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Workshop on The Future of Banking organized by HMA & ISB (October 30, 2004) Vepa Kamesam Former Deputy Governor, RBI Currently Chairman, IDRBT/BRBNML 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 Mass Transaction & Items Processing INSTITUTE FOR DEVELOPMENT AND RESEARCH IN BANKING TECHNOLOGY October 30, 2004 Vepa Kamesam, Chairman IDRBT 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 INSTITUTE FOR DEVELOPMENT AND RESEARCH IN BANKING TECHNOLOGY October 30, 2004 Vepa Kamesam, Chairman IDRBT 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 BANK’S BUSINESS INSTITUTE FOR DEVELOPMENT AND RESEARCH IN BANKING TECHNOLOGY October 30, 2004 LOANS & MISC. SERVICES RAISING DEPOSITS BANK’S BUSINESS Vepa Kamesam, Chairman IDRBT 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 INSTITUTE FOR DEVELOPMENT AND RESEARCH IN BANKING TECHNOLOGY October 30, 2004 Vepa Kamesam, Chairman IDRBT 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…. But…due to rapid technology deployment in Indian banking sector, the “haves” and “havenots” gap is all set to narrow quickly. INSTITUTE FOR DEVELOPMENT AND RESEARCH IN BANKING TECHNOLOGY October 30, 2004 Vepa Kamesam, Chairman IDRBT Technology Differentiation Fades Gradually…. INSTITUTE FOR DEVELOPMENT AND RESEARCH IN BANKING TECHNOLOGY October 30, 2004 Vepa Kamesam, Chairman IDRBT 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… INSTITUTE FOR DEVELOPMENT AND RESEARCH IN BANKING TECHNOLOGY October 30, 2004 Vepa Kamesam, Chairman IDRBT For Long-Term Differentiation Elements of Technology as a Differentiator Scalability & Flexibility Efficient utilisation, mgmt INSTITUTE FOR DEVELOPMENT AND RESEARCH IN BANKING TECHNOLOGY Process enabling October 30, 2004 Utility to customer Support Skills Vepa Kamesam, Chairman IDRBT 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 INSTITUTE FOR DEVELOPMENT AND RESEARCH IN BANKING TECHNOLOGY October 30, 2004 Vepa Kamesam, Chairman IDRBT POS Terminal and Cash Dispenser POS Terminal Connected to Cash dispenser INSTITUTE FOR DEVELOPMENT AND RESEARCH IN BANKING TECHNOLOGY October 30, 2004 Vepa Kamesam, Chairman IDRBT ATM Electronic Banking Branch Banking Branch 3 Branch 2 Branch 1 Head Office Branch n Branch 4 Branch 5 Branch 6 INSTITUTE FOR DEVELOPMENT AND RESEARCH IN BANKING TECHNOLOGY October 30, 2004 Vepa Kamesam, Chairman IDRBT 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 it…I should also do it”) – Be impartial in technology decisions (“I like that technology…I want it”) – Understand where the solution will fit AND where it won’t! – Assess the strengths & weakness of solution – And seek answer to “are we ready for it?” INSTITUTE FOR DEVELOPMENT AND RESEARCH IN BANKING TECHNOLOGY October 30, 2004 Vepa Kamesam, Chairman IDRBT 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 INSTITUTE FOR DEVELOPMENT AND RESEARCH IN BANKING TECHNOLOGY Technology For Sustained Differentiation October 30, 2004 Efficient utilisation Customer utility Technology Management Support functions Maintenance Back-ups and Disaster Recovery Scalability & flexibility Learning & evolution Vepa Kamesam, Chairman IDRBT 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 INSTITUTE FOR DEVELOPMENT AND RESEARCH IN BANKING TECHNOLOGY October 30, 2004 Vepa Kamesam, Chairman IDRBT 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 AND detail INSTITUTE FORbe DEVELOPMENT RESEARCH IN BANKING TECHNOLOGY by Speaker Dr. T.V. Gopalakrishnan October 30, 2004 Vepa Kamesam, Chairman IDRBT 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 RBI’s 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 INSTITUTE FOR DEVELOPMENT AND RESEARCH IN BANKING TECHNOLOGY October 30, 2004 Vepa Kamesam, Chairman IDRBT 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 INSTITUTE FOR DEVELOPMENT AND RESEARCH IN BANKING TECHNOLOGY October 30, 2004 Vepa Kamesam, Chairman IDRBT 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 INSTITUTE FOR DEVELOPMENT AND RESEARCH IN BANKING TECHNOLOGY October 30, 2004 Vepa Kamesam, Chairman IDRBT IT and Payment and Settlement Systems Electronic Dealing Platforms Real Time Gross Settlement Delivery Versus Payments INSTITUTE FOR DEVELOPMENT AND RESEARCH IN BANKING TECHNOLOGY October 30, 2004 Vepa Kamesam, Chairman IDRBT 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 INSTITUTE FOR DEVELOPMENT AND RESEARCH IN BANKING TECHNOLOGY CFMS October 30, 2004 Vepa Kamesam, Chairman IDRBT 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 INSTITUTE FOR DEVELOPMENT AND RESEARCH IN BANKING TECHNOLOGY October 30, 2004 Vepa Kamesam, Chairman IDRBT INSTITUTE FOR DEVELOPMENT AND RESEARCH IN BANKING TECHNOLOGY October 30, 2004 Vepa Kamesam, Chairman IDRBT Financial Networks Reuters Network SWIFT Network NSE Gateways and Integration with Network Other Financial Network Services G1 G2 G3 G4 G5 G6 G7 - G1 G1 G2 G2 G3 SWIFT 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 INFINET G3 Inter Banks/FIs Network G4 Shared ATMs Network G5 G5 G4 G4 Clearing Operations Network G6 G5 Internet G7 INSTITUTE FOR DEVELOPMENT AND RESEARCH IN BANKING TECHNOLOGY October 30, 2004 Vepa Kamesam, Chairman IDRBT Structured Financial Messaging System Central Server at IDRBT Bank-1 Gateway Bank-2 Gateway ………..…………….….…….. ………..…………….….. … … …….…… Branch-1 Branch-2 Branch-n INSTITUTE FOR DEVELOPMENT AND RESEARCH IN BANKING TECHNOLOGY Bank-n Gateway … … …….…… Branch-1 Branch-2 Branch-n October 30, 2004 … … Branch-1 Branch-2 Branch-n Vepa Kamesam, Chairman IDRBT PKI Hierarchy CCA IDRBT CA IDRBT CA Repository RA Subscriber RA Subscriber Subscriber INSTITUTE FOR DEVELOPMENT AND RESEARCH IN BANKING TECHNOLOGY October 30, 2004 RA Subscriber Subscriber Subscriber Vepa Kamesam, Chairman IDRBT 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 INSTITUTE FOR DEVELOPMENT AND RESEARCH IN BANKING TECHNOLOGY October 30, 2004 Vepa Kamesam, Chairman IDRBT RBI Initiatives in Payment and Settlement Systems (2) 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 INSTITUTE FOR DEVELOPMENT AND RESEARCH IN BANKING TECHNOLOGY October 30, 2004 Vepa Kamesam, Chairman IDRBT Real Time Gross Settlement CFMS Intra Day Liquidity SSS Settlement Accounts StripIFTP & Store Processes INFINET Participant’s Interface AND INSTITUTE FOR DEVELOPMENT RESEARCH IN BANKING TECHNOLOGY Participant’s Interface October 30, 2004 RBI Payments and Actg. Entry Interface NSS Participant’s Interface Vepa Kamesam, Chairman IDRBT 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 INSTITUTE FOR DEVELOPMENT AND RESEARCH IN BANKING TECHNOLOGY October 30, 2004 Vepa Kamesam, Chairman IDRBT RBI Initiatives in Payment and Settlement Systems (3) 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 INSTITUTE FOR DEVELOPMENT AND RESEARCH IN BANKING TECHNOLOGY October 30, 2004 Vepa Kamesam, Chairman IDRBT 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 INSTITUTE FOR DEVELOPMENT AND RESEARCH IN BANKING TECHNOLOGY October 30, 2004 Vepa Kamesam, Chairman IDRBT 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 INSTITUTE FOR DEVELOPMENT AND RESEARCH IN BANKING TECHNOLOGY October 30, 2004 Vepa Kamesam, Chairman IDRBT 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 INSTITUTE FOR DEVELOPMENT AND RESEARCH IN BANKING TECHNOLOGY October 30, 2004 Vepa Kamesam, Chairman IDRBT 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 INSTITUTE FOR DEVELOPMENT AND RESEARCH IN BANKING TECHNOLOGY Currency Operations System Integrated Establishment System October 30, 2004 Vepa Kamesam, Chairman IDRBT Issues in Implementation “Less than 10% of failures are due to technical snags – most are due to poor management and implementation” 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 INSTITUTE FOR DEVELOPMENT AND RESEARCH IN BANKING TECHNOLOGY October 30, 2004 Vepa Kamesam, Chairman IDRBT Pre-requisites for Technology Human Resource Business Process Empowerment Re-engineering Planning for Disasters INSTITUTE FOR DEVELOPMENT AND RESEARCH IN BANKING TECHNOLOGY October 30, 2004 Vepa Kamesam, Chairman IDRBT The pre-requisites for Technology Planning for disasters Increased operational risk Business Continuity Planning Business Process Re-engineering Human Resource Empowerment INSTITUTE FOR DEVELOPMENT AND RESEARCH IN BANKING TECHNOLOGY October 30, 2004 Vepa Kamesam, Chairman IDRBT 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? INSTITUTE FOR DEVELOPMENT AND RESEARCH IN BANKING TECHNOLOGY October 30, 2004 Vepa Kamesam, Chairman IDRBT 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). INSTITUTE FOR DEVELOPMENT AND RESEARCH IN BANKING TECHNOLOGY October 30, 2004 Vepa Kamesam, Chairman IDRBT Security Risk Management • Security is about…cementing 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 INSTITUTE FOR DEVELOPMENT AND RESEARCH IN BANKING TECHNOLOGY October 30, 2004 Vepa Kamesam, Chairman IDRBT INSTITUTE FOR DEVELOPMENT AND RESEARCH IN BANKING TECHNOLOGY October 30, 2004 Vepa Kamesam, Chairman IDRBT INSTITUTE FOR DEVELOPMENT AND RESEARCH IN BANKING TECHNOLOGY October 30, 2004 Vepa Kamesam, Chairman IDRBT How to Ensure Security??-A Framework INSTITUTE FOR DEVELOPMENT AND RESEARCH IN BANKING TECHNOLOGY October 30, 2004 Vepa Kamesam, Chairman IDRBT IDRBT’s Solutions for Security Risk Management (SRM) Risk Assessment IS Audit Awareness by Training PKI INSTITUTE FOR DEVELOPMENT AND RESEARCH IN BANKING TECHNOLOGY SRM for Banks Implementation October 30, 2004 Gap Analysis Policy & Procedures Development INFINET Vepa Kamesam, Chairman IDRBT 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 INSTITUTE FOR DEVELOPMENT AND RESEARCH IN BANKING TECHNOLOGY October 30, 2004 Vepa Kamesam, Chairman IDRBT The future will be not be more of the same… … we need to be ready.. INSTITUTE FOR DEVELOPMENT AND RESEARCH IN BANKING TECHNOLOGY October 30, 2004 Vepa Kamesam, Chairman IDRBT