ABSTRACT

Banking technology is generally a bundle or package of different technological

elements such as improved varieties of products and services (processes).
Implementation of information technology and communication networking has
brought revolution in the functioning of the banks and the financial institutions. The
objective of this study was to establish the effects of technological innovations on
financial performance of commercial banks in India.

The study adopted descriptive survey as it provided for explanation of the cause and
effect between independent variables and the dependent variables. This was a census
study and the target was all commercial banks in India. More specifically the target
population was forty three Commercial Banks based on latest available information
from Central Bank of India. Secondary data was used in this study. In order to
situate the study theoretically and produce the conceptual framework the secondary
sources were obtained from, financial and annual statements of the banks over a
period of 5 years and publications were also used. The financial data was collected
from the annual reports which were used to get ROA and other information related
to the variables.

From the findings, a steady rise in return on assets values from 2009 indicated that the
banks financial performance has been very well over the last 3 years in Indian
financial industry. A significant positive relationship between mobile banking and
financial performance was also established by the study. The study as well established
a significant positive relationship between Electronic Funds Transfer at Point of Sale
Terminals and financial performance. The study concluded that the adoption of
technological innovation has enhanced Indian banking industry by making it more
productive and effective and has a strong positive relationship on the overall banking
performance by making workers performance more effective and efficient; the
adoption of technological innovation has enhanced the fortune of the Indian
commercial banks. The study recommended that banks must be focused in terms of
their needs and using the right technology to achieve goals, rather, than acquiring
technology because other banks have it. Regulatory authorities like Central Bank of
India must stipulate standards for the banks to follow to avoid making India Banking
Sector a dumping ground for the outdated technological infrastructures.
 CHAPTER ONE
INTRODUCTION

1.1 Background of the Study

Banking technology is generally a bundle or package of different technological

elements such as improved varieties of products and services (processes). Banking

technology consists of two components; a hardware aspect consisting of the tool that

embodies the technology as a material or physical object such as machines; and

software aspects, consisting of the information base for the tool such as technical

knowledge and skills about how to use the hardware aspect of technology.

Technological efficiency can result in lower transaction costs and increased

revenue for banks. For instance, technology can allow banks to cross-market new and

existing products to customers.

Technological innovation activities include the inter-organizational processes of

market-based sell-buy relationships and collaboration (and consumer-oriented

activities (business-to-consumer and consumer-to-consumer), as well as the intra-

organizational processes that supports them. Organizations are embracing e-

commerce as a means of expanding markets, improving customer service, reducing

costs, and enhancing productivity. Efficiencies are experienced in marketing and

advertising; new technologies make disintermediation possible, eliminating the

middleman. Other efficiencies include reduced inventory and round the clock

access at no additional cost. Superior banking technologies enable higher

customization allowing organizations to improve customer service. A vital benefit

of an integrated banking technology is access to global markets which enables

businesses to expand their

reach. A study of the technologies progress in the banking sector is important because

banks play an important role in providing, financing and mobilizing savings, especially

in emerging markets as compared to mature markets . Technology affects the core of the

banking business of information processing and delivery. In this respect, banking is no

different from other industries. It is largely innovation, and what follows from it, that

will transform the banking and financial services industries.

1.1.1 Technological Innovations

Technological innovation can be considered as a package of innovations. Rogers

defines organizational innovation as the development and implementation of ideas,

systems, products, or technologies that are new to the organization adopting it.

The adoption of innovations is a process that includes the generation, development,

and implementation of new ideas or behaviors. The innovation does not necessarily

have to be new in terms of discovery or invention; it only has to be perceived as

new by the organization.

Technological innovations have been identified to contribute to the distribution

channels of Banks. The electronic delivery channels are collectively referred to as

Electronic Banking. Electronic Banking is really not one technology, but an attempt to

merge several different technologies. Each of these evolved in different ways, but in

recent years different groups and industries have recognized the importance of

working together. Bankers now see a kind of evolution in their business, partly,

because the world has taken a quantum leap in the use of technologies in the last

several years (Porteous, 2006). Mobile Banking refers to provision of bank-related

financial services with the help of mobile telecommunication devices. The scope of

offered services may include facilities to conduct bank and stock market transactions,

to administer accounts and to access customized information. Banks offering mobile

access are mostly supporting some or all of the following services: Account Balance

Enquiry, Account Statement Enquiries, Cheque Status Enquiry, Cheque Book

Requests, Funds Transfer between Accounts, Credit/Debit Alerts, Minimum Balance

Alerts, Bill Payment Alerts, Bill Payment, Recent Transaction History Requests, and

Information Requests like Interest Rates/Exchange Rates.

The idea of Internet banking according to Essinger is: to give customers access

to their bank accounts via a web site and to enable them to enact certain

transactions on their account, given compliance with stringent security checks. To

the Federal Reserve Board of Chicagos Office of the Comptroller of the Currency

(OCC) Internet Banking Handbook Internet Banking is described as the

provision of traditional (banking) services over the internet. Internet banking by its

nature offers more convenience and flexibility to customers coupled with a virtually

absolute control over their banking. Service delivery is informational (informing

customers on banks products, etc.) and transactional (conducting retail banking

services).

Cloud computing, which in the most basic of terms offers unlimited computing

resource as a service on a pay-per-use basis, is proven to directly translate to less

upfront, capital expense and reduced IT overheads, offering a cost-effective, simple

alternative to accessing enterprise-level IT without the associated costs. Cloud

computing has the capacity to change completely the financial services landscape. By
making enterprise-level banking systems and associated technologies available in the

cloud on a pay-per-use basis, now anyone, anywhere can have access to modern core

banking systems without the cost and other barriers usually associated with this

technology. (www.temenos.com).

Networking of branches is the computerization and inter-connecting of geographically

scattered stand-alone bank branches, into one unified system in the form of a Wide

Area Network (WAN) or Enterprise Network (EN); for the creating and sharing of

consolidated customer information/records. An Electronic Funds Transfer at the Point

of Sale is an on-line system that allows customers to transfer funds instantaneously

from their bank accounts to merchant accounts when making purchases (at purchase

points). A POS uses a debit card to activate an Electronic Fund Transfer

Process.

1.1.2 Financial Performance of Commercial Banks

According to Khrawish profit is the ultimate goal of commercial banks. All the

strategies designed and activities Performed thereof are meant to realize this grand

objective. However, this does not mean that Commercial Banks have no other goals.

Commercial banks could also have additional social and economic goals. However,

the intention of this study is related to the first objective, profitability.

To measure the profitability of commercial banks there are variety of ratios used of

which Return on Asset, Return on Equity and Net Interest Margin are the major ones

ROE is a financial ratio that refers to how much profit a company earned compared to

the total amount of shareholder equity invested or found on the balance sheet. ROE is

the ratio of Net Income after Taxes divided by Total Equity Capital .ROA is also

another major ratio that indicates the profitability of a bank. It is a ratio of Income to
its total asset It measures the ability of the bank management to generate income by

utilizing company assets at their disposal (Khrawish, 2011).

1.1.3 Effects of Technological Innovations on Financial Performance of

Commercial Banks

At the organizational-level, innovation has been shown to be positively related to

individual firm performance (Goosen, 2002). One key industry where there are calls

for greater levels of innovation is the retail banking sector. The retail banking sector is

currently struggling as it comes under greater competitive pressure from a number of

sources. Customers are becoming more demanding. Banking services are gradually

being seen as commodities (Onufrey, et al 2008). Non-banking organizations are

increasingly entering the marketplace to compete for customers. Combing these

trends, there appears to be a strong impetus for greater levels of innovation to enable

individual banks to differentiate themselves in an increasingly competitive

marketplace.

Implementation of information technology and communication networking has

brought revolution in the functioning of the banks and the financial institutions. It is

argued that dramatic structural changes are in store for financial services industry as a

result of the Internet revolution; others see a continuation of trends already under way

listed some banking services that have been revolutionized through the use of ICT

as including; account opening, customer account mandate, and transaction

processing and recording. Information and Communication Technology has

provided self-service facilities (automated customer service machines) from where

prospective customers can complete their account opening documents direct

online. It assi st s customers to validate their account

numbers and receive instruction on when and how to receive their cheque books,

credit and debit cards. The ICT products in use in the banking industry in many

developing and developed include Automated Teller Machine, Smart Cards,

Telephone Banking, MICR, Electronic Funds Transfer, Electronic Data Interchange,

Electronic Home and Office Banking.

It is widely recognized that innovation is key to the economic performance of firms.

Innovative firms grow faster in terms of employment and profitability. An innovation

is an idea, practice, or object that is perceived to be new by a person or adopting

entity. The innovation is not seen as something periodical that happened by accident

nor something that results from the action of an individual agent. Innovation is seen as

the result of an interactive and non linear process between the firm and the

environment. When an innovation emerges, diffusion unfolds which entails

communicating or spreading of the news of the innovation to the group for which it is

intended. Adoption however is the commitment to and continued use of the

innovation. The diffusion of innovations theory provide explanations for when and

how a new idea, practice or newly introduced information and communication

medium is adopted or rejected over time in a given society.

According to the application of information and communication technology

concepts, techniques, policies and implementation strategies to banking services

has become a subject of fundamental importance and concerns to all banks and

indeed a prerequisite for local and global competitiveness. ICT directly affects

how managers decide, how they plan and what products and services are offered in

the banking industry. It has continued to change the way banks and their corporate
relationships are organized worldwide and the variety of innovative devices available

to enhance the speed and quality of service delivery .

However, most research about innovation focused on manufacturing industries though

increasing attention has been paid to innovation in service industries recently. The

survival of an enterprise in the age of knowledge-based economy depends on

how to improve their organizational innovation capability. Technological innovation

is the key variable and means of differentiation between logistics service providers.

Commercial banks can increase their performance by employing new technologies.

They should employ new information technologies to raise their service capability in

the e-commerce age.

Internet banking by its nature offers more convenience and flexibility to customers

coupled with a virtually absolute control over their banking. Service delivery is

informational (informing customers on banks products, etc) and transactional

(conducting retail banking services). As an alternative delivery conduit for retail

banking, it has all the impact on productivity imputed to Telebanking and PC-

Banking. Aside that it is the most cost-efficient technological means of yielding

higher productivity. Furthermore, it eliminates the barriers of distance or time and

provides continual productivity for the bank to unimaginable distant customers.

Internet Banking helps to give the customer's anytime access to their banks.

Customers could check out their account details, get their bank statements,

perform transactions like transferring money to other accounts and pay their bills

sitting in the comfort of their homes and offices. However the biggest limitation

of Internet banking is the requirement of a Personal Computer (PC)

with an Internet connection, not a big obstacle if we look at the US and the European

countries, but definitely a big barrier if we consider most of the developing countries

of Africa like India. Mobile banking addresses this fundamental limitation of

Internet Banking, as it reduces the customer requirement to just a mobile phone

The internet offers a potential competitive advantage for banks and this advantage lies

in the areas of cost reduction and more satisfaction of customer needs (Bradley and

Stewart, 2003 and Jaruwachirathanakul and Fink, 2005). Encouraging customers to

use the Internet for banking transactions can result in considerable operating costs

savings (Sathye, 1999). The internet is the cheapest distribution channel for

standardized bank operations, such as account management and funds transfer

(Polasik and Wisniewski, 2009). Customer dissatisfaction with branch banking

because of long queuing and poor customer service is an important reason for the

rapid movement to electronic delivery (Karjaluoto, Mattila and Pento, 2002). The

commitment of senior management is a driving force in the adoption and exploitation

of technology (Shiels, McIvor and O'Reilly, 2003).

According to Porteus (2006), Mobile banking is emerging as a key electronic channel

for the global banking and financial services industry. The ubiquitous nature of

mobile devices and services, and the ability of mobile banking services to reduce

overall operational costs, streamline operations, and expand customer base are

expected to boost prospects in the industry. Increasing adoption of mobile phones

among general consumers, particularly among the younger generation (in the 18-34

years age group), and rapid rise in demand for mobile payments are expected fuel

demand for mobile banking services. The industry is also expected to benefit from
favourable government and regulatory specifications, which are aimed at providing

banking services to unbanked customers to promote economic development.

Financial institutions in the present socio-economic environment are dependent on

computer support and IT innovation, therefore, to a substantial extent, the banking

industry today is clear on what the emerging technology will be. Some useful

solutions in the Cloud are already adopted in some organizations and these include:

product catalog, enabling one to manage catalogs of products and services, as well as

to access pricing information; asset management, permitting one to track the different

financial products customers have purchased; data quality management, which

ensures that customer, product, and pricing data are available, valid, and free of

duplicates; work flow programs that help in customizing sales and marketing

documents; collateral management, which provides a valuable repository for the most

recent versions of sales and marketing information; list management, assisting the

private banker in customer leads, contact information, and business handling; and

marketing analytics, which permit studying the impact of marketing campaigns,

determining those activities generating the most revenue, and measuring the results of

marketing spending (Chorafas, 2010).

Networking of branches offers quicker rate of inter-branch transactions as the

consequence of distance and time are eliminated. Hence, there is more productivity

per time period. Also, with the several networked branches serving the customer

populace as one system, there is simulated division of labour among bank branches

with its associated positive impact on productivity among the branches. Furthermore,

as it curtails customer travel distance to bank branches it offers more time for

customers productive activities (Abor, 2005). Increased banking productivity results

from the use of EFTPoS to service customers shopping payment requirements instead

of clerical duties in handling cheques and cash withdrawals for shopping.

Furthermore, the system continues after banking hours, hence continual productivity

for the bank even after banking hours. It also saves customers time and energy in

getting to bank branches or ATMs for cash withdrawals which can be harnessed into

other productive activities (Chorafas, 2010).

Bank for International Settlement (BIS) in their study recognized that safe and

efficient retail payment systems enhance the effectiveness of the financial system,

boost consumer confidence and facilitate the functioning of commerce.

Conceptionally, payment systems are coined as being two-sided markets (Rochet and

Tirole, 2006). Virtually every economic transaction involves the use of a payment

instrument, such as cheques, electronic funds transfers, and so on (Berger, 2003).

Hasan, Schmiedel and Song (2009) in their study to provide a combined and

integrated view of the importance and significance of retail payments for bank

performance using country level retail payment service data across 27 EU markets

found out that countries with more developed retail payment services, banks perform

better, in terms of both their accounting ratios and their profit and cost efficiency.

They further found that the relationship is stronger in countries with higher levels of

retail payment transaction equipment, like ATMs and POS terminals.

1.1.4 Commercial Banks in India

Currently there are there are 43 licensed commercial banks and 1 mortgage finance

company (Appendix I). The Companies Act, the Central Bank of India (CBK) Act

and the Banking Act are the main regulators and governors of banking Industry in

India. These Acts are used together with the prudential guidelines which Central
bank of India issues from time to time. In 1995 the exchange controls were lifted

after the liberalization of the banking in India. Indian Banks have realized

tremendous grow in the last five years and have expanded to the east African region.

The banking industry in India has also involved itself in automation, moving from

the traditional banking to better meet the growing complex needs of their customer

and globalization challenges (Central Bank, 2013).

The Indian banking industry has been expanding branch networking amid the

introduction of branchless banking system, which include the use of EFTs, ATM

cards, SMS banking etc. The annual reports of CBK clearly indicate that, branch

network has been slowly expanding since 2002. By the end of December 2006, India

had a total branch network of 575, as compared to 486 branches in the period ended

December 2002.Further it is indicated that Nairobi province has a large number of

branch network while North Eastern province has never added any branch since the

year 2000. It has maintained 4 branches in the whole province. This indicates that

many Indian are left un-banked throughout the countrys eight provinces, as banks

have customer bases concentrating in major cities. Also, the slow growth of Branches

can be attributed to the rapid rise of alternatives, which include electronic financial

product through mobile phones and Personal computers (Kihumba, 2008).

Indian banks have exponentially embraced the use of information and

communication technologies in their service provision. They have invested huge

amounts of money in implementing the self and virtual banking services with the

objective of improving the quality of customer service. Some of the ICT-based

products and services include the introduction of Mobile Banking, ATMs, Internet
Banking, Core banking solution, Electronic clearing systems and direct debit among

others. In mid 2005, Indias banking Industry moved a milestone by introducing

Real Time Gross and Settlement system (RTGS) which was renamed India

Electronic Payment and Settlement system (KEPSS). This will facilitate the inter-

bank financial data transfer. The development of e-banking services is expected to

decongest banking halls and reduce the incidences of long queues in banking halls.

Digital based financial services have made a significant contribution in covering the

cost of offering financial services (Kihumba, 2008).

1.2 Research Problem

A fundamental assumption of most recent research in operations improvement and

operations learning has been that technological innovation has a direct bearing on

performance improvement (Upton and Kim, 1999). Strategic management in financial

institutions demand that they should have effective systems in place to counter

unpredictable events that can sustain their operations while minimizing the risks

involved through technological innovations. Only financial institutions that are able to

adapt to their changing environment and adopt new ideas and business methods have

guaranteed survival. Some of the forces of change which have impacted the

performance of financial institutions mainly include technological advancements such

as use of mobile phones and the internet.

A number of studies have concluded that IT has appreciable positive effects on bank

productivity, cashiers work, banking transaction, bank patronage, bank services

delivery, customers services and bank services. They concluded that, these have

positive effects on the growth of banking (Balachandher et al, 2001: Idowu et al,
2002; Hunter, 1991; Yasuharu, 2003). Other previous studies like Pooja and Singh

(2009), Francesca and Claeys (2010), Batiz-Lazo and Woldesenbet (2006) and

Mwania and Muganda (2011) have produced mixed results regarding the impact of

innovations on bank performance. Pooja and Singh (2009) and Franscesa and Claeys

(2010), in their studies concluded that innovations had least impact on bank

performance, while Batiz-Lazo and Woldesenbet (2006) and Mwania and Muganda

(2011) concluded that financial innovation had significant contribution to bank

performance.

Despite the importance of technological innovations in explaining banking

performance, the effects of technological innovation on performance, is still

misunderstood for two main reasons; first, there is a lack of understanding about the

drivers of innovation and secondly innovations effects on banks performance

remains untested (Mabrouk & Mamoghli, 2010). There is a knowledge gap on a

combined effect of technological innovations on financial performance of commercial

banks. Most of the studies considered the effect of a single technological innovation

on financial performance and effect of composite of technological innovations has not

been tested in India. This study therefore aimed to answer the following research

question: Does technological innovation have effects on the financial performance of

commercial banks in India?

1.3 Research Objective

To establish the effects of technological innovations on financial performance of

commercial banks in India.

 1.4 Value of the Study

The findings and recommendations of this study will be useful to the management of

commercial banks by enabling them to formulate and target their technological

innovation products effectively. The study will benefit the existing the management of

commercial banks in understanding the technology challenges facing the banking

industry and how to address the problems. Government and policy makers will find

the findings and recommendations of this study useful in formulating future banking

regulations, policies and laws that will aid in regulating and operationalization of the

banking industry in relation to technology and innovation use. Knowledge seekers in

the fields of economics, research methods, management, and banking studies will find

this research study useful. In particular, this research study will be beneficial to the

researchers with research interests in technology and innovations, by serving as a

point of reference. In addition, future researchers will be able to formulate further

studies based on the recommendations of this study.

RESEARCH METHODOLOGY

This research methodology that was used, in an attempt to achieve the

objectives of the study. Attention is focused on research design, study population

or target population, sample size, sampling techniques, data collection

instruments, data collection procedure and data analysis procedures.

I. Research Design

The study used descriptive survey. Mugenda and Mugenda (2003), support the view

that a descriptive research design aids the researcher to formulate a more precise

problem statement. This design provides for explanation of the cause and effect
 between independent variables and the depend variables. The goal of a descriptive

study hence is to offer the researcher a profile or to describe relevant aspects of the

phenomena industry oriented or other perspective.

II. Target Population

The target population was forty three Commercial Banks based on latest available

information from Central Bank of India (Appendix I). A census survey was

conducted because the population was considerably small and manageable.

III. Data Collection

Secondary data was used in this study. In order to situate the study theoretically and

produce the conceptual framework the secondary sources were obtained from,

financial and annual statements of the banks over a period of 5 years (2013-2017) and
 publications were also used. The financial data was collected from the annual reports

which were used to get ROA and other information related to the variables.

IV. Data Reliability and Validity

Validity shows whether the items measure what they are designed to measure (Borg

and Gall, 1996). The researcher used content validity to examine whether the

instruments answer the research questions (Borg & Gall, 1996). Adjustments and

additions to the research instruments consultations and discussions with the supervisor

were done to establish content validity. Reliability refers to the consistency of the

research and the extent to which studies can be replicated (Wiersma, 1986). To ensure

a high degree of reliability of instruments in this study, the researcher personally

collected the data and only in a few cases where assistance was sought from well-

trained and motivated research assistants.

V. Data Analysis

Data obtained from the field in raw form is difficult to interpret; such data must be

cleaned, coded, and key punched into a computer and analyzed (Mugenda and

Mugenda, 2003). Data collected, was tabulated and analyzed for purpose of clarity,

using SPSS software. It is a computer program used for statistical analysis and has the

ability to handle statistical presentation with array of formulas for ease of

interpretation. Data was presented using tables, and pie charts to make them reader

friendly. In addition, a multiple linear regression was used to measure the quantitative

data and analyzed using SPSS.

3.V.1Analytical Model

The analytical model was as follows Y= 0+ 1X1+2X2+ 3X3+ 4X4+

Where:

Y is the dependent variable (financial performance i.e. ROA)

0 is the regression constant

1, 2, 3, 4, and 5 are the coefficients of independent variables,

X1 is Mobile Banking

X2 is Internet Banking

X3 is Electronic Funds Transfer at Point of Sale Terminals

X4 is Branch Networking

is the Error Term.

3.V.2Variable Measurement

The variables were measured based on the following;

Variable Measurement

Financial performance Return on Assets

Mobile Banking Cumulative number of Customers

registered in an year

Internet Banking Number of transactions in an year

Electronic Funds Transfer at Point of Number of transactions in an year

Branch Networking Number of branch networks in an year

A multiple linear regression model and t-statistic was used to determine the relative

importance (sensitivity) of each independent variable in affecting the performance of

bank Financial Performance was measured using Return on Asset of commercial

banks while the influence of each technological innovation was measured based on

the regression analysis. In order to find out the relevance effect of technological

innovations on financial performance, the results of the study must also be significant.

Results are said to be statistically significant within the 0.05 level, which means that

the significance value must be smaller than 0.05. The significance was determined by

the t-value, which indicates how many standard error means the sample diverges from

the tested value.

CHAPTER-2: TECHNOLOGICAL DEVELOPMENT IN BANKING

2.1.Wave of technology in banking:

The technological development in banking can be traced as follows:-

1960 - Mechanized banking introduced.

1970 - Introduction of computer based banking industry.
1980 - Introduction of computer-linked communication based banking.

Advent of computer technology has created a major impact on working of banks. The
computerization and subsequent development in history of Indian banks can be traced
back to 1966 when Indian Bankers Association (IBA) along with exchange banks
association signed first wage settlement with the union, which accounted for the use of
IBM or ICT accounting machines for inter-branch reconciliation etc. As per the reports
of RBI the first wave in banking technology began with the use of Advanced Ledger
Posting Machines (ALPM) in the 1980s. The RBI advised all the banks to go in for huge
computerization at the branch level. There were two options: Automate the front office or
the back office. Many banks opted for automating the front office.

In the first phase, Whereas banks like State Bank of India also concentrated on
the back office automation at the branch level. The Second wave of development was
Total Branch Automation (TBA) which came in late 1980s. This automated both the
front-end and back-end operations within the same branch. TBA comprised of total
automation of a particular branch with its own database. In the third wave, the new
private sector banks entered into the field of automation. These banks opted for different
models of having a single centralized database instead of having multiple databases for
all their branches. This was possible due to the availability of good network
infrastructure. Earlier, banks were not confident of running the whole operation through a
single data center. However, when a couple of private sector banks showed that it could
be done efficiently, other banks began to show interest and they also began consolidating
their databases into a single database. The banks followed up on this move by choosing
suitable application software that would support centralized operations. The fourth wave
started with the evolution of the ATM delivery channel. This was the first stage of
empowerment of the customer for his own transactions. The second stage was the
Suvidha experiment in Bangalore. This showed the power of technology and how the
reach can be increased amazingly at a great pace. Seeing these, all the banks started
revamping their retail delivery channels. Their core focus became increasing the number
of customers they can service at a lower cost. The main channels for these were internet
banking and mobile banking. After this, came the alliances for payment through various
other gateways. The third important development happening now is the real-time gross
settlement system of the RBI. Once this was in place, transactions between banks could
be done through the settlement system, online, electronically thereby, ensuring faster
collection. The process of computerization had started from back Office application, after
that Total Branch Automation and nowadays it is the period of implementation of Core
Banking Solutions (CBS).

A key trend in the last couple of years has focused core banking systems. With the
implementation of core banking systems across the banks, the usage level of IT for
customer management has increased. Core banking systems have enabled banks to launch
new products and services targeting specific customer segments after understanding their
banking and investment requirements.ATM, internet banking and mobile banking has
improved customer convenience by providing anywhere any time banking services. The
utility bill presenting and payment has help customers to pay their bills online at the click
of a button. Electronic clearing system and electronic funds transfer facilitate faster funds
movement and settlement for the customers of different banks and different centers. The
electronic data interchange and cash management service facilities have enabled better
funds management for the customer. Very few banks offered customers the ability to
access their accounts and perform at least simple money transactions using internet
banking. Advancements in information technology had make possibility for the banks to
use the internet as a delivery channel for banking services. Technological developments
has introduce tremendous changes in the ability of financial and non financial firms to
efficiently collect, store, use and sell information about their customers.

Balasubramanya S.(2002) in his study analyzed that the automation in the banking
sector has come a long way starting with the Rangarajan Committee report on the
banking sector reforms during the eighties, followed by reports of the Narasimhan
Committee in the nineties. With over 65,000 branches of the banks (public, private and
the cooperative sector) in the country, the author found that the percentage of branches
covered by automation was very low. Though many banks had claimed that more than
70% business has been automated due to the enforcement of RBI guidelines, in reality it
was much lower, as many functions in each branch were still done manually or with
partial automation. Hence, there is a significant amount of automation work to be achieve
in the banking sector.

2.2.Technological developments in Banking:

Over a decade Indian banking system witnessed metamorphosis. The main driver of
transformation has been the fast adoption of Information, Communication and
Technology (ICT) based system in the banks. The huge red ledgers, row of racks of
ledger holders, cash scrolls, registers, clearing cheque scrolls, totaling machines, long
rolls of paper ribbons often gazing the floor formed part of hardware in the branches. It
was also common to see staff hiding behind the tall branch counters, row of signature
cabinets standing between the counters and supervisory staff, customers eyeing
frantically on movement of ledgers and cheques until their transactions were done. But in
the post bank reform era, more particularly after the ICT enablement there is semantic
changes and innovation in the quality of customer services. Moreover, the beeline of
customers standing in queue in bank branches staring anxiously at the staff, their
eagerness to catch up bank timings to log in transactions, searching for known employees
to deposit/receive payments late at the counters, receiving wads of currency notes in retail
payments at the counters, waiting for updating pass books, receiving drafts, grumbling
over the bad hand writing of some of the employees were also the common features of
manual banking. They are now no more relevant. The banking work space has changed
for good. Bank branches are now sporting a smart look with refurbished interior,
radiating corporate color, well dressed bank logos, wide glass doors, and plush interiors
and well developed customer lounges etc.

The well painted signage, clear guidance in the branch, customer information,
display of product information, enquiry kiosk, smiling relationship assistants in some
banks adds to the modern branch set up. The low height counters handled by trained
employees wearing inviting look, customers having one to one interface with
departments, banking halls buzzing with clicks of mouse, laptops, computers, currency
notes zipping through the counting machines form part of modernized attire of bank
branches at least in metro cities. The eerie silence of customers and staff, an assured
quick servicing system, provides an atmosphere for maintaining focused quality of
service in the branches. The onsite ATMs, teller counters, swipe machines / kiosks have
speed up standard transactions of every day need of consumers. With the onset of
alternative delivery channels, even the branch timings are not very significant. Phone and
mobile banking, smart cards, debit cards, rechargeable electronic purse are also some of
the modern day banking facilities that allow round the clock access. With the profile and
aptitude of bank consumers fast changing toward the use of ICT facilities, the popularity
of e-channels of banking are set to assume more significance. Banks are fast gearing up
to introduce add-on services to attract young generation of customers.

It can further be observe that with most of the banks migrating to Core Banking
Solutions (CBS), the transaction platform has become common facilitating use of ATMs
of any bank at the ATMs of any other bank / institution so long as they are connected
with a common payment system like VISA/MasterCard. This connectivity has remove
even the limitations in the use of debit/credit cards.
The technological developments are accompanied by the following sections:

Section I: Development of technology in banks

Section II: Development of ICT based products / services
Section III: Opportunities in the Banking Industry
Section IV: Emerging Challenges in the Banking Industry
Section IV: Scope of application of ICT models to tackle key challenges
Section VI: Mergers and Acquisitions

2.2.1. Section I: Development of technology in banks

The ICT driven value proposition has transformed the whole range of banking services to
customers. It has proved to be a great customer centric enabler for banks to induce
innovation. It has made the life of bank employees much better. The skill sets of
employees can also be diversified and synchronized with current needs. The rigors of
reconciliation, matching of entries, the time spent earlier on housekeeping are now better
used for business development. Though technology brought relief to both banks and
consumers, its entry into banking system was initially sluggish. The resistance to change
is always a challenge. But the foundation for large-scale induction of IT in the banking
sector was provided on the recommendations of the committees headed by Dr. C.
Rangarajan, in 1984 and 1989. Subsequently, in 1994, the Reserve Bank constituted a
committee on 'Technology Up-gradation in the Banking Sector'. This committee too
made a number of recommendations covering payment systems including setting up of an
autonomous centre for development and research in banking technology.

The Institute for Development and Research in Banking Technology (IDRBT),

Hyderabad, was created as a sequel. It has establish Indian Financial Network
(INFINET), to conduct research in banking technology and provide consultancy services
to banks apart from providing educational and training facilities for the banking sector. It
plays the role of an incubator for bringing innovation in banking technology. It has
expanded its scope to cover intense research in technology to bring about better standard
of technology and works on evolving suitable security systems to protect the mass of
bank data. It sets a framework for sustained scaling up of ICT capabilities of the banking
industry to move towards international standards.

i. Progress in the entry of ICT in banks :

Banks began using IT with entry of Automated Ledger Posting Machines (ALPMs)
followed by standalone PCs with migration to Local Area Network (LAN) connectivity.
The system of intra branch connectivity with a common software continued for a few
years before inter branch connectivity could be thought of. But with the advancement,
innovations and development of ICT support more sophistication in its application could
be possible. Thus, the stand alone IT infrastructure in banks developed in early 2000
began to migrate to core banking platform for facilitating access to bank account from
anywhere. Thus going beyond the gathering, processing, analyzing and providing service
at the counters locally within the branch, IT moved to provide anywhere and anytime
banking. The new innovation of products based on CBS technology brought sea change
in banking services.

The big change came from the move from localized banking to world-wide
banking services through core banking solution, which provided the ultimate comfort to
customers. Further the advancement of ICT now makes possible to network bank
customers as a member of the whole financial system that facilitates interbank
transactions. The payments, remittances and credit to accounts against outstation cheques
can now move from one bank through electronic connectivity to another. The facilities
which were beyond imagination earlier were made possible now with the onset of CBS
platform and its innovative use.

ii. Density of CBS operations in Banks:

Having moved to CBS, banks began to introduce e-banking products and expanded
network of on-site and off-site ATMs. The statistics of RBI of March 2010 indicates that
90.0% of Bank branches are on CBS mode. Of the remaining 10%, 7.8% are fully
computerized, while 2.2% branches are partially computerized. The total number of
ATMs has reached 60153, of which 45.7% are off-site ATMs. The service charges on use
of other bank's ATMs have been dispensed with in first five transactions in a month. The
Regional Rural Banks (RRBs) have also begun to move to CBS mode. The cumulative
ICT spent in banks from September 1999 up to March 2012 works out to Rs 22052
crores. In order to justify the spent, banks will have to derive the synergy of innovations
to increase revenue streams of banks.

CBS enables use of central shared database support located at the data centre.
Business processes in all the branches of a bank to update a common database in a central
server located at data centre, which gives a consolidated view of the bank's operations.
Branches function as delivery channel, providing innovative range of value added
services to the customers.CBS is an integrated application that supports real-time, multi-
banking and multi-channel services. The single biggest achievement of implementing the
CBS is that each customer is truly the customer of the bank and not just the customer of
the branch, where his / her account is maintained. With the interlinking of ATMs, the
customer has been further transformed into constituent of the financial sector rather than
a bank.

iii. Diversification of ICT delivery channels:

The benefits of ICT based products in day-to-day banking are quite well known.
Diversification and setting up more delivery channels led to more facilities. There is
'Anywhere banking' and 'Anytime Banking' through 24*7*365 delivery channels such as
Automated Teller Machines (ATMs), and Net and Mobile banking in some banks. In
addition, ICT has enabled the efficient, accurate and timely management of the increased
transaction volume that comes with a larger customer base. It has also improved the
capability of banks to handle large number of transactions economically and facilitated
the movement from class banking to mass banking and removed the limitations.

In the process, the banks have also undergone a massive change in terms of
improvement in the IT communication network, which has greatly facilitated, not only
the networking of the internal communication processes, but the integration with the
external payment system gateways as well. CBS can also be used to process customer
relationship management, treasury, ATM application, electronic banking, management
information system, internet banking, mobile banking, smart card operations, biometric
ATMs; chip based electronic purse and such other customer convenient innovative
electronic devices.

2.2.2. Section II: Development of ICT based products / services

i. Key ICT led value propositions:

The application of ICT facilities goes much beyond the CBS. It is one of the enablers for
driving innovation and to provide superior customer experience. On-line electronic
payment systems, generation of SMS alerts against transactions, online swiping of
transactions against debit / credit cards, online internet/e-banking, mobile banking,
operations through point of sale terminals (POS) and a host of other products are some of
the value added innovations. As a result of such innovations in ICT and application of
global interface, further developments in the communication network and messaging
system in India can be seen. The emergence of Indian Financial Network (INFINET),
Structured Financial Messaging System (SFMS), VSAT connectivity, cable and leased
line connection, fiber optics channels, etc., have contributed in using ICT more
aggressively for customer convenience. There have been marked improvements in the
Indian payment and settlement systems in the form of popularizing and strengthening of
Real Time Gross Settlement (RTGS), Centralized Fund Management System (CFMS),
Electronic Clearing System (ECS), National Electronic Fund Transfer (NEFT), Cheque
Truncation, National Financial Switch (NFS), developments and initiatives at Clearing
Corporation of India Limited (CCIL), ATMs, electronic banking channels etc.

ii. Electronic Clearing and Cheque truncation

The quick innovations: The Electronic Clearing System (ECS) is another popular and
widely used product. ECS Debit/ECS Credit are introduced to facilitate execution of
electronic standing instructions for timely settlement of payments. Banks are also in the
process of shifting most of the back-office activities to remote processing centers, so that
branches are in a better position to attend to customer needs. These trends indicate that
technology help to hive off many of the branch activities to a different location to enable
branch employees to move in the market and satisfy the customer needs. The ICT has
thus, come to be a strategic business enabler and a means for bringing innovation. The
customers also have begun to enjoy the blend of technology in banking services.

However, despite the use of electronic methods of payments, the use of cheques
may continue for some more years. In order to improve efficiency, reduce operational
risk and time taken for cheque processing, the Reserve Bank has initiated steps to
introduce a Cheque Truncation System (CTS) where scan images of cheques will travel
to their destination in the place of physical cheques. A pilot project has commenced in the
national capital region in Delhi where processing volumes have picked up substantially
and about 70% of the cheques are being routed through the CTS. They are now
expanding the CTS to other centers. Ultimately the whole country would be connected
through 6 or 7 Grids. The stabilization of cheque truncation facility has benefit the
customers immensely.

iii. RTGS / NEFT a gateway for money transfers

As a remittance product, RTGS / NEFT are becoming more popular. RTGS is a large
value payment system which processes both customer and interbank transactions of Rs.1,
00,000 and above, while the NEFT is essentially a retail payment system. Further, while
RTGS is a real-time gross settlement arrangement, NEFT is a near-real time system with
settlements taking place at hourly intervals. Both systems are operated by the Reserve
Bank of India. The facility of RTGS and NEFT is available in over 70,000 branches with
119 members and 99 banks participating in the respective systems. The volume and value
of transactions processed through the two systems has shown an impressive growth in the
last two years as under:
 Table 2.1 Bank Group wise number of transaction in RTGS and NEFT
Bank group wise number of Transaction in RTGS and NEFT
(No. of Transaction in million)
Bank Group RTGS NEFT
2008-2009 2009-2010 2008-2009 2009-2010
SBI Group 3.3 7.4 2.7 6.7
Nationalized Banks 3.5 9.0 2.2 7.7
Foreign Banks 2.2 5.3 12.4 21.6
Private Sector Banks 4.2 11.3 14.4 29.3
Others 0.1 0.3 0.03 0.2

Source: Report on Trends and Progress in Banks: 2009-10, an RBI

Publication, November 2010

The advantages of popularizing the electronic transmission of funds are twofold. One is
the enhanced speed and efficiency. The other is to ensure compliance with the bank's
KYC policy. Funds coming through the banking channels have more authenticity. Going
much beyond remittances, banks have begun to use the ICT systems to facilitate
centralization of back office operations to ensure more efficiency in serving customers.

iv. Centralization of work processes:

Accordingly, many banks have improved the application areas. Besides the customer
interfacing electronic channels, banks have developed several centralized ICT based
innovative processing centers. Centralized loan processing hubs, city back offices,
regional bank offices, call centers, centralized sales outfits and such other batch activities
are getting pooled in one place. Such centralized processing centers meant for handling
back office work relieves branches of the rigors of non-customer centric activities. Such
approach enables branches to operate on thin model and able to convert into efficient
customer centric sales and service outfit. The new lean branch models are emerging as
customer focused entities providing superior customer experience.

v. Advantages of technology in improving banking services:

Overall, technological innovation has facilitated speedy processing and transmission of

information, provided easy access to the data for marketing of banking products and
Improved access of banking service to customers. The development of ICT has facilitated
diversification of product range, broad based product development, and opened up new
service channels. It has moved beyond the scope of inter branch connectivity to interbank
connectivity. The financial services industry has thus become virtually more connected
with the ICT enablers. Most banks made visible efforts to keep up with the new systems
and processes to deliver improved services to customers. Moreover the spurt in
broadband internet users from 35 million in 2007 to 50 million in 2010 is likely to
increase density of internet banking base substantially. By 2020, the internet users are set
to reach 250 million opening up new vistas of growth. The promotion of Internet services
is an extensive, low-cost and convenient innovative online service. It has facilitated
delivery of banking services to customers, anywhere and anytime. Further the integration
of e-trading with internet banking and banks' websites is also a notable feature. These
ICT advancements have enabled banks to gradually replace manual work by automated
procedures with on-line real time processing. Use of ICT in a large way provides relief in
the form of more effective work processes, capacity building to handle larger volume of
transactions with remarkable ease. There is no pressure of incremental rise in the volume
of transactions and rise in number of customers / users. The system would not feel the
presence of such large number of transactions unlike in the manual mode where the
physical queue always posed discomfort. Thus taking the help of technology, banks is
fast moving from 'brick and mortar' banking to virtual banking, though physical presence
is going to stay in India due to the unique nature of Indian banking and varied Indian
demographic pattern. Personal touch and relationship management in banks in India
continues to hold significance as a value proposition to customers despite the massive
automation of banking services.

2.2.3. Section III: Opportunities in the Banking Industry:

With globalization and changes in the technology, financial markets, world over have
become closely integrated. Customers can access their accounts anywhere and banks
customer base is also spread 126 across the world. Deregulation and liberalization has
opened up new opportunities for banks but at the same time the pressure of competition
have led to narrowing spreads , shrinking margins, consolidation and restructuring.
Increasingly, banks are focusing on core competencies, synchronizing strengths and
shedding activities that are not remunerative. The face of banking is set to change as
banks adopt technology to reduce costs, widen product range for customer convenience
and to manage risks.

2.2.4 Section IV: Emerging Challenges in the Banking Industry

i) Financial inclusion:

The key challenges faced by the banking Industry are as follows: Besides opening new
branches in potential centers, setting up large number of ATMs, massive expansion of
Point of Sale (POS) terminals etc., are needed to be planned to reach out to the
hinterland. Banking system has the agenda to initially expand presence to over 1, 09,000
villages with population of 2000 and above by March, 2012. Appointment of Banking
Correspondents (BCs) on a large scale can be done only if ICT model is scaled up to
meet the larger requirements. The connectivity of base branch operating on CBS with the
Pops terminals available with BCs will be used by the customers. Therefore, the entire
success of implementation of Financial Inclusion Plan of banks will rest on wider usage
of ICT platform and innovation of low cost delivery models.

ii) Risk Management:

Similarly, the up-gradation of the risk management modules and for better ALM,
technology support needs to be strengthened. The credit risk management systems
presently operating on standardized approach under Basel-II in most banks are set to be
migrated to Internal Risk Based (IRB) module. Thereafter to advanced IRB module.
These will require collection of historical data of minimum five year. The increased use
of technology will be able to hasten the process of adopting higher modules of risk
management. Moreover, ALM systems can also be further refined to capture residual
maturity profile of assets and liabilities on online basis. In view of recent experience of
global financial crisis, Bank for International Settlement (BIS) at the behest of global
regulators have come out with the concept of Basel-III framework that calls for more
fine- tuned risk management system. ICT can be better used to refine risk management
systems.
 iii) Customer Relationship Management (CRM):

Another big challenge is to develop customer data that can support cross selling. In India
the culture of cross selling is low. The average number of banking products sold to per
customers in India is significantly lesser than the global bench mark. It is a tough
challenge to harness the significant potential for cross selling. As of now the average
products used by each bank customer in India is 2.2 and 2.1 in PSBs. According to the
global benchmark, the best practice range is 6. That means each customer with the bank
should possess six types of products. In that case the cost of acquisition of customers will
substantially come down. But the gap in the sales is wide. One of the enabler could be
collection and collation of CRM data from the customers. Given that cross selling is the
most cost effective mechanism to develop business, an increased use of ICT will be able
to address this issue.

iv) Leveraging ICT:

The most challenging task will be to make customers use technology. The e-Banking,
ATMs and POS needs to be extensively used to reduce transaction cost. The procurement
of ICT infrastructure is huge. The marginal utility of it can be increased with greater
number of transactions. The basic purpose of using technology is two-fold. One is to
enhance the quality of service. The other is to reduce transaction cost. Banks would be in
a better position to offer affordable banking service to a larger number of customers.
Imparting technology literacy among customers for wider use of ICT delivery model will
be one of the key lasting strategies of the bank that will open up new vistas of growth.
Putting customers on technology mode is an entrepreneurial task that requires a greater
interface between bank and customers.

As a part of harnessing technology, wide publicity of benefits of ICT based products

must reach consumers. Spreading awareness among the customers about the benefits of
technology is to be taken up along with financial literacy launched as part of Financial
Inclusion. This needs to be done on a mission mode to achieve optimum benefit of ICT.
Innovations can be possible only if number of users is substantially increased. The cost of
per transactions in the branch on an average works out to `40 while in ATM it is `17.
Through a call center the cost is still cheaper at `8. It comes down to `2 per transaction in
net banking and will be only 50 paisa in mobile banking. The transactions limit in mobile
is now limited to 5000 due to security reasons. The more customers are migrated to
alternative delivery channels, the more will be the reduction in costs. Hence leveraging
ICT will be a critical differentiator for the banks to innovate and save costs.

v) Management of human capital :

Banking industry has an immense intellectual skill set which needs to be mapped to
deploy them in best fit assignments. ICT can be used as an effective tool to capture the
skill sets of employees and the data base can be used for optimum usage of human
competence. In one of the recent studies by McKinsey & Company in its publication
(Aug 2010) The Zhuman capital key: unlocking a golden decade in Indian Banking, He
pointed out that Over the decade, the Indian Banking Industry is poised for
unprecedented growth but only if it can dramatically strengthen its human capital. For
banks to realize their full potential, developing robust leadership capability and
improving productivity will be critical.

Mentoring, grooming, skill building, training and upgrading human competence and
leadership can be possible only if the various capabilities are captured as part of HR
function. In order to do so, ICT can be leveraged to parameterize and capture the granular
set of competence. Gap analysis can be done. Skill gaps can be identified. Then the
exercise of building up the missing skill sets will be possible. The ICT can be a good
enabler for such critical improvements. Following are the other challenges in Banking
are:

i. Coverage: One of the biggest challenges relates to the extension of the coverage
of banking services to the remotest parts of the country and to the most vulnerable
sections.
ii. Reliable and secure banking transactions.
iii. Proper understanding of the customer: proper identification of their needs and
wants. For this a massive survey must be undertaken may be in collaboration
with other banks.
 iv. There is need for transparency in offering services as customers awareness has
grown considerably.
v. Breach of privacy: online transactions enter straightaway into the records
revealing the identity of customer. Thus black money cannot be transferred with
ease.
vi. Bandwidth: Though companies claim to offer good speed and high bandwidth,
still there are problems in accessing high speed on net. Internet banking can go
high only on the wings of proper infrastructure comprising telecommunications
and bandwidth.
vii. Computer literacy in India is still very low and that is a barrier in fast acceptance
of Internet banking.
viii. The mindset of the Indian customer needs to be changed.
ix. Customer has to be protected against being "net-jacked" i.e. he needs to be
protected from fraud.
x. Cracking login and passwords is a common way of fiddling with the data.
xi. Denial of services: Directing millions of queries can block computer network.
xii. Data Diddling: Data can be modified in an unauthorized manner. A customer can
therefore receive bills of higher amounts than the actual transactions
xiii. Session hijacking: Hijackers become unauthorized intermediaries between the
server and the client; they can then hijack the data and prevent it from reaching
the destination.
xiv. Application for account opening can be accepted over Internet but account should
be opened only after proper introduction and physical verification of the
customer. Security procedure adopted by bank, for authenticating user, must be
recognized by law as a substitute for signature, from a legal
perspective. Information technology Act, 2000 in section 3(2) provides for a
particular technology (asymmetric crypto system and hash function) as means of
authenticating electronic records. Any other method used by bank should be
recognized as a source of legal risk.
xv. The secrecy and confidentiality of customers account has to be maintained.
xvi. Consumer Protection Act is applicable to banking services as well.
 vi) Customers expectations:

In the era of e-banking and severe competition, the expectations of the bank customers
have increased. Due to this banks should offer a broad range of deposits, investment and
credit products through diverse distribution channels including upgraded branches,
ATMs, telephone and Internet. All these changes require vision, determination and
extensive communication across all levels in the organization so that the vision and
mission of the banks is communicated and understood down the line and receiver
unqualified support.

vii) Infrastructure:

The other challenge for e-banking is well developed infrastructure. For effective
deployment of e-banking services, it is necessary to have a reliable and cost effective
infrastructure that can be accessible to the majority of the population. The base
communication infrastructure for e-banking is computer network with internet facility.
Most of the transactions use internet to communicate with the customers. Automating the
banking services is another prerequisite for e-banking. Close financial links between
banks and other financial institutions is necessary. This link is used for clearing and
payment systems among these institutions.

viii) Heavy Investment Costs:

In order to offer e-banking services, banks have to invest huge amount of money. They
have to incur heavy maintenance costs also. This may not be the problem for
well- established banks. But in case of new and small banks, they have to face
financial problems at the initial stage. Banks in developed countries have already
deployed huge amount of investments for e-banking services.

ix) Socio-Cultural Challenges:

Normally customers confidence and trust in traditional banking system will make
customers less likely to adopt new technologies. New technologies will not be successful
until customers are satisfied with privacy and security aspects. It also requires some time
to earn confidence among the customers even it is easier and cheaper than the traditional
methods.

2.2.5. Section V: Scope of application of ICT models to tackle key challenges:

Innovation at every level is possible only if the key challenges could be addressed. An
integrated application of ICT in customer facing and back office operations would
substantially reduce the turnaround time of transactions and bring about improvement in
the quality and efficiency of service. Many banks are in the process of integrating more
activities into back office processing to derive full synergy of ICT capabilities. The
benefits of ICT can be broadly classified into the following:

i. Branch level
ii. Back Office level
iii. MIS level

Many banks have completed the first level of usage and have migrated to the second level
to integrate back office operations. In a dynamic ICT environment, up-gradation of
technology and expanding scope of its usage is an ongoing process. As far as deriving
synergy of technology for improving MIS is concerned, there is lot to be done. Banks
have to adopt Automated Data Flow (ADF) system by developing data warehouse. A
systematic ADF and Data Warehousing seeks to fulfill this requirement in which data is
seamlessly transmitted from the host systems to the recipient system without any manual
intervention thus making the whole process more efficient, consistent and reliable. At the
same time, as a major spin-off benefit, the system of automated data flow also
streamlines the information sharing mechanism at the host level thus serving as a potent
MIS tool and encourages good data management practices. It should help banks not just
to deliver robust and reliable services to their customers at a lower cost, but also generate
and manage information more innovatively and effectively.
On the whole, the banking system is well on course to setup ICT driven delivery
models to improve quality of customer services. In the area of centralize back office
operations and ADF, more action is needed to derive its full synergy.
2.2.6. Section VI: Mergers and Acquisitions:

Today size has become an important issue in financial market world over. Merger on
commercial considerations and strategic mergers are the order of the day. One of the
possible ways to remain in competition would be mergers and acquisition. The
private/foreign banks have already set in the trend. We can say that a constructive and
serious measure should be initiated for:

Better and cheaper access to basic infrastructure requirements such as power,

telecommunications i.e. VSAT, leased lines etc.
Creation of customers awareness and education for technology adoption are
imperative.
The IT, Act 2000 should be implemented in totality to handle legal issues.
Converting branches into boutiques catering to the requirements of clients and re-
engineering the functions of branch banking using technology and delivery
channels.
Setting up an e-banking group to provide grid principles for risk management of
e-banking activities.

2.3.Changes in banking system and services

The Indian banking sector is going through major changes as a consequence of economic
reforms. The changes affect the ownership pattern of banks, availability of funds, the cost
of funds as well as opportunities to earn, range of services (fee based and fund based),
and management of priority sector lending. The new rules of competition require
recognition of the importance of consumers and the necessity to address the needs
through the innovative products supported by new technology. As a consequence of
competition, the managerial challenges include market segmentation, product positioning,
innovative delivery channels and cross selling. The banks may have to reorient their
resources to form reorganize branch networks, reduced manpower, dramatic reduction in
establishment cost, improving the skills of the staff, and innovative ways of attracting
talented managerial pool. The Government of India and Reserve Bank of India on their
part would strengthen the existing norms in terms of governing and directing the
functioning of these banks.

As regard the banking sector, technology has completely changed the nature and pace of
delivery of banking services world over. Technology enables increased penetration of the
banking system, increases cost effectiveness and makes small value transaction viable.
Besides making product and services affordable and accessible, it simultaneously ensures
viability and profitability to providers. Increased penetration brings further reduction in
costs, which in turn attract more people to avail services. Technology has augmented the
scope, reach and coverage of banking through significant networking and the availability
of a wide variety of new delivery channels to such an extent that the death of the
distances and death of identity has already been accomplished. In addition, banking is
poised to be omnipresent through facilities such as any time and anywhere banking
Proliferation of services offer through ATM networks, IT enabled instant remittances
across banks, customer payments, mobile payments and many more.

The changing face of the banking sector, aided by technological innovations, can be
seen from various developments in the recent past. The most noteworthy has been the
usage of ATM technology. ATM started as a substitute of bank branch allowing their
customers to withdraw cash anytime and to extend their services wherever it would not
be viable to operate a physical branch. The delivery channel revolution can be said to
have begun with ATMs. The phenomenal success of ATMs has made the banking sector
develop more innovative delivery channels to build on cost and service efficiencies. As a
consequence, banks have begun to introduce tele-banking, call centers, internet banking
and mobile banking.

Tele-banking is a good medium for customers to make routine queries and also an
efficient tool for bank to cut down on their man power resources. The call centre is
another channel that captured by imagination of bank as well as customers. At these
centre enormous amount of information is at the fingertips of trained customer service
representative. A call Centre not only cut down cost but also improves customer
satisfaction. Moreover it facilitates 24*7 working and offers the human touch that the
customers seek. Mobile banking can be regarded as the delivery channel of the future.
This is because it offers portability and convenience to the users. It is just like having a
bank in the pocket. It would not have been possible for banks to give full benefits of tele
banking, mobile banking, internet banking, and card banking to all its customers without
an appropriate banking solution. CBS is one of the development that has revolutionize the
banking sector. The implementation of core banking system has proven to be a big boon
in providing anywhere access to banking services and the treatment of a customer as that
of a bank not as a constituent of a specific branch. Alongside the banking sector as made
significant efforts to identify security gaps in an IT enabled scenario and has addresses
them effectively as well.

Technology implementation has benefited the banks also due to the facilitation of the
Reserve Bank- both from the operational and legal perspective. In addition, the Reserve
Bank had provided the broad framework for many innovative technology based system.
The guide line on Internet banking and guideline for Information system security/audit in
2001 where early initiatives aimed at ensuring safe and secure technology based
operations by banks. Keeping pace with time and marshalling international practices, RBI
has issued broad guidelines on mobile banking and prepaid (store value cards). These
along with sitting up of systematically important payment and settlement systems such as
RTGS and other retail payment system like ECS (credit and debit clearing), NEFT,
NECS, RTGS have transform the way of banking and todays customer have a wide
array of options to choose from. All these have safety and security at the heart of the
respective system.

In the area of payment and settlement system, where technologies impact the
customer transaction most, there have been significant advancements. The magnetic Ink
Character Recognition (MICR) cheque clearing system processes a staggering 4.5 million
cheques on a single day. The cheque transaction System (CTS) is another innovative
solution that has been developed to enhance the efficiency of paper based clearing
system. CTS have eliminated the need for physical movements of cheques. Speed
clearing has been introduced by the reserve bank to reduce the time taken in clearing up
country cheques and take advantage of and leverage the core banking technology adopted
by banks. The NECS (National Electronic Clearing System), with its centralized
processing capability coupled with the implementation of CBS has brought down the
clearing and settlement system to its current t+1 basis.

A major area where IT security assumes significant pertains to the transformation of

information using IT for communication. Traditionally paper based system have been
subject to certain controls to ensure that the basic requirements pertaining to genuineness,
authenticity etc, are meant with. In the IT based scenario this aspect gain greater
importance not only because of this speed with which IT based electronic information
flow but also on account of the potential havoc that could arise on account of incorrect
transaction.

2.4.Growth of Banking and Computerization

The Indian Banking industry has witnessed an 38.8% growth in its assets in the fiscal
year 2010-2011. A sustainable overall economic growth has laid the foundation of a
robust banking sector. The Industry has been largely classified on the basis of its origin &
ownership into Indian Public Sector Banks, the Indian Private Sector Banks and the
Foreign Banks.

Table 2.2: Trend in growth of banking

assets

Source: RBI, ICRA Research

The trend in growth of banking assets is as follows:

i. While new private sector banks and foreign banks have the edge when it comes to
computerization, public sector banks have not lagged behind in making
investments to computerize their operations. As of end-March 2010, 97.8 % of all
the public sector bank branches have been fully computerized. Of them, 90 %
provide CBS. This figure was 79.4 % at the end of the previous fiscal.
ii. In the past 10 years, public sector banks have spent close to Rs.22, 000 core on
computerization and IT upgrades. For the final half of the 2010 fiscal alone,
spending on this account stood at Rs.1, 370 crore.
iii. The total value of the paper based clearing has been steadily declining, 59% in
volume of transactions and 10% in value terms in the 2010 fiscal year.
iv. Thanks to CBS technology, State Bank of India's capability to handle transactions
went up more than three times. As of April 2011, SBI could handle 35 million
transactions a day as against 10 million earlier.
v. The bank started the move towards CBS in early 2000, and the implementation
was complete by 2008. The entire project was handled by Tata Consultancy
Services (TCS), which was the systems integrator, while the other major
technology partners in the project were Hewlett-Packard (HP), Data craft, Cisco
and Microsoft.
vi. CBS and computerization of its various branches helps in easier rectification of
errors, minimization of fraud and the elimination of human error.
vii. Bank of India has spent close to Rs.1, 500 crore on technological up gradation and
computerization of its branches since September 1999.
viii. ATMs have been a big success. It help in reaching banking services to different
parts of the country, said Kalyan Sundar. Almost 75 per cent of Banks of India
cash advances are made through ATMs. Off-site ATMs of public sector banks
witnessed a 70% increase in the 2010 fiscal from the previous fiscal. The number
grew from 9,898 in end-March 2009 to 16,883 by end-March 2010. For private
sector banks, the growth in the number of off-site ATMs in the 2010 fiscal has
been around 19%. The number stood at 9,844 in end-March 2010 as against 8,324
in the previous year. The number of on-site ATMs for public sector banks showed a
growth of 36%. The number grew to 23,797 as of end-March 2010 from 17,379 in the
previous fiscal.

Table 2.3: Growth of ATMs

Growth of ATMs
Off site ATM On site ATM
ATMs in No. of ATMs ATMs in % No. of ATMs
%
Public 70% 16,883 in 9,898 in 36% 23,797 17,379 in
banks increase in the end of the end of increase in in the the end of
2010 March - March - 2010 end of March -
2010 2009 March - 2009
2010
Private 19 % 9,844 in 8,324 in
bank increase in the end of the end of
2010 March - March -
2010 2009
Source: RBI, ICRA Research

ix. A better and safer environment for electronic transactions has resulted in a sharp
increase in the number of online transactions. The number of RTGS transactions
in public sector banks more than doubled from 6.8 million in the previous year to
16.4 million in 2009-10. The number of RTGS transactions in the private sector grew
to 11.3 million in the 2010 fiscal from 4.2 million in the previous year.
x. In the private sector, NEFT transaction volumes jumped from 14.4 million in
2008-09 to 29.3 million in 2009-10.
xi. Almost 10 % of our total transactions take place via the electronic mode.
xii. Axis Bank recently introduced the Instant Money Transfer (IMT) system. It is a
remittance facility that allows a withdrawer to get money from an ATM even if
the person does not have a bank account.
xiii. Bank of Maharashtra is already gearing up for the 3G revolution. The bank plans
to set up three 3G techno-savvy specialized branches in Mumbai, Delhi and Pune
to cater to the younger generation.
2.5.Adoption of Technology in Banking:

IT offers immense opportunities to significantly improve efficiency and effectiveness of

the functioning of banks. IT will be a tool not only to improve the operational efficiency
of banks but also to serve customers better.

1. Financial inclusion: Technology adoption has enabled a small percentage of

financial inclusion in total rural households. Harnessing technology holds the key
for faster reach even more than the brick and mortar model. The best way offer
for inclusive banking is through twin-routes - mobile banking through a bank-led
model and banking correspondent model. ATM/Smart card technology permits a
bank customer to authenticate one self and then conduct banking transactions in a
secured fashion. Mobile phone also can be used for authentication and banking
transactions in a secured fashion.
2. Enhancing the secured network: Security is at the root of technology centric
banking. The advent of low cost and all pervasive communication channels such
as internet has made communication more efficient, but not necessarily safe and
secure. With the Government planning to implement an e-payment gateway for a
single point distribution of all the payments, the need for a secured network for
transmission of such information becomes essential. IDRBT may explore the
possibility of connecting the secured INFINET with the government (NICNET)
so that the entire sensitive massive financial transfers take place under a secured
environment.
3. Capability of handling large volumes: Financial transactions have increased
phenomenally .Next generation products could handle any amount of volume with
due scalability facilities.
4. Fraud monitoring and prevention: The Reserve bank of India has recently
come out with the recommendations of a working group on Information security,
Electronic Banking, Technology risk management and cyber frauds.
Implementation of the recommendations calls for an assessment of the nature and
scope of activities supported by technologies engaged by banks. In this Electronic
age speed in detecting frauds has become extremely important. The response has
to be with the same blinding speed as the fraud committed, Or else, the fund could
vanish in no time.
5. Business Continuity Plan: Technical experts are familiar with the processes to
be kept ready for activation in response to any disaster that may strike. With the
complexities of modern banking, the BCP is a must for every bank.

Table 2.4: Cost per Transaction of various modes

Cost Per Transaction In The US: Money Transfer (units in US $)

Type Branch Cheque Phone ATM PC Internet
Cost Per 1.07 0.95 0.45 0.27 0/015 0.01
Transaction
Source: RBI, ICRA Research

2.6.Impact of IT on Banks

Paradigm shift from traditional banking to customized banking is the service that can be
delivered via computer and convenient banking i.e. "Anytime, Anywhere banking". A
customer can check balance by logging into banks website through a user name and
password. In this way he can enquire balance, status of cheques, perform funds transfers,
order drafts, request issue of cheque books etc. Under the impact of technology, the
organization structure of the banks, the role of various functionaries and the approach of
bank to customer are undergoing a perceptible change. The technology helped the bank to
strategically look at customer needs to offer efficient banking services, at the same time
gearing its staff to cope with the stress of technology.

i. Changes in Organization structure and orientation

Information technology is a mean for increasing organizational productivity. IT, in fact,

is much more than a series of new machines for organizational efficiency, since it brings
about a new concept of self regulating system and principle in the organization.
Some of the usual change brought under the impact of IT relating to organizational
change and orientation are as follows:

The need for faster information and better control has a direct impact on reducing
the hierarchical tier system in the banks.
The management processes and controlling mechanism characteristic also
undergone a change.
Managerial attitude also undergone a change under the impact of IT. This is
reflected in the way top executives look at IT as a functional requirement and apply
it for improving organizational efficiency and effectiveness.
The organizational change can facilitate the increased involvement of information
system in the mainstream product offering in banking and financial sector.
Integrated Internal accounting system: Banks book-keeping is automated, fast and
accurate. It saves time of staff for marketing and other work after the banking
hours.
Management information system for middle and top management has improved due
to data classification and retrieval, integrated accounting system, communication
and conferencing system and inters- connectivity of branches.
Cross-selling of various financial products due to data mining and electronic
marketing channels.

ii. Impact on service Quality

Banking which is primarily a service industry over the years, becoming more and more
technology dependent. The impact of technology on service quality can be summarized
as follow:

By integration of IT in operations, new banks with limited network of branches

become better place to compete with established banks.
The technology is forcing the banks to develop a strategy for an online delivery
system to broaden the customer relationship and to retain customer loyalty.
 In bank, the technology pushes the delivery of services out of the bank and the
focus shift from cost reduction of market position.
The advent of IT democratizes the information in the sense that bank customers,
particularly the corporate customer, have access to the same real time information
over which the bank has earlier control. This results in greater competition for
banks.

iii. Changes in customer aspiration

Today customers are demanding fast, accurate and reliable services. This has improved
considerably in the following ways:
Increasing new banking channels: ATMs, Internet Banking, Tele-banking.
Increasing customer convenience: Any where and any time banking and 24 X 7
day banking, home banking.
Routine banking transactions are speedier, safe and secure.
Greater flexibility and convenience
Integrated banking service with Inter-connectivity of branches.
Banker-customer communications are fast and neat and information service is
available on 24 X 7 days basis via call centers.
Banks can also handle non-banking services for their customers, e.g. payment of
electricity/ telephone/ gas bills, insurance premium and receipt of pension/
interest/ dividends etc.
Prospective customer can gather all the information from the website and thus if
he comes to the branch his queries will be very specific and will take less time of
employee. Customer can visit these websites and can compare the services
offered by a bank with that of another. Customer can get all the information, by
saving money and time. The trend thus emerging out is that of virtual corporate
system where the human role is minimized to maximum effect.
iv. Impact on human resources

The technology has also brought about a visible impact on the human resources, which is
the most vital component of banking businesses.

The foremost impact of technology on the existing manpower is manifested in the

resistance of the new sysem.The fear of change give rise to anxieties, inhibitions
and skepticism, that can be overcome only with the spread of awareness at all,
levels. These fears can be of the following:
i. Job Content: Fears, such as whether the technology mean losing one
expertise or personal skill to meet the challenges of adequate job
ii. Job security: Fear whether the change will mean a loss of the job itself, or
whether it would be possible to retrain oneself in the new scheme of thing, or
would it man a transfer from the existing work place, or whether the new
computer literate have better job profile
iii. Authority dilution: fear such as whether the change in job requirements may
mean erose in ones authority within the organization.
With the increased use of information technology, there is an ever increasing
demand of the specialized personnel in the field of IT management.
Another impact of IT on human resource is the high turnover rate of computer
skilled manpower. This may necessitate the banks to formulate their own man
power policies to retain these professionals within the organization.

v. Impact on privacy and confidentiality of data:

The concern for the misuse of the stored data becomes more profound when the stored
data pertain to financial transaction of individuals. Customers feels threatened about the
inadequacy of privacy being maintained by banks with regard to their transaction and
look at the computerized system with suspicion .Whereas when the system crashes the
content of users profile get publically displayed at the terminal. Therefore data privacy
assumes two significant dimensions:

The authority to access data

The authority to us data for specified purpose.
The following principles are broadly common in the privacy laws:

The data must be accurate, up to date and kept no longer than necessary
Special measures over and above the normal computer security procedures should
be taken to preserve the privacy of personal data.

A multi-layered security architecture comprising firewalls, filtering routers, encryption

and digital certification ensures that customers a/c information is protected from
unauthorized access. Firewalls and filtering routers ensure that only the legitimate
internet users are allowed to access the system. Encryption techniques used by the bank
(including the sophisticated public key encryption) ensure that privacy of data flowing
between the browser and the infinity system is protected. Digital certification procedures
provide the assurance that the data receive is from the infinity system.

vi. Impact on payment and settlement system:

IT has a positive impact on the payment and settlement system of the country. With some
path-breaking initiatives implemented in this area, the Electronification of payment
system has become the hall mark of the decade electronic based payments are superior to
paper system in terms of traceability, efficiency, speed and safety. The introduction of the
Real Time Gross Settlement (RTGS) system has resulted not only compliance with
international standards but also paved the way for risk-free fund transfers settlement on a
real time basis.

The facility for inter-bank funds settlement through RTGS is available across
more than 88,000 branches of banks spanning more than 5,000 centers of the
country.
IDRBT plays an important role in promoting the electronic payment system, at
the heart of IT enabled banking it provides safe, reliable and effective
communication network and messaging system.
Low cost yet reliable technologies in the form of Multi-Pocket-Label Switch
(MPLS) technology is an effort to offer state-of-the-art network.
2.7.Role of technology in achieving competitive advantage in Banks

For technology to drive the competitive advantage in a sustainable fashion, banks need to
have clearly defined strategic goals and translate them into appropriate IT goals. To
support the IT goals, banks need to invest in building architectures, infrastructure,
processes, IT organizations and governance frameworks. This means,

i. Ensure business benefits expected from IT are clearly identified

ii. Policies and procedures around data quality, metadata management, disaster
recovery, business continuity plan
iii. Ensuring governance has enterprise-wide coverage
iv. Ensuring core transactional applications are in place
v. Having a plan and solution in place for Infrastructure management, and finally,
vi. Having a clearly defined IT organization with appropriate skill sets.

2.8.The focus area for the organization in strategy and the business
benefits expected out of IT

The banks in India are on a growth path as they are apparent from the organization
strategy they focus on building top line growth while managing costs. The banks have
responded that around 60% of the organizations focus on building top line and around
40% for managing cost. The scenario is consistent across all classifications of the
banks.Around 95% of firms have mentioned that retaining customers is critical and 88%
of firms feel the same about acquiring new customers while only 53% of firms said that
cutting costs is a top priority this year. This is in line with International trends. In
conformance with the expressed plans for growth, banks have mentioned the following
top 5 benefits expected from leveraging IT for business. Following are the strategy
adopted by different banks to enhance their business benefits:

_ New Customer Acquisition

_ Leveraging Cross- Sell Opportunities

_ Increasing Process Efficiency
_ Increasing Customer Service Levels, and
_ Adherence to Compliance
 2.9.Issues of Technology in Banking:

Following are the important issues regarding e-banking:

i. New business and new markets: The Indian banking sector is at an exciting point of
evolution. The opportunities to enter new business and new markets and to deliver
higher levels of customer service are immense.
ii. Competition: As the Indian banks are positioning it as financial service provider,
banking businesses are getting redefined. Technology is unsettling the earlier
business processes and customer behavior is also undergoing a change. These have
enhanced the focus of competition.
iii. Competitive advantage: Competitive advantage can be achieved by harnessing the
potential of the employees by creating a positive work culture and enlisting the
support of all the employees to achieve the organizational goals.
iv. Operational strategies: Indian banks have adopted better operational strategies
upgraded their skill to withstood challenges and have become adaptive to the
changing environment.
v. Data quality and consistency: Banks and financial institutions look at common data
standards and protocols so as to make the information systems truly interoperable
and facilitate easy data flow. Information governance is emerging as a distinct
discipline and this deserves much more attention.
vi. IT infrastructure: Banks have accumulated lot of IT infrastructure over the years.
They should actively explore consolidation to improve efficiency and minimize
costs.
vii. IT governance: IT governance is an important component of corporate governance
and banks should put necessary processes and organizational structures to improve
performance as well as compliance.
viii. IT Outsourcing: Banks should develop in-house IT skills, broad IT management
and leadership competencies. Banks have become increasingly dependent on third
party IT service providers for all technology needs, to the extent that in many cases
service providers are in control of the banks technology agenda.
 ix. IT-Business: IT-Business alignment needs special attention to derive better value
from IT investments.
x. Issue of HRM: Training, development and retaining talented and committed staff is
a major emerging challenge before the public sector banks. Today, employee
performance review systems are neither objective nor transparent. They do not
differentiate high performers, risk takers and innovators lot from amongst the total
staff. Time has come to measure the value of human capital and take urgent steps to
ensure it to its optimum level.
xi. Lack of Actionable Planning: Lack of planning or ineffective planning is very
relevant to public sector banks. Though all the banks have establish performance
budgeting system and created MIS, it does not meet the managements present
requirements. Basically, the entire planning process is deposit and credit oriented. To
tackle this challenge actionable strategic plans which are systematically broken-up
into annual plans and performance is strictly reviewed in terms of the targets and
accountability is fixed for non-performance.
xii. Greater customer-Orientation: Greater customer-orientation is the only way to
retain customer loyalty and to stay ahead of competition. In a market-driven strategy
of development, consumer preference is paramount. Gone are the days when
customers come to the doors of the banks and now banks are required to chase the
customers. Thus, only banks that are customer-centric and extremely focused on the
needs of their clients will succeed and there is need to change the mindset of banks
at all levels on this issue. In fact, they must realize that customer is the only profit
center and all others are overheads. Identification of profitable customers,
understanding their needs and preferences, improving the delivery systems and
reducing the transaction costs for them should become important strategic issues for
banks, to survive in the fiercely competitive environment. Enhancing the customer
base, cross selling of products/services and strengthening the customer relationship
management is the most important aspect.
xiii. Security aspects of banking transactions: Banks are developing alternative
channels of delivery like ATM, Tele-banking, remote access, internet banking
etc.The primary issues center on the following aspects of information security are:
 a) Authentication and identity of user: The act of verifying the identity of a user.
b) Confidentiality: The information transmitted has not been intercepted or viewed
by any other party in transit.
c) Integrity: The information sent, received or stored has not been tampered with
modified at any time.
d) Non-repudiation: A particular transaction or action taking place, hold the tests of
court of law.
xiv. Fraud: The kind of fraud that can happen in the emerging banking scenario are as
follows:
a) Mail Spoofing: Sending wrong information to bank customers as if it is from
authentic bank sources.
b) Web Spoofing: Diverting the customers of a bank to an exactly duplicated forged
web site and impersonating those customers on real bank site.
c) Attacking the user Computer: To take control of that machine.
d) Attacking a Banks Server: To take control of that machine.
e) Media tapping: Recording the whole transactions of a bank, or customer etc .and
replaying the same for their advantage.
f) Denying Service: Though the server is available, making it not able to render
service, by poisoning the network Infrastructure.

2.10. Conclusion

The Indian Banking Industry is witnessing significant double digit growth. The sector is
slowly emerging into a market and is becoming increasing, keeping with global trend and
practices. Some of the key growth areas within the banking sector are private banking,
wealth management and investment banking; they showed potential to become significant
businesses in the coming years. With this high growth activity increasing competition in
the banking sector has emerged as the key differentiator in the marketplace. The universal
application of ICT can change the way banking has been perceived. Beginning with
customer centric services, back office set up, MIS needs of banks has dimensions of
innovations and change in quality. ICT application should further be used for
diversification of more value added services, pursuing financial inclusion with more PoS
terminals, developing CRM data, moving more non-customer activities to remote
locations, better mapping of manpower competence, setting up data warehousing and
MIS architecture to reduce dependence on operational units for monitoring and control.
Technology in Indian banking has surely emerged from being "reactive" to "proactive"
and the need of the hour is to enhance the foundation on which applications of future can
safely stand if the bank is to lead through the next wave of growth in banking.

References:

1. C. Rangarajan (Dr.) Chairman Economic Advisory Council to the Prime Minister

delivered a lecture on Role of Technology in Development of Banking Institute
for Development and Research in Banking Technology, Hyderabad, 28 November
2010.
2. Chakrabarty K. C. (Dr.), Deputy Governor, RBI speech on: Financial deepening
by putting financial inclusion campaign rd into mission mode Address at the 23
Skoch Summit, Mumbai, 17 June 2010.
3. CII-PwC Report of Technology readiness of Indian Banks- Current Indian
banking Scenario Business Strategy.
4. Debabrata Das published an article on Banking revolution Frontline, Volume
27 - Issue 24 Nov. 20-Dec. 03, 2010.
5. K. Srinivasa Rao (Dr.), Deputy General Manager, Bank of Baroda, Mumbai,
Paper on Harnessing ICT Systems :The Spring-Board of Innovation The
Journal of Indian Institute of Banking & Finance, January - March 2011,pp-5-12.
6. Mittal, R. K. & Sanjay (2007), Technology in Banking Sector: Issues and
Challenges Vinimaya, Jan-March 2010, pp-18.
7. Neha Dixit, Saroj K. Datta (Dr.) Professor & Dean, Mody Institute of Technology
& science, published a paper on Acceptance of E-banking among Adult Customers:
An Empirical Investigation in India Journal of Internet Banking and
Commerce,August 2010, vol. 15, no.2 at
http://www.arraydev.com/commerce/jibc/.
 8. Poppel, H. L. (1983), Marketing productivity and information
technology
Information Industry Insights, Insights, volume 5, pp 6-7.
9. Report on Indian banking 2020 making the decade's promise comes true.
A
publication of Boston consulting Group Sept, 2010.
10. Report on Trends and Progress of Banking in India 2009-10. Pp-96-97,
Reserve Bank of India, Nov 2010.
11. Satish Tanaji Bhosale (Dr.), B.S. Sawant (Dr.), published an article on
Technological Developments in Indian Banking Sector, ISRJ, and ISSN No:
2230-7850 Vol - I, ISSUE - X [November 2011].
12. Saurabh Srivastava (Dr.), Asst. Professor, B.B.S. Institute of Management
& Technology, published a paper on Internet Banking - A Global Way to
Bank Allahabad.
13. Subba Rao (Dr.) D. V. Governor, Reserve Bank of India, A Speech delivered
at the Banking Technology Excellence Awards 2009 at the IDRBT
Hyderabad, June 18, 2010. On Harnessing Technology to Bank the
Unbanked.
14. www.iibf.org.in
15. www.managementparadise.com
16. www.mckinseyquarterly.com
17. www.rbi.org.in
18. www.scribd.com
19. www.vikalpa.com/pdf/articles
.
 CHAPTER THREE
DATA ANALYSIS, RESULTS AND DISCUSSION

1. Introduction

This chapter presents data analysis and interpretation. The objective of the study was

to determine the effects of technological innovations on financial performance of

commercial banks. Data was collected from all the banks. The data sources included

financial statements, annual statements for a period of 5 years (2008-2012) as well as

other publications. Data was collected based on the variables of the study, that is

Financial performance depicted by Return on Assets; Mobile Banking depicted by the

number of Customers registered in an year; internet banking indictaed by the number

of transactions in an year; electronic funds transfer at point of sale terminals indicated

by the amount transferred or number of transactions in an year as well as branch

Networking indicated by the number of branch networks implemented in an year.

2. Descriptive Statistics

Table 3.1 Return on Assets (Financial Performance )

Year N Mean Std. Deviation

2013 43 2.34 3.18072

2014 43 2.68 1.62044

2015 43 3.21 3.69108

2016 43 3.97 3.04215

2017 43 4.58 3.42043

The findings as shown in table 4.1 shows the distribution of Return on Assets values

over a period of 5 years. The lowest value for ROA was 2.34 in year 2009 while the
 highest as 4.58 in 2017. On the other hand, high scores of standard deviation indicate

variation in financial performance for the various commercial banks statistically.

Nonetheless a steady rise in ROA values from 2014 indicates that the banks financial

performance has been very well over the last 3 years in Indian financial industry.

I. Mobile Banking

Mobile banking has numerous benefits for both customers and banks. As far as the

customers are concerned, it provides increased convenience, expanded access and

significant time saving. On the other hand, from the banks perspective, the costs of

delivering telephone-based services are substantially lower than those of branch based

services. The findings on the number of customers registered in a year are as

presented in the table below.

Table 3.2: Mobile Banking (Number of Customers Registered in an Year)

Year Number of Customers registered in a year (000)

cumulatively.

Mean Std. Dev.

2013 2016 1537

2014 2218 1690

2015 2440 1859

2016 2683 2045

2017 3220 2454

From the findings, averages for the number of customers registered on the mobile

banking service in an year for the commercial banks as extracted from the financial
 and annual statements reflects an upward increase over the 5 year period, with the

highest being 3.2 million in 2017. In addition, the stardard deviation depict a variation

in the number of customers in different commercial banks in India.

II. Internet Banking

The idea of Internet banking according to Essinger (1999) is: to give customers

access to their bank accounts via a web site and to enable them to enact certain

transactions on their account, given compliance with stringent security checks.

Presented below is descriptive statistics on the number of transactions in an year.

Table 3.3 Internet Banking (Number of Transactions in an Year)

Year Number of transactions in an year (in millions)

Mean Std. Dev.

2013 2.70 0.203

2014 2.70 0.160

2015 2.80 0.148

2016 2.87 0.135

2017 2.97 0.180

From the findings, it can be noted that the internet banking averages for number of

transactions in an year (in millions) for the commercial banks rose from 2.70 to 2.97

million. It is also evident that the banks had almost a similar number of transactions as

the stardard deviation is so small (less than 1) depicting minimal variability.

III. Electronic Funds Transfer at Point of Sale Terminals

An Electronic Funds Transfer at the Point of Sale is an on-line system that

allows customers to transfer funds instantaneously from their bank accounts to

merchant accounts when making purchases (at purchase points). The table below

shows descriptive statistics on the number of transactions for the electronic funds

transfer at point of sale terminals in a year for the banks.

Table 3.4: Electronic Funds Transfer at Point of Sale Terminals

Year Number of transactions in an year (in millions)

Mean Std. Dev.

2013 1597.71 233.39

2014 1079.22 512.90

2015 2113.31 363.96

2016 2736.63 762.30

2017 3473.74 933.27

From the findings, there is variation in the number of transactions for the

electronic funds transfer at point of sale terminals in an year for the banks. The

average number of transactions was 1.5 million in 2008, which fell to 1.1 million

and later rose to 2.1 million before rising to 2.7 and later to 3.4 million in

2012. This variation is also depicted by the stardard deviation.

IV. Branch Networking

Networking of branches is the computerization and inter-connecting of

geographically scattered stand-alone bank branches, into one unified system in

the form of a Wide

Area Network (WAN) or Enterprise Network (EN); for the creating and sharing of

consolidated customer information/records. Table 4.5 summarizes the findings of the

number of branch networks implemented in a year.

Table 3.5: Branch Networking (Number of Branch Networks in a Year)

Year

Mean Std. Dev

2013 32 1.35

2014 35 3.86

2015 38 4.62

2016 43 8.75

2017 46 4.01

From the findings, there is no much varition in the number of branch networks

implemented in an year for the banks. The findings indicate a consistent increase in

the averages from 32 in 2005 to 46 in 2017. The stardard deviations also shows

minimal variation.

From the annual averages of the thirty banks, it is evident that financial performance

increased with increase in number of customers registered in a year; number of

transactions in a year; amount transferred or number of transactions in a year as well

as number of branch networks implemented in a year. Thus, financial performance of

the banks (depicted by ROA) also appeared in tandem with every increase and

consequently in a positive relationship with technological innovations.

 3.3 Correlation Analysis

The study used Karl Pearsons coefficient of correlation in order to quantify the

strength of the relationship between the variables. The Pearson product-moment

correlation coefficient determines the strength of a linear association between two

variables and is denoted by r which can take a range of values from +1 to -1. A value

of 0 indicates that there is no association between the two variables. A value greater

than 0 indicates a positive association, that is, as the value of one variable increases so

does the value of the other variable. A value less than 0 indicates a negative

association, that is, as the value of one variable increases the value of the other

variable decreases.

The Pearsons coefficient was used to verify the existence or non-existence of linear

correlation between and among the technological innovation variables with financial

performance. The findings are presented as follows;

Table 3.6: Pearsons Correlation Coefficient Matrix

Mobile Internet Electronic Fund Branch Financial

Banking Banking transfer at POS Networking Performance

Mobile Banking 1

Internet Banking .395** 1

Electronic Funds Transfer at 0.13 .381** 1

Point of Sale Terminals

Branch Networking .283** .318** .375** 1

Financial Performance .350** .313** .243* .309** 1

** Correlation is significant at the 0.01 level (2-tailed)

3.3.1 Relationship between the Variables

Results from table 4.6 above reveal that there is a significant positive relationship

between Mobile Banking and financial Performance (r = .350**, P-value < 0.01).

This implies that Mobile Banking as a technological innovation influences financial

performance in Indian commercial banks.

The findings also disclosed a significant positive relationship between internet

banking and financial Performance (r = .313**, P-value < 0.01). Thus, implying that

internet banking as a technological innovation influences financial performance in

Indian commercial banks.

The findings indicated a significant positive relationship between Electronic Funds

Transfer at Point of Sale Terminals and financial Performance (r = .343**, P-value <

0.01) thus, depicting that Electronic Funds Transfer at Point of Sale Terminals as a

technological innovation influences financial performance in Indian commercial

banks.

The results in table 4.6 above indicate that there was a significant positive relationship

between mobile banking and Internet banking (r = .395**, P-value < 0.01). A

significant positive relationship was observed between Internet Banking and Branch

Networking (r = .283**, P-value < 0.01). In addition, there is a significant

relationship between Electronic Funds Transfer at Point of Sale Terminals and Branch

Networking (3.75**). The findings imply that there is interrelationship in the various

technological innovations in the banking industry such a change in one technology

affect the other. Since the correlations among the predictive variables was not very
strong there was little evidence of multicollinearity among them and thus all the

variables were incorporated into the subsequent regression analysis.

a. Regression Analysis

Regression analysis is the statistical technique that identifies the relationship between

two or more quantitative variables: a dependent variable, whose value is to be

predicted, and an independent or explanatory variable (or variables), about which

knowledge is available. The technique is used to find the equation that represents the

relationship between the variables. Multiple regressions provide an equation that

predicts one variable from two or more independent variables. The study adopted

multiple regression guided by the following model:

Y= 0+ 1X1+2X2+ 3X3+ 4X4+

Where:

Y is the dependent variable (financial performance i.e. ROA)

0 is the regression constant

1, 2, 3, 4, and 5 are the coefficients of independent variables,

X1 is Mobile Banking

X2 is Internet Banking

X3 is Electronic Funds Transfer at Point of Sale Terminals

X4 is Branch Networking

is the Error Term.

Table 3.7: Model Summary

Model Std. Error of the

R R Square Adjusted R Square Estimate

1 .847a .7174 .687 .23655

a. Predictors: Mobile Banking, Internet Banking, Electronic Funds Transfer at Point

of Sale Terminals and Branch Networking

In this study, the coefficient of determination (the percentage variation in the

dependent variable being explained by the changes in the independent variables) R2

equals 0.7174, that is, Mobile Banking, Internet Banking, Electronic Funds Transfer

at Point of Sale Terminals and Branch Networking explain 71.7 percent of the

variance in financial performance.

Table 3.8: Analysis of Variance

Model Sum of

Squares df Mean Square F Sig.

1 Regression .992 3 .331 6.912 .000a

Residual 1.455 26 .056

Total 2.447 29

a. Predictors: (Constant), Predictors: Mobile Banking, Internet Banking, Electronic Funds

Transfer at Point of Sale Terminals and Branch Networking

b. Dependent Variable: Financial Performance

In this case, the significance value of the F statistic is 0.003 indicating that all the

predictor variables (Mobile Banking, Internet Banking, Electronic Funds Transfer at

Point of Sale Terminals and Branch) explain a variation in financial performance and

that the overall model is significant

Table 3.9: Regression Coefficient Results

Unstandardized Standardized
Coefficients Coefficients
Model B Std. Error Beta T Sig.
1 (Constant) .260 0.046001 5.6521 .000
Mobile Banking 0.875 0.074601 .254 11.729 .000
Internet Banking 0.823 0.21784 .300 3.778 .000
Electronic Funds Transfer 0.551 0.248534 .113 2.217 .000
at POS

Branch Networking 0.670 0.088007 -.167 7.613 .000

a. Dependent Variable: Financial Performance

Table 4.9 presents results of the multivariate regression of tecnological innovations on

Financial Performance. From the findings, the coefficients on Financial Performance

are positive and significant in all the four variables, indicating that banks have

efficient financial performance when technological innovations is efficient interms of

mobile banking, internet banking, electronic funds transfer at POS and branch

networking. The coefficient on Mobile Banking is 0.875 and is significant. Internet

Banking has 0.823, Branch Networking has 0.67 while Electronic Funds Transfer at

POS had 0.551

b. Discussion of Findings

The objective of the study was to establish the effects of technological innovations on

financial performance of commercial banks in India. The objective was assessed by

use of secondary data and the subsequent analyses based on the variables of the study.

From the findings, in mobile banking as depicted by the number of customers

registered on the mobile banking service, had a significant effect on financial

performance of the commercial banks. The mean increase in the number of customers

from 2016 million in year 2008 to 3220 million in 2010 indicate a growth in mobile

banking transactions and consequently improved banks financial performance. The

findings regarding mobile banking are similar to those found in India by Misati,

Njoroge, Kamau and Ouma (2010) whose study revealed that mobile banking had

expanded the range of services that a bank could offer and hence expanded incomes

for banks. Similar findings were shown in a study in Uganda by Porteus (2006) and

another one in Tunisia by Mabrouk and Mamogholi (2010) who concluded that

mobile banking helped to increase bank incomes and profitability. The study also

found a significant positive relationship between Mobile Banking and financial

Performance (r = .350**, P-value < 0.01). This growth in mobile payments supports

the findings of this study and those of other corroborating studies. Mobile banking has

experienced high penetration levels in India because it offers an alternative service

delivery channel for banks which is both accessible and affordable to many

customers. The ease and speed with which customers can transact on mobile phones

has made mobile banking very popular to both the banks and the customers.

The study findings revealed that the internet banking averages for number of

transactions in an year (in millions) for the commercial banks rose from 2.70 to 2.97
million. It is also evident that the banks had almost a similar number of transactions as

the stardard deviation is so small (less than 1) depicting minimal variability. The

findings also disclosed a significant positive relationship between internet banking

and financial Performance (r = .313**, P-value < 0.01). The findings of this study

show that internet banking is used by bank as a convenience platform to enable

customers to transact as opposed to it being an avenue for banks to make more

revenue. These findings are consistent with previous studies done by Pooja and Singh

(2009) and Molhotra and Singh (2009) in India, Simpson (2002) in USA, Sullivian

(2000) in USA and Arnaboldi and Claeys (2008) in Finland, Spain, Italy and UK

where they all concluded that internet banking improved bank incomes and

profitability.

The findings on EFT depicted a variation in the number of transactions for the

electronic funds transfer at point of sale terminals in an year for the banks. The

average number of transactions was 1.5 million in 2008, which fell to 1.1 million and

later rose to 2.1 million before rising to 2.7 and later to 3.4 million in 2012. This

variation is also depicted by the stardard deviation. Compared to cheques clearing

system, EFT system has the ability to improve the velocity of money within the bank

payment system and hence more money is moved within the economy within a short

period. This presents an opportunity of banks to make more money. EFT transaction

charges are also higher compared cheque clearance charges and hence EFT system is

capable of netting in more income for banks.

The findings further indicated a significant positive relationship between Electronic

Funds Transfer at Point of Sale Terminals and financial Performance (r = .343**, P-

value < 0.01) thus, depicting that Electronic Funds Transfer at Point of Sale Terminals

as a technological innovation influences financial performance in Indian

commercial banks. These finding corroborate those ones of Sana, Mohammad,

Hassan and Momina (2011) in a study done in Pakistan which concluded that

electronic banking lead to better incomes for the banks. Agboola (2006) in a study

done in Nigeria concluded that EFT not only improved a banks image but also its

incomes and subsequently profitability.

The findings showed that there is no much varition in the number of branch networks

implemented in an year for the banks. The findings indicate a consistent increase in

the averages from 32 in 2008 to 46 in 2012. The stardard deviations also shows

minimal variation. This implies that branch networking offers quicker rate of inter-

branch transactions as the consequence of distance and time are eliminated. Hence,

there is more productivity per time period. Also, with the several networked branches

serving the customer populace as one system, there is simulated division of labour

among bank branches with its associated positive impact on productivity among the

branches. Furthermore, as it curtails customer travel distance to bank branches it

offers more time for customers productive activities. From the annual averages of the

thirty banks, it is evident that financial performance increased with increase in

number of customers registered in a year; number of transactions in a year; amount

transferred or number of transactions in a year as well as number of branch networks

implemented in a year. Thus, financial performance of the banks (depicted by ROA)

also appeared in tandem with every increase and consequently in a positive

relationship with technological innovations. These findings are consistent with a study

conducted in India by Pooja and Singh (2009) which concluded that internet usage in
banks led to more income and profits. Dew (2007) also found that internet usage led

to more income.

From the findings there was a significant positive relationship between mobile

banking and Internet banking; between internet Banking and Branch Networking as

well as between Electronic Funds Transfer at Point of Sale Terminals and Branch

Networking. The findings imply that there is interrelationship in the various

technological innovations in the banking industry such a change in one technology

affect the other. This is consistent with studies by Kariuki (2005) who showed the

positive impacts of ICT on their banking performance using bank turnover and profits

as measure of performance. He established that banks those with high profit growth

are more likely to be using greater numbers of advanced ICTs. He concluded that e-

banking leads to higher profits though in long-term but not in short-term due to high

ICT investment cost. All this studies used profit and turnover as measures of bank

performance.
 CHAPTER FOUR
SUMMARY, CONCLUSION AND RECOMMENDATIONS

5.1 Introduction

This chapter presents the summary of the data findings on the effects of technological

innovations on financial performance of commercial banks in India, the conclusions

and recommendations are drawn there to. The chapter is therefore structured into

summary of findings, conclusions, recommendations, limitations and area for further

research.

5.2 Summary of Findings

The study found out that a steady rise in ROA values from 2009 indicates that the

banks financial performance has been very well over the last 3 years in Indian

financial industry. Mobile banking as depicted by the number of customers registered

on the mobile banking service was found to have a significant effect on financial

performance of the commercial banks. A significant positive relationship between

Mobile Banking and financial Performance was also established by the study.

The study also disclosed a significant positive relationship between internet banking

and financial Performance. Internet banking was found to have improved bank

incomes and profitability as it is provided at a minimal charge by many internet

service providers and hence making it available as a platform for banks to offer their

services. EFT system was found to have the ability to improve the velocity of money

within the bank payment system and hence more money is moved within the economy

within a short period. This was found to present an opportunity of banks to make

more money. EFT transaction charges are also higher compared cheque clearance
charges and hence EFT system is capable of netting in more income for banks. The

study as well established a significant positive relationship between Electronic Funds

Transfer at Point of Sale Terminals and financial Performance. The study also found

out that branch networking offers quicker rate of inter-branch transactions as the

consequence of distance and time are eliminated. Hence, there is more productivity

per time period. Also, with the several networked branches serving the customer

populace as one system, there is simulated division of labour among bank branches

with its associated positive impact on performance among the branches.

The study additionally found that there is interrelationship in the various

technological innovations in the banking industry such a change in one technology

affect the other. From the study it was evident that financial performance increased

with increase in number of customers registered in a year; number of transactions in a

year; amount transferred or number of transactions in a year as well as number of

branch networks implemented in a year.

5.3 Conclusion

Based on the summary of the major findings the following conclusions are drawn:

The adoption of technological innovation has enhanced Indian banking industry by

making it more productive and effective; Technological innovation also has a strong

positive relationship on the overall banking performance by making workers

performance more effective and efficient; the adoption of technological innovation

has enhanced the fortune of the Indian commercial banks.

Customers can have access to their account outside working hours to make

withdrawal to attend to their needs; the technological innovation guideline introduced

by CBK strongly helps in effective technological innovation system. Withdrawal can

be made anywhere at any time and using any bank ATM machine, customer cannot

withdrawal more than some certain amount to allowed other customers have access to

cash and money, can be transfer from one place to another through electronic means.

In general conclusion the technological innovation has made banking transaction to be

easier by bringing services closer to its customers hence improving banking industry

performance. It is safe to say that the various banking parameters of performance and

profitability have significantly improved in the high technology induction era. From

the analysis, the winners emerging would be fully technology oriented banks.
5.4 Recommendations

The banks must be focused in terms of their needs and using the right technology to

achieve goals, rather, than acquiring technology because other banks have it.

Government participation in ensuring focused telecommunication industry must be

visible to reduce or remove avoidable costs of implementing e-commerce and internet

banking. Regulatory authorities like Central Bank of India must stipulate standards

for the banks to follow to avoid making India Banking Sector a dumping ground for

the outdated technological infrastructures.

Training and Manpower development is another major problem militating against the

growth of technology innovation in the country. Government must make right IT

policy by ensuring that Computer, Communication equipments and other IT

infrastructures to a large extent are manufactures in the country so that our people can

acquire first hand necessary skills. Government Policy that will guide against Money

laundering, fraud and Security risks posed by technology innovation are inevitable.

To counter the legal threat and security posed to net banking and e-commerce, the

necessary legal codes backing the industry must be established; this will enhance the

growth of the industry.

5.5 Suggestions for Further Research

This study was done only on the commercial banks in India. The study can also be

extended to other financial markets such as capital and insurance companies in order

to understand the implication of technology innovation on the overall financial

markets in India. Similarly the studies can be done for other bank industry in other

countries. This study studied was confined to commercial banks yet the current

banking innovation such as electronic money is targeted to include the rural

marginalized mostly served by micro finance institution in the banking net. There is

need therefore to study adoption and use of technology innovation by Micro finance

institutions.

There is also need to identify and understand the changes that technology innovation

are causing on the banking sector and the payments systems, in order to examine in

detail how the recent (and foreseeable) advances in technology innovation are

affecting the sector and can affect its future evolution. Therefore a study on the effects

of technology innovation on the banking sector and the payments system is

recommended.
5.6 Limitations of the Study

This study has several limitations. First, it is possible that the nature of data from the

annual statements affected the results in an unanticipated manner or limits the power

of the tests to detect associations. This may be created by variation of statistical

figures illustrating the key variables measurements.

However, the use of secondary data provided an opportunity to search for a more

genuine and intrinsic relationship between the variables. This afforded the researcher

the benefits of a greater focus on analyzing the available data more closely in a way

that would enhance the achievement of the study objectives.

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