BT BEST BANKS 2001:

Faced with mutually interdependent forces of competition, regulation, technology, and expectations of the customers, banks are set for a range of roles. The future mantra: intelligent integration.

By Atul Pradhan

Adjust, adapt, and change. That's the message that technology has sent across to modern day banking. As technology ingrains itself in all aspects of a bank's functioning, the challenge lies in exploiting the potential for profiting from investments made in technology (See Technological Ability). The transition of technology from a historical operational and back-office role to a strategic role complementing the business direction is more evident abroad-a fact exemplified by the top slots notched by foreign banks in the BT-KPMG Best Banks Survey. The new mindset is illustrated by innovations and speculative bets taken by banks, where investments in technology have focused on benefit-realisation. Banks that have adapted this mindset have realised benefits from:

• Customer management-focused investments where integrated informational views and transactional capabilities across products, services, and channels have enabled the banks to obtain a better picture of customer preferences, risk, and profitability.

• Investments aimed at managing risk and regulation issues with banks gaining the ability to identify, manage, and allocate risk exposures on across the enterprise to prioritise business decisions.

• Developing a portfolio of shared service alliances focused on providing integrated cross-channel access and new range of services.

• Implementing best-of-breed workflow around the core e-Enabled business systems to provide the right linkages to yield business benefits.

In India, investments in technologies by financial services organisations are increasing, and new initiatives emerging, albeit at a basic level (See The Impact Of IT). However, in the long run, it is evident that technology investments in transaction and process automation will cease to be a differentiator.

Tuning technology

Banks have traditionally performed the role of financial intermediaries. Apart from the old world game of transforming liabilities or deposits to assets or loans, traditional banking has now expanded to cover areas like logistic support for their customers for collection of receivables (e.g. Citi-Commerce One), tie-ups with other service providers to facilitate bill payments, and providing customised solutions to customer segments. The current trend is to try and be a part of all financial transactions in the market space, and increase the share of the customer wallet.

As banks face the mutually interdependent forces of competition, regulation, technology, and customer expectations, a picturesque setting for the tremendous upheaval and opportunity emerges. This interdependency, in turn, is built upon mutually dependent technological trends.

• Increase processing power: With increasing power of processing, the cost of processing transactions has come down significantly. Radical advances that came about in computing power in the latter half of the 90s has egged on banks to centralise their processing operations, thus enabling multiple points of interaction with customers, paving way to advancements like any-branch banking.

• Increase in networking: Connectivity, and not processing power is the current mantra.

• Increase in flexibility in defining business standards: Business standards are getting redefined in tune with the changing technology standards. While a number of such standards are in the process of being developed for the banking and financial services industry, an industry wide consensus is yet to emerge.

• Increase in modularity of software: Software is increasingly being built like 'Lego' blocks structure i.e., applications created by constructing and combining well-defined modules. The gluing together of various specialised applications is now easier because of this approach in design.

These four trends are impacting irreversibly the business of banking, mainly in product management, outsourcing, insourcing, analytics, and payment systems.

Product management

Existing products and services are changing way for value-added ones thanks to the one-upmanship game among competing banks, sparked off by soaring consumer-demands. For example, cash-management products may soon morph from its current form into products that use payment gateways and alternate settlement mechanisms-for quicker movement of money across manufacturers, suppliers, distributors, and customers.

Banks are increasingly finding that the most viable way of differentiating themselves will be to successfully manage customer relationships and enhance the overall customer experience. In future, the market space will see banks and non-banks striving to seek opportunities for profit, in wake of product commoditisation.

Outsourcing

The challenge of managing the diverse services in a networked environment has caused the banks to introspect on what should be considered as their core skills and primary roles. Many of them have already started outsourcing functions and processes like data entry of account opening forms and cash management data, and call centre functions.

Managing the complexity of the multiple technical components is becoming a challenge to most banks. If banks do invest in creating these skill sets, the value that can be unlocked by spinning off the technology unit is much greater than the advantage of keeping it in-house. This could be in two forms-the products developed like s1 (the Internet banking solution created by Security First National Bank) or the services company that produces applications themselves, like ICICI InfoTech and IDBI Intech.

In future, banks will need to focus on value-differentiating services by keeping in-house their competitive advantages while partnering with others who complement its services-making the argument for best-of-breed integration a necessity.

Insourcing

Insourcing is a model wherein banks perform operations that are originally done by their customers/other banks. Corporate clients may outsource activities like receivable management, accounting and risk management of corporate investments to banks. New product offerings will emerge as a combination of existing products and the new insourced activities Banks, with their established processing capacities, are ideal partners for insurance and other financial service firms in their pursuit of customer reach and service provision.

Analytics

As they realise that product and related services by themselves cannot provide sustainable competitive advantage, banks are paying more attention to relationship with their customers and the way they manage risk, determine price, and allocate capital.

Going forward, banks will attempt to augment their behavioural and economic views of the customer, preferably captured at point of contact in addition to existing transactional and demographic data (in-house and external). Banks will require use of analytics to effectively manage their customer relationships, conduct detailed analysis that help more accurately model, and predict future customer behaviour and lay a quantified foundation for strategic decision-making.

On the other hand, banks often face the tricky task of asset allocation and pricing. In the last decade, investments in risk management and related systems have increased multifold, albeit made with a compliance objective towards identifying, measuring and funding risk. The future will see increasing investments in risk analytics as part of an integrated framework supporting asset pricing, performance measurement, and asset allocation models.

Payment systems

In recent years, alternate money transmission avenues, especially the development of electronic money schemes, have been gaining currency. While electronic money has the potential to take over from cash for making small-value payments, making such transactions are becoming easier and cheaper for both consumers and merchants. This raises policy issues for central banks in its role as the guardian of the payment network and implementer of the monetary policy. The emergence of peer-to-peer money transmission mechanisms poses a challenge to current role of banks as gatekeepers to traditional payment systems. Robust payment systems, therefore, are a key requirement in maintaining and promoting financial stability with technology playing both a facilitating and disruptive role in them.

The Future

Despite the radical new trends emerging, banks will continue to play their role as trust-enablers in all commercial activities. Their role as financial intermediaries and payment enablers will also continue, but they will be outsourcing all non-core activities to specialised service providers and insource opportunities where they have a saleable value proposition. The transfer of money will not generate profits-it will, however, be the basis of other services that banks will provide. The level of integration that banks achieve with their customers supply chain will determine profitability.

Armed with a technology backbone, banking will remain the best business model for managing liquidity, creating trust, and managing risk. The ability to make informed decisions based on business benefits, to become intelligent investors in technology, and seek sourcing options would be some tenets of successful organisations on the right side of this divide.

The author is Executive Director, KPMG India
  

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