The future of digital banking in India definitely looks promising. If we have to look back to see which industries have come up in the last couple of years, then it’s arguably the fintech industry that has seen the most notable changes, particularly the digital banking space. Adding to that, studies show that the Indian digital banking platform market was worth $776.7mn in 2021 and is expected to grow at a CAGR of 9.8%, earning an expected revenue of $1485.5mn by 2028.
The first thing that seems obvious is the pandemic. The pandemic led to a wide-scale digitalisation across industries, leading everyone to use more digital-based platforms. This led to easier payments, personalised assistance, and shorter turnaround times which enticed customers to use them even more.
Also, the smartphone market in India is one of the biggest. The availability of low internet charges just added to the adoption of using digital platforms and mobile apps to get the job done. The growing demand for smartphones in India and more number of internet users are expected to boost the demand for all-in-one banking platforms which will propel the market forward.
To understand where digital banking in India is headed, we need to look at its past. While most prominent banks in the country have a digital presence, they are not without their set of challenges.
Traditional banks that have a banking licence are required to have a minimum number of branches according to RBI regulations. This means having to set up bank branches at various physical locations. Doing this entails that these banks must incur high costs to maintain these locations and pay salaries to their employees. This makes it much harder for these banks to maintain and operate online.
Traditional banks still have to pay to maintain their offline branches. They have to allocate a substantial amount of money towards maintaining these locations. As a result, this takes away from one of the more prominent benefits of digital banking- higher interest rates and reduced fees.
While neobanks can afford to offer higher interest rates and lower fees owing to their online-only presence, they still have certain roadblocks. The most prominent problem with neobanks is that they’re not really banks. Neobanks are actually financial service institutions that do not have a banking licence and are not directly regulated by the RBI. This means that they cannot offer certain banking services like giving loans or issuing credit cards.
One glaring problem with the future of digital banking is addressing customers' grievances. Some customers still find it hard to trust mobile banking applications. In the case of a discrepancy, if they are not able to reach out to a support executive, unlike a traditional bank, they cannot go to a physical location to address their concerns.
While digital banking has a fair share of barriers when it comes to growth in India, there is still light at the end of the tunnel.
Neobanks have started to partner up with banks that are under the purview of the RBI. As a result, they can offer better banking solutions, which also makes it easier for the average individual to trust these banks.
The RBI has hinted at bringing neobanks under its purview. There are discussions about bringing these banks under the direct supervision of the RBI and also giving them digital banking licences. The RBI has put out guidelines for digital lending, as well as bank-fintech partnerships.
Perhaps the biggest factor in the growth of digitalisation in the Indian banking sector is its consumer demand. As technology advances, users are looking for multi-varied modes of banking. Tech-savvy youngsters have grown accustomed to services that can be accessed simply by clicking a button.
The Covid- 19 pandemic has accelerated the need to digitalise most services, banking included. As a result, we have seen the number of neobanks and digital banking platforms sharply increase in the last two years. The large number of new neobanks has resulted in increased competition in the digital banking space- which has in turn, led to massive growth. The use of UPIs and other cash-free methods of transactions has also been greatly emphasised post the advent of the virus.
It is hard to say if traditional banks will become redundant. Many people are quite accustomed to traditional banking services and may find it harder to make the change to digital. However, as time goes on, making the shift to a more digitised banking system seems inevitable.
Collaborating with digital-first financial service providers is one crucial way that will aid in adopting the technological challenges, thereby helping in growing the digital ecosystem. While compared to certain countries, India still has a ways to go when it comes to its digital banking presence. However, the recent RBI regulation changes point to a bright future.
Neobanks are also called “challenger banks” for the threat they’ve posed to the traditional banking system. They offer a more personalised banking experience, better interest rates, lower fees, reward systems, and so much more. They are also very convenient as being entirely online, they can be accessed from anywhere in the world. While there are certainly roadblocks and challenges in the way, it would seem like they are indeed the future of banking.
In India, we are going to see RBI regulations on neobanks and fintech companies change in the near future. While it is not certain if these financial institutions will be treated like banks, RBI regulations and a banking license will allow them to offer services like overdrafts, loans, credit cards, and much more.
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