Digital bank account sparks off a disruption

The bank account is gradually morphing into something that’s easy to get and even easier to change. Eyeing cheap deposits, banks are way keener to open accounts than they were even 10 years ago. Result: the bank account is no longer just a place to park excess funds. It is on its way to becoming a commodity for new tech-savvy customers.

In January, the Reserve Bank of India (RBI) allowed banks to use video know-your-customer (KYC). Instead of the branch officials physically verifying documents, these can now be done online. It was a blessing in disguise for banks post the pandemic-induced lockdown in March 2020. In May, at least four private lenders—Kotak Mahindra Bank, IndusInd Bank, RBL Bank and IDFC First Bank—launched the service. Their public sector counterparts followed soon after.

“Now, every part of the process is digital and the physical interface is no longer required. Because there are such strong mobile banking applications available now, one can almost do all transactions on the phone. Once trust improves, in about a couple of years, the processes will be even more accepted," said Surinder Chawla, head of branch banking at RBL Bank.

While there is no specific data available on the ratio of digital bank accounts in the system, bankers say it is about half of all the new accounts that are being opened. For these customers, the bank branch is no longer necessary.

More recently, in December, ICICI Bank recently played disruptor by allowing customers of rival banks to use its mobile app. By onboarding new customers onto its platform, ICICI Bank sought to give them access to credit. At the launch of the app, Anup Bagchi, executive director, ICICI Bank, said that customers are tired of using multiple apps and there was a market need for a single app to take care of all banking and payments requirements.

Though it is early days yet, some bankers go so far as to see a future where getting out of a bank account could be as simple as shifting a mobile phone operator. In other words, portability. “The bank account is indeed on its way to become a commodity. For many, a wallet is proving to be an alternative to a bank account. What’s next is bank account portability... that will truly make it a complete commodity," said a senior private sector banker on condition of anonymity.

Of course, there is a big sticking point, one that applies to a gap that technology has still not been able to bridge: trust. Although banks are upbeat about the whole process of video KYC, customers are still not able to entirely trust online accounts to park large sums of money.

There are other challenges as well. Not every customer has access to internet bandwidth good enough to support seamless video. The other digital KYC process of Aadhaar-based one-time password (OTP) has some limitations at present. Customers can have balances of only up to ₹100,000 in those accounts and need to do a physical verification in order to remove these restrictions.

“We find that different customers are able to use different kinds of digital onboarding. While some would be comfortable with video, there would be other people who are not able to complete the video process for reasons like bandwidth issues or the unavailability of e-PAN," said Adhil Shetty, chief executive and co-founder, Bankbazaar.com.

There are some ambiguities as well in the video KYC process. For instance, while one can use e-PAN for video KYC, the same income tax identification document is not allowed to be used through DigiLocker, a government of India platform for storing identification documents.

Win-win for banks

Digital banking works not only in favour of customers, but lenders are also able to save significant costs. Lenders have also started positioning their mobile apps as a distinct entity, wooing customers away from the parent.

For instance, State Bank of India’s (SBI) Yono mobile app has gained an identity of its own and the bank now plans to hive it off into a subsidiary, which former chairman Rajnish Kumar said could fetch an astounding $40 billion in valuation. The app has garnered over 27 million users in less than three years.

“The digital-only bank can operate at very low cost, up to 70% lower in steady state compared with traditional operations. Creating such a separate entity often allows it to be launched faster, with fewer constraints related to legacy technology, and it allows banks to test concepts at lower risk before attempting to transform their entire business," McKinsey said in its Global Banking Annual Review last month.

In recent times, most banks have shifted to paperless processes for account opening in branches, leading to fewer human errors. “Digital account opening has undoubtedly led to cost savings for banks and provided greater efficiency. Besides, digital processes have also changed the way branch banking is conducted," said Sameer Narang, chief economist, Bank of Baroda. The public sector lender is looking to redesign its mobile app, which, at the end of March, had 11.43 million downloads on Google Play Store.

That said, the large branch banking networks created by Indian lenders are unlikely to suddenly thin out and be replaced by digital alternatives altogether. Although covid-19 has given a push in the digital direction, a section of their customers, especially for the state-owned banks, prefer to transact at branches.

Besides, some do not have a choice. There are state government pensioners in India who are not allowed access to ATM cards or internet banking and have to rely only on cheque withdrawals. The logic here is that if they are given digital banking access, the government will not be able to determine if the money is being siphoned off by someone else.

Portability conversations

In February 2016, an idea was floated by then RBI deputy governor S.S. Mundra at the Mint Annual Banking Conclave. Just consider the possibility of a dissatisfied or less than satisfied customer asking for shifting his banking relationship, lock, stock and barrel, to another bank, said Mundra.

“He or she would ask, if I can switch my mobile service provider without changing my mobile number, why not the banking service provider without changing my account number? This possibility can no longer be dismissed as wishful thinking," Mundra had said. The issue of portability featured again in his speech in May 2017 at an event by the Banking Codes and Standards Board of India.

However, this is easier said than done. First, banks process payments based on their internal codes known as IFSC. Secondly, the core banking solution (CBS) platform used by banks to stay connected to their branches varies from one lender to another. Not only do they use different software, some are also on different versions of the same software.

Bankers say it is an idea whose time is yet to come, at least from a technological standpoint. “As of now, each financial transaction data is kept on each bank’s server and that data is nowadays used for providing tailored offers to customers. This could be your pre-approved loans or even credit cards. Now, with portability, the issue is how do you migrate historical data between two banks in case the customer wants to move out?" asked Narang of BoB.

There is, however, a section of bankers who believe that it is not entirely impossible to achieve this if banks are brought on to the same information technology (IT) platform. The central bank has already centralised KYC, which will allow customers to use KYC done at one bank seamlessly in another.

The retail banking head of a private bank said that the centralised KYC is the first step toward enabling bank account portability.

“That said, the way bank account numbers are generated will also need to be relooked at. At present, account numbers have the branch and the product code (savings or current) embedded in it and those would not work at other banks, if the customer chooses to port out," said the banker on condition of anonymity.

Considering bank account portability seems distant and has its own set of challenges, what could work in the meantime is banks opening up their apps to users of other lenders—like ICICI Bank did recently. While that is not akin to porting out of a bank, it might be the first step towards users experiencing the kind of service another bank provides.

The challenges

As adoption of technology grows amongst banks, there will be an array of challenges that they could encounter. Keeping customer data and funds safe from fraudsters is a big risk, one that can be mitigated by spending more on cyber security.

According to Ashvin Parekh, managing partner, Ashvin Parekh Advisory Services LLP, identity theft is also a growing concern that needs to be effectively tackled as fraudsters lurking in cyberspace can scam unsuspecting people at the touch of a button remotely. “Challenges arising out of identity theft will be something banks need to secure their customers and themselves against," said Parekh.

Neo-banks, a relatively new concept in India, are yet to create any major disruption in the way people bank. Part of it is because the financial sector is quite tightly regulated by the central bank. Neo-banks or digital-only banks are therefore partnering traditional Indian banks to collaborate and fill gaps in certain segments with technology.

However, they could evolve as a contender to traditional banks, especially the less tech-savvy public sector banks that are already losing market share to private lenders. Globally, they are considered a force to reckon with.

Infrastructure too is a concern. Take the recent example of HDFC Bank’s outages— three since 2018—that led to RBI directing the bank to halt fresh digital banking initiatives, albeit temporarily. As outlined by the bank’s then executive director and now chief executive Sashidhar Jagdishan in January 2020, the bank “underestimated" the growth in payment volumes and the disruption was more of a capacity issue.

There has been an uptick in digital payments since the pandemic-induced lockdown and if banks are unable to scale up their capacities according to the surge in volumes, customers are in for a bumpy ride. Taking cognizance of the matter, RBI governor Shaktikanta Das recently told bank chiefs that they need to strengthen their IT systems in terms of capacity and efficiency.

Even so, the customer’s relationship with the bank account is changing swiftly. “Commodification is quite positive if you look at the telecom story. Even in banking, it means that more people have access to bank accounts and that necessarily propagates financial inclusion," said a former official at RBI on condition of anonymity.

Whenever a product becomes ubiquitous and available to everybody, it does become a commodity and there is nothing wrong in it, says the official cited above. “That it has reached everybody is a positive thing and, therefore, commodification of bank accounts is already a reality."