Technology in banking - IDRBT Awards Review/Technology in...We have pleasure in presenting this report ,Technology in banking —driving efficiency and ... Chairman ICICI Bank, and

Technology in bankingDriving efficiency and optimization

Exploring and Exploiting Technology for Common Good.

3Driving efficiency and optimization |

In India, banking continues to be an industry of unparalleled opportunity and core importance for a vibrant, developing economy. As with all developing economies,India’s banking industry needs to balance its dual responsibilities of economic growth and social development in equal measure — a task made difficult by international pressures and internal demands. Yet the country’s banking sector has come a long way from its post-Independence role of a nation-builder to a dynamic industry that attracts global attention.

The unique socio-economic structure and demography of India made special demands on banking to spread out in a vast country to achieve its objectives. Slowly and steadily technology has come to play a central role in helping banks reach out to the millions of customers. Technology has manifested itself in a numberof ways in banks over a period of time — as an enabler, a protector, the core engine driving operations and as a tool to connect internally and externally.These roles have evolved over a period of time.

As an enabler in the industry, technology has addressed developmental issues through Financial Inclusion and continues to be a lagging indicator of business-related compulsions. While

Abizer Diwanji Partner and National Leader-Financial Services

Dr. A. S. Ramasastri Director Designate IDRBT

B. Sambamurthy Director IDRBT

Forewordthe banking landscape has been changing in the country, so has the role of technology. IDRBT is keen on analyzing the changing role of technology in the banking industry. Our commitment to this analysis is deep,sincethis is the 10th year of the awards and the 4th year the report is being published.

This year’s report once again focuses on themes that banks identify themselves closely with – harnessing efficiency and optimization. The quest to be optimal is elusive in the transaction-oriented industry, which has much to gain by being able to optimally deploy its resources.

The awards questionnaire covering a variety of deployments on the technology front is instructive when looked at across the industry and throws up very useful insights ranging from regulatory compliance to innovative ways of enhancing customer service and reducing costs.

We have pleasure in presenting this report ,Technology in banking —driving efficiency and optimization. We hope the reader finds it useful. We would also like to acknowledge the contribution of all concerned for this report.

Mahesh Makhija Partner – Financial Services Business Advisory Services

4 | Technology in banking

Contents

Introduction

IT for business efficiency

Managing IT risks

IT team The way forward

IT for financial inclusion

Electronic payments in India

Mobile and social media

Business intelligence

06

29 32 37 39

09 14 18 22


The process for the 10th Excellence in Banking Technology Awards was initiated in April 2014 with a jury meeting to discuss and finalize the award categories. The jury for the year was chaired by Mr. KV Kamath, Chairman ICICI Bank, and comprised the following:

• Shri K. V. Kamath, Chairman, ICICI Bank, Mumbai — Jury Chair

• Prof. G. Sivakumar, Indian Institute of Technology, Mumbai — Member

• Prof. B.H. Jajoo, IIM Ahmedabad — Jury Member

• Shri M. V. Tanksale, Chief Executive, Indian Banks Association, Mumbai — Member

• Shri Rajesh Doshi, Sr. Executive Director, National Securities Depository Ltd. — Member

• Dr.Santanu Paul, CEO, TalentSprint and Distinguished Fellow, IDRBT – Jury Member

The award categories for the year:

1. Use of Technology for Financial Inclusion

2. Social Media and Mobile Banking

3. Electronic Payment Systems

4. Business Intelligence Initiatives

5. Use of IT for Business Efficiency

6. Managing IT Risk

7. IT for Business Innovation

8. Best IT Team

9. Best IT Enabled Cooperative Bank

About IDRBT Awards 2013–14

Evaluation processA total of 38 banks, including 16 large, 10 medium, 8 small and 4 cooperative banks, participated in the process. There were 182 nominations across the different categories — an increase from 171 nominations filed last year. Banks were classified as large, medium and small, based on the size of their business (advances and deposits) as on March 31, 2013:

• Large – total business — above INR3 trillion

• Medium – business — between INR1 – INR 3trillion

• Small – total business — below INR1 trillion


Indian banks continued to invest in technology in FY14, primarily in areas including migration of core banking, digital platforms, and enterprise solutions for integration of different platforms and systems. The total IT spend

1 of banks grew at 15% in FY14,

compared to the decline witnessed in FY13. This growth was mainly driven by large banks whose IT expenses increased by 26%, whereas medium-sized and small banks saw a decline of -4% and -40%, respectively. Large banks primarily spend in multiple areas, e.g., strengthening infrastructure to migrate core systems; upgrade network infrastructure; establish green data centers, enterprise payment hub, CRM systems, risk-based transaction monitoring and fraud risk-monitoring systems, enterprise data warehouse/CRM/BI tools and implement social media and tab banking initiatives.

Overall capital expenditure made by banks dipped from 30% in FY13, compared to 12% in FY14. While the capital expenditure of large banks declined from 26% in FY13 to 24% in FY14, it became negative for medium- sized banks and small banks during this period, decreasing from 47% in FY13 to -5% in FY14 in the case of medium-sized banks and falling from 41% in FY13 to -43% in FY14 for small ones. The ratio of their Capex to their total IT spend remained stable in FY14,compared to the previous year.

Ratio of Capex to total IT spend (FY14)

46%

44%

50%

56%

0%

20%

40%

60%All Banks

Large

Banks

Medium

Small

Financial Inclusion to be boosted by the Prime Minister’s Jan Dhaan plan

Banks have made significant progress in the area of Financial Inclusion with a significant increase in the number of no-frills accounts opened in them. As on March 2014,no-frill accounts totaled 139 million, compared to around 102 million such accounts as on March 2013 —a substantial addition of around38 million accounts during the year. While thelarge banksaccounted forthe largest number of accounts,smaller oneshad around 0.24 million accounts and witnesseda 91% growth from the previous year. However, while business models for delivering Financial Inclusion have stabilized, its effectiveness is questionable, since the ratio of active accounts is only 21%.The Prime Minister’s Jan Dhaan plan, which assures financial independence for the poor, is expected to give a strong impetus to India’s Financial Inclusion agenda.

Introduction1

Total IT spend (FY14) (INR Bn)

All Banks Large Banks Medium Small

64.0

74.5 74.5

86.7

55.9 62.8

58.8

74.1

4.1 6.5 8.6 8.3

4.0 5.3 7.1 4.3

-

10.0

20.0

30.0

40.0

50.0

60.0

70.0

80.0

90.0

100.0

FY11 FY12 FY13 FY14

1 Based on data provided by 15 large banks, 8 medium-sized banks and 8 small banks


Electronic payments

Worldwide, revenues from payments are growing faster than overall banking revenues and are expected to account for37% of global banking revenues and gross over US$1 trillion by 2016. However, revenue from the payments of Indian banks constitutes a small portion of their total revenues and is estimated to reacharoundUS$45 billion by 2015.However,payments are not necessarily seen as “services.” Additionally, the volume of electronic payments, varies significantly among banks. Around 97% of the payment-related transactions ofpublic sector banks are paper-based, compared to 60% in the case ofprivate sector banks. While NEFT/RTGS/ECS payments have increased significantly, initiatives needto be taken to migrate small payments to electronic channels. This requiresa concerted effort to increase the penetration of Point of Sale (POS) terminals;debit, credit andprepaid cards, and payment hubs. Card payments needto improve significantly to givea thrust to electronic payments. Cards, transaction banking and online payments are the principal revenue drivers for banks.Mobile wallets, prepaid cards, cross border payments and e-Commerce are expected todrivethe next wave of growth opportunities for banks’payments in India.

Digital banking — mobile and social media

Apart from a handful of large private sector banks, most have only just implemented their digital strategies to establish their presence on social media. While mobile banking is fairly mature as an offering, the social media-related strategies of most banks are limited to their presence on various websites. Most of them do not have definitive strategies on what they want to achieve though this. Is it to gather feedback from customers? Are these discussion forums for new ideas or just to gauge customers’ likes or dislikes? Digital media strategy is at the initial stage of its maturity curve and banks will have to define what they want to achieve by implementing it. In addition, banks should focus on developing the right KPIs or metrics around their digital initiatives. They should have scorecards that help them define and measure the performance of their initiatives and develop the required interventions to correct any issues.

Business Intelligence

Banks are realizing the need to use Business Intelligence (BI) and analytics to increase their business and differentiate the customer experience (a) to acquire new customers (b) service their existing ones better, (c) increase the savings of their existing customers through segmentation and by identifying and capitalizing on opportunities for cross-sell and up-sell, (d) improve retention and loyalty of customers, (e) monitor their portfolios more effectively, (f) implement efficient risk management controls to reduce credit- and fraud-related losses and (g) obtain insights on how they can enhance their products or product bundles to address the unique needs of their customers. In the absence of robust BI systems, banks struggle to answer the questions about unique customers (not just accounts), products per customer, services provided per customer, the cost of providing these services, the profitability of and demand for their products, etc. Since most banks are perceived as offering similar products, how can their senior management think through and define their differentiated customer/product strategies if they do not have a complete view of their customers’ needs and existing utilization of their own products.

Significant challenges face banks in adopting BI and analytics on a large scale. Barring a few large ones, most banks are still at the initial level in their maturity curve in terms of aggregating and cleaning their databases and sources. Deriving meaningful information is still some years away for most of them.

Business efficiency

Business efficiency essentially refers to the effectiveness of an organization to leverage its people, processes and technology to achieve optimal results. Technological innovations have always played a significant role in improving the efficiency of the banking sector, either by improving customer service levels or by reducing the cost of banking transactions for customers.


Most banks have taken initiatives, based on technology including branchless banking, e-lobby, kiosk banking, internet banking and mobile banking, to cater to the needs of their tech-savvy customers, e.g., through use of handheld devices to reach out to remote areas with financially excluded households, business process reengineering(BPR) initiatives such as centralization of processes, usage of workflow systems,and implementation of IT systems. While the impact of initiatives is difficult to measure, banks will have to define their performance indicators and metrics to evaluate investments they makein technology and the benefits derived this.Technology assets and initiatives of any kindand scale should justify investments made in specified time horizons. Alignment with the business goals of banks should be ensured and business cases, in terms of qualitative and quantitative benefits, should be evaluated for every initiative for it to be an effective business-efficiency measure.

Managing IT risk

IT risk management is a critical area, given the intensive use of technology in banking. With their substantial technology assets, it is imperative that banks have stringent risk management and security infrastructure in place. Most have established adequate organizational structures and policies to manage their IT risks. Although IT risk is largely a regulation-driven area, banks will have to be ahead of the game in detecting threats and security breaches. However, due to the evolving nature of attacks, it is difficult to be prepared for each and every threat. “Zero day” exploits have taken a toll of many organizations around the world. In order to stay up-to-date, banks have set up dedicated security teams. They have realized the impact of failure of technology on their businesses and reputations. Although many banks are developing in-house expertise today, implementation of Software as a Service (SaaS) and the outsourcing model is equally beneficial for them.

IT team

An effective IT team is the most critical determinant of the effectiveness of the IT function of banks, since such teams are indispensable to the success of their planning, execution and monitoring of IT projects. Technology is a multifaceted, influential and fluid department, in which IT professionals must be agile while focusing on operational excellence and effectively addressing the demands of consumers. The IT teams of banks should be aligned with their business units and assume the dual responsibility of understanding the business at its core and supporting its growth in the best possible manner. In order to ensure that they generate sustainable growth as well as progress up the technology curve, banks have ensured that their IT teams are equipped with the best professionals who can cope with challenges of ever-increasing competition in the sector. While banks have mandated IT committees and organizational structures, skills levels vary across large, medium and small banks. The capability-building and career-planning process is more rigorous in large banks and there is an emphasis on right-skilling and regular training their IT staff. Such banks also have an advantage over medium and small ones in terms of their large-scale implementation of IT and in their matching their IT functions to their business requirements.

Overall, while banks continue to upgrade and strengthen their existing infrastructure, they are also investing in new areas such as social media, cloud computing, business intelligence systems and customer lifecycle management solutions. However, with significant challenges and a dynamically changing business environment, banks will have to be agile in responding to their customers and maximizing their returns and effectiveness in their service delivery.


Financial exclusion looms large in several growing economics across the world and not only reflects but also contributes to the stark socio-economic divide that exists in these growing economies. In most of these countries, financial exclusion is a phenomenon that is restricted to rural areas, where accessibility to various banking products is limited and population density is substantially lower than in urban locations. For banks, this is an attractive opportunity to serve a new demographic and tap into the previously untouched wallets of the unbanked population. Deployment of technology has been the obvious choice to drive the Financial Inclusion (FI) programs of banks, since the key objective of FI is to drive active acquisition of accounts acquisition in unbanked areas, and thereby eliminate middlemen and bring the excluded population into the organized sector.

The FI initiatives of banks have gathered sufficient traction, which is evident from the fact that there has been a growth of ~ 33 % in no-frills accounts, and ~ 32 % growth in enrollment of Business Correspondent (BC) agents between 2013 and 2014. There is also a substantial 42%growth in no-frills balance outstanding. While a large part of investments in FI-related technology are made by BC service providers, banks have also invested substantially in expanding the transaction-handling capability of their IT infrastructure.

Business growth2

Over the years, the business and technology operating model for FI has more or less stabilized. Banks have made various efforts to meet the requirements of the unbanked and under-banked segments, and in their effort to cater to this requirement, have made substantial progress in terms of the number of no-frills accounts that have been opened. As of March 2014, around 139 million no-frills accounts had been opened compared to around 104 million no-frills accounts in March 2013 —a substantial addition of around 35 million accounts during the year.

With the large bank category adding the largest number of accounts, smaller banks contributed around 0.24 million accounts, witnessing a ~ 91 % growth from the previous year.

The balance outstanding also grew from around INR3700 million in FY13 to INR 5350 million in FY14, a growth rate of around 42 %. During this two-year period, the balance per account has risen marginally from INR37.75 to INR39.33. The latest expert panel on India’s poverty line has defined this segment of the population as earning INR32 per day in rural areas and INR47 per day in urban locations. Therefore, an account balance of INR39.33 per account would still be low and an indicator of poverty alleviation, and FI across the board would be an increase of this figure to at least five months of a year’s daily savings.

IT for financial inclusion2

Allbanks

Largebanks

Mid-sizedbanks

Smallbanks

2013 (Mn.) 2014 (Mn.) Growth

No-frill accounts (mn) and growth

10494

90.8

139126

121.5

33% 33% 30%

91%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

0

20

40

60

80

100

120

140

160

2 Based on data provided by 14 large, 8 medium and 6 small banks


While large and mid-sized banks have grown substantially, smaller ones have seen a significant reduction in focus in this area. The number of active no-frill accounts increased to around 1 million in FY14 from 0.5 million in FY13.

Balance in no-frills accounts (cr) and % growth

10016

8200

847 969

14179 12849

1131199

42% 57% 34%

-79%

-100%

-80%

-60%

-40%

-20%

0%

20%

40%

60%

80%

0

2000

4000

6000

8000

10000

12000

14000

16000

All banks

Large banks

Mid-sized banks

Small banks

2013 2014 Growth

Active no-frill accounts (in '000) and % growth

All banks

Large banks

Mid-sized banks

Small banks

2013 2014 Growth

15040 13278

1247515

28470

25655

2611204

89% 93%

109%

-60%

-80%

-60%

-40%

-20%

0%

20%

40%

60%

80%

100%

120%

0

5000

10000

15000

20000

25000

30000

As on March 2014, there were~ 46000 banking outlets (branches) in rural areas.There has been a significant growth of 33 % in the number of such accounts from March 2013 to March 2014. As on March 2014, there were 139 million no-frill accounts, and mid-size banks have been the driving force for the growth of rural branches and no-frill accounts.

Business and operating model

Large-sized banks have seen a steady growth in enrolment of BCs, while mid-sized ones witnessed a substantial growth, which is evident from its growth percentage in enrolment of BCs/BCAs.

Enrolment of BCs is growing at steady pace with around32 thousand new BCs/BCAs being enrolled in 2014. At the same time, the linkage of SHGs declined marginally.

No-frill accounts per rural branch

Allbanks

Largebanks

Mid-sizedbanks

Smallbanks

6,326 6,526

4,425

3,374

-

2,000

4,000

6,000

8,000


If we slice the data by BCs and SHGs, we find a different picture emerging. We realizethat smaller banks tend to rely more on BCs to address FI, while larger and mid-sized onesutilize BCs and SHGs to acquire accounts. This may be the case because SHGs may be a little more difficult to manage and maintain while BCs are easier to employ and handle.

Accounts per BC

101

191

102

203

78 56

270 299

-

50

100

150

200

250

300

350

FY13 FY14 FY13 FY14 FY13 FY14 FY13 FY14

Allbanks

Largebanks

Medium sizedbanks

Smallbanks

Allbanks

Largebanks

Mid-sizedbanks

Smallbanks

BCs enrolled and % growth

1,01,50390,025

11,130348

1,33,499

1,06,550

26,431

518

32%18%

137%

49%

0%

20%

40%

60%

80%

100%

120%

140%

160%

0

20,000

40,000

60,000

80,000

1,00,000

1,20,000

1,40,000

1,60,000

FY13 FY14 Growth

SHGs Linked and % growth

Allbanks

Largebanks

Mid-sizedbanks

Smallbanks

23,32,773

18,91,683

4,28,759

12,331

23,14,727

18,44,840

4,56,315

13,572 -1%

-2%

6%

10%

-4%

-2%

0%

2%

4%

6%

8%

10%

12%

0

5,00,000

10,00,000

15,00,000

20,00,000

25,00,000

FY13 FY14 Growth

Accounts per SHG

Allbanks

Largebanks

Medium sizedbanks

Smallbanks

37 41

46 51

1 1 0 0 -

10

20

30

40

50

60

FY13 FY14 FY13 FY14 FY13 FY14 FY13 FY14


Pradhan Mantri Jan Dhan Yojana

Assuring financial independence to the poorest of the poor, Prime Minister Narendra Modi launched the Pradhan Mantri Jan Dhan Yojana on 15 August 2014, to provide bank accounts, along with debit cards and an inclusive insurance cover of INR100,000 to all account holders. According to the framework of the Yojana, 750 million unbanked households are to be brought under this FI initiative by 2018. Under this Yojana, those who already have Aadhaar numbers will be able to open their bank accounts, using these as their KYC, while those who do not have Aadhaar cards will first be enrolled under Aadhaar by banks. Moreover, while opening a bank account typically takes two to three weeks, this will be done far more quickly when Aadhaar numbers are provided.

Some of the main features of the scheme include an INR5000 overdraft facility for Aadhaar-linked accounts, a RuPay debit card with an inbuilt INR100, 000 accident insurance cover and minimum monthly remuneration of INR5000 to business correspondents to bring account holders into the banking channel.

According to the Prime Minister’s Vision statement, today there are billions of families that have mobile phones but no bank accounts, and the Yojana will change this situation and provide them access to formal banking. The Yojana is to do much more than extend banking services to the unbanked population; it will enable them to open and operate bank accounts, and providing credit and other financial services, which were not currently available to a large portion of the population. The Yojana aims to help a large portion of the population to pursue their livelihoods in a more structured and purposeful manner.

Technology: Key driver for FI

Various factors such as the spread of digital connectivity, the proliferation of mobile phones, upgrading of banking technology, adoption of Aadhaar, along with other accompanying trends such as the Government’s initiatives, growing urbanization and a rising middle class have created a launching pad for opportunities in India’s FI landscape. In particular, technology promises to enable hundreds of millions of people to access financial services for the first time, its wide reach, convenience and the reduced cost of solution delivery options provided by it.

Today, India is experimenting with many new ideas in FI in almost all areas that need an immediate focus, e.g., banking and payment channels, technology platforms, regulatory frameworks, transaction limits, products and creation of national payment infrastructure. While significant progress needs to be made in FI, certain developments hold substantial potential.

• Operationalization of the Direct Benefit Transfer scheme: Under phase I and II of the Direct Benefit Transfer (DBT) scheme, transfer of Government to Person (G2P) payments under 28 various benefit schemes has been rolled out in 121 districts across the country. It is expected that the flow of funds into poor beneficiaries’ bank accounts will lead to their using accounts and saving in them, and more importantly, reduce the frequency with which they visit money-lenders, and bring them into the formal economy.

• Increased financial support through institutional credit: The Kisan Credit Card (KCC) is an important instrument to ensure farmers’ access to institutional credit. As on March 2014, 39.90 million KCCs were issued against an outstanding loan amount of INR3685 billion.

• National payments infrastructure: Implementation and use of technology has resulted in India setting up strong payment infrastructure assets such as the NPCI (AEPS, APBS, NACH, NFS, RuPay and IMPS), UIDAI, expanded broadband and wireless mobile networks and connectivity, etc.


• Innovative business models: Innovation and technology have spurred the implementation of new business models in the FI space and has led to the creation of an efficient value chain to serve customers including shared service providers, WLA operators, transaction processors, technology service providers, corporate BC agents, etc.

• Rise in bank accounts for the unbanked: Nearly 170 million basic bank accounts have been added in the country from March 2010 to March 2014, taking the total number of bank accounts to 243 million. The share of information and communication technology (ICT) solution-based transaction volumes has also grown from 26 million to 328 million during this period.

• Growth of acceptance infrastructure: Acceptance infrastructure such as ATMs grew at a CAGR of 27% during 2011–14 with ~ 160, 055 ATMs deployed as on March 2014. To give a further push to deployment of ATMs, PSU banks have finalized contracts for installation of over 63,000 ATMs over the next two years, out of which ~50% will be in rural and semi-urban areas. The Reserve Bank of India (RBI) has also allowed non-banking entities to set up, own and operate White Label ATMs (WLAs), with the majority of these being mandated to be set up in small towns and cities. Point of Sales (PoS) infrastructure grew at a CAGR of 25% during this period with the deployment of ~ 10,65,984 terminals (as on March 2014).

• New payment platforms and channels: Establishment of transaction platforms including RTGS, NEFT, Aadhaar Payment Bridge, AEPS and CBS, etc., are bringing about large-scale changes in the usage patterns of consumers. New payment channels such as micro-ATM devices, kiosks, low-cost ATMs, banking through BC agents, etc., are slowly but surely changing established notions of traditional banking.

Conclusion

Large Indian banks have witnessed considerable progress in driving their FI initiatives. This is evident from the fact that ~ 90% of the total number of new no-frill accounts have been opened in large public and private sector banks such as State Bank of India, Bank of India , HDFC and ICICI Bank. Moreover, ~ 80% of the total number of active no-frill accounts and ~97% of the enrolment of new BCs and SHGs in 2014 has been channelized by large public and private sector banks. The growth of new no-frill accounts at medium and small-sized banks was ~ 30% and ~ 91%, respectively, in 2014. While medium-sized banks were able hold balances in their accounts, small ones saw a substantial reduction in their account balance. The increase in the no-frill account balance of large and mid-size banks could be linked to the impressive growth in linkage of BCs, BC agents and SHGs.

It is therefore clear that for significant and meaningful progress in FI, stakeholders will need to look beyond their current positions on various issues and test new commercial, regulatory, technical, process and product models. For example, banks and the RBI will make slow progress in FI if they continue with business models that place an uneven financial burden on key players such as BCs and technology vendors. Mobile network operators are unlikely to provide technology platforms such as Unstructured Supplementary Service Data (USSD) for FI on a wider level unless they are compensated adequately by banks or payment agencies such as the National Payments Corporation of India (NPCI). They will also have to come forward and convert their closed Application Programming Interfaces (APIs) into open platforms, making it easier for application developers to develop applications and providers to integrate their operations with their payment systems.

The digital financial ecosystem framework will evolve significantly, only when market participants re-evaluate their existing positions and assumptions in the areas of regulations, technology, infrastructure and banking. The key challenge is whether we can arrive at the correct mix of technology with the right business model that will lead to a paradigm shift in the current narrative and make FI a priority for all stakeholders.


Electronic payments in India3

Payment landscape in India

India’s payment landscape is evolving rapidly and there is a growing focus on adoption of electronic payment options through banks and non-banking organizations. Rapid adoption of mobile phones, the growth of e-Commerce, increasing in computer literacy, rise in access to broadband and the internet, regulatory push and market innovation are the key drivers of “electronification” of payments in India. Additionally, we also see increased market participation from what could be considered non-traditional players in the payment space.

However, parallel to these trends is the aspect of fragmentation of platforms due to multiple payment methods, channels, and clearing and settlement streams, and consequently, limited development of a holistic payment ecosystem that revolves around a few payment methods, which can integrate seamlessly and efficiently with the India’s commercial ecosystem.

Retail electronic payments are yet to take off and cash and cheques continue to be the dominant mode of payment in India. Cheque payments constituted 54% of the payment volume and 82% in terms of value in 2011–12. Currency in circulation, as a percentage of India’s GDP, is 12.4%, which is very high in comparison with other emerging markets such as Brazil and Mexico. Moreover, the number of non-cash transactions per citizen is also very low in the country.

RBI’s vision and the case for electronic payments

The RBI is focused on developing a safe, standardized, interoperable and inclusive payment system in India and is directly and indirectly driving its agenda — indirectly through issuance of regulations such as the Payment and Settlement Systems Act of 2007, and more recently, through the Draft Guidelines on Payments Bank in 2014, and directly, through the establishment of institutions such as the National Payment Council of India.

It is estimated that setting up of an electronic payment platform for government services can save up to INR1000 billion annually. However, the value of migration to electronic payments for the Indian economy will be far greater. There are substantial strategic benefits that result from electronic payments — (1) reduction in leakage of government subsidies, (2) reduced corruption, (3) increased participation in the country’s tax base, (4) improved financial inclusion and use of government services (5) and enhanced delivery of financial and non-financial services.

Challenges with the current ecosystem

Payment services form the backbone of India’s financial infrastructure, and while the RBI’s initiatives in the area of electronic payments are commendable, the country still has a long way to go. Its payment ecosystem is at a nascent stage and continues to be challenged on several parameters:

1. Proliferation of payment systems: The presence of multiple clearing streams creates challenges for any one stream to become a platform around which an ecosystem can develop. This issue is further complicated by the growth of the number of channels, e.g., the internet, mobiles, branches, etc., across which these payment services are offered. Reduction in payment streams will reduce transaction costs, facilitate innovation of services around some platforms and encourage their adoption.

2. Standardization and Interoperability: In India, payment systems are burdened with a variety of standards, messaging formats and authentication-related requirements. This complexity limits interoperability, increases transaction costs and constrains the growth of electronic payments.

3. Concentration: Payment products and services are largely concentrated in tier-1 and tier-2 cities. Therefore, to accelerate the growth of electronic payments and make these more inclusive, it is critical to ensure the availability of payment services in all parts of the country.

4. Consumer awareness, experience and trust: Consumers are still wary of electronic payment modes in India. Furthermore, fragmentation of platforms hinders consumers’ education and habit-forming processes and they are unaware of the recourse and protection available to them when transactions fail or are fraudulent.

5. Multiple Guidelines: Rationalization of payment guidelines will be critical for the development of payments systems in India. There is a need for consistency and cohesiveness across the guidelines relating to PPIs, BCs, Domestic Money Transfer, Transaction Authentication, Payments Bank, White Label ATMs, as well as access to payment and settlement systems.


Current state of payment systems Mobile wallets

There has been a consistent growth in the transaction value of retail electronic payment systems in India. While the volume of cards, mobile wallets, NEFT, IMPS, ECS, RTGS have seen a varying degree of growth and adoption, they have collectively made significant progress in pushing electronic payments in the country.

1. Growth of cards In India, debits cards have grown at around30% annually in the past five years and there are currently 400 million debit cards in circulation, with INR1885.53.6 billion in monthly transaction volumes, 95% of which are ATM withdrawals. Due to the global financial crisis, there was a decline in the number of credit cards, but with delinquencies at an all-time low,banks arenow showing a renewed interest to grow their credit card portfolio. There are 20 million credit cards in circulation, with INR150billion in monthly volume,and this figure is expected to grow at 10%–12% per annum.

3

2. Mobile wallets In recent years, several telecom and non-telecom players have begunpushing mobile payments. With over 933 million mobile phones in India, mobile devices are slated to be thekey driver of electronic payments and FI in the country. This segment has seen limited uptake,withmobile payments amounting to only INR10-12billion in annual payment volumes.However, itis expected to grow exponentiallywith the riseof interoperability as mobilewallets, mobile commerce, cash-out permitted at agents, use of near field communication (NFC), card-less ATM withdrawals, etc., begin to take hold in the Indian market.

4

3. Penetration of PoS There are currently more than 1 million PoS terminals in the country and card accepting locations are growing at 20% annually.. However, the majority of these are located in tier-1 and tier-2 cities — 70% of PoS terminals are in the top 15 cities and contribute 75% of transaction volumes. India has one of the lowest POS penetration rates in the world at 693 PoS terminals per million people, compared to other emerging markets such as Brazil, which has 32,995 terminals per million and 4,000 terminals per million in China and Russia.

5

4. ATMs There are 160,000 ATMS in India, but as in the case of PoS, ATM infrastructure is concentrated in big cities. White

Label ATMs will help to grow the ATM base in the country, but easy availability of cash may run counter to the goal of electronic payments.

6

5. Prepaid cards The pre-paid card market is growing rapidly at the rate of around 40%. The market grew from INR200 billion to INR700 billion from FY10 to FY13. Closed-loop prepaid cards still dominate India’s prepaid market by a wide margin. However, use of open-loop cards (including Visa or MasterCard cards issued by banks and those issued by private prepaid companies such as Itzcash) has been growing rapidly because these offer additional flexibility and applications. Lack of PoS limits the growth of prepaid cards in India, but creates opportunities for mobile and assisted prepaid programs.

6. RTGS, NEFT and ECS RTGS, NEFT and ECS constitute the bulk of the electronic payments in India. Since its introduction, RTGS has grown rapidly and processed around INR900 billion in payment volume in 2013–14. Similarly, NEFT and ECS have helped greatly in processing large volumes of small value transactions and collectively processed around INR46,000 billion in payment volume in 2013–14.

7

Indian banks’ payment volumes8

Indian banks’ revenue from payments is estimated at US$45 billion by 2015, but their revenue from payment as a percentage of their total revenue is far below the global average of 37%. The volume of electronic payments, and consequently, revenue from payments varies significantly among banks. Electronic payments grew by 24% across all banks, but the bulk of the growth in electronic payments is seen in large banks.

Statistics on electronic payments in India executed through banks

Growth in electronic payments by bank size (FY13– FY14)

24%26%

8% 7%

All bank Large banks Mid size bank Small banks

3 www.rbi.org.in

4 www.trai.gov.in

5 EY analysis & report

6 www.rbi.org.in

7 www.rbi.org.in



The proportion of electronic payments as a percentage of total bank payments varies widely between public sector and private sector banks. The value of electronic payments as a percentage of total payments was 88% for public sector banks compared to 51% for private sector ones.

Table 1: Percentage of electronic payments at banks

Metric All banks

Public sector

Private sector

Percentage of funds transferred using paper-based payment modes

22% 12% 49%

Percentage of funds transferred using electronic systems

78% 88% 51%

Although there are 400 million debit cards in India, significantly higher than the 20 million credit cards in circulation, they only account for 37% of the volume at PoS. Use of credit cards is high among urban and affluent customers and they drive the bulk of the spend on cards and contribute 63% of the volume at PoS

Table 2. Card transaction volumes

Metric Transactions Value

Debit card 53% 37%

Credit card 47% 63%

While cards, transaction banking and online payments are the key revenue drivers of banks, mobile wallets, ATMs, cross-border payments and e-Commerce will provide the next wave of growth opportunities for payments in India.

Strategies for adoption of payment services by banks in India

Bank are now beginning to realize the revenue potential of payment services; some of them are actively investing in building innovative products, creating a streamlined customer experience, actively promoting this in their marketing communication and offering rewards for using their online payment services.

Key Initiatives of banks in India to promote payments:

1. Value-added services on ATM: More and more banks see ATMs as a low-cost high-value touchpoint and are adding value-added services to increase engagement in this payment channel. Some banks have initiated card-less withdrawals at their ATMs. Using their mobile numbers, the amount requested on a mobile app, with password generated through it and a temporary password sent by the bank, customers can withdraw cash from these ATMs. Other Interesting value-added services offered by banks throughATMs include the ability to make temple/trust donations, pay school fees, make utility bill payments, top up mobiles, make payment for card billsandlife premiums, performcard to card transfer, register customers’ mobile numbers for SMS alerts and make requests for issuance of cheque books.

2. Innovative online payment services: Online banking is increasingly becoming a key customer touchpoint among urban and affluent customers, who are heavy users of payment services. Banks are adding a number of payment services to their online banking portals to increase engagement among customers and penetration of online banking. Innovative payment services that can be accessed online include interbank transfer through RTGS/NEFT, Personal Financial Management Solutions, payment of Direct and Indirect Tax, booking of railway and air tickets, payment of fees, top-ups of metro cards, contribution to National Pension schemes, issuance of virtual cards, and payment of bills, utilities and premiums.

3. Focus on mobility: With more than 900 million mobile phones in the country, mobiles will soon become the primary banking and payment channel for the under-banked and unbanked. Almost all banks have mobile apps that provide basic bank-related information. Mobile apps are supplemented bybanking services through USSD and SMS. Establishment of the National USSD server is a key step taken by the NPCI topromote payment services over mobiles.

4. Integrated communication to promote payments: Bank are adopting a number of new communication and marketing channels to accelerate the use of alternate channels for electronic payments. Media advertisements, promotion of payments through branches, Facebook apps, leaflets as part of banks’ statements, email and SMS communication and cashback offers are some of the ways in which banks are promoting their payment products.


Evolution of India’s payment landscape

Integrated payment hubs

Integrated payment hubs (IPHs) integrate different payment systems, channels and the core systems of banks to derive benefits including increased efficiency and revenue potential, and improved return on investment. Payments hubs improve the visibility of payment processes by reducing the time and cost of detecting fraud, risk management and compliance by applying these in a centralized manner across lines of businesses and payments.

Domestic SWIFT operations

SWIFT is a member-owned cooperative that provides a secure and standardized messaging system for exchange of financial information. SWIFT has entered a JV with six banks in India to operate an international messaging platform. The company will service high- and low-value payment market infrastructure, trade and other domestic markets through localized infrastructure. This should help to reduce costs and operational risks and increase Straight Through Processing (STP).

Migration to EMV cards

Banks have been issuing EMV/chip cards according to the RBI’s directive for enhanced security and safety. They have also made changes, e.g., “prompting” for PINs for all debit card transactions. This has helped them curb fraudulent transactions. PoS machines, which were earlier only capable of processing magnetic cards, have been upgraded to process EMV/chip cards as well. However, the overall number of chip cards in India remains low.

Use of customer analytics

Not only does digitization of payments provide an additional source of revenue through sophisticated analytical modeling, it also enables banks to acquire new customers, improve their underwriting and ensure they become more central to consumers’ purchase decisions by driving relevant offers. Banks are realizing the value of payment-related information and are building sophisticated analytical capabilities to take advantage of transaction-related information.

Intersection of mobile payments and commerce

The intersection of mobile and commerce is beginning take hold among consumers in tier-1 and tier-2 cities. Urban and affluent customers are increasingly using mobile apps to conduct day-to-day transactions like ordering food, paying for purchases using M-pos , hiring taxis, paying bills, using coupons, buying travel tickets, etc. Going forward, as more consumers graduate to mobile payment platforms, we can expect enhanced innovation in mobile- based payment solutions.

The way forward

The process of digitization of payments has progressed steadily over the course of the last decade in India. However, it has primarily benefited the upper echelons of society. There is a critical need for building technologies and business models that are profitable and meet the needs of people in rural areas. As we look at the next decade, there need to be in place strategies and regulations that foster innovation and increase access to payment systems. For sustainable FI through payment systems, it is critical that regulations are streamlined and simplified, enable innovative usage and provide adequate returns for the participants. At the same time, regulations also need to protect the interests of consumers. Public Private Partnership (PPP), including in banks, telcos and industry associations, should build increased trust in payment systems to encourage their adoption.

Digitization of commerce through mobiles will create new challenges for payment systems. Securing transactions will be critical. It is important to monitor the participation process and mandate strong risk management practices so that the safety and security of payment systems and privacy of consumers is not compromised.

Limited penetration of branches, ATMs and POS constrain the access of weaker sections of society to payment infrastructure in the country. Implementation of simplified and secure KYC and authorization processes will drive increased inclusion in payment systems.


Digital experiences of Indian consumers

Today, the question for an organization is not about whether it has a digital ecosystem, but it is more about how effective it is. The Indian consumer is exposed to multiple digital experiences on a day-to-day basis, reading news and information on bank account credits and debits, ordering food, topping up mobile payments, paying utility and card bills, booking appointments at clinics, buying electronic gadgets, planning for the next holiday and booking tickets, comparing products and services in-store or online and much more. These experiences are of different digital maturity levels, but the most sophisticated ones leave customers wanting more from all their other experiences. This leaves little choice for companies to benchmark their digital experience based on practices in their industry segments. Companies that are not working on creating a niche innovative digital experience and intervention are likely to lose out to direct and indirect competition by a sizeable margin within the next two to three years.

Mobile technologies and social media platforms are the front-runners where the digital battle is being fought and will dominate during the next few years of funding by companies. This is not just a global phenomenon, but recent numbers clearly indicate that India is among the leading countries in customers’ adopting and using these technologies.

• There are 933 million mobile subscribers in India out of which more than 40% are in non-urban India.

• Mobile internet users in India have crossed the 120 million mark.

• Leading private banks have seen a three- to five-fold y-o-y growth in mobile transactions.

• On an average, Indian users spend 25–30 minutes a day on social media.

• The number of active social media users in India has crossed 106 million.

It is equally important to acknowledge that maturity in adoption and usage of these platforms is different across customer segments. Companies need to therefor create well-rounded digital strategies to engage and service every customer segment.

India’s banking industry has begun acknowledging the business and technology shift through these digital technologies, but has been late to respond to the opportunity created by digital technology. Mobile was seen as just another new age channel and social media a fad, but in the last year or two, this thinking has been changing. Today, banks are looking to develop strategies to improve their engagements, and optimize costs to serve and deepen product relationships through these channels.

The great divide9

In these changing times, it is easy to differentiate the handful of banks that have taken measures to lead the change in implementing digital initiatives.

Most private banks have understood the implications of the winds of change and have been experimenting with multiple digital initiatives and improving them over the last few years.

• A large private sector banks’ focused foray into social media for its retail customers through its “Pockets” solution

• A large private sector banks’ differentiated multi-lingual and graphical content delivery on its mobile offering

• A medium sized private sector banks’ enablement of its employees to sell and serve leveraging BI solutions. Some banks are working on social media-based reward programs and face-to-face advisory solutions on mobile phones.

On the other hand only a few public sector banks have embarked on this journey and are focused on changingthe game for themselves and servicingthe new age consumer.

• A large public sector banks’ recent launch of its Digital Branches,a push on itsmobile initiatives through customer education and targeted marketing,leveraging internal focused social collaboration tools

• A large public sector banks’ reward program encouraging customers to enrol and use its mobile channel. Most of these have begun acknowledging the need of having a social media play, more from a brand connect perspective, but lack defined strategies and operational execution frameworks.

Mobile and social media4



This great divide across public and private sector banks is depicted in the mobile and social media capability maturity graph below.

Digital maturity score of large banks Digital maturity score of mid-sized and small banks

0

1

2

3

4

5PSU 1

PSU 2

PRV 1

PRV2PSU 5

PSU 4

PSU 3

Mobile Banking Score Social Media Score

0

1

2

3

4

5M-PSU 1

M-PRV 1

M-PRV 2

M-PRV 3S-PRV 1

S-PSU 1

S-PRV 2

Mobile Banking Score Social Media Score

• PSU: Public Sector Bank; PRV: Private Sector Bank

• M-PRV: Mid-sized Private Bank; M-PSU: Mid-sized Public Sector Bank

• S-PRV: Small Private Bank; S-PSU: Small Public Sector Bank


• How Digital are your branches: influencing customer digital adoption, digital Q-mgmt, advisory discussion?

• Are digital capabilities connecting low service branches to full service branches?

• Can a customer do a full circle transaction digitally, ex Bill Pay?

• Are you continuously measuring the customer experience score of your digital channels & engaging?

• Is your front line sales/RM digitally enabled to sell & serve in & outside the branch?

• Have you integrated social media insights to know your customer better & understand their needs?

1 Banking

• How intuitive & engaging are your digital channel interactions – does it start with a dashboard?

• Have you created a tablet strategy for increasing HNI’s & UHNI’s?

• Do you understand the channel profile of your customer & market product in integrated manner?

• Can your digital channel emphasis on expense mgmt & engage customers to a Financial Need Analysis?

• Can your digital channel manage transparently product bundling process?

• Does your digital channel provide a peer group spend & saving comparison?

2 Saving

• Does the digital channel let customer take a buying decision at the store?

• Does the digital channel let customer redeem benefits of the rewards programme on the fly?

• Have you started factoring in for the changing mobile payment (contactless) landscape?

• Do you have a blue print of your mobile wallet strategy?

• How close to a retail shopping experience has your bank moved to & integrated partner network?

• How quickly can the digital channel get a OD / personal loan approval for realization?

3 Shopping

Banks need to understand that the banking ecosystem is changing and that too rapidly. Today, digital channels are not only viewed to reduce costs but to acquire tech-savvy and profitable customers and build an ongoing relationship with them, driven by insights and relevant digital interventions.

Many public sector banks are caught up in their false notion that their existing customer base is not tech-savvy. They still have time to embrace the digital wave. It is imperative for such banks to understand that recent studies have shown the following:

The way forward

Banks need to start assessing their digital assets and gauge whether they they are able to support their customers’ banking, saving and shopping journeys seamlessly through digital channels. The graphic below includes some key questions to help them evaluate their operations.


• Within the existing customer bases of banks, there will be 20%–30% of customers who are ready to adopt digital technology if the right solutions provided to them.

• Banks need to focus on acquiring new age customers to align their operations with the customer demographic shift taking place in the country’s market.

When banks begin focusing on leveraging digital technologies, they should consider the following:

• Every digital channel has its innate ability and uniqueness, which needs to be understood and have solutions created around these.

The picture below depicts the levers of a digital strategy:

Banks should also focus on developing the right KPIs and/or metrics around their digital initiatives. They must have a scorecard that will help them define and measure their performance, and develop desired intervention for course correction.

These are exciting times, since the race is not only to be run on these digital mediums, but to manage and ride the swift change effectively and efficiently to win in the market.

Customer strategy• Customer segmentation• Customer education and experience• Contextualized cross-sell and up-sell• Reward management• Personalization

Technology and data strategy• Technology variants and architecture maturity• Data integrity• Information design, tools and calculators• Business intelligence and analytics usage• Usability and device delivery capability

People and organization strategy• Organization structure definition• Roles and responsibility definition• Skill mix• Functional and technical trainings• Manpower planning

Operational strategy• Online marketing effectiveness• Online customer acquisition strategy• Online service (self and assisted) capability• Integrated branch and call center support strategy• Multi channel security and fraud management

Functional and process rationalization strategy• Features richness• Transaction capability completeness• Enrollment and activation management• Multi channel handoffs• Partner process integration

• Digital technology is not only about solutions and their implementation.

• A robust operational strategy and rationalization of processes is the back-bone of any digital initiative.

• The maturity of a digital solution is backed by BI and analytic solutions.

• Every customer segment is unique and has its own needs.

• Implementation of digital technology is not a one-time initiative but a continuous journey of improvement, which must be manned by the right team.

Digital strategy levers


India’s banking industry is on the cusp of a major transformation, with new banking licenses bringing in more competitors in an already competitive environment. Moreover, the slowdown in the economy continues to increase pressure on the profitability of banks, especially with the rise in the number of NPAs due to an increasing number of loans across the corporate and retail sector turning bad. In such an environment, one common theme across Indian banks is increased adoption of BI and Analytics to drive their profitability.

The RBI is encouraging Indian banks to adopt BI to increase their transparency and control over their banking operations. The Automated Data Flow (ADF) initiative has been a strategic step in that direction. It seeks to ensure submission of correct and consistent data from banks, straight from their systems, to the RBI without any manual intervention.

Banks are also realizing the need to use BI and analytics to increase their business and differentiate the customer experience to (a) augment their acquisition of new customers,(b) servicing them better, (c) increase their existing customers’ share of wallet through segmentation and by identifying and capitalizing on opportunities to cross-sell and up-sell, (d) improve their customer retention and loyalty (e) monitor their portfolios more effectively, (f) implement efficient risk management controls to reduce credit and fraud losses and (g) obtain insights to create enhance products or product bundles to address the unique needs of their customers. In the absence of a robust BI system, banks struggle to answer questions relating to their number of unique customers (not just accounts), products per customer, services provided per customer, the cost of providing these services, the profitability of and demand for their products, etc.

Since most banks are perceived as offering similar products, how can a bank’s senior management think through and define differentiated customer/product strategies if they do not have a complete view of their customers’ needs and existing utilization of their own products. It is also worthwhile to note that some leading banks in the country are utilizing advanced analytics capabilities such as Geo-Spatial Analytics to expand their operations, conduct real time transaction scoring to identify and mitigate cases of possible fraud, design campaigns and track their effectiveness through their campaign analytics capabilities and by using social media analytics, which involves analyses of unstructured data to understand customers’ sentiments, the bank’s brand image, etc.

With all the leading banks (large to medium-sized public sector banks and the majority of private sector ones) investing in analytics to optimize their decision-making, it is becoming increasingly necessary for other banks to quickly catch up with the competition to not fall into the “adverse selection” trap described in the example above.

BI capability survey — a brief snapshot10

The banks that participated in the BI capability survey were divided into the following segments:

1. Large banks

2. Mid-sized banks

3. Small banks

The following section provides a brief snapshot of the BI and Analytics practices of the banks that participated in the survey, by segment.

Large banks

It is evident that there is an increased emphasis among large banks, both public and private sector ones, on usage and adoption of BI and Analytics across multiple spheres of their banking business. These banks have not only put in place robust data foundations to build further on their analytical capabilities, but they are also well on their way on the analytics journey, already having put in place and leveraging, on an ongoing basis, various analytical capabilities. These mainly include analytical capabilities that focus on the various stages of customer life cycle management including acquisition and segmentation of customers; cross-selling and up-selling; customers’ life time value, loyalty and attrition; campaign management; business performance and risk management; fraud detection and prevention, and anti-money laundering. While one of the respondents, a large public sector bank, uses analytics to predict its ATM cash replenishment and downtime, a trend that can be noticed among large banks is the reduced adoption rate of analytics in their operations.

Some standout projects using advanced analytics that have been featured include the use of Geospatial Analytics by a large private sector bank to expand its number of locations, a large private sector bank’s real time transaction scoring for fraud and a large public sector bank setting up digital banking branches backed by customer Analytics.

Business Intelligence5



Mid-sized banks

Most banks in this segment have put in place BI capabilities through which multi-dimensional reporting and analyses. These capabilities are mainly used in the areas of business performance, portfolio monitoring, customer acquisition and attrition, customer segmentation, campaign management and regulatory reporting. Transaction-based alert-generation capabilities, available on the BI platform, are also used by these banks to check losses due to fraud. In terms of their analytical capabilities, some private sector banks in this segment have just embarked on their analytics journey. For example, a private sector bank uses predictive models for its “What If” analyses to study the impact on term-deposit costs with changes in the rates of deposits, in their tenor, etc. Therefore, it is evident that mid-sized banks still have a long way to go to become achieve maturity with respect to their usage of analytics.

Small banks

Among small banks, only private sector ones participated in the survey. It is worthwhile to note that these are ahead of the mid-sized segment in terms of their maturity and adoption of BI and analytics. Analytics used by these banks mainly center on the Analytical Customer Relationship Management space spanning customer acquisition, segmentation, attrition, cross-sell and up-sell; customers’ channel-related preferences, etc.; risk management spanning stressed VAR calculations for market risk and simulation analysis of liquidity risk, interest rate risk, etc. There also BI and analytical capabilities for generation of transaction-related alerts, based on analytical transaction pattern detection for all online transactions carried out.

As seen above, although these small private sector banks have already embarked on their BI and analytics journey, there are additional areas where they can leverage analytics, e.g., in business performance and campaign management, etc.

Key BI and Analytics trends in the banking industry

As we dig deeper and evaluate BI and Analytics investments being made across India’s banking industry, certain key trends emerge:

Disparity in sophistication of BI and Analytics across the banking industry

• Mid-sized and small public sector and private sector banks are focused on laying the foundation for BI and Analytics by investing in data warehousing (with single customer view and data quality management) and building BI/dashboards to obtain the right information about their business. They use this information to send reports to the regulator. Some medium to small private sector banks in this segment have also embarked on the journey of building predictive analytics capabilities while putting in place a data foundation, built as part of their data warehouses. These capabilities encompass customer analytics — customer segmentation, attrition and retention; cross-sell and up-sell propensity modeling; scenario-based analyses of business performance; channel, campaign and risk analytics encompassing VAR calculation of market risk under normal and stressed conditions, and credit and liquidity risk.

• Some of the larger public sector banks have taken giant strides in moving up the analytics maturity curve, and have already started begun building up analytics solutions as well as the Customer 360 degrees, which includes customer life time value analyses, customer segmentation, cross-sell/up-sell propensity modeling, credit “decisioning,” fraud and NPA management, etc. Analytics is also used by these banks in the areas of risk, campaign management and business performance management.

• The benchmark for BI and Analytics in India is being set by some leading private sector banks. These have moved into real-time business decision optimization, over and above the capabilities mentioned earlier in regard to medium and small-sized banks and large public sector ones. This includes triggers to guide RM contact frequency/messages to high net worth customers on the basis of internal and external bank data; incorporation of geographical data to customize customers, based on their vicinity to certain stores/locations;, utilization of geo-spatial analytics to expand locations as well as of real time transaction scoring to mitigate fraud and conduct customer life stageand behavioral analyses, and leveraging these for customer analytics.


Different organizational approaches taken by banks on BI and analytics

• IT-function or a standalone function: For a majority of public sector and co-operative banks, BI and analytics is typically an IT function when they start the journey with their initial focus being on single customers’ view and reporting (driven by regulatory requirements).A significant investment is made in terms of money and time (spanning 12–24 months) to create a solid foundation for derivation of insights through creation of an enterprise warehouse. Most such organizations have a low involvement with business, which ultimately results in inadequate use of technology- intensive solutions. Leading private sector banks, on the other hand, have carved this out as a separate specialized function, leveraging it as a key enabler for business-related decision-making. These banks have begun by utilizing analytics to solve specific business-related problems and have graduated to integrating data across systems on the second stage of their journey. They have built solutions in the areas of customer, risk, fraud, cross-sell analytics, etc., and generate ROI in the short term. Such initiatives are mainly driven by business, and in the long run, help to create championship within organizations to consolidate information and provide single versions of the truth.

• Team size: The contrast in adoption of BI and analytics sinks in when one sees a spectrum of team sizes across banks varying from as a team of 4–5 banking professionals working on BI and analytics (as one of their responsibilities) to 150+ team members focused 100% on developing BI and analytics solutions.

Data quality, management and governance for the majority of small and medium-sized banks:

• ► Data quality is a challenge, specifically with respect to customer data. Most of the time, data is either incomplete or incorrect. Moreover, not many banks have identified their unique customers.

• ► DW/BI systems have grown over time without proper metadata management, and have therefore become difficult to maintain in the long run.

• ► Lack of a BI platform and a consolidated data store, especially for business units such as corporate banking, operations and other departments, result in delays in information delivery to the right stakeholders and create challenges in the path of efficient decision-making.

• ► Data governance is still not a focus area in many banks. This presents a challenge in their sustaining an Enterprise Data Warehouse (EDW) and BI environment in the long run, especially with data volume, points and types increasing significantly over the years.

Unstructured data still not part of BI analytics roadmaps of most banks: Banks are increasingly generating huge volumes of unstructured data on multiple customer touch-points across customer service centers, digital channels, etc; However, most of them have not put in place plans to extract insights from this unstructured data and link it to the Consumer 360 degree view. However, some banks are focusing on leveraging unstructured data to gain insights from a business perspective, using capabilities such as big data, for the future.

Flexible and scalable architecture: There is an increasing requirement from public sector and private sector banks for a flexible and scalable architecture for BI and analytics solutions. With rapidly changing market environments and regulatory requirements, all banks are looking at a technical landscape or architecture that can enable them to include multiple types of data at disparate frequencies, introduce new areas of analysis and expand the solution to include new sources, as and when required.

Varying degree of adoption of BI and analytics: In most public sector banks, adoption of BI and analytics is low priority, since these initiatives are mainly perceived, managed and sponsored by IT rather than business teams. In most private banks, business drives analytics initiatives, therefore ensuring a high rate of adoption and utilization of technological assets.

Varying degree of BI and analytics maturity across the banking spectrum:

• Most large banks, both public sector and private sector ones, have implemented an enterprise class BI tool for their multi-dimensional reporting. Some have gone further and implemented analytical tools that work in conjunction with BI tools and provide capabilities across all the segments in the analytics space including customers, products, business performance management, marketing, operations, risk, etc. All the tools and capabilities (mentioned above) act as decision support systems for executives and top management.


• Mid-sized banks mainly have in place data foundations for BI and analytics in the form of a data warehouses and this data is consumed through BI tools that have been put in place to analyze, slice and dice views in existing data to aid decision-making. Private sector banks in this segment have taken a further step in their BI journey by putting in place capabilities around analytics to augment their existing BI capabilities.

• It should be noted that small private banks have also adopted BI and put in place capabilities around analytics — specifically those aligned to customers, risk, fraud and anti-money-laundering.

Department-wise view of BI and analytics —current state and challenges for Indian banks

Consumer/Retail: Most private banks leverage analytics for customer segmentation, product affinity/next best product offering, cross-sell propensity analysis, customer life-time value, customer retention and loyalty, relationship management, etc. They also leverage analytics to check fraud by putting in place capabilities including real time transaction scoring. Public sector banks, especially large ones, have also incorporated statistical analysis as a part of their BI plans.

Challenges:

i. Data consolidation to provide single version of truth and a centralized BI environment

ii. Reduced time to respond to customers, regulators and management needs

iii. Real time analytics, e.g., real time cross-sell decision-making, etc., considered next phase of evolution in BI space

iv. Profitability view of all channels/relationship managers/locations/customers/products, etc., difficult to obtain due to lack of scientific cost allocation

v. For wealth management, immediate response to clients on the performance of their portfolios on a given date and current investment options required

Marketing: Most private banks utilize their analytical capabilities to fine-tune their campaign-related and marketing efforts. Statistical analysis and data mining provide insights on the key success drivers of campaigns and the predicted effectiveness for a target group. Moreover, channel analytics has been utilized by these banks to understand the preferred channels for specific customers, and thereby target the right campaigns for the right customers through the right channels. Campaign analytics has not been a focus area for public sector banks till now

Challenges:

i. Many banks are in the process of identifying their unique customers, and thereby reducing their marketing spend per customer.

ii. Integration of structured data with unstructured data such as that derived from social media and call centers is yet to be considered by most banks.

iii. Currently, most banks utilize retail customer data to manage campaigns and other market- based analyses. The inter-linkage of retail customers with corporate or commercial banking ones, if any, is not yet utilized for analyses in most banks.

iv. Availability of data and establishment of relationships between existing customers and their purchasing patterns, especially for Third Party Products, remains a challenge for private and public sector banks.

Commercial/Corporate: Large banks (both public and private sector ones) as well as medium-sized and small private banks utilize BI and analytics to check their performance against their planned targets in order to monitor and control financial risk. With respect to their business performance management, banks conduct analyses to analyze their scenario-based business performance and make course corrections, if warranted.

Challenges:

i. Real time prediction of a particular customer’s risk and its transactions are yet to be incorporated by most banks.

ii. Visually enabled BI platforms, with the ability to drill down to the last level of details, are yet to be exploited by banks due to their dearth of consolidated data.


Compliance and audit: There is renewed focus on automation of compliance and audit reporting across banks. Earlier, reporting with regard to compliance, audit and regulatory requirements witnessed delays. Considerable effort was required to consolidate the requisite data points, verify these and report them to various internal and external stakeholders. However, a number of analytical and reporting solutions around anti-money laundering, the RBI-mandated Automated Data Flow, etc., have been implemented by most banks, improving their compliance- and audit-related reporting processes in line with regulations, helping banks meet the ever-increasing demands of the regulator on reporting as well as from the perspective of internal audit.

Challenges:

i. Banks are in the process of building consolidated data stores, incorporating all data needed for compliance reporting. However, availability of required data in source systems is a challenge, which is more serious in the case of public sector banks, especially medium and small ones.

ii. With The Central Bank asking for various input, there is an additional drain on banks’ resources to comply with these, e.g., for risk-based supervision, new regulatory reports are required that can be generated from the audit or compliance data store.

Finance: While automated budgeting and planning is being looked upon as the next steps in the finance departments of many medium and small banks, large ones are already well into their journey of utilizing BI and analytics to plan and budget or implement business performance management in their operations. Banks in which it is already implemented are looking at enabling costing methodology for proper allocation of costs and measurement of profitability.

Challenges:

i. Manual budgeting and planning leads to lack of transparency and is not supported by scientific analyses of old data.

ii. Allocation of indirect costs and calculation of all direct costs at multiple levels such as account, branch, office, region, customer, relationship manager, etc., will help banks obtain a profit-based view of business at each level.

Treasury: Most banks have implemented tools to determine fund transfer pricing; portfolio, and risk (market risk and liquidity risk) and asset liability management tools. These are specialized tools for performing multiple analyses in these areas.

Challenges:

i. Many banks are yet to have multi-dimensional, real time analyses platforms, which gives their treasuries a holistic view of their holdings and their ability to perform at multiple levels of ad-hoc analyses.

Operations: Banks’ operations are mainly handled through multiple Excel files and some automated static reports. They are increasingly coming to understand the need for deployment of BI and analytical capabilities in this area and are adopting these. For example, a large public sector bank in India is utilizing BI and analytics to gauge its ATM cash replenishment and downtime. Other operation-related analytical capabilities banks can leverage mainly center around analyses of customer service-related turnaround time.

Challenges:

i. The time taken for an operational analysis is huge, since data is first consolidated and then cleansed and arranged to derive meaningful insights.

ii. Most banks only provide static reports as operational BI to their end users to analyze a particular process.

►

HR: Most banks have HR-specific tools to manage their resources. Some of them have integrated their Human Resource Management System (HRMS) with their BI systems to gain insights into the efficiency drivers of their employees.

Challenges:

i. Training needs, talent management and analysis of costs incurred are yet to be automated in many banks.


IT: Most banks strive toward a single central Enterprise Data Warehouse (EDW).

Challenges:

i. Value of Information has increased.

ii. The motivation of a business to accept slowly evolving single solutions has become less than before.

iii. Cost of data storage and movement has increased.

iv. Traditional Extract, Transform and Load (ETL) process:

a. The time taken to add new information or to update an existing business process or KPIs is very long.

b. Aligning local business units and group processes is complex, long, and often not possible or desirable.

c. When dealing with external information, the ability to enforce standardization is nearly or completely reduced.

Some banks solve the challenges mentioned above by implementing big data technologies to eliminate the cost constraints of data storage and movement, thereby incorporating the 3Vs of data — volume, variety and velocity. They do this within a single environment, and address the challenge by building a single culture and concentrating on areas that deliver true value. They also embrace advanced ETL processes.

Road ahead for BI and analytics in India’s banking industry

The following points need to be considered for implementation of a successful BI and Analytics program:

a) Define a Plan Of Action (POA) vision.

b) Understand the gaps in current data/systems.

c) Business and IT teams need to work together to develop BI and analytics capabilities; either of these teams working in silo will not be able to make the total business impact.

d) Deliver benefits throughout the program and not make it a “investment only mode for the initial years.” Banks should identify projects/business benefits that can be delivered in-parallel with long- term projects to solve data integrity-related issues and create a single customer view. As banks dig deeper into their data, they will realize that despite data quality issues, they still have sufficient information to help them improve their business-related decision-making.

e) Metadata management, data quality and data integration form important aspects that should be considered when banks initiate and implement BI or analytical roadmaps.

f) They should have strong data governance plans in place to ensure the sustainability of underlying data quality.

g) Banks should adopt big data technologies, incorporating the 3Vs of data —. volume, variety and velocity within a single environment.

While it is evident that there is significant emphasis across the large, mid-sized and small bank segments on leveraging data to enable faster and more informed decision-making, Indian banks are spread widely apart from each other as far as their adoption of and maturity of BI and analytics is concerned.

While most banks have made a concerted effort to establish a strong data foundation to help them bank build on their analytical capabilities, it is evident that the focus of mid-sized and small banks is to catch up with large ones in terms of their leveraging analytics across multiple spectrums of the banking business.

Large banks, which are already well on their way into their BI and analytics journey, should focus on the areas of advanced analytics, e.g., leveraging unstructured data using big data technologies to gain additional insights, and gauge customer sentiment analyses using social media analytics, peer and influence analytics, life event analytics, selling of social empathy, location-based offers, and psycholinguistic and user experience analytics.


The following is a graphical illustration of how the BI and Analytics maturity score varies across large, mid-sized and small banks that participated in the survey.

It is evident from the illustrations above, that large banks are way ahead of mid-sized and small ones in terms of the maturity of their BI and analytics processes. Therefore,, large banks, especially those in the private sector, have set the benchmark with respect to BI and analytics maturity levels that could be achieved.

BI and analytics score — large banks BI and analytics score — mid-size and small banks

0

1

2

3

4

5PRV 1

PRV 2

PSU 1PSU 2

PSU 3

BI & Analytics Score - Large Banks

0

1

2

3

4

5PRV 1

PRV 2

PSU 1

PSU 2PSU 3

PRV 3

PRV 4

BI & Analytics Score - Mid Size & Small Banks


For a bank, business efficiency is about using its people, processes and technology to achieve optimal results. Technological innovations have always played a significant role in improving the efficiency of the banking sector, either by improving customer service levels or by reducing costs of banking transactions for customers. It has been used for a long time as the basis of enabling banks to formulate and adopt improved processes.

Most banks competing in the category have taken initiatives based on technology including branchless banking, e-lobby, kiosk banking, internet banking and mobile banking to cater to the needs of their technology savvy customers, handheld devices to reach out to remote areas to financially excluded people, BPR initiatives such as centralization of processes, use of workflow systems to measure business processes and implementation of IT systems.

It has been observed that all banks have installed a spectrum of IT systems such as the Human Resource Management System (HRM), the Loan Life Cycle Management System (LLMS) or Loan Automation and Processing System (LAPS), the Loan Origination System (LOS), the Enterprise Messaging System (EMS), the Complaint Management System (CMS), the Customer Relationship Management (CRM) system, the Campaign Management System, the Business Continuity Management System (BCMS), workflow systems, BI and data warehousing tools and multiple other systems to efficiently structure their operations.

Banks have adopted server virtualization and cloud systems in an effort to reduce their total cost of ownership of IT infrastructure. Risk management being an important requirement, most banks have a Business Continuity Plan (BCP) in place with appropriate certification.

They have also implemented Queue Management Systems (QMS) as well as self-service kiosks such as cheque- deposit machines, pass book printers, Bunch Note Acceptors (BNAs) and other machines to aid smooth functioning of branches. Leading banks have opened digital branches in various forms with no or minimal deployment of manpower.

While most private sector banks have inbound and outbound contact centers in place, public sector ones frequently do not

IT for business efficiency11

6have well-established contact centers. Most private sector banks and a few public sector ones have taken steps to put in place social media strategies for their marketing and customer grievance-handling processes.

Some banks, especially in the public sector, have developed applications for seeding out AADHAAR number in at the account level and credit of Direct Benefit Transfer to accounts by interaction with the Aadhaar Enabled Payment System (AEPS).

Some highlights of differentiated usage of technology include the concept of tab banking, where a large private sector bank is focusing on targeting affluent and HNI customers by providing them instant services and tabs to their relationship managers.

Small banks seem to follow large banks with a time lag of two to four years. Most initiatives taken by them are a subset of those taken by large banks. In addition, small banks are at the nascent stages of adoption of many such initiatives.

In addition to their current and past initiatives, banks are taking steps to implement strategic technologies that are envisaged to significantly affect their operations over the next two years. These initiatives are across four key dimensions — digital banking, payments systems, cloud computing and data analytics. Each of these areas opens a plethora of opportunities for banks to leverage on and have the power to radically transform the way in which they conduct their business.

The diagram below depicts the areas affected by each of the dimensions mentioned above. For instance, while digital banking and data analytics help banks improve their sales, customer experience and cost efficiency, payment systems lead to an improved customer experience; cloud computing help to bring down operational and ownership costs.

Improving sales

Improving customer experience

Improving cost efficiency

Digital banking √ √ √

Payment systems √

Cloud computing √

Data analytics √ √ √



Digital banking

As more and more customers move to smartphones and tablets, banks have realized the importance of having a digital banking platform, which enables their customers to move across devices with ease. It means moving to a multi-channel customer experience, where customers can have a seamless experience across branches, alternate banking channels such as the internet, mobile, etc., as well as social platforms. Banks have started on their journey toward implementation of complete digital strategies including building integrated infrastructure, managing customer data for predictive analytics, managing content and re-aligning business processes according to the new framework.

Leading banks in the large and mid-sized category have taken measures such as opening digital branches where customers are provided enablers to select their mode of interaction with the banks. While this creates a “wow” factor for customers, it also reduces banks’ operational costs. With a view to reduce their operational costs, banks have given tablets to relationship managers to augment the customer sales and service experience. Most banks now have a mobile banking platform to not only enable banking transactions, but for all kinds of transactions including wealth-related, investments and other financial services.

Data analytics

Banks are looking at bringing in customer-centricity in their product offerings In their continuous effort to differentiate their services to their customers. They strongly feel the need to create the wow factor for their customers. Their data analytics capabilities enable them to understand their clients at a granular level and quickly deliver targeted and personalized offers. This enables higher offer and cross-sell rates, which improves profitability, satisfaction and retention of their customers. The experience of developed countries shows that combining pervasive analytics, real-time marketing engine technologies and advanced multichannel integration can make more engaged, satisfied and loyal customers.

Analytics tools also enable customers to benchmark themselves to global banking standards and improve their operational efficiency. Most banks in the country either have in place BI tools or are in the process of installing such systems. In addition to customer profiling, they use BI and data analytics tools to carry out processes including historical analysis, performance budgeting, business performance analytics, employee performance measurement, executive dashboards and reporting, product innovation, customer profitability, regulatory compliance and risk management. These cover all their key business areas, help them provide enhanced access to information and enable them to make informed decisions.

Payment systems

In the last decade, India has seen a shift from traditional payment methods with cash/paper-based payments to modern electronic payment systems. With the mode of payment moving away from cash to more cashless models, secure payment systems are the need of the hour.

The RBI seeks to enable safe, efficient, accessible, inclusive, interoperable and authorized payment and settlement systems in India. This will help to improve banks’ services to their customers through speedy payment transactions and also reduce the cost of transactions. Indian banks have been upgrading their payment systems, largely driven by the need to modernize these and meet regulatory requirements. Most have implemented paperless payment infrastructure such as Electronic Clearing Service (ECS), Electronic Funds Transfer (EFT), Real Time Gross Settlement (RTGS), Pre-paid Payment Systems and Mobile Payment Systems as well as other related systems to ensure safe and secure transactions. In such a scenario, banks are competing for a share of the yet untapped pie of paperless transactions by putting in place innovative payment mechanisms.


Virtualization and cloud

Cloud and related technologies reduce the entry cost for new solutions and technology enablement areas and solutions. Consolidation and virtualization of servers have helped leading banks to build scalable infrastructure to meet their fluctuating business requirements. Desktop virtualization is another key solution that has found popularity amongst banks. It has the potential to increase their flexibility and manageability in desktop environments and keep a check on their IT costs, time and effort.

Most large leading banks that have taken initiatives on adopting cloud have done so in a private cloud environment. Small banks, however, face cash flow- and manpower-related limitations, and therefore, find it profitable to opt for shared high-end data centers and virtualization technologies to have access to the latest solutions available at a fraction of the cost.

Measuring business efficiency

It may be difficult to measure the direct impact of the IT initiatives taken by banks. However, they can keep track of improvements in the efficiency of their business operations though some key objective parameters.

• Cost per transaction across all banking channels: Tracking operational costs incurred across any delivery channel and if there is any increase in customers’ usage of lower-cost channels

• Customer-acquisition costs: Annual calculation of acquisition costs to highlight the benefits of successful utilization of data analytics and increase the conversion rates of banks

• Workforce rationalization in branches through IT initiatives: To gauge whether installation of self-service kiosks such as passbook printers and cash deposit machines had any benefits, with deployment of workforce in such branches being tracked

• Percentage of non-core banking activities of bank employees and percentage of outsourcing in processing transactions

Technology assets and initiatives of any kind and scale should justify investment required in the specified time frame. Alignment with the business goals of banks should be ensured, and the business case in terms of qualitative and quantitative benefits should be evaluated for every initiative for it to be an effective business efficiency measure.


Introduction

IT risk management is not an “out of the box” solution, and therefore, overall governance in a bank is evaluated to make sure its IT risk is managed adequately.

The survey of the awards ceremony held this year to benchmark how well IT risks are managed across banks in India was based on the following performance parameters:

• Management of IT infrastructure

• Cost optimization

• Disaster recovery plans

• Physical environment

• Identification of potential risks in IT usage

• Technology obsolescence management

• External network and penetration testing

• Zero day attack risk mitigation

• Outsourcing strategy and policy framework

• Applications — testing and certification, change management

• BCP/DR plans

• Back-up and disaster recovery-related efforts, implementation and testing

• Fraud management: security, people and fraud management policies; real time alert systems

• Training, capability-building, redundancy, creation and management of awareness

Trends observed12

The majority of the banks have adopted the ISO 27001 and COBIT framework to strengthen their information security and governance structures. This has helped them in institute improved security governance, better amalgamate Information security practices within their business and provide them a roadmap to sustain and continually improve their overall IT functions.

We have noted that most banks have implemented or are in the process of setting up Security Operations Centres (SOCs) in their effort to instil a proactive threat intelligence and incident response. This has been primarily achieved by using off-the-shelf Security Incident and Event Management (SIEM/SIM) solution products or their new variants, which are supported by big data to enable faster correlation and analysis of events. Dashboards are provided to the senior management executives of banks through Security Operations Centres (SOCs) on a near real-time basis. These dashboards depict probable security violations in the environment. The challenges faced in this area, however, primarily relate to two aspects — holistic integration of SIEM/SIM tools with other IT security solutions within banks and a shortfall in the skill-sets of people managing the SOCs.

With the advent of advanced attacks, such as Man-in-the-Browser and sophisticated Banking Trojans, banks have strengthened their access to core banking and various other customer delivery channels by adopting two- factor authentication methods and one-time passwords.

Banks are implementing Anti Money Laundering (AML) solutions to thwart money laundering-related risks. These solutions can extract data from their Core Banking Solutions, make certain calculations, based on rules configured in AML software, and generate alerts on suspicious transactions. These alerts can be then monitored and relevant action taken on flagged alerts/events. In addition, Suspicious Transaction Reports (STRs) should be submitted to a statutory authority regularly.

The other growing trend in most banks’ interaction with and feedback from customers has been usage of social media. This significantly helps banks to engage with them on issues, and understand their preferences and habits to provide them an enhanced experience.

Managing IT risk7



Responses to this year’s questionnaire were sought on the following parameters and sub-parameters:

Serial No. Parameters Subtypes of parameters

1 IT risk policies Network and security architecture

Policies and procedures

Hardware and software risk management

2 Security Physical and logical security

Managing IT risks — security, awareness and availability

Penetration testing and zero day attacks

Secure coding

Review of IT risk management and people policy, and fraud management

3 IT management Management of obsolescence of technology,

manpower and skill-sets

Monitoring of outsourced activities

Implementation of real time alert systems and follow-up on security violations

Implementation of security standards, processes, protocols and measures to protect critical information

Implementation of KYC and prevention of money laundering risks

4 Innovation Innovation in managing IT risk

Depicted below are various trends we have noted, based on the risk scores banks have received against each of the evaluation parameters. Risk scores were assigned based on the responses received for this year’s questionnaire. The hgher the risk score, the higher the maturity of the particular parameter sub-type.

IT Risk policies

0 0.5 1 1.5 2 2.5 3 3.5 4 4.5

Large size bank

Mid-size banks

Small size banks

Risk Score

Hardware and software risk management

Polices and procedures

Network and security architecture

In the area of IT Risk policies, the analysis clearly indicates that large banks have mature policies and procedures for managing their IT risks.

The primary reason for widespread maturity in the sector is due to large banks complying with the RBI’s detailed recommendations and guidelines and their adoption of ISO 27001 standards and the COBIT framework to help them strengthen their information security position and governance structures.


In the area of innovation in managing IT risk, we noted that samll banks have taken initiatives such as implementing transaction-monitoring systems, fraud risk management solutions, conducting vendor/third party risk assessment and setting up security operations centers to monitor and manage real time security-related incidents.

Security

0 1 2 3 4

Large size bank

Mid-size banks

Small size banks

Risk Score

Review of IT risk mgnt policy, people policy & fraud managementSecure codingPenetration testing & zero day attacksManaging IT risks - security, awareness and availibilityPhysical and logical security

Information security is one area where we noted significant effort across the sector. Responses that secure coding and readiness to combat zero day attacks constitute an area in which the banking sector, particularly small and mid-sized banks, needs to improve. This is of utmost importance to our national security, given the National Critical Information Infrastructure Protection Centre’s (NCIIPC’s) guidelines on protecting critical assets across sectors.

IT Management

0 1 2 3 4 5

Large size bank

Mid-size banks

Small size banks

Risk score

KYC and preventing risks of money launderingInformation security standards, processes and protocols. Measures to protect the critical information.Real time alert systems and followup on security violations

Monitoring outsourced activities

Manpower and skill sets

Management of technology obsolescence

Management of technological obsolescence is an area that needs additional focus in some medium and small banks. The trend seen in some banks on technological obsolescence is that the process of reviewing obsolete (end of life or end of support) technology is only reviewed during an IT Infrastructure upgrade or revamp project. A process for continuous monitoring of components nearing obsolescence seems to be lacking.

Innovation in managing IT risk

0

1

2

3

4

Large size bank Mid-size bank Small size bank

Ris

k Sc

ore

Innovation in Managing IT Risk


Managing IT risk: challenges and way forward

The past decade has witnessed a steep increase in the intensity and extent of cybercrimes. The global financial services sector has been hard hit by cyber terrorism, violation of intellectual property rights (IPR), leakage of card data, electronic fund transfer (EFT) fraud, among others. The financial services sector is often targeted due to high recognition of and rewards associated with it. Therefore, banks should keep their information security functions strong by managing their IT risks efficiently and diligently.

The Government of India’s cyber security arm, Computer Emergency Response Team-India (CERT-In), reported 62,189 cyber security incidents in the first five months of the current calendar year

13. Additionally, CERT-In also reported that 9,174

Indian websites were hacked by groups spread across the world

14. These crimes are becoming more sophisticated and

are targeted at critical institutions. They can cripple national security with the rapid evolution and increasing complexity of the technology landscape.

Today, banks are engaged in mitigating a large number of challenges around managing the effectiveness of their security solutions, their compliance with regulations on software licenses, managing technological obsolescence-related issues, online monitoring of fraud, detection of zero day attacks, their response to incidents and challenges around cost optimization of investments in security measures.

Based on current trends and future speculations, we suggest the following steps for banks to be prepared for the challenges mentioned above:

• Strengthen IT system

• Focus on people

• Comply with regulations, policies and procedures

• Plan for the future

Strengthen IT Governance

IT governance is the most talked subject at all strategy forums and events. We have observed that the majority of banks in India are embarking on the journey of adopting the COBIT framework in their organizations. It is also recommended in the RBI’s Gopalakrishna Committee Report that banks should adopt established IT governance frameworks such as the COBIT. In addition, they need to be aware of challenges and/or bottlenecks when they implement the latest COBIT framework. Some key areas they need to consider:

Effective communication of strategy: This is the primary reason for a disconnection in alignment of IT goals with that of the business.

Business ownership of technology projects: To realize the benefits of effective IT governance, it is critical for banks to have business buy-in and ownership. Ownership becomes a fact if there is a demonstrated business benefit and value.

Assessment of IT performance: Regular assessment of projects undertaken and the operational effectiveness of the day-to-day IT delivery will instill confidence and lead to value creation by the technology function.

Focus on people

Imparting training to key staff members in order to keep them updated on business and technological changes is seen as the top priority of many banks in India. Cross-functional and cross-technology training is another area on which banks should focus. This will help their employees be aware of IS policies, rotation of duties, the “Maker Checker” concept, and the technology foot print and security posture. Banks are placing more emphasis on creating awareness among their customers on fraud. With the expansion in the number of delivery channels and the growth of network, managing these is becoming a challenge for banks. Therefore there is a need to improve/ promote/encourage/reward the habits of users habits to minimize fraud risk.

13 (http://economictimes.indiatimes.com/tech/internet/cert-in-reports-over-62000-cyber-attacks-till-may-2014-govt/articleshow/38374486.cms).

14 (http://economictimes.indiatimes.com/tech/internet/cert-in-reports-over-62000-cyber-attacks-till-may-2014-govt/articleshow/38374486.cms).


Adherence to regulations, policies and processes

The RBI provides regular guidelines and policy updates to all banks. These notifications ensure a basic level of information security and business process standardization within them. Banks in India also adopt COBIT practices and align their technology landscapes with industry-recognized Enterprise Architecture models. They should also establish privacy frameworks to protect customers’ personal information and be compliant with the IT Act 2000 and its amendments of 2008 and 2011.

Planning for the future

Due to the evolving nature of attacks, it is difficult to be prepared for every threat. Zero day attacks have taken a heavy toll on many organizations across the world. In order to stay up to date, banks are putting in place dedicated security teams. They have realized the implications of technological failure to businesses and their reputation. Although many of them are developing in-house expertise, the SaaS and its outsourcing model are equally beneficial for them.

The survey gave us a good understanding of the initiatives and steps the banking sector is taking in managing IT risk. The recommendations and guidelines of the RBI have helped banks structure, drive and manage their IT risk management functions.

Proactive threat-related intelligence and response to incidents is an area in which we noted that most banks have implemented or are in the process of setting up SOCs. The other growing trend in most banks in the area of customer interaction and feedback is use of social media.

To conclude, an IT system being compromised in no longer a question of “if” but “when.” To deal with this, IT risk management must become a boardroom issue and a bank’s technology strategy must be aligned with its business focus and organizational goals. By redefining its information security (IS) strategy and being cognizant of current trends, banks can be better prepared to deal with threats and adopt a proactive instead of a reactive approach to these.


People constitute the most important cog in the technology function of a bank. Most banks have a large pool of resources who are skilled in various domains of IT such as project management, business analysis, requirement management, software development, testing, networks, databases, storage systems, data center management, IT security, IT service management, etc. However, the key aspect of any IT organization is how well it understands business requirements and is able to effectively translate these into an IT-enabled solution. The ability to manage large-scale implementation of processes without disrupting the existing operations of banks is another key area. This is where large banks score over medium and small ones. Many of them have also implemented initiatives to launch IT COEs and innovation to drive the effectiveness of their IT solutions and make them more relevant to business-related issues.

The figure below depicts the key aspects of building a strong IT team:

IT team

Implementation capability

Capability building

Alignment of business and IT strategy

Domain and technical integration

Skill sets and expertise

Governance structure

Governance structure

The IT organizational structures of most banks are fairly mature with mandated committees such as IT strategy committees, IT steering committees, project steering committees, etc., being under the supervision of their boards. Some banks have also set up innovation committees/groups to drive innovation across their IT functions. While the IT governance structure is more or less defined by the regulator, leading banks have put in place additional structures to align their business and technology teams for effective service delivery.

The IT initiatives of large banks are based on the business needs of their business and operational units. IT is a facilitator that enables them to meet their business requirements by providing them a proper IT platforms and frameworks. This leads to co-ordination and involvement between their business and IT teams by their holding common meetings and encouraging interaction between them to help them design and implement solutions. IT teams suggests possible changes in the existing IT capabilities of banks to enable improvements in their business processes to enhance their productivity. Additionally, banks will also need to implement appropriate succession planning for an IT organization to develop talent and quickly fill in key gaps at the top levels.

Skill-sets and expertise

Identification of the right skills required for IT jobs at various levels of banks is critical for ensuring the continued success and value delivered by their IT teams. Continued monitoring of skill-sets required at each level and investments in developing employees will help banks form ace IT teams. While all banks have employees with IT qualifications, 14% of the IT professionals in the large ones have professional qualifications such as CISA, CISSP, CCNA and PMP, compared to 13% in the case of medium-sized banks and 11% in small ones.

Domain and technical integration

Technology teams will need to have a large pool of resources who are skilled in various domains IT, e.g., project management, business analysis, requirement management, software development, Testing, networks, databases, storage, data center management, IT security, IT service management, etc. in addition, an IT team should include business analysts with strong domain expertise to translate business requirements to IT specifications. Periodic assessment of the training requirements of IT resources is required to ensure that competent and capable IT resources are available to address business requirements.

IT team15

8



Alignment of business strategy and IT strategy

Banks should align their IT goals with their business goals, policies and procedures, mapped to the industry’s best practices. The success of a project is dependent on how accurately the IT team understands business needs and delivers the required product. Most leading banks have well-defined processes (with proper documentation) for interactions between their business and IT teams. Once a project is initiated, its complexities, scope and impact on business processes should be carefully considered and documented. Stakeholders should be identified and their buy-in ensured so that all operational hurdles are smoothly handled. A cross-functional team with stakeholders from various functions should be put in place. The team should comprise members from the product and process, legal, compliance, technology, operations, fraud prevention, marketing, business intelligence, infrastructure management, and the services and training departments. In a project team, some field officers are involved in capturing a holistic view of ground/customer-facing/sales officers’ experiences.

Capability-building

Most banks have and are continuing to invest in internal as well as external training for their employees. However, capability building is more than just training, it is developing a career path

for employees, defining incremental skills required at each level and then filling the gaps. Capability-building, which is central to a bank’s performance, requires a systematic management approach to learning and development as an integral part of workforce planning. There are various capability-building and career planning mechanisms that inculcate a learning and development culture, and succession planning for top management, knowledge and skills-sharing, training, and reward and recognition systems in banks.

Implementation capability

Implementation of new systems and solutions in banks can be a complex task. Inefficient implementation can have a detrimental effect on their investment returns in terms of time and money. Given their ever-increasing scale of business and IT assets, banks will need to build their project-execution capabilities without downtime and within strict timelines. They need to remember that the complex project-handling capability of their teams indicates the level of maturity and expertise of the team members.

While large banks have sizable and skilled IT teams, and have proper career-planning and capability-building measures in place, medium and small ones lack such capabilities and find it difficult to align their business with their IT requirements.


The way forward9IT functions need to strike a balance between risk and performance. However, reality often falls short of this goal. That is because the influence of a bank’s IT function on its business has evolved so quickly that many of these functions are still struggling with how they can align their technical expertise from a new business perspective.

Top IT leaders are now facing broad challenges including:

• Increasingly complex IT and business operating models

• Cost efficiency- and transparency-related demands

• New regulations and threats

• Expectations of corporate responsibility

Key role of IT in the future:

Bring agility to operations► Assess IT’s skills in innovation, business change

and managing IT-related risk-► Be clear on what the business wants to achieve from

outsourcing and construct your approach around these goals. Build the necessary skills to manage an integrated sourcing strategy

Optimize customer reach► Become a champion for data

analysis and management, to help organizations proactively address macroeconomic trends and profitable market opportunities

Build stakeholder confidence► Confirm that IT understands both the business strategy and its own

expected contribution► Review and enhance IT’s communications skills. This leads to

more satisfaction with the IT function, particularly at the board level► Focus on obtaining, managing and analyzing data, for regulatory

reporting and to meet other stakeholder expectations

Achieve cost competitiveness► Introduce more rigorous measurements for IT expenditure planning

and control. Work with the business to better quantify return on IT investment

► Report all measures clearly and regularly to the board

1

23

4

Role of IT


Build stakeholder confidence

IT can provide vital data and enable accurate reporting to demonstrate that a bank’s financial, operational and environmental performance meets regulatory standards, improves the accuracy of its forecasts and indicates that risks are recognized and managed effectively.

Cost-competitiveness

As banks move from simple cost reduction to cost optimization, IT can help to create a permanently lower-cost business model. This requires a holistic approach to pricing, costs, cash and capital. Hover, having the lowest costs is not a guarantee of success in the market. Cost-competitiveness enable a bank to go on winning sales at a price that generates a sufficient level of return for stakeholders and its investment needs.

Operational agility

IT contributed significantly to the success achieved by banks in the last decade, but it is clear that there is substantial room for additional innovation. By looking at opportunities opened up by cloud computing and virtualization, banks can become more flexible at reduced costs and avoid costly investment

in infrastructure. Therefore, IT needs to continue offering more than mere operational support and help banks to create competitive advantage in their operations.

Customer reach

Segmentation is becoming more and more precise and sophisticated as banks strive to target the most profitable customers. IT needs to be at the forefront, driving systematic collection, analysis and presentation of customer and market data to identify where high-margin opportunities lie. Existing clients should be a rich source of future business and many banks are looking to broaden the range of their products and services, support account management and develop customer life-cycle concepts.

However, moving into new markets brings with it a number of logistical challenges, not the least of these being providing services to customers in different time zones. IT can help to ensure that banks’ customer care functions are geared to support these changes.

Understanding the customer is the key to effective marketing, and IT can be at the center of a continuous feedback culture that encourages sales and service staff to provide relevant information on existing and potential clients.


M. V. SivakumaranFaculty and CoordinatorInstitute for Development and Research in Banking TechnologyTel: +91 40 2329 4101

Abizer DiwanjiPartner and National LeaderFinancial ServicesMobile: + 91 98923 33370Email: [email protected]

Rajendra ReleAssociate DirectorFinancial Services (Business Advisory)Mobile: +91 98203 48164Email: [email protected]

Hema JagtianiAssociate DirectorFinancial Services (Payments)Business Advisory ServicesMobile: + 91 98192 06662Email: [email protected]

Amit TendulkarAssociate DirectorFinancial Services (Business Advisory)Business Advisory ServicesMobile: + 91 98199 48972Email: [email protected]

Dheeraj AnejaAssociate DirectorFinancial Services (Payments)Business Advisory ServicesMobile: +91 99309 04452Email: [email protected]

Kartik ShindeAssociate DirectorFinancial Services (Risk Advisory)Mobile: + 91 98671 63368Email: [email protected]

AcknowledgementIDRBT Team

For more details, please contact:

EY Team

Mahesh MakhijaPartner - Financial ServicesBusiness Advisory ServicesMobile: + 91 96320 36633Email: [email protected]

Ninad VaidyaSenior ManagerFinancial Services (Risk Advisory)Mobile: +91 98334 45054Email: [email protected]

Joydeep DuttaSenior ManagerFinancial Services (IT Advisory)Mobile: + 91 9886 166525Email: [email protected]

Nitin DattaSenior ManagerFinancial Services (Business Intelligence & Analytics)Mobile: + 91 99304 91222Email: [email protected]

Kamal TirkeyManagerFinancial Services (Business Advisory)Mobile: +91 98201 07055Email: [email protected]

Nitish ShrivastavManagerFinancial Services (Payments)Business Advisory ServicesMobile: +91 98921 31727Email: [email protected]

Jagat SabatSenior ConsultantFinancial Services (Business Advisory)Mobile: +91 97697 21566Email: [email protected]

Shantanu ShirkeSenior ConsultantFinancial Services (Payments)Business Advisory ServicesMobile: +91 99309 99387Email: [email protected]

Chandana ChandraManagerWriting & Editorial, EY KnowledgeMobile: + 91 98181 24068Email: [email protected]

Jaspal SinghAssistant ManagerBrand, Marketing and CommunicationsMobile: + 91 95605 08261Email: [email protected]

Rajendra ReleAssociate DirectorFinancial Services (Business Advisory)Mobile: +91 98203 48164Email: [email protected]

Dr. G. R. GangadharanAssistant ProfessorInstitute for Development and Research in Banking TechnologyTel: +91 40 2329 4131

Mr. G. Raghuraj, General ManagerFacultyInstitute for Development and Research in Banking Technology


Our offices

Ahmedabad2

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Near C.N. VidhyalayaAmbawadiAhmedabad - 380 015Tel: + 91 79 6608 3800Fax: + 91 79 6608 3900

Bengaluru12

th & 13

th floor

“UB City”, Canberra BlockNo.24 Vittal Mallya RoadBengaluru - 560 001Tel: + 91 80 4027 5000 + 91 80 6727 5000 Fax: + 91 80 2210 6000 (12

th floor)

Fax: + 91 80 2224 0695 (13th

floor)

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Chandigarh1

st Floor, SCO: 166-167

Sector 9-C, Madhya MargChandigarh - 160 009 Tel: + 91 172 671 7800Fax: + 91 172 671 7888

ChennaiTidel Park, 6

th & 7

th Floor

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Kochi9

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Mumbai14

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5th

Floor, Block B-2Nirlon Knowledge ParkOff. Western Express Highway Goregaon (E)Mumbai - 400 063Tel: + 91 22 6192 0000Fax: + 91 22 6192 3000

NCRGolf View Corporate Tower BNear DLF Golf CourseSector 42Gurgaon - 122002Tel: + 91 124 464 4000Fax: + 91 124 464 4050

6th

floor, HT House18-20 Kasturba Gandhi Marg New Delhi - 110 001Tel: + 91 11 4363 3000 Fax: + 91 11 4363 3200

4th

& 5th

Floor, Plot No 2B, Tower 2, Sector 126, NOIDA 201 304 Gautam Budh Nagar, U.P. IndiaTel: + 91 120 671 7000 Fax: + 91 120 671 7171

PuneC-401, 4

th floor

Panchshil Tech ParkYerwada (Near Don Bosco School)Pune - 411 006Tel: + 91 20 6603 6000Fax: + 91 20 6601 5900


Notes

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This publication contains information in summary form and is therefore intended for general guidance only. It is not intended to be a substitute for detailed research or the exercise of professional judgment. Neither Ernst & Young LLP nor any other member of the global Ernst & Young organization can accept any responsibility for loss occasioned to any person acting or refraining from action as a result of any material in this publication. On any specific matter, reference should be made to the appropriate advisor.

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