An industry that's tightly protected
by regulations has finally opened up. But this has introduced
many new challenges. Here's a look at how technology
can help overcome these challenges and address the new
set of issues associated with modern day banking. by
Anil Patrick R
The Banking sector in India
has experienced a rapid transformation. Just about a
decade back this sector was limited to the sarkari (read
nationalized) and co-operative banks. Then came the
multi-national banks, but
these were confined to serving an elite few.
One could regard
the past as the 'medieval ages' in the banking industry,
wherein every branch of the same bank acted as an independent
information silo, and multi-channel banking (ATMs, Net
banking, tele-banking, etc) was almost non-existent.
|“Banks are increasingly facing
sliding margins and fierce competition. It is imperative
to increase volumes and reduce operational costs”
- K. P. Padmakumar, Chairman, Federal Bank
The opening up
of the Indian banking sector to private players acted
as 'the tipping point' for this transformation. The
deregulatory efforts prompted many financial institutions
(like HDFC and ICICI) and non-financial institutions
enter the banking arena.
With the entry
of private players into retail banking and with multi-nationals
focusing on the individual consumer in a big way, the
banking system underwent a phenomenal change. Multi-channel
banking gained prominence. For the first time consumers
got the choice of conducting transactions either the
traditional way (through the bank branch), through ATMs,
the telephone or through the Net. Technology played
a key role in providing this multi-service platform.
The entry of private
players combined with new RBI guidelines forced nationalized
banks to redefine their core banking strategy. And technology
was central to
Today banks have
to look much beyond just providing a multi-channel service
platform for its customers. There are other pressing
issues that banks need to address in order to chalk-out
a roadmap for the future. Here are the top three concerns
in the mind of every bank's CEO.
Customer retention is one of the main priorities for
banks today. With the entry of new players and multiple
channels, customers have become more discerning and
less 'loyal' to banks. Given the various options, it
is now possible to open a new account within minutes.
Or for that matter shift accounts within a couple of
hours. This makes it imperative that banks provide best
levels of service to ensure customer satisfaction.
Cost pressures come into play when banks are not able
to afford the cost of a certain service or initiative
although they want to or need to have it in place. This
is primarily because the cost structure at the backend
is not efficient enough to offer that kind of service
to the marketplace.
As Gunit Chadha,
MD & CEO, IDBI Bank puts it, "In today's world of
narrowing margins, a serious look at costs is definitely
The entry of new players into the banking space is leading
to increased competition. A recent example would be
of Kotak Mahindra Finance Limited (KMFL)—a financial
services company focused on investment consulting, auto
finance, insurance, etc—morphing into Kotak Bank. Many
other such players are waiting on the sidelines.
it easier for any company with the right channel infrastructure
and money reserves to get into banking. This has been
one of the major reasons behind this kind of competition
from players who do not have a banking background. Kotak
Bank overcame the initial costs of setting up its own
ATM network by getting into a sharing agreement with
New entrants with
strategies such as these make the banking game tougher.
To cope with cost
pressures and increased competition as well as to retain
existing customers, banks have started venturing into
This is one of
the main reasons why banks are focused on retail banking
in a big way. The main advantage of getting into retail
banking is that the risks involved are lesser in this
segment. There are lower Non Performing Assets (NPAs)
in retail banking. This is one of the reasons why loans
such as those for housing, automotive, etc are being
touted by banks like never before. Credit cards and
debit cards is another focus area for banks.
With this banks
have redefined their business priorities. They are now
- Cost reduction
- Product differentiation
- Customer-centric services
Although the ways
in which banks implement these vary, the underlying
objectives remain the same.
Reduced costs basically
translate to higher profit margins. If banks can reduce
costs, it can go a long way in increasing profits.
The focus is on
increasing the profit margins by cutting costs where
it matters—on the operations side. Banks have woken
up to the fact that they need to get into shape fast
in order to handle competition.
"Banks have been
increasingly facing sliding margins and fierce competition.
It is imperative for them to increase the volumes and
reduce the cost of operations," says K.P. Padmakumar,
Chairman, Federal Bank.
The customer is
interested in how he/she can benefit from the bank and
its products. That's why it becomes necessary for a
bank to differentiate its products from the others.
Some of the ways in which differentiation can be introduced
are through specialization, new products, and increasing
basically means that the bank gets involved only in
selected areas. For example, the bank might be getting
involved only in housing finance. Or, it could be limiting
its services just for corporate banking clients. Another
way to specialize could be by handling just specific
sets of portfolios.
Banks can differentiate
themselves by adding new products to their range of
services. This will provide the bank with better yields
per contact. Increasing the added value of products
is another way of differentiation for banks. Operational
excellence is also a key factor in effective differentiation
from the competition.
Indian banks have
realized that it no longer pays to have a 'transaction-based'
operating model. This has led to the development of
a relationship oriented model of operations focusing
on customer-centric services.
While banks have
to ensure product superiority and operational excellence,
the biggest challenge today is to establish customer
intimacy without which the other two are meaningless.
"In the financial
world, product superiority does not last long as it
is relatively easy to copy products. So, the real strength
comes from operational excellence and understanding
the customer and developing rapport with him," says
In this context,
it is very important that banks identify and understand
customer needs. This will help banks in tailoring their
products according to customer needs. It also helps
in new business opportunities like cross-selling and
'upselling,' which takes cues from customer aspirations
and transaction patterns.
have to be managed in the best possible manner. This
will ensure that the customer comes back to the bank.
In addition to good customer retention rates, it will
also provide better income generation capability. This
is because a major chunk of income of most banks comes
from existing customers, rather than from new customers.
|“The cost of transactions
over channels like ATMs and the Internet are lower
than doing it through the branches” - Rangesh Nayar,
Country Manager-Financial Services Sector, IBM
IT is pivotal
IT is central to
banking. This is one of the major reasons why new private
and multi-national banks have been able to survive,
thrive, and adapt in an increasingly competitive space.
These banks were
able to leverage on low-cost channels such as ATMs and
Net banking to the optimum levels contributing to reduced
Banks have realized
that shifting customer access to lower cost channels
can help bring down operating costs.
are used not only to improve customer service but also
to divert traffic from
the branches. It is a fact that the cost of transactions
over these channels is lower than doing this through
the branches," says Rangesh Nayar, Country Manager-Financial
Services Sector, IBM.
But this does not
mean that branch banking is obsolete. Rather, banks
are reinventing their business models to offer new financial
services through its branches.
(See Box below:
'Is traditional branch banking dead?')
Banks are looking
at newer ways to make a customer's banking experience
more convenient, efficient, and effective. They are
using new technology tools and techniques to identify
customer needs and are offering tailor-made products
to match them.
and process automation using core banking applications
and IP-based networks improve efficiency and productivity
levels tremendously. Core banking applications help
a bank to shift from 'branch banking' to 'bank banking.'
This basically means that a customer will be treated
as a bank's customer than just the customer of a particular
branch which was the case earlier. Also, IP-based networks
lets a bank offer multiple services over the same network,
resulting in costs savings.
if implemented and integrated correctly, can help significantly
in improving customer satisfaction levels. Data warehousing
can help in providing better transaction experiences
for customers over different transaction channels. This
is made possible because data warehousing helps bring
all the transactions coming from different channels
under a common roof. Data mining helps banks analyze
and measure customer transaction patterns and behavior.
This can help a lot in improving service levels and
finding new business opportunities.
is another area where technology can play a major role.
"Using technology, banks are able to better assess risks
like interest risks, liquidity risks, FOREX risks, etc.
The other driver for using IT is that banks can reduce
costs and reduce the time to market," says Rangesh Nair,
Country Manager-Financial Services Sector, IBM.
Anil Patrick can be
reached at firstname.lastname@example.org
extent to which new regulatory policies and technology
has transformed the banking industry brings us
to one moot question: Is traditional branch banking
With the emergence
of various channels for (retail) banking, pundits
all over have been predicting the end of traditional
branch banking, at least in the metros and other
upwardly urban areas.
But despite the benefits
offered by other technologies in terms of lower
costs or better reach, it looks like branch banking
is very much here to stay.
The reason: Branch
banking itself is undergoing a transformation.
Traditionally, banks used their retail outlets
to provide services to the individual customer.
Now with ATMs, Net banking, and Tele-banking replacing
traditional service channels, banks are more focused
on enhancing customer value through branches.
They are using their existing network of branches
to advice on and sell new financial instruments
like consumer loans, mutual funds, etc.
They are also using
branches to inform and educate customers about
other, more efficient channels to conduct common
transactions like cash withdrawal or balance checks.
As Naresh Wadhwa,
Vice President-West, Cisco Systems (India) says,
"It is very interesting to observe that no
channel has replaced any of the others. Rather,
they are complementing each other. The customer
remains one, but over the years, there are multiple
channels being developed like ATMs, call centers,
online banking, mail/fax, WAP, etc. The interesting
trend is that customers are using all the available
channels instead of settling for just one."
Chadha, MD & CEO of IDBI Bank spoke to Network
Magazine about the business issues in banking
and how technology can be utilized to address
What are the main
issues besides increased competition or lowering
of costs that banks need to deal with?
These issues have always been there and all banks
have to cope with these. In today's world of narrowing
margins, a serious look at costs definitely is
an imperative. One obviously has to ensure product
superiority and operational excellence. However,
to my mind, the biggest challenge today is to
establish a customer intimacy without which the
other two are meaningless. In the financial world,
product superiority does not last for long as
it is relatively easy to copy products. So, the
real strength comes from operational excellence
and understanding the customer and developing
rapport with him.
What are the techniques
used to ensure that consumer satisfaction and
lower costs are achieved?
Notwithstanding what banks may feel about their
products, customers utilize these products only
for a few minutes. The key lies in making those
few minutes convenient, efficient and effective.
There are multiple ways to achieve these objectives.
For instance, we introduced welcome kits wherein,
a customer who comes in to open an account with
our bank walks out with a fully enabled account,
debit card, cheque book, Net Banking account,
and phone banking accountin a matter of
Another key area
that I can immediately think of is integration
of services. Why should a customer receive multiple
mailers from the bank when he can instead receive
integrated financial statements? Why should a
customer have multiple login IDs for different
These measures not
only lead to customer convenience, they also help
the banks save on cost. Identifying customer needs
and tailoring products to match these needs is
another area where a lot can be done. For example,
we recently launched a 110 percent Housing Loan
to address other needs of a customer when he goes
for a housing loan.
To what extent
are the CEO and CFO involved in the decision for
purchasing/upgrading a bank's infrastructure?
What's the process flow?
We have a well-established Discretion Policy wherein
for budgeted items executives have discretion
available to commit expenditure. However, for
key and large expenses, the respective business
head and CFO get involved in the decision process.
For larger expenditure
amounts the CEO also participates in the decision
process. Expenditure requests invariably originate
from the respective businesses.
What factors are
taken into account when planning IT infrastructure
budgets every year?
IT infrastructure budgets take a medium term (18
to 24 months) view of the requirements. While
cost optimization plays an important role, the
key considerations are on high-availability, scalability
and optimal level redundancy of the infrastructure.
The key lies in making this infrastructure transparent
to the end user.
What are the mistakes
that banks have made in the past in terms of over
investment in IT, underutilization of resources
and so on?
I do not think Indian Banks have at any stage
done over investment in technology. Expenditure
has been right or perhaps less than what has been
the need of the hour. However, expecting tangible
and time-bound returns is today's minimum expectation
from the investments in technology.
Mistakes can be that
there was a lot of emphasis on doing things in-house
and an improper alignment of technology with business
requirements. Another issue is that of proper
synchronization of tech innovations with businesses
processes and rollouts. Without this, however
good a product or service may be, sales do not
result. At the end of the day, anything that does
not result in sales is not meaningful.
What are the main
points to keep in mind when investing in IT?
The main points to be kept in mind while investing
in IT are:
- A well defined
Return on Technology investment
- A visible addition
to customer value
- Improvement of
operational efficiencies leading to customer
convenience and cost savings