While the initial push for implementing CBS came from large private banks, the market is seeing a new trend where CBS deployments are largely driven by PSU banks and regional rural banks, writes Nivedan Prakash

Core Banking Solutions (CBS) have been around in banking circles for quite some time now. Today the situation is such that an increasing number of banks are recognizing the need for a strategic transformation of their day-to-day operations. CBS implementation is the first step towards the transformation and automation of all of a bank’s business processes.

By integrating all the varied and disparate legacy systems and self-contained services, a core banking solution provides a bank with a solid, flexible, and scalable foundation on which other systems can be easily built and harmonized into a robust scalable banking solution. The focus of many banks is now on business agility as a key differentiator in their attempt to gain a competitive edge. With business agility, banks achieve improved operational efficiency, enhanced customer service experience, a proactive approach towards risk, and most importantly, a drastic reduction in operating costs.

By and large, the results have been positive for all banks implementing CBS. According to a report on ‘Trend and Progress of Banking in India 2006-07,’ the process of computerization and Total Branch Automation in commercial banks is now reaching near completion for most banks.

CBS has become a part of basic hygiene for a bank’s operation. Today, if a bank does not have a CBS in place with the ecosystem solutions such as anywhere banking, Internet banking, etc, incrementing CASA (current account saving account) becomes a huge challenge for operations. So the adoption of CBS by all banks—private, PSUs, MNCs—is one of the primary tasks that they want to accomplish first. The pre-requisite for banking business—large, medium or small—has become CBS and it is now being sought even by the RRBs (Regional Rural Banks) and co-operative banks.

Highlighting some of the trends with respect to the adoption of CBS, Srinivasan Arunachalam, Chief Operating Officer & Vice President (Asia Pacific Sales) at Oracle Financial Services Software, said, “We are seeing banks looking at enhancing customer reach by leveraging handheld devices as well as utilizing smart cards and biometric devices to provide microfinance services in remote rural locations. Banks are also looking at enhancing the level of service to their high net worth customers via specific private banking offerings.”

“After years of debate about the need for core system replacement, there is finally evidence of growing momentum both in the market of smaller banks (dominated by package vendors) and of in-house projects at larger banks. For the larger banks, the approach to core system replacement is typically based on an overall service-oriented architecture (SOA) strategy and likely to combine elements of three different approaches: legacy code migration, core banking package implementation, and the introduction of reusable banking enterprise services alongside traditional in-house development,” asserted, Rajiv Srivastava, General Manager-Enterprise and Partner Group, Microsoft India.

Automation, integration and risk & compliance

Prior to the implementation of core banking solutions, most banks lacked an overall view of a customer’s interactions across channels, products and transactions. The real-time monitoring of a bank’s exposure to a particular customer or risk was not possible. This is because most banks had computer systems that were 10 to 15 years old and had added a patchwork of applications to support channels such as ATMs, Internet or phone banking as well as departmental solutions.

Apparently, transactions through these channels and departmental systems were not fully integrated with their core systems and were usually reconciled only at the end of every business day. Also, the resulting systems were expensive to maintain and upgrade.

Murthy Veeraghanta, President and CEO–VSoft, pointed out, “Offering a range of products and services to customers through multiple delivery channels is critical to a competitive banking environment and is applicable to PSUs and small banks as well. Legacy systems are not flexible enough to meet these requirements. With frequent maintenance requirements, the legacy platforms can lead to the draining of a bank’s resources. The foundation of a successful consumer banking strategy is to have a technology platform that can offer anytime, anywhere banking through multiple delivery channels like Internet banking, ATM, mobile banking, etc. A perfect CBS offers all of these with a lower TCO and higher ROI.”

There are primarily two factors that drive the CBS market—compliance with regulatory directives and increasing the bank’s business by getting a single view of the customer to enable up-selling and cross-selling products and services. Additionally, increasingly tightening regime on risks, controls, compliance and regulatory reporting are also driving the adoption of core banking systems in banks.

One of the other primary factors leading to the increased adoption of the solution is the advancement of technology, especially the Internet, which has helped devise new ways of doing business. Apart from financial drivers, industry consolidation, increasing compliance and IT globalization are the main motivators of the CBS implementation by financial institutions today.

“The CBS solution forms the primary IT environment for any bank today. This has become an integral part of business rather than being a support function. Thereby IT, and in turn CBS, becomes a business driver rather than a back office operation. Coupled with this is the fact that CBS enhances both—a better customer experience and employee satisfaction as EOD and BOD timelines have shrunk providing the bank staff with more time to do other activities,” commented Kallol Hazra, Director-Application Services India, EDS, HP Technology Solutions Group.

Additionally, with the growth and adoption of IT in the overall Indian market, customers demand easy access to their banks in the comfort of their homes or using their cell phones and the ability to seamlessly transact across all branches of the bank. This has driven banks to look at the CBS as a key business enabler rather than just a support infrastructure.

Abhay Kumar Sinha, Senior VP and Business Head-Banking and Financial Services, South Asia, 3i Infotech, commented, “The increased regulatory requirements and compliance have put increased pressure on banks to adopt core banking systems. The other key drivers of CBS are IT globalization and rising competition in the market. Therefore, gradually the primary factor for system replacement is shifting from cost reduction to growth.”

PSUs driving CBS implementation

In the Indian context, implementations of CBS by PSU banks are more or less mostly done except for a few that are yet to take a final decision. The co-operative and other smaller banks are definitely the next rung of customers for CBS and this will increase the adoption of CBS solutions to a large extent. The reason for this is that their existence is dependent on retaining their current customers with all facilities like any other banker in a matured market. Core banking helps achieve this.

While the initial growth of CBS solution came from large private banks such as ICICI Bank, HDFC Bank and Axis Bank, 2008 witnessed PSU banks such as PNB, Canara Bank, Andhra Bank, Central Bank of India and SIDBI driving the CBS market. Additionally, we are also seeing small co-operative and other small banks going the CBS way.

With competition intensifying in the banking industry and technological solutions being readily available for an affordable investment, the face of the cooperative banking sector in India has been changing. Day by day, the number of cooperative banks that are implementing CBS is increasing. With some vendors now offering CBS solutions for an affordable TCO, a large number of cooperative banks are leveraging this opportunity to enhance their business.

As some vendors are offering flexible CBS solutions that are modular and parameterized, cooperative banks have the choice of making a strategic decision on investing in the right solution that best meets their business needs. Many cooperative banks are now able to offer their customers, features like mobile banking, mobile alerts and Internet banking, which are integrated with the CBS.

“With the exception of a few large co-operative banks such as Saraswat Bank and Shamrao Vithal Bank, there is little evidence of a comprehensive CBS implementation in the co-operative or small bank sector. However, there is momentum. Most co-operative banks still operate in branch banking mode, and are not expected to upgrade to sophisticated systems unless pushed by the regulator, and other agencies such as the FIU-India which tracks terrorist financing and money laundering activities, which would require the banks to centralize their customer information,” said Kalpesh Desai, CEO, Agile Financial Technologies.

Meanwhile, the largest opportunity at the moment is for the Regional Rural Bank (RRB). According to a mandate by RBI, all commercial and RRBs are supposed to implement CBS by March 2010. As per RBI guidelines, the CBS in RRBs should be geared towards better management control and monitoring, wider range of services offered and enhanced level of customer satisfaction. Adoption of CBS would lead to uniformity in work environment, more informed decision-making, centralized processing and better MIS and reporting and improved regulatory compliance.

Hanuman Tripathi, MD and CEO, InfrasoftTech, said, “The PSU banks have already realized the potential of CBS and most of them have completed CBS implementations as well. There are a few banks which have kept some of their distant branches still on a standalone basis without interlinking them into the CBS, but that momentum is already there. The market is currently in the hands of the RRBs which are being nudged both by regulators and their parent banks to move in the direction of CBS; and in the hands of the district central cooperative banks. These two types of banks are large, and also better equipped to handle a CBS for them and their branches.”

Automating and consolidating operations

Implementing CBS helps a bank not only achieve automation but also assists it in centralizing and consolidating operations and at the same time standardizing branch processes. It also helps a bank consolidate its back office through centralization and maintain standardized operations across branches.

Using a CBS, the banks get to open all customer accounts from a centralized data center with designated branch details. All product definitions are also operated from a central location. System administration activities are also managed by CBS from a single data centre for operation across the bank or in regional data centers in case of international implementation. This takes care of complete control over customer information management, product processes and transactions.

“In today’s context, if banks deploy only vanilla core banking, it will just help in achieving automation. That’s precisely why the ecosystem solution deployment along with core banking becomes so fundamentally important. In all the banking projects HP is delivering, we promote and implement process standardization, optimization and centralization. The primary advantage stems from the fact that by doing so, the branches become pure sales channels and can focus on cross-selling. Standardization helps in quick turnaround time and relatively error free operations,” added Hazra.

With centralization, a set of standards are created throughout a bank. This provides the bank a 360 degree view of the customer allowing the customer to enjoy real-time banking anywhere and at anytime. With a centralized back office and standardized processes, a bank can offer products anywhere without having to create full-fledged branches. Additionally, it offers banks the advantage of better Management Information System (MIS) through which the management can take timely decisions.

Srinivasan further emphasized, “CBS enable the roll out of standardized processes across a bank to create transparency in operations. A bank can roll out a new product or process in a matter of days.”

The bottom line

The CBS implementation also enables banks to further reduce operational costs and revenue leakage while improving productivity of branches, introduction of new and innovative products and visibility of business.

“The above benefits obviously help save a large amount of operating costs of branch automation, when CBS is implemented. Once core banking is fully operational, the workload in the branches reduces substantially. This creates an option for the banks to either use branch manpower for marketing and collection or expand rapidly with same level of manpower with additional branches. Revenue leakages in terms of temporary overdrafts, folio charges and other services charges, uneven interest application, etc. are all unthinkable in a core banking solution,” asserted Tripathi.

With intensifying competition and demanding customers, revenue opportunities have become thin for many banks. Legacy core systems are enormously expensive to maintain. A research survey reveals that the cost and risk of maintaining legacy core systems exceeds the cost and risk of core systems renewal. Therefore, banks will end up spending more on maintaining their legacy systems.

In such a scenario, a cost-effective core banking solution helps banks to increase growth and profits. The crucial requirement of keeping costs low can be ensured through a scalable technology platform and automation. To serve the evolving needs of the marketplace and changing regulations, banks require scalability to attract new customers, agility to create appropriate banking products tailored for different customers, and readiness for mobile and Web-based transactions integrated with branches, ATMs and the Web. Above all, the automated process needs to be error-free and secure, to ensure customer satisfaction. An efficient CBS helps bank to reduce operational cost while improving productivity of branches.

With CBS, all repetitive and mundane jobs are shifted to one central location, which means there is an operational efficiency that provides indirect avenue on reduction of operational cost.

Customer satisfaction

In addition to providing cost advantages, CBS enhances a bank’s operational metrics and customer satisfaction levels. A robust core banking solution augments the bank’s operational efficiency with a faster response time, higher throughput and lesser time-to-market.

In operational metrics, usually service levels and cost per transaction are paramount measurements. If core banking deployment has happened with e-Channel integration, customer service levels enhance drastically with online ATM connectivity, Internet banking, SMS banking, etc. Besides, the queue time in branches reduce drastically as all counters provide common services with low manual work.

As the number of hours of the branch operations increase, e-Channels increase number of transactions, new branch sizes become smaller and lesser manpower manages larger operations, the cost per transaction comes down substantially.

Centralization of back-office processing reduces response time on customer service requests and shows optimized staff utilization. The bank’s ATMs across branches and offsite locations can function, fully networked with centralized core banking database. Banks can provide online banking services from multiple delivery channels like branches, Internet banking, ATMs, Interactive Voice Response Systems (tele-banking), SMS and mobile banking, thus creating a truly valuable customer experience of anytime and anywhere banking.

In order to meet rapidly changing business demands, all banks have implemented CBS to reduce complications in transactions, to meet the challenge of new markets, and ultimately lead to a healthy competitive position. CBS helps provide total connectivity and centralization of the banking operations. It not only ensures standardization of products, but also helps quick launch of the new and innovative financial products ensuring sufficient lead time to market it. The core banking solution offers seamless platform for integrating various initiatives and also reduces the cost of transaction, thereby offering financial products at an affordable cost.