The Hindu Business Line : Centrality of innovation for banks

THE increased volatility in recent years suggests a torrid pace of development. Such contextual changes received an impetus through increasing integration of the productive process, rapid technological advances, slashing of legal and institutional barriers to global trade and a smoother flow of global capital.

Michael E. Porter showed that in any industry, the nature of competition is embodied in threat of new entrant, threat of substitute product or services, bargaining power of suppliers/buyers and the rivalry among existing competitors.

The significance of introducing a steady stream of innovative products for banks emanates from its potential to impact all these factors.

In the present world, where all elements are critically in ferment, launching of innovative products by strong business analytic tools, optimised processes and a modern centralised IT system is central to ensuring short-term survival, achieving long-term prosperity and eventually gaining competitive advantages.

Discontinuity — the new disequilibria

Everything in business is always in flux. For, as Engels pointed out "equilibrium is inseparable from motion and all equilibrium is relative and temporary". The quickening of change has, however, caused discontinuity.

An urgent policy appraisal is necessary to sense and seize the latent growth impulses in banks by synchronised measures for enhanced performance in this turbulent era.

The innovation imperative

Successful innovation is crucial to the competitive edge of all businesses. But it is particularly important for banking and finance companies. Innovation, which transcends invention, represents the point of convergence of invention and insight.

Innovation is a key driver of growth that surprises and delights the customer with new, differentiated and relevant benefits. This is not a cliché but a defining characteristic of the modern corporate saga.

This can be substantiated by innovation within a global framework. Indian banks will be able to weather the competition provided they are relevant to consumers in terms of technology, quality, reliability, pricing, performance and support.

As the convergence of the ICE (information, communication) technologies, "technological evangelisation" and narrowing of the "digital gap" are significant instruments of the growth escalation process, integration of technology and business is required.

Given the increasingly critical role technology plays — from adaptive supply chains to innovative customer relationships — the fact of widening chasm between companies caused by differing use of technology is incontrovertible.

Transforming Indian banking

The banking industry underwent profound changes of consolidation, spread of electronic banking and increased freedom to combine banking with other financial services. The emerging environment highlights challenges of intensified competition, increased business complexities, profitability, thinning spreads, customer expectations and employee productivity.

These factors, which link innovation to products, customers and markets, necessitate positioning of business in a far more global and synergistic context than through contemporary banking products with advanced consumer-friendly features at affordable prices.

The RBI, particularly since 1993, consistently encouraged banks to adopt advanced technologies to enhance global competitiveness. Innovation became an industry phenomenon and innovative products with focus on information technology, multiple channels and proliferating delivery platforms such as branch, Internet, off-site ATMs, anywhere banking, credit, debit, smart cards, mobile, or fixed-line phones and institutional channels (SWIFT, RTGS, ACH, and so on) are commonplace.

Fiercely creative research and technology teams altered the face of Indian banking through innovations in core banking/clustered solutions, centralised processing, distributed servicing and easily scalable open systems to provide choice and convenience. Service with effective, standardised and controlled processes is the true differentiator in the market. Core banking products such as Flexcube from i-flex solutions, Finnacle from Infosys, Sanchez Profile from Sanchez, and so on cost about Rs 5-8 crore depending on customer base, number of branches, and so on. Typically, these products support various delivery channels such as ATM, phone banking, etc. with real-time processing capabilities enabling a bank and its customers to accurately view account balances, regardless of time and location.

Both external and internal factors contribute to development of innovative products tailored to specific needs and special niches. Important external factors include market research, exchange of new product ideas between banks and research or technological developments. Internal factors could relate to in-house development of new products, monitoring and evaluation of existing products and feedback from employees and customers.

Initially, the progress in respect of information technology was slow. But it rapidly gained momentum which is reflected in the enhanced use of pre-paid cards, e-purse, e-wires of money orders, e-banking, e-loans, electronic data interchange (EDI), proliferation of ATMs and so on.

Electronic means of payment include instruments ranging from electronic money orders, debit cards and credit cards to smart cards or e-purse or more generally speaking store value card or pre-paid card.

The use of electronic means of payment, particularly in the case of countries such as India, despite fast growth in recent years, is still greatly restricted. Hence, there is immense latent potential.

The liberalisation of the financial sector and the increased freedom to combine banking with other financial services grounded both in economic theory and practice facilitated consolidation and convergence globally. With online, real-time information growing, e-payment and security issues need to be resolved.

The move towards universal banking will help banks expand and diversify more effectively.

The road less travelled

In view of the gross inadequacy of linear progression, banks need to continually slash costs and improve customer service with new products and competitive advantages by pioneering products and customised software solutions. Solutions have been developed in retail and corporate banking, credit cards, cash management, relationship banking, CRM, ATM, credit appraisal, trade finance, EAI, eCommerce and mCommerce. Some important innovations include:

A treasury solution covering forex, money market, securities and derivative transactions with powerful tools for the bank's treasury front desk, mid office and back office.

A back office banking solution, which is completely parameter driven to facilitate user to change the parameters and generate reports in accordance with the RBI specifications.

A unique customer service value added product, targeted at corporate customers with large volume businesses.

A treasury Solution covering forex, money market, securities and derivative transactions with powerful tools for the bank's treasury front desk, mid office and back office.

Critical success factors — empirical evidence

Strategic factors to devise effective responses to innovation challenges include quick response to identified customer needs, product quality, short cycle times for product development, developing marketing and technical capabilities, extensive training, rewards and recognition of performance.

Franklin (2003) has cited a study of Donald Lehman at Columbia University in New York and Jacob Goldenberg and David Mazursky, both at the Hebrew University of Jerusalem. An incisive examination of 197 product innovations (111 successes and 86 failures) showed that successful innovation was marked by moderate newness to market, tried and tested technology, saved money, met customers' needs and existing practices. Failed products were based on cutting-edge or untested technology, followed a "me-too" approach, or were created without any clearly defined solution.

Peaks to scale

In sum, the new game requires new strategies with an accent on innovation for organizational transformation and to achieve world-class competitiveness through improved efficiency and reduced operational cost.

As innovation transcends an organisation-centric agenda, policy, programme and operationalising accelerating interventions need to strengthen core competencies of Indian banks, while exploring seeding options for future growth. Thrust on innovation is imperative, particularly in the present context of consolidation and convergence both within and across segments of the financial system.

(The author is Chief Economist, Canara Bank. He may be reached at sharma_m@canbank.co.in)