K C Chakrabarty: Connecting the dots
Address by Dr K C Chakrabarty, Deputy Governor of the Reserve Bank of India, at the
6th CII (Confederation of Indian Industry) BANKing TECH Summit 2011, Mumbai, 28 June
2011.
* * *
Shri N Chandrasekaran, CEO & MD, Tata Consultancy Services Ltd., Shri Praveen
Toshniwal, Chairman, CII Western Region, Mr Robert Lattimore, ED, Price Waterhouse
Coopers (PwC), Shri Dev Ranjan Mukherjee, Head-CII Gujarat State, distinguished guests,
friends from the media, ladies and gentlemen. I am thankful to CII for having invited me over
to address the participants of the 6th BANKing TECH Summit 2011. At the outset, I would
like to congratulate CII and PwC for presenting their report titled "Changing the rules of the
game through technology" and I hope that this report would provide an insight into several
challenges which technology seeks to address.
Technology is changing the cultural and business landscapes beyond recognition. You would
agree that world over organisations are using the transformative power of technology to
create business value for today, and step-function growth for tomorrow. And the Banking
sector is no exception.
You would be wondering about the title of the speech and what is its relation to banking. I
have taken inspiration from one of the quotes of Steve Jobs in his address to students of
Stanford University and I quote:
"You can't connect the dots looking forward; you can only connect them
looking backwards. So you have to trust...in something - or your gut,
destiny, life whatever. This approach has never let me down, and it has
made all the difference in my life."
Can we not be inspired by this and work towards "connecting the dots" in our banking
"space" to create a suitable business environment?
My speech today is divided into three main parts. In the first part, I would be touching upon
how banking in India has changed/evolved over the years, what the perceived benefits of
technology usage are and the complex role of the Indian banker. In the second part, I would
be speaking on the drivers of the next generation banking which would touch upon analytics,
technologies (including disruptive ones) and current and possible trends in technology that
can be used by banks which would emerge as the game changers. In the third part, I
would be covering the recent technological initiatives of the Reserve Bank.
PART I
Introduction - genesis of the Indian banking system
The early 1980s were instrumental in the introduction of mechanisation and computerisation
in Indian banks. This was the period when banks as well as the RBI went very slow on
mechanisation, carefully avoiding the use of "computers" to avoid resistance from employee
unions. However, this was the critical period acting as the icebreaker, which led to the slow
and steady move towards large scale technology adoption.
Over the years technological innovation in banking was meant to achieve a broader reach in
terms of consumer banking and continued inclusive growth, to meet the demands of
households and businesses, movement from "class" banking to "mass" banking and quick
transmission of information inexpensively and conveniently. We have moved a long way from
the age of mechanization in the Indian banks to the present age where banks are
successfully experimenting with disruptive technologies.
Perceived benefits of technology usage
It was expected that technology adoption would enable the banking sector to be integrated
with the global financial markets, adopt international best practices and ensure delivery of
superior customer service. It was also envisaged to result in greater productivity, profitability,
and efficiency; faster service and customer satisfaction; convenience and flexibility; and
space and cost savings. It was presumed that robust and reliable services would be
delivered to their customers at a lower cost, as well as help banks to make better decisions.
IT usage was also expected to result in improving process integration and flexibility,
decreasing operational exceptions that climb through the management hierarchy, thus,
freeing up management time for decision making.
But has this happened? Have the banks been able to deliver what they were expected to
deliver with adoption of technology? The answers to these questions are not very
encouraging. Often the inhibiting factors attributed to this would be poor strategic alignment
between business and IT strategy, absence of appropriate and re-engineered business
processes and delivery models, lack of project ownership, poor risk management, ineffective
resource management and missing governance principles.
Also the human resources in banks were drained as they have not done appropriate
Business Process Re-engineering before implementing IT projects. Further, the banks lacked
in possessing business and IT plans to leverage technology for increasing business and
profits. Last but not the least, banks have not used information for MIS and Decision Support
systems.
Complex role of the Indian banker - manage financial inclusion and CRM
The role of the Indian banker is very challenging. At one end of his spectrum lies the demand
to achieve financial inclusion as nearly 50% of the country's population is yet to be covered
under the formal system of banking and at the other end lies the task to fulfill the needs of
the existing customer.
Customer Relationship Management - completing the picture
A bank which closely integrates its technology strategy with its business strategy can
certainly hope to reap the benefits of CRM as it would help the bank to select and reach the
target customers using the right channels, understand the value of the customers to the bank
and optimize service quality, "sense and respond" to customers' needs through appropriate
cross-selling and up-selling tactics besides re-selling opportunities.
Banks are realizing the need to understand their customers like never before. Today's
customer expects - actually demands - to be treated as an individual Consumer and
business depositors will be more valuable to the banks than ever before; failure to
communicate with these customers at the right time, through the right channel, with the right
offer will slowly wear away the client base. Further availability of a single view of customer
would also facilitate the banks. The earlier they realize and accept these issues, the faster
they would be able to face competition from their counterparts. The need of the hour,
therefore, is to be awake and alive to the needs of the masses and to ensure that benefits of
"the strength of the
technology percolate to even the weakest of them. As the saying goes
chain is determined by the weakest link".
Strength of the chain - financial inclusion
I am sure this gathering of bankers needs no introduction to financial inclusion. Today, the
concept is an integral part of every banker's responsibility with the focus being on "inclusive
growth". With increasing adoption of technology by banks, it is but natural that all
stakeholders expect benefit from it. But is it fair that the fruits should be enjoyed only by
those who have access to it or those who can afford it? This in fact has been focus of the
Government - Central Bank commitment to IT-enabled financial inclusion. Setting up of the
Financial Inclusion Technology Fund as well as urging the banks to formulate a board
approved Financial Inclusion Plan for three years up to March 2013 are some of the
initiatives in this direction. Besides resources and strategic planning, the next obvious focus
area is the delivery model and this is where technology provides value. We need to
remember that we should work towards bringing nearly 400 million citizens to the formal fold
of the banking sector. It is not just about opening "no frill" accounts. As of today, 75 million
"no frill" accounts have opened but there are hardly any transactions in them. Banks need to
work towards providing a full range of financial services and this would need a low cost,
reliable, easy to use and secure technology backbone linking 6 lakh villages in the country in
the next 4/5 years.
is to get all banks on adopting Core Banking Solution, including all RRBs.
The first priority
Next, a multi-channel approach using handheld devices, mobiles, cards, micro-ATMs,
branches, kiosks etc. can be used. However, it should be ensured that the transactions put
through such front-end devices should be seamlessly integrated with the banks' CBS.
Often a multitude of operational issues are quoted as reasons for lagging behind in financial
inclusion targets. Till such time complete technology integration can take place on all fronts,
there are bound to be areas where intermediate brick-and-mortar structures need to be in
place. Even with Business Correspondents issues arise regarding their supervision,
customer grievance redressal etc. Certain accounting issues in this regards are also being
addressed. All these operational issues and many more can be resolved if banks begin to
look at financial inclusion as a business opportunity rather than an obligation to fulfill their
CSR objective.
One final observation before I move to Part II. Banks have to realise that for Business
Correspondent (BC) model to succeed the BCs who are the first level of contact for
customers have to be compensated adequately so that they too see this as a business
opportunity. Is this happening? To my mind the answer is in the negative. Similarly as
regards MSPs (mobile service providers) acting as BCs reports reaching us still suggest that
the true spirit of co operation is yet to stabilise with each still trying to destabilise the other.
The entire world is looking at this experiment in India and I would urge all of you to get your
acts together.
PART II
Drivers of next generation banking - game changers
The first decade of this century is behind us and with it, we have seen the euphoria of growth
and also the despondencies brought by the global financial crisis. We have seen that
technology alone cannot be the panacea for all evils. There is a serious responsibility thrust
upon us, and technology - the next generation technology - should be able to help us
navigate our way forward. Some of such key drivers which would evolve as game changers
are mentioned below.
Identity management
UIDAI can emerge as a major game changer as it would transform the management of
identity of citizens into a digital mode. By its usage, customer acquisition and service can
dramatically improve. Banks would, therefore, need to innovate and build systems around
UIDAI architecture to deliver full range of financial services. The requirements of adhering to
the Know Your Customer (KYC) norms of banks may become easy if a citizen acquires an
Aadhar card.
Competition
Interalia,
keen competition among banks as also IT solution providers and BCs would
necessitate devising unique business strategies and demand that the banking industry
develop a robust next-generation architecture to enable customer-centric IT. Thus
a game changer.
competition would stand out as
Use of analytics
Analytics can hold the key to optimized performance, informed decisions, actionable insights
and trusted information thus emerging as a game changer. By bringing together all relevant
information in an organization, banks can answer fundamental questions such as:
What is happening? Why is it happening? What is likely to happen in the future? How
should we plan for that future?
Banks can use analytics in a big way for Business Intelligence encompassing simple
querying and reporting mechanisms that improve decision-making, Analytical Applications
using data models, process workflows etc., Financial Performance and Strategy
Management comprising budgeting & planning and scorecards and Advanced Analytics
including data mining, predictive modelling, "what if" simulations etc. Banks may also look at
carrying out "Sentiment analysis" to better understand internal customer data and understand
perceptions about bank's brand, products and services, and identify problems with customer
experience so that banks can act efficiently and effectively.
Plugging the weak links - prevention of frauds
Banks themselves hold the most powerful weapon to predict and prevent fraud - data and
hold a rich trove of information about customers, transactions, accounts and broader trends
and patterns. The effective use and analysis of that data can become a game changer as it
can identify fraud patterns, anomalies and common data points that reveal associations
between fraudulent accounts and group fraud activity. Banks must deploy the most powerful
analytics available, consolidate data and various fraud components, and make use of
multilayered detection technology. After all, it is just good business to protect the most
important asset of banks i.e. customers.
Big data - big promise
Big data is one of the recent technology trends that is catching up. This catch phrase
encompasses the data, tools, platforms and analytics needed to turn large repositories of
internal and external data into trends, statistics and other actionable information to help in
taking their decisions. As costs fall and new ways to correlate data are devised, Big data
analytics may become commonplace thus surfacing as a game changer.
Alternate channels - role of the social media
Social media is a blending of technology and social interaction for the co-creation of value
another game
and this can emerge as changer. It is one evolving channel that might help
banks to generate insights on customer attitudes and preferences, which can be used to
inform marketing campaigns and help deliver better customer experiences. For banks, use of
the social media has its pros and cons. One influencer can drive thousands of potential
customers to a website. However, that same influencer can spread his or her dissatisfaction,
causing erosion in brand equity and profitability. Regardless, embracing social media may
not be a choice for banks as of now; though it is an imperative. Fortunately, as social media
has evolved, so too has the technology to understand users and their networks. The myriad
benefits that come from analyzing social media data include product and service quality
improvements, assessing customer sentiment and uncovering fraud rings. Banks can tap into
the root of what social media means to the community, enjoy success by way of returning
real value for their institutions.
Customer value innovation
Customer experience is no longer the sole domain of the branch. It exudes in everything we
do, and customers are demanding a better experience across the bank. An emerging field in
customer experience and behavioural research and marketing is the area of value innovation
which can be an eventual game changer. Innovation of the customer experience is no longer
a choice but a necessity and more importantly a competitive weapon. An Innovations group
or network created across the bank can be a useful tool to generate new ideas. Here I
recollect the quote of Jeffrey Immelt, CEO of General Electricon the subject of innovation and
I quote:
"The only source of profit, the only reason to invest in companies in the
future is their ability to innovate and their ability to differentiate".
Current and possible future trends in technology
Before I move over to Part III of my speech, I would like to talk about the current trends in
technologies. It is likely that cloud computing would still remain a medium-low priority. It had
been estimated that globally, emergence of new technologies such as back office
virtualisation, mobile telephony and Service Oriented Architecture (SoA) will reduce absolute
spending on IT. You are all aware that Mobile telephony is pervasive with close to 700 million
subscribers and is ubiquitous. And therefore, Mobile banking has the potential to emerge as
a game changer in terms of costs, convenience, and speed of reach. Business models of
banks, telecom operators and other stake holders need to converge.
All the above would stand out as major game changers in the future.
PART III
Recent initiatives taken by the Reserve Bank in the area related to technology
I would like to draw your attention to the recent initiatives that have been taken up by the
Reserve Bank in the areas relating to technology.
IT vision for the Reserve Bank - 2011-17:
The Reserve Bank has released its IT Vision document for 2011-17. The major
recommendations of this document relate to transforming the RBI into a knowledge
organisation, using IT as a strategic resource, IT governance and environmental friendly
initiatives (including green computing). The Vision Document also sets priorities for
commercial banks to move forward from their core banking solutions to enhanced use of IT
in areas like MIS, regulatory reporting, overall risk management, financial inclusion and
customer relationship management. It also dwells on the possible operational risks arising
out of adopting technology in the banking sector which could affect financial stability and
emphasizes the need for internal controls, risk mitigation systems, fraud
detection / prevention and business continuity plans. Although banks have deployed
technology for transaction processing, analytical processing by banks is still in a nascent
stage. Banks may work towards reaping benefits of technology in terms of cost reduction,
improved customer services and effective flow of information within the banks and to the
regulator. Steps have already been initiated to implement the recommendations as given in
the Vision document.
Automated data flow
Banks have been advised to submit a roadmap indicating the returns which can be sourced
directly from their systems to a centralized repository without manual intervention and then
for submission to the Reserve Bank. It was also decided to prescribe a quarterly monitoring
format in which the banks were advised to certify the list of returns which have been
internally generated from the IT source systems without manual intervention.
Next generation RTGS (NG-RTGS)
The existing RTGS system, even with all upgrades, is not in a position to handle increasing
volumes due to various limitations with regard to scalability, flexibility and adaptability to
technological advancements. Further, there have been developments globally regarding
features and functionalities. Therefore it was decided to replace the application to a higher
level by using the latest technology and redefined business requirements.
Report of the Working Group on Information Security, Electronic Banking, Technology
Risk Management and Cyber Frauds
The above Report examined various issues arising out of the use of Information Technology
in banks and made its recommendations in nine broad areas i.e. IT Governance,
Information Security, IS Audit, IT Operations, IT Services Outsourcing, Cyber Fraud,
Business Continuity Planning, Customer Awareness programmes and Legal aspects.
The objective of this Report is to serve as a common minimum standard for all banks to
adopt as well as lay down the best practices for banks for a safer and sounder banking
environment. The final guidelines in the respective areas as mentioned above have been
issued to banks for implementation.
Keeping the customer's perspective in mind, banks would need to ensure that they
implement solutions that exploit the latest available technology to build their
applications/solutions to ensure customer's delight as also proliferation of banking services;
albeit the cost of providing adequate security. Having said this, I would caution the banks that
unless they keep them simple, they run a risk of losing their customer base to their
competitors. It is also imperative that redundancy or alternate service delivery channels are
available to the customer. We need to give a thought about this and provide workable
systems at the earliest if we have to retain the customer within the fold of the banking
system.
Developments in IT have also brought along a whole set of challenges to deal with. These
include rapid changes in technology, complexities, high costs, security and data privacy
issues, new laws and regulations and inadequate trained manpower. There is a need to
enhance the governance of IT and institute robust information security measures in the
banking sector based on extant international standards and best practices. Given the
instances of cyber fraud in banks recently, it is necessary to improve controls and examine
the need for pro-active fraud risk assessments and management processes in commercial
banks. Banks must also work towards ensuring dissemination of the IT security policy and
procedures and related parameters amongst all operative functionaries of banks.
Summary
How can banks achieve enhanced customer profitability? A bank can take the first step,
which is to consolidate and streamline customer segment data. With accurate, segmented,
easy-to-access data, analysis tools can be used to develop strategies and models, determine
appropriate sales channels, calculate value measures, and set targets to advance the
profitability of each customer segment and individual customer. When the process is running
smoothly, the bank can use business intelligence and planning technologies to monitor the
success of its initiatives and feed the information gained back into a continuous improvement
cycle; thus riding its way to success and meet its growth and customer profitability targets.
Banks should move towards setting new standards that would enable them to attract, retain,
and service customers with superior speed, efficiency, and satisfaction. In the banking
industry use of Information Technology (IT) is omnipresent. From acquiring a customer,
servicing the customer's needs, building the customer relationship to managing employees,
processes and partners, every action in the bank's value chain relies on technology to
ensure efficacy and efficiency. Retail banks that will survive and thrive in the current
economic climate are using new technologies and channels to grow revenue from basic
services, such as deposits and loans, by understanding customer needs, providing relevant
products and services cost-effectively and calculating the unique lifetime value of customers
to the institution.
I would conclude by posing the following three questions to the audience: Is it possible for
us to make our banking paperless? Cheque less? Cash less? I know that the answers to
these questions are not easy and nobody has a readymade answer. But this should put us
on the track to think "differently" and think "Big". It would definitely take time to achieve the
above goals but it is not impossible. Let me tell you that this is already happening globally. It
is possible for us to leapfrog to achieve the above objectives? I hope it would be possible for
the participants this Summit to deliberate on these issues and give some broad
recommendations for the banking sector to emulate.
I wish the Summit a grand success. Thank you.