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Issue of May 2003 
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Tech Update: Technology in Banking
The new face of Banking

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 tipping point

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
this change.

Pressing issues

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: 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: 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 an imperative."

Increased competition: 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.

Technology makes 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 UTI bank.

New entrants with strategies such as these make the banking game tougher.

Redefining objectives

To cope with cost pressures and increased competition as well as to retain existing customers, banks have started venturing into newer territories.

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 focused on:

  • Cost reduction
  • Product differentiation
  • Customer-centric services

Although the ways in which banks implement these vary, the underlying objectives remain the same.

Cost reductions

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 the
added value.

Specialization 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.

Customer-centric model

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 Gunit Chadha.

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.

Customer relationships 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 operating costs.

Banks have realized that shifting customer access to lower cost channels can help bring down operating costs.

"These channels 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?')

Evolving IT

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.

Centralized operations 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.

CRM solutions, 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.

Risk Assessment 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

Is traditional branch banking dead?

The extent to which new regulatory policies and technology has transformed the banking industry brings us to one moot question: Is traditional branch banking dead?

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."

‘The biggest challenge is to establish customer intimacy’

Gunit Chadha, MD & CEO of IDBI Bank spoke to Network Magazine about the business issues in banking and how technology can be utilized to address these.

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 account—in a matter of minutes.

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 electronic channels?

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
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