Deconstructing Digital-Only Banking Models

Technology has facilitated the diversification of banking models, including the emergence of digital banks that offer banking services primarily through an electronic medium. With agile technology infrastructure, digital banks are better equipped to leverage technology to serve traditionally underserved customer segments, such as micro, small, and medium businesses. By adopting a data-driven approach, these banks can design customer-centric products,  employ innovative methods of risk assessment for financing and expand the range of products for underserved customers. In the aftermath of COVID-19, as the emphasis on and the utility of technology grows, digital banks that can serve a diverse customer base can expand financial inclusion. This is particularly relevant for developing countries such as India.

India’s regulatory architecture requires all banks to open a percentage of physical banking outlets, constraining the entry of new players seeking to leverage a digital-only model. This report studies the historical roots of branchless banking in India, identifies the value proposition of digital banks for supporting small businesses and argues for facilitating the entry of digital banks in India through a proposed policy roadmap.