Finacle thought paper discusses origins of banking in India and the major role played by technology in evolution of banking. The paper also highlights the challenges and list banking trends in India.

1. Banking in India:
evolution in technology
Thought Paper
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2. Origins of banking
The origins of banking can be traced to ancient until late into 20th century. But the arrival
times, starting with rudimentary money lending of the Internet in the 1990s changed all that.
and bartering practices for agricultural and A plethora of possibilities emerged for
other commodities. But it gained great worldwide commerce, which naturally impacted
momentum only after the industrial revolution the functioning of banks as well. Even now,
which commenced in Europe in the 17th century, technology evolution shapes the nature
when Europeans started establishing colonies and extent of global economic activity and
around the world and the need for credit for continues to fundamentally alter the global
trade was felt like never before. banking landscape.
Ever since banks started operating, their essential
mode of operations remained much the same
The Indian banking scene
In India, banking as an institution originated in tech-savvy banks’ – were launched. A few
the late 18th century and primarily catered to foreign banks commenced their India operations
the needs of the British. Post-independence, as well. All these banks were quick to leverage
the nationalization of major private sector banks emerging technology, were competitive in
in 1969 – an important milestone in the Indian wooing customers and winning them over by
banking system – made banking accessible to providing professional services. This helped
the unbanked population in India. infuse a sense of urgency in public sector banks
and older private sector banks to mend their
The economic liberalization in the early 1990s
ways, which in turn completely revitalized
ushered in the era of privatization wherein
banking operations in India.
many new private banks – the ‘new generation
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3. Impact of the IT revolution
The opening up of the Indian economy in in this transformational journey, by
1991 almost corresponded with the worldwide issuing regulations and recommendations on
Internet revolution which doubly impacted banking mechanization and computerization.
the Indian private and public sector banks that Establishment of computerized inter-connectivity
were still stuck in old ways of functioning. across bank branches, introduction of MICR-
Once Indian IT services companies started based cheque clearing, modernization of
booming, it was just a matter of time before payment services and settlements through
Indian banks wholeheartedly embraced Electronic Clearing Services (ECS), Real Time Gross
technology. This paved the way for business Settlement System (RTGS), National Electronic
process automation in banking, which enhanced Funds Transfer (NEFT), were all significant
customer service, reduced manpower costs landmarks in the banking technology revolution.
and increased profitability. Apart from normal
Continuing advances in technology rise in
banking products, Indian banks started selling
middle class income levels, and increase in
third party products such as mutual funds and
demand from a consumer-oriented financial
insurance to their clients as well. This single
market, soon catapulted the Indian banking
window selling saved the customer’s time and
sector to a customer centric, technology driven,
enabled the bank to enrich the relationship.
financial supermarket catering to the varied
The Reserve Bank of India, India’s Central needs of its customers.
Bank, not to be left behind, played its part
Significant milestones
Over the years, there has been a noticeable banks could now offer quick service and
shift from traditional to channel-based transparency as well. They even started offering
banking. Introduction of ATMs (Automated Teller incentives to customers for using non-branch
Machines) provided customers with “any channels. All this reduced the number of walk-in
time” access to their money. The credit card by customers and improved the quality of customer
enabling cashless transactions, unleashed a service in branches.
revolution in the banking world. Affordable
The next noteworthy milestone was the
technology infrastructure like cheap, small
introduction of mobile banking primarily
but powerful computers and other handheld
through SMS. The launch of smartphones created
gadgets and higher Internet bandwidth at
a revolution of sorts in the banking world and
lower cost facilitated easy access to banking
smartphones are now a widely accepted delivery
products and effortless banking transactions.
channel in developed countries. As the number
Call centre and phone banking services further
of mobile phone users in India rapidly increases,
added to customer convenience.
banks are exploring the feasibility of using the
By directing banking transactions through ubiquitous device as an alternative channel for
different electronic channels and by providing delivery of full-fledged banking services.
customers direct access to their bank accounts,
Thought Paper 03

4. Current trends
Another concept, virtual banking or direct transactions and data, banks can improve
banking, is now gaining ground. This model productivity, optimize costs, provide quicker and
wherein banks offer products, services and better quality customer service. This will also
financial transactions only through electronic help with the environmental angle of using
delivery channels, generally without any physical less paper. From the customers’ point of view,
branch, has already been tested out in advanced paperless banking translates to easy handling,
countries such as the United States and Europe. storage and retrieval of financial documents
Owing to lower branch maintenance and and account statements without the fear of
manpower costs, such banks are able to offer misplacing them.
competitive pricing for their products and
With customers demanding ‘anytime and
services vis-à-vis traditional banks. More and
anywhere’ access to their money and financial
more customers are already moving to non-
information, banks have no option but to
branch banking, and the direct banking trend
implement wireless solutions in device-
will surely catch up in India as technology-savvy
independent and network-agnostic ways. On
banks adopt this model.
the user side, rapid progression of mobile
Though it may appear to save the bank a lot of technologies as evidenced by the well known
overheads, in reality, the customer never needing LTE (Long Term Evolution) means banks must
to visit a bank branch, either for completing increasingly adapt their own infrastructure to the
the account opening process or the subsequent client side needs.
financial activities actually throws up new On the flip side, unlike PCs, mobile phones are
challenges. The power of technology makes it small and are easily lost or stolen, making them
happen seamlessly and virtually, but customer more vulnerable to fraudulent transactions. This
satisfaction is something which calls for a calls for greater security measures combined
human touch. For all their technological with powerful regulation. There are also some
sophistication, virtual banking should be hassle privacy issues related to wireless banking that
free and a pleasurable experience for the user. need to be resolved.
The virtual banks need to be aware of this fact
in letter and spirit and always ensure that the Overall, there is no denying that there is
quality of user experience is paramount and both challenge and opportunity for banks in
leveraging technology is only an aid to enriching enriching customer experience arising from the
user experience. numerous use case scenarios of powerful smart
phones operating wirelessly. By ensuring the
As Banks adopt more technology, two things ease, comfort, safety, and seamlessness of such
stand out – using less paper and doing transactions operations, banks can assuredly remain in business.
wirelessly. In the last few years, many banks
According to data compiled by the RBI, there
in India have implemented content management
has been steady growth in the number of
solutions and succeeded in conducting
Fig-1
paperless transactions using the imaging and
workflow capabilities of such software. Also,
automated handling of service requests with
proper documentation and tracking facilities has
significantly reduced turnaround time.
Processing online applications for account
opening and other services, transfer of funds
without cheques, online account statements
are all becoming part of the regular banking
process. With digitization of all customer
04 Thought Paper

5. transactions routed through electronic channels fallen over the years and in terms of value,
(Fig. 1). Not only that, the share of paper-based now forms a miniscule part of total banking
transactions via cheques/demand drafts has transactions (Fig. 2).
Fig-2
Representation of Electronic Representation of Electronic
Transactions Volume in Total Transaction Value in Total
Electronic Paper Electronic Paper
100% 100%
90% 90%
80% 80%
70% 70%
60% 60%
50% 50%
40% 40%
30% 30%
20% 20%
10% 10%
0% 0%
2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12
(Upto (Upto
Nov-11) Nov-11)
Source: RBI
Product innovation and technology
The banking industry is going through a period reveal that in rural areas, more than half of
of rapid change to meet competition, challenges personal savings is being invested in land,
of technology, and the demands of the end houses, cattle, and gold. With low cost technology
users. Clearly technology is a key differentiator as the enabler, supported by innovative products
in the performance of banks. Studies reveal tailored for the rural populace, banks can offer
that approximately 20% of non-interest secure investments with good returns and in
expenditure of large banks in the United States addition, act as catalysts to alter rural investment
is on information technology. Banks need to patterns along more productive lines. Indian
look at innovation not just for products, but for banks need to focus on swift and continued
processes as well. Also, along with new product infusion of technology while ensuring its
offerings, they need to work towards existing appropriateness and utility for both the rural
product optimization. and urban market.
The needs of the rural market are quite different
and banks have to innovate accordingly. Studies
Thought Paper 05

6. Challenges
It doesn’t stretch one’s imagination to understand of different sections of people and is also backed
that the scale and complexity of banking has by suitable “humane” yet quick measures in the
undergone tremendous changes in the last 20 event of failure or breakdown.
years. From the Indian perspective, the evolving
banking paradigm presents unique opportunities The large number of complaints received by
and challenges. The reason is India is a country the Banking Ombudsman (Fig. 3), published
with huge population and the demographic in the RBI annual report for the financial years
growth of India is such that it is going to 2009-10 and 2010-11, are indicative of the
become the most populated country very problems of technology proliferation, making it
soon. Channel technologies can bring about a priority area for Indian banks.
closer integration between the rural and urban
Fig-3
populace. The hitch is that the pace of
technology adoption, a key feature of the
urbanized world, cannot be forced upon the
rural population. Here, India needs to learn its
lessons from China which has managed to rapidly
urbanize its rural population and been able to
harness technology to the fuller benefits of its
newly urbanized populations.
Another challenge non-branch channels throw
up is the lack of human touch that previously Source: RBI
characterized banking transactions. The rather
impersonal technology-enabled touch screen In 2010-11, 74% of the complaints were
key presses and automated answering systems from urban/metro regions, 89% were from
might intimidate and overwhelm newly retail (individual) customers and around 30%
urbanized users who are by and large technology- complaints were related to ATM/debit/credit
illiterate. It is therefore imperative for banks to card transactions and remittances. These do not
ensure that technology is tailored to the needs include complaints lodged at individual banks.
Way forward
There has to be a holistic approach to fulfill customer needs ever changing, banks need to
the demand for increased variety in deposit invest in advanced analytical tools for timely
and investment products (also conforming to introduction of new products, which will give
regulations) so as to grab a better market share them early mover advantage. The vendors who
of investments through banks. Development of supply various banking solutions play a vital
sophisticated products with low-cost technology role in leveraging innovation and designing
is key. This calls for an in-depth analysis of products, thereby enabling banks to achieve
customer needs, the market and competitor their goals.
trends. As the markets are very dynamic and
06 Thought Paper

7. Conclusion
Overall, the message for Indian banks is is the de facto agent that can ring in wholesome
very clear. India’s transformational journey changes. Banks would do well to realize their
to modernity is on the cusp of revolutionary central role in enabling this transformation and
change. There is the great rural-urban divide should take conscious recourse to relentless
waiting to be bridged; rural India has to adoption of technology. And the goal should be
connect with the mainstream economy. This has not just to satisfy but to engage with customers
to be a harmonious progression and technology and enrich their experience
Reference
1. www.rbi.org.in 3. www.banknetindia.com
2. www.infosecisland.com
Reghunathan Sukumara Pillai
Industry Principal, Finacle, Infosys
Santhy Sreedhar
Lead Consultant, Finacle, Infosys
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8. About Finacle
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.
For more information, contact Finacleweb@infosys.com www.infosys.com/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
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