Banking will be the First Sector to Adopt Distributed Ledger Technology

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Banking will be the First Sector to Adopt Distributed Ledger Technology

Michael Siddhi is the Head of Transaction Banking at Standard Chartered Bank Nepal Limited. With almost two decades of banking experience in Qatar and Nepal, he is responsible for developing and implementing transaction banking strategy covering both cash & trade products through sales, implementations, product management & commercialization including digital channels. Lately, digital banking is gaining momentum, and banking institutions are investing in technology, infrastructure, customer awareness and adoption. The COVID-19 pandemic served as a catalyst for the adoption of digitisation and accelerated this trend. Sagar Ghimire of New Business Age talked to Siddhi about the opportunities and challenges for digital banking in Nepal. Excerpts:

How comfortable are Nepali consumers with digital banking?
When you talk about digital banking in every geography, not only in Nepal, the digital transformation begins at retail level. Digital adoption usually begins with an individual doing his/ her personal transaction through digital medium. For e.g. an individual first starts doing transactions through online banking or app, does online purchase on a marketplace platform, and uses online capabilities like connectIPS, QR capabilities for fund transfer etc. From this perspective, digital transformation has picked up pretty fast in the last few years. So, I must say, at individual capacities, awareness is increasing and people are adopting digital banking. But on the other hand, the same cannot be said of the Corporate side. Corporates have not picked up digital mode as quickly as individuals which is quite natural.  It happens in every geography & every economy. One of the key reasons why this is so is because corporate payments are usually of large value and the downsides of wrong payments are higher. Thus, the hesitancy from the organization to adopt electronic channel. Another important factor is the capability that banks and financial institutions (BFIs) are providing to the corporate probably did not suit the Organizations. Corporate usually have a payment matrix that requires number of level of makers & checkers which was not available on Digital channels offered by lot of Banks & FIs. The digital channel of most Banks mostly was designed for individuals & not Corporates. Similarly, the digital channels offered by the FIs & Banks to Corporates did not provide end-to-end digital benefits, but it was more of a digital lipstick. For example, if making payments through online channel did not bring any additional benefits to Corporates say by way of efficiency, better controls & security, ability to scale up their processes, it ends up being a digital lipstick. This was situation till some time ago. Another key reason why digital adoption is taking time in corporate space is lack of transparency & governance. Lot of our companies are still running their business, particularly in the accounting space in a traditional way. The recording of transactions happens manually in manual ledgers & thus cheque issuance becomes the most convenient & used method of payment.  

However, in last few years things are changing pretty fast. Organizations are now beginning to adopt digital platform for various reasons. Some large corporates who have implemented ERP system have understood that digital integration can bring lot of benefits & efficiency to their current manual processes. For eg. Bulking & batching payments enables the corporate to process large number of payments in a single go, or Host to Host integration allows corporate to use their internal process flows to make their payments without using Bank’s channels. Some corporates have even consumed Bank statements in a SWIFT format (MT 940) to do auto reconciliations. This will enable Corporate to scale up their operation & enhance efficiency with same number of staffs. This has also been possible because Banks & Fintechs have enhanced their online capabilities for Corporates to provide such capabilities. In last decade NCHL has revolutionised the payment system which began with digitisation of clearing cheques and now they are providing capabilities like IPS, CIPS and now with rollout of National Payment Switch, number of other capabilities will be available in the country.

COVID-19 devastated economies around the world. On a positive note, it has also helped to accelerate the adoption of digital banking. What do you think is the role of COVID-19 in Nepal in terms of digitisation in the banking sector?
If we look at banking transaction volume during the COVID period, the electronic volume really picked up and the manual volume significantly went down. Now again lately, we can see the manual transactions picking up again for obvious reasons. I must say, COVID has really helped & supported digitalization of banking activities. The pandemic has coerced banks to step up their efforts in providing digital capabilities and similarly it has also forced adoption of the digital channel by the consumers – at both individual & organizations level. Let’s pick an example of how bank used to give statements. Long ago, the bank used to give paper statements manually. People used to go to the bank to collect a statement. When fax came, the paper statement was replaced by faxing the statement. Soon, fax was replaced by online banking, but until now, organization could get the statement but could not integrated it in their system. This started Banks to provide statements in CSV or Excel format which the client’s system could consume. Now, it has gone beyond even that. Large corporates need statements in the MT940 format which are delivered to the client either by online banking or H2H connectivity. With further development, high end customers will now start asking for bank reports in real time and even payment requests executed through APIs (Application Programming Interface).

One of the reasons for this transformation is COVID which prompted people to think about doing things differently. Corporate treasuries are now looking at things differently. This has prompted banks to enhance their capabilities so that they can meet cleints needs & requirements. At the same time, there were number of digital capabilities available but our business community was not ready for adoption of these. COVID has triggered use & adoption of these technologies which can bring efficiency, security, controls and scalability. This has also given us opportunities to import a lot of ideas from other countries. So COVID has definitely helped us to push ourselves into adoption of digitalization.

It is often felt that Standard Chartered Bank Nepal Ltd is lagging behind its peers when it comes to introducing digital banking services. Do you agree with this?
I don't agree with that. Let me explain why. While there have been some areas where SCB has taken time in offering digital capabilities, we also offer digital products which other FIs/ Banks don’t have or we were the first one to offer. We deliver our digital value proposition through two channels - Straight to Bank (S2B) which is our electronic channel for corporates and online banking channel which is the channel for individual customers. Today S2B has integrated with IPS, ConnectIPS and RTGS. Our clients can sit at home and push payments through all these switches and there is no need to visit any branch. We were the first bank in the country to integrated our Corporate channel with IPS & RTGS. I agree, we were late in connecting with connectIPS but there is a reason for that and I will come back to that in a while.

Straight2Bank (S2B) is a powerful channel which is offered across all SCB locations and we offer various levels of connectivity. Apart from standalone S2B set up, our clients can also avail of Host-to-Host connectivity with their ERP thereby making their payment flow much efficient. S2B also supports SWIFTNet connectivity which gives clients direct access to SWIFT network. We are the only bank to offer Trade reporting and Trade initiation capability in our digital channel. Our clients can open LCs sitting at the comfort of their home. Or they can accept discrepancies in their trade documents through S2B. We also offer MT 940 reports to our clients over S2B web or H2H connectivity or through API which our clients can use for the purpose of reconciliation at their end. Similarly, we are the first bank in Nepal to offer proprietary API banking capabilities. For eg. we have live APIs which can provide real time balance notifications, real time debit credit notifications or payment requests through API. We offer Virtual account for collection which enables an organization to receive their collections through any digital channel (IPS, CIPS or RTGS) wherein the virtual account details will help the clients to identify payers and enable faster reconciliation which will replace the manual recon process. How many Banks in Nepal have these capabilities? The purpose of these capabilities is not to offer digital lipstick, but we aim to provide efficiency, scalability in clients processes without compromising the controls.

Similarly, in our retail space, our online banking / SC Mobile App is loaded with various features and our clients are not required to come to branch to avail of banking services. Services like bill payment, wallet upload, CIPS fund transfers, credit card payment, instabuy, card activation & blocks, PIN change, FD request etc can be available through our Online Banking channel. We have also lunched our digital account opening channel through Nagarik App and recently upgraded our public website in dual language for our client’s convenience.

That said, I agree that we were late in integrating with Connect IPS and because of which SCB has been pointed at for being behind in the digitization space. However, now we have CIPS available in both S2B and retail Online Banking channel. Similarly, we are yet to enable payments & acquiring through QR code. This is a WIP, and our technical teams are working on connecting to the QR grids. The reason SCB takes time in integrating is because our governance process & controls. Whenever we launch any product, it has to be approved by all our internal departments - compliance, technology, credit risk, operation risk, FCC, legal etc. We make sure all our products are watertight and perfectly suited. We make sure there are no loopholes. For every process, we are required to ensure we meet the compliance like AML, ensure our OR framework is robust and are aligned to global practices etc and thus we take longer time to integrate into these switches. So that's the reason why sometimes it takes a bit of time. A case in point is that, we were not willing to adopt QR flows until Central Bank of Nepal published the Nepal QR standard framework which was published around early 2021 which set the guidelines for usage of QR code for payments & collection. Since then, NCHL has introduced NepalPay through their NPS offering and we are now working on connecting to Nepal QR grid.

People are worried that banks are undermining or ignoring cyber threats. So in Standard Chartered, what are the measures that you are taking to minimise or mitigate these kinds of risks?
As I said earlier, one of the reasons why we take a long time to connect to various digital switches is because of our internal processes and compliance requirements which are quite stringent. For eg. as a part of our payment transparency process, we are not allowed to tamper with client’s payment messages. If a client sends a Connect IPS message, we cannot convert it to IPS despite all good intentions. For eg. Connect IPS supports payments up to NPR 2Mio and if there is any payment that is sent by our client as CIPS payment but value if higher than NPR 2Mio, we don’t convert it to IPS. Or we usually encourage our clients to use our digital channel (say S2B or OLB) to push payments out of our system & don’t encourage third party proprietary channels to pull money from our system. The former is considered safer. While I cannot speak for other FIs, I can assure that we have very stringent internal processes that ensures security controls. To approve any payment product or payment architect, we need sign off from every function like compliance & AML, technology, operation risk team, credit risk etc.

Today, Straight to Bank (S2B) is not only used by our corporates in Nepal, it is used by our corporates globally. Our clients in Nepal or Dubai or Singapore or anywhere in the world use the same platform. Same is for the online banking in respect of retail clients. Whether you are sitting in Nepal doing transactions or doing online transactions from Singapore, these platforms have the same feel, same look wherever you log in. Locally we may have fitted in to plug into the local payment flows, but the look and feel is the same. So, we have, to a large extent, to follow the global processes and that we have to do it stringently. We need to make sure that our flows are in line with the global flow. And to that extent, we take care of the security issues.

What is Standard Chartered’s vision in Nepal in terms of digital banking presence? What services can we expect in the near future?
Digitization remains at the heart of our business strategy which underlines our commitment towards our stakeholders while assuring the best digital lifestyle for our clients. Our digital value proposition is developed & designed for two different segments. For individual users the delivery channel is Online Banking/ SC Mobile app & for Organizations it is Straight to Bank (S2B). We understand that the requirement & expectations of these two different segments are different and accordingly we design our deliver architecture. We have invested a lot in both of these capabilities. Let's talk about S2B first. We have recently upgraded our S2B to S2B Next generation which has more user-friendly features and data analytical capabilities. Similarly, we recently implemented SCPay which is our internal payment processing engine. SC Pay is not only used in Nepal, but all across the world. It is an ISO 2022 certified and cloud-enabled payment engine. We have also invested in our new messaging system viz Alliance Messaging Hub to replace our earlier messaging system. All these are done to make sure we are future ready. Our API Banking is the first in the country where client can directly share or collect information for their consumption or request bank to process payments like IPS, CIPs. Similarly, addition of various advanced features on Online Banking are the key milestones in our digital transformation journey during the past year. In very near future, we are going to launch payment product types like tax, SSF & duty payment through S2B.  We are also doing necessary exercise to integrate with NPS for providing QR enabled payment & collection solutions. In the trade side, in addition to our current S2B Trade, we will be rolling our Digital Trade counter to support the paper-based trade flows. There are number of APIs that are offered by SCB around the world. If there is a demand and appetite in Nepalese market, we can introduce these APIs in the country. We are also exploring the use of Distributer Ledger technology to support client’s needs. Some of these are disruptive capabilities, so we have socialized this with the Central Bank and are exploring implementation. We are committed to providing digital capabilities & will continue to invest that can support our client’s requirements.

Do you think in the future Nepal could have fully digital or virtual neo banks? How far is that future?
Digital bank, neo bank or virtual bank are the terms which are used interchangeably & mutually, though they are not exactly the same. We must also understand that these terms are evolving. Digital banks are an extension of traditional banks whereas Neobank or sometimes also referred as virtual banks are exclusively online bank and do not have any branches and all products & services are offered entirely online. A full virtual bank or NeoBank model is picking up around the world and SCB has also launched our NeoBank called Mox in Hongkong. There have been some soundbites on rollout of Neo Banks in Nepal but I believe rollout of full-fledged neo Banks is going to take time in Nepal. NRB has not offered any licence for a full virtual bank. However, what is possible in Nepal in near future is a Neo bank offering their services in partnership with a traditional bank. This model is already being used in other parts of the world including India. In this model, the end customers are offered Banking services through a Neo Bank but from a regulatory perspective, the monetary txn are managed by their traditional partner Bank. The monetary policy that was recently unveiled has also addressed this issue of implementing framework for full-fledged digital bank in the country. A detailed guideline on this provision is awaited and we will know how this will take shape in future.

You have been with the industry for decades, how challenging is it for the banks to be up to date with digital platforms and features?
One of the spaces in the Banking industry which is evolving very fast is the digital landscape. The fast evolving disruptive technology and agile Fintechs have indeed challenged the traditional banks who have been slow and lagged behind in terms of adopting these changes. Fintechs are more agile because of their flat organizational structure, and they are new company and can do a lot of things which traditional banks cannot do. Traditional banks have to overcome their legacy solution and complex regulations to innovate. That is why traditional banks will never be as agile as these fintechs. On top of that, for the likes of SCB & other global banks, it is not possible for us to plug into every payment service operator or Fintech’s switch. Because of the cost of integration & compliance requirements and especially if the business volume does not justify, it may not make sense. This is not applicable to smaller institutions and to that extent they are more agile. To meet the technological demands of the customer, banks are partnering with fintech to provide improve client experiences, and this is going to be a win win partnership which can combine innovation that Fintechs brings and support and trust the Banks provide to build a digital future.

The next challenge to the Banking industry, I see, will come from adoption of Distributed Ledger Technology (DLT), commonly known as Blockchain. Blockchain will enable banking transaction to be conducted using a decentralised architecture which will eliminate lot of intermediaries & deliver faster services to the consumers in a much-secured environment. I think banks will be the first ones to adopt distributed ledger technology in Nepal. Coming to your earlier question about the Standard Chartered’s vision, we are already talking to some of the clients about using DLT to support their Trade transaction flow. But obviously, because it's disruptive and a new system, it will require socialization and approval from the central bank. It is quite amazing when we look back at the pace of technological changes & how it is shaping the banking industry. The future of banking will look very different from how it is today and this is one of the key challenges for our Banking industry.  

How supportive is the government or the regulator, Nepal Rastra Bank, in terms of promoting digital banking, and accelerating the adoption of digital banking?
I must the central bank has been very supportive towards digital agenda. They understand that the digital banking is something that has to be adopted and is the future of Banking. If you look at RTGS payment system, Central Bank took the initiative to implement RTGS. Central Bank has taken right steps to support digital agenda and that is why today the country’s digital pieces has fallen into right place and volume of transactions passing through digital switches have significantly increased. But, it can be fairly said that there is more that can be done.

The technology landscape & technology in banking is evolving so fast that the regulators are always trying to keep up with these changes & implement effective laws & regulations. This is true in every geography and every business model. It would be extremely naïve to assume ethical behaviours by all the FIs & Fintechs, thus regulatory framework along with strict enforcement is absolutely necessary.  And in the backdrop of the fast-changing landscape, it’s very important that regulators are able to design that framework so that innovation happens. For eg. the rise of cryptocurrency, increasing push for decentralised trust architecture offered by blockchain, increasing use of APIs etc necessitates a proactive regulatory framework which not only protects the consumer but also helps guides the service provider. Let me cite our example. We were not able to rollout QR payment & collection product until Central Bank implemented the regulatory guidelines. In this backdrop, the key expectation from the regulators is to be quick in implementing frameworks to govern the changing digital economy which enables the innovators to implement new ideas that can help the country’s trade & commerce. The recent monetary policy has made provision to rollout regulatory sandbox, innovation centres, framework for digital bank establishment which shows Central Banks commitment towards digitalization.

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