The financial sector in India is currently experiencing a golden period, and its key driver is the effort to move towards a less-cash economy. The Government of India recently announced its step to demonetization. This has created the greatest impetus for the transition from cash to digital transactions for the Indian economy.
The foundation for a less-cash economy was set in the JAM (Jandhan-Aadhar-Mobile) trinity. The PMJDY scheme initiated in August 2014 as a tool for financial inclusion has managed to get over 22 crore bank accounts created for previously unbanked citizens. RBI has strengthened this initiative by offering new banking licenses to payment banks and small banks in 2015. The objectives of setting up payments banks was to further financial inclusion by providing (i) small savings accounts, and (ii) payments/remittance services to migrant labour workforce, low income households, small businesses, unorganized sector entities and other users.
Aadhaar, the world’s largest national identification number project, has covered over 99 per cent of Indians aged 18 and above (as of 27th Jan 2017), per UIDAI. With Aadhaar helping in direct biometric identification for the unbanked and Jan Dhan bank accounts and mobile phones allowing direct transfer of funds into their accounts, the foundational infrastructure for digital banking has been created. The JAM trinity alone wasn’t adequate to make digital payments a preferred transaction mode. It took other technologies such as UPI (Unified Payments Interface) and wallets, which have become the alternate payment modes available post-demonetization and are gaining recognition. The latest step by government is the introduction of the BHIM platform. While apps cater to the estimated 25 crore citizens with smartphones and internet access, *99# caters to the estimated 35 crore citizens who use feature phones or other phones without data. The third segment of people, those without phones, are often the rural, poor and socially disadvantaged and thereby the neediest for easy access to financial services. Being the most difficult category to reach out, it is important to provide assisted banking through banking correspondents to create an account leveraging AEPS (Aadhar enabled payment systems) and deposit and withdraw money through Micro- ATM’s (an AEPS tool).
These micro-ATMs would be able to conduct an eKYC (Electronic Know Your Customer) using Aadhaar and open a bank account, making them complete one-stop- shops for all banking needs. Soon, Aadhaar Pay (Aadhaar enabled Point of Sale devices, complete with fingerprint scanners) will be installed and enabled at retail touch-points. These will allow for direct transactions from a customer’s Aadhaar-linked bank account to the retailer, requiring only the customer’s Aadhaar number and biometric data (fingerprint/iris scan) as authentication.
All the above initiatives through the BHIM platform (UPI, USSD, Aadhaar Pay), IMPS (Immediate Payment Service) and debit cards creates one of the largest inter-operable payment ecosystems in the world as India leap frogs towards adoption of digital payments and moves towards a less-cash economy. There is an emergence of fintechs who have an important role to play and contribute to the less-cash economy. Fintechs are focusing on services for unbanked like digital payments and SME credit, and process enhancements like API Banking and Robotics to help strengthen the digital agenda.
Banks and financial institutions are facing challenges due to the dynamic changing landscape. The bank’s core IT systems are running multiple systems, some of which are legacy and others are based on newer technologies, thus resulting in a two-speed world. Banks spend around 80% to 90% cost in maintaining these legacy applications and there is less budget available for innovation with the newer technologies. The current multi-channel applications have challenges of scalability, security, integration and agility resulting in impact on customer service and customer experience.
On the customer experience side, digital millennials are expecting simplified and personalized experience, faster response and automation of services. Banks need to gear up to overcome these internal and external challenges. On the regulatory side banking technology needs to be agile in handling regulatory changes like GST and IndAS within the given timelines.
SMART Digital Platforms for the cash-light India
To overcome the above challenges, the need of the hour is to have a SMART digital banking platform that is S-Scalable and Secure, built with Modern IT architecture, that provides for business agility, and helps banks and financial institutions to Re-imagine business models and processes and helps reduce their TCO (Total cost of ownership).
Let us look at the capabilities that are needed from this platform on all these aspects.
Murali Mahalingam, Industry Director, Banking & FS, SAP writes this piece for the April 2017 edition of our Financial Foresights.