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From technology driving bankingdevelopment to the other way aroundThought Paperwww.infosys.com/finacleUniversal Banking Solution | Systems Integration | Consulting | Business Process Outsourcing
From technology driving banking development to the other way around Organized banking has been practiced since standardized rules agreed to by the trading several centuries. Prior to the 20th century, countries. The only technological development banking saw little change, but it has undergone in banking during most part of 20th century dramatic transformation in the last few decades, was on the telecommunication front, in the form thanks to the development of technology. of telephone and telex. Generation Z (Internet Generation) will probably This paper is a capsule of banking history. Starting never know the nuances of manual transaction with the days of manual banking operations processing, which was how banking was and the challenges they posed, it moves on to conducted until technology came along. Most the development of banking technology and of these manual banking processes were its benefits, and then on to the drivers of next built around the rules and regulations in each generation banking and the role that technology country, with the exception of those supporting can play in delivering business growth as well trade finance and cross-border fund transfer as customer satisfaction. transactions, which were built according to Early developments Manual banking was prone to a high degree of operations, they also maintained a parallel manual error, despite following the maker-checker or ledger. Bigger banks, which had computerized 4-eye principle. Bank reports would contain large branches, but not those in rural areas, suspense entries, which had not been reconciled; had trouble consolidating data for a zone or MIS reports sent to top management and region. Realizing the benefits of technology regulators were often inaccurate and delayed; enablement, banks slowly moved towards branches would fail to comply with circulars; complete automation. The Central Banks of balance sheets were sometimes doctored to different countries played a pivotal role in exaggerate performance; and bad assets were ensuring that the move was in line with globally neither monitored nor reported correctly. These accepted standards. unhealthy practices increased banks’ risks and Automation enabled easy retrieval of customer losses. At the same time, banks had to watch out and account data at the teller workstation for fraud, usually perpetrated by employees. to speed up customer service and process Technology enablement of the banking industry efficiency on one side and quicker consolidation started with automation of branch and teller of General Ledger data and MIS availability to operations, with the goal of improving customer the branches on another side. service. Manual operations, such as the issuance The 1980s and early 1990s saw the advent of cash receipts and payments, transfer of of massive computerization, electronic fund funds between accounts in the same branch, transmission and ATMs. These innovations and certain paper clearing operations were increased banking efficiency and output. automated. However, core operations such as Automation progressed at a different pace lending, foreign exchange, investment banking across countries, based on acceptance and and treasury remained under manual control. And cost, and was largely driven by the needs of the although banks had started to computerize their banking sector.02 Thought Paper
The online revolutionThe Internet revolution in the late 1990s drove trade finance, treasury and investment banking.banking automation into online mode, and Although core banking applications wereushered in data centralization. This paved inbuilt with basic risk controls and Anti-Moneythe way for a number of banking solutions Laundering (AML) checks, there were alsoincluding core banking applications covering specialized solutions to help banks control andcritical branch operations, deposits, lending, detect fraud.Change of phase from business to technologyIn the legacy systems era, banks could offer accounts and do the same for the charges toonly a few vanilla products, designed and customer accounts; they needed to provisioncontrolled manually. Core banking technology year-end entries and identify non-performingallowed banks to create a variety of products assets. With core banking, banks couldand variants, catering to different customers, accomplish all of the above within hours. Corefrom senior citizens to high net-worth individuals. banking also brought transparency to theProduct creation and maintenance became banking ecosystem by making data available tosimpler, and product innovation took a leap. top management and regulators immediatelyFurther, technology enabled specific customer after financial year closing.segments to be accorded extra privileges, such External and internal audit of accounts couldas doorstep banking (for high net worth now be carried out immediately after closing, atcustomers). The new methods of income the branch or head office. Other than physicalgeneration brought twin benefits for banks – loan documentation, all data was available at thelow cost funds and higher fee income. auditor’s desk.In the manual era, banks needed to plan months All of these added to banks’ efficiency, growthahead of financial year closing. They had to and profitability.process and verify interest on all interest bearingThe benefits of computerization inIndian banking sectorIndian banks, led by Public Sector Banks (PSB), the change. Table 1 below shows the adoptionwhich dominated the market, also embraced of computerization by Public Sector Banks.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 2.2Source: Trends and Progress of banking in India, RBI Thought Paper 03
Core banking solutions brought multiple banking implementation has improved advantages to Indian banks. As per a survey operational efficiency, business agility, customer conducted by FICCI in February 2010, core satisfaction and control and monitoring. Table 2: Benefits derived from implementation of Core Banking Solutions Benefits derived from implementation of Core Banking Solutions 9 8 7 6 5 4 3 2 1 0 Revenue from enhanced Reduced errors Lower operation cost Improved customer Quicker time to market Reduced manual labour Effective control & Instant availability of products & services Monitoring accurate data new products retention Mode Score on a scale of 1-8, 8 being most beneficial While technology was driven by business automation took root in the US and Europe, the requirements in the initial phase, in the second phase of transformation, led by core second, there was a visible turn of events, with banking modernization, was driven by South technology playing an important part in banking East Asia, Latin America and Africa. strategy and business. Whereas the earliest Complex cash management and payment products Complex cash management products for transfer of funds between customer accounts corporate customers having operations in in different banks locally and across borders. multiple countries could not have been developed Central Banks played a pivotal part in local and implemented without the assistance of payments. Organizations like SWIFT Alliance technology. Pooling funds at a central physical facilitated cross-border remittances and by or online location enabled corporate customers bringing in standard messaging mechanism to manage funds efficiently. Internet banking for transmission and receipt of funds. In India, technology made it possible to initiate fund payment systems such as ECS, RTGS and NEFT transfer request locally or cross-border and the were developed to enable bank customers resultant reduction of turnaround time increased transfer funds in real-time. Though this has cut trust with customer who maintains account with into banks’ income from float funds, it has the other bank. This has opened up business enhanced customer satisfaction. Elsewhere, avenues for corporate entities. multiple payment systems like FEDWIRE, GIRO, TARGET, CHIPS, CHAPS, SEPA etc., were developed Driven by Central Banks, many payment systems to enable smooth and secure fund transfer. were developed for the smooth and efficient04 Thought Paper
Online cross border payments, which were the assistance of technology. Customers couldlimited to specific countries and attempted only open an account in one country and access orby major banks worldwide during the early withdraw from it from another country .ATMs and1980s and 1990s, became the new normal with debit cards reduced the physical exchange of cash.Customer service through technologyWith the aid of technology, bank staff could route transactions by unscrupulous elements gainingroutine service requests through Internet or access to customers’ Internet banking accounts,phone banking (IVR) and focus on business pushed banks to invest further in securitydevelopment instead. This, coupled with the measures, as well as in anti money launderingATM, ushered in another phase in which banking and risk management solutions. Regulatorycustomers became independent of the branch. compliance gained importance at the domestic and global level and banks’ decisions/transactionsAs channel banking gained popularity, it came under the scanner.heightened security concerns. Complex fraudulentNew peripheral software solutions for MISThough core banking was the cornerstone of Warehousing and Business Analytics camethe banking revolution, there was a need for other into existence and played a significant role insoftware solutions as well. Software solutions converting banking into a highly technology-for Fixed Assets Management, Budgeting, Asset driven business.Liability Management, Transfer Pricing, DataBusiness process outsourcing done by banksOutsourcing of back office operations helped outsourcing such as software developmentbanks and financial services providers to lower and data centre operations, outsourcing hascosts and avail specialized skills. This enabled grown to specialized areas such as Businessbank staff to focus on core business activities. Process Outsourcing (BPO), Knowledge ProcessThe outsourcing also provided scalability of Outsourcing (KPO), research and analytics.operations to banks and financial institutions. Further on newer models for outsourcing haveThe centralized management of data processing developed such as Collaborative Partnerships,and customer service operations is now a wherein banks as well as the vendors share thecommonplace. From the traditional forms of benefits (losses as well) of the relationship. Thought Paper 05
Future development Today, technology is advancing at a rapid pace, going the B2C way to reach customers directly and innovations in Internet, mobile and virtual using new modes of communication like Internet media are impacting all sections of society and and mobile. Today, more technology systems industry. The way banks operate or manage their are driven by consumer need. Hence, any customers has changed beyond recognition. development in B2C technology also impacts Because of the proliferation of communication the banking sector. In addition, banks are looking technology, banks around the world are evenly at customer experience to build differentiation. matched in technological progress. Even less Social media has started to figure in banks’ developed countries have managed to reach out marketing and servicing strategy, and is being banking services to excluded segments, using seen as a way to improve customer satisfaction the mobile platform. This has created a paradigm and lower transaction costs. Clearly, banking shift in the way banks approach their business; service and outreach are going through a where earlier, banks took the B2B route of fundamental transformation. projecting product capability, today, they are Cost factor and usability It is essential that technology come at affordable Since technology requirements are being driven cost. Cloud computing technology is enabling by user needs, it is imperative that solutions banks to cut down technology related expenses present a friendly interface and smooth experience by moving from a CAPEX (capital expenditure) to users. User friendly, intuitive systems cut model towards an OPEX one, wherein banks down the need for training. It is the technology pay only for the infrastructure or maintenance vendors’ responsibility to ensure that their services that they actually use. This model is solutions score high on both usability likely to initiate next cycle of technology change and functionality. for bringing in more business. Conclusion Banking is now synonymous with technology. be technology enabled, ranging from dispatch That being said, there is scope for further management, management and introduction of automation, and the industry is on the lookout time based processes for banking operations at for ways by which they can employ technology various customer touch points and tracking of to enhance customer trust, improve process the same for improving efficiency, introduction efficiency and speed up operations. Banks, of swipe cards for banking operations, front which have leveraged technology to improve office tools for customer to do banking on their reach, customer experience, data security and own, enhanced customer experience models regulatory compliance, are now deploying mobile when customer visits the branch. Technology banking or cloud services to achieve social vendors can play a big role in changing the objectives, such as financial inclusion. banking landscape of the future by offering innovative products and services catering to all While core banking occupies center stage in sections of society. banking automation, many other processes can06 Thought Paper
Today, technological innovation has a very short This is particularly important because technologylife cycle. Hence banks must put a lot of will continue to drive next generation bankingthought into innovation, before investing in it. and banking strategy for the foreseeable future.References1. Report on trend and progress of banking in 4. Banking on Technology-India, The Economic India - 2008-09; RBI Times Banking Technology Conclave; KPMG2. Report on trend and progress of banking in 5. Monetary Theory and Electronic Money : India - 2009-10; RBI Reflections on the Kenyan Experience; William Jack, Tavneet Suri, and Robert Townsend3. Indian Banking System: The Current State & Road Ahead; FICCI 6. Dataquest– May 21, 2010; Shyamanuja Das Reghunathan Sukumara Pillai Industry Principal, Finacle, Infosys Manoo Jacob Lead Consultant, Finacle, Infosys Thought Paper 07