Why Indian Banks need to overhaul their back-end systems
The amount of information generated and dealt within a bank’s back-end systems is expansive and extremely sensitive.
Indian banks have of late invested significantly on enhancing their customer-facing, front-end operations with digital solutions. As a result, when it comes to sending or receiving money, consumers today are spoilt for choices between mobile apps, net banking and phone-based banking.
Digital payments have been a focus area for banks. In May 2018, ICICI Bank reported a 184% jump in the average volume of card payments over the previous three years. Kotak Mahindra Bank also reported a 100% year-on-year growth in mobile phone-based transactions on its platform. State Bank of India said that 21% of its transactions now happen through net banking as against 18% last year.(Source)
The RBI-backed Unified Payments Interface (UPI) has helped banks collaborate with various third party front-end platforms, such as Paytm and PhonePe and execute settlements at the grass-root level. Banks like Kotak Mahindra and SBI have also launched their respective digital banking offerings in the payments space recently.
However, one underrated yet crucial concern continues to linger within the banking ecosystem - a lack of innovation and investment in back-end systems and processes.These back-end operations are the lifeblood of a bank and determine how efficiently it functions. The amount of information generated and dealt within a bank’s back-end systems is expansive and extremely sensitive. Needless to say, concerns related to enforcing a more structured and integrated back-end service infrastructure, to facilitate seamless and faultless banking operations is crucial.
Moreover, the recent spate of ever-stringent financial regulations imposed by RBI has further triggered a renewed urgency on the part of banks to streamline their operations. While India’s FinTech and RegTech startups are naturally excited with the new opportunities opening up, many banks find moving away from their old legacy back-end systems extremely challenging. Note that these legacy systems have been in place for several decades in most cases, and are the core foundation on which a bank’s operations rely on.
The Real Hurdles to Overcome
Most Indian banks have generated growth by launching new products and adding new layers of features. This unflinching focus on pushing new customer-facing features has resulted in banks losing their grip on the procedural rigour. They often operate highly complex business processes that are not easy to automate in the shorter run. Similarly, the pressure of complying with myriad regulatory obligations is higher than ever. Surprisingly, most banks in India do not have a centralized function to oversee their regulatory compliance, leading to the ever-present threat of penalisation for non-compliance.
A critical dependency on the traditional mainframe environment for running core banking systems is itself a major loophole to address. Redesigning or overhauling the entrenched back-systems is bound to shake up the very foundations of a bank’s operations, and most banks simply avoid it by adding new layers of complexities to their already complicated IT architecture. Moreover, internal IT departments tend to have different motivations and agendas and often do not share a thorough understanding of business or regulatory priorities.
Bear in mind that many RegTech (a derivative of FinTech) startups have developed cutting-edge solutions that allow banks to enhance regulatory compliances, reduce errors and increase the transaction speeds for their customers. However, there is no point in implementing such third-party solutions, say an Automated Transaction Monitoring application, when your back-end systems can’t support it!
It is therefore fair to say that unless banks invest substantively to upgrade their back-end infrastructure, they will not be able to leverage the cutting-edge FinTech advancements in the sector.On the other hand, banks who do undertake such an overhaul will benefit from better quality data and insights made possible by FinTech innovations, which in turn will lead to better business decisions. Only after modernising a bank’s back-end infrastructure and data accessibility within core systems can one start leveraging these technologies.
The Path to Innovation
Fraud and risk management is an important case in point. In the last decade, over 6,800 cases of bank frauds were reported, amounting to ?2.05 trillion. Last year, the ?14,000 crore Nirav Modi scam was unearthed through detection of fraudulent transactions at Punjab National Bank. This scam also revealed major loopholes in the back-end systems of banks; specifically due to the absence of integration between their core banking system and the SWIFT network.
With events like these increasing every year, banks canimplement a risk management solution to strengthen their internal control structure.
In conclusion, banks can proactively increase their appetite for reengineering their legacy systems. They have to prioritise automation of their key processes and ensure tighter integration of these re-engineered processes within their backend systems. To do so, they must deliberately and strategically shift their focus away from flashy customer-facing product enhancements.
A realigned focus on improving the back-end systems will allow banks to integrate with FinTech and RegTech. The benefits will still get passed down to their customers; who arguably want their bank to be safe, robust and well-functioning as much as their ability to send and receive money via a smartphone app.
(As published on 23rd August, 2019 by Economic Times)