The Banking world is undergoing and major shift in the way banks have to function and compete in an evironment where the regulators keep coming up with new demands on making the system more transparent not just for the supervisors but also for the customers of the banks.
This is a big challenge for an industry which is still using systems which are on mainframes with cobol based applications. The situation is further aggravated by issues related to years of unplanned application development and customer data duplication across platforms like unix, mainframe, web based apps etc.
So, does the bank really know its customer when the customer’s information is spread across 30 places and one end does not know the existence of the other. Provisions of the Patriot Act, SOX, GLBA, Basel II demand that banks are able to trace their transactions and protect customers’ privacy.
Given the above scenario, banks have started scrutinizing their existing systems and processes and the role of IT as a business enabler. Many are questioning whether IT should be a strategic investment or just a commoditized service. Why should a bank spend millions on keeping a huge set of applications, people and infrastructure which is inflexible and cannot respond to changing regulatory and competitive pressures? Several banks (esp. in Europe) are coming to the conclusion that it is best to use Software as a Service (SaaS) or a customized of the shelf (COTS) product which is owned and maintained by the service provider; the bank just uses and pays for it as a service. The infrastructure will be provided by an infrastructure provider again as a service.
This is a scenario for which most small and midsize IT service companies are neither prepared nor capable of handling. Typically, the customer will expect an IP driven vendor who will then collaborate with other vendors to provide a solution quickly and without years of customization effort. The service provider should be able to scale up or down the service or capacity on demand. The service provider should also be able to take over people of the bank on their rolls; the customer wants the vendor to have a skin in the game.
The results are visible. Banks are increasing coming out with very large (billion $) deals which they want to outsource to a select group of vendors. Smaller players like Patni, NTL are getting elbowed out by large players like Infosys, TCS, Wipro, Accenture and IBM because the annual deal size itself is sometimes more than the revenue of the smaller company!
Companies who invested in building products and IP have an edge. Even if they are small, they can become suppliers of ‘process components’ which will be then used to provide the complete service. The companies in real danger are those who are pure service providers. I foresee a scenario in which there will be three tiers in ths Banking supply chain.
Tier 1: The Banks (customer)
Tier 2: Manufactures – Large service, solutions providers providing end-to-end solutions to customers
Tier 3: Ancilliaries – Services companies that provide components/services to the manufactures
One analogy that comes to my mind is the automobile industry where companies like Ford and Suzuki make complete cars for the customers but outsource a number of components to suppliers who make components as per their specifications. Then there are those suppliers who make generic components for a range of automobiles (e.g. tyres). For example the customer knows that the tyres in his car are not made by Ford but he does not care as along as the product is good. These generic suppliers are in themselves very large and profitable, but they cannot survive on their own because their products depend on the final product i.e. the car.
I believe that this is a likely scenario in the Banking industry as well. So, the key to survival for the smaller companies and even start ups in this industry would be to build IP or become specialized in certain services which they can offer to the bigger IT companies (“the manufacturers”) instead of directly offering to the end customers (the Banks).
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Arun,
I worked both on the busines side and IT; and with due apologies to Rajagopalan 🙂 I have also worked for IT services companies esp. on the banking product development side.
Rajagopalan: From what you write it seems that SBI (and other such banks that you have come across) are not evaluating the software keeping in mind changing requirements. A software which has 365 days as a fixed basis is clearly antiquated in design. Interest calculation is one of the most critical functions (if not the most!) in a bank and if they did not check these basic flaws in the system then their product selection process is flawed. Perhaps they gave over importance to the cost of the software and awarded the benefit to the least cost provider.
SM
Hi Shashank
Would like to know. Have you worked in a bank in the business side or IT side?
As an auditor who tested compliance on SOX as well as USGAAP I am of the view that banks together should set up a separate IT company and not give the business to IBM or Infosys or Wipro.
Already SBI has tie-up with TCS aand ANZ of Australia.The core banking software is not taking into effect the age old proven requirements of the customers.Many banking practices and laws are violated in the software and the local big heads who work as managers and clerks in the banks don’t care to redress the customers.The standard reply for them to take refuge without satisfying the customer is to blame the software.
Many banks are not paying corect interest to FDRs.The calculation of the interest should be done on quaterly rests as per RBI regulation but he software calculates on the ratio with 365 days as basis thus there is flaw in product calculation for interest.
SBI has introduced the Supoer Saver Scheme much publicised but the retrospective effect has not been corrected in the product functionality so far.
Apart from these specifics these IT comapnies should open a separte division for banks.But the proprietary right and product confidentiality will be lost.
concept of banking has been bruised by these software companies.