Banks Moving From Branch Based To Internet Based Banking

Posted in Finance Articles, Total Reads: 1879 , Published on September 22, 2012

Once there was a bank that was flourishing like anything in 1980s. The bank catered to the needs of individuals, companies, etc. However, with time the economy started to expand and with this the needs of the customers also started changing. The customers now needed professional, efficient and speedy service. Many of the banks, post liberalization in India, realized the need and started to re-mould themselves according to the needs of the customer.

However, there were some banks, which were adamant, and did not want/intend to change and wanted to deliver the same sloppy service to its customers. Eventually, what happened was evident. Profits dropped, customers started to migrate to other banks offering better service and evidently the bank got merged with other bank.

So what we see here is on one hand the banks which evolved, survived and flourished in the market and some banks who due to their adamant nature did not see the rising sun of the 21st century.

In India, people prefer to “see, touch and feel” right from buying their monthly groceries, to selecting clothes for themselves, children. Such was the case with Indian banking too where, till the new millennium the customers preferred to go to their home branches for doing any kind of transaction. This was termed as “Branch Banking”. It was also called the “brick-and-mortar” model. In such a scenario, there was a diversification of risk across geographical areas.Apart from this, the manager of the branch could easily develop personal relationships with its own customer and was in a better position to serve them better.

However, from customers’ point of view, he/she had to go to its respective home branch only to avail the banking service. If there was a branch failure, then the customer was unable to make any financial transaction on that particular day. Also, since the management was now located at the head-office level, the management in the branch could afford to be lax and indulgent in their duties. Apart from this, the managers at the branches used to believe that they were some kind of a god who were lending to the needy people. The branch managers didn’t use to value the customers’ time due to which people had to take a day off to go to a bank.

With the advent of Core Banking System (CBS) in Private Banks around 1994-96, we saw Banks moving from a branch based system to a bank based system. The basic thought process of the Banking industry was challenged – “Customer is of a Branch and not of a Bank”. CBS saw the customer as that of a Bank. The customer was given the option to perform financial transaction at any of the branches of the bank covering whole of India. The customers welcomed this idea.

However, PSU banks were not able to digest this thought and saw losing its valuable customers to Private Banks. Sooner or later, almost all major PSU banks moved to CBS. However, still issues persist in the PSU banks. Some of the major issues highlighted were the inability of their employees to adapt to CBS and development of the necessary infrastructure. Other issue that came into the picture was the back-end data storage mechanism being used. In CBS, the data was stored at a centralized location from where banks used to access the customer data. Failure/hacking/corruption of the data could result in the failure of the bank itself. So, banks had to invest in IT solutions to protect, take backup of the customer database.

The increasing cost of building brick-and-mortar branches, decreasing cost of computers, high delivery costs and slow revenue growth forced a relook at the conventional delivery systems. Moreover, growing comfort of technology usage by the customer was rapidly fostering usage of non-branch channels for routine transactions. CBS saw introduction of internet-based banking wherein, banks provided online transaction facility via NEFT/ RTGS, payment of utility bills, online shopping, selling insurance products, recharging pre-paid phones, opening of fixed deposits, stop payment facility etc.

Slowly we saw all PSU and Private Banks trying to embed Internet banking as one of their major distribution channel for financial services. The banks started investing heavily in Information Technology to provide better, faster and handy service to their customers. Banks started adopting Mobile banking, Phone banking and other technologies too.

There were some banks in Europe, who believed that internet could be exploited as a new delivery channel by the financial services industry. It would use solely electronic channels without presence of physical branches. However, such banks could not survive in the market for much time due to either trust issues of the customer or due to the IT infrastructure issues / glitches. Such banks were poorly suited for “relationship lending” in which the risk is assessed via personal knowledge and direct monitoring of borrowers.

Now that we have gone through all types of banking models adopted by the banking system, be it the traditional / brick-and-mortar model or CBS or purely internet based model, the growth story of any bank is usually judged by two things.First and the most important of all is the “Element of Trust” that customers share with the Bankand other is having a IT flavour in its distribution channel.

It is believed that IT can improve bank’s performance in two ways: First, IT can reduce banks’ operational costs (the cost advantage). For example, internet helps banks to conduct standardized, low value-added transactions (e.g. bill payments, balance inquiries, account transfer) through the online channel, while focusing their resources into specialized, high-value added transactions (e.g. small business lending, personal trust services, investment banking) through branches. Second, IT can facilitate transactions among customers within the same network (the network effect). As stated by Ms Shikha Sharma, MD and CEO of Axis Bank, “As far as retail banking is concerned, technology would help in building confidence at a low cost. Overall, technology would help to solve complex trade-offs in the future”, we can see the amount of dependency banking industry is showing on IT.

Though RBI has acknowledged the immense potential of IT in banking, but it has also showed concerns over compliance with anti-money laundering and Basel-III norms.RBI has thus introduced a concept called “IT Governance”.It implies adoption of a defined framework of plan, do, check and act using performance metrics, key goal indicators and maturity models.

Apart from this, as discussed earlier, banks have to make investments to protect their customer database from hacking or corruption.They also have to make sure that the financial transactions being done by customers online are via a secure channel. They also have to make sure, 24X7 availability of IT services for their customers.

It is well said that “Trust and reputation can vanish overnight. A factory cannot”. Such is the case with Banks too. They just can’t afford to lose out on their customer base because of trust issues.

Around 2004-05, we saw that due to a rumour that ICICI bank does not have funds, the ICICI Bank ATMs saw a total withdrawal of Rs. 500.00/-crore on a single day. Infact, RBI had to interfere and announce that it was a rumour and ICICI bank was doing well. This saw a degradation in the reputation of ICICI bank and drop in the share value of the bank. This depicts the importance of “Trust” in financial markets where, if it is lost, then it can bring down the whole of the economy with it.

Same we are seeing in the financial crisis of 2011 where the foreign investors are losing confidence in various financial institutions and are preferring to invest in gold rather invest in infrastructure projects of various companies.

The key to survival in today’s banking industry is Customer service. Customer loyalty / trust will be determined by innovative and convenient delivery of banking service. Banks need to deliver more than just information and basic services. Banks should now act like a one-stop shop for meeting all the financial needs of the customer, be it insurance, wealth management, forex services, demat services, etc. We can clearly say that the future belongs to financial service providers’ not traditional banks. The need of the hour is to create value networks. Doing so presents tremendous challenges.

Banks need to enhance their distribution system so that they can touch customers at multiple points. Banks must also create performance measurement systems to assure the mix products and services they offer are beneficial to both the customer and the bank. They must determine whether to deploy new technologies themselves or with other service providers. Nevertheless, technology alone will not solve issues or create advantages. This technology needs to be integrated in an organization, with the change management issues linked to people resisting new concepts and ideas. It also needs to support a clearly defined and well communicated business strategy.

This article has been authored by Varun Goel from NMIMS Mumbai.


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