Why top lenders are laying the groundwork for digital-only banks

India currently does not have a licensing and regulatory regime for 'digital-only' banks.
 

Such a bank would primarily rely on the internet to offer its services and not physical branches, all the while being subjected to the same prudential and liquidity norms as that of the incumbent commercial banks.

But some of the leading banks in India seem to be already preparing for that eventuality – looking to seize the opportunity as and when the RBI makes a decision.

The country's largest lender State Bank of India is looking to appoint an advisor who will revamp its mobile banking app YONO to enhance customer experience and ease of use.

The next generation of YONO, to be labelled 'Only Yono' will make SBI ready to launch a completely digital bank with a leaner and modular architecture with a personalised customer-centric design.

And, it's not just SBI. As the Reserve Bank of India lifted the restrictions imposed on HDFC Bank's digital initiatives, a senior executive of the bank said in a TV interview that the private lender believes there is space for a completely digital bank on the lines of what some other countries are doing.

Singapore, Hong Kong and Malaysia have introduced separate digital bank licensing regimes while South Korea, China and the UK have licensed digital banks within already existing regulations.

In November last year, government think tank NITI Aayog floated the idea of setting up completely digital banks. In the absence of regulations for full-stack digital banks in India the closest equivalent is neo-banks where fintech companies partner with existing licensed banks.

Such non-bank fintechs provide a software overlay through which consumers can access banking and value added services. 

Some examples include RazorpayX and Open whose main focus is businesses while neobanks like Jupiter and Niyo are consumer-focused.

This apart, existing licensed bank operate autonomous digital units under a different brand. These are essentially neobanking operations of traditional banks. Examples are SBI's YONO, Kotak Mahindra Bank's 811, 'digibank' by DBS.

In September 2020, the then SBI Chairman Rajnish Kumar had said that YONO could be worth $40-50 billion. However, separating YONO from SBI may not be practical since its value is derived by being the digital interface of the bank. It is still a mobile banking app that is an extension of SBI.  Each one of its users is still attached to an SBI branch.

That is why SBI hopes YONO will lay the foundation for a digital bank in the future.

Digital banks are cost-efficient models to serve different customer segments. The cost base of a digital-only bank can be up to 70% lower than its traditional counterparts. The important task for them will be to meet the expectations of the segments they want to focus on, be it millennials, students, salaried people or small businesses.