RBI governor says FinTechs are key enablers in the banking ecosystem

Sharing his thoughts on the new dimensions and emerging structure of banking in India, the RBI Governor pointed out how numerous FinTech start-ups had come up spanning the banking and financial services industry. “Banks are not only facing competition from Fintech companies but also from large technology companies (BigTechs) which are entering into financial services industry in a big way. Building on the advantages of the reinforcing nature of their data-network activities, some BigTechs are venturing into payments, money management, insurance and lending activities.

At present, he said, “financial services are only a small part of their business globally. But given their size and reach, their entry into financial services has the potential to bring about rapid transformation of the financial sector landscape.”

Talking of digital disruptions, the RBI Governor noted that, “Besides structural changes, digital disruptions will continue to transform the banking sector. Initiatives undertaken by the Government, the Reserve Bank and the industry have led to a radical shift towards ubiquitous digitization, which has provided an impetus to adoption of technology. There is a unique confluence of several positives like demographic dividend, JAM trinity, etc., that would further support rapid digitisation of financial services in India.”

With inroads into their traditional businesses, banks are expanding into newer areas such as insurance, asset management, brokerage and other services. “It is heartening to note that the mindset of banks is changing and they no longer view FinTech firms as disruptive. This change in approach has provided the financial services sector a sense of security. There is evidence that Fintech companies are acting as enablers in the banking ecosystem,” he said.

“Banks are relying on a number of strategies to embrace technological innovation, ranging from investing in FinTech companies and founding their own FinTech subsidiaries, to collaborating with Fintech companies. Banks and non-banks are partnering to offer the combination of trust and innovation to the Indian consumer. This “best of both worlds” approach has resulted in tremendous growth in the number of digital payments, which is expected to continue. These strategies can effectively ensure that banks retain market share, as customers increasingly value more efficient and cost-effective services,” he added.

Das went on to state that the movement towards digital payments has also been facilitated by introduction of fast payment systems, such as Immediate Payment Service (IMPS) and Unified Payment Interface (UPI), which provide immediate credit to beneficiaries and are available round the clock.

The Reserve Bank has recently started operating its retail payment system, viz., National Electronic Funds Transfer (NEFT) on a 24x7 basis. “This is a game changer and places India among very few countries which provide this facility. The Bank for International Settlements (BIS), in a recently published paper, has indicated that the UPI framework of India can become an international model to facilitate quick and seamless payments not only within countries but even across countries,” he informed.

“There is considerable interest at International fora to understand and learn from our experience in furthering digital payments and we are very glad to share and collaborate. The National Payments Corporation of India (NPCI) has also decided to set up a subsidiary to focus on taking the UPI model to other countries which will help enhance global outreach of India’s payment systems,” Das said.

Way Forward

“The changing landscape of the banking industry will unfold in the backdrop of a strong regulatory and supervisory regime with increased intensity and tech-enabled supervision of banks. The challenge before banks is to make the best use of technology and innovation to bring down intermediation costs while protecting their bottom lines. Further, Artificial Intelligence (AI), Machine Learning (ML) and Big Data are becoming central to financial services innovation. They can also help in fraud detection and in identifying better ways of monitoring use of funds by borrowers, track suspicious transactions, etc. by processing large datasets,” the RBI Governor said.

“As the Indian banking sector is propelled forward to a higher orbit, banks would have to strive hard to remain relevant in the changed economic environment by reworking their business strategies, designing products with the customer in mind and focusing on improving the efficiency of their services. The possibilities are enormous. We should be seized of the issues and act in time,” he concluded.