Banking on unique identifier

Business Line: July 13, 2009

The high optimism generated by the appointment of Nandan Nilekani to lead the Unique Identification project has more to it than bringing technology into the limelight in the national development stage, feels Saurabh Tripathi, Partner and Director, The Boston Consulting Group, Mumbai.

“Technology is widely believed to hold the key to unlock a disruptive change in the pace of development. While this initiative will give social programmes a new lease of life, many industries will be deeply impacted. Banking could benefit most,” he observes, during the course of a recent e-mail interaction with eWorld.

If we were to leverage the platform of unique national identifier to solve the knotty financial inclusion challenge, we will hit two birds with one stone, Tripathi hopes.

“A new phase of technology in Indian banking is upon us. It could be a golden era.”

Excerpts from the interview:

What do you see as the advantages of the unique identifier to banking?

KYC (know your customer) bottlenecks will be dramatically reduced. Millions of new customers will become bankable. Growth will get a boost. Risk management will undergo a paradigm shift. Credit histories will be available on tap.

Profitability will improve and so will customer service. What’s more, we could finally have a technology initiative with sufficient firepower to destroy the demon of financial exclusion once and for all.

Banks need to acknowledge the transformative power of this idea and prepare for it with urgency. Technology will clearly remain at the centre-stage of Indian bank growth plans for the next three-five years.

Haven’t banks always been large-scale technology adopters?

Thankfully, technology is not a new idea in banking. All the banks have IT (information technology) as a key department and a strategic project.

Many banks have achieved or are fast approaching 100 per cent CBS (core banking solution) implementation. This is a milestone.

Productivity in public sector banking industry in terms of business per employee has more than doubled in the last five years. A significant part of this is attributed to technology. Exactly how much is not known. This is the challenge for the next phase of investments.

Are there estimates of the returns reaped from technology investments in banking?

Public sector banks collectively spent over Rs 10,000 crore on IT in the last five years. No one knows the exact return on this investment.

It was perhaps okay to not have ROI (return on investment) focus in the past because we were pursuing the low-hanging fruits. No one can argue against the need to have basic banking transactions done on core banking platform with centralised database.

The technology investments in the future need a different framework with ROI at the centre-stage.

Is Indian banking spending enough on IT?

Remember that on an average Indian public sector banks spend 2.5-3.0 per cent of revenues on IT. A comparable benchmark is 7 per cent in the US and 9 per cent in Europe. Even adjusting for lower labour costs in India, there is a gap.

There will be an increased spending on IT by Indian banks. However, if strict ROI discipline is not maintained, IT can be a major destroyer of value. IT projects can be white elephants. Many banks in the West have struggled with it.

Any suggestions on how banks can effectively manage IT investments?

The answer lies in the way IT investments are conceptualised, planned and executed. Business benefits have to drive the project. For example, pilots have to show the proof of business value and not a proof of concept or technology capability.

A key indicator of success has to be a business metric (such as revenue growth/cross-sell achieved) and not the number of branches covered. At most banks, CBS implementation was not run like this.

Where do you see banking IT investments happening in the future?

The future IT investments of Indian banks will come in conventional areas such as risk management, funds-transfer pricing, data warehousing, workflow automation, and CRM (customer relationship management).

In many of these areas, the investment can be huge. Benefits are not always commensurate. One can tap the experience of banks in the developed economies who have tried this journey before.

But beyond these areas, technology investments in India have a very different unique strategic importance. Indian banking has to invest in unconventional areas to solve problems unique to India. There is nowhere to learn from but to innovate and experiment.

Your views on financial inclusion.

With more than half of India’s population effectively unbanked, the problem of financial inclusion is massive. Technology is the key to its solution.

The last mile to the poor customer has to be bridged. The traditional banking model is unviable there. There have been a few technology-driven initiatives. But a lot more needs to be done.

The key issue is the scale of the problem that is unique to India. The technology initiatives are with a handful of venture-funded technology start-ups. That scale is hardly sufficient. The banks are involved in these technology initiatives peripherally as customers.

We do not need banks to “agree” to partner with a technology start-up so that they can meet the obligation of financial inclusion. We need bank-led initiatives where banks take upon themselves the objective of creating low-cost technology to profitably serve the unbanked.

Is the Indian IT industry ready to provide the answers to our banking sector?

The opportunity is as much for the Indian IT industry as it is for the banks. Finacle is a success story for Infosys. But does it have to stop there?

All the very banks that have implemented CBS need to quite urgently implement a host of functional and workflow automation packages to bring about efficiency improvements in decision-making, MIS (management information system), risk management, sales, and customer service.

Most banks have a unique Indian banking nuance and cost requirements. Off-the-shelf packages are not the obvious choice. I find only very small vendors willing to work with the public sector banks to collaboratively develop systems customised to Indian bank needs. The larger vendors are ceding the space.

The solutions developed for Indian banks will be in high demand in other emerging markets and very soon in African banks. The IT industry has to come forward to create a win-win partnership.

The unique identifier will be a matchless project with its scale, ambition, and technology complexity that will come with it. The banking solutions that will emerge from it have never been tried before.