Banks’ customer interface raises questions

Recently, State Bank of India was granted in-principle approval by the RBI to set up an operations support subsidiary (OSS), intended to improve operational efficiency. . Information and communications technology (ICT) has been fast altering the operating models of banks.

With support services becoming increasingly centralised, bank branches are gradually turning into ‘sales and service’ outlets. The workload on staff in some banks is getting reduced, thanks to chatbots to respond to routine customer queries and robots deployed in branches to greet customers. Processing support — a standardised, well-formatted mechanical portion of banking activity that does not normally require mental discretion — is increasingly getting parked at centralised back-offices working on the hub-and-spoke model.

Such support began in a small way with account opening process, KYC verification through scanned documents, dispatching cheque books, and allotting PIN for debit cards. It has now extended to retail/small enterprise loan processing, wealth management and advisory services.

Different banks have adopted different models of support back-office support depending on their technology and business processing wherewithal. Some routine non-core, one-off activities that have no access to customer accounts are outsourced to cut costs and improve efficiency.

Mixed models are also used in many entities depending on their competency, business and customer profile. The focus on centralisation of non-customer facing activities should ultimately reflect in improved profitability ratios.

Scope of OSS model

The transaction cost of banking services has three broad components: (i) infrastructure — physical and digital; (ii) manpower — own/outsourced; and (iii) business process, including regulatory and compliance costs of services.

In adopting an OSS, the key facilitator is technology and its integration with the internal processes. Of the three components, even if infrastructure costs are assumed to remain constant in the near term, the biggest challenge is how to use the unavoidable idle time of resources — manpower and technology — in the near term to improve profitability while continuing to focus on the quality of customer service.

Creating an ecosystem for sharing of resources between different user departments is the main challenge for any back-office model. Since activities may be sporadic at branches, it is difficult to create a full load of activities at support entities, leading to idling of resources — a drag on the profitability of banks.

The efficiency of the OSS will, therefore, lie in optimising resource deployment with a near-term view based on sharing of resources — both manpower and technology. Since support activities will flow from different departments of the bank, employees will have to be groomed for multitasking.

In the long-term, all forms of resources could be realigned to business flows but not with as much precision as is required to take the resource wastage towards zero tolerance. Despite technology facilitating the faster processing of transactions, the service side continues to be manpower intensive. Hence, attaining cost efficiency is a tough goal that needs the combined synergy of people, process, technology and timely intervention of business process re-engineering (BPR).

The most challenging part in institutionalising the OSS will be to identify activities that could be centralised and executed more efficiently. The OSS needs specific checks and balances and micro controls to detect and mitigate risks at nascent stage. The seamless digital-connect of branches with centralised hubs and faster communication between them, including exchange of documents, will be important if such support offices are to function as an extended arm of branches while operating from remote locations.

Banks having a fiduciary relationship with customers have to bank upon rigid encryption standards of data which passes from branches to OSS and back so that there is no information compromise. It is better, therefore, that the core activities of a bank are handled by its own employees. Supervising the work of outsourced employees by the bank’s own staff may not be workable. When OSS is incorporated as a wholly-owned subsidiary, the bank — the principal — will continue to be responsible for the actions of the OSS.

Therefore, the employees of the OSS cannot be gig workers. They need to be on the rolls, responsible for their action in business processing and in supporting branches as an extended arm. They need to be trained, mentored, paid and assured a career growth like any other established entity of repute.

While going fully digital under the OSS, banks will have to institutionalise suitable methods to resolve grievances of those customers who find it difficult to use the digital mode and who fear cyber threats. Simultaneous efforts will be needed to invest in customer education. Doorstep banking should be further activated for serving senior citizens who may have constraints in using the digital services of banks.

With the OSS model adopted by the largest bank, it will be replicated by other financial intermediaries going forward. The differentiated strategic move to optimise resources through OSS model can eventually benefit consumers in a big way. And this will depend on how operational risk is managed in the design and implementation stages.

The writer is Adjunct Professor, Institute of Insurance and Risk Management, Hyderabad. Views are personal

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