The future of banking is rapidly changing in response to technological advancements, shifting customer expectations, and increased competition from fintech firms. Banks are no longer the gatekeepers of financial transactions and are instead shifting towards becoming facilitators for transactions between various parties. Three key trends are driving the future of banking transactions: embedded finance, decentralized finance (DeFi), and the growing trend towards the central banks of several countries experimenting with central bank digital currency (CBDC).

Embedded Finance

Embedded finance refers to the integration of financial services into non-financial products and services, allowing customers to access financial services through the products they already use. For example, a customer may be able to access loans or insurance through a ride-sharing app, rather than through a traditional bank.

Embedded finance is a win-win for all stakeholders involved. Customers benefit from frictionless banking experiences, such as the ability to make purchases using buy now, pay later (BNPL) options. Merchants and brands also benefit from the ability to attract customers with digital financing options and expand their business. Banks, on the other hand, can expand their services to more customers without incurring the costs of distribution.

Progressive banks are approaching embedded finance with a product management mindset. They are building ecosystems of digital platforms, fintechs, e-commerce players, and other entities to offer a wide range of financial services to their customers. This enables them to offer new products and services, such as digital wallets, mobile payments, and other digital financial services in a cost-effective way. By partnering with digital platforms, banks can also gain access to new customers and markets that were previously out of reach. In addition, embedded finance enables banks to increase revenue from existing customers by providing them with additional services such as lending and insurance. This allows them to increase customer loyalty and retention.

DeFi

Decentralized finance refers to the use of blockchain technology to create decentralized financial platforms and services that operate independently of traditional financial institutions. DeFi platforms provide customers with greater access to financial services, such as lending, borrowing and trading, and provide increased transparency and security through the use of smart contracts.

One of the key advantages of DeFi is that it’s built on blockchain technology, which allows for secure, transparent, and tamper-proof transactions. This creates a trustless and decentralized environment for financial transactions, which means that there’s no central authority that controls the system, making it more resistant to censorship and fraud. DeFi also enables greater access to financial services for individuals and businesses that may not have access to traditional banking services. This includes those in emerging economies, as well as underbanked or unbanked populations.

However, DeFi also poses some challenges, such as the lack of regulatory oversight and the potential for security risks. While still in its early stages, DeFi has the potential to revolutionize the way that financial services are provided and consumed.

CBDC

Central bank digital currency refers to digital versions of fiat currencies issued and backed by central banks. One of the key advantages of CBDCs is that they have the potential to enhance financial inclusion by providing access to digital payments for those who may not have access to traditional banking services. This could be particularly beneficial for individuals and businesses in emerging economies or for underbanked or unbanked populations.

CBDCs also have the potential to simplify cross-border transactions by providing a unified digital currency for countries to use, reducing the need for currency conversions and exchange rate fluctuations. This could also reduce transaction times and costs, making international trade more efficient.

However, there are also security and privacy concerns surrounding CBDCs, including the risk of hacking and the potential for governments to monitor citizens’ financial transactions. It’s important for central banks and governments to address these concerns and ensure that any implementation of CBDCs is done with proper security measures in place.

Key Takeaway

In summary, embedded finance, decentralized finance, and central bank digital currency are all key trends that are driving the future of banking. These trends are providing customers with new ways to access financial services and providing new opportunities for financial innovation. Banks must adapt to these changes to remain competitive in the future.

This article was previously published in Payments Journal.

The way money is spent, transferred, or exchanged has changed over the last few decades. The consumer movement from cash-based transactions to cashless transactions has been a distinct change across all countries. The payments sector plays a key role in the Australian economy. Today, a consumer can pay instantly for their purchase by tapping their mobile device or a card. Yet, there are several scenarios where the payment is not instant. It is imperative to continuously evolve the payments ecosystem, create an environment for leveraging the best practices, technology, and learnings from countries where payments ecosystem has excelled and benefitted its citizens at scale.

The journey so far

Australians have come a long way when making a payment for their purchases or transferring money to someone. Cash payments accounted for 27 percent of the number of all consumer payments in 2019. This is a shift from being 70 percent in 2007. In 2021, less than 2 cheques were written per person in Australia, down from close to 50 in 1990.

On average, in 2021, non-cash payments worth around AUD 260 billion were made each business day, equivalent to around 12 percent of annual GDP. The Real-time payments that consumers and businesses can make and receive in Australia is the effect of what had been strategically set as objectives by Reserve Bank of Australia in 2012.

With payments landscape evolving rapidly, the regulator in Australia recommends licensing the payment service providers and vest the regulators with the power to designate new payment systems and services.

The game-changer

The launch of NPP’s (New Payment Platform) PayID service in 2018 has been a landmark for Australia Payments System, enabling faster, flexible, and data-rich payments. PayID service provides the option for payments to the account owner’s registered mobile phone number, email address or Australian Business Number (ABN). NPP based real-time payments has touched about 2 million daily average (daily value is about AUD 1.97 billion), predominantly for low-value payments.

Buy Now Pay Later (BNPL) service, a concept revolving around embedded finance has exploded across Australia’s fintech scene at an unprecedented pace as open banking begins to take hold. By 2025, BNPL is predicted to represent 14% of the eCommerce transaction value in Australia. NPP’s latest innovation ‘PayTo’, to replace direct debit is aimed to make it easier for merchants and consumers to initiate real-time transactions from their bank accounts as well as enhance cross border payments to become faster and secure.

Also, with the emergence of a tokenised economy that offers potential to deliver new economic and social value, the Reserve Bank of Australia (RBA) has been exploring the relevance and role for a Central Bank Digital Currency (CBDC) in the context of its responsibilities for issuing the currency and overseeing the development of the payments system.

Where to from here

As per PWC and Strategy analysis, the global cashless payment volumes by 2025 are set to increase from about 1tn transactions to almost 1.9tn, almost tripling between 2020 and 2030. The APAC region is expected to see the fastest growth in this trend, with an expected over 100% increase until 2025 and beyond.

India is leading the way outpacing developed nations in enabling real-time payments, with a hugely successful nationwide adoption. The initiatives under the India Stack over the past decade and the launch of UPI (Unified Payment Interface) in 2016 by the NPCI (National Payments Corporation of India) has marked a distinct phase in this digitalization journey, which enabled instant real-time payment transactions just based on a UPI handle, linked to the mobile number of the consumer. In the calendar year 2022, India’s UPI based real time payments exceeded 74 billion, with over 80% being made through non-bank entities such as PhonePe, Google Pay, Paytm & Amazon Pay.

While the payments industry in Australia has made significant progress with the NPP, there’s more to be done to realise the full potential of the NPP. According to ACI Worldwide report published in April’22, Australia recorded 970 million real-time transactions in 2021. The report projects the real-time payments transaction numbers to be 2.4 billion in 2026. This will not only give higher cost savings and economic output, but also improve the liquidity in the financial system, which becomes a catalyst for economic growth.

The Australian and Indian governments have recently made strides to deepen their bilateral relationship, in key areas such as trade and investment, defence and security, education and research, with new trade agreements, such as the Australia-India Comprehensive Strategic Partnership (CSP). The Australian government can leverage these new policies to enhance the efficiency and reach of NPP’s.

Building on the strong foundation of NPP in Australia, the industry, governing institutions and technology providers must envision to create an ‘Australia Stack’, on the lines of the proven India Stack, which includes four layers of Identity, Payments, Data and Open Networks. This can enable a presence-less, cash-less, paper-less and open infrastructure for payments. This vision can take small steps of execution such as:

The outcome will encourage usage of PayIDs, reliability of NPP services, and enhanced cross-border payments to name a few.

This article was previously published in The Banking Day.

According to an IBM IBV study, almost half (48 percent) of CEOs surveyed across industries say increasing sustainability is one of the highest priorities for their organization in the next two to three years. However, more than half (51%) also cite sustainability as among their greatest challenges in the next two to three years, with lack of data insights, unclear ROI, and technology barriers, as hurdles.

The increasing focus on sustainability has led leading banks to pioneer initiatives such as green finance, green IT, paperless services, and supporting green industries, among others. The journey, however, is incomplete without a focus on energy conservation. Banking leaders can move closer to sustainability goals by measuring and improving the performance of the IT infrastructure and services running the bank.

Energy consumption, computing efficiency and utilization – The sustainability impact

Most data center facilities consume up to 10 to 50 times the energy per floor space of a typical commercial office building¹, so for many businesses an energy efficient IT solution is an essential step towards achieving carbon footprint reduction. An energy efficient data center design seeks to address all aspects of carbon footprint savings, from its IT hardware, heating, ventilation and air conditioning equipment to its physical layout and construction. Best practices for reducing electricity consumption include:

Infosys Finacle on IBM LinuxONE is designed to help banks meet sustainability goals

Finacle and IBM LinuxONE deliver a core banking solution on a highly reliable platform series offering benefits of reliability, performance, cloud readiness, scalability and high processing power to banking clients.

Finacle Core Banking Solution containerized version with Red Hat OpenShift on IBM LinuxONE systems can scale elastically while minimizing disruptions to running applications. This helps support peak customer demands. Scalability of LinuxONE is ideal for “systems of record” workloads, such as databases and transaction processing, and can reduce the costs of scaling workloads as well. Clients can deploy banking workloads on IBM LinuxONE Emperor 4 and start with minimum 1 core and scale up to a maximum of 200 cores.

Banks also look to reduce or offset their carbon footprint along with overcoming inadequate operational efficiency caused by server performance, server sprawls and inadequately equipped systems. IT efficiency improves with consolidation of data and applications onto a centralized infrastructure. Running workloads on IBM LinuxONE can reduce server sprawl through consolidation leading to smaller physical server footprint and reduced data center costs. This further leads to more environmentally sustainable IT environment and reduced carbon footprint.

The IBM LinuxONE Emperor 4 is designed for “7 9’s application availability, seamless on-demand scalability and to execute disaster recovery actions to respond to unplanned events. This can enable banks to efficiently deploy and deliver Finacle Core Banking solution to enhance trust.

Extended capabilities with IBM LinuxONE Emperor 4

The new IBM LinuxONE Emperor 4, available globally beginning September 14, 2022, is an enterprise server designed for data serving, core banking and digital assets workloads while helping to reduce energy consumption.

For example, consolidating Linux workloads on five IBM LinuxONE Emperor 4 systems instead of running them on compared x86 servers under similar conditions can reduce energy consumption by 75%, space by 50 percent, and the CO2e footprint by over 850 metric tons annually.² Integrations with energy monitoring tools on the server also enable clients to track energy consumption.

As a part of the IBM Ecosystem, Infosys Finacle is helping companies unlock the value of cloud investments by implementing the tools and technologies that can help them succeed in a hybrid multicloud world. Based on Linux, customers can benefit from open standards and an ecosystem that LinuxONE offers including modern DevOps and a variety of popular software. This can also help to remove operational barriers when customers deploy and manage technologies on cloud-native infrastructure.

You can find additional resources about Finacle on IBM LinuxONE below:

References

1. U.S. Department of Energy, https://www.energy.gov/eere/buildings/data-centers-and-servers (excerpt from: https://www.ibm.com/downloads/cas/GYR3MWQN)

2. Disclaimer: Compared 5 IBM z16 Max 125 model consists of three CPC drawers containing 125 configurable cores (CPs, zIIPs, or IFLs) and two I/O drawers to support both network and external storage versus 192 x86 systems with a total of 10364 cores. IBM z16 power consumption was based on inputs to the IBM z16 IBM Power Estimation Tool for a memo configuration. x86 power consumption was based on March 2022 IDC QPI power values for 7 Cascade Lake and 5 Ice Lake server models, with 32 to 112 cores per server. All compared x86 servers were 2 or 4 socket servers. IBM Z and x86 are running 24x7x365 with production and non-production workloads. Savings assumes a Power Usage Effectiveness (PUE) ratio of 1.57 to calculate additional power for data center cooling. PUE is based on Uptime Institute 2021 Global Data Center Survey https://uptimeinstitute.com/about-ui/press-releases/uptime-institute-11th-annual-global-data-center-survey

INTRODUCTION

On February 1, 2022, India’s Finance Minister Ms. Nirmala Sitharaman announced that India’s Central Bank, the Reserve Bank of India (RBI) will introduce digital currency in FY 2022-23. She said “The introduction of the CBDC will give a big boost to India’s digital economy. The digital currency will also lead to a more efficient and cheaper currency management system”. Following up on the Finance Minister’s announcement, RBI announced the launch of digital currency. The write up below is an attempt to provide clarity on the concept of digital currency.

WHAT IS CBDC?

CBDC is an acronym for Central Bank Digital Currency. As we know, currencies are issued by the Central Bank of every country. Likewise, Central Bank proposes issuing digital currencies along with the conventional format (papers and coins).

We have got accustomed to digital formats in every walk of our lives (photos, videos, music, books, etc.). Similarly, the conventional currencies are slowly giving way to the digital format. CBDC in India is also known as e-rupee (e₹).

DIFFERENCE BETWEEN CBDC & DIGITAL PAYMENTS

Many of us are confused between CBDC and digital payments. We use online payment modes through the internet and using mobile devices and are not able to understand how digital payment is different from CBDC.

Every printed currency note mentions that “I promise to pay the bearer, a sum of xxx rupees”. This is signed by the RBI Governor. Therefore, the RBI Governor gives an undertaking that the piece of paper you hold in your hand is worth say ₹100/-.

Let us understand the concept of digital funds transfer.

Let us assume you wish to transfer ₹100/-, to your brother and both of you are in different cities. You deposit this sum in your account, which is held in a bank, say Axis Bank, Chennai. Your brother might have an account in HDFC Bank, Mumbai. When you transfer funds to him through your mobile device using a payments platform like G-Pay, Bharat Pe, etc., his account is credited with ₹100/-. He can walk into HDFC Bank Mumbai branch and withdraw ₹100/-. Had it been prior to 15 or 20 years, you would have sent a cheque or demand draft for ₹100/- to your brother and he would have deposited the instrument in his bank’s branch in Mumbai. The tedious process of issuing a cheque/DD, sending it across to your brother and him depositing the instrument in his bank and waiting for funds to clear is replaced by payment interfaces in mobile and internet.

Coming back to the example, you have sent ₹100/- to your brother and he withdraws from his bank branch or through an ATM. Now, he has a printed currency in his hand. CBDC (e₹) is an attempt to eliminate the physical currency that he holds in his hand, replacing it with digital currency. Every person/entity is issued a digital wallet, irrespective of whether they have an account with a bank. The wallet is credited with digital currencies. Digital currencies have denominations like ₹5/-, ₹10/-, etc. Imagine you having a physical wallet with 2 notes of ₹100/- and 2 notes of ₹500/- (total ₹1200/-). This is now replaced with a digital format.

CBDC ADVANTAGES

RISKS:

As we’ve always heard, “No risks, no rewards”. Any digital innovation is prone to cyber-attacks. It is a no brainer these days that when we set to buy a computer or a laptop for our personal use, we think of the anti-virus that we’ll install on the device before actually buying the device. When the economy of a country is shifting to digital mode, it is much more than an anti-virus or VPN that must be carefully thought about. In India, we witnessed a massive outage on November 23, 2022, at a premier medical institution which was at the receiving end of a cyber-attack, compromising millions of its patients’ data including that of VVIPs. Unless due care is taken to protect the digital currency from cyber risks, the entire exercise might stand to be compromised. It is not only the digital servers, also the individual wallets need protection.

Presently, in India, there are two types of CBDC(e₹), as mentioned above – individual and wholesale. However, there are many types of entities that are dealt by institutions like trusts, proprietor firms, partnership firms, Hindu undivided families (HUFs), corporates, institutes, etc. The type of wallets RBI issues to every type of customer will be an interesting development.

CBDC is a concern in countries like India where mobile networks are not readily available in every nook and corner of the country. In such cases, there is another parallel concept “Offline CBDC” which the central bank is working on. Details and finer points are still awaited.

WAY FORWARD:

RBI proposes to use block chain technology to manage e₹. There are other technologies used by different countries, for example, Bahamas uses DLT (Distributed Ledger Technology). This gives ample opportunities to fintech organizations to provide effective currency solutions to entities and making their lives easier. Presently, four Indian banks have introduced this concept in four cities. Gradually, it is expected that the services will extend to other cities and include more banks. Irrespective of what one’s opinion on technology is, this development is here to stay.

OPPORTUNITIES FOR FINACLE:

At the cusp of every new technology, lies an immense potential to be an early bird, thereby leading to earning the pole position tag of trendsetter. CBDC, in its nascent stages, provides us an opportunity to come up with innovative solutions, in creating and sustaining momentum.