India’s success story in digital payments is exemplary. Until 2015, while efforts were underway to bring about a shift, the digital payment landscape in India was nascent at best. Flash forward to 2022-23 and the payments story has transformed. So far in 2023, over 91 billion digital payment transactions have been recorded. Meanwhile, $1.5 trillion digital payment transactions were recorded as of December 2022 in India. This number is higher than the combined transactions recorded in the US, UK, Germany, and France.

The story so far

The move toward a cashless economy in India started nearly three decades ago with the introduction of online banking. However, the digital payments ecosystem received its first real boost when the Reserve Bank of India (RBI) set up the National Payments Corporation of India (NPCI) in 2008 to shape the payments infrastructure and enable innovations.

This underpinned the launch of IMPS in 2010 followed by the RuPay payment network, AEPS, UPI, Bharat QR, and NETC, and the Indian digital payments ecosystem forged ahead. The 2016 launch of the UPI, which enables instant real-time payment transactions based on a unique handle linked to a mobile number, can be considered the spark that ignited this journey. Since then, the volume of digital payments in India has grown by 50 percent annually.

As of Q3 2022, the UPI ecosystem, which includes 358 banks, saw over 19.65 billion transactions in volume and INR 32.5 trillion in terms of value, an 88 percent increase in volume, and over 71 percent increase in value quarter-on-quarter. UPI payments have now surpassed the usage of credit or debit cards in India, with a penetration of 40 percent, in comparison to 6% for credit cards.

The latest testament to UPI’s success is its global expansion. The NPCI is now enabling non-resident Indians (NRIs) to leverage UPI in countries such as Saudi Arabia, Singapore, Canada, Hong Kong, Oman, Qatar, the USA, United Arab Emirates, the United Kingdom, and Australia. In the EU, the NPCI has partnered with Worldline, a European payment service facilitator to enable the acceptance of UPI and RuPay.

The Indian government is also in the process of expanding UPI, RuPay, and the BHIM app’s functionality in several countries to simplify cross-border payment processing and strengthen interoperability. Recently, the integration between UPI and Singapore’s PayNow has gone live, allowing instant cross-border money transfers between the two countries. More such integrations are expected to follow, taking the impact of UPI to the global stage.

The role of partnerships and innovation

This remarkable growth of digital payments led to over 7,000 fintech companies forge unconventional partnerships. Having previously viewed each other as competition, fintechs and banks now work together to unlock new use cases across the extended ecosystem. An interesting example is a UPI-enabled digital platform for end-users to access the National Pension System (NPS). Aware of the innovation acumen of fintechs and hoping to provide them with the appropriate guardrails, NPCI recently set up a partner program that could expand the frontiers of this payment revolution.

Under the banking-as-a-service umbrella, this innovation surfaces in the form of payment-as-as-service offerings. Taking it a step further, the fintechs M2P and Cashfree Payments now offer payments-infrastructure-as-a-service for any bank/fintech/third-party businesses to launch or embed payment offerings in their business.

The way ahead for India’s digital payments landscape

While the journey thus far has been nothing short of impressive, Indian authorities have been mindful of the data security front, issuing a master direction in 2021. Toward tackling such concerns, in 2022, the RBI mandated that credit and debit card information used for online, in-app, and point-of-sale (POS) transactions be replaced with tokens, providing an additional layer of security, while improving user experience.

India is expected to account for 70 percent of global real-time payments by 2026. In addition, BaaS-led payments innovations will gain traction for their adaptability across environments. Exciting use cases will continue to be identified, such as the wearable payment solutions by Bank of Baroda in partnership with NPCI.

The RBI has also recently launched the digital rupee, India’s central bank digital currency, categorized as a legal tender in digital form. Eight banks have participated in this pilot project, which is expected to further foster the cashless economy ecosystem.

CBDC could help cut operation handling costs for settlements and help make cross-border payments seamless and independent of intermediaries. The expected UPI-like interface will likely drive CBDC adoption due to familiarity and ease of use. This in turn is expected to boost financial inclusion and smooth transfer of financial benefits.

The success of UPI has been truly inspirational. To augment the impact of this success and carry it forward to other industry spaces, the government of India, in association with industry bodies, has launched several new initiatives. Some of these initiatives include the account aggregator model based on the consent architecture, OCEN (Open Credit Enablement Network) to democratize lending and ONDC (Open Network for Digital Commerce) to drive decentralization of eCommerce.

This potent combination of collaborative innovation and robust regulatory steer in India will continue to drive growth and cutting-edge innovation for digital payments, not just in the country but globally.

The Indian payments story continues to radiate success and promise.

This article was previously published in the Economic Times.

The banking sector has been changing rapidly for years. But never before has it experienced so much change along so many dimensions at such speed. Consider just one of these – competition. New players with very different pockets of strength than the big banks are collectively taking business away from incumbents. But someday soon, they will individually pose a challenge to banks’ core business because of their closer connect with customers, innovation capability, low-cost structure, superior talent, etc.

Examples here include GrabPay, the digital wallet from Southeast Asia’s ride-hailing leader, with 190 million users and 9 million GrabPay acceptance points in the Asia Pacific region, and a quarterly payments volume of US$3.8 billion in Q3 2022, up 22% on a year earlier. Shopify, which provides payments, point of sale systems and loans for merchants topped half a billion dollars in new loans for the first time in the Q3 2022 —a nearly 30% jump from the prior year.

This means that even the best organisations are at risk of being relegated to the background unless they take substantive, proactive measures. Staying relevant and undisrupted, and becoming better at what they do should therefore be the priority of banks the world over.

And no bank understands this better than DBS, recently voted the world’s best bank for the fifth time in a row. In a post, the bank said that it focused not on accolades, but rather on becoming a better bank continually.

But how can banks, which have been operating successfully for decades, become meaningfully better? After all the optimisation and transformation that they’ve been through, what’s left to do?

The short answer? Recompose banking.

A simple framework for recomposing banking recommends that banks think of how they would like to create, deliver, and recognise value in the future.

Recompose the creation of value for customers

Some years ago, if a bank wanted to create new value for customers, it would have to create a new product or service. And it had to do this on its own. But today, banks can simply build its offering on top of foundational capabilities sourced from a third-party provider. For instance, if a bank wants to launch a new mortgage product, it no longer needs to build a processing engine from scratch; instead, it can avail of a mortgage utility service from a provider such as Stater. The provider does the heavy lifting, including designing the product and processes, as well as managing operations and collections. The bank need only focus on sales, marketing, and customer engagement.

Similarly, banks can offer a Buy Now Pay Later service by leveraging an external channel, such as UPI in India. This allows them to onboard millions of merchants at once, without having to reach out to them individually.

These examples help showcase how the vertical structure of banking value creation can be recomposed, enabling banks to focus on certain aspects while leaving the rest to their partner ecosystem. What’s more, recomposing value creation can also create additional value, as in the case of Goldman Sachs, which has derived far more from its partnership with Apple Card than it would have earned on its own.

Recompose value delivery to customers

Value delivery is changing even faster than value creation. No longer do banks need to acquire and serve customers through their own channels; today, there are a variety of partners providing origination and distribution services. RBL, one of the fastest growing banks in India, has really leveraged this option by originating more than half of its loan book through third parties. Goldman Sachs recomposed value delivery right from the start by relying entirely on a partner network to take its products and services to end customers. It partnered with Stripe to service sellers, and then got Shopify to work with them to distribute its (Goldman Sachs) products.

Embedded finance and associated developments, such as BNPL, are also ways of composing banking delivery differently. This trend is already underway with banks using non-bank, non-traditional channels such as Google Pay and Amazon Pay to distribute their offerings to a much wider consumer base.

Recognise value for the organisation and shareholders

Historically, banks’ revenue was mostly interest income, with some fee income. In recent years, interest income suffered as interest rates fell. However, despite the recent slow rise of interest rates, banks have still not managed to claw back their previous earnings. In fact, customer forces and regulatory strictures – such as the cap on MDR – are piling pressure on pricing, and stressing revenues further.

Clearly, banks need a new way of recognising value for themselves and their shareholders. Accelerating digital adoption is a solution since it can bring down cost to income ratios dramatically and increase the revenue per customer. And as banks recompose value creation and delivery through digital means, the resulting lowering of cost also means they can recognise more value for their shareholders.

Final word

The purpose of recomposing is to take a new approach to banking, in the manner laid out in the above framework, or otherwise. Thanks to technologies, especially cloud, API, and webhooks, banks can recompose their business quickly and at very low costs. Think Banking-as-a-Service, which enables banks to take a new product to market in a matter of weeks or months. In fact, it is possible to create an entire digital bank by simply recomposing services, without investing big money in technology, operations, talent, etc. What banks need when recomposing banking is a proactive stance, along with the right mindset, skillset, and toolset to put it together.

This article was previously published in MEA Finance.

Man-made climate change is the most pressing concern of our times. To tackle this challenge, governments and regulatory bodies across the world are driving an ESG transformation of the business world with great urgency. The Paris Climate Agreement, signed in 2015 and legally binding 196 countries to undertake actions to curtail climate change, was one of the most definitive steps in this direction.

As financial custodians of global economies, banks are under significant pressure to play their part. There are two primary areas of ESG impact that banks across the globe can easily and immediately address. First, implementing ESG standards and goals in the bank’s standards. Second, how the bank reflects its ESG consciousness in its policies, especially around lending and illuminating borrowers to be more ESG-focused. Additionally, customer and investor awareness in choosing companies, including banks, that align to sustainability principles is steadily growing.

Regulatory bodies are also drafting guidelines and regulations that compel banking and financial institutions to consider ESG in their risk management framework. It is no longer just about sustainability as an ethical obligation, but as a business and investment driver as well. The good news is, it’s not all gloom and doom for banks. A report by Alvarez and Marsal indicates that leading banks in Europe and North America can boost their revenues by 10% by 2030, with adequate commitment to transitioning to a sustainable economy. These revenues could come from green and sustainable lending products and services in their lending framework.

Banks have the potential to access various revenue streams driven by ESG principles. These could involve assessing and rating clients based on their ESG performance, to ascertain their eligibility for green finance and incentives. Additionally, banks could facilitate connections between clients who produce carbon and those who offset it to promote carbon neutrality. Another possibility is the creation of new products, such as carbon calculators, integrated emission statements, and carbon offset deposits, to enable clients to measure, monitor, and tackle their emissions.

The global Sustainable Development Report places India at 121 (out of 163 countries) in achieving sustainable development goals. While this ranking may not be heartening, India has been increasing focus on ESG. The Indian government has been actively encouraging companies to adopt ESG practices through initiatives such as the Sustainable Development Goals, in conjunction with the UN and the National Action Plan for Climate Change, launched in 2008.

The Indian government has also firmly committed to the 2070 Net Zero goals. In addition, there has been a growing emphasis on corporate social responsibility (CSR) initiatives. In 2014, India became the first country to make CSR mandatory, making companies with a certain turnover and profitability to invest 2 percent of their average net profit of 3 years in areas such as education, poverty, gender equality, and hunger. India’s Green Hydrogen mission is expected to be the world’s largest such initiative and is expected help India reach its net zero carbon emission goal by 2070.

For the Indian banking sector, the ESG transition is being largely driven by the Reserve Bank of India (RBI). In its report on ‘Climate Risk and Sustainable Finance’, the RBI issued guidelines or suggestions for banks to assess and manage their ESG risks and ensure that their operations and strategies are in line with ESG principles. Banks must leverage this to identify and assess their ESG risks and set targets to reduce them.

The Indian Banks’ Association (IBA) committed to crafting an ESG framework while carrying out credit assessment and including climate risk as part of their risk assessment strategy. Prior to the G20 summit in December 2022, the IBA also brought together a group of banks to address ESG issues ranging from sustainability to green financing. According to a report, 79 percent of the top 100 companies in India publish a standalone ESG report.

Despite the increasing focus on ESG, the Indian banking sector is yet to make a significant impact in the implementation of ESG policies. According to the CRISIL Sustainability Yearbook 2022, a majority of the financial institutions in India were not tracking their own Scope 3 emissions. Moreover, banks and financial institutions are yet to align to the BSBR and Net Zero commitments.

Several shortcomings in ESG reporting and tracking can be attributed to the lack of awareness and understanding of the importance of ESG among banks, as well as a lack of incentives and stringent regulations to adopt ESG practices. Yet, banks are increasingly being asked to rise to the challenge. According to a report by MSCI, banks and financial institutions will be expected to conduct climate-risk stress tests.

Banks are discovering that pursuing both ESG and digital transformation can have a mutually reinforcing effect, driving progress in both areas simultaneously. Although the challenge of undertaking both digital and ESG transformations may appear formidable, banks can find reassurance in the fact that there are substantial areas of overlap between the two agendas. Moreover, banks that can achieve a reasonable degree of maturity in both areas will have a distinct competitive advantage in the market, with few rivals capable of matching their comprehensive offerings. The successful implementation of dual transformation would require banks to not only modernize their technology systems and business practices, but also to affect a shift in their workforce, culture, organizational structure, and in certain cases, their fundamental values.

In the EU, several countries have begun implementing ESG laws and other nations are following in their footsteps. This heralds a new age of banking where banks will be held accountable for their own ESG impact and be expected to monitor the ESG preparedness of their customers.

This article was previously published in the Financial Express.

As digital payments gain traction, the financial sector is embracing innovative technology and open architectures to meet rising consumer expectations In the financial sector, particularly in payments, change is imminent. The disruption is caused by several factors, which are gaining enough traction in banks to modernise their payment systems.

The rise of a cashless economy is one of them. Rather than relying on currency, nations worldwide are vying to go cashless. For instance, several European countries are setting the bar for the transition to entirely digital transactions.

This rise in online and digital payments is the result of rapid urbanisation and technical development, which is exemplified by the widespread use of mobile devices and smart apps.

The impact of changing consumer preferences on payment methods

As payments grow more digital and real-time, cash is being replaced by cards, e-wallets, tap-to-pay, or mobile-based solutions.

Fintech companies are quickly introducing cutting-edge payment products thanks to their expertise in digital technology and unique business strategies. Large tech firms with billions of customers worldwide also disrupt the payments environment, creating a highly competitive market.

These changes result from shifting consumer tastes and expectations for payments, which are leaning increasingly towards quick, seamless and contactless transactions.

Geopolitical power shifts and their impact on digital payments

Studies predict that by 2025 more than half of the world’s population will reportedly use mobile wallets. The millennial generation, which epitomises this digital lifestyle and expects seamless and continuous financial transactions, has considerably impacted this trend. Those dissatisfied will likely go to another bank that can onboard them quickly and easily.

Large corporations are also increasingly digitising their operations, adopting digital commerce, and making themselves available for online transactions. Digital payments are part of their business model, from payment gateways to structured, time-bound payments and collections. Consequently, by 2027, the value of transactions in the worldwide digital commerce sector will be predicted to exceed $8.9 trillion.

The environment of digital payments is also changing due to the change in geopolitical power. There is a definite shift from partnerships to provide seamless payment corridors and transfer mechanisms towards country-specific silos. SEPA, Immediate, and P27, which aim to create a seamless payments infrastructure throughout the Nordic area, are three examples of these new digital payment proposals.

To decrease risks, improve security, and standardise through an industry-wide transition to ISO 20022, regulatory organisations and industry leaders are pushing modernisation through various efforts. Future digital payments may already be seen as a result of the rising popularity of digital currencies.

According to reports, 86% of central banks are thinking about adopting central bank digital currencies (CBDC). While the Eurozone and the UK are currently doing research, Sweden and Norway are already testing CBDC prototypes.

Lastly, new technology – such as cloud computing, open APIs and distributed ledger technology – lays the groundwork for innovative payment business models and accelerates cashless transactions.

Embracing open architecture through APIs and payment ecosystems

Banks must redesign their payment roadmap and provide the proper technological foundations to succeed in the digital economy. These foundations should have the following:

Banks can better regulate their payments business on several fronts using a payment technology foundation created with the factors mentioned earlier. In this highly regulated industry, it will help manage the time and costs of compliance while enabling seamless consumer experiences. Also, banks can scale more effectively and innovate more quickly, participating in the growing real-time payments ecosystem due to improved procedures and automation.

This future will be possible at cheaper maintenance costs for the technology used. It will give banks a solid foundation to explore possibilities where their products are seamlessly integrated into the customer’s main journey.

This article was previously published in The Fintechly.

Finacle Core Banking containerized version with Red Hat OpenShift on New LinuxONE 4 Single Frame and Rack Mount Models

Amidst the growing focus on sustainability, many organizations are recognizing the importance of environmental stewardship and are taking steps to reduce their impact on the environment. This trend has been driven by a number of factors, including increasing consumer awareness of environmental issues, regulatory pressures, and a desire to improve efficiency and reduce costs. In the context of technology infrastructures, sustainability includes designing and managing these infrastructures in a way that reduces their negative impact on the environment while ensuring their long-term viability and usefulness.

IBM today unveiled its new IBM LinuxONE 4 single frame and rack mount models available globally on May 17, 2023. Powered by IBM’s Telum processor, these new configurations are designed for highly efficient data centers with sustainability in mind. This can help clients make more effective use of their data center space while remaining resilient in the midst of ongoing global uncertainty.

Clients can also leverage Finacle’s digital banking solution on IBM LinuxONE – a highly reliable platform series offering benefits of reliability, performance, cloud readiness, scalability and high processing power to banking clients.

Addressing today’s changing IT landscape

IBM recently released the IBM Transformation Index report. According to the research, security, managing complex environments, and regulatory compliance were cited as challenges to integrating workloads in a hybrid cloud. In today’s evolving IT landscape, it can be difficult for clients to meet business objectives while adhering to environmental regulations and increasing costs.

The new rack mount option is designed with the same reliability standards as all IBM z16 and LinuxONE systems and is for client-owned data center racks and power distribution units. This footprint is architected to let companies co-locate the latest LinuxONE technology with distributed infrastructure and opens opportunities to include storage, SAN, and switches in one frame, designed to optimize both data center planning and latency for specific computing projects. Installing these systems in the data center can help create a new class of use cases, including data center design, optimized edge computing, and data sovereignty for regulated industries.

Optimizing flexibility and sustainability

IBM LinuxONE 4 single frame models are built to help maximize flexibility and sustainability in data centers. With a new partition-level power monitoring capability and additional environmental metrics, these single frame systems are dedicated to helping clients reach their sustainability goals, reducing data center space and energy consumption. These key advantages distinguish IBM LinuxONE 4 for sustainability in the data center, especially when consolidating workloads from x86 servers.

Finacle’s 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. The scalability of LinuxONE is optimized for “systems of record” workloads, such as databases and transaction processing, and can reduce the costs of scaling workloads as well. The new LinuxONE rack mount option is a game changer for clients, as it now provides the flexibility to collocate new LinuxONE server in a single rack with existing distributed infrastructure.

As a part of the IBM Ecosystem, Infosys Finacle is helping companies unlock the value of their infrastructure investments by implementing the tools and technologies designed to help them succeed in a hybrid cloud world. Our partnership with IBM around LinuxONE supports sustainability by providing banks with energy-efficient, secure, and cost-effective infrastructure that can help them reduce their environmental impact.

Additional information:

Research for the Infosys Modernization Radar 2022 found that 88 percent of the systems in organizations were legacy, and more than half of those were core to the business. A huge majority of legacy systems were on course for modernization within five years.

This is true of banking as well. However, while many banks are keen on core transformation, they could become overwhelmed by its complexity. Despite making significant investments over a decade or so, only 16 percent of financial institutions agree that they have managed to transform at scale and obtain full value. Two reasons stand out: the rapid evolution of customers, competition and technology keeps moving the transformation goalpost forward; secondly, most modernizations are incomplete because in focusing on the front-office, they fail to address mid and back-office functionality such as service effectiveness or personalized product creation.

Hence it is critical for a bank to find the right solution and technology partner that can help it achieve the best outcomes from core modernization. Based on our experience, we believe the following eight criteria are key to making the right choice:

Functional richness: Composability is one of the biggest changes to have occurred in the modern core banking platform. But when choosing a composable solution, a bank should also ensure it covers all the banking verticals/ sub-verticals that it serves. For example, a corporate bank catering to the MSME, SME, mid-market and corporate segments, would need a solution that allows it to compose products and services for all of them. Other important solution requirements include depth of capability – for instance, support for syndicated, and not just basic lending – and a functional roadmap aligned with the bank’s own business expansion plans.

Technology prowess: Most banks will want a cloud-native solution. Given that different vendors interpret this differently, our recommendation is to go with a solution that follows the CNCF 12-factor cloud-native framework. In the age of open banking, every bank needs a core solution designed for open integration via APIs and webhooks. Also, the selected vendor must have plans for significant investments in emerging technologies, especially AI and edge computing, which will make a big impact on core systems design going forward.

Depth of services: It is well-known that people make the real difference in any transformation. Therefore, the technology partner’s team should have people with core transformation experience in the country, and platform, of implementation. Competence apart, the bank should ensure the vendor has adequate capacity to see the transformation through; this is because there will be many transforming banks competing for the same talent pool. At the time of choosing the solution/ vendor, the bank must insist on a team of certified professionals to work on its project.

Long-term viability: Even with a composable core, modernization is a long-term endeavor that will likely take several stages to complete. Banks need a partner who can go the distance, one with a long-term outlook and viability. This may be an issue with venture capital-funded providers, whose long time-to-value creation often exceeds their VC’s expectations. More than a billion dollars have been invested in core banking vendors in the last decade, but the collective revenues of a bunch of companies is less than a hundred million. Many of these businesses may not be able to sustain through a funding winter. Therefore, it is critical to check the prospective vendor’s growth and profitability trends, and long-term viability, before signing up.

Customer references: References from other banks – especially of a similar size and persona as the bank undergoing transformation – are very valuable in the selection decision. Also, because banking practices vary from country to country, a vendor with proven credentials in the market of choice, which has built the adapters to connect to its infrastructure, and has understood local requirements, has a clear advantage.

Operational performance: Rapid digital adoption is sending digital transactions soaring. And as open banking and finance penetrate further, there appears to be no limit to the growth. (For example, in India, real-time open payment transactions have crossed 8 billion per month). Core banking solutions need to be highly resilient to withstand this scale of transaction in general, plus the occasional spike on special days like Boxing Day 2022 in Australia which saw record-breaking sales.

Partner ecosystem: Not just scalable and resilient, a core banking platform also needs to be agile and extensible so a bank can add on differentiating capabilities that are not part of the vendor’s package. The existence of a rich partner ecosystem around the core is also an important consideration, because core banking is going the way of consumer platforms to become the “Operating System” of the banking applications landscape. The good news is that most providers have created an ecosystem of partners who build on top of their solutions. Last but not least, a bank should know about the vendor’s technology alignments: for example, is the vendor’s platform cloud-agnostic or tied to any particular provider?

Total cost of ownership: The last, and by no means least, criterion in core platform selection is the total cost of ownership. Core transformation is expensive, entailing a sizeable solution acquisition cost followed by ongoing expenses. However, a bank can optimize its cost by choosing a core solution that uses several open-source components in its stack, and offers economical maintenance, including preventive maintenance, options.

That being said, all contemporary core solutions offer a significant cost advantage versus legacy systems. And while core transformation is a serious investment, over the medium and long-term it delivers value that is several times its cost.

Finally

To make sure they extract every dollar of that value, banks should consider the above eight criteria, assigning different weightage to each, based on their contexts and needs. The right selection will make all the difference to their core transformation outcomes.

This article was previously published in Banking Day.