Digital banking is promising a better banking experience for both customers and banks. However, it is without any doubt that the future banker is a digital banker. 

The potential of Digital banking is fruitful as it brings the unbanked into the banking segment. The major drivers fuelling the digital transformation in the Indian banking segment includes Government initiatives, BYOD and Social Media.

• Definition / Scope
• Market Overview
• Market Risks
• Market Trends
• Industry Challenges
• Technology Trends
• Regulatory Trends
• Market Size and Forecast
• Market Outlook
• Technology Roadmap
• Competitive Factors
• Key Market Players
• Strategic Conclusion
• References
• Appendix

Definition / Scope

Digital technologies when adopted in the banking sector enable enterprises to modify business process to attain operational and financial excellence. Moreover, they improve customer satisfaction substantially. 

The Banking sector in India is at the forefront of digital transformation with them offering services in digital avenues such as Internet banking to mobile banking to more recently, social banking application.

Deep penetration of the digital banking is set to continue with policies such as Digital India government policies with more focus on financial inclusion across the country set to gain stream.

Market Overview

The Indian Banking sector is currently valued at INR 81 trillion and is expected to become the fifth largest in the world by 2020, says a recent report by CII. The BFSI sector contributes 40% of the total revenues to the IT sector.

As digital technologies evolve around the concept of data sharing over public networks on a number of devices, ensuring privacy and security related with banks are the major concerns at all levels.

Hence digitalization will influence the core processes of a bank at a much deeper level, requiring them to revisit their legacy IT infrastructure and workflow.

A major differentiator due to the adoption of digital technologies by the banks is speed in customer query resolution, the response time and the extent of omnichannel support. A service oriented industry, where there is an expectation for customer service and response are instantaneous.

The digital technologies help assure customer expectations are met with instantaneous response and service at finger-tips and this is the major driving factor of the digital transformation of the banking sector.

Market Risks

Technology Risks

The major tech-related risks are Security and Privacy. The lack of standard protocols for issues of ownership, accountability and risks also act as a restraint. One of the risks that arises from the implementation of online Banking is the information security.

A common issue affecting information security is the lack of a Bank in implementing controls that lead to a loss in terms of privacy, causing misuse of sensitive and private information that may affect clients trust transactions in e-Banking.

The other technology risks include Vendor lock-in risks where in the banks are locked-in to the technology Infrastructure provider, Cloud related platform risk where the banks are challenged to pick the right cloud service for their applications, where the Public Cloud can be utilized for non-critical applications and Private Cloud for mission-critical applications.

Intense Competition from non-banking Entities

Several non-financial institutions offer services very similar to what digital banking is expected today. Social media platforms like Facebook, for example, have made it possible for users to send money directly to someone’s bank account.

Because they are not restricted by any rules as seen with financial institutions, it is hard for these financial institutions to cope. To begin with, social media platforms, for example, have a large fan base which unlocks huge opportunities for them to offer digital banking services.

Top Market Opportunities

Social Payments (P2P transfers and Online purchases)

A social payment is a payment made between two people without the trading of cash or bank details. The most popular forms of social payment are apps like KayPay (Kotak Mahindra Bank) and icicibankpay (ICICI Bank). 

Social payments can be utilized between two friends or can be used for transactions either in-store or online. Digitizing has the potential to dramatically reduce costs, increase efficiency and transparency, help build the infrastructure, and broaden familiarity with digital payments.

When governments shift their social, salary, and procurement payments and taxation and licensing receipts to electronic form, it creates a foundation upon which the private sector and person-to-person payments, such as international and domestic remittances, can build.

These platforms offer the opportunity to rapidly scale up access to financial services using mobile phones, retail point of sales, and other broadly available access points,

Leveraging technology to reinvent the banking business model

New advanced technologies allow banks to strengthen customer engagement with personalized, innovative offerings. The industry already leverages IoT with mobile apps, swipe cards, ATMs, card readers, and sensors. It also provides a new opportunity for real-time asset financing.

Some banks are already using blockchain technology to transform their business processes, as it offers secure, convenient alternatives to traditional bank processes. Lately, blockchain has been in the spotlight because of its ability to reduce fraud in the financial world.

Blockchain is already used in the financial instruments areas of banking, including payments (cross-border, peer-to-peer, corporate and interbank); private equity asset transfers; tracking derivative commodities; the management of trading, spending, mortgage and loan records, microfinance applications, and customer service records.

Looking at cross-border payments, for example, blockchain can be used to reduce processing time to minutes from standard times of three to six days.

This elevates the customer experience to a new level with lower cost real-time transactions. Stack processes improved by blockchain include clearing networks; international transfers; clearing and settlement; auditing, reconciliation, and reporting; and asset ownership.

Other technologies, such as machine learning, can help automate manual processes, of benefit to trading, fraud management, and customer segmentation activities.

Market Trends

Digital India Initiative

The initiative is improving the communication infrastructure and is developing the common platforms that will encourage the adoption of dig ital technologies in enterprises for example, Broadband Highways, e-Kranti, etc.

• Broadband Highways

One of the nine pillars of Digital India Programme is broadband highways. Under this programme Broadband connectivity will be provided to all the 2.5 Lakh Gram Panchayats, thereby providing internet connectivity to 2.5 Lakh Gram Panchayats with an estimated investment of Rupees 32,000 crore providing nationwide infrastructure through National Knowledge Network and National Optic Fiber Network. This initiative helps provide access to internet thereby increasing the awareness about digital banking and providing a platform to help avail digital services offered by the Indian banks.

• e-Kranti

The Mission of e-Kranti is to ensure a Government wide transformation by delivering all Government services including banking electronically to citizens through integrated and interoperable systems via multiple modes, while ensuring efficiency, transparency and reliability of such services at affordable costs.

BYOD driving Mobility and Cloud Adoption

Enterprises are embracing BYOD (Bring Your Own Device) as part of Enterprise Mobility to enable the use of personal devices and the concept of work anytime-anywhere to improve employee efficiency and effectiveness.

In the Customer-first world mobile is at the core and the business models are framed for collecting data and providing a truly omni-channel experience to the customer. Enterprises are moving to cloud to provide leveraged BYOD functionality.

Social Media

Social Media has been primarily used by Banks to predict Customer behavior, asses customer experience, market promotions and improve branding. In the last three years banks have used social media platforms such as Twitter and Facebook as mediums to transact.

Banks such as Kotak Mahindra (KayPay on Facebook) and ICICI (icicibankpay on Twitter and Pockets by ICICI bank on Facebook) have facilitated a number of banking services such as fund transfers, account balance and transaction checking, and even recharging prepaid mobile phones.

New Revenue Streams created by Digital technologies

Digital technologies enable Enterprises to unlock new revenue streams. For example, Analytical solutions help identify new patterns to create business models to improve revenue or create new revenue models. Banks are trying to integrate high-end analytics tools to the existing infrastructure and the bank’s core operations to gain insights on customers.

The insights collected would help banks generate additional revenue and at the same time, reduce the risk of being exposed to fraudulent activities.

Security and Privacy issues

Security and Privacy issues are the major barriers for digital transformation of the Indian Banking segment. Banks are wary about insecure application programming interface, confidential data leakage, and malicious attacks.

The lack of standard protocols for issues of ownership, accountability and risks also act as a restraint. One of the risks that arises from the implementation of online Banking is the information security.

A common issue affecting information security is the lack of a Bank in implementing controls that lead to a loss in terms of privacy, causing misuse of sensitive and private information that may affect clients trust transactions in e-Banking.

Migration and Integration

The legacy IT systems are not compatible with modern analytical tools and therefore incorporating them is an alarming challenge. This requires revamping the entire IT infrastructure to make it compatible with the advanced Data Analytical tools, this requires capital investments which add up to the Capital Expenses (CapeX) of the banks, and this is another Challenge.

Gartner predicts that the banking and securities sector in India continues to increase its investment in digital business. The total spending on IT will be around US$ 11 Billion in 2020, an increase of 9.1% over 2019.

 Non-uniform bandwidth

The non-uniform speed and non-uniform bandwidth infrastructure are acting as challenges for digital initiatives. The average Internet speed in India is 2.5 Mbps, which is the lowest average connection speed in APAC.

The immediate challenges for digital initiatives in India are non-uniform connectivity, speed and broadband infrastructure which are yet to be solved due to the poor infrastructure and requirement of huge investments into the segment.

Industry Challenges

Shortage of Skilled Labor

The lack of technical competence in many banks is alarming, as there is shortage of suitably skilled personnel in the market despite an abundance of Engineers in the country.

The main issue is with the skill shortage due to the attainment of training only by a few Engineers having knowledge of digital technologies, as there is poor facilities and lack of training institutes for the training on digital technologies. Companies are required to allocate extra budgets to train the existing employees and new employees during this digital transformation.

Lack of Standards

There is lack of regulatory standards such as compliance with laws and regulations and legal liability in the Indian Banking Segment. There is a lack of awareness about how the customer data is used or the ways in which their Internet use is mediated.

Privacy has less to do with where the data is stored than what is stored and how it is encrypted, processed and shared. While calls to regulate tech to prevent monopoly and protect consumers grow more strident, the ways to do it are unclear. Regulation is essential for implementing full-fledged digital initiatives. 

Clarity regarding IPOs and investment in R&D need to be developed. Licensing policies and taxation issues must be streamlined state-wise to suit the digital environment.

Internal barriers

For banking to be fully digitized, it means that both the banking system and employees will have to undergo a cultural shift. However, it is good to know that unlike other businesses, banks have a unique way of departmentalization, and this greatly influences the level of technology to be used.

While some department will benefit from a digital banking system, some departments will have to lay off some employees. Also, employee training may be required.

Technology Trends

Many initiatives adopted by the Indian banks are within social, mobility, analytics and cloud (SMAC) framework and related technologies. While some of them are still conservative, they have enabled banks to look at innovative ways of customer and employee engagement.

Social: Indian banks are not only using public social networks for consumer interaction, understanding customer sentiments, and personal branding, but also offering real-time money transfers.

Banks such as Kotak Mahindra (KayPay on Facebook) and ICICI (icicibankpay on Twitter and Pockets by ICICI Bank on Facebook) are few of the examples of the social banking solutions offered by Indian banks.

Mobility: The banks are adopting a mobile-first approach for launching their banking applications as more than 70% of the transactions that happened in 2019 were on mobile phones.

Besides increasing penetration of smartphones, the mobile first approach can be attributed to the development of user friendly application and improved awareness among consumers for using mobile applications due to the emergence of eCommerce.

Analytics: In early 2000, banks like HDFC Bank and ICICI Bank set up their Data Warehousing facilities and invested in the technology to analyze the immense data available.

With advancement in technology and reduction in cost of its application, man power, computing and analysis, banks are trying to integrate high end analytics tools to the existing big data warehouse and the bank’s core operations to gain valuable insights on customers.

The insights generated would open doors for new revenue streams or improve the existing revenue streams.

Cloud: Indian banks are using public cloud to move applications such as lead management, email services and human capital management which tend to fluctuate in volume.

Though public cloud provides benefits such as decreased total cost of ownership, increased flexibility and agility, relief from software licensing management, and reduced cost for hardware maintenance and IT talent, headwinds such as security, regulations and interoperability are preventing banks to move their mission critical applications to the cloud.

Regulatory Trends

Digital India Initiative

Digital India is a campaign launched by the Government of India in order to ensure the Government’s services are made available to citizens electronically by improved online infrastructure and by increasing Internet connectivity or making the country digitally empowered in the field of technology.

The initiative includes plans to connect rural areas with high-speed networks. The Government has invested around INR 32,000 Crores under the scheme to implement broadband highways to connect all the 2.5 Lakh Gram panchayats in the country to provide them with broadband facility.

This initiative augurs well for the digital transformation of the banking sector as citizens are getting connected to the internet which opens doors for their digital journey, thereby enabling them create digital bank accounts offered by banks such as Kotak Mahindra Bank and DBS Bank.

Aadhar Enabled Payment System (AEPS)

AEPS is a bank led model which allows online interoperable financial inclusion transaction at PoS (MicroATM) through the Business correspondent of any bank using the Aadhaar authentication.

It is a payment service empowering a bank customer to use Aadhaar as his/her identity to access his/ her respective Aadhaar enabled bank account and perform basic banking transactions like balance enquiry, cash deposit, cash withdrawal, remittances through a Business Correspondent.  

BHIM (Bharat Interface for Money)

Bharat Interface for Money (BHIM) is an app that makes payment transactions simple, easy and quick using Unified Payments Interface (UPI). It enables direct bank to bank payments instantly and collect money using a Mobile number or Payment address.

Pradhan Mantri Jan-Dhan Yojana (PMJDY)

PMJDY is a National Mission on Financial Inclusion encompassing an integrated approach to bring about comprehensive financial inclusion of all the households in the country.

The plan envisages universal access to banking facilities at least one basic banking account in every household, financial literacy, access to credit, insurance and pension facility.

The initiative envisages channeling all Government benefits (from Centre / State / Local Body) to the beneficiaries’ accounts and pushing the Direct Benefits Transfer (DBT) scheme of the Union Government.

Market Size and Forecast

The Indian banking system consists of 18 public sector banks, 22 private sector banks, 46 foreign banks, 53 regional rural banks, 1,542 urban cooperative banks and 94,384 rural cooperative banks as of September 2019.

In FY07-18, total lending increased at a CAGR of 10.94 per cent and total deposits increased at a CAGR of 11.66 per cent. India’s retail credit market is the fourth largest in the emerging countries. It increased to US$ 421 billion on December 2019 from US$ 281 billion on December 2017.

The Indian banks and securities segment is estimated to have invested in about US$ 10.08 billion in 2019, in revamping their platforms from physical medium to digital mediums such as Internet banking,  mobile banking, and other value added services such as Auto loans using biometrics, Missed Call Recharge, Instant loans at ATM.

The Indian banks are investing in emerging digital technologies, such as Artificial Intelligence (AI) and Blockchain, not only to create new product offerings but also to respond to evolving customer needs. As an example, the transition to cashless society aided by newer digital payment channels is creating opportunities for new digital technology investments in the sector.

Technologies such as biometric authentication, machine learning, chatbots are increasingly preferred as an investment opportunity by CIOs to deliver an enhanced user experience and enable digitalizing the sector. According to Gartner’s “Hyper Cycle for Digital Banking Transformation, 2019”, biometric technology would impact 20% of banking organizations in the next 2 to 5 years.

The Indian government has also given significant impetus to banks to invest in new technologies and harness the benefits of digital. The Union Budget 2018 was testament to the government’s focus on emerging technologies such as Artificial Intelligence (AI), Blockchain and more.

Among the first actions the Indian government undertook was to launch the Pradhan Mantri Jan-Dhan Yojana (PMJDY or Jan Dhan) financial inclusion programme on August 28, 2014. On the very first day that Jan Dhan was implemented, the government created 10 million bank accounts using existing Aadhaar IDs in a paperless manner, at a fraction of the previous customer acquisition costs. Demonetisation in 2017 was also a huge push to accelerate digital payments.

Market Outlook

The banking and securities sector in India is set to increase its investments in digital business, its spending on IT will total US$ 11 Billion in 2020 an increase of 9.1% from 2019 where a sum of US$ 10.08 by the segment for digital transformation in that year.

A number of benefits of digital transformation of the banking sector has been witnessed one of which is cost reduction, In 2019 HDFC Bank (the largest private and by market capitalization) has stated that it has been able to acquire customers at 10% of the actual cost due to their digital transformation.

Other benefits offered by digital banking are Improvement in Customer Experience due to Quicker Response time. Sales improvement as digitalization avails multiple channels for tapping customers into the banking channel.

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 coming years.

One important trend witnessed in the digitalization of Banking segment is the way in which  Internet & Mobile have been adopted as a channel for customer transaction, HDFC Bank states that 92% of its customer transactions are through Internet & Mobile in 2019 as compared to mere

Another significant trend witnessed is the increase in usage of prepaid payment instruments. The usage of Prepaid payment instruments (PPIs) for purchase of goods & services and funds transfers has increased considerably in recent years.

The value of transactions through PPI Cards (which include mobile prepaid instruments, gift cards, foreign travel cards & corporate cards) & mobile wallets have jumped drastically to Rs. 1032 billion respectively in 2018-19.

Technology Roadmap

Big Data and its impact on the customer journey

The banking industry is among the most data-driven of industries. Regulatory and insurance requirements mean banks must store many years of transaction data. The challenge is knowing how to translate that information into meaningful insights.

Big Data provides significant opportunities for banks to outshine their competition. Moving data onto a cloud platform provides a 360-degree view of every customer.

This deep insight shows banks where they can provide a higher level of service and create more value. Big Data also allows the use of disruptive technologies like artificial intelligence, blockchain, and IoT to map the customer journey and gain a competitive edge.

Banking on the cloud

Banks are racing to take advantage of market opportunities available through digital transformation. At the same time, they must manage the risks created by the new digital economy. There is a critical need for affordable computing platforms that provide greater agility.

There is no doubt new digital technologies are changing the banking industry. Banks that embrace innovation and adopt new technologies have unprecedented opportunities to change and improve how they provide financial services including offering the ability to:

1. Collaborate with financial technology partners to develop digital products.
2. Provide customers with seamless real-time, multichannel digital interactions.
3. Simplify and optimize business processes through standardization, optimization, and adoption of cloud solutions.
4. Build an open and agile platform that makes it easy to meet regulatory requirements.
5. Innovate with disruptive technologies like artificial intelligence (AI), IoT, and blockchain.

Competitive Factors

Some of the Key Competitive Factors in the Indian Digital Banking segment includes:

Improved Customer Experience

Banking entities that offer digital banking services with improved customer experience are set to dominate the segment with faster response time and efficient customer service.

As digital technologies improve the turnaround time for query resolution and value added services such as missed call banking and Peer-to-Peer Payments (Social Payments) is set to improve Customer Experience and offer edge over other players in the segment.

Lower Overheads

Digital banking has drastically reduced the operating costs of banks. This has made it possible for banks to charge lower fees for services and also offer higher interest rates for deposits. The banks that offer lower service fee and that offers higher interest rates are set to dominate the segment.

Key investments and developments in India’s digital banking industry include:

• In October 2019, the Department of Post launched the mobile banking facility for all post office savings account holders of the CBS (core banking solutions) post office.
• Deposits under Pradhan Mantri Jan Dhan Yojana (PMJDY) stood at Rs 1.06 lakh crore (US$ 15.17 billion
• In October 2019, Government e-Marketplace (GeM) signed a Memorandum of Understanding (MoU) with Union Bank of India to facilitate a cashless, paperless and transparent payment system for an array of services.
• Transactions through Unified Payments Interface (UPI) stood at 1.15 billion in October 2019 worth Rs 1.91 lakh crore (US$ 27.33 billion).
• As of September 2018, the Government of India launched India Post Payments Bank (IPPB) and has opened branches across 650 districts to achieve the objective of financial inclusion.

Key Market Players

The key players in the Indian Digital Banking Segment include Private Banks, Public Sector Banks and Non-Banking Financial Institutions, of this the predominant institutions include HDFC Bank, Kotak Mahindra Bank, ICICI Bank, State Bank of India and

HDFC Bank

It is the largest private sector bank and the largest bank by Market Capitalization in India. The Bank launched Digital Initiatives such as “Go Digital” and ‘Bank aapki mutthi mein’ offering, the Digital Transformation and Mobility Banking (DTMB) unit was founded in July 2014 with a view to positioning HDFC Bank at the forefront of digital innovations.

The Bank has launched digital products such as 30-minute paper-less Auto Loans using Biometric technology, 10-second Personal Loan on NetBanking, PayZapp, Chillr, LITE App, Missed Call Recharge, Instant loans at ATM and the recently introduced Robotic Assistant (IRA) at HDFC Bank branches.

Kotak Mahindra Bank

Kotak Mahindra is one of the pioneers of Social Banking in India offering services such as KayPay, which offers online money transfers using social media platforms such as Facebook; DigiLocker which is an initiative of the Government of India under Digital India, targeted at the idea of paperless governance.

DigiLocker is a platform for issuance, verification and storage of documents & certificates digitally, thus eliminating the use of physical documents.

ICICI Bank

ICICI Bank is the earliest adopter and provider of digital technology in India, the digital journey of the bank started in 1996 when it was the first provider of Internet /banking. ICICI Bank is also the pioneer of Social Payments as it offered platforms such as ICICIbankpay on Twitter and Pockets by ICICI Bank on Facebook. It has also launched a platform called “InstaBiz” which is a digital banking product for MSMEs.

State Bank of India

It is the largest Public Sector Bank and the third largest bank by market capitalization in India. SBI offers Digital Products such as SBI Digital Village, SBI Mingle, State Bank Buddy, State Bank Scribe, SBI Digi Voucher, SBI Video Statement and SBI Smart watch.

State Bank Mingle is the social banking application of SBI which enables you to perform basic banking activities through SBI official Facebook page. 

State Bank Buddy is a mobile wallet application that allows to send or receive money from any of the mobile contacts even if they do not have an SBI account. 

PayTM

Paytm E-Commerce Private Limited operates as a mobile payments and ecommerce platform. The Company offers an online shopping portal for digital and physical goods. Paytm E-Commerce serves customers in India.

Strategic Conclusion

Over the next 5 years, the adoption of digital technologies in the Indian banking sector will be driven by improvement in regulations pertaining to data sharing and ownership, sector specific services related to security and privacy, and enhancement in solutions and services compatible with changing new age consumer preferences.

Private and Public sector banks must focus on improving their legacy systems to make them compatible with new age tools. Rural banks and cooperative banks need to leverage the benefits of analytics and mobility to facilitate financial inclusion.

References

• https://www2.deloitte.com/content/dam/Deloitte/in/Documents/financial-services/in-fs-deloitte-banking-colloquium-thoughtpaper-cii.pdf
• https://www.researchgate.net/publication/268060917_Security_and_Privacy_of_Electronic_Banking
• http://www.oracle.com/us/industries/financial-services/efma-digital-transformation-wp-2904165.pdf
• https://digitalindia.gov.in/di-initiatives
• http://ficci.in/sector/3/Add_docs/Financial-Foresights-April-2017.pdf
• https://asianbankingandfinance.net/banking-technology/commentary/banking-in-digital-era-challenges-and-opportunities
• https://www.mckinsey.com/business-functions/mckinsey-digital/our-insights/six-digital-growth-strategies-for-banks

Appendix

• BFSI – Banking Financial Services and Insurance
• CII – Confederation of Indian Industry
• INR – Indian Rupee
• BYOD – Bring Your Own Device
• P2P – Peer-to-Peer
• IoT – Internet of Things
• CapEx – Capital Expenditure
• IPO – Initial Public Offering
• SMAC – Social, Mobility, Analytics and Cloud