IT spend in the global banking segment, estimated to be $7.1 billion today, is expected to cross the $50 billion mark by 2006. That’s phenomenal growth by any standard. But what about the Indian banking segment? And more importantly, does India’s software sector stand to gain?
From standing in a queue for hours on end to withdraw paltry sums, we have reached a stage where we hardly need to know where our bank is located. A welcome relief for those of us who had to start many a morning on a bad note, courtesy of the pompous officer at the bank counter.
Traditionally, the banking segment has always been the largest market segment for IT companies thanks to the need to automate business processes in order to cope with competition, reduce human error and satisfy customers. But except for a small number of bigger banks, private Indian banks and foreign banks that have deployed core banking products offered by the likes of Infosys or i-flex or Temenos, the others, especially the public sector and co-operative banks, are still in the process of upgrading their legacy systems. Says Ravindra Datar, principal analyst for IT services and BPO at Gartner. "Barring investments by a few large and mid-sized banks, IT deployment in the banking sector in India has a long way to go. However, increasing number of mid-size banks and co-operative banks are investing in IT to improve efficiency, cut costs, expand their range of services offered and provide better customer service." And thanks to India’s strengths in information technology, the biggest beneficiary has been the domestic IT industry.Another group that has benefited immensely from progress on this front are frequent travellers. From having to carry wads of notes stuffed into a wallet ready to burst at the seams all that the traveller now needs is a small piece of plastic that can be used to withdraw money from almost any corner of the country, if not the world. And no, this is nothing to write home about. In fact, we haven’t even explored a tenth of the vistas that the wonder that is IT has thrown open to us.
Adds Anurag Khanna, MD and CEO of Banknet India, an IT-focused banking research and marketing company, "A combination of regulatory and competitive issues have led to the increasing importance of banking automation. Core banking, risk management, asset liability management, treasury, and anti-money laundering are areas, which due to various regulatory reasons, will emerge as growth opportunities in both the domestic as well as the international markets.
According to estimates, IT spend in the banking and financial services sector will touch $50 billion worldwide by 2006. Currently, this sector contributes 22 percent to India’s software and services exports. With close to 300 banks and a total of around 68,200 branches and administrative offices functioning in various states across the country, the possibilities are immense.
The opportunities are huge but largely untapped. Many of the larger banks initially invested in technology to automate tasks at the branch level. The aim was to improve employee productivity and offer quicker service to customers visiting the branch. The customer belonged to the branch and not to the bank. The idea of banking from any branch in any part of the country was still an alien concept. Most of the computerisation that took place was only at the front-end, with little or no computerisation at the back-end. To complicate matters further, even the systems within a branch were many a time not interoperable. As Datar says, "Initially a lot of work was customised for the bank with little scope for interoperability in many cases."
But increasing pressure to cut costs, coupled with changing customer expectations and competitive pressures, thanks to liberalisation in the early 90s, forced most banks to look at IT deployment as a part of a comprehensive IT strategy rather than fragmented investments, as was the case earlier. The new private sector banks and multinational banks, since they began on a clean slate, could invest in a comprehensive core banking system. However, existing public sector banks and co-operative banks were not so lucky. These banks had invested in islands of applications, leading to many expensive legacy systems. Most of these banks also could not afford the core banking products offered by Infosys and i-flex and TCS. Such banks opted for the cheaper but almost equally effective branch automation method.
Says Amit Phatak, industry analyst-information technology practice, Frost & Sullivan, "In the domestic market, the landscape is fragmented with a few public sector and co-operative banks still in the branch automation phase while a few others are simultaneously implementing core banking applications. On the other hand, private sector giants and international banks being in the forefront of technology, are already integrating their customer service mediums." There is still a large pool of small and medium co-operative banks that have minimum automation and are expected to invest in full automation and upgradation of banking applications.
Core banking
Core banking application implementations have gained considerable momentum globally in the past few years. Banks are now looking at tighter integration of all their service channels. Says Phatak, "The Indian banking segments have clearly matured over the past three years from mere branch automation to core banking implementation and channel integration. Banks are looking at bridging legacy systems with CRM and business intelligence solutions in tandem with core banking solutions. Indian IT companies that provide the option of this integration in their value proposition would be the winners in global markets." Indian IT companies have already made their presence felt in this market by leveraging their services experience and offering world-class products like Finacle, Newton, F&S and Flexcube.
Even ICICI Infotech has developed different products to address key verticals. Other than its flagship product, Newton, the company’s key offerings include Kastle for treasury management and Pinnacle for asset and liability management. This is in addition to its offerings for retail and corporate finance, risk management and receivables management. ICICI Infotech is looking at increasing its spread in the products space. Says Manoj Kunkalienkar, executive director & president, ICICI Infotech, "We have a series of products that cater to a wide section of industry.
Apart from banking, we have products for insurance, manufacturing, distribution, retail and contracting. Currently, software products account for 15 percent of our revenues but we are looking at increasing this share to 30 percent in the next couple of years."In the core banking space, players and products tend to be segmented on the basis of bank size, with offerings clearly different for large banks (more than five million accounts) and mid-sized and small banks. Most Indian players in the core banking space cater to the mid-sized space. But some of the larger players have separate products for each of these segments and have tie-ups with international players. For instance, TCS has entered into an alliance with the Australia-based Financial Network Services (FNS) to cater to the retail banking or core banking market. Other than this, TCS has products like ISBS for branch automation and Quartz for private, wholesale and investment banking. TCS also has an array of products for diverse verticals like risk management, treasury, asset management, wealth management, etc. TCS has adopted a multi-pronged strategy of exclusive and non-distribution channels for both products and services. Says N G Subramaniam, vice president, Tata Consultancy Services, "Alliances with OEM vendors and point solution distributors constitute an important element of our strategy Similar alliances in the nature of value-added resellers (VARs) exist in other geographies as well, where they assist TCS in marketing its product offerings." TCS followed this route tenaciously to capture market share in the Middle East.
ICICI Infotech has mainly adopted the direct sales policy to gain market share. The company has set up offices in multiple countries across four continents to build relationships and also provide customer support. In geographies where the company doesn’t have a direct presence, it works through its chain of channel partners.
Companies like InfraSoft Technologies on the other hand have leveraged their expertise in the branch automation space and developed products for the core banking space. The company’s core banking product, OMNIEnterprise, is a multi currency, comprehensive enterprise-wide automation solution for banks. The product boasts of providing a high-level of enterprise-wide integration on a single technology backbone. Anti-money laundering (AML) solutions and Basel II compliant risk management solutions are going to be the major thrust areas for InfraSoft Technologies. Basel II norms articulate that globalisation and consolidation of businesses, and availability of real-time information have changed risk perceptions in the financial-services industry.
The company plans to set up its Zurich office by the end of 2003, which is planned as a major gateway for the company into the emerging markets of Eastern Europe. Says Hanuman Tripathi, managing director, InfraSoft Technologies, "With plans to merge into the European Union, countries like the Czech Republic, Hungary, Poland and Slovenia are likely to invest in technology." The company bases its optimism about Eastern Europe on McKinsey’s forecasts of explosive growth expected in the retail banking market in these combined regions by 14 percent, implying a size of $16.8 billion by 2010.
i-flex, on the other hand, instead of offering separate modules for each vertical, has incorporated everything into its single product, Flexcube. So has Infosys with Finacle. Both these companies have adopted the strategy of partnering with industry leaders to leverage mutual strengths and expand their reach and penetration into both domestic as well as international markets. i-flex has partnered with the likes of Accenture, Hewlett-Packard, IBM, Intel, Microsoft and Oracle to market, implement and support i-flex’s solutions. HP and i-flex together address the global marketplace with complementary end-to-end solutions.
Infosys has also successfully leveraged its partnership with Sun to gain significant market share in the enterprise banking segment. Thanks to the partnership, the company has been able to bag some lucrative projects, both in the domestic as well as the international market.i-flex also addresses the requirements of various markets through more than 33 corporate business partners (CBP) who cover over 55 countries. Says Makarand Padalkar, chief of staff, executive management office, i-flex solutions, "In bringing i-flex to the market, through a local face, the CBP has taken part in the complete life cycle of engagement with the client, right from selling and implementation to support. Other than the CBP, the company has local partners who help cross the multi-culture barrier in certain regions."
Opportunities
Though it’s still a long way off before every Indian bank goes all out and adopts core banking solutions, there is a huge international market which can be tapped by Indian IT companies. For instance, according to Forrester, in the US financial firms on an average spend twice the amount spent by typical companies on IT and more than double on e-business technology. The largest commercial banking companies in the US spend as much as 25 percent of their budgets on technology, with some specialist banks spending even more, according to a Celent report. Top banks are spending more than $2 billion each year on technology.
Even in India, customers are demanding access to sophisticated products and services through multiple channels like the telephone, Internet, cellular phones and the ATM. Today, the top managements of several Indian banks are viewing IT as a business enabler and a vital part of their strategy. Banks are revisiting their technology architecture.
Core banking solutions are one of the few technologies in the banking industry still dominated by proprietary in-house systems. In fact, most large financial institutions are still running mainframe systems built during the 1960s and the 1970s. Many have been forced—at considerable expense—to maintain and develop new functionalities for these systems in order to meet new needs. This presents a tremendous opportunity for Indian software companies that offer core-banking solutions.
Branch automation
Typically, the public sector banks in India consist of four layers: the HQ, the zones, the regions and the branches. Thanks to pressure from the the Central Vigilance Commission (CVC) and the Reserve Bank of India, most of these PSUs have gone in for computerisation. But this happened more than a decade back, a period when something called a core banking solution was unheard of in India. Lack of foresight and proper planning resulted in different application packages for different functions, dissimilar hardware and non-compatible operating systems in the same branch. These could not be integrated with each other. Communication between branches and with the HQ was also a major issue. In fact, there was hardly any interaction between the branches. Each branch was an entity on its own. This is where the second rung of IT services players come into the picture. We have already seen that IT giants like TCS and ICICI Infotech have various packages that can be used even at the branch automation level. But the sheer scale of business to which that segment caters to ensured that more often than not the smaller banking players were neglected. Cost was another major consideration. In many cases it didn’t make sense for a bank to go in for a core banking solution.
Zenith Infotech’s Banc724, offers such banks what it terms a flexi-central approach. If a rural or a PSU bank has an automated teller machine (ATM), the data will be routed through the nearest branch and not the central database. In case the customer’s account doesn’t fall under the purview of that particular branch, then the data will be routed through the nearest branch to the branch where the customer has his account. This system ensures that the customer gets to use the bank’s ATM facility, though the bank has not deployed a core banking solution.
Large banks transfer the cost to the customer, as the urban customer can afford to bear the cost of service, while a rural customer cannot. The cost per transaction in core banking is very high. For a rural bank a core banking application is not feasible since it has over 1,000 to 1,500 branches and cannot afford to burden its customers with the cost of its technological initiatives. Branch automation on an average could cost anything between Rs 5-7 lakh per branch, a core banking application can cost up to Rs 35 lakh per branch.
Says Akash Saraf, CEO and joint managing director, Zenith Infotech, "PSU, rural and nationalised banks can gain a lot by deploying a branch automation system. Since in branch automation, the data is stored at the nearest branch, in case the systems of the head-office stop functioning, it does not disrupt the entire banking process. The concerned bank can still function with their systems up and running."
The CVC has set a mandate for all PSU banks to be computerised by 2004. This opens up vast opportunities for players catering to the branch automation market, considering the fact that of the more than 68,000 bank branches in India only about 19,000 have been computerised so far.
Saraf also sees huge potential for Indian IT companies in markets like China and other African and Asian countries that have social and economic characteristics similar to India. In countries like China, which has a heavy customer base as well as branches spread out in all parts of the country, there is definitely a market for branch automation. According to Saraf, branch automation may even have markets in other poor countries. Agrees Tripathi of InfraSoft, "Branch automation is relevant in countries that are in the same stage of the development matrix as India. Any country, which has a large geography and poor connectivity, is bound to be branch-centric."
But according to Ramesh Padmanabhan, COO of Mphasis, banks are going in for a centralised architecture. Says he, "Standalone solutions will not be in vogue very soon. The private sector has already gone in for core banking and will soon be followed by the public sector." Right now it is a mix of core banking and branch automation. As Padmanabhan puts it "core banking with a thin-client branch terminal." Mphasis has mainly been focusing on application integration and application life cycle management. The company offers end-to-end services, right from front-end to middle-layer and also back-end, where the company creates wrappers to ensure seamless integration.
Adds V S Girish, managing director, Nucsoft, a company solely focused on the banking, financial services and insurance (BFSI) space, "Given the size of India and the state of our communication system, a mix of branch automation with centralised data will serve as a good model. According to him, banks follow the 80/20 principle in centralised solutions, wherein a centralised solution is adopted for the bigger branches while the other branches continue to be based on the branch automation model."
Says Khanna, "In addition to co-ordinating various options to build up visibility in the minds of the decision-makers in the banking industry, smaller software companies should focus on customised products in niche areas with improved functionality."Consumers prefer to buy from companies that have a good brand image, particularly in technology markets where products are relatively complex and often not fully understood. The cautious nature of banking decision-makers with regard to technology products makes it even more difficult for smaller companies to sell to them. In these circumstances, it is a company’s brand and visibility that makes it stand out.
Agrees Phatak, "Smaller IT companies are not the most trusted names in the industry. They do not possess deep pockets as compared to industry giants, and thus miss out on the initial consideration phase itself, when banks are evaluating companies for implementations. The best option then for these companies is to mature from the services level to product development.
Modular solutions, which focus on small and medium segment banks, at competitive prices and with better service levels are some of the entry strategies. Padmanabhan agrees with Phatak when he says that tie-ups with international brands would provide the mileage and exposure in other markets. At a global level not many Indian companies would qualify as "big" in terms of revenues. Hence, a majority would fall in the small and medium category and their cost competitiveness along with the Indian brand name would be a true value addition. Datar suggests that Indian banks could adopt the ASP model, which is slowly gaining prominence the world over. This will not only help banks in cutting down on costs but will also help them get rid of headaches like upgradation, hiring trained and expensive personnel and cost of maintenance.
ASP model
Looking at the phenomenal amount of money that would need to be invested if solutions are implemented in-house, ASP is a very lucrative option, particularly for the small and mid-sized banks. But this model has failed to take off in a big way, primarily due to the security concerns and limitations on availability of proper infrastructure. Says V K Ramani, president-IT,UTI Bank, "We would rather not host core applications on an ASP model because security is a prime concern." But Ramani is open to outsourcing certain jobs that do not form part of the core activity. C N Ram, head of IT at HDFC Bank is open to the idea if he is convinced about the expertise of the hosting agency and the maturity of the software platform and its features.
A few companies are trying to popularise this model among co-operative banks and small regional banks. But, though it is gaining acceptance, it will be a long time before it finds mainstream acceptance.
Convenience banking
Indian banking has come a long way and is maturing rapidly to adopt technology. While private sector banks have been the early adopters, public sector banks have been doing a fast catch-up. Though infrastructure and communication advancements remain an area of concern, especially in the rural areas, standards are being formulated to making banking a secure and pleasant experience.
The banking automation model has its limitations. It will be extremely difficult for banks to scale operations with customers opening accounts from multiple locations. These processing models also do not facilitate the deployment of Net-based services. Also, retail banking is bound to change in the way products are offered. The services offered to customers by the bank have been on the rise and will continue to grow. The current wave of wireless technology is also bound to catch up with the banking sector. Convenience banking is already the buzzword and very soon there won’t be two ways about it. In addition to this, several industry drivers such as BASEL II credit norms, risk management, IAS 39, new payment standards, etc, would continue to dominate. As for the branch automation players, they will either have to tie up with global majors or carve a niche for themselves in the products arena.The current set of consumers are more technologically aware. Customers today consider services and facilities such as Internet, ATM, phone and mobile banking an essential part of the banking experience. This calls for channel aggregation, which would be possible only through complete automation. Within retail banking, Celent predicts that investment in multi-channel integration and customer knowledge will continue to expand and in wholesale banking, banks will further harness Internet-enabled technologies to improve customer offerings and service.
Banks too stand to gain by investing in technologies that integrate all their delivery channels. By collating information from different products and services they get a single, unified view of the customer, thus enabling them to offer higher levels of service and customised products.
Though most banks in India still have a long way to go before they adopt core banking technology, if global trends are anything to go by, it is something that just can’t be avoided.
This article first appeared in Express Computer.
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