IT in Financial Services

Financial Services:

 Very large set of institutions, which bring with itself a whole set of technological
constructs
 30-40% of India’s GDP is based on financial services
What is common between Jaggu Dada and Birla and PC:

 Sab traders hai

Financial Services in India:

 Very old
 Highly unregulated
Banks vs NBFC’s:

 Banks can have both deposits (liabilities) and loans (assets)

 NBFC’s can have only assets (loans)
 An NBFC is a company that provides banking services to people without holding a bank
license.
 NBFC’s have the leverage to lend 100%
 They do not have to go back to RBI to keep any collateral or SLR or CRR
 That allows them to be aggressive and flexible -> Get into pockets where formal
banking cannot go
 Thus, institutions like Bajaj Finserv can lend to anyone
Mutual Funds:

 Asset Management Companies

 Portfolio
 Small investors cannot participate in equity markets due to high volatility
 Thus, an asset management company can take the money and spread it across
multiple assets, debts and equities
Insurance and Finance Companies:

 Multiple categories
 General insurance: General Insurance or non-life-insurance provides insurance of
property against fire, burglary, etc., personal insurance such as Accident and Health
Insurance, and liability insurance which covers legal liabilities.
 Why are general and life insurance companies separate entities? Life insurance
happens to be very different in terms of risk perspective. Terms are different -> Burn
rate in general insurance is low (annual renewals)
Co-operative vs Commercial Banks:

 Co-operative banks from specific communities

  They are largely small -> Not pan-Indian
 Examples: Sugar Co-operative, Saraswat, Shyamro Vitthal Bank, Karad Co-operative
Bank, etc.
 For very long, they were not in the ambit of RBI regulations, but that was exploited
 Harshad Mehta scam padho
Foreign Banks:

 HSBC, HDFC, etc.

 The genesis of the liberation was the Narsimha Committee report
 HSBC was in India since 200 years ago
 The Committee Report said that public sector banks were one of the root causes of
the issues
 The first two private banks in the country were IndusInd (owned by Hinduja) and
Global Trust
Capital Market:

 Consists of the equity and debt markets

Money Market:

 Short-term lending securities

 Inter-institutional
 Banks to banks, banks to government, etc.
Wholesale Bank:

 Institutional clients
 Banks work on both retail and wholesale banks
 Industrial activities need more financing than retail
 There are three fundamental pillars:
o Commercial banking: Working capital and term loans for operational day-to-
day requirements
o Investment banking: Use up excess cash of companies like Reliance
o Transactional banking: All the flowing money -> All these transactions are
important -> Treasury function
 Letter of credit and guarantee: Jo PnB mein hua -> Guarantor basically
Bank’s Treasury:

 When bank’s money runs out (more withdrawals than deposits), they go to money
market -> Interbank market
 For retail banks -> Financial advisors manage their money
 For institutional -> Treasury manages money
Recent Trends:

 Digital technologies
  New bank licenses
 Fee-based income
 Non-performing assets
 MSME sector
 Infrastructure development
 BASEL III: Standardization of asset class
 FDI limits increase
 Payments banks
 Microfinance: Grameen, Andhra Ordinals, Bandhan Bank
 IBC
 IndianStack
ILFS: Many subsidiaries created -> special purpose somethings -> Intercompany linkages ->
They did not represent the true health of the conglomerate -> Bank could not cover it up
Market Risk:

 Huge fluctuations in market -> Market volatility -> Risks -> Mark-to-market (M2M)
 Worst affected was 2008
Liquidity Risk:

 ICICI Bank has come into scrutiny multiple times

 Bank does not have requisite liquidity
Credit Risk:

 Basically NPA’s
Operational Risk:

 Data entry issues

 Or floods
 Basically, operationally something goes wrong
Actuarial Modelling:

 Happens a lot in insurance companies

Core Banking System:

 Very complex system

 300-400 people and can take up to 3-4 years to implement
 Process: Planning -> System Study -> Team Education -> Business Process Definition -
> User Acquaintance Process Definition -> User Acceptance Test -> SIT -> Simulation -
> Pilot -> Effectiveness Review -> Rollout -> Final Review
 Security is extremely important:
o Authentication Security:
  SSO out of the box (Single sign-on (SSO) is a property of access control
of multiple related, yet independent, software systems. With this
property, a user logs in with a single ID and password to gain access to
any of several related systems.)
 Can be integrated with Active Directory and external SSO
o Application Security:
 Role-based Access Control
o Transmission Security:
 SSL, HTTPS, database encryption -> You do not want hackers to know
the net worth of actual people -> So even DBA’s that run stored
procedures and scripts cannot see certain fields
o Database Security:
 Encryption of password, checksum for business-critical fields
o Audit Trail:
 Extensive infrastructure for audit
 PIM -> Privileged Identity Management
o Data Access and View:
 Checksum for data transfer
 Display masking: This is for front end -> Certain fields masked for
display to users
 Data update through CBS only
 CBS Support for Operations Management:
o A lot of work happens at night in banks (account reconciliation, maturity that
come up for the next day) -> The back-end runs a lot of jobs in the night ->
Controlled remotely
 Application server monitoring tool
 CBS monitoring console
 CBS SPI for HP OpenView
 Integration with TEC
 Integration with TWS
 Trends:
o Modularizing CBS
o Creating API’s for external parties
o Open banking
o Data, algorithms and processes are exposed through API’s
 CBS Future:
o Independence and performance of delivery model
o Banks as platforms and open banking
o Mesh architecture
o Embedded
Entity resolution/De-duplication: Check if the customer has applied before (duplicate entry)
How do cheques work:
  Cheque Truncation System (CTS) or Image-based Clearing System (ICS), in India, is a
project of the Reserve Bank of India (RBI), commencing in 2010, for faster clearing of
cheques. CTS is based on a cheque truncation or online image-based cheque clearing
system where cheque images and magnetic ink character recognition (MICR) data are
captured at the collecting bank branch and transmitted electronically.
 Cheque truncation means stopping the flow of the physical cheques issued by a
drawer to the drawee branch. The physical instrument is truncated at some point en
route to the drawee branch and an electronic image of the cheque is sent to the
drawee branch along with the relevant information like the MICR fields, date of
presentation, presenting banks etc. This would eliminate the need to move the
physical instruments across branches, except in exceptional circumstances, resulting
in an effective reduction in the time required for payment of cheques, the associated
cost of transit and delays in processing, etc., thus speeding up the process of collection
or realization of cheques.
Issues with cheques systems:

 Long time
 Prone to frauds
Even the US does not have a payments system as sophisticated payments system.
History:

 So, in 1995, we decided to move away from cheques and we will fully go electronic.
 In 1995, RBI put a centralized payment gateway
 They also put up a network of interconnected banks using MPLS
 They gave a server to every bank, and had to be connected to core banking of RBI
 The processing power was very low at that time
 So, every transaction using RTGS was infeasible
 So, they said big amounts using RTGS, the rest in batches (NEFT)
 In the 2000’s, they introduced IMPS
 IMPS and RTGS are now converging
 NEFT will collapse soon in a few years
Types of electronic payments:

 Payment cards (Sodexo, gift cards, credit and debit cards, etc.)
 Electronics Fund Transfer (EFT) -> NEFT
 Electronics Cash Systems: You pay your electricity bills using a pull system, not push
system (automatically) or accounts maintenance charges -> Utility-based banking
using NACH -> So, when Uber asks me for money and I pay them, it is ECS
 Electronics wallets -> No profits in this industry -> That’s why wallet companies are
becoming Payments Banks
 Electronic check
 Micro-payment systems
Payment Cards:

 More than 85% of worldwide consumer Internet purchases are paid for with credit
cards
 Big players -> MasterCard, American Express, Visa
 Government has said if you’re doing payments in India, you cannot have your
gateways and data outside India
 Government wanted to promote RuPay -> So, they introduced this rule

How do credit cards work?

 ICICI Credit Card

 Making a transaction at D-Mart
 First, it hits the PoS (or Electronic Data Capture)
 Then, the PoS will connect to Switch (application technology used for card payments)
at HDFC (bank of the merchant) -> Switch is always connected to core banking (for
debit card) and card systems (for credit card) using ISO8583 -> Messaging protocol
 From here, it goes to an internal network with the Mastercard switch (which is in US)
-> Through the 16-digit number, it will figure out the country and issuing bank
 From here it will go to ICICI Switch, which contain both core banking and card systems
 If the limit is there in ICICI Bank -> All of this is reversed through the same system

For ATM’s, you should replace the PoS with ATM

MasterCard and Visa don’t take transaction fees, they take annual subscription fees
Onus Transactions
Offus Transactions: Rule of thumb is that issuing bank gets higher cut -> Because the risk is
greater
RBI Domestic Payments:

 IDRBT: Morphed into UPI or NPCI (National Payments Corporation of India)

 INFINET: Closed-loop network of banks getting connecting to RBI
 SFMS: IS8583 was expensive to adopt for RBI, so they created SFMS (Structured
Financial Messaging System)
 PKI-based Security: Public-Key Infrastructure -> Combination of private-public key ->
Every bank has a private and public key -> RBI issues these certificates
 PDO-NDS and SSS Systems -> Interbank systems of RTGS and NEFT for both money
transfer and securities transfer across banks
Centralized Funds Settlement System: Liquidity management, similar to RTGS but amounts
are huge
SWIFT: Society for Worldwide Inter-bank Financial Telecommunication:

 SWIFT operates a worldwide financial messaging network which exchange messages

between banks and financial institutions
 One of the big issues with SWIFT is that it is still not completely online
 When you transfer money from an NRI relative, it does not come immediately because
of this
 Core Banking and SWIFT are on different standards
 That is why interconnectedness is lesser
 Other payment systems are building this interconnected system -> So, SWIFT is also
making it
 Reduces counterparty risk
UPI Features:

 Use personal mobile as primary device

 Push as well as pull
 Use Aadhar, mobile number, card number and account number in a unified way
 Collect using virtual addresses or aliases
 Make payments using aliases without having to share credentials
 Ability to send collect requests with pay by date -> Snoozing
 Pre-authorize multiple payments similar to ECS (utility bills)
 Use a standard set of API’s
 PSP-provided mobile applications
 Fully interoperable system
 1-click 2-factor authentication system
Data Warehousing and Analytics:
New process:
Inputs

 Structured data sources

 Semi-structured
 Syndicate
Data Scientists

 Transformations
o Data integration
o Data organizing
 Business scenarios
o Analysis
o Data services
Visualizations
Roadmap for Banking analytics:
Phase 1: Pre-configured solutions
Report Categories:

 Business volumes
 Financials
 Special focus reports
 Portfolio and business requirements
 Comparative analysis
 Sales and performance management
Visualizations:

 Dashboards
 Slice/dice
 Pre-designed
 Portal
 Alerts
Phase 2: Data Analytics Solutions:

 Credit early warning

 Account planning
 Product analytics
 Client working capital analytics
Phase 3: Predictive/Prescriptive:
  Segmentation
 Pricing
 Cross-sell, upsell
 Risk modelling

Future of Banking Technology:

 Industry is not going for enterprise solutions anymore

 Premium for companies like IBM has come down a lot
 Most of the fintech innovations are coming from start-ups
Corporate Banks and Blockchain:

 Blockchain has been adopted by corporate banks in trade

 Buyers and sellers coming from different geographies -> How do you know that these
come with genuine documents
 Trade hubs like Singapore and China are implementing it
 So, a consortium of banks has created a blockchain -> The documents are added to
the blockchain by the seller bank and verified by the buyer bank
 Earlier, the documents were either scanned or sent physically
 Assessment -> Like knowing if the buyer and seller have the necessary capacity to carry
out the transaction
 All these are permissionable or private blockchains
Blockchain and non-repudiation:

 Immutability of blockchain helps in non-repudiation

 Land record digitization, especially in mortgages, is an extremely useful use case
 This is largely US-based
 House documents ka chain has to go all the way up to the land authorities
 It is very difficult to assess the authenticity of these documents
 Even today, housing loan takes a lot of time -> 2-3 weeks with physical verification
 All of this can be fairly digitized
Blockchain and Rating Agencies:

 How was ILFS rated well?

 From the time that ILFS sent its bonds for rating, it was analysed thoroughly
 All this analysis is present in email, analyst notes (which can be edited)
 This can now be implemented on the blockchain -> Immutable, non-repudiation, etc.
 Creates an audit trail for all the analysis
Counterparty risk: When two people make a transaction and they don’t know each other ->
This is counterparty risk -> A third-party comes in and says I am assessing both parties -> RBI
is the mediator for banks
Private blockchain are coming in, but public blockchains are lacking currently
API Banking:

 This is holding back Blockchain -> API’s are interoperable, Blockchains currently are
not
 Based on light-weight REST API services
 Helps in start-ups hooking on to banking world quickly
 Will help in push banking systems to cloud
 Kotak, RBL
Real-time risk management:

 Drools -> Any fintech which is into fraud management, transaction banking, etc. uses
this -> Use very complex rules
 All payment wallet companies would look at real-time risk management
 Mix of internal and external data give you a comprehensive view of both internal-lag
indicators and external-lead indicators
 SWIFT -> Can somebody come and create an engine that can work on real-time risk
management
Peer-to-peer financing:

 You don’t have the intermediary of the bank -> On both the lending and borrowing
side
 This is the biggest competition to the NBFC’s
 Few big companies: Prosper, Zopa, Lendin, Monaxo
 Lender gets a better rate than average returns, while the borrower gets better rate
than the bank
 How does it work:
o Somebody who has extra money can put it up on the platform
o The platform will assess the genuineness of the lender and its ability to fund
o It will allow the money to be parked into the lender’s account
o The borrower’s ability to pay is examined
 Traditionally, banks would look at your salary slips, tax returns, etc.
 This is now done using the credit card statements, flow of transactions,
etc. -> All this is technology-driven -> OCR techniques now understand
the transactions and make reports based on the borrower’s credit
history
o These are now creating complex algorithms to assess lending capabilities of
people -> If they open it up to NBFC’s, then there is huge potential
Financial Inclusion:

 Banking to Bottom of Pyramid

 iSPIRT – Sharad Sharma -> This is an NGO -> Read about IndiaStack -> All the
 o An Aadhar verification takes 7-8 paisa as opposed to a physical verification
which takes Rs. 40 per verification for borrowers
o Aadhar ID is connected via the IndiaStack API’s -> And generate the OTP
o Once the OTP is put, the name and other details come on the screen
o You can now verify the Aadhar and other details for the person
 What does it mean -> If a person who is selling vegetables daily -> Banks will be able
to offer a Rs 200 loan everyday?
Other Happenings:

 Health insurance and wearables and banking

o Frauds happen a lot of times -> People check in into hospitals that are not
existing
o There’s a wearable -> Lent to the users -> Has geo-tagging up to hospital bed
level -> Match it with doctor’s reports to ensure no frauds
 Another important source of data for insurance is telemetry -> For auto-insurance
 Robotic Assistants -> Robo-advisory -> Largely AI chatbot-led
o Guided chats -> Yes – No -> PIN Reset, chequebook, etc.
o NLP and NLG combination -> Ability to interpret English language and
understand it correctly
o Example: Internal employee HR engagement
o ServiceNow -> Offers a lot of NLP, NLG-led chatbots -> Can look at predictive
patterns and throw up alerts in incident management system
o Splunk -> Does a lot of logs -> But these need to be analysed -> Done by robo-
advisory
o Individual ratings -> Score for SME’s -> Pre-score is done by ML