New business trends to drive IT adoption in banks
For banks, a large part of their IT investments in the last few years has gone toward rolling out core–banking solutions. But now, investments in deployment of other applications, outsourcing of infrastructure and processes have picked up.
According to the CII–BCG IT End User Survey 2013, new private banks and foreign banks have adopted IT the most, followed by nationalized banks and the old private sector banks. New Indian private banks and foreign banks extensively use applications, provide facilities such as unified customer information and branchless banking, and have developed alternate channels of banking. However, nationalized and old private sector banks have used applications across their systems in a limited manner, and not focused heavily on improving customer service and developing alternate banking channels. Unlike most of their peers, old private–sector banks are yet to significantly outsource select business processes and the management of their IT infrastructure.
As far as adoption of new technologies like cloud computing and data analytics is concerned, new Indian private banks and foreign banks have been quite keen, and have started making efforts to leverage the advantages of such technologies. In contrast, nationalized banks and old private sector banks are yet to make headway in this area.
Business trends driving IT adoption
The Indian banking sector is expected to witness strong growth in the coming years, primarily driven by the huge pool of potential customers, favorable demographics, increasing household incomes, and an increasing focus on semi–urban and rural areas.
Some of the key trends that will shape the future of Indian banking are:
Focus on retail banking: Rapid accumulation of wealth in households and emergence of the “next billion” consumer segment would drive growth in retail banking, both for high net worth individuals, as well as, for the emerging middle class.
Increasing banking footprint: Banks will have to expand their networks extensively by setting up branches and ATMs. The industry will follow the model of low–cost branch network, involving smaller sized branches.
Lower margins: The sector would face downward pressure on margins in retail as well as corporate banking. Banks will invest in innovative technologies to improve efficiency and lower costs.
Financial inclusion: Financial inclusion, which requires banks to come up with innovative solutions to cater to low ticket–size customers, is a central item on the Government’s agenda. The Ministry of Finance has mandated public sector banks to focus on financial inclusion. At the same time, private banks have also started focussing on this. The current business models are not economically viable, and new models such as the business correspondent approach will have to be radically different in terms of distribution, technology, HR practices, and risk management.
Key areas of opportunityIT will play a critical role in the growth of the banking sector. The larger banks have successfully implemented the basic IT infrastructure required to run their operations, and the next tier is also moving toward greater IT adoption through increased outsourcing of its IT functions. Larger investments would be needed to upgrade existing systems and develop new ones to meet the growing and ever–changing business requirements.
Customer relationship management: Banks would invest in developing IT solutions to adapt to the increasing needs of their customers, and to manage client relationships effectively. Some of the steps banks are expected to take include:
–Develop superior capabilities in data analytics to develop customer insights, improve customer services, and identify potential cross–selling opportunities–Identify innovative means of targeting customers, such as social media and digitization–Target growth in automated, standardized products to reduce lead time, and allow effective selling of low–risk products
Back–end management: Banks are expected to spend on upgrading their IT systems to make their internal processes efficient and cost–effective. Future IT spends will include:–Use of cloud computing to improve efficiency, reduce costs, and scale up operations without incurring additional expenses on hardware, software, and manpower–Implementation of tools for better HR management, especially in PSU banks–Migration to paperless transactions & processing, such as cheque truncation system–Increased investments in areas such as automated data flow, data storage as per KYC norms and document management, to ensure compliance with regulations
Data warehousing: To manage the growing volume of business transactions, banks would increasingly spend on data warehousing that can enable efficient decision making by providing a repository of historical data through systematic design. This would require a vast suite of applications, giving rise to multiple opportunities for IT providers.
E–payments and mobile banking: For the next generation of tech–savvy customers, mobile is emerging as the preferred medium of conducting banking transactions. Private banks are developing capabilities to provide mobile banking services to their customers. Nationalized banks, too, are starting to adopt this technology. Going forward, banks will invest in development of systems and applications that will cater to the demand for such services from the new breed of technology–friendly customers, helping banks to build lasting client relationships.
Payment systems: An increasing portfolio of products across delivery channels, and coupled with newer methods of making payments, would require banks to invest in development of new payment systems to ensure protection of customer funds and internal security.
ATM outsourcing: Another major opportunity for IT providers lies in the ATM space. The rollout of ATM s is on the rise to cater to the population in tier 2 and tier 3 cities. There is an increasing trend towards outsourcing of ATM management, with many banks embracing total outsourcing models, which encompasses management of installation, ATM services as well as assets.
Regulations: One of the important drivers of IT spending by banks will be the guidelines put forth by the RBI that pertain to the use of IT . Automated data flow, the subject of the central bank’s approach paper released in November 2012, is a case in point. The RBI’s other guidelines for banks include greater use of technology with regard to upgrades in RRBs, KYC norms, and the cheque truncation system.
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