Rohan Jahagirdar
The timing of the recent Punjab National Bank — Nirav Modi scam couldn’t accept been worse. After precisely having committed to pay for a giant recapitalization bundle to bail out the banks’ for bad loans, the populace trust inwards banking organisation is at its lowest. Some commentators accept suggested large boom reforms similar consummate privatization of banking systems patch others retrieve nosotros ask amend regulatory oversight. However, rattling few accept focused on a crucial aspect that enabled the fraud: the bad, sometime tech used yesteryear the bank. Unpacking the details of the scam reveals that it was carried out yesteryear 2 PNB employees who used the international payment system, SWIFT messages, to transportation out guarantees to individual persons, bypassing the primary accounting organisation of the bank. Why were these SWIFT messages non existence represented inwards the accounts? This seems similar an simple matter a bank’s software organisation is supposed to do.
There are multiple elements to this scam. The media in addition to experts accept rightly questioned the role of the supervisors, auditors in addition to administration of PNB. But the storey that a dyad of branch employees of a large banking concern could genuinely commit a fraud yesteryear easily bypassing the systems points to a primal problem; it reeks of miserable software design.
This is non the showtime fourth dimension banks accept fallen prey to incompetent software pattern practices. H5N1 recent study yesteryear IIM Bangalore noted that Public Sector Banks inwards Republic of Republic of India lost at to the lowest degree Rs. 227.43 billion (Rs 22,743 crore) owing to fraudulent banking activities betwixt 2012 in addition to 2016.
Indian customers are amid the unhappiest inwards the globe every bit indicated yesteryear client satisfaction scores. Source: a study conducted yesteryear the Indian Customer Satisfaction Index inwards 2016. While it surely is truthful that all frauds can’t last fixed amongst amend software systems lone or that systems tin give the sack never last completely fraud proof, at that topographic point clearly is meaning room for improvement.
Legacy systems, lumbering dinosaurs
Most banks rely on sometime schoolhouse banking technologies that haven’t changed at all. If you lot were looking to count the pose out of tech innovations to accept come upwards from banking manufacture inwards the final few years, you lot wouldn’t ask to a greater extent than fingers than the ones on 1 hand. H5N1 quick comparing betwixt your bank’s meshwork banking interface in addition to that of other tech companies similar Uber or Netflix volition say you lot that our banking tech has been stuck inwards a fourth dimension warp.
The rising of competition banks
It’s non that banking systems inwards Republic of Republic of India lone accept been boring to adjust to changes; many banks inwards the US of America yet utilisation COBOL — read Latin inwards programming languages — while several inwards the European Union in addition to the UK of Britain in addition to Northern Republic of Ireland yet employ sometime mainframes, a engineering scientific discipline developed inwards the 60s. But regulators inwards the European Union of late rose to address closed to of these challenges yesteryear mandating banks to opened upwards up their backend systems to third political party apps through the PSD-2 directive. This way that tech companies similar Facebook in addition to Google would last able to offering services alone banks could otherwise offer.
In the UK, fiscal regulator, FCA (Financial Conduct Authority) has laid upwards an encouraging surround for FinTech startups that has engendered a slew of app-only startup banks similar Monzo, Atom, Starling amid others.
Challenger banks similar Monzo are seeking to construct novel banking systems grounds-up. Source: Monzo Press Kit Compare this amongst India, where starting a banking concern requires promoters to accept over 10 years of sense inwards banking in addition to finance at a senior degree in addition to a minimum paid majuscule of Rs. v bn.
The novel digital banks, oftentimes dubbed every bit “challenger banks” are unencumbered yesteryear sometime tech that give-up the ghost along banks from innovating. Instead, they are edifice centre banking systems from scratch that are responsive, agile in addition to admit the differentiated needs of the smartphone generation. With an estimated value of £20 billion, FinTech is instantly the UK’s fastest growing manufacture in addition to London has give-up the ghost the FinTech majuscule of the world.
Lessons for now
First, allow us recognize that banking is a technology-intensive functioning in addition to give tech it’s due. To retrieve of engineering scientific discipline every bit an ancillary matter that simply supports banking functions doesn’t create jurist to the reality. Considering how everything else online — with the exception of banks — is constantly improving, nosotros ask to seriously increase our expectations from banks.
Second, regulators ask to start providing banks that desire to modify a fail-safe surround to create so. The back-end of the banks today are black-box systems that operate inwards silos. They rest inaccessible to external parties in addition to the regulatory overtures brand them wary of trying out anything new. The FCA inwards the UK, for example, has laid upwards a “sandbox” for tech companies to attempt out products. This helps startups arrive at a amend agreement of the regulations patch the FCA benefits from seeing what’s out there, in addition to establishing an surround that’s conducive to innovate.
As for the PNB scam, the inquiry remains whether reconciliation betwixt SWIFT in addition to centre banking transactions could accept saved taxpayers a massive neb of Rs 11,450 crore. At the rattling least, the incident behooves us to demand genuine improvements inwards practices that tin give the sack pose Republic of Republic of India on a path to a amend functioning fiscal system.
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