Fintechs replacing banks a misconception; CBDC response is positive, says RBI Deputy Governor

CBDC - Digital Rupee

Fintechs replacing banks is a “misconception,” but lenders must be more diligent in adopting technological changes, according to Reserve Bank Deputy Governor T Rabi Sankar on Saturday.

He expressed confidence that banks will be able to embrace technology, but he also mentioned a few missed opportunities in the past, as well as ones that demonstrated their “resistance” to change.

“Banks are here to stay, but banking is mutating fast,” Sankar said addressing an event organised by IBA in Mumbai and added that they ought to adapt fast to the changes being brought about by technological progress. “It’s a misconception to view Fintech entities as a possible replacement to banks,” he said, stressing that these modern-age enterprises facilitate banking and are not a competition to banks in any way.

Sankar cited the case of the hugely popular unified payments interface (UPI), where non-banking entities own the majority of the business because banks missed the bus by not investing in the change early on.

He also stated that the RBI was surprised by the resistance to change shown by bigger companies in the banking world and elsewhere last year when the central bank implemented a change to make recurring payments more secure.

Sankar stated that those who oppose change claim customer inconvenience, but a survey of customers revealed otherwise, exposing such entities’ resistance to change.

He mentioned that when it comes to new technology adoption, the bank has three options: collaboration, absorption, or internalisation.

Collaboration, of the three, offers the most freedom to banks, and they should consider it, according to Sankar. He also added that the high interest in private cryptocurrencies prompted the RBI to launch its project to create its digital currency that will be regulated and have the benefits of digital currencies.

Sankar noted that two experiments are currently underway, one on wholesale and one on retail central bank digital money and that the results have been encouraging for the system.

Other parameters, such as the technology used, its architecture, and so on, will be examined as the experiment progresses, he said, adding that the central bank is eager to learn from this.

A CBDC has several benefits and uses cases, including increased user privacy and international payments and settlements, according to him. “Private money in the modern age can only be bank money,” Sankar said, adding that technology will aid in the pursuit of trust and efficiency.

He stated that a regulated banking system is required to create money, but banks must consider what their future business will be.

Sunil Mehta, CEO of the industry lobbying group, stated that it will not be surprising to see the lending industry shift to the digital sphere over the next three to four years.

“We thank the regulators and the government towards our sector with initiatives such as RBI Innovation Hub, Sandbox, UPI, among others, that have helped both the bankers and customers in reaching toward a cost-effective solution for financial services,” he added.

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