By Neeraj Jha

Slowly, but surely, technology issues are moving centre-stage in online banking. Internet banking is after all banking served up with a technology dressing. It is more about caixa than compute chips.

Yes, the dividing line between a bank's business and its technology should be distinct. Listen to what Howard Davies, chairman of the Financial Services Authority of UK has to say: "There is a risk that people with strong technological but weak banking skills can end up driving e-initiatives."

Technology benefits
That is not to say you do not need technology. The generic benefits of technology are immense: it gives you connectivity, speed, efficiency and the ability to handle volumes. It is a great saver of operational costs too. Here is an estimate: cost of a banking transaction on the Net is just one cent against one US dollar in a brick-and-mortar bank. Here in India, it is Rs 2 and Rs 43 respectively. And Net banking could be a great revenue-booster.

Look at online banking from a customer’s viewpoint. Online banking means enhanced experience. But, it is critical to retain a customer at a lower cost. The most rudimentary form of this experience: the bank is available to him anytime and anywhere.

The justification
Fine. But, the question here is whether such huge investments in online banking technologies justified? Online banking enthusiasts are unanimous in that Internet will reshape the global economy over the next five years. Well, even if it does not, it would be dangerous to underestimate the impact of Internet and e-commerce on banking.

Sure, success in Internet banking will will depend on the quality of technology and how early a bank can put the required infrastructure in place. But, the pre-requisite is that banks going online should have clear business and revenue strategies with the technology factor built into them.

Clear focus is a must while choosing technology options. Says Makarand Padalkar, head of the products marketing division of the Mumbai-based i-flex Solutions: "Whether a bank's investments in technology is justified or not will depend on the bank's requirement and its overall strategy." If a bank's strategic goal is to enhance customer convenience via offering more products and services, why not take up technology as a facilitator? Says Rivi Varghese, head of the product development, Internet banking, e-commerce and delivery channels and head of the banking business unit of the Bangalore-based Infosys Technologies: "Software apart, the other costs are towards hardware, communication infrastructure and security infrastructure. All these could be significant, if you do not follow the right approach."

Put in place essentials
Online banks need to have certain technology essentials. They need to have backbone technology and should invest in sound, scalable and proven Internet banking e-commerce technology. Such a technology should be open and provide enough leeway to add new products and services. The technology concerned should be able to offer a strong, open and interfacable core banking product.

You also need to have a firewall policy which covers routers, the hardware setup, the software setup and penetration tests. The firewall policy should cover people and procedural issues. According to an estimate, as much as 80 per cent of security threats are internal to the organisation and only 20 per cent are external.

Other essentials for a win-win online banking technology are: good communication infrastruture and an Internet bandwidth, which is expandable, reliable and has built-in redundancy. Link failures should not be allowed to bring down Internet operations. Hardware configuration should be right and upgradable. The systems should be well-equipped. Even if the main Internet servers crash, one should be still online. Finally, a defined Quality of Service (QOS) policy is necessary. Such a policy should specify the time taken to be on-line when a particular calamity happens.

Technology costs
All these do come at a price. Says Rangesh Nayar, vice president of the Mumbai-based Tata Consultancy Services (TCS): "Calculating the cost of setting up a Net bank is not easy. It is more complex than it appears to be. It is a combination of projects and products. Then there are costs incurred on implementation and customisation."

No wonder online banking technology price tags vary. In the UK, for instance, the cost of setting up a virtual bank today is, hold your breath, US $400 million (Rs 1,600 crore).

Bankers going online are not too comfortable with this figure. Says H N Sinor, managing director and CEO of the Mumbai-based ICICI Bank: "From what we have invested in technology, the figure looks far out of tune." Padalkar of i-flex Solutions too takes this figure with a pinch of salt. Says he: "Globally, the cost of setting up an online bank is known to vary from US $200,000 for a very small bank to US $8-10 million. That is between Rs 32 crore and Rs 40 crore, for a large bank."

Sounds reasonable, when compared with Indian figures. HDFC Bank has invested Rs 50 crore in online banking technology solutions between 1995-98. ICICI Bank has invested just Rs 5 crore todate in online banking technology. Explains Padalkar of i-flex Solutions: "Cost incurred on software that enables you to just carry through the transactions is fairly less. This is what most people who claim to have Internet banking capabilities today have done. The real issue: plumbing it to your banking system which means incurring integration costs."

Have a clear focus
It is clear then that technology could help an online bank to become leader in a market place which is increasingly becoming tougher. Speed and convenience are going to be key movers. Says Nayar of TCS: "Banks are not able to take a holistic view of their entire needs. Their focus is not clear." The result: not many banks are able to see the role technology can play in converting unprofitable customer segments into profitable ones.

It is also essential that banks going online tick off a checklist of technology-related questions: Do I have a system where transactions do not wait? Do I have end-of-the-day shutdowns for processing? Am I graduating from being just a cash-handler to being a real cash manager for my customers?

Blackholes ahead
Fine. But, most of the banks will have a no for an answer to the first poser. For, they still suffer from what is called the "drop on the floor" syndrome. Simply put, transactions coming into a bank's system from outside is manually transported into its core system. There is human intervention here, which results in delay. That means additional cost in reconciliation. So, the best way is to go for a system where the transaction does not wait and the customer has real-time access to his account.

Another issue is shutdowns. These are results of inadequate back-end systems. Says Padalkar of i-flex Solutions: "There are many Internet banking solutions in India which do not have strong back-end systems." So, online banks should not go on the presumption that the customers will be forever forgiving. Banks need to spruce up their back-end systems. Says Padalkar: "This will be the crucial factor, if Net banking is to be successful."

Be a cash manager
Online banks can also provide lot of value-additions to their customers. Online banks need to be "real cash managers". Banks need to have in place a business intelligence software to find out why, for instance, a customer has not been using the ATM for the last six months.

And if there are problems, find out how the customer would want the bank help him out. So, online banks should go in for a real-time data warehousing software which would cost between Rs three and Rs four crore.

Better still, the bank can go in for a comprehensive package that integrates transactions with its back-end system.