Amritabha Maity
ABSTRACT
The banking sector is the most important sector in any nation. It is the basic foundation for building a strong economy and almost every other sector operating in a country is directly or indirectly dependent on the banking sector.
In the Indian economy also, the banking sector plays a crucial role by not only assisting the government in achieving its desired goals but by providing financial support for facilitating both internal and external trade. The banking sector has been playing its part in the economic development of our country, and its shift from the traditional banking methods to the use of online or digital banking has opened up new possibilities for a much brighter future in India.
This shift is expected to bring numerous advancements in the society, fostering greater development in India. The banking sector in the Indian economy functions by providing for credit to the various sectors of the society, side by side, by also receiving deposits from them. Thus, this research firstly throws light on the history of banking sector with its evolution and focuses not only on the meaning of digital banking but also on its implications on the modern economy. It brings to our focus laws relating to such type of banking and the changes fostered by such move.
This research uses doctrinal form of research on the various secondary data available online and in articles, to throw light on the recent trends in banking sector, making a brief analysis of the application of enhanced tools, like cybersecurity and digital tools. It also focuses on how this digital banking is helping create better and long term relationships with customers. And thereby concludes by reviewing the impact of such changes on the consumers or consumer welfare.
KEYWORDS: DIGITAL BANKING, FINANCIAL SUPPORT, CREDIT, CYBERSECURITY AND DIGITAL TOOLS
INTRODUCTION
The banking sector in India has seen numerous changes over the last few decades and is still being modified for the betterment of the people. Efforts are being made to increase the flow of transactions and ease the various processes, which earlier were only facilitated by traditional methods. The banking sector has evolved a lot and is evolving day by day with the inclusion of modern methods of banking, for making various transactions and deposits, which are now being deployed at great pace, all across India, for smoother functioning of the banking sector and other sectors associated with it. This change has not only resulted in ease of transactions but has also made it convenient to make payments, from the comforts of home. This in turn has reduced the use of paper for provision of various receipts and also extended the banking services to villages and remote areas. But to get a proper understanding of the banking sector, it is mandatory to know the history of baking sector or its evolution.
Bank is defined as a financial institution which accepts money from individuals, that can be withdrawn on demand, and also lends money to those in urgent need or requirement. The bank/banking sector is the base of an economy and the Bank of Hindustan was the first bank to be established in India by the East India Company. This bank was formed in Calcutta under the European Management and was one of its first attempts from where the origin of the banking sector can be traced. This evolution of the banking sector took place in three phases which has been briefly described as follows:
FIRST PHASE (1786-1969):
In the first phase, that took place between 1786-1986, a number of developments in the modern banking took place. The Bank of Hindustan that was established in 1770 ceased to exist in the year 1830, and three presidential banks were established by the East India Company. The Bank of Calcutta, Bank of Bombay and Bank of Madras were established consequently in the year 1806, 1840 and 1843 respectively. Subsequently, these bank were united to form a single bank by the name of State Bank of India (SBI) which is also referred to as the oldest bank of India. The Bank of Allahabad and Punjab National Bank were other such banks that came into existence after the revolt of 1857. And many such banks were formed during the time but later liquidated due to lack of a regulating authority.
As a result, the Reserve Bank of Indiawas formed in 1935 to operate the credit and currency system in India and also to act as regulatory body for all the other banks in India. Later the RBI or Reserve Bank of India was nationalised in the year 1949. RBI was mandated to consult or take permission from the government before taking any decisions on the policies of the bank as it was under the Ministry of Finance.
Although the first phase, also referred to as the pre-banking period, brought developments in the banking sector it failed because of various reasons like lack of machines and technology, frauds, human errors, fewer facilities and lack of proper management skills.
SECOND PHASE (1969-1991):
Following the Pre-Independence period was the post-independence period which observed some major changes in the banking industry. In this phase the government took steps to build a stronger banking system in India and the banking structure was divided into commercial banks and cooperative banks. Corporate banks were established under the Cooperative Societies Act, which was the only bank whose motive was not to earn profits. The nationalisation of banks was the main turning point in the history of banking system, and it took place in 1949. Fourteen largest commercial banks of India were nationalised, in which the private stake was transformed into public stake or basically government stake, for better distribution of wealth and breaking the ownership control by only few families. This step was also taken to reduce unequal distribution of wealth in the economy.
Nationalization of banks was seen as a positive move as it led to better economic stability and also resulted in strengthening the economy of India. But this move was heavily criticised at that time, since India was fighting a war with Pakistan and China, where India was going through severe economic crisis.
Despite the criticism, the nationalization of banks increased efficiency in the economy and the rural and agricultural sector was promoted to a large extent. These profits were directed towards the betterment of people or the society.
THIRD PHASE (1991-present):
The third phase which started in 1991 continues till present day. This phase is also denoted as the modern phase in which the banking sector is being taken to another level. New inventions and developments are taking place each day and new technologies are being adopted to ease the flow of transactions. The various procedures are being made easy and foreign investments are also being allowed to handle this change. The Government has opened up its economy and is allowing private and foreign investors to invest in India, with the formulation of policies to help the small businessmen and entrepreneurs. This phase has given rise to internet banking, mobile banking, e-banking and other such modern techniques of banking, with the introduction of ATMs, which is giving a whole new life to this sector.
Thus, a committee was set up by the government, under the leadership of Shri. M Narasimham, to manage the reforms in the banking sector and to provide stability to the nationalised public sector banks. Private sector banks were also introduced by the RBI later on, and this phase has been mainly marked by the shift of the Indian citizens to the use of online or net banking.
CONCEPTUALIZATION
Digital Banking has been defined as a type of banking which is done through a digital platform and which does not require any paperwork, as earlier required under the traditional methods. In simple words it is the availing of the banking services through online methods. It is also referred to as the automation of the traditional banking services and is a process which allows customers to access the services provided by a bank through an online or electronic platform. This makes it very convenient for its customers as it eliminates the requirement of a customer to visit the bank regularly.
Digital banking has helped reduce costs and has brought a number of benefits to the consumers, like being able to perform the banking functions easily from their homes, not having to visit the banks, allowing busy-scheduled people much convenience, with better ways of making payments and doing transactions. This also means that the online transactions can be done anytime providing a 24/7 facility for making any such transaction. It has facilitated paperless transactions and has also allowed its users to set up automated payments for paying monthly bills like gas, electricity, phone recharges, which also provides alerts before-hand to give details on upcoming payments and recharges.
Online shopping which is done worldwide has also been boosted during this time, with the implementation of online payments. This has provided customers with the facility of making payments at ease, which has in turn resulted in a vast increase in the use of online shopping platforms. Transfer of funds have become smooth like anything and in a matter of seconds millions and millions of money transfers are taking place worldwide. Rural areas have also benefitted with the extension of such banking services, strengthening the privacy and security of the customers.
LITERATURE REVIEW
It is beyond doubt that the advancements in the banking sector has improved its functionality but at the same time it has also brought many challenges for the banks. The coronavirus pandemic for instance has slowed down its digitalization and has limited the access of banks or banking hours. The pandemic has indirectly affected the banker-customer relationship, but it has in a way paved way for greater adoption of digital banking techniques, preventing from any harm/losses during the period.
In this context it is really important to know the difference between digital banking and online banking. Most of the time these terms are used interchangeably but there is a fine line difference between their meanings. Whereas online banking deals with its use for everyday essentials like transferring funds to friends/relatives, checking balance, reviewing everyday transactions, digital banking on the other hand is aimed at complete digitization of all its banking operations or services and reducing the need of physical banks for its customers. Thus, if digital banking is a master set then online banking is its subset.
Digital Banking has various modes of payments and some of the most important one’s include banking cards, Aadhar Enabled Payment System (AEPS), Unstructured Supplementary Service Data (USSD), UPI or Unified Payments Interface, mobile wallets, internet and mobile banking etc.
- Cards- Banking card’s function is not only limited to withdrawal of cash but also extends to other forms of digital banking and online transactions. Banks also issue a type of prepaid card, which is not directly linked to the bank account but can function through the money deposited in it according to one’s own convenience.
- AEPS or Aadhar Enabled Payment System allows customers or users to initiate banking instructions after successful verification of the Aadhar number and card.
- USSD or Unstructured Supplementary Service Data allows users to access mobile transactions by just dialling *99# and this does not even require an app or internet connection for its functioning. The provided number is applicable anywhere in the world but the bank has to be linked with the mobile number of the caller for making transactions.
- UPI or Unified Payments Interface, which is presently the most trending form of digital banking, has made transfer of funds much easier and smooth, using the VPA or the Virtual Payment Address without the need of entering all the banking details or the IFSC code, as was earlier required. It also allows one to access all the bank accounts in a single place enabling hassle-free transactions. Some of the most famous UPI apps in India are Google Pay, BHIM, PhonePe and others. The biggest advantage for these applications being able to make payments free of cost.
- Mobile wallets have the ability of storing bank accounts and details of card to facilitate easy access to the wallet and making payments anytime without having to remember the pins or the passwords. Some example of such wallets are Mobiwik and Paytm. However, a small fee might be charged in some cases and there is limit on the amount to be deposited in such wallet.
- Internet banking which is also referred to as e-banking means availing of the banking services using internet for opening and closing of accounts or transfer of funds. And it has been earlier defined as the subset of digital banking since it provides for only restricted functions.
- Mobile banking means using of all the banking applications and services online through the mobile phone.
BENEFITS OF DIGITAL BANKING
The study points out the various benefits of digital banking and how it is making the lives of people easier and convenient. It talks about the easy access of various functions from the comforts of home satisfying the needs of the people in a much better way. It enumerates on the all-time availability of such banking functions, eliminating the need to abide by the strict banking hours.
One of the most important changes brought by this digital banking was eliminating the need of paper in making transactions and focusing on paperless transactions, thereby providing better environment-friendly services. The use of automated payments has attracted a lot of users, which has not only allowed regular monthly bills like that of electricity, gas, mobile recharges and internet bills, to be paid automatically before due date, but one can also set alerts and reminders for doing so.
Online shopping has become easier than ever and the use of online payments has doubled customers over the years. All of these services are being made available to the remotest of places and even the rural populations are making the most out of these services. Risks relating to frauds and fund transfers have been reduced to a large extent and the privacy and security policies are being continuously strengthened, reducing risk of fake or forged currency. Lastly, aiming at promoting a cashless society, restricting or reducing the circulation of black money and ultimately lower minting demands of a currency.
OPENING OF A DIGITAL BANKING ACCOUNT
If an individual wish to avail the digital banking services, then firstly he/she needs to open a saving account with the bank, which can be done either by visiting the appropriate bank or by using the online bank website. And after uploading the required documents one can successfully avail the services from the comfort of their homes. Once the account is ready, the digital banking credentials will be forwarded by the bank. Thus, an individual to successfully create a digital banking account must be:
1. Someone who is more than 18 years of age
2. He/she must have both Aadhar card, PAN card and other valid documents
3. He/she must have completed the KYC process within twelve months of opening of the account since failure to do so might result in closing of the account thereby taking away the right of the individual to open a digital banking account with the same Aadhar or PAN number.
FINDINGS OF THE STUDY
DIGITAL BANKING IN INDIA
The study traces the beginning of digital banking in India and how it took a proper shape in the 1990s. It basically started with the ICICI Bank, and the reduced internet charges that helped in increasing the awareness among people on the benefits of using such type of banking methods. Subsequently, after the cost of internet services were further reduced, people started placing their trust in these services and consequently the banks also started proving a number of services online to facilitate ease of doing transactions and carrying business.
Earlier, it was hard to tell which is the best bank offering digital banking services, like opening up of savings account and availing of all the banking facilities, without having to maintain minimum balance in their accounts, but these days there are number of banks providing for such services and through the virtual debit card almost every service can be availed without any constraints. Various portals like HDFC and ICICI net banking also provide for various services. Some of the digital banks providing for zero balance savings accounts are Kotak 811, Axis Bank ASAP, Digi savings DBS and Indusland Online savings account.
The different banks offer different types of services and enables fund transfers in the form of IMPS (Immediate Payment Service), NEFT (National Electronics Funds Transfer) and UPI. Kotak and axis bank also provides for interest rate of 6% on digital savings banks account. Digital banks have been referred to under the Banking Regulation Act, 1949. The ways of issuance of deposits and extension of loans with full suite of services has been empowered to them by the Banking Regulation Act.
Advancements in the technology have helped in the development of the banking sector and the economy as a whole but it has also posed certain threats relating to the accounts getting hacked by potential hackers. And that is the reason why resources have been poured, for building better cybersecurity tools, that have the capability of appreciating threats in advance thereby protecting the consumer’s valuable information.
According to a survey by the Deloitte Centre for Financial Services 71% of the banks have increased their expenses on cybersecurity tools and other such enhanced technologies, with cloud storage and protection of data. These areas have been accorded the most important aspects related to digital banking since around 61% of these cybersecurity breaches or frauds have resulted directly or indirectly due to lack of proper infrastructure within those financial institutions. And because consumers are the main criteria, they shall be protected from such data breaches enabling customer satisfaction and retention.
FUTURE OF DIGITAL BANKING
According to a recent research report by the Deloitte, banks must have certain key drivers for being able to perform their functions digitally. Some key factors helping in their success are options of ordering currency, customizable standing options, features of card blocking, innovation towards safety vaults, analytics on financial management, integration with the channels of stock market investment and easily accessible assistance.
Although a complete transformation from physical banking to digital banking was not possible in such a short span but the coronavirus pandemic accelerated the process to a large extent, bringing unprecedented changes in the consumer behaviour, and use of payment apps
CONCLUSION
Lastly, the research concludes by bringing our focus on the effect of such changes on consumers. It enumerates the 21/90 rule which has been making significant impact on the changing lifestyles of people, which says that if people make a habit of using digital payments, then they will be permanently adopted to this change, due to the amount of convenience offered by it.
Also, emphasising on the ongoing pandemic which has accelerated this change and resulted in outcomes before even they were expected. The Covid-19 pandemic resulted in various restrictions like lockdown and social distancing, when people were unable to go out of their houses regularly to visit the banks for specific purposes, and the use of online banking was boosted remarkably as a result. Although people had started using digital methods of banking before the pandemic came into picture, but after the spread of the virus, it became a necessity.
This shift towards digital banking has already been in effect in most of states in India. Technologically advanced states like Bangalore, Pune are rapidly moving towards a fully digital society with almost no or least cash transactions.
In the recent round table conference of Informa Financial Intelligence’s FBX Banking Outlook, discussions on various matters like enhanced interactive bots, hybrid loan processes, with digital support and self-service suggestions are being considered for future implementations and better shape.
REFERENCES
· Digital Banking and Its Foray into The Banking Sector written by Tavaga April 14, 2021
- Digital Banking as The New Normal in 2021: What to Expect from Banks Brett Holzhauer
- Sharma, Gaurav. “What is Digital Banking?”. VentureSkies. Retrieved 1 May 2017.
- Kelman, James (2016). The History of Banking: A Comprehensive Reference Source & Guide. CreateSpace Independent Publishing Platform. ISBN 978-1523248926.
- Locke, Clayton (15 January 2013). “The irresistible rise of digital banking”. Banking Technology. Retrieved 9 May 2017.