Bringing Change To Rural and Community Banks-Time for Core Banking to be Open

The future of core banking in rural/community banks

 Rural, thrift and community banks are where large numbers of people and small businesses find access to lending and possible wealth creation. As the Open Banking discussion grows, this segment is important for meaningful financial inclusion in many markets. With it's large population and geopolitically important location, Southeast Asia holds the key to the future of both Open Banking and financial inclusion. The two must come together and nowhere more so than the Philippines. The Philippines is strategically key to global free trade and rule of law. It enjoys a massive demographic dividend with a large and growing young population; it has shown consistent economic growth over the years; over 51% of it's people live in rural areas. Things are similar in Indonesia as well. Meanwhile, over in Thailand, a large percentage of the population is occupied in farming and many urban Thais continue to have rural holdings. Thus, institutions rooted in communities outside big cities are quite important. Traditional banks in the non-metropolitan areas have to contend with the high penetration of smartphones and varied product offers from neo or digital banks. At the same time, depositors and borrowers  are vulnerable to extreme weather(and other) events, vagaries of farming and supply chains, and the fallouts of regional conflicts. The impact  falls on capital adequacy, earnings, quality of assets, liquidity and the ability to respond to risks. These banks and financial institutions, therefore, need a strong measuring, forecasting and inferencing capability with a technology architecture that is de-layered, agile and focuses on the basics. While siloed, multi-layered, out-of-the-box software approaches have worked well for larger organizations with very significant compliance demands, small institutions need tech to make rapid and meaningful impact with low overheads. One might say that this is the future of Core Banking and it is this set of needs that brings about convergence with Open Banking.

Transforming the core stack for  rural/community banks

The core tech stack of a rural/community bank should facilitate and enable healthy deposit and lending flows on one hand and provide signals for both operating prudence and future growth on the other. In other words, how the tech stack is designed, deployed and used can make it a key policy and strategic tool. How can this happen? One, the layers that have traditionally separated customer interaction interfaces from the back-office have to be reduced.  Two, the stack has to capture customer or account holder conversational streams and use those to create insights as well as actionable routines through an AI-based back-office. It has to indicate key possibilities and real-time incidents to managers inside the bank, since the staff strength will be small. Three, this requires a significant overhaul of the way data sources are integrated, data is stored and data processing outcomes are displayed. Let us keep in mind that a lot of data will be external to the bank, from diverse sources and accessed via APIs. Four, as digitization happens, the bank infrastructure and customers will face growing matters of security. This may be somewhat dampened at low per capita transactional levels. However, anomaly detection is becoming accessible and affordable and will be of use as the numbers grow. The processing of data gathered through natural language interfaces can help. There is no doubt that the way conversations happen between the banks and their customers digitally will be quite consequential in many ways. 

Bringing convergence between Open Banking and Core Banking via Network Thinking

This kind of architecture at the level of the individual institution will lay the foundation for full-blown Open Banking. This is because it can lead to a robust  and scaleable consent management framework. One might envisage a classification of data and payment providers and data and payment receivers with a potentially neutral entity in between as aggregator. An ACH could be such an aggregator or incubate an aggregator on it's superstructure. However, that would need the community bank ecosystem to connect into that ACH which comes with it's own implications of services, fees, standards, etc. On the other hand, such integration would bring different categories of banks and financial institutions on a single network-and even onto multiple networks at the same time. Purposing Open Banking for the rural and community financial services segment is a bit different than thinking about mainline commercial banks. Here, the emphasis is more on real-time flow of data, providing actionable insights and designing scalable partnerships between small institutions. The variables that lead to product adoption or approval for use(such as in case of loans) may be different too. For instance, many account holders may fall into the classical "thin file" category when assessed on conventional parameters. Such account holders typically are SMEs and farmers looking for a line of credit or individuals seeking short term bridging/emergency finance. The data required to evaluate and approve their applications needs a new generation of providers who are API-enabled. Large organizations such as telcos and tax authorities will play an important role here. They must have the confidence to provide access to relevant data as well.In other words, the consent management framework and the trust to be engendered is not only between the end-user and FI. It includes those who provide the critical inputs necessary for evaluating and approving transactions. It also means a lot of cross-selling and upselling of financial products, opening up a path to significant transactional growth. We are truly at the frontier of great things.