Tuesday, 24 May 2016

Internet Banking? Mobile Banking? Sorry, please say it again, do you mean Digital Banking?

Long ago there was a time when people could access the internet only through their bulky personal computers. You may say ‘long ago’ sounds a bit dramatic because it must have been barely 10 year ago that the PC was the only means for all of us to access the net. But like Ice Age, Stone Age and Iron Age we are living in a Digital Age. And the time in this Digital Age is calculated by the Moor’s Law. Way back in 1965, Gordon Moor had predicted that the computing power will double every two years. So by the standards of Moor’s Law, the primary means of accessing the net through PCs is a relic of 5 digital generations ago. That is long ago indeed.       

I never cease to be amused when people – bankers for god’s sake – use the terms Internet and Mobile Banking. Somehow what is unsaid or implied is that the former is accessed through desktops, the good old Personal Computers or laptops if you will. On the other hand the latter suggests carrying out banking using a mobile app or over SMS or even in some developing countries over USSD.  

But what happens when you do your banking transaction using a tablet, a pad or a smart phone? You simply type mybank.com on your mobile browser and start transacting. So is it now internet banking or mobile banking? As a fact of the matter there are even two separate regulatory guidelines for Internet and Mobile Banking in India.

Staggering 80% of the total internet users in India access the net using mobile phones. Though there is no reliable data available, it will be safe to assume equal proportion of the customers must be carrying out their banking transactions using their mobile phones. More over with the advance technology available today, most of the websites anyway detect if a browser making request for a webpage is coming from a ‘desktop’ or a mobile phone or a tablet and render a page suitable for the screen size of the device making such request.

With the launch of Unified Payment Interface (UPI) in India most of the e commerce transactions will – in reality – be m commerce transactions as a customer will be required to authorize the payment using an MPIN after receiving a payment request on the mobile phone. So as and when  UPI becomes the preferred mode of payment, the end point of all e commerce transactions will actually be a mobile phone  irrespective of whether the goods were purchased on a merchant’s website, in the mobile application or at a shop.   
As for security of an online banking transaction carried out through a particular device say a desktop or a mobile phone there is no more or less vulnerability due to using one or the other.

I don’t want to speculate here whether PCs will be extinct or not but one does not need to be a visionary to realize that most of the incremental access of the net will be through mobile phones or handheld devices. And as a corollary most of the incremental “internet Banking” transactions will be done using mobile phones.

So Banks, Customers and even Regulators need to start using a more generic term Digital Banking for all online transactions regardless of which device is used for carrying out such transactions. There is also a need for a unified Digital Banking regulation in India instead of the banks having to refer to two  separate guidelines.  

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Friday, 20 May 2016

KYC - it's a common sense actually

KYC : It is not whether you should or should not  Know Your Customer but it is How! And I will let you Keep Your Counsel

KYC is just a fancy acronym for Knowing Your Customer. It is coined mainly by the US legislation such as Bank Secrecy Act, 1970 and later reinforced by the Patriot Act, 2001. Effective KYC ensures that the customers of banks and Financial Institutions do not remain anonymous or worse fictitious. It is a major and a very effective tool to prevent money laundering and terrorist financing. Central banks and the Financial Institutions (FIs) around the world have adopted the KYC policies vigorously in the aftermath of 9/11. 

I was conducting a seminar with the constables and officers of a Cyber Security Cell of Mumbai Police recently.  After my lecture a constable asked me whether it is sufficient to collect all the correct proofs and not use common sense at all. Puzzled I asked him to elaborate. He narrated the case of a fraud his cell was investigating. A person opened an account with a bank at its Dadar branch in central Mumbai with a residence proof of Vasai. Vasai is a sleepy suburb of the Mumbai Metropolitan Region about 55 km away from Dadar. This gentleman had received money into his account through a cyber crime, withdrawn it and simply disappeared. The constable wondered why would a branch manager not ask the customer before opening an account 55 kilometer away from where the customer resided when there were at least a dozen branches of that bank between Vasai and Dadar.

And this one takes the cake. A friend of mine had rented his place to a bank to run its ATM. He had also taken a mortgage from that bank for which he was paying his installments regularly. One day the branch manager of a branch where he maintains the account asked him submit a copy of his PAN card*. When my friend protested that he had already submitted it thrice already, when he opened the bank account, took the mortgage and rented his own place the bank to run its ATM. The branch manager apologetically said he was sorry he was just following the KYC guidelines.

Now I must ask the obvious question. Is collecting a copy of the PAN card 4th time when an FI has 3 copies of the same card already in its record or opening an account of a customer residing 12 branches away, same as knowing your customer? I will keep my own counsel on this one.   

* PAN  is a  Permanent Account Number and it is allotted by the Income Tax Department of the Ministry of Finance in India.

(All views are personal)

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Monday, 16 May 2016

Start-up story in India : Bubbles are not formed in the placid water.

An Economic Times headline screamed a few month ago, “Is the bubble bursting for India's online start-ups?” It listed several examples where the poster boys of the Startup bandwagon such as Zomato, TinyOwl, Food Panda, Housing.com seemed to tumble.  There is also growing debate whether the valuations of the stalwarts like Flipkart, Snapdeal and Oyo are unrealistically inflated.  But the purpose of this post is not to argue for or against the business models of the start ups or their valuations. Enough and more experts have been commenting on that already. I want to dig deeper and explore this phenomenon of Indian Start ups.   
Nehru in his classic treatise The Discovery of India says As the First millennium of the CE approached its end, all the rich heritage of India’s Culture, Arts, Science, Literature, Philosophy, Trade and even War craft appears to be  the afternoon of a civilization. Her heart seemed to petrify and gradually this petrification and decay spread to the limbs............... The sense of curiosity and the spirit of mental adventure gave place to a hard and formal logic and a sterile dialectic...................India was drying up and losing her creative genius and vitality. ........................

If a similar discovery is undertaken by another great thinker after a few centuries, he would certainly mark turning of the 21st century as the Economic Renaissance in India. Especially the last decade or so has seen emergence of a new breed of entrepreneurs. They are not scions of rich business families but have come from urban, middle class families. They are young, well educated, highly ambitious and even brash. With almost 10,000 start ups, India is ranked almost 3rd (after the USA and UK) in terms of the total number of active start ups.  And despite doomsday predictions the start ups are here to stay and grow.

Why I bet that this particular period than any other in the past for it to be marked as an epoch of the Indian Economic Renaissance? There are several reasons for that.  Something fundamentally is changing at the core of the Indian society. This is not just an incremental or a superficial change but a tectonic shift in the ethos of the peoples of this country. And it seems to me that in its wake this change has triggered an irreversible fission chain reaction.

So what is changing?

First and foremost it’s the attitude. In the 21st century India people think it’s alright to fail but you tried. There is no social stigma attached, either to the failure or to the failed.  In fact we now willingly agree what is universally accepted that only the brave may fail because they try. While USA has over 85,000 start ups with population of barely 300 million, India with her population of 1.2 billion people, can easily provide enough business and growth opportunities for a few hundred thousand more start-ups.  

Second the employment seekers are becoming the employment creators. For almost two hundred years the ultimate middle class fantasy has been to ensure that their children get a degree and then get a job. And better still a job with the government. Because a job fed the whole family and the government job assured that for rest of your life.  Only those who failed at getting a coveted degree or a job would consider starting a business enterprise so long as they could not land a job. Any job.  With so many new start ups mushrooming practically every day, one hopes that very soon the government will not be the largest job provider.  Though start ups are estimated to have created 100,000 direct jobs so far and are expected to reach around 250,000 to 300,000 by 2020, what is more  exciting is the indirect employment they are creating.  For example, the Teamlease Employment Outlook Report says that the e-commerce sector has created a large  number of jobs in two categories: taxi drivers, and delivery personnel, hired in large numbers by online shopping websites and apps.

Third is the change in the consumer behaviour. IRCTC can safely take the credit for hooking on the train travelers early on to buy train tickets on line. We have come a long way now from buying train tickets online to even vegetables, grocery and medicine. This change is addictive and infectious. It is also spreading albeit slowly but surely to  the  tier 2 and 3 cities.  Consumers are warming up to the fact that buying stuff online is not only convenient but also safe and reliable.

Fourth, the start up economy is driving an economy of start ups within itself where such a symbiotic dependence is sustaining both. For example, we see spawning  of so many newer start ups to cater to the peripheral needs of earlier start ups. They are engaged in the areas of supply chain management, logistics, data analytics, artificial intelligence, digital marketing, payments so on an so forth.  This support system will ensure survival of both sets of the start-ups    

Aren’t bubbles still better than the sloth? They are result of the churn and turbulence in the environment which did not stir for a thousand years. Nehru lamented that the Indian society had lost its values about enterprise, the restlessness, the curiosity, the madness of explorers by end of the first millennium CE. These start ups are a sure sign that India is getting its mojo back.

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Sunday, 8 May 2016

Hitech and a bit of obfuscation are two sides of the same BITCOIN

BITCOIN : The last BIT on it is yet to be heard..............

What is Money? An economist would define it as a Monetary Base added to the broadest money supply,  M3.  A lawyer would argue it as a Legal Tender. An entrepreneur would say it’s a means to realize his dreams. A pauper would regret he never had it.  A spiritual guru would scorn it as Maya, a mere illusion. But if somebody were to ask this to us, the dyed in the wool bankers, we would solemnly declare it as the TRUST.   

In India, the Governor of the Reserve Bank of India promises to give the bearer the sum equal to the denomination of the currency note. While rest of the world trusts the US Dollars, the Dollar Bill of the US of A  says “In God We Trust”.  So the next question would be, ‘Who is trusting Whom’? In times ancient and in times modern, the ruled trusted the ruler in matters of Money.  Be it a monarch, a dictator  or a head of an elected government, the hoi polloi always put their faith in the “money” issued by the ruler.   

If that is so then it will lead us to the third logical question ‘how does money look like’?. Money can come in any form. Currency notes, coins, deposit receipts and so and so forth. Deposit Receipts being the balances kept in the Commercial Banks. Though the commercial banks, don’t print the money themselves, they hold it as trustees. And in them put the depositors, their money and their trust. From historical to  contemporary times, the Banks played the role of the Trusted Third Parties. 

This brings us to the fourth question, can money exist which is neither issued by a government and nor held with the Trusted Third Parties’? If the answer to this question is yes then would you wonder if you could automatically trust such money ? That’s the million dollar, err BITCOIN question.

The BITCOINS, can’t be kept in a wallet nor can these ever be seen. These are amorphous bytes stored in a countless computers around the world. In spite of the BITCOINS being around for a past few years, ironically nobody knows who invented these? We saw earlier that the rulers always took pride in the money they issued. Rather money was the symbol of their power. As for BITCOINS their creator or creators feel safer in remaining anonymous. This is notwithstanding the claims made so far by a Japanese and an Australian to be inventor of the BITCOIN.     

These BITCOINS are not stored – even digitally – with any Trusted Third Party. There is no central record or a common ledger which gives an account of the total bytes created or circulated. BITCOINS are generated, paid and stored as bytes using a beautiful and a novel concept called BLOCKCHAIN*. This BLOCKCHAIN allows all the members to view and validate every single transaction taking place in the network, around the globe in real time. So every time a sender “S” pays some BITCOINS to a receiver “R” the entire network ‘sees’ this transaction. It is up to the network to determine the authenticity of this transaction using the complex algorithms on very powerful computers. When a sufficiently large number of other members (beyond a critical threshold number of the members) validate that “S” indeed had enough BITCOINS to pay to “R”, they ‘authorise’ this transaction and allow it to be included in a “BLOCK” of valid transactions.  Thus in the world of BITCOINS “S”, “R” and rest of the members are trusting each other without any need for a Trusted Third Party. BITCOINS also allow “S” and “R” to remain completely anonymous from each other as well as from rest of the members of the network.

This now begets the fifth and the last question as to  ‘who and why would anybody want to be receiving and paying money anonymously’? The proponents of the BITCOINS claim to be libertarians and advocate laissez faire. The doctrine of Don’t Ask Won’t Tell.  One can understand such a need under exceptional circumstances such as  natural or man made calamities of unimaginable magnitude. However if you are earning your money legitimately, paying your taxes, transferring money for the business you don’t want to hide then there’s the good old money which you always trusted.

* BLOCKCHAIN – BITCOIN probably is the only well known, well publicized even glamorized  by product of the brilliant BLOCKCHAIN. Opportunity or the need for the BITCOINS to become mainstay is yet unknown.  But the underlying philosophy powering this phenomenon, the BLOCKCHAIN shows huge promise. Stay tuned for a deep dive into BLOCKCHAIN and how it may be used to provide wonderful solutions for payments, remittances, stock and commodities trading or even inventory management.

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Thursday, 5 May 2016

Payment Banks - There's many a slip between the cup and the lip

Payment Banks – Why is it also brave to turn back

“Because it’s there”, George Mallory’s immortal riposte on why he longed to  climb  the Mount Everest is now part of the folklore. But it will take a lot more than the heroic bravado to want to run a payment bank (PB). Like the Everest, the challenge is twofold. One, it is about the degree difficulty posed by the mountain itself. And two, it is the climber’s mental and physical endurance, his skills, his will power and maniacal focus on the goal to stay on the course.    

So what’s the degree of difficulty in setting up a PB and turning it into black?
First and foremost let’s see how a typical universal bank (UB) earns most of its revenue.  Net Interest Margin or NIM is a major source of income (60 to70%) of a UB. A typical UB operates at about 4% NIM. What about a Payment Bank? It will not be difficult to imagine that being the new entrants these banks might end up paying higher interest on the deposits than what most of the UBs are offering, say 6 to 7%. More over PBs will need to maintain 75% of their deposits in safest securities such as government bonds. A back of envelope calculation says that their NIM will hover around 1.5% to 1.75%.

This is not all. UBs also supplement their income by earning fee. This fee is earned by advising their customers on Investment and Insurance, Treasury Operations and Commercial Banking.  Fee from Commercial Banking is primarily  due to their ability to extend fund and non fund based limits to their small, medium and large corporate customers. Anybody would guess by now that a PB on the other hand has no opportunity to earn fee from Commercial Banking operations as it simply can’t offer those fund and non fund based limits. It can only earn fee by way of Transaction Banking and by  distributing Insurance and Investment products. It is still early days to comment on their ability to earn large revenues by way of Treasury operations. This will stunt the opportunities of earning fee for a PB.

These challenges are presented to the Payment Banks by the very design that created them in the first place. Payment Banks are going to have to take a route to the top through a very steep climb indeed. Dozens of people and organizations had applied to the Reserve Bank of India to get a license to earn the privilege of setting up a Payment Bank. And one hopes that they had a reason other than the one offered by Mallory.

What do the climbers need to possess to conquer the challenges posed by the Mountain?
We know now a mountain, even the mighty Everest can be conquered.  But it’s not a game for the novice. Beneath the dauntless spirit and nonchalant attitude of Mallory, there was one of the finest mountaineers in the world. That’s the point a PB should bear in mind.

For better odds to be successful as a PB, a player must have some unassailable core strengths.

  • First of all, it needs clarity about who its target customer is.  It also must have a finger on  the gaps in the apparent needs of these customers and the existing options available to them.  It will then have to identify if there are yet any undiscovered needs of these customers which can be fulfilled for a price.
  • Second, it should be a brand that people will trust with their money. It is easier if the aspirant of a PB has already acquired and serviced those millions of customers in its present avatar.  
  • Third,  it is inevitable that customers of a PB would prefer to avail its services primarily through their own mobile phones. This will require a PB to have an ability to deploy its mobile banking solutions easily onto the phones of its target customers.
  • Fourth, it should be able to run a lean and mean force with bare minimum overheads. So as a corollary, cutting edge technology should enable every single aspect of its operations, from running customer facing businesses to managing back office processes. 
  • Fifth, it should have ability to source and service millions of customers spread across the length and breadth of the country at a cost far lower than that  incurred  by a traditional Universal Bank. Rent and HR costs form bulk of the fixed costs of UBs. This would obviously mean that the last mile customer service points (CSPs) of a PB will have to come out of independent network such as local grocery stores.  This will afford them the ability to partner with such Business Correspondents on a variable pricing model. It is anybody’s guess what it would cost to retain loyalty of such independent network when a dozen odd other banks are also trying to woo them simultaneously.  
  • Sixth and the last point is its ability to sustain for unpredictably long periods before it can hope to see positive returns on its investment.
No mountaineer ever dared to set for the Everest without full insight into his own ability and the danger posed by the mountain. World lost two of the finest climbers in Rob Hall and Scott Fischer to the Everest in 1996 because they did not turn back. One hopes that the worthies didn’t apply for a PB license because it was available. Cholamandalam surrendered its license because it was brave. 

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Sunday, 1 May 2016

Sound of Disruption

It is an awe inspiring ingenuity of Man to have built ships, pyramids, steam engines and  rockets. These were the disruptions that determined how wandering nomadic tribes metamorphosized into civilized societies. Nobody heard the drumrolls when a bathtub spilled water out, a kettle jerked with boiling water, an apple fell on the ground or a kite flew in a storm. More often than not many more of such mundane, nondescript occurrences have caused disruptions of such gargantuan proportions that the civilization of the past couple of millennia is unimaginable without them.

A probable meteoric shower made the dinosaurs extinct and an atomic bomb terrorized generations. But such disruptions are few and far between. More often than not history has witnessed  disruptions tip toeing around unannounced. In the recent past a Jobs, a Gates, a Zuckerberg and  closer home a Dhirubhai Ambani or a Karsanbhai Patel went almost unnoticed in the early phase of their careers which belied the deafening disruptions they caused later. Google ran a brilliant search engine for years and Whatsapp runs to date  without having a clue about a sustainable business model. It is needless to even mention what they have left behind in their trails.

Google reminds me of one Tanmay Bakshi. Tanmay says he has invented a search engine which is better than Google because when you ask a question to Google it shows you a few million pages and expects your to look for an answer. Whereas if you ask “Tanmay”, it gives you an answer with an accuracy score. Tanmay is 12 year old Indian Canadian and may alter for good how we search online in the next few years or the next few months.

For a smug organization waiting to “hear” the sound of disruption can be a double whammy. There are two ways in which an organization can allow itself to be annihilated by missing to identify or recognize a  shy  and almost demurring  DISRUPTION. First, ignore an idea heard  at a routine  town hall meeting or presented by a bunch of employees way down in the hierarchy. For an idea not presented by a hot shot consultant and which came without  a hefty bill is really not worth pursuing at all.  If  disruptive ideas came out of the brilliant consultants’ lengthy market research reports, then somebody forgot to keep a record. Second, ignore  an event, a trend,  a recurring customer demand or a complaint as just a passing fad or too vague.

Famously ignoring the touch screen cost both Nokia and BlackBerry their very existence. iPod and now generations of iPhones have walked by the Walkman, Eastman Kodak’s photo print is but  a footprint in the  history of photography. Pagers, Fax machines, Video cassettes and Compact Discs and now even  PCs have been disrupted by newer better cheaper technologies.

There is no one silver bullet to tame this animal called disruption. What may help is to keep one’s eyes open, listen more than talk,  put ears to the ground and once your gut says this is the one go for the home run as if there is no tomorrow. And then let the drums roll.

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Matter of Perception

Ptolemy’s perception of the Universe was such that the Earth was at its centre. And before Columbus,  the whole World perceived that the Earth was flat. Perception may be a result of intelligence not just of an individual but that of the entire species.  Edwin Abbot’s novel Flatland imagines a 2 dimensional world populated only by the 2 dimensional geometric figures. Mr. Square in the Flatland ‘perceives’ a sphere – a 3 dimensional object – passing through the flatland only as a series of expanding and shrinking circles. Since a sphere can’t be ‘perceived’  by the townsfolk  of the Flatland, it simply can’t exist.   

But it is not only the experts whose perceptions are borne out of their ignorance or in case of the denizens of the Flatland, their own inadequacy. Each one of us is a creature of our own perceptions. I don’t even want to guess – at this point in time - whether the perception is a cause or an effect of who we are!

What determines our PERCEPTION? It could be any or all of myriad of factors; Genetics, Gender, Ethnicity, Education, Social &  Cultural milieu, pleasant or tragic Experiences or just plain providence. Perception as we know, also changes over a period of time.   An individual’s ‘perception’ or his world view seems to me as unique as his fingerprint. However at times a person or a whole bunch of them will simply suspend his or their own perception and ‘adopt’ the perception of the majority because it is either safe or convenient or profitable. Naturally, perception is at the core of how families, communities, organizations, even states behave  and respond at any given time to any given situation.

Despite having discovered a tricky quagmire around this seemingly innocuous perception, I want to use mine to reflect on several relevant topics we encounter in our families, societies and organisations. I want to take liberty to share my commentary on such topics and look forward to hearing from you.  What better name than the Matter of Perception.

I have used the pronoun he or his as a matter of habit. The intent is gender agnostic and also  implies she or her.  

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