My first exposure to banking happened in the mid-1980s when I opened my first bank account. Other institutions in the financial sector were the Life Insurance Corporation of India (LIC) and Unit Trust of India (UTI). Apart from this, I can’t recall any other financial institutions in the mid-1980s, when the country was deep in the shell of a closed economy.
Trust in the System
The characteristic feature of the economy observed back in those days was ‘Trust’ of the people on the financial system, backed by the Government. It was for this reason that, perhaps, there was no need for any sort of transparency in the financial system. Back then, no one had heard of financial institutions failing.
Existence of a Barrier
Another visible feature was that of the existence of a ‘Big Wall’ between customers and financial institutions (FI). FIs used to operate in closed enclosures where customers would queue-up for transactions; a process that was much longer than a simple click of a mouse, today.
There was a barrier between the customers and employees of FIs, where customers were heavily dependent on these institutions with very little choice, unlike the present scenario; where customers receive multiple calls a day from different banks for credit card offers and other schemes. The speed and time taken to complete transactions were a lot slower as compared to the current generation who engage in the use of smartphone mobile banking.
Pre-millennium era (Pre-2000)
Once, somewhere in the 1990s, I went to a bank branch to withdraw money using a self-cheque written by my father. On the arrival of my turn, I presented the cheque to the cashier through a small space where only my hand could reach the cashier (who sat in a confined, closed enclosure). The cashier asked me the name of the account holder, to which I mentioned my father’s name. He then asked me to sign the back of the cheque and my next question to the cashier was, “Whose signature do I have to put on the back of the cheque, whether mine or my father’s?,” (I had perfected the art of copying my father’s signature). The cashier gave me a hard stare and asked me who was withdrawing the money.
The above example demonstrates a typical transaction in a bank. All transactions operated in a physical world right from customer passbooks, cheque-books, ledgers in the bank, physical signature verifications, physical copies of Fixed Deposits- all of it existed in a tangible space.
In those days, having a telephone at home was but a dream- forget about anything regarding online, digital and click based options; characteristic of the world we live in today. A similar situation used to exist in the other two financial institutions. As a result of having no exposure to the external world, there was no scope for complaints from customers.
Transactions took place in the physical realm at LIC of India, around the time I started working in the early 1990s. However, some amount of computerization had started during this period, for the purposes of keeping customer records. The quality of physical record-keeping was many folds better, back in those days, as compared to digital record-keeping in the present day.
Reaction to Disruptive Technologies
There was an incident where a computer enthusiast tried to consolidate physical records into an electronic format. As a result, he faced a tough time and ultimately succumbed to the resistance of his seniors, which ultimately led to him leaving the project. This instance constantly reminds me of the fact that it takes time for human behavior to accept change in terms of adopting newer (disruptive) technologies.
In today’s context, the aspects of blockchain trading and Bitcoin are facing stiffer challenges. The genesis of the problem lies in the limited understanding of emerging technologies by people. Individuals must not be blamed and, ideally, it should be the job of corporate houses to keep their employees updated in order to embrace newer technologies for faster development.
Slow and Steady Digitization
Another message from the example stated above is the power of a physical signature on cheques, which in the present day; is replaced by passwords, digital signatures, fingerprints etc. in regards to ATM, mobile and online transactions.
The flip side of present-day digitization is that of increases in the incidences of financial frauds. The physical system prevalent before digitization was more secure than the digital systems of today, which are available to fraudsters, who can embezzle and launder funds in a systematic manner.
The only way to make quick money back then was to rob a bank. Furthermore, the incidences of losses due to frauds back then were far lesser as compared to how it is in the present day scenario. Every individual is now exposed to the risk of online hacking. This is, perhaps, the price we have to pay for the ease of doing business.
Post-millennium era (Post-2000)
Computerization of financial systems (limited to a customer records on a mainframe) during the 1990s started changing the face of the Indian financial system, the effects of which were observed post-2000.
This era was also characterized by the country moving further away from the system of a closed economy. Most public sector organizations began competing with the newly opened private sector, both in terms of infrastructure and services.
Effects of Computerization
ATM and credit cards got popular, however, there was a fee for using credit cards. Physical signatures slowly started taking a digital form in terms of ATM PIN numbers for withdrawal of money.
The duration of transactions also started reducing, leading to the public taking liberties like not waiting for a bank branch to open, for the purpose of cash withdrawal. This was a welcome change for the Indian public; both for the older, as well as the younger generation.
Internet services in the country were gaining momentum but were expensive, as compared to the present day. FIs expanded the online view of the customer accounts on computer systems, for selected services. There was a sense of freedom because of this. Mobile technology was still in the feature-phone era back then, so mobile phones were not connected to the financial system for easy access.
Various branches of financial systems were computerized but were not interconnected to carry out transactions from any branch. This era was characterized by the advancement of technology.
Privatization of Financial Sector
The introduction of the private sector saw financial institutions coming under a different regulatory regime; one that sought to level the playing field, in regards to the rules of the game and maintaining trust and confidence of customers.
The 2008 economic crisis jolted the confidence of customers on new and emerging private financial institutions. There was a definite flow of cash from private banks to public sector banks.
Drag Effect of a Closed Economy
The financial system in India withstood the crisis mainly due to the ‘drag’ of a closed economy, as well as the Indian financial system being more regulated as compared to the western market.
One of the key arguments in regards to the causes of the financial crisis in the western market was a lack of an adequate regulatory regime. There were many commentators advocating the need to create a balance between open markets and adequate regulation.
The era after the economic crisis saw increased efforts in developments towards online transactions; with the availability of smartphones leading to mobile banking, the availability and access to ATM machines, a manifold reduction in time to perform a transaction, less frequent visits to bank branches, and a total makeover of said branches across the country.
This era was defined by customers being treated with respect as compared to the period of the closed economy. The ‘wall’ between customers and FIs was removed.
Complete Drive towards Digitization
Digitization became the focus of development for FIs, with customers becoming the center of attraction, where today regular cold phone calls and SMS to customers are an everyday issue. This is an indication of the kind of transformation that has happened over the last 2 decades.
As mentioned before, digitization of transactions provided open opportunities for fraudsters to penetrate into customers domains leading to increasing cases of frauds. Companies started investing in IT security to maintain customers’ data and privacy, which was not an issue earlier in the world of physical transactions.
Life went full circle in the period between 1985 and 2015 where the security of customer data became the prime concern of financial institutions, something which didn’t pose much of a challenge in the eras before digitization.
Fraudulent transactions and embezzlement reached new heights, which never posed a serious threat earlier. People started talking about transparency which wasn’t heard of before, and the speed of operation of money transfer overseas started increasing dramatically.
Arrival of the Dark Horse
Then came a twist in the tail with the arrival of Blockchain technology. Blockchain is essential in solving all of the above challenges including the maintenance of trust between the customer and the institution.
The most important change that blockchain will bring to the economy is the removal of an intermediary, i.e. financial institutions. It’s a new world altogether and if this technology works in the future, it will change the entire dynamics of how transactions are conducted.
What is Blockchain?
Blockchain is a technology that enables a transaction between two or multiple parties directly without the need for intermediaries or financial institutions. Transactions occur with the same level of trust and a higher level of transparency, at a much faster pace with the click of a button, and at minimal costs.
The security provided during the closed-economy era using physical signatures is the same kind of security that is provided by blockchain cryptography.
The cryptography is based on a mathematical algorithm that uses the power of computing technology, where codes are difficult to break, thereby providing high security.
One of the key features of blockchain is that the history of all transactions and relevant information is stored on a decentralized system of all parties involved in the transaction.
This makes blockchain more secure to a point where if someone tries to hack the system, the person will have to make the same changes in information across all the members’ accounts. This is almost impossible as there could be millions of people in the blockchain system.
This means that in the future, there will be no need for financial intermediaries as the process of transactions between multiple parties can be performed amongst themselves at faster speeds, lower costs, at a high level of transparency and with an equal level of trust. This will remove the opacity existing in the transactions of the traditional banking system.
Blockchain is going to bring a revolution in the financial system where the current centralization of power exercised by FIs will be removed and replaced by a network of individual systems that are hard to penetrate.
This is a drastic change in the already existing dynamic between physical transactions and those occurring on the digital plane.
Being a risk management professional, I can see newer challenges for risk management professionals to identify associated risks and plan for subsequent mitigation.
If the last three decades have brought us to the digital world, the next three decade will bring in an intermediary free society which, at the moment, is hard to imagine.