INTRODUCTION:

Artificial Intelligence is a broad branch of computer science that has its roots in both cognitive science, neural science and mathematics. The application of AI has reached almost every industry today. The banking and financial industry is among the top field where AI is playing its significant role. Banks have adopted AI to provide better customer experience and customised services to their customers along with transaction monitoring and fraud detection (Sabharwal, 2014).

Banking industry being an industry that deals with large amount quantitative data the inclusion of AI in the day-to-day activities has increased the overall performance of the sector. Businesses are including AI into their everyday functions and strategic plans to keep pace with all the industries. AI has also influenced banking sector. As part of the shift towards online banking and digital payment services, banks have also used AI in various aspect like analysing trends and enhanced customer experience in banking. The Indian banking system comprises of 12 public banks, 22 private banks, 46 foreign banks, 56 regional rural banks, 1485 urban cooperative banks and 96000 rural cooperative banks in addition to cooperative credit institutions. The Indian Government’s effort to expand into the rural areas and metropolitan areas by incorporating banking technologies and other measures like Jan Dhan Yojana, 2014 has made banking products available to the people in all parts of India. The Digital India Initiative and other initiatives for improving digital payment by RBI has also helped banks expand into even wider area due to the ease of use and expanding smartphone user base (Banking, 2020).

Banking practices have been an essential part of mankind. It catalysed economy to grow and business to flourish. It is the most crucial part of an economy therefore it can get affected by the market condition at the same time it can effect changes in the market. The banking industry is now being affected by a disruption caused by the technological innovations. The emergence of the Fintech era has caused some significant changes to the banking industry we see today. Few banks that didn’t adapt to this change and has suffered its consequence and the other early birds who shifted their course to the trend reaped their profits. As a result of this dynamic change many physical banks, bank branches, became futile. Many customers of the bank started preferring online banking and applications which was beneficial for the customers, because of faster and convenient, and the banks because of easier management, better transaction recordings and overall, less cost. Banks have discontinued non operative branches but still retains branches in many modern urban cities where nearly everything became online. We cannot conclude that the influence and usage of technology alone is the factor for existence of bank branches, there might be other reasons as well. In our study we intended to find the rationale for the existence of these branches.

The project will be focusing on the necessity and relevance of physical bank branches in India. For this study the secondary data from credible sources will be analysed using visualisation too and interpretation and insights from the analysis will be used to find the need and existence of physical branches. The project will contribute valuable information regarding the reason for maintaining operations in bank branches and the functioning of bank branches could be aligned towards those reason to have an efficient and effective performance and thus reinforcing the strengths of the physical banks.

REVIEW OF LITERATURE:

Nitsure (2003) observed that rapid introduction of technology into banking sector and also reducing traditional banking will create a digital divide in developing countries like India. He also says about new regulatory policies that were introduced after the introduction of e banking that has created challenges to the government and other authorities. These policies being new, will mostly have imperfections that might create a vulnerable state for the users of banking system.

DeYoung (2005) analysed that Internet only banks that chose its operations through means in internet in the US during 1997-2002 has generated revenue that was extremely low which made few of such banks to shift to traditional branch mode, liquidate or get acquired by other banks with physical banks.

Dutta and Kumar (2015) explains that today’s Indian mobile market is flushed with wide variety of smartphone within various price range. Many Chinese phone companies play a key role in developing low-cost smartphones to which is economical to the price sensitive Indian economy. Further, they indicates about how mobile banking is in malleable stage and inclusion of rural population to crucial to get the majority population of Indian into digital mode of payment and e banking services. The article also says around 30% of the population in India are migrant workers who sends transaction to family for domestic use, as long as there is lack of access to technology for such people there will definitely be the need of physical banks

Singh and Singhal, (2015) pointed out that emotional intelligence is necessary to retain customers in any company. Especially if any customer is dissatisfied then there is a chance of reflection of that disappoint in the number of transactions they make or the with deposit amount which will have an impact on the bank’s performance if number of dissatisfied customers increase to significant level. Therefore, it always recommends to invest on emotional intelligence for better customer satisfaction which crucial for bank’s long-term existence. Physical banks become a substantial part while implementing a good customer service and customer retention in banking sector.

Burgess and Pande, (2005), found that the impact of pandemic in India has caused an increase in the number of poor people from 6 crores to 13.4 crores (The Hindu, 2021). According to the study by Burgess and Pande clearly identifies that rural banks branch expansion was an effort to reduce poverty in those areas. Rural India is a large market that needs proper attention and effort to improve the condition and also reduce poverty. The reduction in rural poverty was the main intention of such an expansion. Their study has also provided enough evidence that saving increased as a result of the introduction of bank branches and has enabled development of rural India

Kshetri, (2021) found that AI integrated Fintech projects are only at a prototype level and even the concept of AI itself being at an infant has created a hinderance for transforming these projects from a protype level to an advanced level. Even developed countries face this same challenge due to lack of experts in AI technology. In a developing nation like India is definitely a challenge to give its best use and application to banking customers like in risk assessment or fraud detection. When such a large gap still exists between concept and execution of many AI projects in banking, it will be a redundant idea to reduce physical bank branches from India

Singh and Shafaat, (2020) found that Banks outsource the technological solutions to other companies due to lack of experts they have on technology side. This issue has forced banks to relay on third parties for such services. Since financial transaction are really sensitive it becomes a threat of security and privacy when these kinds of functions are outsourced by banks. Extensive reliance on technology for banks will result in handing over enormous amount of sensitive information to other third parties and tech companies which is matter of concern for all the users of banking service. Any damage caused by these third parties will affect both the customer and the banks in such cases. Therefore, the shift to online mode of banking brings in as much threat to privacy and security as it brings ease of using e-banking activities

DISCUSSION:

1. Need of Physical Banks:

Technology and its influence of banking sector will cause bank branches and co-exist rather than completely over throw the traditional banking. Physical bank branches in certain convenient location will exist even if few non operative branches close. The reason for existence of these branches will be human to human interaction for advice regarding banking activities. Though technological advancement is increasing at extremely fast pace, the trust for people on this new technology is not rising at the same pace. This lack of complete trust on technology itself is prime reason for banking customers to still relay on physical branches for client centric services. The actual trend that was set by the technology for traditional banks is develop an additional interface for customer and bank where operation centric services will be enhanced and swift processing of payments. The traditional mode of in person communication became aligned to more of a client centric service.

One of the expert opinions from Connor Crawford, ex-president of the Southern Bank is that banks that focus on wealth management and commercial banking accomplish better performance when there is interaction between the bank employees and the customers and such interaction and relationship is created and maintained by the employees with the customers. Only deeper level of business interaction between the client and the service provider can assure a better service delivery, this interaction will give a clarity on the attitude and choice of the client which will give better information to the bankers to suggest best suited products to their clients. Technology still lacks perfection and cannot collect or analyse many non-quantifiable information like emotional state of the client, which is a factor of decision making for any person.

The human factor is the most significant element for the existence of the bank branches, which makes physical banks a necessity in India, says Adrien Kirschfink, MD of AFS. When the ecommerce tech giant amazon entered, they had to introduced the cash on delivery mode of payment in India. The reason for such a decision was that the Indian market is hesitant to trust technology even though the service provider has a reputation and a great brand image. This case is a great example to point out that how much the Indian market places its trust on the digital payment and internet banking. Though the trust is slowly building up in paper, an average man if he wants to do a large transaction, then he would prefer doing it from a bank branch. Claes Bell a Mobile Editor from Bankrate said that dealing with large transaction, opening a new account or any serious account related issues, the users prefer to get service in person rather than through a phone call or website (The Financial Brand, 2017). Though an online mode is convenient in different ways, banks being a body that deals with money trust plays an equal role. Regular user of the physical branch is mostly senior citizens or user who lacks knowledge of how to use the digital payment method or e banking. There will also be customers like business owners, who would visit banks to establish a relationship with the bank for getting updates on new banking product or ease of getting loan for business.

For banks providing loan is their major source of income, for loan approval and other legal and operations process both the client and banker will have to meet and verify documents and other necessary criteria for loan approval. For business loan, the client will prefer to convince his proposal in person rather than online at the same time a banker would prefer to know the person and also verify the documents. All these factors still establish the fact that physical branches will not and cannot be eliminated unless a better option emerge in future.

The graph (1) shows the number of bank branches in India from the year 2006 to 2019. The number of active bank branches on the 4^th quarter of every year is taken to plot the graph. From the above graph we can identify that the number of physical banks has only increased and not decreased. From 2006 to 2016, we can see that the number of physical bank branches has nearly doubled in that 10 years. But from the year 2015 to 2019, there is only an increase of 12% whereas from year 2011 to 2015 witnessed around 40% increase in bank branches (RBI). The influence of technology with other factors has resulted in a lesser growth rate but a positive rate shows the necessity of bank branches still exists.

2. The Growth of Electronic Payments:

Graph 2: Shows the Growth of Electronic Payments (NEFT and RTGS)

Source: RBI Statistics Data

Graph 3: Shows the Growth of Electronic Payments (UPI)

Source: RBI Statistics Data

Graph 2: Shows The Growth of Electronic Payments (NEFT and RTGS). Graph 3: Shows The Growth of Electronic Payments (UPI). UPI (Unified Payments Interface) is an initiative by NPCI which was started in 2016 with just 35 Banks on Board for this payments system with just 19 lakhs transactions as on December 2016 but the past 4 years, thanks to Demonetisation, the Electronic Payment system saw an exponential growth to 213 Banks and 2292.9 Million transaction as in December 2020 as per data provided by RBI. Same is the case of NEFT and RTGS mode of Payments too, it has seen a great amount of growth in the past few years (RBI).

All this points out to the fact that dependency on Paper Currency has reduced and people are comfortable and preferring more towards Electronic mode of payments at the comfort of their homes. So, for carrying out these transactions’ customers need not visit any physical banks.

People prefer e-payment over cash remittance on banks is due to convenience, confidence and safety of avoidance to carry large sums to banks to deposit or withdraw. So as the dependency of Cash has reduced as the data too supports the same and the need to go to banks have also fallen, we can arguably say that the necessity of banks has reduced (NCPI).

3. AI in Banking:

Every Sector in the world is going through a digital revolution and Banking through has gone through a lot disrupting the industry. India is growing at a fast pace and now second fastest adoption of digital sector as per Ministry of Electronics and IT. AI is used in Banking so that Banks can use their data to find patterns from their voice, text, location, usage statistics, etc which in turn can find preferences, make predictions, provide customer support, enhanced user experience, etc. Many factors have contributed to this success like cheap data, advanced ML techniques, better mobile infrastructure and connectivity, etc (Payments Journal, 2018). All these Applications will reduce human interface and in result less need of physical banks. Some of the practical applications of AI in Banking are:

· Pre-approved Loan – Now no more people have to evaluate a ability of repayment of a person and value his asset. AI now can predict about a customer, his repayment abilities, and value an asset based on the assets past performance.

· Recommendation Engine – Based on Customers savings, spending, investing habits, the system will generate the best products from the bank’s portfolio. AI can show the best Mutual Funds, Fixed Deposits, etc based on customers risk appetite based on their spending and savings pattern by building models

· Loan Default Prediction – Based on their past data on customers who defaulted, banks can now identify prospective customers who might default based on customers spending and repaying patterns based on red flags generated. This has resulted in lower NPA of banks

· Clustering of Customers is done and the best offers in that segment is given.

· Portfolio Management services are being offered by systems to customers so that the ration between equity, debt, gold and other instruments are automatically rebalanced based on prediction.

· Employees are also having a huge advantage as their system gives out all the analysis and they have to just personalise the decisions. The Robotic Process Automation automates all the repetitive work and leaves the employee’s more productive time.

· Risk and Compliance of bank is increased as the defaults have been reduced and processes are automated with less human error and intervention.

· The customer service has increased through the use of Chatbots. It acts like a person answering to customer’s queries and redirects them to the required bank page or in worst case to a actual employee. This Chatbot services have reduced the need of banks to have many relationship managers responding to repetitive queries of customers.

· Customer Retention is increased and less sales person are required as customers now get better, fast service, instant answers and personalised recommendation.

· Better Market surveillance of any financial securities which results is better returns to customers. The Financial Forecasting done on equity companies, debt instruments, etc results in better recommendation and investment strategy.

· Frauds can be prevented in case of unusual transactions detected in any normal customer’s account. Frauds can be prevented and reduced money laundering as accounts can be blocked and reported to police immediately.

Workload of employees has reduced drastically as basically as process are automated and employees have to only aid the reports generated. So, this has made the banks less dependent on workers and more on AI and ML and so aligns with the question of is Physical Banks needed

4. Challenges of online banking:

Online banking or also known as internet banking is method of banking through which customers take up daily transactions using online banking servers. It has now become a common method of conducting transactions among financial institutions. Online banking allows customers to access their bank statements, conduct transactions, etc. through their laptops, mobile phones etc. Online banking when said has its own pros and cons

· Nowadays, there have been serious concern raised by customers regarding data privacy issues. As, since transactions have now been done through online servers there is a high risk of the bank accounts be hacked. There have been numerous cases recently of hackers trying to steal money through online mediums.

· Hackers usually use trojan virus to hack several bank accounts and transact money to their personal accounts using the same. The means of online banking eases things for customers but also comes up with high risk.

· There have also been limitations regarding transaction limits by means of online banking. Certain users have raised concerns stating the fact that huge amounts cannot be transacted using online banking facility making it inconvenient at times.

· There are also other drawbacks for online banking as technology is not developed in certain regions, taking an example of rural areas where there is lack of internet facilities, power etc. so, online banking has limitations of its own in certain aspects.

· Online banking has another drawback of having no face-to-face communication with the customer by their respective personal banker, even though there is a support team available online there are limitations.

· Online banking fails in terms of providing facility for making deposits as for deposits the customers are required to visit their respective branches to deposit the money.

· Online banking has been developing over the period of time, yes, it is relatively more convenient for customers through one aspect but from another point of view it has numerous limitations and drawbacks.

From various statistics we can witness the rise of bank branches over the period of time which also proves the fact that physical bank branches cannot be replaced by online banking, only few of the activities can be replaced but not the entire banking activities.

5. Case study on HDFC Server outrage:

On November 21^st, 2020. There was a huge server outrage in HDFC bank where all sorts of online transactions were halted due to server issues. Credit cards, UPI, etc. were halted creating inconvenience to the bank’s customers this proved the fact that online banking may not be successful all the time as there can be transactional issues, server related issues, etc. which could create a lot of inconvenience to transact payments. The server outrage had created problems to millions using HDFC online banking services (Bfsi, 2020). This could happen any time, as server related issues are not guaranteed that it would occur only for a few minutes of time rather it takes time to find the server issues which could lead to inconvenience. HDFC also faced a lot of criticism on social media platforms and several others due to the server outrage, a small outrage had caused HDFC its reliability which also portrays the risks involved in online banking mediums.

6. Case study on Royal Bank of Scotland:

In 2012, the royal bank of Scotland had faced a server outrage causing millions of its servers with incomplete transactions which had further costed them a compensation of 175 million pounds. People had faced numerous problems some being a Mexican faced threat on life support from a hospital due to payment not being made, and certain house purchase sale deeds were delayed and many more other inconveniences caused by the server outrage. This proves the fact that online banking comes with hidden risks and costs, being comfortable and ease of access for its customers, it also has its own limitations and risks. So, these are the situations where we can witness the need for physical bank branches. A small outrage issue had caused the royal bank of Scotland millions, online banking activities can be carried out but the customers should not its limitations. Customers must understand the fact that they can’t rely only on online payments and transactions. Financial institutions are now moving onto a digital era but the need for physical bank branches will always exist and the importance must be known and awareness must be done to the customers.

CONCLUSION:

We have seen that Banks have increased in the past few years and even the Indian Banking Population has increased drastically due to various Schemes by Government. This is because still majority of Indian Population is not covered under Banking as they are in Villages and in Remote locations and at the same time believe in Traditional way of saving in cash and don’t believe in Banks. Demonetization was a much-needed push to bring people into banking economy, but it wasn’t enough as still many didn’t have that much money to change or they changed with their local brokers.

So, India still has a long way to bring people into Banking Sector and AI can’t do that as of now. People need a Physical Contact and trust to come into Banking Sector. So, the Need of Physical Banks is inevitable right now. We need a lot of Banks to bring the Population into banking and explain them the need and benefits of it. Also, the cost spent for each customer would be more as majority rural population will have small amount of savings only.

At the same time, we cannot rule out the possibility of reduction in Physical Banks because AI is very efficient for maintaining database on customers, assisting them, preventing risk and fraud, automating process, etc. This would be highly suitable in Cities as employee cost and rent would also be high. So, in those cases AI and digital banking would be very useful and efficient for both clients and banks.

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Received on 02.05.2021 Modified on 19.05.2021

Asian Journal of Management. 2021;12(4):423-429.

DOI: 10.52711/2321-5763.2021.00064