News & Analysis

Digital Banking: What does the Future Entail?

Ever since UPI came to roost in the post-pandemic world, there has been considerable excitement over how digital banking will shape the next decade

If there was one shift in India during the pandemic phase, it was the spread of digital habits to a larger swathe of the country’s population. And in the wake of this change, the banking sector recognised the potential of digitization like never before, thus initiating a healthy competition between the traditional service providers and the new age fintech companies. 

With digital payments set for rapid growth over the next few years – some say it could touch close to three-quarters of all payments – banks are putting eggs in various baskets to capture both the imagination of the digitally savvy customers and their money. We attempt to explore some of the possibilities in these subsequent paragraphs. 


Drawing up the digital finances landscape

Before actually getting into the bells and whistles, let’s first take a look at how the financial services industry landscape is set up currently. Upgraded technology stacks that reduce human errors in the banking industry is the obvious first step. Open stack platforms such as UPI, OCEN and ONDC are suddenly being chased by both banks and fintech companies. 

That reduced ticket sizes and enormous volumes are the way to go in the future has been the sole cause of this shift. Account aggregation efforts by the likes of OCEN is already being spoken of by tech experts like Nandan Nilekani. And once this turns into reality, small ticket lending at a brisk pace could well become the norm rather than the exception. 


Setting the trend in 2023 for future growth

Here are some trends that we expect to come to fruition over the next twelve months. Of course, some of them rely implicitly on the ability of external factors such as the success of ONDC as an open network enabling eCommerce across every city and village of India and enabling banks to create their own private customer networks on them. 

From the technology perspective, artificial intelligence and machine learning are obvious essentials to create better customer experiences for banking clients. However, what is more important is the creation of a metaverse where buyers and sellers reside on the same network as the banking services themselves do. 


Cashless could be the way forward

While dealing with the impact of ONDC on the overall economy, one factor that jumps out at you is the possibility of India’s economy going totally cashless. Given that banks are among the key investors in ONDC, there are no prizes for guessing what they expect in the future – a massive push towards digital transactions and a private network where customers shop and pay on them, thus making the entire money flow simpler and more transparent. 

From the government’s perspective such a shift could bring back age-old discussions around something called transaction tax, which could potentially generate a windfall that ultimately does away with more personalized forms of tax collections such as income tax. 


An era where fintech coexists with banks

From competition, one could witness increasing collaboration between the smart-solutions peddling fintech companies and traditional banks who understand money but not how it can be seamlessly circulated without the presence of a physical entity called currency. There is definitely a play here that could change the way that cash flows, especially when physical currency makes way for a digital one. 

And two specific events of 2022 could aid this move. The first was obviously the crypto currency chaos that brought in the realization that digital currencies need to be pegged to physical ones and cannot be left in the hands of private players. The second is the outcome of this realization in the form of the Digital Rupee, which RBI introduced in an early use format. 


Owning customers through personalization

Having traditionally bragged about owning customers, the banking industry of the future may be better served if customers owned them – not by way of shareholding, but through making them the family Munshi who deals with all payments, both in-bound and out-bound. And this move is definitely afoot, with some banks approaching tech companies like eSamudaay to create private networks on the ONDC that can transact everything from groceries to home repair and beyond. 

One could think of this as a Super App owned by a bank that brings together a variety of fintech solutions to create a virtual space for their clients to perform all transactions, from managing a salary or business account to fulfilling everything from home needs to travel plans and beyond. Imagine the bargaining power of group buying that such an entity can then operate! 


And then there’s more that can happen

The impact of AI and ML on this is unquestionable. Just as chatbots and automated responses are changing the way we communicate digitally, banks are curating customer data to get a better handle of their customers and be available to fulfill their needs, one moment at a time. 

Of course, capturing such a humongous amount of data and storing it centrally could raise the interest-level of hackers. Which is probably why there is talk of account aggregation around a decentralized data usage paradigm. Which also means that cybersecurity could be amongst the first to attempt decentralized approaches as well, but that’s another topic for another day. 

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