Financial Technology (FinTech) and Digital Banking in India

FinTech is an umbrella term coined in the recent past to denote technological innovations having a bearing on financial services. 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. Artificial intelligence (AI) refers to the simulation of human
intelligence in machines that are programmed to think like humans and mimic their actions. 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.
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. This book explains and examines various aspects of financial technology (FinTech) and digital banking in simple and non-technical language. It contains 17 chapters which have been organized into 2 parts.
Part I (chapters 1 to 3) is titled Financial Technology (FinTech) and Artificial Intelligence. (Al). It provides conceptual clarity as regards FinTech and the major FinTech innovations and services. It also explains the basics of Al.
Part II (chapters 4 to 17) is titled Digital Banking in India. It deals with various forms of payment systems, Reserve Bank of India (RBI) and other organizations linked to payment systems, paper-based traditional systems of payment, electronic payments (e-payments), card-based e- payment, non-card e-payment, internet banking, mobile banking, cyber space,
Shri Jaspal Singh (IPS) is currently Director General of Police, Goa. He joined the Indian Police Service in 1996 and has served in Delhi, Goa, Puducherry and Andaman and Nicobar (A&N) Islands in various capacities. He has handled field assignments for 12 years in different ranks.
He is the recipient of the Police Medal for Meritorious Service, Police Medal for Hard Duty and Lt. Governor’s Commendation for exemplary work in A&N Islands during the massive earthquake and Tsunami.
While still a student, he was nominated as a member of the University Senate by the Governor of Punjab for his excellence in academics.
Shri Jaspal graduated with Honours in Economics from Guru Nanak Dev University (GNDU), Amritsar, Punjab and also completed his LLM. from University of Delhi, Delhi. He also holds a Post- graduate degree in Management from GNDU, Amritsar, Punjab and a Masters degree in Computer Applications from Indira Gandhi National Open University (IGNOU), New Delhi. He was also a faculty member of the Department of Business Management, GNDU, Amritsar, Punjab. He also served as a senior executive with state-owned Hindustan Petroleum Corporation Limited.
He has received training with the Police Department of Los Angeles (US) and also attended a course organized by the US Department of State on Advanced Explosive Incident Counter Measures.

About the Book

FinTech is an umbrella term coined in the recent past to denote technological innovations having a bearing on financial services. 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.
Artificial intelligence (AI) refers to the simulation of human intelligence in machines that are programmed to think like humans and mimic their actions. 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.
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.
This book explains and examines various aspects of financial technology (FinTech) and digital banking in simple and non- technical language. It contains 17 chapters which have been organized into 2 parts.
Part I (chapters 1 to 3) is titled Financial Technology (FinTech) and Artificial Intelligence (AI). It provides conceptual clarity as regards FinTech and the major FinTech innovations and services. It also explains the basics of AI.
Part II (chapters 4 to 17) is titled Digital Banking in India. It deals with various forms of payment systems, Reserve Bank of India (RBI) and other organizations linked to payment systems, paper-based traditional systems of payment, electronic payments (e-payments), card-based e-payment, non-card e-payment, internet banking, mobile banking, cyber space, cyber attacks and cyber security, and data protection strategies and technologies.

About the Author

Shri Jaspal Singh (IPS) is currently Director General of Police, Goa. He joined the Indian Police Service in 1996 and has served in Delhi, Goa, Puducherry and Andaman and Nicobar (A&N) Islands in various capacities. He has handled field assignments for 12 years in different ranks.
He is the recipient of the Police Medal for Meritorious Service, Police Medal for Hard Duty and Lt. Governor’s Commendation for exemplary work in A&N Islands during the massive earthquake and Tsunami.
While still a student, he was nominated as a member of the University Senate by the Governor of Punjab for his excellence in academics.
Shri Jaspal graduated with Honours in Economics from Guru Nanak Dev University (GNDU), Amritsar, Punjab and also completed his LL.M. from University of Delhi, Delhi. He also holds a Post-graduate degree in Management from GNDU, Amritsar, Punjab and a Masters degree in Computer Applications from Indira Gandhi National Open University (IGNOU), New Delhi. He was also a faculty member of the Department of Business Management, GNDU, Amritsar, Punjab. He also served as a senior executive with state-owned Hindustan Petroleum Corporation Limited.
He has received training with the Police Department of Los Angeles (US) and also attended a course organized by the US Department of State on Advanced Explosive Incident Counter Measures.

Contents

   About the Book
   About the Author
   Preface
   Explanation of Select Terms Used in the Book
   Abbreviations/Acronyms
Part I: Financial Technology (FinTech) and Artificial Intelligence (AI)
 1. Financial Technology (FinTech): An Introduction
    1.1 What is FinTech?
    1.2 Evolution of FinTech
    1.3 Scope of FinTech
    1.4 Working Group on FinTech and Digital Banking
    1.5 Regulation of FinTech
      2. Major FinTech Innovations and Services
     2.1 Payments, Clearing and Settlement Services
     2.2 Deposits, Lending and Capital Raising Services
     2.3 Market Provisioning Services
      3. Artificial Intelligence (AI)
     3.1 What is AI?
    3.2 Applications of AI
    3.3 Components of AI
    3.4 Methods and Objectives of AI
   3.5 Is Strong AI Possible?
   3.6 Issues and Concerns
Part II: Digital Banking in India
   4. Digital Banking and India’s Digital Competitiveness
    4.1 Significance of Digitization
    4.2 Digitization in Banking Sector
    4.3 What is Digital Payment?
    4.4 Benefits of Digital Payments
    4.5 Role of RBI in Promoting Digital Payments
    4.6 Data on Payment Systems
    4.7 Cashless Transactions: India versus Other Countries
    4.8 World Digital Competitiveness Ranking, 2019 and India
    4.9 Digital Payments Index of RBI
     5. Importance and Forms of Payment Systems
    5.1 Money and Payment Obligations
    5.2 Importance of a Sound Payment System
    5.3 Forms of Payments
    5.4 Pre-Independence Payment Systems
    5.5 India’s Present Payment System Architecture
   6. Reserve Bank of India (RBI) and Payment Systems
     6.1 Payment and Settlement Systems (PSS) Act, 2007
     6.2 Board for Regulation and Supervision of Payment and                           Settlement Systems (BPSS)
     6.3 Vision Document for Payment Systems, 2005-08
     6.4 Vision Document for Payment Systems, 2012-15
    6.5 Payment and Settlement Systems in India: Vision 2018
    6.6 Payment and Settlement Systems in India: Vision 2019-21
      7. Organizations Linked to Payment Systems
     7.1 Board for Regulation and Supervision of Payment and                          Settlement Systems (BPSS)
    7.2 Clearing Corporation of India Limited (CCIL)
    7.3 National Securities Clearing Corporation Ltd. (NSCCL)
    7.4 Government Securities Settlement System
    7.5 National Payments Corporation of India (NPCI)
    7.6 National  Financial Switch (NFS)
    7.7 National Automated Clearing House (NACH)
8. Paper-based Traditional Systems of Payment
    8.1 Cheque
    8.2 Other Paper-based Instruments of Payment
9. Electronic Payments (E-payments) and India’s Global Ranking
   9.1 What are E-payments?
   9.2 Advantages of Electronic Transactions
   9.3  E-payment Ranking Survey
  10. Card-based Electronic Payment Systems
    10.1 Pre-paid Cards
    10.2 Debit Cards
    10.3 Credit Cards
    10.4 How to Use Debit/Credit Cards?
    10.5 Benefits of Debit/Credit Cards
    10.6 Automated Teller Machines (ATMs)
    10.7 Point-of-Sale (POS) Terminals and Online Transactions
    10.8 RuPay
    10.9 Business Correspondents (BCs)
    10.10 Village Level Entrepreneur (VLE)
    10.11 Working Group on Regulatory Mechanism for Cards
  11. Non-card Electronic Payment Systems
    11.1 Real Time Gross Settlement (RTGS)
    11.2 National Electronic Funds Transfer (NEFT)
    11.3 Electronic Clearing Services (ECS)
    11.4 Immediate Payment Services (IMPS)
    11.5 Unified Payments Interface (UPI)
    11.6 Unstructured Supplementary Service Data (USSD)
    11.7 Aadhaar-enabled Payment System (AEPS)
    11.8 Aadhaar Payment Bridge System (APBS)
    11.9 Bharat Interface for Money (BHIM)
    11.10 BHIM Aadhaar (Only for Merchants)
    11.11 e-Rupi
    11.12 Digital Wallet or Electronic Wallet  (E-Wallet)
    11.13 Electronic Toll Collections
               12. Internet Banking
    12.1 Internet Banking and Electronic Banking (E-banking)
    12.2 Distinctive Features of Internet Banking
    12.3 Levels of Banking Services Offered through Internet
    12.4 Advantages of Internet Banking
    12.5 Internet Banking in India
    12.6 Internet Banking and the Reserve Bank of India
    12.7 Security and Privacy Risks of Internet Banking
              13. Mobile Banking
    13.1 Mobile Banking and Financial Inclusion
    13.2 Mobile Banking: Regulatory Framework
    13.3 Various Channels for Mobile Banking
    13.4 Challenges Faced by Banks in Providing Mobile Banking                       Services
    13.5 Technical Committee on Mobile Banking
       14. Cyber Space, Cyber Attacks and Need for Cyber Security
    14.1 What is Cyber Space?
    14.2 Forms of Cyber Attacks and Threats
    14.3 Data Sought by Scamsters
    14.5 Consequences of Cyber Attacks 14.6 Need for Cyber Security
    15. Measures to Prevent Cyber Attacks and Threats
    15.1 International Convention on Cyber Crimes
    15.2 Efforts of Reserve Bank of India (RBI)
    15.3 Fraud Management in Electronic Banking
    15.4 System Architecture and Design
    15.5 Authentication Techniques
    15.6 Firewalls
    15.7 Cryptography
    15.8 Digital Signature and Certification
    15.9 Tools
    15.10 Digital Forensics
    15.11 Cyber Security Audit
    15.12 Artificial Intelligence (AI)
16. National Cyber Security Policy (NCSP)
    16.1 Objectives of NCSP
    16.2 Strategies of NCSP
17. Data Protection Strategies and Technologies
    17.1 What is Data Protection?
    17.2 Data Protection Strategies
    17.3 Data Protection Technologies
    17.4 Data Security and Data Privacy
    17.5 Need for Data Protection Legislation
    17.6 European Union Data Protection Directive
    17.7 Data Protection Act, 1998 of United Kingdom
    17.8 Data Protection Act, 2018 of United Kingdom
    17.9 Customer Data Protection in India
    Bibliography

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.
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
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