Digital Evolution in The Indian Banking System

With nearly 47 Million internet users and a GDP rate of 6-7 percent, India represents a digital economy. India has proved to be the biggest market potential for global players. This digital revolution is expected to generate new market growth opportunities, jobs and become the biggest business opportunity for businesses in the next 20 to 30 years. There was an ardent need for this digital transformation in the Indian Banking System during the late 1980s. Digitalisation was mandatory in order to meet customer expectations, and MIS reporting. To fulfill the need of the hour, a committee was formed by the Reserve Bank of India to introduce digitalization in the banks headed by Dr. C. Rangarajan, during the year 1988.

The banks have needed to adopt disruptive technologies to improve customer service and ensure unparalleled efficiency and service at all times. Banks have been adopting face-to-face interactions with the customers to provide meaningful financial services to the individuals and the businesses. However, this one to one interface has changed since the emergence of new technology to meet the evolving demands of the customers. Thus, branch banking changed to bank banking. Core Banking Solution (CBS) enabled banks to increase the comfort feature thereby delivering a promising step towards enhancing customer convenience. Different Core banking platforms such as Finacle designed by Infosys, BaNCS by TCS, gained popularity.

Core banking systems and the digitization of important services are necessary requirements for banks to provide innovative services. Digitisation has helped developments not only in the operational systems of the bank or customer services but also the new capabilities and services that are provided to customers these days.

The onset of the World Wide Web, truly revolutionized the banking sector and financial institutions to think out-of-the-box in meeting their customers’ needs. This led many banks to invest extensively in internet services and provide services over and above those offered at branches. A major driver for this change was the increasing competition among the private and commercial banks that started to digitalize their processes so as to improve their efficiency and customer service, thereby meeting the current pace of digitalization.

Banks have benefitted in several ways by adopting technological advancements. E-banking has resulted in reducing costs drastically and has generated revenue through various channels. The customer base has also increased because of the convenience of 'Anywhere Banking'. Digitization has reduced human error. It is possible to access any data anytime from any nook and corner of the world. As per The Avaya Banking Survey 2017, 51% of Indians use online banking channels and 26% of Indian customers prefer to access services via their bank’s website, and the same number would prefer to use a mobile app rather than talk to a human agent.

RBI is the guiding force for the banks informing regulations and giving recommendations. Commercial Banks in India have adopted the technology by way of Bank Mechanization and Automation with the introduction to MICR based cheque processing, Electronic Funds transfer, Inter-connectivity among bank Branches. The implementation of ATM (Automated Teller Machine) Channel has resulted in the convenience of Anytime banking. Strong initiatives have been taken by the Reserve Bank of India in strengthening the Payment and Settlement systems in banks.

According to recent surveys, today’s customers prefer to maintain multi-platform interactions with their banks. The number of times one visits the branch has reduced substantially and most of the transactions are done online, bills are paid online, cheques are deposited via mobile banking, etc. One of the major innovations that had transformed the Indian Banking System was the evolution of the smartphones era. This has helped to transform the traditional banking system by the introduction of apps that are used for transactions and other facilities.

Indian Government is actively promoting digital transactions. The launch of United Payments Interface (UPI) and Bharat Interface for Money (BHIM) by National Payments Corporation of India (NPCI) are significant steps for innovation in the Payment Systems domain. UPI is a mobile interface where people can make instant fund transfers between accounts in different banks.

Today banks aim to provide fast, accurate and quality banking experience to their customers. Today, the topmost priority for all the banks in India is digitization. According to the RBI Report in 2016-17, there are 2,22,475 Automated Teller Machines (ATMs) and 25,29,141 Point of Sale devices (POS). Implementation of electronic payment system such as NEFT (National Electronic Fund Transfer), ECS (Electronic Clearing Service), RTGS (Real Time Gross Settlement), Cheque Truncation System, Mobile banking system, Debit cards, Credit Cards, Prepaid cards have all gained wide acceptance in Indian banks. These are all landmarks in the digital revolution in the banking sector. Online banking has changed the face of banking and brought about a remarkable transformation in the banking operations. Source: Banking on Technology, Perspectives on the Indian Banking Industry

National Electronic Funds Transfer (NEFT) is the most commonly used electronic payment method for transferring money from any bank branch to another bank in India. At present, there are 23 settlements. Real Time Gross Settlement (RTGS) is primarily used for high-value transactions which are based on 'real time'. The minimum amount to be remitted through RTGS is Two Lakhs. There is no upper limit. Immediate Payment Service (IMPS) is an instant electronic fund transfer facility offered by National Payments Corporation of India (NPCI) which is available anytime and anywhere.

The usage of Prepaid payment instruments (PPIs) for the purchase of goods & services and funds transfers has increased substantially. The value of transactions through PPI Cards, which include mobile prepaid instruments, gift cards, foreign travel cards & corporate cards & mobile wallets have jumped tremendously from Rs.105 billion and Rs. 82 billion respectively in 2014-15 to Rs. 277 billion and Rs. 532 billion respectively in 2016-17. This is a remarkable development in the process of digitization in the Indian Banking System.

These increase in the number of online transactions and mobile apps’ usages clearly show the response of the customers to the rapid digitization process. According to surveys, Indians prefer a digital approach to banking, and will not hesitate to protest poor service. As far as the numbers are concerned, 37% of Indian respondents will change banks if they had a bad experience. With a larger population in the social media, the customers readily share their experience and ensure that everyone is aware of what is happening with the digitization process.

Today’s young and affluent customers are not only looking for smart banking services, but also for ethical investments that will go a long way in ensuring returns. This also ensures the holistic development of the community at large. Like every other service and sector today, the rapid advances of technology are set to take humongous leaps in the banking sectors as well leading into various prospective domains in the imminent future. The Indian Banking system is the early adopters of disruptive technology. This will help us go a long way to ensure that banks seamlessly manage this change and stay relevant and efficient in this dynamic phase of development.

In this era of digitalization, banks are increasingly becoming the marketplaces and each event is becoming a prospective opportunity. With a plethora of channels for bringing together customers and the banks, the need of the hour is to provide an integrated system for managing the customer lifecycle. According to a CII report, the Indian Banking System is currently worth INR 81 trillion and is expected to become the fifth largest in the world by 2020.

The BFSI sector contributes about 40% of the revenue for major IT companies. As digital technologies evolve around the concept of data sharing over public networks on a number of devices, ensuring privacy and security related to banks are the major concerns at all levels.

Many initiatives adopted by Indian banks are within the social, mobility, analytics and cloud (SMAC) framework.

Social: Indian banks are offering real-time money transfers apart from improving customer interactions and personal branding. Banks such as Kotak Mahindra (KayPay on Facebook) and ICICI (Icicibankpay on Twitter and Pockets by ICICI Bank on Facebook) have enabled a number of banking services such as fund transfers, account balance, and transaction checking, and even recharging prepaid mobile phones.

Mobility: Banks in India are considering the mobile first approach for launching a new application, as more than half of the total transactions that happened in 2017 were on mobile phones. With the emergence of E-Commerce, theirs is awareness among the public regarding the mobile applications.

Analytics: With the advancement in technology and reduction in the cost of its application, manpower, computing, and analysis, banks are trying to integrate high-end analytics tools to the existing big data warehouse. This would help banks to generate revenue and also lower the risk of being exposed to fraudulent activities.

Cloud: Banks in India are using the public cloud to move applications such as lead management, email services, and human capital management which tend to fluctuate in volume. Though public cloud platforms provide the advantages concerns of security, regulations, and interoperability are preventing banks from adopting public cloud platforms for mission-critical applications.

The major challenge of the hour is that the adoption of digital technologies will impact the core processes of a bank at a much deeper level. Security and privacy issues are the major barriers to digital technology adoption in banks. Banks fear insecure application program interface, confidential data leakage, and malicious attacks. The lack of a proper mechanism that decides on issues of ownership, accountability, and risks is also acting as a major barrier. Banks are also exposed to internal risks especially frauds by employees/employees in collusion with customers. The fear of losing money in the online transaction which is highly prevalent in the financially illiterate and the rural poor is a barrier to usage of e-banking. Lack of adequate knowledge among the employees as well as the customers is also a major setback which is preventing things from moving forward. These are a few challenges that the Indian Banking System needs to improve and thus would help take things forward.

As we move forward, business analytics and Artificial Intelligence (AI) has a potential to bring a major change. Robotics, enabled by AI, is expected to be the future game changer in the banks. Many private banks are planning to deploy Robots for customer service, investment advisory and credit-approval process to improve the services and be cost-effective in the long run. Digital Banking will be the most preferred form of banking in the forthcoming years.