BANKING: The Network Is the Bank

Having just selected the car of his dreams, Suresh "Techno" Iyer

swipes his smart card through the card reader attached to his Internet access

device and points to the display button marked "loan officer." A

voice, silky and businesslike, pours out of the speakers: "How can I help

you, Mr Iyer?" Iyer opts for a car loan, and in time less than it takes him

to brush his teeth, the application for his loan is processed and approved. He

slides his card through the slot again to accept the loan. Three hours later, a

driver delivers the car to his door. Suresh slides his card through the driver’s

mobile card reader, to acknowledge the receipt of the vehicle as he recalls that

the most stressful part of the entire process had been choosing the model.

Everything else, including the dealings with the bank, had been easy.

This is not a scene from a Hollywood sci-fi movie, but a not-too-distant

future possibility for households in India. And this may hold true not only for

car loans but the entire portfolio of banking services.

Banking in the country is already witnessing sea changes as the banking

sector seeks new applications for infotech. The best part is that the benefits

are beginning to reach the masses. Earlier, this domain was the preserve of very

few organizations. Foreign banks with heavy investments in technology started

giving some "out-of-the-world" customer services. But such services

were available only to a select few–the very large account holders. Then came

the liberalization and with it, a multitude of private banks. The same customer

service was now available to the masses. With the entry of private banks, a

large segment of the urban population now requires minimal time and space for

its banking needs. Automated teller machines (ATM) are available across the

country, though they are still limited to prominent cities. If there is a

problem, all you need to do is give a call to the 24×7 call centers even in the

middle of the night. If you need information, check out the Web sites for

detailed information about products and procedures, from the comfort of your

home or office.

The first mass-oriented infotech deployment in the banks happened in 1998,

with Citibank’s pilot project "Suvidha" in Bangalore. The project

focussed more on the ATMs and less on the brick-and-mortar branches. Within two

years, it broke even and has now been launched in Delhi and the NCR. The bank’s

customers have access to over 49 ATMs in the region including Citibank’s own

ATMs and other ATMs in the Cirrus network–an international banking network.

Apart from the bank’s Web site providing information about all the ATM

locations, Citibank has put up a 24×7 call center to address all customer needs

from a single location. Another example is ICICI Bank. In Delhi alone, its on-

and off-site ATMs number about 39 while the brick-and-mortar branches number

about 10. It also has a call center to handle any banking queries in Delhi.

Private banks: Big lead

With the liberalization of the banking sector, private banks realized that

the adage "customer is the king" could be their ticket to success. The

customer–long forgotten by the public sector banks–could be attracted and

retained through good customer service. But without a countrywide presence like

the public sector banks, private sector banks could only compete through

innovative means. This came in the form of technology and private banks resorted

to leverage it to dish out a complete banking menu to their customers. Agrees CN

Ram, head, IT, HDFC Bank, "Banks are using technology as an enabler to

provide innovative products, multiple delivery channels and have efficient

service mechanisms." Compare the menu of any private or foreign bank with a

public sector bank and it’s not hard to know why private banks have been

gaining market share. Multiple-site ATMs to tele-banking to PC banking to

Internet banking–you name it and the banks are giving it all without actually

increasing the number of their branches. And yet the customer feels better

served. No longer does he need to prime hours of his workday standing in long

queues in the bank or be forced to visit a particular branch for his banking

requirements. Today, thanks to the technology, one can bank in different

locations in a city or even the country, and more importantly, at ones

convenience. And banks are outdoing each other in increasing that convenience

level. Says Chander Singh, senior VP, IT and e-banking, Bank of Punjab, "By

the end of year 2001, we plan to have more e-bank centers than the actual number

of brick-and-mortar branches."

Already, infotech in banking is become a strategic necessity for banks,

rather than being a key differentiator. Indeed, in its early stages, the ATM was

a source of strategic differentiation for Citibank and other early adopters. For

example, from 1977—1988, Citibank had increased its market share in New York

City from 4% to 13.4%. Many analysts agree that ATMs were a substantial driver

of that impressive growth. But, as the technology was deployed more widely, the

value associated with having ATMs installed shifted. Today, the ATM technology

doesn’t differentiate a bank–consumers expect it as a basic service

offering. ATMs have migrated from being a differentiator to a strategic

necessity.

Next on the line to look at infotech is the insurance segment, which is fast

going to play host to the private players. But public sector players in this

sector too are eager to embrace the technology. Unlike its banking peers, the

Indian insurance monolith LIC has been going full steam with IT initiatives. The

giant is in the process of networking all its branches across the country over a

wide area network (WAN), supplemented by metro area networks (MANs). Unlike the

past where each policy was tied to a particular branch, now it’s possible to

get information in any branch of the city.

Net banking: The next shift

But before the banking industry moves up the technology chain, CIOs need to

look at another issue radically changing this banking industry–the Internet.

In America, several major financial institutions are also launching

Internet-only units apart from the traditional brick-and-mortar branches. For

example, in Canada, the Bank of Montreal launched mbanx, the US-based First USA

Bank unveiled Wingspanbank.com. However, in India, we still have too many

problems like infrastructure and poor Internet penetration to see Internet-only

units in the country. However, as this is becoming a cost-effective way to do

business, the Bill Gates’ quote of "society needing banking but not

banks" is fast becoming true. Rather than going the old way of setting up

branches to increase their market shares, today the financial organizations are

increasingly moving towards the Internet as the next paradigm. In the

Internet-only model, to develop a full-fledged banking unit, all one needs is a

trusted brand name, interactive Web sites and tie-ups with various networks like

the global Cirrus or the Mumbai-centric Swadhan to use the ATM facilities. Of

course, for the brick-and-mortar presence, call centers are required, especially

to handle all business FAQs. It’s also easier to wean away customers since

such banks can offer a higher rate of interest as compared to a megalith

brick-and-mortar set-up, mainly on account of their low maintenance and

operational costs. Comments Ankur Singh, business development manager, Apex

Technologies, "I don’t remember going to the bank in the banking hours

for the last two years and interacting with bank staff in person. It’s now

mainly ATMs, tele-banking, Net-banking and now m-banking."

Though, it will take a lot of time to achieve a level similar to the US,

things are already fluttering in the banking industry. Citibank Suvidha is a

successful experiment in this direction. According to reports, 33% of Citibank’s

banking customers in India have shifted to Net-banking. Most of the private

banks are luring their customers with Internet-banking facilities. The private

segment has taken the lead and the public segment is also moving in the same

direction, but with offerings in select branches only. Agrees R Ravisankar, CEO,

iflex, "Even the larger, traditional public sector banks are realizing the

importance of the Internet and are beginning to incorporate these into their IT

strategies." Today, almost all banks have at least put up basic business

information on their respective Web sites. Most banks have Web sites for two key

reasons–to have a presence on the Web and be seen as a tech-savvy organization

and also to retain customers in response to aggressive banks.

Though there is no denying that the Internet has emerged as a promising new

medium for the financial sector, the issue of security still remains to be

tackled. However, banks are already taking initiatives to address this issue.

Comments Singh, "We are already using a 168-bit encryption." So

according to industry analysts, though security will remain an important concern

for financial institutions, it won’t come in the way of widespread

implementation of online banking, which will continue to be driven by

competitive pressures and market requirements.

Public sector: Why the lag?

This raises the question as to why it’s the private sector, which has been

taking the initiative while the public sector keeps on watching its depleting

market share. The public sector, which controls about 65% of the banking

industry, is certainly aware of the implications. At the core of the problem is

the model on which the public sector banks are based–the service model. As

nationalized banks, they have certain social obligations, which require them to

provide services throughout the country and it will take them time to mature to

a different model.

Moreover, branches spread across the entire country and a lack of national

bandwidth have become a big constraint for the IT endeavors of public sector

banks. Nevertheless, they are on the technology route, though there is less

visibility about that. Comments Ashutosh Gupta, CEO, Deutsche Software,

"The IT initiative was only for large metros and has not visibly affected

the semi-urban or rural areas, given the fact that there are constraints of a

limited backbone network." On the other hand, private banks have no such

bottlenecks and from the beginning can plan their network in a fully

computerized environment even in B-class cities and hence are more visible.

Then there is the issue of the legacy systems. Since the public sector banks

are still in the process of automating their processes, they need to run the

manual processes for some time. Most of the IT initiative so far has meant

automating the traditional paperwork to online process. Contrary to this, as

late entrants in the banking sector, private banks had the benefit of working in

a fully automated work environment right since their inception, and could

compete with the foreign players in terms of technology. Comments Ravisankar,

"The private sector banks have the major advantage of being able to effect

changes quickly, and not have to deal with a huge infrastructure, branch

network, and manpower resource pool that they need to transform." As a

consequence, they have also optimized the use of human resources. To compound

their woes, public sector banks also have the ever-looming issue of unions. Says

Ram, "Automation was always resisted in these banks by the unions since

they perceived it as a threat to jobs." Adds Pravir K Vohra, executive vice

president and head, information technology, ICICI bank, "Apart from inertia

at the lower ranks, banks are also burdened with legacy systems and applications–a

total restructuring needs to be brought about."

CIOs: Crucial decision makers

In this technology-based banking world, it’s the CIO who is fast becoming

the key to a bank’s success or failure. With increasing needs to gear up to

the fast-changing technology, the onus to implement the right banking solutions

lies on the CIO. With the apparent huge potential of the market, the industry

has seen many players offering their financial solutions to the banking sector.

It’s imperative for the CIO to decide upon the best technology. Industry

analysts say that the most important parameter in evaluating the technology

remains the flexibility of the solution along with the scalability. With the

growing popularity of Internet banking, CIOs’ evaluation of the solutions

becomes all the more crucial for the future of the bank. Web sites which offer

static information and primarily replicate existing business processes, will not

be give a bank the cutting edge. It becomes the CIO’s job to ensure that such

sites allow the bank to take useful advantage of the Net.

India is still in the early stages of incorporating technology in banking and

we have barely scratched the tip of the opportunity iceberg. In round one, the

winners have been the private players. However, with 60—65% of the banking

still in control of the public sector banks, they too have an important role to

play and the sooner they start incorporating technology into their overall

business plan, the faster they can recover, some if not all of their lost market

share. Banks have a key role to play in the emerging e-commerce market. A big

opportunity lies in positioning as a co-developer in the e-commerce space.

Though private banks have taken a clear lead in this area, public sector banks

too can grab some of the untapped opportunities by moving in quickly. Comments

Girish Vaidya, senior VP and head, banking, Infosys, "The monopoly that the

banks have enjoyed over the payment system will disappear in the e-commerce era

unless they position themselves between two transacting parties."

While private banks are deploying technology to cannibalize the public sector

market share, the game has just started. Proper technology usage by public banks

can still put them back in the same league with the private ones. But for this

they immediately need to explore and exploit the technology to the fullest. They

also need to look at international trends of Internet-only units supported with

call centers and huge networks of ATMs. Timely measures in these direction will

put them back in the same league as the private or foreign banks. The ongoing

automation in public sector banks is fine, but they also need to deploy the

state-of-the-art banking solutions and services quickly. Probably they will have

to work on parallel on both these issues. While such services are yet to become

a requirement by customers in ‘C’ class cities, they already constitute a

major demand from customers in the urban areas.

At the end of the day, the quality of banking services will win long-term

customer loyalty. Of course, the technology will continue to play the enabler.

Yograj Varma



in New Delhi

• List of Banking and Insurance Solutions Companies

• The Lure of the Internet