Over the last few decades, almost every industry has been disrupted by new technologies, the ability to use data and predict behaviour, and creation of more viable alternatives. With every disruption, the outcomes become cheaper, faster or better. To prevent users from reverting to the previous state, either two out of these three have to happen, or the change has to be addictive.
Banking and financial services are, by design, people-heavy industries because of the associated cost of failure. Since the stakes are high, the industry has relied on human judgment for decades, creating large financial institutions in the process. But to make it all faster, better and cheaper, technology is the perfect answer.
Depending on who you ask, automation, software, user experience, design, digital and sometimes even data science are clubbed into technology. Let's break down ‘technology’ into exclusive, yet exhaustive, components as we discuss the framework for a fin-tech organisation.
In fin-tech, technology spans three key areas:
Cheaper acquisitions: The first win in fin-tech is the ability to acquire customers digitally via a website, phone call, mobile application or aggregators. This dramatically reduces the need for an on-ground force, bringing down customer acquisition cost (CAC) significantly. Besides, it enhances distribution due to the rising penetration of 4G and smartphones.
Online application forms, paperless account opening, and Internet-only banks are all proof of this concept. Use of business-to-business partnerships, social media, and digital search platforms have resulted in up to 80% CAC reduction for many new-age enterprises.
Faster processing: The next big break comes when you need to take action. Automation and low-latency communication have enabled information to flow faster than ever. Whether it is processing a payment across the issuer, acquirer and the scheme within milliseconds, or processing a loan application through real-time scoring, it is all possible now. The rise of API banking, and real-time access to CIBIL, Aadhaar, and other public and private data sources is boosting efficiency further.
What took traditional banks over 3-4 days of processing can now be done in milliseconds with the correct and synchronised use of smart technological interfaces.
Before we go to the third reason, let me introduce the geek(ier) cousin of technology—data science. In order to make better decisions, they all need to work together.
Better intelligence: Human decisions are biased, subjective and not replicable or scalable as the sample size increases. The balance then shifts towards a more optimal man-machine allocation for solving a problem. Fraud-detection, credit-scoring, and default warning systems are all made possible by using data science to predict an event or identify an anomaly.
In the background, sophisticated data science applications are made possible by the availability of extreme computation capability (think distributed computing, super computers, IaaS) and technology to implement algorithms at scale (think Big data architecture, DevOps). The outcomes are mind-blowing. Not many have imagined data the way they can be decoded with the help of systematic data science techniques and intervention.
By itself, technology is not the answer to everything. It is an enabler and propeller, a golden thread that runs across the organisation to make it cheaper, faster and better. When combined with the right use case, a focused data strategy and a well-thought-through architecture, it can be a winner on many fronts.
To build a solid technology function, the three teams need to come together: product, which defines the need; engineering, which builds the software; and data science, which helps take the right decisions.
Together, these three teams can create path-breaking user experiences, enable quick decisions and reduce the risk of failure while making the unit economics work. Fin-tech companies across the world have adopted this framework to devise solutions, creating newer markets that the banking industry didn’t see for over two decades.
An alumnus of IIT Bombay and ISB Hyderabad, Abhishek Kothari is co-founder of Mumbai-based digital lending platform FlexiLoans.