Local access, digital rails: The expanding role of phygital banking

By Amit Nigam, Executive Director & CEO, FindiBANKIT

India’s financial inclusion journey has achieved scale. About 91% of Indian adults now hold a bank account. However, only 69% of these accounts are used actively for transactions, underscoring the gap between access and meaningful usage.
This distinction matters. An account on paper does not ensure easy withdrawals, timely transfers, or comfort with digital platforms. In many rural and semi-urban regions, basic banking still involves travel, waiting, and navigating systems that are not always intuitive. Financial inclusion must therefore be judged by usability and proximity, not penetration alone.

Phygital banking has gained policy and industry attention in this context. By combining regulated digital payment rails with physical access points embedded in local markets, it strengthens how financial services reach consumers who depend on reliability and human assistance.

Distribution beyond the branch network
For decades, bank branches served as the primary gateway to formal finance, expanding mainly in commercially viable urban centres, while dispersed regions saw limited coverage. Even where branches exist, distance and capacity constraints affect small, frequent transactions. Digital infrastructure such as UPI, IMPS, and the Aadhaar Enabled Payment System has enabled real-time transfers and reduced friction at scale.

Yet digital access assumes device ownership, reliable connectivity, and user familiarity. In several districts, these conditions remain uneven, leaving accounts underutilised. Phygital models respond by using neighbourhood retailers as assisted access points. Equipped with biometric devices and micro ATM terminals, they connect customers to regulated banking systems locally while maintaining compliance and lowering distribution costs.

Assisted transactions and everyday liquidity
Financial behaviour is closely linked to trust. For many users, especially those transacting in modest amounts, personal reassurance influences decision-making. Local service points provide that reassurance. Transactions are processed through recognised banking rails, yet the interaction occurs face-to-face in familiar surroundings.

Biometric authentication under AePS enables withdrawals and balance enquiries without the need for cards or PINs. This reduces procedural barriers for individuals with limited literacy or irregular smartphone usage. It also reduces the risk of forgotten credentials or shared passwords.

Remittance flows highlight the practical importance of assisted access. Workers in metropolitan regions routinely transfer funds to families in smaller towns. Digital payment rails ensure that money reaches beneficiary accounts without delay. Local retail outlets allow recipients to access cash promptly. For households managing weekly or daily budgets, such immediacy influences expenditure planning and liquidity management.

The broader implication is stability at the household level. When access points are within walking distance, time and wage losses associated with travel are reduced. For daily wage earners and small traders, this efficiency has tangible economic value.

Retailers as financial access points
The expansion of phygital infrastructure has elevated the role of neighbourhood retailers. Kirana stores and similar establishments increasingly function as business correspondents within regulated frameworks. They facilitate cash withdrawals, domestic transfers, and other assisted services on behalf of banks and payment operators.

This distributed architecture aligns commercial incentives. Retailers earn commission income and increase customer footfall. Consumers gain reliable access without travelling to distant branches. Financial institutions extend outreach without incurring the fixed costs of establishing additional physical branches.

The sector’s scale reflects this growing relevance. India’s business correspondence sector exceeded Rs 147 billion in FY 2025, expanding at nearly a 19% CAGR, signalling sustained growth in last-mile service delivery networks.

Direct benefit transfers, pension credits, and wage payments credited into bank accounts can be withdrawn locally through these networks. Funds circulate more rapidly within neighbourhood markets. Retail spending, school fees, and healthcare expenses are settled without delay. Increased participation in formal transaction channels strengthens financial data trails and deepens integration with the regulated system.

Technology standards and system stability
Phygital access operates within established regulatory architecture. Transactions routed through IMPS, AePS, and other recognised systems remain traceable and compliant. Biometric verification reduces impersonation risks. Interoperability enables customers to access accounts across banks through unified platforms.

Maintaining system integrity requires disciplined oversight. Agent onboarding standards, device security protocols, and transaction monitoring frameworks must remain robust. Consumer grievance redressal mechanisms need to be accessible, particularly for users who rely on assisted channels rather than mobile applications.

Macro indicators provide context for this evolution. The Reserve Bank of India’s Financial Inclusion Index rose to 67.0 in March 2025 from 64.2 in March 2024, reflecting improvement across access, usage, and quality parameters.

These gains suggest that progress in digital infrastructure is increasingly supported by distribution depth. Access, usage, and service quality are interdependent metrics. Growth in one dimension reinforces outcomes in others when supported by reliable last-mile networks.

Inclusion, efficiency, and local economies
Practical access to finance influences broader economic participation. When consumers can withdraw funds locally and transact through assisted channels, financial systems become embedded in daily routines. Reduced friction encourages higher account usage, which in turn strengthens formal sector engagement.
Localised access increases the velocity of money within semi-urban and rural markets. Remittances, welfare payments, and digital wage credits enter local commerce more quickly. Retailers, service providers, and small enterprises benefit from predictable inflows. Over time, this contributes to stronger local economic resilience.
For financial institutions, distributed phygital infrastructure provides a cost-efficient model to expand outreach beyond metropolitan centres. For policymakers, it offers a mechanism to translate account ownership into active participation. For consumers, it provides convenience and familiarity within a regulated framework.

Conclusion
India’s financial inclusion narrative has entered a new phase. High levels of account ownership mark an important foundation. Sustained progress now depends on ensuring that these accounts are usable in everyday contexts.
Phygital banking strengthens the connection between the national digital payment infrastructure and neighbourhood-level presence. It enables secure, compliant financial services to operate within local markets through trusted intermediaries.
As digital systems continue to mature, the depth of inclusion will be determined by accessibility and reliability. Community-based access points integrated with regulated payment rails offer a scalable pathway to ensure that formal finance remains within practical reach of the everyday consumer.