CHAPTER-05

TECHNOLOGY IN BANKING

Core Banking:

Core banking can be defined as a back-end system that processes banking transactions across
the various branches of a bank. The system essentially includes deposit, loan and credit
processing.

Features of core banking

Core banking systems serve as the system board to connect multiple branches on an "always
available" basis with real-time essential services, such as banking transactions and digital
banking online or on apps. Some of the notable core banking features that make up the
system are:

 Loan and credit processing: The process of reviewing credit applications for loan
applicants.
 Mobile banking: The features of a physical bank are in the form of a phone app or on
the web.
 Account management: Whether it’s in-person or mobile, customers can have access
to their account quickly and safely.
 Daily banking transactions: On-demand withdrawals, moving money and changing
account details are all processed because of a core banking system.
 Account onboarding: Existing customers and future customers are able to open a
new account or add to an existing one in an efficient and fast manner.
 Customer relationship management: The back-end system allows for secure
storage of customer data and generating reports as needed.

Benefits of core banking

Banks must consider size and budget when deciding on which core banking solution to use.
Core banking modernization provides a framework for banks to function as efficiently as
possible and provide options for scalability. The core banking system is a critical part of a
bank’s operations and overall system efficiency and success. Here are some of the many
benefits that a core banking system can bring to any bank.

Mitigate risk
Most core banking systems include high levels of cybersecurity to protect the infrastructure
from hackers and malware, and protect customer data. Advanced technology such as
encryption modules are used to mitigate fraud and credit risk. On the customer’s end more
security measures can include two-factor authentication and bio-verification for extra
security.
Improved customer experience
With more streamlined processes customers can get a more enhanced customer experience
(CX) when making transactions and managing their accounts either at a branch in person or
through online banking.
Increased compliance
Regulatory compliance is important for banks and the best way to manage it is through a core
banking system, which is an organized, central repository for all financial data.
Better productivity
The single-entity model of core banking platforms boosts operational efficiency and ROI by
connecting to multiple branches quickly. By cutting down on the time it takes to connect,
banks are processing transactions faster and more accurately.

Artificial intelligence:

Artificial intelligence (AI) is an increasingly important technology for the banking sector.
When used as a tool to power internal operations and customer-facing applications, it can
help banks improve customer service, fraud detection and money and investment
management.

Enhanced Customer Service with AI

Have you ever visited a bank’s website and noticed a chat window pop up, asking if you need
assistance? That’s AI in action! Chatbots, powered by AI, are becoming the new face of
customer service in banking. They can answer queries, help with transactions, and even
provide information about your account balance—all in real-time.
AI-Powered Fraud Detection
Security is paramount in banking, and AI is a potent ally in the fight against fraud. AI
algorithms analyze vast amounts of data to detect unusual patterns or suspicious activities in
real-time. This means that your bank can often spot fraudulent transactions before you even
realize it, keeping your hard-earned money safe.

Personalized Financial Advice

Remember the days when you had to schedule a meeting with a financial advisor to discuss
your investments? AI has changed the game. It can analyze your financial history, risk
tolerance, and investment goals to offer personalized advice. This not only saves time but
also ensures your investments align with your financial objectives.

Streamlined Operations with AI

Behind the scenes, AI is optimizing banking operations. It automates routine tasks, such as
data entry and document verification, reducing the likelihood of human errors. This
efficiency not only saves time but also reduces operational costs, which can translate into
better offers for customers.

Credit Scoring and Risk Assessment

When you apply for a loan or a credit card, the bank needs to assess your creditworthiness.
AI plays a crucial role in this process by analyzing your credit history, spending habits, and
financial behavior. This allows banks to make faster and more accurate lending decisions.

Chatbots: Your 24/7 Virtual Banking Assistant

Imagine having a banking assistant at your beck and call, 24/7, ready to assist with any
financial query or transaction. AI-powered chatbots make this a reality. They are always
available, patient, and capable of handling a wide range of tasks, from transferring funds to
answering inquiries about interest rates.

AI-Powered Investment Management

Investing wisely is a challenge, but AI can help. Robo-advisors, powered by AI, create and
manage investment portfolios tailored to your goals and risk tolerance. They continuously
monitor the market and adjust your investments accordingly, maximizing your returns.

The Future of Banking: AI and Blockchain

As we look to the future, the convergence of AI and blockchain technology holds immense
promise for the banking industry. Blockchain ensures secure, transparent, and tamper-proof
transactions, while AI adds intelligence to automate processes further. Together, they are
poised to revolutionize how we think about financial transactions and security.

Data Security and Privacy Concerns

While AI brings numerous benefits to banking, it also raises concerns about data security and
privacy. Banks must ensure that customer data is protected from cyber threats and that AI
algorithms are used ethically. Striking the right balance between innovation and security is a
challenge that banks are actively addressing.

Challenges Faced in the Integration of AI in the Banking Sector.

The widespread adoption of cutting-edge technologies like AI in banking is not without its
hurdles. Banks encounter several challenges in leveraging AI technologies, ranging from the
scarcity of credible and high-quality data to concerns about data security.

challenges:
Data Security:
Given the massive volume of data collected in the banking industry, robust security measures
are imperative to prevent breaches and violations. It is crucial for banks to seek out
a technology partner well-versed in both AI and banking, providing diverse security options
to ensure the proper handling of customer data.

Quality Data Shortage:

Before implementing a comprehensive AI-based banking solution, banks require structured
and high-quality data for training and validation. The use of quality data is essential to ensure
the algorithm’s effectiveness in real-life scenarios. Additionally, banks accelerating their AI
adoption need to reassess and modify data policies to address privacy and compliance risks,
particularly when dealing with non-machine-readable formats.

Explainability Challenges:
While AI-based systems play a significant role in decision-making processes by reducing
errors and saving time, they may inadvertently perpetuate biases from past instances of
 human error. Even minor inconsistencies in AI systems can quickly escalate, posing
substantial risks to a bank’s reputation and operational integrity.

To mitigate potential calamities, banks must ensure an adequate level of explainability for all
decisions and recommendations generated by AI models. Understanding, validating, and
articulating the decision-making process of these models becomes crucial for fostering trust
and minimizing risks.

Blockchain :

Blockchain is a decentralized technology that can be used in banking to improve the speed,
efficiency, and transparency of transactions. It can also help banks reduce costs and comply
with regulations.

FEATURES:

 Immutable ledger

Blockchain stores data in blocks that are linked together in a chain, making it impossible to
delete or modify the chain without network consensus. This creates an unalterable ledger
for tracking transactions.

 Reduced costs

Blockchain eliminates the need for third-party verification, which can reduce costs for
consumers and businesses.

 KYC process

Blockchain can create a shared database of customer identities and transaction histories,
which can help banks verify customer identities and track transactions in real time.

 Tokenization

Blockchain can create digital representations of physical and financial assets, which can
increase liquidity and operational efficiencies.

 Secure clearance system

Blockchain can keep payments and transaction methods between two parties, making it
safer to use.
Consensus

Every blockchain has a consensus to help the network to make quick and unbiased
decisions. Consensus is a decision-making algorithm for the group of nodes active on the
network to reach an agreement quickly and faster and for the smooth functioning of the
system. Nodes might not trust each other but they can trust the algorithm that runs at the
core of the network to make decisions. There are many consensus algorithms available each
with its pros and cons. Every blockchain must have a consensus algorithm otherwise it will
lose its value.

Unanimous
All the network participants agree to the validity of the records before they can be added to
the network. When a node wants to add a block to the network then it must get majority
voting otherwise the block cannot be added to the network. A node cannot simply add,
update, or delete information from the network. Every record is updated simultaneously and
the updations propagate quickly in the network. So it is not possible to make any change
without consent from the majority of nodes in the network.

Faster Settlement

Traditional banking systems are prone to many reasons for fallout like taking days to
process a transaction after finalizing all settlements, which can be corrupted easily. On the
other hand, blockchain offers a faster settlement compared to traditional banking systems.
This blockchain feature helps make life easier.

Blockchain technology is increasing and improving day by day and has a really bright
future in the upcoming years. The transparency, trust, and temper proof characteristics have
led to many applications of it like bitcoin, Ethereum, etc. It is a pillar in making the
business and governmental procedures more secure, efficient, and effective.

Decentralized
Blockchain technology is a decentralized system, which means that there is no central
authority controlling the network. Instead, the network is made up of a large number of
nodes that work together to verify and validate transactions. Each and every node in the
blockchain network will have the same copy of the ledger.
Transparency – The blockchain ledger is public and transparent, which means that anyone
can access and view the transactions on the network. This makes it a highly transparent
system that is resistant to fraud and corruption.