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Issue of May 2003 
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Tech Update: Technology in Banking
The tech factor in banking

The core issues faced by banks today are on the fronts of customer's service expectations, cutting operational costs, and managing competition. Technology can help banks in meeting these objectives. by Anil Patrick R

IT is central to banking. It has moved from being just a business enabler to being a business driver. In a manner the banking and financial services sector—being the early adopters of any new technology—defines the roadmap for future technology adoption.

As it is clear for the previous story, banks are focused on three areas: meet customer's service expectations, cut costs, and manage competition. For this banks are exploring new financial products and service options that would help them grow without losing existing customers. And any new financial product or service that a bank offers will be intrinsically related to technology.

“The new generation banks showed the way and others had no option but to follow the tech infusion to retain and attract profitable customers” - K.N.C. Nair, Head (IT), Federal Bank.

Automation is key

Automation is the basic thing that banks need to have in place. It involves a combination of centralized networks, operations, and a core banking application. Automation enables banks to offer 24x7x365 service using lesser manpower.

But to be really competitive, banks need to think beyond just basic automation.

Says V Chandrasekhar, GM (Chief Technology Officer), Bank of Baroda, "IT has changed the way a bank reaches out to its customers. Gone are the days where IT was deployed for automating accounting/back office functions to remove drudgery of employees. It is now massively being deployed for customer interfacing/interaction."

A better way to understand the technologies that would define the future of banking would be to start in the past.


The Rangarajan Committee report in early 1980s was the first step towards computerization of banks. Banks started exploring the idea of 'Total Bank Automation (TBA)'. Although titled 'Total Bank Automation,' TBA was in most cases confined to branch automation.

It was only in the early 1990s that banks started thinking about tying-up disparate branches together to facilitate information sharing.

At the same time, private banks entered the banking arena with radically different strategies. Given the huge IT budgets at their disposal and with almost no legacy IT equipment to worry about; private banks hastened the adoption of technology. The philosophy for private banks was very clear: to provide a whole new range of financial products and services at minimal costs. And technology made this possible.

Says K.N.C. Nair, Head (IT), Federal Bank,"The new generation banks showed the way and others had no option but to follow the tech infusion to retain and attract profitable customers."

The improved connectivity and falling costs offered by leased lines and VSATs provided a booster to inter-branch automation.

Confirms Naresh Wadhwa, Vice President-West, Cisco Systems (India), "With the improved services and lowered costs of service providers such as DoT and VSNL, it became more feasible for banks to network their branches. This gave banks an impetus to network all the branches and set up centralized databases. With these developments it became possible for operations such as MIS to be truly automated and centralized."

With centralized infrastructure and numerous connectivity options, banks started exploring multiple delivery channels like ATM, Net-banking, mobile banking, and Tele-banking thus driving down cost per transaction.

“Banks are increasingly adopting core-banking solutions for retaining customers and lowering service costs to the customer” - Joseph John, Head, Banking Products Division, i-flex solutions

The need for centralized infrastructure

In the early days of banking technology, the network/backend infrastructure used to be decentralized. This meant that each branch had its own server(s), banking applications, database(s), and other such assorted hardware/software.

Decentralized networks had their own set of problems in terms of the cost and management fronts. The decentralized model involves huge capital expenditure and resources (trained manpower, hardware, etc). In the decentralized model, there is no coordination or one central control point. "We had problems with updating applications, troubleshooting, etc before we opted for centralization. Technology representatives had to be present at each branch to provide support," says P.K.Vohra, General Manager, ICICI Bank.

This was an acceptable scenario till multi-channel came into the picture. With these concepts came the need for a centralized database. The database had to be updated instantaneously irrespective of the branch or channel the customer used. The networks had to be run and managed with lesser costs.

Although data centers were being used by some of the banking majors, they were never considered as being capable of being a central operations hub. Things changed when banks realized the cost benefits of swapping the decentralized model to a centralized datacenter architecture.

"When one or two private sector banks showed that it can be done efficiently, other banks began to show an interest—they also began consolidating their databases into a single large database," says V.K. Ramani, President (IT), UTI Bank.

Says P.K. Vohra, "Centralization using a data centre has helped a lot in improving and simplifying the network from the operations, user, and administration perspectives. From a cost perspective, centralization has been very effective."

It is not just the datacenter which contributed to centralization. The network has also evolved into a unified IP network. Says Naresh Wadhwa, Vice President-West, Cisco Systems (India), "Older day banking networks used to be a potpourri of several older protocols. There used to be one network for data traffic, another for telephony, and so on. Today, irrespective of whether its data, voice or videoconferencing, ATMs or mobile banking, just a single IP based network is used."

Core matters

After the turn of consolidated databases and networks come core banking applications. Core banking applications help provide complete front and backend automation of banks.

“In banking, being the first to market alone is not enough since products can be copied very fast. It is the customer service levels which matter” - Neeraj Bhai, CTO, IDBI Bank.

These applications also help banks achieve centralized processing and provide 24-hour customer service. "Core banking applications provide anywhere, anytime 24 by 7 non-stop services, which is not possible with traditional localized branch automation systems that are available only between 10 am to 2 pm," says V. Chandrasekhar.

Core banking applications help integrate the enterprise to existing in-house applications to offer a single customer view. These applications provide automation across multiple delivery channels.

Adds Joseph John, Head, Banking Products Division, i-flex solutions: "Banks are increasingly adopting core-banking solutions for retaining customers and lowering service costs to the customer."

Banks are reinventing themselves as marketing agencies by selling products like life insurance, RBI bonds, credit cards, etc. Core banking applications are able to support this.

Risk management is another area where core banking applications can help. These systems take care of the risk monitoring and reporting requirements. Loyalty programs can also be monitored and managed using a core banking application.

A happy customer

Managing customers is one of the main issues that banks face in today's hypercompetitive environment. If the service levels are not up to customer expectations, in all likelihood the customer might take his business elsewhere. This is where Customer Relationship Management (CRM) practices (most important) and software (on the technology side) play an important role.

Before banks go for a CRM solution, they need to ask themselves one question: How well do they know their customer?

For that matter how many customers have moved in the past? Or how existing customers use various services that the bank provides.

"In banking, being the first to market alone is not enough since products can be copied very fast. It is the customer service levels which matter," says Neeraj Bhai, CTO, IDBI Bank.

This is where CRM techniques and tools come into place. While a foremost part of CRM strategy is all about treating your customer right, technology does make a major difference. "CRM is a tool that allows you to emote and relate with your customers. Increasingly, all banks will require it as they get centralized," says P. K. Vohra.

CRM Tools

CRM tools can be broadly classified into two categories: Operational and Analytical.

Operational CRM provides the software support for businesses that require customer contact. These tools are largely workflow based to provide information to employees and document customer interactions. This includes collaborative CRM type of tools used to provide enterprise/customer interaction across all contact channels such as face-to-face, telephonic, electronic, and wireless. Operational CRM types are the major CRM tools being used nowadays for customer support in India. For example, say a premium customer dials your call center from his home. Operational CRM can alert the call center executive of his account status and other details by his home telephone. This will help the employee in extending him the kind of service extended to a premium customer.

Analytical CRM helps you make sense of the information. It helps you target customers and utilize their potential to the maximum. For example, say an account holder withdraws Rs 10,000 every month from his account and deposits it in another bank as EMI for a loan. Analytical CRM tools can help you track this activity. Techniques such as data warehousing and data mining are prominent tools used for this. Your bank could offer a loan to the customer at a lower rate than what the other bank offers. This will keep the customer happy since he knows that you are giving him better service. This translates to gains for your bank as well.

“If you have CRM backed with your data warehouse solution, it not only streamlines the channels, but also tells you which customer to focus on” - V. K. Ramani, President (IT), UTI Bank.

Banks tend to forget one important aspect about CRM; it is more than just a technology implementation, it has to be a clearly defined process with appropriate customer service levels. This is exactly the reason why CRM implementations meet with limited success.

Adds K. N. C. Nair: "e-transformation should not be at the expense of the personal touch in service. This will differentiate a bank from its competitors when the technology is available to all sooner or later."

Mining for intelligence

Another important issue banks face is in proper analysis of financial data to identify business potential. This helps a bank identify cross- sell and up-sell potentials. Technologies such as data warehousing/mining come into play here.

Says Ramani, "If you have an operational CRM, it streamlines your delivery channels. If you have CRM backed with your data warehouse solution, it not only streamlines the channels, but also tells you where to move. It tells you which customer to focus on."

A data warehouse can help the bank get a single view of its data across disparate systems. This comes in handy since most banks have data spread over several disparate, sometimes legacy systems. If the data is spread across different systems, a transaction done on one system will not be reflected in the other. This is not a very desirable situation when it comes to multi-channel banking.

Data warehousing solves these by integrating all the data into a common warehouse (usually an RDBMS). The multiple data coming in from different systems is converted into a common format using the ETL (Extraction, Transformation, Loading) process. This provides a single repository from which you can view or use information when required.

So you have the information in place with the warehouse but how do you make sense out of it? This is where data mining steps in. Data mining can help you recognize patterns in the data you have. For example, how many of your customers have a two wheeler and earn more than Rs 15,000 a month? The answer to this question will give you a list of prospective customers to whom you can offer a car loan. Just give the query you have to the data mining tool and you will have the answer in a jiffy. "Data mining and data warehousing can help banks identify the right customer for a particular promotion. They also help in cross sell and up sell of services to customers," says George Varghese, Head - Marketing, SAS India.

Anil Patrick can be reached at

Click on image for larger view

Pre Server Consolidation Era

Post Server Consolidation Era

Store it
Storage is an ever-increasing proposition. Consider this: The very nature of financial data involves large amount of information generated by the minute. Add to this the RBI regulations for banks and financial institutions to store over the past seven years of financial transactions and you have one big mess up your sleeve.

This brings us to two main issues about storage: storing all the information and managing it. Banks, especially the private and the MNCs, are increasingly going in for SANs.

Says Neeraj Bhai, "The moment you grow beyond a certain size you either go in for disparate systems or integrate them into SAN/NAS."

Waves of change
The first wave in banking technology began with the use of Advanced Ledger Posting Machines (ALPM) in the 1980s. The RBI advised all banks to go in for massive computerization at the branch level.

There were two options: automate the front office or back office. Many banks opted for automating the front office ALPM in the first phase. Banks like State Bank of India concentrated on the back office automation at the branch level. The Rangarajan committee report of 1985 ensured that banks had to get computerized.

With the second wave of development in late 1980s came Total Bank Automation (TBA). This automated both the front-end and back-end operations within the same branch. TBA comprised of total automation of a particular branch with its own database.

In the third wave, the new private sector banks entered the field. These banks opted for a different model of having a single centralized database instead of having multiple databases for all their branches. This was possible due to the availability of good network infrastructure. In the beginning of the 1990s, leased line costs were coming down. The DoT expanded its capacity and new technologies were being implemented.

Earlier, banks were not confident of running the whole operation through a single datacenter. However, when a couple of private sector banks showed that it can be done efficiently, other banks began to show an interest, and they also began consolidating their databases into a single database. Banks followed up on this move by choosing suitable application software that would support centralized operations.

The fourth wave started with the evolution of the ATM delivery channel. This was the first stage of empowerment of the customer for his own transactions.

The second stage was the Suvidha experiment in Bangalore. This showed the power of technology and how the reach can be increased phenomenally at a great pace. Seeing these, all the banks started revamping their retail delivery channels. Their core focus became the number of customers they can service at lower cost. The main channels for these were channels such as Internet Banking and mobile banking. After this came alliances for payment through various gateways.

The third important development happening now is the real-time gross settlement system of the RBI. Once this is in place, transactions between banks can be done through the settlement system, online, electronically. So the collections will become very fast.

Outsourced security
Given the very nature of financial transactions, information security plays a critical role in banking. Most banks have a clearly defined security policy with access rights determined by the role an employee plays in an organization. Banking is one sector where CIOs are focused on the core security processes and operations than just implementing security products.

In addition to investing in the usual security tools and solutions like anti-virus, firewalls, intrusion detection systems (IDS), and PKI, many banks are now outsourcing their security requirements. This way they can focus on their core business competencies than managing their backend security.

As C.N. Ram, Head-Information Technology, HDFC Bank says, "It is not enough to take care of security from just the hardware/software perspective one needs to have security policies in place. At HDFC Bank we have a mechanism in place where a third party is hired to manage our entire security. This third-party is constantly onsite looking at the logs, making the required changes as there are patches and upgrades being constantly released and it is imperative to incorporate all of these."

Re-engineered success
For every successful IT implementation, you will hear about four that failed to make the grade. One of the biggest problems behind this is that most organizations expect software to adapt to their needs without any compromise from their part. The technical issues can be sorted out in every implementation, but this lack of process re-engineering cannot be.

While it is necessary that core processes remain the same as far as possible, it's not always the case. Many a time an existing process might have to be modified to get the best out of the implementation. This is where a change of mindset needs to come in. The goal is to have improved benefits at the end of the day. "The business process changes required for implementing core banking or centralization needs support and buy-in at all level. Hence Change Management is a major issue with the banks during IT implementation,' says Santanu Ghose, Group Manager (Non Stop Systems), HP India.

On the technical side, most of the problems occur on the interfacing part. Different platforms using different standards/protocols require diverse interfacing needs. Since many core banking applications make use of modules for operation, special care has to be taken on this front. Most of the banks have legacy applications running side by side. If the interfacing is not done properly and efficiently, the implementation is bound to be a failure.

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