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

Technology – The Core Service Differentiator

forThe Cochin Roundtable on

Technology for Banks

Vepa Kamesam

Former Deputy Governor, RBI

Chairman, IDRBT/BRBNML

INSTITUTE FOR DEVELOPMENT ANDRESEARCH IN BANKING TECHNOLOGY October 9, 2004 Vepa Kamesam, Chairman IDRBT

Technology and BankingThe Quintessence Nature of Banking harmonizes

closely with Technology –

Banking Technology

Information Storage

ProcessingTransmission

Tasks Common to Both


Pervasive BranchNetwork

Global Operations

Complex Credit Calculations

Innovative RiskManagement

Banking a

nd Tech

nology

Mass Transaction& Items Processing


Many Benefits of TechnologyIncreased operational efficiency, profitability & productivitySuperior customer serviceMulti-channel, real-time transaction processing Better cross-selling abilityImproved management and accountabilityEfficient NPA and risk managementMinimal transaction costsImproved financial analyses capabilities


Core Banking (CBS)

ATMs

Card Management

Any Branch Banking

DocumentManagement

RiskManagement

ResourceManagement

MIS & Intranet

CRM

Corporate Network

Electronic Banking

Focus aspects of Commercial

Banking now are:


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 EquipmentSecurity SystemsSystems at Branches/RO/ZO/CO Depts.Supporting Systems Disaster Recovery Site & Business Continuity


Technology – A DifferentiatorTechnology is indeed a differentiator not only

in terms of competitive advantage, but also in terms of administrative and back-end processes….

But…due to rapid technology deployment in Indian banking sector, the “haves” and “have-nots” gap is all set to narrow quickly.


Technology Differentiation Fades Gradually….


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…


Elements of Technology as a Differentiator

Scalability &Flexibility

Efficient utilisation, mgmt

Process enabling

Utility to customer

SupportSkills

For Long-Term Differentiation


The Human InterfaceTechnology means changes in skills and culture…

This means extensive changes for the employees…

The Implication – Train existing people Get new people

Technology change

Processeschange

Skills required change

People & culturechange


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 technologyHow to undertake the new tasks

This is not easy, as average employee age is nearly 45


Elements in People IssuesChoosing the suitable people for the taskCareer emergence instead of career planningRecognising and rewarding the achieversManagers taking on the role of trainersEncouraging new ideas and conceptsAdopting a multi-disciplinary, multi-functional approachShift from individual to business unitBalancing – creativity & routine, changeInculcating business disciplineUnderstanding the need and extent of continuous educationGetting rid of myths


Issues with CustomersNot only employees, there are problems for

customers too when a new technology arrives…

The major challenges –Comfort levelsSecurity and trust issuesConvenience factorGetting rid of mythsMigration from existing to new systemsChanging the habits


Technology AcquisitionInappropriate 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 it…I should

also do it”) Be impartial in technology decisions (“I like that

technology…I want it”) Understand where the solution will fit AND where it

won’t! Assess the strengths & weakness of solution And seek answer to “are we ready for it?”


TechnologyFor

Sustained Differentiati

on

Goal definitionIntegrating business & technology goalsSolution featuresVendor selectionBusiness process re-engineeringChange management

Efficient utilisationCustomer utilityTechnology ManagementSupport functionsMaintenanceBack-ups and Disaster RecoveryScalability & flexibilityLearning & evolution

Differentiation is attained not achieved just through technology, it is gained in the way the technology is selected, implemented and utilised


Technology and Central Banks

Why Central Why Central Banks are Banks are interested?interested?

Technology has Affected every

CoreCentral BankingFunction

Technology has Affected every

CoreCentral BankingFunction

The potentialTechnology

offersto improveinternal processes

The potentialTechnology

offersto improveinternal processes


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


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 OpportunityRegulators 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


Technology and Banking Supervision

THE RBI RESPONSE

Offsite Supervision & MonitoringOSMOSCOSMOS (Non banking Financial Companies / Development Financial Institutions)

UBD SoftCredit 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.)


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

RBI’s 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


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


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


IT and Payment and Settlement Systems

Demateria-lisation

Of Securities

DeliveryVersus

Payments

Payment Versus

Payment

ContinuousLinked

Settlement

ElectronicDealing

Platforms

RealTimeGross

Settlement

CentralCounter

partySecured NettingSystems


RBIRBIINITIATIVESINITIATIVESIN PAYMENTIN PAYMENT

&&SETTLEMENTSETTLEMENT

SYSTEMSSYSTEMSCompliance with

BIS Core Principles

RTGS

CFMSNEFT

PKI-based Security

SFMS

Clearing Corporationof India

IDRBT

PDO-NDS & SSS

NFS/IBPG

INFINET


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


2 Mbps with ISDN Backup

JAMMU

CHANDIGARH

DELHIJAIPUR

AHMEDABAD

MUMBAI

PUNE BANGALORE

THIRUVANANTHAPURAM

CHENNAI IDRBT HYDERABAD

BHUBANESHWAR

CALCUTTA

PATNA

KANPUR

GUWAHATI

BHOPAL

INFINET Leased Line Network

NAGPUR

KOCHI

GOA

LUCKNOW

4 X 2 Mbps

2 X 2 Mbps

2 Mbps

64 Kbps

HYDERABAD RBI

CUG links


Gateways and Integration withOther Financial Network ServicesG1- SWIFT NetworkG2- Reuters NetworkG3- Stock Exchange NetworkG4- Inter Banks/FIsG5- Shared ATMsG6- Clearing Operations NetworkG7- Internet

Corporate Network

Inter Banks/FIs Network

Shared ATMs Network

Clearing Operations Network

SWIFTNetwork

ReutersNetwork

NSENetwork

G1 G1 G2 G2 G3 G3

G1G2

G3 G1G2

G3 G1G2

G3

G4

G4 G4 G5

G5 G5 G6

G7Internet

Financial Networks

INFINET


Structured Financial Messaging System

Branch-1

Bank-1 Gateway

Bank-2 Gateway

Bank-n Gateway

Branch-2Branch-nBranch-1Branch-2Branch-n Branch-1Branch-2Branch-n

Central Server at

IDRBT

………..…………….…..

………..…………….….……..

… … … … … ……….……

…….……


PKI Hierarchy

CCA

IDRBT CA

RA

Subscriber

IDRBT CA

Repository

RA RA

Subscriber

Subscriber

Subscriber

Subscriber

Subscriber


IDRBT CA Physical Infrastructure

Iron gate with Biometric Access

Access through Swipe Card

Network

Strong Room

Key Ceremony Room

Operational Room

Tier 1Tier 2

Tier 3

Tier 4

Tier 5UPS

Administration Room

Media proof CA Private Key

Storage

Biom

etric A

ccess

Acce

ss thro

ug

h S

wip

e Ca

rd

Iron g

ate

with

Bio

metric

Acce

ss


IP Address:202.138.123.68

Subnet Mask: 255.255.255.254

Location: Mumbai

CashNet

NFS CONNECTIVITY with Existing Consortiums & Individual Banks

National Financial Switch & E- Payment Gateway

ISDN

Primary Link

Backup Link

Broad Band VSAT

Bank 1

Bank N

ISDN

MITRLocation: Chennai

BANCS & CashtreeLocation: Mumbai

ISDN Leased Line

ISDN

ISDN

Leased Line

Bank 2

Leased Line Leased Line

ISDN

Leased LineINFINET



A Real Time Gross Settlement System Reduction of systemic risk in inter bank

payment systemsTo 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


CFMS

SettlementAccounts

IFTPStrip & Store

ProcessesSSS

Intra Day Liquidity

RBI Payments and Actg. Entry Interface

INFINET NSS

Participant’sInterface

Participant’sInterface

Participant’s Interface

Real Time Gross

Settlement


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


Centralised Funds Management System

DAD-1

DAD-2

DAD-16

DAD-17

CFMSServer

Gateway for theparticipating banks

Bank 2

Bank 3

Bank n

Bank 1

Balance checks & funds transfer messages


Centralised Funds Management System – Countrywide Spread


Negotiated Dealing System & the Securities Settlement

SystemElectronic dealing platform in government securities and money market instruments- Primary and Secondary marketsQuicker Price DiscoveryStraight Through Processing- Settlement of transactionsDelivery versus Payments Efficient ServicingCentralised Depository and Debt ServicingWide Area Based Dealing System



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


The Clearing Corporation of India

Promoted by large banks & financial institutionsCentral Counterparty to trades in Government Securities Forex markets

Secure netting system


Smart Cards – The Future

Multi-application Smart CardChannel of the futurePilot project startedPilot Project funded by MCIT, Govt. of IndiaThe project is in progress in partnership with IDRBT, IIT Bombay, and Banks in India


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


RBI itself uses Technology for differentiation

An integrated solution for each functional areaOnline 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


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


RBI and Customer Service...(2)

Improvements in payment and settlement systems MICR Clearing

Enabling faster clearing of cheques

Cheque Truncation & E-ChequesOn the drawing board

ECS/EFTEnabling T+2 settlement of our

equities marketNational EFTEnabling T+0 settlement of all

customer funds transfer transactions


Technology Vision of the RBI

Centralised DatabaseManagement System

EnterpriseEnterprise KnowledgeManagement System

Integrated Accounting System

Integrated GovernmentAccounting System

Currency OperationsSystem

Desk Top Decision Making Capability

Desk Top Analytical Capability

Desk Top Transactional Capability

Securities SettlementSystem

Integrated EstablishmentSystem

Offsite Supervisory Systems

Integrated Forex Management System

Human ResourceInformation System


Issues in Implementation““Less than 10% of failures are due to Less than 10% of failures are due to technical snags – most are due to poor technical snags – most are due to poor management and implementation”management and implementation”

Resistance to changeOverlooking process reengineeringProject managementDedicated project teamsChange managementPoliciesPeople Skills & TrainingBasic Infrastructure – telecom, powerSecurityPrivacy & confidentialityLegal and regulatory issues


Pre-requisites for Technology

Planning for Planning for

DisastersDisasters

Business Process Business Process

Re-engineeringRe-engineering

Human ResourceHuman Resource

EmpowermentEmpowerment


The pre-requisites for Technology

Planning for disasters Increased operational risk Business Continuity Planning

Business Process Re-engineering

Human Resource Empowerment


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?


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 ITHence 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).


Success is a journey not a destination. - Arthur Ashe


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


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


Monetary Policy – The Opportunity

The proliferation of IT has also set the stage for improving and managing risks in payment systemsElectronic Trading SystemsDVP/PVPRTGS Secured Netting SystemsThe growth of the Central Counterparty (CCP)Continuous Linked Settlement

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

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