MANAGEMENT INFORMATION SYSTEMS TERM PROJECT

Impact of IT on Banking

Table of Contents
1. Introduction ................................................................................................................................. 3 1.1. 1.2. 2. Banking Sector .................................................................................................................... 3 Information Technology in Banks ...................................................................................... 3

Banking Technology ................................................................................................................... 5 2.1. 2.2. 2.3. Customer Relationship Management .................................................................................. 5 Business Intelligence and Data Mining............................................................................... 6 Cloud Computing ................................................................................................................ 9

3.

Future Trends in Banking Technology ..................................................................................... 11

Bibliography .......................................................................................................................................... 12

List of Figures
Figure 1. Banking Technology Implementation Overview.................................................................. 3 Figure 2. Survey Snapshot ...................................................................................................................... 4 Figure 3. Trends in Banking Technology ............................................................................................... 4 Figure 4. CRM Architecture in Banks .................................................................................................... 5 Figure 5. Data Mining and Business Intelligence Architecture .............................................................. 8 Figure 6. Disbank Fraud Detection System Design ................................................................................ 9 Figure 7. Areas Suited for the Cloud .................................................................................................... 10

1.
1.1. Banking Sector

Introduction

The global banking sector can be broadly classified into three categories i.e. Commercial Banking, Retail Banking and Wealth Management. Commercial banks cater to organizations all over the world while retail banks cater to individuals. Wealth management is a more recent addition to this sector which involves managing the wealth of high net worth individuals (HNI). The global banking market size is around $125 trillion. Globally, banks are facing very uncertain times as the macroeconomic conditions in many of the western countries are not conducive. The banks are expected to have a revenue growth of about 7.2% globally. This growth is in part fuelled by the investments that banks have made in IT. The primary motivation for this investment is believed to be the growing importance of IT in the strategy of banks across the world. 1.2. Information Technology in Banks The financial sector across the world employs a large number of information technologies to manage its complex, global business. Banking sector technology has developed rapidly over the past two decades. It started with the setting up of Automated Teller Machines (ATM) which served as a substitute for cheques. This was followed by a variety of developments such as Internet Banking, Mobile Banking, and Customer Relationship Management (CRM). This has resulted in more knowledge about the customer, improved customer service and retention and reduction in operating costs for the banks.

Figure 1. Banking Technology Implementation Overview1

The above figure shows how banking technologies have evolved over the years. The technologies that are still in the nascent stage of adoption are Asset Liability Management and Cloud computing. On the other hand technologies like Core Banking and CRM have seen large scale implementation. In the early days of the adoption of technology in the banking sector, it was regarded as a tool that supported the main functions of the bank but did not contribute to the profits. However, as banking technologies have evolved over the years, IT is increasingly being used as a strategic tool by the banks to gain a competitive advantage. A recent study which measures the strengths and weaknesses of online banks across various banks revealed that customers consider online banking to be the most satisfying channel for interaction. A snapshot of the results is as shown in the figure below.

Banking on Technology India (2010) by KPMG

70 60 50 40 30 20 10 0

63 52 41 50

63

56

Continue utilizing Continue to use online banking the website services

Purchase additional services

Recommend the bank

Trust their Satisfied with banking their bank overall institution overall

Figure 2. Survey Snapshot2

Banks across the world are increasingly spending a greater portion of their operating costs on IT applications and infrastructure. The primary motivation behind the increase in IT spending is to manage the rapid growth in the industry and to improve customer service. Also there has been a reduction in the IT spending on hardware by banks as a percentage of the total costs. This has been largely due to the outsourcing of most of the IT related work to the low cost centers across the world. This spending on hardware and software is expected to go down further with the adoption of cloud computing as banks will be in a position to replace large capital expenditure with low operating expenditure.

Figure 3. Trends in Banking Technology3

The latest trends in banking are focused on developing new means of communicating with the customer. Social media and tablet PCs are some of the ways that are being explored by the banks. As the world switches to a contactless mode of service delivery, banks are coming up with more innovative means of communicating with the customer resulting in improve customer experience and better customer acquisition and retention.

2 3

Foresee Results 2011 Online Banking Study Dataquest IT Spending Indices 2011

2.

Banking Technology

2.1. Customer Relationship Management Customer Relationship Management (CRM) is defined as the combination of business processes and technology that seeks to identify a companys customers from the perspective of who they are, what they do and what they are like. It is a business strategy which is primarily aimed at identifying the customers who contribute the most to the banks profitability. By identifying these customers the banks can focus resources on maintaining these relationships better through customized marketing, pricing and service strategies. The need for CRM arises because of the following reasons. To gain improved customer knowledge Respond to intense competition through innovative products Creating insights about customer preferences Seeking out emergent customer segments

The first stage in implementing any CRM application is to decide what information the company needs and what it intends to do with the information. Next, it has to identify the sources of this information and how it is being maintained in the organization. Data Warehousing and Data Mining form a key component of CRM as these provide decision support to the management.

Figure 4. CRM Architecture in Banks4

The importance of CRM to the banking sector can be understood from the fact that an increase of 5% in customer retention can increase the profitability of the firm by 35% in the banking industry and by over 50% in the insurance sector. The main applications of CRM involve customer segmentation, lifecycle management and cross selling of products and services. The main advantages of implementing a CRM system in banks is that longer the relationship continues, the better a bank can understand its customers and design products that cater to their specific needs. Banks are still centred around products and services and are not wholly focused on meeting the needs of the customer. The implementation of a CRM system is an important step towards becoming a customer-driven organization.

Redefining Customer Experience (2009) by Dikesh Kumar

2.1.1.

Case Study

Company Overview YES Bank is a private sector bank which has a presence across all the major cities in India. It was established in 2004 and has since then expanded to offer the whole gamut of banking products such as Business Banking, Retail banking, Investment banking, Transaction banking and Financial services. Business Problem The rapid growth in its customer base resulted in a need to manage its customers effectively. The banking industry as whole is highly competitive and a dissatisfied customer can shift to a competitor relatively easily. YES bank managed its customer relationships via custom designed Excel sheets. The main problem associated with this system was the inability of the customers to contribute to the system as the information flow was one way. There was no system in place to capture the feedback from customers regarding the service and the multichannel interactions with the customers were proving difficult to manage. Solution YES Bank implemented a number of CRM modules such as Sales and Leads Management, Personalized dashboards, Help desk, Marketing Management etc. In addition to this, the CRM system was tightly integrated with the Core Banking system in place in the bank so that any data is made available to both the systems simultaneously. Other features that the bank implemented were automatic routing of customer complaints to the respective departments and a customized reporting environment. Increasing the interactions of the employees with the systems resulted in the formation of business rules that could better serve the overall strategy of the organisation. These rules could be updated easily as a result of the flexible workflows implemented. Benefits The bank witnessed considerable improvements in the customer acquisition wherein over 1 million leads were serviced and half a million service requests handled. The levels of customer service in the organization improved by about 60%. The ability to analyze centrally located data resulted in an increased cross-selling of products and services. Finally, the new system reduced the turnaround time of the banks existing processes by about 70%. 2.2. Business Intelligence and Data Mining Business Intelligence (BI) is a category of applications and technologies aimed at gathering, storing, analyzing data and making it available to the enterprise users to enable better decision making. BI applications include online analytical processing (OLAP), decision support systems (DSS), statistical analysis, reporting etc. Data mining or Knowledge Discovery is the process of analyzing data from different perspectives so that it can be used to increase revenue or reduce costs. It involves finding patterns, causalities and patterns in large volumes of data. Banking is a largely data intensive industry with billions of transactions being conducted every day. The transactions carried out by the customers contain a wealth of information. This large volume of data can be used effectively by banks to gain insights about their customers. With the growing competition and regulation in the industry, banks increasingly need identify the key success factors. Data mining involves the use of data warehouses and data mining techniques to manage a variety of customer and regulatory requirements. Some of the applications of data mining and BI in the banking sector are.

Campaign Management

Direct Marketing

Customer Profitability and Lifetime Value

Attrition and Loyalty Management

Service Request Analysis

Transaction Behaviour Analysis

Costing Analysis

Predictive Modelling

Cross-sell and Product Holding Analysis

Transaction Behaviour Analysis: Banks can use transaction related data to analyze the behaviour of the customers with regard to investment preferences. This is also used to determine which customer prefers what channel and usage and transaction patterns across customer segments. One of the techniques used in this analysis is RFM analysis which measures the recency, frequency and monetary value of the transactions. Higher the RFM score, the more profitable the customer is to the business now and in the future. Campaign Management: Banks use analytics to determine the right offer for a product campaign. A bank assessing multiple product campaigns can use a campaign optimizer scores competing product campaigns against one another, thereby helping the bank to choose the best campaigns. Campaign performance monitoring, cost-benefit analysis etc. are widely used to generate leads regarding products. Customer Profitability and Lifetime Value Analysis: This analysis can be used to price the various banking products based on the customers expected future value. Customer Lifetime Value is the net present value of all the cash flows attributed to the relationship with a customer. This allows the marketing manager to determine the dollar value associated with the long term relationship with any customer. It can help managers understand the value of the customers and shed light on how to satisfactorily service customers. Attrition and Loyalty Management: Banks are increasingly using customer segmentation information and related satisfaction levels to design targeted product offerings. Predictive modelling based on the historical usage patterns, customer service logs and spending patterns can help banks identify customer attrition at an early stage. Loyalty programs can then be designed to improve customer retention. The business intelligence and analytics infrastructure in banks is of the following form.

Figure 5. Data Mining and Business Intelligence Architecture5

2.2.1.

Case Study

Company Background Disbank, founded in 1964, is one of the leading financial institutions in Turkey. It is headquartered in Istanbul and operates with an advanced distribution network consisting of branches, ATMs, kiosks, web portal, internet banking and call centres. The credit card division plays an important role for Disbank and as a result it is paramount to keep credit card fraud in check. Business Problem The competition in the credit card market in Turkey is fierce and as a result, banks issue cards even to lower value targets to expand their customer base. This increase in the volume of customers is accompanied by a concomitant rise in the number of fraudulent cases. The Credit Card Security Group in the bank wanted to find indicators for fraud before the credit card was issued. In the system that the bank had employed earlier, this was done manually based on the individuals demographic information and the fraud detection agents experience. The existing fraud detection system followed a rule-based approach and was reactive in nature i.e. it detected fraud in individual transactions. The system allowed the fraud detection agent to call the owner of the card within seconds of a suspicious transaction. However, the bank was not in a position to check all these alerts. Solution The design of the new fraud detection system was as shown in the figure below.

FINsights (2010) - Infosys

Develop Analytical Models

Score Applications

Generate Reports

Review Application

Forward to Fraud Agents

Figure 5. Disbank Fraud Detection System Design

The solution to this problem involved analyzing the historical fraud related data that the bank maintained in its data warehouse and creating a set of models based on the demographic profile of customers and the historic fraud data. This would then be tested on the historic data again. These fraud models would then be used to score all the credit card applications. The BI reports generated by the fraud detection system would then be forwarded to the fraud agents who would review the applications based on their experience. Since only the applicants who are likely to commit a fraud were reviewed, the work load on the agents was reduced drastically. The existing fraud related rules were also fine-tuned to reduce the number of alerts the bank received. Benefits The improved system increased the fraud detection by 200% from 7/day to 21/day. This amounted to savings of around $25000 per day. The intangible benefit of this approach was the increase in the morale of the fraud agents because of the successful detection of fraud and improves customer service and retention. 2.3. Cloud Computing Cloud computing refers to the offering of dynamically provisioned computing services comprising of a mix of applications, platforms and hardware capacity through a network of geographically disbursed systems. Cloud computing, today, is one of the fastest growing technologies across the IT spectrum. The past few years have seen a growing transition from in-house applications to cloud-based services. The key areas where banks are considering for migration to the cloud are business applications i.e. Enterprise Resource Planning (ERP), CRM etc. The various models of clouds that are available are. Software-as-a-Service (SaaS) Platform-as-a-Service (PaaS) Infrastructure-as-a-Service (IaaS) Business Process-as-a-Service (BPaaS)

Out of these models, SaaS and BPaaS are the models that have found some application in the banking sector and their penetration levels are fast increasing. However, given the increasing cost of maintaining IT resources, other forms of cloud computing may soon catch up. The benefits that cloud computing can offer banks are. Cost Savings Cloud computing can help financial institutions in avoiding large capital expenditure and replace this with smaller ongoing operating costs. As cloud computing offers banks the ability to choose services on a pay-as-you-go basis, it helps in reducing maintenance costs as well. Business Continuity As the responsibility for managing the IT infrastructure lies with the provider, banks can benefit from a greater degree of data protection, disaster recovery and business continuity.

Green IT With the growing emphasis on employing more eco-friendly technologies, cloud computing offers better utilisation of IT resources and this can help in reducing the energy consumption and carbon footprint.

The applications that are best suited for the use of cloud computing in banks are customer analytics, IT applications and infrastructure and content management applications. Following is an overview of all the business areas where banks can adopt cloud computing.

Figure 7. Areas Suited for the Cloud6

As compared to other industries, the banking sector has been more cautious in adopting cloud computing. The primary reasons for this are: Security The sensitive and confidential nature of information stored in the banks makes it imperative that any risk of a security breach be mitigated. As IaaS architecture in cloud computing involves storing information on the providers servers, it has serious security implications. Regulatory and Compliance Regulators in many countries require that financial data for banking customers stay in their home country. Also, compliance requirements mandate that financial data not be mixed with other data.

Inspite of the growing concerns regarding the use of cloud computing, a number of major banks around the world have started deploying applications in the cloud. The coming years would determine the success of this technology in taking the banking sector to the next level.

Cloud Computing in Banking (2011) by Capgemini Analysis

3. Future Trends in Banking Technology

Client Engagement through Social Media Social media marketing is one of the fastest growing forms of marketing in many of the industries today. However banks have been slow to adopt these, with over 80% of the banks not using it. Banks can use social media to identify and respond to any client satisfaction issues and also to understand the perception of the bank. Also social media can be used to conduct market research to understand the needs of the banks customers and to integrate some of the existing banking functionality over the social media and participate in social lending activity. Personal Financial Management Banks can help individuals in managing their finances better by providing customized financial advice to the customers. Based on an analysis of the transactions performed by the customers and their lifestyle preferences, banks can identify the investments that the individual can make. It can also provide proactive budgeting and alerts to the customer. This will help banks in acquiring new customers and retaining existing ones. Tablet PCs with Financial Apps The use of tablet PCs has grown tremendously since the time Apple released the first iPad. The growing number of applications to be used on the tablets is testimony to the fact that it is one of the fastest growing technologies in the world. Banks can collaborate with the tablet manufacturers to make financial apps available to the users. This will create an additional channel through which customers can interact with the bank thus providing another revenue stream. Mobile Banking Mobile banking involves the use of cellular phones to carry out financial transactions. At present three forms of mobile banking are being used; SMS-based payments to individuals, SMS-based payments to businesses and contactless payments made via compatible POS terminals. However these have not been adopted extensively. The next few years will see widespread use of these methods of banking and mobile telephony and data transfers become cheaper.

Bibliography
Capgemini Analysis. (2011). Cloud Computing in Banking. Capgemini. Capgemini. (2011). Trends in the Global Banking Industry. Capgemini. Dataquest. (2011, August 30). IT Spending Indices. Dataquest . Deloitte. (2011). Trends in Retail Banking. Deloitte. KPMG. (2010). Banking on Technology - India. KPMG. KPMG. (2009). Technology Paradigms for the Banking Industry. The Economic Times Banking Technology Conclave. KPMG. Kumar, A., & Shenoy, R. (2010). Analytics in Retail banking: Why and How? Bangalore: FINsights by Infosys. Kumar, D. (2009). Redefining Customer Experience. Infosys. Shashidharan, K. (2011, September 25). Cloud Computing for Banking. Business Line .