A regulated Digital Banking framework has become an undisputed component in the rapidly evolving Fintech ecosystem. The Indian fintech market is considered as one of the most robust, yet highly challenging as far as regulation and governance are considered. In order to bring some regulation within the industry, Niti Aayog has proposed floating an idea on digital banking.
But, would this initiative prove to be enough?
Let’s find out from the top-performing fintech players in India- Signzy, Tide India, Global PayEX, Spice Money, PayNearby, and Decimal. Fintech leaders shared their thoughts on the implications of this proposal and what it could mean for India’s banking and fintech ecosystem.
Government, Banks, and Fintech Come Together to Boost the Digital Banking Model
Ankit Ratan, Co-founder & CEO, Signzy, a banking automation infrastructure provider, said “India’s think tank, Niti Aayog mooting a proposal on licensing and regulatory framework for full-stack digital banks is a much-needed idea that will help set in place a regime for value-added services and boost account aggregators (AA) to create an efficient system for digital transactions. While on the one hand Account Aggregators will enable free flow of data between financial information providers(FIPs) and banks, on the other they will offer ease of access during loan applications, which will encourage entrepreneurs and businesses to execute their ideas faster. However, as Government, banks, and fintech come together to boost the Digital Bank model, fraud detection, electronic know your customer (e-KYC) that enable fully digital onboarding and analysis of customer’s identity, and anti-money-laundering checks will emerge as a business imperative.”
Ankit added, “At the same time, we will also see no-code applications and APIs that eliminate the need for coding software and allow banks to get to the market sooner will dominate the development of new products as well the entire Digital Banking ecosystem. Amidst this emerging technologies, such as blockchain will also play a critical role with advances, such as reduced counterparty risk, real-time settlement, and improved automation.”
Time to Sincerely Push Efforts to Operationalize Our Own Version of Open Banking Framework
Narayan ‘Naru’ Ramamoorthy, Chief Revenue Officer, Global PayEX, an AI-powered cloud platform for working capital optimization, said, “The intertwining of traditional banking and new-age technology has always acted as a push to the financial ecosystem of the country and the idea of developing full-stack digital banks with no physical branches is the next big move in strengthening the digital economy of the country. With this recommendation from India’s think tank, we see the country operationalizing its own version of the Open banking framework. While open banking is revolutionizing banking in developed countries, there are only a few Indian banks that are utilizing its complete potential. With this emerging framework, it will be interesting to watch how Digital Banks in India fill the current digital gap, reduce payment friction, enhance customer experience, accelerate lending decisions, and reduce operational costs.”
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Naru added, “In addition, this recommendation will also provide a thrust to the country’s platform approach towards digital payments. Though UPI is has a drastic growth in the recent past, we are expecting to witness a significant surge in payment modes, such as NACH/ACH, which have grown six times on our platform in the past year. As we go forward, we see a B2B fintech revolution budding in the country, which will help create better solutions for corporates, B2B payments and to bridge the gap in credit penetration for the MSMEs.”
We Should Look to Build An Agile Technical Stack and Robust Security Technology
Gurjodhpal Singh, CEO, Tide (IN), a UK-based fintech that launched its operations in India in 2020 said, “We welcome this proposal by Niti Aayog as the need of the hour. It’s not the geographical presence, but an agile technical stack and robust security technology that will help redefine banking for the underserved segment, and this idea if brought into action will enable us (fintechs) to take financial services to a larger set of the population in a secure and compliant manner. India indeed has a huge scope, potential, and appetite for open banking, developing open API platforms will help banking services and benefits reach a larger section of people.”
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Fintechs Can Leverage Their Already Existing Banking Correspondents Network
Dilip Modi, Founder, Spice Money said, “It’s great to see that Niti Aayog has proposed the idea of setting up full-stack ‘digital banks’. Digital operations have gained massive traction over the last few years owing to the increased internet and smartphone penetration in India.”
Dilip added, “The outbreak of the pandemic acted as a catalyst for further digitalization with several daily activities moving online – be it business operations, jobs, education or banking. There is a dearth of robust banking infrastructure in the rural areas where a major portion of our country resides. The establishment of digital banks will help in bringing this large part of India’s underserved population to the formal banking sector. This will further help in driving financial inclusion for Bharat that will lead to the growth of our overall economy. India is at the forefront of the digital revolution with increased efforts from our government and FinTech firms who are providing customized solutions to create a better customer experience. This is also in line with the PM Jan Dhan Yojana 3.0 that will focus mainly on doorstep banking & digital financial products. As per the scheme, the government aims to ensure the availability of banking services to everyone within 5 kilometers from any residential area. Digital Banks will help to achieve this target and FinTechs can leverage their already existing banking correspondents network to provide banking services to the last mile.”
We Need Digital Banking Framework as India Is Becoming a Digital-First Country
Arvind Nahata, Co-founder, Decimal Technologies, said, “India is becoming a digital-first country where the power of technology is constantly being leveraged to foster financial inclusion. The Niti Aayog’s discussion paper proposing setting up of full-stack digital banks is another major step towards delivering banking services to the farthest corners of the country. As is recognized by the paper, MSMEs are growth and employment generators that remain under-represented in the formal financial system, having to rely on informal, and often exploitative, sources of credit. Given the proposed full-stack digital banks will not rely on physical branches, they will be able to address the credit gap without facing any of the cost or infrastructural issues that is common with traditional banks. The proposal has the potential to disrupt the still largely traditional banking system and bring in innovations that serve the specific needs of MSMEs and SMEs. We are looking forward to seeing how these full-stack digital banks are operationalized and regulated as this step will only further emphasize the position of India as a global fintech leader.”
Arvind’s colleague, Lalit Mehta, Co-founder & CEO, Decimal Technologies pointed out to RBI’s recent insights on the digital lending proposals.
Lalit said, “The report by the RBI’s working group on digital lending is a welcome move as it is a significant step towards creating a safer digital lending ecosystem. Digital lending innovation is crucial for the country as it has the potential to address the credit gap, especially among MSMEs and the population living in underbanked areas. Integrating protection of consumers and transparency into the digital lending landscape will significantly increase the number of people with access to formal banking and sources of credit, eliminating the informal players. Another important point to note is the report’s focus on encouraging innovations – this can lead to growth for products that address the specific needs of the underserved that do not always have the documentation required by traditional financial institutions for a loan application. For instance, Saarathi, Decimal Technologies’ AI-enabled digital lending marketplace, digitizes the entire loan journey, from beginning to end, and addresses risk through AI-based assessment. The process is completely online and transparent that helps in reducing the potential of fraud and offering our customers a quick and personalized experience.”
Iterating on similar lines, Gaurav Chopra, Founder and CEO, IndiaLends and Founding member of Digital Lending Association of India (DLAI) said, “We at IndiaLends welcome all the recommendations as shared by RBI’s working group. We believe that recommendations such as on auditable logs for every action that a user performs on the app will be a game-changer for India’s digital lending industry. It will demolish many existing loan sharks and curb unfair practices. Moreover, the recommendation for digital lenders to provide a key fact statement in a standardized format including the Annual Percentage Rate will give a better perspective to borrowers about the high percentage rate they are willing to bear. Overall, the report seeks to safeguard consumers from unregulated digital lenders who have the potential to exploit borrowers with unfair or predatory terms.”
The Move to Set Up Full-Stack ‘Digital Banks’ Is Directionally a Great Enabler
Anand Kumar Bajaj, Founder, MD & CEO, PayNearby said, “Niti Aayog’s move to set up full-stack ‘Digital Banks’ is directionally a great enabler. Allowing Digital Bank as a new category will help set up a fresh thought process that is end-to-end digital, and where operational efficiencies will help deliver better value to the consumers. Beyond digital-savvy youth, this initiative can help tech-shy Bharat leapfrog to the next level of connectivity and commerce. Leveraging technology, this low-cost, efficient model will help accomplish a lot more in consonance with the existing banking infrastructure.”
Our take
There is absolutely no question if India really needs a digital banking framework. In the current scenario, India, or for that matter any country with an evolving digital economy requires strong regulation. In the coming weeks, we could see regulators taking greater initiatives to balance agile fintech growth with security, experience, and security management. This would definitely help technology innovation companies, end-users, fintech customers, financial institutions, and policymakers drive home a stronger message to all stakeholders involved in the industry.
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