Module 2 - Chapter 3

Service Channels and Operations Management

Topics
Introduction 03
Alternate channels 04
ATM 05
Security 05
Technology 06
Operations 07
Functions 09
PIN Change 09
Balance Enquiry 10
Cash Withdrawal / Fast Cash 10
Cash Deposit 11
Cheque Deposit 11
Mini Statement 11
Cheque Book Request 12
Funds Transfer 12
Value Added Transactions 12
Type of ATM by location 13
Viability 13
Phone Banking 13
Security 15

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 Module 2 - Chapter 3

Service Channels and Operations Management

Internet Banking 15
Technology 16
Security 16
POS Terminals 17
Branches 18
Specialised Branches 18
Limited Service Branches 19
Credit And Trade Related Services 20
Centralised Operations 21
Imaging 23
Workflow Management 24
Cheque Truncation 24
Integrated Currency Management Centres (ICMC) 25
Conclusion 26
Check Your Understanding 27

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 Service Channels and Operations Management
Introduction
Advances in telecommunication and computing technologies have caused
revolutionary changes in business models. Many businesses have been freed
from the constraints of physical space, limited working hours and even
political boundaries. Where physical goods are not involved, like in the case of
music, airline tickets etc., both sale and delivery takes place electronically at all
times of the day, across the globe. Even when physical goods are involved, all
processes except packaging, shipping and delivery take place electronically
24 hours of the day across national boundaries as in the case of Amazon.com
which has emerged as a leading book seller. Technology has enabled many
businesses to do business internationally, all through the day and at much
reduced cost. Technology has removed the constraints of space and time and
also reduced the cost of doing business.
Technology has also impacted banking business in a big way. Banking has
been freed from the constraints of physical branches. It is now possible for the
customers of banks to access their accounts at any time, from anywhere,
through the internet or phone. Even cash withdrawals are possible at any time
across the globe through the ATMs, which are linked internationally through
the VISA and Mastercard networks. Such revolutionary possibilities in
delivery of banking service had prompted McKinsey, the international
management consultancy firm, to pronounce in 1995 that “branch banking is
dead”. However, branches continue to be the most important channel for sale
and delivery of banking services. After neglecting the branch channels for a
few years banks have realized that they can ill afford to neglect the branch
channel and all other channels can at best supplement the branch channel.
Customers still value the physical contact that branches offer and invariably
choose a bank that has a branch that is easily accessible for them. At the same
time, customers want the convenience of any time, anywhere, 24 by 7 banking
too. Such customer preferences and considerations of cost have prompted
banks to leverage technology to the maximum extent to deliver service
through multiple channels.
Banks actively encourage customers to use cheaper self-service channels
to shore up profitability which has been falling due to intense competition.
In fact channel migration is a very important element of the business
strategy of every bank. The cost of a transaction at an ATM is just about 30% of
the cost of a transaction done at a branch. A transaction through the internet
channel costs just 5% of what it costs at a branch. This being so, banks can
ill afford not to develop multiple channels of delivery and actively
migrate customers to the cheaper channels, which in any case are convenient
to the customers. The cost of the alternate channels are cheaper as the data
entry is done by the customer himself and the processing is automated.

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Avoiding intervention by the staff of the bank, who are a very costly resource,
in transaction processing helps to reduce cost of operation and also improves
speed of execution or TAT ( Turn Around Time). Banks ,which have to
continuously focus on enhancing efficiency and customer satisfaction, have
little choice to leveraging technology to develop alternate channels for sale
and delivery of banking services. Many progressive banks have succeeded in
migrating nearly 80% of the transactions to the alternate channels. In other
words, customers approach branches for doing only about 20% of the
transactions. This enables the banks to service a large customer base with few
branches ,which are very costly to maintain and at the same time provide the
customers the convenience of any time, any where banking.
The benefits of alternate channels can be summarized as follows;
! Customers are freed from the limitations of branches in terms of location
and working hours
! Customers get the convenience of any time, any where banking services
! Customers have greater control over their transactions as they are not
dependent on the staff of the bank for initiating the transactions
! Transactions are executed more efficiently as processing is automated
! The profitability of banks is improved as alternate channels are cheaper
than branch channels to build and maintain

Alternate Channels
The alternate channels that have gained acceptance of customers are;
! ATMs
! Phone Banking
! Internet Banking
! POS or Point of Sale terminals
! Mobile Banking

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ATMs
ATMs or Automated Teller Machines, as the name indicates, are meant to
provide the services that a Teller at a branch provides but on a 24 hour basis.
An ATM could be called a robotic teller which works all through the day and
night. ATMs started out as cash withdrawal machines as that was the most
important service customers required on a 24 hour basis and that too near
their place of stay or work. ATMs helped to increase customer satisfaction by
providing the convenience of cash withdrawal service at a large number of
locations round the clock. The bank also benefited as the cost of installing and
maintaining an ATM was much lower that that of a branch.
Gradually, the number and complexity of services provided through ATMs
have increased and the advent of internet technology has enabled ATMs to be
programmed to deliver almost any service including sanction of loans on line.

Security
When a customer gives an instruction to a branch by way of a cheque or letter,
the authenticity of the instruction is validated by verifying the signature of the
customer. To validate a transaction at an ATM, the customer is issued a four
digit PIN (Personal Identification Number) which the customer has to key in
after inserting his ATM card. The first PIN is sent to the customer by post and
he has to change the PIN during the first transaction. The PIN he creates has to
be remembered by the customer. In case three attempts are made with the
wrong PIN, the PIN will be blocked. The customer can access the ATM after 24
hours, if he remembers the pin. If the customer has forgotten the pin, he has to
get a new PIN from the bank to activate his ATM card. This is to ensure that a
fraudster does not gain access to the account by trial and error.
As the PIN is equivalent to the customer's signature, he is advised not to share
it with anyone or even write it down somewhere so that no one can come to
know of it. Since the customer alone is expected to have the card and know the
PIN, banks do not generally entertain any claim for unauthorised cash
withdrawal using ATM cards. ATM frauds are invariably committed by close
friends and family members who have access to the card and to whom the
customer reveals the PIN by using the PIN in their presence. There have been
cases of customers writing the PIN on the card itself. Customers are advised
not to take anyone with them to the ATM or to write the PIN on the card or for
that matter anywhere else.

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Banks generally issue ATM cum Debit cards which can be used at merchant
establishments (shops, hotels etc) just like a credit card for making payments.
The customer is required to sign on the reverse of such ATM cum Debit Card.
This is to enable merchants to identify the customer. While there are POS
(Point of Sale) terminals with facility to enter PINs, majority of POS terminals
do not have the facility. The merchant has to verify the identity of the customer
only by comparing his signature on the charge slip with the signature on the
back of the ATM cum Debit Card.
To protect the customer against unauthorized withdrawals the maximum
amount that can be withdrawn through ATMs in a day is usually limited to Rs.
25000. Banks do specify varying limits and HNIs (High Networth Individual
customers) are permitted withdrawal of up to Rs. 50000. Another purpose of
limiting cash withdrawals is to ensure that the ATMs do not run out of cash
fast. Usually cash is replenished in ATMs only once a day or once in two days
as cash replenishment is a costly process.
The limit for use of ATM cards at merchant establishments is twice the ATM
limit .i.e, Rs.50000/- per day for regular customers and Rs.1 lakh for HNI
customers.The merchant is required to ensure that the customer himself has
presented the card by verifying his signature.

Technology
Simply stated, an ATM is a small computer with a cash dispensing mechanism
attached to it and linked to a central computer called switch through phone
lines or leased lines or V-sat. The switch is in turn connected to the Core
Banking System (CBS) of the bank and also the HSM or Host Security Module.
The HSM generates PINs for new accounts and also verifies the card number
and PIN whenever the customer uses an ATM.
After inserting the card in the ATM the customer is required to enter the PIN
and the transaction he wishes to complete, say cash withdrawal. The ATM will
send the details to the switch which will send the card number and PIN to the
HSM. On receiving confirmation from the HSM that the PIN tallies with the
card number the switch will send a message to the core banking system to
debit the customer's account with the amount he wishes to withdraw. On
receiving a message from the CBS that the customer's account has been
debited, the switch will send a message to the ATM to dispense cash. All these
activities happen in a few seconds. In the case of cash and cheque deposit, no
messages goes to the CBS as no entry is to be made in the account at the time
of the transaction.

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ATMs have two types of card verification mechanisms. The older type of
mechanism takes the card into the ATM and ejects the card only after the
transaction is over. In the newer ATMs the card has to be inserted into the slot
and taken out quickly. The ATM reads the details on the magnetic stripe of the
card while it is being inserted and taken out. In the new ATMs the chances of
the customer forgetting the card in the ATM is remote as he has to necessarily
take it out to start the transaction.

Operations
To be functional ATMs need to be kept stocked with cash and its printer loaded
with paper roll. This job is usually outsourced to cash replenishment agencies
who charge a monthly fee per ATM. The frequency of cash replenishment
(daily, once in two days or weekly etc) will be agreed upon between the bank
and the agency on the basis of number of transactions and cash dispensation
at each ATM. In case in the rare event of more than normal cash withdrawal
from any ATM,additional cash replenishment will be done by the agency for
which additional charges will be paid. The cash replenishment agencies also
collect the cash and cheques deposited by customers in ATMs.
The second operational aspect is technical malfunction or stoppage.
Maintenance agencies provide round the clock maintenance of ATMs and
serious issues are taken care of by the manufacturers of the ATMs who also
provide maintenance support.
To ensure that ATMs are functional round the clock the status of ATMs are
monitored online at a central location normally called “help desk”. It is
manned 24 hours and whenever an ATM “goes down” or stops for some
reason the person at the help desk will be able to see it on his monitor. The
reason for stoppage such as communication line down, cash outage, paper
jam etc will also flash on his screen. He will immediately alert the concerned
maintenance agency to rectify the problem. The security guards at ATM
centres are also trained to call the help desk number and report stoppage of
ATMs so that it is set right immediately. Banks try to ensure 99% uptime of
their ATMs so that their customers are not inconvenienced.
Another aspect of ATM operation is cleanliness and upkeep of the ATM centre.
House keeping agencies provide cleaning services and maintenance agencies
ensure that all electrical and other fixtures are functional at all times.

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Thus, a number of agencies are involved in ensuring that ATM networks
of banks are functional at all times. To save the trouble of having to deal
with multiple agencies, banks may entrust all the jobs to one single
agency who will in turn use the services of multiple agencies to maintain the
ATM network of the bank concerned. Euronet is an agency which not only
maintains ATM networks but also sets up ATM networks for banks. The Bank
only indicates the places where they want ATMs to be installed. From setting
up the ATM centre to maintaining it on a continuing basis is taken care of by the
agency for a fee. In this model the ATM will be owned by the bank but
maintained by the Agency.

Third Party Networks

So far only banks could own ATMs. Recently RBI has permitted service
providers to own ATMs. With this change in policy of RBI, the service
providers will set up ATMs at vantage points and permit customers of multiple
banks to use the ATM for a fee which will be paid by the concerned bank on per
transaction basis. Such third party owned ATM networks exist in many
countries.

VISA/Mastercard Networks
VISA and Mastercard are international networks primarily for credit card
operations. These networks can be used by member banks for ATM cum Debit
Card transactions also. ATMs of banks which are members of the VISA or
Mastercard organization are linked to the computer of those organization at
various international centres such as Singapore or London. Hence a card
issued by one bank can be used on an ATM of another bank. When a card
issued by SBI is used to withdraw cash from an HDFC ATM, the switch of HDFC
routes the message to the VISA/Mastercard system which routes it to the
switch of SBI and the transaction gets completed. For providing this service
Visa/Mastercard recovers a charge called “Inerchange” from the card issuing
bank, in this case SBI, and shares part of it with the paying bank, in this case
HDFC, for permitting their ATM to be used.

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Inter-Bank Networks
To avoid payment of interchange to VISA/Mastercard, some banks have linked
their ATM networks on bilateral basis. This enables the customers of one bank
to use the ATMs of the partner banks at much reduced charges than what
VISA/Mastercard levies.
Bilateral or multiple arrangement of banks, third party ATM networks and the
VISA/Mastercard network have made it possible for bank customers to
withdraw money from their account through any ATM at any place around the
globe at any time.

Functions
The functions available in most ATMs are the following;
! PIN change
! Balance Enquiry
! Cash Withdrawal / Fast Cash
! Cash Deposit
! Cheque Deposit
! Mini Statement
! Cheque Book Request
! Funds Transfer

PIN Change
The very first transaction a customer does on an ATM is changing the PIN sent
to him by the bank so that its confidentiality is ensured. The PIN can be
changed any time and any number of times by the customer. After accessing
the ATM using the existing PIN the customer has to choose the option “PIN
Change” The ATM will ask the customer to enter the new PIN and once again to
enter the new PIN to confirm it. Once the new PIN is entered twice, that
becomes the valid PIN for all future transactions.

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Balance Enquiry
If the customer chooses the balance enquiry option, the balance in his account
will be displayed on the screen. If two accounts of the customer are linked to
the same ATM card, the ATM will prompt the customer to indicate the account
of his choice. On choosing the account, the balance in it will be displayed.
Since most customers make a balance enquiry before withdrawing cash, to
speed up the transaction some banks have programmed their ATMs to display
the balance in the customers' account as soon as the card and PIN are
validated. If two accounts are linked to one card the balance in the primary
account only will be automatically displayed. To know the balance in the
secondary account, the balance enquiry option has to be used.

Cash Withdrawal / Fast Cash

The maximum number of transactions at any ATM is cash withdrawals. On
choosing the cash withdrawal option, the customer will be prompted to enter
the amount and confirm its correctness by choosing from a YES / NO option.
Thereafter the customer will be prompted to indicate whether he needs a
printed receipt or not, again by choosing from a YES / NO option. Thereafter
the cash will be dispensed.
Majority of the ATMs can dispense only 40 pieces of currency notes at
one time.
Hence the maximum amount of cash that can be withdrawn is limited by the
denomination of the notes filled in the ATM. If only Rs 500 denomination notes
are available the maximum amount that can be withdrawn at one time is
limited to Rs. 20000. If only Rs. 100 denomination notes are available the
maximum amount goes down to Rs. 4000. If a customer wishes to withdraw
more that what the ATM can dispense in one transaction he has to do multiple
transactions. Normally currency notes of two denominations, like Rs. 500 and
Rs. 100, are loaded in ATMs so that customers get a mix of high value and low
value currency notes.
To limit the number of key strokes and speed up cash withdrawal operations,
the “fast cash” option enables the customer to choose the amount to be
withdrawn with one key stroke. When the fast cash option is chosen, the ATM
will prompt the customer to choose from Rs. 1000, Rs. 2000 or Rs. 3000. When
the amount is chosen cash will be dispensed and a receipt printed
automatically. If “ultra fast cash” option is chosen the ATM will automatically
dispense Rs. 3000 and print a receipt. Using the ultra fast cash option it is
possible to complete a cash withdrawal transaction in about 20 seconds.

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Cash Deposit
On choosing the “cash deposit “option, the ATM will dispense an envelope.
The customer has to write his account number and phone number on the
envelope, put the cash into the envelope, seal it and insert it into a slot in the
ATM. He has to also key in the amount deposited. While the ATM will print a
receipt, the amount will not be credited to the customers account immediately
as the ATM cannot count the cash in the envelope. The envelopes will be
collected once a day by the cash replenishment agency, the cash counted and
a list of account numbers and cash deposited in the accounts given to the bank
for crediting the customers' account. In case of any difference between the
amount entered in the ATM and the amount found in the envelope, the
customer will be contacted by the cash replenishment agency. To ensure that
no fraud takes place at the premises of the cash replenishment agency, the
envelopes are opened and cash counted in the presence of two persons and
the entire process is video recorded. If need be, the customer can be shown
the video record.
There are sophisticated ATMs that can accept currency notes, recognize their
denomination, count them and credit the account of the customer
immediately. Such ATMs have sensors which can recognize the patterns on
currency notes and counters to calculate the total amount of notes deposited.
They are costly and difficult to maintain as dust can easily affect the sensors.
Poor quality of currency notes, in terms of dirt or moisture or folds, can lead to
rejection of the notes too. Hence banks in India have not installed such
machines except on experimental basis at select locations.

Cheque Deposit
Cheques can be deposited in ATMs in envelopes just as cash is deposited.
They will be collected once a day and sent to the processing centres for further
processing.
This facility is rarely used by customers as it is much easier to deposit the
cheques in drop boxes which are available at ATM centres.

Mini Statement
By choosing the mini statement option customers can view the details of
the last 10 transactions in their accounts. They can also get a print out of
the last 10 transactions.

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Cheque Book Request
Customers can order for a new chequebook at ATMs. The request will
automatically flow to the central processing centre and then to the cheque
book printer who will print it and dispatch it to the customer within 48 hours.

Funds Transfer
If more than one account of the customer has been linked to one ATM card, the
customer can transfer funds from one of the linked account to the other
through the ATM.

Value Added Transactions

! Mobile recharge
! Utility bill payments
! Buying mutual funds
! Charity and donations
! Buying Internet packs or airline tickets or cinema tickets
These transactions are in effect variations of funds transfer. On choosing the
option the customer authorises transfer of funds from his account to the
account of the service provider. In the case of mobile recharge, donations,
utility bill payments etc the details of the customer will be sent by the bank to
the service provider. When purchase of internet recharge, airline ticket etc is
involved, the cusomer will be provided a reference number or code number
through the ATM which he has to use to identify himself with the service
provider to get the service he has paid for.
Banks provide such services to earn commission income from the service
providers.

Limitation
All the value added services explained above can be utilised by a customer
when using the ATM of his bank only. On ATMs of other banks or private
networks, only balance enquiry and cash withdrawal functionsa are available.
On limited function ATMs called CDs or Cash Dispensers also not all functions
will be available. On CDs, cash deposit function will definitely not be avilable.
CDs are essentially meant to facilitate cash withdrawals at places where the
number of transactions is likely to be limited to say 100 to 150 a day. Hence the
cash holding capacity of CDs is limited. They are cheaper compared to full
function ATMs.

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Type of ATM by Location
ATMs located inside branches are called “on site ATMs”.
Off-site ATMs are those located outside branches. They could be at a stand
alone ATM centre or at a shopping plaza or at a petrol pump etc.
When an Offi-site ATM is located in the factory or office of a corporate
customer and it has been put up primarily for the use of their employees it will
be called a work-site ATM.
Some banks also have mobile ATMs which are installed in a van which keeps
moving around locations on a fixed schedule so that customers in those
locations know when they can access the ATM. Mobile ATMs have not been
very succesful in terms of its usage vis a vis its cost, which tends to be much
higher than a normal ATM because of the cost of fitting out and maintaining
the van with driver and support personnel.

Viability
It has been calculated that, in a metro city, the average cost of an ATM
transaction, assuming about 300 transactions per day, works out to Rs. 11 to
Rs. 15 and an ATM is viable if it handles 300 transactions per day on an
average. There are ATMs that handle even 700 to 800 transactions per day on
average. Obviously they are very profitable ATMs. If the average transactions
per day at an ATM does not cross 200 even after an year banks generally
relocate them to ensure better utilisation.

Phone Banking
It is possible to provide almost all banking services except cash transactions
through telephone. Banks have started providing even cash transactions by
taking request for cash deposit or payment over phone and sending a person
to the customer's place to accept or pay cash. With home banking and phone
banking combined ,almost all the services provided at a branch can be
provided through phone banking.
Phone banking is cheaper than branches, as call centres are centralised with a
large number of call centre agents sharing many common facilities thereby
providing economies of scale. Further, space per employee at a call centre
is less than half of what it is at a branch resulting in saving in cost of
rent, electricity etc. The cost of phone banking is further controlled by
enabling customers to complete most of the routine transactions by
themselves through the IVR or Interactive Voice Response system which
guides the customer through various options to complete his transaction.

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By pressing the appropriate option number (For instance, Press 1 for balance
in savings account) the customer is able to get the desired information or
register a request without having to talk to a phone banking officer. The IVR
helps to improve the productivity of the call centre tremendously as more than
half the calls get completed by the IVR.
The call centre system is programmed to identify the caller by his category, i.e.
whether he is a private banking customer or high net worth customer or
ordinary customer and to route it to the correct queue so that waiting time is
reduced for the HNI and Private banking customers. Further, the calls are
routed to dirfferent teams of phone banking officers according to their
specialisation in terms of customer segments and products.
The services provided through phone banking are as follows:
! Check your account balance: The customer can get details of the savings
or current accounts and fixed deposits. He can also get the details of the
last few transactions in the account.
! Enquire on the cheque status: The customers can use phone banking to
check on the status of cheques issued from or deposited in their accounts,
from anywhere in India.
! Order a cheque book / account statement: The customers can request for a
new cheque book or account statements .
! Stop payment: The customer can stop payment of a single cheque or a
series of cheques and that too instantaneously.
! Report loss of your ATM / Debit Card: If the customer's ATM / Debit Card is
lost, he or she may call phone banking numbers to deactivate the card(s).
! Loan related queries: The customer can enquire about his or her loan
account, request for an Interest certificate and repayment schedule.
! Credit card related queries: The customer can enquire about his or her
credit limit, last few transactions, various schemes, request for statement
of account, report the lost card and deactivate the same instantaneously,
redeem points, and apply for an add-on card.
! Learn about all other products: The customer can get details on bank
products and services by talking to PBO.(Phone Banking Officer)
! Cash and cheque pick up request
! Cash delivery request.

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Security
To access phone banking, customers are required to identify themselves by
keying in the TPIN or Telephone Identification Number. Some banks permit
customers to identify themselves by entering the ATM/Debit Card number and
PIN or the Credit Card number and PIN (credit card holders are issued separate
PINs to enable them to withdraw cash from ATMs using the credit card). After
the customer dials in and chooses the option for accessing their bank account
or credit card account, the IVR will prompt them to enter the relevant card
number and PIN. Even if they are not in a position to enter the identification
numbers, they can choose the option to talk to a phone banking officer who
will try to verify the identity of the person by asking him details of his bank
account. Only after the identity is established to the satisfaction of the phone
banking officer will he reveal any information about the account or entertain
any transaction.

Internet Banking
Internet banking is leveraging the potential of the internet to facilitate
customer access to his account and accounts manager from any place at any
time. Apart form viewing the transactions in his account for any period, the
customer is able to effect transfer of funds and request for various services.
Internet is the cheapest channel for delivery of banking services. In India,
Internet Banking was introduced in 1997, but poor and costly
telecommunication network stood in the way of internet penetration. As a
result Internet banking did not become popular till five years later. Now India is
one of the fastest growing internet banking market in the world.
The services available through Internet banking are as follows:
! View account balances and download statements
! Transfer funds between accounts (within same bank as well as to other
bank's at specified locations)
! Create fixed deposits- online
! Request a Demand Draft (DD)
! Pay bills utility, insurance premium, credit card etc
! Order for a cheque book
! Request stop payment on a cheque
! Request for debit card
! Manage DeMat accounts

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Internet banking also facilitates online payments for;
! Refilling prepaid mobile card
! Shopping online
! Booking rail and air tickets online etc.

Technology
Just as the “switch” interfaces between the ATM and the bank's core banking
system, in the case of internet banking an “Internet Banking System”
interfaces between the customers' computer and the bank's core banking
system. The customer is not permitted to access the core banking system
directly to ensure safety. The internet banking system is also protected with
“firewalls” to prevent unauthorised access, hacking and virus infection.
Advanced encryption technology is used to ensure that messages from / to
the customers are not intercepted and misused by anyone.

Security
Customer access is controlled through “customer id” and a eight digit
“password” which the customer is advised to change from time to time. The
customer is also advised not to reveal his password to anyone to prevent
misuse. Instances of customers using internet cafes for accessing their
accounts and their key strokes being captured illegaly and later being misused
by fraudsters have prompted banks to advise customers not to access their
accounts from insecure locations.
Phishing or making the customers reveal their internet banking id and
password by tricking them with unauthorised emails asking for such
confidential data or by directing them to unauthorised sites which resemble
the bank's website is another security threat that has surfaced.
While banks try to educate the customers on the risks in internet banking the
customers have to be vigilent not to get cheated by unscrupulous elements.

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POS Terminals
Point of Sale terminals are the devises on which shopkeepers swipe credit
cards for completing a payment transaction. They are elctronic devices which
read the information encoded in the magnetic stripe behind the card and
transmit it to the “switch” of the bank which has installed the POS terminal
(acquiring bank)at the merchant establishment. The following is the flow of the
transaction:
! Merchant swipes the card, enters the amount and presses the “enter”
button
! The POS dials the switch of the acquiring bank which has installed the POS
and transmits the details of the card and amount
! If the card is issued by the acquiring bank, the switch will route the
transaction to the banks credit card or core banking system (in the case of
debit card)
! If the card has been issued by another bank, the switch will transmit the
data to the system of VISA or Mastercard to which the issuing bank is
affiliated.
! The VISA/Mastercard system will route the transaction to the switch of the
issuing bank which will in turn route it to its credit card or core banking
system.
! The credit card or core banking system of the issuing bank will check the
balance in the card holder's account and approve or reject the transaction.
! The approval or rejection will travel to the merchant terminal through the
VISA/Mastercard system and the switch of the acquiring bank.
! The amount of the transaction will be paid to the merchant by the acquiring
bank the next day, after deducting the interchange which is the charge the
acquiring bank recovers from the merchant for facilitating the transaction.
The interchange will be shared with the issuing bank and VISA/Mastercard
according to the rules of VISA/Mastercard to which the acquiring bank is
affiliated.
In restaurants people pay tips by writing it on the charge slip which has been
generated for the amount of the bill. In POS terminals there is provision for
adjusting tips in a transaction that has already been completed. After pressing
the button for tips adjustment, the transaction has to be retrieved and the
amount adjusted for tips. To prevent unauthorised adjustment only persons
authorised to make such adjustments can do so after identifying themselves
by entering their password.

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A debit/credit card POS is only a reading and transmitting device and does not
store any data. It has to be necessarily connected to the switch of the acquiring
bank to process a transaction.
A smart card enabled POS, on the contrary, is capable of storing transactions
and downloading a bunch of transactions to the host system as and when
connectivity is established. Generally, smart card transactions are
downloaded to the host system once or twice a day.

Branches
As stated in the introductory para, branches continue to be the most important
channel of banks. While the ATM network of banks is a differentiator,
customers tend to prefer banks with branches where they can access it easily
at their convenience. With alternate channels providing almost all services
that are provided at branches, many customers do not have the need to visit
branches at all. Yet, in case they need to visit a branch for some query or
complaint which they are not able to resove through the alternate channels,
customers prefer banks with conveniently located branches. Customer
research has revealed that many customers prefer to deal with a human being,
face to face, when depositing cash or discussing investments or loan terms.
Branches have also proved to be the most effective sales channel. More than
half of the enquiries or leads generated at branches result in business while
the conversion of enquiries/leads through other channels like phone banking
is much lower, just about 10 to 20%.

Specialised Branches
Till the advent of alternate channels, all services were provided at branches
and the branch sraff had to be proficient in all products and services the bank
offered. The people at branches had to be knowledgeable about all products
and services and proficient in transaction processing and customer servicing.
While branches being one stop shop was convenient for customers, it also
led to inefficiencies as the staff member could not gain specialisation in
any service and multi tasking or having to do many things together
led to oprerational inefficiencies. This led to creation of specialised branches
for different segments of customers such as Corporate Banking Branches,
Small Industries Branches, Agricultural Branches, Overseas Branches
for international banking services etc. While the focus was on providing
services required by a specific segment of customers, all the servics they
required had to be provided and gradually the branches ended up providing
all banking products and services with a group of specialists to provide the
specialised services required by the particular segment of customers.

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Such specialisation did help in improving the services provided to important
segment of cusomers. However, it was not adequate to make a bank wide
impact in terms of improving skill levels and increasing operational efficiency.
Another type of specialised branches that emerged were Service Branches
which took care of clearing function. Traditionally the main or largest branch at
a centre used to look after the clearing function. Since clearing of cheques had
to be done in a time bound manner it was felt that having a separate set up for
handling the work will bring in better efficiencies. Hence the clearing
dpartments of main branches were hived off into separate entities. Gradually
the services branches took over certain other functions like accounting of
demand drafts and pay orders.
Almost all the public sector banks continue to function with full services
branches and specialised branches at large centres.

Limited Service Branches

The new generation private sector banks like ICICI Bank, HDFC Bank etc, chose
to follow a different model from their inception in 1994. Since they started with
full computerisation and centralised database, they adapted the operational
model of successful foreign banks like CitiBank which had made the branches
sales and service centres and moved processing work to centralised
operation shops. Moving the operational burden out of the branch enables the
staff at the branch to pay grater attention to sales and service as they have
more time to interact wih customers. Computerisation and centralisation of
operations also enabled them to keep the branches open for longer then the
traditional 10 am to 2 pm business hours. ICICI Bank was the first to start with 8
to 8 banking and many other banks including some public sector banks have
adopted it after they got themselves computerised.
Typically, the new generation banks provide only the following services at
most of their branches;
! Account opening
! Cash receipts
! Cash payments
! Cheque deposits (if customer is not willing to deposit it in the drop box)
! Accepting request for stop payment of cheques or cancellation of debit
cards
! Acceptance of requests for issue of cheque books, standing
instructions etc

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! Issue of demand drafts, pay orders or effecting electronic funds transfers
! Acceptance of various tax payments
! DMat services
! Sale of gold coins
! Sale of travel card (substitute for traveller cheques)
! Advice on and sale of investment products like bonds and Mututal Funds
and insurance products
! Information on retail loan products and also registering complaints in case
the customer is unwilling to use phone banking(customer are encouraged
to use phone banking for resolving complaints regarding retail loans as it is
more cost effective)
! Queries and complaints

Credit and Trade Related Services

Both individual and business customers can avail of the above services at any
branch. However for trade related services like Bills, Letters of Credit,
Guarantees and Cash Management Services, business customers have to go
to select branches which are equiped to provide such services.
Unlike in the case of the traditional branches of public sector banks, the
branches of the new generation banks do not handle credit managemet. While
business credit is processed and sanctioned at regional offices and head
office, retail credit is processed and delivered through separate regional
offices which take care of all retail asset products.
The corporate relationship managers and credit analysts who support the
relationship managers are generally located in zonal offices and head office.
The SME relationship managers and support staff are generlly located at
regional offices. At centres where there is no regional office, they may be
located at the branch which provides trade services.
For retail credit, there are separate regional offices (called retail credit hubs)
where the sales, credit, recovery and operations teams are located.
Customers with complaints and queries are serviced by the operations
teams at the regional offices. Retail credit customers being large in number
are encouraged to use phone banking for queries and complaints.
They may also visit branches for recording their queries and complaints.
The branch staf have to refer the complaint to the retail credit team for

20
rsolution. They make the reference on line through a system called CRM
Customer Relationship Management system."In case the customer is not able
to get resolution through phone banking, he will be required to visit the
regional offices of retail credit group where the operations team will service
the customers.
Thus, branches have become sales and service channels with all credit related
functions centralised in regional or zonal offices and the head office. This
model facilitates greater specialisation in managing credit business which is
the most important function of banks in terms of income and risk. (Interest
income constitutes the major income of banks and crdit risk is the most
important risk banks have to manage.) Customers are also able to get the
convenience of longer business hours and better attention at branches.
In fact, sales and service oriented branches supported by alternate channels
have transformed banking business substantially, both for customers and
banks. While the customers are able to get any time, anywhere banking
services, banks have been able to improve productivity and efficiency to very
high levels which has inturn enabled them to vastly improve the quality of
service and at the same time enhance profitability of operations. Leveraging
the potential of technology and developing new models of service delivery
have been the key factors in the success of the new genertion banks in gaining
market share rapidly.

Centralised Operation
It was stated earlier that banks started Service Branches to take care of certain
common functions like clearing of cheques and accounting of remittances
which involve two branches. The concept of moving operations out of
branches to specialised branches or offices has been one of the corner stones
of the business model of new generation banks. As they grew rapidly, the new
generation banks realised that they had no alternative to increasing the
capaity of their branches to handle an ever growing customer base as opening
many new branches was not cost effective nor possible as the RBI would not
permit unbridled expansion of branches for fear that the banks may not be
able to manage them. While developing the alternate channels would move
the customers out of the branches and make them service themselves (self
servicing), the staff at branches had to be helped by moving the processing
work out of branches so that they have more time to attend to customer and
can handle a larger number of customers.

21
The new generation banks started with service branches and quickly
developed them into centralised processing centres which handle many more
activities than just clearing and accounting. Advancement of technlogy and
reduction in cost of communication facilitated centralisation of certain
activities even on a nation wide basis. Those activities that have to be
completed the same day or the next day were centralised on a regional basis
and those activites to complete which some more time was available were
centralised on a national basis. Thus three types of centralised operational set
ups emerged;
! Centres with single branches Cheque shops which take care of all clearing
and collection activities
! Centres with multiple branches Regional Processing Centres which take
care of multiple functions, enumerated later, which have to be normally
completed within a day.
! Zonal or National Processing Centres which take care of activities for
completing which more time is available or which are easier to be done at
the national level.
The activities normally carried on at Regional Processing Centrs are the
following:
! Inward Clearing
! Outward Clearing
! ECS debit and credit
! Cheque Collection
! Account Opening
! Transfer transactions
! Fixed Deposits creation and payments
! Bulk DD/PO
! ATM Cash Processing
! Office Accounts Maintenance
! Expenses Accounts Maintenance
! TDS Processing
! Regional Mailing Room
! Complaint Resolution

22
The activities performed at National/Zonal Processing centres are:
! Account Opening (with imaging support)
! Transactions
! Inter Branch Transactions
! Bulk Credits like dividend/interest payments by corporates
! Batch Runs to be done in the system before end of day processing
! Batch runs for recovery of charges
! Reconciliation
! ATM Cash lodging / disbursements
! Customer debits
! Internet Banking Bill payments
! Debit Cards Visa, Mastercard transactions in debit cards
! Production
! Debit cards and credit cards
! Cheque Books
! Statements of accounts

Imaging
The advent of imaging technology (scanning) has removed the constraint of
space in centralising activities which has to be completed with very short TAT
or Turn Around Time. The branch is able to scan and send the relevant
documents to the central processing centre instantly and the processing
centre is able to do the necessary scrutiny and complete the transaction with
in a few minutes. Imaging tecnology has enabled banks to centralise
processing even globally. For instance, the trade services transactions (LCs,
Bills, Gurantees) of CitiBank branches in all the countries in Asia and middle
east are processed at a processing centre in Malaysia. Similarly the operations
centre of Standard Chartered Bank at Chennai takes care of transactions
emanating from their branches in many countries. In India too, the foreign
banks wih few branches and corporate banking and trade services activities of
large private sector banks are centrlised nationally with the help of imaging
technology.

23
Workflow Management
In addition to imaging, workflow management systems helps to increase
effectiveness of centralisation. Workflow management can be better
explained wih the help of an example. After an account opening form and
enclosures are scanned, the images will be sent to the central processing
centre where the following activities have to be completed:
! Entering the data in the bank's core banking systm
! Verifying the correctness of the data entered
! Approving opening of the account
The workflow management system is a software package which manages the
movement of the image according to the defined workflow. The image will be
first routed to the data entry operator who is free to do the data entry at the
earliest. If the data entry operator delays making the entry an alert will be sent
to the supervisor so that he can check the reason and reroute the image to
another person in case of need. Once the date entry is over the image will be
routed to the supervisor for verification. The workflow management system
will first check which of the named supervisors is free and route the image
according to availability. In case an operator has made a data entry error the
supervisor can route the image back to the data entry operator for correction.
Once the verification is over, the workflow will be marked as completed. The
workflow management system facilitates automatic routing and queueing and
also tracking of the waiting time and time taken for completing each activity.
Availability of such data facilitates productivity and quality management.

Cheque Truncation
Technologically, it is possible to centralise all processing activities at the
national level, except processing of clearing cheques. At present, the physical
cheques have to be exchanged by the banks through the clearing house. This
necessarily makes clearing operation a local activity. When truncation is
implemented, instead of exchanging physical cheques, banks will send to
each other, images of cheques drawn on each other. Since images can be sent
electronically, clearing can be done at the national level. State Bank of India in
Mumbai can send the image of a cheque to Uco Bank Mumbai or Kolkota in a
few seconds electronically. Hence a cheque drawn on Uco Bank Kolkota need
not be sent to Kolkota for being presented at the local cleaing at Kolkota.
Instead, it's image can be presented directly to the clearing house in Kolkota.
Cheque trancation also is facilitated by advances in imaging technology.

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Integrated Currency Management Centres (ICMC)
As per the Clean Notes Policy of the RBI, soiled and mutilated currency notes,
collectively called non-issuable note, have to be withdrawn from circulation
and only issuable notes must be paid to customers at bank branches and
ATMs. Currency management being the responsibility of the RBI, they have to
make arrangements, across the country, for lifting non issuable notes from
bank branches and for supplying good quality notes to bank branches for
payment to customers. Since RBI has offices in a few places only, they have
outsourced currency management at other centres to local banks who are
encouraged to set up Currency Chests, which are currency note processing
centres. While a commercial bank may own and operate a currency chest, the
cash in the currency chest belongs to the RBI. In other words, currency chests
belong to RBI but are built and operated by a commercial bank on behalf of
RBI, as their agent. Since currency chests belong to the RBI, all banks in that
centre will have access to the currency chest irrespective of which bank
manages the currency chest. The bank managing a currency chest cannot
deny services to any bank wishing to deposit with or withdraw cash from the
currency chest. In large centres, there could be many currency chests
managed by different banks. In that case, the RBI will link various branches of
different banks to each currency chest to avoid confusion.
Bank branches are expected to sort notes received from customers into
issuable and non-issuable and deposit the non-issuable notes with RBI or
the currency chest to which they are linked. Cash deposited with a currency
chest is treated as deposited with RBI and will be credited to the banks
account with RBI.
Sorting cash into receivable and non-issuable, procuring sufficient quantities
of good quality notes for replenishing ATMs and making sure that all ATMs
and branches are sufficiently stocked with good quality notes for meeting
withdrawals by customers and also ensuring that branches do not hold
surplus cash, which is a non interest earning asset, involves a lot of effort
which most branches are not able to cope with. In any case, it makes sense to
centralise these activites at each centre so that branches are relieved of the
tremendous effort involved and risk of carrying large volumes of cash.
Centralisation also facilitates automation of sorting and bundling of notes and
enhances productivity of staff engaged in the activity as they will be
specialising in the activity. Hence, many banks have set up Integrated
Currency Management Centres for effective currency management.

25
Functions of ICMC are:
! Procure unsorted cash from branches
! Sort the cash into ATM usable, issuable and non-issuable notes
! Deliver ATM usable notes (which are the best quality notes) to the Cash
Replenishment Agency and manage ATM cash replenishment
! Deliver issuable notes to the branches
! Dispose of surplus issuable notes to other banks or by moving it to other
deficit centres
! Remit non-issuable notes to nearest RBI
! Monitor cash holdings at branches to ensure that they do not keep cash in
excess of the Cash Retention Limit (CRL) prescribed by Head Office
! Coordinate collection, movement and delivery of cash to optimise cash
management
! Control and optimise use of cash vans
! Maintain reserves for meeting sudden surges in demand for cash from
customers
! Facilitate implementation of Clean Note Policy
ICMCs are concrete vaults built according to the specifications of RBI for
building currency chests and are equiped with sophisticated currency sorting
and bundling equipments. They are secured with electronic access control
and surveillance systems and are guarded through out day and night by
armed guards.
Just as Regional Processing Centres relieve branches of transaction
processing work, ICMCs relieve branches of cash processing work and enable
them to focus on sales and service.

Conclusion
Advances in computing, telecommunications and imaging technologies have
changed the way banking services and products are delivered to customers.
Branches have become just a sales and delivery channel like the alternate
channels. Most of operations have been moved out of branches to centralised
operations centres. The credit management function, both business and
retail, are managed through specialised setups at regional or zonal offices and
the head office. Despite all the revolutionay changes the branches continue to
be the most important channel for service delivery in terms of the variety and
complexity of activities they can handle and the customer satisfaction and
sales they can generate.
Copyright Ó ICICI Bank Ltd. All rights reserved

26
Check Your Understanding
1. The most widely used channel by the customers of modern private sector
banks
¨ Branch
¨ Phone banking
¨ Internet banking
¨ ATM

2. Benefits of migration to channels other than branch: (MRQ)

¨ Cost effective
¨ Quick and efficient service
¨ Reduces pressure on branch
¨ Releases capacity of branch staff to cross sell

3. The maximum amount that can be withdrawn through ATM: (MRQ)

¨ Rs 25000 per day
¨ Rs 50000 per day for HNI customers
¨ Rs 50000 for all customers
¨ Rs.100000 for HNIs

4. Saket keys in a wrong pin at the ATM and his card gets blocked ( MRQ)
¨ The card will get deblocked automatically in 24 hours ,so Saket can try
the ATM next day
¨ Saket has to call up phone banking to deblock the card
¨ Saket has to apply for a new PIN ,if he does not remember the PIN
¨ Saket should write his PIN and keep it with his card

27
5. Aniruddh has misplaced his debit card.
¨ He must immediately visit the police station and give a complaint.
¨ He must call up branch staff or manager and ask them to find the card
for him
¨ He need not worry as pin number is known only to him.
¨ Debit card can also be misused at merchant establishments. He must
speak to call centre immediately and get the card hotlisted.

6. Saswat has an ERS account with his wife in a Bank. He finds an ATM debit
of Rs.5000/- in his account but he claims that he has not withdrawn the
money. Which of these possibilities can be ruled out ?
¨ Saswat's room mate, could have found the ATM card and the PIN
Number slip and used them without informing Saswat
¨ Saswat has shared his secret PIN with his family members, so any of
them could have used the card
¨ Saswat's account is debited wrongly for withdrawal by another
account holder
¨ The Bank has given an add on debit card to his wife , who withdraws
using her debit card

7. Transactions cannot be done through internet : (MRQ)

¨ Without user ID
¨ Without login password
¨ Without transaction password
¨ Debit card pin number

8. The following service is not available through Internet:

¨ Payment of bills
¨ Stop payment of cheque
¨ Creation of fixed deposit
¨ Transfer funds to non ICICI bank account
¨ All the services are available through Internet banking

28
9. Mr. Rahman comes to the branch with the complaint that his Internet
banking is not working. He gives the userid and password to the CSO in the
front office Mr. Saju, and asks him to help. (MRQ)
¨ Saju should demonstrate how to log in using Internet banking user ID
and password
¨ Saju should not take the ID and password and must ask Mr. Rahman to
go home and try.
¨ Saju can advise Mr. Rahman not to disclose his ID and password to
anyone.
¨ Saju can guide Mr. Rahman to login to Internet, but ID and password to
be keyed in only by Mr. Rahman.

10. Shilpa is the phone banking officer at the call centre. She receives a call
from Mr. Ahmed requesting for balance in his savings account. Mr. Ahmed
gives all the verification details correctly but does not remember the date
of birth he has mentioned in the application form. He gives a vague answer.
¨ Shilpa should go ahead and give the balance as other verification
details are correct.
¨ Shilpa should ask more questions to verify authenticity.
¨ Shilpa should tell the customer that verification failed, so she cannot
give the balance.
¨ Shilpa can transfer the call to her team leader in case she has doubts.

11. For which of these banking transactions do customers get a mobile alert?
(MRQ)
¨ Amount above a particular limit is credited to the account.
¨ Cheque bounce
¨ Salary credit
¨ Credits and debits of any amount

29
12. Authentication by signature verification is done for transactions at (MRQ)
¨ Branch
¨ ATM
¨ Internet
¨ POS

13. Mobile request facility is available for: (MRQ)

¨ Balance inquiry
¨ Last 3 transactions in account
¨ Cheque book request
¨ Stop cheque request

14. Challenges faced by Banks in promoting use of alternate channels are :

(MRQ)
¨ Mistrust of technology due to fear of frauds
¨ Lack of awareness about the features and usage
¨ Preference of face to face interaction
¨ Resistance to change

15. Branch channel is used for selling products and services: (MRQ)
¨ Savings, fixed deposits, recurring deposits
¨ Gold, mutual funds, insurance, foreign exchange
¨ Home Loans, car loans, credit card, personal loans
¨ Only deposit products

30
A. State whether the following statements are True (T) or False (F):
1. In branch based banking, TAT for services is low.
2. Centralisation improves efficiency in service.
3. Computerisation is a prerequisite for centralisation.
4. Costs are lower when functions are centralised.
5. Centralisation reduces wastage.

B. Fill in the Blanks

1. Every transaction involves customer interaction and___________________.
2. Value of each account in retail was ____________________ than in
Corporate Banking.
3. Retail explosion resulted in increase in number of ___________________
and ___________________in the bank branches.
4. Channel migration and __________________ were the solutions for
servicing the growing number of customers with limited infrastructure at
the branches.
5. The activity that was first centralised at regional processing centre
was ________________________.

C. Multiple Choice Questions

1. Disadvantages of centralisation are:
¨ Loss of control at the branch
¨ Higher TAT for customer
¨ Higher costs
¨ Both a and b

2. Centralisation leverages the:

¨ Capability of technology
¨ Power of volumes to reduce costs
¨ Opportunity for outsourcing
¨ All the above

31
3. For centralisation to succeed, focus should be on:
¨ Reducing TAT by redesigning processes
¨ Improve quality
¨ Reduce Costs
¨ All the above

4. Benefits of centralisation:
¨ Efficiency of controls
¨ Accuracy of information & data
¨ Minimal person dependency
¨ Increase in the speed & quality of service
¨ All the above

5. Centralisation involves the following activities:

¨ Analysis of processes
¨ Simplification of processes
¨ Standardisation
¨ Automation
¨ All the above

32