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October 28, 2013

Evolution of Channel Banking

Posted by Gaurav Singla (View Profile | View All Posts) at 8:36 AM

Banking jargon like multi-channel banking, cross-channel banking and now, omni-channel banking, has led to confusion among bankers and customers alike. Bankers are unsure as to what banks actually want to offer to their customers, while customers do not know what they can expect from banks' channel banking solutions.

Banks tend to use the omni-channel pitch to rise above competition but clients may not discern this as a significant value-add to the existing services. The onus is therefore on banks to communicate clearly and educate their customers about the difference between omni-channel banking and its predecessor terms, cross- and multi-channel banking.

Although these terms are used interchangeably, there are some inherent differences between them. Traditionally, when a bank claims to provide cross-channel experience, it simply means that "banking is available for customers across different channels" but the user experience differs in each of them. Generally, all channels have their own database with an independent functional and technical logic and, in a sense, they all act independently.

Multi-channel banking refers to a bank's presence across different channels but with a consistent look and feel that fosters a strong brand presence. However, despite this consistency, the functional logic for different channels may be different.

Omni-channel banking caters to the needs of today's customer who wants "everything at any time." The other approaches fail on this count as they are found lacking in one or the other aspect. Omni-channel banking actually allows customers to have a seamless, consistent and real-time experience across all channels. In a bank that is omni-channel enabled, customers can hop from one channel to another and enjoy the same experience in each. Also, different channels work with the same database and share the same functional logic for similar banking activities, so as to ensure consistency.

In a nutshell, omni-channel banking refers to a channel banking solution which allows customers to start a transaction/banking activity on one channel, view it on another and complete it on a third channel, where all three channels afford an identical experience with the same functional logic. With increasing acceptability of social media for banking and a spurt in customers on newer channels, banks need to develop a true omni-channel environment for both their existing and prospective clientele.

October 25, 2013

Making innovation a culture

Posted by Rajashekara V. Maiya (View Profile | View All Posts) at 8:21 AM

Between risk management, regulation and compliance, innovation in banking is essentially an iterated combination of the possible, the practical and the permissible. But then those are the ground rules. And yet 'Culture' trumped 'Regulation' in a bankers' list of the biggest barriers to innovation  compiled by the Efma-Infosys Innovation in Retail Banking Study 2013.

It has long been said that innovation has to become a culture before it can become successful as a program or  practice. And developing a culture of innovation is one of the biggest challenges facing banks in a time when innovation itself has become the key to survival and growth. 

One of the most salient points to emerge from this year's study is that in spite of increasing emphasis and investments on innovation, not many banks have a dedicated department or central resource to drive its agenda. Moreover, in banks that have been successful in developing an innovation culture, the momentum has come from senior management and by involving employees from across functions and business lines.    

The 2013 study attempted to gauge industry perceptions on the growing practice of open innovation. Participating banks were asked to map five possible open innovation techniques on a 1 to 7 scale of increasing effectiveness.     

The option that came out on top, with a rating of 4.2 out of 7, was partnering with IT companies and other suppliers. This approach has a lot of promise and examples like ING's customer experience center in the Netherlands reinforce its utility. Online idea generation and prototyping portals, a concept that has gained popularity in recent times, came in at 4.0 on the effectiveness scale. Non-staff competitions performed below average to register a 3.2. That being said, TEB in Turkey has a popular ongoing non-staff competition with the most recent event generating over 10,000 ideas. The final option, investing in start-ups was least popular even though there is a huge opportunity here, especially for large banks. A good example in this space is that of BBVA Ventures which has launched a US$100m fund for investing in start-ups with the potential to disrupt the financial services industry.

While innovation is never easy in any industry as tightly regulated as banking, it is becoming imperative to embrace and nurture a culture of innovation. Especially considering that most new competition seems to be coming from disruptively innovative technology companies.

October 24, 2013

Making IT innovation-friendly

Posted by Rajashekara V. Maiya (View Profile | View All Posts) at 7:18 AM

Current legacy IT systems have emerged as the most significant barrier for innovation, across banks of all sizes, according to the Efma-Infosys Innovation in Retail Banking Study 2013. Well, not all banks; IT systems ranked either 5th or 6th as problem areas at around 20% of large and medium sized banks that participated in the study. Nonetheless, they are still the exceptions - either because they have up-to-date systems or are focused on non-IT dependent innovation - that prove the rule.

The traditional approach of silo-based IT deployment, say by product or channel, is one of the main problems. Not only does this complicate integration, but also adversely impacts the time to market, cost and functionality of innovation. The study reveals that these parallel systems are especially problematic for larger banks, where, for example, time to market is stretched to 12 months as compared to just 6 months for small banks.   

The study also identifies that IT systems at banks that are in 'change' situations, like legacy replacement or M&A, are severely hampering the ability to prioritize innovation. There's an example from a developed market where one of the large players had emerged from a legacy replacement program to launch a series of innovations in products and services. A competing player in the same market, in the middle of the throes of replacement, was meanwhile struggling to even prioritize innovation programs. 

There are two possible solutions to deal with the issues thrown up by silo systems and change programs - implementing enterprise-wide systems and the componentized deployment of new ones. The participants in the study are overwhelmingly in favor of both these solutions to address the problem of stalled or stymied innovation efforts. 

Beyond IT systems, another factor that also emerges in the context of prioritizing innovation involves the role of the CIO. According to the study, CIOs with the required business experience and a grasp of business needs could help focus and prioritize innovation projects. The alternative, of course, is to create an environment that fosters perfect business-IT alignment to optimize communication and cooperation between the two functions.

October 23, 2013

When IT inhibits innovation

Posted by Rajashekara V. Maiya (View Profile | View All Posts) at 9:49 AM

The 2013 Efma-Infosys study on Innovation in Retail Banking clearly establishes that banks are increasing investments in innovation, drawing up detailed strategies to make those investments work, and defining metrics to determine if outcomes are delivering business value.

But the study also reveals that there are some significant obstacles that stand between banks and their desire to innovate their way to growth and profitability. And current legacy IT systems seem to be the most significant of them all. 

Depending on the size of the institution, there can be different barriers like the traditional silos in large banks or the financial constraints of the smaller ones that can hamper large-scale innovation efforts. Including current legacy IT systems, the study ranked six such factors - culture, organization silos, regulation, management priorities and financial constraints. But across the board, for large, medium and small banks, current legacy IT systems emerged as the number one barrier to innovation.     

The study drilled further down to identify more IT-influenced business conditions impacting innovation capability. The top three constraints that emerged at this stage were the inability to crank up business process speed, agility & efficiency; challenges of creating true customer-centricity; and managing the cost & complexity of running disparate systems.    

Omni-channel customer experience, multichannel integration and customer insight are also factors that banks emphasize as being critical to their innovation capabilities. Both issues at the top of this list are related to channels and this is an area that banks have typically funneled a significant proportion of their innovation dollars into. Customer insight is an obviously critical capability to drive customer-focused innovation and banks stressed the need for a single customer view across channels - a feature that only 35% of them currently possess - and to deliver product personalization, something that only 21% of banks are capable of offering today.  

It is important to note here that all the factors mentioned above are either customer or channel related, if not both. Given that these are the two important focal points for banking innovation, it becomes imperative to address IT-related impediments that are hampering innovations in these areas as well as in other aspects of the business. 

October 22, 2013

Taking innovation mainstream

Posted by Rajashekara V. Maiya (View Profile | View All Posts) at 8:27 AM

The intent is definitely there and so are the strategies and investments to realize it. The metrics are in place to assess performance and over three-quarters of the respondents indicate that they are getting better at it. That, in short, is the current status of banking innovation according to the 5th edition of the annual Efma-Infosys Innovation in Retail Banking Study.

Innovation was never ever completely off the table - even in the first study conducted at the height of the crisis in 2009, 37% of respondent banks had a comprehensive innovation strategy in place. This year that figure has shot up to 60%, but more importantly, strategies are being backed by adequate investments with 77% of banks planning to increase investments in innovation.  

Channel innovation, a perennial banking favorite, continues to account for a lion's share (26%) of all planned IT investments in innovation, with products (21%), processes (18%), customer service & experience (16%), sales & marketing (12%) and others (7%) constituting the rest of the mix. Justifying their choice as investment focal points, channels and products also continue to deliver the maximum performance. In contrast, process innovation, in spite of being the third most important innovation priority for banks posted the highest negative performance variance in banks' ratings.      

Customer satisfaction and revenue, followed by market share, productivity, and profitability, are the most widely used metrics for measuring innovation ROI, though most banks seem to be using a combination of all those factors to assess innovation performance. 

In spite of rising investments in innovation, less than half the banks that participated in the study had any form of formal structure or team for prioritizing innovations and investments. It is critical that they streamline their innovation models around defined structures that can help align strategic enterprise objectives with investments and sustain the process of innovation into the long term. 

October 18, 2013

New Bank Licenses - The Road to Financial Inclusion?

Posted by Vineet Malpani (View Profile | View All Posts) at 5:37 AM

One look at data pertaining to the penetration of formal banking services in India, and the need for financial inclusion becomes crystal clear. That's why financial inclusion is the cornerstone of the Reserve Bank of India's (RBI) initiative on new bank licenses. But has the regulator laid down the perfect norms to achieve this goal? This remains a question worth debating.

Also, there are some who believe that the RBI would have been better off approaching financial inclusion as an opportunity, rather than a compulsion enforced through such norms. Let's take that thought forward.

Firstly, the RBI has retained the stipulation that banks must have at least 25% of their branches in rural areas. Can financial inclusion be achieved only through expansion of branch networks to unbanked areas? Non Banking Finance Companies (NBFCs) that do not have rural branches reach their rural customers through agents and customer relationship associates; hence this stipulation is unfavorable to many such large NBFCs keen on a new banking license. Also, given the fact that many established banks have not found it profitable to open branches in rural areas owing to the high cost of operations, it is unfair for the regulator to demand replication of the same model and force new banks to waste capital. Instead, the RBI should encourage innovative forms of banking and the use of technology on a massive scale to reduce cost. It should also spur innovative distribution solutions and partnerships between established banks and retailers or mobile service providers to enable cost effective reach up to the last mile.

Secondly, in the context of the RBI's decision to permit entry of corporate houses into private banking, the rationale that this move would favor financial inclusion might not stand true. The guidelines in this regard require new banks to comply with the priority sector lending targets and sub-targets as applicable to existing domestic banks. It is seen that the returns from inclusive sectoral lending tend to be much lower and are occasionally negative since the interest charged to borrowers in the agricultural and small industrial sector has to be considerably lower. Public Sector Banks manage to meet these requirements because their interest cost is partly subsidized by the government, and also because they offset the low returns from the priority sector with the high returns from other businesses. What this means is that profits would have been higher had financial inclusion not been an obligation. To expect Private Banks to settle for a lower profit margin goes against the grain of their core objective of private incentive.

Food for thought - Do we need more banks or do we need to make existing banks more robust through innovative forms of banking and the use of technology to reduce costs and enable financial inclusion?

October 11, 2013

NPA (Non-Performing Assets) Restructuring and Core Banking Solution

Posted by Gaurav Gupta (View Profile | View All Posts) at 5:29 AM

Restructuring of Loans:

Debt Restructuring, a common practice globally, provides relief to distressed borrowers. The intent here is to support deserving businesses by extending loan tenures, putting interest payments on hold, converting debt into equity, issuing fresh term or working capital loans, waiving off the interest and so on.

Impacts of Restructuring:
With a helping hand from banks, organizations which are financially viable can remobilize channels and resources and stand a chance to recover from debt traps.

Restructuring of such loans, which are 100% NPA, helps bring the mark down to 18-20% (generally), further cutting losses for banks.

Problem Statement:

Restructuring in a perfect financial world proves to be a very significant tool but when done excessively, brings public funds into depression.

The number of restructuring exercises approved by banks has significantly increased in the recent past:

1. No. of cases:
a.) From 9 (2009-10) to 41 (2011-12).

2. Amount Involved:
a.) Rs 4,200 crore (2009-10) to Rs. 35,000 crore (2011-12).

3. NPA percentages estimates:
a) Credit rating agency CRISIL estimates that banks' NPAs will rise from around 2.3% in 2009/10 to 3.2% by 2012/13, crossing the Rs. 2 trillion mark (1 trillion equals 1,00,000 crore).
"A ratio below 1% is considered ideal. The NPAs could rise to 3.5% if the economic environment weakens further," as per leading credit rating agency estimates.
b. The Reserve Bank of India (RBI) fears further deterioration. In its fifth financial stability report released on June 28, 2012, the RBI says bad loans could rise to 4.6% in a severe risk scenario.

RBI Measures:

1. Sector-specific Viability:

a.) Currently, prudential norms dictate that organizations seeking restructuring should provide the action plan to revive themselves in:
i.   10 years for infrastructure companies.
ii.    7 years for other sectors.

b.) As per strict RBI guidelines, these are considered upper limits and are allowed only in extreme cases.

2. Financial Positions:
a.) Various ratios to be in specified limits.

i. Return on Capital Employed
ii. Debt Service Coverage Ratios
iii. Gap between Internal Rate of Return(IRR) and Cost of Fund
iv. Operating and Cash Breakeven Point
v. Loan Life Ratio

3. Jurisdictional Limits:

a. Currently infrastructure projects are given more flexibility with respect to "date of commencement of commercial operation" and restructuring affords added advantage to this sector. 
b. The RBI also mandates that the infrastructure project should be implemented only in India.

4. According to the RBI's new prudential guidelines on provisioning for restructured loans, banks will now have to write off 5% of the value of restructured assets instead of the current 2.75%. The rate was revised to 2.75% in November 2012, and the further hike to 5% means that banks have to provide more capital in the balance-sheet and more provisions in their P&L account, which directly impacts their profitability. This provision will lead to decreased profits in the P & L account, diminished asset sizes, and increase in capital requirement to comply with Basel rules. In India, where 70% of the banking sector is owned by the Government, requirement of extra capital will dry up Government resources in a two-phased manner, (i) Decreased contribution from banks to the Government as part of profit distribution (ii) Increased capital infusion requirement.

Core Banking Solution to Deal with the Same:

A core banking solution has the capability to deal with these NPAs and restructure the loans with configured rules.

The solution can define asset classification to identify and recognize NPAs and is also equipped to capture the financial information of an organization. A comparative analysis of these financial results, collected over a period of five years, can be made on a quarterly, half-yearly and annual basis.

Additionally, the system is equipped to capture various ratios for the organization. It also records the principal place and date of commencement of operation in order for RBI prudential norms to be implemented. It acquires information on the industry and sector in which the organization is engaged in, so that sector-specific norms can be complied with. Apart from these, maintenance of customer transactions, other product information, credit agency report etc. are the measures used to collect relevant data to perform a financial viability check. 

The core solution, while making feasibility check for any new loan application, has the extensive credit check mechanism so that any unviable application is not going through and resulting into NPA.

The core solution has implemented the checks like:

  • Credit score check: Credit scoring on the basis of customer attributes like age, 
  • DSR (Debt service Ratio)
  • LVR (Loan to Value Ratio): the value of mortgage kept with the bank as proportion to the loan sought.
  • CIF Checks: Black list check, negative list checks
  • Credit reporting checks: Credit reports being taken from rating agencies like CRISIL etc.
  • Underwriting: The application going through the approval hierarchy processes.
  • Exception check and deviation checks: Any loan being passed beyond the configured rules being routed to proper authorities.
  • Delinquency management can be adopted to negotiate with the customer and come to appropriate restructuring terms.
To identify the prospective NPA, the daily reports can be used which will list the overdue accounts with ageing matrix. The categorization of accounts can be modified (special Mention Accounts) so that can be taken care of  well before they actually turn into NPA. While approving any restructuring/rescheduling any application, the various checks can be configured.

Though core banking solutions cannot entirely replace financial viability check procedures, they can help banks, critically analyze the financial viability of businesses and approve only the most deserving and feasible ones.

October 8, 2013

Need for a Unified Content Strategy in the Changing Banking Scenario

Posted by Sunita Shelar (View Profile | View All Posts) at 7:00 AM

Content Strategy.jpg

A pronounced shift in the banking scene, from brick and mortar edifices to virtual spaces, begs the remark, "Banks are dead, banking is alive." Giant strides in technology have brought about a sea change in the way banks function today, with on-the-move, push-of-a-button transactions across geographies and time zones, customer service sans human interactions, and all of this available 24x7x365. Another positive offshoot of this trend is that banks today cater to the literacy-challenged unbanked masses with basic banking services and simultaneously attract high net worth individuals and corporate houses with privileged, elitist offerings, with equal ease.

However, this multi-channel, multi-location, ever present world of banking is not without challenges; information dissemination being one such. How can you ensure timely delivery of appropriate, relevant information to customers in their preferred language? Would you re-create content so as to fit the diverse customer profile, from an urbane smart phone user to a semi-literate rural customer?

The answer is an emphatic NO. What you need is the ability to create content once and reuse it to suit any channel, user, location or need. This is possible only if you plan, manage and strategize your content needs.  While there are tools to help manage content, they will not work without adequate groundwork on your need to create, distribute, store, retrieve, archive and destroy content.  It is also important to understand the cost of managing content and even more important to understand the cost of NOT doing so.

The need of the hour, therefore, is to have a unified content strategy that straddles multifarious banking scenarios. Each aspect of a unified content strategy will be covered in subsequent posts.

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