Impact of digitalisation on the Indian banking sector

Digitalization is the new buzz or the latest expression in all the sectors. It refers to the use of digital technologies to change a business model and further provide new revenue and value-producing opportunities. The world has seen a rapid advancement in technology over the past several decades. Technology has left an indelible mark on […]

Digitalization is the new buzz or the latest expression in all the sectors. It refers to the use of digital technologies to change a business model and further provide new revenue and value-producing opportunities. The world has seen a rapid advancement in technology over the past several decades. Technology has left an indelible mark on everything and anything that human beings can fathom. There has been seen technology outburst in all sectors and banking has been one of the sectors to adopt information technology. All over the world, banks are making a tremendous stride towards digitalization to cope up with the competition and provide their clients with the best services.


“Digital Banking” refers to digitalizing the traditional methods of banking to conduct banking transaction more smoothly. Contrary to traditional banking, digitalized banking aims to make versatile computerized products and services to fulfil the requirements of their digitalized clients. The introduction of digital banking has revolutionized the banking sector and modified the entire procedure bank transfers, it has facilitated the purchasers assisting them to see their account details, pay online bills and transfer money from one account to the opposite during a faster way. This has helped the end-user to enjoy a methodical financial life, further embracing hassle-free online banking.

The need for computerization was felt within the Indian banking sector within the late 1980s, where there was a need to enhance the customer service, book-keeping and MIS reporting. In the late 1980s, India was marred by various financial reforms and therefore the banking sector felt a requirement to enhance customer services and computerization of recording and accounting of knowledge. A committee was found out in 1988 by the Federal Reserve Bank of India which was headed by Dr C. Rangarajan to review Computerization within the Banking Sector. After the introduction of the Liberalization, Privatization, and Globalization (LPG) policy, the method of digitalization picked up the pace alongside the change within the Indian Economy.

The method of computerization gained pace with the reform within the Indian economy in 1991-92 at the time when private and foreign banks entered the Indian market meaning to digitalize the economy and improve the services provided by the general public sector banks to the purchasers. 1996-1998 were the years of internet banking/e-banking adoption in India after which, within the year 2000, the govt of India enacted the Information Technology Act, 2000 to provide legal recognition to electronic transactions and other means of electronic commerce.

The digitalization within the banking sector is often seen in India since the establishment of ATMs. Further developments like Telebanking, Electronic Compensation Service, Electronic Funds Transfer system, MICR, RTGS (Real-Time Gross Settlement), Point of sale terminal, etc. are often seen within the banking sector. E-banking has resulted in reducing costs drastically and has helped generate revenue through various channels. Various steps and initiatives had been adopted by the RBI and National Payment Corporation of India in strengthening the Payment and Settlement Systems in banks just like the launch of United Payments Interface (UPI) and Bharat Interface for Money. It is due to such initiatives and platforms, customers now don’t have to store or carry cash alongside them anymore, they will now make transactions anywhere at any time.


Today banks aim to provide fast, accurate and quality banking experience to their customers. Today, the topmost concern for all the banks in India is digitization.

The Indian Government is at a high rate is promoting digital transactions. The launch of the United Payments Interface (UPI) and Bharat Interface for Money (BHIM) by National Payments Corporation of India (NPCI) are the 2 major significant steps for innovation within the Payment Systems domain in India.

UPI is a mobile interface where people can make instant funds transfer between accounts in several banks supported virtual address.

As per the RBI Report of 2016-17, there are 2,22,475 Automated Teller Machines (ATMs) and 25,29,141 Point of Sale devices (POS). Implementation of electronic payment system like NEFT (National Electronic Fund Transfer), ECS (Electronic Clearing Service), RTGS (Real Time Gross Settlement), Cheque Truncation System, Mobile banking industry, Debit cards, Credit Cards, Prepaid cards have all gained wide acceptance in Indian banks. These are all remarkable landmarks within the digital revolution within the banking sector. Online banking has changed the face of banking and has achieved an important change in banking operations.

National Electronic Funds Transfer (NEFT) is that the most ordinarily used electronic payment method for transferring money from any bank branch to a different bank in India. It operates in half-hourly batches, at the present, there are 23 settlements.

Real-Time Gross Settlement (RTGS) is primarily used for high-value transactions which are supported ‘real-time’. The minimum amount to be remitted through RTGS is Rupees Two Lakhs. there’s no upper limit.

Immediate Payment Service (IMPS) is a moment electronic funds transfer facility offered by National Payments Corporation of India (NPCI) which is out there 24 x 7.

The usage of Prepaid payment instruments (PPIs) for the acquisition of products & services and funds transfers has increased considerably in recent years. Transactions through PPI Cards which include mobile prepaid instruments, gift cards, foreign travel cards, corporate cards & mobile wallets have jumped drastically from Rs.105 billion and Rs. 82 billion respectively in 2014-15 to Rs. 277 billion and Rs. 532 billion respectively in 2016-17.


Artificial Intelligence has acted as a backbone in the E-Banking and has continuously been contributing to the banking industry for a very long time to provide a greater level of value to us, reducing the risks, providing better opportunities as the financial engines of our modern economy.

AI is helping with the coming up innovations and transforming the way the needs of the clients are fulfilled and acts as a major role. Artificial Intelligence is also working on providing personalized support, better customer experience, time-efficient, reduced risks and cost-saving.

Better performance, higher profitability, and risk reduction are the three main goals which banking and financial sectors are trying to achieve at the moment to keep up with the competition in the world.

In this data-driven world, performance is dependent on those big data technologies which can store and manage data in real-time. Banks even have to mandatorily lend loans at a lower rate of interest to priority sectors like agriculture, housing, education. Data Analytics has played an important role in reducing cost, development and increasing client base for the banks.


Digital banking lately is not just confined towards using the web to access the banking services, as is typically perceived, however, it likewise incorporates of a whole exhibit of banking services delivered or consumed using technology. Advantages of digitalization within the banking sector are:-


Digitalization within the banking sector has offered the use of various sorts of services by sitting reception alongside no time restrictions. It has also reduced the gap between rural and concrete areas. With the digital payment modes or through E-Banking one can send money from one account to the other account of any bank branch from anywhere and anytime. Modes like USSD (Unstructured Supplementary Service Data), E-Wallets, UPI, Paytm other banking applications allow us to try to do so.


Digitalization has offered us to take care of our record, track our spending and budget planning. By using online applications, we get a record of each transaction we make. Applications automatically record the transactions within the passbook or simply have the records maintained inside the E-Wallet App. Thanks to digitization, more data are going to be available to banks. Banks can make use of digital analytics to form sound data-driven decisions. The threat of faux currency is going to be reduced as there’ll be a rise in cashless transactions.


Digitalization has created a simple and convenient lifestyle for the purchasers and therefore the financial organization, as now the utilization of physical cash has become very less as compared to digitalized cash and there’s no need carry along loads and a lot of cash from one place to another. The danger of human error has minimized which has led to a rise in consumer loyalty. Services like NEFT (National Electronic Fund Transfer), RTGS, etc. have also made it easy to transfer the amount from one bank to another very conveniently and quickly.


One of the good advantages of online banking is online bill pay. instead of having to write down checks or fill out forms to pay bills, once you found out your accounts at your online bank, all it takes is just simple click — or maybe less, as you’ll usually automate your bill payments. With online bill pay, it’s easy to manage your accounts from one central source and to trace payments into and out of your account.


Many discounts were announced by the govt and therefore the financial institution to encourage digital payments. If one uses digital modes for a payment up to 2000 INR, one gets full exemption from service tax. Nowadays many mobile application operators also provide some incentives like cash back and other promotional offers which have also provided benefits to the consumers. One also gets 75 per cent discounts on fuels and 10 per cent discounts on insurance premiums of state insurers etc.

Challenges Involved in Digitalizing Banking Activities

Digitalization has many obvious advantages such as accessibility to information, easy and immediate communication, low cost, reduced time and ability to share information, new jobs, and increased commercial competition. Even though there are plenty of advantages in going digital and enjoying the comfort of going digital but digitization in banking does not come without disadvantages. Below is a list of some of the challenges faced due to digitalization in the banking sector:

Cybercrime: Cybercrime is the use of digital instruments to further illegal ends, such as committing fraud, violating privacy, or stealing identities. This mode does not require the physical presence of the person, and one can execute such a crime from a faraway place, sitting comfortably in front of their computer/mobile screens. As the information and services have been digitalized the risk has been increased for both the bank and the consumer.


There is an immense feeling of consolation while using smartphones with various applications and features. The introduction by banks and financial institutions of application has progressively offered comfort and extravagance of observing costs at anywhere and time. It has made it easy for consumers to enjoy the services provided by the bank through mobile applications. But these associations have omitted that for several people these services are inaccessible as some can’t afford mobile and a few don’t skill to work these applications. Nonetheless, most of those applications are frequently ridden with bugs and also face various performance issues. it’s hard to explore these apps, once in a while, and that they frequently crash.


Worldwide, business-oriented banks like Chase have global transaction capabilities, like the power to send payments to quite 35 different currencies worldwide, that online banks won’t be ready to master. Without a real-world presence, most online banks can’t even offer the services of a notary, which require an in-person visit and necessary for many important financial transactions like buying a home.

Decreasing Quality at the cost of Speed: In the surge of wanting to convey products and services at an accelerated speed, companies regularly tend to compromise on the standard of the application. The standard-issue is that there’s nothing of the type as a touch bug; a bug may be a bug; it can harm the smartphones easily. There are a couple of cases of associations purposely choosing to disregard deserts in products and programming even before the thing hit the market.


Technology isn’t constant, it always keeps on evolving. As technology develops, more and more banking services are digitized to deal with the competitive market. Thus, it becomes difficult for consumers to stay up with these advancements and learn accordingly. As an example, an adult man after learning the banking application with difficulty started using it but some days later as technology advances, new features and updates are released by the bank on its applications then it again becomes difficult for that man to find out the updated app which mostly happens in the older population of the society and then they have to go back to the traditional ways of banking.


The main issues which are mainly faced by the banking authorities is the issue of authentication of their customers. The instructions which have virtually been provided by the Customer have originally been lodged or requested by him/her only or someone is personating on behalf of him is the main issue. Even after enacting various different measures like OTP, PIN, SMS/CALL verification relationship numbers, customer ID, etc. for securing the authentication of the consumers, the Bank and Cyber Frauds are increasing day by day and have emerged as a major challenge before the Cyber Cells and the concerned authorities.


Superheating the marketplace by offering imaginative services isn’t simply wanted, yet also, it required remaining on top of things and attracting a good customer base. Particularly with a huge base of youthful users, it becomes imperative to acknowledge the institution within the consistently becoming and competitive marketplace. In any case, financial institutions are frequently reluctant to require the jump, as they know that things can reverse discharge and cause moment reactions from perturbed customers.


E-Banking is no different business it is just banking utilizing Internet Channels. Banking is directed by RBI under RBI Act Subject to licensing Law regarding Electronic documents which are contained in the Information Technology Act 2000 as amended by the Information technology Act 2008.

Various provisions of law, which are applicable to traditional banking activities, are also applicable to internet banking. However, this does not overcome various problems, and therefore there is an urgent need for introducing stricter rules and regulations specific to meet the problems of e-banking. The legal framework for banking in India is provided by a group of enactments, viz.

The Banking Regulation Act, 1949; the Reserve Bank of India Act, 1934 and Foreign Exchange Management Act, 1999 are few among many such legislations. It is mandatory on the part of all entities to obtain a license from Reserve Bank of India under Banking Regulations Act, 1949 to function as a bank. Besides, banking activities are also influenced by various enactments governing trade and commerce, such as The Indian Contract Act, 1872, the Negotiable Instruments Act, 1881, Indian Evidence Act, 1872, etc.

Even after having a plethora of laws regulating e-banking yet there exists a grey area, which has neither been spelt out properly nor has there been any workable modes of implementation suggested by the Constitutional institutions.


Business Analytics and AI (AI) has the potential to bring a serious change. Robotics, enabled by AI, is predicted to be the longer-term game-changer within the banks. Many private banks are getting to deploy Robots for customer service, investment advisory and credit-approval process to enhance the services and be cost-effective within the end of the day. Digital Banking is going to be the foremost preferred sort of banking within the coming years.

Indeed, even as the COVID-19 pandemic claims a harsh cost for the economy, it’s catalyzing digital transformation across business models, channels and touchpoints. Fundamental this move is that the requirement for more noteworthy hierarchical nimbleness likewise as closer binds with clients during a changing world request. the technique for computerized change, in any case, is unpredictable and tedious for organizations likewise as buyers. Banking and payments, basic mainstays of the economy, are among the center territories that have seen a genuine uptick in computerized contributions and selection. While going advanced isn’t new, the pandemic has fundamentally quickened the reception of computerized innovations, with extensive ramifications for the more extended term of the financial area.

The digitalization has grown in every sector. As all the things have pros and cons, the same goes for the digitalization in the field of banking. The cons of digitalization carry the danger of fraud. The Linking of bank accounts with other Information’s have led a way for the criminals. The only way out is to have strict rules and regulations and the security system needs to be revised. The digitalization cannot be taken back to the old way but, the new way can be made safer with stringent rules and regulations.