CAIIB BFM Module A Unit 10 : Technology in International Banking

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Sep 8

CAIIB Paper 2 BFM Module A Unit 10 : Technology in International Banking (New Syllabus)

IIBF has released the New Syllabus Exam Pattern for CAIIB Exam 2023. Following the format of the current exam, CAIIB 2023 will have now four papers. The CAIIB Paper 2 (Bank Financial Management) includes an important topic called "Technology in International Banking". Every candidate who are appearing for the CAIIB Certification Examination 2023 must understand each unit included in the syllabus.

In this article, we are going to cover all the necessary details of CAIIB Paper 2 (BFM) Module A (INTERNATIONAL BANKING) Unit 10 : Technology in International Banking, Aspirants must go through this article to better understand the topic, Technology in International Banking and practice using our Online Mock Test Series to strengthen their knowledge of Technology in International Banking. Unit 10 : Technology in International Banking

Introduction To Digitization In International Banking – An Overview

In the Banking industry, especially with regard to International Banking, technologies are revolutionizing the profile of the banking industry and tearing the barriers to entry and opening doors for new financial service providers.
Competition from the startups, internet giants and the financial service providers from outside of banking, along with the increased regulations are forcing banks to accelerate their digital revolution.

Building a truly digital bank

Rethinking customer experiences and developing efficient, effective operating models that facilitate an open ecosystem of the participants are enabled by the underlying processes, technologies and organizational structures.
Many of the Banks who started with technology have started reengineering their architecture in order to support the updated developments in the field of digital banking, especially with regard to International banking.
Banks need to space out their architecture based on their specific strategy and readiness to compete in the digital arena.
Their efforts will need to be strategic in order to reach the objectives with available capital and within an acceptable time frame, thereby increasing the customer's experiences in all the areas of international banking which the customer is involved with.

Digital strategy is based on a Bank's specific goal, vision and mission. The competitive content and target business model needs to be identified for digital reinvention.
Digital capabilities assessment: identify the business and IT Capabilities that the Bank should develop based on the existing models, technology driven in those models, assess the current digital maturity and the gaps existing, to help define the overall digital capability.
Alignment with the existing platforms and the changes required to support the desired digital maturity.
Organization, processes, culture, assets, technology and architecture are all affected by the digitization process and should be transformed to support a bank's digital ambition.
IT architecture alignment is a crucial element in the transformation of the operating models and the evolution of the Bank's business and IT architecture.
The entire process re-engineering should involve traditional systems of engagement and also the current digital enablers used in the front-office, back office and the other operational systems so that the experience of the customers, post advancement, will increase thereby leading to increased business growth
Once the go-ahead is decided, the digital re-engineering roadmap with the operating model, target architecture, bank's budget plan, resources and the risk appetite need to be defined along with the timelines, costs, resources, risks and the expected returns.

The following may be broad thoughts on upgrading the bank's digital re-engineering plans:

Making the bank more relevant to Customers with more flexible financial and non-products.
Relative benefits of speed vis-à-vis in-house talent.
Developing the digital eco-systems and platforms that deliver traditional and non-traditional products to customers.
Organization readiness to re-assigning, re-training and, if need be, recruiting additional resources.
Becoming pro-active and agile to customers responses and market request.
Self-assessment and driving team work to react to the changing market conditions and monitoring the progress at regular intervals and not simply following a plan.

Evolution Of Technology In International Banking

Technology has transformed the entire banking landscape in the past 5 decades and following is a brief takeaway on the stages in evolution of Banking technology in India.

Pre-nationalization period – most of banking activities were manual in view of the fact that the country's population was illiterate.
To take advantage of the increased savings habits and also the need for borrowing funds for the economic development, the customers increased their visit to the Bank's Branches for utilizing the manual services provided by the then Banks.
To take advantage of the increased savings habits and also the need for economic development of the country and reaching the banking services to the nook and corner of the country, the Government under the Nationalization of Banks Act, nationalized 14 Banks into government banks in 1969.

1969 onwards - Post-nationalization period – most of banking activities were centered around investment of surplus savings available with the population.
Though the need for borrowing was prevalent, many of the customers were unable to reach out to the Banks and hence the lending by the financial intermediaries were the norm of the day who used to charge higher rates of interest for their lending.
The country saw rapid progress through the nationalized banks and by 1980, the Banking Sector witnessed tremendous growth and appetite towards savings by the population who had surplus monies and borrowing by the community who had shortage of funds for their businesses increased.
1980 started the 2nd phase of nationalization wherein an additional 6 Banks were brought into the fold of the Government ownership.
The hunger for technology in banking started during this period wherein the Banking sector wanted to take advantage of the technological developments that were witnessed across the global developed countries.
There is no turning back since then and there has been good progress both in terms of business growth and the technological advancements in the banking space.
What started as ALPMs (Advanced Ledger Posting Machine) in the 1980s got converted into the data entry machines which resulted into introduction of computers in Banking.
To take advantage of Internet Banking, 1990s witnessed Banks taking strides into internet banking, ATMs, Credit Cards and the Debit Cards, slowly the activities turned to on-line banking.

Benefits And Limitations Of Technology In International Banking

Benefits: accuracy, speed, lower transaction costs ease of doing business, compliance, reduction in manpower, regulatory requirement, management Information system, continuity in business, etc.

Limitations: costs in Infrastructure, technical glitches, creating awareness amongst customers because of the widespread reach, putting in control limits for withdrawal and deposits may pose inconveniences to customers, customers service gets affected at times, security issues, cybercrime is on the increase and added to this is the frauds by external sources.

Digital Platforms In International Banking

Inward Remittances Online

A secured portal for on-line inward remittances from across the Overseas locations.
Online Money transfer from across the globe, by the NRIs from their country of location or any Overseas Bank from any country (FATF compliant countries) to any Bank account in India.
NRIs to get registered on the Internet Banking Platform of their Bank and get the log-in ID and the password from the Bank subject to adhering to the internal guidelines of the Bank relating to registration.
Register the receiver details, Bank details of the receiver, keep the receiver informed and book the transaction and the transfer the money.
Purpose code details to be filled in and many Banks only allow current account transactions and the regulatory guidelines needs to be adhered to be the remitter.

Benefits:

Quick and seamless transfers from any country (as long as the country is FATF compliant),
Fixed and fair exchange rates,
24/7 customer support.

Outward Remittances Online

A quick and seamless on-line portal for outward remittances.
Residents and NRIs, on request through an application form and subject to Bank's internal guidelines, will get on-boarded by the Bank for International Digital Banking.
Log in ID and password generated by the Bank to the Customer's registered email-ID.
Process flow

Banks may provide an internal control limit up to which the outward remittances can be initiated on line which would be well below the overall limit as prescribed under the regulatory guidelines

Status of the transaction initiated may be checked by the customer on-line including generating the MT 103. (Customer to Customer SWIFT transfer).

Benefits:

Fast, easy and convenient way of outward remittances.
Secure facility for transfer of money (in permissible currencies) via internet banking.
All purposes as permissible under Schedule III remittances as per the provisions of FEMA and subject the permissible limits under the relevant provisions.
Education, Family Maintenance, Self-transfer, Health services, NRE repatriation, etc., can be sent directly in beneficiary home currency (subject to permissible currencies) and facility available 24/7.
World Check List (scrubbing the inward remittance (remitters) and the outward remittances (beneficiaries) to comply with the US/UN/FATF sanction and the related guidelines will also be complied by the Bank through these on-line portals.

Trade Finance Portal

Web based online portal for International Trade transactions viz., Imports and Exports.
A web based online trade portal of the Bank for the trade finance transactions which enables customers of the Bank to initiate, authenticate authorize trade finance transactions in a paperless environment making it a sustainable trading service.
Anywhere, anytime banking for International trade transactions available on-line.
All trade transactions relating to Imports (including Buyer's credit) and all trade transactions relating to Exports (including Pre-shipment and Post-shipment) may be handled on-line through the trade portal.

Benefits:

Templated transactions and in compliance with the provisions relating to International Trade.
Bulk upload facility available.
Approval of the transactions by the corporate online through maker-checker facility.
Copies of advices, ready reference to debit and credit entries, SWIFT copies available online.
Details on limits sanctioned (LC/BG limits), limit availability, limits utilized, etc., available online.
Role based dashboards, overview of pending actionable items viz., IDPMS, EDPMS, Forward contract confirmations, etc., available for different user categories.

Foreign Exchange Rate Portal

Portal provided to the Corporates who meet the criteria set up by the Bank for getting on-boarded after getting the log-in ID and the password, as per the internal guidelines.
Enables the corporates to directly log on to the Bank's Internet Banking Platform and access the Foreign Exchange Rate Portal.
Corporates allowed to access the dealing room on a real-time basis for booking their foreign exchange requirements including Cash, tom, spot and forward contracts.
Corporates confirming the deals through the portal are under obligation to comply with the regulatory guidelines with regard to submission of underlying documents.
Non-compliance in respect of submission of documents will result in the deal automatically getting cancelled by the Bank and losses recovered from the Corporate in this regard.
Banks insist for executing a one-time Indemnity agreement while on-boarding to indemnify the Bank for any losses that could arise from non-compliance of regulatory guidelines.

Benefits:

Seamless interaction through the portal with the Bank's dealing room on rate movements.
Advisory from the Bank's dealers on the Inter-Bank markets and the latest developments on the exchange front.
Real time rate quotation basis.

Export Data Processing and Monitoring System (EDPMS)

The Reserve Bank of India (RBI) operationalized the Export Data Processing and Monitoring System (EDPMS) w.e.f. March 1, 2014 wherein the data pertaining to Export Declaration Forms (EDF)/ Shipping Bills (SB)/ SOFTEX would flow from the Customs/STPI/SEZ to the EDPMS Software and AD Banks were required to report lodgment and realization of these EDF/SB/SOFTEX in EDPMS.

Various enhanced versions of EDPMS with certain additional features which are supported through technology:

Reporting of advance remittances related to exports.
Reporting realization of EDF/SB/SOFTEX against inward remittances reported.
System based caution listing of exporters whose EDF/SB/SOFTEX were outstanding beyond 2 years and where extension of due date was not granted by AD Bank/RBI.
Issuance of e-BRC was introduced w.e.f. 16th Oct 2017, as a result of which AD Banks were to update the EDPMS with data of export proceeds on "as and when realized basis" to facilitate AD Banks to issue e-BRC only from the data available in the EDPMS.
However, the export transactions relating to Service Exports are not supported under the EDPMS Platform.
System based caution listing of exporters whose EDF/SB/SOFTEX were outstanding beyond 2 years and where extension of due date was not granted by AD Bank/RBI.
Issuance of e-BRC [e Bank Realisation Certificate] was introduced w.e.f. 16th Oct 2017, as a result of which AD Banks were to update the EDPMS with data of export proceeds on "as and when realized basis" to facilitate AD Banks to issue e-BRC only from the data available in the EDPMS.
However, the export transactions relating to Service Exports are not supported under the EDPMS Platform.

Import Data Processing and Monitoring System (IDPMS)

In order to enhance ease of doing business and facilitate efficient data processing for payment of import transactions and effective monitoring thereof, IDPMS has been developed in consultation with the customs authorities and other stakeholders.
Based on the AD Code declared by the importer, the Banks shall download the BoE (Bill of Entry) issued by EDI [Electronic Data Exchange] Ports from the BoE Master in the IDPMS.
For non-EDI ports, AD Bank of the importer shall upload the BoE data in IDPMS as per message format "Manual BoE reporting" on a daily basis on receipt of BoE from the Customer/Customs office.
ADVANCE PAYMENT: AD Banks will enter the BoE details for ORM associated with the advance payment for import transactions as per the message format "BoE Settlement.
In case of payment after receipt of BoE, the AD Bank shall generate ORM (Outward Remittance Message) for import payment made by its importer as per the message format "BoE Settlement".
Multiple outward remittances can be settled against single BoE and also multiple BoE can be settled against one Outward remittance.
In case of Import of services, the IDPMS platform does not facilitate reporting of such transactions or remittances routed through the AD Banks.
The AD Bank need to follow up with the Importer (for services) till such time the remittance towards which service imports are requisitioned are completed.

Fintech And Evolution Of Fintech In International Banking

Meaning and understanding FINTECH

Fintech refers to the synergy between finance and technology.
It can take the form of software, a service or a business that provides technologically advanced ways to make financial processes more efficient by disrupting traditional methods.
Digitization of financial services, normally provided by Banks, Credit Card Companies, Credit Unions, Investment Banking and other businesses within the financial services industry.
Used to automate investments, insurance, trading, banking services and risk management
Fintech is equipping the banking industry with tools that makes it more efficient than before.
Banking Institutions are using tools like the chat bots, to enhance customer experiences, mobile applications, etc to give the customers real time looks into their bank accounts and machine learning to secure against frauds.
Fintech is a new Financial & technology Industry used to improve financial services activities.
FINTECH is any innovative idea that improves financial service processes by proposing technological solutions according to different business situations, while the ideas could also lead to new business models or even new businesses.

Evolution of FINTECHs – A Snapshot

1866 – the first transatlantic cable was successfully laid between New York and London providing fundamental infrastructure for the period of intense financial globalization. FINTECH Version 1.0
1918 – FEDWIRE, the first electronic funds transfer with the help of telegraph and Morse Code
1950 – Diners Club and Amex Cards
1967 – though financial services were strongly connected with technology, the financial services remained mostly analogue i.e. using signals, codes until the first ATM machine by Barclays was introduced thereby switching from Analogue mode to the Digital mode. This came to be known as the beginning of Modern FINTECH i.e. FINTECH Version 2.0
1967 – first digital stock exchange and SWIFT (Society for Worldwide Inter-Bank Financial Telecommunication was established. Internet and Computers were brought into on-line banking.
2008 – brought in FINTECH Version 3.0 as a result of the financial crisis that erupted across the globe where people start distrusting traditional banking services.
2009 – Bitcoin introduced followed by other different crypto currencies. Google and Apple Pay introduces payment systems.
2010 - FINTECH Version. 3.5 mainly by the Asian countries where Entrepreneurs, Investors, Consumer businesses and Banks were introduced to FINTECH and FINTECH business applications.

FINTECH - Global Perspective

Global investments in FINTECH increased by more than 2200% from USD 930 Million in 2008 to more than USD 22 Billion in 2015.
In Europe, USD 1.50 billion was invested in FINTECH in 2014 with London based companies receiving USD 539 Mn, Netherland based companies receiving USD 306 Mn, Sweden receiving USD 266 Mn, etc.
FINTECH companies in USA raised USD 12.4 billion in 2018
Sydney is the biggest FINTECH center and contributes 9% to the country's GDP.
Monetary Authority of Singapore has pledged to spend USD 225 Mn in FINTECH in the next 5 years.
South East Asian FINTECH companies have increased Venture Capital funding from USD 35 Mn to USD 679 Mn in 2018 and to USD 1.14 Billion in 2019.

FINTECH and India

India has the highest FINTECH adoption rate globally.
Of the 2,100 + FINTECH companies existing in India today, over 67% have been set up in the last 5 years.
Of the 2,100 + FINTECH companies in India as of August 2020, 17% of the FINTECH companies are into digital payments, 17% of them are into lending, 14% into wealth, making India the second largest FINTECH hub after USA.
Fintechs are set to grow from USD 66 Billion in 2019 to USD 133 Billion by 2023.
As the country with second largest base of internet users, India has quickly adopted to the world of FINTECH.

Delivery Channels Under Fintech In International Banking

FINTECH and Artificial Intelligence

Artificial intelligence is the simulation of human intelligence processes by machines which combines computer systems and robust databases to enable problem solving in the Banking space.

The following are some of the scenarios where AI may be used:

Identify customers better – prospecting, sourcing, underwriting – onboarding of Customers, both Importers, Exporters, etc., who are involved in international trade with the Overseas buyers and suppliers.
Source business better – cash flows, business models, structures and managing global value chains, change in consumer demand and to better manage risks involved in international trade.
AI has the potential to be used to improve outcome from the international trade negotiations analyzing the economic trajectories of each economic partner under different assumption.
Identify the needs of the Customers and analyzing their inward and outward volumes, their overseas counterparties, periodicity of payments, collections, etc.
Business Intelligence of the Clients viz., processing ability, recovery analysis (credit management) understanding the maturity profile of receivables (Exports) and payables (Imports)
Credit Scoring – check on the credit worthiness of the Clients – lending is all about availability of data through which willingness/ability to repay can be analyzed, assessing financial statements and analysis, etc.
Fraud detection by fixing through threshold limits, regulatory compliance – working in tandem with the regulators, etc.

FINTECH and Big Data & Data Analytics

Data analytics helps stakeholders in International Trade to create new portfolios by using historical data and analyzing past trends and patterns in terms of international geographies, which are more prone to volatile movements of rates, exploring opportunities with countries with political stability, countries with robust infrastructure development, etc.
Big data is the use of advanced analytic techniques against very large, diverse data sets that includes both structured, semi-structured and raw data where refining these data helps in coming out with desired analysis.

The following are some of the application areas to big data analysis:

Data on customers is of high value to FINTECH Companies
Data on markets is of high value to FINTECH Companies
Consumer Preferences, spending habits, investment behavior can be extracted and used to develop predictive analysis.
Predictive analysis – refers to how consumers are likely to behave using past information and a mathematical algorithm.
Data helps in formulating marketing strategies.
Helps in fraud detection algorithm.

FINTECH and Robotic Process Automation (RPA)

RPA refers to the process of assigning manual repetitive tasks to robots instead of humans in order to streamline workflows in financial institutions.

The most widespread applications are:

Statistics and data collection
Regulatory compliances management
Communication and marketing through emails and chatbots
Transaction management

FINTECH and Block Chain Management

Blockchain is a system of recording information in a way that makes it difficult or impossible to change, hack, or cheat the system.
A Blockchain is essentially a digital ledger of transactions that is duplicated and distributed across the entire network of computer systems on the Blockchain.
Adopted at a large scale in the financial industry, primarily due to its ability to securely store transaction records and other sensitive data.
Each transaction is encrypted and the chances of cyberattacks are relatively low when block chain technology is employed and has created tremendous strides in the area International Trade Finance.

Advantages:

Disrupted Banks Trade Finance Technologies quite like the manner in which internet disrupted the media earlier.
It is a very highly secure and transparent digital ledger and relatively economical to operate without intervention of any third party
Creates a permanent record of all the trade transactions thereby creating a valid audit trail.

Advantages of Using Blockchain Technology in International Trade Finance

Real time review – financial documents linked and accessible through block chain are reviewed and approved on real time, reducing the time it takes to initiate shipment.
Transparent factoring – invoices accessed on block chain provide a real time and transparent view into subsequent short-term financing.
Disintermediation – banks facilitating trade finance through block chain do not require a trusted intermediary to assume risk, eliminating the need for correspondent banks.
Reduced counter party risk – BLs are tracked through block chain, eliminating the potential for double spending.
Decentralized contract execution – as contract terms are met, status is updated on block chain in real time reducing the time and headcount required to monitor the delivery of goods.
Proof of ownership – the title available within block chain provides transparency into the location and ownership of goods.
Automated settlement and reduced transaction fees – contract terms executed via smart contracts eliminate the need for correspondent banks and additional transaction fees.
Regulatory transparency – regulators are provided with a real time view of essential documents to assist in enforcement and AML activities.

Challenges in Using Blockchain Technology in Cross Border Transactions

Regulatory and Compliance issues are the 2 biggest factors - this is believed to contribute towards internal resistance to adoption of blockchain which is to be addressed.
An additional data layer along the payment process involving blockchain is to be introduced.
Using the data layer, the regulatory and compliance requirements to be implemented around the details of the transaction.
Transaction monitoring is another area which needs urgent attention.
Validating the details of the originator, validating the details of the beneficiary, FATF sanctions, OFAC sanction screening, etc.
The number and amount of suspicious transactions and the routing of transactions through high risk countries need to be monitored meticulously.

Blockchain Technology in the Indian Perspective

Indian Block Chain Infrastructure Co. Pvt Ltd – a company formed by 15 Schedule Commercial Banks in June 2021 having an identical stake of 6.66% by each of the Banks.
Block chain technology to use and /process Inland LC transactions within the country for domestic trade.
System will verify data using invoices on the GST System and e-Way bills which will quicken the transactions and also eliminate risk of frauds.
Eliminate paper work, reduce transaction time, secure environment.
Network connectivity between Banks and the clients.
Based on Infosys Finacle Connect.
All the involved parties can share a digital ledger across a computer network without needing centralized authority or intermediaries.

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CAIIB BFM Module A Unit 10-Technology in International Banking (Ambitious Baba)