Impact of IT in the banking sector

Sarath Malalasekera

In the interest of the wider financial system stability, the Central Bank of Sri Lanka is responsible to ensure smooth, speedy and safe operations of the nation's payment, clearing and settlement system.

Since 2003, the Central Bank has taken the lead to introduce an efficient and safe payment and settlements for both high value and time critical transactions by introducing the Real Time Gross Settlement (RTGS) system for inter-bank and third party customers, said Central Bank Deputy Governor Dr. Ranee Jayamaha at the Lawasia ICT Law Conference held at the Trans Asia Hotel recently.

Chief Justice Sarath N. Silva PC was the Chief Guest at the Conference. Lawasia ICT Conference President Mah Weng Kwal was at the head table with the other members of the Ex-Co.

The Deputy Governor speaking on "Impact of IT in the Banking Sector' said that the RTGS system is a computer-based fund settlement system, which processes and settles each payment instruction individually and irrevocably on a real time basis, using funds in the participants' RTGS Settlement Account or Central Bank funds provided under an intraday liquidity facility.

At present, the value of transactions settled in the RTGS system accounts for about 81 per cent of the non-cash high value payments in Sri Lanka.

The majority of RTGS transactions are on account of the inter-bank call money market, the government securities market, open market operations, the Rupee leg of transactions in the foreign exchange market, urgent and time critical payments of customers and net obligations under the clearing system operated by Lanka Clear Limited, a venture and service.

The reliability of the products and services are assured to a large extent by the attention paid to BCPs by banks. While these have increased productivity in the banking sector, banks have had to spend more money for the acquisition and installation of new IT systems, the Central Bank Deputy Governor said.

The Deputy Governor emphasised that the rapid advancement in Information and Communication Technology (ICT) has had a profound impact on the banking industry and the wider financial sector over the last two decades and it has now become a tool that facilitates banks' organisational structures, business strategies, customer services and other related functions.

The recent "IT revolution" has exerted far reaching impacts on economies in general, and the financial services industry in particular.

Within the financial services industry, the banking sector was one of the first to embrace rapid globalisation and benefit significantly from IT development. The technological revolution in banking started in the 1950s, with the installation of the first automated bookkeeping machines at banks.

This was well before the other industries became IT savvy. Automation in banking became widespread over the next few decades as bankers quickly realised that much of their labour intensive information-handling processes could be automated with the use of computers.

The first Automated Teller Machine (ATM) is reported to have been introduced in the USA in 1968, and it was only a cash dispenser.

The advent of ATMs helped both to improve customer convenience and reduce costs, as before ATMs, withdrawing funds, accounts inquiries and transferring funds between accounts required face-to-face interaction between bank staff and customers.

Overall, technological innovation has brought about the speedy processing and transmission of information, easy marketing of banking products, enhancement of customer access and awareness, wider networking and regional and global links on an unprecedented scale.

IT development has thus changed the product range, product development, service channels and type of banking services, as well as the packaging of such services, with significant efficiencies and only in the banks, but also the ancillary and feeder services to banks.

The financial services industry has thus become virtually dependent on IT development. Most banks make visible efforts to keep up with new systems and processes.

The development in ICT has enabled banks to provide more diversified and convenient financial services, even without adding physical branches. The present day ATMs are more sophisticated machines that can scan the customer and a bank teller, accept cash or cheques, facilitate customer application for loans and allow for face-to-face discussion with a service representative via video.

The development of Internet services, which is an extensive, low-cost and convenient financial network, has facilitated banking services to customers, anywhere and anytime. Along with Internet and Web-based services, a need for changing core banking architecture has emerged.

The introduction of new core banking systems by some banks and their links with the improved telecommunication network has enabled banking transactions to be done on-line, in contrast to the batch-processing mode used earlier.

The integration of e-trading with internet banking and banks' websites is also a notable feature.

These IT advancements have enabled banks to gradually replace manual work by automated procedures with on-line real time processing.

(To be continued)