Now, Technology Puts Small Banks in Your Pockets With minimum legacy and maximum experience in the domain, technology is the only friend that can fix the bridge for SFBs

Financial inclusion tops the government and Reserve Bank of India (RBI)'s agenda, and small finance banks (SFB) are expected to ease the credit problems of millions of under-served and unserved Indians. With minimum legacy and maximum experience in the domain, technology is the only friend that can fix the bridge for SFBs.

In late 2014, when the RBI issued guidelines for SFB, it reasoned that setting up such banks will further enhance the probability for financial inclusion to small and marginal farmers, micro and small industries and other unorganized entities, through high technology-low cost operations. A year later, RBI issued licenses to 10 entities, which includes eight microfinance institutions (MFI) along with a nonbanking financial company (NBFC) and a local area bank. Some of these banks or their parent companies are AU Small Finance Bank, Ujjivan Financial Services and Equitas Holdings that are now listed at the Indian stock market while others are eyeing the bull run.

The Task

K Paul Thomas, Managing Director and Chief Executive Officer, ESAF Small Finance Bank, says one of the challenges the institution faced while upgrading from MFI to an SFB was on the technology front. To address the issue, ESAF tied up with Florida-based financial services technology provider FIS Global. "We are driving initiatives for digital awareness at the bottom of the pyramid. To support FIS, we have a full-fledged IT team in place," says Thomas, who is committed to finding the right balance between technology and the human element. After introducing internet banking and an app, the ESAF now plans to launch its corporate internet banking feature. Similarly AU, as an NBFC, has reasonably invested in technology. However, as a banking platform, it had to adopt the technology at a bigger scale. This pushed it to invest nearly $35-40 million to acquire numerous applications including over 20+ critical applications such as core banking system, transaction monitoring systems, risk mitigation, digital applications etc.

Amiya Dikshit, Chief Technology Officer, AU, shares, "In the first phase, we put in place the basic framework and the next phase is continuous improvement. This was important as banking structure in India is changing every day and we have to keep up."

King's Service

Unlike the larger players, the SFBs are aware that the customer is the king and to please him they need simple products along with easy access, efficient service at a low price point. The approach can turn out to be quite expensive for SFBs where the ticket size is too small. However, Ittira Davis, Chief Operating Officer, Ujjivan Small Finance Bank, feels technology has enabled the bank to open multiple channels to serve customers and reduce operating costs. "Ujjivan's goal is to build a state-of-the-art mass-market bank in five years to serve the customers who are currently outside the formal banking system. We will be spending heavily on technology in the coming years," he adds. The bank recently launched a "Digi Buddy" program to assist customers and educate them about operating digitally.

Another SFB that has benefited from technology is AU. The paperless onboarding of customers for savings account has increased employee efficiency significantly. "We are onboarding 40 customers per month per employee where the industry average is about 20," Dikshit claims. Additionally, workflow applications for loan origination have helped AU identify turn-around-time (TAT) at various steps which will in turn help in identification of process bottlenecks. On the other hand, their unified CRM helps employees have a unified view of the customer from customer service and cross-sell perspective.

Larger Stack

Even though SFBs are successfully implementing and benefiting from the basic technology, one of the major questions is whether these banks are ready to run their processes on the new age technologies? Both AU and Ujjivan are looking at open source for managing the life of the customer and analytics, respectively. "Traditionally banks have been adopting enterprise-class software or hardware considering these are tried and tested. With the dynamic nature of the business, there is shifting need towards experimentation. The mantra is to try fast and fail from the learning," Davis points out adding, "Open source allows this experimentation and also allows for lower cost of ownership. Ujjivan is exploring new technologies."

Banks like Suryoday Small Finance Bank and ESAF, however, continue to remain cautious. R Baskar Babu, Managing Director and CEO, Suryoday, feels open source as a concept does help during the early stages of building an organization. However, in the long run, compliance and regulations enforce certain behaviour which is not easily manageable in open source.

"Support for open source is also a challenge. This does not mean it is undesirable. They do help in providing options in a monopolistic scenario. Security and managing risks in open source would also need greater attention," he notes. While on the other side, SFBs are quite open to see how the blockchain story weaves out. Davis asserts, "The initial investment efforts have primarily been in trade, finance and cross-border payments. Anti-money laundering, through KYC, is another domain, which has luckily been taken care through the India stack. Currently, we are watching this space and will embrace it when we see relevant use cases being built for the segment we operate in."

Way Forward

On asking whether small banks will be interested in hosting hackathons, Babu adds, "This would provide a completely different perspective to the problem and in turn help in finding out some out-of-the box solutions. Hackathons also help in getting a perspective of the next-gen requirements."

Even Manish Sehgal, Chief Information Security Officer, AU, agrees with Babu and feels hackathon as a concept is innovative and promotes creative thinking in a time bound environment. "It helps software developers showcase their skills to the established organization. For us, it helps in leveraging knowledge pool of various young engineers and product managers with great ideas who are looking for a platform to quickly test and scale their products. We would love to engage with such teams," he added.