Why RBI Directed HDFC Bank to Stall Digital Operations Temporarily

If you are ever able to picture the Indian banking landscape in a familial analogy, the RBI is undoubtedly the grand old steward who is tired of disciplining the herd.

On December 2nd 2020, the steward decided to call a time-out on the brightest longhorn.

It directed a temporary ceasefire on all new launches of digital business operations of HDFC Bank, which were in the works under its “Digital 2.0” programme. The ceasefire also extends to sourcing of new credit card customers.

Reason: Repeated and prolonged “technical glitches”

Translation: Enough is enough!

The importance of maintaining the grit and credibility of banking and payments, one of the most critical parts of the country’s economic infrastructure, can’t be overstated. Therefore, the occurrence of such glitches and imperfections in some of the most reliable banks’ networks, is unfortunate.

Let’s take a look at the size and implications of this problem.

What Happened Exactly?

Over the past two years, customers of HDFC Bank have been facing a number of incidents of outages in internet banking, mobile banking and various other payment utilities systems.

Following the outage on November 21st, RBI asked HDFC Bank to show cause behind the disruptions which lasted over 12 hours, which was apparently occasioned due to power failure in the bank’s primary data centre.

The bank’s CMD Sashi Jagdishan, apologised for the inconvenience by way of a public letter, one that is dotted with phrases like “unexpectedly”, “improve ourselves”, “working on war footing” and of course, the classic “not been able to live up to your expectations”.

What Does the RBI Directive Mean?

The following items are put on hold:

• New issue of credit cards.
• Digital 2.0 — An effort to shift customers from a single transaction to a complete financial solutions journey (loan disbursements, payments, investing, insurance etc. while sitting at home)
• Launch of upgrades around app UX, digital origination, STP, API — This means any software upgrades in mobile banking, digital banking and end-to-end processing of transactions.

However, the following items will continue:

• Existing cards issued by the bank will work. Services to replace lost or damaged cards will continue.
• UPI payments, internet banking and other digital payments will function.

Why Does This Keep Happening?

According to its own latest investor report, 95% of all HDFC Bank’s transactions are conducted through internet or mobile channels. Total number of credit cards and debit cards it has issued are 14.9 million and 33.8 million respectively.

As per the National Payments Corporation of India data, HDFC Bank has a technical failure rate of 0.81%.

That is a staggering number. Although it is inevitable for any digital infrastructure to face issues with increasing numbers of users, it must be commensurate with efforts to adapt and modernise itself.

An Accenture Report in June 2019 revealed that banks globally spent up to $1trn over the last three years into IT. But, only 19 out of 161 on the list have focused enough on digital strategies to entice customers for a switch.

In June 2020, the RBI set up a ₹500cr ($67.7m) Payment Infrastructure Development Fund to promote digital payments services in rural and remote areas. Although one has to admit that funds dedicated for digital inclusivity can’t be put to use for strengthening digital infrastructure, it begs the question, how effective can inclusion be without authentication of the systems?

HDFC Is NOT Alone!

Agreed, it’s a bad ship to sail together in, SBI also developed discrepancies on its YONO app due to “system outage”. This is a bank which facilitates around 3,85,675 transactions per day and has ambitious plans to double its customer-base by March 2021.

Also, not to impugn the esteemed steward-in-charge, but the RBI isn’t immune to the problem of “technical glitch” either. In February 2020, RTGS and NEFT transactions were halted for almost 12 hours due to issues encountered by Indian Financial Technology & Allied Services (IFTAS), a subsidiary of the RBI.

Does This Play in Favour of the New Fintech Entities?

Perhaps a traditional bank’s incapabilities indicate changing winds to their shores such as the rightfully expected advent of fintech. One would assume that neobanks or other digital first platforms aren’t indisposed to such lacunae…

Afterall, most new age players, with their slick UI and robust API frameworks are equipped to process high customer requests without being overwhelmed, right?

However, history teaches us the truth is somewhere in the middle. Traditional banks still hold most cards when it comes to actual underwriting (translation: lending), meaning upstart fintechs end up depending on legacy infrastructure of banks, albeit indirectly.

For that matter, it is high time that RBI and other regulators mandate investments in backend technology which needs to be in tandem with the growth of banks, if the onus of money flows is intended to continue on their technologically-challenged shoulders. The bigger you are, the higher compliance you should require!

As the customer bases of banks grow, it is incumbent upon the banks to solidify their existing technological capabilities and retrofit the damaged or imperfect ones. With COVID-induced digital adoption on a high (UPI recently hit at an all-time high of 2.2 billion transactions in November 2020), the reliance on digital banking infrastructure is inescapable and thus calls for integrity.

(Originally published December 7th 2020 in transfin.in)