Process Innovation in the Indian Banking Industry

Process Innovation in the Indian Banking IndustryJanuary 2009

ValueNotes

Arun Jethmalani, Managing Director, ValueNotes

[email protected]

Process Innovation in the Banking Industry

© ValueNotes 2009 2

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Executive Briefing – An outline

Process Innovation in the Indian Banking Industry: Overview

Drivers & Constraints

Services Outsourced by Indian Banks

Market Size & Opportunity

Service Provider Landscape

Key Success Factors



International Banks – Early Adopters

Globally, BFS sector accounts for nearly 60% of the global offshoring market. In contrast, the Indian banking sector has been slower to outsource.

But Indian Banks Lag Behind…Source: ValueNotes’ report on Outsourcing in the Indian Banking Industry




Process innovation in the Indian Banking Industry: Overview





Key Success Factors



Source: ValueNotes’ report on Outsourcing in the Indian Banking Industry

Outsourcing of processes is largely constrained by the RBI regulations


Unlike the offshore BPO market, labor arbitrage is not a key driver for growth in the domestic BPO market.

Aggressive adoption of IT and centralization of operations has served as a key enabler to outsourcing of business processes in the banking industry.

Growth in the banking industry, deregulation, increasing competition, consolidation and improving benchmarks in the industry are driving the outsourcing of business processes.









Key Success Factors




The outsourceability of processes is determined by two factors: their classification as core service and the strategic value of the process.

Core Processes: Classified by

RBI or categorized under KYC

norms

Strategic Value Processes:

Activities / Processes with strategic

importance to banks

Core Processes Non-core Processes

Stra

tegi

c Va

lue

Product Strategy and Policy, New Product Development & Planning, Advertising, Credit Collateral Evaluation, Risk Management, KYC Norms, Anti-Money Laundering, Alliances

Document and reporting, International Banking, Value-Added services, IT services

Non

- Str

ateg

ic V

alue

Payment Processing, Collections, Accounts Closure, Check & Loan Processing, Lease Management, Reconciliation, Transfer Pricing, Asset Management, Funds Management, Account Transaction Monitoring

Data Entry, New Account Opening, Loyalty Programs, Corporate Communications, Sales and Marketing (Inbound customer care, Outbound Sales), Reconciliation


“We will look at outsourcing activities like

tech-enabled customer service delivery

that are not core to our business.”

- Head CBS, Leading Bank in Maharashtra

Large banks currently outsource non-core, non-strategic value processes




Banks typically outsource IT systems and process implementation


Current Level of Outsourcing

Other

Services

Regulatory

Compliance

Treasury Transaction

Processing

Sales and

Marketing

Product

Development

Product Strategy and Policy

Advertising Payment Processing

Reconciliation KYC Norms Alliances

New Product Development and

Planning Loyalty Programs

Corporate Communications

New Account Opening

Credit Collateral Evaluation Collections,

Accounts Closure

Check and Loan Processing

Reconciliation

Lease Management

Asset Management

Funds Management

Transfer Pricing

Risk Management

Anti-Money Laundering

Account-Transaction Monitoring

Document and Reporting

Forex Management

International Banking

Value Added Services

Data Entry

Core ProcessesNon-Core Processes

Low High

HR

IT Services

Majority of the banks typically outsource some of their non-core activities with strategic value like IT systems and process implementation to third party service providers.









Key Success Factors



The total opportunity for outsourcing in the banking sector is estimated at Rs. 11.2 b for FY08. Our research suggests that little over one-third of this opportunity (Rs. 4.08 b) is currently being met.

Outsourcing estimated to grow at a CAGR of 47% over the next 4 years



Majority of the revenues are earned from voice-based services in sales and marketing. Apart from sales and marketing related services, the Rs. 4 b market is spread across processes like payroll outsourcing, recruitment outsourcing and research and analytical support.

“Completion of Core Banking System

projects by large banks will exponentially

increase the outsourcing potential in

domestic Banking sector.”

- Head CBS, Large PSB in India



In case of rapid deregulation, the market has the potential to triple by 2010.


We believe that there are two key determinants to outsourcing in the banking Industry - regulatory framework and the ability of banks to refine their strategy while adapting to changing business conditions.

The growth post 2010 will primarily depend on the government elected at the center and its success in pushing reforms in the banking industry.

Future Opportunities: 3 Scenarios

“De-regulation especially in KYC norms

can trigger the next wave of outsourcing

by domestic Banking Sector”

- Pralhad Tembhe, DGM Central Bank of

India



The complexity of operations will substantially increase – new opportunities for banks/BPOs: Will provide a boost to low value activities such as data entry & validation, CRM services like telesales, SMS based support, chat, Internet support, etc.

With increased use of new delivery channels (Internet, mobile, ATM), multi-product delivery and cross-selling will enhance scope of BPO services.

Enhanced penetration and usage of IT will propel greater usage of BPO, as banks seek to leverage IT investments to improve RoI

Expansion of IT into non-core areas will increase demand for related BPO

Captives will continue to grow, especially for PSBs

Key Trends & Insights









Key Success Factors



With increased automation of back office services, scope for outsourcing will widen…

The Banking industry was one of the first to outsource business processes to third party service providers in

the Indian market. Banking is also one of the largest segments in terms of total outsourcing opportunity the

domestic BPO industry.


Service Provider Evolution




We have categorized the service providers into the following four groups:


Majority of the large service providers in the domestic market have a substantial focus on the banking industry

Out of the 60 large Global leaders (total 10,000+ employees) serving the international Banking and Financial Services vertical, <10 BPOs actively cater to Indian banks

Vendor Group Vendors Key characteristics

Global leaders

IBM-Daksh, Intelenet, HTMT Global, MphasiS BPO, FirstSource, HCL

Established BPO vendor with total employees > 5,000 Primary focus on international markets Presence across multiple locations Typically <20% revenues from domestic clients

India leaders

Aegis BPO, Andromeda, InfoVision, Omnia BPO

Established BPO vendor with total employees > 5,000 Primary focus on domestic markets Typically >60% revenues from domestic clients or substantial scale of domestic operation (comparable to top domestic BPO vendors)

Emerging Companies

ATS Services, CareTel, Intouch, Kankei, Magus, Spanco, vCustomer

Employee size 500 to 5,000 employees; emerging BPOs Limited to specific verticals or horizontals; Specialized offerings on a small scale only Cater to domestic and/or international clients

‘Me-too’ players GK Management, Access Systems

Typically <400 employees Offering undifferentiated low value services Limited presence in terms of delivery centers and marketing setup.

Shell Transource



Vendor Voice Non-voice Data Mgmt. Key Clients

HTMT Y Y Y ICICIIBM Daksh Y naIntelenet Y Y Y Citi, PNB, ABN Amro, OBC, BarclaysMphasis Y Y Y SBIFirstsource Y Y Y ICICIMinacs (Transworks) Y navCustomer Y Y SBI

Aegis BPO Y Y Y HDFC, Citi, ABN AmroInfovision Y Y Y Amex, ABN Amro, HSBC, ICICIOmnia BPO Y Y Y naAndromeda Marketing Y Y Y CitiCaretel Infotech Y Y Y ICICI, SBI, SB of Patiala

Allsec Y Y naShell Transource Y Y HSBC, Kotak, Deutsche BankKankei Y Y naATS Services Y Y Y Amex, Standard CharteredSpanco Y Y Citi, ABN AmroDatamatics Y Y Y HDFC, ING Vysya

Indian Leaders

Global Leaders

Emerging Companies




Frontrunners

Source: ValueNotes’ report on Outsourcing in the Indian Banking IndustryDisclaimer - Findings are based on secondary research combined with detailed discussions with service providers. Quality of information depended on the cooperation of respondents from the management of the companies. Where information was not disclosed by service providers, secondary data, internal analysis and other suitable criteria were used.

Vendors Key Positives

InfoVision Largest vendor in the banking industry (in terms of employees in banking vertical) Its clientele includes over 15 large domestic banks

Aegis BPO

Established and well-known brand in the Indian as well as international market. The company has a sizeable business catering to the domestic market (75%). Within the

domestic market, it has a substantial focus in the banking vertical and has several reputed clients like HDFC, Citibank and ABN Amro

Backed by a large diversified business group, Essar Global

FirstSource

Backing from ICICI Bank Large international clients in the banking industry Supports back office operations for ICICI bank and its subsidiary financial services

companies Prospective buyer in case ICICI bank plans to hive off its captive

Intelenet Serves the domestic as well as international market Largest vendor in the domestic market (in terms of total employees), which the company

was able to achieve with the acquisition of Sparsh

Caretel Backing from Dalmia group, a large manufacturing conglomerate Substantial presence in the domestic market with over 60 clients across various verticals Strong presence in the banking vertical with leading banks like ICICI and SBI in its

clientele

IBM-Daksh One of the first large BPOs in India to serve the domestic market Support from the parent company IBM Technologies, which has strong presence in

domestic banking industry. This helps the company provide end-to-end solutions

MphasiS With strong IT and system integration capabilities, MphasiS is uniquely positioned to

provide end-to-end outsourced solutions to large clients It has also built a strong leadership team and domain expertise, which will help the

company scale up its business while moving up the value chain









Key Success Factors



Large scale, multiple city operations

Most of the mid-sized and large Indian banks have centers and market presence across cities and towns in India.

Most of the banks prefer to have distributed outsourcing delivery centers in each region close to their head quarter.

Ability to quickly ramp up operations will be critical for growth

Local language capabilities are required to serve the end clients (especially in non-metro towns).

Key Success Factors



The complexity of operations will substantially increase as service providers add new clients, manpower and new delivery centers over the next 2 years.

Integrating international operations with domestic operations will be a key challenge.

Developing and implementing new operations and solutions delivery mechanisms to improve quality of services while further reducing costs will become essential to acquire the leadership position.

Partnerships with other entities in IT-BPO supply chain (like IT services providers, hardware service providers) will provide greater value to the client.

Key Success Factors



Advisory capabilities to move up the value chain

Most of the Indian banks have relatively low (technology) maturity in their processes and are new to outsourcing. These banks are currently experimenting with outsourcing by outsourcing small volumes of low value work. With further de-regulation in the banking Industry, the scope for outsourcing will widen.

With increased complexity and scale, further outsourcing will require guidance in terms of process migration, best practices, benchmarking, etc.

Key Success Factors



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Process Innovation in the Indian Banking Industry

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