Digitised banking -- a key tool for efficient financial servicing  

The first of a two-part article  

The term 'Digitalisation of documents' narrows down the scope of the complete transformation process that commonly starts with automation and then migrating data from paper copies to digital system. It is mainly about creating a paperless working environment, and the ultimate target is shifting from physical documents to digital documents. It is not an option today, rather a necessity.

Digitalisation of documents is believed to be widely associated with easy access to banking services, smooth and better banking amenities, speedy processing, and minimisation of costs in a scenario of growing operational expenditures and intense competition in the banking industry throughout the globe. This is relevant for all the major activities of commercial banking operations and services covering account opening and operation, credit assessment and operation, facilitation of trade services, human resource record collection and maintenance and a number of other associated financial services and operations. 

The trend of digitalisation in the banking industry is moving fast mainly with digital currencies, contactless payments, targeted marketing via social media and so on. The cost elements of using paper documents by banks include: price of paper; expenses of printing documents; toner cost of printing; depreciation of computer printers; cost of electricity or energy use; cost of storage of documents and so on. Practically, the benefits of 'digitalisation of documents' to a bank might be much higher than saving costs, and may also include efficiency, compliance and consumer satisfaction. Though harder to envision, productivity is one of the evident benefits.

Digitalisation plays prime role in accelerating financial inclusion efforts by enhancing the reach and capacity of financial service providers. Financial inclusion is seen as a key priority and means of reducing poverty in a manner that ensures inclusive economic growth; and there are efforts to reach the goal of universal access to financial services as part of international collaboration under the platform of sustainable development goals (SDGs). Technology adoption and expansion of digital products are tagged with inclusive banking efforts, mainly in developing countries. The expansion of digital financial services (DFS) has meant greater financial inclusion. Expansion of agent banking offered financial services to a big section of population in the remote areas. Digital transformation is also changing the way the microfinance sector operates.

This concept of transformation is associated with the thoughts of green banking. Sometimes online banking activities are termed as the starting point of green banking as through these initiatives banks are in a position to contribute by saving scarce natural resources and reducing costs. E-statement is one of the early day's initiatives to save papers; and using energy efficiency and renewable energy in the in-house operations of banks are at the centre of green banking activities. As part of the green banking initiatives, banks are increasingly coming up with strategic commitments to save paper through technology infusion and undertaking energy efficiency and renewable energy ventures in their operations.

 Digitalisation efforts may be observed in key banking areas covering account opening and operation, credit operation, trade services operation, human resource operation and other key areas of banking.

The account opening process in general signifies the first critical impression for both applicants and banks in banking business. In this age of digital transformation, the disadvantages of manual account opening and operation process are clearly detectable: rising costs due to operational inefficiencies, customer dissatisfaction resulting from lengthy, cumbersome tasks, and risk of regulatory non-compliance. In recent years, banks are driving to modernise their existing account opening applications. A digitalised structure of account opening in banks might take the following shape:  potential clients fill up forms online or in the mobile platforms and send required documents to the banks; banks verify, identify and comply with due diligence requirements (fraud/AML/CFT screening), communicate customer with approval or denial; capture consent and e-signature for digital fund transfer by the clients. Within the banks, the documents are sent to the customer maintenance department to confirm the opening of the new account; and finally, the documents are archived in a central location.

Though banks are addressing the need for an end-to-end digital account opening process, practically, in most cases banks hardly use a digital-and mobile-first approach; instead, they simply move their branch and place their offline forms to the web and let their risk and compliance groups drive the process. Regarding identity verification, two common approaches are: 'in person-verification' and 'knowledge-based authentication'. Most banks even force online and mobile applicants to come to the branch to verify their identity and sign documents. Only limited number of banks have implemented online verification methods to meet their Know Your Customer (KYC) requirements for their digital channels. The most common method is the use of Knowledge-Based Authentication or KBA, which involves queries to credit bureaus and verifying identity data with third-party databases. Unfortunately, some early challenges of KBA remain. There are opinions that most KBA failures are experienced by legitimate users who cannot answer the questions, because they cannot remember the answers, or because the public records are lacking or incorrect. Furthermore, KBA has become less reliable due to instances of data breaches that occurred in recent years as criminals are now better equipped to successfully answer KBA questions based on information posted on social media or obtained from phishing attacks.

Digitalisation is one of the major trends that have resulted in a remarkable change in bank's lending operations in recent years. Credit is at the heart of banking operation and digitalising it offers significant advantages to banks and customers. With the latest advancements, the loan processing system changed drastically that paved the way for options such as initiation of loans from anywhere anytime through internet connection and also acceleration of paperless system with the key advancements ranging from blockchain, artificial intelligence to Application Programming Interface (API) platform.

The benefits of digitalising credit process might bring remarkable benefits. One large European bank slashed its time on small and medium enterprise (SME) lending from 20 days to less than ten minutes, as observed in a study by Mckinscy. Digitalisation is also offering opportunity to deliver paperless mortgages. For example, NatWest is the first UK bank to offer a paperless mortgage. The bank's customers can now apply for a completely digital mortgage which uses the latest technology to securely share and verify documents online. Customers do not need to post signed paperwork or identification back and forth. This marks the first time that a customer in the UK is able to apply for a mortgage without paper copies of documents being produced.

Trade services solutions have traditionally revolved around paper-based and intensive physical processes, involving contracts, purchase orders, bills of lading etc., and requiring frequent manual data entry. These processes increase the scope for error, introduce business bottlenecks and are costly because of the need to generate paper work, courier it to banks and obtain reimbursement. However, in recent years the pace of development in trade services has accelerated, and there are now numerous solutions that can help companies reduce manual, paper-based efforts. Technologies such as Blockchain, Artificial Intelligence (AI), Internet of Things (IoT) and Machine Learning hold promises in solving banking problems, and have applications in Trade Finance.

The emergence of truly digitalised title documents, electronic bills of lading, electronic warehouse receipts, electronic airway bills has been a driver for early adopters as they seek to digitalise their trade flows. There are global efforts to create supportive regulatory framework. The UNCITRAL Model Law on Electronic Transferable Records was adopted in July 2017; and ICC working groups are set to agree on a common set of standards for electronic title documents.

Technology is bringing changes in the logistics, nature of products, products delivery channels, and documentation process. The International Chamber of Commerce (ICC) finds that elimination of paper from trade finance transaction processing could reduce cycle time by two hours per transaction, and judicious application of technology to compliance-related processes and procedures could reduce compliance costs by around 30 per cent in the trade banking business. The ICC Banking Commission has launched a working group to coordinate all works relating to the digitalisation of trade finance. As part of the mandate, ICC is revisiting e-compatibility of ICC rules for trade finance, and revisions of eUCP and eURC are under process. Certain instances indicate that future of trade finance is digital and paperless. LC transactions in Australia, Singapore, and India represent a significant advancement of the digital blockchain-based LC solution that validates the commercial and operational feasibility to establish a new era of digital trade.

Professor Shah Ahsan Habib is director (training) at the Bangladesh Institute of Bank Management (BIBM).

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