• A high performing year for Indian startups shows the potential for the country’s financial services sector to deliver increased value.
  • As well as fintech, large digital ecosystems beyond banking are emerging in e-commerce, food tech, cab aggregation, payments, among others.
  • Continued digital progress is centred on an institution’s capability and willingness to transform its legacy systems through sustained new-age talent and processes.

The year 2021 was particularly spectacular for the Indian startup ecosystem, which saw 42 companies enter the coveted unicorn club. Twelve of these companies were from the financial technologies sector, the single largest sector amongst unicorns born during the year.

This statistic demonstrates two facts: first, there is considerable potential in the financial services sector to deliver value by embracing digital and second, the time to do so is now.

The exponential rise of startups in the financial technologies sector demonstrates that banks and other institutions have invested significantly in building their digital capabilities over the last several years and the evolution of digital infrastructure has enabled digital delivery. Besides, the COVID-19 pandemic has only accelerated the already evolving customer preferences for digital financial services.

The development of digital banking infrastructure in India is worth a special mention, as it forms the backbone for enabling financial services. The ability to digitally make payments, do digital-KYC verifications and allow customers to share their data with institutions to facilitate underwriting decisions is a unique global infrastructure. The possibility of creating a charge over securities online and searching for them digitally is another innovation.

How 'digital banking' is an enabling factor for financial services

India has taken a unique route of building these capabilities as a public service. Perhaps, one of the most successful modes of digital payments that have emerged is the Unified Payments Interface (UPI). Set up by the National Payments Corporation of India (NPCI) and supported by the banking system, UPI allows consumers to make instant payments to anyone from their bank accounts.

These payments can be made using third-party apps. In March 2022, UPI crossed 5.4 billion transactions in less than six years since its launch. UPI is instant and free to the consumer. The real success behind UPI is that it was set up as public infrastructure, unbundled payments and was made available to everyone.

Digital banking Payment System Indicators – Annual Turnover April – March (AePS - Aadhaar Enabled Payment System; ABPS - Aadhaar Payment Bridge System; ECS - Electronic Clearing Service; IMPS - Immediate Payment Service; NACH - National Automated Clearing House; NEFT - National Electronic Funds Transfer; UPI - Unified Payments Interface; BHIM - Bharat Interface for Money; NETC - National Electronic Toll Collection)
Digital banking Payment System Indicators – Annual Turnover April – March (AePS - Aadhaar Enabled Payment System; ABPS - Aadhaar Payment Bridge System; ECS - Electronic Clearing Service; IMPS - Immediate Payment Service; NACH - National Automated Clearing House; NEFT - National Electronic Funds Transfer; UPI - Unified Payments Interface; BHIM - Bharat Interface for Money; NETC - National Electronic Toll Collection)
Image: RBI

Similarly, India’s unique identification system, Aadhaar has been a significant enabler, with over 1.25 billion Indians enrolled on the platform. After a few setbacks, Aadhaar can now be used to conduct KYC for customers digitally. Additionally, the banking regulator introduced a video-KYC approach to enable the digital onboarding of customers.

India also recently introduced the Account Aggregator (AA) framework for data sharing. By using these account aggregators, customers can share their bank account details with any institution. Customers have complete control over their data, such as the purpose for which their data is being used, what kind of data will be used, what period, etc.

Several banks, including Axis Bank, are already providers and users of data on the AA framework. Many more are expected to join the bandwagon. Over time, data coverage is expected to expand beyond bank data to cover other sources such as income tax, goods and services tax, provident fund and utility bills.

The combination of these infrastructure elements can create magic. Imagine you’d want to buy your favourite mobile phone on an e-commerce app and a bank is offering you a loan to purchase it on the app.

You click on the app and the bank then requests you to share your bank account statement from another bank through the AA framework. The bank then initiates e-KYC using Aadhaar and finally asks you to set up regular monthly repayment instructions using UPI. Once done, the bank disburses the amount directly to the merchant and the phone is delivered to you.

While various versions of this model already exist, the power of this model to expand inclusion and significantly enhance the quality of life for a larger section of the population is remarkable. Digital adoption has already been taking mammoth strides and as per RBI’s recent reports, digital banking transactions reported a 40% year-on-year jump as of September 2021.

The composite RBI – Digital Payments Index (RBI-DPI) in September 2021 stood at 304.06, against 270.59 in March 2021. The total volume of digital payments nearly doubled during the financial year ended March 2021 at 43.37 billion against 23.26 billion in 2018-19.

Year-on-year growth of payments through Digital banking payments.
Year-on-year growth of payments through Digital banking payments.
Image: RBI

Banks' role in digital inclusion

In India, banks have been proactively driving the digital agenda. They have invested in technology, customer awareness and adoption. As a result, significant volumes have already moved to digital banking.

The emergence of fintech firms has also driven the adoption of digital, with their adopting a customer-centric approach and simplifying customer journeys dramatically. They have also played a significant role in increasing adoption by offering customers various incentives to move to digital platforms.

As well as fintech, large digital ecosystems beyond banking are emerging in e-commerce, food tech, cab aggregation, payments etc. and are now offering financial services at the point of sale that are completely digital. Today, booking a vacation, getting a loan to fund it, and purchasing forex and travel insurance all can be done at one place, at the click of a button.

Not without road bumps

There’s no denying that digital banking adoption also brings along some challenges with it, security and fraud issues being the foremost. Social engineering is one of the most common cyber-attacks that operates on the psychological manipulation of people into divulging sensitive data or credentials, which the hackers then use to commit fraudulent activities. With cyber security risks and operational risks becoming increasingly frequent, it is critical for institutions to keep improving their cyber defence strategy to maintain customer trust.

Finally, the continued progress of digital is centred on an institution’s capability and willingness to transform its legacy systems through sustained new-age talent and processes. Banks are now hiring more engineers than ever before as they look to in-source most of the development. With work pivoting around digital, workplaces, as well as the workforce, have evolved.

Newer models that promise greater flexibility and choices to employees while delivering operational resilience cost conservatism and innovation through technology are in demand.

These, combined with the institutions’ ability to change their mindsets, operating models and systems, will truly determine how far their digital strategies will be successful.