Thoughtline july 2010 -the banking & financial services e-newsletter from wipro technologies

JULY 2010JULY 2010

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ethe Banking & Financial Services -newsletter from Wipro Technologies

Volume VIII Edition XXXII

the Banking & Financial Services -newsletter from Wipro Technologies e

Feedback & Suggestions aremost welcome. Please email to

[email protected]

Editorial Team

Aroop Sundar RayAmit Abhishek

Arun Bhaskaran

Volume VIII Edition XXXII

Index

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2the Banking & Financial Services -newsletter from Wipro Technologiese

For Wipro internal circulation only

.......................................................................................................................3• Foreword

............................................................................................4• Know Your Domain Terms

• Demystification

• Innovation/ BTG Corner

• Market/ Product Watch

Fun Corner...................................................................................................................18•

• ASCII art......................................................................................................................20

- Financial Claims Scheme – Leveraging Regulation for (R)evolution............................5

- Core banking - The Islamic Banking Perspective..........................................................8

- Direct Banks and the impact on Core Systems and vendors.......................................11

- Core Banking Transformation – a CIO's Perspective..................................................13

- “FLEXCUBE” it's Global & WIPRO presence................................................................16

Foreword 3the Banking & Financial Services -newsletter from Wipro Technologiese

Greetings!!

Fresh from the devastation of the worst ever financial crisis, banks all over the globe, are recognizing the need to bring in a change in the banking infrastructure to adapt quickly to the unprecedented challenges posed by globalization and the ever changing regulatory environment. Imperative in these situations are large scale IT investment and major realignment with Core Banking investments figuring among the top list for all size of banks. Decision to replace the core banking platform is just the tip of the Iceberg and soon the burden of project goals and promised benefits starts acting as the Achilles Heels. Being in synch to these thoughts, the topic we have chosen for the July edition of Thoughtline is

In this edition, we have an article from Vinayak Bhakta which focuses on the idea of leveraging regulations beyond compliance, followed by a perspective of Islamic “Core” banking by Jilani Pasha. Next, Sushankar Daspal discuses his thoughts on direct banking and its impact on core system and vendors followed by an article on the CIO's perspective of core banking transformation by Andy Fincham and Kees Tuijnman of the BAS. In the account speak section, we have Gaurav Thakur and Gita Seshadri who share their perspective on FLEXCUBE and its Global & Wipro Presence. We also have sections on domain terms by Gaurav Patel and a very interactive fun corner by Kannan Mani.

We sincerely thank all the contributors and hope that you enjoy reading these articles.

“Core Banking (r)evolution across the globe”.

Best Wishes from the Thoughtline Editorial Team Aroop Sundar Ray

Amit Abhishek Arun Bhaskaran

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The views and opinions expressed in the articles/other contributions by individuals are strictly those of the authors and should not be viewed as professional advice with respect to your business.

Parts of the Images used in this Thought Line is from Reproductions of ASCII Graphics


Gaurav PatelProject Lead, BFSI

Accounts payable –

Accretion -

Aging -

Automated Clearing House (ACH) –

Bank reconciliation -

It is a list of liabilities of an organization or an individual that are due but not paid to creditors. Account payable, many a times, also appears as a current liability in the balance sheet. One must note that loans and liabilities to the bank which have not maturated are not a part of account payable.

Accretion is a process, where increments and periodic increases are made in the book value or the balance sheet value of an asset. In the field of banking and finance, accretion is the process where the price of a bond that has been bought at a discount is changed to the par value of the bond. It is also defined as a change in the price of a bond that has been bought at a discount to the par value of the bond.

A report or schedule of all outstanding accounts payable or accounts receivable that lists all account debtors or creditors by name, shows the total amount due to each debtor, and shows how much of the amount due to each debtor is due within specific time periods.

Organization housed within the Federal Reserve Bank (FRB) that acts as a clearing house for all ACH payments (a form of EFT), serving the function of exchanging ACH transactions among member financial institutions, and providing for the settlement of the funds. ACH transactions include “ACH Credits” (direct deposit payments) and “ACH Debits” (electronic drafts). All transactions are subject to the NACHA Operating Rules.

Bank reconciliation is the process of reconciling the bank statement balance, with the book bank account balance in the customer's (client's) books of accounts. A bank reconciliation process should result in the tallying of the two balances i.e. the

adjusted bank balance calculated, must equal the adjusted book bank balance figure. The process of preparing a bank reconciliation statement is a structured one, where bank reconciliation forms containing pre-printed items leave omission errors out. These bank reconciliation forms are found on the back side of your monthly bank statement hard copies and make the process a whole lot easier. The purpose of bank reconciliation process is to identify and rectify divergences between the two bank balances.

Refers to a system operated by a financial institution to accommodate the accounting for the institution's general ledger accounts, as well as the accounts belonging to its customers (i.e., savings accounts and checking accounts, etc.)

Refers to the incident where a bank account experiences an overdraft during the banking day but has a balance at the end of the banking day. Generally results from funds being withdrawn from the account by wire transfer during the day, prior to an anticipated wire transfer being received, or prior to an over-the-counter deposit being posted to the account during the nightly posting cycle. Banks generally limit the amount that an account can be in daylight overdraft, based upon the customer's assigned credit risk.

Debt syndication is the process of distributing the money advanced in, generally a large loan, to a number of companies or investors. It is common to use debt syndication when the loan required, in order to fund a company or save a company from bankruptcy. By employing debt syndication, several banks, investment firms or other companies share both the profits and the risk of making a large

Core Banking System –

Daylight Overdraft –

Debt Syndication -

loan. A decline in the number of available lenders has complicated debt syndication. While banks are often the primary lenders, they can be involved in deals with less outlay, thus reducing their risk.

The general ledger, sometimes known as the nominal ledger, is the main accounting record of a business which uses “double-entry bookkeeping”. It will usually include accounts for such items as current assets, fixed assets, liabilities, revenue and expense items, gains and losses. Each General Ledger is divided into two sections, where the left hand side lists debit transactions and the right hand side lists credit transactions. The balance sheet and the income statement are both derived from the general ledger.

Cash management service provided by a depository bank to its corporate/government customers, where payments are remitted to a post office box, where they are picked up several times during the day by the bank. The service speeds up the collection of the funds, and allows the bank to capture the remittance data accompanying the payment and transmit it electronically to the customer, for automated updating of its accounts receivable system. There are two basic types of lock box services – retail and wholesale.

Liquidity is the availability of funds, or assurance that funds will be available, to honour all cash outflow commitments (both on- and off-balance sheet) as they fall due. These commitments are generally met through cash inflows, supplemented by assets readily convertible to cash or through the institution's capacity to borrow. The risk of illiquidity may increase if principal and interest cash flows related to assets, liabilities and off-balance sheet items are mismatched. Liquidity management involves prudently managing assets and liabilities (on- and off-balance sheet), both as to cash flow and concentration, to ensure that cash inflows have an appropriate relationship to approaching cash outflows.

General Ledger -

Lock Box Service –

Liquidity Management -

Know Your Domain Terms


Financial Claims Scheme – Leveraging Regulation for (R)evolutionVinayak Bhakta Sr. Business Analyst, Banking Domain Team

L

Wearing Blinders on the Regulation Track

ast two years, the world witnessed a significant downturn in the global financial sector. Under pressure of deep economic impacts, governments intervened to introduce preventive laws and regulations for financial sectors

around the world. These regulations were all encompassing and put checks on even the most basic banking functions including statements, payments, disclosures etc touching every segment of the business. The Financial Claims Scheme (FCS) is a regulation introduced in Australia by Australian Prudential Regulatory Authority (APRA) with intent to protect customer deposits in authorized deposit-taking institutions (ADIs) such as banks, building societies and credit unions. APRA requires every ADI to be compliant to the regulation by end of 2011.

Regulation in nut shell is about solving problems that society or businesses can't solve alone, as well as making trade-offs among different objectives and the interests of various stakeholders. But most often when new regulations are introduced, financial sectors take an indifferent approach towards it gradually exploring it and then hurriedly ramping up towards the end to comply within the stipulated deadlines. The primary reason is the lack of will and corporate backing for actively pursuing the regulation which becomes just a tick mark on the organizations “To Do” checklist. Moreover business teams stashed with their LOB specific objectives find hard to focus on the regulation and derive credible value from it which leads to understanding the regulation only from the business impacts point of view. Once the regulation is lightly studied it is migrated to the program team which gathers momentum amongst the technology teams to build a solution. With such little focus upfront often companies miss hidden potentials of leveraging the regulation beyond compliance enabling. Moreover often technological focus is to comply within the shortest duration, using the least resources and making minimal changes to existing systems. Furthermore, opportunities to leverage the regulation to anything beyond compliance is never explored or shunned even if recommended. This causes hindrance within the banking sector to research and explore greater potentials from the regulations while complying with it.

Organizations should understand that even though the regulations may not directly benefit the organization, there is always an opportunity to explore reusability of the regulation and use it to its advantage.

As already explained, FCS provides set guidelines for protecting deposits of customers both retail and corporate customers. The primary deliverables to comply with the regulation can be listed as follows:-

1) Identify each customer uniquely along with all his/her accounts.2) Manage data quality of all customer and account data. 3) Aggregate the account balances of each customer for all his/her accounts.4) Provide user interfaces for audit and reporting purposes.

Holding an opportune lens and understanding all aspects of the regulation, stirs up some innovative ideas easy to explore. The first step is to componentize the requirements into reusable modules. The following three components can be built to meet the FCS regulation requirements as well as to attain additional business benefits for the ADIs as follows:-

The primary regulation necessitates a single customer view to enable customer reportability upon FCS invocation. This single customer view can easily be leveraged for multitude of opportunities from both corporate growth and revenue standpoint. The key areas it could be leveraged include customer servicing, Risk Management, Marketing and Campaign Management, Decision support, Customer Acquisition and CRM tools. SCV is also very critical in today's world for building deeper and innovative strategies and solutions. Some immediate areas or functions where the SCV module can easily fit in and the benefits it can provide are as depicted below:-

Exploring FCS through the Opportunity Angle

Single Customer View (SCV) Module

Demystification


Account Aggregation Module

Data Quality Hub

FCS mandates building an aggregate payout facility which will aggregating the account balances of all the accounts of each of the customer and report the final balance to FCS. This is required by FCS to assess payout figures upon FCS invokement. The account aggregation module provides a single view of all the accounts of each of the customers across the enterprise along with the aggregate balance. Access to this data provides tons of opportunities and can be highly leveraged by banks for Campaigns Management, Risk Management, Customer Servicing, Decision Support, compliance management & CRM activities. Moreover many critical business decisions can be made by understanding the true balance state of the customer. Some areas or functions where the account aggregation module can easily fit in and the benefits it can provide are depicted below:-

From FCS reporting standpoint, in order to handle zillions of data cleansing, matching and merging activities, a data quality hub is required which dedicatedly detects and remove all data quality errors from customer & account data. Distilled customer / account data is of great importance to an organization and can be leveraged in marketing & campaigns, compliance management, customer servicing and CRM activities. Some areas or functions where the data quality hub can easily fit in and the benefits it can provide are depicted below:-

As portrayed above, ADIs should address the FCS regulation beyond compliance and invest to meet some of the relevant benefits from the solution. An assessment needs to be done focusing on the current business environment in terms of the pain areas while planning for the FCS regulation.

Demystification

• Product Bundling & Pricing • Rewards schemes• Advanced Automated

Campaigning• Better Offers• Reduce Duplications.

• Fraud Reduction• Customer Contact Sharing• Reduce Charge offs• Improve Collections/Recoveries• True Customer liquidity

Position

• Market right products• Target right customer

segments• Automated intuitive

Workflows• Quicker booking.• Cross-sell/up-sell

• Enhanced Customer analytics

• Enhanced strategy potential

• Greater Customer Focus• Reduce Repetitiveness.• Improve Productivity.

• Enhanced servicing • Reduce repetitive actions• Improve customer experience• Customer experience

enhancement• Personalization• Cross-selling & Up selling• Greater Customer insights

• 360 degree view across LOBs• Improve customer touch

points.• Improve customer experience • Better quality servicing• Personalized offers • Personalized rewards.• Lead sharing across LOBs

Product Management

Single Customer

View

CustomerServicing

Compliance Management

CRM

RiskManagement

Marketing & Campaigns

•Cross LOB account analytics •Improve product specifications.•Enhance product profitability•Improve product strategies

•360 degree Account view across LOBs•Improve customer touch points.•Improve product profitability.•Better account servicing•Personalized account offers •Personalized & consolidation of rewards.•Lead sharing across LOBs

•Account Fraud Reduction•Account consolidation •Reduce Charge offs•Improve Collections/Recoveries•True Customer liquidity Position

•Larger Account Landscape to Market.•Account Based Product Bundling Pricing •Rewards Consolidation schemes•Advanced Automated Campaigning•Better Offers•Reduce Account Campaign Duplications.

Product Management

Account Aggregation

Module

Customer Servicing

ComplianceManagement

CRM

RiskManagement


•Scalability for compliance changes•Reusable for other Regulations•Customizable for other regulations•Cleansed Account Data can be used to track AML , financial reporting etc.

•Market right products•Target right customer segments•Automated intuitive Workflows•Quicker booking.•Cross-sell/up-sell

•Scalability for compliance changes•Reusable for other Regulations•Customizable for other regulations•Cleansed Account Data can be used to track AML , financial reporting etc.

•Enhanced Quality customer data improves CRM . •More confidence in CRM activities•Better account servicing•Reduces duplications•Personalized account offers •Personalized & consolidation of rewards.•Lead sharing across LOBs

•Data quality must for accurate reporting for any regulations.•Scalability for compliance changes•Reusable for other Regulations•Customizable for other regulations•Cleansed Account Data can be used to track AML , financial reporting etc.•Incorrect reporting can cause legal repercussions.

•Quality Data Enhances trusts in Campaigns•Better Quality and Informed Decisioning•Cleansed data enhanced analytics•Rewards Consolidation schemes•Enables Advanced Automated Campaigning•Reduce Account Campaign Duplications.

CRM

Data Quality

Hub

Customer Acquisition &

Servicing

ComplianceManagement



Demystification

Conclusion and Wipro AdvantageFCS regulation is one such example where greater value could easily be derived creating potentials of huge benefits from the otherwise untapped and unknown business point of view. It is imperative for the financial organizations to address every regulation with optimism and try to mine more value similar to what the business teams do today for most proactive strategies and campaigns. Regulation is incumbent and an inescapable reality in this economic situation, so institutions can find true value and establish a competitive edge only by trying to derive more from the regulation rather than just implementing it just for compliance.

Wipro understands the FCS regulation through detailed study and research of the requirements. In the past Wipro has also conducted similar analysis of depository insurance schemes in other countries like that of the FSCS of UK. Through such in depth understanding of the depository insurance schemes around the world, Wipro can quickly integrate a unique and innovative solution for ADIs and financial organizations to comply with the FCS regulation. Wipro with its proven knowledge and experience with financial institutions around the world can greatly assist ADIs to meet all the terms of the FCS regulations. At the same time Wipro can do an internal assessment of the ADI to identify other challenges of the ADI and according identify components of the FCS solutions which can be leveraged to alleviate them.

From a solutions front, Wipro has extensive experience in implementation of solutions at different customer locations and understands the business of the Australia's ADIs. Its domain and technology consultants have exhaustive exposure to specialized services in the ADI and have devised proven methodologies to quickly integrate and implement solutions in financial institutions. ADIs should hence partner with Wipro to leverage on its understanding of industry wide best practices and approaches that could potentially provide a better customized strategy or solution scalable to future business needs of the ADI while complying with the FCS regulation. Additionally, Wipro believes that there could also be some scope of leveraging the existing infrastructure and upgrade it to support the regulation. Hence, a strategic partnership with Wipro would help ADIs not only meet the terms of the regulation but also bring out a true value beyond compliance enabling.


Demystification

Core banking - The Islamic Banking Perspective Jilani Pasha Project Lead, Testing Service Group

T

Islamic Banking vs. Conventional Banking

he indispensable notion of Islamic banking is furthermore identified as 'interest-free banking', that was introduced to the global market from Middle East and has become a phenomenon that has was widely adapted in

Malaysia, Indonesia and other parts of Asia. While other major financial centers like London, Singapore and Hong Kong are also entering into partnerships with Middle Eastern banks, Islamic Banks are now completely operative in more than 75 countries worldwide.

The basic principles of Islamic banking depends upon the law of Sharia (Islamic rules).The most prominent feature of this law is the prohibition of paying or collecting interest on funds (Ribaa). It also prohibits Gharar – Uncertainty of any contract which involves the element of speculation or gambling is prohibited. To execute theses principles, Muslim financial institutions have launched some monetry devices which would be discussed later in this article. In order to keep their clients satisfied, these interest free banks usually give a share from the bank profits instead of the interest on the savings account.

The conventional banking theories assume that banks earn profits by purchasing deposits from the depositors at a low-interest rate, then reselling those funds to the borrowers at higher interest rate.Therefore, conventional banks make profits from the spread between the interest rate received from borrowers and the interest rate paid to depositors. The equation for conventional banking can be summerized as :

Profit = (Purchase deposit from borrower at low interest rate) – (Resell those funds to the borrower at highest interest rate)

The role of Islamic banks becomes difficult compared to their conventional counterparts because of the basic principle that money is not supposed to earn interest, which inturn eliminates a major role of the financial institution. So, what do they do? They invest in viable projects, with reliable borrowers. If the project succeeds, the bank shares profit with the borrower and in case of a failure, either or both the bank and the borrower suffer the losses.

The following table highlights the differences between Islamic and Conventional Banking:

To execute theses principles, Muslim financial institutions have launched some monetry devices which would be discussed later in this article. In order to keep their clients satisfied, these interest free banks usually give a share from the bank profits instead of the interest on the savings account.

The role of Islamic banks becomes difficult compared to their conventional counterparts because of the basic principle that money is not supposed to earn interest, which inturn eliminates a major role of the financial institution.

Characteristics Islamic Banking System Conventional Banking SystemGuiding principle Guided by Islamic laws. Guided by profit motive alone

Liquidation Assets

An Investment Account Holder will have similar rights as shareholders.

Depositors are paid before the shareholders.

Involvement of risk

Risk-sharing and profit sharing go together.

Carry much less risk, major part of the risks being transferred to the borrowers.

Return on Capital Depends on productivity/success of the venture

Returns are guaranteed

Profit and Loss Sharing

Most transactions are based on this variable returns, dependent on lenders’ performance.

There is no concept of Profit and Loss Sharing

Zakat It has become one of the functions of the Islamic banks to collect and distribute Zakat.

Government Taxes perhaps serve the same purpose - mode and rate of charging are different, though.

Compounding or Interest on interest

The Islamic banks have no provision to charge any extra money from the defaulters.

Compound rate of interest is allowed in case of defaulters.

Money-Market Borrowing

Difficult to borrow money from the money market.

Money market is the main source of liquidity.

Relationship with Clients

Partners, investors or trader. Creditor or Debtors.

Deposit insurance

None An integral component


Demystification

An Overview of Islamic Banking Products

A. Islamic Deposit Products

Mudaraba Accounts – Comprising of Investment Accounts

B. Islamic Financing Products

Murabahah - Cost-plus financing

Ijara – Leasing

Islamic banking and financial institutions have developed a wide range of products which are based on profit and risk sharing, property exchange and certainty. Each of these products very clearly defines rights of the customer and responsibilities of bank. The following lists of products are very common among the Islamic banks:

Wadiah Accounts – Comprising of Savings Account and Checking/Current AccountBank accepts deposit from customers for safe custody of their funds and takes

the permission in utilizing the money with the possibility of some profits. In this case, bank guarantees the full return of the deposits made by the customer. Banks share Hibah (Gifts) as a token of appreciation in this case; however, the frequency of payment depends on bank policies.

Current account holders won't receive Hibah and the relaxation on minimum limits and withdrawals is the differentiating factor between these two accounts.

Investment account is based on the Mudaraba principle. Banks accepts the deposits from investors for fixed or unlimited period of time. It diversifies the fund in permitted investments and financing activities and shares the outcome with depositors based on the portion agreed upon although there is no guarantee of returns. In this case, depositor cannot withdraw the amount from these accounts and any losses are borne solely by the investors.

An interesting feature of the deposit products is the computation of zakat, a charitable payment based on the annual wealth or income of the individual, if the wealth or income exceeds a threshold amount (known as nisab)

Based on the contract between the bank and customer, Islamic financing products are sub-divided into various categories and banks charge administrative and management fees instead of interest. Common forms of financing transactions are discussed below.

This technique is used extensively to facilitate the trade finance activities of Islamic financial institutions. The bank will purchase the necessary goods/equipments and then sell to its clients at cost plus a reasonable profit. The customer cannot re-sell the goods without receiving permission from the bank.

Ijara contracts are similar to rent-to-own arrangements under which the bank

buys and leases out the asset or equipment required by its client for a rental fee. This is commonly used for Islamic mortgages. Bank retains the ownership until the payments have been completed.

This transaction is based on equity participation (Musharakah) in which the partners bring together their capital and jointly generate surplus. Profits or losses would be shared between the partners according to some agreed agreement depending on the equity ratio. The ownership percentage is adjusted periodically (diminishing musharaka) to reflect the customer's cumulative payments.

Istisna is a contract of exchange with deferred delivery, applied to specified made-to-order items. Istisna contracts are used for manufacturing of goods or construction projects and require the buyer and seller to agree on a fixed price. The bank acts as the third party, contracting with the buyer to provide the funds and with the seller to produce the goods. Upon completion of the seller's responsibility, the bank pays the seller and the buyer subsequently pays the bank either in full or in fixed installments

Most of the core banking solution vendors have specific customized modules to address the requirements of Islamic banking. Basically, an Islamic banking solution must provide financial institutions with the following capabilities:

o It should incorporate Sharia'h-compliant components without losing its robust banking capabilities such as investments, financing, payments, cards, treasury management, trade finance and anti-money laundering services.

o Channel the mudaraba investor's returns without co-mingling with the rest of the depositors funds.

o Provide real-time visibility and consistent experience across the enterprise in multi currency and client accounting system.

Musharakah – Joint Ventures

Istisna – Third Party Contract

Characterstics of a Core Banking Solutions for Islamic Banking

An interesting feature of the deposit products is the computation of zakat, a charitable payment based on the annual wealth or income of the individual, if the wealth or income exceeds a threshold amount (known as nisab)


Demystification

o Comply with Sharia'h Standard No. 9, issued by the Accounting and Auditing Organization for Islamic Financial Institutions) and international accounting standards (IAS) among others

o Pursue a comprehensive database schema that captures and consolidates operational data from across all components and other third party systems for business analysis.

o Provide or customize reports which aid Sharia'h scholars during their routine audit

o Provide or customize design in such a way to change the existing products or workflow and aid in new product or in enhancements

It has been observed that core banking product vendors face several stiff challenges while customizing their solution to suit the requirements of a specific Islamic bank.

A few such challenges that need to be overcome while implementing the Sharia'h compliant products are as listed below:

o The varying interpretations of the Sharia'h across different regions is one of the key challenges, as there is a tedious need for accuracy in interpretation of Islamic laws relating to banking in that region. There is also the compelling need for detailed local and tax functionality to cater to the needs

o Product customization according to the Sharia'h becomes challenging as core banking solutions are not exactly paired up with the Islamic banking market and additionally, the banks need to comply with national/domestic policies as well as detailed tax functionality for different banking products

o Resourcing challenges - Shortage of knowledgeable resources, as well as Islamic banking scholars who are qualified to advise banks operating internationally under Islamic law

Need for standard accounting and auditing practice across geographies. Currently, there are around 60 AAOIFI accounting, auditing, governance and Sharia'h standards

Implementation Challenges faced by Core Banking Solution at Islamic Banks

Product Bundling and Relationship

Pricing

DDA Product Processor

Time Deposit Product

Processor

Card Product Processor

Campaign Management

Customer Information

System enabling

a 360 view

General LedgerMIS and Regulatory

Reporting Product Definition

Customer and Product Analytics

Channel Integrator

Mobile Banking • SMS• Mobile Web

• Downloaded applications

Channel In

tegra

tor

ATM Network

IVR

Contact Center – email, voice,

chat, co-

browsing and social

community

3rd party data entry &

validation

vendors

Funding and Payments

engine

Content Management System

Online Analytics and Targeted

Delivery engineSearch Engine

Tools and Calculators

KYC and Fraud Detection systems

Account Origination and Account Servicing Business Processes

Cross Channel Alerts Engine

Goal TrackingChat and co –

browsing

Rules EngineLead

Management System

Secure Messaging platform

Identity and Authentication

Model

Social Community Platform

External Interfaces

Internet Banking – Open Site Internet Banking – Closed Site


Direct Banks and the impact on Core Systems and vendorsSushankar Daspal Practice Manager, Banking Channels and Requirements

One of the effects of the turmoil over the last few years has been a resurgence of interest in direct or “online only” banks. These banks are typically de novo – without the burden of branches or a legacy IT environment. These direct banks might be sponsored by an established financial services brand – often, in a new geography, or for new customer segments in an existing marketplace. Some of these banks are sponsored by non-financial organizations entering the financial services space. Examples abound – from retailers to automotive finance.

These banks are often scrappy and brand oriented; after all, they have to establish themselves in an overbanked market. They differentiate themselves in front of their customers through a few tenets. Pricing is often a primary tenet. Others tenets include simplicity or transparency in their dealings with customers. Underlying is a theme of flexibility to react to changes in market and the ability to offer “relevant” financial products.

The reaction of traditional banking and financial services firm has been to offer online only accounts. This often acts as a stimulus to the direct banks – which further differentiate their accounts to stand out from these traditional players. The model below showcases the functional components of these direct banks.

How have core-banking vendors handled this challenge? Some vendors have created specific core banking products that support these direct banks. Existing modules of the core banking system have been modified to fit an online only world.

Focus has been placed on online origination of application – as this becomes the primary (perhaps the only) sales channel of the bank. Integration connectors for bank office processors have been established that enable in-house departments or third party vendors to efficiently process mailed in documents – including signature cards.

The systems are modeled to enable low IT and operations costs. Manual tasks are eliminated or automated – as far as feasible. The goal is a low cost to income ratio targeted at the range of 30% to 45%. The low cost-to-income ratio becomes critical if pricing is one of the chosen attack strategies. The core banking system support it by enabling STP execution of customer requests – with only fallouts going to operations for manual handling.

Functional Components of the Direct Banking Model

Another critical flexibility needed is product bundling. Direct banks are often leaders in bundling different products together or adding product features to create a compelling value proposition for their customers. Simple offerings can start as a current account bundled with a debit card; with (un)limited free usage of foreign ATMs – subject to some minimum balance conditions or number of purchases made at POS.

o Direct bank's core systems need to have the flexibility to handle various pricing models. It goes without saying that the bank product manager will be demanding to see various types of MIS relating to product and customer profitability.

Key considerations for Core Banking Systems for Direct Banks

Demystification


o Cross sales is often a key strategy of these direct banks. Cross sales can only be done by effective analytics – especially online analytics. The core banking system is often supplemented with third party online analytics to help the direct bank achieve these goals.

o Direct banks also run promotions tied to different themes. These promotions are often widely advertized and lead to a surge in transactions during these period. The core banking system must be able to scale to meet the demand. The online responsiveness of these systems is often the customer's proxy of quality of interaction with the bank.

o An equally key consideration is 24x7 operations. With a direct bank – the system cannot afford to go “offline” for processing. Customers must be able to transact – whenever they choose. It will come as no surprise that core-banking vendors having a fully online architecture have been at the forefront of introducing “direct banking” core products – stealing a march over their legacy brethren.

o Some of these core-banking products come with pre-built integrators for the mobile banking channel. This channel is a critical channel and an attractor for Gen Y customers as well as the smart-phone toting crowd.

o Another emerging area of focus will be the social community platform. The online bank of tomorrow will have to leverage on the social community. It is a part of it anyway. The only question is – does it wish to talk to the community, or is it satisfied to be talked about?

o Equally important is the support for the contact center. The term direct or online bank does not reveal the importance of the contact center. The contact center will be the only source of assisted service for the customers. It will morph from handling only voice processes to support other channels like email, text chat and co-browsing based support. Over a period, it will also start supporting the social community of the bank.

Some of the leading core banking vendors focused on the direct banking space includes Infosys Finacle's Direct Banking Solution, Oracle's FLEXCUBE Direct Banking and Callataÿ & Wouters' Thaler. These vendors have started supporting some of these features – natively; and others via third parties. Legacy systems are supported via the service oriented architecture layer or an enterprise service bus. This is especially helpful for banks having legacy investments and wanting to leverage those when building the online bank.

Watch this space. The developments promise to be interesting.

Demystification

Core Banking Transformation – a CIO's PerspectiveAndy Fincham Practice Director, Business Advisory Services Europe


Innovation/ BTG Corner

In any sphere of life there are things, and then there are BIG THINGS. When it comes to technology, undoubtedly one of the biggest, by any measure, is core banking transformation. And maybe therein lies the appeal.The measures are worth looking at for a start, for 'bigness' comes in many

forms. In financial terms, the commitment required for a core banking replacement is the largest a bank will face: the cost of licenses for core banking application software has traditionally been amongst the highest obtained in the industry, not least because of structures based on number of users or customer accounts. Beyond software, systems integration, even for pre-configured solutions, requires a huge effort, largely as a result of interfacing with secondary banking components. And pre-configuration is rarely fully utilised, since business users can often only be persuaded to tolerate the inconvenience of a system change providing there are 'value adds' in the form of performance enhancements. Often, these are also very large changes, involving new functionality, integrated across channels. The whole affair is hedged around by regulation and compliance, and too often the cost is considered too great for the estimated benefits, and the effort too complex to justify the risks.

Perhaps not surprising, then, that core banking systems transformation is a subject that remains on the IT agenda, as it has for many years. Since the average tenure of CIO in any one firm is less than eight years, it is a brave individual who chooses to lead his team down the replatforming route.

As a result, the core processes of many of the Tier 1, established banks (current account processing, deposit and loan administration, payment systems, general ledger) continue to be run on legacy systems. Further down the chain, the mid-size banks, the wholesale banking networks and most recently the acquired banks in emerging markets, have created for themselves in a different set of problems with the implementations of integrated packages not designed to meet the need for flexible channel solutions, risk reporting and customer intelligence.

All banks have learned to live with the limitations of their existing core, now supporting a myriad of channels, with CRM and risk analysis tools patched into the legacy banking systems. These banks find ways to live with their core systems. And

it is to address consequences of the consequent compromises that we focus on core banking transformation.

Transformation is the 'new' generation of benefit-driven change, one step on from 'replatforming', which replaced 'replacement' following the wave of IT-led transition in the 1980's. For though the whole that can be termed 'system' does deliver what it needs must do, (if not that for which it was originally designed) this has been achieved at the price of a complex legacy environment which increasingly is an unacceptable barrier to efficiency and agility, and demands an ever increasing cost of ownership. And it is on these three levers that that the transformation agenda seeks to pull through change.

Three key drivers combine to make the transformation business case: a). Increasing rate of change as a result of the banking crisis which has spawned

a host of new regulatory and compliance requirements; b). The rise in technology-enabled channels such as internet and now mobile,

which are increasing complexity; and c). The resulting deterioration in the Total Cost/Performance/Stability matrix. Together these issues are driving many banks towards action after their years

of hibernation.

Theoretically there are multiple ways to address a core banking transformation. Firstly, providers of banking packages have promoted their products as a true alternative for legacy systems. However, the high investments and the huge opportunity cost, in addition to the risk of failure has kept large banks away from any aggressive migration scenario, even if for some small and mid-sized banks,

The Evolution of Transformation

The CIO's approach

Kees Tuijnman BAS Global Lead, Core Banking Transformation

All banks have learned to live with the limitations of their existing core, now supporting a myriad of channels, with CRM and risk analysis tools patched into the legacy banking systems. These banks find ways to live with their core systems. And it is to address consequences of the consequent compromises that we focus on core banking transformation.



transition to a different banking package has proved a successful approach. Larger banks needs must adopt a more careful step by step approach. They will

first invest in their business architecture, application and technical architecture to ensure the target environment is well defined. In parallel they will improve service management to avoid issues arising from lack of maintenance discipline, and thus reduce the risk of future legacy problems. Next they will invest in infrastructure components and middleware solutions that will facilitate a component-based replacement of elements from the 'old world'. More recently, investment in SOA has been made to optimise the mix of legacy functions and state-of-the art solutions.

But the role of IT in banks is changing, and in turn the IT vendor community begins to adapt in response. We can anticipate that for certain sectors of the market, simplicity of offerings will become the main requirement, with differentiation through marketing and pricing, rather than IT core banking functionality.

As such, the core will reduce and commoditize, and in so doing avoid regulatory complexity, increase customer visibility of products and enable technological progress. The opportunity for ISPs to engage in large client financed projects will reduce, and instead the CIO will focus on demand management and the architecture of the bank. They will manage their partners who will be risk taking providers of solutions ranging from traditional infrastructure and application components to SaaS, and ultimately full BPO. The IT assets will be more and more on the books of the IT partners, providing banks with the possibility to scale up or down facilitated by a flexible variable pricing model.

In the mantra of the consultancy suits, the role of the CIO is to 'deliver capability, not build assets'

Clearly, there is not always the opportunity to clean up systems in a step-by-step , controlled way. This calls for a hybrid approach where we can find a business case for a BiaB (bank in a box) solution – maybe for a new product line, separate from the existing environment, or a start up with an otherwise impossibly short time to

Wipro's UCB Solution

market new business functionality. In time, the BiaB solution can be architected to become a strategic component of the IT portfolio of the bank.

Combining the BiaB with the Wipro solution portfolio, we can create a capability which addresses this new market, called the Utility Core Bank, (or UCB) this transformation solution

The illustration shows the UCB at a conceptual level: offering a managed services solution to provide a framework for all Wipro and partner services to deliver the core bank.

Transformation is the 'new' generation of benefit-driven change, one step on from 'replatforming', which replaced 'replacement' following the wave of IT-led transition in the 1980's.

But the role of IT in banks is changing, and in turn the IT vendor community begins to adapt in response. We can anticipate that for certain sectors of the market, simplicity of offerings will become the main requirement, with differentiation through marketing and pricing, rather than IT core banking functionality.

Utility Organizational Unit

Pa

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Utility Management

Business Development & Solution Design

Service Integration

Quality Management

Utility Core Services

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BPO Services

ApplicationServices

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Platform Core

InfrastructureServices

UCB Components Schematic



The core UCB components are indicated in the figure above:• UCB Management, Development & Solution Design : internal UCB functions

for multi-tenant• Customer Management: SLA driven governance with the new bank owners• Partner Management: SLA governance for non-Wipro service components • Service Integration: creating a single service from all solution elements• Quality Management: cross- functional for Wipro solution components • Implementation: set-up and future enhancements of core and bespoke

(online) elements • Infrastructure: network, hardware, Service management; hosting; data

centre(s) • BPO: back office process supported by the bank – product specific• Optimisation: cross-functional for UCB components, driven by partner,

client and Wipro teams.

When the pressure is put on the CIO to shift resources to new projects and innovation, whilst in reality a very large part of the IT budget is locked, such a set of capabilities can make all the difference. The advisory role to the CIO must therefore be focussed to support the bank in exploring their options for transformation. Wipro is well placed as strategic partner in the key domains: from architecture and strategic planning; SOA-enabled legacy; carve out and replacement of business process functions. All the way up to complete back office on a variable cost structure, which is where our UCB solution comes in.


Account Speak

“FLEXCUBE” it's Global & WIPRO presenceGaurav Thakur Project Lead, Securities And Gita Seshadri Senior Manager, Securities

Financial institutionsIt's a known fact that Banks and hold a major piece of the pie in IT spending. One of the leading award winning Core Banking products which Banks and Financial Institutions have opted for is FLEXCUBE. With FLEXCUBE Core Banking, banks gain a cost advantage through straight-

through processing and exception handling. In addition, the solution supports regulatory requirements in key markets through a highly secure data management system, which can easily integrate with third-party solutions at your bank. Some of the Key features of Flexcube are listed below:

• 24/7 processing of large transaction volumes, multi currency processing. • Multiple delivery channel support, including branches, ATMs, point-of-sale

terminals, call centers, mobile devices, and internet banking.• Security management covering application and role-based access.• Online validations and automated exception processing.• Operational risk management controls, including limits, collateral, and

nonperforming assets.• Highly customizable capability to interface with upstream and downstream

external systems which are typically operational in all global banks.• Extremely flexible Interest, charges, Commission & Fees setup which allows

customized setups for setting up Customer/Country/Branch/Account specific setup which is key in this highly competitive corporate banking world.

• Compatible with latest reporting systems for accurate Business and Finance reporting.

• Easy to use GUI and Index Help are available for Operations end user comfort and faster processing of the Manual activities.

Capable of generating all required Swift message formats and hence makes it easily compatible to Swift network for cross boarder financial transactions.

FLEXCUBE has won The Banker 'Core Banking Solution of the Year' and 'Application of the year' awards.

(The Banker is a leading UK based global banking publication)Since its launch in 1997, more than 185 financial institutions in more than 85

countries have preferred FLEXCUBE. FLEXCUBE has been ranked the world's No. 1 selling banking solution for two consecutive years, 2002 and 2003, by the UK based International Banking Systems (IBS).

One of Wipro's major clients is Citibank and they have FLEXCUBE implemented in over 70 countries across the globe and they are targeting close to 100 countries at the end of the implementation phase. Wipro Flexcube Team has played instrumental part in making the EMEA Cluster (Europe Middle East & Africa) with 50 countries live & Stable on Flexcube. Wipro Flexcube Team handles various work domains for Citibank providing a complete center of excellence:

L2 Prod Support: Providing 2nd level Production Support for EMEA region to make sure Customer & financial impacting issues are resolved in nick of time to provide a stable banking environment to Citi's wide range of corporate customer.

Country Rollouts: To Sun Set the legacy system and implement Flexcube in all departments in Citibank country, this generally involves 6 to 12 months of rigorous projects which typically covers all phases of SDLC lifecycle like Requirement gathering , Business understanding , User Training , Software Construction,

Finance &

Regulatory

Reporting

Customer

Interfaces

ATM,Net Bnk

OPERATIONS

USERS

BOOKING

BUSINESS

REPORTING

FRONT END

UP-STREAM

MODULE

PROCESSORS

DOWN STREAM

REPORTING

SYSTEMS

FLEXUCBE

CORE BANKING

SOLUTION


Account Speak

Internal and User Acceptance Testing , Implementation planning and execution with adequate back out planning to make sure Flexcube is implemented smoothly providing all the required benefits to the Branch/Country users and its Client base.

Enhancements, Regulatory & Technology Initiatives: Taking up various new modules and functionality implementation projects to make sure Citi has the more innovative and first of its kind solutions to market and keep the Global Corporate customer happy. Also taking up regulatory initiatives like SEPA , BASEL II , FDIC , MT202COV Swift Enhancements etc to make sure Citi is complying with all banking Norms.

Reporting & Admin Activities: To Provide IT support in all server level admin activities and also Reporting Team which provides enhanced ready to use analytics reports to various departments in Citi departments like Finance, Internal controls , Security Maintenance, Operations, Treasury etc using latest tool like Business Objects.

Below is the list of Capability & Coverage of Flexcube Services:• Foreign Exchange (FX) & Money market (MM)• Commercial Lending (LD - LOANS /DEPOSITS /Loans Application Processing

System)• Trade Finance (LC - Letter of credit / BC Bills & Collections)• Retail Accounts (TELLER/ FT - Funds Transfer / SI - Standing Instruction / LP -

Local Payments)• Accounting - Current Savings, Nostro Accounts• Risk Monitoring & Credit tracking• Swift Messaging• Interest/ Charge/ Commission/ Fees• GL- General Ledger & MIS Reporting• Automatic Accounting & Messaging• Comprehensive MIS Reporting• Intuitive GUI front-end• User-Definable Advice Formats• Real-time Limits Monitoring • Multi-Currency, Multi-Language Support & Multi-Branch• Anywhere Banking, Branch-wise EOD• Tanking of Transactions during EOD• Consolidated Reporting & Nostro reconciliationATM Interface, POS / Debit Cards, Telebanking / Call Centre InterfaceBelow is the Internal Architecture Diagram of FLEXCUBE:

Security Management System

Interest/Brokerage/Taxes/Commission

Accounting / Settlement/Overrides

Products/Acc. C lasses/Static data

Currency Conversion/Revaluation

C O R E S E R V I C E S

Lim

its

Mo

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Gen

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Led

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Letter Of Credit

Bills

Loans

Deposits

Foreign Exchange

Money Market

Securities

Derivatives

Funds Transfer

Elec Msg System

Nostro Recon

Standing Inst.

Retail Banking

Branch Teller

Signature Verifn.

Customer Access

Management Information S ystem

Report Generator Messages / Delivery S ystem

Fun CornerFun Cornerthe Banking & Financial Services -newsletter from Wipro Technologiese

For Wipro internal circulation only

18

Kannan Mani Test Lead, BFSI

1. Financial Statements are reports on the financial performance of organizations. They provide data on:

A) Projections for the upcoming fiscal yearB) Where money comes from, what money is

spent on and how much money is available for use

C) Comparative company data to companies in similar industries

D) All of the above E) None of the above

2. The Balance Sheet equation is: A) Assets divided by Equity = Liabilities B) Assets plus Liabilities = Equity C) Assets = Liabilities plus Equity D) Equity = Profit minus Taxes E) Liabilities = Assets plus Equity

3. If information in a financial market is asymmetric, this means:

A) Borrowers and lenders have perfect information

B) Borrowers would have more information than lenders

C) Borrowers and lenders have the same information

D) Lenders lack any information

4. What is the full form 'Core' in Core banking solutions?

A) Central Organization for Rural EmployeesB) Centralized Online Realtime ElectronicC) Centralized Online Realtime ExchangeD) Connected Organizations for a Responsible

EconomyE) none

5. Which of these formed the basic principles of Islamic banking?

A) Profit/loss sharing and interest payment B) Profit/loss sharing and penalty C) Profit/loss sharing and prohibition of interestD) Lending and prohibition of interest E) Savings and profit/loss sharing

6. The payment card where you are required to repay the entire outstanding balance within the due date is called a

A) Credit card B) Charge card C) Debit card

7. Your banking institution will impose a penalty called "early settlement penalty" if you repay your loan in full before the expiry of the mandatory period. Why?

A) To pay for whatever administrative fees incurred

B) Compensate your banking institution for any losses incurred due to your premature exit

C) Penalise you for terminating the agreement D) Pay for the legal fees in terminating the loan E) As withholding sum to settle any amount due

from you later

8. What is the role of the Credit Bureau? A) Blacklist borrowers with bad credit record. B) Collects credit information on borrowers and

supplies the information back to lendersC) Gives credit assessment of borrowers D) Dictates credit decisions of financial

institutions

9. Which among the following is the correct definition of "Computer Audit" used many times in Banking Industry?

A) Practice of using computers to automate or simplify the audit process

B) Practice of testing the computer security procedures and identification lapses before the banking operation is put to risk

C) Software designed to read, process and write data with the help of functions performing specific audit routines

D) Practice of financial statement audit with the help of Computers

10. In context with the use of Information technology in Banks, what is the meaning of Cheque Truncating?

A) Illegal act of taking advantage of the float to make use of non-existent funds in a cheque

B) Creating digital version of the original chequeC) Crossing of chequeD) None of Them

11. Most of the ATM cards, credit cards, debit cards, etc all over the world are of ISO/IEC 7810 ID-1 size, an international standard format that defines the physical characteristics for identity or identification cards. What are the approx. dimensions of these cards?

Banking and Finance Trivia

Fun CornerFun Cornerthe Banking & Financial Services -newsletter from Wipro Technologiese

19

A) 93 x 53 mmB) 90 x 49 mmC) 86 × 54 mmD) 74 x 44 mm

12. The first 6 digits of the credit card number are known as ___?

A) Issuer Identification NumberB) Major Industry IdentifierC) Account numberD) Check sum

13. Which among the following is official registrar of International Bank Account Number (IBAN)?

A) SWIFT B) Euro Banking AssociationC) Banking, Insurance and Finance Union D) none of them

14. Which of the following is not a measure of the Risk Management in Banks?

A) CRR B) RTGS C) SLR D) Deposit Insurance E) All are the measures of risk management

15) Many times we read a term CBS used in banking operation. What is the full form of the letter 'C' in the term 'CBS'?

A) Core B) Credit C) Continuous D) Complete E) None of these

Rush your responses to: [email protected]

The Answers of June month Funcorner is:

The contains atleast 20 words which are Finance Word Search

capital structurechief financial officercorporate financecorporate governancecost of capitalcredit facilitiesdeal flowdebt ratingsderivativesdivestiturefinancinginvestor relationsjoint venturesmergers acquisitionsprivate equityrisk managementsecuritizationspinofftransactionworking capital management

Feedback &Suggestions aremost welcome.Please email to

[email protected] by: [email protected]

ASCII artBy Channakeshava

ASCII (ask'-ee) stands for "American S t a n d a r d C o d e f o r Information Interchange." This standard was developed by the American National Standards Institute. It's basically a table of numbers and their corresponding symbols. We all know that the only things computers send back and forth to each other are zeros and ones. Using ASCII as a standard, a computer can send a series of zeros and ones in a certain order and the other computer will know that it signifies a certain letter of the alphabet. ASCII covers letters, numbers, and certain control codes. It doesn't cover graphics. Essentially, ASCII artwork denotes artwork that is created without using graphics at all. Its palette is limited to the symbols and characters that you have available to you on your computer keyboard.

Since 1867 typewriters have been used for creating visual art. The oldest known preserved example of typewriter art is a picture of a butterfly made in 1898 by Flora Stacey.There are 95 printable ASCII characters, numbered 32 to 126.

The widespread usage of ASCII art can be traced to the computer bulletin board systems of the late 1970s and early 1980s. The limitations of computers of that time period necessitated the use of text characters to represent images. Along with ASCII's use in communication, however, it also began to appear in the underground online art groups of the period. An ASCII comic is a form of webcomic which uses ASCII text to create images. In place of images in a regular comic, ASCII art is used, with the text or dialog usually placed underneath.

During the 1990s, graphical browsing and variable-width fonts became increasingly popular, leading to a decline in ASCII art. Despite this, ASCII art continued to survive through online MUDs, an acronym for "Multi-User Dungeon", (which are textual multiplayer roleplaying games), Internet Relay Chat, E-mail, message boards and other forms of online communication which commonly employ the needed fixed-width.

Thoughtline july 2010 -the banking & financial services e-newsletter from wipro technologies

Technology

Transcript of Thoughtline july 2010 -the banking & financial services e-newsletter from wipro technologies