Payment survey presentation 2009 v 0.4


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First ever holistic survey of Indian Banks with respect to their perspectives on Payments as a business. 29 private sector and public sector banks were surveyed.

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Payment survey presentation 2009 v 0.4

  1. 1. Confederation of Indian IndustryPaymentsBusiness inIndian Banks*
  2. 2. 2 Payments Business in Indian Banks*
  3. 3. Contents06 ------------ Executive SummaryBackground of the Survey ------------ 0708 ------------ Objectives of the SurveySurvey Methodology ------------ 0910 ------------ Macroeconomic Trends in PaymentsPayments Business and Technology in Indian Banks ------------ 1417 ------------ Exploring Enterprise Payments PricewaterhouseCoopers 3
  4. 4. ForewordThe Indian Banking industry is in for exciting but challenging times. The current economic turmoil across theglobe offers a host of opportunities for the Indian banking industry to grow as the Indian economy is betterpositioned compared to many economies.The rising income levels of people are providing ample scope to design and develop a wide range of personalfinancial products and fee-based services. The focus of the Central Government on infrastructure developmentand rural economy, health and education, offers exciting business opportunities for the Indian Banks.Similarly, growing international operations of Indian business houses are supporting Indian banks with globalopportunities.Constant design of new products and services and focus on efficient customer service and concurrentlypursuing global aspirations has to be the mantra for success for Indian banks in the future. While the recentmarket turmoil has dampened the mergers & acquisitions climate in the banking space, the upcomingeconomic upturn in the Indian banking sector should lead to a heightened level of mergers and acquisitions;this will further intensify the competition for the domestic banks. However, the interest rate environmentremains somewhat uncertain. Indian banks, having just suffered through the downturn, and experiencedthe spread crunch (although mild by Western standards), are likely to look for ways to be less dependant oninterest income and rely more on fee-based sources of revenue. They are also likely to institutionalize their costreduction efforts that they have had to master during the economic slowdown. Banks know that technologycan be a great enabler in reducing costs as well as in accelerating revenue accretion through opportunitiesin “Straight Through Processing”, preventing customer churn, and increasing cross sell and up-sell withinthe existing customer base. Thus, banks will be looking to further automate their processes and integratetechnology into their core business and management processes.Confederation of Indian Industry aims at improving efficiency across all business sectors to improvecompetitiveness. Banking being a key driver of growth, we look at different aspects of banking for improvingservices to the economy. In our endeavour to understand the Banks’ technological preparedness for attainingefficiency, and tap into a significant source of fee-based income, we felt there was an imperative need toexplore a core area of banking that has, until recently, remained somewhat of an “orphan” within the hierarchyof a typical banking organization. Thus, we felt this was an opportune time to conduct a comprehensivepayments survey in India, to understand how equipped Indian banks are to leverage this area of opportunity.PwC has been our knowledge partner for this study. We express our sincere thanks to the Executive Directorsand IT heads of all the Banks, who wholeheartedly supported our endeavour by providing their inputs. We hopethis study will help the banks to improve technological efficiency and thus serve the customers in a better way.It would definitely complement our efforts for ensuring “Better Banking for Economic Development”.With proper strategies and execution processes in harnessing technology and human resources, developingmarket segments across length & breadth of India, extending banking services to all sections of people, theIndian banking sector will be able to position itself amongst the best in the world and take on the competitionfrom the global banks in a big way.Mr Mukul SomanyChairmanCII Eastern Region
  5. 5. AcknowledgementsAt the outset I take this opportunity on behalf of my team to thank all banks who took part in the survey. Theinsights and views expressed by participating bank have shaped the broad contours of this report.We at PricewaterhouseCoopers, in our endeavour and mission to help our clients, present our findings on thepayments business in Indian banks. We are hopeful that the banking sector would consider these findings toshape the way forward for their payments business.This report has been prepared under the oversight guidance of Neel Majumder, Financial Services Lead, ITEffectiveness, within the Performance Improvement Group in PwC. Rachna Nath, Harsh Bisht and SivaramaKrishnan, Executive Directors, PwC, provided the organizational and review support to this effort.The report team included Ranadurjay Talukdar and Susmita Majumder, both Senior Consultants with thePerformance Improvement Group of PwC.They have been ably assisted by Manjari Sogi, Summer Trainee with PwC, in collating and analyzing theprimary survey data.Last, but not the least, was the contribution from CII’s end. We thank Abhishikta Chowdhury and RiddhitaBanerjee for their efforts in coordinating the survey and gathering responses from banks.Although we have tried to be critical in analyzing the various aspects of payments business, we are cognizantof the fact that there might be issues and aspects which may not have been included because of a multitude ofreasons. We request the readers of this report to let us know about any issues or aspects which you feel havenot been addressed properly in this report. This would serve as an improvement opportunity and ensure thatthe next time we work on a similar report, it would help us serve you and the community better.We also thank Confederation of Indian Industries (CII) for giving us the opportunity to present our findings andselecting us a Knowledge partner for the event.Ambarish DasguptaExecutive DirectorPricewaterhouseCoopers
  6. 6. 1 Executive Summary We explore why payments are a big deal for banks. We try to understand how banks in India view payments and how open they are towards taking an enterprise-wide view of the payments business. The area of Payments is becoming increasingly important While in the developed economies, the concept of a “Payment for the Indian banking sector. With the volatility in the Czar” has existed for some time, at least in the larger banks, interest rate regime, and the resulting uncertainty in Net such a concept appears not to have reached most of the Indian Interest Income for banks, banks are increasingly looking counterparts. However, most banks still view their payments at fee-based products for assured revenue sources. In the businesses, not as businesses, but as individual products midst of this uncertainty, the revenues that banks earn from and channels. Most banks in India do not track the revenues processing payment transactions stand out as a beacon of at the payment product level. Thus, banks appear to grossly light. However, the revenues accruing from such transactions, underestimate the revenue they receive from their payment as well as the underlying costs associated with processing products and fail to appreciate the complex interplay that can these transactions, can be optimized if the banks start looking happen between different payment products and channels that at payments as a core “business” of theirs, and mot merely could impact their top line and bottom line. as a panoply of service offerings. As long as the payments From the cost perspective, we found that although the majority business remains an “orphan”, fragmented into different of the banks claim to track payment product costs at the Lines of Businesses with individual owners, with no enterprise activity level; only 30 to 35 percent of the banks were capable perspective to the intricate dynamics between the different of tracking the unique costs for each type of product. products and delivery channels, revenue optimization will remain a far fetched goal. Similarly, when the processing The rest used standard fixed and variable costs for their units for the variety of channels and products are distributed payment products, strongly indicating that they might be across different business units, with no underlying integration using gross cost allocations as a substitute for activity-driven architecture, it will be difficult to achieve cost optimization as costing. With respect to technology architecture, most banks well. Therefore, the banks need to view payments in a more agreed that the disparate payment applications and systems, holistic manner, which brings to us the concept of “Enterprise built on legacy platforms, are unsustainable in the long run, Payments”, derived from the need to view Payments business and thus had plans to upgrade their payments architecture. across lines of service, across product and channel and even With respect to security and fraud, most banks surveyed felt customer group boundaries such as retail and wholesale that they were quite up to the task of controlling the security payments. While the RBI has acted as the wise shepherd in environment. However, as the section on fraud and security terms of driving modern payments instruments and channels, in our document illustrates, the issues and challenges may be and ensuring that low-cost, convenient payment instruments more complex than what the banks think. Finally, the bright are not accessible only by the privileged few, banks also need spot of the survey was the finding that most of the banks to reorganize their own houses so that they can profitably surveyed do indeed feel that adopting an enterprise view of meet the challenges thrown at them by the visionary actions payments makes sense due to the positive impact on top of the RBI. line growth, cost reduction, and better service levels for their customer. As one of the largest banks in India has already The results of our survey, which we believe is the first of its embarked on this journey, it is anticipated that many of the kind in the public domain, show Indian banks mostly trailing other large banks will follow suit. their global counterparts in terms of being organized to seize the opportunities afforded by looking holistically at the payments business.6 Payments Business in Indian Banks*
  7. 7. 2 Background of the Survey This section explains the reasons why we undertook this survey. it explores the importance of payments in the economic well-being of our nation. It touches upon some of the recent payment initiatives globally. We look at why payments are an important business for banks. We study the key drivers in the payments business in India.Payments touch everything we do in our everyday lives - from The economies of scale associated with more efficientpaying our bills, buying goods and services for our household modes of making payments has ensured that banks focus onto receiving our salaries. In every payment we make, we make promoting superior payment products.our contribution to the consumption demand in the economy, And of course, technological advancements-while not asthereby boosting the GDP of our country. Thus, a robust system disruptive as some initially feared-are clearly spelling out thethat brings speed, convenience and security to our payments is charter for the financial sector in the long run. Over the nextthe backbone for the economic well-being of a nation. decade or so, we will see millions of devices connected to IPGlobally, the focus today is on integrating payment platforms networks, a lot of them payments-enabled. The customer ofthat brings a large number of payers and payees under the next generation will be able to transact anywhere, anytimethe same umbrella. The Single Euro Payments Area (SEPA) – via cell phones, PDAs, desktops and remote sensing devices.initiative for the European financial infrastructure involves the The challenge for the banks is expected to get tougher ascreation of a zone for the Euro in which all electronic payments wireless device manufacturers and telecom companies play anare considered domestic, and where a difference between increasingly important role in payments.national and intra-European cross border payments does not Traditionally, it has been systemically important paymentsexist. Another initiative is underway in China, with the formation systems that have garnered greater attention; however, withof China Union Pay, which will be the singular payment network a gradual focus on financial inclusion, the existence of anfor processing and managing all electronic transactions efficient retail payment system is being looked upon as aoriginating in China. The introduction of Faster Payment crucial public good. The formation of the National PaymentsService (FPS) in the United Kingdom will now make it possible Corporation of India is a step towards bringing the disparatefor person-to-person or business-to-business payments retail payment systems under a single umbrella.between banks to happen in near real time. Even in India,efforts are on to create India Pay, which will be an indigenous Last year, one of the largest banks in the country initiatedpayment system for India, which is expected to drastically a massive exercise that is currently underway, to align itsreduce transaction costs for electronic payments. payments business to global best practices and identify redundancies and inefficiencies in its payments products.From a business perspective, payments are increasingly While the state-run banks were the last to join the paymentsbecoming significant for Indian banks. Faced with an uncertain bandwagon in India, it is significant that the biggest of theminterest rate regime and fluctuating capital markets, Indian has been the first to take the plunge to redesign its paymentsbanks are understandably looking towards assured fee-based business. It is only logical to assume that other major banksrevenue from payment services. There are discernable efforts would follow suit in the next few years, thereby heralding ato migrate customers from availing of traditional methods of new way of looking at the payments business in India. Whilemaking payments like writing a cheque to superior methods private banks had pioneered the payments revolution in India,like transferring funds online, for the incremental savings that public sector banks are becoming increasingly competitive incan be accrued in the process is significant. the payments space, especially in the Debit Card paymentsThe last decade has witnessed phenomenal changes in market.the architecture, technology and strategic initiatives in the In such a backdrop, we felt an imperative need to conductpayments business in India. The widespread adoption of a comprehensive payments survey in India. We decided toelectronic clearing and settlement networks has provided analyze the business and technology issues pertaining tothe foundation for this metamorphosis. The Reserve Bank of payments and explore aspects of enterprise payments, whichIndia has played a crucial role in this regard, having mandated would enable banks to view their payments holistically.banks to route high-ticket transfers through RTGS and havingintroduced NEFT and NECS services. We see a gradual rise inthe number of customers who choose to abandon cash andcheques for cards and other electronic payments media. PricewaterhouseCoopers 7
  8. 8. 3 Objectives of the Survey This report aims to identify and understand business and technological issues and aspects pertaining to payments business in Indian banks. It also explores the concept of “Enterprise Payments” . Survey Objectives The survey was conducted keeping in mind three major objectives, namely: • Business issues and aspects pertaining to the Payments Business in India • Technological issues and aspects pertaining to Payments Business in India • Exploring the concept of “Enterprise Payments” and ascertaining the readiness of banks to migrate towards such a framework in the future Each of the objectives have been further explained below, where we have explained the various sub-objectives that together give us a perspective on the research objectives Business Issues pertaining to “Payments” • Analyzing broad structure of payments business • Method of tracking revenue from payments business • Method of tracking revenue from payment products • Cost structure of payments business • Considerations for pricing payment products • Understanding of business units responsible for fragmented sections of payments business • Analysis of transaction volume & value for payment products across delivery channels Technological Issues pertaining to “Payments” • Understanding of interoperability issues pertaining to underlying technologies for payments business • Exploring security aspects of payments and upgradation of payments infrastructure Exploring the Concept of “Enterprise Payments” • Triggers for migrating towards “Enterprise payments” • Improvement opportunities across functional areas through “Enterprise Payments”8 Payments Business in Indian Banks*
  9. 9. 4 Survey Methodology This section explains how the target sample for the survey was chosen, provides details about the questionnaire used for the survey and details the exclusions and assumptions pertaining to the survey. Survey Objectives To conduct this survey, a questionnaire was designed which was circulated amongst senior Business, IT and Operations executives of major public, private and foreign banks in India. In addition, we also conducted detailed discussions with the Chief General Manager, Department of Payments and Settlement in RBI. The primary data gathered through the survey was further supplemented through secondary research from industry sources and PwC knowledge bases. Responses to the questionnaire were collected through emails, telephonic conversations and face to face interviews. Target Sample The target sample of banks for the survey was finalized through the following steps: • Stratification of the population of commercial banks in India in terms of Public Sector Banks, Private Banks and Foreign Banks (28 banks in each stratum) • Simple Random Sampling of 10 banks from each stratum Thus, our sample for the survey comprised of 30 banks. About the Questionnaire The questionnaire mostly comprised close-ended questions that were specifically designed to analyze the various aspects detailed in our survey objectives. For most of the questions, we also asked participating banks to offer their opinion on the issue being addressed through the question. This offered us valuable insights on the functioning, and attitude of the banking community. Exceptions and Assumptions • The findings of the report are based on the analysis and insights of the survey and are intended to serve as indicators for further discussion. • Some of the data do not represent the view points of all the respondents because some banks refrained from divulging information regarding certain questions. Survey Confidentiality The identity of all banks which participated in this survey has been kept anonymous. Any reference to the banks’ responses is represented in terms of overall numbers, averages or other pertinent statistical measures and no reference to individual banks has been made anywhere in the survey findings. PricewaterhouseCoopers 9
  10. 10. 5 Macroeconomic Trends in Payments This section talks about the bigger picture – how payment products have evolved in India over the years, the role played by the regulator in shaping the payments landscape and an analysis of business volumes and transaction values of payment products in India. Evolution of Payments in India As business needs and available technologies have changed, so has the landscape of payments business in India. The timeline below gives a chronological snapshot of the evolution of payments in India. 2008 -2 009 • 2008 – CTS • 2008 – CTS 2004 - 2005 • 2009 - Mobile• 2009 - Mobile Banking, • 2004 – RTGS Satellite Banking, 2001 • 2004 – RTGS Satellite • 2005 – NEFT Banking • 2005 – NEFT Banking • Internet 1995 to 1998 Banking • Internet • 1995 - EFT Banking • 1996 - ECS Debit • 1995 - EFT • 1998 - ECS Credit 1996 - ECS Debit 1998 - ECS Credit Role of RBI RBI has played a catalytic role over the years in institutionalizing the framework for development of safe, secure, sound and efficient payments system for the country along with initiation of various institutional, procedural and operational measures to strengthen and refine payment systems. The salient developments by RBI chronologically are as shown in the following figure: Integrated Clearing Payment and Guidelines to Pre- Facilities Corporation of Settlement paid Payment Scheme India Ltd (CCIL) Systems Act Instruments 1940 1986 2001 2005 2007 2008 2009 Uniform Board of National Payments Regulations and Regulation and Corporation of Rules (URR) Supervision of India (NPCI) Payment and Settlement Systems (BPSS)10 Payments Business in Indian Banks*
  11. 11. Paper and Electronic PaymentsThe two subsequent charts illustrate how paper based However, this has happened almost entirely due to RBIpayments have fared vis-à-vis electronic payments in the making it mandatory for banks to route high ticket transfersrecent past, in terms of transaction volume and transaction through RTGS. This becomes abundantly clear when wevalue. While paper based payments, which are essentially study the share of RTGS transactions amongst total electronicpayments made through cheques, still command a lion’s share transactions. Just about 1% of electronic transactions arein terms of volume, electronic payments overtook cheque done through RTGS; yet, RTGS accounts for 96% of the valuepayments in terms of value in 2006-07 and command a bigger of payments made electronically. This has been illustrated inshare of the total payments pie today. the subsequent chart. Transaction Volumes of Electronic Vs Paper Breakup of Electronic Payments in Terms of Value Payments 100% 2,500,000 Total PaymentsVolume in 000s 80% Card Payments 2,000,000 60% Total Electronic 1,500,000 40% Payments Retail Electronic 1,000,000 20% Payments Total Paper 500,000 0% Based Payments 04-050 5-06 06-070 7-08 RTGS 0 04-05 05-06 06-07 07-08 Year Year Transaction Value of Electronic Vs Paper Payments 70,000,000 Total Payments 60,000,000 Value in Rs. Crores 50,000,000 Total Electronic 40,000,000 Payments Total Paper Based 30,000,000 Payments 20,000,000 10,000,000 0 04-05 05-06 06-07 07-08 04-050 5-06 06-070 7-08 Year PricewaterhouseCoopers 11
  12. 12. A Deeper Look into Electronic Payments Volume of Retail Electronic Payments While RBI’s mandate has ensured that RTGS accounts for 83% of the value of Systemically Important 250,000 Volume in 000s Payments System (SIPS) in India, it is noteworthy Retail Electronic 200,000 that it only commands a mere 21% of the volume of Payments 150,000 transactions carried out through SIPS, the remaining ECS Debit 79% being done through high value cheques. 100,000 Increasingly broader coverage of Core Banking Systems 50,000 ECS Credit across Indian banks will facilitate greater usage of 0 electronic funds transfers. The integration of the RTGS 04-05 05-06 06-07 07-08 04-050 5-06 06-070 7-08 NEFT system with the RBI’s internal accounting system (IAS) has enabled straight through processing (STP). Also, Year with the integration of the RTGS-IAS and the securities settlement system (SSS), automatic intraday liquidity (IDL) is now available. The challenge for RTGS lies with Value of Retail Electronic Tr ansac tions respect to payments between INR 1 lakh and 10 lakhs (above which RTGS is mandatory), a segment where 900,000 high value cheques continue to be the preferred mode 800,000 Value in Rupees of payment. 700,000 600,000 EC Debit S On the retail payment front, paper based means of Crores 500,000 EC Credit S payment is still the preferred choice for a majority 400,000 NEFT of customers, primarily because there has been no 300,000 200,000 mandate from RBI regarding usage of electronic modes 100,000 for person-to-person (P2P) or person-to-business (P2B) 0 payments. Electronic retail payments account for 27% 04-050 04-05 5-06 05-06 06-070 06-07 7-08 07-08 in terms of volume and 12% in terms of value amongst all retail payment transactions in the country. Year Amongst the retail electronic payment services, the growth of the much vaunted NEFT service, which Retail payments through cards have been in vogue even replaced the technologically inferior EFT service in before any of the other electronic payment options made 2005, has been slower than that of ECS Credit. The their appearance in India. While credit cards still constitute overall growth in retail payments has resulted primarily the bulk of card payment transactions, the growth in the from greater off take in ECS Credit transactions, which base of debit cards has been significant over the last has seen greater use due to ECS credit becoming few years, primarily due to a majority of Public Sector the instrument of choice for salary disbursements. In banks replacing ATM cards of their existing customers addition, stock exchanges have mandated the refund of with PoS enabled Debit Cards. In fact, the base of debit oversubscription amount of IPOs through ECS Credit, cards is nearly four times than that of credit cards in India further contributing to its offtake. The introduction of the currently. However, usage of debit cards at PoS outlets technologically superior NECS service is expected to is still significantly lower than credit cards, contributing a further lower the manual intervention, and consequently, mere 18% of total card transactions, as illustrated in the the turn around time, for ECS transactions. However, subsequent chart. in sharp contrast to earlier years, NEFT grew by 81% in terms of value in 07-08 over the previous year, an indication of its growing usage. This is expected to further boost retail electronic payments.12 Payments Business in Indian Banks*
  13. 13. Card Transactions by Value 80,000Value in Rupees 60,000 Card Payments Crores 40,000 Credit Cards 20,000 Debit Cards 0 04-05 04-050 05-06 5-06 06-07 06-070 07-08 7-08 YearPossible explanations for low debit card usage include agreater fear of misuse compared to credit cards, since debitcards link directly to bank accounts. Other factors includelow customer awareness (since debit cards are still primarilypositioned as ATM cards by a large section of Indian banks)and lesser incentive for card users for using a debit card inplace of a credit card.Thus, the challenge for retail electronic payments primarilylies in bringing a greater share of P2P, P2B and B2P paymentsunder its ambit. The opportunities in cards business are alsomassive given the low card and PoS penetration in India.The cost of POS terminals is still prohibitively high for a largesection of the target retailers. Lower cost hardware andapplications such as IP (Internet Protocol) based terminalsand mobile devices that could be used as POS terminalsthemselves can play a large role in expanding the acceptanceof POS amongst retailers. In addition, increasing marketingefforts from banks and network associations, coupled withefficient, robust and secure architecture at the back end areexpected to charter the future path on the retail payments front PricewaterhouseCoopers 13
  14. 14. 6 Payments Business and Technology in Indian Banks This section brings out the key findings from the survey we conducted and tells us how banks in India view their payments business. Business Structure We tried to understand the broad contours of the payment how specific customer groups respond to individual payment business in Indian banks through our survey. We probed banks products. Only a handful of the new Private Sector banks and on how they structured their payment business, how they the foreign banks tracked revenue for customer groups. tracked revenues and costs and what were the key triggers We also studied the broad heads under which the banks’ that shaped business decisions in payments. tracked their revenue from payments. The chart below illustrates the broad revenue heads. Method of Structuring Payment Business Reve nue Heads % of Total Responses 100% 88% Both 80% 24% 63% 63% Payment 60% Products 42 40% 42% 20% 0% Float RevenueF ee RevenueP er Transaction Payment Revenue Channel s 34% Types of Reve nue Broadly speaking, banks tend to structure their payments Significantly, more than one-third of banks surveyed did not business in terms of payment products and payment track either float revenue or revenue earned per transaction channels. This was amply supported through our survey, from their payments business. Most of the banks opined which revealed that 24% of banks structured their business that float revenue that could be attributed to payments were on both product and channel lines; 42% structured their considered, for revenue tracking purposes, under the broad business on product lines while 34% structured their heads of savings or current accounts. Similarly, while per business on channel lines. transaction revenue is crucial for card payments and even for RTGS payments, data pertaining to the same was not tracked The Revenue Angle by banks. When it came to tracking revenue from payments business, A direct result of not tracking crucial revenue areas under one-third of the banks revealed that they only tracked payments resulted in majority (57%) of banks indicating that revenue at a macro level, i.e., at the level of a broad line of less than 10% of their total revenues could be attributed to business within the bank, like assets or liabilities. Half of the payments. This has been illustrated in the subsequent chart. banks that tracked revenue at a macro level also additionally tracked revenue from payment channels. Significantly, none Contribution of Payments to Overall of these banks tracked revenue from payment products. Reve nue When probed deeper, it emerged that these banks get MIS reports on volume and value of NEFT/RTGS/Cheque transactions, but do not track the revenues that arise out of these products. However, “Cards” is usually a Line of 14% Business in most banks and hence for cards business, revenue is actually tracked at the product level. 57% 14% However, 57% of the total number of banks surveyed revealed that they tracked revenue at the product level, while 14% only 10% of the banks tracked revenue in terms of customer segments. Since revenue is rarely tracked at the level of customer groups, it makes it difficult for banks to understand Less than 10% 10 to 20% 21 to 30% 31 to 40%14 Payments Business in Indian Banks*
  15. 15. A significant proportion of banks do not track revenue for productindividual payment products. Even among the ones that track, profitabili ty model linkedfloat income originating out of payment products like cards and to Generalper transaction revenue earned from electronic transfers are Ledgeroften ignored. Thus, it is not surprising that banks in India havenot woken up to the impact that payments have on a bank’s completely disagreetop line and bottom line. activity- based disagr e more often than e costing agreeThe Cost Perspective neither agree nor disagreeThe survey touched upon several aspects of costs relating to agree more oft en thanthe payments business. As the subsequent diagram shows, allocation- disagr e ebanks still approach the costs for their payments business based completely agreein a traditional manner, where fixed and variable costs are costingcalculated. In many cases, it is likely that many of the costcomponents are simply allocate instead of the actual costsrelevant to each payment product being tracked.Cost Structure for Payments Business The responses indicate that most banks tend to follow allocation-based costing when it comes to payments, which 80% 75% is the traditional manner of allocating costs into direct and indirect buckets. Thus, banks do not track costs that are% of tot al responses specific to activities under each payment business, but 45% 35% instead consider these as direct or indirect costs pertaining 30% to a particular line of business. An activity-based costing exercise for payments would have told banks how costs are distributed across payment products and channels fixed variable unique cost unique cost shared cost and would have been a better input for shaping strategic cost cost for payment for payment for payment products channels products and decisions. channels Pricing ConsiderationsUnique costs that are attributable to specific payment Pricing of payments products is a very complex issue andproduct or channels are tracked by only 35% and 30% of the takes into account a multitude of factors. The subsequentsurveyed banks respectively. Tracking of these costs would chart shows the factors banks consider while taking theirallow the banks to better understand how individual payment crucial pricing decisions.products earn revenue vis-à-vis the cost the bank incurs inoffering them. Pricing ConsiderationThis viewpoint is further supplemented by the chart below,where we have captured the banks’ viewpoint on thefollowing broad parameters: 95% 85%• Whether profit models used by banks for individual 65% products are linked to the bank’s GL, which would make 60% 50% profitability calculations a lot more robust and reflect the 35% most recent reality• Whether the costing for payment products is activity- Settlement Settlement Transaction External Premium Customer based or allocation-based. Time Risk Size Network Fee Service Fee Relationshi p percent of total Responses It is noteworthy that 85% of banks keep the customer in mind while pricing their payment products. However, exactly how the customer relationship is considered while pricing, given that banks do not have databases of price vs. price, is a puzzle. It is also interesting to note that the customer orientation in payment product pricing does not extend to tracking of revenue from payments, as explained earlier. PricewaterhouseCoopers 15
  16. 16. Technology Architecture Fraud and Security Aspects of Payments Advancements in technology have made it possible for banks Most banks surveyed expressed confidence in the security to offer a multitude of payment products to their customers. of their payments-related data, as depicted in the previous However, our survey brought out that there are issues in terms diagram. However, the issues and challenges may be more of interoperability of these underlying technologies used for complex than what the banks think. different payment products. For instance, the Core Banking The banking industry has been the darling for fraudulent System is usually different from the system used for Cards attempts ever since they came into existence. Over time it business in almost all the banks surveyed. Moreover, these just became more sophisticated with the emergence of net- disparate systems are seldom interoperable, as indicated by a banking, mobile banking etc. large number of banks surveyed. Even India has felt the pangs as several Indian banks have come under more than 400 phishing attacks during the past Technology in payments few months with the number rising sharply in Sept-Oct, 2008, definitely yes yes cant say no definitely no according to industry lobby NASSCOM. It doesn’t matter if it is a state owned bank or a private bank. Criminals using the Do banks intend to upgrade payments Internet have attacked banks such as state-owned Bank of infrastructure in the near future India, private lender HDFC Bank, India’s largest private lender ICICI Bank among others. Are banks confident of the security of Instead of looking in isolation at the credit card, debit payments-related data card, pre-paid card and the online banking frauds, a better perspective emerges if we look at it together as electronic data Are application softwares used in frauds. Human mind, by nature, will always look for loopholes payments business interoperable to exploit the banking system for personal gains. Also, the level 0% 20% 40% 60% 80% 100% of innovation used to perpetuate these frauds is quite mind- boggling. High rate of technological obsolescence demands regular India wears both the mantle of frauds – as a country swiftly and continuous upgradation by banks of their infrastructure. climbing up the ranks in partaking in financial fraud on the This brings in the problem of replicating high-end technology Internet as well as falling victim to it. India occupies the 14th requirement across large user base and also throws up the position globally in hosting phishing sites. The city of Mumbai challenge of ensuring integrity of different systems through accounted for 30% of all phishing Websites in the country, their continuous upgradation against money-laundering and Delhi for 29%, and Chennai and Bangalore hosted 12% each financing of terrorism. However, majority of banks showed an of all phishing Websites as of 2007. inclination towards upgrading their technology infrastructure in A study done by the CAG on potential trade on the Internet the near future. and e-commerce websites had showed that 73 per cent of them allowed several modes of payment, only 7 per cent Financial Inclusion and Technology offered guarantee for products sold and 60 per cent had no mechanism to register complaints. There were very few redress Almost all banks surveyed emphasised that benefits of mechanisms, and even their implementation was not enforced. superior delivery channels like Internet banking and mobile The number of cases (e-fraud) that the Central Bureau of banking percolated primarily to urban consumers. Adequate Investigation had registered was less than 50, and only one infrastructural facilities to reach out to remote rural areas in had reached the prosecution stage. cost effective manner through the use of smart cards, hand- held devices and other cost effective delivery channels were With an increase in the spate of attempted fraud tools and found to be lacking in most banks. Majority of banks agreed techniques to collect, protect, store and present, electronic that the current payments infrastructure still has some way to evidences are something that banks have to invest in. This will go towards achieving financial inclusion. also impact their organizational policy guidelines and tighter handshake between various departments. Frameworks related to collection of the electronic evidence should be incorporated and ingrained across the organization. Apart from IT and security, the legal team will have to be a major stakeholder in the framework definition so as to protect the various privacy related issues. All the above will help in submitting the electronic evidence in a comprehensible manner in court of law.16 Payments Business in Indian Banks*
  17. 17. 7 Exploring Enterprise Payments This section is based on our survey findings and tries to establish a context for Enterprise Payments in Indian banksUnderstanding Enterprise Payments Triggers for Migrating to Enterprise PaymentsThe concept of enterprise payments arises from the We asked the banks about the possible reasons that couldobservation that all payment methods share a common make them migrate towards enterprise payments. The diagramset of data elements and functions. While a cheque and a below encapsulates their responses:credit card may seem very different on the surface, theyare actually quite similar. Both have a source of funds, a Possible Reasons to migrate to Enterprisesecurity model, and a clearing and settlement network. paymentsOnce the check is truncated into an electronic message,it becomes possible to process it through the same 90% 80%infrastructure used for the credit card. 70%There are also common trade documents that govern the 60%transaction and drive the payment, regardless of method: 50%purchase order, invoice, and remittance advice. These 40%documents may have different names depending on the 30%application, but they maintain the same functions. For 20%example, in consumer bill payments, the invoice is called a 10%bill or statement. These documents can be transmitted as 0% Lower Shifting Regulations New Otherselectronic messages just as a payment instruction can be. Prices Payment Payment Percentage of Banks 63% 53% 47% 79% 11%Therefore, an enterprise payment system refers tothe integration of disparate payment functions andapplications, and leveraging the same to achieve higherreturns and competitive advantage. Crucially, introduction of newer payment products and channels and lower prices emerged as the primary triggersBanks around the world are experiencing profit pressures that might make banks gravitate towards enterprise payments.related to their payment systems, such that continuing with Newer payment products like introduction of additional variantsthe existing silo infrastructure is increasingly untenable. of card products and introduction of newer payment channelsAmong these pressures are lower prices, shifting payment like mobile banking will mean that the disparity in underlyingmix, regulations etc. technological architecture will only get wider. Hence, it makesHence, it becomes imperative to understand whether sense if disparate payment systems are integrated, for itthe Indian banking system is awake to the possibilities of will provide banks a common platform for offering a diverseenterprise payments. range of payment solutions. Consequently, integration of such diverse systems will lead to significant savings in terms of cost in the long run, which emerged as the second most important trigger in the survey. Majority of banks agreed that disparate systems were leading to duplication of work, with similar functions being performed by different departments. Are Disparate Payment Systems leading to duplication of Work? No 32% Yes 68% PricewaterhouseCoopers 17
  18. 18. Superior Risk Management through Enterprise Payments The Payments Hub Concept One of the key benefits of an enterprise payment system is in The concept of the Payments hub comes in the backdrop of the introduction of superior risk management measures across an increasing number of choices for the customers to make the bank. Majority of the banks agreed with this observation. their payments, which has led to tremendous complexity of relationships between channels, instruments and customers, as shown in the subsequent diagram. Will Enterprise Payments Improve Risk Mitigation? Channel Web site Web site Phone/ Branch teller/ Mobile ATM (Biller or Mail (bank) IVR Drop Box phone payee) No 20% Instruments Account to ATM/ Credit cards Cheque RTGS NEFT ECS Account Debit cards Yes Customer Corporate 80% Retail In many cases, these relationships are maintained and serviced Key Benefits of Enterprise Payments by many banks as separate payment silos, with separate processing entities for each payment method. Such disparate Based on the survey responses, the following emerged payment infrastructure has caused the bank to face significant as the key benefits that could accrue to banks through challenges, some of which are: enterprise payments are: • Infrastructure duplication, due to hardware and software • It would be possible to develop an enterprise payment systems provided by different vendors, cause huge financial model, which would tell the bank a consolidated maintenance problems and cost and redundant back-office “Profit and Loss” position from all payments-related staff required to monitor and maintain the infrastructure businesses. The model would also tell banks about the cost structure of their payments business - which • Technology legacy, since outdated or soon-to-be-obsolete costs are fixed or variable over changes in volumes, and technology platforms support the silos that are difficult to which are unique to a particular product or channel (like support. This means that banks cannot make changes to network or association fees) or shared across multiple payment systems quickly and easily, and they are unable products and customers (like branches and payment to gain an integrated view on the customer over different processing centres). channels and track payments end to end • Studying the payments P&L would tell the bank • Lack of scalability, since most of the payment systems and about the underlying drivers of payments business. architectures were designed at a time before the current Understanding how to manoeuvre each of these discrete volume in electronic instruments and the future growth were drivers can have significant impact on the profitability of not anticipated. The current volumes and the future levels a payment product. of electronic payments have the potential to overwhelm the payments systems resulting in the failure of the banks to • Simplification of the underlying architecture will lead provide guaranteed uptime of its payment systems. A loss to reduced transaction costs, benefits of which can be of uptime would result in loss of revenues, penalty costs passed on to the end consumer which will consequently and most importantly, the loss of customers drive up usage. • Lack of Straight Through Processing (STP), since many of • Integration of underlying systems would allow for the payment systems cannot provide the high STP rates superior MIS, which would help the bank understand that are required to run a profitable payments business, customer behaviour better. Consequently, it would banks need to employ a large back office staff to either bring about a greater customer orientation in product assist in manual re-keying of transactions, or to repair offerings. erroneous entries • Since underlying systems are integrated, it is possible • Costs related to payments processing are spiralling due to have an enterprise wise KYC/AML platform which to the silo nature of the payment systems, the duplication would allow for transaction level and client level flagging of infrastructure, people and processes. It is increasingly if fraud occurs in any of the payment products used by a getting harder to pass along costs to the customers since customer. customers are becoming savvier and more aware, and regulators are mandating price controls.18 Payments Business in Indian Banks*
  19. 19. Thus, the need of the hour is an IT infrastructure that will help It is in this context that the concept of a Payments Hubreduce costs by enabling payment efficiencies and decreasing emerges, allowing consolidation of multiple payment systemssystem duplication, improve customer satisfaction with faster into one centrally managed mid- office payment system,market response times, and enhance liquidity management thereby improving efficiency, reducing cost, enabling morethrough better monitoring and control. transparency in processing and improving customer service.It is possible to have a solution based on the fact that different The payment hub is built entirely on a Service Orientedpayment types share a common set of data elements: Architecture (SOA) delivering common, reusable services• Source of funds consisting of a comprehensive data model; choreographed payment business process and configurable services including• Security model parsing, validation, cost based routing, warehousing security,• Clearing & settlement network auditing and other services that are typically associated withMoreover, different payments share common process the payments life cycle.steps, covering the life cycle from messages to settlement. Architecturally the Payment Hub is positioned between theIn addition, all payment methods require services such as back office at the core of the bank and the different deliverypricing, limit checking, balance validation, and risk and fraud Without any direct connections between components, it isWithin each silo are duplicated services that could be possible to modify or replace one component without affectingleveraged across silos, such as AML, credit checking, fraud the others. This allows the bank to focus on areas of maximumdetection, etc. that are candidates for reuse. benefit with reduced cost and risk.These common data elements and process steps makecentralized management of payment systems possiblebecause they enable a common message and databaseschema, as shown in the subsequent diagram. Receiving Receive Exception Transmit to bank Payment Settlement Processing Network processes Request (if applicable) payment Check against fraud and compliance filters Risk management Demand for real - time, accurate information by clients SWIFT Unique functions Payment Hub Payment Database RTGS • Pricing • Risk & fraud management ECS • Security NEFT Network Access ss ise ce rpr Mobile Phone Ac nte E Web Site -B ank Channel Management Deposit systems Web Site -B iller or Payee Branch Teller/ Drop Box Application Services General Ledger ATM Reconciliation Phone/IVR PricewaterhouseCoopers 19
  20. 20. The key Components of any Payment Hub are Channel • Improved ability to respond to increasing regulatory Adapters and Business Process Manager, which have been requirements explained below. • Ability to identify new revenue sources Channel Adapters: Channel adapters form the interface • Operational benefits: between Bank Payment Hub and outside world. All incoming payments to the system, including payments from customer • Increase ability to fix problems faster and payments entering from clearing and settlement systems • Produce accurate, timely management reporting are handled by these adapters. • Reduce cost of system integration Business Process Manager: It defines the core functionality of the Payment Hub system. It makes sure that payments that • Quicker product development and roll-out enter the Bank Payment Hub follow a configurable workflow • Reduce cost of compliance through speedy , one-time and defined set of business processes. It allows the alteration changes to parameters affecting all payment accounts and of workflow and business processes without affecting the methods other parts of the system. • Increase system uptime • Broadly, the benefits from a payments hub are: • Improved ability to manage intraday liquidity • Strategic benefits: • Ability to meet processing deadlines confidently • Improved visibility in key payment areas Full service banks offering retail banking through diverse • Lower cost of processing channels and corporate cash management and treasury • Increased flexibility to deal with market conditions operations can expect to significantly benefit from a payments hub. Only time till tell whether the concept will find acceptance • Improved customer service, higher retention in India.20 Payments Business in Indian Banks*
  21. 21. 8 Charting the Future This section is based on our understanding of the future through discussions with the banks and the RBI.It is evident that payments will continue to evolve in the years On the aspect of mitigating security risks in payment, it isto come, both in terms of how we pay and where we pay. This important to periodically review contracts with technologysurvey was conducted to understand the bank’s view of how partners to ascertain whether the contracts are waterproof.payments are structured today and what developments could Audit authority needs to be established to ascertain auditabilitybe expected in future. of security breach. Application softwares need to be tested against vulnerabilities like backdoor windows. Legal cushionThe Banks’ Perspective needs to be set up to ensure that the bank is legally protected against the existing compliance framework.With speed and efficiency increasingly becoming thebuzzwords that shape customer solutions, banks will need torevisit their payments portfolio. It is evident that mobile devices The Regulator’s Perspectiveand the Internet will become increasingly popular as delivery Through our discussions with RBI, we got valuable inputs onmechanisms for payment solutions. However, there will always how the regulator views the future of payments in customer segments that will prefer to transact through a On the business aspect, RBI revealed that they would shortlycheque, or go to a branch to withdraw money. Hence, banks be releasing an updated version of the payments visionwill need to create a mapping of their payment portfolio with document, which would chart the path beyond 2009. Antheir customer segments and decide on the product strategy immediate area of concern is authentication of cross-borderaccordingly. payments, hampered by KYC/AML considerations, whichFrom the point of view of saving costs, banks will need to would lead to significant expansion in the realm of payments.increase their efforts in migrating customers from paper-based A crucial driver for payments might be the National ID Cardpayments to electronic payments. If a customer pays his phone initiative currently underway, which would eventually give everybills through cheques, a bank spends a few rupees in cost and Indian a unique identification number. Government paymentsa few paisa in incremental revenue. If the same customer can might largely be driven through the unique ID made to pay through his debit card, there will be significant However, since banks are the end-users, it is ultimatelyreduction in cost and significant increase in incremental their prerogative to efficiently use the national ID number forrevenue. However, this will require a fundamental change in superior payments solutions for their own customers.consumer behaviour, which can happen only if the banks andthe regulator offer a secure, robust and efficient network, in An extremely important consideration for the future paymentsaddition to incentives in terms of convenience and benefits to framework would be its efficacy in ensuring financialthe customer. inclusion. While several public sector banks have taken significant initiatives in this area through introduction of mobileSince customer orientation will eventually drive business kiosks and the banking correspondent model, there is a lot thatvolumes, migrating to enterprise payments will possibly be is left to be done in the area of financial inclusion. Since mobilean option that banks will not be able to refuse in the years to penetration is the highest in rural India compared to any othercome. A framework that will reduce costs, bring about superior communication channel, mobile banking could possibly be theKYC/AML checks, help banks know customer behaviour better channel that brings about greater inclusion of the unbankedand give an overall idea of the profitability of their payments population in does sound like a good idea. However, takingthe big leap from legacy systems and traditional businessmindsets can only happen if the banks are convinced of thebenefits that can accrue to them. For that, a crucial driverwould be increased acceptance of electronic payments byconsumers across India. The RBI plays a crucial role here, forit is ultimately the entity that shapes the future of any financialoffering in India. Formation of the NPCI is a right effort in thatdirection, for it will bring in a new focus on retail payments,which should also see the electronification that has beenbrought about by the introduction of RTGS in SystemicallyImportant Payment Systems. PricewaterhouseCoopers 21
  22. 22. About Confederation of Indian Industry The Confederation of Indian Industry (CII) works to create and sustain an environment conducive to the growth of industry in India, partnering industry and government alike through advisory and consultative processes. CII is a non-government, not-for-profit, industry led and industry managed organisation, playing a proactive role in India’s development process. Founded over 114 years ago, it is India’s premier business association, with a direct membership of over 7800 organisations from the private as well as public sectors, including SMEs and MNCs, and an indirect membership of over 90,000 companies from around 385 national and regional sectoral associations. CII catalyses change by working closely with government on policy issues, enhancing efficiency, competitiveness and expanding business opportunities for industry through a range of specialised services and global linkages. It also provides a platform for sectoral consensus building and networking. Major emphasis is laid on projecting a positive image of business, assisting industry to identify and execute corporate citizenship programmes. Partnerships with over 120 NGOs across the country carry forward our initiatives in integrated and inclusive development, which include health, education, livelihood, diversity management, skill development and water, to name a few. Complementing this vision, CII’s theme for 2009-10 is ‘India@75: Economy, Infrastructure and Governance.’ Within the overarching agenda to facilitate India’s transformation into an economically vital, technologically innovative, socially and ethically vibrant global leader by year 2022, CII’s focus this year is on revival of the Economy, fast tracking Infrastructure and improved Governance. With 64 offices in India, 9 overseas in Australia, Austria, China, France, Germany, Japan, Singapore, UK, and USA, and institutional partnerships with 213 counterpart organisations in 88 countries, CII serves as a reference point for Indian industry and the international business community.22 Payments Business in Indian Banks*
  23. 23. About PricewaterhouseCoopersPricewaterhouseCoopers Pvt. Ltd. ( provides industry - focused tax andadvisory services to build public trust and enhance value for its clients and their stakeholders.PwC professionals work collaboratively using connected thinking to develop fresh perspectivesand practical advice.Complementing our depth of industry expertise and breadth of skills is our sound knowledge ofthe local business environment in India. PricewaterhouseCoopers is committed to working withour clients to deliver the solutions that help them take on the challenges of the ever-changingbusiness environment.PwC has offices in Ahmedabad, Bangalore, Bhubaneshwar, Chennai, Delhi NCR, Hyderabad,Kolkata, Mumbai and Pune.ContactsJairaj Purandare Ambarish DasguptaExecutive Director Executive DirectorFinancial Services Leader Performance Improvement PracticeTel: +91 22 6669 1400 Tel: +91 33 2357 3397Email: Email: Krishnan Rachna NathExecutive Director Executive DirectorRisk and Regulations, IT Effectiveness,Performance Improvement Practice Performance Improvement PracticeTel: +91 22 6669 1350 Tel: +91 33 2357 3199Email: Email: Bisht Neel MajumdarExecutive Director Managing ConsultantBanking and Capital Markets Leader Performance Improvement PracticeTel: +91 22 4007 4602 Tel: +91 33 2357 3196Email: Email: publication has been prepared for general guidance on matters of interest only, and does not constitute professional advice. You should not act uponthe information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is given as tothe accuracy or completeness of the information contained in this publication, and, to the extent permitted by law, PricewaterhouseCoopers, its members,employees and agents accept no liability, and disclaim all responsibility, for the consequences of you or anyone else acting, or refraining to act, in relianceon the information contained in this publication or for any decision based on it. Without prior permission of PricewaterhouseCoopers, the contents of thispresentation may not be quoted in whole or in part or otherwise referred to in any documents. PricewaterhouseCoopers 23
  24. 24. Designed by: PwC Brand & Communications © 2009 PricewaterhouseCoopers. All rights reserved. “PricewaterhouseCoopers”, a registered trademark, refers to PricewaterhouseCoopers Private Limited (a limited company in India) or, as the context requires, other member firms of PricewaterhouseCoopers International Limited, each of which is a separate and independent legal entity.24 Payments Business in Indian Banks*