Technology The Core Service Differentiator for The Cochin Roundtable on Technology for Banks

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Technology The Core Service DifferentiatorforT
he Cochin Roundtable on Technology for Banks

• Vepa Kamesam
• Former Deputy Governor, RBI
• Chairman, IDRBT/BRBNML

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Technology and Banking
The Quintessence Nature of Banking
harmonizes closely with Technology
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Innovative Risk Management
Complex Credit Calculations
Global Operations
Pervasive Branch Network
Mass Transaction Items Processing
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Many Benefits of Technology

• Increased operational efficiency, profitability
  productivity
• Superior customer service
• Multi-channel, real-time transaction processing
• Better cross-selling ability
• Improved management and accountability
• Efficient NPA and risk management
• Minimal transaction costs
• Improved financial analyses capabilities

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Focus aspects of Commercial Banking now are
Core Banking (CBS)
ATMs
MIS Intranet
Card Management
Electronic Banking
Corporate Network
Document Management
Any Branch Banking
Risk Management
Resource Management
CRM
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Financial Technology Infrastructure

• Data Center to host servers for
• CBS
• ATM/Financial Switch
• Internet Banking
• DW/DM/CRM/MIS etc.
• Back-office Application
• E-mail Servers, Internet Server,
• Enterprise-wide Network Networking Equipment
• Security Systems
• Systems at Branches/RO/ZO/CO Depts.
• Supporting Systems
• Disaster Recovery Site Business Continuity

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Technology A Differentiator

• Technology is indeed a differentiator not only in
  terms of competitive advantage, but also in terms
  of administrative and back-end processes.
• Butdue to rapid technology deployment in Indian
  banking sector, the haves and have-nots gap
  is all set to narrow quickly.

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Technology Differentiation Fades Gradually.
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How Long a Differentiator?

• Then.can technology be enough of a
  differentiator?
• Any new technology or technology-enabled process
  can act as a differentiator or a competitive edge
  for some level of time.
• After that time, the technology still has to be
  adopted as a necessity and as a cost of doing
  business
• Thanks to shortening technology life cycles, it
  would be short sighted to assume that technology
  would be a long term differentiator

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For Long-Term Differentiation
Elements of Technology as a Differentiator
Scalability Flexibility
Efficient utilisation, mgmt
Process enabling
Utility to customer
Support Skills
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The Human Interface

• Technology means changes in skills and culture
• This means extensive changes for the employees
• The Implication
• Train existing people
• Get new people

Technology change
Processes change
Skills required change
People culture change
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But Change is not easy

• Organisational structure and culture not dynamic
• Extensive job redesign redeployment is
  tough.as bank machinery is slow
• Staff has 2 critical jobs to learn
• How to operate new technology
• How to undertake the new tasks
• This is not easy, as average employee age is
  nearly 45

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Elements in People Issues

• Choosing the suitable people for the task
• Career emergence instead of career planning
• Recognising and rewarding the achievers
• Managers taking on the role of trainers
• Encouraging new ideas and concepts
• Adopting a multi-disciplinary, multi-functional
  approach
• Shift from individual to business unit
• Balancing creativity routine, change
• Inculcating business discipline
• Understanding the need and extent of continuous
  education
• Getting rid of myths

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Issues with Customers

• Not only employees, there are problems for
  customers too when a new technology arrives
• The major challenges
• Comfort levels
• Security and trust issues
• Convenience factor
• Getting rid of myths
• Migration from existing to new systems
• Changing the habits

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Technology Acquisition

• Inappropriate technology purchases can be the
  root of all problems
• The Bank management has to
• Give thought to the utilization rate
• Avoid knee-jerk reactions (they have done itI
  should also do it)
• Be impartial in technology decisions (I like
  that technologyI want it)
• Understand where the solution will fit AND where
  it wont!
• Assess the strengths weakness of solution
• And seek answer to are we ready for it?

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Differentiation is attained not achieved just
through technology, it is gained in the way the
technology is selected, implemented and utilised
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Technology and Central Banks
The potential Technology offers to
improve internal processes
Technology has Affected every Core Central
Banking Function
Why Central Banks are interested?
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Why Central Banks are Interested?

• The widespread adoption of technology by the
  banking industry
• The impact of technology on every single core
  central banking function
• Supervision and Regulation
• Currency Management
• Monetary Financial Stability
• The potential technology offers to central banks
  for rendering more effective its internal
  processes and functions

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Regulation and Supervision The Challenge

• Challenge of Technology
• New markets, products, services, delivery
  channels
• Opened up a market for risks derivatives
• Challenge of financing tech firms IT
  innovation
• all have implications for the stability of banks
  and of the economy
• The Opportunity
• Regulators have new tools
• Focus of all recent financial sector reforms
• Emergence of non-intrusive, focused supervision
• with a view to prevent frauds and disturbances
  to financial stability

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Technology and Banking Supervision
THE RBI RESPONSE
Offsite Supervision Monitoring OSMOS COSMOS
(Non banking Financial Companies / Development
Financial Institutions) UBD Soft Credit
Information Bureau (A joint venture between
Housing Development Finance Corporation Ltd.,
State Bank of India, Trans Union International
Inc. Dun Bradstreet Information Services
India Pvt. Ltd.)
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Currency Management and Technology
Opportunities Galore

• Currency Management - a formidable task in India
  given
• the geographical size, the volume and value of
  notes and coins in circulation, preference for
  cash and currency handling practices
• ...but technology offers immense opportunities to
  improve performance
• RBIs The Clean Note Policy (1999)
• Establishment of 2 state of the art currency
  presses
• Technology driven anti counterfeit measures
• 48 fully automated Currency Verification
  Processing Systems
• 21 Shredding and Briquetting Machines

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Technology Monetary Systems

• Technology has
• transformed the conduct of the payment and
  settlement system
• set the stage for an unprecedented growth in
  financial activity across the globe
• Rendered more vulnerable the domestic payment
  system and financial stability to international
  shocks
• making the conduct of monetary policy more
  complex and prone to implementation and
  operational risks

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Technology Monetary Systems

• The Opportunities
• The proliferation of IT has also set the stage
  for improving and managing risks in payment
  systems
• Electronic Trading Systems
• DVP/PVP
• RTGS
• Secured Netting Systems
• The growth of the Central Counterparty (CCP)
• Continuous Linked Settlement

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IT and Payment and Settlement Systems
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NFS/IBPG
RBI INITIATIVES IN PAYMENT SETTLEMENT SYSTEMS
PDO-NDS SSS
INFINET
Clearing Corporation of India
IDRBT
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RBI Initiatives in Payment and Settlement Systems
(1)

• The IDRBT
• Network Externalities
• The Indian Financial Network (INFINET)
• Messaging Solutions
• The Structured Financial Messaging System (SFMS)
• Security
• Public Key Infrastructure
• IDRBT CA
• National Financial Switch
• Inter Bank Payment Gateway

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(No Transcript)
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Financial Networks
INFINET
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Structured Financial Messaging System
Branch-1
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PKI Hierarchy
CCA
IDRBT CA
RA
RA
RA
Subscriber
Subscriber
Subscriber
Subscriber
Subscriber
Subscriber
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IDRBT CA Physical Infrastructure
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NFS CONNECTIVITY with Existing Consortiums
Individual Banks
National Financial Switch E- Payment Gateway
ISDN
Bank 1
Bank N
Broad Band VSAT
CashNet
IP Address202.138.123.68 Subnet Mask
255.255.255.254 Location Mumbai
Primary Link Backup Link
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RBI Initiatives in Payment and Settlement Systems
(2)

• A Real Time Gross Settlement System
• Reduction of systemic risk in inter bank
  payment systems
• To be implemented by the year end
• The Centralised Funds Settlement System
• Facilitating effective liquidity management
• The Negotiated Dealing System
• A modern electronic dealing platform for gilts
• Enabling Straight Through Processing

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Real Time Gross Settlement
CFMS
IAS
Settlement Accounts
Intra Day Liquidity
SSS
IFTP
Strip Store Processes
RBI Payments and Actg. Entry Interface
INFINET
NSS
Participants Interface
Participants Interface
Participants Interface
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RTGS Scenario

• 87 banks have implemented it
• 6 more to implement in a fortnight
• Customer transactions have already started
• Total volumes Transactions on average Rs.20,000
  crores per day

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Centralised Funds Management System
Gateway for the participating banks
DAD-1
Bank 1
DAD-2
Bank 2
CFMS Server
Bank 3
DAD-16
Balance checks funds transfer messages
Bank n
DAD-17
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Centralised Funds Management System
Countrywide Spread
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Negotiated Dealing System the Securities
Settlement System

• Electronic dealing platform in government
  securities and money market instruments- Primary
  and Secondary markets
• Quicker Price Discovery
• Straight Through Processing- Settlement of
  transactions
• Delivery versus Payments
• Efficient Servicing
• Centralised Depository and Debt Servicing
• Wide Area Based Dealing
• System

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RBI Initiatives in Payment and Settlement Systems
(3)

• The Securities Settlement System
• Providing centralized depository and
  settlement services
• Seamlessly integrated with the NDS and RTGS
  Systems
• The Clearing Corporation of India
• Secured netting services with central
  counterparty arrangements
• G-Sec and Forex segments
• Elimination of settlement risks with liquidity
  saving elements

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The Clearing Corporation of India

• Promoted by large banks financial institutions
• Central Counterparty to trades in
• Government Securities
• Forex markets
• Secure netting system

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Smart Cards The Future

• Multi-application Smart Card
• Channel of the future
• Pilot project started
• Pilot Project funded by MCIT, Govt. of India
• The project is in progress in partnership with
  IDRBT, IIT Bombay, and Banks in India

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Goal of Payment and Settlement Systems

• Establishment of a secure, efficient, modern
  payment and settlement system in the country
• Ensuring full compliance with the Core
  Principles for Systemically Important Payment
  Systems of the Bank for International
  Settlements

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RBI itself uses Technology for differentiation

• An integrated solution for each functional area
• Online analytical capabilities The Integrated
  Foreign Exchange Management Solution, The Human
  Resource Information System, Integrated Monetary
  Policy Solution
• Online Decision Making The Centralized Database
  Management System , The Enterprise Knowledge
  Management System
• Customer Service RBI website, coin note
  dispensing machines for public, Interactive voice
  response for banks FIs, ECS/EFT, cheque
  truncation
• This is apart from technologies used for central
  banking functions

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RBI and Customer Service(1)

• Dissemination of information
• The RBI website
• Multiple Delivery Channels
• Coin Note Dispensing Machines
• For the general public
• Interactive Voice Response System
• For banks and financial institutions
• Web server
• For government customers
• On the anvil.
• A secured web server
• SFMS/email based communication with customers

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RBI and Customer Service...(2)

• Improvements in payment and settlement systems
• MICR Clearing
• Enabling faster clearing of cheques
• Cheque Truncation E-Cheques
• On the drawing board
• ECS/EFT
• Enabling T2 settlement of our equities market
• National EFT
• Enabling T0 settlement of all customer funds
  transfer transactions

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Technology Vision of the RBI
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Issues in Implementation Less than 10 of
failures are due to technical snags most are
due to poor management and implementation

• Resistance to change
• Overlooking process reengineering
• Project management
• Dedicated project teams
• Change management
• Policies
• People Skills Training
• Basic Infrastructure telecom, power
• Security
• Privacy confidentiality
• Legal and regulatory issues

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Pre-requisites for Technology
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The pre-requisites for Technology

• Planning for disasters
• Increased operational risk
• Business Continuity Planning
• Business Process Re-engineering
• Human Resource Empowerment

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Getting Personal with Personnel

• People represent the most precious asset
• Large employee base largely untrained. Training
  scope methodology?
• VRS to balance costs. Break even? Down sizing?
• Bring in young blood
• Campus recruitment
• Re-defining designing jobs. Career paths?
• Specialist Vs. Generalist
• Attrition of trained employees to IT industry /
  other banks. Competitive incentives?
• Re-location of personnel. Union issues?
• Retrained personnel. Morale of employees?

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Need for Training

• All these developments call for extensive,
  continuous training
• Current and future technology implementations
  call for at least 20 of officers specialise in
  IT
• Hence need for specially skilled people a mix
  of
• System administrators
• Application managers (knowledgeable about both
  banking and technology)
• Technology managers (who form the core team of
  technology professionals).

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Success is a journey not a destination. - Arthur
Ashe
Thank You
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Monetary Policy The Challenge (1)

• The proliferation of IT has
• redefined the toolkit of economic indicators
  used in implementing monetary policy
• rendered more complex, the task of compiling
  statistical information
• rendered difficult the task of capturing the
  impact of IT on price levels
• raised issues in respect of the possible
  proliferation of digital money

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Monetary Policy The Challenge (2)

• transformed the conduct of the payment and
  settlement system
• set the stage for an unprecedented growth in
  financial activity across the globe
• Rendered more vulnerable the domestic payment
  system and financial stability to international
  shocks
• making the conduct of
• monetary policy more complex and prone to
  implementation and operational risks

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Monetary Policy The Opportunity

• The proliferation of IT has also set the stage
  for improving and managing risks in payment
  systems
• Electronic Trading Systems
• DVP/PVP
• RTGS
• Secured Netting Systems
• The growth of the Central Counterparty (CCP)
• Continuous Linked Settlement