A digital leap of faith

Digital banking is widely touted as the future of banking in India as more and more consumers recognise its benefits. But is the ecosystem ready?

Recently, NITI Aayog released a report on digital banks, recommending a roadmap and new reforms for regulatory regime and licensing in India. The key recommendations include:

• Issuing a restricted digital bank licence to an applicant. This licence will be restricted in terms of value and volumes of customers serviced by the applicant. • Enlistment of all the digital bank licensees in an RBI enacted regulatory framework. • Issue of full-scale digital bank licence to licensees on satisfactory performance in terms of prudential, salient and technological risk management.

This report highlights the increasing importance of digitisation in the Indian banking system. It is clear that digitalization is the future of banking all over the world. This is reflected in the advent of open banking, introduction of BaaS (Banking as a Service), and the rise of the Indian fintech sector. The share of digital banks in India is 26% and expected

CHALLENGES IN GROWTH OF DIGITAL BANKS

1. Evolution from traditional banking system

Ancient banking systems are written in COBOL programming language, which is very hard to adapt to modern technology.

2. Brick and mortar vs Fully digitised banks

While the concept of digital banks is increasingly supported, a sizeable population still finds physical banks to be more secure.

3. Competition from nonfinancial institutions

Digital banks are facing fierce competition from non-financial institutions like Facebook and Whatsapp that allow users to transfer money online.

4. Internal barriers within bank departments

Financial institutions need to provide effective training across their departments and staff.

to cross 46% by 2027. Digital banks offer the following key benefits:

a) For customers

• Higher sense of control over their funds • Access from anywhere, anytime • Faster processing • Hassle-free transactions • Higher security

b) For financial institutions

• Automating tasks • Keeping customers up-to-date • Higher customer retention • Reduced risk of fake currency via cashless economy • Better penetration in rural areas • Access to customer data to design personalised products

Government initiatives like PMJDY and Digital India have played a major role in the development of the digital banking sector and the pandemic has catalysed the shift towards digital payment platforms. Moreover, competition from nonfinancial institutions has also accelerated the development of digital banking.