Hello Banks!

Technology is fueling customer expectations; digital bank within the bank is now inevitable
Hello Banks!
"In the past two years of the pandemic, we witnessed an unprecedented level of digitization and digital disruption, which has completely transformed the way in which public services are delivered."Pxhere [Creative Commons]

There is no denying the fact that the outbreak of coronavirus in December 2019 in the Chinese city of Wuhan, later taking the shape of an unprecedented pandemic of the century just in the beginning of the year 2020, not only consumed millions of lives, but also devastated the world economic order.

However, the pandemic-induced miseries at the same time brought a host of opportunities at our doorsteps to guide us to realign in line with the never-seen-before changing world order, particularly on the economic front, for betterment.

In fact, the deadly impact of the pandemic taught us lessons of the century, triggering radical changes not only in the way of our living, but also reshaped the economic processes on the whole.

In the context of changing lives, it’s the economics of living where a series of radical transformation has been set in motion.

The systems and procedures driving our economic processes have been highly impacted and most of these pre-covid processes are fast becoming redundant. In other words, the virus has made technology viral and with inevitable intervention even in small things.

Precisely, the biggest contribution of the pandemic on the developmental side is the huge push it gave to the digitization of the systems and procedures, particularly in the financial system.

In the past two years of the pandemic, we witnessed an unprecedented level of digitization and digital disruption, which has completely transformed the way in which public services are delivered.

Today, digitization is driving inclusion across the financial services’ landscape, education platform and healthcare ecosystem for all the citizens of the country.

Let’s focus on the radical changes it brought in the financial system. When we talk of the financial system, it’s our banking system which is in focus for the kind of massive technology-driven changes witnessed in its day-to-day operations.

As all of us know, the outbreak of the virus triggered the world’s largest digital revolution in India after lending huge impetus to the ‘Digital India Mission’.

Even as the ‘Digital India’ campaign was catalysed by the Prime Minister’s Jan Dhan Yojana PMJDY, launched in 2014, opening 420 million bank accounts, it was the Covid-19 infection which forced millions of people to board the information technology (IT) platform to conduct even small financial transactions.

Unified Payments Interface (UPI) launched in 2016, also got a huge push and trillions of transactions are being conducted through this channel of fund transfer.

Today, payments are made through a mobile phone not just at retail outlets but also peer to peer, completely redefining the way in which money is transferred between individuals. Besides, we have seen innumerable payment Apps which facilitate transfer of funds at lightning speed.

It is worth mentioning that India is working on its own version of “Open banking” through the Account Aggregator (“AA”) regulatory framework enacted by the RBI. The AA framework is envisaged to catalyse credit deepening among groups that have hitherto been under-served.

To be precise, in the ongoing post Covid-19 era, banks have been left with no option but to strengthen their information technology infrastructure to keep the digital banking momentum driving.

Today the people are using digital banking channels much more now compared to the pre-pandemic days. In fact, many banks saw a record growth in digital banking usage and have remained proactive in welcoming first-time users. Not only does this rise in digital transactions bode well for banks’ cost reduction plans, it is also contributing to top line growth.

Of course, banks are delighted to observe this increased digital adoption—they have spent the last several years persuading their customers to take up mobile banking. But the main question remains about the sustainability of this digital momentum in the post-pandemic world.

Various surveys reveal that the customers will likely continue to prefer the convenience of digital channels for simple, transactional activities, such as paying bills, transferring funds, etc.

To be precise, digital banking is establishing itself firmly as a separate set of modern banking practices in the banking landscape. The best thing that has happened is that the customers have welcomed these state-of-the-art banking practices and have shown keenness to keep themselves updated about digital banking features.

Many first-time users have grown in confidence using the digital banking products and services, at least for their transactional banking needs.

Notably, NITI Aayog last year in November, had proposed setting up of full-stack ‘digital banks’, which would principally rely on the internet and other proximate channels to offer their services and not physical branches, to mitigate the financial deepening challenges being faced in the country.

The Aayog, in a discussion paper titled ‘Digital Banks: A Proposal for Licensing & Regulatory Regime for India’, makes a case and offers a template and roadmap for a digital bank licensing and regulatory regime for the country.

We don’t have a licensing and regulatory regime for ‘digital banks’. As observed by the experts, such a bank would primarily rely on the internet to offer its services and not physical branches, all the while being subjected to the same prudential and liquidity norms as that of the incumbent commercial banks.

Some of the leading banks in the country are reportedly already preparing for having a digital bank within the bank. For instance, media reports reveal that the State Bank of India is looking to appoint an advisor who will revamp its mobile banking app YONO to enhance customer experience and ease of use.

The next generation of YONO, to be labelled ‘Only Yono’ will make SBI ready to launch a completely digital bank with a leaner and modular architecture with a personalized customer-centric design. And, if reports are to be believed, HDFC Bank too sees a space for a completely digital bank on the lines of what some other countries are doing.

Remarkably, Singapore, Hong Kong, Malaysia and China have all adopted strong digital licence frameworks, with other countries in the region watching closely. Regulators on the other hand, have highlighted a desire to work together to establish global standards.

Meanwhile, the success that India has witnessed on the retail payments and credit front, has failed to replicate when it comes to payments and credit needs of its small businesses.

The current credit gap and the business and policy constraints reveal a need for leveraging technology effectively to cater to the needs of this segment and bring them within the formal financial fold.

The point here is to capitalize on the power of digital banks as banks have to put a strong digital arm where lending is done digitally to reach even the smallest section of businesses and other needy customers.

Lastly, Precisely, the technology is fueling customer expectations to the highest level and digital bank within a bank will help the banks to meet these expectations.

Even as the Reserve Bank of India has already allowed the banks to open digital banking units (DBUs) to offer products and services in both self-served and assisted mode round-the-clock, the existing response of customers from all segments in adopting digital banking practices suggests that this is the time to have a complete digital bank within a bank.

Banks need to gear up their infrastructure in line with the growing demand of digital banking products and services. However, at the same time, the RBI has to work over time to encourage establishment of such digital banks with the existing banks with a separate set of regulations.

This will help the system, in the context of both banks and the customers, to observe digital hygiene.

(The views are of the author & not the Institution he works for)

Disclaimer: The views and opinions expressed in this article are the personal opinions of the author.

The facts, analysis, assumptions and perspective appearing in the article do not reflect the views of GK.

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