The great banking shake-up: Will digital kill the branch, or is hybrid the future?

When was the last time you visited a bank branch? Chances are that you will get different answers from Indians. If you are young and tech-savvy, most of your banking requirements are met through digital banking and you have hardly felt the need to visit a bank branch. If you are a senior citizen or in small-town India, you would be visiting bank branches regularly. As a High Net Worth Individual (HNI) or someone having a family office, you would again be meeting up with Wealth and Fund Managers for deeper discussions on trends and new-age investment options.

Banks, like many other firms in the service industry, have been digitally transformed over the past decade. Driven by changing consumer preferences, government initiatives (Unified Payments Interface (UPI), Aadhar-enabled authentication, etc.), online investing, digital banking and AI-driven financial services have already gained significant traction in India.

The post-pandemic era has accelerated the adoption of digital banking. A recent report by the Reserve Bank of India (RBI) highlights a 50% increase in digital transactions in 2023 compared to pre-pandemic levels. Banks like ICICI and HDFC have responded by ramping up digital services, while fintech disruptors like PhonePe and Paytm continue to push boundaries.

India’s banking industry is at a crossroads. With fintech innovations, regulatory changes, and evolving consumer preferences, the question of whether banks should go fully digital or adopt a hybrid model has been more relevant.

Munish Sahrawat President and Dean, Shoolini Business School, says, “The future of banking in India is likely to be a mix of hybrid and digital-first, given India’s socio-economic diversity. Few trends shaping the future which are likely to further accelerate transformation.”

“For instance, neobanks and Fintechs as challengers. Fintech companies are revolutionising the banking sector by offering solutions across payments, lending, insurance and wealth management. Paytm, Groww, Zerodha et al have become household names and being nimble and customer-centric, many of these will either acquire banking licences or will get acquired,” says Sahrawat.

Whichever way, fintechs are enabling neobanks to challenge traditional banking models by providing digital banking in the comfort of homes and offices. Industry 4.0-led Innovation; Technologies like Blockchain, AI and Big Data are delivering improved decision-making, personalized banking experiences, and real-time fraud detection. Whilst banking will continue to be regulated, central banks and governments are likely to champion some of these technologies to shape the future., adds Sahrawat.

This way, traditional banks will have no other option but to have a partnership with neobanks, which are fintech firms that provide banking services exclusively digitally.

Neobanks have lower operational costs and tend to offer more competitive interest rates and convenience. However, as of now, the RBI does not grant them a banking license, and hence, neobanks are not directly regulated by the central bank.

Dr. Rajeev Sengupta, Program Director- Banking & Finance, School of Business, MIT World Peace University, Pune, says, "Neobank is similar to any other commercial bank, with the only difference in its absence of physical presence or branches. It is completely operated through digital modes. Neobanks, or digital-only banks, have revolutionised banking by offering low-cost, AI-driven, and user-friendly financial services. Firms like Jupiter, Fi Money, and RazorpayX leverage UPI, API-driven banking, and AI-based credit assessments to cater to tech-savvy customers.”

“According to a PwC India report, India’s neobanking sector is projected to grow at 53.4% CAGR between 2022 and 2030. However, the lack of direct banking licenses and regulatory constraints from the RBI remain key challenges," adds Sengupta.

This clearly shows that while neobanks' customer base will grow faster in the coming years, however, India’s banking future will continue to be hybrid rather than purely digital.

Vidya Mahambare, Union Bank Chair Professor of Economics and Director of research, says, "All major banks in the country have heavily invested in digital transformation. In urban areas, with higher digital financial literacy, the customer base, especially young adults, has shifted to use digital banking services. In urban areas, visits to bank branches among the younger population are becoming limited to resolving complaints, for complex financial transactions, or seeking personalized advice."

Global lessons in banking transformation

Globally, neobanks like Revolut, a British multinational neobank and fintech company, and Chime, a US-based digital bank, have demonstrated the potential of digital-only banking. However, traditional banks such as JPMorgan Chase and HSBC continue to invest in hybrid banking models, blending digital efficiency with physical infrastructure to serve diverse customer needs.

China’s banking sector, driven by digital giants like Alipay and WeChat Pay, has seen a near-complete shift to digital banking. Yet, even in such an advanced landscape, major banks maintain branch networks to cater to certain demographics. This global perspective reinforces the argument that digital-first does not necessarily mean branchless banking.

Why hybrid banking still matters

Despite the digital wave, India remains a cash-heavy economy with deep regional disparities in financial literacy and digital accessibility. The rural-urban divide presents a strong case for a hybrid banking model where branches complement digital offerings.

Sengupta says, "India’s banking future is unlikely to be purely digital-first. Instead, a hybrid model, combining digital advancements with physical banking infrastructure, will be key to financial inclusivity. Emerging trends include embedded finance, API-led banking, and AI-powered financial solutions.”

A study by the National Payments Corporation of India (NPCI) indicated that a significant portion of Indians still prefer branch banking for critical financial transactions, citing concerns over cybersecurity and the lack of digital literacy. Furthermore, a report by EY and the Confederation of Indian Industry (CII) revealed that despite increased adoption of smartphones, mobile banking, and internet banking among younger individuals, a substantial majority of account holders in rural and semi-urban India still prefer visiting branches.

"India, unlike highly developed economies, has to cater to a diverse customer base where digital literacy, last-mile connectivity, and unbanked populations will still keep traditional banking needs alive. In summary, digital banking will become all-pervasive on account of convenience and efficiency, but a hybrid banking model will ensure inclusivity and cater to the diverse needs of India's population in the future," proclaimed Sahrawat.

Hence, a successful future for Indian banking lies in strategic digital adoption, enhanced security, and regulatory clarity, ensuring a secure, inclusive, and technology-driven financial ecosystem.

Mahambare further illuminated this path, envisioning that with a growing shift to digital banking services, bank branches may become smaller, both in terms of physical space and staff.  The resultant cost savings, she argued, can be used to develop better security standards and customer education regarding digital financial literacy among the rural and older population.

Hence, the entire financial sector, from venerable traditional banks to the nimble neobanks, can take this responsibility of nurturing a culture of saving among young adults, employing behavioural tools to simplify and incentivise responsible financial practices.

So, the future of Indian banking is about balancing digital and traditional ways. It is about using technology to make things easier; while also making sure everyone can use banks, no matter where they live or how much they know about technology. It is about making banking safe and helping everyone learn how to manage their money.

It is thus a future where the convenience of digital banking will coexist harmoniously with the accessibility of traditional services, ensuring that no one is left behind in India's evolving financial reforms.