Role of Information Technology in Indian Banking Sector

Introduction:

With the globalization trends world over it is difficult for any nation big or small, developed or
developing, to remain isolated from what is happening around. For a country like India, which is
one of the most promising emerging markets, such isolation is nearly impossible. More
particularly in the area of Information technology, where India has definitely an edge over its
competitors, remaining away or uniformity of the world trends is untenable. Financial sector in
general and banking industry in particular is the largest spender and beneficiary from
information technology. This endeavours to relate the international trends in it with the Indian
banking industry. The last lot includes possibly all foreign banks and newly established Private
sector banks, which have fully computerized all the operations. With these variations in the level
of information technology in Indian banks, it is useful to take account of the trends in
Information technology internationally as also to see the comparative position with Indian banks.
The present article starts with the banks perception when they get into IT up gradation. All the
trends in IT sector are then discussed to see their relevance to the status of Indian banks. IT
Considerations Since the early nineties, each Indian bank has done some IT improvement effort.
The first and foremost compulsion is the fierce competition. While deciding on the required
architecture for the IT consideration is given to following realities.

(1.) Meeting Internal Requirement: The requirements of the banks are different individually
depending upon their nature and volume of business; focus on a particular segment, spread of
branches and a like. Many a time’s banks do have the required information but it is scattered.
The operating units seldom know the purpose of gathering the information by their higher
authorities.

(2.) Effective in Data Handling: As stated earlier the banks have most of the needed data but
are distributed. Further the cost of collection of data and putting the same to use is prohibitively
high. The accuracy and timeliness of data generation becomes the causalities in the process. Best
of the intentions on computerization are wished away because there is nonvisible reduction in
cost /efforts/time required for the required data gathering.

(3.) Extending Customer Services: Addressing to rising customers expectations is significant

particularly in the background of increased competition. In case bank A is unable to provide the
required service at a competitive price and in an accurate manner with speed. 3 www.ssijmar.in
There is always a bank IT at its next-door waiting to hire the customer. Awareness of customers
about the availability of services and their pricing as also available options have brought into
sharp focus the issue of customer satisfaction.

(4.) Creative Support for New Product Development: It has become necessary for the banks
to vitalize the process of product development. Marketing functionaries needs a lot of
information not only from the outside sources but also from within the banks. Banks are looking
to retail segment as the future market places for sales efforts. Having full-fledged information of
existing customer is the key for this purpose. The emergences of data requirement and an
appropriate architecture to support the same are significant issues to be handled in this regard.
(5.) End-user Development of the Non-technical Staff: Banking being a service industry, it is
the staffs at counters that deliver the products. In Indian scenario, virtual banking is likely to
have a few more years to establish. The dependence on counter staff is unavoidable. The staffs
are large in number and the majority is non-technical. The customer satisfaction levels at the
counter determine the ultimate benefit of IT offensive. Giving due consideration to this aspect in
choosing architecture in necessary.

Trends in Information Technology

Certain trends have been visualized of information technology in banking sector all over the
world.

(1.) Outsourcing: Outsourcing is one of the most talked about as also a controversial issue.
The drivers for getting in to outsourcing are many to include gaps in IT expectations and the
reality, demystification of computerization in general and IT in particulars, trend towards
focusing on core competencies, increased legitimacy of outsourcing and intention of getting out
of worries and sort of up gradation of hardware and software versions. Not that the practice is
new as earlier it was refused to as ‘buying time’ or ‘service bureau’. What is needed is the clear
of outsourcing, beside a definite plan to be more competitive after outsourcing. It is necessary to
have checks and balances to monitor vendor performance. Cost aspects merit consideration, as
also a decision on the part of the process to be outsourced shall be significance. Exit route and
resource on the amount of failure after outsourcing are the other issue to be looked onto. Not
withstanding these risks, outsourcing has come to say.

(2.) Integration: One of the IT trend is moving from hierarchy to team approach. The purpose
is to see an alternative to retooling, to react speedily and to develop capabilities rather than
exploiting them. Such integration is necessary so as to address to prevalent situations:

(a) Functions needing data and not getting from others.

(b) Sending data to those who do not want to require them.

(c) Global data exist but do not travel to required business functions. Indian banks seem to
follow this trend through the sincere redesign as described earlier. Instead of vertically divided
pyramid type organizational set-ups, banks are now being to have separate group like finance,
international consumer banking, industrial/commercial credit etc.

(3.) From Solo to Partnership: With the development of IT, two things are taking place
simultaneously. The work force as a percentage of total staff is going down and spending on IT
as percentage of total spending is going up. The forms of partnership can include binding by
superior service, accommodation in service sharing network, equal partnership and situations,
where survival is threatened. At times, the partnership becomes necessary to get out of areas
where there is no competitive advantage. Low development cost or wider geographical coverage
is the aspects that create such partnership. Instances are not frequent, where joint ventures have
been found with the IT vendors.
 (4.) Distinctive Edge: It is always said that many use but a few make use of IT. Historically, the
emphasis is on using IT for large volumes like payrolls, balancing the books, the consolidation
etc. That realization on having IT as matter of competitive edge has come about very lately. It is
recognized that customer service is not an easy thing to provide, but IT is used as a mean. It does
give value additions and erases barriers for competitors to enter. Banks understand that the cost
of cultivating the new customer is 5 to 6 times of retaining the old one. Customer normally
switches banks due to poor service. The appreciation of these facts has compelled the banks
world over to look upon IT as an instrument to create distinctive edge over competitors. The
private sector banks that were established in 1990’s as a part of finance sector reforms did make
good of IT to have an edge over the others. The foreign banks operating in India have also been
able to market IT superiority as a distinctive edge. The public sector banks are still to make use
of IT in this regard, although they are blessed with huge information base all across the country.
While steps are mooted in this direction by leading public sector banks, more offensive postures
are necessary.

(5.) IT as Profit Centre: In the embryonic phases, IT was looked upon a means to get rid of
high processing cost and time and to convert the manual operation with high volume/low
complexity in two mechanical ones. With the evolutionary the process, it was seen as the best
means of generating, MIS. The same approach gave the status of DSS to IT. All along, IT has
been recognized as the service function in Indian Banks. However, the new trend that is
emerging is considering IT as a profit centre. The cost benefit analysis of having IT or otherwise
in one part. But having IT set up to generate income for the organization is the new beginning.
Getting jobs from outside the bank for processing data and the like are the current trends. The
outsourcing done by others is the business, cater to by these organizations the trend of this kind
is not deserved in Indian situation particularly banks. The Banks have been 5 www.ssijmar.in
able to just manage what is to consider as their responsibility as IT, within the individual banks.

(6.) Prospering in Down Market: The trend suggests that when there is a down turn in the
market place, Pro-active corporations take the benefit of available unutilized resources to
upgrade and revisit technology issues. This is seen as the right time to establish the R & D centre
for IT. There are false notions about technology and its capability. Some misconceptions include:
Best-fit possible technology is implemented.

* System solution is good enough and there is need to look into user expectations.

* Innovations are generally successful.

* Success is related only to novel ideas.

* Technology is the sole determinant of business success, and

* Measures and standards i.e. audit and inspection issues stand in the way of innovation.

* The time available to debate on similar issues is ample and these false notions get clarified
during the down market. Eventually, the decision makers reach a consensus that IT is not a
panacea but it is an enabler that too when well supported by BRP (Business Process
Reengineering), human resources initiatives, physical infrastructure and responsive organization
set up.

(7.) Leading to Downsizing: The IT initiative is making the organization lean and flat. For IT
functionaries downsizing means transferring computing power from mainframe to the personal
computer and workstations. Downsizing is a typical issue faced with associated problems.
Absence of top management commitment, lack of understanding of the prevalent IT
infrastructure, doing too much and too fast and undertaking the exercise without a framework for
controlling the downsizing operations are primarily the situations that create adversities in
downsizing. In any case the trend of downsizing is very much existent in the IT environment.

(8.) Getting Competitive Intelligence: IT is now seen as a resource for gathering and
dissemination of executive information system (EIS). The purpose is to minimize that the
bombarding and focusing on the relevance, accuracy and timeliness of the information
particularly about the competitors such information enhances follow up and tracks early warning
on competitor move and also customer expectations.

As far as Indian banks are concerned individually, they have to compete with other banking
industry participants as also with other players in the financial sector. The competition from for
insurance and government notes and saving, mutual funds and the like is always 6
www.ssijmar.in forthcoming particularly because of attendant tax benefits. Collection of
required information and using the same for business purpose is constrained by the availability of
the information, its volume and diversity. As such it may take some time for this trend to be
visible in Indian banking scenario.

Recent Developments in Banking Sector

(1.) Internet: Internet is a networking of computers. In this marketing message can be

transferred and received worldwide. The data can be sent and received in any part of the
world. In no time, internet facility can do many a job for us. It includes the following:

* This net can work as electronic mailing system.

* It can have access to the distant database, which may be a newspaper of foreign country.

* We can exchange our ideas through Internet. We can make contact with anyone who is a
linked with internet.

* On internet, we can exchange letters, figures/diagrams and music recording.

Internet is a fast developing net and is of utmost important for public sector undertaking,
Education Institutions, Research Organization etc.

(2.) Society for Worldwide Inter-bank Financial Telecommunications (SWIFT): SWIFT,

as a co-operative society was formed in May 1973 with 239 participating banks from 15
countries with its headquarters at Brussels. It started functioning in May 1977. RBI and 27
 other public sector banks as well as 8 foreign banks in India have obtained the membership
of the SWIFT. SWIFT provides have rapid, secure, reliable and cost effective mode of
transmitting the financial messages worldwide. At present more than 3000 banks are the
members of the network. To cater to the growth in messages, SWIFT was upgrade in the
80s and this version is called SWIFT-II. Banks in India are hooked to SWIFT-II system.
SWIFT is a method of the sophisticated message transmission of international repute. This
is highly cost effective, reliable and safe means of fund transfer.

* This network also facilitates the transfer of messages relating to fixed deposit, interest
payment, debit-credit statements, foreign exchange etc.

* This service is available throughout the year, 24 hours a day.

* This system ensure against any loss of mutilation against transmission.

* It serves almost all financial institution and selected range of other users.

in It is clear from the above benefit of SWIFT that it is very beneficial in effective
customer service. SWIFT has extended its range to users like brokers, trust and other
agents.

(3.) Automated Teller Machine (ATM): ATM is an electronic machine, which is operated by
the customer himself to make deposits, withdrawals and other financial transactions. ATM is a
step in improvement in customer service. ATM facility is available to the customer 24 hours a
day. The customer is issued an ATM card. This is a plastic card, which bears the customer’s
name. This card is magnetically coded and can be read by this machine. Each cardholder is
provided with a secret personal identification number (PIN). When the customer wants to use the
card, he has to insert his plastic card in the slot of the machine. After the card is a recognized by
the machine, the customer enters his personal identification number. After establishing the
authentication of the customers, the ATM follows the customer to enter the amount to be
withdrawn by him. After processing that transaction and finding sufficient balances in his
account, the output slot of ATM give the required cash to him. When the transaction is
completed, the ATM ejects the customer’s card.

(4.) Cash Dispensers: Cash withdrawal is the basic service rendered by the bank branches. The
cash payment is made by the cashier or teller of the cash dispenses is an alternate to time saving.
The operations by this machine are cheaper than manual operations and this machine is cheaper
and fast than that of ATM. The customer is provided with a plastic card, which is magnetically
coated. After completing the formalities, the machine allows the machine the transactions for
required amount.

(5.) Electronic Clearing Service: In 1994, RBI appointed a committee to review the
mechanization in the banks and also to review the electronic clearing service. The committee
recommended in its report that electronic clearing service-credit clearing facility should be made
available to all corporate bodies/Government institutions for making repetitive low value
payment like dividend, interest, refund, salary, pension or commission, it was also recommended
by the committee Electronic Clearing Service-Debit clearing may be introduced for pre-
authorized debits for payments of utility bills, insurance premium and instalments to leasing and
financing companies. RBI has been necessary step to introduce these schemes, initially in
Chennai, Mumbai, Calcutta and New Delhi.

(6.) Bank net: Bank net is a first national level network in India, which was commissioned in
February 1991. It is communication network established by RBI on the basis of recommendation
of the committee appointed by it under the chairmanship of the executive director T.N.A. Lyre.
Bank net has two phases: Bank net-I and Bank net- II.

Areas of Operation and Application of Bank net:

* The message of banking transaction can be transferred in the form of codes from the city to
the other.

* Quick settlement of transactions and advices.

* Improvement in customer service-withdrawal of funds is possible from any member branch.

* Easy transfer of data and other statements to RBI.

* Useful in foreign exchange dealings.

* Access to SWIFT through Bank net is easily possible.

(7.) Chip Card: The customer of the bank is provided with a special type of credit card which
bears customer’s name, code etc. The credit amount of the customer account is written on the
card with magnetic methods. The computer can read these magnetic spots. When the customer
uses this card, the credit amount written on the card starts decreasing. After use of number of
times, at one stage, the balance becomes nil on the card. At that juncture, the card is of no use.
The customer has to deposit cash in his account for re-use of the card. Again the credit amount is
written on the card by magnetic means.

(8.) Phone Banking: Customers can now dial up the bank’s designed telephone number and he
by dialling his ID number will be able to get connectivity to bank’s designated computer. The
software provided in the machine interactive with the computer asking him to dial the code
number of service required by him and suitably answers him. By using Automatic voice recorder
(AVR) for simple queries and transactions and manned phone terminals for complicated queries
and transactions, the customer can actually do entire non-cash relating banking on telephone:
Anywhere, Anytime.

(9.) Tele-banking: Tele banking is another innovation, which provided the facility of 24 hour
banking to the customer. Tele-banking is based on the voice processing facility available on bank
computers. The caller usually a customer calls the bank anytime and can enquire balance in his
account or other transaction history. In this system, the computers at bank are connected to a
telephone link with the help of a modem. Voice processing facility provided in the software. This
software identifies the voice of caller and provides him suitable reply. Some banks also use
telephonic answering machine but this is limited to some brief functions. This is only telephone
answering system and now Tele-banking. Tele banking is becoming popular since queries at
ATM’s are now becoming too long.

(10.) Internet Banking: Internet banking enables a customer to do banking transactions through
the bank’s website on the Internet. It is a system of accessing accounts and general information
on bank products and services through a computer while sitting in its office or home. This is also
called virtual banking. It is more or less bringing the bank to your computer. In traditional
banking one has to approach the branch in person, to withdraw cash or deposit a cheque or
request a statement of accounts etc. but internet banking has changed the way of banking. Now
one can operate all these type of transactions on his computer through website of bank. All such
transactions are encrypted; using sophisticated multilayered security architecture, including
firewalls and filters. One can be rest assured that one’s transactions are secure and confidential.

(11.) Mobile Banking: Mobile banking facility is an extension of internet banking. The bank is
in association with the cellular service providers offers this service. For this service, mobile
phone should either be SMS or WAP enabled. These facilities are available even to those
customers with only credit card accounts with the bank.

(12.) Any where Banking: With expansion of technology, it is now possible to obtain financial
details from the bank from remote locations. Basic transaction can be effected from faraway
places. Automated Teller Machines are playing an important role in providing remote services to
the customers. Withdrawals from other stations have been possible due to inter-station
connectivity of ATM’s. The Rangarajan committee had also suggested the installation of ATM at
non-branch locations, airports, hotels, Railway stations, Office Computers, Remote Banking is
being further extended to the customer’s office and home.

(13.) Voice Mail: Talking of answering systems, there are several banks mainly foreign banks
now offering very advanced touch tone telephone answering service which route the customer
call directly to the department concerned and allow the customer to leave a message for the
concerned desk or department, if the person is not available.

Challenges Ahead

Important Business Challenges:

* Meet customer expectations on service and facility offered by the bank.

* Customer retention.

* Managing the spread and sustain the operating profit.

* Retaining the current market share in the industry and the improving the same.
* Completion from other players in the banking industry.

in Other Important Operational Challenges:

* Frequent challenges in technologies used focusing up grades in hardware and software,
attending to that implementation issues and timely roll out.

* Managing technology, security and business risks.

* System re-engineering to enable. Defined and implemented efficient processes to be able to

reap benefits off technology to its fullest potential.

* Upgrading the skill of work force spread across the country.

* With the opening of economy, deregulation, mergers and acquisition of banks, implementation
of BASLE II norms, disinvestment of government holding in banks, the competition is going to
be increased from new banks and merged entities. This will also open up new opportunities for
introduction of a new products and services. A definite trend is emerging as to consolidation of
the banking system, sharing of ATM networks and services, tie ups with insurance companies,
other billing organizations like mobile operators, electricity and telephone bills and bank for
cross selling of various products and services.

How to meet the challenges?

At corporate level to meet the challenges, various initiated have been taken and implementation
is in process beside up gradation of data centre facilities:

(1.) Centralization of functions

* Inward clearing data uploading and processing

* Check book issues

* MIS-On-Line Monitoring/Generation of statement by controlling offices

* Audit from the remote location

* Sending mails and statement of accounts to customers & completion of nonmandatory

field in newly opened accounts.

(2.) Single Window System

(3.) Revised Account opening from for capturing complete customer/Account data as per
CBS requirement.

(4.) Call centre for customers.

 (5.) Customer Relationship Management (CRM) Application.

(6.) Data Warehousing.

Immediate Focus

To facilitate successful implementation of the above initiative, intensive efforts are to be

undertaken by all of us on following issues:

* Completion of correct MIS details in all accounts and SRM’s.

* Customer/ Account data completion/correction.

* Customer-ID crystallization.

* Aggressive marketing of Internet Banking & Debit Card products to increase share of
delivery channels transaction.

* Skill up gradation & increase in awareness of all staff member.

* Strict compliance of Circular & Guidance available online (CBSINFO)/ Messages

issued through scrolling ticker on login page.

Present slowdown in rollover must be put to full use to have concrete action on these
fronts.

Conclusion

Indian public sector banks that hold around 75 % of market share do have taken initiative
in the field of IT. They are moving towards the centralized database and decentralize decisions
making process. They posses enviable quality manpower. Awareness and appreciation of IT are
very much there. What is needed is a ‘big push’ the way it was given in the post nationalization
period for expansionary activities. IT and India have become synonymous. Whether India
becomes a destination for outsourcing or it becomes a development centre is matter of debate. As
far as banking industry in India is concerned it can be said that although the Indian banks may
not be as technologically advanced as their counterparts in the developed world, they are
following the majority of international trends on the IT front. The strength of Indian banking lie
in withering storms and rising up to the expectations from all the quarters-catching up with all
the global trends is a matter of time.
The New Era

The 21st century will bring about an all-embracing convergence of computing,

communications, information and knowledge. This will radically change the way we live,
work, and think. The growth of high speed networks, coupled with the falling cost of
computing power, is making possible applications undreamed of in the past. Voice,
data, images, and video may now be transferred around the world in micro-seconds.
This explosion of technology is changing the banking industry from paper and branch
banks to' digitized and networked banking services. It has already changed the internal
accounting and management systems of banks. It is now fundamentally changing the
delivery systems banks use to interact with their customers. All over the world, banks
are still struggling to find a technological solution to meet the challenges of a rapidly-
changing environment. It is clear that this new technology is changing the banking
industry forever. Banks with the ability to invest and integrate information technology will
become dominate in the highly competitive global market. Bankers are convinced that
investing in IT is critical. Its potential and consequences on the banking industry future
is enormous.

FUTURE OUTLOOK IN INDIA: The Indian banks lag far behind the international banks in
providing online banking. In fact, this is not possible without creating sufficient infrastructure or
presence of sufficient number of users. The experience of ICICI Bank Ltd. And HDFC Bank Ltd.
Shows that the number of transactions carried out on the NET are very limited. Technology is
going to hold the key to future of banking. Banking achievements not possible without IT
revolution. So banks should try to find out the trigger of change. The approach of the IT concept
to the rural area may also be adopted. More and more regional languages software‟s could be
introduced to attract more and more people from rural area also. The surplus manpower
generated by the use of IT should be used for marketing new schemes of the banks.
Technology and Banks Transformation

Computers are getting more sophisticated. They have given banks a potential they
could only dream about and have given bank customers high expectations. The
changes that new technologies have brought to banking are enormous in their impact
on officers, employees, and customers of banks. Advances in technology are allowing
for delivery of banking products and services more conveniently and effectively than
ever before - thus creating new bases of competition. Rapid access to critical
information and the ability to act quickly and effectively will distinguish the successful
banks of the future. The bank gains a vital competitive advantage by having a direct
marketing and accountable customer service environment and new, streamlined
business processes. Consistent management and decision support systems provide the
bank that competitive edge to forge ahead in the banking marketplace.
Major applications. The advantages accruing from computerization are three-
directional - to the customer, to the bank and to the employee.

For the customer. Banks are aware of customer's need for new services and
plan to make them available. IT has increased the level of competition and forced
them to integrate the new technologies in order to satisfy their customers. They
have already developed and implemented a certain number of solutions among
them:

 Self-inquiry facility: Facility for logging into specified self-inquiry terminals at the
branch to inquire and view the transactions in the account.
 Remote banking: Remote terminals at the customer site connected to the
respective branch through a modem, enabling the customer to make inquiries
regarding his accounts, on-line, without having to move from his office.
 Anytime banking- Anywhere banking: Installation of ATMs which offer non-stop
cash withdrawal, remittances and inquiry facilities. Networking of computerized
branches inter-city and intra-city, will permit customers of these branches, when
interconnected, to transact from any of these branches.
 Telebanking: A 24-hour service through which inquiries regarding balances and
transactions in the account can be made over the phone.
 Electronic Banking: This enables the bank to provide corporate or high value
customers with a Graphical User Interface (GUI) software on a PC, to inquire
about their financial transactions and accounts, cash transfers, cheque book
issue and inquiry on rates without visiting the bank. Moreover, LC text and details
on bills can be sent by the customer, and the bank can download the same. The
technology used to provide this service is called electronic data interchange
(EDI). It is used to transmit business transactions in computer-readble form
between organizations and individuals in a standard format.
 As information is centralized and updates are available simultaneously at all
places, single-window service becomes possible, leading to effective reduction in
waiting time.
 For the bank. During the last decade, banks applied IT to a wide range of back
and front office tasks in addition to a great number of new products. The major
advantages for the bank to implement IT are:

 Availability of a wide range of inquiry facilities, assisting the bank in business

development and follow-up.
 Immediate replies to customer queries without reference to ledger-keeper as
terminals are provided to Managers and Chief Managers.
 Automatic and prompt carrying out of standing instructions on due date and
generation of reports.
 Generation of various MIS reports and periodical returns on due dates.
 Fast and up-to-date information transfer enabling speedier decisions, by
interconnecting computerized branches and controlling offices.
  For the employees. IT has increased their productivity through the followings:
 Accurate computing of cumbersome and time-consuming jobs such as balancing
and interest calculations on due dates.
 Automatic printing of covering schedules, deposit receipts, pass book / pass
sheet, freeing the staff from performing these time-consuming jobs, and enabling
them to give more attention to the needs of the customer.
 Signature retrieval facility, assisting in verification of transactions, sitting at their
own terminal.
 Avoidance of duplication of entries due to existence of single-point data entry.

A search of the banking literature reveals that banks are moving rapidly to take
advantage of recent and new customer service and cost reduction opportunities
that new technologies offer. A sampling is in the table below:

Technology Current Use Use in Next 3 Years.

Infrastructure
PC Networks: Tellers 48% 80%
Sales Tracking Software 44% 80%
Relational Data Base 36% 76%
Automate Credit Scoring 8% 48%
E-mail 60% 95%
Equipment Management Software 33% 57%
Imaging Checks / Statements 12% 72%
Imaging Documents 7% 45%
Delivery Systems
Internet Banking Home Page 3% 25%
Internet Electronic Office 1% 15%
Telebanking 56% 88%
Smart Cards Debit Cards 35% 70%
Electronic Banking 12% 76%
Internet: Riding the tiger. The Internet is rapidly becoming the information
superhighway of a global electronic marketplace. The rising commercial interests in the
Internet are especially evident in "frontend" applications such as electronic catalogs,
yellow pages, storefronts, malls, and customer support centers. All these applications
are based on the World Wide Web (WWW) -- the fastest growing segment of the
Internet. Although "back-end" applications such as electronic data interchange (EDI) are
equally important, their adoption has not been as rapid. One major concern is security:
the Internet is generally perceived as not secure enough for transmitting sensitive data
such as payments. Upon a closer look, however, this view is not warranted, since
technologies such as public key encryption and firewalls address essential security
concerns. Moreover, such technologies are already available. The only remaining
barrier is the lack of real world users of those technologies.

The pilot project between Bank of America (BofA) and one of its large corporate
customers involves transporting financial EDI transactions over the Internet. If
successful, BofA expects that this new EDI option will lead to a reduction in
telecommunications costs, an improved position with respect to its value-added network
(VAN), and valuable learning experience with the Internet environment, which is
becoming increasingly important to the bank. The project is also significant beyond
BofA: because it is one of the first large-scale, real-world trials, its outcome will help
dispel many uncertainties surrounding Internet-based EDI, and encourage more
companies to move in this direction.

Investing in technology. According to a survey conducted by the American Bankers

Association, US banks expenditure on information technology grew from $16.3 billion in
1994 to $18.7 billion in 1995-an increase of 14.7%, and $1 billion more than the same
bankers forecasted they would spend in last year's survey. By 1998, the banks expect
to spend $21.2 billion (an increase of 7. 1 %).
How to survive. The key to survival is customer service. Customer loyalty will be
determined by convenient and innovative delivery of products and personalized
services. In the '70's and '80's, banks were marketing to a generation raised on old style
banking: personal interaction at a banking office. That generation was disdainful of
"impersonal" service and afraid of computers. Convenience was having a "branch" in
one's neighbourhood. Today, personal service and convenience are still the critical
factors in the banking relationship, but they are defined differently. Consumers still want
to bank with a financial institution they "know," and one who "knows" them, but they do
not necessarily want to go to the bank. They are not afraid of computers and
technology; they embrace them. Convenience is doing their banking when they want,
and where they want. They are now comfortable with personal computers and other
electronic devices. They expect fast, efficient, and accurate service And the only way to
cost effectively provide the instant, quality service that customers demand, and that the
competition provides, is through intensive use of the most advanced information
technologies and through good people trained in the use of these technologies. For all
these reasons, the banks delivery systems are completely changing.
The new Delivery Systems. The increasing cost of building brick-and-mortar branches,
decreasing cost of computers, high delivery costs and slow revenue growth force a
relook at the conventional delivery systems. Moreover, growing comfort of technology
usage by the customer is rapidly fostering usage of non-branch channels for routine
transactions.

The new strategy changes the focus of the branch from being a high cost transaction
center to a provider of a wide range of services like telebanking, customer service
kiosks, ATMs, and remote electronic banking.
New Marketing Opportunities. As the new technology is so expensive banks need to
use the new systems to do more than deliver information and basic services. Banks
need the ability to also sell insurance and investment products to get a better return on
this investment. Telephone banking can bring financial services to the home or office,
especially if they are affordable screen phones. By noticing how much interest the
customer expresses, the bank can market stock quotes and insurance quotes.
Interactive videos are new technology that banks can make available to the customer to
maintain personal contact while still lowering the expense of delivery service. With an
interactive video an expert employee is not needed in each branch. Complex life
insurance products, open brokerage accounts, customized product illustrations can be
widely available where needed. The interactive videos will be cost effective expertise.
The internet is a medium to allow banks to offer products to customers outside the
normal customer base of a branch. Banks are aware of the customer's need for these
services and plan to make them available before other sources do.
Drawbacks. Early experiences with electronic commerce in the banking industry, which
has been a pioneer in the use of electronic systems, can be used to learn of some
potential dangers and issues to be taken into account. The use of Automated Teller
Machines and electronic home banking systems has increasingly allowed customers to
bank outside of traditional bank facilities, for most of their usual transactions. This was
consistent with the cost-savings strategy of most banks, which discovered that
electronic transactions were about seven times less costly compared to the manual
handling of these transactions by a bank teller. Nevertheless, the fact that customers'
only contact with their banks was through (rather unsophisticated) electronic interfaces,
and the major difficulties in integrating the legacy systems of a typical bank, prevented
banks in many cases from selling additional products to customers (cross-selling). In
some European markets, the insurance companies took opportunity of that to grab
business from banks, selling savings products to customers through their extensive
distribution network. Similarly, the decrease in human interaction with customers could
also lead to a less sophisticated understanding of their needs, as they're not always
able to express comments, criticisms or requests for new products while interacting with
machines. This should lead to a design of electronic commerce systems which
incorporate capabilities for customer understanding and for proactive selling of new
products. Electronic business transactions can only be successful if financial exchanges
between buyers and sellers can occur in a simple, universally accepted, safe and cheap
way. Various systems have been proposed, some of them based on traditional
mechanisms (e.g. credit cards accounts) while others rely on new designs, such as
electronic money. The key here will be to find a few widely accepted mechanisms,
which can be used by most actors. The recent agreement between Mastercard and Visa
on one security standard for credit card transactions over the Internet, and its backing
by most major software vendors is one step in the right direction. This doesn't diminish
the need for more specialized systems, for instance to allow microtransactions, the
exchange of very small amounts of money (a few cents) in exchange for information or
services. These new payment mechanisms will in turn enable new business models
such as pay-per-article newspapers.
The Lebanese Case: During the last civil war (1975-1990), eighty percent of the
Lebanese infrastructure was destroyed. The remaining twenty percent are now
outdated. The Lebanese banking sector was heavily affected by the war. They lacked
the information technology revolution in the banking sector. It becomes a strategic
necessity for the Lebanese banks to implement the new technologies at all levels,
transactional level, managerial level and executive level. In the 1990's they started
implementing IT capabilities to change the work organization, raise the productivity, cut
costs and deliver the best services to their customers and increase their profits in the
same time. Most of the Lebanese bankers believe that IT will enable them to face the
foreign competition and the possible consequences of the coming peace.
Technology Adoption. The vast majority of the Lebanese banks have set very high
standards of excellence for themselves in terms of technology, state-of-the-art facilities,
customer service and customer orientation with all facets of operations totally
computerized. The banks also make extensive use of communication technology to
provide off-site banking facilities including ATMs.

Their ambition is to position themselves as technology-driven banks offering superior

services to both their clientele classes - the corporate customer and the retail customer.
The corporate customer typically requires quick disposal of loan applications and
maximum returns from the cash balance. The needs of the corporate customer are
functions of the speed of response. Technologically the answer to this is a reliable
network connecting branches that run on-line.
The first steps. At the early stage , Lebanese banks started to build their databases
and automate their work procedures. Most banks have adopted ready made packages
for their internal operations. Currently, these banks are replacing their old information
systems. The banks branches are planning to provide state-of-the-art services to their
customers enabling a rapid growth of the bank's performance in a very competitive
marketplace.

Different approaches are followed in the Lebanese banks to acquire and implement the
new technologies. Banque du Liban et d'outre-mer (BLOM), for example, has developed
its own complete banking information system. While Ban k Audi followed another
strategy and purchased an on-line information system providing a real time on line
branch network with an up-to-date banking and customer information to senior
management, middle managers, end users and business analysts. Both information
systems, in BLOM in Bank Audi are scheduled to run during this year. The major
reasons behind adopting or developing new information systems are:

 Rapid geographical expansion has forced banks to replace their off-line systems
by an on-line system linking the branches to the head office through the
telecommunications network.
 Restructuring bank's processes in order to reduce staff expenses which
constitute a large part of the operating costs and a heavy burden on its operating
profitability.
 Incompatibility of the old systems with the strategic necessity of integrating new
technologies like ATMs, telebanking, etc. in order to provide the high quality
services to the customers and competing on an equal foot with the foreign banks.
The competition. The Lebanese banks are also planning to offer the entire range of
services like telebanking, ATMs, etc. They also respond very actively in the marketplace
in introducing new products and services. Arab Bank was the pioneer in introducing
ATMs in Lebanon. Arab bank started to install ATM machines in 1993. Other banks
followed, by establishing in 1994 a network called Link Network, using Link cards. About
25 banks have joined this network and are sharing now its almost 60 machines located
in the major cities of Lebanon. The central bank is expecting that about 700 ATM
machines will be installed in Lebanon by the year 2000.

Lebanese banks are also introducing remote banking services. Arab bank was also the
first bank in Lebanon to offer this service. Early in 1994, Arab bank installed an
interactive voice response system, called Phone Banking. At the same time, it
introduced the computer based remote banking service which is called Corporate
banking. Four other banks, Allied Business Bank, BLOM, Universal Bank, and the
British Bank of the Middle East followed and introduced their telephone based remote
banking. However these services are providing only inquiry facilities because they are
off-line systems.
Technology Assessment. The diffusion and successful implementation of IT in Lebanese banks
is not an easy process. Lebanese banks are facing enormous challenges in mastering the new
tools provided by IT. An important constraint to the diffusion and success of IT implementation
is the telecommunications infrastructure, another obstacle is managerial practices and
organizational weaknesses. In the following section, I will analyse and discuss these obstacles. In
evaluating banks'use of technology, we look at both the technology in place to serve today's
customer and the plans for serving tomorrow's. The first objective is to examine the bank's
deployment of technology relative to what is available, tested, and proven to enhance bank
performance. The second is to examine the bank's preparation for the future. We want to answer
the following questions: The most important issues to be analysed are :

To what degree is the bank using proven technologies to enhance performance?

Are there any technologies not deployed that would have a significant, positive
effect on performance?

What level of specialized training has been received by the officers and
employees assigned to selecting, deploying, and managing technology?

What level of systems training has been provided to other officers and
employees?

How effective are the systems that are being used?

Is Management monitoring the evolution of banking technologies and planning

for the future?
Telecommunication infrastructure. The greatest obstacle to real time electronic
banking in Lebanon is the telecommunications infrastructure. Telecommunications in
the banking sector is a major factor to the success or failure of any application or
service. The Lebanese telecommunications infrastructure was devastated by the civil
war. The process of rehabilitation and modernization of this infrastructure started in
1993.According to the recovery plan developed by CDR the telecommunications
rehabilitation plan will be completed by the year 1998. This means that banks will not be
able to rely on the public network until 1998. The result of such situation is a delay in
implementing new services and products like remote banking, electronic funds transfer,
real time bank information systems. This has also an effect on the reliability of the
services already implemented like ATMs. In order to face this challenge, banks began
studying the feasibility of installing a private telecommunications network. Four banks,
Bank Audi, Arab Bank, Byblos Bank, and BLOM, started in the early 1996 considering
the installation of a private network to connect their branches and thus conduct real time
banking operations. This network will also be used to connect the ATMs machines
which will thus function on-line. However three problems are delaying the
implementation of such network:

 Obtaining a license from the Ministry of Post and telecommunications.

 The high cost of the equipment 0 The lack of coordination between the members
of the Lebanese Banks Association.
Human Resources Problems. Banking industry is heavily depending upon information
technology that needs professionals for development, implementation and support.
Despite the programs performed by many banks to develop their local expertise in IT,
there is still a real shortage of qualified personnel. According to a recent survey ( T.
Abdul Reda and M. Dayya, Banking IT: a look at Lebanon, AUB, 1996) the following
problems were identified:

 almost half of the Lebanese banks do not have one engineer among their staff.
 lack of professional training programs. Financial institutions in Lebanon offer a
wide range of training programs to their employees. However, with respect to
their technical IT staff the percentage of training programs is much less, because
IT staff are considered to be trained, highly qualified and hence do not need
extended training sessions. The consequence of such policy is a reduction of the
capability of IT staff to be up to date in the most recent advances .
 High turnover rate of technical staff. The turnover rate of the technical staff in
some 40% percent the Lebanese banks is around 20%. The low salaries and
better opportunities in other industries are the main reasons for this high rate.
 Resistance to change. Resistance to change and the absorption capacity is often
neglected once the automation system is adopted. However, this human factor is
a critical factor in the success of any banking application of information
technology. The only way to solve this problem is to design adequate training
programs and increase the awareness of the employees. Most Lebanese banks
have realized this fact and some of them have established a training centre.

These are the major obstacles for implementing IT in Lebanese banks. Another point
that should be mentioned is the necessity of planning very carefully the development of
any new application. A computerization plan is the basis for implementing successful
information technology solutions. To be relevant, these plans have to be linked closely
to organizational strategies, objectives, priorities and processes.
Strategy for the future

Banks face a serious challenge. The basic structure of the bank is

increasingly in conflict with the changing product, delivery, and service
needs of the customers The future belongs to financial service providers
not traditional banks. The vast majority of large banks, will create value
networks. Doing so presents tremendous challenges. Banks will have to
first develop a comprehensive distribution system that will enable
customers to touch them at multiple points. Banks must also create
performance measurement systems to assure the mix products and
services they offer are beneficial to both the customer and the bank. They
must determine whether to deploy new technologies themselves or with
other service providers. Nevertheless, technology alone will not solve
issues or create advantages. This technology needs to be integrated in
an organization, with the change management issues linked to people
resisting new concepts and ideas. It also needs to support a clearly
defined and well communicated business strategy.