Shaping the ICT/Banking Innovations for the Future

Priam Kasturiratna ACI-Ops, CISM, CRISK, AIB(SL), MBA(Sri J)

ABSTRACT
This paper appraises how ICT innovations have contributed to shape the Banking in the past, and present, eventually bonding ICT with Banking Innovations in an inseparable manner. Looking at different aspects in use of ICT in Innovating Banking, locally and overseas, it attempts to foresee and understand the challenges that lie in present and future, with a view to make the optimum use of ICT/Banking Innovations to a better future for Banks, and customers.

2.0 ICT/BANKING INNOVATIONS

Banking was not a service that reached the average citizen up until the 19th and 20th centuries. Industrial revolution shifted people from traditional income sources like farming and other self employment, to salary earnings from employment. Personal financial patterns such as regular salaries, savings, and money management created opportunities for the Banks to spread their services to both commercial and personal clients. This required servicing an increasingly large number of customers, recognition of the service quality, which in turn focused on understanding the customer needs such as value, timing, transaction costs etc. This background led to creation of Innovative Banking services such as Credit cards and Automated Teller Machines (ATM) which have become standard features of Banking today. Banking, in its over 600 year history, has developed its scope from original deposit taking and lending, into, modern trade and treasury activities, cross border transactions, and close integration with industries such as IT and telecommunications. Innovations linked to technology mostly come from post 1950 period. Growing commercial activities and savings created the need for more Banking Services, thereby increasing the number of Banks. This created competition, and created the need for marketing to survive and achieve organisational targets within a competitive business climate. ICT became one of the key saviours the Banks looked up to, in meeting these challenges. Initially, Computers and later Communications created drastic changes in Banking all over the world, including Sri Lanka. These developments paved way for Banks to think seriously about

1.0 INTRODUCTION & BACKGROUND

The recorded origins of Banking date back to traders in Babylonia, Assyria, India and China around 2000 BC. The word Banking has its roots in Roman Empire, where money lenders set up stalls within enclosed courtyards called macella on a long bench called a bancu, from which the words banco and bank have been derived. Banking in the modern form developed in medieval and early Renaissance Italian cities like Florence, Venice and Genoa. The Italian Bank, Medici was set up by Giovanni Medici in 1397. The earliest known state deposit Bank, Banco di San Giorgio (Bank of St. George), was founded in 1407 at Genoa, Italy. (Wikipedia, 2011) The core of Banking business is built around managing money with a view to profit. Bankers have added product structures such as Credit Cards, Leasing, Factoring, Wealth Management, Treasury, Trade related Services and many other ancillary services, so that, today, Banking denotes a fairly complex bundle of money and wealth management activities.

service innovations, faster product developments, at last, after almost 600 years in business. The first bank to use computers for accounting was Bank of America. In 1959, production systems with 32 units of ERMA Mark II computer built by General Electric commenced operating as the bank's accounting and check handling system. ERMA computers were used into the 1970s. (Bellis, 1997) Next notable IT use was an experimental envelope deposit machine called Bankograph installed in New York in 1961 by the City Bank of New York. However this was removed after 6 months due to lack of customers. The first cash dispensing device was installed in Tokyo in 1966, which is said to have been operated with credit cards. The first ATM was installed by Barclays Bank in Enfield, North London, United Kingdom in June 1967. (Wikipedia, 2011) During the last 40 plus years, ICT and Banking combination Innovated many areas of Banking by expanding delivery channels, improving service levels, creating new Banking products and reengineering internal processes at a steady pace. In Sri Lanka, introduction of ATMs in late 1980s, Phone Banking in mid 1990s, Internet Banking and Mobile Banking in early 2000s are good examples. Each of these Innovations created quite an interest in the market, as well as making the Banking activities more convenient and accessible to the customers. Today, the entire commercial Banking industry is dependent on ICT as its backbone, and if Banks wish to Innovate, ICT has to be a major part of the Innovation. Banking Innovation has now become a joint effort of both Bankers and ICT professionals.

Senior Banking and IT Analyst of Celents Banking Group summarises why and how Banks must innovate, a. To remain competitive, to take a leadership position. b. To recognize customer requirements, and stay one step ahead of them. c. Banks need to focus on customer experience, improve the overall customer experience and maturity of features. Customer experience and ease of use is where the real challenge lies. d. Banks must embrace online trends, not shy away from them. Banks need to keep up with the trends. A great example is the use of media (e.g. video, blogs) to further knowledge and emphasize education. (Jegher, 2009) If Banks do not innovate, financial services are so competitive that eventually, someone else will Innovate and eat into the Bankers market. Hence, there is no question about Innovation, if and when it is not practical to provide a full service, Banking Innovations must at least start to deliver basic services through all stable and popular channels, multiple technologies and devices so that the customers, new technologies and techgadgets will not be detached from their Banks.

4.0 HOW INNOVATIONS GENERATED

ARE

Innovation can be generated with two broad approaches, a. Build Innovation into the organization DNA b. Circumvent the organization when Innovation is required. While the newer, smaller organisations can use DNA building approach, larger established Banks will usually adopt the other due to organisational size, internal controls, compliance and other regulations. Industry analysts and Bankers themselves are noticing that the speed of Innovation at Banks is

3.0 WHY BANKS MUST FOCUS ON INNOVATION

Whether it is Banking or otherwise, an organisation must continuously Innovate to survive and grow in todays rapidly changing and competitive business environment. Jacob Jegher,

gradually becoming slower due to organisational/social complexities and increasing regulations that came into effect mostly during the last decade. Banking expert and author Brett King suggests possible approaches to re-gain and fast track Banking Innovations, a. Provide 20% of employee time to work on a project or initiative of their choosing. If the idea works, it can then be incorporated back into the overall business as part of a longer-term shift. b. Once a month, or once a quarter, get delivery channel team together for brainstorming a new customer journey or experience. Define prototypes of the ideas to come up with something better for the customer. The deep dive process is much faster than the traditional planning. c. Get product and channel teams, 20% of their time to spend on improving customer experience. Create a multichannel deep dive session quarterly where all teams, product representatives, look at new ways of engaging the customer. Prototype the customer journey on paper. Sketch up new web, mobile, or ATM screen flows to show how the interaction could be simplified and improved, or even come up with completely new ideas based on behavioural analytics. (King, 2010) Kings comments are based on two insights, first, Customer Centric Initiative is the way of generating Innovation without breaking the Bank, the second, the enlightened trial and error has a better chance of success than planning of the lone genius. His views can be seen as a summation and integration of the customer lifestyle needs and a practical way to face challenges the Banks face today.

developed a much stronger and technically advanced infrastructure and became internally efficient in many aspects. Facilities such as Image Based Cheque Clearing, Real Time Gross Settlement System (RTGS), same day low cost Interbank Payments (SLIPS), online access to Credit Information Bureau (CRIB) and closer integration with Telcos are few examples. From a Regulatory viewpoint, regulators tightened supervision and at the same time developed closer interaction with the Banks. Regulations were developed to be in line with the developed financial centres, Regulatory Reporting was set-up online, Banking Ombudsman position was established, compliance with Basel Regulatory Framework commenced, defences against Money Laundering and Terrorist Financing were developed, concepts such as Whistle Blowing, Risk Management and Corporate Governance were introduced to qualitatively enhance the Banking Industry. At the same time, almost all local Banks became more profitable, and paid higher dividends to their shareholders. The fact that local Commercial Banks have opened 48 new branches and installed 91 ATMs in 2010 indicates how the Banking industry performs in the country now.

6.0 ARE WE ON THE CORRECT TRACK IN CUSTOMER INSPIRING BANKING INNOVATIONS?

Despite all the good and worthy developments in infrastructure, technology use, regulations, service quality, geographical coverage, the question still remains whether these developments brought forth sufficient Banking Innovations to generate visibly significant customer inspiration towards Banks?; are the Banks running their own race with themselves, and in the process gradually loosing the focus on customer? Whilst not underestimating the efforts and creativity that went into introduction of Banking Innovations, lets list some of the key customer visible ICT Innovations by Banks during the post 2000 era.

5.0 MULTIFACETED DEVELOPMENTS IN LOCAL BANKING

Throughout the last two decades, Sri Lankan Banking industry became more IT reliant,

a. b. c. d. e. f. g. h. i. j. k.

Virtual Banking Internet Payment Gateways Internet Bill Payment Portals Electronic Bulk Payment Processing (Inter/Intra Bank) Investment options over Internet Inter-bank Payments and Credit Card Settlement over Internet/Phone Banking Letters of Credit Opening/Amendments over Internet Cheque Image View over Internet E-Statements Mobile Phone Top-up Outward Remittances, Local/Foreign

Sri Lankan Banking is not isolated in this grey area. Debbie Bianucci, CEO of Bank Administration Institute in US points out that the recent turbulent times have resulted in shifts in the Banking landscape as well as priorities and key initiatives of financial institutions. Innovation will play a key role as the financial services industry focuses on efforts to rebuild consumer trust and confidence, drive growth, reduce costs and enhance the customer experience. (www.finextra.com, 2009)

7.0 RISKS OF DECLINE ICT/BANKING INNOVATIONS

IN

The first two innovations, Virtual Banking and Bill Payment Portal that were launched in early part of 2000s created a notable impact due to their ability to cater to significantly large market needs/segments preferring to get their Banking done without a visit to the Bank. Electronic Bulk Payments Processing, Internet Payment Gateway and Letters of Credit Opening/Amendments over the Internet are valuable innovations, but they are mainly used by the business organizations, thus, may not have created a visibly significant impact among masses. All other innovations listed here involve integration among two or more systems, or tweaking existing features/services to create a new product or a service. Do these Innovations provide an answer to the question whether they have been able to create a visibly significant positive customer impact? are these Innovations individually or together create a customer inspiration? Looking back towards ATMs to Mobile Banking era (late 1980s to early 2000s), one can possibly raise the argument that, despite all the very important developments in the Banking Industry, the Banking/ICT Innovations that came out lately did not create visibly significant and lasting impact in inspiring the customers, nor that they created a significant advantage for an Innovative Bank to gain a notable Marketing advantage over its competitors.

A Bank may have a well built infrastructure, very good internal procedures, but none of them would guarantee achievement of business goals and long term sustainability, unless correct strategic decisions are taken by the top management. Since none of the Banks are enjoying a monopoly condition, they need to compete among themselves, and at the same time, will have to compete with small scale Innovators trying to eat into the Banking Market Share. Thats where ICT/Banking Innovations come handy and essential for survival in the long run. How does this happen? An Innovation can serve two basic purposes, it can improve internal efficiency, or it can serve a customer need today, or in future. If Innovation improves internal efficiency, then the Bank will become more profitable, and short term increased profits are assured. It may assure long term profits too. If Innovation serves a customer need, then the Bank will attract more customers, and/or generate more loyalty among existing customers. The more futuristic and long lasting the Innovation (and resulting customer inspiration) is, the effect of Innovation will benefit the Bank longer. Truly great Innovations will be rich in both these aspects, and will lead to significant customer inspiration and internal efficiency advantage over

the competitors. They would eventually set new trends and benchmarks in the industry. What are the possible impacts of Banks not being capable of Innovating to generate a visibly significant customer inspiration? a. Although there are entry restrictions (regulations) to enter into Banking, individuals and organisations looking for a way-in will find it over a period of time. b. Banks being large and bureaucratic to some extent, and thus slow in Innovating, start-ups and non regulated enterprises can innovate very fast and cheap compared to Banks. The only way out for Banks is continuous innovation, preferably, fast track it. c. In a world where almost all others are changing and Innovating, why should customers stick to an un-innovative Bank? When Banks are not Innovative, their systems would no longer be capable of making full use of capabilities of latest tech-gadgets such as smart phones, that are continuously integrating with customer lives. d. Customers expect highest service quality, which, to a large extent, relative to what prevails in the environment, locally and globally. Fifteen years back, no one would have expected a SMS confirmation when they pay their mobile phone bill over Internet or Phone Banking, but today, if the customer does not get a SMS confirmation within a few minutes, customer will certainly feel that the Bank is lacking something important. The signs of Banks loosing the race are already apparent; Jeremy Quittner of Business Week Magazine says, Many small-business owners in search of online banking and cash management services are turning to third-party vendors, which are innovating in those areas faster than banks. (Quittner, 2011). Sri Lankan Mobile operators entering the traditional Banking business of accepting deposits

is a good example of Banks being outsmarted in Innovation. Over a period of time, this opening can facilitate a series of other Banking like services for the rural or other untapped market sectors that have not yet been approached by the Banks.

8.0 POSSIBLE CAUSES FOR DECLINE IN ICT/BANKING INNOVATIONS

Industry Analysts agree that there are few important categories of reasons contributing to low-key ICT Innovation among Banks.

8.1 Organizational Inertia

Organizational inertia has been widely discussed as a key reason for Banks being not Innovative. Large organizations like Banks usually take comparatively longer time for projects. Management and other approvals such as Risk/Compliance, allocation of development resources, policy requirements, poorly performing staff, testing delays and other internal inefficiencies make it difficult to Innovate fast, thereby depriving customers from getting the best service they deserve. The result; customers may positively consider shifting to those non Banking service providers who provide Innovative services. Brett King says that most banks are too big to Innovate and as a result, lots of 3rd parties like Square, PayPal, Facebook, and others coming in over the next 10 years are going to capture the hearts and minds of customers. Banks will end up just being the back-end transaction hubs that enable those 3rd parties. (King, 2010)

8.2 Strategic Blind Side

In a survey conducted jointly by European Financial Management & Marketing Association and Infosys Technologies Ltd among senior managers from 89 Banks in 26 European countries, it was revealed that over three quarters of those polled think that the importance of Innovation is high or very high for both growth and efficiency, yet just 37% say they have a clear strategy. In Western Europe, less than 15% (of the

Banks included in the survey) have a department responsible for coordinating innovation. (www.finextra.com, 2009). This result alone shows that many Banks, despite being in such highly developed EU region, do not make a conscious effort to Innovate. This state of affairs suggests that many Banks lack a clear focus on their own future success, which amounts to failure in both Strategic and Corporate Governance aspects. How many Sri Lankan Banks do have a R&D unit; budget or targets? Therefore, lack of proper Corporate Governance and Strategic Risk Management, or in simpler terms, being blind to the need to Strategise, could be another contributor to lack of Innovation. Banks and their IT professionals must beware of Myopic situations similar to those described by Theodore Levitt in his famous Harvard Business Review article Marketing Myopia, where he argues that, to continue growing, companies must ascertain and act on their customers needs and desires, and not depend on the presumptive longevity of their existing products and innovations (Levitt, 1975). Levitt boldly points out that this is not because of saturated or declining markets, but a result of a management failure.

and functional background. In addition, the effects of Bank size, location (state of operation), and team size were assessed. Results indicated that more Innovative Banks are managed by more educated teams who are diverse with respect to their functional areas of expertise. These relationships remain significant when organizational size, team size, and location are controlled for. (Bantel & Jackson, 1989) The study found that Innovations get more support from the top level Banking management when they possess the following qualities, a. b. c. d. Diverse capabilities backed by high technical and educational expertise Courage to take on challenges Openness to emulate new technology Technology savvy in individual capacity

8.4 Simple But Important Other Causes

A Service Innovation becomes a success only when customer needs are fulfilled, and as a result, customers get satisfied and inspired. Therefore, logically, the Innovation process should have a holistic view of customer needs. Many good Innovations may have gone down the drain due to incorrect positioning, inappropriate or lack of focussed marketing, and not addressing the initial drawbacks in a timely manner. For example, the ATM networks in Sri Lanka were experiencing high downtime levels mainly due to poor communications infrastructure of the country in late 1980s up to late 1990s. Nevertheless, ATMs were fulfilling a major customer requirement. Despite the initial problems, consistent attention, continuous improvements and persistence by the Banks, and developments that took place in the countrys communications infrastructure contributed to maintaining ATM services in the best possible manner, and today, ATMs are a good customer Inspiration. From another perspective, ATMs survived all problems because they are providing a significant customer Inspiration, and the Banks were continuously monitoring and addressing the issues; just imagine

8.3 Leadership Characteristics

Leadership Characteristics of the top management is a key factor in deciding whether a Bank takes a completely Innovative path, whether it will market simple old products Innovatively to earn higher profits, or do nothing and perish. Karen Bantel, President of Cyber Michigan Public Policy and Advocacy Group, and Professor Susan E. Jackson of State University of New Jerseys joint research examined the relationship between the social composition of top management teams and Innovation adoption in a sample of 199 US Banks. Top management teams characteristics studied are, average age, average tenure in the firm, education level, and heterogeneity with respect to age, tenure, educational background,

Banking without ATMs to understand the facts, and to learn from history. Another very significant requirement for Innovation is keeping IT/Banking Innovators within the Bank, and then, inspiring them to Innovate. The Innovators may have their own egoistic and other needs such as due recognition and rewards to fulfil, sometimes, Innovators do not blend with the organizational culture and eventually get branded as mismatches because they are too good at Innovating. As a result, Innovative Bank employees may move to startups that can provide opportunities to make use of their Innovation talents. These unfortunate events can be avoided if Bankers (or any organisation in that matter) understand the strategic requirement to retain the Innovators, and foster an Innovation friendly and mutually supportive cross functional environment where Innovators can work in harmony with other internal functions such as Marketing, Banking operations, Risk/Compliance, Finance, Legal, Audit etc. Providing an Innovation conducive working atmosphere is the key to inspire Innovators to make use of their talents.

e. Improved Online presence (such as use of Social Media and online channels as an engagement platform - Blogging, Facebook, Twitter for Banking information distribution, marketing and recruitment) As much as adding new Innovations to the list, it is important to develop the ability to categorise and bundle many smaller Innovations in a way that customers understand them, accept them in a significantly Inspiring context; that makes a whole lot of meaning to the customers than the smaller components; and, in a way that visibly addresses significant customer needs.

10.0

CONCLUSION

Innovations in Banking in todays context is synonymous with ICT/Banking Innovations. Future of Banking relies on Visibly Significant Customer Inspiring Innovations, which, in turn depends on a number of technical, managerial and human factors. It is also very important to recognise the fact that being Innovative today will never be a final success destination, but just a status in a continuous mechanism of organisational success. The degree of realisation of the significance of continuous ICT/Banking Innovations, fostering an Innovation conducive organisational culture and policies, identifying possible areas for Innovations and building on them to provide the best advantage to the Banks and best value to customers will map the future of Banking. The more the Bankers develop this ability and continue to do so, the understanding and the ability to provide better value to customers is gained, thus becoming more successful in providing Visibly Significant Customer Inspiring Innovations, which is a must for successful Banking business.

9.0 UNUTILISED OPPORTUNITIES THE WAY FORWARD

In a topic area like Innovation, both the problem description and the solution may not come from the same source. Nevertheless, listing a few unutilised possibilities for Banking/ICT Innovations is a worthwhile attempt to ignite thinking Innovation. a. Smart Phones Such as iPhone and Android applications for Banking and Financial Service products b. Next Levels of Internet Banking and Interactive Voice Response (IVR) based services c. Online Share, Bills/Bonds Trading for Banking clients d. Next Level Customer Service Innovations that looks at addressing holistic needs of the customer.

11.0

REFERENCES & BIBLIOGRAPHY

Bantel, K. A., & Jackson, S. E. (1989). Top management and innovations in banking: Does the composition of the top team make a

difference? Strategic Management Summer 1989 , 107124.

Journal;

http://www.finextra.com/news/fullstory.aspx?new sitemid=20707

Bellis, M. (1997). Inventors of the Modern Computer. Retrieved May 10, 2011, from http://inventors.about.com/library/inventors/bl_E RMA_Computer.htm Jegher, J. (2009, September 18). Peeking Out From Under The Hood - Next Generation Online Cash Management. Retrieved May 10, 2011, from www.celent.com: http://bankingblog.celent.com/?p=921 King, B. (2010, May 31). Analysis: Lack of innovation is killing bank valuation. Retrieved May 2, 2011, from www.finextra.com: http://www.finextra.com/community/fullblog.aspx ?blogid=4124 Levitt, T. (1975). Marketing Myopia. Harward Business Review . ONeil, E. (2011). USAAs Star-Spangled New Online Banking Features. Retrieved May 15, 2011, from about.com: http://banking.about.com/od/bankaccountreview1/ a/Usaas-Star-Spangled-New-Online-BankingFeatures.htm Quittner, J. (2011, April 8). Nonbanks Leapfrog Banks in Small-Business Cash Management and Treasury. Retrieved April 30, 2011, from www.americanbanker.com: http://www.americanbanker.com/issues/176_68/n onbanks-leapfrog-banks-small-biz-software1035670-1.html Wikipedia. (2011). Automated teller machine. Retrieved May 2, 2011, from Wikipedia: http://en.wikipedia.org/wiki/Automated_teller_ma chine Wikipedia. (2011). History of Banking. Retrieved May 10, 2011, from Wikipedia: http://en.wikipedia.org/wiki/History_of_banking www.finextra.com. (2009, November 6). Inflexible IT top barrier to bank innovation. Retrieved May 5, 2011, from www.finextra.com: