The banking and financial sector is fast integrating technology to provide efficient financial services through multiple digital channels. The increase in financial and digital literacy is enabling users to explore the digital payment mode and are able to navigate gateways to make payments using debit and credit cards. Digital infrastructure in the financial sector when integrates with digital public infrastructure (DPI), the speed and digital reach multiplies. With the onset of the mission ‘Digital India’ in 2015, India is well poised to reach US $ 1 trillion digital economy by 2027-28.
Leveraging DPI could enable speedy financial inclusion. It was possible to issue 1.389 billion Aadhaar national IDs, introduce Digi lockers, and facilitate more than 10 million daily e-KYC transactions. 500 million individuals could access bank accounts, with 55 percent being women and 66 percent residing in rural areas. CoWIN app, roll out of 5G, 6G, internet and its accelerated speed impacted the digitalization of the life of the masses.
It enabled over 13 billion Unified Payment Interface (UPI) transactions in April 2024 alone, with a cumulative US $ 230 billion in value. DPI enabled the effective use of direct benefit transfer (DBT) across multiple Central Government Schemes that helped the government save over $41 billion by preventing leakages and transferring funds directly into bank accounts of beneficiaries. DPI thus enabled millions to be lifted out of poverty, providing new opportunities and creating enterprises. The Digital Personal Data Protection Act of 2023 protects against any data compromise.
1. Progress of digital penetration:
The financial sector witnessed phenomenal digital penetration and faster adoption by users more importantly during the last decade. Several innovative alternate digital channels were added to disseminate banking and financial services in addition to nurturing traditional modes as under:
Due to the proliferation of mobile/internet banking/digital wallets/tap and pay facilities (up to Rs.5000), the need for ATMs has come down. Nevertheless, the RBI data indicates that POS terminals, credit cards, and debit cards have increased significantly firming up the outreach of digital mode. The introduction of Payment Banks, Digital Banking units (DBUs), and India Post Payment Bank (IPPB) with a network of 650 branches and 1.37 lakh banking access adds substantial banking touch points.
According to the Telecom Regulatory Authority of India (TRAI), the
number of internet users reached 936.16 million as of December 2023, with 659 million smartphone users and 350 million feature phone users. In digital banking ecosystem, smartphones are capable of accessing banking services at any time, any place. RBI introduced UPI 123PAY for feature phone users to access banking services in March 2022.
The introduction of Pradhan Mantri Jan Dhan Yojana (PMJY) way back in August 2014 to connect people with the formal financial system has facilitated the opening of new savings accounts, issuing debit cards, and creating means of digitalization. Notably, 53 crore new bank accounts were opened under the PMJDY scheme in the last decade canvassing Rs 2.28 trillion of bank deposits. 11.59 lakh Bank Mitras (business correspondents) are providing branchless banking services to the account holders. The synergy of Jan Dhan Adhaar and Mobile (JAM) has been a critical differentiator in pushing digital orientation among users.
To measure the density of digital payments, RBI introduced the digital payment index (DPI) which grew to 445.50 in March 2024 increasing from a base of 100 in 2018. The fourfold growth of digital payments in the last 5-6 years indicates the increased user base and faster adoption of digital mode. Similarly, the financial inclusion (FI) index reached 64.2 in March 2024 starting at 43.4 in March 2017. Both benchmarks signify the increasing digital banking penetration.
2. Interoperability:
Interoperable technology has been the cornerstone of the digitalization of the financial system. Interoperability among service providers has been the key enabler in spread of digital financial services. It got a fillip when ‘Technical standards for Interoperability Framework for E-Governance (IFEG) in India’ was rolled out by the government in November 2010. It was followed by the launch of the ‘Digital India’ mission in 2015.
The next milestone came from NPCI when it facilitated the issue of
‘RuPay’ debit cards in March 2012 followed by innovating the unique Unified Payment Interface ‘UPI app’ in April 2016 integrating technology mode with retail payments.
With its help, digital wallets expanded the scope of digital payments
using QR codes and the ‘Bharat Interface for Money (BHIM) app’. The interoperable technology took digital transformation to a different trajectory where international collaborations are made possible. Indians can now use the UPI app in seven countries to make payments –Singapore, France, UAE, Mauritius, Bhutan, Sri Lanka, and Nepal.
The evolving FinTech and BigTech ecosystem and greater collaboration with Non-Banking Financial Companies (NBFCs) and spread of embedded finance is fast leading to expansion of E-commerce and expansion of consumer loans. Thus the product and process innovations is meeting the diverse needs of customers. The Open Credit Enablement Network, the Open Network for Digital Commerce, and the Public Tech Platform for Frictionless Credit and Digital Lending Apps (DLAs) are fast multiplying the digitization of the economy.
Account Aggregators, Peer-to-peer Lenders, Trade Receivables
Discounting Systems (TReDS), and Pilots on Public Tech Platforms
designed for Digital Commerce are some of the evolving digitally
empowered services. Globally, India ranks first in biometric-based
identification (Aadhaar) and real-time payment volume; second in
telecom subscribers; and third in terms of the startup ecosystem.
3. Coping up with Risks:
Amid the rise in digital payments and volume of transactions, the user base increases, and, logically, the risks to stakeholders increase paving the way for sturdy regulations. Financial intermediaries should now increasingly focus on cybersecurity, data privacy, avoiding data bias, better vendor management and third-party risks, and customer protection. Prevention of the proliferation of fraudulent apps and mis-spelling through dark patterns. It calls for strategic investments in upskilling and reskilling of employees on a sustained basis.
RBI is creating a compatible digital ecosystem by focusing on the
issuance of robust guidelines on account aggregators, peer-to-peer
lenders and digital lenders. The regulatory sandbox, Innovation Hub,
framework for self-regulatory organizations, and strengthening of the supervisory approach by going beyond an entity-focused approach towards a more thematic and activity-based approach intended to realize the long-term digitalization vision.
The Central Bank is also advocating a strong risk culture focused on
customer-centricity, governance, and business conduct in financial
sector entities. The endeavour of financial sector players should be to promote a sustainable and resilient financial sector. The merits of digital transformation can facilitate ease of doing business, customer
convenience, and reduction in the cost of transactions leading to
improved operational efficiency.
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