In this article, we will discuss why banks are talking about industrialization and banking food or zero and the steps to go towards it.
If we look at the industry, it has transformed itself in the last one and a half centuries, where it started with electric power and then went to the automated and entire supply chain. Then it went into the adoption of robotics and automation, and now, we are talking about industry 4.0, which is building intelligence into the machines and so on. Similar things have happened in the banking industry also.
The banking industry started by adopting core banking solutions on the mainframe. Then, they got the open system for banking and then got into self-service and entire workflow automation. Now, we are talking about building intelligent banks, which can interface and deliver their services to machines and applications and interface with humans. This is what we call Banking 4.0.
To support this combination of humans and machines, banks need to industrialize. The primary reason why banks are industrializing is that customers have changed. More than 45% of the population is born post-internet. They were born with channel and self-service etc. Now their expectations are changing. They are looking for a digital experience and are talking about lifestyle and delightful experiences etc. They want value addition from banks in every stage of their customer journey. They shift residences, so they don’t come to branches but use the internet and mobile banking. They are permanent residents of Super applications or a marketplace. If banks need to service them, they must reach out to their marketplace. And if they need to reach out to the marketplace, they must completely transform and industrialize the entire bank.
Banks are now moving towards industrialization because of technological development, cloud infrastructure, and its acceptance by the banking and BFSI regulator.
We are talking of banking as a service. The entire industrialization of data platforms has created a platform to provide and build AI and machine learning services.
In addition, there are external drivers. Interest rates are still low. So, income received from interests is low. Banks are talking about high costs. Their cost-to-income ratio has gone up, and they need to survive. So, they need to find income sources from the non-interest areas. Regulators have also become technology savvy and are coming up with new initiatives.
Banks need to industrialize their internal processes to cope with and map the regulator’s requirements. In addition, new business opportunities are in the marketplace. FinTechs started as a backup, then became partners, and are now becoming benchmarks for innovation.
The journey from automation to industrialization is not smooth. There is a big gap. As part of Banking 3.0, banks set up workflows, analytics, etc. Banks improved and provided self-service for high volume, low complex transactions. Now we are talking about providing that human interface, dealing with machines, etc. We are talking about conversational banking, AI, and predicting risk, which are high complexity, low volume transactions.
When we talk about Banking 4.0, we are talking about delivering a digital experience and excellence to customers, partners, and employees. Industrialization gives digital experience to the entire ecosystem. Banks need to industrialize their back office and front office. Ultimately, we will create hyper-personalization and API banking, partnering with third-party products and the marketplace. We need to consider compliance and financial risk digitization when considering Open banking. Banks need to build risk as a service, finance as a service, and compliance as a service.
Banks are trying to build a single platform and build automation into it.
In the past decade or so, with the digitization of channels, a substantial investment went into the front office for digitization of the channel and delivery. However, not much was done regarding back office digitization.
Building intelligence and human interface into Banking machines
The bank’s machines can interface, interact and integrate with the machines and applications from partner ecosystems, marketplace ecosystem, and the customer.
We are trying to create an API banking platform. This is required for external as well as internal interfaces. We need to unbundle and re-bundle our services. Banks are transforming their entire application infrastructure. APIs are being used. Public APIs are published to be used by partners and customers. Banks are also enabling their interface with marketplaces to sell financial and non-financial products.
The purpose of industrialization is to sustain innovation, manage costs, and increase revenue.
The cost-to-income ratio, in the developed world, especially in Canada, the US, and Europe, is 80%. The interest rates are 0 to 3%. In India, interest rates are 6% or more, and the cost-to-income ratio is 35 to 60%.
Six engines of industrialization and innovation
- Technology investments
- Digital Experience
- Agility, scalability, and resilience
- All pervasive intelligence into process and technology
- Industrialize data
- Banking AI corpus and services
So, Banking 4.0 is an iterative process. It will take more than a decade for an entire transformation. The bank’s focus should be dedicated to innovation.