AI Chatbots in Indian Banking: Balancing Innovation with Privacy in a Post-DPDPA

The Digital Personal Data Protection Act, 2023 (DPDPA), assented to by the Hon’ble President on August 11, 2023, marks a watershed moment in India’s journey towards a comprehensive data privacy framework. It introduces a robust regime centered on transparency, accountability, and user consent. With the Ministry of Electronics and Information Technology releasing draft rules for its implementation in January 2025, industries that are heavily reliant on data—most notably fintech are preparing for substantial transformation.

With the swift adoption of technology, the fintech sector in India has increasingly utilized AI to tailor services, identify fraudulent activities and increase operational efficiency. The implementation of AI-powered chatbots is one of the most prominent examples, with nearly 80% of Indian banks now utilizing them. These bots manage everything from basic customer interactions to more complex transactional work, thus optimizing services while enabling human agents to troubleshoot more intricate challenges.

Beyond efficiency, AI chatbots play a critical role in real-time fraud detection. By continuously monitoring transaction patterns, they flag unusual behavior that could indicate fraudulent activity, enabling swift intervention and bolstering security protocols. This level of automation has significantly fortified the cybersecurity posture of banks while improving customer satisfaction through round-the-clock support.

However, these technological advancements are not without privacy trade-offs. Chatbots inherently process large volumes of sensitive personal and financial data, raising concerns around data security, unauthorized access, and regulatory compliance. The situation is further complicated by the opaque nature of AI algorithms, which often lack transparency in their decision-making processes. In October 2024, RBI Governor Shaktikanta Das raised red flags about the unchecked integration of AI and machine learning in financial services, particularly regarding their susceptibility to cyberattacks and data breaches. He emphasized the need for banks and financial institutions to adopt robust risk mitigation strategies and ensure better auditing of AI systems.

India’s financial sector is no stranger to regulation, having long operated under frameworks that safeguard customer rights, data privacy, and cybersecurity. Yet, the DPDPA introduces a stricter regime, with principles such as purpose limitation, data minimization, and storage restrictions that go beyond previous guidelines. While banks and established financial institutions are relatively well-positioned to adapt, achieving full compliance demands a thorough re-evaluation of current data retention, sharing, and disposal practices.

To navigate this transition successfully, banks and fintech companies must take the following critical steps:

1. Comprehensive Data Inventory and Mapping with “Radar”

Action: Identify and document all personal data collected, processed, and stored by AI chatbots.

Why it matters: Without a clear inventory, compliance efforts may miss hidden data flows or shadow processing.

How we help: Using our proprietary automated data discovery tool, Radar, we conduct deep data discovery, dynamic mapping, and classification exercises to build an actionable data inventory ensuring that all data touchpoints are clearly documented and privacy risks are surfaced early.

2. Reviewing Data Collection Practices Against DPDPA and Other Regulatory Requirements

Action: Analyze the types of personal data being collected through chatbots, the reasons for their collection, and the timelines for their storage, use, and deletion.

Why it matters: DPDPA enforces strict principles around purpose limitation, data minimization, and retention periods, with penalties for non-compliance.

How we help: We review the data points collected (without evaluating AI algorithms or decision logic), assess their necessity under business and legal perspectives, and recommend appropriate retention and deletion schedules aligned with DPDPA, RBI, and other sectoral regulations.

3. Implementing Transparent and Multilingual Consent Mechanisms

Action: Deploy easy-to-understand, multi-language consent prompts at appropriate user interaction points.

Why it matters: Consent under DPDPA must be “free, informed, specific, and unambiguous”a simple ‘I agree’ checkbox won’t suffice.

How we help: We build and integrate consent management platforms customized for chatbot interactions, covering mobile, web, and in-app environments.

4. Securing Cross-Border Data Transfers

Action: Implement encryption, anonymization, and ensure contractual safeguards where data leaves Indian borders.

Why it matters: Unauthorized or insecure data transfers attract serious sanctions under DPDPA.

How we help: We perform cross-border data flow assessments and help negotiate compliant data transfer agreements with offshore partners.

5. Building a Rapid Breach Notification Framework

Action: Set up automated breach detection and reporting systems tailored to chatbot platforms.

Why it matters: DPDPA mandates timely reporting of breaches, and delays can lead to heavy penalties.

How we help: We develop incident response plans, train internal teams, and establish breach communication workflows aligned with regulatory expectations.

For assistance in building privacy-compliant AI chatbot ecosystems, reach out to us.

As AI chatbots become deeply embedded in the fintech ecosystem, the Digital Personal Data Protection Act (DPDPA), 2023 serves as a timely wake-up call. The balance between innovation and privacy is no longer optional, it’s a regulatory requirement. With sensitive financial data being processed in real-time, organizations must go beyond basic compliance and adopt a privacy-by-design approach that is transparent, accountable, and user-centric.

At SISA, we help fintech and financial institutions proactively align their chatbot and AI systems with privacy regulations. Partner with us to make your AI chatbot ecosystem secure, compliant, and future-ready. Connect with our privacy experts today.