“AI is probably the most important thing humanity has ever worked on.” – Sundar Pichai, CEO, Google and Alphabet.

Artificial Intelligence (AI) seems to be everywhere nowadays – at home, on our phones – Alexa, Siri, etc. Before we know it, AI will be in just about every product and service we buy and use. Further, its application to business problem solving is growing by leaps and bounds.

Alan Turing, who broke the Nazi encryption machine “Enigma” and helped the Allied Forces win World War II, is considered the father of AI or Machine Learning. In its essence, AI is the endeavour to replicate or simulate human intelligence in machines.

Artificial intelligence and cognitive computing are redefining numerous areas of business, including banking. Processes and functions that involve large amounts of information, significant complexity and nuanced analysis are all prime candidates for an AI-enabled revolution. AI can help banks improve their processes, significantly reduce time delays, increase accuracy and reduce cost. And given the information-intensive nature of banking, multiple processes and functions are ripe for cognitive-enabled transformation.

Today’s customers increasingly expect faster, personal, and meaningful services and interactions with their banks and have little tolerance for generic unsolicited messages. Therefore, banks must leverage AI to balance the need for privacy and security with personalisation and engagement.

How are Indian Banks employing AI?

Most of the Indian banks are using AI to improve customer experience by adding chatbots as an additional interface for customers. SIA by State Bank of India (SBI), EVA by HDFC Bank and iPal by ICICI Bank can be cited as examples.

HDFC Bank’s Eva can assimilate knowledge from thousands of sources and provide simple answers in less than 0.4 seconds. Going forward, Eva would be able to handle real banking transactions as well. SBI’s SIA addresses customer enquiries instantly and helps them with everyday banking tasks just like a bank representative. ICICI’s iPal helps in answering queries, in financial transactions and discovering new features. It now supports an average of 1.5 million customer queries every month.

State-owned banks have been slow to leverage AI, largely because AI implementation requires banks to operate outside of the traditional privacy framework. Justice Srikrishna Committee has opined that the biggest challenge in regulating emerging technologies such as AI lies in the fact that they may operate outside the framework of traditional privacy principles. Reserve Bank of India (RBI) would need to frame regulations on emerging technologies and data privacy, thus ensuring the business interests of the banks.

While improving customer experience has been the primary focus of most of the Indian banks in using AI, it can also be used in other areas such as fraud prevention and detection, compliance, risk monitoring, to name a few.

Fraud detection and prevention and Risk Management

According to RBI’s Annual Report, 2019, losses due to banking frauds have risen by a whopping 73.8%. As per RBI data, it took an average of 22 months for the banks between the occurrence of fraud and its detection. AI can play an important role in fraud detection and prevention. Hence, banks must deploy context-sensitive AI solutions to enable advanced and adaptive real-time monitoring of their payment networks.

These AI solutions additionally leverage relevant data points to assess transaction risk, true identity-matching, and identification of complex typologies and patterns. For example, Axis Bank is using an AI algorithm to authenticate paper checks rather than relying on tellers to do so. The technology analyses check signatures to detect changes or signs of hesitation that indicate fraud, including blots or skips that could be invisible to the human eye.

Online fraud is another area of massive concern for banks as they digitise at scale. Risk management at internet scale cannot be managed manually or by using legacy information systems. AI would help banks develop predictive analytics to examine transactions on a real-time basis. This would include mitigating fraud by scanning transactions for suspicious patterns and enabling risk analysts with the right recommendations for curbing risks on a real time basis.

Compliance

Compliance is one of the most vital aspects of banking. This is especially true for Indian banking, where systems, procedures and regulations will always be going hand-in-hand with the businesses. Abiding by these is a necessity for the banks to stay and survive in the market and AI will be able to provide smarter solutions by way of using cognitive technologies.

Digitization of processes

Indian consumers are next only to China in the use of mobile devices and the internet. AI would be able to analyse the consumers’ spending patterns and would be able to offer them suitable recommendations on investment and risk profiles, based on these data. Already many private sector banks are digitizing the KYC process to eliminate the need for submission of physical documents and their verification. This process can be further simplified by leveraging AI-based computer vision technology to verify documents, Optical/Intelligent Character Recognition (OCR/ICR) technologies to digitise scanned documents, and Natural Language Processing (NLP) to make sense of them.

Decision making in respect of loan products

Given that processing loans involve judgemental decision making on the part of loan officers, verification of the antecedents of the borrowers etc., most of these processes have remained manual. Some of the banks have automated retail loan processing to a certain extent, but still, there is a long way to go. AI can be used in respect of decisions based on available structured and unstructured data. For example, it can help predict potential loan defaulters and offer loss mitigation strategies that will work for them. AI can also help collate data from multiple sources and arrive at inferences, which can be used to make decisions. AI can also improve straight-through processing using Intelligent Automation to automate repetitive processes that need decision making. In fact, many Fintech companies are already using consumer profiles based on social media like Facebook, Twitter etc. for arriving at loan decisions.

Way forward

While AI has immense scope in transforming Indian banking, given the magnitude of the challenge, banks would benefit from a consortium-based approach for knowledge sharing on AI. This would also aid the smaller regional private players, cooperative banks etc. benefit from a broader nationwide secure banking network. AI in Indian banking is only set to grow and the banks would reap rich dividends over time.

A Blockchain is a digital, immutable (unable to be changed), distributed ledger that chronologically records transactions in near real-time. That is, Blockchain is a distributed ledger technology (DLT), in which the transactions can be shared amongst a distributed network of computers. The prerequisite for each subsequent transaction to be added to the ledger is the respective consensus of the network participants (called nodes), thereby creating a continuous mechanism of control regarding manipulation, errors, and data quality.

Thus, Blockchain, as the name suggests, is a chain of blocks – each being a repository that stores information pertaining to a transaction and also links to the previous block in the same transaction. These connected blocks form a chronological chain providing a trail of the underlying transaction. Blocks created are cryptographically sealed in the chain. This means that it is impossible to delete, edit or copy already created blocks and put it on the network, thereby creating true digital assets and ensuring a high level of robustness and trust.

Also read: significance of blockchain in banking & financial institutions

Blockchain uses cryptography to allow each participant on the network to manipulate the ledger in a secure way without the need for a central authority. Once a block of data is recorded on the Blockchain ledger, it is extremely difficult to change or remove it. When someone wants to add to it, participants in the network (called miners) — all of which have copies of the existing blockchain — run algorithms to evaluate and verify the proposed transaction.

Hence, at its core, Blockchain is a novel system to digitally manage data in a decentralised manner, transforming how individuals, companies and businesses can transact and trade with each other.

Banking and Blockchain

The interest in Blockchain technology arose after the 2008 economic meltdown. Its best-known application is “Bitcoin”, the cryptocurrency developed by a pseudonymous individual (or group), under the name Satoshi Nakamoto in 2008. Bitcoin employs Blockchain technology to allow, in principle, any anonymous individual or entity to perform transactions without a trusted third party. Unfortunately, many of the banking regulators (including Reserve Bank of India) banned the use of bitcoin and this has hampered the mass adoption of Blockchain technology. According to a 2017 study by Deloitte, the US consulting firm, while the interest by banks and financial institutions on Blockchain technology is huge, challenges remain for large scale adoption of the same.

Blockchain and Indian Banks

As early as the beginning of 2017, Reserve Bank of India (RBI), through its research arm Institute for Development and Research in Banking Technology (IDRBT), tested Blockchain technology. This was done in collaboration with MonetaGo, a New York-based cryptocurrency firm, Indian banks, financial institutions and clearing houses. RBI’s Blockchain research followed a partnership between one of the Indian banking majors, ICICI Bank and Stellar. ICICI Bank had announced its plans to develop a Stellar-based blockchain application for transactions within closed groups.

Reserve Bank of India’s experiment involved the use of blockchain in a trade application and the results are now available in a white paper titled “Applications of blockchain technology in banking and financial sector in India”. The whitepaper was developed in collaboration with State Bank of India, Punjab National Bank, Bank of Baroda, ICICI Bank, HDFC Bank, Axis Bank, Citibank, Deutsche Bank, Infosys, IBM Research, Deloitte and other partners.

R. Gandhi, the then Deputy Governor of Reserve Bank of India and Chairman, IDRBT, said in the whitepaper that “Blockchain technology (BCT) provides a tamper-evident recording of the linked transaction history in a distributed network, and has the potential to disrupt the financial business applications”. The whitepaper stressed on banks adopting internal experiments and pilot projects first and then moving on to interbank applications such as centralized KYC (Know Your Customer), cross-border payments, syndication of loans, capital markets, supply chain finance etc.

Individual banks like ICICI Bank, Axis Bank and Yes Bank have since made considerable strides in developing Proofs of Concept (POC) in different areas like trade finance, remittance and cross border payments with the collaboration of partners such as Infosys, Stellar and Ripple. State Bank of India had taken the initiative to form India’s first Blockchain exploration consortium called Bank-Chain.

In 2018, IBM and Mahindra announced a partnership to create a POC for supply chain financing. Bajaj Electricals and Yes Bank employed blockchain technology to design a vendor financing solution that cut down bill discounting time from 4-5 days to a real-time transaction. National Stock Exchange (NSE), along with banks like ICICI Bank, IDFC First Bank, Kotak Mahindra Bank, RBL Bank collaborated on a Know Your Customer (KYC) POC involving blockchain.

Blockchain: Areas of application in banking

Fraud Reduction:

With most banking systems throughout the world built on centralized databases, they are extremely vulnerable to cyber-attacks, which have been increasing over the years. Using blockchain technology, banks would be able to protect themselves from many of the online cybercrimes being committed today, thus protecting valuable customer databases from being hacked.

Know Your Customer (KYC) Regulations:

According to a Thomson Reuters 2017 Global KYC Survey, financial institutions spend about USD 60 million to USD 500 million per year to keep up with Know Your Customer (KYC) and customer due diligence regulations. Blockchain technology would allow a bank to access the verification details of a client by another bank, thus avoiding repetition of the KYC process. The reduction in administrative costs for compliance departments would be significant.

Trade Finance:

Trade finance is another area where blockchain technology offers significant benefits of speed, transparency and the freeing up of capital. Trade finance is still mostly based on paper, such as Bills of lading or Letters of credit, being sent by fax or courier around the world. Blockchain technology is the obvious solution especially as numerous parties need access to the same set of information. Under the blockchain technology, all the documents such as LCs, Bills of lading/ Shipping bills, Tax invoices can be recorded in a centralized repository where all the parties involved can access real-time data. This will, in turn, improve the efficiency tremendously and will also allow the parties required to track the transactions with ease.

n May 2018, Infosys, along with seven Indian banks, set up the India Trade Connect, a blockchain-based trade network with the aim of increasing transparency and to manage risks in trade finance operations better, while cutting time to deliver supply-chain financing.

Vendor Financing:

Bank’s vendor financing programs provide credit facilities such as Letter of credit, Bill discounting and financing against purchase orders and invoices. Banks also provide structured financing services against confirmed purchase orders from their customers. The system currently in vogue has several drawbacks such as manual documentation and time-consuming manual process which adversely impact the working capital cycle of the vendors, lack of mechanism to track the status of invoice throughout the process and huge potential for fraud. All these can be overcome by using blockchain technology by using automated documentation, real-time tracking and settlement of transactions and fraud-proof systems in place.

Cross Border Payments:

Cross border payments are riddled with several pain points like inefficiencies, costs and risk to daily operations by way of cyber-attacks etc. Blockchain technology can help in facilitating near-frictionless settlement at any time, thus facilitating global interoperability, high security, and ultimately, quicker and lower-cost transactions. In September 2019, J.P. Morgan, a leading US Bank brought in seven Indian Banks namely ICICI Bank, Axis Bank, Yes Bank, Union Bank of India, Federal Bank and Canara Bank to its blockchain platform that would enable payments to reach beneficiaries faster with fewer steps in cross-border payments. IIN (Interbank Information Network), as it is known, is the first live blockchain service by JP Morgan and represents the largest number of banks to join a live application of blockchain technology. INN is aimed at providing a secure exchange of information to banks associated with cross-border payments. It aims to reduce costs and mitigate the risks involved in the cross-border transactions.

Monitoring end-use of funds disbursed:

Banks have been facing many issues in terms of recoverability of loans granted by them due to diversion of funds by big borrowers. Using blockchain technology, all the transactions right from the disbursal till its end-use can be recorded, which will help the banks in tracing the diversion of the loaned funds, if any.

Tackling the NPA menace:

To tackle the problems of bad debts and defaulters, eleven Indian banks including ICICI Bank, HDFC Bank, Axis and Yes Bank came together to launch India’s first blockchain-linked funding initiative for Micro, small and medium enterprises (MSMEs). This is also expected to remove the information asymmetry between large corporates and MSME lenders.

The above are some of the areas in which Blockchain technology can be used in banking.

Applications of Blockchain technology in other financial institutions

While many of the applications pertain to the banking sector, blockchain technology has applications in other financial institutions as well.

Capital Markets:

Issuance of securities, sales and trading, clearing and settlement, post-trade services and infrastructure, asset servicing and custody are some of the areas in which blockchain technology can be used. Facilitation of capital market activities, streamlining processes, reducing costs and decreasing settlement times can be some of the applications of the technology.

Asset Management by Mutual Funds:

Similarly, Fund launch, Fund Administration and Transfer Agency in Asset Management are some of the areas of application in respect of Mutual Funds.

Insurance:

Property and casualty insurance claims are prone to fraud and claim assessments can extend over long periods of time. Blockchain technology can securely streamline data verification, claims processing, and disbursement, thus reducing processing time significantly.

Claims processing and disbursement, parameterized contracts and Reinsurance markets are some of the areas where blockchain technology can be used effectively in the insurance industry.

Other Financial Institutions:

About 77% of Fintech is expected to adopt blockchain in their production system by 2020, according to Global Fintech Report 2017. Blockchain will be a boon for the financial services sector as it seeks to bridge the existing gap that prevails between the regulators, financial institutions and the consumers.

Concluding Remarks:

While Blockchain technology offers a host of benefits to financial institutions, it is to be understood that banks and fintech firms are still grappling with many technological issues. This being a new technology, banks and other financial institutions will have to adopt a trial-and-error approach. Also, the complex, encryption-based and distributed nature of blockchain transactions can be lengthy to process vis-à-vis traditional payment systems, and hence require more advances in engineering and processing speeds. Hopefully, blockchain’s capacities would expand in the ensuing years.

Apart from implementation, another important issue is whether cost reductions from adopting blockchain technology can outweigh its operating costs, as otherwise financial institutions may not be willing to adopt the technology. Further, regulatory and governance challenges to remain. Also, safekeeping of crypto-assets, the method for storing, controlling, and handling of private keys are important questions that would clarify the definition of digital custodial services.

About the Author

Rajan Sundaram

Rajan Sundaram is a banker with more than 3 decades of experience with Canara Bank. Earlier, he was a faculty with Canara Bank, specializing in the area of Credit, Risk Management and Legal & Recovery. He has also been AVP (Credit Analyst) with Wells Fargo.

A holder of MBA (Finance) and PG Diploma in Human Resources Management from IGNOU, Rajan Sundaram has been Academic counsellor for the MBA Program at IGNOU and guided students for their MBA projects. He has taught papers on Statistics for Management and HR for IGNOU. Sundaram has also taught papers on Trade Finance and Quality Management at B Schools. Apart from academic teachings, he is a freelance trainer on credit and soft skills programs.

Furthermore, he contributed articles to Canara Bank House Magazine and Vinimaya a publication from NIBM Pune. He has presented research papers at Management Development Institute (MDI), Gurgaon and other colleges. Currently, he is serving as a faculty of Banking in Manipal Global Academy of BFSI.

Covid-19 has brought two important points into the limelight for the entire human race:

All human beings irrespective of race, richness, nationality, civilisation and health status are equally exposed to the risk of untimely death – despite advancements in science and technology in medical front.

Prevention is always the only better available remedy for COVID-19 as no medicine is invented for its cure so far and still a vaccine is far away.

The only safest and proved measure of not getting Coronavirus is to have a mask completely covering the nose, mouth and eyes, to maintain safe distancing from others and to maintain personal hygiene. To curtail the spread of this virus across the globe is to identify the people with Corona positive and isolate them from healthy people.

Currently, we are witnessing the same followed in all societies across the globe. Unless you are proved that you were not affected by the Coronavirus you would not be ‘selected’ for joining the group which you wish to join! This is what currently we are witnessing in India and all other countries.

So, I feel there are so many similarities between COVID-19 regime and working of life insurance.

Life Insurance also works with the same principle of selection of good lives to give insurance policies as otherwise substandard or ‘bad’ lives may be selected that results in fake/fraud claims.

The selection process by the Life insurance companies involves preventing the ‘bad lives’ to join the group of existing policyholders to take away their (existing customers’) rightful share of benefits from the life insurance products.

The process of selection of ‘good lives’ works on the below parameters:
A person must be medically fit so that his/her life is not exposed to an untimely death.
A person must be financially fit to honour the policy contract for a long term of more than 15 years without making the policy lapse due to financial problems.
A person must be having financial value that can be replaced by the policy if untimely death occurs.
A person must pay the policy premiums from income sources legally validated by PML Act and within KYC guidelines.

If you are falling in the category of ‘Good Lives’, then COVID-19 regime is the best time than ever before for taking a life insurance policy.

Opportunities in COVID-19 Regime

One should take a life insurance policy before being infected by COVID-19, once affected, one ceases to be a ‘good life’ in the eyes of life insurers. Medical research so far reveals that Corona would have a lasting impact on the wellbeing of people of all the ages, affecting vital parts of the body like heart, lungs, kidneys etc. Its effect is more fatal for those who are already suffering from critical diseases.

Getting life insurance protection policy is relatively easier now than ever before as all life insurance companies are providing online facility to purchase the policies. Without stepping out of one’s drawing-room, the policy can be taken by online submission of proposal forms, uploading documents digitally, following the e-KYC formalities etc., and online payment of required premium. These customer-friendly measures with without violating the COVID-19 guidelines, make the process of getting a policy much easier and simpler.

As per latest IAMAI (The Internet and Mobile Association of India) Report, India has 504 million active internet users now and out of this, 55% of the users are from rural India. This indicates that even people from rural areas can also get life insurance through online mode as easily as their urban counterparts.

Life insurance companies are offering policies with competitive premiums to sustain in the business in the COVID times and this is an opportunity for people to get the policies at cheaper rates than earlier.

The basic characteristic of life insurance, that is -With minimal investment periodically, one can immediately create a huge estate and provide protection to one’s loved family against the untimely death-still holds good with COVID-19 pandemic. Here one should not get into the trap of comparing the returns under a life insurance policy with other financial instruments as life insurance falls in a separate category altogether.

When the threat to life of everyone including the young and healthy people is more now than ever due to COVID-19, it is ONLY the life insurance that guarantees the future financial stability and security of the dependent family.

Summarising the similarities between COVID-19 regime and buying life insurance:

“If you slain in battlefield, you will qualify for heaven, if you win you will enjoy the luxurious life of a King. Therefore, O Son of Kunti, rise and determine to fight.”