The banking sector has been historically regarded as one of the most stable systems across the globe. Even with the global upheavals, such as the 2008 Financial Crisis., the banking industry is continuously evolving with the introduction of digitalization. The long-established financial industry and market entrants are regularly introducing novel technologies into the banking system, such as AI and Blockchain. Moreover, the market players working over these technologies are considering the banking industry as one of their prominent customers. The financial firms are implementing several new products and services into the banking industry, such as risk management, lending, and investment products. However, the evolving regulatory and cybersecurity landscape has continued to create a challenging operating environment for companies offering digital banking platforms to financial institutions. 

Digitization is transforming the financial services industry as the financial industry is effectively leveraging digital technologies to innovate and improve the customer experience. The digital revolution is transforming the relationship between banks and their customers and the new features continuously appear for enhancing customer experience. This shift from old-fashioned banking to digital banking will continue over the years. The global digital banking industry is classified into corporate digital banking, investment digital banking, and retail digital banking.

Building blocks of the digital banking industry

A peek in the future of digital banking industry 

Increasing focus on the implementation of advanced technologies, including AI and Blockchain in the banking sector is offering an opportunity for highly secure and reliable operations. Banks are collaborating with fintech companies to develop DLT (Distributed Ledger Technology) platform. For instance, the Bank of England has announced to modernize its Real-Time Gross Settlement system (RTGS) with Blockchain technology by 2020. Similarly, there are several other innovations done by some players operating in the digital banking market. This includes the introduction of watch banking solutions. ebankIT, a UK-based digital banking company, has introduced the watch-optimized platform and digital channel for performing banking operations over smartphones.

Major banks thathave incorporated AI

The banks have been shifting their focus towards Blockchain technology to increase the security of financial transactions. In October 2016, EdgeVerve Systems, a subsidiary of Infosys; ICICI Bank Ltd., India's largest private sector bank by consolidated assets; and Emirates NBD, a banking group in the Middle East declared the pilot launch of a Blockchain network for international remittances and trade finance. Both, ICICI Bank and Emirates NBD, run Finacle solutions suite and have accelerated the Blockchain framework to pave the way for the business transaction between the two entities for trade finance business and international remittances.

India Digital Banking Industry

As per Invest India, the Indian banking industry comprises 27 public sector banks, 21 private sector banks, 49 foreign banks, and 56 regional rural banks. Along with these, the country consists of 1,562 urban cooperative banks and 94,384 rural cooperative banks. In the fiscal year 2019, the public and private banking sector were valued at $1422.9 billion and $741.8 billion, respectively. During April 2000-December 2019, around $80.7 billion of FDI inflows were attracted under the service sector (finance, banking, insurance, non-fin/business, outsourcing, others). India endeavors to promote a cashless economy, which catalyzed the rapid adoption of digital payment solutions across the country. As per Invest in India, digital payments are expected to get doubled to $135.2 billion by 2023. 

Realizing the potential of digital transactions in the banking sector, the Government of India is raising funding for the exploration of technology in every potential area of the banking sector. According to the Government of India, digital transactions in India increased to 31,335 million in 2018-2019, at a growth of 51% over the previous year. Further, to boost the digital transactions in the country, in June 2018, the Reserve Bank of India (RBI) has removed charges on fund transfers through Real Time Gross Settlement (RTGS) System and National Electronic Funds Transfer (NEFT).

The increasing investment in the fintech sector has been reported in the country in the recent past which is expected to continue in the forthcoming years. For instance, as per the Invest India, the Indian fintech market is estimated to jump from approximately $65 billion in 2019 to $140 billion in 2023. Nearly $5.7 billion investments in fintech were reported during the period, 2014-2018. Major segments within the Indian fintech space include Digital Lending, Digital Payments, InsurTech, BankTech, and WealthTech. Moreover, the Government and Reserve Bank of India (RBI) have taken several measures to facilitate easy access to finance for Micro, Small, and Medium Enterprises (MSMEs). Some of these measures include the unleashing Credit Guarantee Fund Scheme for Micro and Small Enterprises, along with issuing guidelines to banks regarding collateral requirements and setting up a Micro Units Development and Refinance Agency (MUDRA).

Initiatives by the Government of India 

Increasing internet penetration is significantly contributing to increasing digitalization and growing cohesive government policies such as “Digital India” in the country. The Government of India and RBI are actively promoting the financial inclusions with schemes such as Aadhar enrolment, MUDRA Yojna, Jan DhanYojna, VayaVandanaYojna, licensing of the payments bank, and others. The major FinTech companies across the nation are taking advantage of these initiatives for the expansion of financial inclusion that will further support the growth of the digital banking industry. Furthermore, initiatives such as Bharat Interface for Money (BHIM) which is based on a Unified Payment Interface (UPI) to facilitate e-payments directly through the bank is again encouraging the growth of digital banking industry in India.

Moreover, the Government of India is providing subsidies tax incentives to the fintech players to encourage the adoption of digital solutions in their banking systems. India is considered a potential market for the fintech sector due to the availability of large untapped market and the government is also pushing the investments in the fintech sector to boost digital banking. According to CFA Institute, Paytm had raised $1,400 million, and PhonePe funding amount to $500 million in 2017 in India for the development of fintech platforms. Around 29 startups out of 78 are currently working in fintech space in the country.

Under the Digital India initiative, a National Payment Service platform, PayGov, a government-approved, secure & convenient online platform offers an end-to-end transactional experience for citizens which allows them to access a range of services using the internet with payment gateway interface to conduct online payments. PayGov India is utilized for payments, including citizens debiting their bank/card account for payment to Govt. Dept. and settlements (monies getting settled in relevant tax head - major/minor head into government treasury with challan, such as BSR+CIN of an Agency Bank or Bank Account of Department/ PSU/ Local Bodies - Municipals) in case of treasury payments, the monies as per RBI guidelines will be settled into the treasury at T+1. The government is focusing on providing secure and reliable platforms and creating awareness for digital payments among consumers across the country.