Vipin Malik, Chairman & Mentor-Infomerics Ratings and Sankhanath Bandyopadhyay, Economist-Infomerics Ratings shares their point of view
As highlighted by the RBI’s July’24 report of the Currency & Finance, over the past three decades, a revolution has been transforming the world, its waves swooping across advanced and developing economies alike, with countries like India traversing its peak. The speed and scale of the digital revolution, as it is universally known, has overshadowed all past revolutions. Over the past decade itself, the global digital economy has grown 2.5 times faster than the physical world economy to account for more than 15 per cent of global GDP. Digital technologies are reshaping our lives through their impact on economic growth, employment, consumer welfare and living standards.
India’s retail digital payments are expected to double to US$ 7 trillion by 2030, driven by strong online adoption and growth in e-commerce, according to a Kearney and Amazon Pay study. The report highlights that around ninety per cent of surveyed consumers prefer digital payments, with significant adoption in both online and offline transactions. Leveraging increasing mobile density, Payment Service Provider (PSPs), both banks and non-banks, have started services using mobile as an access device as well as an admittance channel.
The current upsurge of innovations in payments system started with the rationalisation of decentralised electronic products like Electronic Clearing Service (ECS) and Electronic Funds Transfer (EFT) into centralised pan-India payment solutions like the National Automated Clearing House (NACH) and National Electronic Fund Transfer (NEFT) which enabled servicing customers spread throughout the country with settlement at a central location. This phase was assisted by the adoption of Core Banking Solutions (CBS)/centralised liquidity management solutions in banks which facilitating straight-through processing of payments.
The RBI has undertaken a focused survey conducted in March 2024 covering 25 scheduled commercial banks (SCBs) and 68 NBFCs, to gauge the following:
- Understanding the factors driving the adoption of digitalisation in banks and NBFCs.
- The extent of digital adoption in their business operations.
- The impact of digitalisation on customer acquisition and retention.
- Risk perceptions related to data privacy, cybersecurity, third-party and contagion risks, their preparedness to deal with such risks, and their views on the regulatory approach to FinTech.
Regarding the first context, it has been found that digitalisation is driven by the need to provide enhanced customer banking experience and remain competitive. For NBFCs, increasing operational efficiency, and improving risk management and compliance were the major driving factors behind digitalisation, along with motives like improving customer reach and gaining competitiveness.
Banks, NBFCs and FinTechs employ technology to provide new products and business models that expand credit access to sectors like households and micro, small and medium enterprises (MSMEs). Many banks have also introduced digital platforms in the primary intermediation services like bank deposit mobilisation and lending activity. While banks are, at present, mobilising only a small portion of their deposits through digital mode, the importance of this channel is perceived to be increasing rapidly.
One of the crucial challenges that have been emphasised is that technological complexity involved with FinTech poses potential systemic risks. Hence, successful collaboration requires careful planning, effective communication, and a combined vision for mutual growth and value creation. Cloud computing can help improve efficiency through cost reduction, faster processing, and business scalability and flexibility. However, while using cloud services, banks viewed regulatory compliance and data privacy and security issues as prime hurdles.
Digitalisation could pose financial stability concerns owing to cybersecurity threats, data breaches and the speed at which information and rumours can flow through the system. Cyber fraudsters are increasingly targeting financial institutions instead of end users globally. Consequently, cyber risks and frauds, third-party risks, and data privacy issues were indicated as the most significant risk factors by banks and NBFCs at the current juncture as well as going ahead.
Emerging technologies like Artificial Intelligence (AI) have the potential to impact the banking industry significantly in the next five years, but can also propagate challenges such as data privacy, reputational risk and model hallucinations (Model hallucinations occur when an AI model generates information that is not based on input data or real-world context).
In a nutshell, the survey suggests that banks and NBFCs in India are increasingly leveraging the digital revolution to reduce costs related to customer acquisition, transactions and employees, while favouring collaboration with FinTechs to maximise gains. Cybersecurity threats, implementation costs, legacy core banking applications and customer unwillingness are seen as the major challenges thwarting the adoption of digital technologies.
