FOCUS: BFSI: Charge of the Bank Wagon

In the liberalization and financial reforms era, banks and financial services

are all about information and competitiveness. And we can see the change in

mindset coming in at an inspiring pace. India’s largest PSU bank, State Bank

of India, announced two major IT investments entailing an outlay of Rs 700 crore

in the past year. More than anything else, it put to rest the doubts of many

other banks smaller than SBI, but with the same baggage of legacy. Competition

from neo-banks in the private sector–those that had the advantage of starting

off on a clean slate and small scale–have started threatening PSU banks, by

moving within striking distance. Private banks are skimming off the creamy layer

of corporate business, and banking habits of consumers are also getting changed.

"There are 10^11 stars up there. That used to be a huge number. But it’s only 100 billion. That’s less than the national deficit! We used to call them astronomical, now we should call them economical" Richard Feynman

Public sector banks account for 80% of the total assets and income while

foreign and new private sector banks account for 8% and 6%, respectively. Public

sector banks also account for 86% of the gross non-performing assets (NPAs), a

measure of risk and inefficiency. The government does not intend to infuse

additional capital to support the growth of PSU banks. It intends to reduce its

equity stake to 33% in PSU banks, retaining the public sector character of these

banks. The capital market gives lower discounting to stock prices of PSU banks,

when compared to private sector banks, due to the perceived inefficiency, lower

productivity, and higher NPAs of the PSU banks. Various regulatory requirements

designed to help India participate in the global financial services industry are

to be complied with by these banks. Technology is the only route to achieve

this. This is the milieu in which a PSU bank chairman, an experienced banker,

operates. And these are the very circumstances that are forcing these chairmen

to accelerate the technology efforts in their respective banks.

Indian banking product vendors like Infosys, TCS, and iFlex, have the

experience of hawking their products in the global market. Until the past few

years, these vendors found the Indian market to be a nightmare. The heads of PSU

banks wouldn’t go in for their products because it had dreaded structural

implications–centralizing the present 4-tier structure in PSU banks. Even

those that bought the ‘centralized core-banking solution’ logic wouldn’t

take the decision, deferring it to a time when their term got over. In fact, one

prominent PSU bank raised an RFP for computerization three times over and

deferred it to a point that even their World Bank loan for the project lapsed.

Moving to the center



But now many of the PSU banks have decided to go in for a centralized

core-banking solution. The move is highly investment intensive in terms of the

infrastructure build-up, software, and training costs. According to reports, SBI

would invest Rs 500 crore in the IT architecture project and an additional Rs

200 crore in the trade finance project over the next three years. This would

result in around 35% of its staff being redundant (about 75,000 employees). The

bank has already shed 20,784 employees in a VRS exercise that costed Rs 2,271

crore. However, the bank is not planning another VRS and has reportedly decided

to retrain and re-deploy these personnel and gradually reduce staff through

natural attrition. But the move is strategic for SBI. And so it would be, for

most other PSU banks as well.

The central theme behind computerization in PSU banks through the nineties

has been that of automation of tasks at the branch level for manpower

productivity and quick customer service for customers visiting the branch. The

customer belonged to the branch and not to the bank. These systems were in the

form of isolated front office computerized counters for ledger posting,

balancing of books, interest calculations, printing passbooks, periodical

statements, and reports. The branch was connected through a local area network

or a Unix-based machine running an RDBMS. The back office of the bank per se had

limited computerization. There was limited or no connectivity amongst branches

and their regional and zonal offices. There was no bank-wide MIS available and

no connection between the organizational layers. Total branch automation is a

sort of a movement that continues even today with banks gradually covering

important branches.

The management of the bank gets no information to be able to proactively

manage the business. For example information on maturity patterns of assets and

liabilities, sensitivity of interest rates structure changes, or access to

computerized databases for credit and investment management function. To plan

and monitor the profitability of any bank, the senior managers would need a

variety of information placed in the context of their decision-making. Says AG

Prabhu, banking technology consultant, "The system offered neither a

customer-centric view nor a bank-wide view. Linkages with electronic banking

channels for funds transfer and bill payments and settlements were poor. With

the overall risk profile of the bank going up, the entire bank is affected and

the situation needs to be remedied."

Architecture imperatives



The three major parts of a bank’s technology imperative are–transaction

processing, information systems, and strategic technology–with full

integration amongst them. The topmost priority for PSU banks is to put the

transaction processing in place over the next three years. In the meanwhile,

electronic banking channels and payment systems for funds transfer and bill

payments can be taken care of. A corporate MIS for the bank should be rich

enough and complete with costing and pricing of different products and services,

external data like socio-economic parameters and profitability ratings for

individual customers, companies and groups of companies, for the management to

take operational as well as strategic decisions for all functional areas of

banking. Various analytical models can be applied on this MIS data for areas

like asset liability management, optimization of investment portfolio, and

optimization of credit allocation to different sectors and regions.

Deepak Ghaisas, CEO (Indian operations) of iFlex Solutions, says–"Banks

should go in for a BPR before they embark on a centralized solution. Don’t ask

us to customize our product to your existing process. It would result in merely

automating your existing process along with all its inherent

inefficiencies." The VRS offered to bank employees had an overwhelming

response.

But the resultant impact in many bank branches was the inadequacy of staff to

man counters. "Such a situation can be avoided if a BPR is done," adds

Ghaisas.

What after all is the IT architecture suited to a bank expecting growth?

Simply put, it is an overall systems framework for the development and

implementation of application systems. Such a framework comprises common

systems, components, designs, and standards as well as shared tools, facilities,

and infrastructure that can be employed across multiple application systems,

reports an industry white paper. The most critical of these is the common

bank-wide critical systems, rather than systems that are personal, local or

departmental in nature. The scope of an enterprise architecture lies beneath the

various application systems of the bank, serving as a common platform or

foundation. At the same time, it is positioned independent of the implementation

details of particular computer hardware, operating systems, communication

protocols, and other specific configuration characteristics. Such an

architecture should be able to interface with a wide array of channels and other

systems like–dealing room systems, ALM systems, portfolio analysis system,

Internet trading system, CRM system and institutional delivery channels like

ACH, and SWIFT. The principles on which this architecture is built are:

n  Processing

high volumes of data with scalability and continuous availability;



n  Separation
of application services from data management and user interfaces through layered

multi-tiered information access to data warehouses;



n  Inter-operation
of application components through message-based architecture;



n  Platform-independence
of application services;



n  Flexibility
for migrations.

This then, is what the centralized core banking solutions are all about.

Interestingly, RBI does not advocate nor oppose a centralized core banking

architecture. In a recent speech to IBA members, RBI deputy governor Vepa

Kamesam said–"One of the prime thrust areas for the future would be

completion of branch computerization and networking of banks." While

technology has resulted in facilities such as ‘Total Branch Automation’, ‘Single-window

Service’ and other account-related functions in the recent past, the thrust

areas of the present relate to the use of technology for providing centralized

systems for banks where centralized data exists with decentralized access to

branches and their constituents. This would result in the customer being treated

as a customer of the bank as a whole rather than of a particular branch.

Overcoming centralization woes



So what are the caveats of centralized core-banking solutions? It takes too

long to implement and is investment-heavy. Says Prabhu, "By the time the

PSU banks implement the core-banking solution, the private sector banks would

have taken a major lead in terms of business." Adds H Tripathi, managing

director of InfraSoft–"It is a mirage to create a 1,000-branch core

banking solution which will take five years to implement."

Also, there is no proof that it will actually work though theoretically

centralization has got its benefits. Some of the core-banking projects signed up

in the past two years have reportedly gone too slow. For instance, Syndicate

Bank spent Rs 25 crore and managed to centralize only ten branches in two years.

Similarly, Vysya Bank, which went in for Profile–a core banking solution from

Sanchez, has reportedly managed to put 35 branches, against a plan of 200. The

fact is–the pace is too slow.

The real issue is the readiness of the bank to respond to a centralized

system when the structure of the bank itself is not so. A PSU bank has four

tiers–the branch, region, zone, and HO. These are actually centers of

administrative and executive powers. Monitoring of NPAs and suit filing and

recovery are the responsibilities of the regions and zones. Rural banking which

feeds the treasury and rural credit is the responsibility of the rural branches,

regions, and zones. A core banking solution demolishes this entire structure.

Says Tripathi, "Banks should be realistic and understand that a centralized

solution has got its structural and business implications. The fact is there is

no functional proof of the concept under the present structure, though a

centralized solution in itself is not wrong."

But technology is not without choices. There are middle-of-the-road options

available. One is called cluster banking while the other is the ASP mode. In

cluster banking, interconnections are done through an ATM switch. "The

investment and time-to-deploy is reduced to one-fourth that of a centralized

solution," avers Tripathi. Bank of India has deployed ten cluster servers

for 600 branches for ATM connectivity and MIS consolidation. Similarly,

Corporation Bank has gone in for a cluster-banking approach for 300 of its

branches. The ASP option is more suited for the smaller banks like co-operative

banks. The advantages of the ASP option are numerous, but the practice is yet to

take off. Presently there are two ASPs in the banking area–one hosted jointly

by IBM, Midas Kapiti, and Indus Ind Infotech and another a JV between HDFC,

iFlex, and Lord Krishna Bank.

Managing risks



The New Basel Capital Accord or Basel II seeks to contribute to the safety

and soundness of the financial system of a country by implementing minimum

capital requirements on credit, operational and market risk; executing new

supervisory review processes; and improving market disclosure. Complying to the

Basel II requirements is important for any Indian financial institution to

participate in the global financial services industry.

Basel II requires banks to collect and store a minimum of two years worth of

historical data with full data integrity and timeliness, effectively integrate

different risk types and guarantee accurate calculation of risk measures–possible

only with a robust IT architecture and sound reporting and analytic capability

to predict and analyze performance and risk data.

Data in decentralized systems like the Indian public sector banks is

unconsolidated. Such banks will find it difficult to effectively manage credit

risk. Operational risk management, heavily dependent on statistical probability

distribution models, would be impossible with scarce data to begin with.

Analytic tools manage market risks with the results interpreted to comply with

regulatory reporting and risk disclosure requirements. A complete risk

management strategy therefore requires a centralized data warehouse with the

requisite reporting and analytic tools. The idea is to capture

inter-relationships between various types across geographies, departments, and

lines of business. RBI’s Kamesam said–"It is imperative that the banks

in India study the proposed capital adequacy framework, identify the transition

path and initiate steps to be fully prepared for adoption of the new standards

when introduced." Specifically about risk management, Kamesam exhorted–"Banks

need to evolve an integrated risk management system depending on their size,

complexity and the risk appetite."

The risks associated with the bank’s operations have been complex and

large, requiring strategic management. RBI has issued guidelines on ALM systems

and on integrated risk management systems in banks. Due to diversity and varying

size of balance sheets, banks have been advised to design risk management

architecture, dictated by the size, complexity of business, risk philosophy,

market perception and the level of capital. To fine-tune risk management systems

in banks, RBI has since issued draft guidance notes on credit and market risk.

The Reserve Bank is making rapid progress towards setting up ‘Real Time

Gross Settlement’ (RTGS). RTGS, when operational, will provide a new

generation of high value payments systems that would enable the core of the

banking system across the country to make secure inter-bank payments across the

country. The transactions will cover the entire general transactions and central

accounting of the RBI, including the bank’s general ledger. It is expected to

enable about 205 Indian banks and financial institutions to interface directly.

By underwriting all payments with collateral held at the Reserve Bank of India,

the RTGS system will reduce ‘systemic risk’ in the Indian banking system,

thereby providing increased integrity and security for all inter-bank

transactions. Improvements are also being brought about in the payment system

through the Centralized Funds Management System (CFMS), which enables funds

managers of banks to obtain a national position of balances in their accounts

with the Reserve Bank. The CFMS covers the four major metropolitan centers and

would soon be extended to most other locations of RBI offices.

The initiatives are expected to reduce all kinds of costs that exist in the

financial marketplace. These costs result in the widening the bid-ask spreads

and form a kind of social tax or a deadweight loss on savers and investors in

the economy. A favourable impact of the IT initiatives is evident on the

transaction costs, inventory-carrying costs, and most importantly on adverse

information costs and the spreads, in general, are beginning to narrow down in

the Indian banking sector.

CRM and banks



Financial institutions are developing more intensive knowledge about retail

customers and corporate clients so that they can execute relationship management

strategies designed to enable them to interact with individual or corporate

customers in the most appropriate and desired manner.

A CRM term that’s now emerging in the financial industry is C²RM that

stands for corporate client relationship management. A team comprising product

specialists anchored by a relationship officer manages the many-to-many

relationship with the corporate entity and a customized product set. CRM, retail

banks’ customer relationship management is designed for a large volume of

customers, while C²RM is designed for a more complex product set used by fewer

clients who are corporate entities. Both CRM and C²RM depend on internal and

external data. Execution of CRM and C²RM relies on data and technology to

create knowledge about the customer or the client. Banks combine internal data

with data obtained from external sources to create a repository, a data

warehouse. This is further analyzed to create customer or client profiles to

identify opportunities. This analysis results in customer intelligence that can

be used to decide on actionable points to maximize business opportunity and

minimize risk.

People often think CRM is about call center or sales force automation.

Effective CRM usage in financial services helps improve customer acquisition and

increase cross-selling. But this has to be applied consistently across the

entire enterprise.

That is, for the project to succeed- there has to be a one-view of the bank

and a data warehouse in place. Unfortunately, this is not the case for most

banks in India, including the private banks that may be a shade better in that

these banks have a centralized architecture and integration of multiple channels

of customer delivery. Even those who have CRM solutions deployed, the benefits

are "on the way". But definitely, these are not lost cases. CRM

requires the discipline of science, coupled with the skill of an art. CRM itself

is a long-term vision but short-term benefits can be proved–for example, by

simply optimizing channels, banks can save on mailing costs and increase return

on marketing campaigns. CRM has evolved from being a technology-driven

sophisticated tool for marketing to being a key component of business strategy

in the financials services industry.

In the private sector, ICICI Bank and HDFC Bank have put in place the

building blocks for an elaborate CRM solution. UTI Bank has implemented a CRM

software with respect to it’s priority banking offering for it’s high net

worth clients, where the software carries out profiling and analysis, contact

management, data analysis, and cross-selling. The bank is currently evaluating

various products for its mainline CRM. Among foreign banks, HSBC’s CRM system

is a proprietary sales support system developed to enhance the bank’s response

to its retail customers. HDFC Bank has also taken the first step by investing in

a data warehouse solution procured from i-Flex.

ICICI Bank has invested in a large Teradata data warehouse, which allows

business managers to get a single-window view of various accounts of a customer

across different products and channels. Currently, a powerful Campaign

Management solution–NCR Communication Manager–is being implemented at the

bank, the country’s second largest. In the operational CRM space, investments

in a Siebel sales force and customer service and support application have been

made. ICICI Bank has started to link customers’ accounts. An employee manning

the call centre can now get a unified view of all the relationships that a

customer has with the bank. The bank is expecting two clear benefits–one, the

cost savings in acquiring new customers, and the second is much improved

customer service.

Most organizations have a variety of "touch points" with their

customers, including relationship managers, sales force, sales office, field

service, help-desk, accounts, branches, call centers, interactive voice response

systems, kiosks, web sites, mobile telephones, interactive television, automated

teller machines, electronic mail, letters and fax. Customers are now demanding

multiple channels and consistent 24x7 service across all of these channels

irrespective of their location. In effect, banking services can be accessed

"Any time, any place, anywhere." Banks must therefore provide a

synchronized and consistent level of service across all channels, integrating

new technologies into their channel mix. It is becoming increasingly important

for banks to manage their brand across all customer touch points, ensuring

consistent appearance, and also consistent levels of service to their customers.

The ability to launch new products across all these channels in a coordinated

and cost-effective fashion is vital. The use of any system that can manage all

of these channels, in an economical, efficient and proactive manner, and the

leveraging of this capability to enhance customer relationships, will

distinguish the successful players. Banks who are able to move quicker will see

this as an ideal platform on which to steal a march on slower rivals and gain

marketshare.

Easwardas Satyan

Future of ATMs and Smartcards

From bartering to cash to cheques, ATMs, credit cards, debit cards and

smartcards–the means to purchase necessities, luxuries and equities have

evolved greatly overtime. ATMs, the Internet, call centers, instant messaging,

mobile phones, and wireless-enabled handhelds are giving people round-the-clock

access to cash, retail goods and services. In this age of accessibility, people

no longer need to visit their bank to retrieve their money–it comes to them.

Financial service sector organizations are competing with one another to deliver

to their customers the most sophisticated access points to funds.

This

has lead to the development of technologies such as smart-cards, which have the

capability to store large amounts of personal and account information more

securely; and to the re-invention and enhancement of traditional, remote

channels such as the ATM.

It is not only the emergence of new markets that have lead to substantial

growth, but software application advancement is also driving the next generation

of ATMs. New open standards for ATMs are enabling closer integration into a bank’s

channel mix. This allows banks to have a more consolidated view of accounts,

thereby giving customers a more seamless banking experience as they move from

channel to channel. Internet technology has led to the development of the

browser-based ATM, which enables collaboration with other electronic channels

even easier. At present, ATMs can issue coupons, prepaid telephone cards, stamps

and other profit generating items as well as print statements and dispense

money.

Even further down the road, biometric technology may be used to recognize

customers by their physical characteristics and used as a tool to guarantee

cardholder verification. Graphics and sound will become more appealing, creating

a more user-friendly experience. Coupled with the CRM capabilities and the power

of targeted marketing, the ATM can be a powerful as well as profitable tool for

financial institutions.

Smartcards

have been a lot slower to take off. A lot of this can be attributed to poor

marketing and a failure to understand their full potential. Ovum predicts that

2.7 billion smartcards will be shipped in Europe annually by 2003. On a global

scale, the US has made rapid developments in multi-application smart-cards and

in Asia, there has also been huge growth. The power of a smart-card comes from

the data that can be loaded onto the embedded microchip, and used to facilitate

a variety of functions from mobile telephone communication, car parking payment,

to identity verification during internet banking. The big draw card for

smart-cards in the financial services industry is the security factor and their

capacity to reduce fraud. Smart-cards are a secure way for customers to

communicate online with the bank, as well as transact over the Internet. They

can also be used for network security, as smartcards are ideal for carrying

digital certificates and private keys that individuals will need to operate

within a PKI.

In the past, the major inhibitors to smartcards for financial institutions,

have been their limited capacity and cost. However, in recent times, memory

capacity of smartcards has increased significantly, and combined with dramatic

price cuts, the cost-benefit arguments that have traditionally weighed against

this technology are being rewritten. Put simply–banks are implementing

solutions which enable their clients to manage their money while faced with this

multitude of spending choice securely, conveniently and on a global scale.

Easwardas Satyan