Technology in Banking

Banks have benefited Immensely due to scaling up of business and growth in volumes, the Journey has been beneficial for the customers too, with Improvement In customer service quality. While for larger banks the IT capital expense to total IT expense ratio has stabilized to approximately 1 smaller banks are increasing their capital expenditure to acquire IT infrastructure, with approximately 54% capital expenditure. Most banks have also put up a robust mechanism for governance and management of IT assets with board level committees and alignment of functional and technical teams for IT implementation.In the future banks will have to focus on two major aspects - delivering customer satisfaction and driving business optimization.

Banks today have built up significant database about the customer - demographics, transactions and behavioral data. However the key is to derive information from this data to deliver business Impact. Information and technology will have to be separated with substantial focus on Information. Banks will need to have a significant level of Integration of data warehouses and analytical capability both In terms of people and tools to face this challenge.

In addition banks will also need to have a robust customer life cycle management program to effectively utilize the information. The second significant challenge is driving business optimization which broadly deals with highest level of revenues or returns given a particular level of resources. Specifically in terms of IT resources it would mean, given the level of IT resources have the revenues or returns achieved the maximum achievable levels.Banks will need to define metrics for performance of IT assets starting with productivity measures [ like Return on Investment (Roll) and marginal Ron to efficiency measures (like cycle time, response time, utilization) and performance effectiveness measures like coverage, outcome, quality, satisfaction etc). In cleaving these objectives banks will have to Integrate people, processes and technology to deliver superior customer service.

Banks will have to focus on aqualung and retaining adequately skilled manpower. Banks should also pay enough attention to reengineering their business enterprises.As in the previous years, this report captures the developments in banking technology and the visible business impact of the initiatives. In future we expect banks to take substantial steps towards customer service and business optimization.

B. Sympathy Director DIRT Spavin Parker Partner and National Leader Global Financial Services Ernst & Young Pot. Ltd Institute for Development & Research in Banking Technology Contents Executive Summary..

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.... Awards for Excellence in Banking Technology 2012-13.

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.... 3 DIRT 52. IT for 63.

Mobile 10 4.Electronic Financial Inclusion Payments....

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. Management and Business Intelligence Optimization Ahead ? 15 5. Customer 196. IT for Business . 23 7. Looking 24 13 Executive Summary The IT capital expenditure of the surveyed banks shows an improvement of 23% in IFFY after a decline of 1% in IFFY.

Initiatives taken by banks have been in multiple areas both to augment business services as well as the control functions and include upgrading of core banking system, data center migration, incident management command center, upgrade of ATM switches and fertilization of servers among others.These initiatives will have a significant impact on the business of banking in the coming years. Banks have made significant progress on the financial inclusion front with a growth of 41% in no-frill accounts increasing from approximately 69 lion in IFFY to 98 million in IFFY with outstanding balance increasing from RSI. 4,459 core to RSI. 7,317 core respectively. While the ratio of active no frill accounts (accounts with at least 4 transactions in last financial year) was only 1 5%, the number of no-frill accounts provided with overdraft increased by 441% from 1.

Laces in IFFY to 8 Laces in IFFY with the outstanding balance increasing by 225% from RSI. 2,256 shows a significant growth of 97% increasing to 1. 47 Laces in IFFY, while She linked shows a marginal growth of 9% increasing to 23 Laces in IFFY. The scale of progress augurs well for the financial inclusion agenda. Mobile banking is starting to gain traction with approximately 55 million customers registered and average daily value of mobile fund transfers increasing from RSI. 3.

7 scores in IFFY to RSI. 25. 8 scores in FYI 3, a Jump of 593%. Comfort, convenience and anytime transfer facility makes mobile banking a huge growth opportunity. Initiatives taken by banks on security front with two factor authentication and one time authentication have also helped.

Customers accessing mobile banking through applications or APS have grown by 50% over the past year, though they are only 7% of the total customer base. Electronic fund transfers have also grown at a steady pace increasing by 29% over the past year to RSI. 102,137 core in IFFY.Furthermore average daily value of debit, credit and internet banking fund transfers were RSI.

4,537 core, RSI. 52 core and RSI. 12,090 core in IFFY. However a majority of debit card transactions related to cash withdrawal at Tam's rather than merchant payments. Given the time-span of IT adoption most banks have put in place appropriate structures and policies for managing IT risk.

While managing IT risk is a Journey and always evolving with respect to changing environment, Indian banks have put in place an appropriate framework and review mechanism to manage IT risks.There is significant ground to be covered by banks in use of IT for customer management, business optimization and business innovation and the near future may see substantial development on the front. 14 DIRT Awards for Excellence in Banking Technology 2012-13 The process for the Ninth Edition of DIRT Awards for Excellence in Banking Technology was initiated in March 2013 with a Jury meeting to discuss and finalize he award categories. The Jury for this year was chaired by Mr.

. K. V. Kamala, Chairman, ICC Bank and comprised the following: Dry.

R. B. Barman, Former Executive Director, RIB Our Member) Dry.K. Renaissance, CEO, BIB Our Member) Proof.

G. Sparkman, IT Iambi Our Member) Dry. Suntans Paul, CEO, Totalitarians and Distinguished Fellow, DIRT The awards categories for the year were as follows: 1. 2.

3. 4. 5. 6. 7.

8. 9. Use of Technology for Financial Inclusion Use of Technology in Mobile Banking Electronic Payment Systems Customer Management & Business Intelligence Initiatives Use of IT or Business Optimization Managing IT Risk IT Innovation Best IT Team Best IT Three new categories were introduced this year - Use of IT for Business Optimization, IT Innovation and Best IT Team.Additionally to encourage the cooperative banks one award for Best IT enabled cooperative bank was also introduced. During evaluations the Jury felt that banks had not provided substantial nominations for Use of IT for Business Optimization category and hence decided to drop the category for this year.

Evaluation process A total of 34 banks including 23 large, 8 small and 3 cooperative banks participated in he awards process with 171 nominations across different categories. This is a significant increase from 138 nominations filed last year. Banks were classified as large and small based on the deposit size of RSI. 0,000 core.

15 1. Introduction Banks today have become synonymous with technology and have leveraged IT in all areas of governance, operations and control. Banks have put in place fairly robust 'IT Strategy to support the vision and business objectives. The larger banks (both private and public) have also put in strong organization structures with alignment between chemical and functional teams.

The total IT expenses of banks grew at 6% in IFFY, less than half of 13% witnessed in IFFY, for small banks the IT expenses grew by 39% as compared to 42% in IFFY.Figure 1 Total IT spend (RSI. Cry) 14,712 12,967 AZIZA 15,659 14,159 14890 389 FYI All Banks 554 IFFY Large Banks 770 IFFY small Banks Figure 2 Growth in Total IT spend IFFY All Banks small Banks 39% Large Banks IT infrastructure. A look at the ratio of cape to total IT spend shows that smaller banks are still in the process of IT adoption while larger banks are spending more in maintenance of the IT infrastructure. Based on a sample of 27 banks (19 large and 8 small) categorized as large and small based on deposit base above and below RSI.

0,OHO scores 16 Figure 3 Ratio of Cape to Total IT spend (IFFY) All Banks 0. 60 0. 40 0. 20 0.

20 0. 54 small Banks 0. 18 Large Banks 2. IT for Financial Inclusions Leveraging technology is helping build economies of scale and bringing down transaction costs.

In addition the governments' support in terms of electronic transfer of benefits is also adding to viability of the initiatives. The financial inclusion initiatives of banks have gathered sufficient traction with approximately 41% growth in no-frill accounts opened, 97% growth in BC and BC agents and 9% growth in She linked.There is also a substantial growth of 64% in no-frill balance outstanding. While a large part of the technology investments in Fl is being done by the BC service providers, banks have also invested substantially in expanding transaction handling capability of the IT infrastructure. Business growth With the business models more or less stabilized, banks have made tremendous progress in terms of no-frill accounts opened.

As on March 2013 approximately 97. 53 million no-frill accounts had been opened, an addition of approximately 30 million accounts for the year.Figure 4 Figure 5 Total No-frill Accounts (MN) 97. 53 96.

44 68. 99 68. 20 Growth in No-frill Accounts (IFFY) All Banks 42% 34% small Banks 37% Large Banks 1. 09 IFFY small Banks Large Banks 2 Data based on the nominations submitted by 19 large and 6 small banks for the category While the larger banks added the bulk, smaller banks contributed approximately 0.

3 million accounts. On average banks added 1. 15 million accounts each. The balance outstanding has also increased significantly, growing from RSI. 4,459 scores in FYI 12 to RSI. ,317 scores in IFFY, resulting in a growth rate of approximately 64%.

Figure 6 Growth in balance All Banks small Banks 35% 65% Large Banks 8,000 4,000 2,000 0 IFFY All Banks Large Banks 95 IFFY small Banks 128 4,459 4,364 Figure 7 Balance o/s in No-frill accounts (RSI. Cry) 7317 7,188 While the larger banks have grown substantially, smaller banks have been growing steadily with a better control on the quality of accounts as evidenced by the percentage of active accounts. Figure 8 Figure 9 Active no-frill accounts (MN) All Banks 20. 00 15. 06 15. 00 10.

00 5. 00 0. 3 Active no-frill accounts (%) All Banks small Banks Large Banks Small Banks Large 14. 53 Banks Business and operating model The enrollment of Bcc has grown significantly with approximately 1. 5 lace BC/Baas enrolled, while the linkage of She grew at a slower than these predominant models banks are also deploying other models like mobile vans, kiosks and ultra small branches.

18 Figure 10 Figure 11 PC's enrolled All Banks 150,000 147,675 100,000 50,000 small Banks 440 147,235 Large Banks Growth in Bcc All Banks 100% small Banks 98% Large Banks Figure 12 Figure 13Eggs linked JAZZ,oho 1 1 500,000 - All Banks 2310838 25,276 2,285,562 DEBT is expected to add to the viability of Fl initiatives by providing the banks with a good amount of float and while multiple challenges remain in terms of personalizing the scheme; these are expected to be smoothened out as the operations mature. The direct benefit transfer was launched on January 1, 2013 and currently covers schemes like National Child Labor Project, Student scholarship and LAP subsidy. 19 Banks across the spectrum, both public and private, have implemented the DEBT scheme for transfer of funds to the beneficiaries.The banks have integrated with UNPIN to provide the following services - 0 0 0 National Automated Clearing House (NACHO) Dharma Enabled Payment System (APES) Dharma Payment Bridge System (APES) Benefits under various government schemes are being credited to the beneficiaries' accounts basing on Dharma number through UNPIN payment gateway. The list of beneficiaries with Dharma numbers and respective amounts will be provided to the bank for disbursement of subsidies. Banks have developed in-house software to seed Dharma numbers and look-up the details of the beneficiary in the AID database.

Banks have been appointed as Authentication User Agencies (ALGA) and use the SAID infrastructure for bio-metric authentication. The initial kick-off of the LAP distribution has been fairly successful. The government has been able to undertake 2. 28 million transactions impacting 1. 25 million households across 18 districts. Reduction in leakage will ensure that the subsidy actually reaches the truly deserving classes of the Indian population.

The next step will be implementing the DEBT scheme for paying kerosene, fertilizer and food subsidies.Of these, while pilot programmed for Rosen are underway, the DEBT of food subsidies is likely to begin in the Union territories in IFFY, but the payment of the fertilizer subsidies will be the most difficult to implement. | 10 Despite this rise in m-banking transactions in India, banks are yet to fully exploit this technology even for their existing customers. The current penetration is low compared to the number of bank accounts and the vast mobile subscriber base of more than 900 million.Some of the reasons for which consumers are not adopting mobile banking include the lack of adoption of mobile as a channel for banking , imitations of services on mobile banking, non-replication of mobile banking services in varied languages in India etc.

Most mobile banking applications are designed for smart phones, which also limits the customer base, but with the introduction of USED-based applications, this may change in coming years. Mobile banking can be classified as follows: Figure 14 In an environment which has a paucity of advanced technology and mobile handset capabilities a one-size-fits-all solution does not work.Therefore, there is a need for banks to make investments on mobile banking applications like custom applications, bile browser, etc to offer mobile banking services to cater to various mobile / tablet platforms like ISO, Android etc which are available on high-end phones / tablet platforms with good processing capabilities while at the same time offer services like SIDES to the low-end segment having Java based phones with limited data processing capabilities.There have been various developments over the past year in the mobile banking space including new strategic partnership models (like banks and telecoms) and products / services (Inter Bank Mobile Payment System (IMPS), National Unified SIDES Platform (INNING), etc) emerging in the Indian markets. M - Banking has lowered some of the key barriers to financial inclusion in India by reducing start-up costs and service prices.Eke India Financial Services, as business correspondent provides bank accounts, deposit, withdrawal and remittance services, micro-insurance, and micro- finance facilities to its customers (nearly 80% of whom are migrants or the unbaked section of the population) through mobile banking.

3 Data based on the nominations submitted by 22 banks (1 5 large and 7 small) for the Ill Key developments and initiatives taken in mobile banking Nanking space to reduce the burden on Tams and other channels.Following are some initiatives taken: IMPS - An emerging, convenient remittance system An IMPS is a mobile based remittance system which is inter-bank in nature and is owned and operated by the National Payment Corporation of India (UNPIN). IMPS facilitate access to bank accounts and transfer of funds through mobile phones. The system, launched in November 2010, provides real time transfer of funds between the customers of different banks on a xx basis.In other words, funds can be transferred any time to the beneficiary who receives the funds instantaneously, and OTOH the sender and receiver get the confirmation of debit and credit respectively. IMPS enables mobile banking users a facility to make payment to merchants and enterprises, through various access channels such as Internet, mobile Internet, IVR, SMS, SIDES.

IMPS products includes IMPS fund transfer person to person (POP), IMPS Funds Transfer through Account Number / IFS, IMPS Merchant Payments.NUB National Unified SIDES Platform (INNING), launched by National Payments Corporation of India (UNPIN) and offered on a short code *99#, is a service which would take banking services to every common man in this country. The service was launched in November 2012. The service would allow every banking customer to access banking services with a single number across all banks - irrespective of the telecoms service provider, mobile handset make or region.A common platform for all banks instead of each bank having to develop a platform is a strategic move by UNPIN to help banks and let them focus on customers to enable this service while UNPIN manages the technology behind the platform One of the main features of the service is that it works on all GSM phones irrespective of handset make, cost, operating system or even the telecoms service provider.

Also, it does not require a GAPS connection and works on basic voice connectivity.