The digital divide in banking is huge. Some of the new private sector banks have successfully leveraged technology to penetrate markets, capture marketshare and serve customers better. On the other hand, there are banks still struggling with even basic implementation. The latter will be swept aside as the former ride the huge technology wave that will see a transformation in the very way banking is conducted.
Overall, the accomplishments of the Indian banking sector with regard to technology are noteworthy. From the primitive standalone advanced ledger-posting machines to the current integrated core banking system, most banks have come a long way in their quest for total branch automation. ?Today, more than 90% of banks are in computerised mode,? said PP Mallya, chairman & managing director, Vijaya Bank, in a paper presented at the Bancon bankers? conference in Mumbai recently.
Among other things, the real-time gross settlement architecture is now broad-based, he says, with 105 participants and a quadrupling of transactions from 2005 to 2007. Participation, too, is more customer-oriented rather than inter-bank. And the results of implementations like Internet banking and front-end solutions like ATMs are visible for all to see: intermediation costs for scheduled commercial banks in all segments have fallen by 40 basis points in five years to FY06.
?Bankers and technology providers will have to think beyond transactions,? says an IT head with a foreign bank. This has been a limiting factor for most banks. One public sector bank changed a solution and vendor thrice, creating confusion, leading to under-productivity and low employee acceptance. ?Vendors have taken a product approach and there have been piecemeal implementations. These will have to be rolled back,? adds an IT head.
This becomes particularly critical as 2009 will see the shackles on international competition being removed and an open arena created for foreign banks to compete in India. This time around, merely having branch reach may not help. Technology will be the key differentiator. So, banks will have to view technology in a more strategic light. ?Perhaps with the exception of treasury and forex operations, the IT plan is not completely interwoven into many banks? business plans and priorities,? says Mallya in his paper.
For many banks, upgrading technology?replacing obsolete boxes with state-of-the-art infrastructure?is an on-going process. For others, regulation is going to force the pace of change. Overall, IT spending is set to rise. ?The IT expenses would be on the rise due to increased regulation and compliance-oriented banking in the days to come. There will be major investments in IT in times to come,? said TM Bhasin in his paper presented at the same conference. He adds that banks have no option but to invest in IT.
This known, the Indian banking sector is clearly poised to manage this challenge and opportunity. One of the lessons learnt from early adoption experiences, especially with core banking solutions, is that return on investment is critical. Here, total cost of ownership (TCO) and flexibility are the two critical parameters. With banking needs evolving rapidly, and competition innovating with great velocity, nimbleness to change track also becomes critical.
In an earlier column on technology challenges for the banking sector, Merwin Fernandes, head of business for Finnacle (a retail banking platform) at Infosys Technologies, stated, ?A startling revolution from the CBS implementation in India is about the power of new generation software solutions running on Unix-based open systems to create a platform for differentiation, innovation and cost optimisation. The myth that only mainframes and legacy systems can handle such large volumes and provide a robust platform with high availability has been effectively busted.? He adds that Unix-based platforms have scaled up to meet the challenge successfully by lowering TCO.
Apart from managing costs, there is also the human element involved. ?One of the elements that banks tend to overlook in implementing core banking solutions is that this is a human resource issue rather than a plain technological one. Merely making cosmetic changes in people managing technology will not work,? wrote i-flex?s Deepak Ghaisas in his column in an FE publication. Getting the people perspective?and people means customers as well?is critical to every implementation. ?We need a technology that suits the bank customer,? points out K Unnikrishnan, deputy chief executive, Indian Banks? Association. IBA is working on the introduction of a unique account number, which promises to bring the transaction cost of banks down even further.
It?s not just costs. Technology is set to charge up the channels that will take services and quality to the next level. Mobile banking has already caught on and growing fast. SMS-based banking has become a reality in many of developed nations where there has been an acceptance of transaction authentication systems. India, by the virtue of its superior technological infrastructure, is ready for such solutions. Many basic features are already present. However, the mobile platform has the potential to go beyond transactions and build strong relationships.
But, it?s not the mobile that is exciting bankers. Good old branches are. It was believed that the advent of online banking would reduce the need for branches. But data in the US, with its high penetration rates, suggests that this might not be the case. A study by IBM Business Services reveals that in the past decade, branches have grown by 15%, while the number of banks fell by 29% in the same period. Banks are diverting monies accumulated through mergers to build branch networks and empower them with high-tech tools. Smart IT spending in branches, along with a savvy staff and products, is the three-pronged strategy that IBM Business Solutions propounds to get the most of emerging opportunities.
In India, the scope for bank expansion is greater as the opportunity to tap the rural segment is still very attractive. Financial inclusion objectives will not be met without technology, and here communication tools and smart card solutions are seen as first-level enablers. ?As part of our financial inclusion programme, we have adopted the smart card route. We have taken up Neemrana village in Rajasthan as a pilot project,? says KS Bajwa, GM, operations, payment & settlement division, PNB. The bank has set aside Rs 200 crore for IT spending in the current fiscal, he adds.
While there is a rush for size and scale, it would also be pertinent to note the words of Alan Greenspan, former Federal Reserve chairman: ?It would be a mistake to conclude that the only way to succeed in banking is through ever-greater size and diversity. Indeed, better risk management may be the only truly necessary element of success in banking.?
The current subprime crisis in the US reminds banks of the need to manage risk effectively. The bank of the future, then, would be a bank that would be able to dynamically and flexibly price risk with an eye on its true economic value, taking into consideration key dimensions such as the credit market, operational, liquidity, legal and reputation risks, marks Thomas Day, vice-president of product development with Sungaurd Bancware in a white paper entitled ?The bank of the future?.
IT solutions will have to be geared to provide integrated solutions by working out the risk parameters in every domain. In future, technology will not only be the enabler of transactions, but its scope in decision-making will be enhanced much further. Database management is set to get a new dimension. The third wave has set in.
?With inputs from Kumud Das