RTGS implementation in banks presents a staggering Rs25,000-crore opportunity for IT companies. By Jangoo Dalal, Sr VP, enterprise, Cisco Systems (India & SAARC)

In the famous movie, Catch me if you can, a true-life story of a con artist, the hero posing as a Pan Am employee issues fraudulent outstation cheques and escapes capture time and again, only because by the time the cheques are verified, he has fled the scene of the crime. The story that is based in the 1960s, shows how easy it was to take advantage of the existing banking system when technology was archaic and settling outstation instruments had a two-week or longer time lag.

It may be hard to believe, but a similar offence can still go unnoticed even in today's banking system. That is because from a security perspective, paper cheques (the kind we still use today) require expensive and time consuming manual processing that slows fraud detection and makes delivery of settlement information unreliable.

This is not to say that banks have not progressed tremendously in building secure and resilient networks. As a matter of fact, keeping pace with world-wide standards, Indian banks have shortened settlement cycles to a T+2 cycle. The problem still lies with outstation cheques though, which can still take anywhere between two to four weeks on account of their having to be physically transported from the presenting bank located in one city to the drawee bank in another city.

Enter the need for Real Time Gross Settlement (RTGS) - a payment system in which processing and settlement takes place in real time (continuously). How this is achieved is simple - an electronic image of the cheque is transmitted and based on this digitally encrypted image, the payment advice is made and the settlement done.

The significance of RTGS is obvious- in addition to quicker realisation of cheques for the bank's customers; it is also beneficial for banks since it lessens intra- settlement risks and volatility, not to mention significantly cuts down on handling costs.

In the United States alone, more than 40 billion checks are written each year and the resources expended in their collection and return is staggering. Industry estimates of cost savings associated with full implementation of cheque truncation vary, but most concede the annual recurring savings to the industry is between US $2.5 and $5 billion.

To understand how seriously Indian banks are taking the issue of RTGS, one only has to look at the huge amounts being spent on its implementation; RTGS implementation is estimated to be around a staggering Rs25,000-crore opportunity for IT companies ranging across imaging companies, document management players, business process management solution providers and networking companies. No wonder then during the last concluded fiscal, RTGS emerged as one of the significant new trends spurring domestic IT spend by as much as 46 per cent over last year.

Spearheading the industry's efforts is also the Reserve Bank of India's fiat to banks to commence cheque truncation systems (CTS) around NCR by end March 2006. The apex bank has set a target for providing RTGS coverage to 10,000 branches and 500 centres by March 2006, after which it will be extended to other parts of the country.

Nobody denies that RTGS is the magic bullet that will allow for faster verifications, reducing chances of fraud within payment processes. However before we jump the gun, banks need to take stock of their existing networks. RTGS as a platform demands extremely robust, sound and scalable physical infrastructure.

And while Indian banks have historically always been extremely high on the technology adoption curve (at Rs10,543 crore, the financial sector has proven to be the most lucrative vertical accounting for nearly a quarter of the domestic industry for FY 2004-05 according to DataQuest Top 20); there is always more that needs to be done.

During the last couple of years, one of the main drivers of IT spend amongst banks has been the deployment of core banking solutions enabling the "Anytime, Anywhere" banking experience. In a core banking solution, the bank creates a central repository of data and creates networks mapping its various branches to this hub.

However, the core banking solution is merely the first building block towards creating a RTGS platform. Banks today are grappling with getting their respective networks to talk to each other - meaning a mapping of diverse systems to enable intra-bank transactions occurring through the course of the day. The issue of compatibility not to mention security between diverse networks is the need of the hour today.

Enter the need for an Intelligent Network - a converged IP network that creates a single, open, intelligent, standards-based Ethernet platform that provides for a new generation of collaborative applications. Such a network integrates information and processes spanning the entire intra-bank workflow, dramatically increasing visibility and flexibility across the value chain.

A converged IP network offers a significant advantage over other solutions. Specifically, such advantages include:

• Check image capture and check truncation at the branch: The most significant benefit of IP implementation, this will enable banks to route transactions to multiple systems for processing at the time of capture (teller station or branch ATM). These include authorisation systems, image archives, online banking applications, fraud detection systems, positive pay, cash management systems, etc. This capability can significantly improve risk management, reduce operating costs and improve customer service.
• On site imaging at the customer's site (PoS): This would allow even earlier capture of the checks, and further reduce expenses for the bank, while providing better service and availability for their commercial customers. Such a capability would require robust VPNs or extranets to allow functionality without compromising security. The first banks to connect their commercial customers in this method will also find those customers more likely to remain customers long-term. This provides the bank further opportunities to deliver products and services to those customers.
• Easier, more efficient monitoring and tracing of customer transactions: With banks that deploy IP video surveillance and image capture within branches, monitoring and tracing customer transactions can be much easier both at the teller line and at the ATMs.
• Use of e-learning to enable easier deployment and updating of capture technology: Banks deploying a converged IP network solution within their branches can use e-learning to make branch capture easier to deploy and update - for both customers and branch employees.

In conclusion, suffice to say that by implementing a converged IP network, banks can realise significant benefits through the RTGS transition. Along with the cost benefits will also come the ability to ensure economic welfare by improving the overall efficiency and resiliency of the nation's payment system.