Networked Banks

Reduced

margins, intense competition, sweeping reforms, rapid technology changes. That

is the Indian banking sector for you. While the techno-savvy, private domestic

banks hog the limelight, the basic tenet of survival for our ailing PSU banks is

this: A robust communications infrastructure.

The Oxford English dictionary defines the bank as an entity which uses money

deposited by customers for investment, pays it out when required, makes loans at

interest, exchanges currency, etc. But what would you call an entity, which

apart from basic financial services, offers you mobility, financial advice, pays

your utility bills and lets you go on a shopping spree without walking into a

mall. Probably this is what makes it increasingly difficult to define what a

bank is these days.

Welcome to the brave new world of banking and financial services. Probably,

no other industry is going through such a turbulent albeit interesting phase of

re-invention — riding piggyback on technology. Banking today is not about

where the branch is but being where the customer is. Perhaps, to use the

cliché, this is the most discernible paradigm shift taking place in the Indian

banking sector. And there are many terms to describe this radical change:

universal banking, next generation banking, etc. But whatever name you choose to

call it, this all means only one thing: deliver cost effective and better

services to the customer in the way he wants, where he wants it and how he wants

it. Banks in the country, especially in the public sector, have just woken up

from a deep slumber and are getting their act together to meet increased

customer expectations and fine-tuning their communication infrastructure.

For the traditional financial service providers, who are reeling under

technology shifts and a balance of power from intermediaries to consumers, the

message is loud and clear: connectivity is the name of the game.

Can of Worms

Our banking system is faced with several difficult challenges–the high cost

of doing business, level of non-performing assets and a poor level of customer

satisfaction, to name a few. On the other hand, there has been a phenomenal

growth in the volume of capital flow across the nation and integration of

financial markets across the globe as a fall out. Indian banks are no longer

insulated from international development and international capital movements.

The same holds true in the case of technology.

What came as a rude awakening to the Indian banks was the introduction of

electronic technology for transactions, settlement of accounts, bookkeeping and

all other related functions. This was where many behemoths in the public sector

were caught napping and whether they like it or not, all banking transactions

are on the way to being electronic. Those who can’t catch up with the times

are bound to be the losers.

In a way, the RBI set the ball rolling by spearheading technological change

as part of its reform process in the early 90s. The banking industry responded

to the clarion call by accelerating the pace of computerization among branches,

controlling offices and head offices. The thrust was on commercially important

centers, which account for sixty five percent of banking business in terms of

value. Probably that explains why a staggering eighty percent of PSU bank

branches in the country are still non-connected and non-networked.

A New Dawn

The seeds of technological change began with branch automation. Moving from

automated ledger-posting machines to partial branch automation and total branch

automation. Now it stands on the threshold of offering financial services

through multiple delivery channels, including the Internet–the most cost

effective of all. The development and use of communication networks are what has

really helped the banking industry to improve the quality of its services.

The Indian financial system, particularly the banking sector, is thronged by

public sector institutions and banks. Are they gearing up their communication

infrastructure to play a globally competitive role in the near future? India’s

public sector banks present a grim picture as of now. Burdened with legacy

systems and a wide network of branches spanning across the country, these

entities are finding the going increasingly tough when pitted against the new

breed of private domestic banks like ICICI and HDFC. Consider this: State Bank

of India, undoubtedly the largest bank in the country, has around 10,000

branches all over the country and interconnecting all these branches is a

technical pipe dream. What hampers the speed of modernization of technology

among the PSU banks, is the sheer size and magnitude of their operations. On the

other hands, it was smooth sailing for private sector banks like ICICI and HDFC,

which came into existence a few years ago and therefore are leapfrogging to the

cutting edge of technology. Technology and branding of services are likely to

separate the wheat from chaff.

But all is not lost for the PSU banks. Spearheaded by RBI, banks like the SBI

have already embarked upon ambitious projects to pick up the gauntlet. Take SBI

Connect for example. This public sector behemoth, which alone accounts for

around twenty two percent of banking transactions in the country, has chalked

out a blueprint with the help of its technology consultant KPMG, to be at the

forefront of technology. The project, the biggest of its kind in the country,

envisages to network around 5,000-branches and streamline a totally integrated

network. Every system integrator worth its salt has pitched in to bag this

project. Biggies like Reliance Infocom and Tata Infotech have formed a

consortium to pitch for this large networking project. The bank, at present, has

around 2,337 fully computerized branches, and has made available telebanking and

interbanking at select outlets. The number of operational ATMs stand at around

179, with plans to add around 800 more by the end of this fiscal year. Though

SBI has unveiled a strategy to become a tech-savvy bank with the target of

"anywhere, anytime banking", it is a tall order for the bank as the

stumbling blocks are too many. To begin with, none of the public sector banks in

the country have a centralized database, which is crucial for the success of its

initiatives on the web. SBI might opt for regional hubs with all the branches in

that particular geography connected to the hub. But how efficient would this

cluster of databases be is a question worth asking. If this is the plight of the

largest bank in the country, the story of others is anybody’s guess.

However, there is no denial of the fact that state-run banks are now harping

to the tune of technology. Probably the most attractive incentive for them is

cost reduction. Saddled with a bloated workforce and squeeze-on margins brought

about by intense competition, these banks are exploring new vistas of technology

to shore up their sagging fortunes. Says Santosh Khanolkar, GM, consulting e—commerce

services, Global Tele-systems, "the cost of an ATM transaction is just one

tenth of a normal transaction." The same is the case with the cost of

retail banking on a delivery channel like the Internet. This is where private

domestic banks score over PSU banks. Banks like ICICI and HDFC have been quite

nimble to lap up the opportunities and fully realize the potential of the

Internet. Take the case of ATMs. In a metro like Mumbai, ATMs of this new breed

of banks are proliferating by day, making the lives of their customers simple.

C. N. Ram, the head of information technology at HDFC Bank, points out: "We

have received very enthusiastic response to our Net Banking. We have around

250,000 registered users for our Internet offering." This sounds impressive

but not all of them log on to the web to control their purses. "Around

fifty percent of the registered users actually use the web for financial

services. It has to be borne in mind that we have been offering these services

only for about a year and these are the people who would have otherwise

overcrowded our branches," adds Ram. The HDFC experience shows that a

customer, who does four or five transactions through the ATM, now does around

5-transactions via the web too. The new mantra is to use the web to reduce

execution/service costs. "All said and done, everything boils down to one

thing–convenience for the consumer, be it retail or corporate. Chances of

survival are slim for those who don’t latch onto the new delivery

channels," points out Sreekrishna, general manager, Internet consulting

group, HCL Comnet.

Internet banking, without doubt, is a better value proposition for the banks.

Apart from cost-reduction benefits, this medium offers greater operational

flexibility to the banks. Starting with a central database, with its attendant

applications, there are many other key issues to be addressed. Though all

nationalized banks now have a web presence, it still leaves a lot to be desired.

The majority of these sites are at the entry level, offering very basic

information. But by any stretch of imagination, the Internet is not the panacea

for all the ills plaguing the Indian banking sector today. There are many other

key issues that are yet to be addressed, like poor efficiency and management,

excessive degree of regulation and frequent government interventions in the name

of political populism.

Communications Network — A Survival Tool

This can be called the elixir of life for banks: a fine tuned communications

network, which is up and running round the clock. The data available from the

RBI, pertaining to public sector banks, reveals that a staggering 10,458

branches in the country are eligible for partial/branch automation, out of the

total number of 45,837 branches in the country. This is the dilemma facing the

PSU banks in the country. The investment that would be required to wire up all

these branches together poses a major challenge. The use of the communications

systems in the banking sector had a modest beginning with leased terrestrial

technology i.e. Banknet, an initiative of the RBI. Then came another milestone

with the operationalization of the Shared Payment Network System (SPNS) of ATMs

of the Indian Banks’ Association, a voluntary organization based in Mumbai,

which has done some pioneering work on the banking technology front. But the

landmark event was the launch of INFINET, a wide area satellite based network

using VSATs. Currently, the INFINET connects around 439-VSATs distributed over

around 200-cities in the country. The RBI is currently working on setting up a

fibre backbone, initially with 2 Mbps and 64/128 Kbps connectivity, integrated

with the VSAT network. Intentions are to make the INFINET a blend of satellite,

microwave and terrestrial links. That is good news for the PSU banks as VSATs

make sense for branches in far-flung places, which are inaccessible

terrestrially.

Networking

For the system integrators, there are opportunities galore in the banking and

finance sector. Being one of the biggest growth areas, banking network projects

account for a major chunk of revenue for integrators, which works out to around

thirty percent of the total network integration market. Says Harin Bhattacharya,

VP, systems integration division, Tata Infotech, which has done some major

turnkey projects for banks, "Banking undoubtedly is a major revenue earner

for us. But we find ourselves in a catch-22 situation. Almost all banks opt for

turnkey projects and we have to provide a SLA assuring 24/7 uptime of the

network. There is serious shortage of leased lines in the country and DoT itself

doesn’t guarantee uptime for leased lines. So the vendor has to assure

something on which it has little control. The main challenge here is the

provisioning and maintenance of leased lines." Tata Infotech is currently

implementing a WAN for the Union Bank of India, connecting around 242-locations

in the country. Datacraft, which has done major projects for MNC banks in the

country, was the SI, which implemented one of the largest voice and data

networks for ANZ Grindlays Bank, for its branches throughout India. One can

easily guess the importance of the banking sector for the networking industry

when the product portfolio of major networking product companies include

integrated multi-protocol routers designed for branch banking and retail office

environments.

Software

The RBI committee of technology upgradation in the banks had recommended an

outsourcing model for technology and services as a better option in the context

of the rapidly changing IT industry. And the marketplace is now inundated with

banking software solution providers of various hues and colors. It is

interesting to note that the banking software market forms a large pie and there

is room for everyone. Notable amongst this bunch are I-flex, Infosys, Ways

India, Infra Soft and Sanchez Capital Services. The product offerings vary from

solutions for core transaction process to branch automation products. Then,

there are niche players like Financial Software & Systems, which provide

turnkey solutions for ATM/POS switching and Global Telesystems which takes care

of payment gateway solutions.

Road Bumps Ahead

Originally, banks had a proprietary network, with point to point leased line

links or closed user groups like the INFINET. But those were the good old days.

What a bank essentially does when it centralizes its database and opts for

diverse delivery channels, is putting all its eggs into one basket This raises

serious security concerns. This is truer when a bank offers it’s products and

services on the web. In Internet banking, the core technology being used now is

encryption, 128-bits to be precise. Private sector banks like HDFC and ICICI

have security policies on their web sites, elaborately describing the security

measures taken by the bank. All these banks which offer Internet banking use a

combination of filters, routers and digital signatures using a technology called

security socket layer (SSL). Here, conspicuous by its absence is the deployment

of Public Key Infrastructure (PKI). Though banks like HDFC offer smart card

based PKI security to its 300-plus corporate customers, we are yet to see a

large-scale deployment of PKI in the country. "It is a wrong notion that

SSL is good enough to secure your network. PKI is a must-have to ensure and

protect your business, along with proper intrusion detection and security

management systems," says Hanif of HCL Comnet.

However, there are other areas, which need urgent attention: Authentication

of payment systems, the legal framework for payment systems, lack of

standardization and intra-bank connectivity. This would be followed by the need

for robust management information systems, data warehousing and data mining at

individual bank levels. Life would be easier for these banks if the DoT permits

encryption of data files over its communication channel, which would result in

easier access of remotely located branches to the RBI’s backbone network. So

far, computerization efforts in our banks have been in the direction of

accounting and related activities with little thrust on management information

systems and customer service. Perhaps, customer relationship management is a

foreign concept for these behemoths, which are buckling under their own weight

or size. The question on everybody’s lips seems to be the public sector

character and bureaucratic mindset of the nationalized banks.

For years, these banks have been impregnable forts. One does not really want

to close the account he/she has had with a public sector banks for ages. There

is no denial of the fact that PSU banks enjoy a psychological advantage over its

technology-savvy counterparts. But the million-dollar question is whether they

would be able to cash in on this good will and surge ahead or fall out of the

race? Literally, the Indian banking sector is at a crossroads. And it is a kind

of Hobson’s choice. You can either prosper or perish.

MT Jeevan