The Hindu Business Line : Tech-driven business transformation in banking

Hyderabad, Jan. 8 Grappling with issues of change management, innovation for new delivery channels and broadening the range of services portfolio — both internal and external, the banking sector in the country, like its peers across the world, is taking to business transformation solutions.

With the Indian banking sector poised to open up further by welcoming global competition, consolidation has gained momentum. This now means that the large banks, with disparate systems, cannot any longer assume that the current rate of growth and returns will continue given the nimbleness of some of the new players and the likely competitive environment in the financial services business.

A common connecting link for the banking sector globally is continued consolidation and sustained pressure on profitability. It is here that early technology adoption is making a difference. They would require non–traditional innovation that stands out, according to Mr Sandip Patel, Managing Partner for IBM Global Services in India and South Asia. Mr Patel, who also serves as the Asia Pacific Financial Services Leader for IBM Global Services, in a conversation with Business Line provided some insights into the technology-driven changes that could help the players in the banking sector in effective decision making.

The areas of general focus have been building loyalty programmes (as it is now a case of relationship banking) while enhancing branch reach and strengthening customer relationship management and significantly, product innovation that is a differentiator.

This has meant a focus on unified client management, integrating financial service products that cut across trade, payments, and cash along with treasury and risk management.

This therefore requires re-engineering the basic bank technology infrastructure.

While most of the technology infrastructure developed in Indian banks is relatively new when compared to some of the large integrated banking and financial services players in the US, some of the banks who had taken to core banking solutions about 5-6 years are now faced with a situation where their technology infrastructure is actually getting obsolete or becoming another legacy system, Mr Patel said.

However, this does not mean that they would have to remove and rip off the existing infrastructure. All they need to do is build solutions around the existing IT infrastructure in a modular fashion.

However, what is significant is that most banks in India are now looking at third party services providers in some select areas while they prefer to focus on core banking.

This is where they are looking at offering wider range of services – be it railway ticketing, airline bookings and electronic payment channels for other services.

In this scenario, telecom service providers such as Bharti Airtel and Vodafone are very active, he explained.

OUTSOURCING

Historically, banks and financial institutions are very possessive about parting with their core business functions and handing them over to third party services providers. And, this is something that is not going to change overnight.

However, there are pointers towards some banks in the US, and even in India, gradually drifting towards multi-year outsourcing deals for infrastructure management. Such a move offers them the flexibility to focus on core business and also allows experts to handle their technology assets.

As opposed to managing a multi-skill technology human resource base, they now prefer the outsourcing option, he explained. So will it go the telecom way as in the case of Bharti Airtel and Vodafone or other services providers outsourcing their infrastructure?

It certainly would happen but it would take a while to take to this transition. However, some functions such as loan processing, mortgage issues, would make early inroads and gradually encompass other areas, he said.

The issues of consumerism and retail banking have brought about pressures on margins for banks.

Therefore, most banks such as Bank of America, Wachovia and many other banks in the Asia-Pacific region, including India are exploring additional delivery channels and partners. Likewise, banks in Japan partner retail chains which serve as additional financial delivery channels.

It is interesting to note that even public sector banks such as Canara Bank, with whom IBM works, are looking to such services, Mr Patel said.

BEYOND COMMODITY SERVICES

Banks are, therefore, looking at growth from new delivery channels away from commoditised services such as bank drafts, loans, letters of credit and regular deposits and savings. Unless banks explore these avenues they would be faced with plummeting margins. This comes through in our interaction with CXOs and decisions makers in some of the leading banks in India, Mr Pate said.

Therefore, banks now partner non-traditional businesses such as retail chains and mobile carriers.

Banks who have initiated core banking, say about 6-8 years ago, would require either a new technology platform or a massive updation of their systems while incorporating new services and addressing compliance and risk modules.

In these cases, they require business component applications that help them add new services and solutions capabilities. These could be in the areas of Know Your Customer (KYC) mandate, anti-money laundering solution or even Basel II compliance.

All these technology solutions basically come down to addressing the challenge of banking business transformation. From the work IBM manages in the Asia-Pacific region, it is clear that banks in the region have taken lead in building business component architecture that helps add services in a modular manner.

Likewise, anti-money laundering is a big issue in some of the markets such as the US and Australia, but it would not be long before Indian banks with global ambitions and domestic banks would have to address this issue, he said.

With booming economies in India and China, the banking sector is just about beginning to witness consolidation. And this trend would only get accelerated posing integration and management issues.

DATAWAREHOUSE, BUSINESS INTELLIGENCE

While acquisition of a new customer is a constant pursuit, mining the existing customer base for new products is a big investment area. This is where banks are building data warehouses and business intelligence capabilities. This is also one of the areas where banks were building capabilities either directly or taking the help of third party services providers, he said.

According to IBM, in addition to these broader issues, banks are constantly looking to expand their network while maintaining profitability. While physical infrastructure cost and overheads for banks extending their branch networks to less profitable centres is another concern, they are investing in electronic connectivity to speed up response time.

This is where technology would be a differentiator while bringing about greater operational flexibility and efficiency.

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