Trends of Digitalization of Documents in Global Banking
(Published in the Financial Express in December 2019)
Professor Shah Ahsan Habib
Globally, banks have been looking for new ways to make transactions easier, and for that digitalization is the recognized option. ‘Digitalization of documents’, until recently, has only been associated with paperless statements produced by a bank; however, it’s only a small part of a much larger equation; and practically, it is about all the practices banks can automate and make available online to create more productive, environment and user-friendly service interactions and transactions. Digitization efforts may be observed under key banking areas covering account opening and operation; credit operation; trade services operation; human resource operation and other key areas of banking.
The account opening process in general-banking signifies the first critical impression for both applicants and banks in banking business. In this age of digital transformation, the disadvantages of manual account opening and operation process are clearly detectable: rising costs due to operational inefficiencies, customer dissatisfaction resulting from lengthy, cumbersome tasks, and risk of regulatory non-compliance. In recent years, banks are driving to modernize their existing account opening applications. A digitized structure of account opening in banks might take the following shape: potential clients fill up forms online or in the mobile platforms and attach required documents to send to the banks; banks verify, identify and comply with customer due diligence requirements (fraud/AML/CFT screening); communicate customer with approval or denial; capture consent and e-signature; digital fund transfer by the clients. Within the banks, the documents are sent to the customer maintenance department to confirm the opening of the new account; and finally, the documents are archived in a central location.
Though banks are addressing the need for an end-to-end digital account opening process, practically, in most cases banks hardly use a digital- and mobile-first approach; instead, they simply move their branch and place their offline forms to the web and mobile and let their risk and compliance groups drive the process. Regarding identity verification, two common approaches are called as: ‘in person-verification’ and ‘knowledge-based authentication’. Most banks even force online and mobile applicants to come into the branch to verify their identity and sign documents. Only limited number of banks implemented online verification methods to meet their KYC requirements for their digital channels. The most common method is the use of Knowledge-Based Authentication or KBA, which involves queries to credit bureaus and verifying identity data with third-party databases. Unfortunately, some early challenge of KBA remains. There are opinions that most KBA failures are experienced by legitimate users who cannot answer the questions, because they cannot remember the answers, or because the public records are lacking or incorrect. Furthermore, KBA has become less reliable due to huge instances of data breaches that occurred in recent years as criminals are now better equipped to successfully answer KBA questions based on information posted on social media or obtained from phishing attacks.
The digitization is one of the major trends that have resulted in a drastic change in the lending industry in recent years. Credit is at the heart of banking operation and digitizing it offers significant advantages to banks and customers equally. With the latest advancements, the loan processing system changed drastically that paved the way to options such as initiation of loans from anywhere anytime through an internet connection and also acceleration of paperless system with the key advancements ranging from blockchain, artificial intelligence to Application Programming Interface (API) platform.
The benefits of digitizing credit process might bring remarkable benefits. One large European bank slashed its time on small- and medium-enterprise (SME) lending from 20 days to less than ten minutes, as observed in a study by Mckinscy. Digitization is also offering opportunity to deliver paperless mortgages. For example, NatWest is the first UK bank to offer a paperless mortgage. The bank’s customers can now apply for a completely digital mortgage which uses the latest technology to securely share and verify documents online. Customers do not need to post signed paperwork or identification back and forth. This marks the first time that a customer in the UK is able to apply for a mortgage without paper copies of documents being produced. All NatWest mortgages applied for over the phone offered paper-free, which could save over 4.4 million sheets of paper a year. With this proposition, mortgage offers can be made within 24 hours and an average offer is 10 days faster than before, as claimed. In advance of a call with a mortgage adviser, a customer is able to upload the documents required for an application, such as a driving license, passport or pay slips through a secure online portal. A telephone call with a mortgage adviser is then arranged at a convenient time for the customer, to guide them through the process. The customer is able to sign the final documents electronically using a mouse or tablet.
Trade services solutions have traditionally revolved around paper-based and physically intensive processes, involving contracts, purchase orders, bills of lading, etc., and requiring frequent manual data entry. These processes increase the potential for error, introduce business bottlenecks and are costly because of the need to generate paperwork, courier it to banks and obtain reimbursement. However, in recent years the pace of development in trade services has accelerated, and there are now numerous solutions that can help companies to reduce manual, paper-based efforts. Technologies such as Blockchain, Artificial Intelligence (AI), Internet of Things (IoT) and Machine Learning hold promises in solving banking problems, and have applications in Trade Finance.
The Letter of Credit’s (LC) evolution is powered by a few key trends which are occurring in the digital trade space and creating the foundation for future trade transactions. The emergence of truly digitized title documents, electronic bills of lading, electronic warehouse receipts, electronic airway bills has been a driver for early adopters as they seek to digitize their trade flows. There are global efforts to create supportive regulatory framework. Like UNCITRAL Model Law on Electronic Transferable Records was adopted in July 2017; and ICC working groups looking to agree on a common set of standards for electronic title documents.
Technology is bringing changes in the logistics, nature of products, products delivery channels, and documentation process. ICC finds, the elimination of paper from trade finance transaction processing could reduce cycle time by two hours per transaction, and the judicious application of technology to compliance-related processes and procedures could conservatively reduce compliance costs by 30 percent or more in the trade banking business. The ICC Banking Commission has launched a working group to coordinate all work relating to the digitalization of trade finance. The group aims to help the trade finance industry accelerate its progress towards greater digitalization. As part of the mandate, ICC is revisiting e-compatibility of ICC rules for trade finance; and revisions of eUCP and eURC are under process. Certain instances indicate that future of trade finance is digital and paperless. LC transactions in Australia, Singapore, and India represent a significant advancement of the digital block-chain based LC solution that validates the commercial and operational feasibility to establish a new era of digital trade.