-Peer lending market shares avery small proportion of the total unsecuredlending market at present. In the UK, P2Plending is about only 0.53 per cent of the totalunsecured lending with 0.45 per cent to theSME lending (Milne and Parboteeah, 2016). InIndia the market is at a nascent stage.Transaction value in this segment is $55millionas of January 2018. 28 However, this segmenthas huge growth potential and many newentrants are anticipated after the guidelines fromthe Reserve Bank were released in October,2017.29 But there remains certain concerns thatneed to be addressed by the regulators andpolicy makers.

a. Information asymmetry: P2P lendingpromises high and quick returns. But investorsmight not have the adequate knowledge beforeinvesting in to one of the platforms. And hence,it is difficult to analyse the risk to rewards trade-off in such cases. Most lenders in P2P lendingare not skilled in evaluating investment risks andthus face difficulty in judging the quality of aloan application.30

Investors typically are urged to havecomplete information while making investmentdecisions. However, in this new asset class

where the history of its performance is highlylimited and varies widely across countries andplatforms, investors and borrowers might faceproblem of asymmetry of information. This ineconomic sense results into moral hazards andadverse selection.

i) Operational Risks and DataProtection: Regulatory authorities have takenserious consideration of private data shared tothird parties and have issued guidelines for dataprotection and cyber-security.The EuropeanUnion’s General Data Protection Regulation(GDPR) to be in effect from May 2018 haslaid out guidelines for companies participatingin any form of data collection to protect EUcitizens against data breaches.

Under RBI’s guidelines on information security,electronic banking, technology riskmanagement and cyber frauds in section 43Aof the Information Technology Act, 2000, P2Pplatforms are required to have a privacy policyto protect sensitive personal data. It includesdetails such as bank account, credit/debit cards,financial information of an individual.

ii) Performance of Credit Risk Assessment:The business model of a P2P platform is pivotalto its overall functioning. This includes theprocess of assessing credit risk of the



borrowers and setting an accurate interest rate.In the investor side, it is important to understandthe risk-reward factors while fixing the rate ofreturns. This varies across models.P2Pplatforms make use of a greater amount of data,that is more recent and carry specializedanalytics. P2P platforms leverage borrower’ssocial behavior, past spending activities ononline retail shops and finance management forcredit rating and these are given moreconsideration. Yet there is no robust evidencethat these methods of credit scoring are betterthan the traditional methods.

b. Risks Related to Financial Stability:

i) Market Risks and MacroeconomicFactors: There are chances that a lot ofinvestment flows in to the platforms waiting tobe lent. This might result into blockage of funds.The investors will seek high returns but theremight be temporary shortage of borrowers. Thismight significantly reduce interest rate returnsfor the investors, causing market fluctuations.In times of economic recession, there might beunder employment. This can result into higherdefault rates. Taking example from the 2007-08 recession, the default rate of Zopa (UK)

increased by 4.61 per cent.31

Figure 7: Zopa’s Actual Default over the Expected Default Rates 12 years period

Source: www.zopa.com

Reference Note:

28 https://www.statista.com/outlook/332/119/p2p-money-transfers/india#29 In the RBI guidelines, P2P platforms have been categorized under Non-Bank Financial

Corporations. Certain terms and conditions have been set for platforms to qualify as P2P lending

companies, to operate in India.

30 M. Klafft, “Online peer-to-peer lending: A lenders’ perspective,” in: proceedings of theInternational Conference on E-Learning, EBusiness, Enterprise Information Systems,and E-Government, IEEE, pp. 371-375, 2008.

31 In 2007, Zopa reported 0.49% default rate, which increased up to 5% by the end of year2008. https://www.zopa.com/lending/risk-performance

Increasing competition resulting intovolatile interest rates: With many new entrantsin this space and increased competition, therecan be a decline in the interest rates offeredto the investors. However, it is unlikely toaffect the lending rates offered by the banks.Lending rates of P2P market is absolutelygoverned by the demand and supply of loans.

ii) Borrower’s insolvency: Theperformance of borrowers is not guaranteedafter the loans are passed. Again, thereremains risks and uncertainties in the part ofthe borrower, who may default. To preventthis, investors are mostly made to invest in anumber of loans and diversify across variousborrowers. For example, Funding circle (a UK



based P2P platform that specializes in providingloans to small businesses), at one time aninvestor carries only 0.5 per cent risk of defaultfrom a single business.

On an average, the default rates of globalP2P platforms have been between 2 to 6 percent (excluding those in China). Zopa (UKbased) operates at 2-3 per cent (notconsidering 2007-08. Recession period) andLending Club (US based) operates on 3-4 percent average annual default rates.

iii) Liquidity Risks: When an investorenters a contract, he is obliged to provide thepromised amount for the time period decidedmutually between the platform, investor andin some cases the borrower. Transfer of thiscommitment is not possible and hence thisremains illiquid. But, with the growing market,there can be a rise of secondary market,where the investors can sell their contract toanother investor and come out of the deal.Investors wishing to sell loans have no superiorinformation to potential purchasers canincrease the adverse selection problem thatcan otherwise impede market development.32

Maintaining investor confidence is verycrucial to these business models. Attractingand retaining lenders is more difficult than thatof borrowers.33 But investors can be lost dueto reasons like:

Increasing default rate of the borrowers

Operational risks like fraud or cyber-threats and attacks

Misuse of data of investors in theplatform

Better options available in other platforms

Lack of borrowers and funds sitting idle inthe platform for a long time.

iv) Credit Risks: The platforms are notdirectly exposed to loan loss or theperformance of the loans. The role offacilitating direct lending from investors toindividuals or SMEs makes the platform moredirectly responsible for servicing loans and notrepayment guarantee. Whereas, banks arespecialised to take risks for which they gatherknowledge to extend loans to individuals ofMSMEs, they conduct screening and loanperformance checks and have secured as wellas unsecured loans to manage exposure.

Reference Note:32 Peer-to-Peer Lending: Structures, Risks and Regulation. Kevin Davis & Jacob Murphy.

June 2016

33 Milne and Parboteeah (2016)

V.B. Changing dynamics of CrossBorder Payments

Amongst the financial technologyinnovations over the last decade, the model ofDistributed Ledger (Blockchain) Technologyhas been one of the revolutionarybreakthroughs. This technology is being widelyexperimented and adopted. And one of the mostsuccessful use cases until now is its integrationinto the current model of cross borderpayments.

While cross-border payments accountfor less than 20 per cent of total payments

volumes, they comprise about 40 per cent ofglobal payments transactional revenues (i.e. thetransaction related fees and float income).Consumer-to-consumer remittances generatea global cross-border revenue of 8 per centand business-to-business payments brought in$240 billion revenue on $135 trillion in flows,roughly 80 per cent of cross-border paymentsrevenues.34 Banks hold about 90 per cent shareof revenues that comes from the globalremittance market.

But this market did not go through any costreductions in the ways of their functioning. Theoperational cost per transaction for international



payments remained at an average of $20,though varying a lot between countries andcorridors. There is a growing need to improvecorrespondent banking with changing customerexpectations and newer technologieschallenging the cost of sending remittancesworldwide.

Today’s customers demand a smoothand transparent user experience. Real-time iswhat they look for in any digital transformation.But there hasn’t been much of a change in theway people or businesses send money acrosscountries, for years. If domestic transfers canbe so cost effective and efficient, moneycrossing international borders also should bequick and less costly. The limitations of today’sinfrastructure in cross border payments are highprocessing costs and lengthy settlement times.These inefficiencies result in an enormous cost.The global average cost of sending remittancesworldwide remains at 7.21 per cent in Q3 of

2017 and banks remain the most expensivemeans to send money across countries with anaverage cost of 11 per cent compared toapproximately 6 per cent of the MoneyTransfer Operators.35

V.B.1.Traditional model of internationalmoney transfer

In the traditional model, multiple hops areinvolved to send money. Each party involvedneeds to validate the transaction. The validationprocess is done through book transfers, whichis different for different systems. It includesmanual processes and takes a lot of time andincurs costs. The chances of error are high witherror rates more than 12.7 per cent.36 Figure 8depicts the present model of sending paymentsacross countries and the costs associated ateach step, while making a payment. At present,international transfers take settlement time upto 3 to 5 days.

Reference Note:34 McKinsey Global Payments Report, 2016

35 World Bank’s Remittance Prices Worldwide report of 2017.

36 Experian, Does Valid Bank Account Data Matter?

Figure 8: Traditional Method of International Money Transfer

V.B.2. The Blockchain Technology

In order to understand the changingdynamics of cross border payments, it is first

essential to understand how the Blockchaintechnology works.



The Blockchain technology has beenone of the revolutionary breakthroughs thatenables peer-to-peer transfer of digital assetsseamlessly through its secured networkprotocol without the need for centralintermediaries. Blockchain maintains acryptographically-secured multi-asset sharedledger. Using this ledger, participants cantransfer any proof of value in real time with notransactional intermediary. Each participant inthe business network holds a copy of the ledgerand independently validates each update. Thismakes it a decentralized platform, without anoverlooking intermediary. The technology usesSmart Contracts, which are computerprotocols that work on logic assigned, in orderto verify and validate a transaction. Withoutthe agreement of all the participants in thenetwork or without verification from the smartcontract, no transaction can take place. Thismakes it as a single source of proof for everytransaction. Every participant receives a real-time update of the transaction. And these

transactions once occurred, cannot be altered.The following are the major attributes ofblockchain technology

Acts as a store of digital assets

Enables exchange and tracking ofdigital assets and its ownership in real-time

It is a distributed ledger whereeveryone in the network has a copy ofthe ledger

It has a consensus mechanism whereevery transaction is validated throughconsensus in the network

Immutable transaction records are cutinto a block and chained to previousblock enabling audit trails andestablishing provenance.

Blockchain maintains a continuously growinglist of records into blocks which are securedfrom tampering. Each block contains atimestamp and a link to the previous block.

Figure 9: International Money Transfer leveraging Distributed Ledger (Blockchain)technology.

Figure 9 is a basic model of internationalmoney transfer leveraging the DistributedLedger (Blockchain) Technology. All financial

institutions have got their own proprietarytechnology and processes to processpayments. They are independent of each other.



In a traditional model, the request from a bankis converted into a gateway and sent to acorrespondent bank. That bank has a differentprocess of validating and taking thetransaction forward. It might also includemanual processes. So, there are a number ofsteps of validation that any request has to gothrough before the transaction is passed. Herethere is a loss of time and huge service costs.

Whereas, if a Blockchain solution isimplemented in the above system, all banksinvolved in a particular transaction will hold adistributed ledger which is a part of theBlockchain network. And when a payment isinitiated, all the ledgers can be updatedinstantaneously. This will drastically reducethe time of processing payments andoperational costs.

Consider a money transfer from a senderin the US to a receiver in India. Unliketraditional model where there were a numberof hops to get the transaction verified andapproved, a messenger system is used that isencrypted at both the ends. Both sender andreceiver banks use this messenger system thatis built of smart contracts and secured in theblockchain based ledger. The request istriggered by the sender bank, whichinstantaneously reaches the correspondentbanks and when approved, it is updated in thereceiver bank’s ledger. The actual moneytransfer takes place just the way it was doneoriginally.

So, the technology provides a messagingand verification gateway that is common toall the parties involved. It is automated andself verifies any requested transaction withthe prevailing FX rates, customer KYC,transaction fee, etc. Once it is approved, thetransaction update is visible to everyparticipant in real-time.

The technology self verifies a request thatworks on logic based in the smart contracts.And this works as a single source of proof,guaranteeing the receiver bank that funds willbe transferred in that bank’s account once ithas been approved in the messenger system.Because of which the receiver bank caninstantly update the account of receiver sittingin India and later, through the original process,funds are transferred to receiver bank. Thishas reduced time of settlements from 3 to 5days to just 3 to 5 seconds, reduced servicecharges by more than 30 per cent and itprevents defaults and fraud invariably with itsbuilt-in authentication mechanism.

The table below shows a simplecomparison of few of the services of wirelesstransfers and Automated Clearing House(ACH) system in India. For every 1000 USDsent to India at a prevalent market FX rate of1 USD equals 65 INR, the service charges,time taken to receive payments and the totalmoney received is shown below. It clearlydepicts the time inefficiencies, and amount lostin transaction. For instance, for every 100 GBPsent to India, Western Union charges a 2.99GBP fee. Also, their FX rate is always 0.5 to0.8 GBP lower than the market rate.

Figure 10: The global average cost of sending $200 has remained nearly flat at 7 per cent.

Source: Remittance Prices Worldwide, World Bank, April 2017.



Figure 11: Comparison of five widely used systems to send money from the US toIndia (1000 USD at FX rate of 65 INR per USD)

Source: Compiled taking data from individual websites of the systems mentioned

India is one of the major remittancereceiving countries. Many Indians stationedin global locations lose out heavy amounts ofmoney as cost to transfer. Ripple – a-Blockchain based enterprise, has partneredwith Axis bank in India to receive remittancesfrom the RakBank of UAE and StandardFigureered of Singapore. This partnership hasbeen able to scale up transactions withprocessing rates as high as 1000 transactionsper second. Operational costs reduced byabout 33 per cent.37

V.B.3.Concerns and Mitigation Strategy

a. Financial management and traceability:The Blockchain network takes care ofsecurity, traceability, immutability andtransparency.All the banks involved in atransaction (sender, receiver andcorrespondent banks) are provided with adedicated ledger with 24/7 access with real-time updating of all transactions.

b. Network System and Security: TheBlockchain inherently secure withcryptographic technology. Every

communication is encrypted and transactionsrecords can’t be altered, instead a new recordis inserted for every update.

VI. Concluding Remarks

The Fintech market has been growingexponentially year-on-year in India favoredby foreign investments and governmentsupport. The financial sector holds huge scopefor the new innovative models to upscaleoperations and increase convenience to thecustomers. The report is an attempt to highlightthe models of P2P lending and cross-borderpayments to understand their functionalities,scope and risks. Indian banks can gain byimplementing strategy for effectivecollaboration and utilize elements of the newmodels of lending and cross border paymentsto enhance the overall customer experience.The regulators and policy makers need toidentify potential and associated risks toprovide the required support for the sustainedgrowth of the new players so they co-existwith the traditional models and contribute tothe financial inclusion endeavor.

Reference Note:

Ripple.com



Petrushenko Yu.M et.al (2014), Evolution ofmethods for collective funding as afactor of social and economiccommunity development, World ofFinance 1, 106-113

Milne and Parboteeah (2016), The BusinessModels and Economics of Peer-to-Peer lending, European CreditResearch Institute, 2017

M. Klafft, “Online peer-to-peer lending: Alenders’ perspective,” in: proceedingsof the International Conference on E-Learning, EBusiness, EnterpriseInformation Systems, and E-Government, IEEE, pp. 371-375, 2008.

Crowdfunding as an innovative tool forfinancing projects of social andeconomic development, Yu.M.Petrushenko; O.V. Dudkin, Marketingand Management Innovations Journal,Vol 5.

Zhang B. et.al (2016), Harnessing Potential:The Asia-Pacific Alternative FinanceBenchmarking Report, CambridgeCentre for Alternative Finance, 96p.

Peer-to-Peer Lending: Structures, Risks andRegulation. Kevin Davis & JacobMurphy. June 2016.

Unified Payments Interface (UPI),Retrieved from: (http://cashlessindia.gov.in/upi.html)

RBI Master Circular - Priority SectorLending-Targets and Classification,Retrieved from: https://rbi.org.in/scripts/BS_ViewMasCirculardetails.aspx?id=9046

RBI publication, 2014, Retrieved from:https://rbi.org.in/scripts/PublicationReportDetails.aspx?

REFERENCES

UrlPage=&ID=763#11Financial Markets, Institutions and Risks,

Volume 1, Issue 3, 2017 92Einav, Liran, Farronato, Chiara and Levin,

Jonathan 2015, ‘Peer-to-PeerMarkets’, SIEPR Discussion Paperno. 15-029, Stanford Institute forEconomic Policy research, StanfordUniversity.

Murphy, JP 2016, ‘P2P lending: Assessingsources of potential competitiveadvantage, paper presented at 21st

Melbourne Money and FinanceConference.

McKinsey Global Payments Report, 2016World Bank’s Remittance Prices Worldwide

report of 2017. Retrieved from:https://remittanceprices.worldbank.org/sites/default/files/rpw_report_march_2017.pdf

PwC report: Redefining Banking forCustomers, Retrieved from: https://www.pwc.in/assets/pdfs/publications/2016/fintech-redefining-banking-for-customers-june-2016.pdf

KPMG, Pulse of Fintech, Q4 2017Retrieved from: https://assets.kpmg.com/content/dam/kpmg/xx/pdf/2018/02/pulse_of_fintech_q4_2017.pdf

PwC-Fintech Trends Report 2017,Retrieved from: https://www.pwc.com/sg/en/publications/assets/fintech-startupbootcamp-state-of-fintech-2017.pdf

Fintech in India Ready for breakout,Deloitte report, July 2017.



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