IT STRATEGY CASE STUDY FOR BANKING INDUSTRY IN INDIA

This case study was prepared as a part of the IT Strategy course taught by Prof. Sanjiv Mehta at SICSR

BACKGROUND:

Industrial Credit and Investment Corporation of India was formed in 1955 at the initiative of the World Bank, the Government of India and representatives of Indian industry. The principal objective was to create a development financial institution for providing medium-term and long-term project financing to Indian businesses.

ICICI Bank was originally promoted in 1994 by ICICI Limited, an Indian financial institution, and was its wholly-owned subsidiary.

In the 1990s, ICICI transformed its business from a development financial institution offering only project finance to a diversified financial services group offering a wide variety of products and services, both directly and through a number of subsidiaries and affiliates like ICICI Bank. In 1999, ICICI become the first Indian company and the first bank or financial institution from non-Japan Asia to be listed on the NYSE.

CASE FOR IT STRATEGY:

Analytic technology was not relevant for the old ICICI but it is now central to the banks growth and success. In the next decade, retail banking is expected to be one of India’s fastest growing markets.  Nearly 70% of the population is under 35 years of age according to the 2003 government census and banking services are a new phenomenon for most of the population.

ICICI is aiming to be in the domestic urban and rural markets where 70% of the population lives and to be the bank of choice for Indian’s living abroad in North America and Europe. ICICI is using analytics and information technology to accelerate new customer growth and manage its risk exposure. It has positioned itself as a high tech innovator with cost effective and convenient banking through online banking, ATMs and mobile phone banking.

 

HOW WAS IT STRATEGY IMPLEMENTED:

ICICI was the first bank in India to offer internet banking. In 2008 ICICI introduced iMobile banking wherein customers connect to the internet using their mobile phones to do transactions with the bank. With the growth in e-channels, branches are now more valuable to ICICI as points of sale for products.

Credit Analytics:

When ICICI created its first in-house analytics team in 2001, there were only 25 analysts whose sole responsibility was to track market conditions and delinquencies. India did not have a credit bureau until 2005, so when ICICI began developing its first predictive models, it had no external source of data on consumer credit behavior. Moreover because ICICI was new to the consumer banking market, it also did not have internal data. Therefore the first in house score cards were constructed without data.

Now ICICI has large internal databases and has refined its internal score cards which are used in credit card services, mortgage, auto and 2-wheeler bicycle lending. Better customer segmentations increase the banks precision and agility in monitoring delinquencies and adjusting credit lines. Segmentations are also used for transactions based target marketing programs and to forecast accurate foreclosure rates. New segmentations are being developed based on consumer behavior rather than static attributes.

Analytics has also been a powerful tool for ICICI to expand pre-approved credit line offers. An ATM based overdraft service for checking accounts is one of the bank’s most novel services. ICICI has also developed scores to monitor the risk behaviors of a single customer across multiple products. ICICI and other Indian banks have an edge over the foreign global banks competing for their slice of the new urban consumer class. The domestic banks advantage is even more pronounced in rural areas. Using technology and imagination, ICICI is coming up with radically different retail services for a radically different client.

Rural Lending:

Rural lending might include loans for growing crops or buying a buffalo as well as for education, health care and mortgages. Because there is no data, ICICI has been creative in characterizing the rural segments. For example, an affluent farmer is someone who purchases hi-tech equipment and has a large land holding whereas a normal farmer owns small plots of land and is often employed by an affluent farmer. ICICI is developing its micro-finance lending for as little as $100 and terms of payment are also personalized. For example, for a farmer it might be adjusted to the milk yield of a single buffalo.

ICICI is constantly investigating other ways to proliferate their banking presence. In fact, one of the key challenges for the future is how to create more convenient and low-cost access points for rural customers. Some ideas include partnering with the Indian postal service to place ATMs within their extensive infrastructure and integrating ATMs with vending machines.

Rural Kiosks:

ICICI has now set up additional partnerships with EID Parry, n-Logue, ITC e-Choupal and BASIX to take advantage of the rural kiosk network they each have established. Each partnership is designed to build on the unique strengths of each organization and to truly leverage their experience and relationships. These partner organizations receive in return the backing of the second largest bank in India to help expand their kiosk network. ICICI envisions setting up many more partnerships with MFIs and NGOs that have the expertise and passion for serving the rural poor.

Rural ATM:

The rural ATM machine, to be placed in the kiosks, is a simplified version of a regular ATM. With a simple interface and multiple languages, the rural ATM will be accessible by all and will be the conduit through which ICICI delivers banking services to the remote Indian countryside. It is currently in development in the lab of Dr. Ashok Jhunjhunwala and is expected to cost a meagre 3000 rupees or USD 600 versus the 80,000 rupees or USD 16,000 that it costs for a normal ATM machine. ICICI envisions placing this rural ATM in the kiosks their partners have already implemented.

Mobile ATM:

ICICI also is investigating the possibility of building a mobile ATM. The ATM machine would be installed in an ICICI-branded truck that would circulate through a number of villages on a specified, pre-determined route. Rural villagers would know when the ATM was coming to their village and would be able to take care of their banking needs on that day. With the mobile ATM, ICICI could serve a number of villages with limited capital outlay.

Smart Cards:

ICICI is also researching the possibility of implementing a smart card based payment system in order to eliminate the costs associated with cash handling. “The two key challenges that must be overcome to extend banking to the rural poor population are elimination / reduction of cash handling and innovation of low cost delivery channels.”  Smart cards effectively harness the technology advances of the new economy and apply it to the old economy. “By combining the features of a handy credit / debit card with the advantages of storage capacity, the smart card provides secure identification, a store of value and an ability to function off line while maintaining an audit trail of all the transactions.”

Smart cards were launched by ICICI in October 2000 by ICICI at Infosys Campus in Bangalore and at Manipal Academy of Higher Education to create a cashless economy. However, many problems exist with smart cards, such as high cost and lack of technological infrastructure for widespread adoption. The high cost is especially amplified at the rural level. However, ICICI is watching closely what BASIX is doing currently with smart card technology to see if it is cost effective and viable.

New Rural Initiatives:

With new initiatives such as rain insurance, venture capital, mobile ATMs and derivatives, ICICI is always testing, rolling out and then scaling up innovative ways to profitably serve the BOP.

ICICI Bank Pockets:

“Pockets” is a new offering from ICICI Bank and it offers all the features of an e-wallet with some additional features as well. 'Pockets' is a mobile application, which can be used to send money, pay utility bills, book movie tickets, send gifts and share expenses. One can use this service even if one doesn’t have an ICICI Bank account. With this app, one can also open a zero-balance account.

The Reserve Bank of India (RBI) is in the process of deciding on payments bank licenses, for which it has 41 applications.

Payments banks can accept deposits up to Rs.1,00,000, offer current and savings account deposits, issue debit cards and provide internet banking.

Explaining the rationale for calling it the ‘first digital mobile bank’, Rajiv Sabharwal, executive director, ICICI Bank said, “We have called it a bank because it can do much more than what an e-wallet does. It can actually function as a bank account. Going ahead, we are going to be adding a lot more features and services that are available in a bank otherwise.”

According to RBI regulations, the maximum amount a consumer can keep in the e-wallet is Rs.10,000. The upper limit on a transaction set by the bank is Rs.5,000.

With Pockets, ICICI Bank plans to target the youth segment and first-time banking customers. Currently, 50 per cent of the bank’s customers transact via the digital medium.

Between April-October, ICICI Bank has recorded transactions worth Rs.7,400 crore on its mobile banking platform.

USP OF IT STRATEGY:

The IT strategy at ICICI has been designed with the end customer in mind. They have tried to penetrate both the urban and the rural markets in India, designing specific products for both. They have been consistent first movers in the segment. They were first to offer internet banking, phone banking and mobile wallets. Their rural initiatives are also pioneering.

KEY OUTCOMES:

A product of India’s liberalization policies in 1990s, today ICICI has come a long way. ICICI is India’s largest private sector bank in market capitalization. It is India’s second largest bank in terms of assets. It is a growing international competitor with presence in 18 countries. In 2000, ICICI’s consumer banking business had a fewer than a million customers. By June 2006, that number had risen almost 10 fold to 9.5 million. Its asset base grew from around USD 2.5 million in 1996 to USD 80 billion in 2006 and to almost USD 100 billion by the end of March 2008. As of 2007, ICICI had a 30% market share overall in retail financing products including credit cards, mortgage lending and personal lending.

FUTURE IT STRATEGY:

Going in line with the customer segments that ICICI has developed, the future IT strategy could be divided into these segments:

Urban Retail Customer:

Analytics on a customer’s credit card spending could lead to a better understanding of the customer behavior and needs, helping the bank design customized credit offerings.

Rewards points on the use of credit cards could be en-cashed through petrol and diesel payment receipts (as is done by CITIBANK.)

Microcredit facilities for school and college drop-out students could help them in starting new business ventures.

 

Rural Retail Customer:

Linkages with AADHAR and RUPAY will help in reducing fraud and also in mobile payments in rural India. Government is experimenting with Direct Benefits Transfer with RUPAY linked bank accounts. This would overcome a significant hurdle in rural banking with regards to payments and receipts.

Investment Banking:

Develop algorithmic trading platforms for automated online trading based on mathematical models.

Develop high speed trading platforms for large organizations to trade.

International Markets (USA and Europe):

Explore the BITCOIN market and study its feasibility as a payment system.

OTHER TOP FIN-TECH DISRUPTORS:

HDFC Bank has started automatic loans processing through the use of machine learning and big data algorithms.

TradeLab (http://tradelab.in/)

Algorithmic trading platform, high speed trading platform and paper trading on simulated market competition

Metamako

Low latency trading platform. Metamako is a technology company that specializes in solutions for latency sensitive businesses. It was founded by Scott Newham, Dave Snowdon and Charles Thomas who have a background in ultra low-latency hardware, software and trading. 

Klarna

Klarna is one of Europe’s leading providers of payment solutions for e-commerce. 
Klarna separates buying from paying by allowing buyers to pay for ordered goods after receiving them, providing them with a safe after-delivery payment solution. Klarna also assumes all credit and fraud risk for e-stores, providing assurance to sellers that they will always receive payment. Klarna’s vision is to enable trust and to offer a frictionless buying experience to buyers and sellers across the world.

Square, Inc.

Square, Inc. is a financial services, merchant services aggregator and mobile payments company. The company markets several software and hardware products and services, including Square Register, Square Reader and Square Order. Using a free credit card reader on their iOS and Android device, Square Reader allows anyone to accept credit cards anywhere, anytime for a low transaction rate per swipe and no hidden fees. Square Register is a full point-of-sale system that allows businesses to accept payments, manage items and share menu and location information. Square Order lets people place orders for pickup from local businesses eg. shops and restaurants.

Kreditech

Kreditech uses big data and complex machine-learning algorithms to serve a simple mission: make faster, better credit decisions. Via its consumer platforms Kredito24 and Zaimo, individuals can apply online, mobile or via SMS and receive funds into their bank account, credit card or at an ATM in under 15 minutes. Kreditech's technology identifies and scores individuals in seconds based on 15,000 dynamic data points. Customers can apply for short or long-term loans and other financial products in seven countries worldwide.

Xero

Xero is the emerging leader in online accounting software, providing business owners with real-time visibility of their financial position in a way that’s simple, smart and secure. At its core Xero is an easy-to-use but powerful online accounting platform designed from the ground up for the cloud, not adapted from desktop software. For advisors such as accountants and bookkeepers, Xero forges a trusted relationship with clients through online collaboration.

REFERENCES:

1. Case study on ICICI Bank by Todd J. Markson and Michael Hokenson, University of Michigan Business School (Research Paper)

2. The Deciding Factor by John Nash and Larry Rosenberger (Book)

3.  Pockets: ICICI Bank’s answer to payments (The Business Standard)

http://www.business-standard.com/article/finance/pockets-icici-banks-answer-to-payments-banks-115021000859_1.html

4. FINTECHINNOVATORS.COM