Much of the talk about transformation in public sector banks (PSBs) will come to naught if reforms in technology procurement are not dealt with squarely. The existing procurement methods based on reverse auction and ‘lowest bidder wins’ have served well so far. But these methods are severely constraining when it comes to procurement of the best digital technology and innovation, the deployment of which is now a must for survival, even more so for PSBs.

So what really is digital and how is it different from the technology we have known all these years? To appreciate this, let’s step back and look at how the world of technology in banking has evolved in the last five years. Banking technology has changed into a “2-speed world". The basic underlying systems where customer transactions happen and customer’s primary information is stored comprise the traditional layer. This layer has to be reliable so that the data is safe and payments take place on time. It is called “slow speed", because any change in this layer is done carefully and slowly so as not to disturb the bank’s working or risk loss of sensitive information.

However, being a minimum expectation, this layer does not differentiate one bank from another. The layer of technology on top of this basic layer is what differentiates one bank from another. This is the digital layer, which houses the applications that the customers or employees use to interact with the bank. For instance, the mobile applications we use to interact with our bank reside in this layer of technology. It is called “high speed" layer because banks update this layer rapidly. They can experiment on this layer with innovative features and services to enhance navigation ease and make the application more engaging. Similarly, they can also discard a feature if it is not relevant anymore. Customers have started expecting this after being delighted by the rapid introduction of engaging features by successful Internet firms such as Amazon and Google. Winning banks of the future will need to champion this art of innovation in the digital layer.

The procurement of technology in a 2-speed world has to operate at two different speeds. Procurement approach that suits the traditional slow speed layer can be counterproductive for the high-speed digital layer.

For a deeper understanding, let’s comprehend the traditional way of buying technology and the problems it creates. PSBs buy technology through a reverse auction process. Bidders compete with each other by reducing prices in a live online auction. Technology is often bought at rock-bottom prices. Sometimes, PSBs are pleasantly surprised at the low prices at which they are able to buy technology. But thereafter, it all goes downhill. The lowest cost bidders then have to make up their profitability by cutting corners on service and quality. Banks (and their customers eventually) pay through their noses due to delays in technology projects or exorbitant cost of modifications, as and when required.

Painful as it is, banks have been able to get by so long as their technology requirements were stable and standard. The application in traditional layers such as core banking platforms or human resource management software vary only so much from bank to bank and specifications can be quite sharply detailed to permit like-to-like comparison in a reverse auction bidding process. This is impossible in the digital layer where frequent changes are expected.

Hence, banks need to adopt a new approach. They need to deal with a broader range of vendors on more flexible contracts. A whole new type of suppliers comes into play: the designers. Digital applications depend heavily on creative design of interfaces and services. Innovation and creativity cannot be bought with reverse auctions. They need to embrace new technologies such as cloud and open source. Banks need to augment skills in-house and not rely on vendors for everything. Since the talent here cannot be hired on the relatively rigid public sector service conditions, banks may need to hire talent in special subsidiaries.

Procurement can get even the most seasoned public sector bankers worked up a bit. The “3Cs"—CVC, CBI, CAG—loom large here. Despite its stated desire to stay at arm’s length, this is one place where government has been quite active in making suggestions to the banks. The Reserve Bank of India (RBI) has been rather strict with issues relating to technology procurement and cyber security. If they have to deliver on the very public promise to transform public sector banking, both the government and RBI need to acknowledge the new “2-speed world" of technology.

Saurabh Tripathi leads Asia-Pacific digital banking practice, and Rajiv Gupta heads the India technology practice at Boston Consulting Group. The views expressed in the column are personal. This is the final in a two-part series on digital transformation of banks.

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