India Opts for Phygital Banks Over Digital Banks.
“The challenge for banks isn’t becoming digital; it’s providing value perceived to be in line with the cost consumers are comfortable paying for.” – Ron Shevlin.
The RBI governor has rejected the idea of digital-only banks as the model poses risks to the system. “We received some suggestions on the digital bank, but we felt it carries certain risks. So, we have not accepted it at the moment. There is no proposal on digital banks because we feel that the existing banks and NBFCs can adopt more and more technology to deliver banking services.”
The step is a dampener to the Niti Aayog, who recently floated a discussion paper proposing digital-only banks that would entirely rely on digital platforms without having any physical presence. Anticipating approval from the RBI to the NITI Aayog proposal, the government announced opening digital banks in 75 districts across the country in its latest budget. The plan stands shelved. The RBI prefers hybrid Phygital banks over the exclusive Digital banks due to the risk of systemic failure.
Systemic risk is the inability to deliver confidentially and comfortably over a long sustained period due to insecurity of the delivery apparatus. It is the risk of the breakdown of an entire system rather than simply the failure of individual parts. In an economic context, it denotes the risk of a cascading loss caused by linkages within the financial system that can create severe economic downturns.
The threat of systemic failure is genuine due to ever-increasing digital frauds. Various technology companies in the financial sector pose risks around competition and data protection. The RBI is working on an approach to regulating fintech, which could be activity-based, entity-based, outcome-based or a mix of all three. Companies from social media, e-commerce, and search engines have started offering financial services on their own or on behalf of others like banks and NBFCs. These companies possess vulnerable customer data, which has helped them offer tailored financial services to entities lacking credit history or collateral. Lenders use fintech companies’ platforms in internal credit assessment processes. Such semi-cooked new methodologies in credit assessment are risky as they can create systemic concerns like over-leverage and inadequate credit assessment—the regulator endeavours to strike a balance between innovation and systemic risks by opting for hybrid phygital banking.
India is a teeming confluence of diversities where disparate views co-exist, cementing varied ethos and cultures. With the largest pool of youngsters, the country skillfully ornates the exuberance of youth with the experience of elders blending wisdom with knowledge. The contradictions and similarities are harnessed deftly for the way forward. India’s Banking reflects a new middle approach, with phygital and digital products catered simultaneously from a standard pedestal. With the ever-increasing need for credit, this model shall prevail, knocking off the switchover efforts from Phygital to Digital.
It is a fact that India’s success on the retail payments and credit front has failed to replicate when it comes to the credit needs of its small businesses. A significant credit gap persists in the MSMEs. The current credit gap reveals a need for leveraging technology to serve the needs of this segment.
A Full-Stack Digital Bank (DB) is an entity that operates as a fully functional bank regulated by the banking regulator. It accepts deposits and makes loans on its balance sheet. The idea for the full-stack digital bank was floated to address the limitations of the Physical banks to reach remotely placed last-mile aspirants of bank credit. Digital banks could quickly get there through mobile phone apps.
The advantages outweigh the disadvantages due to the existing poor digital firewalls. The idea of digital banks has evaporated as almost all banks cater digital and physical financial products to the delight of customers of all age groups.
The RBI step of rejecting the opening of exclusive digital banks is the right step in protecting the march to pursue the $ 5.0 trillion economy, as the country can ill afford path deterrents. RBI can ill afford to scatter further the personal data of depositors that lures fraudsters to derail the growth march.
At the end of the day, the customer-centric fintech solutions alone will win. Let Phygital prevail over Digital till digital banking is fully secure for customer delight.
– Hargovind Sachdev
