New tech cooperative banks turn to technology

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New tech cooperative banks turn to technology

In a bid to stay relevant, cooperative banks are fast turning to technology, providing a business opportunity for leading Information Technology service providers.

As digitisation changes the face of modern banking, community banks — one of the last bastions of a shared economy — are up against a stiff challenge.

In a bid to stay relevant, cooperative banks are fast turning to technology, providing a business opportunity for leading Information Technology service providers.

Cooperative banks have always been a weak spot in the financial services landscape, which is closely monitored and controlled by the Reserve Bank of India.

Mainstreamed way back in 1966 and brought under regulatory supervision, they have however steadily improved over time.

The number of financially weak urban cooperative banks (UCBs) has declined, according to the RBI. In a report published in December, the RBI said the number of cooperative banks fell to 1,551 in March 2018 from 1,926 in 2004. Their gross bad loans have also reduced to less than 10% from nearly 25% in the same period.

While a clean-up has helped these organisations stabilise, they need technology support to remain relevant in the future.

Indian banks and financial institutions invested around $19.1 billion in 2017 on Information Technology, which includes money spent on upgrading their existing infrastructure, according to a November 2017 Gartner Inc report. There are no such estimates for the UCB sector.

Many of these UCBs are, however, coming round to the idea that neo-banking is a reality and that fintech players will change the way consumers access financial services, and that they need to adapt fast.

In an era of smart-phones, high speed connectivity, artificial intelligence and machine learning, simple community-based, branch-led financial services are not enough.

While they understand that innovation is the key to survival, the shift to digital is expensive and comes with its own set of challenges.

Tech: The Only Way

These banks know they do not have the capability to develop cloud-based solutions in-house or own those solutions themselves. The way forward, then, could be through hosting — helped by technology companies, big and small.

“We are pitching to these entities that the way forward for them is ‘software as a service’ model, where technology players will host the solutions and these banks will just pay for every transaction or every module they adopt,” said S Sundararajan, executive director, i-exceed Technology Solutions, a Bengaluru-based software solutions provider for lenders, which has urged cooperative banks to embrace a hosted model.

I-exceed works with multiple lenders such as Canara Bank, Andhra Bank, DBS and others. It is now pitching for cooperative bank clients as well.

Hosting ensures that these banks do not need to own servers or separate data centres. They just need to adopt a core banking solution, connect their branches to the internet and link up with these service providers digitally.

This means, they are spared the cost of setting up an IT infrastructure themselves and their systems get protection from vulnerabilities.

Some cooperative banks have already started using such applications by leading technology providers, including IBM.

“For a few cooperative banks, on-boarding small traders could take at least two weeks. Their decision to migrate to a cloud-based platform (which can be accessed remotely using the internet) has helped reduce the time to two days,” said Subram Natarajan, chief technology officer at IBM India and South Asia.

Some of the biggest UCBs, like SVC Bank, Saraswat Cooperative Bank and Cosmos Bank, are almost as large as a small-sized commercial bank and are at the forefront in adopting the latest technology.

“We are migrating to the latest version of Infosys Finacle. We have also created an IT subsidiary and now see more than 70% of our transactions being undertaken digitally by our customers,” said Milind Varerkar, General Manager, Information Technology, at Saraswat Bank. “We are even setting up an analytics cell that can help us reach out to our huge customer base with better offerings.”

Many teething troubles that these banks face are best solved by technology, as demonstrated by the National Bank for Agriculture and Rural Development (Nabard) and the National Payments Corp of India (NPCI), which had taken the lead in helping these cooperatives.

In fact, in the Union Budget of 2017-18, the government made a budgetary allocation of Rs 1,900 crore to modernise credit societies and district cooperative banks through Nabard. 

“Today, nearly 10,000 banks of Nabard are running on Finacle. Nabard has been a role model for many other cooperative banks,” said Rajashekara V Maiya, vice president, head-business consulting, Infosys-Finacle, Infosys.

Many others, like Cosmos Bank and Ernakulam District Cooperative Bank, are transforming their services using a strong tech backbone, which IT companies are happy to provide.

The Early Adopters:

In effect, the digitisation journey has already started.

The initial phase of implementing core banking solutions has since moved on to enhanced payment offerings for consumers, bulk payments like RTGS and others.

As per data shared by the NPCI, out of 144 banks that were live on the Unified Payments Interface (UPI), cooperative banks form a substantial chunk.

There are already 16 such banks live on AePS (Aadhaar Enabled Payments) and more than 360 cooperative banks live on IMPS (Immediate Payment Service).

Access to the UPI means customers of these banks can use any of the available UPI apps such as Bhim, PhonePe and Google Pay to make transactions digitally from their cooperative bank savings accounts.

Besides, cloud computing has been a game-changer. Many cooperative banks have directly moved their applications to the cloud, and by not using legacy or traditional IT infrastructure they have seen more operational expenditure than capital expenditure, said Maiya of Infosys.

ATM infrastructure is another space where these entities have invested. Andaman and Nicobar State Coop Bank has deployed more than 50 ATMs across the main islands, said Mandar Agashe, vice chairman, Sarvatra Technologies, a Mumbai-based tech company that works with more than 500 cooperative banks.
This not only helps customers withdraw cash, but also allows tourists from the mainland to use these facilities even if they are customers of other commercial banks.

“Only once they become part of the interoperable payment networks will they get visibility on customers and open new avenues of business,” Agashe said. 

The Flip Side

Tech transformation, however, brings with it the threat of cyber attacks, ones that could destroy the whole establishment.

Cosmos Bank is a case in point. The Pune-headquartered cooperative bank recently found that Rs 94 crore was siphoned off through ATM transactions done across 28 countries. A panel of experts constituted by the United Nations Security Council later implicated North Korea for the malicious attack.

The Cosmos Bank case has proved that even if the banks are small, extremely sophisticated hackers can target them. Managing the security infrastructure for such players is a huge challenge.

Retaining high level talent in the IT domain is a challenge, said Varerkar of Saraswat Bank, especially in specialised services like cyber security where it is best outsourced.

In October, the banking regulator outlined cyber security frameworks for all UCBs, albeit noting the wide variations in the sector.

“Some banks are offering state-of-the-art digital products to its customers and some banks are maintaining their books of account in a standalone computer and using e-mail for communicating with its customers/supervisors/other banks,” said the circular.

This clearly shows that a standardised framework is needed for the sector.

A centralised pool with expert protection could help reduce vulnerability and ensure that systems are also updated, said Sundararajan of i-exceed, once again highlighting the efficacy of the hosted model as a solution for these entities.

While most banks understand the need to embrace technology, there is also resistance.

Data sharing is perhaps one of the biggest hindrances to rapid digitisation.

Secondly, since cooperative banks come under the dual control of state governments as well as the RBI, some governance issues creep in. This sector also suffers from political interference, causing the management to shy away from the latest innovation and technology intervention.

The Slow Pace of Change

Things are changing, albeit slowly.

“There is a slow shift in mindset among consumers, people are storing their documents, pictures on Google Cloud, but for banks the movement is slower,” said Sundararajan.

“They are still very protective of their data. There needs to be a mindset change at the end of the regulator as well, perhaps a push from them will make this change happen faster,” he said.

State cooperative banks and district cooperative banks, which are typically located in smaller towns such as Latur, Ahmednagar, Adilabad or Chittoor, are slow to change.

They rely more on relationships to get customers, while their urban counterparts transform faster as they compete head on with larger private sector banks for customers.

Smaller cooperative banks also face budgetary restrictions and a limited talent pool.

The Community Banks in the United States have already made early movements in this space, even Credit Unions in the United Kingdom are increasingly partnering with fintech startups to create a better value proposition for their consumers and reach out to new ones.

That is the only way available for them to remain relevant in the fast changing times.

“These small banks with a customer base between 20,000 and one lakh cannot afford to have large IT teams to manage these issues. For them, transformation is possible only through a hosted model,” said Agashe.

“Technology is good and path-breaking, but it comes with its own challenges on security and maintenance.”