CHAPTER 1: INTRODUCTION TO DIGITAL BANKING

A study of digital banking services used by citizens of Ulhasnagar consists of views and opinions
of the people of Ulhasnagar including their feedbacks, suggestions and future expectations
on/about/from digital banking services offered by banks or/and online payment systems.

Before proceeding further let's have a look on broader concepts of digital banking.

1.01 MEANING OF DIGITAL BANKING

Digital banking is part of the broader context for the move to online banking, where banking
services are delivered over the internet. The shift from traditional to digital banking has been
gradual and remains ongoing, and is constituted by differing degrees of banking service
digitization. Digital banking involves high levels of process automation and web-based services
and may include APIs enabling cross-institutional service composition to deliver banking
products and provide transactions. It provides the ability for users to access financial data
through desktop, mobile and ATM services. This includes activities like:
● Money Deposits, Withdrawals, and Transfers
● Checking/Saving Account Management
● Applying for Financial Products
● Loan Management
● Bill Pay
● Account Services

1.02 DEFINITION OF DIGITAL BANKING

Digital banking can be defined as:
(1) The transactional facility to customers by banks through various secured digital channels
by taking care of data security, related risk mitigation and regulatory aspects by banks
themselves. This is achieved by integrating online or internet and mobile banking
services by adoption of latest digital technologies like analytics, social media, innovative
payment solutions and mobile technology with the aim of exceeding customer
expectation, convenience and experience.
(2) A virtual process that includes online banking and beyond. As an end-to-end platform,
digital banking must encompass the front end that consumers see, the back end that
bankers see through their servers and admin control panels and the middleware that
connects these nodes. Ultimately, a digital bank should facilitate all functional levels of
banking on all service delivery platforms. In other words, it should have all the same
functions as a head office, branch office, online service, bank cards, ATM and point of
sale machines.
(3) And a service offered by banks and online payment systems to make banking more
easier, convenient and flexible.

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1.03 VISION AND MISSION OF DIGITAL BANKING
The vision and mission of digital banking is to provide all the traditional banking services over
online mode without visiting the physical branch and facilitating all kinds of financial
transactions through secured mode.
It includes following:
● Improving customer access at ease irrespective of location and time by providing account
monitoring, transactions and other facilities through computer, smartphone and tablet
with internet connectivity.
● Facilitating the offering of more services by digitalizing all the traditional banking
activities offered by banks through the bank's official websites and partnering with online
payment systems.
● Increasing customer loyalty by providing 24 x 7 instant customer support by
professionals through phone banking, email and chatbots.
● Attracting a large number of customers by providing innovative services such as digital
accounts, digital wallets, and secured payment gateways.
● Providing cost-effective services by availability of instant payment options, loans,
investments and portfolio management at minimum interest rates and charges.
The main aim of digital banking is to make banking more easier for the customer without any
hassle and to provide the financial support at fingertips irrespective of location and time.

1.04 HISTORY OF DIGITAL BANKING

The earliest forms of digital banking trace back to the advent of ATMs and cards launched in the
1960s. As the internet emerged in the 1980s with early broadband, digital networks began to
connect retailers with suppliers and consumers to develop needs for early online catalogues and
inventory software systems.
By the 1990s the Internet became widely available and online banking started becoming the
norm. The improvement of broadband and ecommerce systems in the early 2000s led to what
resembled the modern digital banking world today. The proliferation of smartphones through the
next decade opened the door for transactions on the go beyond ATM machines. Over 60% of
consumers now use their smartphones as the preferred method for digital banking.
The challenge for banks is now to facilitate demands that connect vendors with money through
channels determined by the consumer. This dynamic shapes the basis of customer satisfaction,
which can be nurtured with Customer Relationship Management (CRM) software. Therefore,
CRM must be integrated into a digital banking system, since it provides means for banks to
directly communicate with their customers.
There is a demand for end-to-end consistency and for services, optimized on convenience and
user experience. The market provides cross platform front ends, enabling purchase decisions
based on available technology such as mobile devices, with a desktop or Smart TV at home. In
order for banks to meet consumer demands, they need to keep focusing on improving digital
technology that provides agility, scalability and efficiency.

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1.05 EVOLUTION OF DIGITAL BANKING IN INDIA
The need for computerization was felt in the Indian banking sector in the late 1980s, in order to
improve the customer service, book-keeping and MIS reporting. In 1988, Reserve Bank of India
set up a Committee on computerization in banks headed by Dr. C. Rangarajan.
Banks began using Information Technology initially with the introduction of standalone PCs and
migrated to Local Area Network (LAN) connectivity. With further advancement, banks adopted
the Core Banking platform. Thus branch banking changed to bank banking. Core Banking
Solution (CBS) enabled banks to increase the comfort feature to the customers as a promising
step towards enhancing customer convenience through Anywhere and Anytime Banking.
Different Core Banking platforms such as Finacle designed by Infosys, BaNCS by TCS,
FLEXCUBE by i-flex, gained popularity.
The process of Computerization gained pace with the opening of the economy in 1991-92. A
major driver for this change was propelled by rising competition from private and foreign banks.
Several commercial banks started moving towards digital customer services to remain
competitive and relevant in the race.
Banks have benefitted in several ways by adopting newer technologies. E-banking has resulted in
reducing costs drastically and has helped generate revenue through various channels. As per last
available information, the cost of a bank transaction on Branch Banking is estimated to be in a
range of Rs.70 to Rs.75 while it is around Rs.15 to Rs.16 on ATM, Rs.2 or less on Online
Banking and Rs.1 or less on Mobile Banking. The number of customers has also increased
because of the convenience in 'Anywhere Banking'. Digitization has reduced human error. It is
possible to access and analyze the data anytime enabling a strong reporting system.
RBI has been a guiding force for the banks in forming regulations and giving recommendations
to achieve various objectives. Commercial Banks in India have moved towards technology by
way of Bank Mechanization and Automation with the introduction to MICR based cheque
processing, Electronic Funds transfer, Inter-connectivity among bank Branches and
implementation of ATM (Automated Teller Machine) Channel have resulted in the convenience
of Anytime banking. Strong initiatives have been taken by the Reserve Bank of India in
strengthening the Payment and Settlement systems in banks.
In 2016, the Government launched its Unified Payment Interface (UPI) system, a digital banking
system that allows people to easily transfer money to and from a bank account or to others via a
smartphone. This UPI system has started a revolution and gave birth to Mobile Banking in India.
While this kind of digital money transferring was available to bank account holders before 2016
as well but it wasn’t accessible to everyone as that was not based on mobile systems. Now, with
UPI, anyone in the country can open a bank account, save money and make transactions using a
mobile phone.
Now the Government has also made linking of a 12-digit Aadhaar number with your bank
account mandatory. This proves that the person accessing the bank account is the person who
owns it. This also works well for “know-your-client” formalities.

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Digital banking ensures that once you have an Aadhaar number and mobile number, you can
easily open a bank account without visiting the bank branch with help of Mobile Banking. This
works well for our country as many of our citizens cannot write or read or have a bank branch at
the place they are living.
India has around 300million smartphone users. While the overall penetration is just under 30%
only but the user base is growing at a 27%annual growth rate (Source: Vserv, a mobile
marketing company). It’s these smartphones, and the rapidly growing digital banking culture,
that will allow the unbanked to open accounts and those with bank accounts to more easily
manage their finances using Mobile Banking or get their Government benefits transferred
directly to their account.
The wave of Digital Banking in India has made most of the banks in India to leverage
technology by bringing an entire bank squeezed to fit into your smartphone and encouraging
customers for Mobile Banking. Mobile Banking is the future of banking as only 5% of the 6
Lakhs villages in India have a commercial bank branch and only 40% of the adult population has
bank accounts. However, Tele-density in rural India soared at a CAGR rate of nearly 71% during
2007-2016. Therefore, the banks, telecom providers and RBI are making efforts to make inroads
into the unbanked rural India through mobile banking solutions. (Source: IBEF)
Mobile Banking allows customers to avail banking services on the move through their mobile
phones and is especially critical for India, as it promises to provide an opportunity to offer
banking facilities to a previously under-banked market. The growth of mobile banking has
already impacted the banking sector significantly as the mobile banking transactions in India will
soon cross 400 million & would result in cost savings of approximately INR 11 billion (USD230
million) – (Source: IBEF)
If you have an AADHAAR Card, you can now easily open a bank account online while sitting at
home. Once your account is opened, using Mobile Banking, you can deposit, withdraw and
transfer money with lightning speed. Breaking away from conventional banking norms which
involves onerous form-filling, physical document submission and cumbersome processes, digital
banking in India is a completely paperless, signature-less and branchless banking experience.
The bank leverages biometrics enabled ID 12 digit Aadhaar card and UPI (United Payment
Interface) technology to ensure that there is no paperwork involved for opening the account.
Anyone with a PAN Card, Aadhaar Card and a smartphone can open this savings account. Once
your account is opened you can use Mobile Banking for all your banking needs and there is no
need to visit any bank branch.
Today in India, we find ourselves in a digital world where the vegetable vendor accepts wallet
payment without any fuss, a student can buy stationery using a debit card or a merchant uses QR
code based scan and pay utility. The wave of digital banking in India helps you remain paperless
and do all you want to do with your bank account using the new age mobile banking. The
objective of mobile banking is not only to make banking accessible to all citizens of the country
but also meant to bring the millions who are still unbanked into the financial system and to make
banking more convenient and flexible for them.

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1.06 IMPACT OF DIGITAL BANKING IN INDIA
Digital banking has changed the way people manage their finances and created a more
competitive and agile banking market. Here is how it impacted in India:
(1) Financial Inclusion: Across 191 million people in India are unbanked. This means they do
not have access to a bank account, lending facilities or savings options. Thanks to the increased
prevalence of smartphones and internet connectivity more people than ever are accessing
banking services online. Simpler online KYC processes have also made it easier for those who
cannot go into a branch to set up an account to get access to banking facilities online. Along with
access to accounts, people can now also access financial literacy tools helping those who need it
most to effectively manage their money. There is huge potential in unbanked markets and many
of the new digital-only banks that are emerging in South-East Asia are expected to go after these
unbanked populations.
(2) Access to Lending: Customer data has always been a central decision-making factor for
financial institutions – bankers may make lending decisions based on your credit score while
insurers might look at your driving record or require a health check before issuing a policy. But
as people and their devices become more interconnected, new streams of granular, real-time data
are emerging which support more efficient and speedier decision-making processes. This is
particularly beneficial for Small and Medium Enterprises or SMEs who in the past have
struggled getting access to finances when they needed it. All SMEs need is access to finance,
advice on banking and analysis of their accounts for financial planning.
(3) Personal Financial Management: Personal Financial Management or PFM refers to the digital
tools that consumers use to manage their financial situation. Through clearer, digital
categorisation of transactions, users can view budgets, analyse trends and track bills online. PFM
tools give customers the ability to manage their finances in an educated and transparent way
leading to better financial planning and overall financial wellness. Customers can use PFM tools
to take control of their finances by setting up and managing budgets, track progress of their
financial goals and set-up notifications and nudges to manage overspending. For small and
medium-size enterprises, similar tools are available under the BFM acronym for Business
Financial Management and extend their functionality to cash flow management and other
business matters. Why should banks offer PFM tools? To stay competitive. Challenger financial
institutions have entered the market with intuitive apps preloaded with proactive and
personalised PFM tools. Traditional players are automatically at a disadvantage if they aren’t
offering something similar. To keep up with customer expectations. A side effect of the
aforementioned challenger banks is that modern customers expect a rounded experience on their
digital banking apps. Millennial customers in particular have become accustomed to having easy
to access, graphical representations of budgets, goals and spending in their financial platforms.
To increase customer engagement online. The more time consumers spend in bank apps, the
more exposure they have to a bank's brand, which will keep it top of mind when deciding on
future banking products or services.

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1.07 RECENT DIGITAL BANKING TRENDS IN INDIA
Consumers now have so many options when it comes to digital banking. Even the most
established financial institutions will need to work to stay relevant if they want to stay ahead.
The recent baking innovation trends and services described as follows:
1. Automated Teller Machines (ATMs): An Automated Teller Machine (ATM) is an
electronic banking outlet that allows customers to complete basic transactions without the
aid of a branch representative or teller. Anyone with a credit card or debit card can access
cash at most ATMs. ATMs are convenient, allowing consumers to perform quick
self-service transactions such as deposits, cash withdrawals, bill payments, and transfers
between accounts. Fees are commonly charged for cash withdrawals by the bank where
the account is located, by the operator of the ATM, or by both. Some or all of these fees
can be avoided by using an ATM operated directly by the bank that holds the account.
2. Mobile Banking: Mobile banking is a banking service in which a customer is able to do
banking transactions and gather related information using a mobile phone or tablet
anytime and anywhere without seeking assistance from the bank’s CRM. All the
customer needs to do is to download and install the bank’s mobile applications from their
smartphone or tablet application store. Mobile banking to customers is like carrying a
virtual bank on their mobile devices. Using it we can download mini statements, get
alerts on account activity, monitor term deposits, access loan statements, manage
insurance policy, transfer funds between customer’s linked accounts and third parties
including bill payments etc.
3. Credit / Debit Cards: This facility promotes cashless purchasing. It enables the customers
to purchase goods without holding physical cash. A credit card allows the customer to
borrow money within predetermined limits and the Credit Card Company charges a
certain amount of interest for the money being used for purchasing by the customer.
However the debit card is linked directly to the customer’s bank account and when a
customer makes purchases through it, the money is debited automatically from the
customer's bank account. Types of Credit / Debit Card:
1. Rupay: Can be used anywhere in the country to withdraw money and for online
payments within the country.
2. Visa and MasterCard: Can be used anywhere in the world to withdraw money and
for international online payments. It also comes with some advanced features such
as "Tap and Pay".
4. National Electronic Funds Transfer (NEFT): It is a nationwide payment system
facilitating one to one transfer. Under this scheme, a person can electronically transfer
funds from any bank branch to any individual having an account with any other bank
branch in the country participating in the scheme. Individuals, firms, and corporate
maintaining accounts with bank branches can transfer funds using NEFT. Even, the
individuals who don’t have a bank account can also deposit cash at the NEFT enabled
branches with instructions.

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5. Prepaid Payment Instruments (PPIs):
Mobile Wallets and PPI Cards – PPIs are payment instruments that facilitate purchase of
goods and services, including financial services, remittance facilities etc. against the
value stored on such instruments. There are three categories of PPIs: closed, semi closed
and open system. Closed systems are PPI issued by an entity for facilitating the purchase
of goods and services from that entity only. Semi closed are PPIs which can be used for
purchase of goods and services including financial services at a group of clearly
identified merchant locations/establishments which have a specific contract with the
issuer to accept the payment instruments and open system are PPIs which can be used for
purchase goods and services, including financial services like funds transfer at any card
accepting merchant location (point of sale terminals) and also permit cast withdrawal at
ATMs/business correspondents. While banks and non banks can issue closed and semi
closed PPIs only banks are allowed to issue open system PPIs. Some of the largest non
bank issuers PPIs / wallets include paytm, mobikwik and itzcash. The PPIs have been
registering impressive growth in the recent past.
6. Unified Payment Interface (UPI):
This is the most convenient form of financial transaction interface. It was launched on
23rd August, 2016. It allows for instant money transfer through the mobile device
anytime anywhere. It facilitates accessing different bank accounts through a single
mobile app merging several banking features and single click two factor authentication.
Every bank has its own UPI for different operating systems like android, IOS, Windows
etc.
7. Social Media Banking:
Social Media is a new trend in banking. The banking industry is aware of the power of
social media. It gives the customers a voice and enables the banks to connect and reach
out for more customers than traditional channels, but currently banking activities on
social media are limited to marketing products, engaging customers and providing
support. Few banks like ICICI bank and Kotak Mahindra bank allow their customers to
transact online and open new accounts using facebook. Presently social media banking is
not so popular but it will play an important role in shaping the future of banks.
8. Digital/Instant Bank Accounts:
A digital savings account is paperless, fast and secure way for opening an account on a
digital platform. With the help of a digital savings account, the account holder can avail
banking services like instant transfer, Additionally, there are free email and SMS alerts. It
can be opened through an app on your smartphone without the need to visit the bank's
branch. Complete Know Your Customer (KYC) formalities using PAN and Aadhaar
number and get all the banking facilities at your fingertips. Some features of
digital/instant accounts - zero balance account, free debit card, bank statements on email
and other banking features. Some examples - SBI YONO, Kotak 811, ICICI Insta savings
account, etc.

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1.08 FUTURE OF DIGITAL BANKING IN INDIA
Digital banking has transformed how we manage our finances and how banks serve their
customers. Ongoing innovation in technology and regulation will continue transforming banking.
In the near future digital banking will be more advanced, faster, convenient and flexible to use
without any loophole.
1. Data Transformation:
Data offers companies a way to grow into new sectors and capitalise on new
opportunities. Most big tech companies are successful because of the efficient way they
manage customer data. In the future, data transformation will play a crucial role in the
success of the bank and will be made simpler by innovative tools and technologies such
as AI-powered analytics to track and monitor, distributed file systems that allow for
easier access to data and cloud technology to make operations leaner and more efficient.
2. Banking-as-a-Service or BaaS:
BaaS involves banks providing third parties with access to core systems and functionality
so that they can integrate digital banking and payment services into their own products.
From a bank’s perspective, it involves embracing a more modular way of working and
allowing an ecosystem of fintechs and software providers to connect to the bank through
APIs. BaaS provides new revenue streams and improved customer service for banks and
faster speed to market and reduced costs for fintech. In the future, incumbent banks will
function as platforms that allow customers to choose services personalised for their needs
from a range of providers.
3. All Banks will be Digital Banks:
As technologies such as AI, IOT and cloud computing transition from emerging to
transformative, they will cause aspects of banking to become unrecognisable from what
we experience today – changing the channels, services and role that banks play in our
lives today. Already we have seen huge shifts in customer preferences when it comes to
banking. While more and more customers are embracing digital banking we can expect
fully-digital, personalised and one-touch banking to become the norm in the future. A
side-effect of this will be a reduced need for in-branch services, as the high level of
personalised experiences that were previously only found in-branch become available
online and through a bank's digital channels. Government regulation aimed at digitalising
and democratising banking, will continue to push the finance industry forward and
encourage a new breed of digital banks to emerge. Digital banks have the capacity to
serve groups of the global population that previously were unbanked, increasing access to
financial products and services and creating entirely new markets for digital-only players.
In the future, customers will still need to save, borrow, invest and make payments. Digital
banks, thanks to technology, shifting customer preferences and government regulation,
will continue to help customers find smarter and better ways to carry out these tasks and
manage their financial lives digitally.

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1.09 COMPETITORS OF DIGITAL BANKING:
The mix of new technological innovation and supportive government legislation has opened up
the banking industry to a wave of disruption. The use of new technology has had implications for
both incumbents, fintechs and other market participants and has led to lower costs in lending,
payment systems, financial advising, and insurance and overall better products and services for
consumers. Regulation like Open Banking has changed the way incumbents and fintech players
interact and digital banking licenses have made it possible for digital-only banks to emerge. All
of this has naturally increased the level of competition in the market, new entrants are creating
rival products and services that are cheaper, digitalised and more efficient to use. There are many
new types of competitors emerging that incumbent banks need to keep a watchful eye on:
1. Digital-Only Banks:
In the last decade digital-only competitors have been set up with the aim of providing
banking services online and without branches. The move away from branch-based
business has allowed these new players to provide financial products and services at
lower costs. With a strong focus on innovation and agility, these digital banks have
created effective and personalised customer experiences in much shorter time frames than
incumbents could. In Europe digital-only banks like N26 and Monzo have signed up
millions of customers with their digital-only, free bank accounts, debit cards and cheap
exchange rates. In Hong Kong, digital banking license grantees such as Mox, ZA Bank
and others are in beta stage and incumbents like Goldman Sachs have launched separate
digital banks to compete with the newcomers.
2. FinTechs:
Financial technology (abbreviated fintech or FinTech) is the technology and innovation
that aims to compete with traditional financial methods in the delivery of financial
services. It is an emerging industry that uses technology to improve activities in finance.
The use of smartphones for mobile banking, investing, borrowing services, and
cryptocurrency are examples of technologies aiming to make financial services more
accessible to the general public. Financial technology companies consist of both startups
and established financial institutions and technology companies trying to replace or
enhance the usage of financial services provided by existing financial companies.
3. Big Tech:
Big tech firms including Google, Amazon, Facebook and Apple, have all launched
versions of financial products over the last year. This group of tech companies already
dominate a number of industries and have large and loyal customer-bases that would be
keen to try their financial products. Since the end of the 2000s, these five have been,
besides Saudi Aramco, the most valuable public companies globally, with each having
had a maximum market capitalization ranging from around $500 billion to around $2
trillion USD at various times.