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Digital banking: A paradigm shaper

Last Updated 21 September 2014, 17:44 IST

The Pradhan Mantri Jan-Dhan Yojna (PMJDY) to universalise banking access and financial inclusion has now been formally launched. One of the features of the PMJDY that makes it different is the provision of a debit card.

The experiences of advanced countries suggests that as economies grow, preferences for substituting cash with more electronic based payment methods becomes imperative. The experience in India over the last couple of years has been somewhat on similar lines — a greater acceptance and penetration of modern electronic payment methods in the country. 

The use of electronic payment instruments also allows the unbanked to start building a transaction history, which can be a step towards initiating them towards financial inclusion. Choosing a cost effective model for such financial inclusion will require banks to significantly free up human resources, apart from using a banking correspondent model. One way to do that is to use the digital banking route.

The Pradhan Mantri Jan Dhan Yojna (PMJDY) to universalise banking access and financial inclusion has now been formally launched. 

The scheme envisages provision of a bank account, a debit card, accidental and life insurance cover up to Rs 1.30 lakh for the poor families. Further, the vision is to gradually move in a direction where every poor person is able to operate his bank account from his mobile as mobile penetration is higher than financial services penetration.

Beyond information access

The new scheme is unique in three senses. First is that while earlier, expansion in banking was considered as an opportunity for cross-sale of insurance, this time, providing insurance upfront to everyone will be a novel departure. Not many people know that the government of India, under its Postal Life Insurance (PLI), provides one of the cheapest insurance. PLI can be one of the vehicles for this insurance cover. However, PLI needs to be completely revamped to meet the ambitions of this new scheme. Currently, the scheme is open for government employees and rural populations.

Second, the use of mobile banking will take banking beyond information access, making transactions like bill pay, funds transfer, and service requests more easy and right at figure tips. The vast potential of cellular technology in future banking growth is evident from the fact that mobile banking-based transaction costs about 2 per cent of the branch banking cost, 10 per cent of ATM-based transaction cost and 50 per cent of Internet banking cost. This cost advantage of mobile banking still remains untapped. The future business opportunities of banks business will vastly depend on how well banks connect with customers, be its technology savvy or otherwise. Third, one of the features of the PMJDY that makes it different is the provision of a debit card. The importance of payment systems and involvement of banks in the same cannot be understated. The experiences of advanced countries suggests that as the economies grow, preferences for substituting cash with more electronic-based payment methods becomes imperative. The experience in India over the last couple of years has been somewhat on similar lines — a greater acceptance and penetration of modern electronic payment methods in the country. Even with an associated fee, electronic mode can be less expensive compared to the available alternatives.

The use of electronic payment instruments also allows the unbanked to start building a transaction history, which can be a step towards initiating them towards financial inclusion. Additionally, available data in public domain suggests that debit cards are a more preferred option of use in India than credit cards. The experience in China and Germany, both of whose economies are bank-dominated, suggest the same. This preference, if accounted in policy, can lead to significantly better product designs and hence customer satisfaction for banks.

Choosing a cost-effective model for such financial inclusion will require banks to significantly free up human resources, apart from using a banking correspondent model. It may be noted that in the next five years nearly one-third of the existing manpower of banks is going to retire on attaining superannuation. Against this background, banks can continue to encourage people to (1) go for branchless banking (mobile and Internet banking) and (2) digital banking. While branchless banking is already prevalent, the concept of digital banking is beginning to get relevant for Indian banks.

In effect, through digital banking, the customers will be able to open accounts on their own along with issuance of debit card instantaneously. State-of-the art technology with the active help of remote relationship managers will enable an interactive environment for cash deposits and withdrawals, cheque deposits and enquiries.

(The author is Chief Economic Adviser, State Bank of India)

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(Published 21 September 2014, 17:44 IST)

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