K C Chakrabarty: Beyond Core Banking Solutions (CBS) - fast forward to
Banking 2.0!
Address by Dr K C Chakrabarty, Deputy Governor of the Reserve Bank of India, at the
Executive Roundtable organised by the Institute for Development and Research in Banking
Technology (IDRBT) in collaboration with Union Bank of India, Mumbai, 18 February 2011.
* * *
Assistance provided by Smt Nikhila Koduri in preparation of this address is gratefully acknowledged.
1. Shri M V Nair, Chairman & Managing Director, Union Bank of India, Shri B
Sambamurthy, Director, IDRBT, Shri S S Mundra, Executive Director, Union Bank of India,
Shri M G Sanghvi, Executive Director, Bank of Maharashtra, senior bankers, other
distinguished guest, ladies and gentlemen. It is a pleasure to be in your midst today at this
Executive Roundtable organised by IDRBT in association with Union Bank of India on the
theme "Beyond Core Banking". As you may be aware, this is a part of a series of roundtable
organised by IDRBT in collaboration with banks on the subject and I am happy to have been
associated with some of them. IDRBT has been doing a commendable job in enlarging the
role banking technology and research and I do not recall of any other comparable institution
in the world. Under Mr Sambamurthy's leadership, in keeping with its mandate, it is moving
away from transactional areas into more strategic areas and research.
2. The next information revolution is well under way. Peter Drucker in the New
Information Revolution has said and I quote "The next information revolution is forcing us to
redefine what business enterprise actually is - the creation of value and wealth."
But it is not
happening where information scientists, information executives, and the information industry
in general are looking for. It is not a revolution in technology, machinery, techniques,
software, or speed. It is a revolution in CONCEPTS-internet, web etc. It is age of the
"Prosumer": producer and consumer of information. This Prosumer is you - a web user who
creates and uses content and information on the web. So far, for 50 years, the information
revolution has centered on data - their collection, storage, transmission, analysis, and
presentation. It has centered on the "T" in IT.
The next information revolution asks two pertinent questions:
What is the meaning of information, and what is its purpose?
3. And this is leading rapidly to redefining the tasks to be done with the help of
information, and with it, to redefining the institutions that do these tasks. This holds good for
banks also. My address today would be centered on the ways of bringing in the focus of
banking to a new level which would be based on a "whole new customer service" and the
significance of a customer-centric strategy. We must understand here that customers want a
great banking service, tailored to their needs and in a timeframe that works. I would also
touch upon what are the technologies beyond core banking and the business and
technological requirements of Financial Inclusion. I would be briefly be touching upon the
alignment between business and IT and concluding with the recent initiatives taken by the
RBI in the area of technology.
Out with the old, in with the new
4. All of us would agree that technology has no longer remained just a means for
automating processes. It has revolutionized every industry in the world by rendering faster
and cost effective delivery of products and services to customers, who in the normal course
could not have afforded the same, and at the same time producers of goods and services
would remain viable and profitable. Technology is the surest and most appropriate way of
bringing inclusion in respect of any product and/or service.
5. Banking services is no different. The major technological innovation in banking was
the ATM over 25 years ago, and up until the early 1990s this was the only customer-facing
technology that existed. Following this came the phone banking, IVR systems, advent of the
internet, increasing complex database mining, and remote distribution channels. While
banking and retail financial services are generally considered a traditional business area, the
fact is that there have been more changes in this sphere in the last 10 to 15 years than in the
preceding 100 years. If I had told you 15 years ago that Google would be one of the largest
global brands, you would have said "who"? If 5 years ago, I had told you the total number of
facebook users today would be greater than the physical population of about half countries in
the world, you would have said "what"? In a similar fashion, it is possible that some
enterprising corporate incubator will figure out the customer behaviour secret and construct a
purpose-built retail bank that would take off like Twitter globally. We are experiencing an age
where the impact of internet and mobile devices have made the rules in managing delivery
channels and the mode of reaching customers a "moving target". How the banks can reach
this target would be challenge to be addressed by the banks.
6. I would pose a question here: What came first in this chicken and egg argument -
technology or customer demand for technology? Does technology change customer
behaviour or is it customer demand that influences technology in banking. In the earlier days,
it used to be said about banking that: "build it and they will come". However this will not hold
well in the present day. Technology should work for the business in its aim to make its
products and services relevant and accessible to its customers, instead of a fixed sunk cost
that sits heavily on a bank's P&L account. Technology should also not only be looked as a
cost cutting tool but as a value creating opportunity to customers and through this to the
organisation.
7. I would like to talk to this august group about the increasing acceptance of
technology and innovation in our lives. I would like you to appreciate that while the telephone
took approximately 50 years to reach "critical mass", television took half of that
(25-35 years), PCs about 12-14 years and, the Internet about just seven years. Ultimately
now facebook and twitter are now being adopted not in years but in months. The lesson
learnt here is that as we become more used to technology and innovation, it is taking less
time to adopt these technologies into our lives, and this further encourages innovation and
this, increases the impact on business. What I am trying to say here is that banks have less
time to react and anticipate the impact of such changes on their business unless they deliver
fast.
Navigating rapid change
8. Technological advancement enables a broader and inclusive banking sector and in
the process, is a key driver for the sustained and inclusive growth of the economy.
Technology by itself is not a panacea. But technology has evolved to such an extent that it
can hold the key to achieving your goals - if banks are willing to accept the changes that
they will need to make to get there. Banks have implemented Core Banking Solutions (CBS)
which marked a paradigm shift in more senses than one and branch customers are now
bank customers as they can access their accounts from any branch for defined purposes. It
was envisaged that the CBS would offer new opportunities for information management,
better customer service and improved risk management. However banks have not been able
to reap the benefits of this technology in terms of reduction in costs of small value
transactions, speed with which the transactions are done if both successful and unsuccessful
transactions are considered, improved customer services and effective flow of information
within the banks as also to the regulator. Banks have not gained in terms of efficiency partly
because the much needed business process re-engineering was not done. Further, banks
have deployed technology for transaction processing and the same has not been explored
extensively for analytical processing like customer relationship management and decision
making. Thus, there is a need to take care of what we could not achieve in the first round of
technology implementation and think beyond CBS. Supported by the latest technology,
banks would need to identify new business niches, to develop customized services, to
implement innovative strategies and to capture new market opportunities. With further
globalization, consolidation, deregulation and diversification of the financial industry, the
banking sector is set to become even more complex. But successful banks make it simple
and those who are able to achieve that will be more successful. It is here that the concepts of
Next generation Banking is taking centre stage. There is a need to fast forward to
Banking 2.0.
Next generation banking
9. Bill Gates has once said "Banking is necessary but banks are not". The next
generation banking should aim to provide customer-centric features, giving users an
extremely personalized experience while at the same time providing increased intelligence
and automation to help banks sell appropriate products and services to their customers.
Changes in demography and how banks reposition themselves to reap the advantages of
demographic dividend will be a crucial deciding factor for the success of bank. The GenNext
banks would be providing life cycle wise products and services, right from birth till death,
under one roof. The essential idea is that a relationship once built at birth carries on till death
and all the products and services are made available under one umbrella. Technologically,
next generation banking would mean several interconnected applications and flexible
orchestration, driven by business needs, and without a long intermediation cycle. This would
call for seamless their customers. Changes in demography and how banks reposition
themselves to reap the advantages of demographic dividend will be a crucial deciding factor
for the success of bank. The GenNext banks would be providing life cycle wise products and
services, right from birth till death, under one roof. The essential idea is that a connectivity
across systems and operating units. It would also demand that all this be achieved with costs
absolutely under control. The technology that will support this new world must be able to
incorporate all these features and more. Our technology adoption was not customer-centric,
it was employee-centric. I would like to mention a few illustrative technologies beyond core
banking that are likely to which can add value to a bank and gain prominence in the near
future are delineated below:
Customer Relationship Management: In order to enhance the effectiveness of the various
channels such as branch banking, mobile banking, internet banking, Banks may consider the
use of a comprehensive Sales Customer Relationship Management (CRM) solution which
enables the user to access the entire customer details and provides a 360 degree view
across channels and products and enhances service quality. This will enable customer
interactions across various touch points (such as a call or email) to be captured on a
centralised single system. We need to transit from transaction orientation to customer
orientation.
Use of Data Analytics (Business Intelligence): Business intelligence (BI) helps a bank
decide on various business strategies including customer segments, product mix, channel
mix etc. A good data warehouse can also enable call center technologies like outbound
dialing to be used for active marketing and sales channels and not just for transactions.
Human Resources Management: For medium to large enterprises, an effective Human
Resources Management System (HRMS) can bring remarkable efficiencies and handle the
various needs of the employees. Such systems can also handle the localised requirements
of banks operating in multiple countries. The demographic dividend alluded to earlier not only
has implications from customers expectation side but from human resources side as a larger
pool of talent is potentially available.
Mobile Banking: The fast-paced growth of consumer mobility has made the mobile phone, a
channel of choice for last-mile end-user connectivity. The business imperatives of a mobile
banking platform include:

Mobile presents the lowest per transaction cost for the Bank as compared to other
channels.

Push-based offers that can be delivered over-the-air and can result in increased
offtake of services.

Value added services such as Prepaid mobile recharge, funds transfer and bill
payment can also be enabled.
Capital Adequacy Framework: In order to meet the requirements of the Capital Adequacy
framework, Application Systems are available which provide capability to compute the capital
adequacy as per the RBI guidelines with Standardized, Advance internal Ratings Based
(AIRB), advanced management approach (AMA) for Operations risk and other management
reporting. Thus, credit risk, market risk and operations risk can be measured, simulated and
controlled using these systems.
Today, it is imperative to reach Banking services to the
Alternate Channel (TV Banking):
maximum number of households and television is an ubiquitous medium in today's
households. TV Banking empowers TV viewers to access banking product/service
information at the touch of a button.
Treasury systems: As a key component of a bank's activities, treasury needs to accorded
adequate attention in terms of technology solutions. Integrated platforms for dealing with the
broad range of assets including foreign exchange, money market, fixed income and
derivatives etc. would be of great value. Such systems may cover the range of functionalities
including pricing, booking, risk management, value at risk, limit control, confirmation,
payment and accounting etc. More efficient treasury operations and better controls would be
the key outcomes of such systems.
The right mix
10. As institutions in the banking industry adjust to an altered competitive landscape and
a revised set of priorities, the role of the core system is becoming more important. The new
era of banking demands a fresh technological approach, as banks must rid themselves of the
burden of inflexible solutions designed and implemented when the financial world was a very
different place.
11. As might be expected, well-established operational objectives - such as increasing
revenues and efficiencies while simultaneously decreasing costs - remain prominent. Here I
would like to draw a parallel to Darwin's theory of evolution, as published in his work "The
Origin of Species" that, purports that populations evolve through a process of natural
selection, whereby favourable traits become more common and unfavourable traits become
less common. Over the time, this process may result in adaptations for particular niches,
resulting in the emergence of new species. If we apply this theory to banking systems, we
can draw a number of parallels one of them being that unfavourable technologies would
become extinct, while newer, more agile and flexible technologies provide competitive
edge - and will ultimately survive the test. The theory of they (customers) needed the bank
more than the bank needed them (customers) is surely undergoing a transformation.
Customer imperatives
The writing on the wall is clear: "keep your customers happy and survive".
12. I would like to dwell on the five customer imperatives that would drive the Next
Generation banking:
Channel improvement: Banks would need to develop a right mix of assisted and
selfservice channels to provide a rich unified and consistent banking experience. Most of the
time, customers choose a channel because they do not have a choice. Towards this, banks
need to transform their business with a channel strategy with the idea that a customer's
approach to channels is additive not substitutive. This would result in better communication,
better mobility and better customer insight.
Service Accessibility: Banks also have opportunities to incorporate technologies which
would make banking accessible for a broader base of population. By this I mean banks can
look at trends like providing for talking ATMs, provision of Braille statements, ATMs with
Braille keyboards, dedicated service line for customers with hearing or speech impairment,
setting that allow persons with low vision to customize the internet.
Customer serviceability: You would agree with me that today customers can access
banking services 24 hours a day, 7 days a week and they can do so in person, over the
phone, online and in some places through the television. The growing customer bases are
the product of instant gratification. While banks need to balance their service offerings across
customer segments, they also need to provide a responsive, reliable and competent service
model which offers a uniform level of information and interaction across various channels.
Data Privacy and Security: Data privacy is still a relevant area of concern for banking
customers despite technological advances and strong risk management processes within the
banks not only minimise the financial loss to the customer but also safeguard emotional
victimization of customers.
Simplified Banking: It would be more meaningful if banks would make banking
sophisticated, yet simple, in terms of processes and services, to enhance banking
experience. Providing a simplified yet fully loaded banking experience is the need of the hour
for banks.
Financial inclusion with IT
13. Business requirements: I would like to emphasise that it is imperative to facilitate
opening new accounts, provide need based credit, remittance facilities and help promote
financial literacy in rural India. It is expected that new technologies and business
correspondents will drive this movement. In the long run, it is expected to cover the economic
distance between rural and urban India. It is here that technology would play a major role in
achieving the objectives set out. For all services that entail payments to citizens, the last mile
interface is the weakest link. An efficient payments and transfers system warrants bank
connectivity to every individual and institution, including those in remote rural areas. This
coupled with building a technological interface for ensuring this would result in creating
wonders for Financial Inclusion.
14. Technology helps the financial institution to go
Technological requirements:
where the customer is, while playing an important role in reducing the operating costs for
providing banking services, particularly in remote rural areas. Internet and mobile
technologies have spread out and are visible at various levels of the technology delivery
chain. But, the challenge hereon, in the context of financial inclusion, would be to get the
technology pieces together in a complete whole that is viable and sustainable. All banks
should accord top priority to provide connectivity to ensure that banking facilities reach all its
customers ubiquitously.
Need for a clear strategy and planned approach
15. For a plan to succeed there must be a vision and strategy driving implementation.
There is clearly an absence of vision of how technology is going to drive business and
customer relationship. Thus technology adoption in banks is a result of external pressures
rather than a vision shared by the bank staff percolating right down from right up or a
corporate vision of the positive externalities that will result. Consequently, this lack of
longterm vision and strategy has impacted the way technology has been utilised.
Alignment between business and IT
16. The Business-IT Wall is only a figurative wall, but it literally separates the Business
and IT in most organizations today. The success of all enterprise information initiatives
requires that this wall be torn down, ending the conflict between the Business and IT, and
forging a new collaborative union.
Back office centralization
17. Indian banks have been on the forefront of back office technology adoption -
successfully harnessing the power of information technology to gain operational and strategic
advantage. This has been possible largely through the adoption and upgradation of
technology in the back office operations. Computerisation of back office operations was
envisaged to release manpower for various front office jobs to the satisfaction of the
customer. Customers were to get better services at lower direct and indirect costs. But this
has not happened the way it was planned. Banks are still involving a sizeable number of their
back office staff in the preparation and submission of various returns. There is an urgent
need for building an MIS server to generate returns automatically. In this connection, I would
like to inform you that the RBI has prepared an approach paper on automated data flow (a
straight through process) of information from the core banking solution (CBS) or other IT
systems of commercial banks to the Reserve Bank. The approach paper, inter alia,
discusses the methodology to be adopted by banks to classify themselves into a cluster
based on its technology and process dimensions. Accordingly, banks have been advised to
conduct a self-assessment and furnish the estimated timelines for the project.
Report on information security, electronic banking, technology risk management and
tackling cyber fraud
18. RBI has recently released a report on Information Security, Electronic Banking,
Technology Risk Management and Tackling Cyber Fraud. The Group that has prepared the
report has delved into various issues arising out of the use of Information Technology in
banks and made its recommendations. The detailed recommendations are comprehensive
and if adopted by the banks, they would go a long way in minimizing the risks that the banks
are more often than exposed to. I would like to speak upon some of the issues highlighted in
the report which have a major bearing on the functioning of banks:
IT governance
19. Bankers need to feel confident that investments in IT are likely to realise value in the
enterprise. They should consider these questions regarding their IT:

Are we doing the right things?

Are we doing them the right way?

Are we getting them done well?

Are we getting the benefits?
Gaining this understanding will enable them to unlock and maximise value from these
investments and enhance their business operations. In this regard, IDRBT has already
prepared a model IT Governance framework which can be emulated by banks for their
benefit. This model framework derives inputs from the Business Goals. These inputs are put
through a four dimensional inter-linked view of IT as a Function - Strategize, Build, Operate
and Assure (SBOA) - aimed at delivery of the desired results in terms of the pre-defined
Performance Indicators which can be tweaked further depending on the evolving
expectations of the bank's business. The model suggests the SBOA cycle for the IT Function
be brought under effective IT Governance through appropriate linkages and
interdependencies. It is for banks to derive benefit from the pioneering work done by IDRBT in
this regard.
Information security
20. As the use of critical IT systems becomes widespread within banks, the growing
connectivity between these information systems, the Internet and other infrastructure, create
opportunities for increasingly sophisticated attacks on such systems. It is therefore essential
to ensure that any disruptions of critical information systems are contained and managed
effectively to minimize their impact. The security team for important projects must be best in
class, and the security solutions must always be cutting edge at all times. Security is widely
regarded as a hygiene factor which comes to fore only in times of disaster, while in
organizations that manage security well, the ownership of security vests at the highest levels
of governance. Implementing security is often considered a one-time activity, which is
effectively discharged when funding approvals are accorded for a technology stack. It is often
perceived that having a set of information security tools will ensure adequate protection for a
reasonable period of time. The information security landscape is dynamic in nature and
techniques that worked at one point may not suffice for that year. Often a regular high level
review and monitoring framework is not in place, leading to a reactive rather than proactive
approach to information security.
IS audits
21. Banks may look at IS Audits being conducted periodically, the scope of audits may
include:
Technology review covering all the technology components of the IT projects such as:
(a) Ethical hacking: Vulnerability assessment and Penetration testing of the network.
(b) Application Security: Application security audit to identify known vulnerabilities and
source code review:
(c) Design Review: Review the IT architecture from security point of view and identify
single point of failure.
Process review covering all the process related to security adopted by the IT project.
Third party review: Review should the security controls deployed by the third parties on the
Government data/information.
Business continuity plans
22. If a bank is to survive a disaster, it must select the "right" strategy. Development of
alternative Business Continuity Plan strategies should be based upon the outcome of the
business impact analysis.
Cyber frauds and security
23. Even though the actual value of losses accruing on account of cyber crime in India
might not be substantial, nearly 39 per cent of these cases are related to banks and financial
institutions excluding those of the government. The cyber criminals find banks to be a
lucrative target for their ingenuity. Instances of Credit-card fraud have become common
given the growing popularity of credit card transactions, Internet banking and ATMs. As of
now, the cyber criminals seem to be a few clicks ahead of cyber-crime sleuths. This is where
the banks may need to take preventive action.
Fraud management
24. Frauds directly impact the bottom line, hence it would be imperative that banks
combat them effectively. If the Business Intelligence framework unifies various data sources,
it would be possible to mine the data, detect suspicious transactions on different online
channels and suggest an appropriate action. Therefore, banks need to put in place
appropriate policies and systems. In this era of technology, even small suspicious
transactions cannot be ignored as it can have larger implications.
Conclusion
25. I would like to conclude by adding that the long term success of any bank cannot be
achieved without the development of new business ideas, innovative products and services
and intense focus on customer retention. Banks have to instil in their DNA the enablement of
a positive and consistent customer experience that can transform them into trusted advisers.
At no time in banking history has this been more important. Banks have adopted technology
but the benefit of technology has not percolated in terms of cost, speed and convenience.
The banks should move towards empowering the present day customers of information or
digital age by greater choice, greater access, and better, faster, more efficient modes of
delivery and service. Customers are not going back to the old ways of banking. They are
moving forward. If the banks do not complement their speed, the customers will pass by.
Things move so fast technologically that you cannot wait until a trend is three years into its
cycle to adapt. Because by three years into the adoption cycle, the next big thing will already
on its way. Therefore I say GET GOING, INNOVATE and EXPERIMENT!