Disruptive technology or disruption disguised as convenience

By Gaurav Sahay and Ashita Sahay, SNG & Partners

Finance, book-keeping, transaction-making, investment, credit, insurance and trade have always operated under the strict eye of the regulator. The sector has always been a conventional one, and an authoritarian compliance regime has overseen its workings. In the light of the dynamic, world-order economy, however, changes have become inevitable. The unyielding regulator too, in facing pressing and immutable circumstances, has had to relax its tight grip in order to accommodate these changes by moving away from its totalitarian approach.

Gaurav Sahay, SNG & Partners
Gaurav Sahay
SNG & Partners

Many factors can be identified as catalysts for this change, none more so in the last decade than the surge in disruptive technology. This has carried out its fair share of the transformation of the financial and banking sector but may only foreshadow greater change to come. Accelerated development in the technology sector has led to the acceptance of change in the finance area previously averse to it.

The finance and banking sector, increasingly embracing innovation and technology, is providing opportunities as well as growth for consumers and service providers. Significant impact is seen in retail banking that was previously branch-based but can now be accessed using online handheld devices. The metamorphosis caused by digital disruption in the sector is obliterating obstacles in financial and banking markets. Up to now, financial and banking markets have seen a disconnect between regulation and innovation. Regulation has not always updated itself and has often been overtaken by innovation.

Inertia and a failure to acknowledge technological disruption led to the regulator simply banning and prohibiting that which it did not understand. However, emerging technologies and opportunities cannot be resisted for long. To take an example, the pandemic forced the inevitable acceptance of disruptive technology.

Ashita Sahay, SNG & Partners
Ashita Sahay
SNG & Partners

There are specific technological disruptions that can be seen to have altered the entire landscape of the financial and banking sector. This new digital ecosystem, however, must be overseen by specific regulation of intrusive technological advances. Such regulation will keep a semblance of continuity amidst change. A dual approach of legislative and regulatory amendment has been adopted to manage the new opportunities. Technological oversight using such measures as sandboxing has also come into play.

There have been significant changes to core banking platforms, loan origination and management, customer relationship management, payments, business process management, the application programming interface (API) gateway, API integration and digital banking systems. With the arrival of neobanks, big tech, data providers, India Stack (the world’s largest open API), tech providers and third-party products, the involvement of private players in the financial and banking space poses acute regulatory challenges.

Major disruptions caused by technology advances include real-time payment systems that enable around-the-clock transactions; open application programme interfaces connecting financial institutions, businesses and consumers to products and services, and the integration of cloud-computing into business processes. Artificial intelligence or machine learning has speeded up and simplified complex business problems through the use of algorithms and by addressing and managing customer interfaces. The internet of things has improved security, the automation of transactions and better customer experience. Automation in general has supplied a virtual workforce to integrate back and front offices and support functions.

These disruptions show that technology can deliver important economic and societal gains through enhanced competition and financial inclusion, and the efficient and cost-effective delivery of tailored financial products and services.

The adoption of new technology does open confidential data to theft and abuse. The question, therefore, is how much convenience and utility should be allowed through its use. The role of the regulator in this fluid era should be to learn and evaluate new technology, understand the extensive and profound impact that it creates and regulate it in a way that encourages progress. In the words of Alfred North Whitehead, “The art of progress is to preserve order amid change and to preserve change amid order”.

Gaurav Sahay is a partner and Ashita Sahay is an associate at SNG & Partners.

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