Process Innovation in the Indian Banking Industry

Process Innovation in the Indian Banking Industry January 2009 ValueNotes Arun Jethmalani, Managing Director, ValueNotes jetu@valuenotes.com

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Executive Briefing – An outline • Process Innovation in the Indian Banking Industry: Overview • Drivers & Constraints • Services Outsourced by Indian Banks • Market Size & Opportunity • Service Provider Landscape • Key Success Factors

International Banks – Early Adopters Globally, BFS sector accounts for nearly 60% of the global offshoring market. In contrast, the Indian banking sector has been slower to outsource. Source: ValueNotes’ report on Outsourcing in the Indian Banking Industry But Indian Banks Lag Behind…

Executive Briefing – An outline • Process innovation in the Indian Banking Industry: Overview • Drivers & Constraints • Services Outsourced by Indian Banks • Market Size & Opportunity • Service Provider Landscape • Key Success Factors

Drivers & Constraints Unlike the offshore BPO market, labor arbitrage is not a key driver for growth in the domestic BPO market. • Aggressive adoption of IT and centralization of operations has served as a key enabler to outsourcing of business processes in the banking industry. • Growth in the banking industry, deregulation, increasing competition, consolidation and improving benchmarks in the industry are driving the outsourcing of business processes. Source: ValueNotes’ report on Outsourcing in the Indian Banking Industry Outsourcing of processes is largely constrained by the RBI regulations

ServicesOutsourced by Indian Banks The outsourceability of processes is determined by two factors: their classification as core service and the strategic value of the process. • Core Processes: Classified by RBI or categorized under KYC norms • Strategic Value Processes: Activities / Processes with strategic importance to banks “We will look at outsourcing activities like tech-enabled customer service delivery that are not core to our business.” - Head CBS, Leading Bank in Maharashtra Source: ValueNotes’ report on Outsourcing in the Indian Banking Industry Large banks currently outsource non-core, non-strategic value processes

Product Development • Sales and • Marketing • Transaction • Processing • Treasury • Regulatory • Compliance • Other • Services Product Strategy and Policy Advertising Payment Processing Reconciliation KYC Norms Alliances Asset Management Anti-Money Laundering Credit Collateral Evaluation Forex Management Collections, Accounts Closure New Product Development and Planning Funds Management Account-Transaction Monitoring International Banking Loyalty Programs Check and Loan Processing Transfer Pricing Value Added Services Document and Reporting Corporate Communications Risk Management Reconciliation New Account Opening Lease Management Data Entry HR IT Services Non-Core Processes Core Processes Current Level of Outsourcing Low High ServicesOutsourced by Indian Banks Majority of the banks typically outsource some of their non-core activities with strategic value like IT systems and process implementation to third party service providers. Source: ValueNotes’ report on Outsourcing in the Indian Banking Industry Banks typically outsource IT systems and process implementation

Market Size & Opportunity The total opportunity for outsourcing in the banking sector is estimated at Rs. 11.2 b for FY08. Our research suggests that little over one-third of this opportunity (Rs. 4.08 b) is currently being met. “Completion of Core Banking System projects by large banks will exponentially increase the outsourcing potential in domestic Banking sector.” - Head CBS, Large PSB in India Source: ValueNotes’ report on Outsourcing in the Indian Banking Industry Majority of the revenues are earned from voice-based services in sales and marketing. Apart from sales and marketing related services, the Rs. 4 b market is spread across processes like payroll outsourcing, recruitment outsourcing and research and analytical support. Outsourcing estimated to grow at a CAGR of 47% over the next 4 years

Future Opportunities: 3 Scenarios • We believe that there are two key determinants to outsourcing in the banking Industry - regulatory framework and the ability of banks to refine their strategy while adapting to changing business conditions. • The growth post 2010 will primarily depend on the government elected at the center and its success in pushing reforms in the banking industry. “De-regulation especially in KYC norms can trigger the next wave of outsourcing by domestic Banking Sector” - Pralhad Tembhe, DGM Central Bank of India Source: ValueNotes’ report on Outsourcing in the Indian Banking Industry In case of rapid deregulation, the market has the potential to triple by 2010.

Key Trends & Insights • The complexity of operations will substantially increase – new opportunities for banks/BPOs: Will provide a boost to low value activities such as data entry & validation, CRM services like telesales, SMS based support, chat, Internet support, etc. • With increased use of new delivery channels (Internet, mobile, ATM), multi-product delivery and cross-selling will enhance scope of BPO services. • Enhanced penetration and usage of IT will propel greater usage of BPO, as banks seek to leverage IT investments to improve RoI • Expansion of IT into non-core areas will increase demand for related BPO • Captives will continue to grow, especially for PSBs

Service Provider Evolution The Banking industry was one of the first to outsource business processes to third party service providers in the Indian market. Banking is also one of the largest segments in terms of total outsourcing opportunity the domestic BPO industry. Source: ValueNotes’ report on Outsourcing in the Indian Banking Industry With increased automation of back office services, scope for outsourcing will widen…

Service Provider Landscape We have categorized the service providers into the following four groups: Out of the 60 large Global leaders (total 10,000+ employees) serving the international Banking and Financial Services vertical, <10 BPOs actively cater to Indian banks Shell Transource Source: ValueNotes’ report on Outsourcing in the Indian Banking Industry Majority of the large service providers in the domestic market have a substantial focus on the banking industry

Service Provider Landscape

Frontrunners Source: ValueNotes’ report on Outsourcing in the Indian Banking Industry Disclaimer - Findings are based on secondary research combined with detailed discussions with service providers. Quality of information depended on the cooperation of respondents from the management of the companies. Where information was not disclosed by service providers, secondary data, internal analysis and other suitable criteria were used.

Key Success Factors Large scale, multiple city operations • Most of the mid-sized and large Indian banks have centers and market presence across cities and towns in India. • Most of the banks prefer to have distributed outsourcing delivery centers in each region close to their head quarter. • Ability to quickly ramp up operations will be critical for growth • Local language capabilities are required to serve the end clients (especially in non-metro towns).

Key Success Factors • The complexity of operations will substantially increase as service providers add new clients, manpower and new delivery centers over the next 2 years. • Integrating international operations with domestic operations will be a key challenge. • Developing and implementing new operations and solutions delivery mechanisms to improve quality of services while further reducing costs will become essential to acquire the leadership position. • Partnerships with other entities in IT-BPO supply chain (like IT services providers, hardware service providers) will provide greater value to the client.

Key Success Factors Advisory capabilities to move up the value chain • Most of the Indian banks have relatively low (technology) maturity in their processes and are new to outsourcing. These banks are currently experimenting with outsourcing by outsourcing small volumes of low value work. With further de-regulation in the banking Industry, the scope for outsourcing will widen. • With increased complexity and scale, further outsourcing will require guidance in terms of process migration, best practices, benchmarking, etc.

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Process Innovation in the Indian Banking Industry