The Need and Impact of Digital Banking UnitsVishnu Vardhan Vankayala
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Digital banking involves the digitization of all traditional banking products, processes, and activities to serve customers through online channels.
Banking that is done through the digital platform without any paperwork like account opening forms, cheques, pay-in slips, and so on is referred to as digital banking.
It relies on high-level process automation, web-based services, and APIs to provide banks and their customers with high levels of cost efficiency, security, and flexibility.
All over the world, banks are taking a huge step towards digitalization to cope with the competition and to enhance the customer experience as per their expectations.
In India, digitalization of the banking sector was initiated in the 1980’s. The first blueprint for computerization in the banking industry was drawn up in 1983-84.
A Committee was set up in 1983, under the chairmanship of Dr. C. Rangarajan, Deputy Governor, Reserve Bank of India, to draw up a phased plan of computerization in the banking industry.
However, the pace of computerization increased when private and foreign banks entered the market in the early and mid-90’s with the aim of digitalizing the economy and improving the services provided by public sector banks to their customers.
Banks in India accelerated the mechanization of processes by introducing cheque processing dependent on Magnetic Ink Character Recognition (MICR), the electronic transfer of assets, the interconnection between bank branches and the implementation of ATMs, Internet banking and mobile banking.
The RBI and NPCI have taken many initiatives to strengthen the payments and settlement systems of the banking industry.
India has witnessed a major transformation in digital payments and now customers need not carry cash but can still perform a transaction anywhere, anytime.
As per a study, the cost of a bank transaction for bank is estimated to be ₹ 70 for branch banking, ₹ 15 for ATM transactions, ₹ 2 for online banking transactions, and ₹ 1 for mobile banking transactions.
In recent times, digital banking has emerged as the preferred banking service delivery channel in the country, along with “brick and mortar” banking outlets.
The Reserve Bank has been taking progressive measures to improve the availability of digital infrastructure for banking services.
In furtherance of this objective and as a part of efforts to accelerate and widen the reach of digital banking services, the concept of “Digital Banking Units” (DBUs) is being introduced by the Reserve Bank, which has further issued the guidelines to establish Digital Banking Units in April 2022.
A DBU is a specialized fixed-point business unit/hub housing a certain minimum digital infrastructure for delivering digital banking products and services as well as servicing existing financial products and services digitally, in both self-service and assisted mode.
All public sector banks are vulnerable to growing competition from both fintech’s and digitally savvy banks.
PSU’s, apart from SBI, have been slow in technology investment as reflected in their small shares in digital transactions.
The major objectives of establishing DBU’s are the inclusion of rural customers; the inclusion of unbanked and underbanked; to reduce the cost of banking services and customer acquisition as well as maintenance costs; and to increase the availability of digital infrastructure.
The RBI may also have thought to ensure healthy competition among players by ensuring digital enablement of all PSU banks before issuing licenses to digital-only banks.
As per the published guidelines, all DBU’s should offer the following minimum products and services.
1. Liability Products and Services:
(i) Account Opening: Savings bank accounts under various schemes, current accounts, fixed deposit accounts, and recurring deposit accounts.
(ii) Customer Digital Kit, which includes mobile banking, internet banking, debit and credit cards, and mass transit system cards.
(iii) Merchant Digital Kit: UPI QR code, BHIM Aadhaar, POS, and so on.
2. Asset Products and Services:
(i) Obtaining and onboarding customers for identified retail, MSME, or schematic loans. This may also include end-to-end digital processing of such loans, starting from online application to disbursal.
(ii) Determined which government-sponsored schemes are covered by the National Portal.
3. Digital Services:
(i) Cash withdrawal and Cash Deposit only through ATM and Cash Deposit Machines respectively-no physical cash acceptance/disbursal across counters
(ii) Passbook printing / Statement Generation
(iii) Internet Banking Kiosk which may also include facilities to provide all/majority of services available on internet banking including indent and issuance/processing of Cheque Book request, receipt and online processing of various standing instructions of clients
(iv) transfer of funds (NEFT/IMPS support)
(v) Updation of KYC / other personal details, etc.
(iv) Lodging of grievance digitally and tracking of resolution status
(v) Account Opening Kiosk
vi) Kiosk with e-KYC/ Video KYC
(vii) Digital onboarding of customers for schemes such as Atal Pension Yojana (APY); Insurance onboarding for Pradhan Mantri Jeevan Jyoti Bima Yojana (PMJJBY) and Pradhan Mantri Suraksha Bima Yojana (PMSBY)
RBI says banks can adopt more core-independent digital-native technologies, offering better scalability and flexibility in creating new/reusable digital environments through continuous development/software deployment and interconnectivity specifically for this business segment, based on their digital strategy.
It further mandates that if the digital banking segment of a bank uses an API layer (integration layer) to connect with external third-party application providers, the same should be tested in an isolated or test environment before being integrated with the bank’s core systems, backed by a comprehensive risk evaluation and adequate documentation.
Banks are free to adopt an in-sourced or out-sourced model for operations of the digital banking segment, including DBUs.
This gives the banks an opportunity to experiment with disruptive technologies in the cloud, one thing at a time.
With so many innovations happening out there by fintechs, banks do not have to bother about getting them to work with their core banking system, picking up best-of-breed solutions available on the cloud.
The solutions tried and tested can then be added to the bank’s core banking system.
We may see new technology solution providers coming into this segment to build smart equipment for DBU’s.
The new products and innovation in this segment will be driven by the option to adopt Core-Independent Digital Native Technology solutions.
We may also see new players coming up and building the core banking platforms specifically for digital banking units.
Fintech companies, on the other hand, will benefit greatly.
There will be a lot of opportunities for FinTech to tie up with banks and offer management of the Digital Banking Unit infrastructure.
New Neo Banks & Infrastructure Management FinTech’s might come up as all banks have to establish DBU’s.
Rural customers and the unbanked will have access to a cost-effective and convenient onboarding process to banking services and products via digital channels, which will assist them in gaining financial literacy and using mobile banking apps.
While the immediate benefit of DBU’s might be limited to underbanked and unbanked in rural areas, it will substantially lead to technological innovation opportunities in banking sector and further boost the digitalization of Indian Banking System.
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