Furtureofbanking

Workshop on
The Future of Banking
organized by
HMA & ISB
(October 30, 2004)
Vepa Kamesam
Former Deputy Governor, RBI
Currently Chairman, IDRBT/BRBNML

INSTITUTE FOR DEVELOPMENT AND
RESEARCH IN BANKING TECHNOLOGY October 30, 2004 Vepa Kamesam, Chairman IDRBT
Technology and Banking
The Quintessence Nature of Banking harmonizes
closely with Technology –
Banking Technology
Information
Storage
Processing
Transmission
Tasks Common to
Both

Pervasive Branch
Network
Global Operations
Complex Credit
Calculations
Innovative Risk
Management
Banking
and
Technology
Mass Transaction
& Items Processing

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

Focus aspects of Commercial Banking
now are:
Core
Banking (CBS)
ATMs
Card
Management
Any Branch
Banking
Document
Management
Risk
Management
Resource
Management
MIS &
Intranet
CRM
Corporate
Network
Electronic
Banking
POS Terminals
and Cash
dispenser
BANK’S BUSINESS
BANK’S BUSINESS
RAISING
LOANS&MISC.SERVICES

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

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

Technology Differentiation Fades Gradually….

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

Elements of Technology as a
Differentiator
Scalability
&
Flexibility
Efficient
utilisation,
mgmt
Process
enabling
Utility to
customer
Support
Skills
For Long-Term Differentiation

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

POS Terminal and Cash Dispenser
POS Terminal
Connected to
Cash dispenser

Electronic
Banking
ATM
Head Office
Branch
Banking
Branch 1
Branch 2
Branch 3
Branch 4
Branch 5
Branch 6
Branch n

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

Technology
For Sustained
Differentiation
•Goal definition
•Integrating
business &
technology goals
•Solution features
•Vendor selection
•Business process
re-engineering
•Change
management
•Efficient utilisation
•Customer utility
•Technology
Management
•Support functions
•Maintenance
•Back-ups and
Disaster Recovery
•Scalability &
flexibility
•Learning &
evolution
Differentiation is attained not achieved just
through technology, it is gained in the way the
technology is selected, implemented and utilised

Regulation and Supervision –
The Challenge
Challenge of Technology:
New markets, products, services, delivery channels
Opened up a market for “risks” – derivatives
Challenge of financing tech firms & IT innovation
all have implications for the stability of banks and of the
economy
The Opportunity
Regulators have new tools
Focus of all recent financial sector reforms
Emergence of non-intrusive, focused supervision
…with a view to prevent frauds and disturbances to
financial stability

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

Currency Management and
Technology – Opportunities Galore
Currency Management - a formidable task in India
given…
 the geographical size, the volume and value of notes and coins in
circulation, preference for cash and currency handling practices
 ...but technology offers immense opportunities to improve
performance
RBI’s The Clean Note Policy (1999)
Establishment of 2 state of the art currency presses
Technology driven anti counterfeit measures
48 fully automated Currency Verification & Processing Systems
21 Shredding and Briquetting Machines

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

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

IT and Payment and
Settlement Systems
Demateria
-lisation
Of
Securities
Delivery
Versus
Payments
Payment
Versus
Payment
Continuous
Linked
Settlement
Electronic
Dealing
Platforms
Real
Time
Gross
Settlement
Central
Counter
party
Secured
Netting
Systems

RBIRBI
INITIATIVESINITIATIVES
IN PAYMENTIN PAYMENT
&&
SETTLEMENTSETTLEMENT
SYSTEMSSYSTEMS
Compliance with
BIS Core Principles
RTGS
CFMS
NEFT
PKI-based
Security
SFMS
Clearing
Corporation
of India
IDRBT
PDO-NDS & SSS
NFS/IBPG
INFINE
T

RBI Initiatives in Payment
and Settlement Systems (1)
The IDRBT
 Network Externalities
 The Indian Financial Network (INFINET)
 Messaging Solutions
 The Structured Financial Messaging System (SFMS)
 Security
 Public Key Infrastructure
 IDRBT CA
 National Financial Switch
 Inter Bank Payment Gateway

2 Mbps with
ISDN Backup
JAMMU
CHANDIGARH
DELHIJAIPUR
AHMEDABAD
MUMBAI
PUNE
BANGALORE
THIRUVANANTHAPURAM
CHENNAI
IDRBT
HYDERABAD
BHUBANESHWAR
CALCUTTA
PATNA
KANPUR
GUWAHATI
BHOPAL
INFINET Leased Line Network
NAGPUR
KOCHI
GOA
LUCKNOW
4 X 2 Mbps
2 X 2 Mbps
2 Mbps
64 Kbps
HYDERABAD
RBI
CUG links

Gateways and Integration with
Other Financial Network
Services
G1 - SWIFT Network
G2 - Reuters Network
G3 - Stock Exchange Network
G4 - Inter Banks/FIs
G5 - Shared ATMs
G6 - Clearing Operations Network
G7 - Internet
Corporate Network
Inter Banks/FIs Network
Shared ATMs Network
Clearing Operations
Network
SWIFT
Network
Reuters
Network
NSE
Network
G1 G1 G2 G2 G3 G3
G1
G2
G3 G1
G2
G3 G1
G2
G3
G4
G4 G4 G5
G5 G5 G6
G7
Internet
Financial Networks
INFINET

Structured Financial Messaging System
Branch-1
Bank-1 Gateway Bank-2 Gateway Bank-n Gateway
Branch-2Branch-n Branch-1Branch-2Branch-n Branch-1Branch-2Branch-n
Central Server at
IDRBT
………..…………….….. ………..…………….….
……..
… … … … … ……….………….……

PKI Hierarchy
CCA
IDRBT CA
RA
Subscriber
IDRBT CA
Repository
RA RA
Subscriber Subscriber Subscriber
Subscriber Subscriber

IP Address:202.138.123.68
Subnet Mask: 255.255.255.254
Location: Mumbai
CashNet
NFS CONNECTIVITY with Existing Consortiums & Individual Banks
National Financial Switch &
E- Payment Gateway
ISDN
Primary Link
Backup Link
Broad Band VSAT
Bank 1
Bank N
ISDN
MITR
Location: Chennai
BANCS & Cashtree
Location: Mumbai
ISDN
Leased Line
ISDN
ISDN
Leased Line
Bank 2
Leased Line
Leased Line
ISDN
Leased LineINFINET

A Real Time Gross Settlement System
 Reduction of systemic risk in inter bank
payment systems
To be implemented by the year end
The Centralised Funds Settlement System
 Facilitating effective liquidity management
The Negotiated Dealing System
 A modern electronic dealing platform for gilts
 Enabling Straight Through Processing

CFMS
Settlement
Accounts
IFTPStrip & Store
Processes
SSS
Intra Day
Liquidity
RBI Payments and
Actg. Entry
Interface
INFINET NSS
Participant’s
Interface
Participant’s
Interface
Participant’s
Interface
Real Time
Gross
Settlement

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

The Securities Settlement System
 Providing centralized depository and
settlement services
 Seamlessly integrated with the NDS and
RTGS Systems
The Clearing Corporation of India
 Secured netting services with central
counterparty arrangements
 G-Sec and Forex segments
 Elimination of settlement risks with liquidity
saving elements

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

RBI and Customer Service…(1)
Dissemination of information
The RBI website
Multiple Delivery Channels
Coin & Note Dispensing Machines
For the general public
Interactive Voice Response System
For banks and financial institutions
Web server
For government customers
On the anvil….
A secured web server
SFMS/email based communication
with customers

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

Technology Vision of the RBI
Centralised Database
Management System
EnterpriseEnterprise Knowledge
Management System
Integrated Accounting
System
Integrated Government
Accounting System
Currency Operations
System
Desk Top Decision Making Capability
Desk Top Analytical Capability
Desk Top Transactional Capability
Securities Settlement
System
Integrated Establishment
System
Offsite Supervisory
Systems
Integrated Forex
Management System
Human Resource
Information System

Issues in Implementation
““Less than 10% of failures are due to technical snags –Less than 10% of failures are due to technical snags –
most are due to poor management and implementation”most are due to poor management and implementation”
Resistance to change
Overlooking process
reengineering
Project management
Dedicated project teams
Change management
Policies
People Skills & Training
Basic Infrastructure –
telecom, power
Security
Privacy & confidentiality
Legal and regulatory issues

Pre-requisites for Technology
Planning forPlanning for
DisastersDisasters
Business ProcessBusiness Process
Re-engineeringRe-engineering
Human ResourceHuman Resource
EmpowermentEmpowerment

The pre-requisites for
Technology
Planning for disasters
 Increased operational risk
 Business Continuity Planning
Business Process Re-engineering
Human Resource Empowerment

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

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

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

How to Ensure Security??-A FrameworkHow to Ensure Security??-A Framework

IDRBT’s Solutions for SecurityIDRBT’s Solutions for Security
Risk Management (SRM)Risk Management (SRM)
Risk
Assessment
Gap
AnalysisIS Audit
Awareness by
Training
Policy &
Procedures
Development
Implementation
SRM
for
Banks
PKI
INFINET

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

The future will be not be more of
the same…

… we need to be ready..

Furtureofbanking

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