Will Digital Banking Increase or Reduce Regulation?

In the initial stages of banking, clear guidelines, acts and frameworks were required for customers to transact with the banking system. Regulations were required to frame rules to prevent money laundering, institute measures to avoid fraudulent transactions, protect and control the country’s foreign exchange, protect customer interest .Regulations were also required to prevent funds from being misused, or being invested in risky instruments by banks and customers to protect the latter’s interests. Banks followed a number of internal processes to comply with guidelines and mitigate risks.

With the advent of software solutions, controls and validation checks were built in to the solutions to prevent money laundering and other fraudulent transactions and alert bank users when necessary. Software vendors built exceptions, transaction controls and data fields at various processing points to put checks and balances into place.

With online banking and digital solutions being used increasingly by customers, the incidence of fraud also increased. Regulators had to modify rules as and when new solutions emerged or existing ones evolved. However, intruders kept penetrating the banking ecosystem by hacking personal email accounts, luring customers into clicking on fraudulent sites, accessing ATM passwords and PINs and using other mechanisms of fraud. Digital technologies and advancements in banking necessitated more and more regulations.

Clearly, digital technology platforms and solutions need to provide frameworks and controls so that these breaches can be minimized. Today, banking infrastructure is often on the cloud where it requires greater protection. As banking transactions move from conventional banking to digital, control mechanisms need to be built into various solutions irrespective of regulations. The platforms also need to ensure that transaction processing time is not increased by passing through this layer and performance is not impacted.

With the arrival of blockchain and distributed ledger technology, peer-to-peer payments bypassing the regulated payment gateways will become increasingly common across the globe. Similar is the concept of peer to peer (P2P) lending availing the online digital platform services which will match the needs of lenders and borrowers

To conclude, a foolproof digital technology platform and solution can reduce the need for regulation and control, while enabling a smooth, risk-free transaction. Digital solutions should prevent intruders from entering the system and assure all stakeholders of the safety of transacting from any channel, at any location or time. Both society and the banking ecosystem should mature to facilitate digital transactions. The maturity of a country’s economy and banking industry should be assessed by factors such as the quantum of regulation, fraud, digital transactions, and processing time. Banks and software vendors need to work towards achieving this end-state.