Importance Of IT in Banking

Abstract

Ever since the nationalization of banks in India, this sector has been

growing without Leaps and bounces and catering to the needs of

various segments of the society. In recent times, the Banking Sector

has been making rapid straights by using information technology as

a platform and endeavoring to scale higher heights. An attempt has

been made in this paper to examine various innovative instruments

that have been introduced by Banks in recent times.

Keywords

Banking Sector, Risk Management, Automated Systems and

Processes, Mobile Banking, EFT and Knowledge Management.

I. Introduction

Technology has brought a complete paradigm shift in the

functioning of banks and delivery of banking services. Gone are

the days when every banking transaction required a visit to the

bank branch. Today, most of the transactions can be done from the

home and customers need not visit the bank branch for anything.

Technology is no longer an enabler, but a business driver. The

growth of the internet, mobiles and communication technology

has added a different dimension to banking. The information

technology (IT) available today is being leveraged in customer

acquisitions, driving automation and process efficiency, delivering

ease and efficiency to customers.

The increased penetration and impact on the scale of business can

be judged from metrics such as deposit and credit per account,

which according to the RBI data was INR 6,412 and INR 20, 757

in 1992 and INR 19, 898 and INR 84, 618 in 2000 — these metrics

increased to INR 59, 217 and INR 258, 751 in 2009, respectively,

approximately thrice the levels in 2000 and 10 times the levels

in 1992.

Many of the IT initiatives of banks started in the late 1990s or

early 2000 with an emphasis on the adoption of core banking

solutions (CBS), automation of branches and centralization of

operations in the CBS. Over the last decade, most of the banks

completed the transformation to technology-driven organizations.

Moving from a manual, scale-constrained environment to a global

presence with automated systems and processes, it is difficult to

envisage the adverse scenario, the sector was in the era before

the reforms, when a simple deposit or withdrawal of cash would

require a day. ATMs, mobile banking and online bill payments

facilities to vendors and utility service providers have almost

obviated the need for customers to visit a branch. Branches are

also transforming from operating as transaction processing points

into relationship management hubs. The change has been very

productive for banks bringing in an increase in productivity

and operational efficiency to be more competitive. Better risk

management due to centralization of information and real time

availability of critical data for decision making.

With most of the banks being technology-enabled, the focus is

shifting to computerizing regional rural banks (RRBs). In addition,

banks are moving toward decision making and business intelligence

software and trying to optimize the IT infrastructure created.

II. Growth and Expansion

Over the last Decade, the size of the banking industry has grown

by 7.5 times. The business per employee has increased from

INR27.6 million in 2005–06 to INR62.7million in 2009–10,

while the profit per employee increased from INR0.12 million

in 2005–06 to INR0.39 million in 2009–10. Indian banks are

also no longer constrained by geography as they have worldwide

operations. IT has been instrumental in the global expansion of

banks. It is a huge challenge for banks to maintain and keep the

vast network operational. IT has helped banks put in place alternate

delivery channels such as internet and phone. Mobile banking and

ATMs are rapidly becoming the prime delivery channels. The

consolidation and centralization of information is also providing

banks with accelerated decision making and risk management

capabilities. Electronic payments through credit and debit cards

are also emerging as a fast-growing segment providing ease of use

and convenience to customers. The banking sector is projected

to grow at a strong pace over the next decade and will need to

strongly leverage the IT infrastructure to acquire and service the

customer base and risk management.

A. Computerization in Banks

Technology has charged the face of the Indian banking sector

through computation, while new private sector banks and foreign

banks have an edge in this regard. Among the total number of

public sector bank branches, 97.8 percent are fully computerized

at end – March 2010 whereas all branches of SBI are fully

computerized.

III. Emerging Trends in Banking Technology

• Financial Inclusion

• Mobile Banking

• Electronic Payments

• CRM Initiatives

• IT Implementation and Management

• IT for Internal Effectiveness

• Managing IT Risk

• IT for business innovation

IV. Awards for this Year - 2010 - 2011

Awards for the latest edition (for FY 2010-11) have been given

in the following categories:

• Use of Technology for Financial Inclusion

• Mobile Banking

• Electronic Payments Systems

• IT Implementation & Management

• Use of IT for Internal Effectiveness

• Managing IT Risk

A. IT in Banking

Indian banking industry, today is in the midst of an IT revolution.

A combination of regulatory and competitive reasons has led to

increasing importance of total banking automation in the Indian

Banking Industry. The bank which used the right technology to

supply timely information will see productivity increase and

thereby gain a competitive edge. To compete in an economy which

is opening up, it is imperative for the Indian Banks to observe

the latest technology and modify it to suit their environment.

Information technology offers a chance for banks to build new

systems that address a wide range of customer needs including

many that may not be imaginable today.

Following are the innovative services offered by the industry in

the recent past:

B. Electronic Payment Services - E Cheques

Nowadays we are hearing about e-governance, e-mail, e-commerce,

e-tail etc. In the same manner, a new technology is being developed

in US for introduction of e-cheque, which will eventually

replace the conventional paper cheque. India, as harbinger to

the introduction of e-cheque, the Negotiable Instruments Act has

already been amended to include; Truncated cheque and E-cheque

instruments.

C. Real Time Gross Settlement (RTGS)

Real Time Gross Settlement system, introduced in India since

March 2004, is a Interlink Research Analysis system through

which electronics instructions can be given by banks to transfer

funds from their account to the account of another bank. The

(RTGS) Real Time Gross Settlement system is maintained and

operated by the RBI and provides a means of efficient and faster

funds transfer among banks facilitating their financial operations.

As the name suggests, funds transfer between banks takes place on

a ‘Real Time’ basis. Therefore, money can reach the beneficiary

instantaneously and the beneficiary’s bank has the responsibility

to credit the beneficiary’s account within two hours.

D. Annual RBI report 2009-10

As on November 30, 2010 there are more than 72000 RTGS

enabled bank branches.

E. Electronic Funds Transfer (EFT)

Electronic Funds Transfer (EFT) is a system whereby anyone

who wants to make payment to another person/company etc. can

approach his bank and make cash payment or give instructions/

authorization to transfer funds directly from his own account to

the bank account of the receiver/beneficiary. Complete details

such as the receiver’s name, bank account number, account type

(savings or current account), bank name, city, branch name etc.

should be furnished to the bank at the time of requesting for such

transfers so that the amount reaches the beneficiaries’ account

correctly and faster. RBI (Reserve Bank of India) is the service

provider of Electronic Funds Transfer (EFT).

F. Electronic Clearing Service (ECS)

Electronic Clearing Service is a retail payment system that can be

used to make bulk payments/receipts of a similar nature especially

where each individual payment is of a repetitive nature and of

relatively smaller amount. This facility is meant for companies

and government departments to make/receive large volumes of

payments rather than for funds transfers by individuals.

Table 3: ECS transaction in Rs. Crores

G. Automatic Teller Machine (ATM)

Automatic Teller Machine is the most popular devise in India,

which enables the customers to withdraw their money 24 hours a

day 7 days a week. It is a device that allows customer who has an

Automatic Teller Machine (ATM) card to perform routine banking

transactions without interacting with a human teller. In addition

to cash withdrawal, Automatic Teller Machines (ATMs) can be

used for payment of utility bills, funds transfer between accounts,

deposit of cheques and cash into accounts, balance enquiry etc.

H. Point of Sale Terminal

Point of Sale Terminal is a computer terminal that is linked online

to the computerized customer information files in a bank and

magnetically encoded plastic transaction card that identifies the

customer to the computer. During a transaction, the customer’s

account is debited and the retailer’s account is credited by the

computer for the amount of purchase.

I. Tele Banking

Tele Banking facilitates the customer to do entire non-cash related

banking on telephone. Under this devise Automatic Voice Recorder

is used for simpler queries and transactions. For complicated

queries and transactions, manned phone terminals are used.

J. Electronic Data Interchange (EDI)

Electronic Data Interchange is the electronic exchange of

business documents like purchase order, invoices, shipping

notices, receiving advices etc. in a standard, computer processed,

universally accepted format between trading partners. Electronic

Data Interchange (EDI) can also be used to transmit financial

information and payments in electronic form.

H. Implications

The banks were quickly responded to the changes in the industry;

especially the new generation banks. The continuance of the

trend has re-defined and re-engineered the banking operations as

whole with more customization through leveraging technology.

As technology makes banking convenient, customers can access

banking services and do banking transactions any time and from

any ware. The importance of physical branches is going down.

Thus, the changes have the following implications:

• Anywhere Anytime Anyplace Banking

• Timeless and Placeless Banking

• Banking at Convenience

• Dismantling of Physical Structure

• Goodbye to Traditional Instruments and Invitation to New

Instruments

• Disappearance of Conventional Risk and Arrival of New

Risks

• Leading to Currency-less Monetary system

V. Challenges in Implementation

It is becoming increasingly imperative for banks to assess and

ascertain the benefits of technology implementation. The fruits of

technology will certainly taste a lot sweeter when the returns can be

measured in absolute terms, but it needs precautions and the safety

nets. The increasing use of technology in banks has also brought

up ‘security’ concerns. To avoid any mishaps on this account,

banks ought to have in place a well-documented security policy

including network security and internal security. The passing of

the Information Technology Act-2000 has come as a boon to the

banking sector, and banks should now ensure to abide strictly by

its covenants. An effort should also be made to cover e-business

in the country’s consumer laws. Some are investing in it to drive

the business growth, while others are having no option but to

invest, to stay in business. The choice of right channel, justification

of IT investment on ROI, e-governance, customer relationship

management, security concerns, technological Obsolescence,

mergers and acquisitions, penetration of IT in rural areas, and

outsourcing of IT operations are the major challenges and issues

in the use of IT in banking operations.

VI. Future Trends

A. Beyond Core Banking

Increased adoption of e-payments and mobile banking are

clearly the emerging areas which are bound to strengthen in the

near future. In addition, the focus is shifting towards systems

and processes needed in the maturity phase of the Technology

needs curve. Banks will need to increasingly focus on cost and

profitability management, business intelligence, dashboards/

executive information reports, data warehousing and analytics.

Improving internal effectiveness and efficiency with integrated

data warehouse and real-time access to all customer information

will help the banks’ decision making and ability to deliver

appropriate products and services to the customers.

Banks must see beyond applications that provide solutions to

today’s problems. They need to develop a vision of a comprehensive

infrastructure— comprising internal and external networks

instantaneously moving information from data stores to users

and back again. The importance of the IT-business unit partnership

cannot be overemphasized. The people and processes are just as

critical to success as hardware and software.

Undoubtedly, banks have made great technological advances

in storing information. However, the full power to use that

information to be more productive and make better decisions still

goes unrealized. By continuing to emphasize only technology and

the peripheral business processes it affects, banks have seriously

neglected their personal and enterprise-wide intelligence.

The effectiveness of the infrastructure is measured in the value

it brings to the customer. That value is diminished by business

units and individuals that are not networked. Therefore, banks

must provide access and training, to each member of the bank

who directly or indirectly serves customers. To make this possible,

clear standards and expectations must be published, so the

information technology organization can bring individuals online

in a consistent manner.

B. Increasing Interconnectivity and Ease of Payments

through Different Form Factors

The economic role of payment systems is connected intimately to

the economic role of money. Money is a unit of account, a store

of value, and a medium of exchange. Cash, checks, electronic

transfers, debit, credit and charge cards, as well as payment methods

relying on mobile phones and on the internet are based on different

systems for exchanging value between economic entities and on

different form factors for engaging in this exchange. Anywhere

anytime banking is becoming the norm due to the implementation

of core banking solution (CBS), additionally increased efforts by

the regulator in setting up Electronic Clearing Service (ECS), Real

Time Gross Settlement (RTGS) and NEFT systems is leading to

interconnectivity and ease of inter and intra-bank funds transfer.

The increasing usage of credit/debit cards and mobile banking is

facilitating the ease of payments through different factors linked

to vendors and service providers. The trend is likely to strengthen

with an increasing number of transactions moving online.

Presently, a technological development is closely related to

computerization in banks branches for adoption of the core banking

solution (CBS). An important development in the percentage

of branches of public sector banks implementing core banking

solution (CBS). The percentages of such branches increased by

79.4 % at end March 2009 to 90% at the end of March-2010.

Table 4: Branches under Core Banking (in %)

Name of the Bank Branches under core banking solutions

Public Sector Banks 90%

Nationalised Banks 85.9%

State Bank Group 100%

C. Energy Management and Move Towards ‘Green

Technology’

Most of the banks are conscious of the carbon foot print generated

and are working towards energy management and use of ‘Green

Technology’. Some of the measures adopted are:

• Adoption of Server Virtualization technologies to save on

floor space, power & cooling components,

• Use of Data center enhancements and Best practices for

optimum usage of space, hot air/cool air pockets etc.,

• Adoption of Blade server technology to have higher computing

power in smaller footprint.

• Upgradation of older power hungry Servers, Storage and

Networking equipments.

• Dynamic power capping of Servers, Desktops by employing

newer power saving

• Technologies like processor stepping

• Solar powered ATMs

• Use of windmill energy

Energy management and adoption of green technology will

become increasingly important in the future and banks will have

to streamline efforts towards accurately monitoring, measuring

and optimizing the energy consumption.

VI. Role of CRM Techniques

Customers have grown to expect comprehensive financial services

from a single point of contact. They are attracted by many new

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www. i j m b s. c o m International Journal of Management & Business Studies 39

ISSN : 2230-9519 (Online) | ISSN : 2230-2463 (Print)

products and services that non-banking institutions have been

offering. The challenge for banks is to package these products

and services and deliver them through convenient, user-friendly

channels. Only by integrating people, processes, and technology

across business lines will banks be able to forge a portfolio of

virtual banking services based on the proclivities of specific

customer market segments.

Consumer behavior is an important factor that will change the

functioning and business plans of banks in the next decade. The

banking sector will increasingly move towards a CRM banking

model where the banks will have to develop and service products

suited/ required at different phases of a consumers life. Banks have

already started moving towards catching the customers young by

providing school and college going students with bank accounts.

As the youngster grows banks will have to track and predict the

financial needs using sophisticated analytical models and deliver

focused products and services.

It has always been difficult for large institutions to compile

information on a single customer from multiple points of contact.

Customers who choose services and products from multiple

business areas typically are treated as separate relationships

within each area. Because a customer- centric infrastructure

does not exist at most banks, customer service representatives

do not have the infrastructure support or the incentive to pull the

information together. Without clearly understanding the strategic

advantages of using a customer data warehouse, bank customer

service representatives will not change their behavior, and any

competitive advantage will be short-lived. The bank will gain

minimal value from the significant investment required to develop

the requisite technologies.

Knowledge Management treats the behavior of people as an

equal and essential component of effective information-sharing.

Knowledge management also enables knowledge from similar

previous situations to inform current decisions. Both managers and

service teams must play a role in building a knowledge culture.

Managers must codify relevant experiences, packaging them to

maximize their relevance and reusing them in new situations that

create value. Once the knowledge has been codified, it needs to

be shared with appropriate individuals.

An integrated approach to knowledge management enables the

bank to group its products to serve specific market segments, such

as lawyers, young professionals, retirees. The product groupings

would be based on customer feedback as to which products

are in demand and on the bank’s assessment of each product’s

profitability. Once the bank identifies the product groupings, it

can provide high-quality service, with high-quality support from

front and back offices, cross-functional data bases, and customer

service personnel.

For banks, information technology plays an important role in

informed decision-making by creating a means to collect and

codify experiences and solutions from similar decisions in such

areas as financial management, customer service, or relationship

development. The enabling technologies include client/server

technology, distributed computing, networking, and data

warehousing. Knowledge of what customers need most and are

willing to pay a premium to get, should be frequently updated and

shared across the bank. Technology allows the bank to accomplish

this enormously complex task. Knowledge means more than just

having information; it happens when information is put in proper

context and shared. For customers, valuable knowledge might be

reflected in the performance of their financial portfolio or in the

ease and success of making transactions. The data warehouses and

graphical interfaces that support the customer’s portfolio provide

real-time access to all customer accounts and present them in an

integrated, seamless interface. For the bank, technology creates a

tool for gathering knowledge about customers’ financial behaviors,

purchasing proclivities, portfolio performance, and market and

competitive alternatives.

Profitability analysis is crucial to the bank’s customer relationships,

and it helps identify alternatives for delivering value to customers.

At present, customer profitability is being redefined as customer

relationship profitability. Customer relationship profitability

includes not only a single customer account but the full relationship,

which might extend to personal checking, a business account,

an investment account, and more. For branch services to be

mostly focused on marketing and cross selling, customer-centric

knowledge will need to be leveraged in a well-teamed, highly

automated branch platform.

A. Stronger Role of IT as Business Transformer/Performer

The bank infrastructure is not immutable. New technologies

surface every day, and new media (like Internet did) will force

management to reconsider infrastructural objectives. Defining

fundamental infrastructure goals will enable the bank to stay

focused and adapt without being distracted by technologies that

do not contribute to customer value.

The IT function can play a central part in helping organizations

adapt to and thrive in this new status quo. By aligning their teams

with the needs of the business, chief information officers (CIOs)

can provide strong strategic and operational support.

IT also has to consider its most appropriate role. In some cases,

particularly for larger, global companies, senior management may

expect IT to provide innovation and transformation, whereas in

certain smaller firms the emphasis could be upon a more basic

service, to keep costs down and serve daily operational needs

efficiently. Typically, IT fits into one of four broad categories:-

1. Utility

Where its main purpose is to keep the business running

2. Protector

Where it is primarily concerned with managing the IT estate

3. Performer

Where it is expected to deliver tangible value to the business

Transformer: Where the function transcends day-to-day operational

needs to help bring real Change.

To advance from a more basic utility/protector function to a

transformer/performer IT should better understand the needs of

the leadership team, continuously work on delivering customer

benefits and help the organization gain a competitive edge.

VII. Conclusion

From enabling banking services to driving transformation in the

Industry. Information Technology course do promise to change the

pace of banking to the next few years. Mobile bank and internet

banking are going to make indoor in the banking sector in the near

future. Even though IT systems are complex and sophisticated but

they are “energy guzzlers”. Hence, the future for banking sector

is going to make rapid straights in near future.