Emergence of Flexible Distribution Channels for Financial Products: Electronic Banking as Competitive Strategy for Banks in India

De Sarkar, Partha

Abstract

In India, with competition heating up in the banking industry and the increase in the number of private and foreign banks in the post liberalization era, all players in this market are gearing up their supply chain management processes for better customer acquisition and retention. Most of these new private sector banks and the foreign banks are handicapped by the lack of a strong branch network as compared to their public sector counterparts to distribute their products or services. In the absence of such a network, the market place has seen the emergence of a lot of innovative services by the players to increase their market share and reduce their cost of service delivery through direct distribution strategies of Non-Branch Delivery. All these are using "homebanking" as a the key "pull" factor to wean customers away from the well-entrenched public sector bank.

Technology is enabling banks to provide the convenience of "anytime-anywhere" banking to increasingly demanding customers. Banks are now reengineering the way in which their services can be "distributed" to their customers. The earlier brick-and-mortar branch is no longer sufficient, technology is now taking banks to the homes and offices, 24 hours a day, 365 days a year through ATMs, phone banking and PC banking. Therefore, the financial supply chain is undergoing a fundamental strategic change. In this paper, the four major category of players, in the Indian banking sector, i.e. Public Sector Banks, Private Sector Banks, Financial Institutions like ICICI and IDBI, and Foreign Banks have been studied to identify competitive strategies followed by each to get into the Non-Branch Delivery Business. Developmental Banks, Rural Banks and Co-operative Banks have been left out of the scope of this study, since this is not their area of focus.

Keywords: electronic banking, financial products, flexible distribution channels

Introduction

In India, from the early I990's, electronic banking is gaining in popularity as an important distribution channel to provide banking services. This direction is being taken by the batiks to differentiate their services to the consumers to gain their loyalty. The stratégies adopted by the Indian banks to survive the increased competition is the focus of this study.

Technology is enabling banks to provide the convenience of anytime-anywhere-banking. Banks are now reengineering the way in which their services can be reached to their customers by bringing in flexibility in their "distribution channels". The earlier brick-and-monar branch is no longer sufficient; technology is now taking banks to the homes or offices, 24 hours a day, 365 days a year through ATMs, phone banking and PC banking. The financial supply chain is undergoing a fundamental strategic change.

What is Non-Branch-Banking

Traditionally, consumers could do their banking only by coming to the bank branch. The brick-and-mortar building of the bank branch defined the periphery of service delivery of banking products.

The trend of Non-Branch-Service Delivery in banking started with the growing popularity of electronic payment services. It started with Electronic Funds Transfers (EFT). Then came credit cards. ATMs and smart cards were next in the evolutionary history. Gradually, with the advance of computing technology, telephone banking and Computer Telephony Integration (CTI) became a powerful medium of delivering banking services. The latest product is Internet banking, where the technology and other issues are still under evolution.

These new technologies have broken the paradigm of branch banking. Customers, whether individual consumers or business corporales, no longer have to go to the bank to do their business. It can be done from home, using the PC or the telephone, or at the shopping markets, using plastic money.

Some banks have now also started door to door delivery of services. As a result, it is now possible to order cash or demand drafts to be delivered at home. Consumers wishing to open accounts with banks or to apply for durable loans can call up Direct Sales Associates (DSAs) of banks and their representatives will complete the necessary documentation at the customer's convenience, at his desired place und time. These are the elements of the new flexible financial supply chain.

Objective, Scope and Methodology

The objective of this paper is to identify competitive supply chain management practices that are being used by the banking industry in India. More specifically, the paper attempts to answer the following questions:

* Why are banks in India adopting non-branuh-banking?

* What are the differences in their approach to harness the technology?

* What are the issues that the Banking Industry faces in implementing non-branch-banking - legal issues, techno-managerial issues, consumer behavior issues etc.?

This paper presents the competitive behavior across the commercial banks in India, i.e. the Public sector Banks, the Private Sector Banks, the Financial Institutions like IDBI and ICICI and the Foreign Banks operating in India to identify innovative technology strategies employed by them to acquire and service their customers in a flexible mode.

This paper has used a mix of academic literature review, business press reviews, and research on the Internet and expert opinion surveys. Specifically, the following sources have been studied:

* Writings in the business press to gather market in tonnai ion on the industry

* Media advertisements by banks of their electronic banking services

* Internet based research on the websitcs of the banks offering electronic banking services

* Case studies of some prominent banks in the area on non-branch delivery

* Literature survey to unearth the issues which need to be resolved to make electronic banking a reality in India.

* Interviews with experienced bankers to get their views on the issue

How Electronic Banking Gained in Popularity

To get a holistic picture of how the technology and its public acceptance has evolved over the years , it becomes necessary to trace the development of electronic payments through lime. In its evolutionary history Electronic banking had started in the 1920's. But this technology or this form of hanking did not gel much of a widespread acceptance till the 1960s. This is true for both electronic funds transfers (FKT) and for credit cards. It required almost a compiete generation before this form of banking found popularity with a sizable group of consumers and hankers who are comfortable with technology as a part of their day-to-day lives. The reason for this is explained by Welch (1993). He says that in the early days, the effectiveness of electronic banking systems was inhibited by four main factors:

* communication technology was in its infancy and inadequate fur local or global coverage - hanks and customers could not communicate internationally within their own organizations or with each other

* most companies and banks had incompatible systems - sometimes even different branches of the same bank had different systems

* computer manufacturers were unable to agree on tlie development of technology standards which would permit data exchange directly between computer systems

* computer hardware and software were expensive in comparison to the efficiency savings available through automation.

After the 1960s, electronic banking and its use recorded a quantum jump. To explain this, Kalakota and Whinston (1996) say that recently, several innovations helped to simplify consumer payments. These can be broadly classified into:

* Innovations affecting consumers: credit and debit cards, automated teller machines(ATMs), stored value cards and electronic banking.

* Innovations enabling electronic commerce: digital cash, electronic cheques, smart cards (also called electronic wallets) and encrypted credit cards and EDI and Internet technologies

* Innovations affecting companies: such as interbank transfers through automated clearing houses lhat allow companies to pay dividends to their shareholders directly, or utility companies to debit their customer' accounts electronically though, standing instructions.

Rohlwink (1991) explains how this form of banking is becoming a competitive advantage. According to him, "distribution channel strategies are particularly important because many new types of channel for financial services are emerging and rapidly gaining importance. For example, technological advances have made home, office and telephone bunking more effective and efficient as a means of selling and delivering products, and these channels are gradually gaining more acceptance among customers. At the same time, the rapidly rising costs of operating a physical branch network, particularly in terms of staff and premises, are making this traditional channel less attractive. Such developments are changing the relative competitive advantage of various distribution channels. They can thus pose a major threat to established competitors with extensive branch networks while creating specific opportunities for new entrants to improve their competitive position with respect to this key success factor."

According to the leading management consultants PriceWaterhouse Coopers (1999) "...with the advent of ATMs, "Anytime Banking" has come into the picture. Satellites and telecom networks across the world have made "Anywhere Banking" possible. Now it is the turn of "Anyhow Banking", and the leading bank of the next century will be the one which has all the three A's..."

Electronic Banking in India

In India, Electronic Banking is of fairly recent origin. The traditional model for growth has been through branch banking. Only in the early 1990's has there been a start in the non-branch bunking services. The new private sector banks and the foreign banks are handicapped by the lack of a strong branch network in comparison with the public sector banks. In the absence of such networks, the market place has seen the emergence of a lot of innovative services by the non-public sector players to increase their market share and reduce their cost of service delivery through direct distribution strategies of Non-Branch-Delivery. All these banks are using "homebanking" as a key "pull" factor to wean customers away from the well entrenched public sector banks. Some relevant facts are given below:

* ATMs made their firsl appearance in the early nineties, started by foreign banks like Citibank and Hong Kong Bank. By the end nineties, even private banks and public sector banks have come up with their own ATM networks, the private sector banks being more aggressive of the two to adopt the new technology.

* Under the initiative of the Indian Banks Association (IBA), in Mumbai, a pilot project to link up 156 ATMs of 31 member banks has come up in the form of SWADHAN, a shared payment network system, which boasts of a cardbase of 1,000,000 cards and 30,OUO transactions per month. Masiercard and VISA arc also following suit to offer shared ATM networks.

* Credit cards have found widespread acceptance in the métros and big cities. The major players in the credit card market are the foreign banks and some big public sector blinks like SBl and Bank of Baroda. India now has about three million credit cards in circulation.

* Debit cards have also now started becoming popular in the last 2 years only with Mastercard and VISA tying up with Indian and foreign banks.

* Telephone banking is available with a lew foreign and private banks offering this service through the technology called Interactive Voice Response Service (IVRS). It has moved into the domain of mobile phones as well, in a service that is being marketed as mobile commerce (M-commerce).

* Internet banking has made its debut with IClCI bank's product called Infiniti and Citibank being the pioneers in this field. H is now being offered by some select other banks as well. This seems to be the latest growth area.

There are interesting contrasts in the approach followed by the each of the four categories of players in the study. This has been described in detail in subsequent paragraphs.

Foreign Banks Operating in India

Most foreign banks, especially the American banks like Citibank, Bank of America, American Express and ABN AMRO have followed the strategy of having one branch per city and reaching the customers geographically through non-branch-delivery mechanisms (Bank of America has subsequently sold its consumer bunking business to ABN AMRO).

On the other hand, banks like ANZ Grindlays Bank and Standard Chartered Bank, which have historically had a large number of branches in some cities like Calcutta are in the process of closing and consolidating them into fewer numbers. All these foreign banks have embraced electronic banking in a big way and are investing heavily in computerization and setting up ATM networks. But because they require licenses from the Reserve Bank of India (RBI) before they can set up branches, they have utilized the licenses granted to them to set up new branches in new cities where they had no presence, rather than opening more branches in the same cities. HSBC Bank on the other hand, is an exception to this trend amongst foreign banks, and has set up branches in the same cities where ihey were already present.

The products offered by most of the banks are state-of-the-art products on electronic banking like ATMs, credit cards, debit cards, phone banking, internet banking etc.

Indian Private Sector Banks

In the 1990s, the private sector banks have been aggressively following a mixed approach to enhancing their reach. They have no restrictions in opening branches. This explains the reason why Timesbank, Centurion Bank, Global Trust Bank and HDFC Bank have been setting up new branches at a fast pace. Very recently, HDFC Bank and Timesbank have merged and created India's largest private bank under the umbrella of HDFC Bank. These branches are very small and operate as Front Oflke Sales and Service points only. No backroom accounting or processing activity happen here. Backrooms of these branches are centralized in regional locations, and serve multiple branches. Therefore, the approach of these private banks has been the best mixture of ATM driven electronic banking and sales and service driven branches as distribution points. Other smaller private banks like Bank of Madura, Bank of Rajasthan or Vyasa Bank have not got into electronic banking in any big way.

Indian Financial Institutions

A very interesting study is the approach followed by the traditional Developmental rinaneial Institutions like ICICI, IDBl and UTI, All these organizations have expanded their scope of operations from being the traditional developmental financial institutions or mutual fund organizations to full function commercial banks with consumer and corporate hanking functions,

In-effiect, JClCl Bank in particular, has become one of (he most aggressive players in the consumer hanking Held, emerging as very strong competitor to the foreign hanks in this arena. The approach of IDBi and UTi has been more relaxed. All these financial institutions have opened many branches, and most of the brandies have ATMs associated with them. IDHI has also tied up with American Express, as ' a result of which American Express Cards can be used in their ATMs.

Thus, we see that these traditional financial institutions have also reinvented themselves and are trying to become players in the consumer banking arena through electronic banking as one of the prominent service delivery mechanisms.

Indian Public sector Banks

In terms of sheer geographical spread, the public sector banking system is probably the largest in the world- The statistics are as Follows; a network of 64,000 branches - one branch for every 14,000 Indians with over 46 crore customers. This labour intensive network has built-in costs which make the public sector banks inherently uncompetitive. Therefore, reduction of branches to achieve cost savings has not received as much thrust as it should. The other factor inhibiting this process is that all these banks have a huge unionized workforce, which is difficult to relocate or retrain. An attempt is being made lo reduce manpower through the launch of "Voluntary Retirement Schemes (VRS)".

Despite the compelling business case for restructuring their distribution channels, the puhlie sector hanks have not given too much priority to non branch delivery. Also, the customer profile tor the public sector bank is probably not (he right ("it for electronic banking services, because of their social obligations to provide banking services for the masses as well. Hleeironie banking products require a certain sophistication that may prove to be a hurdle on the way of smooth absorption of llie technology by the client profile of tlic public sector banks. Therefore., there is not much locus on electronic banking services here, even though exceptions are there like Bank of Baroda and State Bonk of India, who have aggressively pushed ilieir credit cards. Bank of Baroda has a credit card brand of its own called the BOBCard, which is India's one and only propreitory card. SBI has tied up with the multinational UF. Capital to provide its VISA credit cards. It has already become the second highest issuer of credit cards in India within just 3 years.

Many of the mher banks like Allahabad Bank, Vijaya Bank. Central Bank and Andhra Bank etc. have issued credit cards as well, in collaboration with either Visa or Mastercard, but they u re not actively promoting these cards. Some of iliese banks also have ATMs, which are mostly attached to their branches, and can he used by customers of that particular branch only. Some of them have also gone to the extent of having a homepage on the net, which, by and large, is just for the purpose nf information dissemination to prospective customers, primarily NRIs. Though they have plans of networking them in future, it becomes evident while talking Io their personnel thai it is not a key area of focus yet.

The Flexible Distribution Model

IC we look at the direction in which the successful banks seem to be growing their business, it becomes very clear that even in India, the traditional model of branch based hanking is slowly changing. This is primarily because of the fact that over the years, the consumer profile has changed. The fast pace of modern lifestyle has started pulling a premium on the consumer's time. They want flexible and conveniently situated distribution channels available ai limes and places thm suit them and not the bank. They no longer have ihe time to find a separate lime slot to do their banking. Instead, they prefer banks which come to their doorsteps to enable them to do their banking.

Traditionally, banks had built branches closer Io the customer habitation in an effort 10 distribute their services. This approach had seen the mushrooming of branches at residential and commercial centres. While this distribution model has had a lair degree of success so long, it lias also been an expensive route, because of the real estate costs and the manpower costs that this has entailed for hanks. More branches mean more rentals, renovation, maintenance, administration and salary costs. But even alter spending so much, distributed branches have not been able to fully address Lhe consumer's need for anytime-anywhere banking. The consumers still need to come to the bank to withdraw or deposit cash or Tor other banking services like overdrafts or payment instruments, A comparative table of costs of servicing through the different channels is given in Table 1:

The problem with this model is that it confines the payment mechanism, by and large, to the four walls of the branch. It does not make funds available at the point of sale, which is the ultimate convenience that the customer is seeking.

The ideal scenario for both the buyer and the seller would he a system where the payment settlement happens at the point of sale itself, when the goods or services are exchanging hands. This is what electronic banking has achieved. Through electronic data networks, it makes the payment on-line, at the same time as the actual exchange nfgoods or services is taking place. As a distribution model, it brings the bank closer to the consumer - either at his doorstep or at a telephone call or at his PC or in his wallet, wherever he goes.

It is this need that non-branch banking is serving, which is the route taken by the foreign banks and the private banks to attract their customers. They have successfully extended the reach of the target market for client account acquisition and service delivery capabilities beyond the branch network by using alternative delivery channels for sales and servicing of their customers.

The re-engineered supply chain of these banks has six main components as follows:

* Braueli Acquisition

* Remote Acquisition

* Branch Servicing

* Remote Servicing

* Centralized Operations Facility

* Vendors and suppliers

The new distribution model therefore can be graphically represented as a 5 Star model as shown in Figure 1:

Branch Acquisition

Branch acquisition or sales are restricted to customers who walk-in to the branch to open an account or apply for a loan. Such customers are serviced by Customer Service Stations; manned by front-office staff. They facilitate the process of explaining lhc different products and helping the customer fill up the necessary forms. Once the customer interaction is over, the documentation for setting up a new account or disbursing a new loan moves to the centralized processing site, which takes over the rest of the processing.

Remote Acquisition

To augment the capacity of the branches to act as catchment areas, banks have set up outsourcing channels, alliances and franchisees to reconfigure the distribution network and improve the variable/fixed cost ratio, These include deploying new sales channel by Direct Selling Agents (DSA's). who are mobile franchise agents (like insurance-agents) selling the products of the bank door-to-door. These mobile franchise agents source business on a commission basis, depending on the volume of business they are able to generate. These days, for a few select banks, it is possible to open a bank account or apply for an automobile loan or credit card, by just calling up any of these agents on the phone, without having to ever step into a branch. In this fashion, it is possible to achieve greater penetration at a traction of the cost of setting up an extensive branch network by outsourcing the sales force. Most of these agents work on a retainership basis, and are cheaper in the long run than having own sales employees on the bank's rolls. The emphasis therefore needs to shift tram waiting to get business in the branches to aggressively going out and acquiring business at a much reduced cost.

Branch Servicing

The branches maintain some infrastructure to service customers to transact on their account. Only the following activities require a large amount of customer interaction, for which the branch needs to provide teller stations:

* encash/deposit cheques

* request for payorders/remittances

* opening/closing of accounts and fixed deposits

* loans and overdrafts

* trade finance transactions

All other transactions, which do not require customer interaction, are shifted to a centralized facility, which can service multiple branches.

Remote Servicing

This is the area where technology is playing a big role in reducing transaction costs and giving customer convenience at the same time. ATMs at shopping centres, airports, railway stations, busy office localities, full service phone hanking (either automated or operator assisted) and PC/Internet banking are revolulionizing the way customers are using hanking services and accessing their money while saving time. Many hanks are also having strategic alliances with oilier banks to distribute products or services, by leveraging each other's infrastructure. Thus, they are sharing ATM networks, allowing cash advances on credit cards of member banks of Mastercard/VlSA. Apart from technology driven products, banks are also offering customers the convenience of being able to order for cash pickup/ delivery, dial-a-draft llmiugh courier services, so that these items are delivered at their doorsteps, without their having to move.

Centralized Operations

This centralized operations facility services multiple branches and does all back-room driven processing activities, which do riot require direct customer face-to-face interaction. It issues chequebooks, ATM cards, fixed deposit receipts or loan dishursal payments, processes clearing checks and trade finance or treasury operations, reconciliation/accounting etc. The branches thus reduce the floor space required by eliminating duplicate infrastructure at each branch therefore cut down on unnecessary rentals. These centralized backrooms are never on prime real estate, but at remote locations with low rental costs, so that further economies are available to the bank.

Vendors and Suppliers

This facility in turn outsources processing work to cheap data processing agencies, either on-site or off-site. Most of low value added activities like statement printing and mailing, chequebook printing and mailing, ATM card embossing, even some low risk data entry jobs are outsourced to external vendors and suppliers, thus further bringing costs down.

The prerequisite of such an operation is bank computerization, which can link branches and the central processing unit through wide area networks to make distributed processing possible. The encouraging sign is that bank computerization has acquired a substantial momentum in banks in India,

* The foreign banks operating in India have computerized ftorn the 1980's onwards. Most of them have branches which are connected to each other.

* The private banks are fairly new, and most have started their operations with computerized networks.

* Even in the public sector banks, bank computerization has come a long way since the days of manual operations. Following the Rangarajan Committee recommendations, the unions of these banks have reluctantly agreed to the introduction of electronic funds transfers, computerization of major clearing houses, setting up of communications networks to connect the far Hung branches. PCs are therefore becoming increasingly a common site in bank branches. But distributed processing is still a far way off.

The operations of banks are increasingly resembling the picture shown in Figure 2:

Case Studies

In this section, we present two case studies to highlight how banks are adopting non-branch service delivery in varying degrees.

ICICI Bank

The Industrial Credit and Investment Corporation of India Limited (ICICI) was founded by the World Bank, the Government of India and representatives of private industry on January 5, 1955 to encourage and assist industrial development and investment in India, Over the years, ICICI has evolved into a diversified financial institution, which is into mediumterm and long-term project financing for the infrastructure and manufacturing sectors, corporate finance, lease finance etc.

The liberalization of the Indian economy in the 1990s offered ICICI an opportunity to provide a wider range of financial services. ICICI then set up specialized subsidiaries in the areas of commercial banking, investment banking, nonbanking finance, investor servicing, broking, venture capital financing and state-level infrastructure financing.

ICICI Bank is a commercial banking outfit set up by the ICICI Group. The Bank was registered as a banking company on January 5, 1094 and received its hanking license from the Reserve Hank of India on May 17, 1994, The first IClCI Bank branch was started in Madras in June 1994. For the last two years, ICICI Hank lias been in the forefront as a provider of state-of-the-art electronic banking services.

As of July 2000, it has opened 102 branches. These branches are a judicious mix of full service branches and partial service branches. The full service branches offer the entire range of product and services under the ICICl umbrella, while the partial branches offer a restricted range of services. The branches are fully computerized with state-of-the-art technology und systems. All of them are fully networked through V-SAT (Satellite) technology. The Bank is connected to the international SWIFT network since March 1995. Currently the Bank has around 150,000 customers.

It also has a centralized backroom in Mumbai. which does all the backroom processing activities like opening of accounts, issuance of chequebooks, statements, various types of cards like ATM cards. Credit Cards, Debit Cards and PINs.

In electronic banking, ICICI has launched a total of 227 ATMs, with ambitious plans to add many more to the network. Amongst all hanks operating in India, il has the biggest ATM network, most of which was added in the last two years only. Cleariy, a very successful implementation of an aggressive growth plan.

It was the first bank in India to launch Internet banking services through its product branded as "Infinity", much before the other foreign banks could do so. It calls itself the "virtual universal bank", which is a reflection of the fact that most of its products are available in the net as well. These include account views and reconciliations, funds transfers, bill payments, mutual funds and bond applications, e-shopping and loan applications.

In the last six months, ICICI has also started offering phone banking and mobile banking through cell phones. Its !atest ventures is into credit cards and debit cards, where it has tied up with VISA to provide its services.

For its consumer finance operations, its subsidiary, ICICI Personal Financial Services Limited (IClCI PFS), formerly IClCI-Credit, was one of the first four companies to obtain registration as a Non-Banking Financial Company (NBFC) from the Reserve Bank of India (RBI) on September 10, 1997 under lhe new section 45 IA of the Reserve Bank of India Act, 1934.

During the year 1998-99, there was a significant shift in IClCI PFS's operations from leasing and hire purchase to distribution and servicing of all retail products for the ICICI Group. It is now a focal point for marketing and distribution of all retail asset products for ICICI, including auto loans, consumer durable finance and other financial products. This subsidiary has thus become a critical part of ICICI's retail strategy aimed at offering a comprehensive range of products and services to retail customers. It uses Direct Selling Agents(DSAs) to source asset products from the markets, very similar to the approach followed by the foreign banks and private banks.

IClCl Capital Services Ltd, is another wholly owned subsidiary of ICICI effective from April 1, 1996. It carries oui retail resource raising activities and provides front office services related to all retail and semi retail liability products of IClCI. The Company also operates the network of ICICI Centres being set up by IClCl. As un date the company has set up 91 centers across the country.

This subsidiary was earlier involved in distribution of bond product (in the brand name of Safety Bonds) and private placement treasury products from IClCI. However, from December 1999 onwards the Company has focused on being a provider of a comprehensive range of financial products and services like IClCI Bonds, ICICl Fixed deposits, Mutual Funds, IPOS, e - invest accounts, Depository services, select IPOS, investment consulting and is all set for the forthcoming foray into insurance, with a joint venture with Prudential Insurance.

The widespread geographical locations of centres, which are well equipped with the necessary infrastructure, have provided the Company with strategic distribution initiatives so as to become one of the lop distribution houses in the country. The company has also strengthened its distribution network by effectively managing over 11000 agents.

This is the story of the transformation of one of India's premier infrastructure financing institutions into a universal provider of financial services. In its revised vision of becoming the one-stop-shop for providing the entire suite of financial services, it has re-engineered its business model completely. Its revamped business model now looks very similar to the model proposed in Figure 2. All the elements of the new flexible supply chain - the judicious mix of direct branch acquisition and remote acquisitions through channel partners or DSA's. a strong centralized backroom, robust electronic banking infrastructure and products are very visible.

A clear vision and strategy, backed with excellent implementation, has made ICICl Bank one of the best providers of consumer financial services in India in a short span of just two years. It is proven itsetf to be a strong competitor to the more established foreign banks like Citibank. American Bxpress Bank and ABN AMRO Bank, all of whom have lost substantial market share to the homegrown Indian financial powerhouse.

Bank of America/ABN AMRO Bank

Bank of America (BofA) started its operations in India in 1962, with the opening of its first branch in Delhi. After that, it extended its operations in the other metrus of Mumbai, Calcutta and Chennai by opening a branch each in these three cities. Till the 1980's. BofA in India was by and large a Corporate Bank. It dealt primarily with the American nuiltinatiunals operating in India and other large Indian and foreign corporate houses. On the Consumer hanking side, it dealt only with the high net worth individuals and Non-Resident Indians (NRIs), This was in contrast to its global operations. In the US it is the largest middle-market consumer bank in the west coast, primarily in California.

Of all the foreign banks that were operating in India at that time. Citibank was the first to start Consumer Banking in a big way in the 1980s. Citibank and Hong Kong Bank were the first to start with ATMs in early 1990s. Citibank went into electronic banking as a deliberate strategy of technological leadership to widen its consumer banking operations. Like BofA, it had only one branch in the cities that it operated in. Therefore, to broaden its distribution network, it followed up the launch of the ATMs with other electronic banking products like credit cards, phone banking, net banking and debit cards, one after the other. The others like Hong Kong Bank, Grindlays Bank and Standard Chartered Bank were more sedate in their approach to non-branch banking, because they already had a large branch network as well. These banks therefore were more sedate in their approach to introduce electronic banking for their customers.

In 1990, BofA too changed its strategy to enter into the consumer banking area. By 1994, it came out with its first consumer loan products in the form of loans against shares and car loans. In 1996, it pioneered the concept of the 7 days - 10 to 7 banking in India.

But BofA's approach in consumer banking was very different from the other banks in the area of remote banking. Rather than getting into technology-driven investment-intensive electronic banking products like Credit Cards, Debit Cards and Net Banking, it chose to use a wide network of Direct Sales Agents to distribute its products and services to its customers. These agents would go from door-to-door and offer BofA's products and services. This was in sharp contrast to the other banks, who depended on technology to increase their reach to consumers.

Being a foreign bank, BofA required licenses from the Reserve Bank of India to open new branches. It had one branch each in all the four metro cities that it operated in. So long as it was into corporate banking only, these few branches were sufficient for BofA to service its few corporate clientele. But, when it entered consumer banking, these branches located at the heart of the city were inadequate to offer consumer banking on a mass scale, since the consumers were located all over the city. To BofA's credit, it overcame this limitation in a very innovative fashion, In 1996, it brought about a paradigm change in the concept of banking by being the first bank to offer cash delivery to its customers at their homes and offices. It used the services of local couriers and direct sales agents to deliver cash and pay-orders, pick up cheques, complete account opening documentation etc. In this manner, it was able to overcome the limitations of branch banking to provide banking services way beyond the geographical reaches of its only branch. It also centralized its backroom in Delhi to service its branches economically in the four other cities and linked up the operations through Satellite communications and leased telephone lines.

This was a big success, because il targeted the middle market segment of consumers that was not very technology-savvy. Its doorstep banking brought the cherished human touch right to the consumer's doorstep. This was a concept that the electronic banking products clearly could not match. With one phone call, consumers could open accounts, get cash delivered, cheques picked up for deposit into their accounts, as well as overdrafts and loans for purchase of cars with the aid of an agent of the bank who would come to their homes and offices. All this was designed in a manner that consumers would not have to visit a bank branch at all to avail of its services. Following this innovative approach, within two years of its launch, BofA by 1998 had increased its market share in the consumer banking business to become a market leader in consumer loans, ahead of its well-entrenched competitor Citibank. This distribution model soon became the industry practice, when other banks also started offering the same service.

To compare the approach of ICICl Dank with BofA, one realizes that that there are many similarities as well as dissimilarities. While both of them aggressively promoted non-branch distribution through direct sales agents, ICICI Bank pursued the strategy of state-of-the-art electronic hanking as well - by offering an entire range of ATMs. Credit Cards, Debit Cards, Phone Banking, Net Banking etc. BofA on the other hand just offered a few ATMs in a very few locations. Apart from that it had no other electronic banking product Io talk about. But, in its own way, it was just as successful in acquiring market share. The contrast becomes clearer from Table 2:

After Bank of America merged with Nations Bank in the US in the year 1998, it sold off its highly successful consumer banking business in India to ABN AMRO Bank, a Dutch bank. ABN AMRO Bank thus gained entry into the consumer banking business in India through this strategic purchase. While retaining the approach of non-branch banking through its agents network, ABN AMRO does plan to get into electronic banking as well. Its first offering is likely to be credit cards.

Issues in Electronic Banking

This is not to suggest that banks need to close down all branches and go completely into the direct distribution route. The key is in being able to do a judicious mix of both direct distribution and indirect distribution to increase breadth of geographical coverage while keeping the costs low. This is more so, because while consumers' comfort with technology is increasing, it is yet to reach a critical mass in India, which still has a large proportion of the population which does not understand technology at all, and would get alienated if the human face of the bank goes totally away, to be replaced by machines to which they cannot relate easily.

While electronic banking and the Internet docs offer exciting possibilities for payment mechanisms, there cire many open questions that have still not been satisfactorily addressed, wiihoul which this form of banking cannot make significant progress.

On-line hanking will meet its full potential when the following key consumer issues are addressed:

* Consumer protection from fraud

Electronic fraud is a scourge in the west and is on the rise even in India. Unless eiectronic message transmission can be safeguarded from unauthorized access through hacking, people will continue to be hesitant about using electronic banking for fear of fraud.

* Transaction privacy

In India, cash transactions are popular because of the anonymity it provides, because of the absence of any paper trail. A substantial part of Indian economy is the black economy, where transactions are in cash and there are no audit trails. This will be a factor that will continue to hinder wider acceptance of electronic banking, because electronic payments always leave a paper trail.

* Infrastructural issues of telecommunication and bandwidth

This form of banking thrives only when telecommunication infrastructure is robust, since it requires large scale wide area network connectivity. India still has a long way to go.

* Comfort with technology and proliferation of PCs

The average Indian consumer is still PC illiterate and prefers the human touch over technology driven service. Il is still ti long way off when PCs become like TVs in every household. The consumer behavior towards technology will also lake some time to change. Till such time, electronic banking will remain restricted to the younger, upwardly mobile consumer only.

* Legal recogntion of electronic contracts

Is an electronic contract a valid contract? Negotiable Instruments Act covers payment in writing only, what about electronic instruments? When will digital signature get legal validity? These are some of the crucial questions that stand in the way of electronic banking gaining momentum. Some progress has been made with the passing of the Cyberlaws in the IT Act by the Indian Parliament recently. It is now a question of successful implementation.

Concluding Remarks

Despite the low diffusion of technology in India, the momentum of on-line banking lias picked up recently, led by the Foreign Banks and the Indian Privaite banks. It is expected to accelerate in future for three reasons:

* Banks now have a variety of technological means to initiate on-line hanking programs without incurring the investments needed to develop their own systems. The reach and delivery capability of computer networks such as the internet far exceeds any proprietary hank network ever built, and makes it continuously easier for customers to manage their money anytime, anywhere.

* Internet and mobile phone usage has been growing at a very fast pace, which would remove the last stumbling block in the way of the popular acceptance of electronic banking.

* Banks need to separate me eontentf financial product) from the distribution channcl(the branch). Attempting to provide both is similar to movie companies(content producers) owning their own lheatres( distribution channels). Clearly, the traditional model of integraled delivery has outlived its usefulness and needs to be thought of again.

* Though the Indian consumer at large is still not completely comfortable with technology as a way to do hanking, the affluent middle class is becoming more familiar. The younger generations have started using computers from a very early age, and this would be the generation which would be the consumer of the future. But, it is going to be a long time before this technology becomes the technology for the masses in India.

On-line banking will realize fts full potential when the following key elements fall in place:

* Internet access becomes more widespread in the country.

* The emergence of low cost interactive access terminals for hume as well as interactive hume information services, e.g. set lop boxes to convert TV sets into computer terminals

* Security aspects of transactions over the Internet improves

* Cyber Laws are implemented to give legal sanction and validity to electronic signatures.

References

Kalakota R and Whinston A B (1996) Electronic Commerce: A Manager's Guide 2nd Edition Addison Wesley Pub. Co., New York

Price Waterhouse Coopers Study (1999) Tomorrow's Leading Retail Bank-ICFAI Render, April

Rohlwik, A (1991) Strategic Positioning for Financial Istitutions, Woodhead Faulker Ltd., Simon & Schuster Int. Group, London

Welch. B. (1993) Electronic Banking & Security: A Guide for Corporate & Financial Managers, Oxford

Websites:

www.hdfc.com

www.icicibank.com

www.citibank.com/india

www.utibank.com

www.globaltrustbank.com

www.centurianbank.com

www.indusind.com

www.bankofbaroda.com

www.corphank.com

www.denabank.com

www.indian-bank.com

www.iob.com

www.punjabandsindbink.com

www.sbi.com

www.syndicatebank.com

www.ucobank.com

www.vysbank.com

www.swadhan.com

www.indianbankassociation.org

Partha De Sarkar

General Manager, Deloitte Consulting, Hyderabad

Surendra S. Yadav

Dalmia Chair Associate Professor

Department of Management Studies

Indian Institute of Technology, Hauz Khas, New Delhi

D.K. Banwet

Professor, Department of Management Studies

Indian Institute of Technology, Hauz Khas, New Delhi

Copyright Global Institute of Flexible Systems Management (GIFT) Jul-Sep 2001
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