building best-in-class direct banking

WHITEPAPER MAY 2014

Building best-in-class Direct Banking HCL Banking – Partnership & Alliance Group

www.hcltech.com

BUILDING BEST-IN-CLASS DIRECT BANKING | MAY 2014

© 2014, HCL TECHNOLOGIES. REPRODUCTION PROHIBITED. THIS DOCUMENT IS PROTECTED UNDER COPYRIGHT BY THE AUTHOR, ALL RIGHTS RESERVED. 2

TABLE OF CONTENTSEXECUTIVE SUMMARY 3

DIRECT BANKING - THE ROAD TRAVELLED 3

DIRECT BANKING MUST BE USED AS A STRATEGIC TOOL 4

BENCHMARKING METHODOLOGY FOR DIRECT BANKING 5

BEST PRACTICES FOR BANKS WORLDWIDE 9

CONCLUSION: WHAT IT MEANS 10

REFERENCES 11

AUTHORS 11

ABOUT HCL 12



EXECUTIVE SUMMARYIn today’s challenging business environment, no one can doubt on worldwide acceptance of Direct Banking. Its importance as strategic tool to acquire and retain customers, is forcing augmentation of new features every day. The choice depends on two critical factors which run to the heart of a bank’s long-term goals - customer value proposition designed by bank and the technology enablement. What all consumer banking features do financial institutions want to offer without putting security and reputation at stake? While designing bank’s Direct Banking strategy, one should not forget the fact that technologies and business processes have its own obsolescence and beyond a point of time, these also will need to be changed. Direct Banking strategy should keep customer at its center and ensure flexibility in the system to quickly respond to its changing preferences.

This white paper tries to examine various aspects and challenges associated with Direct Banking deployment and upgrade. A comparison is also made between Direct Banking products and independent developments undertaken by banks, along with best practices to be followed. Towards the end of this paper, guidance for next steps is provided which banks should follow.

DIRECT BANKING - THE ROAD TRAVELLED Direct Banking or e-banking (used interchangeably in this paper) is a combination of two facets - Technology & Banking. In the nutshell, it is a channel through which a customer performs banking transactions electronically without visiting brick-and-mortar institutions. Banking services can be availed by customers without direct recourse to the bank and it is made possible by usage of information technology. Over the period of time, e-banking applications have evolved in various ways:

y Independent development: Many banks, wanted to have their presence in Direct Banking, have developed their own e-banking platforms. Two main reasons behind this thought process were a) To roll out e-banking services incrementally using step by step approach; b) Better connect with end users (these product offerings used to have their own language).

y Product augmentation: A scenario of forward integration, where Core Banking vendors deployed extensions of their banking platforms. The vendors pitched in because earlier Core Banking systems could not be launched on browser; hence there was an inherent need to have internet based client platforms. Second, these vendors had the knowhow to integrate Direct Banking platforms with Core Banking applications.

y Dedicated e-banking suites: These were the options to choose off-late where independent Direct Banking products provided full range of banking services and content to customer .These solution offered complete set of Direct Banking functionality covering services for retail, private and corporate-banking customers. They were late entrants, even then they have managed to get considerable market share due to their dedicated offerings. These independent vendors have managed to replace existing internet banking application by their dedicated Direct Banking suites.



The next section carries out detailed analysis on deciding factors for Direct Banking application.

DIRECT BANKING MUST BE USED AS A STRATEGIC TOOLIn order to use Direct Banking as a strategic tool, bank needs to address following challenges:

y How to add value on user experience i.e. look and feel, home page setup, bank’s brand management?

y What all business functionality/processes do need to be customized / changed and to what extent?

y What would be the impact of proposed Direct Banking on existing IT landscape?

y Does the proposed application comply with security policy as laid down by corporate?

y How robust is the proposed application for performance and downtime minimization?

In order to use Direct Banking as a strategic tool, bank needs to address following elements:

Configurable & Flexible Platform

Banks need an online-banking solution that can deliver a wide range of different online services by matching requirements of different customer segments it attempts to service. Solution has to be configurable enough in order to cater to local market needs. For example online service offering a Dutch retail customer will be very different in contrast to a Nigerian customer.

Customer Expectations

There is no denying of the fact that customer expectations from online-banking has been raising and customers are demanding the same from their banks. Quite a few banks still charge for premium services, but soon it would be a norm. It is important that their online-banking solution should be in the position to respond to changing expectations over a period of time.

Transaction Speed

Transactions processing time for online services have reduced exponentially over a period of time. This could be made possible only after banking business processes were seamlessly integrated into the banks’ internal back-office systems.

Value-adds

Customers are also looking for value-added information about their business and finances, not just ‘static’ data. For example, PFM solution for budget and personal cash flow forecasting analyzes customer’s spending and help them plan for the future.



Central Management & Control

Banks need a centralized administration module so that it can allow enterprise-wide updates to be rolled-out from a central location, avoiding duplicated maintenance and development. A centrally managed solution gives banks the power to drive forward their online-banking services in a consistent and strategic way.

Having decided key elements to use Direct Banking as a strategic tool, this section tries to evaluate Direct Banking products with respect to independent developments by banks on a few key parameters.

BENCHMARKING METHODOLOGY FOR DIRECT BANKING To compare an e-banking product and independent development, total five aspects are considered. These parameters are: i) Technology, ii) Integration Aspects, iii) Common Services, iv) Banking Functionality, and v) Personal Finance.

At the start when direct\e-banking system is implemented in the bank, it starts with all the basic business processes. Over the period of time, more and more business processes and functionality get added functionality. This creates a significant difference on availability of features between e-banking products and independent development.

Technology

This section covers comparison between i) e-banking products and ii) Independent development of internet banking platforms by bank; on technology parameters. All the main parameters are considered to make it as exhaustive as possible. Grading for each parameter as supported, not supported and partly supported is done.



Based on above comparison it can be assumed that since Direct Banking products are based on latest technology and gives bank an edge under technology platform parameters.

Most of the independent development undertaken by bank lacks support to custom protocols, open source component etc.

Integration Aspects

Following chart tries to compare Integration capability for i) e-banking available products and ii) Independent development of internet banking platform by banks. Based on analysis it can be concluded that both of them have similar capabilities so far as system integration aspects are concerned.



Common Services

Common services are referred to those services, which handle various transactions and operations handled by Direct Banking platform e.g. parameter management, message management, user administration, exchange rate, transaction management etc. These services give the flexibility to deal with various functional and business process requirements without any customization.

The Direct Banking product has many configurable features like template management, account preferences, transaction pool, sidebar management, messaging widget, dictionary management etc. These configurable features reduce customization and makes banks flexible to the end user banking needs.

It is easy to conclude that e-banking product scores heavily over independent development. Since the E-banking products are better planned, these provide better features on common services parameters.



Banking Functionality

Functionalities are the actual offerings to bank’s customers and directly visible to customers. In this section, various online-banking functionalities are covered.

Even though e-banking products and independent development are almost at par, independent development has an edge over e-banking product platforms in this area.

Personal Finance

Main objective of this module is to deal with personal finance budgeting, individual saving goals, peer analysis for income and expense, which helps banking customer to achieve their financial objectives. Only a few of the independent development banking platform covers personal finance functionality.



Based on this analysis, it appears that e-banking products are richer in features for personal finance management compared to independent development.

Benchmarking Analysis

Above Analysis indicates that e-banking products have an advantage on Technology, Common Services and Personal Finance. However Independent Development for direct Banking has slight edge in Banking Functionality. Both stand almost at par with respect to Integration aspects.

Parameters E-banking Product Independent DevTECHNOLOGYINTEGRATION ASPECTSCOMMON SERVICESBANKING FUNCTIONALITYPERSONAL FINANCE

It can be concluded that e-banking product gives banks a distinct advantage in comparison to independent development, hence banks can consider for e-banking product deployment or module upgrade.

BEST PRACTICES FOR BANKS WORLDWIDE

Transformation of Delivery Channels

A customer likes to have a convenient and familiar experience across all channels when he / she interacts with their bank using any channel including internet, mobile, phone, ATM, kiosk or branch. Hence in order to maintain competitive position, financial intuitions will require investments in developing an integrated architecture. This architecture will seamlessly unite data, controls and set-ups to provide a consistent experience to its customers.

Mobile-banking

Not a long time ago, Mobile-banking was considered as an additional offering along with other online banking channels; but not anymore. Its significant growth indicates that its reach is going to be farther and much more important in the coming days.

In a report by Juniper Research titled, ‘Mobile-banking : Handset and Tablet Strategies 2013-2017’, it is estimated that more than 1 billion mobile phone users will use their devices for banking purposes by 2017 . In addition, it was projected that more banks will have multiple mobile offerings, maximizing customer penetration potential.

Continued Focus on Compliance and Security

Compliance and security are one of the key areas which digital channels need to deal with in everyday world. Ever changing regulations keep banks on their toes and make the job more difficult. It requires a dedication and commitment to meet day to day challenges while ensuring compliance and security. Only dedicated vendors are



in a position to take these challenges and provide updates to ensure compliance to changing rules and regulations.

In order to deal with regulatory and compliance requirements, many will figure out new ways to meet their regulatory obligations with creativity and some fresh ideas. Not every institution will follow this path, but few of them will definitely do. As per ex RBI governor C Rangarajan “Too little regulation may encourage financial instability, but too much of it can impede financial innovations which are badly needed.”

Battle for Payments Supremacy Will Continue

In the last couple of years, banking has seen many changes in payments landscape. It starts from SEPA going live, payments being more real time (Faster Payments in UK, G3 in Singapore), reduction of interchange fees, to addition of new non-banking players like PayPal, MCX, etc. This is one of the most used functionality in online banking and has a significant impact on online offerings. Evolutions of these concepts are expected to involve many more partnerships, joint ventures and acquisitions in online-banking space.

PFM The Future of Online-banking

In 2011-12, less than 4% of the online users of large banks were actively engaged in Personal Finance Management (PFM). Personal finance management module adoption is rising and is expected to rise further in the coming days. As of now, it is considered as Value - add, however it is expected to become an integral offering soon. The banks, not offering or offering only basic features of PFM need to enhance PFM experience of its customers.

CONCLUSION: WHAT IT MEANS Most of the banks have Direct Banking application in place, ranging from basic to advanced ones. Not all but a large percentage of these applications are ageing now and require a fresh relook. To determine action plans, banks can be profiled as follows:

Large

Low

Small

RISK

Add New Module

Due Diligence

Replace / Add New Module

Replace

High

CU

STO

ME

R B

ASE



Neeraj Gupta handles Banking vertical of Partnership and Alliances Group of HCL. He has more than 16 years of experience in Product Management, Engineering, Implementation, Competency Building and Pre-sales support of various leading banking products in the domain of Payments, Direct Banking and Core Banking.

Manikant Jha is a Banking specialist with HCL Technologies. He has been associated with various Core Banking, Direct Banking and Retail Banking products consultancy for more than 13 years for leading banks worldwide.

AUTHORS

Small Customer Base & Low Risk: Banks standing on small customer base and low on replacement risk, it’s recommended to go for a replacement of Direct Banking application with a new Direct Banking product. New product is the best investment to service its customer as one it will assist to get additional customers by channel augmentation; second it will assist the bank to reach the stage of branchless banking. Normally small or niche banks fall under this category.

Large Customer Base & Low Risk: Banks standing on large customer base but low on replacement risk, it’s recommended for new module\features augmentation like PFM, better payment services through Direct Banking etc. Typically the state owned banks offering basic Direct Banking services would fall under this category.

Small Customer Base & High Risk: Banks having small customer base, but a high replacement risk fall in this category, mainly because IT landscape is not fine-tuned for last many years. It is recommended to have Direct Banking replacement if risk can be mitigated by enhancing IT landscape; else new module addition should be considered if associated risks cannot be mitigated at all. Investment in Direct Banking is required to increase customer base.

Large Customer Base & High Risk: Banks having large customer base and high replacement risk fall under this category. Banks need to spend considerable resources in due diligence before making any decision. It is not recommended for Direct Banking replacement without this. A proper consideration needs to be given on customer’s expectations, market trends, competition, integration, banking functionality, security risk and technological unification; as various customizations would have been carried out over the period of time. Typically large multinational banks fall under this category.

REFERENCES i) http://bankingblog.celent.com ii) www.economictimes.indiatimes.com dated 16-Sep-2013 iii) www.nextbank.org

Disclaimer: Above article is based on authors’ own opinions and not HCL’s opinion.

ABOUT HCL

About HCL Technologies

HCL Technologies is a leading global IT services company working with clients in the areas that impact and redefine the core of their businesses. Since its emergence on global landscape after its IPO in 1999, HCL has focused on ‘transformational outsourcing’, underlined by innovation and value creation, offering an integrated portfolio of services including software-led IT solutions, remote infrastructure management, engineering and R&D services and Business services. HCL leverages its extensive global offshore infrastructure and network of offices in 31 countries to provide holistic, multi-service delivery in key industry verticals including Financial Services, Manufacturing, Consumer Services, Public Services and Healthcare & Life sciences. HCL takes pride in its philosophy of ‘Employees First, Customers Second’ which empowers its 90,190 transformers to create real value for the customers. HCL Technologies, along with its subsidiaries, had consolidated revenues of US$ 5.2 billion, as on 31st March 2014 (on LTM basis). For more information, please visit www.hcltech.com

About HCL Enterprise

HCL is a $6.5 billion leading global technology and IT enterprise comprising two companies listed in India – HCL Technologies and HCL Infosystems. Founded in 1976, HCL is one of India’s original IT garage start-ups. A pioneer of modern computing, HCL is a global transformational enterprise today. Its range of offerings includes product engineering, custom & package applications, BPO, IT infrastructure services, IT hardware, systems integration, and distribution of information and communications technology (ICT) products across a wide range of focused industry verticals. The HCL team consists of over 96,000 professionals of diverse nationalities, who operate from 31 countries including over 505 points of presence in India. HCL has partnerships with several leading global 1000 firms, including leading IT and technology firms. For more information, please visit www.hcl.com

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