TECHNOLOGICAL INNOVATION IN BANKING IN INDIA

Jyoti Prakash Rath Sai International College of Commerce INTRODUCTION In all over Asia, development in information and communication technology (ICT) is radically changing the way business is done. Electronic commerce is now thought to hold the promise of a new commercial revolution by offering a less expensive and direct way to exchange information and to sell or buy products and services. This revolution in the market place has set in motion a revolution in the banking sector for the provision of a payment system that is compatible with the demands of the electronic marketplace (Balachandher et al, 2001). Innovations in information processing, telecommunications, and related technologies collectively as information technology (IT) are often credited with helping fuel strong growth in the many economies (Coombs et al, 1987). It seems apparent then that, technological innovation affects not just banking and financial services, but also the direction of an economy and its capacity for sustainable growth. IT is defined as the modern handling of information by electronic means, which involves its access, storage, processing, transportation or transfer and delivery (Ige, 1995). According to Alu (2002), IT affects financial institutions by easing enquiry, saving time, and improving service delivery. In recent decades, investment in IT by commercial banks has served to streamline operations, improve competitiveness, and increase the variety and quality of services provided and product designing in customized basis. According to Yasuharu (2003), implementation of information technology and communication networking has brought revolution in the functioning of the banks and the financial institutions. It is argued that dramatic structural changes are in store for financial services industry as a result of the Internet revolution one can perceptibly notice a continuation of trends already under way. With rising globalization, fierce competition and technological developments, the trading and investment environment have changed dramatically over the years. Today, technology plays a predominant role in trading activities with the spread of internet activities and improvement in information technologies. The banking industry, in particular, has been significantly influenced by the evolution of technology. Fierce competition between banks, has forced them to find new and profitable areas where to expand. Rising numbers of financial institutions are introducing and expanding their offerings of electronic banking products.

Many banks are making what seem like huge investments in technology to maintain and upgrade their infrastructure, in order not only to provide new electronic information-based services, but also to manage their risk positions and pricing. At the same time, new off-theshelf electronic services such as online retail banking are making it possible for very small institutions to take advantage of new technologies at quite reasonable costs. These developments may ultimately change the competitive landscape in the financial services. A number of studies have concluded that Technology has appreciable positive effects on bank productivity, cashiers work, banking transaction, bank patronage, bank services delivery, customers services and bank services. They concluded that, these have positive effects on the growth of banking (Balachandher et al, 2001: Idowu et al, 2002; Hunter, 1991; Whaling, 1995; Yasuharu, 2003). Leading Factors for Technological Development The whole picture of banking sector in India is changing dramatically in the recent time; the process of revival have commenced by the various global economies leaving behind the worst recessionary phase and moving towards growth. These are exciting times for customers in India and challenging times for existing Banks, more so for the Public Sector Banks. These are the emerging factors which may probably be the key drivers for Innovation in Banking, keeping in mind customer expectations and behavior changes: 1. With intense competition between banks which is going to be more severe in the coming years and with more private players waiting to step in, adopting new technology has assumed added importance, especially for public sector banks. The key to success is adopting state-of-the-art technology and continuously accelerating business processes. 2. Investment and innovation in technology will result in further advancement in credit analytics systems that will help in assessing customer behavior and enhance portfolio profitability. Experience in matured markets has proven the value of credit bureaus in the development of consumer credit. With the possibility of more credit bureaus competing with CIBIL looming large, further advancement and innovation to quickly

assess customer credit history will be a critical factor to provide convenience banking to customers. 3. The 3G spectrum auction expected in mid 2010 across various circles to private telecom providers in India will further open up immense migration possibilities to more convenient channels. It may not be too long where the customer would access his bank account using a secured application through his mobile phone. Needless to say, a secured and fast internet banking platform will become a basic necessity. 4. RBIs directive on payment of interest on daily balance maintained in the savings account effective 1st April 2010 will result in higher outflow to Banks. While most Banks seem to have enhanced their technology to comply with interest calculation methodology, Banks will find ways to innovate and encourage customers to use their debit cards for purchases, bring the average daily balance down and gain the differential between interchange spend and interest payouts. These strategies of promoting debit card usage will also keeps the banking system going, interchange revenues flowing in and ensuring that credit exposure by way of credit cards is minimized. Forms of Technological Innovations in Banking Sector Banks has adopted different forms of technological innovations or electronic delivery channels keeping in mind customer expectations and behavior changes. Technological innovations have been identified to contribute to the distribution channels of Banks. The electronic delivery channels are collectively referred to as Electronic Banking. Electronic Banking is really not one technology, but an attempt to merge several different technologies. Each of these evolved in different ways, but in recent years different groups and industries have recognized the importance of working together. Bankers now see a kind of evolution in their business, partly, because the world has taken a quantum leap in the use of technologies in the last several years. The various electronic delivery channels are discussed below: a) Computerization It is the first step taken by the bank towards the faster growth and development through technology. The process of computerization marked the beginning of all technological initiatives in the banking industry. Computerization of bank branches had started with

installation of simple computers to automate the functioning of branches, especially at high traffic branches. Thereafter, Total Branch Automation was in use, which did not involve bank level branch networking, and did not mean much to the customer. Networking of branches are now undertaken to ensure better customer service. Core Banking Solutions (CBS) is the networking of the branches of a bank, so as to enable the customers to operate their accounts from any bank branch, regardless of which branch he opened the account with. The networking of branches under CBS enables centralized data management and aids in the implementation of internet and mobile banking. Besides, CBS helps in bringing the complete operations of banks under a single technological platform. CBS implementation in the Indian banking industry is on the way for achievement of cent percent success ratio. One of the major achievements during the year under review was the increase in coverage of the number of branches providing Core Banking Solution (CBS). The process of computerization of the banking sector, which is regarded as the precursor to other technological initiatives, is almost on the completion stage. Public sector banks continued to spend large amounts on computerization and development of communication networks. In fact the growth rate of amount spent by public sector banks on computerization, which had shown accelerated during 2010-11. The proportion of public sector bank branches which achieved full computerization increased from 97.8 per cent as at end-March 2010 to 98.0 per cent as at endMarch 2011. Continuous progress is being made by banks to achieve a higher target, as more number of banks has moved into the 'more than 90 per cent but less than 100 percent' category b) Satellite Banking Satellite banking comes up with the vision to develop a better terrestrial communication links in many parts of the country especially in hilly and rural areas. The use of satellites for establishing connectivity between branches will help banks to reach target areas in a better way, and offer better facilities, particularly in relation to electronic funds transfers. However, this involves very high costs to the banks. Hence, under the proposal made by RBI, it would be bearing a part of the leased rentals for satellite connectivity, if the banks use it for connecting the north eastern states and the under banked districts. c) Automatic Teller Machines

Rose (1999), describes ATMs as follows: an ATM combines a computer terminal, record-keeping system and cash vault in one unit, permitting customers to enter the banks book keeping system with a plastic card containing a Personal Identification Number (PIN) or by punching a special code number into the computer terminal linked to the banks computerized records 24 hours a day. ATMs were introduced to the Indian banking industry in the early 1990s initiated by foreign banks. Most foreign banks and some private sector players suffered from a serious handicap at that time- lack of a strong branch network. ATM technology was used as a means to partially overcome this handicap by reaching out to the customers at a lower initial and transaction costs and offering hassle free services. Since then, innovations in ATM technology have come a long way and customer receptiveness has also increased manifold. Public sector banks have also now entered the race for expansion of ATM networks. Development of ATM networks is not only leveraged for lowering the transaction costs, but also as an effective marketing channel resource. Introduction of Biometrics Automated Teller Machine has come up with the new system of biometric technology to tap the potential of rural markets. Illiteracy contributes a lot for the failure of adoption of technology in the rural areas as like urban areas. Development of biometric technology has made the use of self service channels like ATMs viable with respect to the illiterate population. Though expensive to install, the scope of biometrics is expanding rapidly. It provides for better security system, by linking credentials verification to recognition of the face, fingerprints, eyes or voice. Some large banks of the country have taken their first steps towards large scale introduction of biometric ATMs, especially for rural banking. At the industry level, however, this technology is yet to be adopted; the high costs involved largely accounting for the delay in adoption. Multilingual ATMs Installation of multilingual ATMs has also entered pilot implementation stage for many large banks in the country. This technological innovation is also aimed at the rural banking business believed to have large untapped potential. The language diversity of India has proved to be a major impediment to the active adoption of new technology, restrained by the lack of knowledge of English.

Multifunctional ATMs Multifunctional ATMs are introduced by most banks in India, have already been recognized as a very effective means to access other banking services. Multifunctional ATMs are equipped to perform other functions, besides dispensing cash and providing account information. Mobile recharges, ticketing, bill payment, and advertising are relatively new areas that are being explored via multifunctional ATMs, which have the potential to become revenue generators for the banks by effecting sales, besides acting as delivery channels. Most of the service additions to the ATM route require specific approval from the regulator. ATM Network Switches ATM switches are used to connect the ATMs to the accounting platforms of the respective banks. In order to connect the ATM networks of different banks, apex level switches are required that connect the various switches of individual banks. Through this technology, ATM cards of one bank can be used at the ATMs of other banks, facilitating better customer convenience. Under the current mechanism, banks owning the ATM charge a fee for allowing the customers of some other bank to access its ATM. Among the various ATM network switches are Cash Tree, BANCS, Cashnet Mitr and National Financial Switch. Most ATM switches are also linked to Visa or MasterCard gateways. In order to reduce the cost of operation for banks, IDRBT, which administers the National Financial Switch, has waived the switching fee with effect from December 3, 2007. Internet Banking Internet Banking refers to systems that enable bank customers to get access to their accounts and general information on bank products and services through the use of banks website, without the intervention or because of reasons such as security concerns (43%), preference for face-to-face transactions (39%), lack of knowledge about transferring online (22%), lack of user friendliness (10%), or lack of the facility in the current bank (2%). Internet banking in India began taking roots only from the early 2000s. Internet banking services are offered in three levels. The first level is of a banks informational website, wherein only queries are handled; the second level includes Simple Transactional Websites, which enables customers to give instructions, online applications and balance enquiries. Under Simple Transactional Websites, no fund based transactions are allowed to be conducted. Internet

banking in India has reached level three, offering Fully Transactional Websites, which allow for fund transfers and various value added services. Phone Banking and Mobile Banking Phone and mobile banking are a fairly recent phenomenon for the Indian banking industry. There exist operative guidelines and restrictions on the type and quantum of transactions that can be undertaken via this route. Phone banking channels function through an Interactive Voice Response System (IVRS) or telebanking executives of the banks. The transactions are limited to balance enquiries, transaction enquiries, stop payment instructions on cheques and funds transfers of small amounts (per transaction limit of Rs 2500, overall cap of Rs 5000 per day per customer). According to the draft guidelines on mobile banking, only banks which are licensed and supervised in India and have a physical presence in India are allowed to offer mobile banking services. Besides, only rupee based services can be offered. Mobile banking services are to be restricted to bank account and credit card account holders which are KYC and AMC compliant. Card Based Delivery Systems Among the card based delivery mechanisms for various banking services, are credit cards, debit cards, smart cards etc. These have been immensely successful in India since their launch. Penetration of these card based systems have increased manifold over the past decade. Aided by expanding ATM networks and Point of Sale (POS) terminals, banks have been able to increase the transition of customers towards these channels, thereby reducing their costs too. Electronic Payment Systems One of the areas where technology has facilitated significant revolution is payment systems. It started with the mechanization/ automation of certain processes by introduction of cheque sorters and readers, MICR based clearing etc. and has moved on to use information technology for efficient funds transfer mechanisms such as ECS, NEFT, CTS, RTGS. Electronic Clearing Service The Electronic Clearing Service (ECS) introduced by the RBI in 1995, is akin to the Automated Clearing House system that is operational in certain other countries like the US. ECS has two variants- ECS debit clearing and ECS credit clearing service. ECS credit clearing operates on the principle of single debit multiple credits and is used for transactions like payment of salary, dividend, pension, interest etc. ECS debit clearing service operates on the

principle of single credit multiple debits and is used by utility service providers for collection of electricity bills, telephone bills and other charges and also by banks for collections of principal and interest repayments. Settlement under ECS is undertaken on T+1 basis. Any ECS user can undertake the transactions by registering themselves with an approved clearing house. Electronic Funds Transfer Systems National Electronic Funds Transfer (NEFT) is a nation-wide payment system facilitating one-to-one funds transfer. Under this Scheme, individuals, firms and corporate can electronically transfer funds from any bank branch to any individual, firm or corporate having an account with any other bank branch in the country participating in the Scheme. individuals, firms or corporate maintaining accounts with a bank branch can transfer funds using NEFT. Even such individuals who do not have a bank account (walk-in customers) can also deposit cash at the NEFT-enabled branches with instructions to transfer funds using NEFT. However, such cash remittances will be restricted to a maximum of Rs.50,000/- per transaction. Such customers have to furnish full details including complete address, telephone number, etc. NEFT, thus, facilitates originators or remitters to initiate funds transfer transactions even without having a bank account. Individuals, firms or corporate maintaining accounts with a bank branch can receive funds through the NEFT system. It is, therefore, necessary for the beneficiary to have an account with the NEFT enabled destination bank branch in the country. There is no limit either minimum or maximum on the amount of funds that could be transferred using NEFT. However, maximum amount per transaction is limited to Rs.50,000/- for cash-based remittances. NEFT can be used to transfer funds from or to NRE and NRO accounts in the country. This, however, is subject to the adherence of the provisions of the Foreign Exchange Management Act, 2000 (FEMA) and Wire Transfer Guidelines. Besides personal funds transfer, the NEFT system can also be used for a variety of transaction including payment of credit card dues to the card issuing banks. It is necessary to quote the IFSC of the beneficiary card issuing bank to initiate the bill payment transactions using NEFT. Cheque Truncation System (CTS) Truncation is the process of stopping the flow of the physical cheque issued by a drawer at some point with the presenting bank en-route to the drawee bank branch. In its place an electronic image of the cheque is transmitted to the drawee branch by the clearing house, along with relevant information like data on the MICR band, date of presentation, presenting bank, etc. Cheque truncation thus obviates the need to move the physical instruments across

branches, other than in exceptional circumstances for clearing purposes. This effectively eliminates the associated cost of movement of the physical cheques, reduces the time required for their collection and brings elegance to the entire activity of cheque processing. With the other major products being offered in the form of RTGS and NEFT, the Reserve Bank has created the capability to enable inter-bank and customer payments online and in near-real time. However, as cheques are still the prominent mode of payments in the country and Reserve Bank of India has decided to focus on improving the efficiency of the cheque clearing cycle, offering Cheque Truncation System (CTS) as an alternative. As highlighted earlier, CTS is a more secure system vis-a-vis the exchange of physical documents. In addition to operational efficiency, CTS offers several benefits to banks and customers, including human resource rationalization, cost effectiveness, business process re-engineering, better service, adoption of latest technology, etc. CTS, thus, has emerged as an important efficiency enhancement initiative undertaken by Reserve Bank in the Payments Systems area. The Reserve Bank has implemented CTS as a pilot project in the National Capital Region (NCR), New Delhi with effect from February 1, 2008. After migration of the entire cheque volume from MICR system to CTS effective from July 1, 2009, the traditional MICRbased cheque processing has been discontinued in NCR. Based on the advantages realized by the stakeholders and the experienced gained from the pilot roll-out in NCR, it has been decided to operationalised CTS across the country. Accordingly, CTS has been rolled out in Chennai w.e.f September 22, 2011 with few banks. RTGS The acronym 'RTGS' stands for Real Time Gross Settlement, which can be defined as the continuous (real-time) settlement of funds transfers individually on an order by order basis (without netting). 'Real Time' means the processing of instructions at the time they are received rather than at some later time. 'Gross Settlement' means the settlement of funds transfer instructions occurs individually (on an instruction by instruction basis). Considering that the funds settlement takes place in the books of the Reserve Bank of India, the payments are final and irrevocable. The RTGS system is primarily meant for large value transactions. The minimum amount to be remitted through RTGS is ` 2 lakh. There is no upper ceiling for RTGS transactions. Under normal circumstances the beneficiary branches are expected to receive the funds in real time as soon as funds are transferred by the remitting bank. The beneficiary bank has to credit the beneficiary's account within two hours of receiving the funds transfer message.

The remitting bank receives a message from the Reserve Bank that money has been credited to the receiving bank. Based on this the remitting bank can advise the remitting customer that money has been delivered to the receiving bank. As on September 29, 2011, there are more than 78,000 RTGS enabled bank branches. For a funds transfer to go through RTGS, both the sending bank branch and the receiving bank branch would have to be RTGS enabled. The lists are readily available at all RTGS enabled branches. Besides, the information is available at RBI website. Considering that more than 74,000 branches at more than 20,000 cities/ towns / taluka places are covered under the RTGS system, getting this information would not be difficult. Conclusion In todays technologically advanced environment, Core Banking Solution (CBS), does not remain an edge anymore, but has become the basic prerequisite for any bank. Building on this, banks need to move on to adapting higher technology in order to provide better products and upgrade their risk management systems. As we become global, banks would need to become technologically more sophisticated in diverse areas, whether it is moving towards adopting advanced approaches in Basle II or in upgrading their delivery channels for providing better customer service. The time is now ripe for banks to look at initiatives beyond their core banking. Banks would need to look beyond core banking in order to stand out from their competitors, work efficiently and manage their risks better. Banks would need to look to avenues Beyond Core Banking to serve their customers, devise an appropriate strategy to deal with the challenges by utilizing its resources. As per the IT Vision Document of RBI 2011-2017, commercial banks have to increase the level of technology involvement in different areas like MIS, regulatory reporting, overall risk management, financial inclusion and customer relationship management. The Vision document urges banks to work towards reaping benefits of technology in terms of cost reduction of small value transactions, improved customer services and effective flow of information within the banks and to the regulator. Focus should be on Leveraging of benefits, adoption of more energy efficient devices and architecture for tangible savings in energy costs and helping to build green credentials to IT.

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