technology enabled transformation in banking 2011

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Technology enabledtransformation

in BankingThe Economic TimesBanking Technology

Conclave 2011

kpmg.com/in

KPMG IN INDIA


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2011 KPMG, an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (KPMG International), a Swiss entity. All rights reserved.


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Foreword

Information technology in banking is fast evolving. From enabling

banking services to driving transformation in the industry, Information

technology holds a promise to change the face of banking in the next

few years. New entrants are looking to leverage their existing strengthsin the Indian banking arena. The opportunity available to these entrants

through leveraging their understanding of technologies and markets

they operate in, promises innovative business models with a focus ondelivering customer value.

The theme for the Economic Times Banking Technology Conclave 2011

Indian Banking 2015: Towards technology enabled transformation

considers changes expected in the banking industry. The pace of

change aided by regulatory directions, will push banks to direct their

strategies to a customer centric focus over the next four years.

We can expect to see shifts in the Banking industry unlike any we have

seen before, considering the far reaching impact of certain

technologies, national initiatives as well as the potential innovation inthe business of banking.

KPMG in India presents this whitepaper titled Technology enabled

transformation in Banking with a view of technologies which could be

the change agents in the years to come. While, technology has had aprofound impact on all aspects of banking we have chosen to look at

Mobile banking, Consumer banking and Payment systems, which we

believe are of considerable importance in shaping the industry by 2015.

These areas are likely to see the most change from a perspective of

customer centricity, speed of delivery and cost of servicing customers.KPMG has had the opportunity to be a witness to growth in the

industry through interactions with a number of banks, many of whom

we have been an advisor. We are confident that the views elicited from

this years Banking Technology Conclave will be useful to the banks intheir technology led transformation.


Sunny Banerjea

Head

Management Consulting

Abizer Diwanji

Head

Financial Services


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Table of

Content

01 06

02

03

The Present Banking Business Model

12The next round of change agents Asneak preview

Mobile Banking

Consumer Banking

Payment Systems

12

15

17

24Conclusion



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05 | Technology enabled transformation in Banking


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The PresentBanking Business

Model

Financial Intermediation sector in India is a highly regulated industry. Banks challenges

range from inefficient allocation of resource/ infrastructure to customer stickyness. To

adapt and survive, banks in India are adopting multiple techniques to entice and retain

clients.

As the reader is no doubt aware, the Indian Financial Intermediation market is a milieu

interspersed with a range of players like PSU Banks, Private Banks, Foreign Banks,

Cooperative banks, Regional Rural Banks (RRB's), Non Banking Financial Companies

(NBFCs), Housing Finance Companies (HFC's), Investment Houses, Post offices,Microfinance Institutions (MFI's) and the ubiquitous neighborhood money lenders.

While, it would be difficult (and counter-productive) to provide an exhaustive overview of

the business practices across all institutions, we present few emerging business models

that are helping extend the reach and diversity of financial intermediation in the country.

There was a time when banking meant waiting in long queues during working hours onweekdays just to get a passbook updated or get the busy' bank staff to answer your

queries.

Then Internet Banking and call-centers started to proliferate. However, it was not

uncommon to find Internet banking and call centre systems lagging behind the in-banksystems because the batch processes only ran overnight to update the alternate

channel. Numerous technical challenges emerged in creating an integrated channel

infrastructure from a transactional perspective, largely because we were bolting new

channels onto legacy systems that were simply not designed to work in real time. Todayvarious channels and customer touch points are integrated such that there is no lag in the

view the channels present. However, a lot of work still needs to be done to have common,

consistent and integrated systems.

The need to provide personalized, speedy and cost effective services is pushing banks tofurther reorient and innovate the business model of banking and enabling technology. It

has become inevitable and is seen as the only way for banks to survive in the increasingly

competitive banking arena. Technology not only simplifies the banking process and service

channels but also plays a holistic role in enabling financial inclusion. However, somebankers are of the opinion that unless the financial inclusion is supported in some form by

the government it will not be a viable initiative. Many Indian banks have embarked on the

journey of technology revolution and are at varying degrees of success. This is due to the

fact that not all of them have understood diversity of their customer base and their varyingneeds. As one senior banker put forward bankers need to understand customer needs in

rural India as well as Gen Y and develop products and services focused on their needs.

Indian banks took a major step forward in customer services when the Banking Codes and

Standards (BCSBI) were released in 2006. A lot has still to be done as has beenhighlighted in a recent RBI report on customer service, Banks have also been quick to

impose penalties and fees while getting away with apologies for gross negligence in somecases. This has been one of the hurdles in driving customer adoption of new facilities

offered by some banks. This is a critical point banks need to consider for acceleratingadoption of technologies.


Technology enabled transformation in Banking | 06


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Channel Interaction mix across customer segment

In the following sections, we have

attempted to touch upon some of theseinitiatives and assessed the readiness of

Indian banks in these areas.

Transforming the Service Channels

A number of banking institutions in India continue to hold on to the belief that physical

branches remain at the core of the customer delivery strategy. Many banks, today,

have not adapted easily to the customer of tomorrow who rarely visits the branch or

the customer who sees no need for an over-the-counter transaction.

Retail Banking - UrbanCustomers

Retail Banking - Non-

Urban Customers

Financial InclusionSegment

Corporate Customers

Wealth Management

Customers

Branch Banking Internet Banking Mobile Banking ATM / Kiosk IVR / Call CenterBranch

Correspondents / RM

RM

RM

HIGH MEDIUM LOW

Source: Technology enabled transformation in Banking - KPMG 2011

Various technology-based initiatives undertaken by Indian Banks

Operational Efficiency

?Straight-through-processing?Transformation of Service Channels

?Collaborative Channel Management Strategy

?Branchless banking for Financial Inclusion

?Business Correspondents

Governance & Risk Management

?Enterprise risk management

?Real-time executive dashboards

?Real time Security management

?Risk based Authentication

New Solutions

?Mobile phone based banking application

?Social media support

Regulatory/ Compliance

?IFRS

?UID readiness

?Data flow Automation

Customer Centricity

?Customer analytics

?Efficient customer data management

OperationalEfficiency

Governance& Risk

Management

NewSolutions

CustomerCentricity

Regulatory/Compliance





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Financial Inclusion Ecosystem - an illustration

Customers should have the freedom to

choose channels and interactions thatget them to their desired solution in the

quickest and most efficient manner.

However, in the Indian context,

customers are forced to choose aspecific channel most of the time

because they don't have any other

option.

Consumers, who have been able toassert their preference and are primarily

in the urban centers, stand at cross-

roads of innovative access channels like

Doorstep banking: While, the level

of automation and integration offeredby courier firms is not yet available to

banking clients, many of us currently

enjoy the convenience of a

representative coming to collectcredit applications at our doorstep.

Self-Service Channels:The foreignand large private sector banks in

India have long provided self service

channels as a convenience and

differentiating factor. Many PSU and

other private sector banks have alsodeployed channels viz. internet

banking and ATM's.

Mobile banking: A number of banksare in the early stages. We are yet to

see a large scale adoption of mobile

banking. This is surprisingconsidering the penetration levels of

mobile phones in India. While, banks

are now offering mobile banking

solutions, innovative m-commerceservices are in their infancy. We

believe smaller cooperative and rural

banks can also vastly improve their

customer service by offering mobilebanking services.

In-store stealth branches: Many acredit institutions have started to

embed sales personnel within

stores. While, a standard practice in

the automobile industry, the trend

has extended to white goodsmarkets for offering easy credit

facilities.

Virtual Wallet: Recently, innovativeproducts like semi-closed wallet

have been introduced to promote

convenience and inclusive growth.Semi closed wallets are prepaid

payment instruments that are

redeemable at a group of clearly

identified merchant locations,without permitting cash withdrawal

or redemption by the holder.

Banking the Un(der) banked

Focusing on the un(der) banked section

of society, the two basic tenets for a

successful case are accessibility and theease of use to the end banking services.

Serving retail customers with limited

disposable incomes in these geographies

pose some operational, regulatory andviability challenges for banks.

Inability to establish a persons identity is

a fundamental challenge that prevents a

vast segment of the country to haveaccess to formal banking channels. The

problem is especially acute in case of the

urban poor as they are unable to accessthe available banking infrastructure in

cities. While, we have not yet witnessed

large scale adoption of the UID, with the

rollout of the program in the comingyears, we would witness greater

adaptation. The UID initiative is also

expected to bring down the on boardingcost of a customer for the bank as well

as allow easier mechanisms for

identifying customer during transaction

processing. This shall create a businesscase for servicing the un(der) banked.

NGO IT CompaniesBusiness

CorrespondentTelCo FMCG UIDAI

Banks

Rural Un (der)-banked households





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believe the banks would need to learn

and analyse customer preferencesbefore developing an integrated approach

to customer focused channel

management.

The creation of a collaborative channelmanagement engine begins with

understanding customer perspective and

their preferred channel. This demands a

commitment to rigorous collection of

information on customer channelpreference, and recording how and when

the customer interacts with the bank for

different transactions.

Another important concept is the

identification of common channel

management processes (e.g. user

identification, customer personal details,

Faced with the challenges of shrinkingproduct margins and growing customer

demand for more personalized service,

retail banks are being forced to considerinnovative customer sales and service

strategies. This requires a

comprehensive approach to the

management of the many channels thatcustomers may use to interact with their

bank.

Banks are typically trapped between thedichotomy of allowing the customer tochose among a wide variety of channels

vis--vis deciding the channel that is

best.

While, the utopian world demands

balance to be struck between customerpreference and cost-effectiveness, we

customer enquiries, self-service

activities) and ensuring those processes

are delivered consistently acrosschannels.

If a customer is willing to use the

Internet channel to update her personal

details and preferences, then that new

information needs to be visible to otherchannels. If a customer switches from

one channel to another mid-way through

a service request, then that 'hand-over'process should be managed in a way

that does not waste the time the

customer has already invested. The

alignment of processes across channelsand the protocol for switching channels

must be seamless to the customer.

Strides forward

Sustainable growth is best achieved by allowing banks to work within an appropriate

framework of cost efficient regulations and guidelines.

Growth through Channel Innovation Financial Inclusion Initiatives Increased Competition

?Technology improvement

?Younger population, more conversant with

technology

?Customers desire to be in-control

?Leverage Social Media

?Encouragement by Regulator

?Establishment of viable business models

?Potential Volume

?New entrants - Foreign Financial

Institutions and Non-Traditional players

?Other Financial service providers

?India Post Bank

SYMBIOTIC GAINS FROM TELECOM EXPLOSION

EFFICIENCY AND COST BASE IMPROVEMENTS


Transition of service channel architecture

Retail

BRANCH ATM / DEBIT CARD IVR / CALL CENTER INTERNET BANKING MOBILE BANKING

Lending Corporate Treasury Trade Finance Trading Payments Card Services

Common layer of data warehouse, customer analytics and content management

Retail Lending Corporate Treasury Trade Finance Trading Payments Card Services

BRANCH ATM / DEBIT CARD IVR / CALL CENTER INTERNET BANKING MOBILE BANKING





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Branchless- banking, by breaking the

barriers of conventional branch-basedbanking (in terms of cost, man-power

etc), has the potential to reach out and

become truly inclusive banking. The

essential proposition of branchlessbanking that financial provider can reduce

fixed costs by using existing facilities and

devices, whether owned by the

customer (e.g., mobile phones) or byagents has made the concept very

attractive. An innovative and simple

example of this is the use of multimedia

(i.e. voice, video and data) to extendspecialized services across branches. For

example, HSBC bank has implemented

video conferencing to leverage this needwhile solving the problem on specialized

skills at branches. While, basic customer

requests are handled by branch

employees, enquiries needing expertcounsel are handled by a centre of

excellence through video conference

calls with customers.

Most large Indian banks are now gearedto shoulder new responsibilities of

financial inclusion and penetration into

the rural sector to serve the less

privileged. The government has planned

financial Swabhiman a program toensure banking facilities in habitation

with a population in excess of 2,000, byMarch 2012. The program will use various

models and technologies, including

branchless banking through business

correspondents.

Social media can be leveraged by banksto conduct product research, used a tool

for customer service, a medium for

marketing and promotion and build

transparency & trust with customers,especially urban and Gen Y customers.

However, not many Indian banks are

leveraging the power of web 2.0 socialmedia platforms to engage and connect

with their customers.

The transformation of consumer banking

will be accelerated through the

convergence of banking and telecomplayers. The industry collaboration will

lead to an atypical communications and

financial services partnerships, aimed atcreating new forms of competition. Ithas, thus, become more imperative for

Banks and Telecom companies to

collaborate and surge in order to meet

the demands of the Indian denizen.

However, the human factor needs to be a

focus of all technology initiatives.

Bankers we have spoken to mention the

need of even customers using internetbanking prefer speaking to someone

before completing a transaction. Along

the same vein pensioners continue to

prefer a dealing with people.




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The next roundof change agents - A

sneak preview

Mobile BankingWith the emergence of smart phones, communication for customers is not limited tovoice only. Ever evolving technology has given way to multifunctional wireless

infrastructure that is available to the customers 24/7, thus becoming a key driver for

mainstream adoption of mobile financial services. Gen Y has responded to this in with

great enthusiasm. With the mobile phone becoming an early companion to thisgeneration, adoption of mobile banking has taken off. This upwardly mobile group

promises to grow in the next decade giving banks an opportunity to explore innovative

services at a reasonable cost.

With nearly 885.99 million mobile connections, only 400 million customers

having bank accounts and only 38 percent of bank branches in rural India; do we

have a long way to go?

Well, not really. With the increasing awareness of technology in India, the user acceptance

graph is going high. Benefits of increasing penetration of telecommunication and anytime

reach, will lead to mobile based business models proving instrumental in realizing

branchless banking and taking it to higher grounds by enabling low cost and real timetransactions over secure networks.

The main reasons behind low penetration of banking have been as shown below:-

Low level of

awareness

Financial and

educational

Illiteracy

Lack of access

to banking

facilitiesMain reasons

for low banking

Penetration

Unemployment

and under-

employment

Low

income




Mobile Banking refers to

the platforms that

enable customers to

access financial

services (such as

fund transfers, bill

payments, balance

information and

exploring investment

options)


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High mobile penetration and limited

banking facilities are driving the growth ofmobile banking in emerging markets like

India!! A glimpse of growing tele density

can be seen in the graph of Number of

Mobile Subscribers.

The mobile services platform is a hugeopportunity for banks to offer innovative

banking and payment services.

With the changing trends, banks prefer

servicing their customers at their

doorsteps and at their convenience. Thisnot only gives them an opportunity to

service larger customer base but also

reduces their transaction costs.

Some of the other driving forces behindquick adaption of mobile banking and

payments shall be convenience,

accessibility and ease of use.

Number of Mobile Subscribers in millions

Source: BCG, IBA and FICCI Report on Indian Banking 2020

Base: 451 global companies (Multiple responses accepted)

Source: KPMG 2011 Mobile Payments Global Survey

Convenience and simplicity top the list for driving adoption

Transaction costs by banking channel

Source: Tower Group, Fisery, Mcom data, 20 09

6-9% 25-30%

1400

1200

1000

800

600

400

200

0

166

2007

484

2010

1150

2020 (Expected)

InternetPenetration

on mobile

Call Centre

Branch

IVR

ATM

Online

Mobile

USD 4.00

USD 0.75

USD 1.25

USD 0.85

USD 0.17

USD 0.08

What are the compelling attributes of a successful mobile payment strategy in terms of driving customer adoption?

Convenience/Accessibility

Simplicity/Ease of use

Security

Speed

Low cost

User experience

Availability

Brand Trust

Control

Scalability

Regulation/Legislation

Other

81%

73%

57%

43%

43%

40%

34%

28%

24%

19%

11%

3%




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Projected Growth in Revenues and Enrollment of ALW/ZMF

Source: Presentation made at Sankalp Awards, April, 2009, Mumbai.

It would be safe to say that most large

banks and many mid-sized banks alreadyoffer some form of mobile banking

service. Mobile Banking by HDFC Bank,

State Bank of India (SBI) Freedom by SBI

and iMobile by ICICI Bank to name a few,give their customers an access to easy

banking services. There are no charges

for downloading, activating and using

such applications.

With Mobile Banking, you can conduct

financial and non financial transactions

effortlessly and securely. From making

payments to checking your accountinformation, Mobile Banking allows you

to bank from anywhere at any time. The

security of the transactions is enforced

using multifactor authentication ie mobiledevice and a 4-digit PIN set by the

customers and encrypted transactionflow. These applications are compatible

with multiple GSM and CDMA devicesand flexible to work with both GPRS and

SMS channels.

Indeed, mobile banking is often arelatively straight forward proposition for

retail banks. The new channel can be

built at relatively low cost, by adapting

existing internet platforms to mobile

devices. And with little to no incrementalcosts for each additional mobile user. The

Financial justification for basic mobilebanking services is easy to rationalize.

An interesting case of, A Little World

(ALW) and its sister entity, a non-profit

organization, ZERO Microfinance and

Savings Support Foundation (ZMF) isaround streamlining of the rural financial

payments/ transactions conducted by

public and private financial institutions in

India. These companies act asintermediaries between rural

communities at one end, and

mainstream financial institutions and thegovernment at the other end. The

strategy of using the NREGA and similar

government schemes to grow and

The recent studies conducted show that

customers across all demographicsprefer anywhere and anytime access to

their banks and avail the services

provided by them.

Generation Y, often described as theMobile Generation has an obsession

with all things mobile and digital. In India,

applications like ngpay, obopay, mcheck,etc. provide ready to deploy mobile

banking solutions.

deliver financial services to rural areas

were previously unknown business

models. Leveraging the UID project willextend the efficiency of the bussiness

model further.

The mobile phone is in essence a bank

in a box run by ZMF for the villagers inrural India. The services currently offered

include: cash deposits, withdrawals and

transfers (as in bank saving accounts),

payments for government social securityprogrammes and welfare schemes

electronically what is generally called

the Electronic Benefit Transfer (EBT),disbursal and collection of loans and loan

installments, collection of cash for third

parties, insurance products and premium

payments and payment of utility bills.

These applications have been

successful in getting convenience at

customers fingertips.They providethe feasibility of participating in

promotions, travel tickets, accessingATM Services, shopping anything from

home appliances, gadgets, books, music,

apparel and jewellery to health and

beauty products from the brand outletsof your choice.

Besides providing easy access to

account information, details on loan

account, to the rural customers mobileBanking will also help the rural

households in saving themselves from

the travelling cost to the local post office,village headman or government officials.

9,000

7,200

5,400

3,600

1,800

0

100

80

60

40

20

0

Mar-09 Mar-10 Mar-11 Mar-12 Mar-13

En

rolments(Mn)R

evenue(IN

RMn)

Enrolments (Mn) Revenue (INR Mn)




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The mobile in addition allows banks to

offer innovative services usinggeolocation information with other

technologies. A consumer can be offered

location specific information such as the

nearest car or bike dealer as well as thebanks finance terms on purchase.

The Myth:Banking on Mobile puts

security of the customers on stake.

Fact: Mobile banking services useinternet technologies as well as basic

SMS/ USSD based data transfer

technologies. While, security of internet

technology over mobile is similar tointernet banking, the use of SMS/ USSD

that is generally less secure is being

used by most banks for informationdissemination like balance and

transaction alerts and small valuetransactions. Further, additional features

like authentication using OTP, instantalerts are being deployed to enhance

security aspects.

Customers have been moving away from

making their traditional visits to thebanks. They prefer convenience and

anytime service, and have started to opt

for the mobile based banking for transfer

of funds, utility bill payments,

account summary, Fixed Depositsummary, balance checks, credit card

payments, stop payments , stock market

transactions, etc.

Some of the points from recent KPMGglobal survey are:-

58% of the companies already have

strategies for handling mobilepayments.

Half of them are already offering

mobile payments services.

The Myth: In rural areas, people hesitate

to have banking accounts because of the

lack of knowledge and the perception

that the banks serve the bigger andaffluent customers.

Fact:The existing deep penetration of

Mobile technology and its use for

features like accessing weatherinformation , market information etc. in

rural India belies the view that lack of

knowledge stops the banks fromreaching to the end client doesnt stand

true. Rather should be a motivation for

the banks to approach a higher client

base with more technology orientedservices. Mobile Banking will mean

different things for different customers,

for the urban customer it will beshopping and fund transfer, however for

rural customer it will be an accessible

banking channel.

With process innovation and technology,the new business models are proving to

be reliable, transparent, quick, cost

effective and efficient delivery

mechanisms of financial services frommainstream financial sector to rural poor

households besides just limiting and

expanding for the urban population.

The financial inclusion project in India andits focus on enrolling more and more

customers for banks in India provides a

large opportunity

Thus, for the banks that focus on

customer service and innovation as thekey differentiators, mobile banking is a

must.

Consumer BankingDr. K.C. Chakrabarty, Deputy Governor of

RBI, has quoted four issues which can beconsidered important for the emerging

markets to move ahead in the global

arena are -

?Know Your Customer

?Fair Treatment to their customers

?Technology for greater Financial

Inclusion

?Risk Management Leveraging

A research conducted by KPMGInternational on the global banking

growth agenda, concludes that Indian

Banks are not yet on the global radar

screen they have not made theirfootprint. As Indian Banking braces for

growth both regionally as well as in the

global banking market, they need to

evolve to service their customerseffectively and focusing on reducing the

operating cost and improving profitability.

Many factors, including the rise inconsumerism with demand for

mortgages and asset loans are leading to

growth in the middle class, which isstimulating retail and private banking andwealth management.

In the Indian context, banking andfinancial sector broadly falls into

following categories - commercial banks,

co-operative banks, rural banks and

microfinance financial institutions, non-banking financial companies (NBFCs),

housing finance companies (HFCs),

financial institutions (FIs), mutual funds

and the insurance sector. As per RBI,commercial banks together with co-

operative banks account for nearly 70 per

cent of the total assets of Indian financialinstitutions. Out of this, 70 percentcommercial banking assets are held by

the Public Sector Banks (PSBs).

It is imperative now that the Banking

sector takes cues from the larger servicesector such as Retail/ Telecom sector to

achieve the growth in acquiring and

maintaining the market share. These

sectors have realized the value of thecustomer centricity and knowledge

which gives them clear insight into

customer behavior, purchasing patternsand recognition. This helps them in

competing strongly and selling products,services beyond their core offerings at

competitive rates.

To address the issue of fair treatment, it

is very important for the Banks to

forecast and fulfill the customersrequirements and expectations in a

consistent approach, thus leading the

improved service quality.

Customers expectation with the service

from various delivery channels is thesame level of convenience that they

receive from a Bank branch. If the

present business model continues toevolve, the challenge banks will be facedwith is to change customers perception

through a focus on improving quality of

service offered to customers. Newentrants in the market could change the

business model through an innovative

focus on the customer and not just on

the operating model. This could put directpressure on the existing banks who are

trying to rebuild customer confidence

and trust by consolidating business to

compete and survive. Metro Bank, UK,for example, adopted the banking to its

basics such as offering personalized

services and concentration on retailproducts to gain the sizable market shareamong its counterparts.




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ability to launch unique products their products and thus provides anAddressing customer satisfaction,which are for example of interest to interface to sell these products viaBanks can use technology to achieve -Gen Y. Banks can create a brand online channels. New technologies

Transparency Complex products identity by offering improved service can help the Banks in reducing thesuch as top up deposits, revolving levels, transparency, quality of staff, cost of the operations such as per

loans, top up loans, etc. introduced and relevant information to the unit product cost, infrastructureby the Banks to benchmark existing and new customers. This maintenance and increasing thethemselves in the competitive will develop long lasting frequency of communication withmarket and provide the best possible relationships with the customers the customers. Banks aredeal, leaves customers confused who will perceive it as full-service attempting to cater to all customerwith the choices. Customers provider and thus recommendation segments through same deliveryregularly indicate the penalization for to other potential customers. channels. The focus can bebeing loyal or introduction of unfair enhanced by redefining the strategy

Reaching customers and costor unexpected changes. To rebuild to use hybrid channels (kiosks,reduction Banks usually struggletrust, Banks can undertake the franchisees, MFIs, etc.)in frequent communication with theresearch through myriad data

Response to regulatorycustomers. Primary mode as usedanalytics solutions to understandby Banks to share information with regulations and reportingcustomers wants better. This willtheir existing customers is thehelp them to build right relationships requirements Analytics usingITwebsites and the mailers. However,with the customers and provide for can help the Banks to focus on the

Banks can use blogs andfocused products/services. products/ service offering to theparticipation in social networks to customers and in decision making

Unique identity and sense of allow customers to discuss the on what should be done as per thebelonging Most Banks are now offerings, compare and evaluate regulatory guidelines. Successfuloperating on core banking systems services. Banks can also arrange the integration will help in decision ofhowever they are not able to Audio Visual Van, Mela visits, weekly what risk Bank wants to take,harness the capabilities of the meeting with the potential and understanding and measurementsystem to meet todays needs existing customers to offer various and finally right pricing of theeffectively and may not meet financial facilities offered by the products and services.tomorrows 24x7 banking Bank. Feedback from customersrequirements. This reduces the would help the Bank in redesigning

Regulatory requirements

Transparency

Customer Satisfaction

Reaching customers

Unique identity


Leveraging technology for greater financial inclusion

According to the RBI report 2009, only about 50 percent of the population has a bank

account with 11 percent of people having life insurance cover and only 0.6 percenthaving non-life insurance cover of any kind. This brings in a huge opportunity for banks

to increase financial penetration by bringing the unbanked population under the

banking system.

RBI, in June 2010, asked all banks to present three-year financial inclusion plan by

incorporating the government's goal of making banking facilities available in all villageswith 2000 population by March 31, 2012. Government is planning to leverage UIDAI

project to further achieve Financial Inclusion in a much efficient way. Banks like SBI are

planning to open financial inclusion centers in all the districts of Andhra Pradesh andSBBJ to follow Business Correspondent model with unique service of 'Bank on Bike'

for unbanked population. Similarly, UCO Bank has opened the Financial Literary and

Credit Counseling Centers in villages to meet the financial inclusion target. To achieve

the financial inclusion goal, it is imperative to implement scalable, standardized,platform independent technology solutions such as multipurpose ATMs, simputers

with regional language based communication. This will help the banks in reducing the

operational cost and achieve the last mile reach.




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Payment SystemsA key requirement of sturdy banking

system is the availability of an efficientpayment system. In the light of inter-

linkages it has with other financial

systems, the payment system forms the

backbone of the financial system.

With the entire world converging into a

single big bowl of globalization, there has

been multitudinous increase in the

number of cross border transactions. The

outburst of innovations and technologicaladvancements have revolutionized the

financial markets and played a vital role inblurring the distinction between banks

and non-banks.

The banks would, however, have a vital

role to play in the payment system of any

economy, hence would continue toremain special from the point of financial

systems.

Different types of delivery channels otherthan the conventional ones can help the

banks in reaching the un/under banked

segment of the society. Some of the

unique delivery channels that banks are

using

Multi-channel delivery model

Delivery channels will not only service

the customers in financial transactions

but can also be used for non financial

transactions such as account opening,

account statements, etc. However, thefundamental work that bank have to do

before implementing technology is to

understand the customers unique needsand design products according to their

occupation, repayment capability,

investments and insurance. This will helpthem in leveraging the technology to

provide affordable, cost-effective

services to masses.

As Dr. K.C. Chakrabarty, Deputy

Governor of the RBI, stated, Technologyreally holds the key for financial inclusion

to take place on an accelerated scale. To

achieve the Government and RBIs visionof financial inclusion, need of the hour isto deploy a suitable delivery model on

the platform independent technology. Yes

Bank believes that the effective deliveryand suitable product design for the rural

areas can be achieved by leveraging

technology enabled partnerships. This

may result in improved financialpenetration in under-penetrated financial-

services sector, driven by a contributing

economic environment and a supportive

regulatory regime. Supportive economicenvironment and regulatory regime are

two major drivers which may help in

increasing the financial penetration inunder-penetrated financial services

sector.

Banks will require an out-of-the-box

solution with a strong delivery trackrecord because they know they cannot

afford lengthy implementation which

would drain financial resources andmarket share and therefore, the launch ofrevenue generating products, operations.

The emphasis would be on relationships,

by organizing products lines and channelsfor the customer attention, thus forcing

banks to rethink their strategy for

achieving lost market share and planned

targets. We believe at initial stageshelping hand from the government in the

form of a support through the UID

mechanism or a customer/ transaction

based direct financial support shall play akey role.

Mobile Banking

Internet Banking

Biometric ATMs

POS/EDC

NGO

FMCG

Business Corespondent





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Types of Payment Systems

Evolution of Credit Cards/Debit

Cards

Payment systems of the 21st century

not only include the traditional paper

based payments, electronic fund

transfers, credit, debit and charge card

but also new technologies such as digitalwallets, e-cash, mobile payment, e-

checks, etc. A newly emerged form of

payment system is allowing a 3rd partyto offer online transaction capability for

consumers (by merchants). Companies

facilitating this new form of payment arecalled Payment Service Providers (PSP).

A payment service provider (PSP) offers

merchants online services for accepting

electronic payments by a variety ofpayment methods including credit card,

bank-based payments such as direct

debit, bank transfer, and real-time bank

transfer based on online banking. SomePSPs provide unique services to process

other next generation methods including

cash payments, wallets such as PayPal,

prepaid cards or vouchers, and evenpaper or e-check processing.

Some banks abroad are offering Contactless cards which have a chip that enables

consumers to wave or tap the card in

front of the card readers withoutrequiring the cards to be physically

swiped or inserted into the Point of saledevice. They also eliminate the need for

the merchants to issue receipts forcustomer's signature or cardholders to

enter PINs. Like many magstripe and

EMV chip cards, the new cards also offer

customers SMS alerts related tospending, balances and the remaining

credits.

Such cards use NFC contact less

payment technologies. VISA andMasterCard are offering products on NFC

called VISA paywave and MasterCard

PayPass.

Credit cards have also become anessential part of Indian society. The

Indian banks are currently focusing more

on the premium card segment and with

a number of card options available for thecustomer, the banks are finding ways to

innovate and hence capture a higher

share of the Indian credit card market. A

number of banks such as HDFC Bank,AXIS Bank, Citibank, Kotak Mahindra

Bank, etc. have introduced chip based

cards.

Challenges

One of the major challenges involved in

technological advancements in cards

ecosystem is fraud and data security.Compliance to increasingly complex

Payment Card Industry (PCI) Security

standard is not sufficient. For Example,

one of the largest payment processor ofUSA, which processes payroll and credit

card payments for more than 250,000

businesses, reported that customer datahad been exposed. Attackers are

becoming increasingly sophisticated and

banks need to respond accordingly.

Measures introduced include One TimePasswords (OTPs), risk based

authentication/ authorization (e.g.

payment to not normally visited

merchant site requires additional checks),tokenization, etc.

Despite achieving all of the above, there

still remains an inherent risk of card

misuse by customer servicerepresentatives, staff in restaurants etc.

It is here that RBI initiated instant alert

mechanism and additional factor of

authentication for card not present,transactions have gone a long way in

reinforcing customer confidence.

As correctly quoted by Dr K. C.

Chakrabarty, Deputy Governor, RBI

At the same time, given the sprouting

instances of cloning happening,

particularly with regard to Debit-ATM

cards, the central bank of India has alsostarted contemplating a move over to

more secure Chip and Pin cards.

the challenging canvas for the

central bank and operators of the

various payment systems lies in

ensuring that while the various

products are increasingly used

across various delivery channels, the

security of the payment systems is

not compromised and the customers

funds are protected. This is a big

challenge to be faced to avoid

erosion of customer confidence in

the new age payment systems. It

was towards this endeavor that RBImandated the additional factor of

authentication for all card-not-

present transactions, which is

perhaps the first attempt made in

this direction by any regulator.

One of the other challenges faced by the

Indian banks in this segment is the

decline in the credit card numbers overthe last one year. This has been a direct

consequence of the delinquencies faced

by the issuing banks owing to therecession that began in 2008. But this

declining trend is going to reverse as

many banks are now becoming

aggressive in issuing cards and areintroducing many new features. A sigh of

relief has been growing per card

consumption. Having learnt from the

past mistakes of issuing cards to peoplewithout verifying their creditworthiness,

banks are now playing in this field with

an extra cautious effort.

An example of an innovative productrecently launched is a combo card called

IDBI Magic Card launched by IDBI

Bank that has the features of both debit

and credit card. This card is being offeredto eligible salary account holders of IDBI

Bank with a credit limit in a multiple of

the monthly salary earned by the card

holder. The card will work as a debit cardtill the account holder has balance in it

but once exhausted, any further

withdrawal or expenditure on the cardwill act similar to a credit card, IDBI

Bank Chairman & Managing Director R M

Malla said at the launch event.

HDFC Bank with an aim to tap the rich in

the country has launched Infinia ultrapremium card, which has no limit on

spending.

Another example of innovation is the

State Bank of Indias combo card thatcan be used as a debit card and a transit

card to travel on Bangalore Metro Rail.

The card has an embedded smart chip

that can be used for charging cash to payfor Metro travel and at the same time it

can be used as a debit card for any other

transaction.

With technological innovations beingintroduced by VISA and MasterCard

abroad and most of the banks in India

being members of either of these two

payment organizations, and withcontinuing rise in the acceptance and

use of credit card, India is also likely to

witness and benefit from such innovation

in the coming two to three years.




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Inhibitors

Concerns over Security and privacy

Cost of Investment

Lack of global technology standards

Mobile Payments

The entire world is converging onto the

handheld devices and the financial

services are no different. The banks are

being swayed by the halo of the newly

opened market of mobile banking andmobile payments. Some are thinking of

capitalizing the first-mover advantage by

developing innovative mobile solutionswith an objective to gain market share

and increase revenues, while others are

waiting for the technology standards toget set and customer adoption and

interest to rise.

This newly evolved payment channel will

not only provide the banks an opportunity

to tap new revenue streams but wouldalso aid in reducing overall costs of

serving the customers.

How lucrative is the market?

Customers are looking forward to the

evolution of this new payment channelwith anticipation. Drastic increase in the

use of smart phones is stimulating thesharp rise in customer demand for suchinnovative ways of making payments.

According to Monetizing Mobile report

published by KPMG, mobile phones

unseat PCs as a preferred channel foraccessing internet by 2015.

Cognizant of the ever rising telecom

penetration in India and alarming rates

with which smart phones are beinglaunched and adopted in India (operators

such as Micromax launching android

mobile phone for as low as INR 6000),

the key questions that the banks are

looking answers for are how best tocapitalize this rapidly evolving and

nascent channel to deliver better

customer service, to retain market shareand to improve revenues.

For early adopters of mobile payments, it

would be much more than a first mover

advantage. The innovation will alsotranslate into strong customer loyalty and

satisfaction, and build reputation. The

banks can leverage their mobile

applications to deliver targetedadvertisements, promote cross selling

opportunities.

How to go about it?

The banks need to have a clear

understanding of the objectives ofadopting the newly evolved payment

channel whether to increase revenues,gain or maintain market share, to

innovate and lead the race. Strategies

and business plans need to be developedthat would consider a long term and

customer centric view of their progress.

The banks need to work with the new

and emerging value chain partners, get

involved in the development oftechnology standards and identify means

to adhere to the same. New technologies

need to be identified, tested and adopted

for smooth execution. Banks need toidentify new revenue sharing models in

order to create a win-win situation for

each of the value chain partner thatcontributes to the delivery of mobile

services.

For stepping into the blue ocean before it

turns red, the banks need to make largeinvestments on unproven technologies.

While, waiting for the technology

standards to get set will reduce therisksspecified above, these banks will lose

market share to early adopters. They will

have no role to play in influencingtechnology standards and technology

adoption and will have less time to 'catch

up' once a standard technology emerges.

The banks need to identify the

technology for deploying bankingsolutions. While, one straight forward

way the banks are adopting is to set up a

Wireless Application Protocol (WAP) sitewhich can be accessed using a handheld

device. It is platform independent and

looks consistent on all sorts of devices

with same look, feel and functionality ascurrent internet banking websites.

Definition: Mobile Payments

The term mobile payments refers to the process of

using a handheld device to make purchases and

hence for making payments. Such payment can

either be made remotely or at a point of sale.

Influencers

Ease/convenience and improved accessibility for customers (introducing them to financial service

capabilities previously beyond their reach. With mobile phone prices continuing to decline,penetration among this population too is rising)

Mobile phone connections outnumber bank accounts by more than a factor of three: 886 million

mobile phone connections and 400 million bank accounts

Enhanced user experience

Brand awareness boost

Reduced cost of service

Rising investments in technology and rising valuations of technology vendors

First-mover advantage




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The banks who intend to innovate, may

also consider collaborating amongthemselves and with mobile network

operators to form a forum, which can

form a common approach to define the

required technology standards. In fact, itwill require the players of the value chain

to collaborate and work together to

formulate the technology standards that

can operate across banks andgeographies.

One of the primary concerns that may

restrain banks from experimenting in the

newly emerged market of mobilepayments is data security. With rising

number of data breaches in other

industries, there would be concerns over

security of the mobile payments.Moreover, the smart phones that form

the means of accessing these newpayment systems would come under

scrutiny due to the lack of securitycontrols as compared to PCs. These

devices are expected to be one of the

most liable targets for cyber attacks.

Having said that mobile paymentservices use internet technologies as

well as basic SMS/ USSD based data

transfer technologies. While, security of

internet technology over mobile is similarto internet banking, the use of SMS/

USSD that is generally less secure is

being used by most banks for

information dissemination like balanceand transaction alerts and small value

transactions. Also, additional features like

authentication using OTP, instant alertsare being deployed to enhance security

aspects.

Cost of investment that would berequired to build the new payment

system is another barrier that may stop

banks from to adopt a new paymentmethod. Apart from the financial costs,

the new payment system adoption may

also require a transformation in the

business model which will haveimplications across the front and back

end of the bank.

The banks however may look at both the

tangible and intangible benefits, for

themselves and as well for their

customers, in order to present a strongbusiness case of stepping into the

mobile payments ecosystem, which willessentially

The guidelines on mobile banking issued

by RBI were an initiative to promote the

orderly development in the use of this

channel by banks. Currently, 39 bankshave been granted approval by RBI to

provide payment services using this

channel. 34 of these banks have startedoperations. On an average, 5.5 lakh

payment transactions of value rupees 56

crore are being processed through this

channel during a month.

(Source: Inaugural address by Dr K. C. Chakrabarty,Deputy Governor, RBI at Banknets 7th Annual

Conference on Payment Systems at Mumbai on Jan19, 2011)

Aadhar Enabled Payment System

and IMPS

Banks are forming ventures with theMobile operators to form Business

Correspondents and attempting to reach

to the bottom of the pyramid. Bharati

Airtel and SBI have announced their

banking correspondent JV, in which

Airtels retail network will be used asservice points. This was followed by

Vodafone announcing a tie-up with ICICI

Bank. Similarly, Nokia tied up with UnionBank of India where Nokia Stores will be

the BCs. Idea Cellular also signed up as a

banking correspondent to Axis Bank. Tata

Indicom and MChek had also receivedfunds from the GSMA Mobile Money for

the unbanked fund to provide

Microfinance services in rural areas.

The National Payment Corporationestablished specialized Interbank MobilePayment Service switch (IMPS)

specifically for mobile phone

transactions, which links a unique MobileMoney ID (MMID) to a specific bank

account. By making this link, mobile

phone accounts are tied in to a switch

that will enable any transaction betweenbanks on this switch. This has led to

Indian Banks offering a host of services

through IMPS. The innovative uses of

this platform go beyond offering ofconventional non financial transactions

like checking balances. This is a

wonderful option for people who need toremit money to their relatives within

India and is a virtual money order with

almost no transaction charges.

What in your opinion are the main challenges companies face as they

develop mobile payment strategies?

Security

Technology/adoption

Cost

Regulation/legislation

Privacy

Complexity

Reliability

Availability

Other

71%

61%

37%

35%

34%

26%

24%

19%

5%

Source: KPMG International 2011




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The evolving payment system industry

offers new opportunities and at the sametime challenges to all the segments of

this industry. The banks which are the

drivers of the financial industry need to

innovate to overcome these challengesand leverage the new doors sprung open

by these new opportunities and

products. The regulatory system of India

would provide the required support oforderly development of new systems

and processes, within the legal mandate,

as correctly quoted by Dr K. C.

Chakrabarty, Deputy Governor RBI.

Definition: Aadhar Enabled Payment

System

New payment service offered by the National

Payments Corporation of India to banks, financial

institutions using "Aadhaar" which is a unique

identification number issued by the Unique

Identification Authority of India (UIDAI) to any

resident of India. A customer can perform

balance enquiry, cash withdrawal, Cash Deposit

and Fund Transfer from Aadhar enabled bank

agents (called Business Correspondents).




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Conclusion

Bank's are increasingly developing models to address needs for wide spectrum of

customers ranging from Gen Y to un(der) banked to pensioners and technology is a key

enabler for all this. Innovative models using mobile devices and efficient payment systems

will make banking services more widely available 24 x 7.

It is becoming more and more critical to develop new intelligence that enables financial

institutions make informed judgments and become much more customer centric. Smarter

banks will increasingly invest in techniques to gain new customer insights, effectively

segment their customers, develop deeper relationships and be the bank of choice.

Banks will be increasingly using technology that will enable them to determine pricing,new products and services, the right customer approaches and marketing methods, which

channels customers are most likely to use and how likely customers are to change

providers or have more than one provider. Banks which will understand their customersbetter and look to charge only for services used will benefit more than other banks.

We may conclude that every aspect of banking will be transformed by new technology by

2015. Customer-friendly products, delivery channels, easy and accessible services and

competitive pricing would be the driving forces and technology shall play a dominant role

in all these. The most successful institutions will be those that combine visionarytechnology with strong customer centricity.

2011 KPMG, an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with K PMG International Cooperative (KPMG International), a Swiss entity. All rights reserved.



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This document has been published on the occasion of The Economic Times Banking

Technology Conclave 2011.

We thank all the bankers who contributed towards the Technology enabled

transformation in Banking for their valuable input. We would like to thank Times Grey Cellfor all the support offered.

The KPMG team, who have contributed towards articles included in this document

comprises of Sunny Banerjea, Abizer Diwanji, Akhilesh Tuteja, Nakul Goswami, Lipika

Nandwani, Mohit Bansal, Shikha Chauhan, Remedios Dsilva and Priyanka Agarwal.

The editorial team for 'Technology Paradigms for the Banking Industry' comprises of KunalPande, Asim Parashar, and Glyn Crasto.



Acknowledgment


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The information contained herein is of a general nature and is not i ntended to address the circumstancesof any particular individual or entity. Although we endeavor to provide accurate and timely information,there can be no guarantee that such information is accurate as of the date it is received or that it willcontinue to be accurate in the future. No one should act on such information without appropriate

professional advice after a thorough examination of the particular situation.

2011 KPMG, an Indian Partnership and a member firm of the KPMG network of independent memberfirms affiliated with KPMG International Cooperative (KPMG International), a Swiss entity. All rightsreserved

Contacts

Head - MarketsE: [email protected]

T: +91 22 3090 2370

Head - Management Consulting

E: [email protected]

T: +91 22 3090 1700

Head - Financial Services


T: +91 22 3090 2380

Director - Management Consulting


T: +91 22 3090 1959

Rajesh Jain

Sunny Banerjea

Abizer Diwanji

Kunal Pande

kpmg.com/in

technology enabled transformation in banking 2011

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