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CONTENTS

Introduction ........................................................................................................................................................ 3

Overview of Financial Services in India ................................................................................................................ 3

Key Technology Drivers in India ........................................................................................................................... 4

Key Challenges in Adopting Technology in India .................................................................................................. 4

Technology Trends in Indian Smaller Financial Institutions .................................................................................. 5

Challenges and Solutions for a typical MFI loan lifecycle ...................................................................................... 5

Overview of Australia Banking System ................................................................................................................. 7

Technology Drivers in Australian Customer Owned Banks ................................................................................... 7

Key Technology Challenges for Australian Customer Owned Banks ..................................................................... 9

Digital Innovations in Australian Customer Owned Banks ................................................................................... 10

Key Technology Trends in Australian Customer Owned Banks .............................................................................. 10

Mutual Benefits for Indian and Australian Institutions ......................................................................................... 12

Future Outlook for Digital Transformations .......................................................................................................... 12

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Technology innovations and digitization are initiatives that are helping modernize and enhance financial services business

models, and recent trends indicate that these are no longer the monopoly of the larger financial services institutions. Smaller

financial institutions are active participants in the push towards deploying digital innovations for various applications – rang-

ing from financial inclusion for the underbanked to better customer experience – in both developed and developing markets.

Through this white paper, IBS Intelligence (IBSI) and Latitude Fintech, have endeavored to identify the key technological

trends and the new digital innovations impacting the financial services industry, focusing on the institutions catering to the

local communities. In India microfinance institutions (MFI), co-operative banks and small finance banks are the primary par-

ticipants serving the unbanked and the underbanked population, while customer owned banks are the institutions primarily

serving the local communities in Australia.

In IBSI’s view, the technology and digital innovations by the smaller financial institutions in a developing market like India is

more broad based. It encompasses both backend core technology and front-end technology focused on improving efficiency

and making the customer comfortable with using technology. On the other side is a mature market like Australia, where Mu-

tual banks and Credit Unions have invested in new technology initiatives to increase customer convenience and improve cus-

tomer retention. Different approaches to digital technology innovation has resulted in varied solutions being developed and

deployed in each of these markets and hence providing a huge scope for cross leveraging technology to improve the efficiency

and customer service for both of these markets.

Overview of Financial Services in IndiaIndia has a vibrant financial services industry which has participation from large pan-India commercial banks as well as newly

formed small finance banks and the microfinance institutions which focus on serving the financially excluded population.

Introduction

Source: MFIN, NABARD

Microfinance industry started in India in 1980’s with

primary participation from the social sector in the form

of Trusts, Society, and Section 25 companies. Howev-

er, as the industry continued to grow, Reserve Bank of

India, the regulatory body, introduced a new form of

Non-Banking Finance Company (NBFC) called NBFC-

MFI to cater specifically to this industry. In the inter-

vening decades, the industry has had some ups and

downs, but largely has been on a growth trajectory.

As of 3rd Quarter, 2017 NBFC-MFI served more than

27.5 million customers across India with total lending

of about INR 570 Billion. The industry is largely domi-

nated by the NBFC-MFI which account for more than

90% of the loans disbursed. The last few years has seen

increased Urban focus among the MFIs illustrated by

loans disbursement among urban areas (53%) which

has overtaken disbursements in rural areas (47%).

The Reserve Bank of India working on its agenda of in-

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creasing financial inclusion introduced a new category of banks called the Small Finance Banks granting initial licenses in 2015.

The primary function identified for these banks was to provide a savings vehicle to unserved and underserved sections of the

population as well as to supply credit to SMSE and unorganized sector by leveraging technology. Since the larger MFIs already

had a wide reach in the targeted section of the population, RBI granted the small finance bank license to eight microfinance insti-

tutions establishing a close tie between the MFI and small finance banks.

The main agenda that drives all these institutions is to deepen the financial inclusion and provide financial services to the finan-

cially excluded population of the country. MFIs and small finance banks have started leveraging technology to deliver these

services in a sustainable and cost-effective ways.

Key Technology Drivers in IndiaSmaller financial organizations in India have traditionally lagged behind the bigger commercial banks in adopting technology for

their business. However, in the recent years, the country has seen an increased push from these organizations to leverage tech-

nology to improve their processes and efficiency. Some of the drivers identified by IBSI for the adoption of new technology are:

While these drivers have resulted in rapid uptake of technology, there are certain challenges that MFIs continue to face in adopt-

ing technology.

Key Challenges in Adopting Technology in India• Cash based Eco-System: India is predominantly a cash based economy with over 75% of all transactions being conduct-

ed through cash. The target customers of the smaller financial institutions as a result deal mainly in cash making this

a cash intensive economy. According to an industry report, in MFIs’ 61% of the disbursement and almost 95% of the

repayment was done through cash means. However, there has been some increase in digital payments partly due to

the push by the Government, initiatives taken by the institutions themselves, and through disruptive policy decisions

like the demonetization drive carried out by the Government in November 2016.

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• Customer preference: Customers of smaller financial institutions primarily have their inflows and outflows in cash, hence

it becomes cumbersome for them to switch to digital payments and there is little incentive for them operate their bank

accounts digitally. Another issue is their relative discomfort, lack of awareness and ability among customers to transact

using digital means. There are some benefits like quicker loan disbursements, greater security and lesser duration of

weekly meetings which are attractive to customers, however on the whole there is high reluctance to accept digital

methods for transacting.

• Digital Infrastructure costs: India has a strong potential for mobile based financial services with over 1 Billion mobile

connections and improving broadband connectivity due to Government initiatives. However, the cost of utilizing this

infrastructure for basic transactions like weekly collections that MFIs have to bear is a proving to be a hindrance.

Technology Trends in Indian Smaller Financial Institutions In the face of increased competition from commercial banks and due to the advocacy efforts of the Government, RBI, and industry

organizations, smaller financial institutions in India have started upgrading their core systems. The improved core has allowed

these institutions to explore the available digital technology and use it to enhance their efficiency and offer better services to their

customers. These institutions have explored potential use of mobile based technology and Aadhar biometrics to improve their

operations. IBS Intelligence has identified some of technological innovations that can potentially have widespread use:

• Mobile Devices: Due to the rampant spread of mobile technology in Indian market, there has been significant leverag-

ing of mobile devices to deliver digital services in a cost-effective manner. Mobile devices have been utilized to deliver

services such as payments, biometric authentication, banking services, loan origination, and improving efficiency.

Product is there, processes can be easily adapted, technology is no longer a challenge just the pricing is proving

to be a hinderanceCEO of Mumbai based MFI commenting

on digital payment infrastructure

“

Challenges and Solutions for a typical MFI loan lifecycle

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We leverage analytics to conduct customer & market segmentation to en-hance sales productivity, identify early warning signals for fraud & defaults

and improve our product offerings for our customers.Digital Transformation Head of an Indian Small Finance Bank

“• Biometrics: With the Government run Aadhar program, smaller financial institutions have significant space for innova-

tion in using biometrics for near real-time credit bureau check to determine eligibility of the client, faster e-KYC process-

ing and simpler client on-boarding which improves efficiency.

• Agency Banking: This is a business model which has been enabled by technology. In agency banking, MFIs act as busi-

ness correspondent for Co-operative and other banks, and deliver the financial services in unserved regions through the

use of technology. This last mile connectivity is provided through hand held mobile device connected to the banks server

using mobile internet. To improve customer protection, use of biometric ATM has permeated where financial services are

delivered only after biometric verification of the customer.

• Digital payments: Weekly loan collection is the single biggest source of inefficiency in MFIs, and is being addressed

through digital payments. Innovation in digitization of payments has primarily led to banks offering multiple platforms

for transactions. Payments can now be done through channels such as online using UPI and AEPS, mobile platforms like

m-wallets and BHIM and through SMS.

Bharat Financial Inclusion has piloted an Aadhar based instant loan approval system. In this system, field officer at weekly meetings announces members eligible to take a loan, and if the member is interested, they can apply for the loan instantly. Their biometrics are captured and sent to credit bureau for verification, which reports the eligibility in near real time. On member’s consent, the loan is processed and debited to their bank account on the same day.

• Geo-Tagging: Applications allow the field officer to map the location of the members. This data is then fed to an analytics

systems which identifies the most optimal route for weekly collection and thus improving staff efficiency. This is partic-

ularly relevant for rural based institutions where field officers cover a larger area. Another area of application is to track

field officers for audit and safety purposes. This data is also being used by financial institutions to identify sites to set up

their new branches.

Ujjivan Microfinance made use of hand-held PDA device to digitize the capture of cus-tomer details during loan origination. The use of these devise reduced the Turn Around Time (TAT) of new loans by 50% for 68% of its loans. It also eliminated data capture er-rors improving field officers’ efficiency by 134%.

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Svatantra Microfinance has conducted a pilot to leverage National Payments Corpora-tion of India’s USSD based platform #99 and Aadhar payment bridge system for loan collection. Customers who have their aadhar linked to the bank account can initiate pay-ment for loan collection through the use of ‘#99’ service. This service doesn’t require internet connectivity making it viable for use in almost all areas with mobile connectivity.

Overview of Australia Banking SystemThe Australian banking market primarily consists of commercial

banks and ‘Australian Mutuals’ which consists of customer owned

banks like Credit Unions and Mutual Banks. The banking land-

scape is dominated by the big 4 commercial banks accounting for

83% of the market share. The customer owned banks consisting

of credit unions, mutual banks, building society have a combined

customer base of more than 4 million, collectively accounting for

AUD 111 billion in assets. There is a long-term trend of consolida-

tion within the customer owned banks resulting in fewer institu-

tions but with larger average assets.

The increased focused on digital services, technological innovations combined with new industry wide initiatives like the New Pay-

ments Platform and Open banking are set to transform the banking sector in Australia. In this white paper we will be focusing on

customer owned banks (who cater to the local community) having technology related challenges comparable to the smaller finan-

cial institutions in India.

Technology Drivers in Australian Customer Owned BanksCredit Unions and Mutual Banks, in a challenging operating environment, are increasingly channeling technology to bring cost

efficiencies and client centric products. The changes afoot in the Australian markets like NPP and open banking and proactiveness

of some of the customer owned banks have resulted in opportunity for them to compete with the big 4 banks. The relative small

size of these banks also allows them to more quickly adapt and offer newer technologies to their customers. Some of the major

developments are listed:

• Customer Experience: Customers’ expectation of banking digital channels are getting shaped by their experience of tech

companies like Google & Apple and hence customer owned banks have to provide personalized offerings and services

to meet those expectations. The availability of big data and advanced analytics at a relatively low cost allows these banks

to compete with bigger banks to deliver customized and relevant services to their customers in near real time across all

touch points.

While there are some unique challenges and innovations in a developing market such as India, increased digitization has meant

there is potential to transfer digital technology across geographies. Hence IBSI has assessed the digital innovations in mature mar-

ket such as Australia to identify technology that can have a much wider application.

Source: COBA

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Douugh, an Australian fintech firm has a mobile banking app powered by an AI platform that analyses users’ spending habit and advises them to better manage money. The data for the AI platform is sourced from all the user’s accounts through open banking api. This solution is currently deployed at Choice Financial in USA, with potential for use in the Australian market once the open banking regime is in place

It’s the perfect way for us to further strengthen our commitment to fintech partnerships and differentiate from the big banks, while show-

casing our benefits as a customer owned bank that always looks to empower the customer,

Paul Thomas, Gateway CEO

on partnering with FinTech Companies

“

70% of Australians support more competition and more choice in the retail banking market that open banking can potentially deliver

COBA research on Open Banking“

• Open Banking: The Australian Government is working towards introducing an open banking regime similar to the United

Kingdom which recommends banks make customer data available through APIs. This regime permits sharing of custom-

er data such as past transactions, credit history currently in possession of bank to be shared with other institutions, of-

fering customers a wider choice of products. This will lead to a disruption in the banking market in Australia and provide

an opportunity for customer owned banks to better compete with the big 4 banks provided their legacy technology can

support APIs to take advantage of this development. They can increase the value proposition to customers through third

party suppliers to deliver high quality, innovative and tailored products and services. One of the value-added service that

can be delivered through open banking is cited below.

• Collaboration: The relatively small size of customer owned banks compared to the Big 4 banks has meant that these

banks have to collaborate even more with each other and other FinTech participants to tackle the digital technology

challenge in the cost-constrained environment. This is manifested by these banks creating a shared service ecosystem

for their backend systems and operations by tendering together for vendor services leading to reduced operational costs

and improved efficiency and quicker rollout of digital services for their customers. They are also collaborating with Fin-

Tech companies through initiatives like “KPMG Mutuals Fintech Acceleration” program to deliver next-gen client centric

services to their customers to garner a large share of the customers’ wallet. One such successful model for collaboration

is Society One, Australia’s earliest P2P lender, where at least four customer owned banks have got onboard as investors

and lenders.

Heritage Bank has deployed SAS campaign management platform to deliver person-alized services through targeted campaigns instead of mass marketing campaigns, in-creasing sales through minimal opt-outs and better conversion rates.

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• New Payments Platform (NPP): This platform, expected to go live in early 2018, is a real-time payment infrastructure

that facilitates Australian businesses and consumers to make instant payments combined with 280-character de-

scription with 24x7 availability. NPP also allows for overlay services where additional features such as bill payments,

e-commerce transactions, etc. can be offered for the customers leveraging the infrastructure. Customer owned banks

have the opportunity to reform their existing payments platform and thus offering an enhanced customer experience

by teaming up with fintechs to offer innovating payment solutions such as allowing to request payment, instead of just

sending payments.

• Mobility: The widespread smart phone penetration in Australian markets has resulted in having a superior mobile plat-

form being critically important for the banking sector. With mobile banking set to overtake online banking, customer

owned banks will put greater emphasis on innovations in the potential applications of mobile devices and platforms.

This will be manifested by customer owned banks tapping this platform for process efficiency, enabling mobile com-

merce and personalized customer service delivery.

Key Technology Challenges for Australian Customer Owned BanksAs the Australian customer owned banks seek to compete with the larger banks, they have to deal with challenges which are

unique to them. IBSI has mapped key challenges for various area of bank operations.

BPay has already developed an overlay service application called Osko in anticipation of the NPP which will be effective in 2018. Osko allows its users to instantly send pay-ments securely along with rich data, allowing 280 characters description. Osko along with PayID, which is a virtual identifier for a bank account, is expected to be offered by over 55 institutions including some customer owned banks which have integrated this offering with their mobile and internet banking applications.

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Key Technology Trends in Australian Customer Owned BanksMutual Banks and Credit Unions in Australia are essentially focused on leveraging technology to speed up flow of information,

automation of transactions to reduce costs and improve efficiency, control and analysis of quality data, improving customer out-

reach and engagement. IBS Intelligence has identified some key trends that will influence the market for the next few years:

• Digital Payments: Adoption of digital payments is set to increase exponentially in Australia driven by newer contactless

payment technology by Apple, Samsung & Google as customers increasingly use their phones as their primary source of

payments. This coupled with the expected launch of New Payments Platform providing real-time payment infrastructure

in early 2018 would result in enhanced interest in this space by customer owned banks. These banks will have to focus

on customer convenience making digital payments more intuitive, secure, and invisible, with differentiated services such

as loyalty programs, ticketing etc. delivered through a handheld or wearable device.

79% of Australia’s smart phone users believe it will be a cashless society by 2022

Westpac Cash Free Report“

Digital Innovations in Australian Customer Owned BanksCredit Unions and Mutual Banks are having to deal with challenges from all fronts as they try to retain and acquire new customers.

Thus it is imperative for Credit Unions and Mutual Banks to continually offer innovative products that bring value to the customers.

These banks have been focusing on delivering better products which is reflected by the 12.4% increase in their technology spend

amounting to AUD 168.2 Mn in 2017. Some of the innovations done by these banks are listed below.

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• Customer centricity: In the competitive financial services market, all institutions are focused on creating technology

that centers around the customer. As the customer increasingly moves away from having a physical contact with the

banking institutions, the digital presence becomes even more critical to maintain a connect with the customer. Cus-

tomer owned banks will deliver customer centricity through two avenues, one will be to enhance customer experience

and the other will be personalization of products. Customer experience will be primarily delivered through seamless

banking experience across channels, convenience of 24x7 banking through chatbots and biometric authenticated

transactions. Banks will also need to deliver contextual experiences with value add personalized services like financial

advice, location based offers etc.

USA based credit union Enrichment Federal Credit Union has introduced voice based banking using Amazon’s Alexa. This functionality enables the bank’s customers to con-duct a wide variety of transactions such as check account balances, transfer funds, make payments, get loan payoff amounts, cancel payment cards using simple spoken state-ments.

• Advanced Analytics: Increased use of digital technology and regulatory requirements has resulted in creation of large

amount of structured and unstructured data which can be used by institutions to draw insights on their business

processes, identify fraud and understand customer habits. One such use case is utilizing predictive analytics based

on scoring models & algorithms to anticipate customer needs and run customized campaigns to increase target rate.

Customer owned banks, which identify data analytics as the area with the third largest technology spend according to

an industry report, will need to increasingly start leveraging predictive and cognitive analytics as a key business value

proposition.

• Automation: Rising competition and the resultant pressure on customer owned banks’ margins has meant that these

banks are having to rethink their existing technology architecture and business processes to maximize digitization to

remain competitive. The customer owned banks will leverage automation technology initially for simpler processes

such as account opening, customer onboarding with the aim to using automation for most of its business processes. In

IBSI view, customer owned banks will leave the experimentation to the big banks, quickly adopting the viable innova-

tions into their processes.

• Artificial Intelligence: Advancement and refinement of artificial intelligence technology has meant that it has applica-

tions across almost all functions of a bank. Customer owned banks would initially focus on improving operational effi-

ciency through intelligent automation and using intuitive chatbots for client servicing. The next level of application for

AI will be in client insights and risk management through pattern recognition to deliver real time insights and anomaly

detection. Customer owned banks need to identify the pain points in their process and leverage artificial intelligence

and machine learning with RPA to have a comprehensive outcome.

RACQ, part of QT Mutual, as part of its’ digital transformation is replacing click-to-chat functionality across its sales channel with an AI powered Chatbot application. It also plans to introduce Robotic Process Automation to improve straight through processing across the organization.

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Mutual Benefits for Indian and Australian Institutions Indian smaller financial institutions and Australian customer owned banks, while operating in different markets with varying

levels of maturity, face common challenges such as capital crunch and increased competition. There is potential for these

institutions to identify and deploy proven innovative products and service offerings without going through the cost intensive

lifecycle of experimentation.

Indian institutions can play the role of fast followers by implementing relevant innovations carried out by customer owned

banks in Australia. As the Indian institutions start focusing on digital customer experience, they can leverage products like

chatbots and invisible payment offering as a differentiating factor. These institutions can utilize technology developments such

as Open banking and Cloud based delivery of products to make themselves technologically future-ready.

Australian customer owned banks can leverage innovations developed by Indian institutions to cater to the technologically

challenged customers. Innovations such as SMS banking and instant KYC can help Australian institutes to penetrate the under-

banked population and serve their community better. Matured Indian payments infrastructure, where Indian institutions have

leveraged overlay services like Unified Payments Interface, an API interface, offers a blueprint for Australian customer owned

banks to map out their journey to maximize the potential of the upcoming NPP.

Future Outlook for Digital TransformationsMost of the institutions in India & Australia have embarked on a program of digital transformation absorbing innovative tech-

nologies into their businesses to propel their agenda of greater financial inclusion. Australian customer owned banks will con-

tinue their focus on technologies that enhance customer experience to retain and acquire more customers. Digital innovations

among Indian MFIs will be more geared towards improving business efficiency and getting customer buy-in for digital services

before eventually maturing to better customer experience.

Based on IBSI research and interaction with key stakeholders from the industry, it is evident that digital is focus area and Indian

small finance institutions and Australian customer owned banks having recognized that are trying to be early technology

adopters and key innovators in their businesses. Going forward there will be greater focus by these institutions on complete

digitalization of processes, mobile first approach to customer facing technologies and intuitive payment solutions.