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From technology driving banking development to the other way around

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From technology driving banking development to the other way around

Early developments

Organized banking has been practiced since several centuries. Prior to the 20th century, banking saw little change, but it has undergone dramatic transformation in the last few decades, thanks to the development of technology. Generation Z (Internet Generation) will probably never know the nuances of manual transaction processing, which was how banking was conducted until technology came along. Most of these manual banking processes were built around the rules and regulations in each country, with the exception of those supporting trade finance and cross-border fund transfer transactions, which were built according to

Manual banking was prone to a high degree of error, despite following the maker-checker or 4-eye principle. Bank reports would contain suspense entries, which had not been reconciled; MIS reports sent to top management and regulators were often inaccurate and delayed; branches would fail to comply with circulars; balance sheets were sometimes doctored to exaggerate performance; and bad assets were neither monitored nor reported correctly. These unhealthy practices increased banks’ risks and losses. At the same time, banks had to watch out for fraud, usually perpetrated by employees.

Technology enablement of the banking industry started with automation of branch and teller operations, with the goal of improving customer service. Manual operations, such as the issuance of cash receipts and payments, transfer of funds between accounts in the same branch, and certain paper clearing operations were automated. However, core operations such as lending, foreign exchange, investment banking and treasury remained under manual control. And although banks had started to computerize their

standardized rules agreed to by the trading countries. The only technological development in banking during most part of 20th century was on the telecommunication front, in the form of telephone and telex.

This paper is a capsule of banking history. Starting with the days of manual banking operations and the challenges they posed, it moves on to the development of banking technology and its benefits, and then on to the drivers of next generation banking and the role that technology can play in delivering business growth as well as customer satisfaction.

operations, they also maintained a parallel manual ledger. Bigger banks, which had computerized large branches, but not those in rural areas, had trouble consolidating data for a zone or region. Realizing the benefits of technology enablement, banks slowly moved towards complete automation. The Central Banks of different countries played a pivotal role in ensuring that the move was in line with globally accepted standards.

Automation enabled easy retrieval of customer and account data at the teller workstation to speed up customer service and process efficiency on one side and quicker consolidation of General Ledger data and MIS availability to the branches on another side.

The 1980s and early 1990s saw the advent of massive computerization, electronic fund transmission and ATMs. These innovations increased banking efficiency and output. Automation progressed at a different pace across countries, based on acceptance and cost, and was largely driven by the needs of the banking sector.

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The online revolution

The benefits of computerization in Indian banking sector

The Internet revolution in the late 1990s drove banking automation into online mode, and ushered in data centralization. This paved the way for a number of banking solutions including core banking applications covering critical branch operations, deposits, lending,

Indian banks, led by Public Sector Banks (PSB), which dominated the market, also embraced

trade finance, treasury and investment banking. Although core banking applications were inbuilt with basic risk controls and Anti-Money Laundering (AML) checks, there were also specialized solutions to help banks control and detect fraud.

the change. Table 1 below shows the adoption of computerization by Public Sector Banks.

Change of phase from business to technology In the legacy systems era, banks could offer only a few vanilla products, designed and controlled manually. Core banking technology allowed banks to create a variety of products and variants, catering to different customers, from senior citizens to high net-worth individuals. Product creation and maintenance became simpler, and product innovation took a leap. Further, technology enabled specific customer segments to be accorded extra privileges, such as doorstep banking (for high net worth customers). The new methods of income generation brought twin benefits for banks – low cost funds and higher fee income.

In the manual era, banks needed to plan months ahead of financial year closing. They had to process and verify interest on all interest bearing

accounts and do the same for the charges to customer accounts; they needed to provision year-end entries and identify non-performing assets. With core banking, banks could accomplish all of the above within hours. Core banking also brought transparency to the banking ecosystem by making data available to top management and regulators immediately after financial year closing.

External and internal audit of accounts could now be carried out immediately after closing, at the branch or head office. Other than physical loan documentation, all data was available at the auditor’s desk.

All of these added to banks’ efficiency, growth and profitability.

Table 1: Status on computerization at Indian Public Sector banks

Category Percent of total bank branches

FY06 FY07 FY08 FY09 Fy10

Fully computerized branches (CBS and others) 77.5 85.6 93.7 95.0 97.8

Branches under CBS 28.9 44.4 67.7 79.4 90.0

Branches fully computerized (Other than under CBS) 48.6 41.2 26.0 15.6 7.8

Partially computerized branches /

Non-computerized 22.5 13.4 6.3 5.0 2.2

Source: Trends and Progress of banking in India, RBI

Complex cash management and payment products Complex cash management products for corporate customers having operations in multiple countries could not have been developed and implemented without the assistance of technology. Pooling funds at a central physical or online location enabled corporate customers to manage funds efficiently. Internet banking technology made it possible to initiate fund transfer request locally or cross-border and the resultant reduction of turnaround time increased trust with customer who maintains account with the other bank. This has opened up business avenues for corporate entities.

Driven by Central Banks, many payment systems were developed for the smooth and efficient

transfer of funds between customer accounts in different banks locally and across borders. Central Banks played a pivotal part in local payments. Organizations like SWIFT Alliance facilitated cross-border remittances and by bringing in standard messaging mechanism for transmission and receipt of funds. In India, payment systems such as ECS, RTGS and NEFT were developed to enable bank customers transfer funds in real-time. Though this has cut into banks’ income from float funds, it has enhanced customer satisfaction. Elsewhere, multiple payment systems like FEDWIRE, GIRO, TARGET, CHIPS, CHAPS, SEPA etc., were developed to enable smooth and secure fund transfer.

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Core banking solutions brought multiple advantages to Indian banks. As per a survey conducted by FICCI in February 2010, core

banking implementation has improved operational efficiency, business agility, customer satisfaction and control and monitoring.

While technology was driven by business requirements in the initial phase, in the second, there was a visible turn of events, with technology playing an important part in banking strategy and business. Whereas the earliest

Table 2: Benefits derived from implementation of Core Banking Solutions

automation took root in the US and Europe, the second phase of transformation, led by core banking modernization, was driven by South East Asia, Latin America and Africa.

Benefits derived from implementation of Core Banking Solutions

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Mode Score on a scale of 1-8, 8 being most beneficial

Customer service through technology

New peripheral software solutions for MIS

With the aid of technology, bank staff could route routine service requests through Internet or phone banking (IVR) and focus on business development instead. This, coupled with the ATM, ushered in another phase in which banking customers became independent of the branch.

As channel banking gained popularity, it heightened security concerns. Complex fraudulent

Though core banking was the cornerstone of the banking revolution, there was a need for other software solutions as well. Software solutions for Fixed Assets Management, Budgeting, Asset Liability Management, Transfer Pricing, Data

transactions by unscrupulous elements gaining access to customers’ Internet banking accounts, pushed banks to invest further in security measures, as well as in anti money laundering and risk management solutions. Regulatory compliance gained importance at the domestic and global level and banks’ decisions/transactions came under the scanner.

Warehousing and Business Analytics came into existence and played a significant role in converting banking into a highly technology-driven business.

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Online cross border payments, which were limited to specific countries and attempted only by major banks worldwide during the early 1980s and 1990s, became the new normal with

the assistance of technology. Customers could open an account in one country and access or withdraw from it from another country .ATMs and debit cards reduced the physical exchange of cash.

Business process outsourcing done by banksOutsourcing of back office operations helped banks and financial services providers to lower costs and avail specialized skills. This enabled bank staff to focus on core business activities. The outsourcing also provided scalability of operations to banks and financial institutions. The centralized management of data processing and customer service operations is now a commonplace. From the traditional forms of

outsourcing such as software development and data centre operations, outsourcing has grown to specialized areas such as Business Process Outsourcing (BPO), Knowledge Process Outsourcing (KPO), research and analytics. Further on newer models for outsourcing have developed such as Collaborative Partnerships, wherein banks as well as the vendors share the benefits (losses as well) of the relationship.

Future development

Cost factor and usability

Today, technology is advancing at a rapid pace, and innovations in Internet, mobile and virtual media are impacting all sections of society and industry. The way banks operate or manage their customers has changed beyond recognition. Because of the proliferation of communication technology, banks around the world are evenly matched in technological progress. Even less developed countries have managed to reach out banking services to excluded segments, using the mobile platform. This has created a paradigm shift in the way banks approach their business; where earlier, banks took the B2B route of projecting product capability, today, they are

It is essential that technology come at affordable cost. Cloud computing technology is enabling banks to cut down technology related expenses by moving from a CAPEX (capital expenditure) model towards an OPEX one, wherein banks pay only for the infrastructure or maintenance services that they actually use. This model is likely to initiate next cycle of technology change for bringing in more business.

going the B2C way to reach customers directly using new modes of communication like Internet and mobile. Today, more technology systems are driven by consumer need. Hence, any development in B2C technology also impacts the banking sector. In addition, banks are looking at customer experience to build differentiation. Social media has started to figure in banks’ marketing and servicing strategy, and is being seen as a way to improve customer satisfaction and lower transaction costs. Clearly, banking service and outreach are going through a fundamental transformation.

Since technology requirements are being driven by user needs, it is imperative that solutions present a friendly interface and smooth experience to users. User friendly, intuitive systems cut down the need for training. It is the technology vendors’ responsibility to ensure that their solutions score high on both usability and functionality.

ConclusionBanking is now synonymous with technology. That being said, there is scope for further automation, and the industry is on the lookout for ways by which they can employ technology to enhance customer trust, improve process efficiency and speed up operations. Banks, which have leveraged technology to improve reach, customer experience, data security and regulatory compliance, are now deploying mobile banking or cloud services to achieve social objectives, such as financial inclusion.

While core banking occupies center stage in banking automation, many other processes can

be technology enabled, ranging from dispatch management, management and introduction of time based processes for banking operations at various customer touch points and tracking of the same for improving efficiency, introduction of swipe cards for banking operations, front office tools for customer to do banking on their own, enhanced customer experience models when customer visits the branch. Technology vendors can play a big role in changing the banking landscape of the future by offering innovative products and services catering to all sections of society.

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Reghunathan Sukumara PillaiIndustry Principal, Finacle, Infosys

Manoo JacobLead Consultant, Finacle, Infosys

References1. Report on trend and progress of banking in

India - 2008-09; RBI

2. Report on trend and progress of banking in India - 2009-10; RBI

3. Indian Banking System: The Current State & Road Ahead; FICCI

4. Banking on Technology-India, The Economic Times Banking Technology Conclave; KPMG

5. Monetary Theory and Electronic Money : Reflections on the Kenyan Experience; William Jack, Tavneet Suri, and Robert Townsend

6. Dataquest– May 21, 2010; Shyamanuja Das

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Today, technological innovation has a very short life cycle. Hence banks must put a lot of thought into innovation, before investing in it.

This is particularly important because technology will continue to drive next generation banking and banking strategy for the foreseeable future.

Finacle from Infosys partners with banks to transform process, product and customer experience, arming them with ‘accelerated innovation’ that is key to building tomorrow’s bank.

About Finacle

© 2012 Infosys Limited, Bangalore, India, Infosys believes the information in this publication is accurate as of its publication date; such information is subject to change without notice. Infosys acknowledges the proprietary rights of the trademarks and product names of other companies mentioned in this document.

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