#32 Research as Infrastructure - The Case of IDRBT
Why Africa needs to build Fintech Research Institutes
Hi all - This is the 32nd edition of Frontier Fintech. A big thanks to my regular readers and subscribers. To those who are yet to subscribe, hit the subscribe button below and share with your colleagues and friends. 🚀
Sponsored Content:
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Event Notice
Gwera Kiwana, a Senior Ops Analyst at 11:FS as well as a host of the famous 11:FS Fintech Insider Podcast (I listen to all the episodes) is hosting a Fintech Insider event in Nairobi on the 15th of September and I’ll definitely be there. The details are below;
When: Wednesday September 15, 5pm - 8pm
Where: UNSEEN Nairobi Rooftop Patio - Wood Avenue
Contact: Gwera Kiwana - DM her on Twitter to book your space.
It would be great having you there!
Introduction
In June this year, I attended the Fintech Meetup virtual event which is one of the best things to happen to the global Fintech community. It’s organised like a virtual speed dating event where you can organise meetings with interesting people in the Fintech space. There is one organised for March 2022 and I highly recommend it.
During that meet up I met a gentleman called Abhishek who worked at the Institute for Development and Research in Banking Technology (IDRBT) in Hyderabad India. We spoke about IDRBT and some of the areas they are working on and I was super impressed. I later came to realise that IDRBT is the intellectual energy behind some of the biggest breakthroughs in Indian Fintech. From then I have always wanted to write about IDRBT but for a long time, I didn’t have the full framework for an insightful discussion about IDRBT.
Last week as I was writing about Fintech infrastructure, it hit me that academia and particularly the linkages between academia and industry are a critical bit of infrastructure that are essential for creating a successful Fintech industry. These linkages, if well designed, can then create a cluster such as the British Formula 1 valley that can be found in Oxfordshire. Here, almost all the top F1 teams can be found from Woking to Banbury where all the best engineers live and work. Of course, both Oxford University and Cambridge University can be found within this cluster. Formula 1 then is a decidedly British sport and the British Economy benefits greatly from this cluster not only in terms of GDP but also in terms of expertise and learnings in engineering.
For this article, I will start by introducing IDRBT, highlighting some of its achievements, and then discussing how an IDRBT type institution can work in Africa with examples of similar institutions such as the Kenya School of Monetary Studies. Throughout the article, I’ll comment on some institutional and cultural issues that need to be considered.
IDRBT
“Bill Gates has once said “Banking is necessary but banks are not”. The next generation banking should aim to provide customer-centric features, giving users an extremely personalized experience while at the same time providing increased intelligence and automation to help banks sell appropriate products and services to their customers. Changes in demography and how banks reposition themselves to reap the advantages of demographic dividend will be a crucial deciding factor for the success of a bank. The GenNext banks would be providing life cycle wise products and services, right from birth till death, under one roof. The essential idea is that a relationship once built at birth carries on till death and all the products and services are made available under one umbrella. Technologically, next generation banking would mean several interconnected applications and flexible orchestration, driven by business needs, and without a long intermediation cycle. This would call for seamless access to their customers. ...The technology that will support this new world must be able to incorporate all these features and more. Our technology adoption was not customer-centric, it was employee-centric.” - K.C. Chakrabarty - Former Deputy Governor of the Reserve Bank of India at a IDRBT Roundtable in 2011
The quote above was from a speech given 10 years ago by the former Reserve Bank of India Deputy governor. It’s interesting that such concepts have started becoming mainstream only in the last couple of years whereas India’s Apex Bank was thinking like this at the very highest levels over 10 years ago. In fact, here’s another gem from the same speech;
I would pose a question here: What came first in this chicken and egg argument – technology or customer demand for technology? Does technology change customer behaviour or is it customer demand that influences technology in banking. In the earlier days, it used to be said about banking that: “build it and they will come”. However this will not hold well in the present day. Technology should work for the business in its aim to make its products and services relevant and accessible to its customers, instead of a fixed sunk cost that sits heavily on a bank’s P&L account.
The RBI has been at the forefront of thought leadership on global Fintech where India is now seen as a model country for Fintech adoption. Technologies such as UPI which is part of the India Stack may go down as some of the biggest achievements together with the Green Revolution that took place in the late 60s and early 70s.
Peer deeper and you’ll find the fingerprints of the IDRBT scattered across the current Indian Fintech ecosystem.
In the late 80s and early 90s, there were significant reforms going on in the banking sector as it moved from the nationalisations of the 60s and 80s. As the industry became more dynamic, there was increased adoption of computer technology both in banking processes and payments. In the year 1993, the Employees' Unions of Banks signed an agreement with Bank Managements under the auspices of Indian Banks' Association [IBA]. This agreement was a major breakthrough in the introduction of computerised applications and development of communication networks in Banks. As computer adoption increased, it was felt at the top management level that there needed to be an institute that would conduct applied research on banking technology and also train bank staff through both certified and academic programs.
In 1994, RBI instituted a Committee on Technology issues relating to Payments System, Cheque Clearing and Securities Settlement in the Banking Industry. The Committee was under the leadership of Mr W.S. Saraf, then an Executive Director of RBI.
One of the suggestions was Setting up a Research Institution on Banking Technology:
“12.10 The industry needs a core Computer Group capable of developing sophisticated application software at bank/industry level... This group should not only possess a very high level of skills in IT but should also possess expertise in banking/finance/accounting/audit etc. and be conversant with the latest developments in these areas. A new generation of Techno-bankers who are software engineers specialising in financial management or bankers/accountants/managers with Information Technology expertise may emerge.
The Committee is of the view that the above interests will be best served if a specialised Institute of IT is set up to cater to the specific IT requirements of the Banking Industry. ...The Institute will not only develop technical personnel of a high calibre (comparable
to the Institutes of Management) but also undertake research projects in IT as applied to Banking and Financial Sector. The
Institute may take up specific projects for software development on a turn-key basis.”
In 1996, the Institute for Development and Research in Banking Technology (IDRBT) was formed as a society by the Reserve Bank of India with Mr. Saraf as the first director. The focus of IDRBT is applied research where the institution researches on how advanced technology can be applied to solving problems within the Indian financial system.
One of the first projects by the IDRBT was developing a VSAT system for bank communications. Later projects included;
INFINET - Indian Financial Network - a Closed User Group including the RBI and Member banks. This is the network platform for the financial system that hosts RTGS, NEFT and RBI e-kuber (The Core Banking Solution) of the RBI;
Structured Financial Messaging System (SFMS) - India’s backbone for structured financial messaging - think SWIFT. SMFS supports ISO 20022 and is backed by INFINET to support RTGS and NEFT;
Indian Banking Community Cloud (IBCC) - a cloud based core banking system targeted at community and village financial institutions enabling them to offer banking services without heavy IT set up costs.
IDRBT has also played a key role in the development of the National Payments Corporation of India which supports the Unified Payments Interface (UPI). IDRBT developed and operated the National Financial Switch (NFS) which was transferred to NPCI in December 2009. Past Chairmen of NPCI have been former directors of IDRBT showing a revolving door of sorts where ideas flow freely between the RBI, NPCI and IDRBT.
In addition to its work in the development of core financial infrastructure. IDRBT offers PHDs, Masters Programs, Post Graduate certificates and Executive programs.
IDRBT Key Research Themes
IDRBT is organised around research areas, but I find their Research Centres particularly interesting.
Centre for Excellence in Analytics;
Centre for Excellence in Cyber Security;
Centre for Excellence in Mobile Banking;
Centre for Affordable Technologies;
Centre for Cloud Computing;
Centre for Payments Systems;
5G Use Case lab for Banking and Financial Services
I find some of the research areas they are working on quite useful.
Under the Centre for Analytics, IDRBT is studying;
Proof of concepts for big data analytics;
Conduct applied research in areas such as big data mining, soft computing and text mining.
Under the Mobile Banking sector - one of the key areas is the provision of a test environment for mobile banking applications to the banking sector as well other financial institutions;
The centre for affordable technologies is conducting applied research on open source technologies and other internet technologies within the realm of driving financial inclusion.
The centre for cloud computing is prototyping common centralised services to banks on clouds. I assume this could eventually include access to services such as INFINET. IDRBT also provides a suitable cloud platform to banks for testing.
The Centre for Payments is working on a host of things;
Tap and go payment solutions;
Alternatives to PoS solutions;
Cryptographic solutions for payments decentralisation;
Cryptography protocols for facilitating multi-hop transactions for use in banking contracts such as LCs and BGs. In a previous article on Bitcoin, I mentioned the importance of cryptographic protocols for next gen trade finance.
The 5G use case lab is carrying out interesting research with a view to build and demonstrate use cases for 5G in banking services. The following are some of the key initial use cases;
ATM-NR-VRAR: High bandwidth and low latency will enhance ATMs and make them more usable like bank branches with VR and AR capability. There could be a need for building cheaper and usable gadgets and software development kits
ATM-NG-BTS: The high-density requirement of (Base Transceiver Station) BTS can be extended to ATM centres. This could be disruptive and bring banks closer to network providers
ATM-NG-Reduce-Fraud: Digital adoption leading to high Volume, Veracity and Velocity of data improves fraud detection ability
MicroPayments-IoT-Gateway: Multiple devices connectivity feature will enhance growth of IoT. IoT devices-initiated payments will become new normal
FI-Frugal 5G: Frugal 5G is expected to improve connectivity in rural areas and thereby increasing opportunities for Financial Inclusion
Alt-Authentication: Sub millisecond latency and higher bandwidth can provide voice and other biometric authentications as an alternative to SMS
Mobile-IoT-Gateway – IoTs initiate payments, get authenticated by Mobile and then forwards the transaction to UPI.
In addition to all this, IDRBT provides extensive training across all its research centres to the banking sector participants.
Benefits of an IDRBT;
In Africa and particularly Nigeria, we have seen erratic responses to Fintech players from the apex regulator. In Kenya, innovation has proceeded at a glacial pace and the burden of innovation is placed on Safaricom. In South Africa, the banking sector runs the show and the future of fintech innovation so far seems to be bank-led. Across the world, a hybrid of market and government driven regulatory edicts seem to be the standard. Recently, the US Administration released a set of executive orders that laid the framework for Open Banking.
Nonetheless, there lacks in most of these markets coordinated thinking and understanding that sits at the intersection of advanced technology, business and societal requirements.
In Kenya for instance, in the late 80s and early 90s, the banking environment riddled with bad debts and poor management called out for an institution that created the conditions for improved bank prudential management. This birthed the Kenya School of Monetary Studies which was registered in 1997 and is a highly regarded institution in banking. As a side note, I remember my economics professor from university telling me of how highly regarded Kenyan monetary economists were in African academic circles. In fact, he told me that just like the Brazilian team in the World Cup, macro-economic conferences only kicked off once the Kenyan economists arrived.
In 2011, Nigeria launched the Centre for Financial Studies for similar reasons as the KSMS just much later. A lack of well trained management was considered a factor in the 2009-11 banking crisis in Nigeria.
Interestingly, it seems that both the KSMS and the CFS of Nigeria have succeeded because the regulators in both markets as well as the bankers are risk averse and somewhat wary of technology. Indeed, we shape our houses and then our houses shape us.
In my view the following are the key benefits of an IDRBT type institution;
Applied research
The Central Bank is at the forefront of applied research across multiple advanced technologies. I have been concerned about the role of technology import in the banking sector and recently Nigerians have been complaining about the role of a Barbados based technology company in the design of the CBDC. We may not be the ones to create or develop modern technologies, but we have to understand them in depth and apply them to the development of our financial systems. The Indian Banking Cloud is a perfect example of how an institution can design the frameworks for inclusive finance whilst applying modern tech.
Tech Leadership
If the Central Bank in each country is managing and overseeing advanced tech research, then it is likely to be less sceptical of technological advancements brought about by the banking sector. Most likely, these innovations will already have been studied. The Central Bank can then guide the financial industry on how these technologies can be applied. In Africa for instance, there is an issue about data and cloud computing with banks barred from hosting their core systems on cloud. In principle, mechanisms exist where concerns around data sovereignty can be handled whilst still embracing cloud computing;
Culture
I was having a talk with a Nigerian Fintech founder and he mentioned to me how part of the issue with the CBN is that most previous governors have all been ex bankers and thus bank thinking dominates. In Kenya on the other hand, most governors have been academics. Such small things may go unnoticed but they really matter. Consider it a Conway’s law but in this case defining organisational design rather than software design. If advanced tech guys can be part of the revolving doors between banking and central banking then some of the mind-set issues that top leaders complain about could be resolved. Tech needs to shape our houses;
Inception Theory
Tying all the above is the power of the idea. I don’t know how many of you have watched Inception, but according to IMDB, it’s one of the best movies ever created and directed by the legendary Christopher Nolan who also directed Batman: The Dark Knight Rises. The plot of the movie revolves around Dominick Cobb and Arthur who use advanced military technology to infiltrate their target's subconscious. This way they can either implant an idea or potentially delete one.
The main take, at least for me was that ideas are powerful and to effect change, it’s important to spread powerful ideas. Recently, we’ve seen the power of ideas carried through pop culture such as MAGA (Make America Great Again).
Now you’re probably wondering what Inception and MAGA have in common with IDRBT. Well, the underlying theme is the dissemination of ideas. For instance, when it comes to payments in Africa, Kenya has released a “Vision 2025” document that covers the evolution of payments. South Africa has taken a similar approach and so has Tanzania. Nigeria has dabbled with CBDCs, Open Banking and “anything but Mobile Money”. Nonetheless, I’ve not seen any multi-faceted approach to fintech innovation coming from the Central Banks that ropes in all the players and all the potential use cases.
What if an African IDRBT set out payments infrastructure principles governing each element from authentication to settlements to CICO through a white paper that is officially adapted by respective Central Banks. The idea will be incepted and the houses will be shaped and through trial and error, this payments nirvana will be achieved.
Look for example at one of the principles governing UPI written by the NPCI: (Please read through this document when you have time).
“Innovation - Solution should be minimal, functional, and layerable so that innovations on both payee and payer side can evolve without having to change the whole interface. This unified layer should allow application providers to take advantage of enhancements in mobile devices, provide integrated payments on new consumer devices, provide innovative user interface features, take advantage of newer authentication services, etc.”
The above thinking is similar to VisaNet that we’ve studied before on the Visa article.
Areas for Research and Innovation;
The following are some areas that are worth researching on;
Agricultural financing - both insurance and financing. The issue is that agricultural financing suffers from significant information asymmetry. Financiers don’t know how agricultural seasons will turn out and neither do they know the quality and practices of each farmer. I’m sure something can be done around big data, digital ID and satellite imagery to create farmer profiles that can be passported whilst predicting weather patterns;
Regional trade finance - ECOWAS and EAC are quite well managed in terms of trade and commercial linkages. Can there be a messaging system that is integrated to one stop border posts. A use case could be smart contracts that enable easier payments upon for instance crossing the border and reaching the depot;
Financial inclusion for marginalised groups - This requires the India stack i.e. digital identity, biometrics and a basic payments account that is interoperable. Mobile Money has largely achieved a lot of this. Nonetheless there are use cases that are yet to be executed on mobile money such as direct debits for loan repayments;
Ideas on How to Develop a Research Institute
In 2020, the Monetary Authority of Singapore together with the National Research Foundation (NRF) and the National University of Singapore (NUS) launched the Asian Institute of Digital Finance (AIDF) which has the mandate providing thought leadership and strengthening synergies between research, commerce and regulation. WeBank and the Nanyang Technological University (NTU) launched a joint research centre to focus on AI in the realm of personal finance. The Bank of International Settlements as well as the European Banking Authority have launched Innovation Hubs which are largely meant to intermediate between regulators and the private sector.
Africa needs more of IDRBT and AIDF. This should have the following principles;
Launched and owned by National Central Banks but with the potential of being transferred to Regional Central Banks once they materialise;
Participation at EXCO level by national or regional banking associations;
Tie ups to a local university for instance University of Nairobi;
Academic driven with postgraduate programs both Masters and PHD. Of course executive training on emerging technologies must be provided;
Regional Hub and Spoke model with potentially an EAC cluster headquartered in Nairobi but with linkages to a Ugandan, Tanzanian, Rwandan and Burundian institute to drive co-innovation in areas such as regional payments;
Closing Thoughts
If you add academic research to deeper fintech infrastucture, the Fintech ecosystem can really take off. In fact, one can argue that there’s a chicken and egg problem here as well. What will come first, Fintech infrastructure or research capabilities? Central Bankers should rush to form the research capabilities. If you think about the fact that Indian Fintechs raised US$ 2 billion in the first half of 2021, and that a lot of the capabilities underpinning these Fintechs were created or defined by the IDRBT, then it’s really a no-brainer. Hopefully this shall come to pass.
As always thanks for reading and drop the comments below and let’s drive this conversation.
If you want a more detailed conversation on the above, kindly get in touch on samora.kariuki@frontierfintech.io