Tag: RBI

Q. How do you view the digital transformation journey of banks in India?
Neal: If you see most digital transformations around the world, probably 99.99% of them won’t deliver on their promise, I’m not being contentious, it’s just that I have been long in this industry to see not a single software project being on time and on budget feature and that’s just the reality.

Digital transformation is not about software, 99.99% of it might not fail but might not live up to the expectation or the promises delivered by the consultancies who work in this space.

In many companies and banks over the years great IT capabilities have been built and CTO wanted to transform the architecture to make it more agile and open but got delayed due to budgets or prioritizing new products so it gets delayed and delayed and pushed back in creating agile architecture. The same story is with data, banks are brilliant in collecting data and lucky around data monetization. But historically, they’re bad at data and arrived towards the data monetization party too late. We’ve seen wonderful things with Big Techs and E-commerce giants partying on this free data they’ve got and how they’ve monetized.

Banks, by the time they realized and turned up for the party of data monetization, the police (referring to data privacy issues and scandals happened in the past) arrived and everyone is fearful and positioned as “we take care of your data”. While data is safe in banks but it’s lying and lost in disparate systems and nobody knows who owns the data. Banks should use and move the data within the systems and within the regulatory ambit to enrich the life of consumers and then the whole cycle of budget for the exercise repeats and the transformation exercises takes a back seat.

The biggest challenge with digital transformation is not the technology but the culture and people. Having worked across different organizations and industries, I know what good tech culture feels like. I never wanted to work with a bank, because I had been selling to banks for 20 odd years and I know the culture, the big difference between a tech company and a bank is the approach. Bank’s think from an ownership mindset over systems and its people but tech company’s entire model is partnerships. The second thing I noticed is banks are very hierarchical, micro-management, process based roles and I have never seen in any other organizations.

Thirdly, it’s around risk appetite. Banks are very funny, almost schizophrenic because their entire business model is monetizing risk but are skeptical of taking risks due to regulatory or compliance issues or culture. Capital Markets strive on risk, banks’ business is around pricing risk and Insurance companies model is avoiding risk, if you look at these three level it directly correlates to their innovation capabilities.

Banks need to experiment a lot, while it’s a regulated environment but it can start at small things, rigid processes won’t take it anywhere. Technology, Data & Culture is what will drive digital transformation and by the time banks realise it’s too late.

Digital Transformation should start at “Why are we doing this?” “What outcome do we want?” You don’t have to boil the ocean, just fix the bits and pieces which are going to make money. You don’t have to digitise everything, just digitise which is going to make money.

Do simple cultural transformation, you don’t need to get rid of your staff or hire Google employees. Get people the inspiration to try new things and give them the freedom to enjoy their work life.

On the Indian Banks: Banks in India are huge banks with huge staff bases, you can forgive them as compared to the banks in the West, because in India the smartphone churn came later but banks in western didn’t catch-up with the digital transformation even when they got smartphones quiet before India. The population in India is catching up quickly and banks in India have done a fairly good job.

I wouldn’t put India as the most innovative finance market from the bank perspective on what we are doing! I won’t put it in tier 1 innovation, but overall the ecosystem is doing well.

But I would put India on number one around putting up the national infrastructure Aadhar platform and UPI, etc. Regulators, FinTech & e-commerce have been doing a good job.

Q. How do you view Bank-FinTech collaborations?
Neal: FinTechs started with competing banks but then eventually realised it’s too hard to go alone and in most of the cases customer acquisition cost and regulatory compliance is too high. Banks have distribution and FinTechs have tech and speed.

In any megatrend if you see, for e.g. e-commerce, The race between Amazon and Walmart, has merged in between from starting at extreme ends. That’s exactly what we are seeing between Banks and FinTechs. Banks are fintech-y and Fintechs are bank-y- more towards building hybrid models. (Neal explained this in a lighter tone)

FinTechs are agile, quick, focus on the client, think differently and don’t have historical roles and technology and quite a lot of it is not directly regulated. Banks are good at security, trust, products but slow, culture issues and expensive.

I know a lot of banks these days say they are FinTech companies that they magically transformed in such a short period of time but when I meet them they are “bankers”.

Questioning banks, Neal asks, do you want to be a bank or tech company? You’re not good at building softwares but as a bank you’re great at being resilient, safe, secured and reliant system and that’s the sweet spot for bank’s technology team and they’re really good at that and they should focus more on that and stuff which they own like digital banking platforms but if you want to do something new and interesting, in all fairness banks should partner with FinTechs and keep their capability with themselves.

That’s where the world is moving towards where you’ve many partners, for e.g. Neo-banking platforms in India. Banks should partner where it makes sense, usually around the UX, RegTech, SupTech, compliance. It takes an average 9-10 months to sell a technology solution to a bank, if you’re a small FinTech and you’ve got a small sales team, you’ve got to understand, is this going to be successful and qualify quickly, you’ve to understand why the bank is concerned if you don’t do pen testing. It’s changed quite a lot in recent times, banks do have a point. In fairness, banks don’t get hacked, I can’t recall any recent incident where someone hacked into and took all money, it doesn’t often happen because of bank’s control and FinTechs have to learn a lot in that.

Banks and FinTechs can build a nice symbiotic relationship and do things at which they’re good at.

Q. What are your views on neobanking entities?
Neal: There are different models in this particular space, a bank rolling out a neobank like DigiBank by DBS Bank, even if it fails the bank can roll it back into its fold like how recently BBVA did it with Simple. The other model is building a digital bank from scratch like Standard Chartered did with Mox in Hong Kong, that’s quite an undertaking and there they’re looking at better operational metrics and it’s to be seen how it performs.

For banks doing this the DBS Bank way could be the right way to go which is a hybrid way essentially cutting your tech stack in half and keeping the backend stuff, put a bus or microservices layer and build net new code on top of that. All the front end stuff is new and over a period of time you can replace the stuff below as customers won’t know about it and at the same time bring changes in the culture.

At DigiBank, the bank staff were in a separate building, they had different reporting lines and slightly different roles but stationed more in an innovation lab kind of space.

The second model is getting a license from a regulator and building a bank from scratch like Xinja, Starling, etc. It’s a start-up; these things cost $50mn just for initial build for a full service bank. It’s funny how people tell me how successful these banks are and I’m like can you come back and tell me how successful they’re when they’ve lent some money or got some deposits. They’re essentially a prepaid card with a mobile application and that’s not a bank.

In fairness, I would not like to do that, it’s an expensive affair. The Xinja team was amazing but got blindsided by Covid-19, set high interest rates, the only way I have seen to succeed in a banking venture is to buy your clients, either buy them through free ATMs, free transactions, like In India, banks offer 7% deposit rates. Some way you’ve got to spend a lot of money to get people on your platform. These models kind of make money, Starling has turned profitable because they’ve a business model which works.

The third type are payment apps like Revolut, Monzo, etc. They do transactions, give flashy cards and everyone’s incredibly proud of their cards. We did one with Razer FinTech where if you tap a card the NFC is enough to light the Razer logo and these apps look to scale up on these transactions and hope they grow. Not all of them have been successful in terms of being profitable.

The fourth type, like neobanking platforms we’ve seen in India and in my mind that’s a brilliant play. You don’t need a license as you’re not storing the data. It goes directly to your partners core platform you’re managing the operations and I think that’s kind of great.

The final type which could be worrisome for traditional financial institutions is the neobanks created by e-commerce and tech companies giants because they’re good at technology and they’ve massive scale.

The top three banks according to me are WeBank (China), MYbank (China) and Kakao Bank (South Korea), because they’ve free distribution and tens of millions of clients, so the cost of customer acquisition is low and they’ve data for scoring.

I like the India model which is putting a wrapper on the bank and it’s a smashing idea. Building a digital bank from scratch is only for the brave but there’s money there as you’re doing the traditional bank model better. These ones like payment models we’re going to see lots of failures because the only way they work is by continuously pumping money.

India has taken the right path, some regulators have jumped on this too quickly in terms of Hong Kong and we might see how it will pan out. Singapore, it’s a tiny market but regulators are pushing as banks are refusing to innovate and taking it slow.

Essentially solving customer’s problems is the main idea, banks have been doing it the monolithic way and that’s what digital disruption is about. It’s not about technology, it’s about someone else solving your customer’s problem better than you and that’s digital disruption.

Q. Any advice to the regulators?
Neal: My advice to regulators is to read science fiction, what is playing out has already been defined, the future is defined. A lot of it is inevitable, regulators should read science fiction, understand tech megatrends because the way it rolls out affects how people operate in a society and how people will purchase products in future and they’ve a difficult job here.

Even if regulators have a team which thinks about future regulation based on future tech and societal trends you’ll be way ahead of the curve, things like blockchain, cloud-computing, we already have hands on it and we are still waiting for it.

While I did get blindsided by how crypto evolved but generally everything else is talked about and is inevitable. My guidance is around tech and societal trends, think about how regulations need to change in the future with fewer regulations.

The cost of regulatory burden for banks goes up and up every year and in fairness if you’re a regulator your job is to write regulation, if you don’t do that you don’t have a job while I do acknowledge Regulators do a fantastic job.

My point is, you keep adding layers on and on and if you write new stuff can’t you just take some other stuff away or simplify what you’ve done. Secondly, be clearer, it’s a challenge and you can’t be wrong as a regulator and they cannot be specific, and that leads to interpretation problems.

Regulators should use technology to enforce regulations, give out clarity and simplify things. In the last five years they’ve changed a lot and are doing a stellar job.