Core Banking: The Modern Way of Banking Transactions
Automating bank transaction accounting: Initial Half-hearted Approach
This is the age of ‘automation’ – replace manual operations by machine-driven ones, and cut time, energy and human errors. The banking sector, too, has now evolved from automating the accounting processes in a ‘stand alone’ mode, i.e., installing software programs for specific banking processes or transactions in specific bank branches. Subsequently, it developed into so-called TBM's (‘Transaction Business Management’ systems), which only integrate various ‘stand alone’ accounting applications in one or more branches over a small geographical area through ‘local area network’ (LAN) connections between computer terminals at various branches. Several registers, ledgers, scrolls and other forms of MIS (‘Management Information System’) reporting continued to be generated manually in the branches. Several application packages like FDR (fixed deposit receipt), PPF (‘public provident fund’ deposit accounts), etc. still function without TBM integration, i.e, in a ‘stand alone’ mode, even in a TBM branch. Such partly computerised or automated and partly manual operations in a branch create a complex unmanageable IT infrastructure, because it is difficult to integrate the automated and manual operations. Besides, this creates IT server administration problems. Changing/modifying any application relating to any banking process or transaction in such environment means changes to be applied over vast geographically distributed individual branch systems by sending CDs containing software for the modification (called ‘patches’) physically for installation in all the bank’s branches. This was necessary to ensure uniform system of carrying out the changed processes, to consolidate individual branch accounts into accounts for the bank as a whole. Skilled manpower for installing the patches were also not readily availaible in all branches. All this resulted in slow and error-prone updating of software and databases.
With frequent interest rate changes, new product launches and MIS reports mandatory for regulatory authorities like RBI and Finance Ministry’s Banking Division, it is a Herculean and immensely time-wasting task to effect these changes across all Bank branches, generate required information output and consolidate into specific MIS reports. Added to this is the unsatisfactory quality of data output from branches, because of human, software or machine errors in making entries of basic data, along with errors in running wrong programs to generate required outputs in specified report formats. Most data entry operations are outsourced and correctness of such massive data entered by outsiders is questionable.
Core Banking: Transformation to full automation
Therefore, the need was felt to integrate and automate at least all the ‘core’ or basic transactions and processes in all branches of a bank throughout one or more countries where it operates, and centralise them in a ‘central data site’ (CDS) server by developing a software package called ‘core banking solution/system’ (CBS) for such integrated operation of the bank as a whole. This is called ‘Core Banking’ and any branch where the CBS is installed is called a ‘CBS Branch’. Computer software is developed to perform core operations of banking like recording of transactions, passbook maintenance, interest calculations on loans and deposits, customer records, balance of payments and withdrawals, using the same standardised set of steps for each operation in all branches, so that they can be consolidated through the CDS for the bank as a whole, as well as for individual branches or divisional, regional, zonal and other controlling higher offices. To enable this, the software is installed at different branches of the bank and then interconnected through ‘wide area network’ (WAN) by means of communication lines like telephones, satellite, cable, internet etc. This network is an ‘Intranet’ or internal connection between the branches and other offices of bank, and not a connection through ‘Internet’ or external medium, except in certain circumstances, like allowing a bank’s customers to access certain specific information from the bank’s database through its centralised Website. To enable this, certain links are established between the bank’s ‘Intranet’ and the external ‘Internet’. The software program does not allow outsiders to the bank to use the bank’s own ‘Intranet’, but customers are given specific ‘User ID’ or ‘Username’ and ‘Password’ to access only limited information and perform limited operations like transfers of money from one account to another in different branches of the same bank, by logging in to the bank’s website through the ‘Internet’. But employees at different levels at different offices of the bank are given separate ‘User ID’s and ‘Password’s to access limited information and record transactions or perform operations specific to their roles through the bank’s ‘Intranet’. While minimising the chance of fraudulent manipulation of accounts, this allows the user, whether the bank’s own employees or customers at different levels and geographic locations, to access limited data specific to a particular bank office (branch or higher controlling office), or data stored in the CDS. For example, a customer can then operate his accounts in one or more branches of the same bank from any branch, if that branch has installed ‘core banking solution’ (CBS). Through the Internet, he can perform such operations even from his home PC, by logging in to the bank’s website, using his unique ‘User ID’ and ‘Password’.
The Example of SBI
Taking the example of internal operations, let us see how ‘core banking’ transformed the working of India’s largest bank, SBI.
In 1991, the bank undertook a computerization initiative called ‘total branch automation’, using a software package called ‘Bankmaster’, deployed first in the largest branches, and then in all branches. The bank used a ‘stand-alone’ IBM mainframe computer for inter-branch reconciliation of accounts and used weekly reporting with central reconciliation in a very manual system.
Customers were still expected to queue in different areas of the bank branch for different functions at the bank. There was one ‘teller’ (operator at a branch counter) for issuing drafts, another for accepting deposits, another for foreign exchange dealings, etc. In 2003, the bank rolled out multifunction ‘tellers’ and ‘Internet banking’, allowing multiple functionality from either a ‘single window teller’ or a browser. Customer service has improved due to the bank’s ability to provide single-window operations, i.e, allowing a customer to approach any window or counter of a branch of the bank to perform any function. ATMs were connected to the ‘Bankmaster’ branch system via a ‘gateway’ PC Personal Computer), and ATM transactions were posted at the ‘end of (each) day’ (EOD) to ‘Bankmaster’.
State Bank of India was running a ‘branch system’, meaning that you did business with the branch, not the bank as a whole. All records of account activity resided in the branch. The bank found itself at a competitive disadvantage with respect to both the global banks (Citi, Standard Chartered, HSBC) and the private (as opposed to publicly owned) banks such as ICICI Bank and HDFC Bank, which had a single centralized ‘core banking’ system in India so that customers could do business with any branch. Corporate customers were moving to other banks that could work with a single bank operating across the country rather than multiple branches that couldn’t offer real time consolidation of positions. Because SBI was at a technology disadvantage with the ‘branch system’, the bank was losing deposit share due to new entrants in the market. The Indian banking market is dynamic and competitive. The private banks were rolling out new products on modern systems, and State Bank of India had trouble keeping up with this innovation.
On the ‘Bankmaster’ branch system, CDs called ‘patches’, containing program modifications to the software to modify the initial software to suit changing needs needed to be transported periodically to every branch and applied to every branch server. This alone made it much more difficult to compete in the Indian market. Therefore, in 2001, the Bank decided to adopt the ‘TCS BaNCS’ software package of ‘Tata Consultancy Services’ (TCS), world’s 2nd best ‘universal banking solution’ and 3rd best retail/private banking solution package as awarded by ‘International Banking Systems’ in 2007, to implement ‘core banking’ and automate and integrate all its branch operations. Now, it has achieved ‘core banking’ for all its branches. The primary data center setup or ‘central data site’ (CDS) is located in Mumbai; and a duplicate setup is in Chennai as a ‘disaster recovery’ (DR) site, storing duplicate back-up of all database of the primary centre, in case there is a failure of the primary centre. The ‘recovery point objective’ (RPO) is 0, meaning there is no data loss in the event of a failure. The recovery time objective (RTO) is four hours, which means that in the event of a disaster, the bank would be able to start normal operations through the alternative DR site within four hours.
As a result, while all other PSU banks lost their share of total bank dposits in India fom 56% in 1996 to 48% in 2008 to commercial private banks such as ICICI Bank, HDFC Bank, Yes Bank, Axis Bank, and others who increased their share in the same period from 8% to 20%, SBI’s share declined far less, from 26% to 23%, over this same time period, and actually grew from 2007 to 2008 and further in 2009, after migrating to ‘TCS BaNCS’.
Core Banking: Immense Advantages
Some of the specific benefits of ‘core banking’ are as follows:
Ø Reconciliation between branches in SBI, especially at year-end, was painful. Each branch would compile reports on paper and send them to a central point where they would be entered into a single system. Clerks would match these reports against branch batches on a weekly basis. When there were discrepancies, clerks would send memos to the branch, and the mismatched batch would be physically mailed back to the central office for reconciliation. There was no network connectivity across branches. There was a requirement that large payments from the government be reconciled at the end of the same day for settlement with SBI. Within the current system, this was impossible. Today the bank has better control of reconciliation due to a centralized view of branch books for system suspense accounts, inter-branch accounts, etc. The entire clearing process is now totally automated with minimal manual intervention or physical transportation of papers.
Ø With the new ‘core’ system, the bank was able to consolidate corporate relationships across the entire branch network. Earlier, a customer had a credit limit at a certain branch. Now the corporate entity can allocate credit limits in different branches across the bank. The bank can also measure the activity of a corporate customer across the bank, understanding the value that customer is bringing to the bank and measuring achievements with that customer against annual account plan.
Ø The bank now had centralized control of interest rates, charges, and fees. Better ‘customer relationship management’ (CRM) and risk management have been possible due to a single unified customer view. SBI can now monitor advances and ‘non-performing assets’ (NPA) via a single view in TCS BaNCS.
Ø A new product called ‘Power Jyoti’ (flame) became very popular with customers. This product took advantage of the new TCS ‘core’ system and allowed a business to funnel all the cash from multiple accounts into a single consolidating account. Businesses used this product to both concentrate money from a number of business branches and act as a universal payment agent. This product also utilised both SBI’S unequalled branch network in India and the new centralized ‘core’ system. For businesses collecting money across the country, a customer of that business could make a payment to the business unit at any SBI branch to credit to the business’s account in any other branch. A ‘non-local’ account payment fee of Rs. 25 to 50 would be deducted from the payment, if the payment is to be ultimately credited to a branch outside the local area of the branch where the payment is made. Inter-branch transactions have been enabled through TCS BaNCS, resulting in an increase in the variety of transactions and quicker settlement.
Ø SBI currently uses ‘call centers’ for sales and service. Customers can learn about products, make inquiries about their account, or report a lost ATM card. Fund transfers are not permitted through these ‘call centres’. Consumers can access their accounts via Internet banking and make payments between their own accounts, after logging in to the bank’s website. A consumer is likely to have a current account, a public provident fund (PFF) account for tax-deferred savings, a demat (dematerialized) account for use in investing in shares (stocks), and normal savings accounts, all supported and linked via the ‘core’ baking system. Multilingual interface support enables banking in local languages. Urban branches are under tremendous pressure at SBI due to the modern nationwide nature of the bank and its use for domestic money transfer. Migrant workers from rural India come to get jobs in large cities like Mumbai or Bangalore and open a SBI account in their home villages. The migrant worker will deposit cash into the account from his remote urban location and pay a ‘non-local’ account deposit fee. The family back at home can take the money out at no charge with an ATM card.
Ø Consumers can also make payments to other parties via Internet banking at the SBI website, or using the bank’s specified ‘billing sites’ to arrange payments. Transfer of money to third party accounts maintained with other banks is made possible through ‘real time gross settlement’ (RTGS) and ‘national electronic funds transfer’ (NEFT) systems operated by the country’s central bank, Reserve Bank of India (RBI). Aggregators such as ‘Bill Desk’ and ‘CC Avenue’ collect payment requests and send consolidated requests to SBI, using Internet banking credentials as a way to authenticate and accept payment requests.
Ø SBI has also launched a mobile banking service, which enables a customer to make account enquiries, download short account statements, transfer funds, and pay bills.
Ø The bank is now using the ‘electronic clearing service’ (ECS) to accept mandates for automatic bill payments from utility providers, phone companies, etc. Drafts (checks) are being driven out of the system. The bank is encouraging ‘inter-office credits’ (IOC) as a way to send money to other parties. If the other party has an account at SBI, you can make a payment to that account. This saves the postage of mailing a draft (check) to the recipient. The process is more secure, faster, less expensive, and fully supported by the new ‘core’. The goal is to move 40% of all payments to these alternative methods of payment to reduce the transactions that have been taking place at the branch.
While most other PSU banks have so far converted only upto about 60% of their branches to CBS branches, SBI has converted 100% of its branches into CBS branches, even in rural areas where network connection is more difficult. Thus, SBI has now achieved 100% ‘core banking’, i.e, all its branches are now CBS branches.
What the IT System must Support in ‘Core Banking’
It should be evident now that ‘core banking’ must lead to IT-enabled services (ITes) in its ‘core’ functions or transactions – accepting deposits from customers who open ‘current’, ‘savings’ and ‘fixed’ deposit accounts (and various flexible combinations of these main types of deposits) and lending to retail individuals or corporate institutions/bodies, whether existing deposit account holders or not. The IT software to support the recording, accounting and related tasks arising from such transactions should be efficient and user-friendly enough to allow:
Ø easy data entry of transactions by the bank operators in the PC terminal at their respective counters at the same time as carrying out the transactions (i.e, without any ‘time-lag’, or in ‘real time’, according to modern jargon, like accepting or disbursing cash to account holders
Ø automatic posting of the entered data immediately into the correct computerized ‘accounting heads’ and subsequent consolidation of hundreds of different entries by different operators at different PC terminals into the appropriate ‘Books of Accounts, including ledgers. These are ensured through appropriate ‘codes’ to be used by the operators while entering different types of transactions, classified in a ‘Manual’, and accessible on the computer screen through various classified ‘menu’ and ‘sub-menu’ choices. The coded data are then centralized and consolidated in a central ‘server’ at each bank branch. The consolidation includes automatic computation of certain operations; ex, ‘interest’ is calculated by the system software based on entry of coded parameters like interest rate applicable, period of deposit, periodicity of compounding, etc.
Ø further transfer of data and consolidation of the same organized in ‘accounting heads’ and ‘Books of Accounts’ (including ‘General Ledger’) entries as above in different branches into centralized servers at higher zonal and head offices into consolidated ‘accounts’ for the bank as a whole, at the end of each day (EOD transfer)
Ø similar ‘beginning of day’ (BOD) access to selected data, information or reports at branch, zone and head office levels, according to hierarchical needs, as per policy directives decided at the highest management level by the use of specified ‘User IDs’, ‘Passwords’ , as also to bank’s deposit holders or other customers accessing their accounting information vide ‘Internet Banking’ through unique ‘Customer Identification’ or ‘Customer Information System’ (CIS) Nos. In fact, in modern ‘Internet Banking’ by using the CIS No., a customer can direct the bank and effect ‘fund transfers, between his different accounts in different branches, or between his accounts and other accounts, and carry out other related transfers, besides simply accessing his accounting information; physical visits to the bank for such tasks are no longer necessary.
Ø generation of various reports in various formats according to requirements at various levels, including shareholders, internal and external auditors and various regulatory authorities, including ‘Trial Balances’, and ‘Final Accounts’ composed of yearly ‘Profit & Loss’ Accounts and ‘Balance Sheet’
Thus, the word ‘CORE’ in ‘Core Banking’ may also stand for "Centralized Online Real-time Exchange", because various transaction data recorded in the PC Terminal at the counter of any employee in a branch or other office are transferred ‘online’ to the central CDS via ‘Intranet’; moreover, this data transfer or access to data stored in the CDS can be done at the instant the ‘Intranet’ is used from a PC terminal – hence, we say there is exchange of data in ‘real’ or instant time, with no time lag. The same facility is extended to bank customers in ‘Internet’ banking.
Training: The Need to Upgrade Human Skills
However, it is often said that a 'machine' or 'technology' can at best be as good as its operator. And herein lies the problem - the existing staff and officers of most of the banks have scarce exposure to computer or IT applications, even simple menu-driven operations. It is often seen that they fail to properly differentiate the computer operations connected to separate banking transactions, or take too much time to graduate to a trained enough force. Unfortunately, the 'training' needs for matchin this relatively backward human skill base with the suden onslaught of most advanced IT interface in banking transactions is still now relegated to almost spontaneous 'on-the-job' training, where a new or existing operator is given a hurried overvie of the vaious menu options corresponding to various transactions, and then left to himself to swim in the ocean of daily huge transactions, where the scope of even soliciting advice from a colleague at the neighbouring counter is hihle constricted in terms of heavy work-load. Perhaps the need of the hour is to develoop in-house training module in simulated 'core banking' environment, with the neccessary network between a no. of PC terminals in place in specialised training centres.
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