Banks and financial services are the biggest adopters and spenders on technology which has helped
them totally transform their business models. Banks have leveraged information technology (IT) in
multiple areas apart from core banking. There is also a marked difference in the approach to IT
which is no longer thought as replacement for human capital but as a critical enabler for business.
With the emergence and convergence of mobile technology with information technology, the
developments in the banking space has become much more exciting and dynamic, especially in
increasing the reach and last mile connectivity for banks. Most banking transactions today can be
executed through a mobile handset and the need to visit a bank branch has been drastically
reduced.
IT will continue to play an increasingly important role in banks of tomorrow. Information
management and data security will become critical. Some banks are already investing in social media
tools and strategies such as linking to customers' Facebook profiles and building online communities.
This will give banks access to customers' social profiles. This could be combined with customers'
transactions and behavior data will allow banks to personalize service and product offers. Security of
banks IT systems will become vital to prevent hacking attacks and information theft. Instances of
website cloning and identity theft are also on the rise and banks will have to be constantly a step
ahead on security issues. The roles and responsibilities of chief information officer (CIO) and chief
information security officer will become vital in the near future.
Significant initiatives are being taken by banks in areas like analytics for customer relationship
management, business intelligence, enterprise data warehouse, security and real-time systems to
manage business risks, consolidation. Banks are getting into virtualization and are quite curious
about cloud computing. Automated data flow is another area where there is considerable progress.
Banks have initiated the process of adopting IT Governance framework. Independent directors are
showing keen interest in facilitating IT governance process by putting in place appropriate strategies
and organizational structures.
We expect significant developments in these areas in the immediate future. This report captures the
developments in banking technology and their impact in various functional areas.
B. Sambamurthy
Director
Institute for Development & Research
in Banking Technology
Ashvin Parekh
Partner and National Leader
Global Financial Services
Ernst & Young Pvt. Ltd
Contents
Executive Summary................................................................................................................................. 3
1.
2.
Introduction .................................................................................................................................... 4
3.
4.
5.
Customer Relationship Management (CRM) & Business Intelligence (BI) initiatives ...................12
6.
7.
8.
9.
Conclusion.....................................................................................................................................18
Executive Summary
Most banks have evolved rapidly in technology adoption with infrastructure, governance, policies,
procedures and security in place. Public sector banks have progressed tremendously to narrow the
gap with new private sector banks, while old private sector banks and smaller banks still have some
way to go. A majority of banks having completed the implementation of core banking systems (CBS)
are exploring advanced solutions to business problems. Initiatives like enterprise data warehouse
and business intelligence solutions are being implemented for real-time data analysis and complete
view of customer relationships. Significant initiatives are being taken by banks on the financial
inclusion front. The total number of no-frill accounts increased from 50.8 million in FY11 to 69.3
million in FY12, importantly the number of no-frill accounts with overdraft showed a huge increase
from 99,000 in FY11 to 684,000 in FY12. Total outstanding balance in no-frill accounts increased
from INR 41 billion to INR 57 billion (approximately 40%). KCC/GCC cards increased from 9.6 million
in FY11 to 11.4 million in FY12. The number of BCs enrolled and SHGs linked also showed a huge
growth from 21,000 to 39,000 and 1.2 million to 1.6 million respectively. Inclusion efforts have
gained sufficient momentum with stabilization of technology and business models. Smaller banks
are also making increased efforts towards inclusion. With a sizable IT infrastructure deployed the
scale-up in the next few years is going to be rapid and we may see significant progress.
With the countrys mobile penetration at roughly 85%, mobile banking has been a thrust area for
banks with most banks already implementing a comprehensive service suite. However, the mobile
channel is mostly being used for information provision rather than banking transactions. The
number and amount of fund transfers will grow in the coming years as services (mobile to mobile
transfers and interbank mobile payment service IMPS) gains acceptance. Electronic payments have
been steadily growing with increase in NEFT/RTGS volumes but the usage of internet banking needs
to grow (only 2 out 25 banks declared average daily fund transfer of more than INR 10 billion). Debit
cards have become more popular with average daily value of transactions being almost 187 times
more for debit than credit cards.
Customer relationship management (CRM) and business intelligence (BI) initiatives of the banks still
have some way to go. With the exception of a handful of banks, others are still in the process of
integrating data warehouses to get a full view of all customer relationships. BI and analytics teams
are being setup and strengthened but real-time availability and full view of customer relationships is
still a couple of years away. Cross-selling and lead generation activities are offline and based on
inputs from customer facing personnel.
The IT implementation capabilities of banks has improved tremendously with most banks having
aligned their corporate structure for a better and improved interactions of the business and IT teams
for implementation. Banks also need to now measure and track metrics like return on investment
(ROI) and total cost of operations (TCO) as the balance of IT expenses tilts more towards operational
expenses than capital expenses. The scale of IT infrastructure set-up also requires attention and
proper policies and procedures for managing infrastructure as well as IT risks which have become
fairly standardized across banks.
The jury also decided that IT innovation be one of the parameter for judging the nominations, but
given the past experience where the nominations were not very strong, the jury felt that in each of
the categories banks may be asked to reply on any innovative initiative and if found substantial they
may be requested for further details. However once the evaluation was completed the jury decided
that the category may be dropped. The jury also noted that multiple initiatives have been taken by
banks on innovation but the results are not yet visible and strong response in the category is
expected from the banks in next years awards.
Evaluation Process
Strong and heartening response was received from the banks in all awards categories, indicating an
overall increase in level of confidence and maturity in use of technology in banking. A total of 30
banks, with 138 nominations, participated in the awards process, comprising 21 large and 9 small
banks. Banks were segregated into large and small category based on deposit size of INR 50,000
crores.
2. Introduction
Financial services especially banks have been early adopters of technology and have leveraged it in
multiple areas like service delivery (alternate channels), operational effectiveness (workflow and
data management), cost reduction, productivity enhancement and governance. Information and
communication technology (ICT) has helped banks increase their scope and scale to overcome
geographic and time boundaries. Indian banks today have global operations and round the clock
service delivery. The Banking sector has and continues to implement new information technology
systems to assist and complement growth. Banks have been significantly upgrading their technology
infrastructure to bring down costs of resources, facilitate cross selling and enhance customer service
and operational efficiency.
A look at the IT expenses1 (both capital and operational) of banks shows that the average spends has
increased from Rs. 269 crores in 2009-10 to Rs. 283 crores in 2010-11 and Rs. 308 crores in 2011-12.
Figure 1
422
391
373
308
283
269
54
41
35
2009-10
2010-11
All Banks
2011-12
Large Banks
Small Banks
The IT expenses grew by approximately 9% in FY12 as compared to 5% in FY11. Smaller banks are
increasingly embarking on transformation and undertaking technology adoption to retain, grow and
service their clientele. Their IT expenses grew by 16% in FY11 and 32% in FY12.
Figure 2
Figure 3
All Banks
20%
15%
10%
5%
5%
0%
5%
Small Banks
16%
Large Banks
2010-11
Small Banks
32%
Large Banks
2011-12
Based on a sample of 26 banks (18 large and 8 small) categorized as large and small based on deposit base
above and below Rs.50,000 crores.
Institute for Development & Research
in Banking Technology
vision provides direction to IT initiatives, and aligns IT objectives with the banks mission and vision.
IT strategies of bank have been designed to provide necessary support to improve Business, i.e. align
IT with Business requirement and reduce costs. The following aspects inter alia form critical
components of IT vision and strategy for effective and efficient use of technology.
Banks have also put in strong mechanisms to align IT and business objectives. IT strategy committee,
IT steering committee and project level committee have been put in place with representation from
business owners to facilitate and ensure that IT initiatives are driven by business goals.
Data is based on the nomination submitted by 18 large and 4 small banks for the category
Institute for Development & Research
in Banking Technology
Figure 4
Figure 5
No-frill accounts (million)
3.85
3.15
2.34
1.97
36%
28%
36%
49%
27%
0.01 0.01
All Banks
Large Banks
Small Banks
Average Median
All Banks
Large Banks
Average
Small Banks
The outstanding balances in no-frill accounts show a sizable growth with an average of Rs. 2,590
million and median of Rs.895 million. The large banks expectedly are driving the FI agenda and the
smaller banks have also started to make their presence felt.
Figure 6
Figure 7
79%
11
All Banks
Large Banks
Small Banks
Average Median
35%
All Banks
43% 35%
Large Banks
Average
100%
Small Banks
The average active (accounts with at least 4 transactions in the last financial year) have also shown
some improvement. However it is an area of concern as only 7 out of 22 banks have active accounts
ratio of more than 10%, the remaining 15 banks hover around 1-1.5%.
Figure 8
Figure 9
Active no-frill accounts (000s)
All Banks
300
226
200
All Banks
20%
15%
10%
100
-
Small Banks
0%
285
Large Banks
Average
Small Banks
20%
15%
Large Banks
Average
banks and the primary mode of distribution and reaching the target customers is through business
correspondents (BCs) and self help group (SHG) linkage.
The enrollment of BCs and linkage of SHGs has improved drastically with banks having an average of
1,788 BCs and 74,000 SHGs linked. Growth over the previous year for BCs has been approximately
86% driven by large banks. A total of 39,346 BCs and 1.62 million SHGs have been linked by the 22
nominating banks of which 18,160 BCs and 349,389 SHGs have been added for the year.
Figure 10
Figure 11
Growth in BCs
Business Correspondents
All Banks
3,000
1,788
2,000
1,000
2,175
48
Small Banks
Large Banks
Figure 12
All Banks
100%
86%
50%
0%
Small
Banks
86%
Large
Banks
65%
Figure 13
SHGs (000s)
All Banks
100
74
80
60
40
20
3
Small Banks
Growth in SHGs
All Banks
30%
28%
20%
10%
0%
89
Large Banks
28%
Large Banks
The accounts of financial inclusion are hosted in a separate CBS which offers all the functionalities
required for conducting basic banking transactions and does not clog the existing bank CBS with low
value high volume transactions.
The FIG purpose is to integrate all diverse front end technology platforms with Banks CBS and thus
promote BC interoperability and integrated middleware, referred to as the Financial Inclusion
Gateway. This switch would manage the diverse authentication modes (till date the authentication
responsibility mostly resided with the BCs) and interface seamlessly with the external environment
like NPCI/ UIDAI. It would act as a repository of Biometric Fingerprints and authentication, maintain
DCMS for Rupay Cards, offer user friendly interfaces for customer enrolment and kiosk applications
facilitate reconciliation and MIS etc.
In the outsourced model the necessary IT infrastructure is provided by the service provider which
interface/ establishment of connectivity with CBS of bank, supply of point of sale (POS) devices/
hand held terminals, webcams, biometric reader to the field BC for capturing of enrolment data,
photo and finger prints of the customers at villages.
Financial inclusion initiatives have started to generate momentum with increasing number of
customers being acquired and banks making increasing efforts to deliver basic banking services on a
large scale and low cost. The technology enabled service delivery model coupled with viability
measures through Aadhar and other electronic benefit transfer (EBT) mechanisms will lead to
sustained momentum of FI initiatives. Some banks have also begun to offer micro-insurance
products through BCs and SHGs leading to improved viability for the intermediaries as well as the
banks themselves.
Figure 15
Avg daily number of alerts pushed by banks
(000s)
All Banks
1,500
1,000
879
500
Small Banks
1,117
166
Large Banks
All Banks
150.0
110.5
100.0
50.0
147.0
1.1
Small Banks
Large Banks
Data based on nomination submitted by 18 large and 7 small banks for the category
Institute for Development & Research
in Banking Technology
The total customer base enrolled for mobile banking stood at 81.7 million; however most of them
were registered only for alert services pushed by the banks. Only 23% of the total or 18.7 million of
them were registered for mobile funds transfers. Additionally only 9 large banks and 1 small bank
have mobile customer base of more than 1 million.
Figure 16
Figure 17
4.33
All Banks
150%
3.28
100%
50%
1.52
0%
0.92
0.54 0.53
All Banks
Large Banks
Average
Small
Banks
106%
59%
57%
Large
Banks
Small Banks
Median
While the banks have managed to register a sizable customer base for mobile banking the usage of
the channel for banking transactions need to be popularized.
Figure 18
Mobile fund transfer user base (000s)
1,001
771
99
94
64
All Banks
Large Banks
Average
16
Small Banks
Median
The average daily value of mobile fund transfers stood at Rs. 16.85 million for the year 2011-12.
However the growth for the year has not been significant which could be due to customer behavior
and concerns on security.
10
Figure 19
Figure 20
All Banks
20.00
16.85
15.00
10.00
5.00
12.95
18.37
Small
Large
Banks
Banks
All Banks
50%
32%
0%
Small
Banks
1%
45%
Large
Banks
According to the recent World Bank report, Information and Communications for Development
2012: Maximizing Mobile (released July 17, 2012), the number of mobile subscriptions in use
worldwide, both pre-paid and post-paid, has grown from fewer than 1 billion in 2000 to over 6
billion now, of which nearly 5 billion in developing countries. The report estimates that soon the
number of mobile phone subscriptions will exceed the world population.
There is no doubt that mobile banking will become increasing critical for banking not just as an
information device but as a channel banking transactions. However the process simplicity, security
and interoperability will be crucial in driving the increase in usage.
Electronic Payments Business Growth
Electronic payment has been a critical component of technology adoption by banks. Initiatives from
the regulator such as electronic clearing service (ECS), national electronic funds transfer (NEFT), realtime gross settlement (RTGS) have accelerated the pace of technology adoption by banks and
enabled interconnectivity between banks. This has truly manifested in anywhere anytime banking.
However a look at the data shows that a large proportion of banking funds transfers are paper
based.
Figure 21
Figure 22
Small Banks
All Banks
750
468
500
250
15
645
Large Banks
Trends in retail payments show that the use of debit cards has increase considerably alongwith
internet banking, credit cards still have not gained much acceptance possible due to a dislike for
credit among the general populace or the high charge structure of credit cards.
Institute for Development & Research
in Banking Technology
11
Figure 23
7,000
6,000
5,000
5,311
4,742
3,831
4,000
3,000
2,000
1,000
31
25.4
Debit cards
33.0
5.9
Credit cards
All Banks
Large Banks
24
Internet banking
Small Banks
Changing customer preferences, mobile and internet penetration, rising cards, growth in disposable
income and spend, as well as new technology initiatives have bolstered the payments landscape in
India.
12
withdrawals and cheque book requests have taken some burden of the branches. However
phone/internet banking still has a long way to go. A probable reason for phone banking's lower
popularity could be the troublesome menu and waiting time.
Figure 24
3,000
2,458
2,500
2,000
1,500
1,484
1,000
500
Branch
281
27
0.18 9.36
447
45
0.16 14.91
All Banks
Large Banks
Internet banking/ email ATMs Mobile
22 1 33 0.21 1.04
Small Banks
Call center/ Phone
Business Intelligence
With the exception of a few banks, most others are still in the process of putting business analytics
in place in terms of people and IT tools. BI capabilities in terms of data mining and knowledge
management capabilities are still low. Customer life cycle management approach is still to be
adopted and most banks rely on branches or other product teams to pass on information of a
customers additional requirements.
The largest bank in the country has undertaken commendable initiatives in BI like a data warehouse
with seamless integration to different source systems, corporate one view (which provides the
exposure to Corporates, turnover with the Bank and the income generated through services
provided to them. It includes commercial, institutional, small business and small industries
corporate, campaign management tool (to track campaign category, and customers reached etc),
periodic analysis of customer churn/ attrition, acquisition and retention.
As the proliferation of business processes on systems continues unabated, banks are in the distinct
situation of having access to a lot of data online. Staying competitive increasingly means utilizing this
data in a way that it transforms into Information that can be converted into a business advantage.
Towards this purpose many banks have put in place Information Management systems ranging from
process specific data marts to Enterprise wide Data Warehouses. Significant investments have also
been made in procuring and deploying state of the art reporting and analytics tools that help the
banks make more sense of the data its systems are capturing. However most banks are at the start
of the curve and need to increase efforts towards effective leverage of business intelligence.
13
Banks have formed various teams under the chief information officer (CIO) and chief technology
officer (CTO) like infrastructure technology group, systems management group, technology solutions
group, governance compliance and finance group to effectively align business objectives with IT
objectives in addition to chief information security officer to cover all aspects of technology
implementation.
Most of the banks have put in place adequate IT and network infrastructure for operational needs.
The data center infrastructure is mostly tier 3 and designed and maintained according to Uptime
standards institute and ISO 27001 certified. In view of the criticality of IT infrastructure banks have
put in place appropriate disaster recovery (DR) and redundancy plans.
Given the critical dependence on IT, banks have implemented a robust IT Governance mechanism
considering best practices under different IT frameworks and standards like CoBIT [Control
Objectives for Information and Related Technology], ITIL, ISO20000, ISO27001 and other regulatory
requirements. To ensure good synergy between Business & IT Strategy, banks have set-up following
mechanisms:
14
IT Strategy Committee to provide overall direction to IT function and to look into strategy
alignment, policy formulation, reviewing IT investment, value delivery, risk management, compliance
aspects. IT Steering Committee at group head & business head level, to take forward the directions
set by strategy committee and drives, implements & reviews the execution. Project Steering
Committees for all significantly large strategic initiatives to review and monitor project progress. IT
Disaster Recovery Committee for application team, DR teams, and other related parties about
disaster and records of all DR events. Project progress is monitored throughout the project lifecycle
and post project Go Live, there is a Post Implementation Review (PIR), which is conducted for all
significantly large projects. Control Self-Assessment (CSA), which is conducted by IT Governance
team to ensure that laid-down policies & processes are adhered and a report is presented to IT
senior management.
Management of IT assets is another critical component of the IT strategy and banks have put in place
various policies and processes to effectively manage the IT infrastructure. Bank are adopting best
practices and frameworks like COBIT, ISO20000 & ISO27001 standards for building a robust IT
Governance infrastructure and accordingly various IT Policies and procedures have been launched.
Below are some of the specific processes, which are focused on management of information
applications, infrastructure & people.
Banks have put in place a proper IT Policy & IS Security Policy and set standards to efficiently manage
the Information Security and risks. The Information Systems Security Standards Committee (ISSSC) is
used for approving the standards and procedures to safeguard and improve the information security
within the Bank. Periodic IS audit also creates and reinforces security awareness.
Energy management and green technology is also increasing forming a critical part of IT
management, banks are increasingly looking at energy saving measures and reducing the power
consumption of data centers. Green initiatives like solar powered ATMs and even branches have
been adopted by some banks.
15
16
Despite the intensive use of IT, people will remain a critical aspect of service delivery and continuous
training both job skills and soft skill will be important in achieving operational effectiveness.
8. Managing IT Risk
Most banks have IT security policy in place which is reviewed every year in accordance with the
regulatory guidelines. The policy covers information security management (ISA) architecture, data
classification, access control, change management, backup, password policy, email policy, internet
usage policy, incident handling, business continuity and disaster recovery plan, security awareness &
training, disposal of IT assets, etc. All these information are to have better controls on IT security and
ultimately managing and minimizing IT risk.
Figure 26 Managing IT Risk
17
The logical access control is based on user ID. The user type and capability level associated with each
user ID is based on the role the user would perform. Most IT policies cover all the aspects of
information handling and processing and the requirements of latest security standards and the best
industry practices.
IT risks in terms of security and threats need to be monitored on a continuous basis and automated
and real-time alerts systems need to be implemented in addition the incident response plans need
to be initiated as soon as possible on indication of any threat.
9. Conclusion
Information technology (IT) has become critical for many organizations. In todays business
environment, IT is a fundamental and growing component of day-to-day business operations and
represents a significant area of investment for many banks. In recent years, the role of IT has been
changing and rather than being seen merely as a utility, the function is increasingly expected to
come up with innovative business improvements. With competition increasingly being shaped by a
number of macroeconomic factors, IT leaders have to understand the dynamics of this new normal
and work closely with the business to address the challenges.
Business and IT leaders must balance their vision for how IT can add value to the enterprise, while
addressing concerns such as levels of IT service and support, program delivery and other
fundamental operational needs. Many banks have made progress to counter significant challenges
to:
However all the initiatives have to result in operational agility and not just remain on paper. The
speed with which a bank can respond and adapt to market changes has a direct influence on how
effectively it can compete.
Indian banking though a late adopter of technology has made rapid strides especially in the adoption
of newer technologies like internet and mobile banking and IT still offers space for improving
efficiency and effectiveness of banking as well as increasing the coverage.
IDRBT Team
18