Minimizing Risk in Banking Industry by Implementing ICT in the API’’s Era

Dr. Richardus Eko Indrajit indrajit@post.harvard.edu

Studi Kasus Penerapan Dan Pemanfaatan ICT di Sektor Perbankan

Negara Maju

Agenda

1. ICT in Banking & Finance Industry

2. Integrated Architecture Framework

3. Various Implementation Models

4. Issues to be Solved

ICT in Banking & Finance Industry

Part 1

The Four Wheels of Globalisation

Source: Foreign Policy and A.T. Kearney (data for year 2004)

Political Technological Personal Economic

Convergence as Business Infrastructure

BANK

INSURANCE

MULTI FINANCE

STOCK EXCHANGE

Healthcare Telecom Utility Retail Manufacture Education Transport.

Agriculture Trade Government Defense Food Entertainment Hich-Tech

Media Hospitality Services Consumers Aerospace Real Estate Pharmacy

Banking Industry Evolution Trend

Monolithic C&C

 One-stop-shop  All products/services delivered internally  Channel diversification  Differentiation driven primarily by FS value system  Assets based on products

Consolidator

 Capital adequacy inhibits growth  New rivals proliferate  Product regionalization  Banking commoditized   Industry consolidates  Global expansion is key

Adaptive Collaborative  Forecasting drives strategies  Assets based on customer LTV  Delivery based on a network of business partners  Differentiation driven by customer value system

Globalization

  ‘Global Customer’’ concept emerges  Products personalization  Operation optimization  Differentiation through short time-to-market

Time

Evolution

In order to survive, Financial Institutions will transform from ‘‘Monolithic C&C Model’’ into ‘‘Adaptive Collaborative Model’’.

Bank in Networked Economy

The Bank’’s value chain is continuously evolving to harness ““Excellence Partnerships”” in each process. Consider the following:

Ban

k

Valu

e C

hain

Sell Collect

Process

Accounts

Service

Customers

Market

Attract

Assets

Lend

Manage Assets

Advise

Exce

llenc

e P

artn

ersh

ips Channel Partners (e.g. Retail, Corporate)

Market/Products Partners (e.g. Joint Ventures, Visa/Master)

Industry Associations (e.g. SWIFT, ACH)

Operations Partners (e.g. Cash Management)

ICT Partners

Corner Stone Of ““Excellence

Partnerships””

Bank as an ICT-Enabled Enterprise

§  Integration of Information and Communication Technology

§  Business Processes and ICT Systems become strongly Intertwined

§  New Business Models – e.g. Virtual Bank §  Future is Complex ICT-Enabled Enterprises with

Agile and Adaptive Character

THE NETWORK IS THE BANK ! (Cisco on Apconex 2005)

Banking as a Lifestyle

The Era of ICT–Enabled Enterprise

Business As Is

Integrated Architecture Framework

ICT enabled Enterprise

ICT As Is

Business and ICT

Transformation ICT Vision

Business Vision

Vision, Strategy

Architectural Design

Development,Change

Operation, Maintenance

The ICT-Enabled Enterprise

Information Systems Co-operation of

SW Components

Technology Infrastructure Co-operation of

SW&HW Components

Business Processes Collaboration of Human Beings

IS services

TI services

External Relations Information Provision

Collaboration of Human Beings

Business System

ICT System

information services

business products, services

information services

External ICT Systems

Risk Factors

1.  Financial 2.  Business 3.  Operational

Financial and Business Risk

§  Credit risk �  Default risk �  Down grade risk �  Counter party risk �  Settlement risk

§  Market risk �  Price risk �  Rate of return risk �  Exchange rate risk

§  Liquidity risk �  Funding liquidity risk �  Asset liquidity risk �  Cash management risk

§  Management Risk �  Planning �  Organization �  Reporting �  Monitoring

§  Strategic Risk �  Research and

development �  Product design �  Market dynamics �  Economic �  Reputation

Operational Risk

§  People risk �  Relationships �  Ethics �  Processes risk

§  Legal risk �  Compliance �  Control

§  System risk �  Hardware �  Software �  Models �  ICT

§  External risk �  Event �  Client �  Security �  Supervisory �  Systems

§  Equity investment risk?

Integrated Architecture Framework

Part 2

Risk and People-Process-Technology

§  “…the risk of loss resulting from inadequate or failed internal processes, people and systems or from external events…”

§  The classic trio at the heart of delivering value from the (technical) capabilities of the Information and Communication Technologies (ICT) revolution.

Issues of Capabilities and Competencies

Capabilities are expressions of ‘what technology enables’: technological realities, based on the ‘what & how’ that

technology can deliver

Competencies are expressions of the ‘human ability to exploit’ these capabilities: innate human factors, plus experiential depth & breadth,

training & education: of people, teams, departments, companies…. & their learning

Risk Management Tools

§  Clearly market opportunity in Operational Risk Management (ORM) tools: �  internal loss databases, �  self assessment tools, �  reporting tools �  statistical modelling, �  AI/Expert Systems modelling tools �  Etc……

‘…one of the main culprits is operational risk, whose tools and analytical approaches are still under development.’ S&P September 2002

The Real Challenge

§  The real challenge lies in delivering ICT systems fit for purpose & fit for use: �  complexity hinders rationalisation of & with legacy systems �  inherent failure profiles of the technology deliver inherently

unreliable operations �  lack of capability for seamless integration of old & new, and new

with new as the norm �  Lack of a rooted 6σ performance culture

§  A fundamentally weak foundation for delivery of tightly defined & measured operational risk

How to Solve the Problems ?

§  Successful delivery of effective & efficient Operational Risk Management depends on the correct blend of �  Relevant competencies (rooted in people and process) as well

as �  Relevant (technological) capabilities

§  The ICT industry (and its frequently captive client ICT departments) has classically over-focused on the capabilities agenda and under-focused on the competencies agenda

§  How to measure the people & process dimensions as well as the technological?

IAF in Banking Industry

Modern/Virtual Bank

Business Roles

Information Systems

Information Architecture

Technology Infrastructure

Business Roles in Bank

General Management

Risk Management

Mid-Office

Transaction Management

Marketing

Back-Office/ Third Parties

Cha

nnel

Man

agem

ent

Third Party Product

Back Office Product A

Back Office Product B

Customers

Channels

Call Centre

Internet

ATM

Kiosk

Branches

Sales

Service Desk

Contract Management

Product Management

Third Party Management

Customer Management

Human Resource Management

ICT Management

Co-ordination Production Communication

Information Architecture in Bank

General Management User

Risk Management User

Mid-Office

Transaction Man User

Marketing User

Back-Office/ Third Parties

Cha

nnel

Man

agem

ent U

ser

Third Party Product

User

Back Office Product A

User

Back Office Product B

User

Customers Provider Channels

Call Centre Provider/User

Internet Provider/User

ATM User

Kiosk Provider/User

Branches Provider/User

Sales Provider/User

Service Desk Provider/User

Contract Man User

Product Management

Third Party Man User

Customer Man Manager

Human Resource Management

ICT Management

Co-ordination Production Communication

Information Systems in Bank

Management Information System

Risk Management Information System

Mid-Office

Transaction Management IS

Marketing IS

Back-Office/ Third Parties

Cha

nnel

Man

agem

ent I

S A

utho

risat

ion

Secu

rity

Third Party IS (TP Product)

Back Office IS (Product A)

Back Office IS (Product B)

Customers Channels

Call Centre IS

Web-Server

ATM Application

Kiosk Applications

Branch IS

Sales IS

Service Desk IS

Contract Management IS

Product Management IS

Third Party Management IS

Customer Management IS

HRM Information System

ICT Management Information Systems

Co-ordination Production Communication

Technology Infrastructure in Bank

Management System

Risk Management System

Mid-Office

Transaction Man

Marketing

Back-Office/ Third Parties

Cha

nnel

Man

.

Third Party

Back Office

Back Office

Customers Channels

Call Centre

Web-Server

ATM

Kiosk

Branch

Sales IS

Service Desk

Contract Man.

Product Man.

Third Party Man.

Customer Man.

HRM System

ICT Management Systems

Co-ordination Production Communication

Various Implementation Models

Part 3

Applications Trend

§  Email §  Intranet §  Internet §  EDI §  Neural Networks §  Expert System §  Intelligent Agents §  Workflow Management §  Broadband Networks §  Mobile Computing

§  Genetic Algorithm §  Executive Dashboards §  Interaction Televisions §  Electronic Marketplace §  Electronic Purses §  Point of Sales Lobbies §  Intuitive Desktop §  Smartcard §  Workgroup Computing §  Virtual Banking

Merril Lynch & Co., Morgan Stanley

§  Definition �  Email is a method of sending and receiving electronic

information - text, images, and voices - across the internet or an internal network

§  Applications �  Internal communication �  Advertisement of products and services to existing

customers �  Communication with suppliers

§  Benefits �  Cost effective and faster way to disseminate and update

non-sensitive information firm-wide �  Effective way to interconnect disparate local networks or

communication between different Web servers �  Growing compatibility with Lotus Notes

ELEC

TRO

NIC

MA

IL

Bank of Boston, First Union Corp.

§  Definition �  Intranet is an enterprise information system that uses the model of

the Internet’s World Wide Web to share information which can only be accessed by members of the organization

§  Applications �  Fund transfer �  Clearing house processing �  Collection of corporate tax returns �  Internal communication �  Knowledge database �  Information consolidation

§  Benefits �  Cost effective, fast and secure way of disseminating information to

the members of an organization �  Easy to integrate with functional applications �  Easy to consolidate information from various sources

INTR

AN

ET

Security First Network Bank

§  Definition �  Internet is a collection of computer networks

connected together with a common standard of communication and unrestricted access

§  Applications �  Distribution of financial services �  Electronic payment �  Advertising of products and services �  Internal communication

§  Benefits �  Cost effective distribution channel

INTE

RN

ET

Rabobank

§  Definition �  EDI is the transfer of structured data by agreed message

standards from computer to computer by electronic means §  Applications

�  Automatization of payments �  Reconciliation of invoices and commercial data, through

banks, between corporate customers §  Benefits

�  Increase customer satisfaction with tailored financing, especially for companies that in a reasonably high frequency deliver goods or services of high value

�  Increase security for the bank who can match much more precisely its lending to the actual risk profile of the customer

�  In-depth understanding of the business and the business requirements of the client

ELEC

TRO

NIC

DAT

A IN

TER

CH

AN

GE

Visa International

§  Definition �  NNs are self-learning computing devices inspired by the

function of nerve cells in the brain §  Applications

�  Focused direct mailing campaign (micro-marketing) �  Credit scoring �  Bankruptcy tracking �  Fraud detection �  Account attrition �  Risk management

§  Benefits �  Reduce fraud cost �  Reduce IT cost due to processing speed efficiency

NEU

RA

L N

ETW

OR

KS

Hanover Insurance

§  Definition �  ESs are information systems that embody the knowledge of

a human expert in a computer program §  Applications

�  Insurance underwriting �  Mortgage lending �  Commercial lending �  Risk rating �  Credit evaluation �  Fraud detection

§  Benefits �  Cost savings �  Increase application processing speed resulting in higher

prospect conversion �  Enhance ability to serve agents �  Efficient transfers of organizational learning

EXPE

RT

SYST

EM

Bellcore

§  Definition �  IAs are software that carry out some operations on behalf of

user or another program with some degree of independence or autonomy, and in so doing, employ some knowledge or representation of the user’s goals or desire

§  Applications �  Electronic commerce �  Mail and messaging management �  Information access and management �  Mobile access and management �  Workflow and administrative management �  Systems and network management

§  Benefits �  Increase customer value by providing tailored value-added

information and advises �  Increase customer retention by being more influential in the

customer decision process

INTE

LLIG

ENC

E A

GEN

TS

Bank of America

§  Definition �  WM is the routing of a document through an organization;

Document Management Systems are automated information systems that manage a document and its subsequent versions

§  Applications �  Sharing and consolidation of “soft” client information such

as client-contracts, meetings, pending deals �  Electronic distribution of documents �  Back-office operations management

§  Benefits �  Reduce processing cost �  Improve communication �  Support to continuous Improvement

WO

RK

FLO

W M

AN

AG

EMEN

T

The Mill

§  Definition �  BN is a technology that enables a faster transmission of voice plus

data through the same phone line, plus the ability to transmit compressed images to support multimedia applications

§  Applications �  Validation of credit card authorization �  Videophone �  High speed fax communication �  Multimedia terminals �  PC cards and terminal adapters

§  Benefits �  Improve speed to cost ration in data and voice transmission

compared with traditional technologies �  Simplify network processing by decreasing the total number of

ports connected to the main switch �  Improve maintenance with the possibility of ATM remote diagnostic

testing �  Increase security with the possibility of alternate transaction

routing during high volume periods, line outages or disasters

BR

OA

DB

AN

D N

ETW

OR

KS

Founder’’s Bank

§  Definition �  MC broadly defines all the technologies that improve the

physical mobility of information systems §  Applications

�  Promotion of the banks’ products and services �  Virtual banking �  Disaster recovery plan �  Distribution of products and services in remote areas �  Compliance with some regulation needs

§  Benefits �  Improve quality of service and convenience �  Time saving MO

BIL

E C

OM

PUTI

NG

Citibank

§  Definition �  GA is an optimization technique that based on the

judgement of historical data §  Applications

�  Credit and risk evaluation �  Targeted mail campaign (micro-marketing) �  Asset management (portfolio optimization) �  Market trends forecast �  Consumer behavior analysis

§  Benefits �  Exploitation of the opportunities deriving from

understanding patterns of behavior

GEN

ETIC

ALG

OR

ITH

M

People’’s Bank

§  Definition �  An ED is intended to provide a more elegant way of

analyzing operational reports than the standard practice of looking at computer printouts, or entering data into electronic spreadsheets

§  Applications �  Management reporting �  Risk consolidation �  Middle-office management �  Data reconciliation

§  Benefits �  Improve return on management �  Improve business understanding through cross-application/

cross-business analysis �  Reduce training cost

EXEC

UTI

VE D

ASH

BO

AR

DS

Washington Mutual Inc., Thomas Cook, and National Westminster

§  Definition �  Interactive TV is a two-way TV in which the viewer can

make programming and advertising choices §  Applications

�  Self-service branches �  Application filing �  Loan simulation �  On-line services such as shopping or movie-on-demand �  Video conferencing �  Information and advertising

§  Benefits �  Increase number of new customers at lower cost to serve �  Improve leverage in the use of talented bank staff and

banking experts �  Quick geographical expansion of the distribution channels IN

TER

AC

TIVE

TEL

EVIS

ION

Jack White & Co.

§  Definition �  An EM is a digital or virtual representation of a

mall from where customers can order and buy goods and services

§  Applications �  Electronic mail �  Multimedia kiosks �  Home banking �  Phone banking

§  Benefits �  Cost effective distribution channel EL

ECTR

ON

IC M

AR

KET

PLA

CE

Deutche Bank

§  Definition �  EP is money that moves along multiple channels mostly

outside established networks of banks, check , and paper currency overseen by central banks

§  Applications �  Purchase of goods and services on the internet �  Purchase of goods and services in other traditional retail

distribution channels �  Electronic transfer of funds

§  Benefits �  More convenient than check or credit card for small amount

payments �  Safest payment system currently available on the internet �  Preserve the anonymity of the payment �  Increase benefits in combination with the smart card

technology

ELEC

TRO

NIC

PU

RSE

Thomas Cook, Co-Operative

§  Definition �  POSL are public terminals where people can get

information, advice or initiate transactions or purchase products and services

§  Applications �  Distribution of financial and non-financial products �  Expansion of the distribution network

§  Benefits �  Cost effective distribution channel �  Scale economies through the cross-selling of

financial and non-financial products

POIN

T O

F SA

LE L

OB

BIE

S

Union Bank

§  Definition �  ID refers to all the technologies that aim at

facilitating the interaction or the interface between the computer and the user, using representations that sound intuitive

§  Applications �  Improve the ergonomy of interactive applications

§  Benefits �  Time saving �  Convenience and user friendliness �  Reduced training costs

INTU

ITIV

E D

ESK

TOP

Banksys SA, Austria’’s Bank, Nation. Westiminster, and Midlank Bank

§  Definition �  SC is the successor of the “Swipe Card” with a micro chip

replacing the magnetic stripe §  Applications

�  Payment of goods and services, especially in partnership with specific retail distributors or for specific events

�  Payment over the internet �  Telephone shopping

§  Benefits �  Increase customer loyalty both for card issuers and retailers �  Improve security against counterfeiting and against theft �  Exploitation of opportunities from better understanding of

customer behavior

SMA

RT

CA

RD

AIG

§  Definition �  WC is a document management database system which

stores information, replicates it, presents it to teams of users for the purpose of communication, cooperation , and coordination within an organization

§  Applications �  Electronic sharing of document and financial reporting �  Internal and external communication with buyers, suppliers,

clients �  Knowledge database

§  Benefits �  Fast and secured way of communication and sharing

information both internally and externally �  Improve communication and increase learning within

organization

WO

RK

GR

OU

P C

OM

PUTI

NG

Huntington Bank

§  Definition �  VB is an umbrella for a scenario in which a banking

relationship based around visits to a particular brick-and-mortar branch gives way to one where the bank may be contacted in a variety of ways at times and situations convenient to the customer

§  Applications �  Video banking machine �  Advanced ATMs �  Call centers �  Cross-selling products or services with retailers

§  Benefits �  Increase number of customer at a lower cost to serve �  Increase awareness especially among customers with no

current account at the branch �  Improve customer service

VIR

TUA

L B

AN

KIN

G

Issues to be Solved

Part 4

Top Five Issues

1.  Standard Individual Reference 2.  Cyberlaw(s) Existence 3.  Security Awareness 4.  People’’s e-Readiness 5.  Infrastructure Availability è  API should be equipped with

““the Indonesian Architectural Framework for ICT Development in Banking Sector””

Recommendations by Meta Group

§  Banks need to institutionalize a “Change Culture” to cope with growing competition, regulations and customer expectations

§  “Change Culture” mandates focus on building core competencies (e.g. Finance) and acquiring support competencies (e.g. ICT) through “Excellence Partnerships”

§  ICT components are rapidly consolidating and commoditizing where price and value-added services becoming the key differentiators

§  Banks should apply the “Portfolio Management Theory” to its ICT assets and operations to maximize returns through consolidation, retirement, outsourcing and partnerships

Remember…

Old Bank

plus

Information Technology is equal to

Old and Expensive Bank !

Thank You