Finacle thought paper discusses banking history from its early days to how new banking technology helps in delivering business growth to banks.

1. From technology driving banking
development to the other way around
Thought Paper
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2. From technology driving banking development to
the other way around
Organized banking has been practiced since standardized rules agreed to by the trading
several centuries. Prior to the 20th century, countries. The only technological development
banking saw little change, but it has undergone in banking during most part of 20th century
dramatic transformation in the last few decades, was on the telecommunication front, in the form
thanks to the development of technology. of telephone and telex.
Generation Z (Internet Generation) will probably
This paper is a capsule of banking history. Starting
never know the nuances of manual transaction
with the days of manual banking operations
processing, which was how banking was
and the challenges they posed, it moves on to
conducted until technology came along. Most
the development of banking technology and
of these manual banking processes were
its benefits, and then on to the drivers of next
built around the rules and regulations in each
generation banking and the role that technology
country, with the exception of those supporting
can play in delivering business growth as well
trade finance and cross-border fund transfer
as customer satisfaction.
transactions, which were built according to
Early developments
Manual banking was prone to a high degree of operations, they also maintained a parallel manual
error, despite following the maker-checker or ledger. Bigger banks, which had computerized
4-eye principle. Bank reports would contain large branches, but not those in rural areas,
suspense entries, which had not been reconciled; had trouble consolidating data for a zone or
MIS reports sent to top management and region. Realizing the benefits of technology
regulators were often inaccurate and delayed; enablement, banks slowly moved towards
branches would fail to comply with circulars; complete automation. The Central Banks of
balance sheets were sometimes doctored to different countries played a pivotal role in
exaggerate performance; and bad assets were ensuring that the move was in line with globally
neither monitored nor reported correctly. These accepted standards.
unhealthy practices increased banks’ risks and
Automation enabled easy retrieval of customer
losses. At the same time, banks had to watch out
and account data at the teller workstation
for fraud, usually perpetrated by employees.
to speed up customer service and process
Technology enablement of the banking industry efficiency on one side and quicker consolidation
started with automation of branch and teller of General Ledger data and MIS availability to
operations, with the goal of improving customer the branches on another side.
service. Manual operations, such as the issuance The 1980s and early 1990s saw the advent
of cash receipts and payments, transfer of of massive computerization, electronic fund
funds between accounts in the same branch, transmission and ATMs. These innovations
and certain paper clearing operations were increased banking efficiency and output.
automated. However, core operations such as Automation progressed at a different pace
lending, foreign exchange, investment banking across countries, based on acceptance and
and treasury remained under manual control. And cost, and was largely driven by the needs of the
although banks had started to computerize their banking sector.
02 Thought Paper

3. The online revolution
The Internet revolution in the late 1990s drove trade finance, treasury and investment banking.
banking automation into online mode, and Although core banking applications were
ushered in data centralization. This paved inbuilt with basic risk controls and Anti-Money
the way for a number of banking solutions Laundering (AML) checks, there were also
including core banking applications covering specialized solutions to help banks control and
critical branch operations, deposits, lending, detect fraud.
Change of phase from business to technology
In the legacy systems era, banks could offer accounts and do the same for the charges to
only a few vanilla products, designed and customer accounts; they needed to provision
controlled manually. Core banking technology year-end entries and identify non-performing
allowed banks to create a variety of products assets. With core banking, banks could
and variants, catering to different customers, accomplish all of the above within hours. Core
from senior citizens to high net-worth individuals. banking also brought transparency to the
Product creation and maintenance became banking ecosystem by making data available to
simpler, and product innovation took a leap. top management and regulators immediately
Further, technology enabled specific customer after financial year closing.
segments to be accorded extra privileges, such
External and internal audit of accounts could
as doorstep banking (for high net worth
now be carried out immediately after closing, at
customers). The new methods of income
the branch or head office. Other than physical
generation brought twin benefits for banks –
loan documentation, all data was available at the
low cost funds and higher fee income.
auditor’s desk.
In the manual era, banks needed to plan months
All of these added to banks’ efficiency, growth
ahead of financial year closing. They had to
and profitability.
process and verify interest on all interest bearing
The benefits of computerization in
Indian banking sector
Indian banks, led by Public Sector Banks (PSB), the change. Table 1 below shows the adoption
which dominated the market, also embraced of computerization by Public Sector Banks.
Table 1: Status on computerization at Indian Public Sector banks
Category Percent of total bank branches
FY06 FY07 FY08 FY09 Fy10
Fully computerized branches (CBS and others) 77.5 85.6 93.7 95.0 97.8
Branches under CBS 28.9 44.4 67.7 79.4 90.0
Branches fully computerized (Other than under CBS) 48.6 41.2 26.0 15.6 7.8
Partially computerized branches /
Non-computerized 22.5 13.4 6.3 5.0 2.2
Source: Trends and Progress of banking in India, RBI
Thought Paper 03

4. Core banking solutions brought multiple banking implementation has improved
advantages to Indian banks. As per a survey operational efficiency, business agility, customer
conducted by FICCI in February 2010, core satisfaction and control and monitoring.
Table 2: Benefits derived from implementation of Core Banking Solutions
Benefits derived from implementation of Core Banking Solutions
9
8
7
6
5
4
3
2
1
0
Revenue from enhanced
Reduced errors
Lower operation cost
Improved customer
Quicker time to market
Reduced manual labour
Effective control &
Instant availability of
products & services
Monitoring
accurate data
new products
retention
Mode Score on a scale of 1-8, 8 being most beneficial
While technology was driven by business automation took root in the US and Europe, the
requirements in the initial phase, in the second phase of transformation, led by core
second, there was a visible turn of events, with banking modernization, was driven by South
technology playing an important part in banking East Asia, Latin America and Africa.
strategy and business. Whereas the earliest
Complex cash management and payment products
Complex cash management products for transfer of funds between customer accounts
corporate customers having operations in in different banks locally and across borders.
multiple countries could not have been developed Central Banks played a pivotal part in local
and implemented without the assistance of payments. Organizations like SWIFT Alliance
technology. Pooling funds at a central physical facilitated cross-border remittances and by
or online location enabled corporate customers bringing in standard messaging mechanism
to manage funds efficiently. Internet banking for transmission and receipt of funds. In India,
technology made it possible to initiate fund payment systems such as ECS, RTGS and NEFT
transfer request locally or cross-border and the were developed to enable bank customers
resultant reduction of turnaround time increased transfer funds in real-time. Though this has cut
trust with customer who maintains account with into banks’ income from float funds, it has
the other bank. This has opened up business enhanced customer satisfaction. Elsewhere,
avenues for corporate entities. multiple payment systems like FEDWIRE, GIRO,
TARGET, CHIPS, CHAPS, SEPA etc., were developed
Driven by Central Banks, many payment systems
to enable smooth and secure fund transfer.
were developed for the smooth and efficient
04 Thought Paper

5. Online cross border payments, which were the assistance of technology. Customers could
limited to specific countries and attempted only open an account in one country and access or
by major banks worldwide during the early withdraw from it from another country .ATMs and
1980s and 1990s, became the new normal with debit cards reduced the physical exchange of cash.
Customer service through technology
With the aid of technology, bank staff could route transactions by unscrupulous elements gaining
routine service requests through Internet or access to customers’ Internet banking accounts,
phone banking (IVR) and focus on business pushed banks to invest further in security
development instead. This, coupled with the measures, as well as in anti money laundering
ATM, ushered in another phase in which banking and risk management solutions. Regulatory
customers became independent of the branch. compliance gained importance at the domestic
and global level and banks’ decisions/transactions
As channel banking gained popularity, it
came under the scanner.
heightened security concerns. Complex fraudulent
New peripheral software solutions for MIS
Though core banking was the cornerstone of Warehousing and Business Analytics came
the banking revolution, there was a need for other into existence and played a significant role in
software solutions as well. Software solutions converting banking into a highly technology-
for Fixed Assets Management, Budgeting, Asset driven business.
Liability Management, Transfer Pricing, Data
Business process outsourcing done by banks
Outsourcing of back office operations helped outsourcing such as software development
banks and financial services providers to lower and data centre operations, outsourcing has
costs and avail specialized skills. This enabled grown to specialized areas such as Business
bank staff to focus on core business activities. Process Outsourcing (BPO), Knowledge Process
The outsourcing also provided scalability of Outsourcing (KPO), research and analytics.
operations to banks and financial institutions. Further on newer models for outsourcing have
The centralized management of data processing developed such as Collaborative Partnerships,
and customer service operations is now a wherein banks as well as the vendors share the
commonplace. From the traditional forms of benefits (losses as well) of the relationship.
Thought Paper 05

6. Future development
Today, technology is advancing at a rapid pace, going the B2C way to reach customers directly
and innovations in Internet, mobile and virtual using new modes of communication like Internet
media are impacting all sections of society and and mobile. Today, more technology systems
industry. The way banks operate or manage their are driven by consumer need. Hence, any
customers has changed beyond recognition. development in B2C technology also impacts
Because of the proliferation of communication the banking sector. In addition, banks are looking
technology, banks around the world are evenly at customer experience to build differentiation.
matched in technological progress. Even less Social media has started to figure in banks’
developed countries have managed to reach out marketing and servicing strategy, and is being
banking services to excluded segments, using seen as a way to improve customer satisfaction
the mobile platform. This has created a paradigm and lower transaction costs. Clearly, banking
shift in the way banks approach their business; service and outreach are going through a
where earlier, banks took the B2B route of fundamental transformation.
projecting product capability, today, they are
Cost factor and usability
It is essential that technology come at affordable Since technology requirements are being driven
cost. Cloud computing technology is enabling by user needs, it is imperative that solutions
banks to cut down technology related expenses present a friendly interface and smooth experience
by moving from a CAPEX (capital expenditure) to users. User friendly, intuitive systems cut
model towards an OPEX one, wherein banks down the need for training. It is the technology
pay only for the infrastructure or maintenance vendors’ responsibility to ensure that their
services that they actually use. This model is solutions score high on both usability
likely to initiate next cycle of technology change and functionality.
for bringing in more business.
Conclusion
Banking is now synonymous with technology. be technology enabled, ranging from dispatch
That being said, there is scope for further management, management and introduction of
automation, and the industry is on the lookout time based processes for banking operations at
for ways by which they can employ technology various customer touch points and tracking of
to enhance customer trust, improve process the same for improving efficiency, introduction
efficiency and speed up operations. Banks, of swipe cards for banking operations, front
which have leveraged technology to improve office tools for customer to do banking on their
reach, customer experience, data security and own, enhanced customer experience models
regulatory compliance, are now deploying mobile when customer visits the branch. Technology
banking or cloud services to achieve social vendors can play a big role in changing the
objectives, such as financial inclusion. banking landscape of the future by offering
innovative products and services catering to all
While core banking occupies center stage in
sections of society.
banking automation, many other processes can
06 Thought Paper

7. Today, technological innovation has a very short This is particularly important because technology
life cycle. Hence banks must put a lot of will continue to drive next generation banking
thought into innovation, before investing in it. and banking strategy for the foreseeable future.
References
1. Report on trend and progress of banking in 4. Banking on Technology-India, The Economic
India - 2008-09; RBI Times Banking Technology Conclave; KPMG
2. Report on trend and progress of banking in 5. Monetary Theory and Electronic Money :
India - 2009-10; RBI Reflections on the Kenyan Experience; William
Jack, Tavneet Suri, and Robert Townsend
3. Indian Banking System: The Current State &
Road Ahead; FICCI 6. Dataquest– May 21, 2010; Shyamanuja Das
Reghunathan Sukumara Pillai
Industry Principal, Finacle, Infosys
Manoo Jacob
Lead Consultant, Finacle, Infosys
Thought Paper 07

8. About Finacle
Finacle from Infosys partners with banks to transform process, product
and customer experience, arming them with ‘accelerated innovation’
that is key to building tomorrow’s bank.
For more information, contact Finacleweb@infosys.com www.infosys.com/finacle
© 2012 Infosys Limited, Bangalore, India, Infosys believes the information in this publication is accurate as of its publication date; such information is subject to change without notice. Infosys
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