Retail Banking Technology Driven Processes

Author: Sonal Vaid Date Written: 19-Jan- 2007 Declaration: I hereby declare that this document is based on my personal experiences. To the best of my knowledge, this document does not contain any material that infringes the copyrights of any other individual or organization including the customers of Infosys. Target Readers: Any one interested in learning new processes and technology used in Banking. Keywords: Real Time Gross Settlement (RTGS), Cheque Truncation System (CTS), ATM Banking Banking is defined as a financial institution which accepts deposits and channels the money into lending activities. The bank provides the services to individuals, small business and corporate. Lately, the services of the banks have grown from accepting deposits and lending money. The bank now offers other services like investment advisory, cross sell of products like insurance, mutual funds, gold etc. Retail Banking The individual centric banking is retail banking, where an individual is improvised with the various products & services of the banks. The banks look forward to improve upon the service and provide innovative products to retail customers. The risk is diversified in retail banking. The services offered under retail banking includes savings account, checking account, fixed deposits, mortgages, loans, debit card, credit card, insurance, investment advisory, wealth management, online banking, phone banking, mobile banking, etc. Latest Trends in Retail Banking The buzz word in todays world is TECHNOLOGY. Every aspect of growth in someway or other is linked with technology. The banking industry has availed the benefits of technology. The technology has enabled services like anytime fund transfer, real time transactions, image enabled clearing, and transfer of funds anywhere with minimal turn around time, talking and image enabled automated teller machines, the concept of virtual banking. Following are the few concepts described here -

1. 2. 3. 4.

Real Time Gross Settlement (RTGS) Cheque Truncation System (CTS) Talking ATM Image enabled ATM

Real Time Gross Settlement As the term suggests its the payment system which enables final settlement or intermediary transfer between banks. RTGS is used by banks and also its available to retail and corporate customers. The customers can send funds to the beneficiary, through their bank by giving his details to the bank. RTGS is mainly used for low volume high value transactions. The implementation of RTGS is done by central bank of the country. The transactions are settled in accounts held at central bank for different banks. The settlement in RTGS is immediate, final and irrevocable. The transactions are settled as per FIFO + priority basis. The transaction takes maximum 2.5 hrs - 3 hrs. to send funds from one account to another. The flow chart below shows the transaction flow and the settlement of funds in between banks through central bank.

Customer gives request to his bank with the other party details- bank name, bank a/c number and branch. The bank takes the request from the customer after verifying it for AML. The bank verifies the customers details and processes it in the payment system linked with central bank system. Data once inputted cannot be retrieved.

The bank makes entry in its book of accounts. The fund in the account with central bank gets credited. Customer account gets debited.

The central bank receives data from the bank and processes it further and send the information of fund transfer to receiving bank.

Central bank makes entries in the book of account for both banks. In one bank the funds get reduced and in other it increases.

The bank receives information from central bank on its payment system. The bank verifies the customer and transfers the fund to the respective a/c as per details received.

The customers account gets credited and central banks account gets debited for the funds received. ed.

The customer receives the credit from the bank after AML check.

Cheque Truncation System Till date, we have seen the cheques moving from one bank to another, for clearing of funds. The cheque truncation system replaces the physical movement of cheque from one bank to another. However, the images of cheques will travel and clearing will take place. Its an online image based cheque clearing system. The cheque image and MICR (Magnetic Ink Character Reader) data is captured by presenting bank and transmitted to the clearing house. The clearing house sends the data to the respective bank and will receive back the data after the completion of process. The data will be further sent back to presenting bank with details of all cheques whether cleared or returned. The reasons for implementing CTS are

1. 2. 3. 4. 5. 6.

It reduces operational risks Reduces turn around time for clearing cycle Reduction in frauds Banking is complex and transaction intensive Lower cheque handling costs Improved customer service levels

Process flow of Cheque Truncation System

The above illustration shows the process flow of Cheque truncation system. The cheques are deposited with the presenting bank where the images of cheques are scanned. The data is further sent to the clearing house from where it goes to the paying bank. The paying bank processes the data and marks the returns for the day. After the completion of clearing process the details of cheques passed and returned is sent back to the clearing house. On receipt of data, clearing house sends back the data to the presenting bank. The clearing cycle time reduces and physical movement of cheque does not take place. The physical instruments are kept in warehouse and are archived for use in future if required. The benefits are 1. 2. 3. 4. 5. 6. 7. Efficient and streamlined processing of images Elimination of transportation of physical cheques Shorter clearing cycles Extended cut off time for cheque submission Real time clearing positions available to banks throughout the day Economies of scale with centralized National Image archive Automated inward signature verification process

8. Fraud prevention measures Kiting made difficult Black listed accounts flagged Built in anti money laundering features in the system Talking Automated Teller Machines Automated Teller machines or Automatic teller machines is defined as a computerized telecommunication device used by financial institutions for customers to give a secure method of performing transactions without the presence of human assistance or bank teller. The ATMs are the alternate channels provided by banks to reduce the footfall in the branches. The banks educate their customers to use ATM for services like deposit of cash, withdrawal of cash, balance inquiry, cheque book request, mini statement request, transfer of funds etc. With the advent of technology the ATM has come to next generation as Talking ATMs. As the term suggests these ATMs can instruct and inform the users. The talking ATMS provide audible instructions to the users who cannot read or are not aware how to use an ATM. The facility is given in the form of either head phones attached to the ATM or separately attached telephone set. The talking ATM was developed keeping in mind the requirement of a blind person. The worlds first talking ATM was made by NCR for Royal Bank of Canada. The instructions in talking ATM are either pre-recorded or are based on speech synthesis. Talking ATMs are most popular in United States, as per the guidelines by American with disabilities Act of 1990 the banks have to install talking ATMs. Image Enabled Automated Teller Machine As explained above Automated Teller Machine is defined as a computerized telecommunication device used by financial institutions for customers to give a secure method of performing transactions without the presence of human assistance or bank teller. The image enabled automated teller machines are the machines in which once the cheque is deposited without envelope the image of the cheque and the related data is captured and submitted to back office of the bank for processing. This enables a bank to process the cheque as required by customer as soon as data is captured. The transaction is completed even though the physical instrument is still in ATM. The customers receive the receipt of the cheque deposited from the ATM. Process flow of capture of transaction at Image enabled ATM

Source Capture Suite/ATM Capture is a complete remote deposit capture solution that allows bank customers to make convenient ATM image deposits without envelopes The above diagram shows flow once a cheque is deposited the data is transmitted to the data base of bank and the central site. The processes takes place and the transaction can be posted and the image is archived. Benefits of Image enabled ATM 1. 2. 3. 4. 5. 6. 7. 8. 9. Reduction in fraud Reduction in courier costs Reduces operational or handling costs Eliminates risk of loss of instrument Reduces back office work load Provides immediate proof of deposit to customers Reduction in turn around time in processing Reduces empty envelopes fraud or fake deposit slips fraud Improves efficiency of payment system

Image enabled ATM facilitate faster clearing process as well. The image is sent to branch from where it can be routed for image based clearing or transfer of funds i.e. via cheque truncation system.