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					               Technology in Banking
                                                        Insight and Foresight




Institute for Development and Research in Banking Technology
               (Established by Reserve Bank of India)
Foreword
The Indian banking industry, almost in keeping with the deep entrepreneurial approach of the
country s business, has come a long way. This report is an effort to capture some exemplary
initiatives and developments so far as well as discuss the emerging trends. The insights and
understanding of the technology trends and ground-level work being done by the banks has been
culled from the nominations received from banks for the IDRBT Banking Technology Excellence
Awards 2010.
The transformation of Indian banks in the last decade has been phenomenal           from local branch
banking to global presence and anywhere-anytime banking. Most of the regular banking transactions
can today be carried out from mobile phones. Sustained reforms and information technology (IT)
have played a pivotal role since the initiation of the second phase of reforms post 1998. The benefits
of technology such as scale, speed and low error rate are also reflecting in the performance,
productivity and profitability of banks, which have improved tremendously in the past decade.
Regulatory initiatives from the Central Bank have also played a large role in the banking sector.
Robust technology-enabled organizations have now become the mainstay of the industry. Initiatives
such as electronic clearing service (ECS), national electronic funds transfer (NEFT), real-time gross
settlement (RTGS) have accelerated the pace of technology adoption by banks and enabled
interconnectivity between banks. While the focus in the early stages was on technology adoption and
aligning/retraining human capital, now with more or less suitable technology infrastructure in place
and a young technology-adept workforce, banks are focusing on improving the performance and
optimum utilization of IT systems. Most IT initiatives are today derived from business objectives.
The report captures technology initiatives taken by banks in the areas of financial inclusion, mobile
banking, electronic payments, IT implementation and management, managing IT risk, internal
effectiveness, CRM initiatives and business innovation. While some areas have gained sufficient
traction, others are still evolving. However, without doubt, technology has today become imperative
for banks, and going forward, will become a strong business driver in all functional areas of the
banking business.




             B. Sambamurthy                                                 Ashvin Parekh
             Director                                                       Partner and National Leader
             Institute for Development & Research                           Global Financial Services
             in Banking Technology                                          Ernst & Young Pvt. Ltd.
Technology in Banking Insight & Foresight                                                                                                         1


Contents
1. IDRBT Banking Technology Awards...........4
   1.1.       Background ........................................................................................................................ 4
   1.2.       Coverage ............................................................................................................................ 4
   1.3.       Nomination Process ............................................................................................................ 5
   1.4.       Evaluation Process .............................................................................................................. 5
   1.5.       Announcement of the Awards ............................................................................................ 6
   1.6.       Awards for this Year - 2010 - 2011 ...................................................................................... 6
   1.7.       Major Changes during the Current Year .............................................................................. 6
2. Introduction ................................. 7
   2.1.       Technology and Transformation in Indian banking .............................................................. 7
   2.2.       Business Growth and Expansion ......................................................................................... 7
   2.3.       Areas of use of Information Technology (IT)........................................................................ 8
   2.4.       Productivity and Efficiency .................................................................................................. 8
   2.5.       IT Governance and Management Systems .......................................................................... 8
3. Current and Emerging Trends in Banking Technology...............10
   3.1.       Financial Inclusion .............................................................................................................10
     3.1.1.      FI Accounts ....................................................................................................................12
     3.1.2.      Distribution Network .....................................................................................................15
     3.1.3.      Training and Development .............................................................................................16
     3.1.4.      Review and Control........................................................................................................17
     3.1.5.      Technology ....................................................................................................................17
     3.1.6.      Enrollment, Authentication and Transaction Process .....................................................18
     3.1.7.      Way ahead.....................................................................................................................18
   3.2.       Mobile Banking..................................................................................................................18
     3.2.1.      Mobile Money and the Indian Market ............................................................................19
     3.2.2.      RBI s take on Mobile Banking Transactions ....................................................................19
     3.2.3.       Interbank Mobile Payments Service (IMPS) ...................................................................20
     3.2.4.      Developments in the Mobile Banking Arena...................................................................21
     3.2.5.      New Trends in Mobile: ...................................................................................................22
     3.2.6.      Operator Bank Tie-ups ...................................................................................................22
     3.2.7.      IMPS Merchant Payments ..............................................................................................22
     3.2.8.      Prepaid Wallets and Mobile POS ....................................................................................23
     3.2.9.      Critical Success Factors ..................................................................................................23
     3.2.10. The Road ahead .............................................................................................................25


                     Institute for Development & Research
                     in Banking Technology
Technology in Banking Insight & Foresight                                                                                                    2

  3.3.       Electronic Payments ..........................................................................................................26
    3.3.1.      Evolution of Electronic Payments in India.......................................................................26
    3.3.2.      Overview of Electronic Payments Markets globally and in India .....................................26
    3.3.3.      Vision of the Regulator ..................................................................................................27
    3.3.4.      The Rise of Electronic Payments.....................................................................................28
    3.3.5.      Trends in Electronic Payments .......................................................................................30
    3.3.6.      Electronification Approaches by Indian Banks ................................................................31
    3.3.7.      Internet Banking ............................................................................................................31
    3.3.8.      Upcoming Technology Architecture ...............................................................................31
    3.3.9.      Fraud and Security Aspects of Electronic Payments ........................................................31
    3.3.10. Emerging Payment Channels and Technologies ..............................................................31
    3.3.11. Real Time Gross Settlement System ...............................................................................31
    3.3.12. Rise of Prepaid Instruments ...........................................................................................32
    3.3.13. New Credit Bureaus .......................................................................................................32
    3.3.14. IMPS: Mobile-based Payment System ............................................................................32
    3.3.15. Future Trends ................................................................................................................32
  3.4.       CRM Initiatives ..................................................................................................................33
    3.4.1.      Customer Education ......................................................................................................34
    3.4.2.      Grievance Handling........................................................................................................34
    3.4.3.      Customer Service Delivery Channels ..............................................................................34
    3.4.4.      Cross-channel Integration ..............................................................................................35
    3.4.5.      Analytics becoming the Dominant Technology ...............................................................35
    3.4.6.      Increase in Cross-sales ...................................................................................................36
    3.4.7.      CRM for Innovation ........................................................................................................36
    3.4.8.      The Future           CRM 2.0 ...................................................................................................36
  3.5.       IT Implementation and Management .................................................................................37
    3.5.1.      IT Strategy Alignment with Business Alignment ..............................................................37
    3.5.2.      IT Organization Structure ...............................................................................................38
    3.5.3.      IT Infrastructure Physical Environment...........................................................................38
    3.5.4.      Organizational Mechanism and Processes for Strategy Implementation .........................39
    3.5.5.      IT as Strategic Enabler to Reduce Costs or Increase Revenues ........................................39
    3.5.6.      Backup and Disaster Management Plan .........................................................................40
    3.5.7.      Energy Management ......................................................................................................40
    3.5.8.      Measurement of IT Performance ...................................................................................40
    3.5.9.      IT as a Value Creator ...................................................................................................41
    3.5.10. IT Risk Management Policy ............................................................................................41
    3.5.11. Management of IT Resources .........................................................................................41


                    Institute for Development & Research
                    in Banking Technology
Technology in Banking Insight & Foresight                                                                                                     3

  3.6.       IT for Internal Effectiveness ...............................................................................................42
  3.7.       Managing IT Risk ................................................................................................................43
    3.7.1.      IT Risk Management Framework ....................................................................................43
    3.7.2.      Policies and Procedures .................................................................................................44
    3.7.3.      Managing IT Hardware Risks ..........................................................................................45
    3.7.4.      Managing IT Software Risks: ..........................................................................................45
    3.7.5.      Access Controls and Authentications .............................................................................46
    3.7.6.      Physical Access ..............................................................................................................46
    3.7.7.      Physical System Access ..................................................................................................47
    3.7.8.      Logical Access ................................................................................................................47
    3.7.9.      People risks to IT in terms of Security, Awareness and Availability .................................47
    3.7.10. IT Support ......................................................................................................................48
    3.7.11. Outsourcing of IT ...........................................................................................................48
  3.8.       IT for business innovation ..................................................................................................49
    3.8.1.      Use of IT for Business Innovation ...................................................................................50
    3.8.2.      Trends in innovation in products and services offered: ..................................................51
    3.8.3.      Innovation Trends in Processes ......................................................................................51
    3.8.4.      Innovation in Business Model ........................................................................................53
    3.8.5.      Key Issues ......................................................................................................................54
4. Future Trends and the Changing Role of IT .................56
  4.1.       Beyond Core Banking .........................................................................................................56
  4.2.       Increasing Interconnectivity and Ease of Payments through Different Form Factors...........57
  4.3.       Energy Management and Move towards Green Technology ............................................57
  4.4.       Increasing importance of CRM techniques and Knowledge management ...........................57
  4.5.       Stronger Role of IT as Business Transformer/ Performer ....................................................59




                    Institute for Development & Research
                    in Banking Technology
Technology in Banking Insight & Foresight                                                           4



1.      IDRBT Banking Technology Awards
1.1.    Background
Banking Technology Excellence Awards were instituted in the year 2001 with a primary objective of
encouraging and recognizing the excellence in implementation of Technology for better customer
service, operational efficiency and expansion of banking services to the hitherto uncovered sections
of Society. The category of awards has been undergoing changes over the years, in view of the focus
of technology implementation at that time and the need to recognize and encourage a particular
aspect of technology implementation. In the initial period, the Awards were given for
implementation of branch computerization, Implementation of email Services, INFINET usage and
applications, ATM networks, internet banking, etc. Gradually, the newer categories such as
Information Security, IT Governance, Financial Inclusion, Customer Relationship Management etc.,
were covered. Extension of technology to semi-urban and rural areas has also been in focus in
several years awards.
1.2.    Coverage
The banks which are privately owned and the Foreign Banks generally had initial advantage in view of
the extant guidelines as well as ability to extend the solutions implemented abroad as compared to
the Indian Banks and particularly the Public Sector Banks. Therefore in the initial years, the focus of
the awards was only the public sector banks. However, subsequently it was observed that some of
the Public Sector Banks surged ahead in implementing technology even in the face of constraints and
could compete effectively with their private and foreign peers. In view of this observation in the
recent years , awards selection process did not discriminate between banks with different ownership
and compared their performance on merit. The only factor that was given consideration was the size
of operations of the banks which determine the opportunities as well as challenges faced by the
banks in implanting technology solutions. Rather than any specific criteria of size, the classification
was based on judgmental discretion of the Jury Panel.

The awards typically sought to recognize the efforts during the year rather than cumulative
achievement over the years. As part of the nomination process, the banks were asked to provide
detailed information covering both quantitative as well as qualitative aspects in the form of a
detailed questionnaire for each award category. The evaluation of these submissions was done
objectively by ranking the quantitative aspects as well as assigning scores to the qualitative aspects
based on the comparative performance of the banks. For the purpose of evaluation, the statements
made by the banks were taken to be correct on the face value and no cross validation of the
responses was carried out by the evaluation teams. The only exception to this was when the
apparently inconsistent responses were cross checked with concerned banks for clarification. During
formal or informal interactions there were suggestions from Jury members over the years about
asking the short-listed banks to make presentations. This could not be implemented on account of
the difficulty in organizing this activity, in view of the busy schedule of the Jury members.




               Institute for Development & Research
               in Banking Technology
Technology in Banking Insight & Foresight                                                          5

1.3.     Nomination Process
Before calling for information from the banks and finalizing the questionnaire the evaluation
parameters for each of the Award category are drawn up. Guidance of the Jury regarding their
appropriateness and completeness is also sought. Thereafter detailed questionnaires are framed
and sent to all the banks through a letter addressed to the IT chiefs. In addition, the Director also
writes letters to the CEO s informing them about the awards process. The Banks are normally given
about three to four weeks time to provide the information. Experience has shown that a few banks
normally seek a couple of days grace period for submission on account of several reasons. For the
requests received prior to last date of submission, such grace period is generally granted.

Subsequently an internal evaluation team consisting of two or three faculty members evaluates the
submissions and assigns numeric scores to various banks on the different parameters. After
completion of the initial evaluation and thorough discussion internally, a shortlist of probable
winners in each category is drawn up by the internal evaluation team. This process was carried out
jointly with the knowledge partners in the last two editions. Subsequently, a Jury meeting is held to
discuss the evaluations and choose the winners. While most of the recommendations of the internal
evaluation team generally find acceptance of the Jury, for some categories, there had been
suggestions to make further enquiries or to further refine the evaluation process. In such cases, the
final award winners are chosen either in a meeting or over email discussion. Whenever the Jury has
found that there are no deserving winners in an award category either only one award is given or
award is not given at all in that category. As such the number of awards finally given sometimes
differs from the originally intended number. While selecting the winners and runner-ups for each of
the Award categories, it is ensured that the difference between the winners and others is substantial
and material.

1.4.     Evaluation Process
In the initial years the evaluation of responses was wholly done in-house by the academic staff of the
Institute. In 2008 and 2009 help of outside knowledge partners was also taken. For the 2008 awards
the Institute of Public Enterprise, Hyderabad was associated with the evaluation process. The
knowledge partners for 2009 and 2010 Awards were Ernst & Young. The whole process starting from
discussion on award categories to conduct of the award function normally takes about six months.
The Jury typically consists of four / five members with eminent personalities from the Banking and
Technology backgrounds serving as Jury members. The typical composition of Jury is:
    1.   Serving or retired senior executives (Chairman / CEO) from bank,
    2.   Senior central bankers,
    3.   Eminent academicians in the field of Information Technology,
    4.   Representatives of Indian Banks Association.

In the initial years Director of the Institute was also member of the Jury, however in the last two
editions it was not so.




                Institute for Development & Research
                in Banking Technology
Technology in Banking Insight & Foresight                                                         6

This year, the Jury consisting of the following adjudged the banks.
        Shri K. V. Kamath, Chairman, ICICI Bank,
        Dr. R. B. Barman, Former Executive Director, Reserve Bank of India;
        Prof. G. Sivakumar, Professor, Indian Institute of Technology, Bombay;
        Dr. K. Ramakrishnan, Chief Executive, Indian Banks Association; and
        Prof. S. Sadagopan, Director, International Institute of Information Technology (IIIT-B),
        Bangalore;
1.5.    Announcement of the Awards
The awards are announced and given away at a function held at IDRBT and attended by senior
bankers including several CMDs. Normally the awards are given away at the hands of Governor,
Reserve Bank of India. While giving away the awards only the names of winners and runner-ups are
announced. Unlike other awards there is no practice to disclose the list of nominees or shortlisted
banks. At the award function, the process of evaluation is also explained to the audience either by a
member of internal team or by a member of Jury.

1.6.    Awards for this Year - 2010 - 2011
Awards for the latest edition (for FY 2010-11) have been given in the following categories:
        Use of Technology for Financial Inclusion
        Mobile Banking
        Electronic Payments Systems
        IT Implementation & Management
        Use of IT for Internal Effectiveness
        Managing IT Risk
1.7.    Major Changes during the Current Year
Banks were divided into two categories large and small (those having less than Rs. 50,000 Crores of
deposits) to ensure a level playing field.
There are no special awards (runner up) like last year.
The Institute received a record number of nominations aggregating to 158 as against 70 received last
year.

There are no winners in the Innovation category for the second year in a row.




               Institute for Development & Research
               in Banking Technology
Technology in Banking Insight & Foresight                                                           7


2.      Introduction
2.1.    Technology and Transformation in Indian banking
Technology has brought about a complete paradigm shift in the functioning of banks and delivery of
banking services. Gone are the days when every banking transaction required a visit to the bank
branch. Today, most of the transactions can be done from the comforts of one s home and
customers need not visit the bank branch for anything. Technology is no longer an enabler, but a
business driver. The growth of the internet, mobiles and communication technology has added a
different dimension to banking. The information technology (IT) available today is being leveraged in
customer acquisitions, driving automation and process efficiency, delivering ease and efficiency to
customers.
The increased penetration and impact on the scale of business can be judged from metrics such as
deposit and credit per account, which according to the RBI data was INR6, 412 and INR20, 757 in
1992 and INR19, 898 and INR84, 618 in 2000 these metrics increased to INR59, 217 and INR258,
751 in 2009, respectively, approximately thrice the levels in 2000 and 10 times the levels in 1992.
Many of the IT initiatives of banks started in the late 1990s or early 2000 with an emphasis on the
adoption of core banking solutions (CBS), automation of branches and centralization of operations in
the CBS. Over the last decade, most of the banks completed the transformation to technology-driven
organizations. Moving from a manual, scale-constrained environment to a global presence with
automated systems and processes, it is difficult to envisage the adverse scenario the sector was in
the era before the reforms, when a simple deposit or withdrawal of cash would require a day. ATMs,
mobile banking and online bill payments facilities to vendors and utility service providers have almost
obviated the need for customers to visit a branch. Branches are also transforming from operating as
transaction processing points into relationship management hubs. The change has been very
productive for banks bringing in an increase in productivity and operational efficiency to be more
competitive. Better risk management due to centralization of information and real time availability of
critical data for decision making.
With most of the banks being technology-enabled, the focus is shifting to computerizing regional
rural banks (RRBs). In addition, banks are moving toward decision making and business intelligence
software and trying to optimize the IT infrastructure created.

2.2.    Business Growth and Expansion
Over the last decade, the size of the banking industry has grown by 7.5 times. The business per
employee has increased from INR27.6 million in 2005 06 to INR62.7million in 2009 10, while the
profit per employee increased from INR0.12 million in 2005 06 to INR0.39 million in 2009 10. Indian
banks are also no longer constrained by geography as they have worldwide operations. IT has been
instrumental in the global expansion of banks. It is a huge challenge for banks to maintain and keep
the vast network operational. IT has helped banks put in place alternate delivery channels such as
internet and phone. Mobile banking and ATMs are rapidly becoming the prime delivery channels. The
consolidation and centralization of information is also providing banks with accelerated decision



               Institute for Development & Research
               in Banking Technology
Technology in Banking Insight & Foresight                                                           8

making and risk management capabilities. Electronic payments through credit and debit cards are
also emerging as a fast-growing segment providing ease of use and convenience to customers.
The banking sector is projected to grow at a strong pace over the next decade and will need to
strongly leverage the IT infrastructure to acquire and service the customer base and risk
management.
2.3.    Areas of use of Information Technology (IT)
The adoption of technology required banks to re-engineer processes, network branches and
introduce alternate delivery channels such as internet banking, phone banking and mobile banking,
data warehousing and data mining, customer relationship management, integrated treasury
management, human resource management and the implementation of core banking solutions.
In addition, many initiatives of the regulator such as ECS, RTGS and NEFT also led to overall
technology adoption by banks.
The basic technology adoption is almost complete and banks are now looking at improving the
efficiency and effectiveness of the IT Infrastructure created. Newer areas of technology initiatives are
enterprise risk management, business intelligence, improving internal effectiveness and managing IT
risks.

2.4.    Productivity and Efficiency
The extensive use of IT has helped banks deliver banking services and products more conveniently
and effectively. The rapid access to critical information and the ability to act quickly and effectively
has lent a critical edge to banks. It is difficult to quantify the exact impact of IT adoption on
productivity and efficiency; however, broad parameters such as cost and profit per employee can be
used as proxy to assess the impact that IT has had. Consistent management and decision support
systems provide banks a competitive edge to forge ahead. The optimum utilization of IT
infrastructure is fast becoming a priority as banks focus on better implementation and the
measurement of efficiency parameters such as return on investment (ROI).
IT should be considered as a service unit in the bank and IT performance metrics should be
developed to properly assess benefits. Currently, there are various types of monitoring, which
happen at various levels to measure IT performance on availability, budget, projects, capacity
planning and expansion, among other parameters. Performance measurement tracks and monitors
strategy implementation, project completion, resource usage, process performance and service
delivery, using, for example, balanced scorecards that translate strategy into action to achieve goals
measurable beyond conventional accounting.

2.5.    IT Governance and Management Systems
With the increasing importance of financial systems in the global and domestic economies and the
ever-increasing regulatory compliance requirements, banks are also automating risk assessment and
management systems. IT governance and management is increasingly acquiring importance with
board-approved governance policies, alignment of business and IT teams and realignment of
organization structures for the smoother implementation of IT projects. Organization structure has

               Institute for Development & Research
               in Banking Technology
Technology in Banking Insight & Foresight                                                          9

been defined, ensuring all the requirements of business with respect to IT projects, enhancements to
applications and infrastructure, backup, finance and budgets and IT governance. The Responsibility
Accountability Consulted Informed (RACI) Matrix has also been defined to better clarify the roles and
responsibilities and segregation of duties.
Business and IT teams have to increasingly work together for new IT initiatives to meet business
goals. The IT Strategy Committee has representations from IT as well as from business and
operations. The involvement and interaction is facilitated across the board based on the constitution
of the project teams and the steering committee. The IT project management process defines the
documents/templates required for all IT projects with clear roles and responsibilities for the
completion of these templates. The IT Steering Committee plays a vital role in ensuring that the IT
strategy is implemented as envisaged by the senior management.
Here are some of the tools being used to enforce and improve IT governance:
        IT Governance Portal contains all the IT policies, workflows, procedures and templates. The
        links to important and interesting websites such as itgi.org, itil.org and isaca.org are
        available. There is a schedule for IT training programs. A link is also available for feedback
        and queries on IT processes.
        The Universal Service Desk (USD) tool for users to log calls for various service requests,
        incidents and change requests to name a few.
        The Control and Compliance Suite (CCS) tool has the capabilities of mapping various
        standards/compliances to IT policies.
        The COMET (COmpliance and MEasurement Techniques) process, a self-assessment exercise,
        using tools persuading process owners to confirm adherence to established processes has
        been implemented. The periodic scorecards of processes based on self-assessment have
        been published.




               Institute for Development & Research
               in Banking Technology
Technology in Banking Insight & Foresight                                                             10


3.      Current and Emerging Trends in Banking Technology
3.1.    Financial Inclusion

India witnessed a sustained period of strong economic growth since the onset of economic reforms
in the early 1990s. The banking sector has grown tremendously over the last two decades. With
approximately 40% of the Indian population having a bank account, large sections of the population
have been excluded from financial services and are therefore unable to participate fully in the
economic growth. Further, the potential of the financial system has not been harnessed fully due to
the extent of financial exclusion prevailing today. Financial inclusion, in recent years, has emerged as
a major policy initiative. The Reserve Bank of India has significantly scaled up its efforts aimed at
increasing the level of penetration of bank financing in the economy. The government has set up two
funds      the Financial Inclusion Fund to meet the costs of developmental and promotional
interventions toward financial inclusion, and the Financial Inclusion Technology Fund to meet the
costs of technology adoption. The regulation on branch licensing has been relaxed to promote
financial inclusion. Domestic commercial banks are also required to prepare their own financial
inclusion plans (FIPs) and implement them over the coming years, adhering to their laid-out
performance assessment norms. The RBI has progressively liberalized the branch authorization
policy, providing in-built incentives for branch expansion in the unbanked areas.

There have been considerable efforts toward financial inclusion through State Level Bankers
Committee (SLBC) convener banks and lead banks. The regulator advised lead banks to constitute a
sub-committee of District Consultative Committees to draw a roadmap to provide banking services
through a banking outlet in every village with a population of more than 2,000 people. The BC model
was comprehensively reviewed. In November 2009, banks were permitted to engage the following
additional entities as BCs (a) individual kirana/ medical/fair price shop owners, (b) individual public
call office operators, (c) agents of small saving schemes of the Government of India/insurance
companies, (d) individuals who owned petrol pumps, (e) retired teachers, (f) authorized functionaries
of well-run SHGs linked to banks. Further, with a view to ensuring the viability of the BC model, banks
(not BCs) were permitted to collect reasonable service charges from the customer, in a transparent
manner. In April 2010, the BC ambit was further widened by permitting banks to engage any
individual as BC, subject to their comfort level and their carrying out due diligence, as also instituting
additional safeguards considered appropriate to minimize agency risks.

Scheduled commercial banks (SCBs), especially public sector banks, have stepped up efforts toward
financial inclusion. However, there is a need to ensure that financial inclusion does not end up being
only a number target. It should qualitatively be such that it makes a difference to the lives of those
who are financially included by the process. Banks have been permitted by the RBI to engage the
services of approved intermediaries to be engaged as business facilitators and business
correspondents with the objective of ensuring greater financial inclusion and increasing the outreach
of the bank branches. In the process of outsourcing vital banking services, the bank is exposed to
both operational and reputational risks. This requires efficient and effective monitoring of the
activities of the business correspondents by the concerned branches to safeguard the interests of the
bank's customers.

               Institute for Development & Research
               in Banking Technology
Technology in Banking Insight & Foresight                                                                    11


The implementation of the FI business strategy required a new business model to be adopted. Banks
are slowly, but steadily, working to implement this strategy.


The primary models adopted by banks to establish a linkage with the excluded populace are:

         Business correspondents (BCs)
         Self help group linkage
         Branchless banking mobile vans
         Bulk lending to MFIs
         Mobile-based M-Paisa and IMPS

Exhibit 1: Financial Inclusion Business Models
                                                                         Product/service design
                                                                         ·    No frill saving account with
                                                                              overdraft facility
                                                                         ·    Recurring deposit
                                                                         ·    Kisan credit card
                                                                         ·    General credit card
                                                                         ·    Life and health insurance

                                                                         Reach
                                                                         ·    Brick and mortar
                                                                         ·    Business correspondent
                                                                         ·    Self help groups
                                                                         ·    Branchless banking mobile vans
                                                                         ·    Mobile based M-paisa IMPS


                                                                         Capacity building
                                                                         ·    Front-end systems
                                                                         ·    Back-end systems
                                                                         ·    Human capital
                                                                         ·    Risk management
                                                                         ·    Awareness and outreach programs
                                                                         ·    Training and development
                                                                         ·    Monitoring and process
                                                                              improvement




Most banks have a basic product/service suite available for FI services, while some institutions have
also started profiling customers to provide appropriate risk-managed products and services. Nearly
all the banks that responded have set up a separate FI department for the implementation, with
appropriate processes in place for customer acquisition, transaction processing and back-end
systems. Banks are strengthening their efforts in training and development activities for BCs,
employees and SHGs and creating awareness among the target customers. Financial exclusion is not
just a rural but an urban phenomenon as well and one of the large PSU banks has made noticeable
effort in this regard with their Branchless Banking for Short Distance Commercial Vehicle (SDCV)


                  Institute for Development & Research
                  in Banking Technology
Technology in Banking Insight & Foresight                                                          12

Community initiative. The bank tries to provide branchless banking services to drivers, cleaners,
conductors and helpers who ply their vehicles for short distances by tying up with petrol pumps to
provide banking services. Based on the feedback the service is planned to be extended to truckers
and lorry drivers. It is planned to expand to 100 centers by March 2012 from the current 20. The
Bank is also implementing a mobile based solution that would co-exist with the RFID Cards and the
device at the petrol pumps would be able to handle transactions from the cell phones of the users as
well as from the Smart Cards. This would enable the users to carry out the transactions themselves
and visit the petrol pumps only for cash-in and cash-out.
3.1.1. FI Accounts
Exhibit 2: FI accounts (million)




A strong momentum is now increasingly visible as far as opening no-frill, FI savings and credit
accounts (Kisan Credit Card KCC and General Credit Card GCC) is concerned. Responding banks
have opened a total of 48.7 million such accounts. As expected, PSU banks have done better than the
average by opening 3.4 million accounts, as against 2.6 million accounts for all banks. We also
witnessed that median number of FI accounts for all banks is 2.2 million, which means that some of
the small and private banks are skewing the numbers at the lower end of the spectrum and need to
step-up efforts in that direction.

However, account opening should not only be considered as effective implementation. We identified
the percentage of active accounts, which we defined as accounts that have at least four transactions
in the last financial year and we observed a radical change in the scenario. The average percentage of
active accounts hovered around 40% on an average across all banks.




                   Institute for Development & Research
                   in Banking Technology
Technology in Banking Insight & Foresight                                                      13



Exhibit 3: Active FI accounts (%)




Exhibit 4: Active FI accounts (million)




A look at the two primary modes of reaching the excluded customer, the BC and SHG model shows
that most of the banks are clustered towards the lower end of the spectrum with an average of 2.6
million accounts and 1500 BCs. The SHG scatter diagram is much more spread out. PSU banks clearly
have put in more efforts in developing and linking SHGs. Though the ratio of accounts per SHG is
lower, the SHG-bank linkage model affords a better risk managed model and a better activation rate
than the BC model.




                   Institute for Development & Research
                   in Banking Technology
Technology in Banking Insight & Foresight                                                         14



Exhibit 5: BC model




Exhibit 6: SHG model




*Note The size denotes the number of FI accounts.
The business correspondent-led model is much more leveraged in terms of customer acquisitions.
The average number of FI accounts is 1,724 accounts per BC or BC agent. For SHGs, the number is 26
accounts per SHG. However, there is no particular trend that is clearly visible. As expected, smaller
banks seem to be clustered toward the lower end of the spectrum with a smaller number of BCs as
well as SHGs linked. Large PSU banks occupy the higher end of the spectrum; these banks have both
a large number of BCs as well as SHGs linked.




                 Institute for Development & Research
                 in Banking Technology
Technology in Banking Insight & Foresight                                                        15

3.1.2. Distribution Network

Realizing the difficulties in reaching the excluded customers, the RBI allowed the banks to appoint
intermediaries for customer acquisition and transaction processing. Banks have made increased
efforts in enrolling BCs and SHGs for reaching the clients. The charts below reveal that large banks
have made significant inroads in enrolling BCs and SHGs. Private and smaller banks have a long way
to go in scaling up operations.
Exhibit 7: BCs




Exhibit 8: SHGs




The data in these exhibits reveals that large banks have made considerable inroads in enrolling BCs
and SHGs. On an overall basis, there were approximately 1,500 BCs and 1 lac SHGs enrolled, large
banks outperformed the average with 2,000 BCs and 1.19 lacs SHGs.




                  Institute for Development & Research
                  in Banking Technology
Technology in Banking Insight & Foresight                                                         16

Exhibit 9: Business correspondents




Exhibit 10: SHGs




3.1.3. Training and Development

During the year 2010-11, the nominating banks trained a total of 78,169 people, including BCs, SHGs,
employees and others (RSETIs Rural Self Employment Training Institutes). Banks are also stepping
up awareness campaigns, preparing village credit plans, incentivizing BCs for customer acquisition
and setting up RSETIs. Financial inclusion should be meaningful and holistic and it should be ensured
that no frill accounts are put to work. Financial literacy and awareness constitute another most
critical element in putting no-frill accounts to work. Access to banking services through a no-frill
account is an enabling condition. The necessary condition would be fulfilled if there is wider
awareness of the entire range of banking products and services. Such awareness should also help in
alleviating apprehensions and instilling faith and trust in the banking institutions and financial
services they proffer, among the excluded section of the society, especially in rural areas.

                   Institute for Development & Research
                   in Banking Technology
Technology in Banking Insight & Foresight                                                           17

3.1.4. Review and Control
In order to have a better review mechanism and to have proper control on the functioning of the
outsourced agencies, particularly business correspondents, it is now felt necessary to have a
structured periodical reporting mechanism, so as to enable the branches to supervise the business
generated by business correspondents and take immediate corrective steps to redress the genuine
grievances of the customers who are serviced by the business correspondents.

3.1.5. Technology
Most banks have a set up a separate IT infrastructure for financial inclusion. There are systems
geared for low-value high-volume transactions with implementations varying from 500 to 1,500
transactions per second.
The technologies deployed for financial inclusion are:

        Biometric smart card
        Handheld biometric POS device for authentication and transaction
        GPRS-enabled mobile phones
        Core banking solution

Most of the banks have deployed the model of operating as end-to-end service providers for
financial inclusion initiatives. The POS machines are seamlessly integrated with CBS systems through
the FI Gateway System. The data from POS machines is first transferred to the CBS system of service
providers that consolidates and sends out data on a daily basis to the bank s server. For the self-help
group model through the branches for reaching out to people at the last mile, the technology of
service providers is converged at a branch, which operates through the regular CBS system.
The choice of multiple service providers and different models has been seamlessly captured in the
bank s system and therefore the portability is easily achieved across different systems such as UIDAI
and NPCI.
The Smart Cards and the associated fingerprints of the customer provide unique, foolproof
identification of customers without the requirement of a PIN/Password, which is required in the
other customer delivery channels. The fingerprint identification ensures non-repudiation and the
solution deployed is offline and requires only the device to carry out transactions.
There is a day- begin to synchronize and download the balance on to the card and the day-end
would enable the settlement and creation of data files, which would be used to update the balances
in the account at the back-end. The communication channel can be either GPRS or dial-up or CDMA,
depending on the availability of the service. The device has a lithium ion battery for backup during
power breakdowns. The device can work on car/sealed maintenance free (SMF) batteries as well
during long power outages.
The POS device has also got voice guidance in the local languages to facilitate the semi-literate and
the functionally literate villagers to understand transactions carried out by them. The transaction
amount is spoken and the customer authorizes transactions using their fingerprints.



               Institute for Development & Research
               in Banking Technology
Technology in Banking Insight & Foresight                                                          18

3.1.6. Enrollment, Authentication and Transaction Process
During enrollments done by the Field BC, the account opening form is filled at the field level in the
presence of the branch personnel supervising this work. The customer details are then fed in the POS
system. After the customer s information is completely filled up on the POS, this enrollment data is
pushed to the FI server of the service provider, which will generate a unique reference number per
customer. This number is written down by the FB on the individual account opening form of the
customer.
The scheduler at the FI server reads the unique number and pushes the data to the relevant branch
from where this POS is mapped to the base branch. The base branch will view this enrollment data in
the CBS menu for financial inclusion and view and correct the data at the branch end, in case of any
wrong entry in the names and addresses after verifying the account opening forms. The data is then
authenticated at the branch terminals. Once authenticated, the CBS system generates a CIF number
and an account number for a specific customer, which is written on the account opening form. This
form is then preserved at the branch level.

3.1.7. Way ahead
The financial inclusion initiative is gathering momentum with increased efforts from banks to cover
the unbanked population through the BC and SHG route. Most of the private sector banks seem to
favor the BC model, while public sector banks are taking both the BC as well as the SHG route. In the
near future, we are likely to witness and increase in the active accounts as more and more subsidy
payments are disbursed directly. In addition, the trust and awareness-building measures carried out
by banks will start to show effect. However, banks and policymakers still need to figure out a way of
keeping the accounts active and not letting included customers fall back into exclusion. Mobile
remittance and transfers from the migratory labor are also expected to increase in the near future,
given the convenience they offer.

3.2.    Mobile Banking
India has 700 million+ mobile subscribers, but only 240 million individuals with bank accounts, 20
million credit cards, 88,000 bank branches and 70,000 ATMs. Of the households without a bank
account, 42% have at least one mobile phone. This is just a snapshot into the penetration that mobile
has achieved in a relatively small period of time.
Mobile banking could be a revolution in banking. It has been in the news for quite a while and, very
recently, the transaction limit for mobile wallet cards was increased to INR50K. Mobile banking in
India is set to generate a fee-based income of INR202.5 billion (approx. US$4.5 billion) over the next
five years, mainly driven by lower transaction costs, favorable regulatory environment and the UID
project.
By 2015, US$350 billion in payment and banking transactions could flow through mobile phones,
compared with about US$235 billion of total credit-and debit-card transactions today. This forecast
depends on the willingness of banks, telecom operators, regulators and consumers collectively to
embrace this form of payment.



               Institute for Development & Research
               in Banking Technology
Technology in Banking Insight & Foresight                                                           19

It is less expensive to offer banking and payment services using mobile technology than to build new
branches in a country that, outside of major cities, is still largely rural. As mobile-money initiatives
take shape, the projected fee income in India from mobile payment and banking transactions could
exceed US$4.5 billion by 2015. Although the fee size seems large, the amount is less than it may
appear. These fees will be shared by banks, telecom operators, device manufacturers and service
providers.

3.2.1. Mobile Money and the Indian Market
There are essentially two mobile banking meta-markets in India: rural and urban. Over the next five
years, unbanked rural markets could begin to rival the urban market in size. In urban areas, many
consumers have bank accounts, but still rely on cash for 90% to 95% of small-ticket transactions.
Mobile payments would not only seek to change the cash-based nature of transactions, but also
would be a tremendous convenience for these consumers.
The mobile banking industry in India is ready to take off, especially with the ecosystem players, i.e.,
operators, banks and mobile manufacturers coming together and launching pilot services. The bigger
question still remains whether these services are planned keeping consumers at the center, or
whether it is just about the proof of concepts.
The Inter Bank Mobile Payment Service (IMPS) facility was launched with much fanfare in November
2010, under the aegis of the National Payment Corporation of India (NPCI). It promised an instant
interbank electronic fund transfer service that customers could conveniently access using their
mobile phones. However, although the facility is being offered by more than 20 banks across the
country, the adoption rate has been low. Industry analysts have attributed this to the fact that the
service in its current format is custom-made for Smartphone users who can download an application
from their respective banks and use it to make a fund transfer. Users with basic phones have the
option of transferring funds via an SMS, which limits the transaction value.
With more than 600 million connections and over 15 million being added each month, the belief is
that herein lays the panacea and the pill for the great Indian dream for universal financial access.
Often considered a utopian and untenable policy statement issued in corporate boardrooms and
election speeches, mobile is visibly the immediate opportunity to drive financial inclusion. The key
questions delve into the facts that whether this would happen on the existing payment architectures
or seed another one altogether.
The following subsections are important from the point of view of mobile as the dominant channel.
3.2.2. RBI s take on Mobile Banking Transactions
The RBI introduced operative guidelines for banks for mobile banking transactions in India in October
2008 under the umbrella of the Payments & Settlements Act 2007 with a few revisions and
clarifications outlined in subsequent releases. The key highlights of the act are:

        Only INR-based domestic services are permissible, clearly prohibiting the use of cross-border
        inward and outward transfers.
        Banks are allowed to use the services of business correspondents top extend this facility to
        customers.


               Institute for Development & Research
               in Banking Technology
Technology in Banking Insight & Foresight                                                          20

         Only banks with core banking solutions would be permitted to provide mobile banking
         services on their platform.
         The customer registration for mobile banking is mandatory.
         The mobile banking service offered by banks should be network operator-agnostic and
         should work across the entire mobile spectrum of operators.
         To ensure inter-operability between banks, message formats such as ISO 8583 were to be
         adopted for transactions.

To enable a nationwide mobile banking framework, facilitating inter-bank settlement, a robust
clearing and settlement infrastructure operating on a 24x7 basis was considered necessary. However,
the pending creation of such a national infrastructure, banks were permitted to enter into a bilateral
or multilateral arrangement for interbank settlements. Transaction limits were placed with a daily
cap of INR5K per customer for funds transfer and INR10K per customer for purchase transactions.

The Reserve Bank of India has allowed 39 banks to launch mobile banking services and recently
raised the limit for the amount, which can be paid through mobile phones tenfold to INR 50K.

Currently, just 5% of mobile phone subscribers are registered for the service. Even among the
registered users, only a small fraction uses it regularly. Approximately 680,000 transactions worth
INR610 million (US$13.55 million) are conducted every month.

The RBI also decided to permit the issue of mobile phones based on a semi-closed system of pre-paid
payment instruments (semi-closed mobile wallets) complying with the following conditions:

         The purchase/reloading of these instruments against the value of airtime/talk time should
         not be permitted.
         This facility should be enabled only to facilitate the purchase of goods and services. The
         person-to-person transfer of value should not be permitted.

The monetary ceilings on prepaid instruments issued are based on customer due diligence under the
extant guidelines.
3.2.3.   Interbank Mobile Payments Service (IMPS)
IMPS offers an instant, 24X7, interbank electronic fund transfer service through mobile phones. IMPS
facilitates customers to use mobile instruments as a channel for accessing their bank accounts and
put high interbank fund transfers in a secure manner with immediate confirmation features.
The IMPS money transfer is instantaneous. Both the remitter and the beneficiary receive SMS from
their respective banks immediately after the transaction. A bank customer needs to register as a
mobile banking customer to avail of the benefit as a beneficiary. For remitting money, the customer
would have to download the software (one-time activity) on the mobile and activate the same. The
number of users is growing by about 10,000 each day.
Operative guidelines were followed up by the introduction of IMPS by the National Payments Council
of India, allowing the bank s registered customers to transfer funds between banks via their mobile
phones. The earlier models allowed only transfers between customers having an account with the
same bank.


               Institute for Development & Research
               in Banking Technology
Technology in Banking Insight & Foresight                                                              21

        Customers are required to register with the participating banks and receive a unique seven
        digit MMID (mobile money transfer identified number).
        There is no requirement of internet connectivity or a personal computer.
        The service may be operated via SMS or a special application installed on the customer s
        handset.

This facility is provided by NPCI through its existing NFS switch. The eligible criteria for the banks that
can participate in IMPS are as follows:

        The bank should be a member of the National Financial Switch (NFS) driven by NPCI.
        The bank should have received an approval from RBI for its mobile banking service.

Banks have issued nearly 8.5 million mobile money identifiers (MMID) to customers. The mobile
payments system is poised to become a popular mode of fund transfer in the coming months. The
MMID, in combination with the mobile number, acts as a proxy for the account number. Many
customers, who would like to receive money electronically and are reluctant (for security purposes)
in revealing their bank branch and account number, would have a solution. They can now share their
mobile number and MMID with the remitter without the fear of providing personal banking details.
MMID, in combination with the mobile number, would uniquely point to an account number in a
bank. A person having multiple bank accounts would have multiple MMIDs tagged with the same
mobile number.

This model can potentially allow more than 300 million bank accounts (estimated 200 million active)
to transfer funds within 700 million mobile phone connections, possibly making this the largest 24x7
real-time Interbank transfer facility in the world.
3.2.4. Developments in the Mobile Banking Arena
RBI has been insisting repeatedly that mobile payments in India have to be driven by a bank led
model. This has prompted several stakeholders such as handset manufacturers, network providers
and telecom operators to enter into strategic tie ups with banks to develop a scalable model. Several
offerings have emerged or are around the corner over the past year.
        RBI came up with the regulation of an additional factor across IVR and mobile channels. This
        affected mobile service aggregators such as ngpay, Mchek and Paymate.
        Several new banks have come up with their mobile banking offering through java-based
        applications. Newer channels such as USSD and SMS have also gained in prominence after
        RBI increased the limit for unencrypted transactions over mobile channel to INR 5,000 per
        day.
        Banks such as SBI offer certain value-added services such as prepaid mobile recharge, which
        has been a hugely successful functionality. SBI boasts of more than 1 million customers in its
        mobile banking platform freedom by virtue of balanced service offerings as well as effective
        customer communication.
        Apparently, the regulator believes that mobile banking is yet to show remarkable growth
        even after the daily transaction limits have been raised to INR 50,000 per day per customer.
        Apart from major banks such as SBI and ICICI, other banks are still to gain numbers in terms
        of volume and value of transactions.


                Institute for Development & Research
                in Banking Technology
Technology in Banking Insight & Foresight                                                           22

        Nokia Money launched its services with Yes Bank and Union Bank of India to provide financial
        services to customers. Nokia plans to use its distribution network coupled with the financial
        prowess of the banks to provide a service of its kind.
        Airtel received approval to issue prepaid instruments from regulators and launch it in the
        name of Airtel Money. Other mobile operators too are defining models wherein payment
        and/or transfer enabling instruments would be launched either on their own or with banks,
        leveraging the principles of business correspondents.
        In the area of proximity payments, Citibank, in conjunction with Vodafone and Nokia
        conducted an NFC (near field communication)-based mobile payments trial in Bangalore,
        which saw considerable success. However, the scalability would depend on the proliferation
        and adoption of NFC-enabled handsets and acceptance capabilities at merchant outlets.
        There are several players in the space of financial inclusion such as FINO, ATOM, Eko and
        ALW who offer a bouquet of services such as deposits, cash withdrawals and payment and
        transfer transactions via the mobile channel.

3.2.5. New Trends in Mobile:

The success of MPesa in Kenya has provided an appetite for a host of global players whose entry into
the Indian market is only a matter of time. The Indian market for payments and transfers is set to
witness several interesting and possibly unique business models and consumer propositions.
Furthermore, with the introduction of 3G services, a host of value-added products and services will
be unleashed, which could potentially be purchased via mobile based wallets managed or even
operated by mobile operators.
3.2.6. Operator Bank Tie-ups

Three of India s largest mobile operators have tied up with India s largest banks to offer a bouquet of
mobile-based banking and financial services to their customers.
        Airtel and State Bank of India: A joint venture company has been set up that envisages
        opening bank accounts, cashless transfers, cashless spending and payment facilities,
        targeting the rural and urban poor. Customers would be offered a no-frills banking account
        from SBI, across Airtel s 1.5 million+ retailer network. Both partners have envisaged investing
        more than INR1 billion in this enterprise. The JV plans to acquire more than 2 million
        accounts annually.
        Vodafone and the ICICI Bank: Similar arrangement being entered offering financial products
        ranging from savings accounts, prepaid instruments and credit products through a mobile
        phone platform
        Idea and Axis Bank: They have entered into an association to offer financial services to
        customers under the Idea Mycash brand. These players have partnered a pilot launch in the
        Dharavi-Allahabad corridor and have plans to shortly launch the service at a pan-India scale.
3.2.7. IMPS Merchant Payments
NPCI, encouraged by the launch of IMPS for individual-to-individual money transfers, is all set to
foray into the field of merchant payments. RBI has already permitted the payments institution to go
ahead with merchant payments on the IMPS platform. NPCI is all set to launch the pilot of this new
service with seven banks.



               Institute for Development & Research
               in Banking Technology
Technology in Banking Insight & Foresight                                                           23

3.2.8. Prepaid Wallets and Mobile POS
Stored value prepaid wallets are being experimented in a large way in India and it is believed that
prepaid-based mobile wallets can drive financial inclusion. The greatest advantage for mobile is that
it breaks the investment barrier. This feature is being used to convert mobile devices to POS in
inaccessible areas.
3.2.9. Critical Success Factors
Any mobile phone solution for non-cash retail transactions needs to have certain basic characteristics
to succeed:
        Mass reach: The solution must be adopted by small traders and delivery agents for whom
        transaction volumes or values are low for supporting credit card and similar non-cash
        payment mechanisms
        Secure: Must be compliant with RBI guidelines for end-to-end encryption, fraud protection,
        etc.
        Service provider agnostic: Solution must not be linked to a particular service provider.
        Convenient/Easy: Payment through mobile phones must be convenient, easy and faster
        compared to cash and other non-cash payment mechanisms.
        Low set-up costs and time: The effort required and the cost of set up has to be much lower
        compared to traditional PoS.
        No/little requirement of additional infrastructure: The ecosystem required should be
        primarily set up, based on the existing wireless telecom infrastructure and the current
        mobile phones used by customers and merchants.
        Competitive pricing with existing methods: Pricing needs to be competitive with other non-
        cash payment mechanisms.

Given the specific conditions and critical factors required for the success of mobile payments in India,
there is a need for a customized mobile payment solution, which does not just copy the
West/matured economies, nor is it extremely influenced from any other country based on its initial
success outside India.
There are multiple models of mobile payments that can be adopted are prepaid instruments where
the balance is credited before the purchase by a top-up transaction, direct debit where the bank
account is directly debited for the purchase, and the post-paid wallet where it is either linked to a
credit card or a mobile account and the customer has to pay for the purchase at the time of
settlement with the credit provider.
A solution that meets the above critical success factors has the potential to succeed as an effective
mobile payment instrument in India.

The figures below reflect the average daily value of mobile-to-mobile and mobile-to-others. As is
evident, the numbers for the mobile transfers have not picked up. However, the transactions value of
the large banks seems to be high, which is a positive index of growth.




               Institute for Development & Research
               in Banking Technology
Technology in Banking Insight & Foresight                                      24


Exhibit 11: Average daily value of mobile to mobile fund transfers (INR 000)




Exhibit 12: Average daily value of mobile to others fund transfers (INR 000)




                  Institute for Development & Research
                  in Banking Technology
Technology in Banking Insight & Foresight                                                           25

Exhibit 13: Average value per transaction (INR)




3.2.10. The Road ahead
Mobile phones are as much a part of our pockets as are our wallets and vehicle/home keys. This not
only suggests the importance, but the level of dependence on phones. To tie the loose end, banking
through a mobile channel is very intuitive and is the logical idea for banks and consumers alike.
However, it is daunting and confusing to implement. In today s world of electronic-based accounts,
money is information passing through communications networks. The customer experience at the
ATM     punching in a PIN, selecting among various options, being instantly gratified, evokes our
mobile phone experience.
Mobile banking is a very lucrative vertical for growth-oriented banks. The alliances with mobile
operators will play a key role in this growth strategy:
         Leverage operator s key assets
         Use mobile operator s widespread wireless coverage and extensive use of wireless devices as
         part of a branchless expansion program. Branch economics, with heavy capital and labor
         costs, favor an environment for branches that is densely populated and where the customer
         transacts at higher values.
         Take advantage of the large and tiered distribution networks of mobile operators to roll out
         their banking agents
Telecommunications companies have substantial leverage in mobile banking. Banks need to work
with mobile operators if they want to create mobile banking services that are highly customer-
friendly, fast and secure. Mobile operators control of the SIM, plus the attraction of leveraging their
distribution networks, puts them in a strong negotiating position.
While this is conducive for a bank with an already large base (customer or asset), this may create a
challenge for smaller banks, who may find it more difficult to strike the right deal with stronger
operators, or who might simply struggle to get them at the negotiating table. It also may create a
tension with the principle of interoperability across networks, because tighter relationships may not
be achievable with all networks.

                  Institute for Development & Research
                  in Banking Technology
Technology in Banking Insight & Foresight                                                         26

For mobile payments to even remotely become a substitute for liquidity (cash), the key is a wide
acceptance network. This is the real anchor of the value proposition for mobile banking customers.
To derive maximum value from remote transactions, using the cell phone just like an internet
terminal, begins with getting people to leave more cash in their accounts. This may happen when
people see that there are many ways in which they can cash out. Once that network is established,
the value of transacting remotely may become more apparent.

Banks that want to use mobile banking to reach unbanked customers need access to marketing
channels and brand credibility with precisely those customers who have been excluded from
banking. Unlike most banks, mobile operators traditionally use a mass-market approach and aim to
get into the pocket of every citizen in the form of mobiles.

Mobile applications-based banking is poised to emerge as a significant m-commerce feature, and if
South Africa s foray into mass mobile banking is any indication, mobile banking could well be the
driving factor to increase the sales of high-end mobile phones. Nevertheless, banks need to take a
hard and deep look into the mobile usage patterns among their target customers and enable the
requisite technology on their mobile services to reach out to the majority of their customers. Mobile
banking is slated to get big in terms of volumes and value; it is projected to drive the financial
revolution at the bottom of the pyramid. However, the times ahead will indicate whether the banks
will ascend toward financial strength over mobiles or a new ecosystem would emerge comprising
various stakeholders to tap the hidden potential of mobile banking.

3.3.    Electronic Payments
Payments are an age old phenomena that have been with human beings since ages. We have
certainly evolved, having come a long way from the barter system to written promises such as notes
to quite recently adopted electronic payments.
3.3.1. Evolution of Electronic Payments in India
The electronic payments in India have evolved steadily over the past few years. The first big leap
came in the late 1990s with the growth of the ECS debit and credit transaction, then came the rise of
internet banking in the early 2000s and the introduction of RTGS in 2004 and NEFT in 2005. Recent
years have seen the rise of newer channels such as prepaid instruments and mobile phones. While
the traditional cash-based and paper-based channels continue in the retail space, electronification
has demonstrated significant progress in these years.
3.3.2. Overview of Electronic Payments Markets globally and in India
        The total turnover of various payment and settlement systems in India grew by 16% in value
        terms in 2009 10. The annual turnover in payment systems has been increasing as a ratio of
        GDP, consistent with the financial deepening of the economy.
        In 2010, India s electronic payments were US$17 trillion (INR786trillion). In 2009, McKinsey
        estimated India s payments industry revenues at US$14 billion. Payment flows (both
        electronic and paper) are 7.8 times the GDP, comparable to many Western countries and
        emerging economies such as Brazil (7.3), Italy (7.2) and the US. (7.0).




               Institute for Development & Research
               in Banking Technology
Technology in Banking Insight & Foresight                                                          27

        There has been significant growth in the electronic payments from below 5% of the total
        value in 2005 to 88% in FY10, largely due to the electronification of business-to-business
        payments.
        Electronification is a relatively new concept in consumer transactions and the transactions
        are mostly cash and paper-based. In this segment, less than 3% of the consumer-to-business
        flow value is electronic.
        Subject to variance between banks, payments contributed about 30% of bank revenues.
        Most of this was from transaction banking (including cash management plus trade and
        supply-chain financing), credit cards and cash and paper transactions. The majority of
        payment flows occur to and within the business sector.
With over US$133 billion payments from bank accounts via ECS and NEFT, electronic fund transfers
have emerged as the much-preferred option for transactions, with an increasing orientation toward
cashless and even cheque-less payments in India.
3.3.3. Vision of the Regulator
The Indian retail payments space has witnessed several key events in the recent past. These
developments are expected to potentially influence and catalyze the electronic payments landscape
in this decade.
The Reserve Bank of India, after setting up the Board for Payment and Settlement Systems in 2005,
released a vision document, which outlined the vision for moving from a predominantly cash-based
payment system to an electronic system, which is more efficient. It was meant to establish a
framework and emerge as a handbook of regulations to develop efficient payment systems.
The vision also proposed the formation of an umbrella institution, which would consolidate and
integrate multiple systems with varying service levels into nation-wide uniform and standard
business process for all retail payment systems. The other objective was to facilitate an affordable
payment mechanism to benefit the common populace across the country and help financial
inclusion.
To enable the finalization of a framework for the delivery of basic financial services using mobile
phones, the Cabinet Secretariat constituted an inter-ministerial group (IMG) in 2009. The framework
envisages the creation of mobile-linked no frills accounts, enabling a basic set of transactions via a
mobile PIN-based system.
The government plans the implementation of a UID (unique identifier), a 12-digit number for every
citizen of India, to enable a national identifier for all citizens. MasterCard is developing a payment
solution for Aadhar (UID), which should pave the road ahead for integrated electronic payments.
The payment system in India has gone through significant transition over the past decade. Based in
the Payment and Settlement Systems Act 2009, RBI has regulated the charges being imposed by
banks to their customers. Some of the examples of these regulations are:
        RBI, effective 8 October 2008, rationalized the charges levied by banks for outstation cheque
        collections as well as electronic products such as RTGS/NEFT/ECS.
        RBI had set a ceiling on cheque collection charges as INR50, INR100 and INR150 for cheque
        amounts, respectively, up to INR10,000, INR10,001 to INR1,00,000 and more than
        INR1,00,000.


               Institute for Development & Research
               in Banking Technology
Technology in Banking Insight & Foresight                                                                     28

         For Inward RTGS/NEFT/ECS transactions, RBI has mandated that no charge is to be levied. For
         outward transactions, the limits for RTGS of INR1,00, 000 to 5,00,000 should not exceed
         INR25 and INR5,00,000 and above should not exceed INR50 per transaction. Similarly, for
         NEFT, the limits are INR5 for up to 100,000 and INR25 for 100,000 and above per transaction.
3.3.4. The Rise of Electronic Payments
The payment business in India is currently witnessing a phase of a rapid transition, enabled by the
growing acceptance of electronic payment systems across various segments. A look at the electronic
payments in India over the years reveals the growth in electronic payments in India both in terms of
value as well as volume.
Exhibit 14: Electronic payment trends




Source: RBI

The two subsequent charts illustrate how paper-based payments have fared vis-à-vis electronic
payments in the recent past, in terms of transaction volume and transaction value. While paper-
based payments, which are essentially payments made through cheques, still command a lion s share
in terms of volume, electronic payments overtook cheque payments in terms of value in 2006 07
and command a larger share of the total payments pie today. The percentage of electronic
transactions in terms of volume has also been growing y-o-y since 2006 07.
However, the credit for the shift in transaction volumes toward electronic transactions goes to
regulators. After RBI made it mandatory for banks to route high-ticket transfers through RTGS, 96%
of the value of payments made electronically come through RTGS, while just about 1% of the
electronic transactions are done through RTGS.
Exhibit 15: Value breakup cheque and electronic     Exhibit 16: Volume breakup cheque and electronic (Source RBI)




                 Institute for Development & Research
                 in Banking Technology
Technology in Banking Insight & Foresight                                                         29

If we consider the value for the paper-based transactions and the average daily value of electronic
transactions, we can clearly see that the electronic transactions have been doing better that the
traditional payment systems. Large banks and private banks are doing really well in the electronic
transactions space.
Exhibit 17: Average daily value of paper transactions (INR billion)




Exhibit 18: Average daily value of electronic transactions (INR billion)




Average daily transactions value for paper and electronic transactions for banks in India, 2011

Upon having a close look at the percentage of electronic transactions, smaller banks are lagging
behind the large and private banks in the overall percentage of electronic transactions. With the
growing customer awareness and the increase in demand for electronic transactions, the trends
indicate that even the small banks will start promoting electronic payments in an aggressive manner
in the future.


                  Institute for Development & Research
                  in Banking Technology
Technology in Banking Insight & Foresight                                                          30

Exhibit 19: Percent of electronic transactions (value)




3.3.5. Trends in Electronic Payments
The paper-based systems categorized as a system-wide important payment system (SWIPS) still
continue to dominate in terms of volume. However, its share has been declining both in volume and
value terms in recent years.
The RTGS system has been in operation in India since March 2004 and has been exhibiting rapid
growth, not only in terms of volume and value of transactions, but also in the coverage of branches.
During the year 2009 10, a total of 11,172 bank branches were added in the RTGS system, increasing
the number of RTGS-enabled bank branches to 66,178. The efficiency of the RTGS system can be
judged from the peak volume of RTGS transactions, which reached 248 thousand transactions on 30
March 2010, as compared to the last year s peak level of 128 thousand transactions on 29 March
2009.
NEFT (national electronic funds transfer) has been doing extremely well and the product is growing
from strength to strength in terms of acceptability, reach and volumes handled. As at end-February
2011, around 75,000 branches of the 100 banks participated in the NEFT system and the volume of
transactions processed increased to 13.5 million in February 2011.
The concept of speed clearing was introduced in 2008, leveraging on the core banking infrastructure
of banks. It has now been made available as a part of the Magnetic Ink Character Recognition (MICR),
clearing at all the 66 MICR cheque processing centers (CPCs). This has reduced the time taken for the
realization of proceeds of outstation cheques to T+2/3 days.
The cheque truncation system (CTS), which involves the use of images for processing cheques in
clearing, was introduced in the national capital region (NCR) of Delhi in 2008. It was meant to ensure
the efficiency of cheque clearing as well as reduce the physical movement of cheques. With the
complete migration of cheque volume to CTS, the MICR processing has been discontinued in the NCR
and the CTS system now handles around 12% of the total cheque volume in the country. Currently,
CTS is being rolled out at Chennai and it will soon be extended throughout the country.



                  Institute for Development & Research
                  in Banking Technology
Technology in Banking Insight & Foresight                                                            31

3.3.6. Electronification Approaches by Indian Banks
Since the adoption of core banking systems by most banks, banks have started to focus on
technology enablers in a broad spectrum of areas and electronification of payments is a major area in
this direction. Banks have taken up the regulators initiatives seriously and have taken various steps to
improve electronic channels to meet customer demands.

3.3.7. Internet Banking
Currently, internet banking has emerged as a major banking channel in India. Most of the large and
medium banks now offer internet banking and funds transfer facilities. While the large banks have
developed specific infrastructure to handle large value transactions, even the small banks operate
through shared resources. The positive fact is that most of the electronic transactions are through
STP (straight through processing) in the larger banks. This trend will result in enhanced service
delivery and quick settlement.

Banks are offering several value-added services through their electronic channels such as tax
collections, trading, bill payments, and viewing demat accounts, etc. Certain services such as prepaid
mobile recharge have become extremely popular among consumers.

3.3.8. Upcoming Technology Architecture
With the growth of the concept of payment hubs, the technology architecture for processing
payments is going to change a lot. Banks are evaluating newer architectures such as payment hubs,
which will act as the single point of routing for all payment transactions.

3.3.9. Fraud and Security Aspects of Electronic Payments
Considering the inherent risks involved and as an important step toward encouraging the transition
to alternate efficient electronic payment systems viz. RTGS, NEFT, the Reserve Bank discontinued the
separate high value clearing (HVC) (i.e., same-day clearing of local cheques of INR1 lakh and above),
which was operational at 30 large centers across the country. The cheques of higher value can,
however, continue to be presented in the normal MICR clearing.

3.3.10. Emerging Payment Channels and Technologies
The use of the electronic/online mode of payments for the purchase of goods and services and
making payments to public utility companies is becoming increasingly popular. This involves
intermediaries such as aggregators and payment gateway service providers handling customer funds.

3.3.11. Real Time Gross Settlement System
RBI is working toward the implementation of the next generation real time gross settlement (NG-
RTGS) system. The Reserve Bank has initiated steps to enhance the capacity of the hardware system
in the short term by rationalizing the use of resources during peak and non-peak periods and has also
initiated the process of enhancing the capacity. Moreover, several new features are being envisaged
in the proposed NG-RTGS system such as advanced liquidity management facility; extensible markup
language (XML)-based messaging system conforming to ISO 20022; and real-time information and
transaction monitoring and control system.

               Institute for Development & Research
               in Banking Technology
Technology in Banking Insight & Foresight                                                         32

3.3.12. Rise of Prepaid Instruments
Banks have seen the opportunity served by prepaid in addressing the gap left between the debit and
credit customer base. Over 14 non-banking corporate entities have been granted permissions to
issue prepaid cards in card-based, paper-based and other electronic formats, including virtual/mobile
wallets to date. One of India s leading mobile operators has been granted permission with several
others in the fray.

3.3.13. New Credit Bureaus
With two new credit bureaus being set up, in addition to the existing CIBIL, the quality and depth of
the credit history and analysis is expected to grow multifold in the coming years, resulting in the
enhanced quality of credit scoring and recoveries. The remarkable transformation has been the
increased consumer awareness of the importance and impact of their credit histories.

3.3.14. IMPS: Mobile-based Payment System
NPCI has introduced the Interbank Mobile Payment Service (IMPS) enabling seamless mobile-based
transfers between bank account holders. The cornerstone of interoperability has been established
with this measure.
The innovation spree continues with a wide array of breakthrough business models, consumer
propositions and technology solutions being implemented, driving the adoption of electronic
payments.

3.3.15. Future Trends
Changing customer preferences, mobile and internet penetration, rising cards, growth in disposable
income and spend, as well as new technology initiatives have bolstered the payments landscape in
India. It is evident that electronic payments will become increasingly popular as a delivery
mechanism. However, there will always be customer segments, which will prefer to transact through
a cheque or go to a branch to withdraw money. As such, banks will need to decide on the product
strategy and create a mapping of their payment portfolio with their customer segments. Banks will
need to increase their efforts in migrating customers from paper-based payments to electronic
payments if they want to reap their benefits of cost advantages. However, this will require a
fundamental change in consumer behavior, which can happen only if the banks and the regulator
offer a secure, robust and efficient network, in addition to incentives in terms of convenience and
benefits to customers.

Business leaders of tomorrow would need to build on technologies foundations to deliver electronic
payment systems. A robust architectural framework should be built by all banks to enable flexibility
in gaining market share and increasing profitability from a more demanding customer base. Further,
the technology framework needs to be developed, ensuring security to protect the reputation and
support effective risk management. A framework that will reduce costs, bring about superior
KYC/AML checks, help banks gauge customer behavior better and give an overall perspective on the
profitability of their payments business would be most befitting. To achieve this, the increased
acceptance of electronic payments by consumers across India is important. RBI has already extended


               Institute for Development & Research
               in Banking Technology
Technology in Banking Insight & Foresight                                                            33

a supporting hand to banks through the formation of the NPCI, for it will bring in a new focus on
retail payments, which should also see the electronification that has been brought about by the
introduction of RTGS in systemically important payment systems.

3.4.    CRM Initiatives
The Indian banking industry has undergone a sea change in the past few years. With the rapid growth
in the services industry across the economy, customers have been exposed to higher standards of
service and customer orientation. Profitable customers have started demanding the same level of
service and customer differentiation from their banks. Banks have therefore largely started
dismantling the commoditized services of the past and are focusing their efforts on creating value for
customers. The only mantra of success for any bank is to build lasting customer relationships.

As measuring and valuing customer relationships has taken centre stage, CRM has become a
comprehensive approach that aligns business strategy, corporate culture and structure, as well as
supports information technology.

It is clear that although CRM has been in India for a long time now, but its penetration, especially in
the financial services market, has been rather uninspiring. It has tended to largely focus on things at
an operational level, essentially "middle-office" offers such as branch automation, fraud detection,
straight-through-processing and other internally-focused efficiency plays as opposed to more
beneficial front-office plays. New-age banks have taken a clear lead in the front-office play. But the
survey also reveals that old-age banks are playing catch-up in this area.

Being a low-cost player and having great operational efficiencies is now a mandatory requirement for
banks and can no longer be looked at as differentiators. The true differentiation will arise from the
customer value garnered by each bank. The long-term valuation of a bank will therefore be gauged
by its customer loyalty. Customer loyalty should be gauged by the penetration of products per
customer. This higher penetration is possible only when banks have a robust CRM system running
across the entire organization seamlessly across channels providing customers with the right product
at the right time through the right channel.

The survey highlighted all the initiatives that banks are taking in this space and their individual level
of preparedness for customer wars ahead. The survey also threw up some interesting, but widely
held beliefs: There is a large standard deviation among banks in their CRM capabilities. All new-age
banks do not have the same level of CRM maturity. In fact, there are some public sector banks, which
will soon leapfrog over some private sector banks in the CRM race, provided public sector banks
implement all their plans. The other trend at the leading banks witnessed is the focus on customer
education and grievance redressal and a seamless integration of all channels. Meanwhile, banks have
launched a host of new channels for customers. These channels have brought ease to customers at
one level, but have also increased the challenge of providing a common experience to customers.
Banks have all rolled out these channels, but are still struggling with migrating customers on to these
alternate channels. A few banks have used their CRM capabilities well in this space to reveal a higher
degree of channel usage by their customers.


               Institute for Development & Research
               in Banking Technology
Technology in Banking Insight & Foresight                                                           34

3.4.1. Customer Education
Banks have understood that educating the customer makes good business sense. There are two
levels of education products and practices. Product education is targeted toward increasing usage
and the practices education is targeted at gaining customer confidence around systems and
processes employed at banks. We have seen a high degree of education linked around security-
related features at the banks, which is their way of emboldening customers to access the bank
through lower-cost alternate channels. Banks have also started viewing customer education as a
means of building an image of leadership. Banks that view themselves as leaders are spending more
on customer education in non-product-related features. This is positively viewed by customers as
there is no hard-sell involved.

Currently, banks are using various channels such as email, SMS, online platform, IVR and unutilized
space on the reverse of the statement of accounts and customer awareness screens in ATMs and the
print media to reach out to customers. Leading banks are using their analytic capabilities to target
the right level and relevant communication to the right customers.

Most public sector banks organize customer meets with their leading customers. A few of them also
educate customers about new products and interest rates through SMS and mailers. However, their
ability to educate a large portion of customers is hampered by their customer data quality in terms of
contactability. A few of these banks have now embarked on a data cleansing exercise to address this
problem. Private sector banks have taken the lead here in educating customers regularly on topics
such as safe banking, phishing and responsible debt. One particular example is of a bank
implementing enhanced ATMs with ATM Next application, which provides extra services, including
educating customers on bank products.

3.4.2. Grievance Handling
With the increased activism of customers and media, banks will have to take a particular focus on
their grievance-handling mechanisms. Banks manage billions of transactions annually. But even with
great processes, there will still be a few thousand transactions that do not deliver in sync with the
customer s expectations. These service failures may be viewed as opportunities        opportunities to
convert these customers into the bank s promoters post prompt redressal. In our survey, we have
seen that most banks have taken steps to make it easy for customers to lodge their complaint
through 24x7 call centers, email ids published on the website and branch walk-ins. Some banks have
also set up segment-wise grievance redressal desks. But the true opportunity lies post this. All banks
will have to pay closer attention to this area and build better systems to track and resolve customer
complaints.

3.4.3. Customer Service Delivery Channels
CRM initiatives, being the forefront of customer touch-points, play a major role in creating a positive
perception of the bank by providing the best possible customer experience. All banks have taken
steps from better and faster grievance handling to providing new channels to educating.



               Institute for Development & Research
               in Banking Technology
Technology in Banking Insight & Foresight                                                           35

While some private banks have started monitoring individual consumer activity and making the right
offer at the right time using CRM analytics, others have started providing differentiated services to
make customers feel special and therefore gain their loyalty. Offering the most relevant products at
the right time ensures customer retention and increases customer profitably.

We observed that while all banks had the basic necessities in terms of toll free numbers, IVR facilities
and call centers, some banks also implemented strategies such as enhanced ATMs, online chat and
automatic call distribution and the skill-based routing of calls (diverting calls to relevant personnel
based on customer requirements) to improve customer experience. Large private sector banks with
service-oriented CRM and an end-to-end tracking system seem to be ahead of others in having CRM
initiatives actually implemented. However, CRM still lacks the cohesiveness and problem-solving
power that it should address.

3.4.4. Cross-channel Integration
We have seen that channel strategies were implemented and managed in an uncoordinated fashion,
which led to sub-optimal resource allocation and poor customer management. Leading banks have
now realized this problem and are addressing this aggressively. As banks have become multi-product
as well as multi-channel, cross-channel integration insulates customers from internal machinations
and presents them with a 360-degree view of the organization. In addition, it provides complete
visibility of customer activity rather than a partial visibility of individual channels, enabling a
comprehensive influence of purchase decisions.

Banks are now focusing on developing, implementing and integrating their channels more rapidly
and efficiently to provide consistent service and get increased revenues through the adoption of new
products as well as improve profitability through lower product development and service costs. More
forward looking banks are simultaneously deploying integrated CRM strategies to improve customer
service quality and profitability.

3.4.5. Analytics becoming the Dominant Technology
Business analytics that used to be the game play for consumer goods companies have now made
their need felt in banking as well. We have seen that the banking industry has started relying on
more sophisticated segmentation techniques to reach out to relevant customers. The importance has
changed from the difference in banking products to who is targeted and how is a customer targeted.
What we are seeing is the gradual depletion of product marketing, which has given way to customer
segment marketing.

Since a one-size-fits-all customer strategy no longer seems to work, banks have started catering to
the needs of rapidly changing markets. A couple of private lenders have a large CRM team in place at
the enterprise level and have a robust model of data collection from its customer relationship
systems to understand customer behavior and his/her needs through various channels of
engagement. These insights are then used to run campaigns on specific sets of customers.




               Institute for Development & Research
               in Banking Technology
Technology in Banking Insight & Foresight                                                          36

3.4.6. Increase in Cross-sales
Banks have utilized data that they have from CRM solutions to improve their cross-selling programs,
which range from identifying target segments to marketing new products. In terms of conversion, we
see an average of 12% conversion rates from the customers pursued. While some banks have made
these initiatives a part of their overall strategy, some others have taken many item-level benefits
such as the introduction and selling of new specialized services to HNI/Priority clients as well as the
launch of segment-based CASA products.

3.4.7. CRM for Innovation
While some banks use CRM primarily for middle/back office systems improvement, including areas of
sales force automation, customer service and marketing campaigns management, there are others
who have tried product innovation. Having a greater understanding of customers enables banks to
introduce new products, which would cater to the needs of customers in a better way. Few banks, if
any, have used customer feedback to create a new product or service.

3.4.8. The Future     CRM 2.0
The emergence of Web 2.0 technologies has facilitated CRM 2.0 as the next step in this journey. It is
a philosophy and business strategy supported by technology and processes to engage customers in a
collaborative interaction that provides mutually beneficial value in a transparent business
environment. Banks now see customers as partners in the development and improvement of
products, services as well as the company-customer relationship.

As traditional CRM is being practiced and put in place, it is imperative for most banks capturing all
the data about the customer to give a 360 degree view. The bank is a consumer of all this data
created and uses an analytics layer, if at all, on top of this data to run marketing campaigns on
customer segments. With the advent of social media, traditional CRM was no longer able to keep
pace with customer demands. Earlier an unhappy customer shared his angst with 10 people around
him through word of mouth. Now he just posts it on Facebook and reaches out to a few thousand
with a click. And the customer knows this! CRM 2.0 or social media CRM is therefore the next
frontier, which all banks have to reach to keep pace with the changing environment. India currently
has 100 million broadband users and this number is expected to reach 200 million by 2015. These
broadband users are also extremely active on social networks. India also has more than 700 million
mobile users and, with the digital convergence in full swing, mobile will be the preferred gateway to
the internet. Therefore, CRM 2.0 has immense strategic implications for all banks. Banks will need to
start monitoring external networks. Just tweeting and blogging will no longer be enough. In banks
with CRM platforms, we have seen most of the banks viewing CRM platforms as lead management
systems. The high level of integration where the system has a view of each transaction, service
query, product and behavior of the customer is still a rarity with only a couple of banks being at that
level. Compared to the current methods of having a single view of customers across channels, the
insights from CRM 2.0 methods are based on the personal profile of customers; social characteristics
associated with them as well as from customer participation, and are therefore more dynamic.



               Institute for Development & Research
               in Banking Technology
Technology in Banking Insight & Foresight                                                          37

CRM 2.0 will focus on collaboration with customers and customer groups. Some banks have started
taking baby steps in this direction by starting their Facebook pages. Just creating a page will not
suffice. A symbiotic interaction needs to happen wherein the customer plays a role in assisting the
bank in improving its products and services and the customer in turn is rewarded by the bank. Net
promoter scores will retain their influence, but will be fused with richer metrics to truly gauge
customer advocacy. CRM 2.0 also focuses more on customer access and privacy. Customers will be
able to decide what products and services they are fine with being pitched by the bank no longer a
blanket yes or no. Sales processes will undergo a sea change with CRM 2.0. The bank will have to be
good at social network management and be present at the social networks where their clients are.
Banks will need to institute systems of tracking connections and activity in the external world, which
are seamlessly in sync with the existing internal sales workflows. Sales measurement metrics will
need to undergo changes to compensate for the new way consumers will interact and buy from
banks. Sales productivity tools will have to be enhanced to allow better and online access to client-
related data across various platforms.

The old adage of catch them young and keep them for life is still true. With the average age of the
active social networker being in the twenties, it is imperative that banks have a well thought-out
strategy for rolling out CRM 2.0. Banks that have not embarked fully on the traditional CRM may well
use this opportunity to leapfrog by implementing CRM 2.0 strategies.

3.5.    IT Implementation and Management
Over the past few years, the Indian banking and financial services industry has seen transformational
changes in how banks are being run from the technological perspective. The implementation of the
core banking solution (CBS), in accordance with the guidelines of the Reserve Bank of India, has now
been implemented or in the advanced stages of being implantation in most large public sector as
well as private sector banks in India. According to the latest guideline issued by the Reserve Bank of
India, it has become mandatory for all regional rural banks to be made CBS-compliant by the 30
September 2011 deadline.
The following sections of the report have been prepared to understand various aspects of IT
implementation and management that banks have used in running their internal IT department at
the bank level, which includes the current trend and any emerging trends in the banking technology
space.
3.5.1. IT Strategy Alignment with Business Alignment
In most large nationalized banks, whether private or public sector, there is a strong emphasis on
aligning the IT strategy of the bank with its business goals. The senior management of the bank
supports and maintains a culture where business verticals are ready to shift and accept changes
brought in by new IT systems and processes, which impacts the operational and technological
environment of the bank.
Some of the measures that banks have implemented are:
        The IT strategy of the bank or an IT vision document is typically approved by the board,
        which serves as a roadmap to the future implementation of IT within the bank.


               Institute for Development & Research
               in Banking Technology
Technology in Banking Insight & Foresight                                                           38

        The IT committee of the board constitutes the senior management of the bank at the board
        level to ensure and review IT strategic goals on a periodic basis. The committee is also
        responsible for the approval of the IT budgets and prioritization of projects within the scope
        of IT. This group acts as a bridge between the IT and business teams and ensures that
        business objectives are planned and implemented to drive the bank s vision over the long
        haul.
        Large nationalized banks have also implemented a layer of the Project Steering Committee
        for critical strategic initiatives or large projects where senior executives record the progress
        at pre-defined intervals monthly or quarterly.
        In public sector banks, it has also been observed that various verticals are created to support
        business groups at various levels to implement IT initiatives. A strategic planning process
        group co-ordinates the alignment of business objectives with IT objectives.

3.5.2. IT Organization Structure
It has also been noted that some of the large public and private sectors banks have made significant
investment in attracting, retaining and nurturing their IT staff members. The teams have been varied
in terms of the size and complexity of its structure according to the requirements of the bank,
number of initiatives and level of outsourcing that has been implemented in the bank.
Most large banks have reported that they have separate streams or verticals to manage their IT in
some form or the other, such as technology solutions, infrastructure management, systems
management and IT information security, among others. The primary responsibility of these groups is
to manage their individual areas in terms of delivery, ensure compliance to the IT policies of the bank
and drive the innovation or business programs that the IT committee of the bank proposes.
We have also observed that some of the banks have the business technology layer, which acts and
co-ordinates the initiative between the business and technology group within their bank s
environment.

3.5.3. IT Infrastructure Physical Environment
Since the growth of financial services in India has been significant in the past few years, most large
banks have ensured that their current IT set up is not only capable of handling the current level of
customers and their associated volumes, but are also well equipped to ensure a similar level of
service for the future growth and services in line with their business goals.
The leading banks of the country have ensured state-of-the-art data center facilities for their DC and
DRC, maintaining a 2/3 security compliance level and ISO 27001 certification. Banks have also
ensured zero data loss with the implementation of the near site, considering the RPO (recovery point
objective) and RTO (recovery time objective) for critical applications.
These data centers have been housed in different seismic zones to ensure data security in Force
Majeure situations such as earthquakes, floods and fire. The replication of data between the data
centers has been done using redundant network links from different service providers.
The security environment of the data center has been ensured at the physical level and operational
level by the installation of firewalls, network-based intrusion prevention system (NIPS) and host-
based intrusion prevention system (HIPS) as well as the installation of anti-spam and anti-virus


               Institute for Development & Research
               in Banking Technology
Technology in Banking Insight & Foresight                                                          39

solutions from industry leaders. The installation of devices such as CCTV cameras, finger printer
readers and scanners ensures physical security and prevents intrusion.
The consistent improvement in IT is another theme that has emerged not only to keep pace with
organizational priorities, but also to pro-actively build capacity over the next three to five years.

3.5.4. Organizational Mechanism and Processes for Strategy Implementation
Banks today recognize information technology (IT) as a key strategic function to enable an
institution s business vision, as the boards of these banks believe that the appropriate use of IT can
substantially improve the efficiency and competitiveness of the business.
To achieve the management s objective, we have observed that the IT department of banks works
closely with business operations to create effective mechanisms and processes. These processes
include the implementation of the IT governance, risk and compliance (GRC) framework based on
best industry practices in addition to driving standardizations with the COBIT, ITIL, ISO20000 and
ISO27000 framework. They have also ensured compliance with the regulatory requirements of RBI,
CVC and SEC [SOX compliance], to name a few.
The bank s IT strategy committee or steering committee provides direction to the bank s IT
department and has laid down a roadmap to further drive the IT strategy at a senior management
level. Banks also ensure that the information security audit of the critical systems and applications
are done by qualified external auditors appointed by the bank s IT team.
We have also noted that an individual at the GM or DGM level in banks is assigned to monitor the
progress of critical initiatives and report to the steering committee on a monthly basis.

3.5.5. IT as Strategic Enabler to Reduce Costs or Increase Revenues
Several banks use IT to automate their key business and operations and help reduce operational
costs. Revenues are largely increased with the introduction of more channels such as ATMs, internet
banking or mobile banking to bring more customers or to retain existing customers by offering
convenience to banks on a 24x7 basis. Banks have also placed a strong emphasis on IT to improve
customer service, security, efficiency and competitiveness of the business.
Some of the initiatives to reduce costs or increase revenues that the banks have implemented
include consolidation of data centers and servers, virtualization, network bandwidth management
tool, installation of solid state hard disks or implementation of advanced data replication tools.
The proactive monitoring of the infrastructure and applications has also helped banks reduce costs
and improve customer service. Infrastructure monitoring helps to reduce the potential downtime
and cost of servicing. The implementation of dashboards for various applications helps the senior
management to monitor the status of applications on a real-time basis.
e-Procurement or reverse auction has also helped the bank s IT team to reduce their procurement-
related expenditure.




               Institute for Development & Research
               in Banking Technology
Technology in Banking Insight & Foresight                                                               40

3.5.6. Backup and Disaster Management Plan
The DR site at banks is vital for recovery in a disaster situation. Banks have set up their DR for all their
critical applications and replication of data on a periodic or a real-time basis to ensure quick recovery
in an adverse scenario. Banks also conduct the DR mock drill once in a quarter for all critical
applications and servers to be well equipped to respond in the face of a real exigency.
Banks have also implemented a centralized backup solution for the back-up of critical applications.
An everyday backup on the SAN storage and back-up tapes and stored in fire proof cabinets in an off-
site location would ensure data survival in case of a disaster. A business continuity plan includes
availability of people, processes and technology. There are packages available in the market, which
some of the banks have implemented to take care of their business continuity plan that includes
automated disaster recovery management solutions.
3.5.7. Energy Management
All banks have introduced measures in some form or the other to conserve or save energy in their
operating environment. Some of the measures that banks have introduced are:
        Consolidation of datacenters
        Green data centers with active tile design, cold aisle concealment, real-time monitoring,
        sensor-based lighting controls and optimized cooling systems
        Virtualization of servers and desktops
        Adoption of blade server technology
        Upgradation of older servers, storage and networking component
        Dynamic power capping of servers
        Cloud computing to reduce consumption
        CFL lighting or LED lights
        Precision ACs
        Solar-powered ATMs
        Paper less banking
        Use of thin clients

3.5.8. Measurement of IT Performance
The measurement of IT performance is done by using various parameters such as availability of
critical systems, execution of IT budgets, project implementation, capacity planning and expansions.
Steering committee meetings and IT committees of the bank conduct meetings at a monthly interval
to ensure that the project progresses is monitored and tracked by the top management of the bank.
Quarterly updates are sent to the board on the performance of the projects with respect to timeline,
critical milestones, budget and resource planning.
The monthly reports of the bank highlight uptime of the systems, SLA report, incident and problem
resolution, service desk report as well as network uptime report, which are sent to the project
steering committees for effective monitoring and control.



                Institute for Development & Research
                in Banking Technology
Technology in Banking Insight & Foresight                                                             41

Dashboards are generated for the senior management review to monitor the health of the systems
at various levels such as availability of the systems, infrastructure and report on a number of
incidents or events that have been generated.

3.5.9. IT as a Value Creator
Value can be attributed in terms of tangible and intangible benefits. Tangible benefits are evaluated
based on the comparison between return on investment (ROI) calculation versus the total cost of
ownership (TCO). Tangible benefits sometimes outweigh intangible benefits that the project
generates. Intangible benefits can be accrued in terms of customer convenience, brand creation,
increased operational efficiency, compliance, improved skills sets of the employees and better
decision making to generate a unified view of customers.

3.5.10. IT Risk Management Policy
The objective of the IT risk management policy is to ensure that IT risks are identified, assessed and
managed for infrastructure and applications within the operating environment of the bank. Banks
have an IT risk management policy approved by the board, which is regularly reviewed and updated,
considering the changing technology landscape within and outside the bank.
The policy is applicable to all personnel and/or process related to IT applications, IT infrastructure, IT
services, vendors and documents for the applicable bank locations in scope. The risk management
policy document encompasses all aspects such as physical/logical security, encryption, remote
access, intranet/internet, password and network security. The risk management framework includes
risk assessment, risk reporting, risk treatment and residual risk monitoring.

3.5.11. Management of IT Resources
IT resources can be classified further into applications, infrastructure-related technologies,
operational technologies and people, to name a few. Banks have incorporated the same to reflect
the vision and mission statement.
Various banks have recognized the need for better IT governance and have developed a set of IT
policies and associated procedures using control objectives for information and related technology
(COBIT) as the base framework, meshed with standards such as the Information Technology
Infrastructure Library (ITIL), ISO 20000 and ISO 27001 and have aligned it to various regulatory
requirements that banks need to comply with, including RBI and SEC (SOX).
The IT policies of the banks are applicable to all personnel and/or processes, which are used for the
management of the lifecycle of IT assets, including applications and infrastructure that are managed
by the IT teams of banks.
On the people front, the HR frameworks of various banks ensure that people are equipped with the
required skill set to perform their jobs. Banks make a significant effort to ensure that the right person
has been put into the right job by organizing training programs to keep people up to date in terms of
the skills required for the job they are performing.




               Institute for Development & Research
               in Banking Technology
Technology in Banking Insight & Foresight                                                          42

3.6.    IT for Internal Effectiveness
IT is an important lever in improving internal organization effectiveness and not just delivering
customer benefits. In fact, a misalignment will result in deficiency in delivering customer benefits.
These two factors play a vital role, namely knowledge management and internal process
effectiveness, to reduce TAT in service delivery.
Most of the banks have implemented online training systems and knowledge management
methodologies. Building human capital and capabilities is of utmost importance in the service sector
to maintain a competitive edge. One of the large private sector banks has also implemented an m-
Learning solution, which provides audio nuggets on topics such as credit awareness, current
economics and operations risk management.
Workflow automation and BPR efforts to improve internal process efficiency are helping banks
toward more effective utilization of IT resources. The various areas of implementation include:
        Data collection package for the various Bancassurance products of the bank
        Centralized web-based inspection information system made available for inspection centers
        and the Head Office
        Claiming reimbursement of FIT (Funds in transit) ATM cash through RACS (Reconciliation
        accounting and cash settlement)
        Review and renewal of structured loan products
        Automated solution to move accounts under subvention products to non-subvention
        products on the specified date (subvention end date)
        Input data entry screen provided to the branches to enter data related to the ATM access
        lock functioning, ATM door functioning, UPS functioning, ATM security-related issues and
        ATM ventilation availability to enable both CO/HO for effective monitoring
        Online tax accounting system (OLTAS), electronic accounting system in excise and service tax
        (EASIEST) implemented in all designated branches
        Integrated treasury software for domestic and forex treasury operations implemented
        HRM software to automate HR-related activities implemented; centralized processing of
        salary, pension, deposit processing, clearing operations for both inward and outward clearing
        Automated performance appraisal systems
Most banks are trying to reduce the use of paper. Therefore, in order to have a paperless office,
various activities that were earlier done manually are now online. This has resulted in the easy
retrieval of data, including scanned documents. Many banks have implemented a document
management system (DMS) to facilitate a faster flow of documents and information internally.
Documents are scanned using the Omni scan and images are stored in the remote image server (RIS)
available locally in the respective regional back offices to enable faster loading of the image of the
account opening form. The data entry is done from these images, which are stored in the RIS server.
Therefore, the turnaround time is reduced considerably. The automated cheque processing solution
is implemented wherein cheque images are captured and used for data entry, verification and
passing. The minimal data entered in Finacle at the branch level for account opening is auto
populated through a cron job in Omniflow at regional back offices (RBOs). The authenticity is ensured
as there is no manual intervention in data transfer from branches to RBOs, i.e., from Finacle to

               Institute for Development & Research
               in Banking Technology
Technology in Banking Insight & Foresight                                                            43

Omniflow. Moreover, on scanning the Account opening forms, a tif file is generated and the data is
entered from images that are populated from this tif file. The bank has implemented Netcast
products to provide various reports and documents generated from various systems centrally for
branches/offices. Data warehouse and the enterprise wide general ledger system provide various
reports to administrative offices.

3.7.    Managing IT Risk
In the last couple of years, the financial services sector has experienced a global downturn, followed
by inevitable rationalization with organizations thereafter gearing up their business for growth.
Organizations had to work back and realign their operating models to address the growing demands
for a cost-conscious operating model and make sourcing decisions on the basis of organized and pre-
established priorities. As technology continued to gain importance and became a key driver to
achieve business targets, the investment decisions in the same started being looked upon more from
a strategic intent, than as traditional capex/opex outflows.
The business demands from IT functions have evolved over the last few decades. From being just a
 supporter initially, IT has evolved to be a protector and enhancer of business. The importance
and pervasiveness of IT is on the rise. IT is now widely recognized as an important driver of enterprise
strategy. Business and IT are expected to work together to capitalize on market opportunities to
realize business aspirations. These opportunities are time-sensitive and, more often than not,
technology departments do not have enough time for developing internal capacities and capabilities.
It is difficult to imagine any financial services organization being effective today without the benefit
of IT systems. IT is the foundation on which many enterprises run, and its successful design and
implementation, have a profound effect on business performance.
Risks have a close association with all businesses. These risks are particularly significant when it
comes to financial services business. Over time, we have seen risks being better managed by the
development and use of information technology.
Information technology can be effectively used as a tool to provide internal effectiveness and
business risk management. The tools to manage information technology risks are as follows:

3.7.1. IT Risk Management Framework
Firms are expected to have a detailed IT risk management framework along with the policies and
procedures detailing IT risk management. Banks typically design their governance, risk and
compliance [GRC] framework based on best practices under different IT frameworks and standards
such as CoBIT [Control Objectives for Information and Related Technology], ITIL, ISO20000, ISO27001
and other regulatory requirements such as RBI and SEC (SOX). The framework is governed by various
committees, information security, information security risk management, IT strategy, IT steering and
business continuity, which provide direction and value creation from IT-enabled investment. There
are certifications such as ISO27001 certification for data centers, which can be received to certify
security levels.




               Institute for Development & Research
               in Banking Technology
Technology in Banking Insight & Foresight                                                       44



Exhibit 20: IT risk management framework




Exhibit 21: Managing IT risk




An analysis of the scores indicates that smaller banks are lagging behind the curve. While larger
banks have extensive IT risks management policies in place, smaller banks need to step up their
efforts toward internal awareness measures, data centers and software risk management policies.

3.7.2. Policies and Procedures
Most banks have risk management policies and procedures approved by the board. The IT risk
management policy ensures that IT risks are identified, assessed and managed for infrastructure and
applications within the production environment. The scope of IT risk management policy covers all



                  Institute for Development & Research
                  in Banking Technology
Technology in Banking Insight & Foresight                                                           45

the IT assets. The policy coverage extends to all personnel and/or processes related to IT
applications, IT infrastructure, IT services and documents.

3.7.3. Managing IT Hardware Risks
Banks have policies such as asset life cycle management policy (ALCM), physical security policy,
minimum baseline security standard (MBSS), SLA and AMC with hardware suppliers, capacity
management policy, DR/BCP policy and risk management policy, which collectively take care of the
mitigation of all hardware risks. The asset life cycle management (ALCM) procedure is to manage the
security and risks of all assets with users at banks such as software and hardware, as well as covers
processes to be followed from the procurement to the disposal of hardware assets.
Banks have implemented a centralized backup solution and have a robust backup infrastructure to
support critical data and applications. There is a provision to take daily backups and a copy of the
same may be sent to the offsite location, in case of primary site disasters. The backup tape is shipped
to the DR/Standby site where data can be restored.
A disaster recovery (DR)/business continuity planning center needs to be built to take care of one or
more application failure at the primary data center and:
        Provide a comprehensive user-agnostic DR solution for each mission critical application of
        the bank
        Successful partial disaster simulation of three or more applications with their multiple
        interfaces continue to be operational from the production site
        Full disaster simulation at a network level

Most banks have certifications such as BS 25999 and ISO 27001 to validate their compliance to BCP
and DR.

The data centers need to be secured by the physical security perimeter, which may be supported by
CCTV cameras, security guards, bullet proof doors, separate physical access cards and biometric
devices, fire alarms and fire extinguishers. Authorized vendors can carry out preventive maintenance
on a periodic basis to ensure availability on a consistent basis.

3.7.4. Managing IT Software Risks:
The bank s IT policies and related processes and procedures such as change management,
application security standard, release management, service level agreements and asset management
charges with vendors, suppliers relationship management, IT risk management and license
management process guard the bank from all software-related risks focusing on software assets,
including licenses, versions and installed endpoints. Any software before installation goes through
System Development Life Cycle (SDLC) phases, to check the relationship between threat agent,
probability and the impact on business. The high and continuous availability of operating systems,
databases and applications is ensured through the installation of updated anti-virus software,
firmware versions, patching of servers and security devices. All the foregoing activities help banks to
contain IT software risks. For any new application or system enhancements, the security should be
incorporated since inception. Applications should be monitored and patched for technical


               Institute for Development & Research
               in Banking Technology
Technology in Banking Insight & Foresight                                                          46

vulnerabilities. Auditing, logging and monitoring are additional activities, which need to be
undertaken strictly in accordance with stipulated IT policies to ensure the effective management of IT
software risks.
PCs/workstations provided to the staff/users of the bank should have preloaded standard tested and
licensed software. Users need to be instructed to refrain from installing any unauthorized/unlicensed
software on their PCs/machines for any official or personal use. These software applications are also
known as freeware or sharewares and contain malicious programs such as Trojan resulting in the
corruption of system data or relay user confidential information to a hacker on the internet without
user knowledge. If these are virus-infected software applications, then they endanger the other
systems in a bank s network. This software also utilizes system resources such as memory and
processing power, which could affect or slow down a user system and hamper routine business
activity. User access management can be practiced rigorously, by providing authentication only to
authorized users in the bank s network through active directory.
Banks can implement sophisticated tools such as the Desktop and Server Management [DSM] to
probe the software installed in the IT system to avoid any license-related legal risk.

3.7.5. Access Controls and Authentications
Banks are responsible to maintain confidentiality, integrity and availability of data regardless of the
form     electronic, print or other media and instill confidence and reassurance to their customers
that their accounts are being monitored very closely and effectively. Banks should commit to protect
their customers information from unauthorized access, use, disclosure, disruption, modification or
destruction. They can take several steps to ensure that customer information is fully protected such
as putting in place necessary control mechanisms involving hardware, software and physical security
to ensure secure processing and storage of data.

3.7.6. Physical Access
Banks have a well-defined physical and environmental security procedure aligned to their risk
management objective. The procedures define a detailed process to be followed for perimeter
security, zone level security, access provisioning, monitoring and baselines for environmental
controls such as fire safety, and heating, ventilation and air conditioning (HVAC).
Physical access controls need to be implemented such that the access to the official premises is
provided to authorize personnel only. In case of a change in access requirement or new access
requirement, necessary approvals should be arranged. Physical access controls should be reviewed
periodically and the results of the review may be shared with the bank s CISO (Chief Information
Security Officer).
Employees, visitors and contractors are instructed to wear the ID card issued to them throughout the
time they are in the bank s premises. ID cards are configured for access to approved areas only and
are provided to the employee or regular visitors. Any lost/misplaced access cards should be reported
immediately to the physical security supervisor for the revocation of the access privileges associated
with the lost/misplaced card.



               Institute for Development & Research
               in Banking Technology
Technology in Banking Insight & Foresight                                                            47

3.7.7. Physical System Access
Users are advised and cautioned against sharing their systems with other users who are not
authorized by the bank or who have no business requirement to access the banks systems,
especially the external entities. This may result in the loss, damage or theft of the information assets
(hardware and software) of the bank. Users should take adequate precautions that their systems are
sufficiently protected from water and dust sources that could damage the system. Storage media is
kept away from sunlight and dust and is beyond the reach of third-parties such as visitors or
contractors, which may result in the loss of some confidential information such as customer data.
The physical security controls of banks at various locations are reviewed on a periodic basis. Physical
access controls should be implemented to provide entry within premises only on a need basis to
authorized personnel. Physical access should be given only with due approval from the reporting
manager of the employee. Further, a separate approval from the datacenters may also be required;
this follows a very stringent process for all locations of bank where servers are hosted; the logs (CCTV
and manual entry) should be reviewed on a periodic basis.
Apart from the entry and exit of employees and visitors (in and out of the bank s premises) should be
logged either manually or through automated mechanism. For regular visitors such as contractors /
consultants / auditors who need to be provided temporary access cards the separate process should
be followed where in the request has to be approved by the authorized person / Head. The access of
resigned employees should be disabled immediately once the list is published from HR. For Non
regular visitors the visitor should be required to sign and mention details. Physical security of offsite
equipments like EPABX, faxes and printers should be placed in a secured area. Access given should be
restricted to ensure that no visitor can gain access without notice of Bank s employees.

3.7.8. Logical Access
The information security policy (ISP) and global user access management (GUAM) policy together
govern logical access controls at various levels. Banks deploy various controls such as system
lockdown, password policies and restrictions on internet access through URL filtering and
monitoring, data loss prevention tools and active directory policy.
To ensure that only authorized users access bank systems, every user should be provided a user id
and corresponding password to access systems and the user should be held accountable for all
activities originating from his account. Users can protect their passwords by following the password
usage policy. Users should not share their files and directories with other users on the bank s
network. This is because shares can be exploited by viruses and can infect other PCs over the
network. Users can justifiably raise a business case to install a file server for their department to
share files.

3.7.9. People risks to IT in terms of Security, Awareness and Availability
Banks should focus on the development of a comprehensive awareness strategy to augment
technology and process controls. This is with a view to bring about a behavioral change, rather than
just to educate employees about what the desired behavior should be. Focused efforts from the
senior management help in focusing on changing attitudes and encouraging a security-minded

               Institute for Development & Research
               in Banking Technology
Technology in Banking Insight & Foresight                                                          48

culture. This endeavor motivates banks employees to keep themselves informed of information
security risks and remediate them in a timely manner for their respective units. Here is a list of our
key awareness initiatives:
        There is a theme-based approach to spread awareness on the importance of security.
        The security policy can be broken into simple and understandable points.
        Posters are a means of passive re-iteration and various touch points in a bank. Simple
        themed posters can carry IT security messages illustrated in the form of interesting images.
        Videos and films can emphasize on good and bad security behavior and convey that banks
        stand in a dos and dont s format using animated characters.
        A mandatory on-line e-learning course can cover the key elements of the information
        security policy of banks and can be attached with an online certification course for the
        completion of the course.
        There are online quizzes to spread awareness.
        Employees who do not comply with the bank s policy should be given warning memos and
        should be asked to leave through the HR process in case of serious issues.
A full-time awareness manager may be appointed to raise awareness levels and provide appropriate
training so that employees can protect their confidential electronic information; understand risks
when using and storing electronic information; reduce risks to the confidentiality, integrity and
availability of confidential electronic information and understand the roles and responsibilities for
the protection of information and systems.
Through training, reward programs and global awareness, banks can take a constructive and
proactive approach to security, which is making a positive difference for their business. Security-
positive behavior should be encouraged by making attendance at the security awareness training
mandatory, publicizing security successes and failures throughout the organization, and linking
security to personal performance objectives/appraisals.

3.7.10. IT Support
Adopting newer technologies for application implementation, enhancements or improvements,
which result in a satisfactory response to customer needs, has become the driving force for the IT
team within banks. Banks should have adequately sized teams in terms of manpower with
appropriate skill sets and capabilities to cater to current and future IT initiatives.

3.7.11. Outsourcing of IT
Banks should develop a policy on outsourcing, based on the guidelines issued by the Reserve Bank of
India (RBI). All the business and support functions of the bank are mandated to adhere to this
outsourcing policy.
As a part of the policy, banks should maintain a complete list of all service providers with whom the
bank engages to perform its business. These service providers are subjected to a review based on the
materiality of outsourcing.




               Institute for Development & Research
               in Banking Technology
Technology in Banking Insight & Foresight                                                           49

The Information Security Group should develop a comprehensive checklist of information security
controls, which each of the material service providers are expected to comply with. This is reviewed
and any actions coming from there are tracked till closure.
Some of these reviews should also include on-site assessment by the information security risk
managers. These reviews should also form the basis of taking a decision of whether to get into a
partnership with these service providers.
As a part of PCI-DSS compliance, banks may ensure that all the service providers they deal with are
compliant to the PCI-DSS standard and they have achieved their certification.
While dealing with outsourced agencies, banks should ensure the following:
        There are pre-defined service level agreements (SLAs) with outsourced partners.
        For proactive and effective monitoring, IT systems are configured to provide regular
        automated alerts with an escalation mechanism of the outsourced staff.
        The monitoring aids in providing timely and acute resolution of issues.
        Periodic meetings are conducted to resolve any operational issues challenges with
        vendors/outsourced partners who provide various services.
        The vendor evaluation process is an ongoing process to gauge the vendor output.
        In case any violation is detected, the bank takes appropriate management action against
        them.

3.8.    IT for business innovation
Information technology (IT) has become mission-critical for many organizations. In today s business
environment, IT is a fundamental and growing component of day-to-day business operations and
represents a significant area of investment for many companies. Technology can be a competitive
advantage or a marketplace disadvantage. In recent years, the role of IT has been changing and, in
some cases, radically. Rather than being seen merely as a utility, the function is increasingly expected
to come up with innovative business improvements. Post-recession, organizations inhabit a very
different global economy and IT has a vital part to play in supporting change and growth. With
competition increasingly being shaped by a number of macroeconomic factors, IT leaders have to
understand the dynamics of this new normal and work closely with the business to address the
challenges.
The emergence of personal laptop computers, smart phones, enterprise resource planning (ERP)
systems, the growth of the internet, global sourcing and commerce, coupled with increasing threats
to information security and the privacy of customer data, have made IT a core competency and
strategic focus area for many companies. And the executives interested in IT are not just the CIO and
the IT Director; CEOs, CFOs, COOs, as well as other C-level executives, business unit (BU) leaders and
audit committee and board members are more concerned about IT than ever before. And they are
not only concerned about IT risks, but also about the performance of the IT function.
Organizations are realizing the importance of having strategic IT roadmaps. While businesses have
realized the importance of IT and the need for investments thereof; the question that arises now is
that can they restructure their business to increase the level of flexibility and adaptability to market
conditions? Where and how can they cut costs? How can we focus on core competencies? Can we

               Institute for Development & Research
               in Banking Technology
Technology in Banking Insight & Foresight                                                             50

source non-core work from outside? What are the models available? Which one suits me the best?
How can I source from outside and still have control? What are the risks involved? Business leaders
expect business restructuring to play an increased role in their company s activities over the coming
years and for many organizations, the IT function is clearly targeted as a priority.
Business and IT leaders must balance their vision for how IT can add value to the enterprise, while
addressing concerns such as levels of IT service and support, program delivery and other
fundamental operational needs. Many organizations need to counter significant challenges to:
        Align IT strategy, investment and efforts with the business strategy
        Provide IT enablement for key business process and major transformations (e.g., supply
        chain, finance, customer)
        Increase the overall return on IT investments
        Reduce the cost and effort required for IT to maintain required levels of support
        Establish effective IT sourcing strategies
        Improve the management of security, risk and compliance issues related to IT
        Manage and measure IT performance
With the economy showing signs of recovery and businesses turning their attention to pursuing new
market opportunities, it is a good time now to focus on establishing IT as an efficient and controlled
business function.
There are several options available to organizations for reshaping and restructuring their IT function,
including centralizing functions in a shared service centre, relocating for better access to cheaper
labor or specialized skills, or sourcing IT functions to a service provider. The benefits that a right
technology decision offers are myriad, making it one of the most preferred options for restructuring.
At their most basic level, IT sourcing strategies are about plans, directives, policies and decisions that
determine how to integrate internal and external resources and services to achieve business
outcomes. One of the most important aspects of any IT strategy is that it is developed in a manner
that is consistent with the overall business strategy. To do this effectively, there must be an
understanding of the role of IT and how it supports and drives the business strategy. The current
volatile and dynamic market conditions are urging organizations to outsource IT services with an aim
to reduce costs and strengthen IT efficiencies. The decision however is more complex as technology
is taken as a strategic enabler, which makes sourcing a more important strategic decision.

3.8.1. Use of IT for Business Innovation
Business innovation has become a critical survival quotient for many firms today. Information
technology powers the rapid pace of innovation by all businesses around us. The senior management
at banks and financial services firms see innovation as an important parameter to improve the
performance of their companies. The investments toward technology and innovation have increased
substantially. These investments are usually realized over a large period of time and are also subject
to the firms achieving the scalability, which was envisaged.
Some of the trends in business innovation and information technology noticed in banks are in the
following areas:


               Institute for Development & Research
               in Banking Technology
Technology in Banking Insight & Foresight                                                           51

3.8.2. Trends in innovation in products and services offered:
        Savings Accounts with Auto Sweep Facility
        With an objective to deliver higher value for the savings account customers, banks have
        designed savings accounts with an auto sweep facility with the help of technology. The
        product feature works in a way that when the balance exceeds a given threshold value, the
        same is converted into a fixed deposit. If the balance falls, the fixed deposit is automatically
        broken and the balance is automatically credited back to the savings account of the
        customer. This facility provides a greater yield for customers on ideal funds and help banks
        retain low-cost deposits.
        Smart Cards
        The processor type smart cards with built-in integrated circuits (ICs) or microchips offer a
        wide range of transactional opportunities even from remote areas. Smart cards are
        extensively used for transactions such as cash withdrawals from ATMs, payment of bills and
        online purchases.
        Virtual Bank
        Multimedia technology has been quite effective in bringing banking services to the doorstep
        of its customers. The customer-activated terminal (CAT) or self-banking kiosks are an
        interactive multimedia display unit, housed in a small enclosure, which typically consists of a
        computer workstation, monitor, video disk player and a card reader. It enables customers to
        browse through the information and use the available banking services at their own speed.
        Some banks have established virtual or self-banking branches where the customer enters the
        branch, explores services on the touch screen and at any time calls up members of the bank
        staff by video conferencing. While customers get the convenience of 24X7 banking, the bank
        saves in heavy real estate and manpower costs when compared to establishing a branch.
        Electronic Funds Transfers
        Real time gross settlements (RTGS) and national electronic funds transfer (NEFT) have
        transformed the way funds transfers are done. Moving from three to four days for clearing
        and funds transferred, banks have moved to real-time transfers using online channels and
        mobile phones.

3.8.3. Innovation Trends in Processes
        Automated workflows and processes
           Electronic Data Interchange (EDI): EDI typically denotes paperless financial transactions
           across the locations within the banks and with customers. EDI is fast becoming a norm
           for intercompany transactions as well as for the procurement of items bought from
           suppliers. For example, the account opening, the forms and documents are scanned and
           sent to the centralized operations unit of the bank to facilitate speedy account opening.
           Banks in Singapore allow electronic submissions by clients by uploading documents and
           establishing trade net, which reduces the delivery time from days to minutes.


               Institute for Development & Research
               in Banking Technology
Technology in Banking Insight & Foresight                                                           52

            Image Processing: As financial services, including capital markets and banking, are highly
            document intensive, image processing technology can have a far-reaching impact for
            such applications for its less-paper characteristics. Image technology in banks can be
            used for automatic identification or character recognition to read text and diagram
            wherein the cheques or documents can be scanned.
        Business intelligence and customer relationship management applications
        Many banks have strengthened their focus on customer service and have implemented
        business intelligence (BI) and customer relationship management (CRM) applications in the
        organization. These applications help banks to capture the customer expectations better and
        manage the information of a large customer base of banks in a scientific manner to provide
        intelligent and useful customer information to the banks.
        Optimizing Customer Reach
        Segmentation is critical to focus on profitable customers and markets as well as exploit
        effective distribution channels, particularly online. Effective account management can help
        companies broaden their products and services, while customer retention remains a high
        priority.
        Innovation in Delivery Channels
        With the improvisation of delivery channels to the establishment of new deliver channels,
        this is one area where banks have seen the highest level of the impact of technology.
        ATMs
        Automated teller machines have reduced costs per transactions to almost one-fourth as
        compared to the branches. ATMs support a variety of transactions such as cash withdrawal,
        cash deposits, cherub deposits, placement of service requests, including the request for a
        new cheque book. New technology has facilitated the installation of in-wall ATMs, which are
        weather-proof and can be established in shopping malls or busy commercial localities and
        have further reduced the transactions and operations costs for banks.
        Internet Banking and e-Business
        Internet banking has helped the scalability of banks and served customers to maintain and
        manage their accounts without a need to visit the bank. Customers can now process diverse
        transactions with internet banking. They can view transaction details, transfer funds, pay bills
        as well as make purchases. Internet banking has further reduced the costs per transactions of
        banks and is even lower than the cost per transaction done at ATMs.
        Mobile and SMS Banking
        Transactions using GPRS-enabled mobile phones and SMS alerts are the latest innovations in
        delivery channels. Customers can view transactions, transfer funds, pay bills and make
        purchases through mobile banking. SMS alters are sent to customers for all transactions
        made by them above a specified value. Customers can also request to know their balances
        and the last few transaction details by sending an SMS.



               Institute for Development & Research
               in Banking Technology
Technology in Banking Insight & Foresight                                                           53

        Accelerating the Speed of Response
        In a rapidly changing world, organizations have to develop and launch new products quickly
        and act swiftly when the demand rises or falls. IT has contributed immensely to business
        success in the past decade, but it is clear that the management seeks even more innovation.
        The board and the CIO should therefore be clear on what is expected of IT to ensure that it
        continues to meet expectations.
IT has continued offering more than just operational support and helps create a competitive
advantage. For example, in a service industry, the speed of response in customer care may be more
of a priority to differentiate the offering.

The extent to which IT facilitates agility also depends largely on the role of the department. While IT
is seen more as a utility that supports day-to-day operations, it is unrealistic to expect highly
innovative thinking.

Outsourcing has also aided agility. However, many businesses are primarily focused on the savings
this can bring. And by revisiting the opportunities opened up by cloud computing and virtualization,
organizations have become more flexible at lower costs, reducing the need for investments in
infrastructure.

3.8.4. Innovation in Business Model
Some technological innovations have had such a significant impact that they have transformed the
business models of banks. Some of them are explained below:
        Core Banking (anywhere Banking)
        Most banks in India support anywhere banking for their customers. This is established by the
        core banking solution implemented across the bank, which provides the same and live
        customer account view to all branches across the bank at any point of time.
        The centralization of back-office operations and innovations such as virtual experts at
        branches is instrumental in transforming the role of branches to advisory hubs from being
        mere transaction processing centers.
        Modern branches have a video conferencing facility where they can connect to the excerpts
        to seek their advice from branches. Branches with a video conferencing facility can also
        receive online training and attend online meetings and town halls, eliminating the need for
        branch professional to travel frequently.
        Financial inclusion
            ·   Branchless banking comprises essentially all of the following elements:
            ·   Use of technology, such as payment cards or mobile phones, to identify customers
                and record transactions electronically and, in some cases, to allow customers to
                initiate transactions remotely
            ·   Use of (exclusive or nonexclusive) third-party outlets, such as post offices and small
                retailers, who act as agents and enable customers to perform functions that require
                their physical presence such as cash handling and customer due diligence for account
                opening


                Institute for Development & Research
                in Banking Technology
Technology in Banking Insight & Foresight                                                                54

            ·   Offer of at least basic cash deposits and withdrawal in addition to transactional or
                payment services
        Advantages   of branchless banking
            ·   The service provided at their doorstep/village also helps save time.
            ·   This is user friendly and hassle free for villagers as there are no challans/vouchers.
            ·   The business correspondent (BC), being a permanent resident of the village, knows
                the people and their requirements and can assist customers at any time of the day.
            ·   The cost of transaction is reduced considerably.
            ·   This equips banks to handle large volumes with less staff.
            ·   This model reduces the pressure on the counters at rural branches.

        Improving Operational Agility
        The speed with which a company can respond and adapt to market changes has a direct
        influence on how effectively it can compete. To understand market movements, many
        companies are looking to increase their analytical capability, utilize business intelligence
        systems and gain better access to data. And by investing in the right processes and people,
        by seeking opportunities to collaborate or outsource, they can respond quickly to changes in
        demand. An organization s ability to innovate is critical to its success.
        Achieving cost competitiveness
        Optimizing costs is about more than just reducing expenditure. It starts with managing the
        pricing process, investing in productivity and passing on the pressure to others by seeking
        better commercial terms from partners. Growth has a cost, so financing and optimizing
        capital are also important elements of cost competitiveness.
        Building stakeholder confidence
        To meet the need for greater transparency, companies are engaging with stakeholders by
        identifying and explaining any risks, anticipating regulatory requirements and providing
        enhanced reporting on financial, environmental and operational performance. There is a
        stronger focus on the importance of reengaging with internal stakeholders, notably the
        talent of organizations, to attract and retain the right people. With internet and advanced
        reporting, IT has played a significant role in transforming the way businesses communicate
        with their stakeholders.

3.8.5. Key Issues
While technology-focused possibilities of IT may be unlimited due to their application and adoption
in India, there is a need to exercise a conscious approach for the business process re-engineering of
existing practices and procedures to capitalize effectively on IT. Training and upgrading skills play a
critical role in the absorption of new technologies.




                Institute for Development & Research
                in Banking Technology
Technology in Banking Insight & Foresight                                                             55

    Fraud: The elimination of manual records with the introduction of electronic funds transfers and
    ATMs raises the important question of IT security. This includes issues related to the
    confidentiality of information, prevention of data corruption and cyber crime.
    Costs: IT initiatives usually consume a lot of capital expenditure for banks and the benefits are
    realized over a period of many years to come. Companies really need to prioritize IT expenses
    and conduct a detailed cost-benefit analysis before establishing the need for these technology
    initiatives.
    Resistance to change by employees: Irrespective of how good the applications or systems are, it
    is the people who will be required to enable the effective implementation and smooth transition
    of products and services toward new systems. Further, employees need to gain education and
    expertise in these systems to enable the firms to leverage on the investments and convert them
    to returns. It has been observed that large technology initiatives usually face a lot of resistance to
    change and low acceptance by the employees and therefore become the main reason for the
    failure of such implementation. Banks need to focus their efforts on the training and education of
    employees to enable the successful implementation of their information technology and convert
    investments into returns.




               Institute for Development & Research
               in Banking Technology
Technology in Banking Insight & Foresight                                                          56


4.       Future Trends and the Changing Role of IT
4.1.     Beyond Core Banking
Increased adoption of e-payments and mobile banking are clearly the emerging areas which are
bound to strengthen in the near future. In addition the focus is shifting towards systems and
processes needed in the maturity phase of the Technology needs curve. Banks are and will need to
increasingly focusing on cost and profitability management, business intelligence, dashboards/
executive information reports, data warehousing and analytics. Improving internal effectiveness and
efficiency with integrated data warehouse and real-time access to all customer information will help
the banks decision making and ability to deliver appropriate products and services to the customers.
Banks must see beyond applications that provide solutions to today s problems. They need to
develop a vision of a comprehensive infrastructure comprising internal and external networks
instantaneously moving information from data stores to users and back again. The importance of the
IT-business unit partnership cannot be overemphasized. The people and processes are just as critical
to success as hardware and software.
Undoubtedly, banks have made great technological advances in storing information. However, the
full power to use that information to be more productive and make better decisions still goes
unrealized. By continuing to emphasize only technology and the peripheral business processes it
affects, banks have seriously neglected their personal and enterprise-wide intelligence.
The effectiveness of the infrastructure is measured in the value it brings to the customer. That value
is diminished by business units and individuals that are not networked. Therefore, banks must
provide access and training, to each member of the bank who directly or indirectly serves customers.
To make this possible, clear standards and expectations must be published, so the information
technology organization can bring individuals on-line in a consistent manner.
Exhibit 22: Technology needs curve




                 Institute for Development & Research
                 in Banking Technology
Technology in Banking Insight & Foresight                                                          57

4.2.    Increasing Interconnectivity and Ease of Payments through Different Form Factors
The economic role of payment systems is connected intimately to the economic role of money.
Money is a unit of account, a store of value, and a medium of exchange. Cash, checks, electronic
transfers, debit, credit and charge cards, as well as payment methods relying on mobile phones and
on the internet are based on different systems for exchanging value between economic entities and
on different form factors for engaging in this exchange.

Anywhere anytime banking is becoming the norm due to the implementation of CBS, additionally
increased efforts by the regulator in setting up ECS, RTGS and NEFT systems is leading to
interconnectivity and ease of inter and intra-bank funds transfer. The increasing usage of credit/debit
cards and mobile banking is facilitating the ease of payments through different factors linked to
vendors and service providers. The trend is likely to strengthen with an increasing number of
transactions moving online.

4.3.    Energy Management and Move towards Green Technology
Most of the banks are conscious of the carbon footprint generated and are working towards energy
management and use of Green Technology . Some of the measures adopted are:
        Adoption of Server Virtualization technologies to save on floor space, power & cooling
        components,
        Use of Datacenter enhancements & Best practices for optimum usage of space, hot air/cool
        air pockets etc.,
        Adoption of Blade server technology to have higher computing power in smaller footprint.
        Upgradation of older power hungry Servers, Storage & Networking equipments.
        Dynamic power capping of Servers, Desktops by employing newer power saving technologies
        like processor stepping
        Solar powered ATMs
        Use of windmill energy
Energy management and adoption of green technology will become increasingly important in the
future and banks will have to streamline efforts towards accurately monitoring, measuring and
optimizing the energy consumption.

4.4.    Increasing importance of CRM techniques and Knowledge management
Customers have grown to expect comprehensive financial services from a single point of contact.
They are attracted by many new products and services that non-banking institutions have been
offering. The challenge for banks is to package these products and services and deliver them through
convenient, user-friendly channels. Only by integrating people, processes, and technology across
business lines will banks be able to forge a portfolio of virtual banking services based on the
proclivities of specific customer market segments.
Consumer behavior is an important factor that will change the functioning and business plans of
banks in the next decade. The banking sector will increasingly move towards a CRM banking model
where the banks will have to develop and service products suited/ required at different phases of a

               Institute for Development & Research
               in Banking Technology
Technology in Banking Insight & Foresight                                                           58

consumers life. Banks have already started moving towards catching the customers young by
providing school and college going students with bank accounts. As the youngster grows banks will
have to track and predict the financial needs using sophisticated analytical models and deliver
focused products and services.

It has always been difficult for large institutions to compile information on a single customer from
multiple points of contact. Customers who choose services and products from multiple business
areas typically are treated as separate relationships within each area. Because a customer- centric
infrastructure does not exist at most banks, customer service representatives do not have the
infrastructure support or the incentive to pull the information together. Without clearly
understanding the strategic advantages of using a customer data warehouse, bank customer service
representatives will not change their behavior, and any competitive advantage will be short-lived.
The bank will gain minimal value from the significant investment required to develop the requisite
technologies.

Knowledge Management treats the behavior of people as an equal and essential component of
effective information-sharing. Knowledge management also enables knowledge from similar
previous situations to inform current decisions. Both managers and service teams must play a role in
building a knowledge culture. Managers must codify relevant experiences, packaging them to
maximize their relevance and reusing them in new situations that create value. Once the knowledge
has been codified, it needs to be shared with appropriate individuals.

An integrated approach to knowledge management enables the bank to group its products to serve
specific market segments, such as lawyers, young professionals, retirees. The product groupings
would be based on customer feedback as to which products are in demand and on the bank s
assessment of each product s profitability. Once the bank identifies the product groupings, it can
provide high-quality service, with high-quality support from front and back offices, cross-functional
data bases, and customer service personnel.

For banks, information technology plays an important role in informed decision-making by creating a
means to collect and codify experiences and solutions from similar decisions in such areas as financial
management, customer service, or relationship development. The enabling technologies include
client/server technology, distributed computing, networking, and data warehousing. Knowledge of
what customers need most and are willing to pay a premium to get, should be frequently updated
and shared across the bank. Technology allows the bank to accomplish this enormously complex
task. Knowledge means more than just having information; it happens when information is put in
proper context and shared. For customers, valuable knowledge might be reflected in the
performance of their financial portfolio or in the ease and success of making transactions. The data
warehouses and graphical interfaces that support the customer s portfolio provide real-time access
to all customer accounts and present them in an integrated, seamless interface. For the bank,
technology creates a tool for gathering knowledge about customers financial behaviors, purchasing
proclivities, portfolio performance, and market and competitive alternatives.




               Institute for Development & Research
               in Banking Technology
Technology in Banking Insight & Foresight                                                             59

Profitability analysis is crucial to the bank s customer relationships, and it helps identify alternatives
for delivering value to customers. At present, customer profitability is being redefined as customer
relationship profitability. Customer relationship profitability includes not only a single customer
account but the full relationship, which might extend to personal checking, a business account, an
investment account, and more. For branch services to be mostly focused on marketing and cross-
selling, customer-centric knowledge will need to be leveraged in a well-teamed, highly automated
branch platform.

4.5.    Stronger Role of IT as Business Transformer/ Performer
The bank infrastructure is not immutable. New technologies surface every day, and new media (like
Internet did) will force management to reconsider infrastructural objectives. Defining fundamental
infrastructure goals will enable the bank to stay focused and adapt without being distracted by
technologies that do not contribute to customer value.

The IT function can play a central part in helping organizations adapt to and thrive in this new status
quo. By aligning their teams with the needs of the business, chief information officers (CIOs) can
provide strong strategic and operational support.

IT also has to consider its most appropriate role. In some cases, particularly for larger, global
companies, senior management may expect IT to provide innovation and transformation, whereas in
certain smaller firms the emphasis could be upon a more basic service, to keep costs down and serve
daily operational needs efficiently. Typically, IT fits into one of four broad categories:-
Utility: Where its main purpose is to keep the business running
Protector: Where it is primarily concerned with managing the IT estate
Performer: Where it is expected to deliver tangible value to the business
Transformer: Where the function transcends day-to-day operational needs to help bring real change

To advance from a more basic utility/protector function to a transformer/performer IT should better
understand the needs of the leadership team, continuously work on delivering customer benefits and
help the organization gain a competitive edge.


                                                 ***




               Institute for Development & Research
               in Banking Technology

				
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