U N I T

1
Digital Delivery Channels

Objective
The objective of this Unit is to understand the concept of digital
banking and the various types of products/channels/services
available as a choice while performing banking transactions. This
module also details the usage pattern of each product/channel
and its benefits to the customers and banks.

1.1 Introduction to Digital Banking

Digital banking, internet banking, Omni Channel or online banking refers
to using digital channels and technologies to conduct financial transactions
and manage financial services.
Digital banking allows customers to access their bank accounts and per-
form banking transactions through a web-based or mobile applications.
This includes checking account balances, transferring funds between
accounts, paying bills, applying for loans and opening new accounts
online.
With digital banking, customers can access their accounts and manage
their finances anytime and from anywhere without visiting a physical bank
branch. This provides convenience, flexibility and cost savings for the
bank and the customer. Digital banking enables banks to offer their cus-
tomers new and innovative services and products such as digital wallets,
mobile payments and peer-to-peer transfers.
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The term “digitization” describes the transition from analogue to digital

implementations of certain tasks. Think about how far automated teller
machines have come from when customers had to deal with a human
teller to get their money out of the bank. As an organization undergoes
a digital transformation, it unifies and streamlines its many digital com-
ponents (such as digital operations, processes and other digitally enabled
activities). Efforts like this aim to provide a unified customer experience
across all channels and gain a comprehensive understanding of each indi-
vidual client’s needs. Digital reinvention is pushing digitalization to new
heights, which itself is developing.
Today, the world is fast-paced and financial processes run on the cutting
edge of applied technologies. Large volumes of money must be moved
instantaneously across the globe, or transactions are desired in the physical
world without physical cash. Customers look towards completing their
banking and other financial operations from the comfort of their homes
and with maximum possible convenience. This has led to the advent,
rise and explosion of Alternate Delivery Channels, quickly overtaking
traditional Banking Channels like Brick-and-Mortar (i.e., branch-based)
banking. Alternate Delivery Channels include ATMs, Debit/Credit/
Prepaid Cards, Point of Sale (POS) terminals, Internet, Unified Payment
Interface (UPI) and Mobile Banking. Also, advanced electronic payment
systems like RTGS and NEFT have quickened and interlinked transac-
tions across organisations and individual accounts. The Development and
use of Alternate Delivery Channels contribute to digital banking.
Digital Banking is evolving using new innovative technologies and
banking tools. It aims to leverage the strengths of digital technologies to
bind and put together the standard online/mobile/electronic banking
services to enrich and enhance the value of the service rendered and user
experience. An example may be to run Analytics in the background.
At the same time, the customer is online and controls the screen-based
interactive content in the session to facilitate the customer’s banking ac-
tivities while attempting ‘up sale’ or ‘loyalty enforcement’ for the bank.
Customer centricity is a major trend in service industries now, and to do
this in banking, banks need to capture customer actions in the banking
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application, and then process that huge data to yield meaningful insight
into customer behaviour and needs and create services and products to
meet them, market them where exactly customer expects them, etc. Using
and leveraging digital techniques for this entire gamut is all that digital
banking is about.
Conducting a banking business in the modern age would be extremely
challenging without digitalization. Financial institutions that fail to provide
adequate service to their clientele in this digital age will not fare well in
today’s highly competitive financial environment. Nowadays, inhabitants
staying in the farthest corners of the world can relate to the help of modern
processes. Electronic banking services such as money transfers, statements,
enquiries, deposit creation, online trading settlements, online actions, fees
and taxes payments etc., are all made possible without visiting a bank.
Banks, by examining the customer portfolio and transaction habits etc.,
quite often initiate payment reminders, analysis of investments, advisories
on markets and many other financial conveniences. These can happen
without physical travel or loss of time across accounts in various banks of
the same or different customers. Digital Banking is more than just going
paperless. Besides reducing paper-based transactions, the primary focus
is enhancing the product suite with value-added services and achieving
an integrated channel experience, through Omni Channel services, for
the customer.
Banking operations have transformed from Manual Ledgers to Advanced
Ledger Posting Machines (ALPMs) to Core Banking Systems (CBS) during
the last two decades of the 20th century and the initial phase of the 21st
century. CBS automated banking operations, where the customer has the
option to do the same transaction, say payment, over multiple channels,
viz. Cheque issuance/NEFT/IMPS/Card based payment, Fund Transfer
through UPI/BHIM/Wallets etc., using either bank branch, Internet or
mobile. Now, Banking is moving towards “Open Banking”, where banks
open up their APIs (Application Programming Interfaces) for third parties
to develop new apps and services. This service allows banks to offer more
personalized products & services to their customers.
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1.2 Need for Digital Channels

Due to the growing demand for increased consumer convenience, acces-
sibility and banking options, alternative delivery channels are becoming
increasingly important in today’s banking business. Some of the many
benefits of using non-traditional methods of distribution include the
following:
 Customers today want the convenience of checking their accounts
and making financial transactions whenever and wherever they like.
Online, mobile banking and UPI banking are three major alternative
delivery channels enabling financial institutions to fulfil these needs.
 A traditional bank branch’s operating and maintenance costs can
add up quickly. Alternative delivery channels help banks save cost
with added advantage of enhanced customer convenience.
 Alternative delivery channels allow banks to serve consumers
in locations where opening a branch would be too expensive or
impractical.
 Customers can get a more tailored and hassle-free service using
alternative delivery channels. Mobile banking apps, for instance,
can furnish customers with individualized budgeting advice,
specialized product recommendations and remuneration for their
loyalty.
 Biometric verification, two-factor authentication and real-time
fraud detection are some improved security features made available
via alternative distribution channels.
 The convenience and adaptability that various distribution
channels offer customers give banks an edge in today’s fast-paced,
digital environment.
It is evident that both brick-and-mortar channels (branches) and ATMs
are under pressure for banking services not only from the operations
point of view but also from the business point of view. Besides this, the
cost of performing a transaction at the bank branch level is quite high
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compared to ATM; the cost is further reduced when a customer opts

to transact at a Merchant Point of Sale (PoS), E-commerce, or Mobile
Banking. Incidentally, we have only 60.7 lakhs bank-linked POS devices
(RBI Annual Report, 2021-22) and considering the population, this seems
inadequate.
Adopting digital channels can help banks to cut costs, deepen customer
satisfaction and loyalty, and drive long-term relationships and profitability.

1.3 Cost of Transactions

According to an ASSOCHAM-PwC study, Banks in India can reduce
costs by up to 50 per cent on a per-transaction basis by redesigning their
processes and systems for the digital age, structurally changing their cost
base and instituting more aggressive ongoing cost management processes.
Banks incur cost in implementing and maintaining the infrastructure
required for processing electronic transactions. They have both fixed and
recurring costs which are incurred for ensuring that the infrastructure is
safe and secure, and processing of payments is done in timely manner.
Processing such transactions also involves costs as sufficient manpower /
resources need to be deployed to support their processing.
For transactions performed using a debit card, the costs incurred by
the issuer are limited to the cost of IT systems, fraud risk management
systems, support systems and incentives (like reward and loyalty points)
for customers. Unlike in credit cards, the debit card issuer does not incur
any cost on the funds transferred. It also enjoys the float benefit. In this
regard, the transaction done using a debit card is akin to a normal funds
transfer payment transaction, with deferred net settlement where the
merchant receives the funds on a T+n basis. The below mentioned depicts
the approximate cost incurred by stakeholders in processing a debit card
transaction
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Box 1: Approximate cost incurred by PSPs in processing of a typical debit card transaction

This box depicts ~ cost incurred by three PSPs – card issuer, acquirer and card network – in processing of a
typical debit card transaction of value ` 1,700/- at PoS terminal/online (e-commerce)

Card network
Card issuer incurs Acquirer incurs
incurs ~0.12%
~0.35% (~` 5.95) ~0.25% (~` 4.25) of
(~` 2.04) of
of transaction transaction
transaction
value value
value

The three PSPs – card issuer, acquirer and card network – collectively incur ` 12.24 for process-
ing a debit card transaction of value ` 1,700/- at PoS terminal / online (e-commerce)

Note: Costs mentioned above reflect approximate figures and may vary with transactions processed using
debit cards affiliated to different card networks. They do not reflect cost incurred in giving incentives to
users for increasing the use of digital payments.

As on date, charges in UPI are nil for users and merchants alike. Merchant
payments using UPI do not require installation of costly infrastructure by
merchants as UPI QR codes are used. The cost of merchant infrastructure
for UPI is lower as compared to the cost incurred in a card-based acceptance
infrastructure. UPI as a fund transfer system enables real-time movement
of funds. UPI as a merchant payment system also facilitates real-time set-
tlement, as against the T+n settlement cycle for card settlements. However,
the settlement among participant banks in UPI is on a deferred net basis.
Facilitating this settlement requires the Payment System Operators (PSO)
and banks to put in place adequate systems and processes to address the
settlement risk. This involves additional costs to the system. The below
mentioned chart depicts the approximate cost incurred by stakeholders
in processing a UPI P2M transaction.
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This box depicts ~cost incurred by different stakeholders in a UPI-P2M transaction

with average transaction value ~` 800/-

Beneficiary's bank,
UPI app provider
Payer’s bank incurs beneficiary's UPI app
of payer and its
~0.10% (~`0.80) of provider and its PSP bank
PSP bank incur ~0.06%
average transaction collectively incur ~0.07%
(~`0.48) of average
value (~`0.56) of overage
transaction value
transaction value

NPCI incurs
~0.02% (~` 0.16) of
average transaction
value

Collectively, the stakeholders incur ~ ` 2 for processing a UPI-P2M transaction with average
transaction value ` 800
Note: Costs mentioned above reflect approximate figures. They do not reflect cost incurred in giving incentives
to users for increasing the use of digital payments.

Source: Discussion Paper on Charges in Payment Systems, RBI

1.4 Customer Preferences for Digital Banking

The shift towards alternate delivery channels in banking has been occur-
ring for some time, and it’s expected to continue in the coming years.
Customers are increasingly using digital channels such as mobile banking
apps, online banking and chatbots to conduct their banking activities,
which is driving the growth of digital banking.
It is observed that customers do not mind having to pay a little extra for
digital banking services, as it offers them value and convenience. The
add-ons like e-wallets for loyalty points, social media notifications etc., are
perceived as value-adds, and customers may not object to being charged
for them.
Recent developments of new digital features in banking service delivery
often utilise:
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 Improvements in user-experience design through interactive

interfaces that blur the boundaries between the real and the virtual,
thereby, bringing data to life through rich presentations.
 The power to access the internet from anywhere.
 Tremendous advances in Analytical tools which can decipher and
work out customer profiles.
 New technologies enable end-to-end communication between the
customers and the Bank.
Relationship in banking is very important which ties a customer to the
bank. A bank that can cater to customers’ requirements in a desired format,
functionality, platform, speed and ease in the initial interactions is likely
to be the bank of choice for customers when they are planning to buy
another financial product. Incidentally, it is seen that while the elderly
population do not change their banker easily and they refer all their needs
to their existing bank first, the younger generation displays less loyalty and
goes for the best deal in the market. So, customer retention for banks has
become tougher, especially, in the case of young customers.

1.5 Customer Digital Interface for Digital Banking Products

Customers today look for high digital communication standards, sleek
page designs, rich functionalities, rapid results for searches and interactive
features. Digital banking permits the customer to generate their accounts
statement from anywhere on a 24 × 7 basis instead of waiting for a monthly
statement by postal mail.
Consumers today have a vast amount of information, a large amount of
which is often obtained instantaneously. Opinions, both good and bad, can
be shared in seconds and can even go viral. This is exemplified by various
posts on Facebook, WhatsApp, Twitter and even email. Therefore, it is
essential for banks to understand their contemporary customers well and
take care of their changing needs, failing which there is every possibility
of the customers turning around and becoming a source of bad publicity
for the Bank.
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Banks must understand the logic of customer thinking in deciding where

to save their money and in choosing their primary banking relationship.
This has a long-term influence on the customer, which can also strongly
influence their friends and social circle.
There are some aspects that banks need to reckon with for offering robust
digital services, namely:
1. Customers’ attitude and behaviour are evolving rapidly.
2. Digital mode is preferred worldwide.
3. Digital technology is changing, and every technological advance
opens new capabilities for enhancing customer experience.
4. Technology reduces the cost of operations and servicing for the
bank, and the reduction can, thereby, be passed on to the customer.
5. Technology also reduces the delivery time of products/services.
6. Digital channel is more customer friendly in terms of saving their
effort, cost and time.
7. However, computerised operations bring in their associated risks,
and all products, services, and offerings must be secure so that
information loss, error and unintended access do not happen.
With more digital content and platforms, banks need to implement
information security measures to protect interests of both Bank
and Customer.
8. Customer education and communication for technology-based
services will be different in content and mode of delivery, compared
to traditional practices. Banks need to master these also for effective
use of their offerings.

1.6 Technology - The foundation for user-friendliness and

customer interaction
Digital banking relationships need to move beyond basic internet bank-
ing to 360-degree interaction. In the digital era, KYC or ‘Know Your
Customer’ is something beyond regulatory compliances and is trying to
determine the complete customer profile and how the customer wants to
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interact with the bank. Tools such as data mining, analytics, etc. are being
used to map customers’ behaviour, preferences and attitude.
With customers adopting more and more digital channels for commu-
nications, banks have a new opportunity to present themselves in a fresh
light. Banks must understand and appreciate the evolving behavioural
patterns in using bank accounts, purchasing lifestyle goods online, re-
sorting to e-commerce etc. Getting it correct can reap rich rewards for
banks in the long term, whilst getting it wrong can potentially lead to
a lost generation of customers. It is very important to note here that
the formulation of a digital banking service needs to take cognizance of
the customer’s behaviour and needs based on his/her habits and general
practices in society. For example, say a young customer is comfortable on
Facebook or similar social media for a longer part of his time and displays
tendencies to use advertisement links and hints to search and make online
purchases or searches for banking services. A bank’s presence in such a
platform, look and feel of the offerings, ease of navigation of the options
offered for transaction, stability and security of its operations thereon
will be found helpful for that customer, if the bank’s messages and nav-
igations are aligned to such environment and user behavioural aspects.
Understanding the customer and aligning and empowering services are
the basic steps at the backend of digital banking.

1.7 Security is the cornerstone of digital banking

Security extends from the bank’s hardware to the endpoint devices –
whether a PC/Mac at home, a tablet or the newest smartphone. In
all cases, digital banking must employ strong and secure technologies
which protect communication, user information and the bank’s IT
infrastructure.
Banks should address weaknesses in security, balance between security
posture and business goals and also think beyond regulatory compliance.
The most common issues that banks need to address to achieve effective
and proactive security in their digital banking segments are:
 Linking security and business practices - Dovetailing.
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 Robust Information Security Governance – Prescribing best

practices and controls in development, operations and delivery of
services; Customer education and effective Information Security
Audit procedure.
 Engaging business stakeholders in the security dialogues.
 Aligning IT Governance with business goals of the organisation.
 Governing the enterprise - Establishing appropriate frameworks,
policies and controls to protect IT environments and practice info-
security.
 Establishing an effective Cyber Security Operations Centre (Cyber
S.O.C)- Keeping pace with persistent threats - Adopting a proactive
and dynamic approach, including intelligence, analytics and tie-up
with specialized security service providers to deal with the widening
array of possible failures/attacks.
 Addressing the security capability need - Developing, training
and retaining staff experienced in security planning, design and
execution to increase the likelihood of continued success of the
security set-up.
In the following chapters, we shall look at various aspects of digital tech-
nology-based banking operations, different products, channels, and the
issues involved.

1.8 Information Security (IS)

All actions and values of the bank, customers, and vendors, like customer
data, transactions, business data etc., are recorded electronically in the
bank’s computer system. Information Security is the domain of knowl-
edge and practices to secure this information. Information Security (IS) is
designed to protect the confidentiality, integrity and availability of com-
puter system data from those with malicious intentions. Cornerstone of
Information Security is the concept of protecting the CIA-Confidentiality,
Integrity and Availability –for both Bank and its customers:
A. Confidentiality - none other than the authorised user can see/access.