Monday, April 2, 2012

The Payoff is in Payments

As more and more consmers stay away from bank branches, their expectations have changed. Over the past decade, technology has enabled consumers to rely less on branches, and more on alternate banking...

By Prakash Seernani I  Practice Lead - BFSI, Omnitech InfoSolutions Ltd.

An advertisement on television last night caught my attention. It was by a Private Bank advertising the use of mobile-phone, in place of an ATM card, to access the ATM. It also brought to mind another advertisement I had seen some time back that showed Shah Rukh Khan declaring that Cash is dead, promoting a pre-paid debit card.

I could not help thinking about the way banks are looking at their business. Not long ago, the banks stressed on their reliability and care – when consumers focused on how the banks treated their money. How safe and liquid they were to be entrusted with their savings?

This was followed by a phase where the consumer was more concerned about the treatment that (s)he got from the bank. The banks soon shifted focus and started focusing on customer-friendliness. Advertisements had catch lines like 'good people to bank with', 'Personalized Service', 'Together', 'Family Bank', etc. We still see these catch words.

However, over the recent past, the consumer has taken service to be a given, and has moved on. The focus is now on convenience. As more and more consumers stay away from bank branches, their expectations have changed. Over the past decade, technology has enabled consumers to rely less on branches, and more on alternate banking channels. There is a clear trend away from paper-based transactions to electronic transactions. A number of payments have moved from paper-based to electronic.

Where are we now?

Both consumers and banks have realized that the true reason for banking is transactions, and more so payment transactions. Electronic payments innovations (ECS, EFT, NEFT, NFS, CTS, and cards) though quite a few in number, are still insufficient. The consumer is looking for more innovative products from banks. Thus far, the innovations have been led by the regulator (The Reserve Bank of India) and it has done a commendable job in showing the way. The Banks from their side have also done well by adopting these innovations and have seen benefits.
Now is the time for the banks to take the baton from the Reserve Bank and get into the innovation space. The benefits of these are two-fold. They get a substantial market share of the transactions pie and they command a leadership position in the innovation space.

Banks that choose to follow also stand to benefit, though not as much as the leader, not to mention, that banks that do not follow will be out of business (as customers move to the innovating banks).

Is Innovation sufficient?

While innovation is needed, it is not really sufficient. Execution of innovation is critical. Most innovation happens on the back of technology and most technology-savvy banks will invariably have the best execution track record. However, what might seem to be sufficient capacity, can easily run out. Banks will soon realize that their requirements for data-storage, and data-processing are growing faster than they can anticipate. Multiple initiatives like financial inclusion and micro financing can increase the load on their payment messaging systems apart from testing the efficiency and reliability of their Core Banking Systems.

Core Banking Systems are a metamorphosis of the branch banking concept and thus architected for multiple users, each providing transactions as a slow pace (any single bank user/clerk would do a maximum of about 800-1,000 transactions in a day at about 100-120 transactions per minute).

The game has been constantly changing over the past decade.

The Landscape Today

The ATM channel has been the first major player to change the rules. It suddenly added users into the network (each ATM being a user of the IT eco-system) adding to the volume of transactions at an approximate average of 20-30 transactions per working hour per ATM.

Another major player was the introduction of ECS. While it may not have changed the transaction volume, it drastically altered the usage pattern with huge batches of transactions coming into the system.

The introduction of cards (both debit and credit) showed a steady but constant rise in the number of payment transactions that came into the system. As cards replaced cash, multiple quick transactions replaced single relatively bigger (withdrawal) transactions. The volume of transactions steadily grew.

The birth of Internet Banking saw a single channel user that could generate a few thousand transactions every hour with customers resorting to utility bill payment over the internet and shopping on e-Commerce sites.

Mobile banking is a new entrant to the field and is just about settling down to bat. The banks have been adding storage and processing power into their core systems.

Is this sufficient?

The banks understand that there is a limit to which they can stretch the systems that they have implemented years ago and upgraded over time. They also understand that it is time they consolidate the transaction and payment systems that are implemented. A number of banks have clearly seen the advantages of this. Top-3 advantages that are derived are as follows

Cost: As systems are consolidated and rationalized the cost of operations comes down. Also, the cost of security on the diverse systems can be brought down with the use of a single bank-wide SOC (Security Operations Center).

Efficiency: With systems in tighter clusters there is a substantial improvement in the efficiency of the channels along with a process for implementation of newer channels. The payment and messaging systems are almost in cruise mode.

Growth: With the volume of transactions growing by leaps and bounds, the consolidated and rationalized payment systems (in a Payment Hub) are better geared for growth. Also, managing growth becomes faster and simpler, with no adverse impact on the speed of execution or security of the information.

The Next Mile

As the CIO/CTO sits down to work out the plan for the next mile, there are a few more parameters that deserve consideration. Prime-on-priority in the list are the following.

While Banks have looked overseas for solutions, the depleting exchange rate over the recent past has made foreign-solutions a tad more expensive, thus impacting the TCO and cost-benefit analysis of these solutions. The CIO/CTO of today is more open to considering Indian software industry as the Indian software industry has also woken up to the mature Indian IT user.

Size which was an advantage at a point in time, is losing ground and lean-n-mean IT companies are standing up and getting counted. Cost-reduction exercise in Banks, and Financial Service companies, is creating a pressure on the margins and services of the large IT companies. Cases of large banks moving from their relationships with large IT companies to the medium-sized lean-n-mean agile IT companies are a reality.

With innovation being top-of-the-agenda, Banks, and Financial Service companies, are increasingly partnering with IT Companies to create solutions that are indigenous and not available off-the-shelf.
As these new relationships come about, it will be a journey that Banks will travel with IT Companies. Examples of Banks hiving-off IT Companies are abundant. The next few years will see the independent professional IT Companies partner with Banks and deliver beyond the benefits that the Banks have expected out of the IT Partner.

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