Many Indian banks are adopting the information technology not merely as a frill, but as a dire need. It is helping the banks in many core and diversified functions. Technology is key business enabler in six critical areas of banks. These are augmentation profit pool, operation efficiency, customer management, product innovation, distribution and reach, and efficient payment and settlement system. For the success of any IT program, integration of IT and business strategy is crucial factor.
Banking basics have undergone radical shifts, thanks to the advent of modern technology, increasing pace of globalization and the need for stronger fundamentals to operate in the fiercely competitive environment. The digital divide among Indian banks that was quite discernible before the millennium has considerably narrowed down with many banks taking to technology not merely as
a frill, but as a dire necessity. Technology today catalyzes many core and diversified functions in banks, including issues like transaction automation and multiple delivery channels, product innovation, data warehousing and effective MIS, secured storage mechanisms and a real-time based payment and settlement system.
Seen in the present context, technology is a key business enabler in six critical areas of banking.
Augmenting Profit Pool; Operational Efficiency; Customer Management; Product Innovation; Distribution and Reach; Efficient Payment and Settlement.
Augmenting Profit Pool
Sustained profits and profitability have been major yardsticks
for assessing the true health of banks in a fiercely competitive and compelling business environment. Technology has proved, at least in case of new generation banks and major public sector banks to be a major profit driver. With progressive decline in interest rates, banks’ spreads have come under pressure, which per se, affects their profitability. However, technology had a favorable effect in terms of reducing the operating cost and improving the burden to a
considerable extent. Technology also enable commissioning of new products like Net banking, mobile banking and other forms of 24X7 banking like ATMs and Networked services across branches like anywhere banking, electronic funds transfer, customer relationship management, call centers across the banks. Hi-tech and hi-touch services, it goes without saying, have also enlarged the clientele base in banks and commanded considerable customer loyalty. Technology has created an enabling environment for banks to diversify into various fee-based activities like bancassurance and funds transfer arrangements.
Operational Efficiency
Operational efficiency, in terms of optimum utilization of resources, has been one of the most positive offshoots of technological application in banks. Thanks to greater technological application, banking system has seen a near consistent improvement in the intermediation efficiency and consequent decline in transaction cost. Yet, technology application has been by and large confined, especially in the state-owned banks, towards cost saving
and improved service standards through product innovation. While savings in cost and improvement in service quality could turn out to be short-term in nature, it is essential that technology is leveraged as a long-term and efficient cross-functional application. It is also time that the focus of technology shifts from product innovation to process innovation commonly referred to as Business Process Reengineering (BRP), for banks to gain long-term operational efficiency.
Customer Management
Technology also spells significant benefits on the realm of
customer research and management. In a predominantly buyers’ market and high propensity if customers to switch service providers, customer management need no longer be a front office function, but a bank-wide obsession. Many banks have duly realized the significance of such functions and introduced new models like the High Net Worth clients’ branch, imbued with state of the art technology, exquisite ambience and quickest possible processing of transactions. Customer management is a very sensitive issue entity hears only from 4% of its dissatisfied customer, while 96% of its
customers quietly go away of which 91% never come back. Technology, thus, already implemented the tech aided e-CRM application as strategic tool to retain as well as expand their customer base. The bottom line is that banking products are getting commodities and price wars are slowly leading to a zero-sum game. In such a scenario, technology backed customer orientation will hold the key to take service standards anywhere near to world-class.
Product Research
In the field of product research as well, technology plays a decisive role, in terms of swift product innovation, an active R&D set up effective pricing of products to protect banks’ margins and safeguard customers’ interests. Banking product life cycles are getting shorter day by day and more than delivery, product servicing defines competitive edge for banks. Marked to market product processes are equally important for sustained improvement in the value chain of services and command ‘top of the mind recall’ from the customers. Technology also aids product profitability research and review, which have not adequate attention in many of the banks.
Distribution Reach
The thumb rule for strategic management masters is that
structure must follow strategy in any business reorganization. Technology, thus, calls for attendant restructuring endeavors that will be in tune with the level of technology application. For instance, many banks need to put in a place a leaner structure and remove intermediate decision-making tiers. That is how one can see that many of the regional outfits of banks are slowly being dismantled while branch expansion is not being accorded the thrust it used to be given earlier. Rightsizing of human and physical overheads is a major strategy adopted by many banks wherein the role of the earlier brick and mortar banking is slowly getting dissipated. In turn, devices like Internet and mobile banking. Technology, thus, facilitates downsizing of overheads cost without compromising much on clientele reach. Public sector in the rural and semi-urban areas. Many of these branches are not performing to their potential mainly because of their typical business mix, cost diseconomies and lack of technology-based services offered in these branches. Technology can facilitate the branch rationalization exercise such as setting up mobile branches and satellite branches, especially in the
rural areas, and bring many of those into the “Performing” category without affecting the extent of client reach.
Efficient Payment and Settlement
Innovation in technology and worldwide revolution in information and communication technology have emerged as dynamic sources of productivity growth. This is true about banking as well as its relationship with technology has become symbiotic fundamentally. Payment system is probably the most important mechanism in the banking sector where technology’s interactive dynamics is getting manifested in an increasing measure each day.
Banking system has adopted a holistic approach for designing a modern, robust, efficient and integrated payment system. The approach to the modernization of the payment and settlement system has been basically three pronged – consolidation, development and integration. Consolidation of the payment system has revolved round strengthening computerized cheque clearing and expanding the reach of electronic clearing services through state-of-the-art technology. Critical elements under the developmental strategy related to the opening of new clearing houses, interconnectivity of
clearing houses through INFINET and optimizing the development of resources the Negotiated Dealing System, Structured Financial Messaging System (SFMS) and the recently introduced Real-Time Gross Settlement (RTGS) system. Integration is the next stage that the banking system is currently going through which is premised on a high degree of standardization within a bank and seamless interfaces across banks, leading to Straight Through Processing (STP) of transaction on a regular basis. Further, cheque truncation system will also pave way to expedite settlement of payments process.
However, so far as integration is concerned, Indian banks still have a fair distance to traverse. In order to efficiency leverage an integrated payment and settlement systems, banks, especially those in the public sector, need to address certain core issues expeditiously. These include the following:
• Toning up of infrastructure in terms of standardization and build up security features like firewalls, Intrusion Detecting System (IDS) and implementing a security policy.
• Popularization of electronic funds transfer mechanism.
• Institute collaborative arrangements, including outsourcing of IT expertise.
In addition to the above, banking sector is also confronted with a classic dilemma. It relates to differentiating between and mapping the role of business vis-à-vis the role of information technology, a feature typifying an enterprise wide technology initiative. This is where the significance of integrating business and IT plans comes to the fore.
Integration of IT and Business Strategy
Many banks, especially those in the public sector, are embarking on a comprehensive set of IT initiatives encompassing total branch automation, core banking solution, networking of ATMs, Internet and mobile banking, data warehousing and a comprehensive MIS backed decision support system. Contrary to popular perception, such initiatives are not merely because of competitive pressure from the foreign and new generation private banks. The avowed goal of these initiatives was to improve overall efficiency in terms of lower intermediation cost, swifter decision-
making process, grater customer convenience and effective internal control, including an objective risk management mechanism. It goes without saying that the fast pace of globalization and progressive move towards reaching global operational benchmarks also catalyzed the technology drive dividends to these banks although the need of the hour is to consolidate the gains so far and address the weak links.
One such weak link relates to lack of integration between the IT strategies which, it is felt, is applicable to many of our banks. Technology introduction can offer significant benefits only when they are in total alignment with business strategies. Especially, in public sector banks, a phased approach is desirable in view of the heterogeneous nature of their branch architecture and vast area specific differentials in their branch functioning. In the current context, business strategies may differ from bank to bank, yet a core set of business objectively will, for sure, be common to all the banks. Such commonalities call for at least an open technology plan, in board consonance with the business objectives, and the same can be fine-tuned on an ongoing basis to suit the business model.
Recently, a study was conducted by National Institute of Bank Management, at the behest of RBI, for suggesting a methodology to integrate IT and business plans in banks. The study has proposed an ‘Enterprise Maturity Model’, for attaining total convergence of technology and business strategies with focus on selected, generic business strategies. The model suggests solutions not merely for business and technology, but for issues related to human resources and customers who form an integral part of banks’ strategic road map.
The suggestions in the study promise to be useful benchmarks for banks in their complete switchover to the virtual mode. Application of the model can help banks to develop effective Executive Information System as effective decision support, integration of varied workflow processes, objective customer analysis and most importantly, devise simulative and real-time based tools to track business, profits and profitability. Effective and an objective technology application system will also enable a business process reengineering mechanism that will considerably enhance the real technological capabilities of banks.
Core Banking Solution
In the light of ongoing emphasis on business process
reengineering, one comes across many banks assiduously pursuing a centralized server-based system, better known as Core Banking Solution (CBS). CBS offers, among others, benefits like privilege of single window service to customer in order to facilitate a shift from “customer of the branch” to “customer of the bank” concept, online transfer of funds, longer business hours, lower transaction costs, slimmer staff structure at branches, effective monitoring of business, comprehensive MIS as a policy support and above al, improved visibility of the banks implementing CBS. A robust MIS also supports vital functions like ALM, risk management, product profitability and customer profitability analyses leading ultimately to efficient portfolio management in banks. CBS also leads to significant mileage in terms of staff and other overhead costs. Staff rendered surplus on account of CBs can also be put for marketing and recovery functions, which warrant dedicated staff in the present context.
One major issue in CBS relates to security aspects and a host of operational risks that banks are confronted with. Be it system
failure or planned hacking or any kind of human error, centralized system is perennially susceptible to failure which may prove to be endemic across the financial system and result in vital data erosion. Retrieval of the same may also cost dearly to the banks and their associates. Security aspects like implementing a robust security policy, firewalls, IDS are, therefore, indispensable for preventing any systematic problem. There are even cases where multi-point security has not been able to check the fraudulent practices. Thus, security aspects need to be examined threadbare before putting core banking in place.