furture_of_banking

Workshop on

The Future of Banking

organized by HMA & ISB(October 30, 2004)

Vepa KamesamFormer 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 TechnologyInformation

StorageProcessing

Transmission

Tasks Common to Both



Pervasive BranchNetwork

Global Operations

Complex Credit Calculations

Innovative RiskManagement

Banking a

nd Tech

nology

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

DocumentManagement

RiskManagement

ResourceManagement

MIS & Intranet

CRM

Corporate Network

Electronic Banking

POS Terminals and Cash dispenser

BANK’S BUSINESS

BANK’S BUSINESS

RA

ISIN

G

DE

PO

SIT

SL

OA

NS

& M

ISC

. SE

RV

ICE

S



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 EquipmentSecurity SystemsSystems 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

SupportSkills

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?”



TechnologyFor

Sustained Differentiati

on

Goal definitionIntegrating business & technology goalsSolution featuresVendor selectionBusiness process re-engineeringChange management

Efficient utilisationCustomer utilityTechnology ManagementSupport functionsMaintenanceBack-ups and Disaster RecoveryScalability & flexibilityLearning & 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 OpportunityRegulators 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 & MonitoringOSMOSCOSMOS (Non banking Financial Companies / Development Financial Institutions)

UBD SoftCredit 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

DeliveryVersus

Payments

Payment Versus

Payment

ContinuousLinked

Settlement

ElectronicDealing

Platforms

RealTimeGross

Settlement

CentralCounter

partySecured NettingSystems



RBIRBIINITIATIVESINITIATIVESIN PAYMENTIN PAYMENT

&&SETTLEMENTSETTLEMENT

SYSTEMSSYSTEMSCompliance with

BIS Core Principles

RTGS

CFMSNEFT

PKI-based Security

SFMS

Clearing Corporationof India

IDRBT

PDO-NDS & SSS

NFS/IBPG

INFINET



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 withOther Financial Network ServicesG1- SWIFT NetworkG2- Reuters NetworkG3- Stock Exchange NetworkG4- Inter Banks/FIsG5- Shared ATMsG6- Clearing Operations NetworkG7- Internet

Corporate Network

Inter Banks/FIs Network

Shared ATMs Network

Clearing Operations Network

SWIFTNetwork

ReutersNetwork

NSENetwork

G1 G1 G2 G2 G3 G3

G1G2

G3 G1G2

G3 G1G2

G3

G4

G4 G4 G5

G5 G5 G6

G7Internet

Financial Networks

INFINET



Structured Financial Messaging System

Branch-1

Bank-1 Gateway

Bank-2 Gateway

Bank-n Gateway

Branch-2Branch-nBranch-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

MITRLocation: Chennai

BANCS & CashtreeLocation: 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 systemsTo 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

SettlementAccounts

IFTPStrip & StoreProcesses

SSS

Intra Day Liquidity

RBI Payments and Actg. Entry Interface

INFINET NSS

Participant’sInterface

Participant’sInterface

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 informationThe 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 ClearingEnabling faster clearing of cheques

Cheque Truncation & E-ChequesOn the drawing board

ECS/EFTEnabling T+2 settlement of our equities marketNational EFTEnabling T+0 settlement of all customer funds transfer transactions



Technology Vision of the RBI

Centralised DatabaseManagement System

EnterpriseEnterprise KnowledgeManagement System

Integrated Accounting System

Integrated GovernmentAccounting System

Currency OperationsSystem

Desk Top Decision Making Capability

Desk Top Analytical Capability

Desk Top Transactional Capability

Securities SettlementSystem

Integrated EstablishmentSystem

Offsite Supervisory Systems

Integrated Forex Management System

Human ResourceInformation System



Issues in Implementation““Less than 10% of failures are due to Less than 10% of failures are due to technical snags – most are due to poor technical snags – most are due to poor management and implementation”management and implementation”

Resistance to changeOverlooking process reengineeringProject managementDedicated project teamsChange managementPoliciesPeople Skills & TrainingBasic Infrastructure – telecom, powerSecurityPrivacy & confidentialityLegal and regulatory issues



Pre-requisites for Technology

Planning for Planning for

DisastersDisasters

Business Process Business 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 Security IDRBT’s Solutions for Security Risk Management (SRM)Risk Management (SRM)

RiskAssessment

GapAnalysisIS Audit

Awareness byTraining

Policy &Procedures

Development

Implementation

SRMfor

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..

furture_of_banking

Education

security risk management

currency management

customer service

disaster recovery

business process

settlement systems

monetary systems

financial stability