The Future of Banking PPT

Workshop on organized by

 HMA  HM A & ISB (October 30, 2004)

Vepa Kamesam Former Deputy Governor, RBI Currently Curr ently Chairman,

Technology and Banking The Quintessence Nature of Banking harmonizes closely with Technology – Tasks Common to  Both

Banking

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Information Storage Processing Transmission

Technology

Innovative Risk  Management Complex Credit Calculations

Global Operations

Pervasive Branch Network 

Mass Transaction & Items Processing INSTITUTE FOR DEVELOPMENT AND

  y  g  o  o   l  o  n   h  c   T e  d  n  a  g    n n   i   k   n  a   B

Many Benefits of Technology • Increased operational efficiency, profitability &  productivity • Superior customer service • Multi-channel, real-time transaction processing • Better cross-selling ability • Improved management and accountability • Efficient NPA and risk management • Minimal transaction costs • Improved financial analyses capabilities INSTITUTE FOR DEVELOPMENT AND

BANK’S BUSINESS Core Banking (CBS) Electronic Banking Any Branch Banking R A

CRM

MIS & Intranet

ATMs POS Terminals and Cash dispenser

Card Management

Corporate Network 

Document Management Risk  Management

Resource Management

I S I BANK’S BUSINESS N INSTITUTE G FOR DEVELOPMENT AND

L  O A  N  S   & M I    S   C  .  S  E R  V I    C E  S 

Data Center to host servers for:  CBS  ATM/Financial Switch  Internet Banking  DW/DM/CRM DW/DM/CRM/MIS /MIS etc.  Back-office Application  E-mail Servers, Internet Server, Enterprise-wide Network & Networking Equipment Security Systems Systems at Branches/RO/ZO/CO Depts. Supporting Systems Disaster Recovery Site & Business Continuity INSTITUTE FOR DEVELOPMENT AND

Technology – A Differentiator  Technology is indeed a differentiator not only in terms of competitive advantage, but also in terms of administrative and back-end  processes…. But…due to rapid technology deployment in Indian banking sector, the “haves” and “havenots” gap is all set to narrow quickly. INSTITUTE FOR DEVELOPMENT AND

Technology Differentiation Fades Gradually….

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How Long a Differentiator? • Then….can technology be enough of a differentiator? • Any new technology or technology-enabled process can act as a differentiator or a competitive edge for some level of  time. • After that time, the technology still has to be adopted as a “necessity” and as a cost of doing business Thanks to shortening technology life cycles, it would be short sighted to assume that technology would be a long term differentiator…

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For Long-Term Differentiation Elements of Technology as a Differentiator

Scalability & Flexibility

Efficient utilisation, mgmt

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Process enabling

Utility to customer 

Support Skills

Issues with Customers  Not only only empl employees oyees,, there there are are problem problemss for  customers too when a new technology arrives… • The major challenges –   –  Comfort levels  –  Security and trust issues  –  Convenience factor   –  Getting rid of myths  –  Migration from existing to new systems  –  Changing the habits

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POS Terminal and Cash Dispenser 

POS Terminal Connected to Cash dispenser  INSTITUTE FOR DEVELOPMENT AND

ATM Electronic Banking Branch Banking Branch 3

Branch 2

Branch 1 Head Office

Branch n

Branch 5 Branch 6

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Branch 4

Technology Acquisition • Inappropriate technology purchases can be the root of all  problem  prob lems… s… • The Bank management has to:  –  Give thought to the utilization rate  –  Avoid “knee-jerk” reactions (“they have done it…I should also do it”)  –  Be impartial in technology decisions (“I like lik e that technology… I want it”)  –  Understand where the solution will fit AND where it won’t!  –  Assess the strengths & weakness of solution  –  And seek answer to “are we ready for it?” i t?”

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Differentiation is attained not achieved just through technology, it is gained in the way the technology is selected, implemented and utilised

Goal definition Integrating  business & technology goals Solution features Vendor selection Business process re-engineering Change management • •

• • •

•

Efficient utilisation Customer utility Technology Management Support functions Maintenance Back-ups and Disaster Recovery Scalability & flexibility Learning & evolution • • •

Technology For Sustained Differentiati on

• • •

•

•

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Regulation and Supervision –  The Challenge Challenge of Technology: New markets, products, services,

delivery channels

Opened up a market for “risks” – derivatives Challenge of financing tech firms & IT innovation all have implications for the stability of banks and of the economy

The Opportunity Regulators have new tools Focus of all recent financial sector reforms Emergence of non-intrusive, focused supervision …with a view to prevent frauds and disturbances to financial stability INSTITUTE FOR DEVELOPMENT AND

Technology and Banking Supervision THE RBI RESPONSE Offsite Supervision & Monitoring OSMOS COSMOS (Non banking Financial Companies / Development Financial Institutions) UBD Soft Credit Information Bureau (A joint venture between Housing Development Finance Corporation Ltd., State Bank of India, Trans Union International Inc. & Dun & Bradstreet Information Services India Pvt. Ltd.) Will be covered inAND detail INSTITUTE FOR DEVELOPMENT

by Speaker Dr. T.V. Gopalakrishnan

Currency Management and Technology – Opportunities Galore Currency Management - a formidable task in India given… 

the geographical size, the volume and value of notes and coins in circulation, preference for cash and currency handling practices



...but technology offers immense opportunities to improve performance

RBI’s The Clean Note Policy (1999) Establishment Establishm ent of 2 state of the art currency presses Technology driven anti counterfeit measures 48 fully automated Currency Verification & Processing Systems 21 Shredding and Briquetting Machines INSTITUTE FOR DEVELOPMENT AND

Technology & Monetary Systems Technology has: • Transformed the conduct of the payment and settlement system • Set the stage for an unprecedented growth in financial activity across the globe • Rendered more vulnerable the domestic payment system and financial stability to international “shocks” • … making making the conduct of monetary policy more more complex and prone to implementation and operational risks

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Technology & Monetary Systems The Opportunities – 

• The proliferation of IT has also set the stage for  improving and managing risks in payment systems  –  Electronic Trading Systems  –  DVP/PVP  –  RTGS  –  Secured Netting Systems  –  The growth of the Central Counterparty (CCP)  –  Continuous Linked Settlement INSTITUTE FOR DEVELOPMENT AND

IT and Payment and Settlement Systems Secured Secured Netting Systems Syst ems

Electronic Dealing Platforms

Dematerialisation Of  Securities

Delivery Versus Payments

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Real Time Gross Settlement

Payment Payment Versus ent Payment Paym

Central Central Counterr Counte party par ty

Continuous Continuous Linked Settlement Sett lement

NFS/IBPG CFMS

NEFT

RTGS

PKI-based Security

SFMS

INFINET IDRBT

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RBI INITIATIVES IN PAYMENT & SETTLEMENT SYSTEMS

PDO-NDS & SSS

Compliance with BIS Core Principles Clearing Corporation of India

RBI Initiatives in Payment and Settlement Systems (1) The IDRBT 

Network Externalities 

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Messaging Solutions 

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The Indian Financial Network (INFINET) The Structured Financial Messaging System (SFMS)

Security 

Public Key Infrastructure

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IDRBT CA

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National Financial Switch



Inter Bank Payment Gateway

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CHANDIGARH

INF IN FIN INET ET Lea sed Line Line Network Network

JAMMU LUCKNOW JAIPUR

DELHI KANPUR CALCUTTA

BHOPAL AHMEDABAD

GUWAHATI MUMBAI PATNA GOA GOA

NAGPUR BHUBANESHWAR PUNE

BANGALORE HYDERABAD RBI

KOCHI CHENNAI

THIRUVANANTHAPURAM

4 X 2 Mbps

IDRBT HYDERABAD 2 Mbps

2 X 2 Mbps 2 Mbps with ISDN Backup

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CUG links 64 Kbps

Financial Networks

INFINET

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Structured Financial Messaging System

Central Server at IDRBT Bank-1 Gateway

Bank-2 Gateway

Bank-n Gateway ……….. …………….…. ……..

……….. …………….…..

…

…

……. ……

…

…

……. ……

…

…

Branch-1Branch-2 Branch-n Br Branch-n Branc anch-1 h-1Br Branc anch-2 h-2 Branch-n Branch -n Bra Branch nch-1 -1Bra Branch nch-2 -2 Branch-n Branch-n

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PKI Hierarchy CCA 

IDRBT CA 

IDRBT CA 

Repository

RA 

Subscriber

RA

Subscriber

Subscriber

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RA

Subscriber

Subscriber

 

Subscriber

NFS CONNECTIVITY with Existing Consortiums & Individual Banks National Financial Switch &  E- Payment Gateway

ISDN

ISDN

Leased Line

Leased Line Bank 2

Bank 1

ISDN

INFINET

Leased Line

Bank N

Broad Band VSAT Leased Line ISDN

ISDN Leased Line ISDN

CashNet IP Address:202.138.123.68 Subnet Mask: 255.255.255.254 Location: Mumbai

BANCS & Cashtree MITR  Location: Chennai

Location: Mumbai Primary Link Backup Link

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RBI Initiatives in Payment and Settlement Systems (2)  A Real Time Gross Gross Settlement System System Reduction of systemic risk in inter bank payment systems  To be implemented by the year end 

The Centralised Funds Settlement System 

Facilitating effective liquidity management

The Negotiated Dealing System  

A modern electronic dealing platform for gilts Enabling Straight Through Processing

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Real Time Gross Settlement

CFMS

Intra Day Liquidity SSS

Settlement Accounts

StripIFTP & Store Processes INFINET

Participant’s Interface AND INSTITUTE FOR DEVELOPMENT

Participant’s Interface

RBI Payments and Actg. Entry Interface

 NSS Participant’s Interface

RTGS Scenario • 90 banks have implemented it • 3-4 more to implement in a fortnight • Customer transactions have already started • Total volumes – Transactions on average Rs.20,000 crores per day settled continuously from the time of opening of markets • Guarantee settlement fund INSTITUTE FOR DEVELOPMENT AND

RBI Initiatives in Payment and Settlement Systems (3) The Securities Settlement System 



Providing centralized depository and settlement services Seamlessly integrated with the NDS and RTGS Systems

The Clearing Corporation of India Secured netting services with central counterparty arrangements  G-Sec and Forex segments  Elimination of settlement risks with liquidity saving elements 

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Smart Cards – The Future • • • •

Multi-application Smart Card Channel of the future Pilot project started Pilot Project funded by MCIT, Govt. of  India • The project is in progress in partnership with IDRBT, IIT Bombay, and Banks in India INSTITUTE FOR DEVELOPMENT AND

RBI and Customer Service…(1) Dissemination of information The RBI website

Multiple Delivery Channels Coin & Note Dispensing Machines For the general public Interactive Voice Response System For banks and financial institutions Web server For government customers On the anvil…. A secured web server SFMS/email based communication with customers

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RBI and Customer Service...(2) Improvements in payment and settlement systems MICR Clearing Enabling faster clearing of cheques Cheque Truncation & E-Cheques On the drawing board ECS/EFT Enabling T+2 settlement of our equities market National EFT Enabling T+0 settlement of all customer funds transfer transaction transactionss

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Technology Vision of the RBI Desk Top Decision Making Capability Centralised Database Management System

Enterprise Knowledge Management System

Desk Top Analytical Capability Offsite Supervisory Systems

Integrated Forex Management System

Human Resource Information System

Desk Top Transactional Capability Integrated Accounting System

Integrated Government Accounting System

Securities Settlement System INSTITUTE FOR DEVELOPMENT AND

Currency Operations System

Integrated Establishment System

Issues in Implementation “Less than 10% of failures are due to technical snags – most are due to poor management manageme nt and impleme implementation” ntation” implementation”

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Pre-requisites for Technology Human Resource Business Process Empowerment

Re-engineering

Planning for Disasters INSTITUTE FOR DEVELOPMENT AND

The pre-requisites for  Technology Planning for disasters 

Increased operational risk



Business Continuity Planning

Business Process Re-engineering Human Resource Empowerment INSTITUTE FOR DEVELOPMENT AND

Getting Personal with Personnel • • • • • • • •

People represent the most precious asset Large employee base – largely untrained. Training scope & methodology? VRS to balance costs. Break even? Down sizing? Bring in young blood Campus recruitment Re-defining & designing jobs. Career paths? Specialist Vs. Generalist Attrition of trained employees to IT industry / other banks. Competitive incentives? Re-location of personnel. Union issues?

• Retrained personnel. Morale of employee employees s? INSTITUTE FOR DEVELOPMENT AND

Need for Training

• All these developments call for extensive, continuous training • Current and future technology implementations call for at least 20% of officers specialise in IT • Hence need for specially skilled people – a mix of:  –  System administrators  –  Application managers (knowledgeable about both banking and technology)  –  Technology managers (who form the core team of technology  professional  profes sionals). s). INSTITUTE FOR DEVELOPMENT AND

Security Risk Management • Security is about…cementing the weak link  • Strong security measures (physical & data security) plus disaster recovery are essential • Authentication of e-banking customers and accountability for e-banking transactions • Segregation of duties, proper authorization controls etc. • Physical security measures - Graded access control, Iris & X-ray scanners, CCTV & detection systems, hotline and wireless links, fingerprint readers, concealed cameras, various sensors, bollards, boom barriers etc.

• Disaster Management and Disaster Recovery

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How to Ensure Security??-A Framework 

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Risk Assessment

IS Audit

Awareness by Training

PKI INSTITUTE FOR DEVELOPMENT AND

SRM for  Banks

Implementation

Gap Analysis

Policy & Procedures Development

INFINET

At a Glance……. Technology Related Issues People Related Issues – Reskilling Monetary systems, Efficient Telecommunication & Infrastructure to Drive Banking on Real-time Basis Risk Management & Physical Security INSTITUTE FOR DEVELOPMENT AND

The future will be not  be more of the same… … we need to be ready..

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