"Integrating IT into the Banking Business Model"

25th November 2003, Nairobi

Agenda

Banking OverviewIssues in Banking Banking In Africa: KenyaTechnology in BankingDelivery Channels & M BankingSecurity Management Banks Position in the New EconomyThe Road Ahead

Banking Overview

Retail Banking

Using the functional perspective, a retail bank (or the business of "retail banking") is a particular combination of functions performing the transfer of purchasing power across time and distance. Consider a simple example: the savings account.

This financial product transfers purchasing power from the present to the future. But this savings function can be accomplished in other ways; for example, by investing in common stock. There are risk differences between the instruments: the savings account comes with a guarantee of principal, and in that regard is safer than stock. However, stock investing can be made through mutual funds which lowers the risk. The functions provided by the savings account remain the same (transferring purchasing power into the future, reducing risk), but they need not be provided by a depository institution. This multiplicity is changing the nature of competition in retail banking markets.

Changing Face of Banking

In recent years, the banking industry has been undergoing rapid changes, reflecting a number of underlying developments. Internet, wireless technology, and global straight-through processing have created a paradigm shift - from brick-and-mortar banks to banking virtually across time zones, geographical locations, access points and delivery channels.

Customers are increasingly fickle and demanding.Unprecedented advances in technology are changing the rules of the game. New entrants to the industry are picking off profitable niche businesses. A rash of mergers & acquisitions will most probably evolve into massive global consolidation across the industry as a whole. And last not the least diminishing lines between banking and other financial services.

Three Pillars of Banking Strategy

Principal issues that will determine the transformation of Banking:

Transparency, or the ability of all market participants to determine the available range.

Differential pricing, in which finer and finer distinctions must be made among groups of customers, setting their prices based upon the revenue streams they generate, the costs to serve them, and their resulting profitability;

Dis-intermediation or bypass, in which direct interaction eliminates the role previously enjoyed by financial advisors, retail stock brokers, and insurance agents.

Or traditionallyPrice (interest rate)Quantity (deposit and loan size) Quality (reputation-relationship)

Issues in Banking

The Dynamics of The banking Industry

Banks today are faced with unprecedented challenges created by the three forces of

De-regulation Deregulation has created a climate of increased competition and changing business structures. New competitors have emerged from both different geographies and other industry sectors -- such as insurance -- challenging the value delivered to customers and the costs. There are more opportunities for mergers, and they must offer a return on investment through greater reach and economies of scale.

GlobalisationCustomers have better access to information and new expectations. The Internet, cable news, mailing lists and newsgroups are just a few examples of how regular investors are provided with information that was previously unavailable to them. As service industries have moved to availability through a variety of communications and support 24x7, customer expectations have hit new highs.

Technology The innovations in computing and telcommunications have improved all the functions in retail banking. Computers have empowered the production and telecommunications have created new distribution channels that have instantaneous and global reach. The advances in communication and information technology have accelerated and broadened the dissemination of financial information while lowering the costs of many financial activities.

The Capabilities

Key capabilities that are pivotal to Banks’ future success are

FlexibilityEfficiencyInnovationConvenience ExperienceSecurity

Banking in Africa: Kenya

Snapshot

"In recent years, the banking industry has been undergoing rapid changes, reflecting a number of underlying developments. The most significant has been advances in communication and information technology, which have accelerated and broadened the dissemination of financial information while lowering the costs of many financial activities. A second key impetus for change has been the increasing competition among a broad range of domestic and foreign institutions in providing banking and related financial services. Third, financial activity has become larger relative to overall economic activity in most economies. This has meant that any disruption of the financial markets or financial infrastructure has broader economic ramifications than might have been the case previously".

“Kenyan Banking” The Story story so far

………Before 1990 in Kenya

Most organizations used batch processing on mini computers

No centralized information systems or Core banking application systems

Manual processing

No Wide Area Networks

Information was not current

“Kenyan Banking” The Story story so far

1990 Onwards……

Banks implemented Core banking application systems

Banks centralized their processing

Banks begun using e-mail for communication

Banks deployed wide area network

Banks also started using the Internet

Vision for the Banking System

In future, the customer and technology will together drive the banking industry.

Its mix of business and profitability - State ownership and good customer service in banking cannot coexist. State ownership is also an anathema to sound commercial banking.

There will be a sea change for employees too. Contractual appointments, for a specified period of time, will replace secure jobs. The unions will merge into the shadows and bank managements will turn effective. As a result, there will be swifter turn over of personnel in banks. However, at the same time, skilled personnel from other disciplines will enter banks in increasing numbers.

The changes will have an impact on the branch network of banks, their number will shrink in urban/metro locations: while they may grow, slowly though, in remote/rural areas. The network will also be a mix of click and brick and mortar branches - the former in urban/metro locations & the latter in remote/rural areas.

It is likely that these two sets of branches may be run by two subsidiaries. Also click branches in urban/metro locations will be driven by technology, manned by just 1/2 persons, and open for business 24 hours of the day, 7 days a week, 365 days in a year.

Banking System .. Technology Developments

Aggressive approach in some key thrust areas dealing with Technology in Banking

Computerisation & AutomationPayment and Settlement SystemsElectronic Funds Transfer (EFT) Real Time Gross Settlement System (RTGS) Centralised Funds Management System (CFMS) Structured Financial Messaging Solution (SFMS) Monitoring of Clearing Systems Imaging of InstrumentsElectronic Clearing Services

Two Extremes: Learning from India

The statistics of two banking institutions in India, the largest and the next large in size can be fruitfully compared.

These are the State Bank of India, that was until recently employing 2.3 Lakh workers, for a turn over of Rs.36,000 Crores (Deposit 25000 + Advances 11000 Crores - latest). ICICI bank has at present less than 1000 branches and around 10000 employees. It has a turnover of Rs.23000 Crores (Deposits 16 + Advances 7 thousand Crores).

The bank started functioning from the year 1997 and has gained the No.2 position in status in India after SBI in volume of business turnover within 5 years of its operation.

It will be interesting to know that CMD of ICICI Bank draws annual emoluments of Rs.150 Lakhs, while CMD of SBI around Rs.4 to 5 Lacs. ICICI is a new age high-tech and fully computerised bank, while SBI retained its manual operations in totality up to 1993 and maintained the work force of that time up to 2001, though it is partially computerised starting from the year 1993.

The per employee turnover for ICICI bank is Rs.2.3 Crores, that for SBI is Rs.1.56 Lakhs. The gap accounts for the difference between manual operations and high-tech banking.

Technology in Banking

Technology: Fast Changing Landscape

Availability of convergence, a concentration of computer power in a variety of devices such as laptops, dashboard computers, mobile phones and personal digital assistants has led to an explosion in mobility and therefore – higher productivity levels. The growth of the Internet has coincided with another major phenomenon – the introduction of the mobile phone. The growth in the number of cellular subscribers has eclipsed that of any other technological development in the 20th century, including the Internet. Statistics are proving that mobility will be increasingly important. This year alone, there will be nearly 1200 million mobile subscribers, as against 600 million online personal computer users. Microprocessors are rapidly becoming smaller, faster, more power- efficient and less expensive, which means they will be used more often, in more places to create a host of intelligent devices that will increase access to those services. Wired and wireless bandwidth is expanding at a rapid rate, providing the final component necessary to create “universal connectivity” among all of those new devices and the instant availability of the information and services they help to deliver.

Technology Evolution in Banking

More than most other industries, financial institutions rely on gathering, processing, analysing, and providing information in order to meet the needs of customers. Given the importance of information in banking, it is not surprising that banks were among the earliest adopters of automated information processing technology.

The technological revolution in banking actually began in the 1950s, when the first automated bookkeeping machines were installed at a few U.S. banks. Automation in banking became common over the following decade as bankers quickly realized that much of their labour-intensive, information-handling processes could be automated on the computer.

A second revolution occurred in the 1970s with the advent of electronic payments technology.

Next in the line the world's first Internet bank opened its virtual doors in the fall of 1995. Today, all banks in USA and 80% of banks in Europe offer Internet based banking.

The euphoria surrounding the m banking being the latest in the technology advancement in Banking.

General OverviewTechnology Architecture

Wide Area Network

Local Area Network

Mainframe/Paralel Sysplex

Branch Architecture

Call Center

ATM

POS

SWIFT/MERVA

Wireless

Mobile Banking

Call Center

POS

ATM

Branch BankingApplication Architecture

Bank

Program & Project Mngt.

Change Mngt.

Service Mngt.

Recovery Mngt.

Quality Mngt.

Technological Organization & Key Processes

Security Mngt.

Operations Mngt.

Delivery Channels & M Banking

Electronic Delivery Channels

Alternative electronic delivery channels provide a major means to cut costs. The proliferation of ATMs, plastic cards, PINs and a totally revised customer value system.

The first renaissance was profound but took about 20 years to fully take hold.

The second renaissance is driven by the Internet and is now in the early stages and migrating towards a more convinient wireless banking.

The most striking difference between the two periods is the financial customer. In the 70’s and 80’s, financial customers were being led by the financial industry. Today customers are waiting for the industry to catch up to their expectation levels.

Average cost of a transaction committed on various channels

Branch 2.95 USD

Call-Center 0.56 USD

Internet 0.04 USD

ATM 0.01 USD

Mobile 0.004USD

BranchesATMs

PCBanking

InternetBanking

InteractiveVideo

Banking

Low TechHigh Touch

Banks Must Give Customers Options

Wireless

Banking

High Tech

High Touch

Cost

Efficiency

1970s 1980s 1990s 2000+

Delivery Channels - Convenience

ATMBenefits:Transection Cost Reduction, 24-hour availability, Saving of Customer Time.Fact: Even today, for a retail bank, an average of 30% of consumers still do not bear an ATM card.

Call CenterBenefits:Transection Cost Reduction, 24-hour availability, Saving of Customer Time, Anywhere Banking.Fact:Transaction fulfilled by a live agent over the phone can be as low as 1/6th of that of the branch agent and IVR and automated call handling is ineffective so far.

InternetBenefits:Transection Cost Reduction, 24-hour availability, Saving of Customer Time. Anywhere Banking.Fact:Very effective but requirement for computer with network connection, basic computer and browser literacy

Mobile Benefits:Transection Cost Reduction, 24-hour availability, Saving of Customer Time. Anywhere Banking.Fact:Mass Appeal

Other channels under development are TV, RFID etc.

Internet Banking

Sample Internet Banking Architecture

–More and more banks are coming to realize that internet is a part of banks' alternative delivery channel strategies activities concentrated in the business-to-consumer segment, focused on retaining clients–In Internet banking, security is a primary concern. Security concerns have been addressed from every angle within the architecture of the Internet banking application.

M Banking: Anytime, Anywhere bankingMobile banking is a subset of online banking, The motivator for mobile banking from the bank’s perspective is to have an additional distribution channel and to further cut costs, as every transaction on the internet, fixed or mobile, is saving money on the bricks and mortar operations side. Based on an existing back office online banking operation, mobile banking can be deployed in a straightforward manner. It requires the elements in the form of a private information service, SIM Toolkit or WAP support and security.The services mainly considered for offering through mobile banking are:

Public Information

check exchange rates

check interest rates

Private Information

check account and credit card balances

administer credit lines

check interest earned on deposits

check last transactions

Transaction transfer funds

pay invoices

apply for credit line

Current Mobile Banking Applications:SMS BankingWAP BankingSTK (Sim Toolkit) Banking

M Banking Application Architecture from Net4Nuts

Millions of people with mobile internet access

  2000 2003 2005

USA 20 120 224

Africa 4 34 78

Asia/Pacific 29 151 282

Western Europe 101 324 409

Rest of the World

7 64 159

World Total 184 737 1,187

Africa Wireless Perspective

-

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000

90,000

100,000

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

Fixed telephone lines Mobile subscribers Internet Users

2004, MOBILE/PC/TV HOUSE HOLDS

0

200

400

600

800

1000

1200

1997 1998 1999 2000 2001 2002 2003 2004 2005

Millions Mobile Subscribers

TV Households

PCs

Uganda became the 1st country in Africa to have more mobiles than fixed lines and the 3rd in the world after Finland and Cambodia.

By 2000, Africa had more mobile subscribers than fixed lines.

Nearly every African country that introduced cellular services has done well in subscriber growth.

Senegal beats all countries in the world with a growth rate of 360% of cellular subscribers from 1995 to 2000.

The very rapid growth of mobile services is causing the growth of fixed lines to slow down.

In Kenya, Uganda and Tanzania, the number of fixed lines has begun to decline.

Africa’s current growth rate for fixed lines is just 8% p.a. compared to 80% for mobile.

A number of fixed line subscribers have given up their lines for mobile for various reasons including convenience, cost and prestige.

Mobile Revolution in Africa

Cellular Penetration in Africa

Attributes of Mobile Banking

Ubiquity - A mobile terminal in the form of a smart phone or a communicator can fulfill the need both for real-time information and for communication anywhere, independent of the user’s location.Reachability - The wireless device also provides users with the choice to reachability.Convenience - Devices store data, are always at hand and are increasingly easy to use. Enhanced functionality that will become available, based on technological advances, on tomorrow’s devices.Localisation - Knowing where the user is physically located at any particular moment will be key to offering relevant services that will drive users towards transacting on the network. The mobile operator will soon know where the user is physically located.Instant Connectivity - new wireless devices will become the preferred way to access information.Personalisation - Emerging need for payment mechanisms, combined with availability of personalised information and transaction feeds via mobile portals, will move customisation to new levels, leading ultimately to the mobile device becoming a real life-tool.

Integration

Channel Integration StrategyReuse

Efficiencies of Scale

Reduction of Redundancies

Financial Aggregation

Financial aggregation is a technique used by banks and other financial services firms to gather customer data from multiple sources, such as savings, credit card and brokerage accounts, and consolidate that information at a single Web site. The goal is to use that data to cross-sell additional products, such as home mortgages or credit cards. The consumer appeal of financial aggregation rests on the convenience of being able to manage different financial relationships from a single Web page through PCs, mobile phones and wireless devices. Access to the service will enable customers to transact online between several accounts, regardless of how many banks these are spread over, make online bill payments and check portfolio performance.

CMR {Customer Managed Relationship}

Since the concept was introduced in late 1998, the financial aggregation has become a rapidly growing area of the financial services industry. Banks can drive Customer Relationship Management to Customer Managed Relations using financial aggregation model.

Extend self-service functionality across channels to reduce costs and improve service for consumers.Customer receives consolidated financial information not just data. Deepen the customer relationship by encouraging new product adoption.Let customer choose service he wants.Improve distribution channel efficiency and loyalty through self-service.Customer have best of all world.

Customer Based Banking

• Customer introduction on different systems• Difficulty in creating new products• Different user interfaces for different environments• Product based Customer - Bank relation

•One customer informationfile

•Product factory

•Standard graphical user interface

•Consolidated customer data

Product Based Customer Based

Security Management

SecurityThere are four different concerns that a security system can address:

privacyintegrityauthenticity non-repudiation

The Role of Banks in the New Economy

Internet and mobile devices have brought new rules to economy and shaped the way to do businessBanks has also evolved according to the new economy and took their places in this new world to add value to their customerAbout 20-30 cents per dollar of E-commerce transactions are income to banks.The new ways to do business are :

m/e-commerceThe bank role is to provide a reliable payment infrastructure that add value to corporate business.This infrastructure should cover:

Bill presentmentBill paymentDifferent payment types(credit card, deposit account, loan)Information after payment

The Road Ahead

Business Comes Before “e, m or t” Technology is Big, but the Processes are Bigger Build on a Solid Technical Foundation Look Beyond the Business Involve the Right People Create a Clear Plan of Action Refresh the Strategy

Thank You

Presentation By:-Deepak Pareek