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In a February 24 document, ‘Assessment of the Progress of Digitisation from Cash to Electronic’, the Reserve Bank of India (RBI) noted that ‘cash still rules but it is increasingly seen as a way to store value as an economic asset ratherthan to make payments’.
This, despite the fact that the report candidly admits that there is no method to measure cash payments, while the great progress made by digital payments can be measured accurately. Encouraged by the reduction in the volume of notes in circulation, it asserts that RBI’s ‘endeavour is to make digital (payments) a divine experience to the users’.
One may choose to ignore this Panglossian claim as inspired hyperbole. But what if RBI governor Shaktikanta Das himself makes a set of pronouncements on the future of banking and fintech? Surely, these need to be analysed carefully to assure ourselves that any future regulatory framework balances the opportunities resulting from technological advancement with the risks inherent in a financial system.
Buffeted by headwinds like sluggish economic growth, slow credit offtake,rising inflation and ever-emerging bank non-performing assets (NPAs), coupled with strident calls for repo rate cuts and quantitative easing, Das probably has a limited amount of time to devote to the future of banking. But it is also true that he must weigh the consequences before articulating what lies ahead.
At a recent banking conclave in Mumbai, Das shared his ‘vision’ of an ideal future financial services landscape — there would be large banks, medium banks, small banks (including NBFCs, I assume) and digital players. But it was only when he predicted that fintech companies and other non-bank entities would collaborate with banks to service core banking needs, and help banks to use technology and innovation to bring down intermediation costs, that it really got interesting.
When fintech companies take advantage of banks’ reluctance to manage and expand a digital payments ecosystem — or provide the tools to simplify money management processes — their efforts are to be lauded. Banks would do well to imitate, or partner with, such entities. But when these same companies begin to develop and replace some of the core competencies of a bank itself —customer acquisition, risk assessment, fraud monitoring, product development and cross-selling — it begs the question: how long till these fintech entities are granted banking licences on account of their data, technology or delivery expertise? After all, Amazon and Netflix began as distribution adjacencies.
And are we sure that this unfettered scenario, awash with banking licences and thousands of competing products, will be the best possible world of all worlds? Without a crystal ball, this question can’t be answered. But what is clear is that RBI would be better served by focusing less on encouraging banks and fintechs to collaborate on ‘designing products with the customer in mind and focusing on improving the efficiencies of their services’.
Instead, it may want to focus on charting a vision for more stringent oversight and consumer protection. Das has spoken about a supervisory regime with technology-enabled supervision. While this is interesting, it does not spell out exactly how he intends to oversee and enforce a framework of rules that enables new entrants to harness the power of emerging technology, or existing players to outsource processes. Any compliance failures in this regard can be both expensive and reputationally disastrous.
The last time around, new entrants were found to be flouting KYC norms. In a world where anyone can peddle personal loans, this may be the least of RBI’s concerns. Another point on which Das has been somewhat silent pertains to consumer safeguards. In the US, all checking and savings accounts, and fixed deposits, are insured up to a value of $250,000 for each qualifying bank and depository account.
This is why, despite multiple wars, oil shocks and recessions, no US consumer has lost a penny since 1933. Given recent events, like the deplorable collapse of Punjab and Maharashtra Cooperative Bank last year, such a system is well worth emulating. For, despite the assurances of many startups and fintechs — waiting impatiently in the wings for their banking licences — any future disaster will have to be underwritten by GoI anyway.
While the market will evolve quickly and cheaply — and, hopefully, for the better — RBI should look to its own garden to ensure a safer and more sustainable future.
The writer is former head, partnerships and Citi merchant service, Citibank, US
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