RBI’s Bar On HDFC Bank: Another Blow For Digital Banking Ecosystem

In another stark example of how India’s traditional banking ecosystem is struggling to build robust infrastructure for digital banking and the cashless economy, the Reserve Bank Of India has temporarily barred HDFC Bank from launching new digital services and issuing new credit cards to customers until it fixes technical issues. The central bank noted that HDFC had seen a number of major systemic outages across internet and mobile banking services over the past two years, which need to be fixed before new projects can be taken on.

The most recent outage occurred on earlier this month on November 21, which was attributed to a failure in HDFC’s primary data centre. RBI’s move is likely to impact future card products for HDFC Bank which is currently the largest credit card seller in the country with a 31% share of the market.

Meanwhile, the State Bank of India would also be scrambling to fix technical issues as SBI’s YONO App also suffered an outage earlier today, prompting users on social media to call for similar bars on SBI. YONO is seen as SBI’s big punt for the digital banking world, but has been hamstrung by a number of technical glitches, as we saw in our in-depth look at the platform.

The RBI noted that HDFC had suffered certain incidents of outages in the “internet banking/ mobile banking/ payment utilities” over the past two years. Therefore it barred the bank from launching “Digital Business generating activities planned under its program ‐ Digital 2.0 (to be launched) and other proposed business generating IT applications and sourcing of new credit card customers”.

Digital 2.0 is part of HDFC’s strategy to digitise customer experience through initiatives like virtual banking and analytics. The temporary ban is expected to continue until the RBI is satisfied with necessary compliance on the part of the private sector lender.

HDFC assured its customers that these supervisory actions will have no impact on existing credit cards, digital banking channels and existing operations. Its board of directors were told by the RBI to examine the lapses and fix accountability.

How RBI’s HDFC Order Impacts Fintech

According to HDFC Bank’s latest investor report, 95% of all transactions are through the internet & mobile channels, while it has issued 14.9 Mn credit cards and 33.8 Mn debit cards, according to RBI data, making it one of the largest transaction banks in the country.

The bank also supports a huge share of digital transactions in the country and was the third-largest remitter bank in October on the UPI network behind State Bank of India and Axis Bank with 179.5 Mn transactions. It also had a technical failure rate of 0.81%, according to National Payments Corporation of India (NPCI) data.

Processing of UPI transactions may not be affected, but if indeed there are any technical overhauls, there are chances of bugs or errors in the future. The RBI has not yet laid down what would happen if indeed outages continue. It’s not the first time HDFC has seen an outage.

While CEO Sashidharan Jagdishan assured clients that they have no reason to worry and also offered an apology for the recent outages, HDFC  Bank has had a bad track record off late. It faced its first big (almost week long) outage in November 2018 while upgrading its mobile application which had to be replaced with the previous version of the app to fix the issue. This not only left customers confused but also led to fake apps coming into the picture.

A year later it faced its second outage for three days in December 2019 sparking concerns of a cyberattack and forcing RBI to send its team to study the issues that the lender was facing. It affected payment cycles of thousands of customers. The bank had informed at that time that they had “underestimated the growth in transaction volumes” and since then had taken steps to strengthen its IT infrastructure and systems.

Digital Banking On Poor Infrastructure

Apart from online services, the bank’s customers also complained that linked accounts on applications like Google Pay, Zomato and PhonePe were disabled. Some people also complained about the bank website and HDFC app on Twitter, while many were not able to receive the one-time passwords or OTPs for transactions.

Given the banking and payments regulations in India, most fintech startups have partnered with banks who are running on weak infrastructure. PhonePe suffered in a major way earlier this year when the RBI imposed a moratorium on YES Bank. At the time, speaking to Inc42, Siddarth Pai of 3one4 Capital had said, “YES Bank was a boon to fintech startups and was one of the first banks to embrace them by opening up their APIs. The spillover effect of this will severely curtail operations. This must be taken as an opportunity by fintech startups to broad-base their banking partners and not rely solely on one.”

Soon after, the RBI also released notification saying apps should broaden their banking partner base. But if such incidents keep occurring, the reliability of fintech startups and payment apps also comes into question.  Ajit Deshmukh, MD and co-head of investment banking at Equirus Capital, an investment banking service provider, said that banks need to consider improving their spend on technology to prevent such issues.

“We have witnessed a similar issue with telecom operators in the past when their technology investments were not in sync with the growth in user base that they were driving for. Banks have been interested in technology as cost items rather than revenue generators which results in technical glitches,” said Deshmukh.

He added that regulators should mandate investments in backend technology in sync with the scale of growth that the banks aim for in order to strengthen their technical backbone.

Incidents such as HDFC’s failure or YONO’s outage also highlight some of the problems in rapid digitisation of banking services without creating the right tech and security infrastructure for seamless operations. Such incidents only serve to erode the trust in digital banking and hurting the digital financial inclusion efforts.