The Reserve Bank of India (RBI) has finally cracked the whip on HDFC Bank announcing certain supervisory actions following recent outages in the lender’s digital banking channels.
The regulator has asked the bank to temporarily stop all launches of the digital business generating activities planned under its program ‐ Digital 2.0 and other proposed business generating IT applications and sourcing of new credit card customers. In addition, the RBI order states that the Bank’s Board must examine the lapses and fix accountability.
The latest regulatory action follows a major digital outage reported by HDFC Bank on November 21, when all transactions through HDFC's credit/debit cards, internet banking, UPI, IMPS, and other modes of payment failed. The bank quickly swung into action and rectified the issue but not without leaving a question mark on the reliability of HDFC Bank digital channels.
The RBI reportedly sought an explanation from the bank on the event and yet again asked to make sure the problems are fixed.
There are seven key points raised here:
1. RBI action unprecedented
This is the first time the RBI asked a major bank to stop all new digital launches. In the past, the RBI has warned banks about the need to have adequate systems to support their digital banking functions and has looked into major outages. The regulator has observed that those instances were more of a ‘capacity issue’ or ‘technical glitches’ that occurs when the volume of transactions grows and the bank underestimates the growth. But, this time, the RBI seems to have lost patience and decided to crack the whip.
2. Not the first time, not the first bank
In December 2019, HDFC Bank’s digital banking services were affected for several days on end due to an alleged technical glitch in one of its data centres. The RBI expert team had then examined the issue and gave directions to the bank to fix the problems.
To be fair, technical glitches aren’t limited to HDFC Bank alone. Other banks too have been facing problems on the technical side, with the latest instance reported on State Bank of India’s (SBI) mobile banking application, YONO, in the last two days with customers complaining on Twitter that they are unable to login to the application following an error. This issue has not been resolved yet.
In October, some of the customers of another leading private lender, ICICI Bank too took to social media complaining of issues with the bank’s online payment systems and mobile app.
3. Banks under immense pressure from competition to be at the top of the digital game
Banks are under immense pressure from competition to come up with new digital banking products, often without proper testing and leading to such failures, said senior bankers. “There is intense competition from industry and new players such as payments banks to keep introducing new products. In their anxiety to remain at the top, banks often come with digital banking products that are not fully tested. Banks need to be careful to make sure they have enough technology capabilities to back such products,” said Naresh Malhotra, a senior banking consultant.
HDFC Bank is a pioneer in digital transactions and probably wants to be at the top of the game with new aggressive digital initiatives. In the process, the bank has probably struggled to make sure there are adequate capabilities leading to frequent failures, said bankers.
4. Technical issues at data centres. What exactly is this?
Most of these issues are attributed to technical snags in the data centres of the banks, often shared with other banks. In November during the digital banking outage, an HDFC Bank official, who didn’t want to be named, had told Moneycontrol that "the technical glitch was due to a power outage in DAKC data centre, which has several banks as clients."
But, there are many questions here. What are the technical snags in data centres? Why do these keep happening frequently? What can the bank and the regulator do to address this problem? These questions need answers to restore customer faith in digital banking channels.
5. Can customers trust digital banking channels for key transactions?
The frequent technical issues arising on major banks’ digital technology platforms are bound to raise questions among the customers on the reliability of these channels and could pave hurdles in banks’ efforts as they strive to draw more customers to alternative banking channels from traditional brick and mortar branches. Can customers rely on banks' digital banking products to do their important transactions?
6. Big challenge for HDFC Bank's new management
HDFC Bank just had a major leadership change. Aditya Puri, who served as CEO for 26 years, handed over charge to Sasidhar Jagdishan. For Jagdishan and his new team, the frequent mass digital outages are a big challenge to address before the problem gets worse. The management needs to restore customer faith.
This is especially important for a large private bank like HDFC bank which has a significant number of customers using digital channels for banking transactions compared with traditional state-run banks.
7. What is the key takeaway for banks from HDFC Bank episode?
As more people begin using the digital banking channels, it is the duty of banks to make sure there are enough technology capabilities to back up the growing volume. According to a Mint report, UPI transactions grew 6.7 per cent sequentially to 2.2 billion in November. Around 1.21 billion transactions were recorded in November 2019.
In recent years, more tech-savvy young customers now using only digital banking channels for important cash transactions. In the light of such frequent technical snags, can customers rely on digital banking products?The regulator has sent a strong message to banks on digital safeguards with supervisory action on HDFC Bank. Other banks should take cues from the RBI’s supervisory actions and up the safeguards on their digital channels.