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This article is written by Shreya Shambhavi who is pursuing a Certificate Course in Banking & Finance Practice: Contracts, Disputes & Recovery from LawSikho.

Introduction

Digital transformation of the banking sector in India is synonymous with the terms telebanking, online-banking, digital banking etc. The digital revolution vis-à-vis the banking sector starting in the early part of this century with banks focusing on reducing customer footfalls in their branches. This drive was to serve a two-fold purpose, firstly, with the reduction of customer footfall in the branches, the banks would need lesser man-power and lesser number of branches in a city or town which would obviously be cost-effective and economical for the banks and will result in revenue optimization and as a result more profit generation. Secondly, with the advent of superior technology aiding the banks to move towards digitization, have resulted into processes which are faster and more accurate when compared to traditional manual processes which were earlier in place in the banks for day-to-day business activities.

Digitalization in the banking sector, as per the current trend is mainly focused on transforming India into a cashless economy. I have been working as an in-house counsel for almost eight years now and I am certain when I say that banks endeavor to adopt latest technologies as far as feasible to enhance the customer experience in this fast-paced competitive world. With demonetization being a successful stint and government’s objective of Digital India, the aim now is to transit to an economy where all transactions shall take place on a digital platform which will result in leaving no room for human-errors, fraudulent transactions and restrictions on the black money which usually gets circulated within the economies were physical methods of cash management and transfer are preferred over digital methods.

Through this article, I shall discuss the steps taken by Indian banks in this regard by adoption of existing or emerging technology and the challenges being faced by them. I shall also discuss the legal position in the country that either assists/hinder the transformation of the banks.

Digitization journey

I believe we have come a long way since the onset of the digitization journey. Starting with the basic technologies with respect to cheque clearance i.e. MICR technology which helped in reduction of cheque frauds significantly. Subsequently, the concept of CTS based cheques were introduced in India and with the help of which not only the authenticity of cheque transactions can be verified and ensured in a much better way than before but also the turnaround time for processing inter and intra city cheques have reduced significantly. Now the RBI has further streamlined the cheque processing and management system by setting up national clearing houses in various zones of India, where inter-bank cheques are processed while following stringent parameters.

The advent of CORE banking system, ATM machines, and the various other electronic methods for fund transfers such as Real Time Gross Settlement (RTGS), Immediate Payment System (IMPS). National Electronic Fund Transfer (NEFT) and National Electronic Clearing Service (NECS) have helped in further reducing human involvement in processing banking transactions and have been significant steps in the path of digitalizing the Indian economy. These systems have been effectively synced with the mobile applications of banks which are also downloadable on any basic smartphone and hence, the customer can now process high-value cash transactions with just a click of button. Such convenience for the customers has only been made possible due to the introduction of digital banking within the banking system.

As has been mentioned by me earlier, all these steps have not only benefited the ultimate customer but have also helped these banks to significantly reduce their manpower and logistical requirements and now they are in a position to cater to a larger customer base with the same manpower and logistical support as was being used earlier. 

One of the most important benefits due to the introduction of these systems and processes has been rural inclusion or rural inclusive banking which has seen a surge in recent years. Earlier, due to manpower/logistical challenges, many banks including private sector banks had a very little rural presence. 

Due to this the rural population of India was still elusive with the concept of basic banking services, leave alone, digital banking. With the advent of digital banking, now basic savings accounts can be opened paperless and with the help of only the most essential documents confirming identification. 

This has led to an expansion of many private sector banks into the rural areas, where with the help of very limited manpower, they have been able to reach a large number of the rural population and are helping in providing them access to basic banking services like, account opening, cheque facility, debit cards, money transfer etc. 

The concept of Business Correspondents as introduced by RBI in 2006 has further helped in enlarging the scope of rural banking and now banks are not event required to open a branch in remote locations and they can appoint an agent to provide basic banking services to the customers. Such agents are appointed under the RBI guidelines on Business Correspondents, and they are able to provide banking services like money transfer, bill payments etc. by using the core banking software of the parent bank and the IMPS/NEFT transaction pipes of such banks.

Benefits of digitization

  • Use of high-speed internet at a cheap cost and smartphones for providing banking functions has made the basic banking facilities accessible to larger sections of population; 
  • No geographical barriers as it can reach customers at different counters/jurisdictions;
  • All-time (24*7) access to online banking transactions;
  • Usage of innovative technology i.e. use of electronic devices which saves time and energy of banker and customer;
  • Ensuring security of the transaction, thereby upholding customer’s privacy and transparency of the transaction.

Focus on FinTech: Regulatory Changes

One of the most innovative developments in the recent past is FinTech, which has heavily transformed the payments and lending system in India with a range of FinTech products. Both bank and non-bank players have now come together to provide their respective strengths to bring to customers easy to use financial products. In the payments sector, banks have partnered with technology platforms to manage the customer and product interface for both pre-paid and UPI enabled payment solutions. The launch of smartphones and the ease that it has brought into the lives of common man, has also provided an impetus to techies to build and innovate various financial products that can be used with the help of smartphones and high-speed internet. Mobile banking and FinTech has seen a tremendous growth in recent times. FinTech has a special role in leading the banks and non-banking institutions to re-think their business strategy. 

A few examples of these can be made with a reference to applications like Paytm, Phonepe etc. The advent of these applications have provided multiple options to the customers for making daily payments with the help of payment services like UPI, Open/Closed Wallets etc. These applications have seamlessly integrated their platform with the core banking systems of almost all the banks in India and due to which they provide quick and easy methods for making payments by the customers. From a simple over the counter payment to recurring payments like electricity bills, society charges, fees etc. everything can be paid through these applications. 

They have also integrated with the GOI billing system like Bharat Bills Payment System and by way of which any consumer agencies of the government can accept payments from their customers through these applications. Additionally, many schemes and discounts are also offered by them application providers to their customers to encourage digital spending and transactions by them.

Consequently, due to the advent of such payment options, the Reserve Bank of India has also taken cognizance and has introduced certain guidelines for effective operation and management of these services. The framework of regulatory sandboxes, notified by RBI is also a laudable approach to promote innovative thinking by listing down innovative products and services that could be tested under the framework. Such steps having been introduced by the regulator has increased the safety levels of these applications and shall also help in developing increased consumer confidence and reliability.

Conclusion

To summarize, we can definitely say that digitization of banking services has helped every sector of the Indian population. Technology integration of banking services is the need of the hour and it is safe to say that the processes and options which have been introduced in the Indian Banking Ecosystem are just the beginning. We can expect to see many more revolutionizing concepts and systems in the future which will further enhance the ultimate customer experience. The concept of digital retail and SME loans has just started to pick up speed in the Indian Economy with many small players providing options to middle income customers with small loans purely on a digital platform. Such entities are entering into various types of innovative and niche arrangements with banks and NBFCs which will only make the role of legal manager reviewing and advising on such documentation more challenging.


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