Financial Technology (FinTech) and Digital Banking in India

Preface

The term FinTech is a contraction of the words finance and technology. It refers to the technological start-ups that are emerging to challenge traditional banking and financial players and covers an array of services, from crowd funding platforms and mobile payment solutions to online portfolio management tools and international money transfers. FinTech is an umbrella term coined in the recent past to denote technological innovation having a bearing on financial services.

FinTech is broad term used to describe emerging technological innovations in the financial services sector, with ever increasing reliance on information technology. Starting as a term referring to the backend technology used by large financial institutions, it has expanded to include technological innovation in the financial sector, including innovations in financial literacy and education, retail banking, investments etc.

Artificial intelligence (AI) has applications in the financial industry, where it is used to detect and flag activity in banking and finance such as unusual debit card usage and large account deposits-all of which help fraud department of a bank.

Artificial intelligence (AI) refers to the simulation of human intelligence in machines that are programmed to think like humans and mimic their actions. The term may also be applied to any machine that exhibits traits associated with a human mind such as learning and problem-solving. The ideal characteristic of artificial intelligence is its ability to rationalize and take actions that have the best chance of achieving a specific goal.

Banking system forms the core of the financial sector of an economy. Role of commercial banks is particularly important in underdeveloped countries. Through mobilisation of resources and their better allocation, commercial banks play an important role in the development process of underdeveloped countries. By offering attractive saving schemes and ensuring safety of deposits, commercial banks encourage willingness to save among the people. By reaching out to people in rural areas, they help convert idle savings into effective ones. Commercial banks improve the allocation of resources by lending money to priority sectors of the economy. These banks provide a meeting ground for the savers and the investors.

The banking industry all over the world has undergone transformation since the early 1980s under the impact of deregulation, advances in information technology and globalisation. Banks have traditionally been in the forefront of harnessing technology to improve their products, services and efficiency.

Due to steps taken by the Reserve Bank of India (RBI) to encourage electronic transactions, paper-based systems (cheque, demand draft, banker’s cheque, payment order, travellers’ cheque, interest warrant, dividend warrants, and money order) constitute a miniscule portion of retail payments. The number of clearing houses has also declined.

India has a rich diversity of digital payment options. Many of these are interoperable, and work through bank accounts, thus giving the users a lot more choice. However, the costs of digital payments are still an issue, and acceptance infrastructure is not widespread.

Card-based electronic payment systems are well-understood at the global and national level, and find acceptance at stores, as well as for online payments. India has had the presence of international players in the payments space for many years. Recently, an Indian player-National Payments Corporation of India (NPCI) has also introduced card payments through the RuPay scheme.

Cards are usually issued by banks and can be classified on the basis of their issuance, usage and payment by the card holder. There are three types of cards: (a) pre-paid cards, (b) debit cards and (c) credit cards.

In recent years, non-card electronic payment systems have become very popular. Advancements in banking technology. progress in mobile banking and innovative technologies to facilitate digital payments have enabled large number of small denomination transactions to be handled smoothly in electronic mode. The Government of India has taken policy decisions to encourage cashless/electronic transactions.

Cyber space is a complex environment consisting of interactions among people, software services, devices, networks and worldwide distribution of information and communication technology (ICT).

Owing to the numerous benefits brought about by technological advancements, the cyber space is a common pool used by citizens, businesses, critical information infrastructure, military and governments in a manner that makes it difficult to draw clear boundaries among these different groups. The cyber space is expected to be more complex in the foreseeable future, with many-fold increase in networks and devices connected to it.

One of the biggest attractions of cyber space, as an electronic medium, is its openness and freedom. It is a public domain and there is no restriction on who can use it as long as one adheres to its technical parameters. This has also given rise to concerns over the security of data and information and privacy.

Cyber space is vulnerable to a wide variety of incidents, whether intentional or accidental, man-made or natural, and the data exchanged in the cyber space can be exploited for nefarious purposes by both nation-states and non-state actors.

Cyber attacks and threats are faced by individuals, businesses and governments. These can take the following forms: (a) phishing, (b) hacking, (c) scamming, (d) sniffing, (e) spoofing and (f) denial of service attack.

The only way to protect ourselves from such activities is to be vigilant about our data and protect the data from getting into the hands of scamsters and fraudsters.

Consequences of cyber attacks are disastrous. Large-scale cyber incidents may overwhelm the government, public and private sector resources and services by disrupting functioning of critical information systems. Complications from disruption of such a magnitude may threaten lives, economy and national security.

Openness and freedom of use of the cyber space has given rise to concerns over the security of data and information and privacy. These concerns are common to any network including closed user group networks. However, over the internet, the dimensions of risk are larger while the control measures are relatively fewer.

Rapid identification, information exchange, investigation and co-ordinated response and remediation can mitigate the damage caused by malicious cyber space activity.

To improve customer confidence in digital payments, it is of utmost importance to keep a control on the number of frauds that occur, and to ensure that customers are not impacted.

Acknowledgements

This work draws, in part, on the information provided in the publications and websites of various national and international institutions/organizations, in particular the Ministry of Finance, Government of India, Ministry of Communications, Government of India, Ministry of Electronics and Information Technology, Government of India, Reserve Bank of India (RBI), National Payments Corporation of India (NPCI), and NITI Aayog. Use of information from these sources is gratefully acknowledged.

Goa July 2022

Jaspal Singh