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Nand Gopal Anand
Partner, Juris Corp
Reserve Bank of India: Riding the Technological Wave
During recent years, global economies have witnessed a surge in technological advancements and development. Governments and central banks in such economies are promoting development of new technologies and financial products by undertaking various measures, such as policy liberalisation, promoting tech start-ups, incentivising technological innovators, starting regulatory sandboxes etc. The Reserve Bank of India (“RBI”) has also been working tirelessly towards development of India financial markets by leveraging innovative technology.
16February, 2021by Nand Gopal Anand , Harshit Dusad Vrindesh Patel
During recent years, global economies have witnessed a surge in technological advancements and development. Governments and central banks in such economies are promoting the development of new technologies and financial products by undertaking various measures, such as policy liberalisation, promoting tech start-ups, incentivising technological innovators, starting regulatory sandboxes etc. The Reserve Bank of India (“RBI”) has also been working tirelessly towards development of India financial markets by leveraging innovative technology.
In May 2005 RBI had published the Financial Sector Technology Vision Document, which paved way for the Indian financial market’s technological transformation. Since then, RBI has made significant changes to the Indian financial sector for the implementation of technological solutions. One of the major innovations implemented by the RBI were the new delivery channels for customers. These included internet banking, mobile banking, ATMs, multi-functional ATMs, shared ATM services, online fund transfer services (RTGS/NEFT/IMPS/UPI) etc. The aim of these landmark developments, being towards an enhanced customer service using innovative technologies.
COVID-19 and Financial Technology Initiatives
In the year 2020, when the world was witnessing a lockdown due to the global pandemic outbreak, the need to function using technology-based systems became essential. Therefore, RBI too accelerated introduction and implementation of its technology promoting policies for enabling the public to access banking functions remotely. Continuing its trend of making banking services conveniently accessible, the RBI moulded the existing setup and undertook multiple initiatives to push the use of technology across India. Some of the key initiatives introduced by RBI are as follows:
- introduction of video-based customer identification process to complete KYC formalities remotely
- introductions of guidelines for authorisation and regulation of payment aggregators and payment gateways
- issuance of a perpetually valid certificate of authorisation to payment system operators under the Payment and Settlement Systems Act, 2007.
- creation of the Payments Infrastructure Fund to encourage deployment of points of sale infrastructure in tier-3 to tier-6 centres and northeastern states in India.
- introduction of a pilot scheme for testing innovative products enabling offline retail payments using cards, wallets, and mobile devices.
- setting up an incubation centre - Reserve Bank Innovation Hub, which shall invite and foster innovative ideas from all over India in the interest of efficient banking services, business continuity in times of emergency, strengthening consumer protection etc.
- launching two themes under the regulatory sandbox framework of RBI, focused on:
(a) retail payments, aiming to offer mobile payment solutions focused on feature phone-based payment services, offline payment solutions, and contactless payments.
(b) cross border payments, aiming to develop a low cost, secure, convenient, and transparent system having the potential to overhaul the cross-border payments landscape.
The above initiatives have the potential to catapult the Indian banking sector to newer heights, becoming a source of further innovation and development in various fields as well as opening new markets and opportunities for businesses. By the introduction of targeted initiatives through various means, RBI has been able to guide investments and orchestrate the growth and development of the Indian financial services sector. These initiatives have also helped the market participants to gauge the intentions of RBI and work towards targeted developments, thereby reaping the benefits of the initiatives by following guidelines of the RBI.
Consumers and Businesses Tagging Along with RBI to Ride the Wave
During recent years, India has been a frontrunner in implementing technological developments. However, the penetration and distribution of these throughout the country has been a challenge due to the unique demography, diversity and uneven spread of businesses. To address this, RBI has taken multiple initiatives to incentivise market participants to spread the existing technology across India. Further, it has also ensured that the development of new and innovative products is encouraged to cater to the specific needs of every part of the country.
The RBI has been actively working towards identifying areas of further development and implementing relevant guidelines for benefitting the product developers and businesses working in such fields. Given that the key to developing a successful product is the proper testing and implementation of the same in real-life conditions, RBI has ensured, through its initiatives such as the regulatory sandbox, that enough testing opportunities are available to developers. Such testing usually takes place under the supervision of RBI, which also helps it in formulating appropriate policies and guidelines in relation to such products.
Market Analysis and Future Prospects
From the initiatives adopted by the RBI, it can be very well said that India is aiming to become a frontline player in the field of financial technology. According to ‘Digital Payment Index’ published by RBI, the extent of digitisation of payments across India in March 2020 more than doubled as compared to March 2018. Further, digital transactions also grew by 15% as a share of retail payments in the last five years.13 This came as a surprise since traditionally, cash has always been the preferred mode of making payments in India. It is expected that digital transactions will further grow threefold to almost INR 7.09 trillion in 2025 from the current market value of INR 2.16 trillion in 2020. This clearly depicts that Indian banking sector has great potential of providing unparalleled returns to market participants, as well as services to the banking customers. With the ever-increasing reach of technology to rural areas, RBI will have to endeavour to get banks digitally geared up on all fronts, as the products developed by them will see more penetration across all corners of India. This will not only increase the customer base of banks, but innovative products shall be accessible to people across the country rather than only to urban areas where they are currently restricted to. This potential needs to be harnessed by the RBI by formulating proper policies and guidelines.
Adoption of artificial intelligence and machine learning has also been ground-breaking for the Indian banking sector. While larger Indian banks have already started with implementing products based on artificial intelligence, the smaller ones are also not far behind. However, this development is still at an early stage, and RBI can leverage Indian minds to steer developments specifically for the Indian banking sector. Simultaneously, RBI will also have to focus on formulating appropriate policies to ring-fence the development of artificial intelligence to ensure data protection of the consumers.
While the above picture may seem perfect, it shall also be noted that cybersecurity incidents related to digital banking almost doubled to approximately 2.9 lakh in the last year, as compared to 1.6 lakh reported in the year 2018. This highlights that technological development is directly proportional to increase in cybercrimes. Therefore, along with technological initiatives, measures for customer awareness and protection shall also be a focal point of the RBI. While RBI has taken adequate measures for customer protection, it is essential that innovative products are developed to identify and mitigate risks against cyber threats.
Once policy frameworks and technology-based products are implemented in concert, the dream of financial inclusion will turn out to be a reality.
The article has been authored by Nand Gopal Anand, Partner, Juris Corp, Harshit Dusad Senior Associate, Juris Corp, Vrindesh Patel, Associate, Juris Corp