Description
use of technology as the business enabler for banking industry. It lists down the IT challenges before the banking industry.
Banking Technology
The term “banking technology” refers to the use of sophisticated information and communication technologies together with computer science to
enable banks to offer better services to its customers
in a secure, reliable, and affordable manner, and sustain competitive advantage over other banks
Banking technology also subsumes the activity of using advanced computer algorithms in unraveling the patterns of customer behavior
by sifting through customer details such as
demographic, psychographic, and transactional data. This activity, also known as data mining.
•
•
Technology has opened up new markets, new products, new services and efficient delivery channels for the banking industry. Online electronics banking, mobile banking and internet banking are just a few examples. Information Technology has also provided banking industry with the wherewithal to deal with the challenges the new economy poses. Information technology has been the cornerstone of recent financial sector reforms aimed at increasing the speed and reliability of financial operations and of initiatives to strengthen the banking sector.
Technology – A great Enabler
Large volume and variety of business, accuracy and timeliness. ? Large number of Products, Delivery Channels and Customer-centric Processes. ? CRM – For cross selling and meeting the customer life cycle needs. ? Redefining of Customer Convenience. ? Decision support System, Supervisory Monitoring and Control.
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Challenges before Banking Industry
Ever rising customer expectations ? Security and integrity of data-base – Risk management. ? Disparate Systems ? Customer retention and life cycle management. ? Diseconomies of Scale ? Employee Training & Retention
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Colossal costs – Technology is a monster – Guzzler of Money. ? Issues of branch structure, lay out and redeployment of staff. ? Redefining of work-flows – front office, back office jobs… ? Change in employee role profile and management/supervisory practices
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Issues to be addressed…..
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How to pay for Technology? How to get / create best value out of use of Technology ? How to put spare capacity to use ? Can we collaborate, co-brand or outsource…..? How to leverage Technology – A great Disciplinarian ? How to meet aspirations of Stakeholders, Customers, Employees ….optimally ? How can Technology facilitate consolidation/ convergence ?
Benefits of Technology
Increased operational efficiency, profitability & productivity ? Superior customer service ? Multi-channel, real-time transaction processing ? Better cross-selling ability ? Minimal transaction costs ? Improved financial analyses capabilities
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Technologies in banks
Core Banking
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Core Banking solutions are banking applications on a platform enabling a phased, strategic approach that lets people improve operations, reduce costs, and prepare for growth. Implementing a modular, componentbased enterprise solution ensures strong integration with your existing technologies. An overall service-oriented-architecture (SOA) helps banks reduce the risk that can result from multiple data entries and out-of-date information, increase management approval, and avoid the potential disruption to business caused by replacing entire systems.
ATM
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A automated teller machine (ATM) or the automatic banking machine (ABM) is a computerized telecommunications device that provides the clients of a financial institution with access to financial transactions in a public space without the need for a cashier, human clerk or bank teller. On most modern ATMs, the customer is identified by inserting a plastic ATM card with a magnetic stripe or a plastic smartcard with a chip, that contains a unique card number and some security information such as an expiration date or CVVC (CVV). Authentication is provided by the customer entering a personal identification number (PIN).
ATMs typically connect directly to their host or ATM Controller via either ADSL or dialup modem over a telephone line or directly via a leased line. Leased lines are preferable to POTS lines because they require less time to establish a connection. Leased lines may be comparatively expensive to operate versus a POTS line, meaning less-trafficked machines will usually rely on a dial-up modem.
An ATM is typically made up of the following devices:
• • •
CPU (to control the user interface and transaction devices)
Magnetic and/or Chip card reader (to identify the customer)
PIN Pad (similar in layout to a Touch tone or Calculator keypad), often manufactured as part of a secure enclosure.
• • •
Secure cryptoprocessor, generally within a secure enclosure. Display (used by the customer for performing the transaction) Function key buttons (usually close to the display) or a Touchscreen (used to select the various aspects of the transaction)
• •
Record Printer (to provide the customer with a record of their transaction) Vault (to store the parts of the machinery requiring restricted access)
Currency-counting machine
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A currency-counting machine is a machine which counts money, either stacks of banknotes or loose collections of coins. Counters may be purely mechanical or use electronic components. The machines typically provide a total count of all money, or count off specific batch sizes for wrapping and storage. • Currency counters are commonly used in vending machines to determine what amount of money has been deposited by customers.
Magnetic ink character recognition
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Magnetic Ink Character Recognition, or MICR, is a character recognition technology used primarily by the banking industry to facilitate the processing of cheques. The technology allows computers to read information (such as account numbers) off of printed documents. Unlike barcodes or similar technologies.
MICR characters are printed in special typefaces with a magnetic ink or toner, usually containing iron oxide. As a machine decodes the MICR text, it first magnetizes the characters in the plane of the paper. Then the characters are then passed over a MICR read head, a device similar to the playback head of a tape recorder As each character passes over the head it produces a unique waveform that can be easily identified by the system.
SMS banking
SMS banking is a technology-enabled service offering from banks to its customers, permitting them to operate selected banking services over their mobile phones using SMS messaging. It is extremely important that SMS gateway providers can provide a decent quality of service for banks and financial institutions in regards to SMS services.
Hardware security module
A hardware security module is a type of secure cryptoprocessor targeted at managing digital keys, accelerating cryptoprocesses in terms of digital signings/second and for providing strong authentication to access critical keys for server applications. They are physical devices that traditionally come in the form of a plug-in card or an external TCP/IP security device that can be attached directly to the server or general purpose computer.
IT Product and services
ATM-cum-Debit Card
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An ATM card (also known as a bank card, client card, key card or cash card) is a card issued by a bank, credit union or building society that can be used at an ATM for deposits, withdrawals, account information, and other types of transactions, often through interbank networks.
The use of debit cards has become widespread in many countries and has overtaken the cheque, and in some instances cash transactions by volume. ? ATM cards are typically about 86 × 54 mm
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Uses of ATM card
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24-hour access to Cash • Personalised Cash Withdrawals • View Account Balances & Ministatements • Deposit Cash or Cheques • Transfer Funds between accounts • Refill your Prepaid Mobile • Pay your Utility Bills • Cheque Status Enquiry
Credit card
A credit card is part of a system of payments named after the small plastic card issued to users of the system. It is a card entitling its holder to buy goods and services based on the holder's promise to pay for these goods and services. The issuer of the card grants a line of credit to the consumer (or the user) from which the user can borrow money for payment to a merchant or as a cash advance to the user. Usage of the term "credit card" to imply a credit card account is a metonym.
A credit card is different from a charge card, where a charge card requires the balance to be paid in full each month. In contrast, credit cards allow the consumers to 'revolve' their balance, at the cost of having interest charged. Most credit cards are issued by local banks or credit unions, and are the shape and size specified by the ISO/IEC 7810 standard as ID-1
How credit cards work
Credit cards are issued after an account has been approved by the credit provider, after which cardholders can use it to make purchases at merchants accepting that card. When a purchase is made, the credit card user agrees to pay the card issuer. The cardholder indicates consent to pay by signing a receipt with a record of the card details and indicating the amount to be paid or by entering a personal identification number
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The main benefit to each customer is convenience. Compared to debit cards and checks, a credit card allows small short-term loans to be quickly made to a customer who need not calculate a balance remaining before every transaction, provided the total charges do not exceed the maximum credit line for the card.
Demat account
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A demat account, the abbreviation for dematerialised account, is a type of banking account which dematerializes paper-based physical stock shares. The dematerialised account is used to avoid holding physical shares: the shares are bought and sold through a stock broker.
The Benefits
- A safe and convenient way to hold securities; - Immediate transfer of securities; - No stamp duty on transfer of securities; - Elimination of risks associated with physical certificates such as bad delivery, fake securities, delays, thefts etc.; - Reduction in paperwork involved in transfer of securities; - Reduction in transaction cost; - No odd lot problem, even one share can be sold; - Nomination facility;
Electronic Clearing Service (ECS)
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ECS is a mode of electronic funds transfer for transactions that are repetitive and periodic in nature. ECS is used by institutions for making bulk payment of amounts towards distribution of dividend, interest, salary, pension, etc., or for bulk collection of amounts towards telephone / electricity / water dues, cess / tax collections, loan instalment repayments, periodic investments in mutual funds, etc. Essentially, ECS facilitates bulk transfer of monies from one bank account to many bank accounts or vice versa using the services of a ECS Centre at a ECS location.
RTGS System
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The acronym 'RTGS' stands for Real Time Gross Settlement. RTGS system is a funds transfer mechanism where transfer of money takes place from one bank to another on a 'real time' and on 'gross' basis. This is the fastest possible money transfer system through the banking channel. Settlement in 'real time' means payment transaction is not subjected to any waiting period. The transactions are settled as soon as they are processed
Service Charges for RTGS transactions
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a) Inward transactions – Free, no charge to be levied
b) Outward transactions – • Rs. 1 lakh to Rs. 5 lakh - not exceeding Rs. 25 per transaction.
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Rs. 5 lakh and above – not exceeding Rs. 50 per transaction.
Internet Banking
“Internet banking” refers to systems that enable bank customers to access accounts and general information on bank products and services through a personal computer (PC) or other intelligent device. • Online banking (or Internet banking) allows customers to conduct financial transactions on a secure website operated by their retail or virtual bank, credit union or building society.
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View Account Balances & Statements Transfer Funds between accounts Create Fixed Deposits Online Request a Demand Draft Pay Bills Order a Cheque Book Request Stop Payment on a Cheque Online Ticket Booking for travel by Road, Rail and Air
Online Application for IPO ? Fee Payment to select educational institutions including IITs and NITs ? Customs Duty Payment· ? Online Share Trading ? Online Application for IPO
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Telephone banking
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Telephone banking is a service provided by a financial institution which allows its customers to perform transactions over the telephone. • Most telephone banking use an automated phone answering system with phone keypad response or voice recognition capability. To guarantee security, the customer must first authenticate through a numeric or verbal password or through security questions asked by a live representative
International Banking Services
Foreign Exchange and Trade Services The following are different methods of transacting in Foreign Exchange and remitting money. Travellers Cheques ,Foreign Currency Cash Foreign Currency Drafts, Cheque Deposits, Remittances ,Cash to Master, Trade Services,Forex Services Branch Locator
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Bank for International Settlements
The Bank for International Settlements (BIS) is an international organization of central banks which "fosters international monetary and financial cooperation and serves as a bank for central banks." It is not accountable to any national government. The BIS carries out its work through subcommittees, the secretariats it hosts, and through its annual General Meeting of all members. It also provides banking services, but only to central banks, or to international organizations like itself. Based in Basel, Switzerland, the BIS was established by the Hague agreements of 1930. A central bank, reserve bank, or monetary authority is a banking institution granted the exclusive privilege to lend a government its currency.
As an organization of central banks, the BIS seeks to make monetary policy more predictable and transparent among its 57 member central banks. While monetary policy is determined by each sovereign nation, it is subject to central and private banking scrutiny and potentially to speculation that affects foreign exchange rates and especially the fate of export economies.
Two aspects of monetary policy have proven to be particularly sensitive, and the BIS therefore has two specific goals: to regulate capital adequacy and make reserve requirements transparent.
Regulates capital adequacy Capital adequacy policy applies to equity and capital assets. These can be overvalued in many circumstances. Accordingly the BIS requires the capital/asset ratio of central banks to be above a prescribed minimum international standard, for the protection of all central banks involved. The BIS's main role is in setting capital adequacy requirements. From an international point of view, ensuring capital adequacy is the most important problem between central banks, as speculative lending based on inadequate underlying capital and widely varying liability rules causes economic crises as "bad money drives out good"
Encourages reserve transparency
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To insure liquidity and limit liability to the larger economy, banks cannot create money in specific industries or regions without limit. To make bank depositing and borrowing safer for customers and reduce risk of bank runs, banks are required to set aside or "reserve". Reserve policy is harder to standardize as it depends on local conditions and is often fine-tuned to make industry-specific or region-specific changes, especially within large developing nations.
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Role in banking supervision
The BIS provides the Basel Committee on Banking Supervision with its twelve-member secretariat, and with it has played a central role in establishing the Basel Capital Accords of 1988 and 2004. There remain significant differences between US, EU and UN officials regarding the degree of capital adequacy and reserve controls that global banking now requires.
Capital adequacy ratio
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Capital adequacy ratio (CAR), also called Capital to Risk (Weighted) Assets Ratio (CRAR), is a ratio of a bank's capital to its risk. National regulators track a bank's CAR to ensure that it can absorb a reasonable amount of loss and are complying with their statutory Capital requirements. Capital adequacy ratio is the ratio which determines the capacity of the bank in terms of meeting the time liabilities and other risks such as credit risk, operational risk, etc. In the most simple formulation, a bank's capital is the "cushion" for potential losses, which protects the bank's depositors or other lenders. Banking regulators in most countries define and monitor CAR to protect depositors, thereby maintaining confidence in the banking system.
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Risk-weighted asset
Risk-Weighted asset is a bank's assets weighted according to credit risk. Some assets, such as debentures, are assigned a higher risk than others, such as cash or government securities/bonds. Since different types of assets have different risk profiles, weighing assets based on the level of risk associated with them primarily adjusts for assets that are less risky by allowing banks to "discount" lower-risk assets. The specifics of CAR calculation vary from country to country, but general approaches tend to be similar for countries that apply the Basel Accords. In the most basic application, government debt is allowed a 0% "risk weighting" - that is, they are subtracted from total assets for purposes of calculating the CAR.
Capital requirement
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The capital requirement is a bank regulation, which sets a framework on how banks and depository institutions must handle their capital. The categorization of assets and capital is highly standardized so that it can be risk weighted. Internationally, the Basel Committee on Banking Supervision housed at the Bank for International Settlements influence each country's banking capital requirements.
Basel Accord
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The Basel Accord(s) or Basle Accord(s) refers to the banking supervision Accords (recommendations on banking laws and regulations), Basel I and Basel II issued by the Basel Committee on Banking Supervision (BCBS). They are called the Basel Accords as the BCBS maintains its secretariat at the Bank of International Settlements in Basel, Switzerland and the committee normally meets there.
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The Basel Committee consists of representatives from central banks and regulatory authorities of the Group of Ten countries, plus others (specifically Luxembourg and Spain). The committee does not have the authority to enforce recommendations, although most member countries (and others) tend to implement the Committee's policies. This means that recommendations are enforced through national (or EU-wide) laws and regulations, rather than as a result of the committee's recommendations - thus some time may pass between recommendations and implementation as law at the national level.
Basel Committee on Banking Supervision
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The Basel Committee on Banking Supervision is an institution created by the central bank Governors of the Group of Ten nations . It was created in 1974 and meets regularly four times a year. The Committee's members come from Argentina, Australia, Belgium, Brazil, Canada, China, France, Germany, Hong Kong SAR, India, Indonesia, Italy, Japan, Korea, Luxembourg, Mexico, the Netherlands, Russia, Saudi Arabia, Singapore, South Africa, Spain, Sweden, Switzerland, Turkey, the United Kingdom and the United States. The Committee usually meets at the Bank for International Settlements (BIS) in Basel, Switzerland, where its 12 member permanent Secretariat is located.
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The Committee is often referred to as the BIS Committee after its meeting location. However, the BIS and the Basel Committee remain two distinct entities. The Basel Committee formulates broad supervisory standards and guidelines and recommends statements of best practice in banking supervision (see bank regulation or Basel II Accord, for example) in the expectation that member authorities and other nations' authorities will take steps to implement them through their own national systems, whether in statutory form or otherwise.
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The purpose of the committee is to encourage convergence toward common approaches and standards. Dieter Kerwer reports that "the BCBS is not a classical multilateral organization. It has no founding treaty, and it does not issue binding regulation. Rather, its main function is to act as an informal forum to find policy solutions and to promulgate standards." (pp 619)
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The present Chairman of the Committee is Nout Wellink, President of the Netherlands Bank, who succeeded Jaime Caruana of the Bank of Spain on 1 July 2006.Actually, the IMF is collaborating with the Committee to improve bank regulation.
Background
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The Committee was formed in response to the messy liquidation of a Cologne-based bank in 1974. On 26 June 1974, a number of banks had released Deutsche Mark (German Mark) to the Bank Herstatt in exchange for dollar payments deliverable in New York. On account of differences in the time zones, there was a lag in the dollar payment to the counter-party banks, and during this gap, and before the dollar payments could be effected in New York, the Bank Herstatt was liquidated by German regulators. This incident prompted the G-10 nations to form towards the end of 1974, the Basel Committee on Banking Supervision, under the auspices of the Bank of International Settlements (BIS) located in Basel, Switzerland.
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Basel I
Basel I is the round of deliberations by central bankers from around the world, and in 1988, the Basel Committee (BCBS) in Basel, Switzerland, published a set of minimal capital requirements for banks. This is also known as the 1988 Basel Accord, and was enforced by law in the Group of Ten (G-10) countries in 1992 .
Main Framework • Basel I, that is, the 1988 Basel Accord, primarily focused on credit risk. Assets of banks were classified and grouped in five categories according to credit risk, carrying risk weights of zero (for example home country sovereign debt), ten, twenty, fifty, and up to one hundred percent (this category has, as an example, most corporate debt). Banks with international presence are required to hold capital equal to 8 % of the risk-weighted assets.
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Since 1988, this framework has been progressively introduced in member countries of G-10, currently comprising 13 countries, namely, Belgium, Canada, France, Germany, Italy, Japan, Luxemburg, Netherlands, Spain, Sweden, Switzerland, United Kingdom and the United States of America. • Most other countries, currently numbering over 100, have also adopted, at least in name, the principles prescribed under Basel I. The efficiency with which they are enforced varies, even within nations of the Group of Ten. ? Most other countries, currently numbering over 100, have also adopted, at least in name, the principles prescribed under Basel I. The efficiency with which they are enforced varies, even within nations of the Group of Ten. ? Basel I is now widely viewed as outmoded, and a more comprehensive set of guidelines, known as Basel II are in the process of implementation by several countries.
Basel II Accord
Basel II is the second of the Basel Accords, which are recommendations on banking laws and regulations issued by the Basel Committee on Banking Supervision. The purpose of Basel II, which was initially published in June 2004, is to create an international standard that banking regulators can use when creating regulations about how much capital banks need to put aside to guard against the types of financial and operational risks banks face. ? Advocates of Basel II believe that such an international standard can help protect the international financial system from the types of problems that might arise should a major bank or a series of banks collapse. In practice, Basel II attempts to accomplish this by setting up rigorous risk and capital management requirements designed to ensure that a bank holds capital reserves appropriate to the risk the bank exposes itself to through its lending and investment practices. These rules mean that the greater risk to which the bank is exposed, the greater the amount of capital the bank needs to hold to safeguard its solvency and overall economic stability.
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Objective The final version aims at: ? Ensuring that capital allocation is more risk sensitive; ? Separating operational risk from credit risk, and quantifying both; ? Attempting to align economic and regulatory capital more closely to reduce the scope for regulatory arbitrage.
The Accord in operation
Basel II uses a "three pillars" concept –
(1)
minimum capital requirements (addressing risk), supervisory review and market discipline .
(2)
(3)
The first pillar ? The first pillar deals with maintenance of regulatory capital calculated for three major components of risk that a bank faces: credit risk, operational risk and market risk. ? The credit risk component can be calculated in three different ways of varying degree of sophistication, namely standardized approach, Foundation IRB and Advanced IRB. IRB stands for "Internal Rating-Based Approach". ? For operational risk, there are three different approaches - basic indicator approach or BIA, standardized approach or TSA, and the internal measurement approach (an advanced form of which is the advanced measurement approach or AMA). ? For market risk the preferred approach is VaR (value at risk).
The second pillar The second pillar deals with the regulatory response to the first pillar, giving regulators much improved 'tools' over those available to them under Basel I. It also provides a framework for dealing with all the other risks a bank may face, such as systemic risk, pension risk, concentration risk, strategic risk, reputation risk, liquidity risk and legal risk, which the accord combines under the title of residual risk. It gives banks a power to review their risk management system. The third pillar The third pillar deals to promote greater stability in the financial system.
Implementation progress ? In India, RBI has implemented the Basel II standardized norms on 31st March 2009 and is moving to internal ratings in credit and AMA norms for operational risks in banks.
Tier 1 capital
Tier 1 capital is the core measure of a bank's financial strength from a regulator's point of view. It is composed of core capital, which consists primarily of common stock and disclosed reserves (or retained earnings), but may also include non-redeemable noncumulative preferred stock.
Tier 1 capital is that which includes equity capital and disclosed reserves, where equity capital includes instruments that can't be redeemed at the option of the holder (meaning that the owner of the shares cannot decide on his own that he wants to withdraw the money he invested and so cannot leave the bank without the risk coverage). Reserves are held by the bank, and are thus money that no one but the bank can have an influence on.
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The Tier 1 capital ratio is the ratio of a bank's core equity capital to its total assets. The Tier 1 risk based capital ratio is the ratio of a bank's core (equity capital) to its total risk-weighted assets. Riskweighted assets are the total of all assets held by the bank which are weighted for credit risk according to a formula determined by the Regulator (usually the country's Central bank). Most central banks follow the Bank for International Settlements (BIS) guidelines in setting formulae for asset risk weights. Assets like cash and coins usually have zero risk weight, while debentures might have a risk weight of 100%.
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The theoretical reason for holding capital is that it should provide protection against unexpected losses.This is not the same as expected losses which are covered by provisions, reserves and current year profits.
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Tier 1 capital is also seen as a metric of a bank's ability to sustain future losses.
Tier 2 capital
Tier 2 capital is a measure of a bank's financial strength with regard to the second most reliable form of financial capital, from a regulator's point of view. The forms of banking capital were largely standardised in the Basel I accord, issued by the Basel Committee on Banking Supervision and left untouched by the Basel II accord. National regulators of most countries around the world have implemented these standards in local legislation.
There are several classifications of tier 2 capital, which is composed of supplementary capital. In the Basel I accord, these are categorized as undisclosed reserves, revaluation reserves, general provisions, hybrid instruments and subordinated term debt.
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Undisclosed Reserves Undisclosed reserves are not common, but are accepted by some regulators where a Bank has made a profit but this has not appeared in normal retained profits or in general reserves. Most of the regulators do not allow this type of reserve because it does not reflect a true and fair picture of the results. Revaluation reserves A revaluation reserve is a reserve created when a company has an asset revalued and an increase in value is brought to account. A simple example may be where a bank owns the land and building of its headquarters and bought them for $100 a century ago. A current revaluation is very likely to show a large increase in value. The increase would be added to a revaluation reserve.
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General provisions A general provision is created when a company is aware that a loss may have occurred but is not sure of the exact nature of that loss. Under pre-IFRS accounting standards, general provisions were commonly created to provide for losses that were expected in the future. As these did not represent incurred losses, regulators tended to allow them to be counted as capital. Subordinated-term debt Subordinated debt is classed as Lower Tier 2 debt, usually has a maturity of a minimum of 10years and ranks senior to Tier 1 debt, but subordinate to senior debt. To ensure that the amount of capital outstanding doesn't fall sharply once a Lower Tier 2 issue matures
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Thank You
doc_559266517.pptx
use of technology as the business enabler for banking industry. It lists down the IT challenges before the banking industry.
Banking Technology
The term “banking technology” refers to the use of sophisticated information and communication technologies together with computer science to
enable banks to offer better services to its customers
in a secure, reliable, and affordable manner, and sustain competitive advantage over other banks
Banking technology also subsumes the activity of using advanced computer algorithms in unraveling the patterns of customer behavior
by sifting through customer details such as
demographic, psychographic, and transactional data. This activity, also known as data mining.
•
•
Technology has opened up new markets, new products, new services and efficient delivery channels for the banking industry. Online electronics banking, mobile banking and internet banking are just a few examples. Information Technology has also provided banking industry with the wherewithal to deal with the challenges the new economy poses. Information technology has been the cornerstone of recent financial sector reforms aimed at increasing the speed and reliability of financial operations and of initiatives to strengthen the banking sector.
Technology – A great Enabler
Large volume and variety of business, accuracy and timeliness. ? Large number of Products, Delivery Channels and Customer-centric Processes. ? CRM – For cross selling and meeting the customer life cycle needs. ? Redefining of Customer Convenience. ? Decision support System, Supervisory Monitoring and Control.
?
Challenges before Banking Industry
Ever rising customer expectations ? Security and integrity of data-base – Risk management. ? Disparate Systems ? Customer retention and life cycle management. ? Diseconomies of Scale ? Employee Training & Retention
?
Colossal costs – Technology is a monster – Guzzler of Money. ? Issues of branch structure, lay out and redeployment of staff. ? Redefining of work-flows – front office, back office jobs… ? Change in employee role profile and management/supervisory practices
?
Issues to be addressed…..
? ? ?
?
? ?
How to pay for Technology? How to get / create best value out of use of Technology ? How to put spare capacity to use ? Can we collaborate, co-brand or outsource…..? How to leverage Technology – A great Disciplinarian ? How to meet aspirations of Stakeholders, Customers, Employees ….optimally ? How can Technology facilitate consolidation/ convergence ?
Benefits of Technology
Increased operational efficiency, profitability & productivity ? Superior customer service ? Multi-channel, real-time transaction processing ? Better cross-selling ability ? Minimal transaction costs ? Improved financial analyses capabilities
?
Technologies in banks
Core Banking
•
Core Banking solutions are banking applications on a platform enabling a phased, strategic approach that lets people improve operations, reduce costs, and prepare for growth. Implementing a modular, componentbased enterprise solution ensures strong integration with your existing technologies. An overall service-oriented-architecture (SOA) helps banks reduce the risk that can result from multiple data entries and out-of-date information, increase management approval, and avoid the potential disruption to business caused by replacing entire systems.
ATM
•
A automated teller machine (ATM) or the automatic banking machine (ABM) is a computerized telecommunications device that provides the clients of a financial institution with access to financial transactions in a public space without the need for a cashier, human clerk or bank teller. On most modern ATMs, the customer is identified by inserting a plastic ATM card with a magnetic stripe or a plastic smartcard with a chip, that contains a unique card number and some security information such as an expiration date or CVVC (CVV). Authentication is provided by the customer entering a personal identification number (PIN).
ATMs typically connect directly to their host or ATM Controller via either ADSL or dialup modem over a telephone line or directly via a leased line. Leased lines are preferable to POTS lines because they require less time to establish a connection. Leased lines may be comparatively expensive to operate versus a POTS line, meaning less-trafficked machines will usually rely on a dial-up modem.
An ATM is typically made up of the following devices:
• • •
CPU (to control the user interface and transaction devices)
Magnetic and/or Chip card reader (to identify the customer)
PIN Pad (similar in layout to a Touch tone or Calculator keypad), often manufactured as part of a secure enclosure.
• • •
Secure cryptoprocessor, generally within a secure enclosure. Display (used by the customer for performing the transaction) Function key buttons (usually close to the display) or a Touchscreen (used to select the various aspects of the transaction)
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Record Printer (to provide the customer with a record of their transaction) Vault (to store the parts of the machinery requiring restricted access)
Currency-counting machine
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A currency-counting machine is a machine which counts money, either stacks of banknotes or loose collections of coins. Counters may be purely mechanical or use electronic components. The machines typically provide a total count of all money, or count off specific batch sizes for wrapping and storage. • Currency counters are commonly used in vending machines to determine what amount of money has been deposited by customers.
Magnetic ink character recognition
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Magnetic Ink Character Recognition, or MICR, is a character recognition technology used primarily by the banking industry to facilitate the processing of cheques. The technology allows computers to read information (such as account numbers) off of printed documents. Unlike barcodes or similar technologies.
MICR characters are printed in special typefaces with a magnetic ink or toner, usually containing iron oxide. As a machine decodes the MICR text, it first magnetizes the characters in the plane of the paper. Then the characters are then passed over a MICR read head, a device similar to the playback head of a tape recorder As each character passes over the head it produces a unique waveform that can be easily identified by the system.
SMS banking
SMS banking is a technology-enabled service offering from banks to its customers, permitting them to operate selected banking services over their mobile phones using SMS messaging. It is extremely important that SMS gateway providers can provide a decent quality of service for banks and financial institutions in regards to SMS services.
Hardware security module
A hardware security module is a type of secure cryptoprocessor targeted at managing digital keys, accelerating cryptoprocesses in terms of digital signings/second and for providing strong authentication to access critical keys for server applications. They are physical devices that traditionally come in the form of a plug-in card or an external TCP/IP security device that can be attached directly to the server or general purpose computer.
IT Product and services
ATM-cum-Debit Card
?
An ATM card (also known as a bank card, client card, key card or cash card) is a card issued by a bank, credit union or building society that can be used at an ATM for deposits, withdrawals, account information, and other types of transactions, often through interbank networks.
The use of debit cards has become widespread in many countries and has overtaken the cheque, and in some instances cash transactions by volume. ? ATM cards are typically about 86 × 54 mm
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Uses of ATM card
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24-hour access to Cash • Personalised Cash Withdrawals • View Account Balances & Ministatements • Deposit Cash or Cheques • Transfer Funds between accounts • Refill your Prepaid Mobile • Pay your Utility Bills • Cheque Status Enquiry
Credit card
A credit card is part of a system of payments named after the small plastic card issued to users of the system. It is a card entitling its holder to buy goods and services based on the holder's promise to pay for these goods and services. The issuer of the card grants a line of credit to the consumer (or the user) from which the user can borrow money for payment to a merchant or as a cash advance to the user. Usage of the term "credit card" to imply a credit card account is a metonym.
A credit card is different from a charge card, where a charge card requires the balance to be paid in full each month. In contrast, credit cards allow the consumers to 'revolve' their balance, at the cost of having interest charged. Most credit cards are issued by local banks or credit unions, and are the shape and size specified by the ISO/IEC 7810 standard as ID-1
How credit cards work
Credit cards are issued after an account has been approved by the credit provider, after which cardholders can use it to make purchases at merchants accepting that card. When a purchase is made, the credit card user agrees to pay the card issuer. The cardholder indicates consent to pay by signing a receipt with a record of the card details and indicating the amount to be paid or by entering a personal identification number
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The main benefit to each customer is convenience. Compared to debit cards and checks, a credit card allows small short-term loans to be quickly made to a customer who need not calculate a balance remaining before every transaction, provided the total charges do not exceed the maximum credit line for the card.
Demat account
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A demat account, the abbreviation for dematerialised account, is a type of banking account which dematerializes paper-based physical stock shares. The dematerialised account is used to avoid holding physical shares: the shares are bought and sold through a stock broker.
The Benefits
- A safe and convenient way to hold securities; - Immediate transfer of securities; - No stamp duty on transfer of securities; - Elimination of risks associated with physical certificates such as bad delivery, fake securities, delays, thefts etc.; - Reduction in paperwork involved in transfer of securities; - Reduction in transaction cost; - No odd lot problem, even one share can be sold; - Nomination facility;
Electronic Clearing Service (ECS)
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ECS is a mode of electronic funds transfer for transactions that are repetitive and periodic in nature. ECS is used by institutions for making bulk payment of amounts towards distribution of dividend, interest, salary, pension, etc., or for bulk collection of amounts towards telephone / electricity / water dues, cess / tax collections, loan instalment repayments, periodic investments in mutual funds, etc. Essentially, ECS facilitates bulk transfer of monies from one bank account to many bank accounts or vice versa using the services of a ECS Centre at a ECS location.
RTGS System
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The acronym 'RTGS' stands for Real Time Gross Settlement. RTGS system is a funds transfer mechanism where transfer of money takes place from one bank to another on a 'real time' and on 'gross' basis. This is the fastest possible money transfer system through the banking channel. Settlement in 'real time' means payment transaction is not subjected to any waiting period. The transactions are settled as soon as they are processed
Service Charges for RTGS transactions
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a) Inward transactions – Free, no charge to be levied
b) Outward transactions – • Rs. 1 lakh to Rs. 5 lakh - not exceeding Rs. 25 per transaction.
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Rs. 5 lakh and above – not exceeding Rs. 50 per transaction.
Internet Banking
“Internet banking” refers to systems that enable bank customers to access accounts and general information on bank products and services through a personal computer (PC) or other intelligent device. • Online banking (or Internet banking) allows customers to conduct financial transactions on a secure website operated by their retail or virtual bank, credit union or building society.
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View Account Balances & Statements Transfer Funds between accounts Create Fixed Deposits Online Request a Demand Draft Pay Bills Order a Cheque Book Request Stop Payment on a Cheque Online Ticket Booking for travel by Road, Rail and Air
Online Application for IPO ? Fee Payment to select educational institutions including IITs and NITs ? Customs Duty Payment· ? Online Share Trading ? Online Application for IPO
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Telephone banking
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Telephone banking is a service provided by a financial institution which allows its customers to perform transactions over the telephone. • Most telephone banking use an automated phone answering system with phone keypad response or voice recognition capability. To guarantee security, the customer must first authenticate through a numeric or verbal password or through security questions asked by a live representative
International Banking Services
Foreign Exchange and Trade Services The following are different methods of transacting in Foreign Exchange and remitting money. Travellers Cheques ,Foreign Currency Cash Foreign Currency Drafts, Cheque Deposits, Remittances ,Cash to Master, Trade Services,Forex Services Branch Locator
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Bank for International Settlements
The Bank for International Settlements (BIS) is an international organization of central banks which "fosters international monetary and financial cooperation and serves as a bank for central banks." It is not accountable to any national government. The BIS carries out its work through subcommittees, the secretariats it hosts, and through its annual General Meeting of all members. It also provides banking services, but only to central banks, or to international organizations like itself. Based in Basel, Switzerland, the BIS was established by the Hague agreements of 1930. A central bank, reserve bank, or monetary authority is a banking institution granted the exclusive privilege to lend a government its currency.
As an organization of central banks, the BIS seeks to make monetary policy more predictable and transparent among its 57 member central banks. While monetary policy is determined by each sovereign nation, it is subject to central and private banking scrutiny and potentially to speculation that affects foreign exchange rates and especially the fate of export economies.
Two aspects of monetary policy have proven to be particularly sensitive, and the BIS therefore has two specific goals: to regulate capital adequacy and make reserve requirements transparent.
Regulates capital adequacy Capital adequacy policy applies to equity and capital assets. These can be overvalued in many circumstances. Accordingly the BIS requires the capital/asset ratio of central banks to be above a prescribed minimum international standard, for the protection of all central banks involved. The BIS's main role is in setting capital adequacy requirements. From an international point of view, ensuring capital adequacy is the most important problem between central banks, as speculative lending based on inadequate underlying capital and widely varying liability rules causes economic crises as "bad money drives out good"
Encourages reserve transparency
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To insure liquidity and limit liability to the larger economy, banks cannot create money in specific industries or regions without limit. To make bank depositing and borrowing safer for customers and reduce risk of bank runs, banks are required to set aside or "reserve". Reserve policy is harder to standardize as it depends on local conditions and is often fine-tuned to make industry-specific or region-specific changes, especially within large developing nations.
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Role in banking supervision
The BIS provides the Basel Committee on Banking Supervision with its twelve-member secretariat, and with it has played a central role in establishing the Basel Capital Accords of 1988 and 2004. There remain significant differences between US, EU and UN officials regarding the degree of capital adequacy and reserve controls that global banking now requires.
Capital adequacy ratio
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Capital adequacy ratio (CAR), also called Capital to Risk (Weighted) Assets Ratio (CRAR), is a ratio of a bank's capital to its risk. National regulators track a bank's CAR to ensure that it can absorb a reasonable amount of loss and are complying with their statutory Capital requirements. Capital adequacy ratio is the ratio which determines the capacity of the bank in terms of meeting the time liabilities and other risks such as credit risk, operational risk, etc. In the most simple formulation, a bank's capital is the "cushion" for potential losses, which protects the bank's depositors or other lenders. Banking regulators in most countries define and monitor CAR to protect depositors, thereby maintaining confidence in the banking system.
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Risk-weighted asset
Risk-Weighted asset is a bank's assets weighted according to credit risk. Some assets, such as debentures, are assigned a higher risk than others, such as cash or government securities/bonds. Since different types of assets have different risk profiles, weighing assets based on the level of risk associated with them primarily adjusts for assets that are less risky by allowing banks to "discount" lower-risk assets. The specifics of CAR calculation vary from country to country, but general approaches tend to be similar for countries that apply the Basel Accords. In the most basic application, government debt is allowed a 0% "risk weighting" - that is, they are subtracted from total assets for purposes of calculating the CAR.
Capital requirement
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The capital requirement is a bank regulation, which sets a framework on how banks and depository institutions must handle their capital. The categorization of assets and capital is highly standardized so that it can be risk weighted. Internationally, the Basel Committee on Banking Supervision housed at the Bank for International Settlements influence each country's banking capital requirements.
Basel Accord
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The Basel Accord(s) or Basle Accord(s) refers to the banking supervision Accords (recommendations on banking laws and regulations), Basel I and Basel II issued by the Basel Committee on Banking Supervision (BCBS). They are called the Basel Accords as the BCBS maintains its secretariat at the Bank of International Settlements in Basel, Switzerland and the committee normally meets there.
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The Basel Committee consists of representatives from central banks and regulatory authorities of the Group of Ten countries, plus others (specifically Luxembourg and Spain). The committee does not have the authority to enforce recommendations, although most member countries (and others) tend to implement the Committee's policies. This means that recommendations are enforced through national (or EU-wide) laws and regulations, rather than as a result of the committee's recommendations - thus some time may pass between recommendations and implementation as law at the national level.
Basel Committee on Banking Supervision
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The Basel Committee on Banking Supervision is an institution created by the central bank Governors of the Group of Ten nations . It was created in 1974 and meets regularly four times a year. The Committee's members come from Argentina, Australia, Belgium, Brazil, Canada, China, France, Germany, Hong Kong SAR, India, Indonesia, Italy, Japan, Korea, Luxembourg, Mexico, the Netherlands, Russia, Saudi Arabia, Singapore, South Africa, Spain, Sweden, Switzerland, Turkey, the United Kingdom and the United States. The Committee usually meets at the Bank for International Settlements (BIS) in Basel, Switzerland, where its 12 member permanent Secretariat is located.
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The Committee is often referred to as the BIS Committee after its meeting location. However, the BIS and the Basel Committee remain two distinct entities. The Basel Committee formulates broad supervisory standards and guidelines and recommends statements of best practice in banking supervision (see bank regulation or Basel II Accord, for example) in the expectation that member authorities and other nations' authorities will take steps to implement them through their own national systems, whether in statutory form or otherwise.
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The purpose of the committee is to encourage convergence toward common approaches and standards. Dieter Kerwer reports that "the BCBS is not a classical multilateral organization. It has no founding treaty, and it does not issue binding regulation. Rather, its main function is to act as an informal forum to find policy solutions and to promulgate standards." (pp 619)
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The present Chairman of the Committee is Nout Wellink, President of the Netherlands Bank, who succeeded Jaime Caruana of the Bank of Spain on 1 July 2006.Actually, the IMF is collaborating with the Committee to improve bank regulation.
Background
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The Committee was formed in response to the messy liquidation of a Cologne-based bank in 1974. On 26 June 1974, a number of banks had released Deutsche Mark (German Mark) to the Bank Herstatt in exchange for dollar payments deliverable in New York. On account of differences in the time zones, there was a lag in the dollar payment to the counter-party banks, and during this gap, and before the dollar payments could be effected in New York, the Bank Herstatt was liquidated by German regulators. This incident prompted the G-10 nations to form towards the end of 1974, the Basel Committee on Banking Supervision, under the auspices of the Bank of International Settlements (BIS) located in Basel, Switzerland.
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Basel I
Basel I is the round of deliberations by central bankers from around the world, and in 1988, the Basel Committee (BCBS) in Basel, Switzerland, published a set of minimal capital requirements for banks. This is also known as the 1988 Basel Accord, and was enforced by law in the Group of Ten (G-10) countries in 1992 .
Main Framework • Basel I, that is, the 1988 Basel Accord, primarily focused on credit risk. Assets of banks were classified and grouped in five categories according to credit risk, carrying risk weights of zero (for example home country sovereign debt), ten, twenty, fifty, and up to one hundred percent (this category has, as an example, most corporate debt). Banks with international presence are required to hold capital equal to 8 % of the risk-weighted assets.
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Since 1988, this framework has been progressively introduced in member countries of G-10, currently comprising 13 countries, namely, Belgium, Canada, France, Germany, Italy, Japan, Luxemburg, Netherlands, Spain, Sweden, Switzerland, United Kingdom and the United States of America. • Most other countries, currently numbering over 100, have also adopted, at least in name, the principles prescribed under Basel I. The efficiency with which they are enforced varies, even within nations of the Group of Ten. ? Most other countries, currently numbering over 100, have also adopted, at least in name, the principles prescribed under Basel I. The efficiency with which they are enforced varies, even within nations of the Group of Ten. ? Basel I is now widely viewed as outmoded, and a more comprehensive set of guidelines, known as Basel II are in the process of implementation by several countries.
Basel II Accord
Basel II is the second of the Basel Accords, which are recommendations on banking laws and regulations issued by the Basel Committee on Banking Supervision. The purpose of Basel II, which was initially published in June 2004, is to create an international standard that banking regulators can use when creating regulations about how much capital banks need to put aside to guard against the types of financial and operational risks banks face. ? Advocates of Basel II believe that such an international standard can help protect the international financial system from the types of problems that might arise should a major bank or a series of banks collapse. In practice, Basel II attempts to accomplish this by setting up rigorous risk and capital management requirements designed to ensure that a bank holds capital reserves appropriate to the risk the bank exposes itself to through its lending and investment practices. These rules mean that the greater risk to which the bank is exposed, the greater the amount of capital the bank needs to hold to safeguard its solvency and overall economic stability.
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Objective The final version aims at: ? Ensuring that capital allocation is more risk sensitive; ? Separating operational risk from credit risk, and quantifying both; ? Attempting to align economic and regulatory capital more closely to reduce the scope for regulatory arbitrage.
The Accord in operation
Basel II uses a "three pillars" concept –
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minimum capital requirements (addressing risk), supervisory review and market discipline .
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The first pillar ? The first pillar deals with maintenance of regulatory capital calculated for three major components of risk that a bank faces: credit risk, operational risk and market risk. ? The credit risk component can be calculated in three different ways of varying degree of sophistication, namely standardized approach, Foundation IRB and Advanced IRB. IRB stands for "Internal Rating-Based Approach". ? For operational risk, there are three different approaches - basic indicator approach or BIA, standardized approach or TSA, and the internal measurement approach (an advanced form of which is the advanced measurement approach or AMA). ? For market risk the preferred approach is VaR (value at risk).
The second pillar The second pillar deals with the regulatory response to the first pillar, giving regulators much improved 'tools' over those available to them under Basel I. It also provides a framework for dealing with all the other risks a bank may face, such as systemic risk, pension risk, concentration risk, strategic risk, reputation risk, liquidity risk and legal risk, which the accord combines under the title of residual risk. It gives banks a power to review their risk management system. The third pillar The third pillar deals to promote greater stability in the financial system.
Implementation progress ? In India, RBI has implemented the Basel II standardized norms on 31st March 2009 and is moving to internal ratings in credit and AMA norms for operational risks in banks.
Tier 1 capital
Tier 1 capital is the core measure of a bank's financial strength from a regulator's point of view. It is composed of core capital, which consists primarily of common stock and disclosed reserves (or retained earnings), but may also include non-redeemable noncumulative preferred stock.
Tier 1 capital is that which includes equity capital and disclosed reserves, where equity capital includes instruments that can't be redeemed at the option of the holder (meaning that the owner of the shares cannot decide on his own that he wants to withdraw the money he invested and so cannot leave the bank without the risk coverage). Reserves are held by the bank, and are thus money that no one but the bank can have an influence on.
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The Tier 1 capital ratio is the ratio of a bank's core equity capital to its total assets. The Tier 1 risk based capital ratio is the ratio of a bank's core (equity capital) to its total risk-weighted assets. Riskweighted assets are the total of all assets held by the bank which are weighted for credit risk according to a formula determined by the Regulator (usually the country's Central bank). Most central banks follow the Bank for International Settlements (BIS) guidelines in setting formulae for asset risk weights. Assets like cash and coins usually have zero risk weight, while debentures might have a risk weight of 100%.
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The theoretical reason for holding capital is that it should provide protection against unexpected losses.This is not the same as expected losses which are covered by provisions, reserves and current year profits.
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Tier 1 capital is also seen as a metric of a bank's ability to sustain future losses.
Tier 2 capital
Tier 2 capital is a measure of a bank's financial strength with regard to the second most reliable form of financial capital, from a regulator's point of view. The forms of banking capital were largely standardised in the Basel I accord, issued by the Basel Committee on Banking Supervision and left untouched by the Basel II accord. National regulators of most countries around the world have implemented these standards in local legislation.
There are several classifications of tier 2 capital, which is composed of supplementary capital. In the Basel I accord, these are categorized as undisclosed reserves, revaluation reserves, general provisions, hybrid instruments and subordinated term debt.
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Undisclosed Reserves Undisclosed reserves are not common, but are accepted by some regulators where a Bank has made a profit but this has not appeared in normal retained profits or in general reserves. Most of the regulators do not allow this type of reserve because it does not reflect a true and fair picture of the results. Revaluation reserves A revaluation reserve is a reserve created when a company has an asset revalued and an increase in value is brought to account. A simple example may be where a bank owns the land and building of its headquarters and bought them for $100 a century ago. A current revaluation is very likely to show a large increase in value. The increase would be added to a revaluation reserve.
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General provisions A general provision is created when a company is aware that a loss may have occurred but is not sure of the exact nature of that loss. Under pre-IFRS accounting standards, general provisions were commonly created to provide for losses that were expected in the future. As these did not represent incurred losses, regulators tended to allow them to be counted as capital. Subordinated-term debt Subordinated debt is classed as Lower Tier 2 debt, usually has a maturity of a minimum of 10years and ranks senior to Tier 1 debt, but subordinate to senior debt. To ensure that the amount of capital outstanding doesn't fall sharply once a Lower Tier 2 issue matures
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