Addressing the Challenge of High Growth in Digital Transactions

by Ritesh Masand, Darpan Kulshreshtha, Sreeram Narayan, Tarun Sharma

It has been an action-packed year like never before. As the lockdown took effect at the cusp of the new fiscal for India, Financial Institutions (FIs) saw demand evaporate as customers could not walk into stores. Demand had moved online, making banks offer multiple digital products. Putting together a digital face was the only option.

Stores had to, overnight, turn digital and their FIs were expected to support them. A delay meant that business opportunity could be lost. Or worse, competition could leave them far behind in the emerging order.

Transaction volumes have been consistently increasing- be it in payments, lending, insurance, investment, or even cards. Technology driven challenger institutions and fintechs have shown the way in many digital initiatives, compelling traditional FIs to, sometimes, hurriedly put up a digital face. The ecosystem was just getting ready for the surge in digital payment volumes. Then came the pandemic. Users who had warmed up to the idea of alternate channels for transactions spurred a never seen before spike in digital transactions.

For lenders, it was a problem of plenty. They had to innovate overnight and offer new digital products to meet the flood of new customers, nearly all of whom were shifting from in-store purchases to online shopping. New sneakers, a MacBook, a Peloton — almost anything is available in instalments via ‘buy now pay later’ (BNPL).

When FIs offer these, and other similar products, it tells the customer that their needs are being met. In his mind, he feels that the FI is living up to his needs. Across the world, 2020 has seen a sharp spike across the world for similar offerings.

In India, UPI transaction volumes took 3 years to cross the watershed of one billion by the last quarter of 2019. By January 2021, it has more than doubled to reach the 2.3 billion mark (source). Traditional ‘over the counter’ banking transactions have been replaced with online alternatives.

In the age of digital transactions on the fingertips, 24/7 banking is no more a wow factor. Customers interact with FIs through multiple channels- web, mobile, IVR, chatbots and more. Digital channels are rapidly morphing and can be called the heart of a bank. If and when it happens, customers may begin to wonder what is a ‘downtime’ for the bank. FIs that falter on customer expectations will find regaining customer loyalty a gargantuan task. With numerous options available, switching may be just a few clicks away. Who knows, it could be made easier still.

The multichannel approach of the banks of yesterday has given rise to an omnichannel approach. In some instances, additional channels were bolted on to complicated IT systems and legacy platforms. Some may call it patchwork but when customers demand a particular solution urgently, banks need to come up with such solutions.

Challenges for Financial Institutions

Digital superficial layers get added to the rigid legacy systems. They may not be scalable and robust by their very design, given that they are often put together hurriedly. ‘Being Digital’ is not about adding layers of channels atop the traditional, monolithic architecture. The surge in transactions induced by the pandemic was unanticipated and the infrastructure was not, strictly speaking, designed for that. With rapidly increasing volumes, failure could be inevitable unless handled with meticulous planning.

The challenges faced by banks have not gone unnoticed. The central bank has been urging banks to expand their digital innovation and offerings. It is also not shying away from penalising the FIs. In some cases, FIs have been asked to compensate the customers or have been asked not to source new business till the time challenges are not addressed. IT audit is another example through which regulators are trying to monitor, access and control disruptions.

Make no mistake, FIs are adept at managing money in the market and earn profits out of the services they offer. It becomes critical that they join hands with the right technology partners who can share their business mind-set and take care of the technology needs to complement business growth.

Choosing the Right Technology

With the role of technology becoming more critical by the passing day, choosing the right one could decide the future of the FI as a brand or a super brand. Demands by the customer is the driving force for the evolution of technology and infrastructure. FIs need to be agile by scale to meet the spikes and surges in today’s digital era. Platforms they choose need to be built on modern frameworks. If it allows them the flexibility to rapidly upgrade to ride through any known vulnerabilities, it is definitely an option every company may want to choose.

Traditionally, FIs have been more at home with the on-premise hosted infrastructure or at best a private cloud. Such a setup has the comforting factor of allowing them the access to physical infrastructure and the control towards security protocols. To meet scalability needs, FIs could consider a hybrid cloud model to move closer towards the benefits of a public cloud environment and would also allow for greater control. Applications can be designed as cloud agnostic and allowing them to be containerised for much better resource utilisation.

Modern applications also need to have inbuilt controls to avoid single point of failure by design. These also need capabilities to service transactions in an asynchronous manner when handling multi-party interactions. This helps avoid the domino effect of any unforeseen failure or downtime caused to the entire gamut of banking services. The architectures should provide resilient controls like deploying separate servers for the non-online transaction processing (OLTP) or reporting and enquiries. The redesigned systems should not add further load to OLTP servers that always require a high uptime. Capability to add or reconfigure nodes at runtime in the event of a failure to maintain continuous availability of systems to users and customers is another key dimension of contemporary platforms.

FIs need to ensure that platforms they deploy are benchmarked against the latest market needs — for business capabilities or technology advancements. There must be a strong focus on periodic upgrade of platform to latest version not just business stack but also the technology stack that proactively protects businesses from any potential & unwanted security threats.

The digital opportunity is huge, allowing FIs to reach to millions, offering scalable digital revenue. Are the banks and FIs ready? Or are they still putting digital arrow heads on top of their legacy infrastructure? Asking the right questions may help in identifying the right technology too. Banks that choose to ride the digital wave smartly, could leave competition behind.