Practical Data Analytics for BFSI

Section - I

Introduction to BFSI Sector, Analytics, and Data Science

Banking has to work when and where you need it. The best advice and best service in financial services happen in real time and is based upon customer behaviour, using principles of Big Data, mobility and gamification.

-Brett King, CEO and Co-Founder of Moven

The upcoming three chapters mark the introductory section of this book. These chapters help you visualize the depths of BFSI, especially in banking, and how Analytics, even though always being a part of the sector, has progressed substantially. The Data Science element reflects the growth of Analytics in the sector and how, from standard bookkeeping, the sector has developed into an insight-inclined decision-making sector. These chapters cover the introduction to BFSI, Analytics, and Data Science. You may skip to the next section for further detailed content of the book.

CHAPTER 1

Introduction to BFSI and Data-Driven Banking

This chapter encapsulates the core components of new-age Banking and Technology. We will go through a brief history of banking and the changes the industry has seen since the Great Recession of 2008 in the United States. The chapter will then proceed to the main areas of focus, that is, Digital Banking and its services, including Fintech development.

By the end of this chapter, you should be able to understand the core concepts of the BFSI sector and how it has evolved over the years and through multiple highs and lows. The chapter also walks through the different types of Banking practices today and how Digitalization and customer ease have governed these organizations into Data-Driven decision-making sectors. By the end of this chapter, you will have an understanding of the basics terminologies such as BFSI and Digital Banking and will be able to develop an intuition of how Analytics has evolved in these organizations.

Structure

The following topics will be covered in this chapter:

Understanding BFSI

Digital Banking

Data-driven Banking

A brief history of BFSI

The Banking, Financial Services, and Insurance (BFSI) sector is a service-oriented sector that usually performs multiple operations. The most popular while still being corporate and consumer banking, which is inherently defined in Section 5 of the Banking Regulations Act as the ‘accepting, for the purpose of lending or investment, of deposits of money from the public, repayable on demand or otherwise, and withdrawable by cheque, draft and order of otherwise’. The sector typically also incorporates the major areas as mentioned in Figure 1.1.

Figure 1.1: BFSI Sector and its Components

The sector’s growth has been a benefactor of the success and failure of multiple organizations, from the first ATMs by Lloyds to the full online banking by Wells Fargo, the Great Recession by multiple investment banks in the US, and now, Cryptocurrency. However, does new-age Banking or Digital Banking promise a move in the direction of financial success, or is it just another collapse in the waiting? How is it relevant to the Indian context? Is it a good solution for such a huge market?

There is no question though on how earlier waiting days in branch queues have now been reduced significantly. Every day, we enjoy the major benefits of easy money transfer, account opening, and even loan sanctioning through end-to-end digital products. The ease of pre-approved loans and services has also gained immense popularity and set new bars in the competitiveness between the banks for offering easy loans to customers.

But to answer our questions about confidence in financial services in India, we set out to explore and provide assurance in this book. The book does not explain the core technical concepts of banking and the tools associated with it; instead, it explains the core analytical areas of Banking utilization, which itself seeds from Data-Driven Banking.

The upcoming chapters in the book will explain the major functions performed in the Indian banking space. Some of the most common functions of the bank include:

Accepting Deposits: This includes accepting and maintaining deposits in the bank for a customer, while the major objective is to mobilize adequate deposits as required. The further categorization of these topics can be understood in Figure 1.2:

Figure 1.2: Type of Deposits

Granting Loans and Advances: This includes offering different loan products to customers as per requirements, some of the major loan products are shown in Figure 1.3:

Figure 1.3: Type of Loans and Advances

Loans are offered to all types of customers against securities created from bank funds or personal securities, whether movable or immovable in nature. This generally includes:

Advances through tangible security on the personal security of the debtor.

Advances covered by tangible securities or collateral securities.

Advances on the personal security along with banker guarantee of one or more securities.

Against the security of Fixed Deposit receipts.

Unsecured loans are also offered, including personal loans and education loans, that require no collateral. Since they are generally based upon customer’s bureau credit score; they are charged at higher interest rates.

Some of the other very common services also include:

Security Dealings, on own or third party

Letter of Credits/Issuing guarantees

Foreign Exchange or Foreign Remittance

Demand drafts, NEFT/RTGS (bulk payments, real-time payments)

Collection of cheques, drafts pay orders etc.

Cash Management

ATMs

Depository Participant

Government Business

Acting Trustees and Executers

Lockers and Safekeeping

While there are other para-banking services also that could be performed by authorized banks in India, those are out of the scope of this book.

Banking as a field includes multiple products with details that could be drilled enough to study separately. The digital aspect of these operations and how enhancements can be understood hands-on will be analyzed further in this book. Now that we have a brief understanding of the banking sector, let us move on to understanding the digitalization of banks.

Digital banking can also be termed as ‘online’ banking since it is being performed over the Internet. While this definition might be an easy interpretation today, the earlier form of online banking has also been known as home banking, a way of conducting banking through phone lines. It was first performed by United American Bank in the Late 1980s, which included multiple services such as checking account balances, paying bills, loan applications, etc. Major banks around the world tried to get a hold of such technologies, and United American had set the standards for this new banking until they failed in 1983 due to loan frauds. Other European countries and their banking services, including Prestel in the UK, continued to be utilized for another few 10 years until the rise of the Internet.

Web-based viewable bank account management hit the Banking industry by storm in the mid-1990s. It started with a cooperative bank called OP Financial Group in 1995. Every bank and its customers now wanted its services to be moved into the new online banking space, aiming to build loyalty, profits, and maintain customers for earlier and the ease of access for the latter. This also took a little unpopularity among a crowd of individuals not happy with transacting online, considering the recency of the Internet.

Banks could foresee a future with reduced transactional costs, easy integration, and reduced paperwork, leading to better profit margins now. The idea, therefore, expanded to include more services into these websites to bring together a vision of a Digital Banking Future.

Digital Banking

In layman’s terms, Digital Banking can be explained as a wholesome web-based view of banking, where a customer can perform all the operations performed in a branch. However, developing confidence in finance-related security can only be developed over time. After all, it was only around 30 years ago that the Internet gained popularity, and it was only around 22 years ago that ICICI introduced Internet banking in India by an Indian company.

The concept of a completely digitalized bank is still debated today, but we can confidently say that we have been able to digitalize and automate some of the most complex banking problems. Core banking provides a great opportunity by centralizing bank transactions carried out by banks and individuals as a whole. It allowed a 24*7 secured banking facility, making major services like fund transfer and mobile banking easily accessible.

Another bank that currently leads the digital banking space across Asia is DBS Banking. It has even been named the world’s best in digital banking by Euromoney. The bank holds a 26-year penetration in the Indian market, and Laxmi Vilas Bank also amalgamated into it in 2020. They were the first ones to introduce a mobile-only bank in India, or digibank, with more than a million savings accounts.

However, does digital banking really mean only online banking and mobile banking? Does it only involve all operations to move on the internet? A study conducted by John Ginovsky, the editor of Banking Exchange - an independent journal and website that has been with the banking space for more than two decades - now questions the meaning of digital banking as a term (1). Some of the major inputs received from the study include:

47% bankers improve customer relations through digital engagement

44% require digital banking to keep up with the competition

Only 33% use it to attract new customers and upsell

16% are looking to reduce costs by migrating transactions

The study also details the differences between brick-and-mortar banks and smart branches, which means innovative banking services at a new virtualized location. It also explains the financial on how wealthy customers are likely to switch financial institutions, putting 57 million bank products and services, $348 billion in bank deposits, and $2.3 trillion in investable assets at risk. Customers are moving towards an online mode of banking for opening and servicing their accounts, reducing in-person branch utilization from 68% to 27%.

It is easily understandable that banks are looking to improve and, as any business, reduce costs as much as possible. Some of the main areas that can be highlighted and can come as a requirement from digital banking are as follows:

Business Efficiency

Cost Savings

Reduce Manual Overhead and Increase Accuracy

Better Competitiveness

Improved Agility

Security Improvement for Financial Confidence

Research published by Statista: Tavaga Research, on their online website, explains (2) Digital Banking as:

Digital Banking is the automation of traditional banking services. Digital banking enables a bank’s customers to access banking products and services via an electronic/online platform. Digital banking means to digitize all of the banking operations and substitute the bank’s physical presence with an everlasting online presence, eliminating a consumer’s need to visit a branch.

The research also details some of the prominent areas of enablement, as highlighted above. The answer to the question of online banking vs. digital banking has also been explained: online banking involves running the core operations of a bank, such as balance inquiry and performing and reviewing transactions, while digital banking means to encompass all core and non-core operations in the bank. Online Banking is a stepping stone to the final stage of Digital Banking.

Having understood the requirements, and since we have developed Online Banking through two decades of experience, how do we lead to being completely digital? How do we develop the capability enough to automate operations in a way that we bring the branch operations to a bare minimum or even end it? Eventually, offering customers the ease of highly available, performant, and secure banking at their convenience.

Products and Services

Some of the most common roles expected from Digital Banking and what to keep and clean from it can be highlighted in Figure 1.4.

Figure 1.4: Digital Banking Products Keep and Clean

Most of the topics mentioned in Figure 1.4 are currently being worked on in most of the banks in India, to bring this to a complete achievement is still a matter of question. Top Banks in India, including SBI, HDFC, and ICICI, provide digital savings account opening facilities through their respective mediums, which include mobile banking like SBI’s YONO, Kotak 811, and Pockets by ICICI. Some other players, including DBS and Kotak, also provide a further higher interest rate of 6% compared to 5% from other banks. But does this cater to the whole society too? Is it reachable to all the sectors of the society too? Is it being utilized by the whole customer base of the bank?

Approach to Digital Banking

LiveMint report on Digital Banking explains the utilization very well in (3). Besides, the RBI has also issued guidelines asking both traditional and new banks to adopt a Digital Strategy where Digital Businesses cross the bar of 50% including many services, as listed in Figure 1.4.

A report published by Niti Aayog (4) also explains the Digital Banking scenario very well in India. Besides explaining the benefits of Digital Banking, Niti Aayog also presents the newly developed banking approach that has emerged in the UK since 2015, also known as neo-banking. Three models of challenger banks are mentioned as follows:

Neo-Banking: Such banks partner with incumbent licensed banks to offer over-the-top services to the customers renting the balance sheet of the bank. 100th unicorn start-up named Open is an example of the same.

Fully Digital Licensed Banks: Fully functional digital banks regulated by the standard regulatory bodies.

Unit of Traditional Banks: Traditional banks open their own autonomous units similar to neo-banking, some of the examples include SBI’s YONO.

The report also highlights how the cost-to-income ratio has been significantly higher in PSBs like SBI, above 50%, while new private banks run at around 43%, leading to higher requirements of Digital Banking and reductions in operational costs.

Digital Wallet Payment banks from organizations like Airtel, Paytm, and India Post are some of the most prominently occurring and far-reaching services for Indian customers.

It is fair to say, at this stage, that Digital Banking is the future of banking. Now, it is important to understand the reasons behind the lack of confidence in its utilization and the lack of a pillar of confidence in digital financing.

Drawbacks of Digital Banking

Digital Banks are prone to security issues, which are primarily online, considering their state. Some of the major frauds come from social engineering areas, including phishing, pharming, identity theft and keylogging, and so on. With digitalization, the known vulnerabilities of software tools and the internet are also other factors of digital banking security.

Some of the major areas of concern in Digital Banking can thus be understood as follows:

Service Interruptions: While the technology being the main area of utilization also faces non availability at times. The total reliance on digital and no physical support would also require a strong always available system.

Social Engineering: Phishing, vishing and Identity theft are some of the most easily noticeable concerns.

Service Limitations: Large amounts are generally regulated in digital scenarios, for example, UPI limit for a customer per day is only 1 Lac, while businesses can move onto the online business websites of the bank, the limitations kept for digital banking affect here too. While E-KYC is a known methodology now, loan processing and servicing would still require identity verifications within the branch. Besides that, until a fully digital cash economy is achieved, the requirements of ATMs would never decrease.

Personal Relationships: Due to accounts built without any bank personnel being involved there is a lack of personal relationships for building further customer potential.

Digitalization, on the other hand, also leads to easy solutions for security and compliance. Here, connectivity with the customer front as authentications are made easier and faster. Better monitoring of transactions and easier authentications through OTPs allow a sense of trust and authenticity for the customer. Some of the other areas of authentications include Captcha for bots, two-factor authentications, and so on.

On the contrary, Tavaga Research in (2) explains why Digital Banking is still a more secure way of banking than the traditional branch banking system. Security is maintained at the front end of such services, and compromising anything is very crucial for the organization and its reputation.

We have understood the concepts of Digital Banking, but how can we develop an intuition for aligning an organization with a target of going fully digital? How do we implement a fully digital bank?

Enablers of Digital Banking

From the previous part of the chapter, it is implied that for a bank to be fully digital, it requires strong technological backing. Traditional branch banking needs to be converted logically into a virtual environment, taking into respect the risks of all kinds while also keeping sure of the main business rules.

The IBS Digital Banking report and the Cedar consulting research (5) explain three major providers of a customer value proposition for a Digital Ready Bank, namely:

Technology Infrastructure

Omnichannel – Multiple Bank products/departments connected through a single channel

Integrated Data – Data is integrated from multiple data sources within the banking and its products

Information Architecture – An architecture built around intelligent insights and information gathering

Organization

Customer Centric Culture – organization culture developed with customer service in main focus

Cross Functional Collaboration – Collaboration between multiple departments/products of the organization

Personalized Customer Engagement- Engagement tailored to each customer and their needs

Operating Model

Seamless digital delivery – highly available digital availability for nonstop delivery

Customer Experience Centric design – design with customer ease point of view

Customer Lifecyle driven proposition – designing approach around customer span, churn and business development.

The study also presents the key enablers of such an ecosystem. The technology investments are thus aimed toward such companies or fields, which work together in synergy to provide a secure and available infrastructure.

The major enablers involved are as follows:

Governing Bodies such as NPCI

FinTech Companies

Internet and Mobile Banking

Big Data Analytics

Cloud Service Providers

Crypto Currencies

Mobile wallets and payments

To achieve these, the basic skill sets therefore could be further encapsulated into those mentioned in Figure 1.5.

Figure 1.5: Skills for Digital Banking Enablers

A small example that is considered to be an almost solved solution in Digital Banking is customer onboarding. The tedious process of multiple visits to the branch or multiple clicks and processes required an easy, customer-centric solution, which through traditional ways was seeing serious disinterest issues. In a recent study by PWC (6), almost 97% of banking applications that were through online banking were abandoned mid-process. Most organizations understood this major issue and came up with multiple innovative solutions, including a 5-click process by SBI’s YONO. Such a solution came around the core skills and has significantly smoothed the onboarding process.

This book covers most of these skills, except the technical aspects of a few, such as Blockchain, Enhanced Connectivity, and Human-Centered Design, which are out of the scope of this book.

The top three skills, as shown in Figure 1.5, are interconnected in a way to be established around Data. The upcoming chapters dive deep into data, and hence it is essential to develop a proper intuition around data and Data-Driven Banking through its core components including Analytics and Data Risk & Governance.

Data-driven Banking

Data has become the heart and soul of multiple sectors, including Pharma, Healthcare, Defense, and so on, in this generation. The traditional banking system also utilized data, but the extent was still not explored enough due to the systems and technologies available in the market. Traditional systems majorly revolved around structured numerical data for basic accounting and statistics, in other words, to resolve the core operational areas.

However, that data strategy is not enough to achieve the sort of hyper-personalization currently being performed in the market. To develop better customer potential, it is required to develop a better connection with the customer, and the silent approach is through Data. An example of such a utilization is a UK-based Digital Bank known as Monzo, which started by finding ways to save customer money by analyzing the spending pattern. Such a strategy was enough to gain word-of-mouth marketing while also cross-selling