By Mr Sarvjeet Virk
Banking is one of the oldest and most essential services in human history. From the ancient times of bartering goods and exchanging coins to the modern era of digital transactions and cryptocurrencies, banking has evolved to meet the changing needs and preferences of customers and society. Digital banking, the use of digital technologies to provide banking services, has revolutionised the financial sector in India, right from the early days of computerisation and electronic payments to the current era of mobile and internet banking. It has evolved through distinct phases, driven by customer demand, regulatory support, technological innovation, and competitive pressure. Today, digital banking in India is entering a new phase of transformation, where banks are adopting trends driven by emerging technologies to offer personalised and groundbreaking digital banking solutions to their customers.
Before looking forward to the future of digital banking in India, it is important to have a glance at its past. India has a rich and diverse banking history, dating back to the Vedic era (1500-500 BCE), when moneylenders and merchants used to lend and borrow gold and silver coins. The first formal bank in India was the Bank of Hindustan, established in 1770 by Alexander and Co. in Calcutta (now Kolkata). Since then, banking in India has gone through several phases of development, influenced by political, economic, and social factors.
The first phase of modern banking in India began after independence in 1947, when the government nationalised the major banks and introduced various reforms to promote financial inclusion and social welfare. The second phase started in the 1990s, when the liberalisation of the economy and the advent of technology enabled the emergence of new private and foreign banks, offering competitive and innovative products and services to customers. In the 2000s, the third phase commenced when the internet and mobile penetration increased, leading to the rise of online and mobile banking, as well as the entry of non-banking financial companies (NBFCs) and fintech startups, offering digital solutions to cater to the unbanked and underbanked segments of the population.
The fourth and current phase of banking in India is characterised by the emergence of neo banks, which are digital-only banks that operate without physical branches and offer a range of banking and financial services through mobile apps and web platforms. Neo banks often function by partnering with licensed banks to provide their services to customers.
While the digital banking landscape in India is evolving rapidly, there are still many challenges and gaps that need to be addressed. One of the major challenges is the lack of standardisation and interoperability among the various players, platforms, and systems in the ecosystem. For instance, there are multiple payment methods, such as UPI, IMPS, NEFT, RTGS, cards, wallets, and QR codes, each with its own features, limitations, and charges. This creates confusion and inconvenience for customers, who have to switch between different apps and interfaces to make payments and access their accounts.
Another challenge is the low level of personalisation and customisation of the products and services offered by the digital banks. Many neo banks currently function as digital extensions of partner banks, leveraging the advantage of providing additional financial services. Despite this, a predominant trend persists: the adherence to a ‘one app, one customer pain point, one solution’ approach. Neo banks, while diversifying services, often lack a holistic perspective. For example, a millennial customer may prefer a flexible and gamified savings plan, while a woman customer may need a tailored insurance and investment plan. A freelancer customer may require a seamless invoicing and tax management solution, while a small business customer may need a comprehensive cash flow and inventory management solution, while a rural customer may need a simple and accessible financial literacy and inclusion solution, while an urban customer may need a sophisticated and secure wealth management solution.
This calls for a comprehensive solution that transcends singular pain points, emphasising the necessity for a more integrated and inclusive approach in the evolving landscape of digital banking. Achieving a holistic model would address individual challenges, while also enhancing the overall user experience, marking a crucial evolution in the neo banking sector.
Notably, challenges like these pave the way for a host of opportunities, many of which can benefit enormously from emerging technologies, particularly AI.
Artificial intelligence (AI) is a potent technology that can help digital banks overcome the challenges and gaps mentioned above, and add value to their customers and stakeholders. AI can enable digital banks to leverage data and analytics, machine learning, natural language processing, computer vision, and other advanced techniques to automate and enhance various banking processes, such as customer identification and verification, customer service and support, product recommendation and cross-selling, fraud detection and risk management, credit scoring and underwriting, and regulatory compliance and reporting.
AI can also help digital banks to create personalised and customised products and services for different customer segments, based on their behavior, preferences, needs, and goals. AI can help digital banks to understand their customers better, anticipate their needs, and offer them relevant and timely solutions. AI can also help digital banks to engage their customers more effectively, by providing them with interactive and intuitive interfaces, such as chatbots, voice assistants, and biometric authentication. AI can also help digital banks to educate and empower their customers, by providing them with financial literacy and wellness tools, such as budgeting, saving, investing, and borrowing tips, as well as feedback and rewards.
Based on the current and potential applications of AI in digital banking, there are five key trends that are going to redefine the future of digital banking in India. These are:
- Hyper-personalisation: Emerging digital banks in India are using AI to offer hyper-personalised products and services to their customers. They are tailoring savings plans, investment portfolios, insurance policies, and loan products to the customer’s risk appetite, financial situation, and life stage. Continuing their efforts at making finance customised, they can provide personalised rewards, incentives, and offers based on the customer’s spending patterns, loyalty, and feedback. Collectively, these efforts will create a banking experience that is highly individualised and aligned with each customer’s unique needs and preferences.
- Omnichannel integration: Digital banks are gradually adopting AI to seamlessly integrate their services across various channels and platforms, such as mobile apps, web portals, social media, messaging apps, and voice assistants. This approach ensures that customers can access their accounts, make payments, transfer funds, apply for loans, and receive financial advice through any channel of their choice, without the need to switch between different apps and interfaces. Additionally, digital banks are enabling customers to interact with their services through natural language, voice, and gestures, simplifying the user experience.
- Collaborative ecosystem: Digital banks in India are forging partnerships with other players and stakeholders in the digital banking ecosystem. This can be done to achieve several objectives, such as issuing virtual and physical debit cards to customers, offering health insurance products, enabling customers to use UPI services, and much more. These collaborations aim to provide customers with a comprehensive and integrated suite of banking and financial services, leveraging the strengths and synergies of each partner. In the coming years, we can expect to see many new collaborations between financial institutions and neo banks to empower more customers.
- Responsible and ethical AI: Digital banks are using AI to ensure that their products and services adhere to principles of fairness, transparency, accountability, and privacy. This includes monitoring and auditing AI models and systems to detect and prevent biases, errors, or anomalies that could impact the accuracy and reliability of their offerings and potentially harm customers or stakeholders. Furthermore, digital banks are using AI to explain and justify their AI decisions and actions to customers and stakeholders and provide them with opportunities to review, correct, or challenge these decisions. They are also taking measures to protect and secure customer data and respect their preferences regarding data collection, storage, and usage. These initiatives are essential for building trust and maintaining the integrity of their services.
- Data-driven innovation: Digital banks are expected to use AI to leverage the vast amount of data generated by their customers and the ecosystem, to create new and innovative products and services, that solve existing and emerging customer problems, and create new value propositions and revenue streams. For example, data and analytics can be used by digital banks to create new credit scoring models that take into account alternative and unconventional data sources, such as social media, e-commerce, and utility payments, to assess the creditworthiness and repayment capacity of customers, especially those who are unbanked or underbanked. Digital banks may also use data and analytics to create new financial inclusion and literacy solutions, that help customers to access formal financial services, and improve their financial well-being.
Digital banking in India is undergoing a transformation, driven by the adoption of AI technologies, and the changing customer expectations and market dynamics. Digital banks that leverage AI to create personalised, integrated, innovative, collaborative, and responsible products and services, will be able to differentiate themselves from the competition, and deliver superior value to their customers and stakeholders. Digital banks that fail to embrace AI, or use it inappropriately, stand at risk of losing their relevance and market share, and face regulatory and reputational risks. The future of digital banking in India belongs to the AI-first banks, that can harness the power of AI to redefine the banking experience for their customers and themselves.
(The author is Mr Sarvjeet Virk, Co-founder and MD at Finvasia, and the views expressed in this article are his own)
