Banking Survey 2009

Innovation Perspectives

Preface 01

Executive Summary 03

Challenges for Indian Banks: View from the Top 04

Innovation in the Context of Banking 08

Innovation Strategy 11

Strategic Vs. Incremental Innovation 14

Innovation and Efficiency 16

Innovation for Growth 19

Products, Customer Experience and Collaboration 22

The Role of IT in Innovation 27

How Banks Can Become More Innovative 30

Conclusion 34

About Us 35

CONTENTS

Although the Indian banking industry is nearly two hundred years old, it is only since

the last fifteen years that it has witnessed radical transformation of internal operations

as well as products and services. Two significant developments have influenced the

functioning of the industry. The first occurred in 1969 when the Indian government

nationalized a large number of banks, forcing them to look beyond urban markets

and initiate operations in the rural sectors. The next big move came in the 1990s in

the form of deregulation, which led to the birth of new generation private banks on

the heels of foreign institutions that had been permitted entry through relaxation of

FDI norms. These paved the way for an era of intense competition and technology-led

transformation within the industry. New entrants leveraged a combination of people,

processes and technology to transform the way products and services were delivered

to their customers.

This phase was marked by a slew of innovations, especially in the retail space as

banks automated their processes, created new channels, built ATM networks and

delivered services at their customers’ doorstep in both urban and semi-urban areas.

While private sector and foreign banks led the transformation in its early stages,

public sector banks followed suit by deploying core banking platforms that connected

their numerous branches and allowed them to offer competitive products. Over the

next few years, the Non Performing Assets (NPAs) of banks decreased marginally as

they targeted new business fuelled by a growing economy and rising urban

middle-class income levels. Today, nearly every large bank leverages technology to

offer Internet banking services and, in several cases, mobile banking as well. Banks

are also augmenting their traditional offerings with non-banking products like

insurance, besides exploring emerging opportunities such as micro-banking.

The last few years have been challenging for the banking industry which has

witnessed both significant competition and consolidation. An evolving regulatory

framework has added to the pressure by way of stricter compliance mandates. And

it is needless to point out the extent of the impact of the economic downturn on the thindustry. The Planning Commission’s draft document of the 10 Plan forecasts a

likely deceleration in the pace of expansion of banks’ balance-sheets. The combined

assets of all scheduled commercial banks are estimated to touch Rs 40,90,000 crores

by end-March 2010. That will be about 65 percent of GDP at current market prices

as compared to 67 percent in 2002-03. The annual composite growth rate of banking

assets is expected to slow to 13.4 percent during the rest of the decade from the 16.7

percent level that prevailed between 1994-95 and 2002-03. The report also predicts

large additions to the capital base and reserves on the liability side.

Preface

1

In this milieu, it is a significant challenge for Indian banks to sustain growth and

profitability. They will have to innovate to enhance process efficiency, optimize

costs, rejuvenate products, add channels and improve customer experience to

remain competitive.

The Economic Times and Finacle from Infosys are pleased to present this exhaustive

report on Innovation in Indian Banking, based on a detail study. The objective of this

study is to provide insights into the key challenges and opportunities before Indian banks

and the way in which they plan to overcome the former and leverage the latter. More

importantly, the report presents senior managements’ perception of innovation and their

vision for translating that into innovative processes, products, channels and customer

experience. The study showcases perspectives from 70 C-level executives across 33

leading banks in India. 43 percent of the banks covered are public sector banks, while 36

per cent are private sector banks. Foreign banks and other institutions such as

cooperative banks and regional banks account for 9 percent and 12 percent respectively.

Preface

2

Respondents by Designation

BusinessHeads, 33%

CEOs, 27%

CIO/ITHead, 40%

Banks by Category

ForeignBanks, 9%

Private SectorBanks, 36%

Others, 12% Public SectorBanks, 43%

27 percent of our respondents were CEOs and CMDs, 33 percent were business heads and

40 percent were CIOs and IT Heads.

This report takes a strategic view of innovation in Indian banking, with insights from

top industry executives. We examine strategic innovation vis-à-vis incremental

innovation and their relative importance to growth and efficiency. We assess the

barriers to innovation and evaluate the steps taken by banks to enhance their

innovation agenda across the business. This study reveals the following about

Indian banks:

They aim to be innovation leaders and look to establish best practices for new

age banking. 56 percent of the respondents said their banks were aiming to lead

innovation with respect to the local market as well as international best practices.

They are focusing on strategic and incremental innovation. 77 percent of the

respondents said they were pursuing strategic and incremental innovation in

equal measure.

They consider innovation extremely important for growth and efficiency.

88 percent felt innovation was critical for growth and 57 percent said innovation

was extremely important for efficiency improvements.

They are increasing investments in innovation, with several banks in the process

of instituting an independent function to co-ordinate the same. 83 percent said

their banks were increasing investment on innovation and 25 percent said they

were in the process of creating a separate department to coordinate innovation.

Technology-led innovation is perceived to have maximum impact on efficiency

improvement and product delivery. 38 percent said IT was extremely important

for innovation and 47 percent said it was very important.

Internet technologies, mobile technologies, Business Intelligence (BI) and

analytics software along with web services are viewed as having a clear impact

on innovation initiatives.

Innovation is the industry’s direct response to regulatory and compliance

challenges. 58 percent said they were becoming more innovative in response to

regulatory and compliance challenges.

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Executive Summary

3

4

Challenges for Indian Banks:View from the Top

Although the banking sector is all set to

fuel economic growth in the years to

come, it must address multiple challenges

at various levels to achieve desired levels

of functional efficiency. 90 percent of

respondents affirm that the recruitment,

development and retention of talent is a

key challenge.

For many public sector banks, the

problem lies in the ageing manpower

which needs to be replaced with equally

skilled personnel. While several Banks

including State Bank of India (SBI) are

For many other banks the human on a recruitment spree, Canara Bank and

resources issue is directly linked to smaller public sector banks like Vijaya

Bank and Corporation Bank, among increasing competition. Banks will

continue to compete for quality business

and customers, financial resources and

deposits in addition to physical resources

such as branches and ATMs. Their

challenge is to groom their staff so that

they don’t merely survive, but thrive

amidst the competitive pressure.

While many private banks seem to have

others, are impeded by a shortage of got the people equation right, most of

talent. At Canara Bank, for instance, them observed that nurturing human

staff at various levels, recruited in capital was crucial. At ICICI Bank, the

the 1970s, will retire in 2009-2010.

largest in India’s private sector, the Replacing them suitably will be a

emphasis is on getting the skill-set mix Herculean task.

“Innovation has been a

critical element of the

transformation paradigm.

It is a continuous activity. We can’t say

that we have innovated enough and rest.

There is always a need to revisit what we

have done. Contexts change, opportunities

change and we need to examine how we

can do things differently every time.”

K.V.KAMATHCHAIRMAN, ICICI BANK

Top CEO Challenges

5

earn revenues. Needlessly to say, they

will be adversely impacted if customers,

with inadequate knowledge of these

products, incur losses, from investments.

Hence, the challenge of managing the

ensuing risks is of significant concern.”

says J.M.Garg, CMD, Corporation Bank.

In addition, banks must also address the

risk of doing business with companies

having ambitions of multi-national

expansion. Innovation is the key to

success in all these areas.

Raising capital in compliance with Basel right. “Our challenges will be in terms

II norms is a challenge for many banks. of ramping up branch network we did

However, most CEOs we interviewed not have. Getting the skill set equation

assured us that they had their strategy right in the branch context will also be

perfected. While liquidity is flowing freely critical.” says K.V. Kamath, Chairman,

ICICI Bank.

Post implementation of Basel II, risk

management is also perceived as a major

challenge. 40 percent of our respondents

felt the need for robust risk management

systems. Some of them noted that banks

must carefully navigate the path to

managing new risks arising from the

introduction of new products. “Today we

see that there are new products like the at present, it may become a cause for

derivatives of commodities and futures. concern in the coming months if the

Banks must address the challenge of Government of India borrows heavily as

understanding these products and yet per expectations. “Various stimuli from

“Risks must be managed

in a way that they allow

profit optimization without compromising

on the longer-term sustainabil i ty of

the business.”

NEERAJ SWAROOPREGIONAL CHIEF EXECUTIVE, INDIA AND SOUTH ASIA, STANDARD CHARTERED BANK

“When you deploy cutting

edge technology, human

r e s o u r c e s m u s t b e

competent as well. It’s important that the

ageing work profile, especially at public

sector banks, be continuously tuned and

complemented by fresh talent recruited

directly from outside of the organization.”

ALBERT TAROUCMD, VIJAYA BANK

the government will adversely impact

liquidity and the quality of credit.”

caut ions Jayarama Bhat , CMD,

Karnataka Bank.

It has been almost a year since the

recession set in and the after-effects

are clearly showing. In general, the

quality of banking business has been

adversely impacted. Most banks we world-class customer services, adherence

spoke to have started to closely monitor to KYC (Know Your Customer) and

asset quality. “The challenge is to ensure AML (Anti Money Laundering) norms,

that we maintain growth without improvement of channel productivity,

compromising quality, because these cost control and maintenance of

are two sides of the same coin. It’s profitability margins.

important to maintain the quality of

business at high levels. Maintaining Respondents believe that adherence to

asset quality would also be key.” says international standards of corporate

M.D.Mallya, CMD, Bank of Baroda.governance, including those related

to transparency and disclosure will Other business challenges cited by

be crucial. Scaling up technology respondents include the provision of

architecture is also viewed as a major

challenge by both public and private

sector banks. “As we expand reach and

add services to our portfolio, scaling up

technology infrastructure to meet

the needs of the business becomes a key

challenge.” says Sanjay Sharma, CEO

IDBI Intech, the IT arm of IDBI Bank.

IDBI Bank is planning to double its

number of branches over the next year.

“Upgrading skill sets to

perform and deliver in this

environment would be a

key challenge for banks. Retention of talent

would also be crucial.”

YOGESH AGARWALCMD, IDBI BANK

6

“The challenge is to ensure

that we maintain growth

without compromising quality,

because these are two sides

of the same coin. It’s important to maintain the

quality of business at high levels. Maintaining

asset quality would also be key.”

M.D.MALLYACMD, BANK OF BARODA.

7

For many public sector banks, with a friendlier with the spectrum of clientele

diverse customer base spanning age that a public sector bank has, because

groups, the challenge is to promote the it’s so wide and varied. We have farmers

use of technology-enabled products. “The who are not tech savvy and pensioners

biggest challenge is to make technology who draw Rs. 350/- a month. Both would

like the bank to address their specific

needs. It’s essential they all reap the

benefits of technology,” says R.I.S. Sidhu,

CIO and Chief Compliance Officer,

Punjab National Bank.

As banks look to creatively overcome

these challenges, they will benefit most

from those innovations that tap new

opportunities, optimize cost structures

and deliver the right product mix

to customers n

“The biggest challenge is to

make technology friendlier

with the spectrum of clientele that a public

sector bank has, because it’s so wide and

varied. We have farmers who are not tech

savvy and pensioners who draw Rs. 350/-

a month. Both would like the bank to address

their specific needs. It’s essential they all reap

the benefits of technology.”

R.I.S. SIDHUCIO AND CHIEF COMPLIANCE OFFICER, PUNJAB NATIONAL BANK.

8

Within the business context, innovation ones to offer certain products and

translates into efforts that result in a services.” points out Chanda Kochhar,

product, service or process that helps CEO, ICICI Bank.

organizations transform and grow.

Products in the banking industry are

In the government regulated environment more often notional than physical, and

of the 1970s and 1980s, every bank offered rarely, if ever, protected by Intellectual

the same products and services. It was Property (IP) rights. As a result, almost

only in the late 1990s, when private every process, product, service and

sector and foreign banks entered the delivery channel can be replicated and

fray that the wellsprings of innovation bettered by competing banks. With any

were truly tapped. These banks pioneered banking innovation having a short shelf

the use of technology to enhance process life, there is very little advantage for

efficiencies. Consequently, ATM networks the first mover.

were ushered into urban India in the

Some innovations help banks improve late 1990s and the early part of this

internal efficiencies, reduce costs and century. Innovations grew beyond the

payment system. A plethora of loan

products, with competitive interest rates

and repayment schemes triggered the

retail banking revolution. Many banks

added incremental value to their products

by throwing in additional services. For

instance, some banks assisted their

customers in finding and buying a home, in

addition to financing the purchase. Used further their business goals, while others

car re-finance was another innovation positively impact banking customers.

conceived during this period. Banking innovation is both an enabler

and a differentiator. “Innovation helps Banks also innovated on their deposits.

create differentiation in the minds of Several allowed customers to earn higher

customers, to whom we can be the first interest on their savings by offering a

Evolution of Innovation 3

Innovation in the Context of Banking

“Innovation helps create

differentiation in the minds

of customers, to whom we

can be the first ones to offer certain products

and services.”

CHANDA KOCHHARCEO, ICICI BANK.

`sweep in’ facility whereby funds • K o t a k M a h i n d r a B a n k a l l o w s

exceeding a pre-specified amount were customers to buy and sell mutual

automatically moved into a fixed deposit funds through its ATM

account. Kotak Mahindra Bank went a

• IDBI Bank goes a step further, offering step further by enabling excess funds in

customers’ accounts to be invested in a airline bookings through its ATM

high-yielding liquid mutual fund.

• HDFC Bank pioneered the mobile

Point of Sale (PoS) terminal which is

slated to make the use of plastic for Over the years, technology and innovation

transactions ubiquitous have enabled banks to move from a

`working hours/week days’ model to an • Standard Chartered Bank pioneered ‘always-on 24x7’ framework. Some

the concept of a single card that doubles examples include:

up as both credit and debit card

• ICICI Bank’s 8 am to 8 pm banking in Innovations have not been restricted to

many cities large private sector banks and foreign

banks. Smaller public sector banks have • HDFC Bank’s 24x7 branch at Mumbai

also leveraged their size, scale and areas

International Airport of operation. Corporation Bank, one of

the smallest in the public sector, allows Banks have also taken services

customers to remit income tax through to customers’ doorsteps. Some

its comparatively small ATM network. examples:

Public sector banks have largely delivered

innovation through their branches. Bank • SBI and ICICI Bank introduced mobile

of India, for instance, has establishedATMs in some cities

solar powered branches in some remote

rural areas where power is scarce. • Kotak Mahindra Bank delivers money

ICICI Bank was the first to launch a to customers’ homes

business correspondent model where

Customer facing innovations are representatives provided banking to the

aplenty. For instance: rural poor. Many of the public sector banks

Paradigm Shift

9

we spoke to are emulating this model to

penetrate rural markets. A significant majority of respondents

Banks have innovated in the predicted that future innovation would

focus on channels and the delivery of corporate space too.

new products over them. Most banks are

• SBI took the lead in offering MIBOR betting big on Internet and more

recently on the mobile, as the delivery rates to top companies. Many banks

platform of the future. They point out followed suit with similar offerings

that net transactions have shown an • ICICI Bank securitized Rs. 4.2 crores

upward trend in the last couple of years

for Bharatiya Samruddhi Finance for and see good potential ahead. The mobile

crop production, thereby becoming the is a platform on which they expect to

first bank in the world to securitize a deliver maximum innovation. “India is

microfinance portfolio well known as the hub of innovation

around the mobile space. These are • HDFC Bank launched a seamless CMS

mostly process innovations where the Supply Chain System to connect to

mobile industry has driven costs down its corporate customers running

dramatically and thereby increased SAP and other ERP systems. With

efficiencies and usage. This is going to this, customers were empowered to

surpass the Internet as a preferred transact and manage their wholesale

channel.” says Aniruddha Paul, Head-

banking services across geographies Change Delivery, ING Vysya Bank.

using a single platform Respondents from public sector banks

believe that the mobile platform will • Standard Chartered Bank’s “kiosks”

help them extend services to their extended virtual banking to customer

rural customers and reach out to premises

the unbanked n

New Channels

10

11

3

Innovation Strategy

A whopping 96 percent of our respondents systems and processes to enhance

said that their banks had a clear strategy customer experience, while managing

for innovation. However, for a majority, risks and costs. HDFC Bank, another

this was an integral part of their business mature IT user, has a two-pronged

strategy. They were of the opinion that strategy - expand network to capture new

innovation cannot be viewed in isolation, customers and more importantly, mine

but in tandem with the overall business internal (branch banking) customers for

incremental business.

At ING Vysya, where the traditional client

base built over a period of 70 years is being

augmented by new customers, innovations

are tailored for customer segments

through a streamlined mechanism.

The key elements of YES Bank’s strategy

strategy. The rationale for the innovation for innovation include encouraging the

strategy factored in business imperatives spirit of professional entrepreneurship

like competition, customer retention among employees. A knowledge-driven

through better services and customer approach to financial solutions and

acquisition through the launch of technology makes for quality service.

innovative products. Rana Kapoor, the CEO and founder of

the bank strongly believes that these Banking innovation is driven by strategic

will be the pillars of the bank’s considerations premised on both short and

innovation engine.long term objectives. The more mature

users of IT among banks rely on advanced Meanwhile, Kotak Mahindra Bank is

Business Intelligence (BI) tools to power focusing on internal innovation to

innovation. The strategy at Standard increase channel productivity.

Chartered Bank, for instance, is to

Punjab National Bank, which has a optimally use Business Intelligence to

nationwide network of over 5,000 track customers’ evolving needs and

branches, talks of creating 100,000 touch improve products and services. The bank

points spanning the urban, semi-urban continually undertakes improvements of

Do You Have a Strategy for Innovation?

No, 4%

Yes, 96%

12

and rural markets. Their strategy Not all banks have a strategy outlined

entails deploying technology to penetrate specifically for innovation. However, they

under-exploited market segments with understand that it is critical to growth

meaningful’ products. and efficiency. Their business strategies

factor in the need to innovate both At Bank of Baroda, the top management

inward-looking aspects such as processes plans to put in place innovation policies as

and outward-looking elements such as an adjunct to their ongoing Business

channels, products and customer service.Process Re-engineering (BPR) exercise.

Smaller regional banks have innovation

high on their agenda, as evident from the Public sector banks including Syndicate

following examples: Bank, Corporation Bank and Vijaya Bank

are keen to deliver innovation powered by

• Federal Bank is improving its technology, but with a human touch. They

payment systems by enabling believe that the human element is crucial

straight-through-processing of to customer retention.

remittances

• Dhanalakshmi Bank is investing

heavily on IT to deliver a suite of

We asked respondents whether the banks new products and services

they represented aimed to emerge as

• South Indian Bank, which brought innovation leaders relative to just the

domestic market or international best down the average age of its customers

from 51 to 39, is planning to unveil

innovative schemes, including some

targeted at students, under its `next

generation banking’ campaign

• Lakshmi Vilas Bank is looking

to leverage tie-ups with larger

banks to offer new services such

as brokerage

Technology with a Human Face

Innovation Leadership and Next

Practices

Is Your Bank Aiming to be an Innovation Leader?

Relative to thelocal market,

44%

Relative to localmarket and

international bestpractices, 56%

practices as well. A majority of these new customers across the counter.

banks have strong domestic operations ICICI Bank was the first to introduce

and believe that Indian conditions this concept in international markets

demand a distinct treatment. 44 percent where opening an account across the

aimed to be innovation leaders in the counter was unheard of. Remittances

domestic market, while 56 percent are another area where India has

sought to lead innovation both locally created highly cost effective models,

and in the global market. unknown in other parts of the world.

“In which other country can you take “I would not say our best practices will

a technology and apply it to a billion have to be a mix of global and Indian. In

people?” she questions,” It’s only here fact, we should go ahead and create

that you can test things on a scale best practices for the world to follow.”

that is so large that you make your says Chanda Kochhar of ICICI Bank.

products cost effective and then apply it She cites the instance of ICICI Bank

everywhere else.” n

starting the practice of giving a kit to

13

14

3

Strategic Vs. Incremental Innovation

organizational structure. The exercise

resulted in the closure of 26 zonal

offices and enabled faster decision

making. State Bank o f India

undertook a similar project as part

of a larger restructuring exercise and

reduced the number of its zonal offices

Banks can approach innovation from a

strategic or incremental perspective.

When a bank revises its business model

and sets in motion transformation

resulting in competitive advantage and

large-scale organizational impact, the

innovation is clearly strategic. But not • Recently, ICICI Bank moved from

all innovation need be as dramatic. a n o u t s o u r c i n g m o d e l t o a n

Improved processes, channels and in-house model to enhance cost and

products are the basis for incremental, operational efficiencies

yet highly effective innovation. The past

decade has seen Indian banks innovate • Dhanalakshmi Bank is in the midst

of organization-wide technology strategically as well as incrementally.

transformation expected to bring in Instances of strategic transformation

process efficiencies along with abound in the Indian banking industry,

innovation in channels and productsas shown below:

• Standard Chartered Bank introduced

• Punjab National Bank hired Boston cards that double up as both debit and

Consulting Group to review its credit cards

Strategic Vs. Incremental Innovations

Both strategic andincremental in equal

measure

Strategic

%80

07 %

%60

05 %

40%

03 %

20%

%10

0%

the opinion that a series of incremental •

innovation across multiple facets of organization-wide Business Process

a bank’s business can amount toRe-engineering exercise

strategic innovation. Most banks we spoke to are looking

Respondents expressed the view that to innovate both strategically and

incrementally. 77 percent of respondents while strategic innovation was primarily a

indicated that their banks were working top management prerogative, incremental

on strategic and incremental innovation innovation emerged mostly from lower

in equal measure, while 23 percent levels, particularly the customer-facing

maintained that strategic innovation was field force. They opined that incremental

on top of their agenda. innovation could have significant and

positive, long term impact. “Strategic Typically, public sector banks, regional

innovation looks great on paper. But banks and old generation private

it’s the smaller, incremental innovations sector banks are focusing on strategic

that can improve customer experience innovation. At these banks, incremental

which really counts.” says K. Ram Kumar, innovation often follows strategic

Executive Director, ICICI Bank. A innovation. New generation private sector

clear example is ICICI Bank’s focus banks and foreign banks are working

on innovation to reduce the IVR call on a mix of both strategic and incremental

hold time n innovation. Some respondents are of

Bank of Baroda undertook an

15

16

Innovation and Efficiency

felt that innovation was extremely

i m p o r t a n t t o a c h i e v e e f f i c i e n c y

improvement, while 31 percent said it was

very important. The banking industry is witnessing

significant widening and deepening of Many of the banks we spoke to are

markets and a corresponding increase leveraging IT for product and service

in the scale of activities. Business delivery and automating critical processes

is increasingly going international; to enable straight-through-processing.

therefore, it is crucial for banks to Some of them told us that they have put

understand global business dynamics. in place process management systems

Many of the banks we spoke to are of for seamless execution of customer

the view that while product innovation transactions and risk mitigation. IDBI

lends competitive advantage to an Bank carried out a comprehensive BPR

organization for a few months, process exercise recently. Now, the bank has a

innovation can do so for a significantly full-fledged BPR department driving

longer period. process efficiencies.

At the core of HDFC Bank’s efficiency

strategy are its quality initiatives,

which are expected to create customer We asked the respondents to rate the

delight. One such process of collecting impact of innovation on future efficiency

documents for new sales acquisition is improvement at the banks. 57 percent

I n n o v a t i o n a n d E f f i c i e n c y

Improvements

How Important is Innovation for Efficiency Improvements at your Bank?

Somewhat Important

Important

Very Important

Extremely Important

57% 31%

8%4%

“First Time Right” (FTR). Focused enable online real-time tracking. Tools

measurement and management of FTR provide online MIS, enabling managers

metrics has enabled the bank to utilize to allocate resources optimally.

sales capacity optimally. The bank has We also queried respondents on the

also invested significantly in technology approach adopted by their banks

and other resources to support the towards innovation aimed at achieving

quality initiatives. “This has helped cost reduction, operational process

tremendously to reduce our unit cost of redesign and technology upgrade.

operation despite increase in volumes”,

states a spokesperson from the bank.On the cost reduction front, 47 percent of

respondents said the level of activity was At Standard Chartered Bank, two

very high and 36 percent said it was fairly critical metrics tracked regularly are

high. However, only 21 percent of the transactional cost per unit and operations

respondents said the level of innovation cost as a percentage of revenue. The bank

with respect to cost reduction was very has invested in sophisticated productivity

high and 36 percent said it was fairly high.measurement and tracking systems that

General Cost Reduction Exercises Level of Activity

General Cost Reduction Exercises Level of Innovation

17

Low

Not High

High

Fairly High

Very High

33%36%

21%

4%6%

High

Fairly High

Very High36%

17%

47%

43 percent of respondents said that the level of activity in core technology and systems

redesign or replacement was very high. 22 percent said that the level of innovation in

this area was very high.

Core Technology & Systems Redesignor Replacement Level of Activity

Core Technology & Systems Redesignor Replacement Level of Innovation

Outsourcing of Activities Level of Activity Outsourcing of Activities Level of Innovation

6 percent of respondents said that the level of activity technology outsourcing was very

high and just 4 percent indicated that the level of innovation in technology outsourcing

was very high. Most of the banks believe that outsourcing is feasible only in limited

ways and with respect to functions that are non-critical n

18

Operational Process Redesign and Simplification Level of Activity

Operational Process Redesign and Simplification level of Innovation

On the operational process redesign front, 17 percent said the level of activity in their

banks was very high and 65 percent said it was fairly high.

Low

Not High

High

Fairly High

Very High

Low

Not High

High

Fairly High

Very High

20%

29%

4%

27%

20%14%

29%

6%

23%

28%

Low

Not High

High

Fairly High

Very High34%

13%

43%

6%4%

Low

Not High

High

Fairly High

Very High42%

22%

22%

8%

6%

High

Fairly High

Very High

40%

58%

2%

Not High

High

Fairly High

Very High

65%

10%

8%

17%

19

3

Innovation for Growth

In any competitive environment, customer was extremely important, 31 percent

acquisition and growth are decidedly said it was very important, 8 percent

powered by innovation. By innovating, said it was important while only 4 percent

companies challenge the status quo and said it was somewhat important.

create new offerings that customers are

willing to purchase. Companies innovate

when they find ways of reaching out to RBI estimates growth in the banking

untapped markets and geographies. sector to be in the range of 18 to 20 percent

Eventually these innovations drive over the next year. According to Indian

growth. The story is no different in the Banks’ Association’s vision document,

banking sector. banking assets are expected to account

for two-thirds of India’s GDP. Thus,

We asked our respondents how important depending on their reach and strength,

innovation was to them from a growth banks are focusing business energies on

perspective. 57 percent indicated that it verticals such as:

Growth Drivers

Innovation & Growth

8%

Somewhat Important

57%

ImportantVery

ImportantExtremely Important

31%

8%4%

70%

60%

50%

40%

30%

20%

10%

0%

have set up business verticals to provide

best-in-class services and products to

large corporate houses, MSME, agro-

business and the personal banking

segments.” says M.V.Nair, CMD, Union

Bank of India. The bank is planning to

leverage technology to create innovations

aimed at Increasing delivery efficiency.

Banks are looking to generate fee based

income from M&A, loan syndication and

para-banking activities such as insurance

and mutual fund distribution. Bill

collection and payment of services is one

growth area where banks are planning

• Infrastructure, construction and to innovate leveraging e-banking, ATM

construction equipment and mobile banking channels.

• Retail Bank of Baroda, for instance, is planning

a series of product rollouts in this area. • Agriculture and rural business

CMD M. D. Mallya sees retail business • Government

as a major growth driver of both assets

and liabilities. “On the liability side, I Banks are reorganizing their business

see an increase in customer base as retail to tap these segments. For instance, IDBI

customers will provide us more savings Bank has recently created customer-

and current accounts. On the assets focused verticals which, inter alia, cover

side, we have a number of products that personal banking, SME, agri-business

could be utilized for cross selling, whether and infrastructure to tap the growth

it’s a housing loan, vehicle loan, potential in these sectors. The bank is

innovating to provide customized, focused educational loan or a trader’s loan.

and efficient services to these segments. There are opportunities to innovate

Another bank considering vertical focused here,” he says. Mallya is also expecting

innovation is Union Bank of India. “We corporate business to drive volumes

20

and grow the overall business. He believes Customers are presented with biometric

cards that act as passbooks. They are that it could also facilitate cross-sales

offered overdraft facilities ranging from in terms of employee payroll accounts

Rs.500 to Rs.1,500. Transactions are and so on. Bank of Baroda is also reviving

supported online between 10 a.m. and 6 a subsidiary for merchant-based lending

p.m. Customers are also given credit and syndication activities.

cards. The bank offers both life and Some banks believe that financial

non-life insurance products to rural inclusion and micro-banking are the

customers. In addition, they train next big opportunities and expect these

prospects for employment within the to significantly contribute to their

organization. The bank has already growth in the years to come. Corporation

collected Rs.25 crores in deposits and is Bank has put in place a business

looking to increase it manifold this year. correspondent model spanning 400

“The cost of servicing is high. But we villages. According to CMD, J.M.Garg,

are getting deposits at 3.5 percent and the bank is planning to cover more than

lending at 9 percent. It is a 20 to 30 2,000 villages this year alone. Corporation

year game plan and there is immense Bank’s business correspondents are

scope for innovation.” says Garg nmostly grocers or retired teachers.

21

22

3

Products, Customer Experience and Collaboration

Indian banks are realizing that Technology transformation at banks,

continuing focus on only driving-up sales undertaken with a view to positively

in an attempt to get more customers, can impact its innovation agenda and

be counterproductive. They have long efficiencies, is viewed as a complex and

since realized the value of investing challenging program. More than resources to retain and thus grow revenue

plugging a new application into the from customers. We find that banks are

bank’s IT infrastructure, respondents looking at creative means of packaging

were of the view that it encompasses a and delivering their products to set

host of services, from consulting tothemselves apart from their rivals as well

infrastructure management to BPO. as to stay a step ahead on the path to

effective and meaningful differentiation.

In fact, the drive to leverage technology

for connectivity and information, is also

gaining impetus among Indian banks.

22 percent of the participants felt that

product bundling and packaging are

extremely important components on the

innovation agenda while 27 percent O u r s t u d y a t t e m p t e d t o g a u g e

were of the opinion that these are respondents’ perception of factors driving

somewhat important.innovation impacting products, channels

and customer experience.For instance, a savings account that

doubles up as a fixed deposit or a 62 percent of our respondents believe

savings account linked to mutual that product technology features are

funds, l ike the Kotak Mahindra very important for innovation while only

7 percent were of the view that it was ‘sweep in’ account, holds an attractive

extremely important. proposition for customers.

Product Technology Features

Product Bundling or Packaging

Not Important

Somewhat Important

Very Important

Extremely Important20%

27%

13%

22%

Not Important

Somewhat Important

Very Important

Extremely Important

62%

29%

2%

7%

23

Banking customers are wide and varied, constituent of a broad consumer segment.

Consider a home loan customer with a and so are their financial needs. Several

clean track record, forced to default on respondents were of the view that

account of a job loss. The bank must treat banks must look to further develop its

the customer with greater lenience products and services to specifically

versus a habitual defaulter. If the bank serve these differentiated requirements.

were to propose a temporary waiver or a Custom bundling products for different

restructuring of the loan, it would not segments, they opined, was one way of

only secure the customer's loyalty but doing this. A significant section of

also reduce the risk of future non-respondents further qualified their

payment, as well.response by stating that it is easier to sell

more products to an existing customer

than go about acquiring a new one. The

ability to introduce small variations by

way of bundling or preferential offers,

they felt, increases their ability to cater

to a larger cross-section of customers,

with a smaller core set of offerings.

Personalization was rated as one of

the most important factors while 28 percent of the survey participants

innovating on products. 31 percent of said innovation in product pricing was

the respondents said it was extremely extremely important and 43 percent said

important and 47 percent noted that it it was v ery important.

was very important.

There seems to be greater than ever

b e f o r e e m p h a s i s o n t a k i n g

personalization to the next level and

u n d e r s t a n d i n g e a c h c u s t o m e r

qualitatively and individually; and not

viewing him as an undifferentiated

Product Pricing

Product Personalization

47%

9%

13%

31%Not Important

Somewhat Important

Very Important

Extremely Important

Not Important

Somewhat Important

Very Important

Extremely Important43%

23%

6%

28%

24

Interesting views were expressed by

respondents, in the arena of pricing

related innovations. One initiative that

is likely to catch the imagination of

bankers, is the move to develop

channel-preferential pricing that is

segment-specific as well. For instance,

a Gen-Y customer who prefers to use

Internet banking would pay a small technical collaboration with companies

premium to use a branch service, whilefrom other industries was more

a retired senior citizen would be important. Very few believed that

charged a small premium for a mobile collaboration with competitors would be

banking transaction.important from an innovation standpoint

We also surveyed respondents on factors Banks are under unprecedented pressure

that influence customer experience. 42 today – from customers demanding more

percent of the respondents opined for less, from regulators expecting tighter

that staff capabilities were most compliance and from competitors vying

important while innovating on customer for market share. In order to stay on top of

experience. 30 percent felt technology their game, respondents were unanimous

features were of utmost importance in their opinion that there is need to take

with respect to customer experience.

Almost a similar number accorded

process design top priority.

Partnership and collaboration also play

a critical role in innovation at banks. 33

percent of our respondents said that their

supplier partnerships played a critical

role in their innovation programs. 26

percent said distribution partnerships

innovative action, in one form or the with companies from other industries

other, and make it count. were critical. 22 percent of them felt

When Innovating with Customer Relationship or Customer Experience, How Important

are the Following?

Will Partnerships and Collaborations be more or less Important in the Future for Innovation

at your Bank?

33%

With competitors

With companies from otherindustries: for distributionpartnerships

With companies from other industries: for combining capabilities and technologies

With major suppliers

With small, innovative companies

11% 8%

26%

22%

Technology features

Staff capabilities

Process desugn

42%

28% 30%

By leveraging the collective wisdom, investment came next, followed by

techniques and technology at their management focus on other priorities

disposal, banks are innovating to emerge and insufficiency of innovative ideas.

winners, and create a brighter future. Bottlenecks in IT development and

regulatory compliance mandates were

not seen as barriers by most respondents.

We asked respondents to rate 11 factors Respondents were unanimous that

that could act as barriers to innovation. the regulatory compliance framework

presented little challenge and did not Lack of coordination across departments

hinder innovation, in general. When and management/ employee attitude

we asked them whether they were were identified as the biggest barriers

becoming more or less innovative in to innovation. Lack of senior executive

response to the regulatory framework, support came second followed by

58 percent said that were becoming companies’ risk aversion and inflexible

more innovative, while the rest saw IT systems. Lack of incentives to

no correlation between compliance reward innovation among employees

and innovation.was seen as less of a barrier. Lack of

Barriers to Innovation

16%

14%

12%

10%

8%

6%

4%

2%

0%

Lack of senior executive support

Lack of investment

Lack of co-ordination

across departments

Insufficient innovative

ideas

Management and employee attitudes and

behaviour

Inflexible IT systems

Bottlenecks in IT

development

Risk aversion of the

company

Regulatory and compliance

requirements

Management focus on other

priorities

Lack of incentive

schemes and compensating

benefits for innovation

Factors that are Most Likely to Act as Barriers to Innovation

25

Respondents were largely univocal in It is also important, according to several

stating that bringing in the innovation respondents, that successful innovation

culture is not very different from be defined by the right parameters.

making an organizational thought-shift. Although Return On Investment (ROI)

For any organization to create a culture is important, it cannot be the only

of innovation, they said, change must measure of success, they clarified. Some

start at the top. Leadership, they opined, examples of such innovation, they

must create an environment that not mentioned, impacted brand equity or

only rewards and nurtures innovation even customer advocacy, without having

but encourages its people to feel ‘safe’ a direct impact on the immediate ROI n

to innovate.

26

27

The Role of IT in Innovation

in processes, product delivery, cost

optimization or organizational agility,

IT is clearly playing the enabling role.

We asked our respondents how important

IT was for innovation within their

organizations. 38 percent said that it was

Information technology has driven almost

every innovation rolled out by banks in

the past decade. Technology has led to

the deployment of core banking systems, extremely important. A majority of the

phenomenally improving efficiencies. It respondents who said so were from banks

has also driven down transaction costs that had either rolled out core banking

and provided impetus to the emergence across all branches or were in the process

of new channels like Internet banking of doing so. 47 percent of the respondents,

and more recently, mobile banking. A mostly from banks that were relatively

number of new products delivered

through these channels are technology-

driven as well. Technology has empowered

banks to access astronomical amounts

of data, playing a critical role in the

creation and deployment of knowledge

systems that predict customer behavior

and preferences and take banking to

the next level. Whether it is innovation

The Importance of IT

3

Importance of IT for innovation

Maximum Impact of IT from anInnovation Standpoint

CostOptimization, 18%

Process Innovation andDelivery, 22% Process

Innovation, 26%

OrganizationalAgility, 18%

CustomerExperience, 16%

Important

Very Important ExtremelyImportant

47%

38%

15%

05 %

04 %

03 %

2 %0

1 %0

%0

28

advanced users of IT, felt that IT was v the respondents said that IT impacted

ery important for innovation. customer experience significantly.

We also asked them where IT could

create maximum impact within their Mobile and Internet were rated as the

banks. Process innovation topped the list top technologies driving innovation by

with 26 percent saying that the impact 33 percent of the respondents. Business

of IT was most evident while improving Intelligence tools were next with 24

process efficiencies. 22 percent of our percent of the respondents saying that

respondents felt that IT revolutionized these would play a major role in banking

product innovation and delivery. 18 innovation. Most of the respondents

percent were of the opinion that IT who chose Business Intelligence (BI) were

had the maximum impact on cost from banks that had recently embarked

optimization and an equal number upon or completed data warehousing

believed it enhanced organizational projects. Virtualization took the next

agility. Surprisingly, only 16 percent of

Technologies Impacting Innovation

What Technologies will Specifically Impact Innovation in the Banking Sector?

Software-as-a-Service, 4%

Cloud Computing, 3%

Virtualization, 12%

Web Service/SOA, 18%

VoIP and Communication

Technologies, 6%

Mobile and Internet

Technologies, 33%

BusinessIntelligence and

AnalyticalSoftware, 24%

place with 12 percent of the respondents incremental benefits when deployed with

saying that it would have considerable other powerful technologies. Most

impact on innovat ion re lated to respondents preferred traditional

resource optimization. Web services software licensing models to Software-as-

and SOA followed with 18 percent of a-Service (SaaS) and felt the latter was

the respondents identifying these as not yet mature enough to significantly

technologies that could power innovation.impact innovation. A few of the

respondents were aware of the concept of The surprise, however, was VoIP

cloud computing and its possible relevance and communication technology. Most

to innovation in the banking sector npeople believe that this could provide

29

30

How Banks Can Become More Innovative

If innovation is to drive efficiency, growth

and differentiation, banks must find the

means to cultivate this spirit across the

We asked our respondents whether organization. At the strategic level,

the banks they represented had banks can make innovation a top priority

made innovation a top priority. An and roll out a clear plan in tandem with

overwhelming 88 percent responded in the overall business objectives of the

the affirmative. Only 12 percent of the organization. They must earmark a

respondents said their banks were yet budget for innovation. They can go a step

to elevate innovation to the top of the further by creating a separate department

priority list.which solely co-ordinates and supports

innovation efforts across all others.

Banks must institute systems to ensure

that the innovation vision percolates to

employees at all levels. They must initiate

training programs to sensitize staff to

customer needs and nurture innovation

that not only results in improved

efficiency, but enhanced customer

experience, loyalty and retention.

Banks that truly consider innovation

as a key differentiator must reward

innovative ideas. If innovation is to drive

growth and profitability, it must be the

When we asked the banks if they had a cornerstone of their business strategy.

clear innovation strategy, 96 percent

Interviews with our respondents revealed responded in the affirmative. However,

that banks in India are increasingly most qualified their answer with the

realizing the importance of innovation observation that their organizations’

in their efforts to gain mindshare, innovation initiatives were a by-product of

market share, revenues and profits. the overall business strategy.

Is Innovation a Top Priority for

Banks?

Have Banks Charted a Clear

Innovation Strategy?

Making Innovation a Top StrategicPriority

Yes

No

No, 12%

Yes, 88%

31

I s Investment in Innovat ion Is there a Separate Department

Increasing? Coordinating Innovation?

25 percent of the respondents said that 83 percent of the respondents said

their banks were in the process of they were increasing investment in

creating a department responsible for innovation while only 17 percent said

innovation. 75 percent were of the that their investment was unchanged.

view that innovation was a shared

responsibility across departments.

Bank of Baroda, YES Bank, Union

Bank of India and Lakshmi Vilas Bank

are among those considering creating an

independent department for innovation.

Many banks have committees or task

forces that drive innovation agendas.

Lakshmi Vilas Bank, for instance

has a board level committee that

spearheads innovation.

Setting Out a Clear Innovation Strategy

Increasing Investment in Innovation

Yes

No

75%

96%

010 %

08 %

60%

40%

20%

0%4%

Yes

No

No, 17%

Yes, 83%

Are there Idea Generation and

Are Banks Providing Incentives for Screening Procedures?

Innovative Employees?

90 percent of the respondents said

92 percent of the respondents said they that they had already set up or were in

had some kind of incentive scheme to the process of setting up idea generation

recognize employee efforts, whether for and screening procedures with respect

innovation or performance. These are to innovation.

Setting up Better Idea Generationand Screening Procedures

Creating a Department Responsible for Driving Innovation

Providing Incentives for Employees to be more Innovative

32

Yes

No

No, 8%

Yes, 92%

Yes

No

Yes, 90%

No, 10%

Yes

No

75%

25%

80%

60%

40%

%20

0%

33

given as cash incentives in some cases, specific training could be provided to make

in kind in others, and as recognition or employees more creative or innovative.

mementoes in the rest.

87 percent of the respondents said 59 percent of the respondents said they

that flexible IT systems helped innovation were increasing employee training in

and their banks were investing in them. general and were also looking to increase

The rest said that they could innovate training to help them come up with

despite inflexible IT systems ninnovative ideas. The rest said that no

Are Banks Investing in More

Are Banks Increasing Employee Flexible IT Systems?

Training on Innovation?

Increasing Employee Training on Innovation and Creativity

Investing in More Flexible IT Systems

No, 41%

Yes, 59%

Yes, 87%

No, 13%

Yes

NoYes

No

Conclusion

The Indian banking sector is poised to welcome innovation from across avenues in the years

to come. Private sector banks and foreign banks, which are advanced users of technology,

will deploy advanced tools to mine customer data and build a host of innovations into their

products and services. They will also be looking to scale their channel and branch networks,

while devising new means of driving down transaction costs. Most public sector banks

currently deliver their innovations through branches as opposed to private sector banks

that deploy them over e-channels like ATMs and the Internet. Moving forward, public sector

banks, at least the bigger ones, will roll out large scale e-channels. Regional and other

smaller banks will customize their products and services for specific regional demographies.

Banks in India realize that innovation across all fronts is critical to their success in a market

place that is getting increasingly competitive. But, as this study reveals, there is a lot more

banks can do to make innovation deliver greater value to their business in the long run.

• Banks that have a strong innovation component factored into their business strategy

will emerge at the head of the pack. Their innovation agenda must take a lead from a

judicious mix of both local and international best practices.

• The right mix of incremental and strategic innovation is crucial for banks. While

employees across cadres can add value by engaging in incremental innovation,

significant management investments must essentially drive the fruition of strategic

innovation.

• Banks will benefit from augmenting their own innovation efforts to take customer

experience to the next level, by leveraging strategic partnerships and collaborations,

for the purpose.

• The innovation culture at the bank must be nurtured carefully and continuously,

through adequate training initiatives and with sustained efforts to create an

`innovation-safe' milieu.

• Innovation is a direct outcome of people directing energies to think innovatively.

Management at banks must focus on making innovation an organizational priority

and ensure that the agenda percolates down the ranks, without dilution.

In summary, a highly focused and objective approach to innovation will help banks hone

their operational efficiencies, deliver better products, take customer experience to the next

level and eventually drive growth and profits.

34

About Us

The Economic Times, launched in 1961, is India’s largest financial daily newspaper and the

world's second largest financial daily, with a circulation of over 620,000 copies. It is

published by India's leading media group Bennett, Coleman & Co Ltd, which also publishes

The Times of India, India’s largest English daily. It has also launched a 24 hour business

channel - ET NOW.

Infosys (NASDAQ: INFY) defines, designs and delivers IT-enabled business solutions that

help Global 2000 companies win in a flat world. These solutions focus on providing strategic

differentiation and operational superiority to clients. With Infosys, clients are assured of a

transparent business partner, world-class processes, speed of execution and the power to

stretch their IT budget by leveraging the Global Delivery Model that Infosys pioneered.

Infosys has over 100,000 employees and operates globally from 21 countries. Infosys is

part of the NASDAQ-100 Index.

Finacle™ from Infosys partners with banks to power-up their innovation agenda, enabling

them to differentiate their products and service, enhance customer experience and achieve

greater operational efficiency. Finacle™ solutions address the core banking, wealth

management, CRM, Islamic banking and treasury requirements of retail, corporate and

universal banks worldwide. Finacle™ solutions also empower banks with multiple

sales,service and marketing channels including e-banking, mobile banking and call

centers. These offerings make Finacle™ a strong innovation-facilitator enabling banks to

accelerate growth, while maximizing value from their large scale business transformation.

Finacle is the chosen solution in over 116 banks across 62 countries.

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