Banking on IT

The optimism in technology circles is palpable, following the banking regulator’s decision to throw the doors open to fresh aspirants. IT companies, expecting to ride the wave, have already begun to showcase core banking, back office and managed services capabilities to the 26 banking licence hopefuls.

The Reserve Bank of India’s decision to usher in a new generation of banks comes nearly a decade after Yes Bank, now the youngest in the country, started operations.

The applicants include brokerage houses, non-banking financial institutions, industrial houses and micro-finance firms including Aditya Birla Nuvo, Bajaj Finance, Edelweiss Financial Services, India Infoline, LIC Housing Finance, Reliance Capital, UAE Exchange India and many more. The RBI has set the right expectations by releasing pro-technology and pro-innovation guidelines for banking hopefuls.

“The bank should operate on Core Banking Solutions (CBS) from the beginning with all modern infrastructural facilities… the bank should have a high powered customer grievances cell to handle customer complaints,” according to RBI’s ‘Guidelines for Licensing of New Banks in the Private Sector’.

Key factors

For players who get the regulators go-ahead, the crucial aspect would be the ability to lure existing customers from incumbents, especially in the metros. Technology can play a major role in enhancing customer experience. Corporate and individual customers will flock to a bank, which can address existing pain points and provide better services than the incumbents.

“It is not straightforward to assume that a customer will move his business to another bank just because he gets higher interest rates. Several factors would influence the decision to switch banks,” said Chet Kamath, Managing Director and Chief Executive Officer at Oracle Financial Services Software.

Hence, banks need to come up with differentiated strategies so that they do not become me-too players. “Once their strategy is in place, they can go for best-of-breed technology,” adds Kamath.

Analysts believe that new banks have several advantages of going completely digital from the word go. Since they do not have any legacy systems that have to be automated, they would be able to pick and choose technologies and services that are more futuristic depending on their budget and business plan, says Alok Shende, Director and Principal Analyst at research firm Ascentius Consulting.

Arup Roy, Research Director at advisory firm Gartner believes that the new players will be able to leverage technologies such as cloud computing, big data, mobility and analytics faster than their established counterparts.

Though banks refrain from divulging technology spending (included often in operational expenses), generally it is as high as 6 per cent of revenues for an international lender.

As a thumb rule 4-6 per cent of a global bank’s revenues is spent on IT, while that by a domestic lender is in the range of 2-2.5 per cent (of revenues), Gartner’s Roy added.

According to a recent report by the research and analysis firm, the Indian banking sector is expected to spend 13 per cent more on IT products and services at Rs 42,200 crore in 2013 compared with Rs 37,300 crore last year.

Here lies the opportunity for the home grown IT services companies. Indian firms such as Tata Consultancy Services, Infosys, Polaris and others have already cut their teeth by working with banking and financial services customers globally.

So how much will a new bank, especially one which intends to ramp up to say 100 branches in two years, spend on IT? Industry watchers have put across varied estimates. N.G. Subramaniam, President of TCS’ financial solutions unit says that an initial investment of Rs 25-40 crore can be envisaged for the hardware, software and networking part. Shende of Ascentius paints a more bullish picture, touting the opportunity per bank to be in the Rs 80-100 crore range.

By and large, investments will be made in hardware, networking, security, data-centre set-up, validation and infrastructure management services, back office services, integration service, core banking, customer relationship management, risk management and analytics applications.

In addition, there needs to be provisions for regulatory reporting, anti-money laundering and fraud detection, according to Rajashekhar Maiya, Assistant Vice President and Lead Product Manager-Finacle Product Strategy at Infosys.

While Infosys has ‘Finacle’, TCS and Oracle are positioning ‘Bancs’ and ‘Flexcube’, respectively, as their preferred core banking options. Multinational players such as Accenture (Alnova), FIS (Corebank) and Misys (Universal) are also vying for a piece of the cake.

On the back office side, banks have the option of choosing from a range of shared call centres, in addition to requesting for automated response management and specific service level agreements with vendors. “We see opportunities in processing around payments, accounts and customer on boarding, statementing and platform based BPO offering for accounting, HR and payroll processing and analytics,” Maiya added.

Licensing models

Several parallels can be drawn between the new telecom licences granted in 2008 and the current happenings in the banking sector. In both industries, the new players were pitted against established incumbents with steady cash flows.

Hence, the new banks will prefer IT engagement models similar to those which found favour with the greenfield telecom operators: sharing of risk and rewards. In such deals, the business for a service provider increases proportionately with the increase in the number of a banks customers and branches.

“The licensing model has always been volume-driven or module-based. Volumes typically involve the account, customer, branch, user, transactions among others. The banks will have the choice of deciding on the exact model that is beneficial to them considering the aspects such as growth plan, strategies for acquisition, international expansion,” Maiya added.

Subramaniam of TCS believes that new banks may prefer vendors who could provide managed services or hosted kind of offerings so that they can refrain from having large in-house IT teams. “They would love to go in with an asset light strategy so that can have single minded focus on the core business of banking” he said.

All major IT firms are in touch with the aspiring players as they seek to educate them on banking technology, with an eye on building long term relationships. However, Roy of Gartner has a word of caution for the aspirants. “Do proper due diligence before roping in the vendor. Not only should the vendor be financially stable but he should be able to partner with you for the long term,” he said.

However, little ground has been covered till now as the ball is still in the RBI’s court. Over to the regulator!

adith.charlie@thehindu.co.in