The Indian banking system is the backbone of the Indian Economy. Today, we have 34 banks functioning in our country of which 12 are public, and the rest 22 comprise the private sector, handling more than 41 million real-time payment transactions each day.
Were our banks that much efficient from the start ?; No, they were not. In 1990s various banking reforms were introduced in the country to make the banking system a lot more efficient. Around the same time, our country also started to witness the start of Information Technology sector. Like any other industry, the I.T. had a huge impact on our banking system making it more cost and time efficient.
Important events in evolution of Information Technology –
1. Introduction of MICR based cheque processing- One of the important means of efficient funds movement through the organised sector of an economy is the process of clearing of cheques. To facilitate quick processing of cheques and prompt settlement thereof, mechanised cheque processing systems use Magnetic Ink Character Recognition (MICR) technology. These are machine – readable codes added at the bottom of every cheque leaf which helped in bank and branch-wise sorting of cheques for smooth delivery to the respective banks on whom they are drawn. This, no doubt, helped in speeding up the clearing process, but physical delivery of cheques continued even under this partial automation.
2. Introduction of Electronic Clearing Services- Though MICR clearing made check clearing more efficient, the underlying flaws with cheques caused challenges, especially when they were used for bulk and recurrent payments like utility payments, dividend payments, and so on. The Electronic Clearing Service (ECS) was introduced in the early 1990s to address this growing need while also reducing the use of cheques for such payments. ECS Credit facilitates one-to-many payments such as dividends, salary, interest payments, and so on, while ECS Debit facilitates many-to-one payments such as utility payments. ECS has gone through several transformations, from a local system to a regional system to a national system.
3. ATM- ATM is one of the most important aspect of revolutionizing banking industry. It allows user to conduct banking transactions 24*7 from literally any place with an ATM card and an ATM, making banking very flexible for the user. ATMs are the most useful tool in today's society for ensuring the concept of "Any Time Banking" and "Anywhere Banking."
4. NEFT- Moving forward on the route of non-cash, non-paper payments, numerous systems have been put in place throughout time to meet the remittance requirements of diverse user segments. Today, the National Electronic Funds Transfer, or NEFT as it is more commonly known, is a pan-India system. Though it began as a local EFT system a decade ago, it later extended to span broader territories. Even in other countries, there aren't many comparison systems. Aside from NEFT, the Immediate Payment Service (IMPS) and Real Time Gross Settlement System (RTGS) also helps consumers with their financial transfers. The latter is effectively a Financial Market instrument for big payments, such as Customer payment transaction with a value more than '2 lakhs.
5. Online mobile banking- The cost efficiency of mobile phones and the internet today, has introduced several options of doing banking transactions online. Mobile banking has allowed customers to perform banking transactions from the comfort of their home. It has also helped banks to reduce customers visiting banks for minimal works like checking bank balance etc.
6. New Reforms- A slew of reforms have also been implemented in terms of government pay-outs as well. Digitalization of government transactions have increased transparency and efficiency of work. Accordingly, the APBS, or Aadhaar Payments Bridge System, has been implemented to permit bulk and repeating government benefit and subsidy payments to Aadhaar-seeded bank accounts of identified recipients.
Emerging Banking Technologies in India
Banking and financial security service industry continuous to increase its expenditure on Information Technology. The total expenditure as predicted by Gartner for the year 2020 was around $11 billion, a rise of 9% from the previous year. The majority of this expenditure according to the survey will be done on AI and ML(27%) followed by Data Analytics(20%). This spending on emerging technology is done to create products according to the demands of evolving customers. Lets discuss some of these technologies-
1. ROBOTIC PROCESS AUTOMATION(RPA)- RPA provides a great opportunity to banking sector to reduce time and manual effort by partially or fully automating regular and repetitive tasks, allowing them to enhance efficiency and speed up critical processes for reducing the me to market new products and services to end customers.
2. AI Bots: AI and ML are now being combined with RPA to make intelligent automotive bots which can learn the complex business processes. AI-based software robots may teach themselves to automate more complicated and subjective tasks via pattern recognition. ML helps these AI systems to identify patterns out of unstructured data with the help of mathematical and statistical equations.
3. APPLICATIONS PROGRAMMING INTERFACE – It is very well understood by the banks that they cant do everything on their own and therefore they are considering opening up their transactional data to third-party developers and consume third party capabilities via APIs.
4. Using Data and Business Analytics- As it is said ‘DATA is the new oil’, and organisations which know how to use this ‘oil’ to run their organisation’s vehicle will be more successful then others. Banking sector is spending heavily to become data literate and using analytics as a powerful tool to gain insights from data about their past and present performance for the future and also to make the process of retrieving and processing large datasets more efficiently and effectively.
Effect of Demonetization and Covid-19
Banking in India has seen a tremendous changes in recent years. Two of the main reason of these changes are Demonization and Covid-19 Pandemic. Let’s try and analyse the effect of these changes from changes in banking-tech point of view.
1. Demonetization- The Government of India demonetized the Rs.500 and Rs.1000 notes on 8th November 2016. These old Rs. 500 and Rs.1000 note accounted for about Rs 14.2 lakh crore, which is 86.4 percent of money in circulation. As a result of this withdrawal, there was acute shortage of money for people to carry their day-to-day work. People started to look for alternative methods of transactions. Digital banking platforms both government like Aadhar pay, BHIM app and non-government Paytm, google pay emerged as the answer to this cash shortage problem. People who were earlier reluctant to switch to electronic banking were now forced indirectly to do so. Online platforms saw a huge growth due demonetization. Further 67% jump is noticed in number of transactions using immediate payment service to 2 million. 3 times jump in Rupay transactions on point of sale to 10 lakh a day, three times the norms. 133% growth in card transactions across India in the second week of demonetization. For Example - Paytm definitely went on to become one of the biggest beneficiaries of demonetisation. The company's user base catapulted from 140 million in October of 2016 to 270 million in November of 2017. We can say thus say demonetization pushed digitalization of Indian economy, today we can see around us that electronic banking is used for almost everything from buying and selling daily consumer items to buying and selling securities in share market.
2. Covid-19- Covid-19 is proving to be a test for the economy again and again. It has changed how one see the world completely. Banking sector like any other sector saw several changes due to Covid-19. As a result of social distancing, an increasing number of consumers are using online banking channels to manage their money. This shift is likely to become permanent and therefore banks will have to adapt to this change by providing all the possible services online. We expect financial firms to implement video collaboration tools, new chat and messaging software and other fintech innovations to continue live interactions with customers. Also, banks continuously need to invest to make their apps more secure for the user and to prevent the user from frauds.
Challenges faced by banking industries in implementing IT changes
1. Unskilled Staff at Banks- Most of the staff (especially Senior Level Officials) are recruited on the basis of their skills set in accounting and commerce. They are skilled in today’s frequently changing technologies to adapt to the changes in Information Technology
2. Rural Digital Divide- There exists a huge digital divide in urban and rural areas in India, it will be very difficult to carry these newer digital technologies to the large part of rural areas where people are still much educated about digital stuff.
3. Frauds- Cyber Crimes and Frauds is indeed one of the greatest challenges that the industry is facing at the moment. According to a report by Hindustan Times, India has lost a total of ₹615.39 crores in more than 1.17 lakh cases of online banking frauds from April 2009 to September 2019. According to the RBI’s annual report, bank frauds of ₹100,000 and above have more than doubled in value to ₹1.85 lakh crores in FY20 as compared to ₹71,500 crores in FY19.
4. Lack of privacy- Data privacy is a big issue in today’s world. Crucial data of public like account and card details can be used by hackers and crackers for illegal and criminal use
5. Inadequate budgets and lack of support from top management: Budgets are usually driven by business demands and low priority is accorded to cyber security.
Banking industry has come a long way in India playing a crucial role for economic and social development of the country. Technology is going to lead the way forward for the banking industry. Many innovative technology trends are emerging to address the ever growing customer need. E- banking with internet as its backbone is going to be future of the industry. With people becoming more and more familiar with digital transactions, online transaction platforms like Paytm and Google Pay are likely to grow in the future. However, there is a dark side of this progress as well, Banking Frauds are also increasing day by day with increase in volume of online transactions. Attack from viruses and hackers is likely to increase as well, the management of the banking industries together with RBI and other regulatory bodies will have to develop more and more secure systems to protect the common people from financial losses.
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