CHALLENGES IN DIGITAL FINANCIAL SYSTEMIN INDIASlow infrastructure development Slowand delayed infrastructure development is one of the greatest challenges fordigital evolution in India. India is a developing country and about 70% ofIndians live in rural areas. Even today, a major portion of the rural arealacks access to internet. In India, the average Internet penetration is about33% but it is only about 16% in the rural areas. Digitalization of India cannotbe achieved without internet access. Among 139 countries, India has been ranked91st on the Networked Readiness Index 2016 (World Economic Forum). Ithas been estimated that internet access is available only to 15 out of 100households.
According to the Cellular Operators’ Association of IndiaIMC-Deloitte report, India has been ranked 36th in Internetinclusion based on affordability, availability, readiness and relevance. India also lags behind many countries inbroadband penetration with only 23% as of August, 2017. Studies show thatbroadband penetration is an important factor in the social-economic developmentof a country.
It has been estimated that if broadband penetration increases to60%, there could be possible increase of 5-6% in the GDP. Overthe past years, the usage of mobiles in rural areas has been rising steadily inspite of poor network connectivity. Though India has achieved more 350 millionmobile Internet users in a short period of less than a decade, much of it isconcentrated in the urban areas. The benefits of digitalization are multitude.
But so as to achieve digitalization, proper measures need to be taken. Thegovernment proposed the ‘National Optical Fibre Network’ as its flagshipprogram. This program will connect 2,44,729Gram Panchayats in the country through optical fibre cable (OFC). The program hasbeen allotted a budget of Rs 70,000 crores. The program has been under operationfor the past few years yet several villages are yet to reap its benefits.
Whilethe government claims to have reached 61,000 villages, reports say only 7,000of them have a working network. And as most of these 7,000-odd panchayats,there are almost no users or usage of the internet. India continues to trailthe world’s major economies in telecom infrastructure and penetration. Afterthe demonetisation move made by the government, the people were encouraged touse e-Wallets and make e-Payments. But e-Wallets can be used only if one hasaccess to internet, an internet-enabled phone, functional bank account and acredit/debit card. Freecharge, Paytm and the newly launched Bhim app by thegovernment cannot be used if the consumer does not have internet connection. So,a major challenge to ‘Digital India’ is lack of proper infrastructure.
Cultural differencesTheculture of a country also plays an important role in deciding the extent ofdevelopment. In India, there have been several cultural barriers fordigitalization. For instance, some panchayats or religious groups ban the useof mobile phones or computer education for women. About 72% of Indian women donot have access to mobile phones and only about 38% women have access tointernet in urban India (in 2015).
Whereas in the rural areas, only about 12%women have access to Internet.India isone of the most multilingual countries of the world in which more than athousand of mother-tongues were recorded by the census of India. In order totap rural areas, mobile manufacturers need to provide gadgets with multiplelanguage support as majority of people in India use local languages. Similarly,all e-Transaction apps should have the option of multiple languages.Moreover,illiteracy is still a major issue in rural India.
Therefore, e-contentneeds to be delivered in not only in text mode but also in speech because thatis the only way to ensure that the illiterates can also make use of the digitalfinance system.IT literacyThe 2016 FIIsurvey found that 49 % of India population had less digital literacy.Among the vulnerable groups, the situation was much worse. The elderly are 18% more likely to be digitallyilliterate that youth. Women also had very low levels of digital literacy.
Mostof the illiterate population was found to be digitally illiterate. Anotherchallenge was that people are not fully informed about digital services. As aresult of which, they lack trust in such services. When transactions fail dueto poor connectivity or confusing instructions, the initial trust placed in theplatform is lost and the customer returns to cash transactions. Data securityCyber security has become one of the most compellingpriorities for the government to ensure the safety of data. Over the past fewyears, cybersecurity in India has come a long way and has gained huge importance in recenttimes with the thrust on Digital India, e-commerce, and mobile payments. Databreaches have increased in number and intensity over the past few years. Thishas made cyber security a top priority for governments today.
The repeatedattacks against banks have shown that breach prevention and threat monitoringalone will not protect the system.Withdigitalization, there has been a shift in the banking industry. The use ofdigital channels such as mobile banking, digital wallets, Internet banking hasincreased.
This has made the financial system more susceptible tocyber-attacks. The main sources of threat are hackers, malicious insiders, terrorists,nations and unknown malicious outsider. Hackers are people who break intocomputers for revenge, financial gain or other purposes.
Maliciousinsiders are employees or contractors who manipulate the system for personalgains. In the first six months of 2017, one cyber-crime wasreported every 10 minutes. According to the Indian Computer Emergency ResponseTeam, 27,482 cases of cybercrime were reported from January to June, 2016. Financialsector faced almost three times the cyber-attacks as compared to that of theother industries. India has the highest average number of breaches recorded.
InIndia, 31,225 records were breached in 2015 whereas 29,611 records got breachedin the US. There was a 64 per cent increase in security incidents in India in2015 compared to 2014, with incidents growing both in terms of volume andsophistication,As digital channels have become thechoice of many customers for banking services, banks will also need to leverageadvanced authentication and access control processes, without any compromise tocustomer experience. The increased growth in digital payments platform in Indiaand the push towards a cashless economy has made cybersecurity the need of thehour. Fewof the major challenges faced by banks include1. The struggle to secure customerdata: There arenumber of ways in which violation of privacy can take place in banking sectorlike stolen or loss card data, unauthorised sharing of data with third partiesand loss of client’s personal data due to improper security measures.2. Third party risk: Banks need to conduct duediligence on third parties they are associated with. As per Payments cardindustry data security standard, third parties need to report any criticalissues associated the card data environment to the bank.
3. Evolving cyber threat landscape: The development in technologiesis leading to the latest cyber threats like next generation ransomwares, webattacks etc.4. Transaction frauds: Fraud detection technologies shouldbe in place with proper consideration of risks based on the business factors. 5. Secure SDLC: Banks need to incorporate SDLCsecurity for banking products and applications. Many Indianshesitate using online payment platforms due to security risks. Estimates showthat there was little growth in the percentage of consumers likely to makemobile payments between 2013 and 2014, increasing just 2 percentage points from22% to 24%.
Secure storage of financial account information is the mostimportant factor to consumers in a mobile payment application. There have beenseveral instances of State Bank of India, India’s largest bank, on October 19th2017, stated that it had blocked close to six lakh debit cards following amalware-related security breach in a non-SBI ATM network. Several other banks, suchas Axis Bank, HDFC Bank and ICICI Bank also admitted to being victims ofsimilar cyber-attacks.
Due to the massive data breach, Indian banks havedecided to either replace or request users to change the security codes of asmany as 3.2 million debit cards. However, in certain cases banks have decidedblocked the cards or issue fresh onesCard data of 3.
2 million customers was stolenbetween May 25th and July 10th from a network of Yes BankATMs managed by Hitachi Payment Services. OPPORTUNITIESIN DIGITAL FINANCIAL SYSTEM Digitalfinance can help achieve financial inclusion Aroundthe world, about 2 billion people do not have any access to financial services.The scenario is worst in the developing countries where only about 59% of womenand 50% of men have bank accounts. It can be observed that women, the poor, andsmall businesses depend mostly on informal financial services. In India, in theyear 2015, out of 600,000 villages only about 30,000 had a commercial bank branch.This meant that a significant fraction of the rural population did not haveaccess to financial activities. More than 50% of the Indian population did nothave access to bank accounts. Digitalpayment systems play an important role in driving financial inclusion.
Digitalpayment systems help overcome barriers in access to financial services. Mobilemoney schemes enable people who have a phone but not a bank account to make andreceive payments. In the right environment, these systems can take off andreach massive size rapidly.Mobile money can create significant improvements inthe lives of the poor. As most of rural India relies solely on cash, they areexcluded from the formal economy. Mobile money and payment systems is a convenientalternative to informal financial services and cash-based assets.
This waymobile money helps in financial inclusion. It reduces dependency on cash and encouragesdigital payments through mobile. It provides a way for people to take advantageof a much broader range of financial services. The business case for providing mobile money servicesto the unbanked in the most remote rural areas of India is not appealing tobanks.
Banks are interested in providing additive mobile banking services for theirexisting client base, where mobile is simply an additional and more convenientaccess channel. Until now, transformational mobile money services—the use ofinformation and communication technologies (ICTs) and non-bank retail channelsto extend financial services to clients who cannot be reached profitably withtraditional branch-based financial services—have not given banks the rightincentives to invest in these customers long term.Digital finance can increase women’s economicparticipation. In part, this is because digital payments can more easily beconcealed by the recipient than cash, at least temporarily, which helps shifteconomic decision making in favour of women. This helps in increasing femaleempowerment as women start feeling more independent and they learn to make choicesof their own. There is a significantly positive relationship between femalelabour force participation and female bank account ownership.
Digitalfinance can increase efficiency The internet reduces the cost of many financialtransactions by allowing their unbundling into separate components that can beautomated or provided by specialized entities. Digital payments help reducecosts to recipients. Digital payments allow better control. A retail paymentconsists of pre-transaction, authorization, clearing, settlement, andpost-transaction, each one again involving several steps. Specialized providerscan execute individual steps, yielding economies of scale that translate intosavings. Such service providers are becoming more widespread in developing andemerging markets.
Governments can also lower the cost of financialtransactions. Digital finance also increases the incentive to save, throughautomatic deposits, text reminders, or default options. Digital payments speedup delivery, which is especially important in case of emergencies such asnatural disasters. And they increase security as it is often not safe to travelwith large sums of cash. Moreover, a report by McKinsey had estimated thatIndians lose more than $2 billion a year in income simply because of the timeit takes travelling to and from a bank. With digital finance, vital baking servicescan be brought to 1.
6 billion people. For all individuals, convenience, cost,and the range of financial products would dramatically improve. (McKinsey Global Institute (MGI) report’Digital finance for all: Powering inclusive growth in emerging economies’)Financial services providers would also benefitfrom the shift from cash to digital payments, expanding their balance sheets byas much as $799 billion in India. For financial service providers, the cost ofoffering customers digital accounts can be 80 to 90 per cent lower than usingphysical branches. (McKinsey GlobalInstitute (MGI) report ‘Digital finance for all: Powering inclusive growth inemerging economies’)Digitalfinance reduces frauds Digital payments create a clear digital record andcan be traced back to the source. Thus, the likelihood of funds not reachingthe beneficiary or of duplicate payments or payments to “ghost” recipients whodo not exist will be lower. Evidence from India also shows that using smartcards rather than cash for social security payments halved the incidence ofdemands for bribes.
(World DevelopmentReport, 2016) Digitalfinance enables financial innovation The financial sector is transaction-intensive andhas always adopted cutting-edge new technology. Automation has helped reduce financialtransaction costs. This has encouraged innovations, such as automated creditscoring using advanced analytics and massive amounts of data. Automating processesenable emerging fin-tech firms to offer services costs much lower than traditionalproviders.
Another important innovation has been the emergenceof digital currencies. The most well-known digital currency called Bitcoin wasintroduced in the year 2009. Over the past years, its value in terms ofnational currency has been wavering. It has not been widely accepted as a meansof exchange. There have also instances of frauds.
But a study conducted by the Bank of England states that the main innovation ofsuch currencies is the distributed ledger which does away with accounting andsettlement by banks. This model could also work for other financial assets suchas loans, stocks, or bonds.Digitalfinance can boost the economyA report by McKinsey has estimated that the widespreadadoption of digital finance can boost the GDP of emerging economies by as muchas $3.7 trillion by 2025, a 6 per cent increase versus a business-as-usualscenario. For India, digital finance is a $700 billion opportunity which can offera 11.8 per cent boost to GDP by 2025, benefitting millions of people. Thisadditional GDP could create up to 95 million new jobs across all sectors, 21million of them in India (McKinsey GlobalInstitute (MGI) report ‘Digital finance for all: Powering inclusive growth inemerging economies’)Digital finance could be a boon to individuals, businesses,and governments across the developing world in boosting GDP. In India, digitalfinance can unleash over $689 billion in loans to individuals and smallbusiness.
This will have a good impact on the economy in the long run. Withincreased loans, more capital investments can be made. This will improve productivityand improve the economy in the long run.REFERENCES:1. McKinsey Global Institute (MGI) report ‘Digitalfinance for all: Powering inclusive growth in emerging economies’2. World Development Report, 20163. ‘DigitalFinancial Services: Challenges and Opportunities for Market Banks’ – https://www.ifc.org/wps/wcm/connect/4e45d83f-e049-41d3-8378-2e388ffc1594/EMCompass+Note+42+DFS+Challenges+updated.pdf?MOD=AJPERES