The Future of Banking: Workshop On

Workshop on
The Future of
Banking
organized by
HMA & ISB

(October 30, 2004)
Vepa Kamesam
Former Deputy Governor, RBI
Currently Chairman,
Technology and Banking

The Quintessence Nature of Banking harmonizes
closely with Technology
Tasks Common to
Both
Banking
INSTITUTE FOR DEVELOPMENT AND

RESEARCH IN BANKING TECHNOLOGY
Information
Storage
Processing
Transmission
October 30, 2004
Technology
Vepa Kamesam, Chairman IDRBT
Innovative Risk
Management
Complex Credit
Calculations
Global Operations
Pervasive Branch
Network
ng
i
k
n
Ba
d
n
a
Te
y
g
o
l
o
n
ch
Mass Transaction
& Items Processing
October 30, 2004
Many Benefits of Technology

Increased operational efficiency, profitability &
productivity
Superior customer service
Multi-channel, real-time transaction processing
Better cross-selling ability
Improved management and accountability
Efficient NPA and risk management
Minimal transaction costs
Improved financial analyses capabilities
October 30, 2004
Focus aspects of Commercial

Banking now are:
Core
Banking (CBS)
Electronic
Banking
Any Branch
Banking
CRM

MIS &
Intranet
ATMs
POS Terminals
and Cash
dispenser
Card
Management
Corporate
Network
Document
Management
Risk
Management
Resource
Management
LOANS & MISC. SERVICES
RAISING DEPOSITS
BANKS BUSINESS
BANKS BUSINESS
October 30, 2004
Financial Technology
Infrastructure
Data Center to host servers for:
CBS
ATM/Financial Switch
Internet Banking
DW/DM/CRM/MIS etc.
Back-office Application
E-mail Servers, Internet Server,
Enterprise-wide Network & Networking
Equipment
Security Systems
Systems at Branches/RO/ZO/CO Depts.
Supporting Systems
Disaster Recovery Site & Business Continuity
October 30, 2004
Technology A Differentiator
Technology is indeed a differentiator not only in
terms of competitive advantage, but also in
terms of administrative and back-end
processes.
Butdue to rapid technology deployment in
Indian banking sector, the haves and havenots gap is all set to narrow quickly.
October 30, 2004
Technology Differentiation Fades Gradually.

October 30, 2004
How Long a Differentiator?

Then.can technology be enough of a differentiator?
Any new technology or technology-enabled process can act
as a differentiator or a competitive edge for some level of
time.
After that time, the technology still has to be adopted as a
necessity and as a cost of doing business
Thanks to shortening technology life cycles, it would be short
sighted to assume that technology would be a long term
differentiator
October 30, 2004
For Long-Term Differentiation

Elements of Technology as a
Differentiator
Scalability
&
Flexibility
Efficient
utilisation,
mgmt

Process
enabling
October 30, 2004
Utility to
customer
Support
Skills
Issues with Customers

Not only employees, there are problems
for customers too when a new
technology arrives
The major challenges
Comfort levels
Security and trust issues
Convenience factor
Getting rid of myths
Migration from existing to new systems
Changing the habits

October 30, 2004
POS Terminal and Cash Dispenser
POS Terminal
Connected to
Cash dispenser
October 30, 2004
ATM
Electronic
Banking
Branch
Banking
Branch 3
Branch 2
Branch 1
Head Office
Branch n
Branch 4
Branch 5
Branch 6

October 30, 2004
Technology Acquisition
Inappropriate technology purchases can be the root of
all problems
The Bank management has to:
Give thought to the utilization rate
Avoid knee-jerk reactions (they have done itI should
also do it)
Be impartial in technology decisions (I like that
technologyI want it)
Understand where the solution will fit AND where it wont!
Assess the strengths & weakness of solution
And seek answer to are we ready for it?
October 30, 2004
Differentiation is attained not

achieved just through technology, it
is gained in the way the technology is
selected, implemented and utilised
Goal definition
Integrating
business &
technology goals
Solution features
Vendor selection
Business process
re-engineering
Change
management

Technology
For
Sustained
Differentiati
on
October 30, 2004
Efficient utilisation
Customer utility
Technology
Management
Support functions
Maintenance
Back-ups and
Disaster Recovery
Scalability &
flexibility
Learning &
evolution
Regulation and Supervision

The Challenge
Challenge of Technology:
New markets, products, services, delivery channels

Opened up a market for risks derivatives
Challenge of financing tech firms & IT innovation
all have implications for the stability of banks and of the
economy
The Opportunity
Regulators have new tools
Focus of all recent financial sector reforms
Emergence of non-intrusive, focused supervision
with a view to prevent frauds and disturbances to
financial stability
October 30, 2004
Technology and Banking

Supervision
THE RBI RESPONSE
Offsite Supervision & Monitoring
OSMOS
COSMOS (Non banking Financial Companies /
Development Financial Institutions)
UBD Soft
Credit Information Bureau (A joint venture between
Housing Development Finance Corporation Ltd.,
State Bank of India, Trans Union International Inc.
& Dun & Bradstreet Information Services India Pvt.
Ltd.)
Will
covered in detail
INSTITUTE
FORbe
DEVELOPMENT
AND
by Speaker Dr. T.V. Gopalakrishnan

October 30, 2004
Currency Management and

Technology Opportunities Galore
Currency Management - a formidable task in India
given
the geographical size, the volume and value of notes and coins in
circulation, preference for cash and currency handling practices
...but technology offers immense opportunities to improve
performance
RBIs The Clean Note Policy (1999)

Establishment of 2 state of the art currency presses
Technology driven anti counterfeit measures
48 fully automated Currency Verification & Processing Systems
21 Shredding and Briquetting Machines
October 30, 2004
Technology & Monetary Systems

Technology has:
Transformed the conduct of the payment and settlement
system
Set the stage for an unprecedented growth in financial
activity across the globe
Rendered more vulnerable the domestic payment system
and financial stability to international shocks
making the conduct of monetary policy more

complex and prone to implementation and operational
risks
October 30, 2004
Technology & Monetary Systems

The Opportunities
The proliferation of IT has also set the stage for
improving and managing risks in payment systems
Electronic Trading Systems
DVP/PVP
RTGS
Secured Netting Systems
The growth of the Central Counterparty (CCP)
Continuous Linked Settlement
October 30, 2004
IT and Payment and

Settlement Systems
Secured
Netting
Systems
Electronic
Dealing
Platforms
Demateria
-lisation
Of
Securities
Real
Time
Gross
Settlement
Central
Counter
party
Continuous
Linked
Settlement
Payment
Versus
Payment
Delivery
Versus
Payments

October 30, 2004
NFS/IBPG
NEFT
RTGS
PKI-based
Security
SFMS
INFINE
T
RBI
INITIATIVES
IN PAYMENT
&
SETTLEMENT
SYSTEMS
PDO-NDS & SSS
Compliance with
BIS Core Principles
Clearing
Corporation
of India
IDRBT
CFMS
October 30, 2004
RBI Initiatives in Payment

and Settlement Systems (1)
The IDRBT
Network Externalities
The
Indian Financial Network (INFINET)

Messaging Solutions
The Structured Financial Messaging System (SFMS)
Security
Public Key Infrastructure
IDRBT CA
National Financial Switch
Inter Bank Payment Gateway
October 30, 2004
CHANDIGARH
INFINET Lea sed Line Network
JAMMU
JAIPUR
LUCKNOW
DELHI
KANPUR
CALCUTTA
BHOPAL
AHMEDABAD
GUWAHATI
MUMBAI
PATNA
GOA
NAGPUR
BHUBANESHWAR
PUNE
BANGALORE
HYDERABAD
RBI
KOCHI
THIRUVANANTHAPURAM
CHENNAI
IDRBT
HYDERABAD
4 X 2 Mbps
2 Mbps
2 X 2 Mbps
2 Mbps with
ISDN Backup

64 Kbps
October 30, 2004
CUG links
Financial Networks
Reuters
Network
SWIFT
Network
NSE Gateways
Networkwith
G1
G2
G2
Integration
Other
Financial
Services
G1 - SWIFT Network
G2 G3 G4 G5 G6 G7 -
G1
and
G3
Network
Reuters Network
Stock Exchange Network
Inter Banks/FIs
Shared ATMs
Clearing Operations Network
Internet
G3
Corporate Network
G1
G2
G3
G1
G2
G3
G1
G2
G3
INFINET
Inter Banks/FIs Network
G4
Shared ATMs Network
G4
G5
G4
G5
Clearing Operations
Network
G6
G5
Internet
G7

October 30, 2004
Structured Financial Messaging System
Central
Server at
IDRBT
Bank-1
Gateway
Bank-2
Gateway
Bank-n
Gateway
..
..
..
..
...
Branch-1
Branch-2
Branch-n Branch-1
Branch-2
Branch-n Branch-1
Branch-2
Branch-n
October 30, 2004

PKI Hierarchy
CCA
IDRBT CA
IDRBT CA
Repository
RA
Subscriber
RA
Subscriber
Subscriber

October 30, 2004
RA
Subscriber
Subscriber
Subscriber
NFS CONNECTIVITY with Existing Consortiums & Individual Banks

National Financial Switch &
E- Payment Gateway
ISDN
ISDN
Leased Line
Leased Line
Bank 2
Bank 1
ISDN
INFINET
Leased Line
Bank N
Broad Band VSAT

Leased Line
ISDN
ISDN
Leased Line
ISDN
CashNet
IP Address:202.138.123.68
Subnet Mask: 255.255.255.254
Location: Mumbai
BANCS & Cashtree
MITR
Location: Chennai
Location: Mumbai
Primary Link
Backup Link

October 30, 2004

A Real Time Gross Settlement System
Reduction of systemic risk in inter bank
payment systems
To be implemented by the year end
The Centralised Funds Settlement System
Facilitating effective liquidity management
The Negotiated Dealing System
A modern electronic dealing platform for gilts

Enabling Straight Through Processing

October 30, 2004
Real Time
Gross
Settlement
CFMS
Intra Day
Liquidity
SSS
Settlement
Accounts
StripIFTP
& Store
Processes
INFINET
Participants
Interface AND
INSTITUTE FOR DEVELOPMENT
Participants
Interface
October 30, 2004
RBI Payments and

Actg. Entry
Interface
NSS
Participants
Interface
RTGS Scenario
90 banks have implemented it
3-4 more to implement in a fortnight

Customer transactions have already started
Total volumes Transactions on average Rs.20,000
crores per day settled continuously from the time of
opening of markets
Guarantee settlement fund

October 30, 2004

The Securities Settlement System
Providing centralized depository and

settlement services
Seamlessly integrated with the NDS and
RTGS Systems
The Clearing Corporation of India

Secured netting services with central
counterparty arrangements
G-Sec and Forex segments
Elimination of settlement risks with liquidity
saving
elements
October 30, 2004
Smart Cards The Future
Multi-application Smart Card

Channel of the future
Pilot project started
Pilot Project funded by MCIT, Govt. of
India
The project is in progress in partnership
with IDRBT, IIT Bombay, and Banks in
India
October 30, 2004
RBI and Customer Service(1)

Dissemination of information
The RBI website
Multiple Delivery Channels

Coin & Note Dispensing Machines
For the general public
Interactive Voice Response System
For banks and financial institutions
Web server
For government customers
On the anvil.
A secured web server
SFMS/email based communication
with customers
October 30, 2004
RBI and Customer Service...(2)

Improvements in payment and settlement
systems
MICR Clearing
Enabling faster clearing of cheques
Cheque Truncation & E-Cheques
On the drawing board
ECS/EFT
Enabling T+2 settlement of our equities
market
National EFT
Enabling T+0 settlement of all
customer funds transfer transactions
October 30, 2004
Technology Vision of the RBI

Desk Top Decision Making Capability
Centralised Database
Management System
Enterprise Knowledge
Management System
Desk Top Analytical Capability

Offsite Supervisory
Systems
Integrated Forex
Management System
Human Resource
Information System
Desk Top Transactional Capability

Integrated Accounting
System
Integrated Government
Accounting System
Securities Settlement
System
Currency Operations
System
Integrated Establishment
System
October 30, 2004
Issues in Implementation
Less than 10% of failures are due to

technical snags most are due to poor
management and implementation

October 30,
Resistance to change
Overlooking process
reengineering
Project management
Dedicated project teams
Change management
Policies
People Skills & Training
Basic Infrastructure
telecom, power
Security
Privacy & confidentiality
Legal and regulatory
issues
2004
Pre-requisites for Technology

Human Resource Business Process
Empowerment
Re-engineering
Planning for
Disasters
October 30, 2004
The pre-requisites for

Technology
Planning for disasters
Increased operational risk

Business Continuity Planning
Business Process Re-engineering

Human Resource Empowerment
October 30, 2004
Getting Personal with Personnel
People represent the most precious asset

Large employee base largely untrained. Training
scope & methodology?
VRS to balance costs. Break even? Down sizing?
Bring in young blood
Campus recruitment
Re-defining & designing jobs. Career paths?
Specialist Vs. Generalist
Attrition of trained employees to IT industry / other
banks. Competitive incentives?
Re-location of personnel. Union issues?
Retrained personnel. Morale of employees?

October 30, 2004
Need for Training
All these developments call for extensive, continuous training

Current and future technology implementations call for at
least 20% of officers specialise in IT
Hence need for specially skilled people a mix of:
System administrators
Application managers (knowledgeable about both banking and
technology)
Technology managers (who form the core team of technology
professionals).
October 30, 2004
Security Risk Management

Security is aboutcementing the weak link
Strong security measures (physical & data security) plus
disaster recovery are essential
Authentication of e-banking customers and accountability
for e-banking transactions
Segregation of duties, proper authorization controls etc.
Physical security measures
- Graded access control, Iris & X-ray scanners, CCTV & detection
systems, hotline and wireless links, fingerprint readers,
concealed cameras, various sensors, bollards, boom barriers etc.
Disaster Management and Disaster Recovery sites

October 30, 2004

October 30, 2004

October 30, 2004
How to Ensure Security??-A Framework

October 30, 2004
IDRBTs Solutions for Security

Risk Management (SRM)
Risk
Assessment
IS Audit
Awareness by
Training
PKI
SRM
for
Banks
Implementation
October 30, 2004
Gap
Analysis
Policy &
Procedures
Development
INFINET
At a Glance.
Technology Related Issues
People Related Issues Reskilling
Monetary systems, Efficient
Telecommunication & Infrastructure to
Drive Banking on Real-time Basis
Risk Management & Physical Security
October 30, 2004
The future will be not

be more of the same
we need to be ready..

October 30, 2004

The Future of Banking: Workshop On

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Workshop on

HMA & ISB

Technology and Banking

INSTITUTE FOR DEVELOPMENT AND

October 30, 2004

Vepa Kamesam, Chairman IDRBT

October 30, 2004

Vepa Kamesam, Chairman IDRBT

Many Benefits of Technology

October 30, 2004

Vepa Kamesam, Chairman IDRBT

Focus aspects of Commercial

INSTITUTE FOR DEVELOPMENT AND

LOANS & MISC. SERVICES

Vepa Kamesam, Chairman IDRBT

October 30, 2004

Vepa Kamesam, Chairman IDRBT

October 30, 2004

Vepa Kamesam, Chairman IDRBT

Technology Differentiation Fades Gradually.

INSTITUTE FOR DEVELOPMENT AND

October 30, 2004

Vepa Kamesam, Chairman IDRBT

How Long a Differentiator?

October 30, 2004

Vepa Kamesam, Chairman IDRBT

For Long-Term Differentiation

INSTITUTE FOR DEVELOPMENT AND

October 30, 2004

Vepa Kamesam, Chairman IDRBT

Issues with Customers

INSTITUTE FOR DEVELOPMENT AND

October 30, 2004

Vepa Kamesam, Chairman IDRBT

POS Terminal and Cash Dispenser

October 30, 2004

Vepa Kamesam, Chairman IDRBT

INSTITUTE FOR DEVELOPMENT AND

October 30, 2004

Vepa Kamesam, Chairman IDRBT

October 30, 2004

Vepa Kamesam, Chairman IDRBT

Differentiation is attained not

INSTITUTE FOR DEVELOPMENT AND

October 30, 2004

Vepa Kamesam, Chairman IDRBT

Regulation and Supervision

New markets, products, services, delivery channels

October 30, 2004

Vepa Kamesam, Chairman IDRBT

Technology and Banking

by Speaker Dr. T.V. Gopalakrishnan

Currency Management and

RBIs The Clean Note Policy (1999)

October 30, 2004

Vepa Kamesam, Chairman IDRBT

Technology & Monetary Systems

making the conduct of monetary policy more

October 30, 2004

Vepa Kamesam, Chairman IDRBT

Technology & Monetary Systems

October 30, 2004