7 ways in which Technology is changing Banking

DQI Bureau
New Update

If the headline sounds prophetic, it, of course, is by design. If it sounds

profound, we leave it to you to decide, but we need to set the expectations

right. In fact, that itself is not a bad idea to start with.


Why did a business technology magazine in India choose a topic like this?

The Bank is one of the oldest institutions that the civilized world has

known. In the modern world, the maturity of the banking system of a country is

often the reflection of the maturity of the countrys economy. If the

institution, as it is known for more than five centuries, is undergoing some

fundamental change, due to any factor, that is certainly worth recording and

analyzing. And if that happens to be induced and influenced by technology, it

needs to be analyzed in that context.

To be sure, banking is not the only industry that is changing fundamentally

because of technology. There are other businesses like telecommunications that

have been completely transformed by technology. But two critical differences

make banking an especially interesting area to analyze. One, none of the other

industries that are going through those fundamental changes are as old as

banking. And two, the difference between the most tech savvy and the least in

none of those industries are as wide as it is in banking.

So, prophetic as it may sound, it is not really crystal ball gazing or

futurology that the story is about. It is an attempt to identify those areas in

banking where technology is creating the most lasting impact, changing the

fundamental rules of the business. Many a times, analyses like this would focus

on most disruptive changes. We want to clarify, that is not a criterion in

particular for our analysis. Whether a change is disruptive or not, our key

parameter is, whether the change to business is fundamental.


The most important clarification: the analysis is global in its perspective.

Any of the changes discussed here would be applicable to banking anywhere in

the world. We have taken the common denominator approach. That, of course, put

some constraints on us: we had to leave out one area in banking where technology

is making an equally strong impact: regulations. But beyond making that broad

statement, it is almost impossible to discuss any further detail without getting

country specific.

  • The New Age of Innovation by CK Prahalad and MS Krishnan
  • Half the World is Unbanked by Financial Access Initiative, October

  • Innovation in Retail Banking by EFMA/Finacle, September 2009
  • Payment Systems in India: Vision 2009-12 by the Reserve Bank of India,

    February 2009
  • Mobile Banking Transactions in India-Operative Guidelines for Banks,

    December 2009

Finally, why should an Indian magazine try this out? And this is the most

exciting question for us to answer. For long, technology and business changes

have come from the West in general and the US in particular. We believe that is

changing. The future growth of bankingor for that matter, any other consumer

businesslies significantly in being able to successfully reach out to people

who do not have access to those products and services. Not only has India plenty

of such people, it is a good microcosm of the entire such population in the

world, with its economic, social, cultural, and linguistic diversity. So, what

works in India is very likely to work anywhere in the developing and

underdeveloped world. Why, Indias economic diversity spreads even beyond that.

At $1,031 annual per capita nominal GDP, it is one of the poorest countries in

the world, occupying the 139th spot among 180 countries tracked by IMF. At the

same time, it is among the top five countries in the world when it comes to the

number of billionaires that it has.

While that is reason enough, what gave us the courage to try this out is the

access to a number of people who understand how technology is affecting global

banking. Apart from world class institutions like IDRBT, India is home to a

number of vendors like Infosys, Polaris, Nucleus, and Infrasoftcompanies which

are leading technology vendors globallyfrom the US to the Middle East, from

Africa to Japan, not to talk of India and APAC. We spoke to the top executives

in most of these firms (see experts panel). At the same time, with half the

world still unbanked, no future story of banks would be complete without

discussion on how things might unfold in that crucial area: making banking

accessible to that part of the population which is yet to be banked.

Technologys impact, in that area, arguably, would be most significant in the

coming days. And there is no place like India to study the early development of

that wave, which is only getting more and more exciting. With the governments

most important political agenda of inclusive growth, financial inclusion is the

big opportunity for banks. And innovative models are being tried out there, with

help from technology, thanks to Indias technology prowess. Apart from following

the story of financial inclusion in India for the last few months, we have

spoken to the top executive in one of the major players in that space, Eko. The

final list of seven defining trends are a result of the collective experience of

these business leaders as well as our research over a few months on development

of banking and banking technology. We have acknowledged some such sources (see

Thought Papers)

We present the conclusions in seven distinct (though often overlapping)



01 the segment of one

Every product of a bankbe it a savings account, a loan, or forex services,

in essence, is nothing but an information product. What it means is that these

products can be fundamentally altered using IT; what it also means is that new

products can be created seamlessly.

B Sambamurthy, director, IDRBT

Haragopal M, vice president and business head, Finacle, Infosys Technologies

Vishnu Dussad,

CEO, Nucleus Software

Hanuman Tripathi,

 CEO, InfrasoftTech

That has already happened. Web-based banking was such an innovation about a

decade back, which has become commonplace today. That was a big leap then. But

increasingly, many things got added to it, including access to multiple

accounts, even multiple products.


What is happening now is that the banks have taken it furtherthey are not

just offering a seamless experience to the customer, they are using the

knowledge of the customer to create newer products, offer the right products to

the right customer, and even offering newer channels such as mobile.

But through all these shifts, what has still not changed is the assumption

that it is the bank which has to create these products, based on the learnings,

knowledge and understanding of the customer. Though it is based on much better

knowledge of customers needs, preferences and habits, at the end of the day,

the product is still designed by the bank.

The fundamental change that we talk about here is shifting of that function

to the customer. The customer will co-create the product. This is what CK

Prahalad and MS Krishnan called N=1 or one consumer experience at a time in

their book, The New Age of Innovation. While Prahalad and Krishnan argue that

N=1 or the centrality of the individual is the future of all business, in no

other business is this as critical and feasible. It is most critical in banking

because that is the ultimate differentiation. It is feasible because all

products of a bank are based on information, and information alone.


One direct fallout of that will be that banks will take a customer-centric

view rather than a product centric view of the business, the same way B2B

services companies such as IT and BPO firms do. As Prahalad and Krishnan put it,

B2B and B2C will converge.

Implications for tech world: demand for business analytics, SOA and portals

02 globalization of resources

Another idea that Prahalad and Krishnan put forward in the same book is what

they called R=G (resources are global and you do not need to own them always as

long as you can access them). On the face of it, it is not a new idea. The

present wave of offshoring and global outsourcing already makes use of the fact

that human resources are global and a firm can use resources without owning



But so far, this has remained as an isolated, tactical experiment, used to

improve cost efficiencies of the traditional business models. With two major

changes brought about by technologyseamless access to global resources and the

thinning of the branch because of various alternate channels such as web, mobile

and ATMa few leading banks are looking at changing the fundamental business

model of branches. They are building a new architecture of thinner branches and

globally distributed back-offices all connected seamlessly. That would not just

make them far more efficient and cost-effective, it would make banking a truly

24/7 experience for the customer, irrespective of where she is.

Interestingly, this model is being led by some banks from the developing

world, including Indias ICICI Bank. These banks are keeping their back-offices

in low-cost, high-resource locations such as India and are operating lean

branches, using the better margin to offer interest rates that are say 50 basis

points higher. Since it is a born-global model, the overhead cost too is low. In

most offshoring models, while the cost of operations of what is offshored is

brought down significantly, it does not impact the overhead and management


The good thing about the model is that it changes the definition of

globalization 180 degrees . Today, a bankor any businessis considered global

if its customers are spread globally. In this new model, a bank can be extremely

local in its customer base, while using back-offices and technology

infrastructure that are spread across the globe. They would serve the customers

24/7 while lowering cost.

Implications for tech world: offshoring, global outsourcing, cloud

03 reaching the unbanked

According to an October 2009 report, Half the World is Unbanked by Financial

Access Initiative, a consortium of researchers at New York University, Harvard,

Yale and Innovations for Poverty Action, 2.5 bn adults, or a little more than

half of the worlds adult population, do not use any formal financial services

to save or borrow. Some 2.2 bn of them live in Asia, Africa, the Middle East and

Latin America, where they comprise 62% of the adult population.

There can be no double opinion that the big growth of banking in the next few

decades would come from this segment. But there are significant challenges. Many

of these people live on less than $5 a day. Many of them live in areas that are

not easily accessible. So, the traditional branch-ATM model of banking would not

work in these areas. One, the cost has to be kept at a level so that business

becomes viable. Two, the users should find the service worthwhile to use.

In many countriesincluding Indiathe governments have made financial

inclusion a top priority in governance. In such cases, they often help out the

banks, make all the regulatory changes necessary, and in certain cases even

support the banks financially. In India, where there is a large set of public

sector banks, the central bank, RBI, has actively driven the agenda.

What India is trying to do has great lessons for the entire world. Most of

the developing and underdeveloped world, where the cost of manpower is low, can

try out this model. RBI has allowed banks to allow agents, called business

correspondents to take banking to the unbanked. While some of them are

individuals, many organized players have entered the area and are trying

innovative technology applications to bring down the cost of transaction as well

as making it easy to use.

The next billion dollar banking technology opportunity would come from

thismaking banking possible through cost-effective and convenient means for

people whose transaction sizes would be low. On one hand, it involves access

side technologiessmart card-based, mobile-based and biometrics-based solutions

for non-cash transactions and micro ATMs or similar devices for cash-based


The next challenge would be to make more and more services available to these

people, which would mean that there is some integration of all these last mile

technologies with the core banking system.

Suresh Kamath, CEO, LaserSoft (A Polaris company)

Rajiv Kaul, CEO, CMS

Abhishek Sinha, CEO, Eko Financial Services

This, most experts agreed, would be the biggest challenge and opportunity for

banks. India may actually lead the world in creating the solutions.

Implications for the tech world: branchless banking solutions, specialized

devices, micro-ATMs

04 non-core:managing cash

Increasingly, banks will get out of the areas that are non-core. With more

and more banking products being available digitally, and more and more

transactions being completed electronically, the banking world is moving towards

cashlessness. While an absolute cashlessness is not expected anytime soon,

managing physical cash is increasingly becoming a secondary function in a

financial services firm.

Most banks have outsourced cash management areas such as refilling in ATMs to

third party companies. Most of the ATMs are now part of back-end networks such

as Euronet that make them interoperable with one another. The next phase will

see most banks completely becoming custodians of information rather than

custodians of cash.

ATMstill yesterday a differentiation for bankswould be the next area that

most banks would get out of. This may happen initially through consortia of

banks running ATMs, the same way the telecom tower businesses are run by JV

companies of telcos, before ultimately going to independent companies that would

run them as white label ATM services. This is a real possibility and may

actually happen in countries like India first as maintaining an ATM here is a

comparatively costlier affair and without using them for other transactions, it

may not be a sustainable business for banks over a period of time.

We expect it to start in some form or other in the next two years.

Co-location may be first to start with.

Implications for the tech world: ATM interoperability solutions, management

of large ATM networks

05 money@speed of thought

Everywhere in the world, transactions are being carried out electronically.

Most regulators/central banks are aggressively pushing real time settlements,

which increases velocity of money that is said to have a direct positive impact

on GDP of a country.

Also, intermediation in payments is becoming very uncompetitive with lots of

margin pressure and is becoming more and more capital intensive. This is further

catalyzing the movement to fully electronic, real time settlements.

Real time settlements challenge one age-old way of making money for banks:

from float. With no float being available with transaction completion becoming

real time, banks have to look at newer ways of making money. Experts say banks

would move to a fee-based model from a float-based model.

This is yet another fundamental change to core principle of traditional

banking. In float, a banks earning is based on the amount of money. In a

fee-based system, the earning of a bank would depend on how much work does it

do/how much responsibility does it take, rather than what is the amount of


What that could mean is banks becoming extended arms of the F&A departments

of their corporate clients. Already some areas like receivable reconciliation,

traditionally a corporate function, is in many cases being done by a bank.

Implications for the tech world: specialized software

06 convergence of social with financial space

Another futuristic trend that many experts envisage comes from not what

technology has done to banking, but what it has done to the rest of the world.

Increasingly, more and more transactions are being done digitally (web/mobile):

be it buying of an air ticket, purchase of a movie ticket, or ordering of a pair

of shoes. What people do in the social space gets completed through the

financial system: a bank payment, a credit card payment or use of some

electronic coupons to pay. All these transactions are supported by a bank in the


In the traditional cash payments, a bank has no direct involvement in every

transaction. In an electronic transaction, a bank completes and hence knows and

records all transactions. Increasingly, as we are seeing in the social

networking space, various offerings are getting integrated. It would not be

surprising to see banking/payment getting integrated with this.

Many experts feel since the transactions are nothing but information

exchanges, banks can even control them. Banks, which deal in information

products and enjoy a lot of trust among the customers, can even end up being the

distributors of non-financial products.

Implications for the tech world: integration services

07 the ultimate cloud

The IT world may have become excited by cloud computing. But banking is

witnessing the advent of the ultimate cloud. Today, it is possible to withdraw

money from any banks ATM even if one has an account in some other bank. It is

possible to use the credit card issued in one country in another. Sitting in one

country, one can use the bank account in another country online to make a

payment to a merchant in a third country.

The next change would be to make all these work seamlesslymaking it possible

for a user to access any servicesanywhere in the world through any channel from

any service providersomething that is still not as seamlessly possible in the

telecom world.

In other words, for the customerand there is no difference between B2B and

B2Cthe whole of financial services would be a cloud, when it comes to accessing

it when he needs. We believe the banking world would be there sooner than


But doesnt that mean there will be nothing like customer loyalty?

That is a big question. A businessbanking or anythingwould always be won

or lost based on customer satisfaction. Just that in the new world ensuring that

becomes far tougher.

The next phase of a banks technology plan would be driven by that need. As B

Sambamurthy, director, Institute of Development and Research on Banking

Technology (IDRBT) puts it, Driving efficiency through technology is fine, but

ultimately, it is customer empathy that will differentiate banks from one

another. Touche!

Shyamanuja Das