Finacle on Banking in India & Technology Evolution


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Finacle thought paper discusses origins of banking in India and the major role played by technology in evolution of banking. The paper also highlights the challenges and list banking trends in India.

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Finacle on Banking in India & Technology Evolution

  1. 1. Banking in India:evolution in technologyThought Banking Solution | Systems Integration | Consulting | Business Process Outsourcing
  2. 2. Origins of banking The origins of banking can be traced to ancient until late into 20th century. But the arrival times, starting with rudimentary money lending of the Internet in the 1990s changed all that. and bartering practices for agricultural and A plethora of possibilities emerged for other commodities. But it gained great worldwide commerce, which naturally impacted momentum only after the industrial revolution the functioning of banks as well. Even now, which commenced in Europe in the 17th century, technology evolution shapes the nature when Europeans started establishing colonies and extent of global economic activity and around the world and the need for credit for continues to fundamentally alter the global trade was felt like never before. banking landscape. Ever since banks started operating, their essential mode of operations remained much the same The Indian banking scene In India, banking as an institution originated in tech-savvy banks’ – were launched. A few the late 18th century and primarily catered to foreign banks commenced their India operations the needs of the British. Post-independence, as well. All these banks were quick to leverage the nationalization of major private sector banks emerging technology, were competitive in in 1969 – an important milestone in the Indian wooing customers and winning them over by banking system – made banking accessible to providing professional services. This helped the unbanked population in India. infuse a sense of urgency in public sector banks and older private sector banks to mend their The economic liberalization in the early 1990s ways, which in turn completely revitalized ushered in the era of privatization wherein banking operations in India. many new private banks – the ‘new generation02 Thought Paper
  3. 3. Impact of the IT revolutionThe opening up of the Indian economy in in this transformational journey, by1991 almost corresponded with the worldwide issuing regulations and recommendations onInternet revolution which doubly impacted banking mechanization and computerization.the Indian private and public sector banks that Establishment of computerized inter-connectivitywere still stuck in old ways of functioning. across bank branches, introduction of MICR-Once Indian IT services companies started based cheque clearing, modernization ofbooming, it was just a matter of time before payment services and settlements throughIndian banks wholeheartedly embraced Electronic Clearing Services (ECS), Real Time Grosstechnology. This paved the way for business Settlement System (RTGS), National Electronicprocess automation in banking, which enhanced Funds Transfer (NEFT), were all significantcustomer service, reduced manpower costs landmarks in the banking technology revolution.and increased profitability. Apart from normal Continuing advances in technology rise inbanking products, Indian banks started selling middle class income levels, and increase inthird party products such as mutual funds and demand from a consumer-oriented financialinsurance to their clients as well. This single market, soon catapulted the Indian bankingwindow selling saved the customer’s time and sector to a customer centric, technology driven,enabled the bank to enrich the relationship. financial supermarket catering to the variedThe Reserve Bank of India, India’s Central needs of its customers.Bank, not to be left behind, played its partSignificant milestonesOver the years, there has been a noticeable banks could now offer quick service andshift from traditional to channel-based transparency as well. They even started offeringbanking. Introduction of ATMs (Automated Teller incentives to customers for using non-branchMachines) provided customers with “any channels. All this reduced the number of walk-intime” access to their money. The credit card by customers and improved the quality of customerenabling cashless transactions, unleashed a service in branches.revolution in the banking world. Affordable The next noteworthy milestone was thetechnology infrastructure like cheap, small introduction of mobile banking primarilybut powerful computers and other handheld through SMS. The launch of smartphones createdgadgets and higher Internet bandwidth at a revolution of sorts in the banking world andlower cost facilitated easy access to banking smartphones are now a widely accepted deliveryproducts and effortless banking transactions. channel in developed countries. As the numberCall centre and phone banking services further of mobile phone users in India rapidly increases,added to customer convenience. banks are exploring the feasibility of using theBy directing banking transactions through ubiquitous device as an alternative channel fordifferent electronic channels and by providing delivery of full-fledged banking services.customers direct access to their bank accounts, Thought Paper 03
  4. 4. Current trends Another concept, virtual banking or direct transactions and data, banks can improve banking, is now gaining ground. This model productivity, optimize costs, provide quicker and wherein banks offer products, services and better quality customer service. This will also financial transactions only through electronic help with the environmental angle of using delivery channels, generally without any physical less paper. From the customers’ point of view, branch, has already been tested out in advanced paperless banking translates to easy handling, countries such as the United States and Europe. storage and retrieval of financial documents Owing to lower branch maintenance and and account statements without the fear of manpower costs, such banks are able to offer misplacing them. competitive pricing for their products and With customers demanding ‘anytime and services vis-à-vis traditional banks. More and anywhere’ access to their money and financial more customers are already moving to non- information, banks have no option but to branch banking, and the direct banking trend implement wireless solutions in device- will surely catch up in India as technology-savvy independent and network-agnostic ways. On banks adopt this model. the user side, rapid progression of mobile Though it may appear to save the bank a lot of technologies as evidenced by the well known overheads, in reality, the customer never needing LTE (Long Term Evolution) means banks must to visit a bank branch, either for completing increasingly adapt their own infrastructure to the the account opening process or the subsequent client side needs. financial activities actually throws up new On the flip side, unlike PCs, mobile phones are challenges. The power of technology makes it small and are easily lost or stolen, making them happen seamlessly and virtually, but customer more vulnerable to fraudulent transactions. This satisfaction is something which calls for a calls for greater security measures combined human touch. For all their technological with powerful regulation. There are also some sophistication, virtual banking should be hassle privacy issues related to wireless banking that free and a pleasurable experience for the user. need to be resolved. The virtual banks need to be aware of this fact in letter and spirit and always ensure that the Overall, there is no denying that there is quality of user experience is paramount and both challenge and opportunity for banks in leveraging technology is only an aid to enriching enriching customer experience arising from the user experience. numerous use case scenarios of powerful smart phones operating wirelessly. By ensuring the As Banks adopt more technology, two things ease, comfort, safety, and seamlessness of such stand out – using less paper and doing transactions operations, banks can assuredly remain in business. wirelessly. In the last few years, many banks According to data compiled by the RBI, there in India have implemented content management has been steady growth in the number of solutions and succeeded in conducting Fig-1 paperless transactions using the imaging and workflow capabilities of such software. Also, automated handling of service requests with proper documentation and tracking facilities has significantly reduced turnaround time. Processing online applications for account opening and other services, transfer of funds without cheques, online account statements are all becoming part of the regular banking process. With digitization of all customer04 Thought Paper
  5. 5. transactions routed through electronic channels fallen over the years and in terms of value,(Fig. 1). Not only that, the share of paper-based now forms a miniscule part of total bankingtransactions via cheques/demand drafts has transactions (Fig. 2).Fig-2 Representation of Electronic Representation of Electronic Transactions Volume in Total Transaction Value in Total Electronic Paper Electronic Paper 100% 100% 90% 90% 80% 80% 70% 70% 60% 60% 50% 50% 40% 40% 30% 30% 20% 20% 10% 10% 0% 0% 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12 (Upto (Upto Nov-11) Nov-11)Source: RBIProduct innovation and technologyThe banking industry is going through a period reveal that in rural areas, more than half ofof rapid change to meet competition, challenges personal savings is being invested in land,of technology, and the demands of the end houses, cattle, and gold. With low cost technologyusers. Clearly technology is a key differentiator as the enabler, supported by innovative productsin the performance of banks. Studies reveal tailored for the rural populace, banks can offerthat approximately 20% of non-interest secure investments with good returns and inexpenditure of large banks in the United States addition, act as catalysts to alter rural investmentis on information technology. Banks need to patterns along more productive lines. Indianlook at innovation not just for products, but for banks need to focus on swift and continuedprocesses as well. Also, along with new product infusion of technology while ensuring itsofferings, they need to work towards existing appropriateness and utility for both the ruralproduct optimization. and urban market.The needs of the rural market are quite differentand banks have to innovate accordingly. Studies Thought Paper 05
  6. 6. Challenges It doesn’t stretch one’s imagination to understand of different sections of people and is also backed that the scale and complexity of banking has by suitable “humane” yet quick measures in the undergone tremendous changes in the last 20 event of failure or breakdown. years. From the Indian perspective, the evolving banking paradigm presents unique opportunities The large number of complaints received by and challenges. The reason is India is a country the Banking Ombudsman (Fig. 3), published with huge population and the demographic in the RBI annual report for the financial years growth of India is such that it is going to 2009-10 and 2010-11, are indicative of the become the most populated country very problems of technology proliferation, making it soon. Channel technologies can bring about a priority area for Indian banks. closer integration between the rural and urban Fig-3 populace. The hitch is that the pace of technology adoption, a key feature of the urbanized world, cannot be forced upon the rural population. Here, India needs to learn its lessons from China which has managed to rapidly urbanize its rural population and been able to harness technology to the fuller benefits of its newly urbanized populations. Another challenge non-branch channels throw up is the lack of human touch that previously Source: RBI characterized banking transactions. The rather impersonal technology-enabled touch screen In 2010-11, 74% of the complaints were key presses and automated answering systems from urban/metro regions, 89% were from might intimidate and overwhelm newly retail (individual) customers and around 30% urbanized users who are by and large technology- complaints were related to ATM/debit/credit illiterate. It is therefore imperative for banks to card transactions and remittances. These do not ensure that technology is tailored to the needs include complaints lodged at individual banks. Way forward There has to be a holistic approach to fulfill customer needs ever changing, banks need to the demand for increased variety in deposit invest in advanced analytical tools for timely and investment products (also conforming to introduction of new products, which will give regulations) so as to grab a better market share them early mover advantage. The vendors who of investments through banks. Development of supply various banking solutions play a vital sophisticated products with low-cost technology role in leveraging innovation and designing is key. This calls for an in-depth analysis of products, thereby enabling banks to achieve customer needs, the market and competitor their goals. trends. As the markets are very dynamic and06 Thought Paper
  7. 7. ConclusionOverall, the message for Indian banks is is the de facto agent that can ring in wholesomevery clear. India’s transformational journey changes. Banks would do well to realize theirto modernity is on the cusp of revolutionary central role in enabling this transformation andchange. There is the great rural-urban divide should take conscious recourse to relentlesswaiting to be bridged; rural India has to adoption of technology. And the goal should beconnect with the mainstream economy. This has not just to satisfy but to engage with customersto be a harmonious progression and technology and enrich their experienceReference1. 3. www.banknetindia.com2. Reghunathan Sukumara Pillai Industry Principal, Finacle, Infosys Santhy Sreedhar Lead Consultant, Finacle, Infosys Thought Paper 07
  8. 8. About FinacleFinacle from Infosys partners with banks to transform process, productand customer experience, arming them with ‘accelerated innovation’that is key to building tomorrow’s bank.For more information, contact© 2012 Infosys Limited, Bangalore, India, Infosys believes the information in this publication is accurate as of its publication date; such information is subject to change without notice. Infosysacknowledges the proprietary rights of the trademarks and product names of other companies mentioned in this document.