Banks have to ensure that none of their core banking activities are outsourced at any point in time, according to Ajay Kumar Choudhary, Executive Director, Reserve Bank of India. This will ensure stability of the banking system.

“As the technology and systems are evolving, we are observing an increase in the outsourcing of services in the banking and financial sector. With the advent of fintech coupled with easier access to mobile phones, internet, higher speed, higher bandwidth, reduced cost of tech products, the industry is witnessing immense growth in terms of expansion as well as customer acquisition,” Choudhary said at the IBA Banking Technology Conference.

He observed that fintech is transforming the way financial services are delivered (how credit is extended, how payments are made or the way wealth management/ invesment advice is provided, insurance is priced, etc).

“Many of the industry participants are focussing on collaborating with fintechs, partnering with them for efficient delivery of financial services,” the RBI ED said.

He noted that the role of fintechs can also been seen in enhanced customer facing applications, efficient data analytics, alternate credit models, etc.

Need for safeguards

“While outsourcing any such roles to third parties, it is very important that adequate safeguards are established to seal the institution as well as the financial stability of the banking system.

“In line with our outsourcing guidelines, the Board and senior management must ensure that at no point of time the core activities of banks are outsourced and as it is said “put not all thy eggs in one basket”. The industry must ensure that there is no concentration risk which may risk the stability of the entire system,” Choudhary said, adding that banks need to diversify.

Given the velocity with which the tech industry is evolving, it gets demanding on the industry, requiring participants to keep pace with it, he said. “This, in turn, leads them to collaborate with limited tech providers. This may result in concentration, which may prove to be severe when it comes to a mishap,” Choudhary said.

Diversification is, perhaps, the easiest way to mitigate such risk. Participants should explore more options when it comes to technology, he added.