Branchless banking: India vs world markets

In recent years, the internet has made the world one large marketplace where communication happens in real-time. It has affected every spectrum of our life making things more convenient. One of the key areas where the benefits of the internet have been put to good use is the financial services industry, especially banking. It has empowered banking to be location agnostic ensuring that regardless of where a person is, they have access to banking facilities. 

While banking as a concept goes way back to the 17th century it has been constantly evolving owing to changing customer behaviour, and a lot of its services have today turned digital with the assistance of modern technology. The late 20th century marked the dawn of branchless banking which has since then evolved significantly whilst moving towards tier-II cities and small towns offering the masses enhanced accessibility to banking and financial services.

The new developments in banking have led to sweeping changes in operational-centric services and have resulted in a more developed stream of services under branchless banking. The digital era in the 21st century has given rise to financial institutions optimizing branchless banks and their services to a large spectrum of audiences.

With the advent of COVID-19 and the fear of being affected, the banking sector witnessed crucial developments over the recent years. A drastic shift to branchless banking has been one such significant use-case owing to the growth of banking-focused technology. While in countries abroad, this was a matter of convenience, in India, it served as an impetus for the necessity of financial inclusion. 

Today, populations in rural geographies hindered by illiteracy, lack of access and tech-savviness are being served resourcefully by the model. In these volatile times, many fintechs have stepped up and enabled kirana stores and MSMEs to serve as cash disbursal points and banking agents in areas deprived of adequate financial infrastructure. Besides financial services, owing to their ability to seamlessly reach the masses, the network is also efficiently being leveraged to facilitate the vaccination drive to immunize the country. 

The Reserve Bank of India has been in a constant pursuit to empower India through the digitalization of banking and financial institutions. It is not only the customer on the banking side that has to be kept in check, but the non-banking financial institutions also need to be encouraged and given equal opportunities. On this front, at the beginning of the current financial year, RBI had announced new digital payment moves in its Monetary Policy Committee (MPC) meeting. The focus was on reducing the settlement risk and the widening the ecosystem through various measures. These included deposits hike to ₹2 lakh for payment banks, full KYC to PPIs (Prepaid Payment Instruments), using RTGS and NEFT by non-banking payment operators and finally, cash withdrawal from KYC PPIs issued by non-banks.

On the international front, branchless banking has been incorporated majorly in the developed countries. However, developing countries are working in a parallel growth pattern like India due to the lack of technology and uneven financial systems. Globally, fintech and banking technology vendors are making noise by bringing in big beneficiaries to the fore. The appealing power of these tech-savvy banks identifies the gaps, problems and pain points of traditional bank offerings and plugs them accordingly. However, these services differ from India by luring the young and unbanked population in developed nations through attractive saving account rates. In the US, they offer a rate of 1.50% compared to traditional banks that offer between 0.01% to 0.07%.

The financial inclusion measuring scale, known as the ‘global index’ by the World Bank, suggests that determinants such as age, demography, education or gender can impact the extent of financial inclusion. Therefore, the branchless ecosystem should be strengthened accordingly. Individual agents, introduced as business correspondents (BCs), should be supported. Provisions such as customer relationships, qualitative service delivery, data privacy and security, and cash availability enable connectivity and accessibility to digital banking. 

Artificial Intelligence, on the other hand, has grown in significance by aiming to add $1.2 trillion to the financial industry by the year 2035. AI-enabled tools are being facilitated by messaging apps and chat-bots answering people’s queries. Bankers have reoriented ways to access potential businesses and credit risks as they are equipped with high-security data analytics and AI algorithms. This helps the MSMEs, emerging tech companies and start-ups to know their creditworthiness.

India has a strategy in place to encourage the creation of ‘Responsible AI’. Its expansion of fibre-based internet to 6 lakh villages by 2025 will help transform access to financial services that will benefit the banking system.

Domestically or internationally, the rapid evolution of the banking system such as branchless banking will lead to favouring the investment pattern of customers. The regulatory aspects help in improving customer service and increasing the democratization of banking by giving rise to digital-first thinking. Branchless banking is the new mantra of the banking industry. It is, therefore, the most proficient scheme to bridge the urban-rural digital divide while empowering a digitally-centred country.