7 ways in which Technology is changing Banking

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.

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)
trends.

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.

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
them.

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
costs.

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
transactions.

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.

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
money.

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
back-end.

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
latter.

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

shyamanujad@cybermedia.co.in