Dec 08 - 21, 2008

Use of information technology in the banking sector has an interesting history spread over decades in Pakistan. However, lately it has become a must for cost cutting and improving quality of services being offered to the customers. Majority of the customers perceive that use of technology in banking has a positive impact on the way the services are rendered to the customers.

Customers strongly believe that it is necessary for banks to deploy the latest technology. However, customers also feel that not only the personal touch is missing in modern banking but banks also charge exorbitant fees on transactions carried out on information highways and number of fatal accidents are also on the rise.

Technology has opened up new markets, new products, new services and efficient delivery channels for the banking industry. Technology has also provided banking industry with the tools to deal with the challenges facing the economy. Information technology has been the cornerstone of recent financial sector reforms aimed at increasing the speed and reliability of financial operations and of initiatives to strengthen the banking sector.

The IT revolution has set the stage for unprecedented increase in financial activity across the globe. The progress of technology and the development of world wide networks have significantly reduced the cost of global funds transfer. This enables banks in meeting such high expectations of the customers who are more demanding and are also more techno-savvy compared to their counterparts of the yester years. They demand instant, anytime and anywhere banking facilities.

Deployment of technology provides solutions to banks for taking care of their accounting and back office requirements. This has paved way to large scale usage in services aimed at the customer of the banks. This facilitated introduction of new delivery channels, prominent among these being Automated Teller Machines (ATMs), internet based banking and mobile banking.

The deployment of technology has assumed such high levels that it is no longer possible for any bank to select and manage its hardware and software on a standalone basis. With technology revolution, banks are increasingly interconnecting their computer systems not only across branches nationwide but also to other geographic locations with high-speed network infrastructure, and setting up local area and wide area networks and connecting them to the Internet. As a result, information systems and networks are now exposed to a growing number.

It is evident that the last few years have seen a truly phenomenal pace of new technology adoption by even the most conservative banking organizations. A number of financial trade publications are now devoted almost entirely to emerging technologies and the latest financial technology ventures.

Many banks are making what seems like huge investments in technology to maintain and upgrade their infrastructure not only to provide new electronic information-based services, but also to manage their risk positions and pricing. These developments will ultimately change the competitive landscape in financial services in ways that no one can predict.

A closer look at the history highlights three key reasons financial institutions are investing in technology: 1) Attempt to reduce operating costs through such efficiencies as the streamlining back-office processing and the elimination of error-prone manual input of data. 2) Capitalizing opportunities to serve their current customers and attract new customers by offering new products and services as well as enhancing the convenience and value of existing products and services. 3) With more powerful data storage and analysis technologies, institutions able to develop and implement sophisticated risk- and information-management systems and techniques.

It is evident that many of the earlier investments met those objectives. However, it is unclear whether today's most current expensive technologies will yield the desired results. Overall, the impact of the current technology investment boom in the financial services sector is difficult to assess.

Admittedly mixed, experience of the financial services sector with technologies demand further probe because many of the investments have been made to automate existing processes, but the challenge of fundamentally rethinking the process from start to finish is necessary to reap the full benefit of the current generation of technologies. Many of the services that banks are attempting to automate currently are "joint goods," that is, the production and consumption of the product or service depend on the inputs or behaviors of many players outside of the bank and even outside of the financial industry.

For example, the flow of services from checks depends on a complex of economic actors, including consumers willing to write cheque, merchants willing to accept them, and an infrastructure in place to clear and settle them. Attempting to automate part of the cheque process by imaging or to replace cheque with a single instrument, such as the debit card, requires cooperation among all the organizations that support cheque transaction.

Technology is also changing the supervisory and regulatory landscape. It is creating new tools for supervisors and new supervisory challenges. Technology-driven issues such as privacy and the nature of electronic communications have reached the forefront of the policy agenda. As a result the line between electronic banking and electronic commerce is becoming more difficult to define clearly.

The sector offers immense opportunities but the uncertainties are also high. Banks and supervisors need to recognize that it is acceptable and even expected to make some investments that do not pay immediately. There have been, and will continue to be, technological glitches - computers and web sites go down occasionally, and e-mails get lost. The new Internet world is a punishing one for these routine mistakes, and financial institutions have strong incentives to take precautions and to fix problems well before they reach supervisors' and policymakers' attention.

The information-based nature of financial services is unlikely to change. Therefore banks and other financial institutions will continue to find new and better ways to put technology to their and their customers' best use, and that they will manage the technology and the business risks associated with these investments.