Zinnov Management Consulting

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IT Adoption in BFSI Sector in India 2012

India is a fast growing IT market; BFSI vertical constitutes a significant share of the overall spending

$3.5

$11.0

$11.7

$4.2

$12.6

$13.7

FY12 FY11

17.1%

USD billion

14.4%

19.5%

Total domestic IT market FY12 ~ USD 30.4 billion

Hardware

IT Services

Software Products

Energy 15.7%

Government 15.4%

BFSI 11.1%

Telecom 7.2%

Education 1.5%

Healthcare 1.0% Retail

0.4% Others1

7.0%

Consumers 11.9%

Manufacturing 28.8%

Distribution of IT Spending in India, FY12

Overall, BFSI vertical is contributing significantly to the growth of the Indian economy; its share in Indian GDP is estimated at ~8%

Source: Company Annual Reports and Press Releases; Dataquest; Primary Interviews with Stakeholders in the Indian IT Ecosystem; MOSPI; Zinnov Analysis Note: 2

Source: RBI, IRDA Note: *Not registered with RBI, but the RBI issues direction relating to deposit acceptance policy

The rapid diversification of the sector including Banks, NBFCs and Insurance presents huge IT opportunity

Scheduled Banks in India (235)

Commercial Banks (166)

Public Sector Banks (26)

Nationalized Banks (20)

SBI and its Associates (6)

Private Sector Bank (21)

Old private Sector Banks (14)

New Private Sector Banks (7)

Regional Rural Banks (82)

Co-operative Banks (69)

Urban Co-operatives (53)

State Co-operatives (16)

Life Insurance (24)

Non Life Insurance (24)

Reinsurance (1)

Insurance Sector (49)

NBFCs (12,409)

Registered and Regulated by RBI

Loan Company

Investment Company

Equipment Leasing Company

Hire Purchase Finance Company

Residuary Non-Banking Company

Exemption from RBI regulations and registration

Insurance Companies

Stock Exchange, Stock brokers, etc.

Housing Finance Companies

Micro Finance Companies

Not registered but regulated by RBI*

Mutual Benefit Finance Cos. (notified nidhis)

Mutual Benefit Cos. (potential nidhis)

Misc. Non-Banking Cos. (chit funds)

Foreign Banks in India (33)

Over 97,000 Unscheduled

Banks

3

After a slow growth phase during the economic downturn, the banking industry has started growing rapidly again

Performance Indicators for Indian Scheduled Commercial Banks, USD billion

794 830 948

1,141

587 601 685

864

2007-08 2008-09 2009-10 2010-11

Aggregate Deposits Bank Credit

Source: RBI; Company Websites; Zinnov Analysis Note: *Regional Rural Banks

Rapid geographic expansion plans (SBI, Indian Overseas Bank,

etc.)

New banking licenses from RBI (Maharashtra

State Cooperative Bank)

Foreign banks opening branches in India (Woori

Bank, FirstRand Bank, Westpac)

Expansion into investment banking and other advisory services

(Axis Bank)

Regulation and compliance (IFRS, Basel

III, etc.)

Innovative products and platforms (virtual debit

cards, RuPay, etc.)

Focus on Financial Inclusion (RBI, SBI, Punjab

& Sind Bank)

Single view of customer; single point of access for

all Information

Consolidation/ recapitalization of RRBs*

across India

Branchless banking via mobile, internet kiosks, etc. (SBI, Union Bank)

Banking – Key Trends

4

Financial Services and Insurance sectors are following suite and have shown promise

• Statutory automation as per IRDA • Growth of Micro-insurance • Collaboration with banks: the Bancassurance model • Targeted customer approach • Increasing competition (no. of players increasing) • Delivery channels like mobile, internet, distance

marketing in addition to agent model • Portability of health insurance policies • E- insurance accounts

16

24

19

25 26

2007 2008 2009 2010 2011

Total Assets of Non-Bank Finance Companies in India (end-March), USD billion

36

52 48

56

64

6 7 7 7 9

2007 2008 2009 2010 2011

Life Non-life

Gross Premium Underwritten by Insurers, USD billion

Financial Services

Insurance

Source: RBI, IRDA Note:

• Growth of Micro-credit • Need for real-time processing in capital markets • Focus on wealth management • Introduction of new financial products (CDS for

corporate bonds, securitized debt, fund products) • Government focus on increasing investor base for

the capital market

5

The growing business needs of BFSI players have led to a rapid adoption of IT in the BFSI vertical…

Source: Zinnov Analysis Note:

Meet Regulatory Requirements/

Security

New Channels for Furthering Reach

Improve Internal Efficiencies

Support Growth Strategies

Develop Customer Experience

Customers are investing in IT applications which help them better align their business processes and improve internal efficiencies

Regulatory authorities like RBI, IRDA and SEBI release regular mandates necessitating IT adoption for better services and security

Key IT investments are targeted at supporting the business growth plans of BFSI customers Customers are looking

for IT solutions which can help them differentiate themselves from their competitors

IT is helping BFSI players in extending their reach to the unbanked population of India

Key Drivers for IT Adoption in BFSI Vertical

6

…as a result, the IT market has been growing at 13% YoY, with key adoption across all domains

IT Spending in BFSI, USD billion

Services ~32%

Hardware ~53%

Software ~15%

IT Spend Distribution

2.4

2.7

FY11 FY12

Customer IT Service Provider Description

IDBI Bank Oracle IDBI Bank deployed Oracle Hyperion Planning to create budgets and rolling forecasts that are linked to its balance sheet and profit and loss models

Bank of Baroda HP Assessment and refresh of the bank's applications and IT infrastructure

ICICI Securities Microsoft Enabling an online trading platform for ICICI

Dhanlakshmi Bank Hitachi Transfer of bank’s non-core banking applications to Hitachi USP VM which allowed it to adopt virtualization and reuse old storage boxes

NABARD Wipro End-to-end solution to computerize four co-operative banks

Mannapuram Finance IBM A 10-year deal to manage entire IT infrastructure in the areas of finance, HRM, BI, collaboration and document management

Union Bank Cisco; Wipro Deployment of Cisco’s wide area network optimization solution across all of 1,600+ branches of Union Bank

Key Recent IT Deals in BFSI Vertical

Source: Nielsen Domestic IT-BPO study 2010; Primary Interviews with Stakeholders in the Indian IT Ecosystem; News Updates; Company Websites; Zinnov Analysis Note:

IT Budgets as a Percent of Revenues for BFSI: ~1.5-2.0%

Percentage Outsourcing in BFSI: ~60%

7

Compliance requirements and guidelines by governing bodies have played a key role in driving IT adoption in the vertical

Source: RBI; News Updates Note: *Credit Default Swap

• In Oct-11, RBI instructed all NBFCs to gradually phase out use of checks and shift to electronic payment system

• In Apr-11, RBI allowed co-operative banks and RRBs to transfer funds electronically through RTGS and NEFT

• RuPay, India’s domestic card payment network was introduced by NPCI in early 2012

• RBI has mandated that corporates seeking banking licenses will have to commit to having 25% of their bank branches in rural unbanked areas

• In 2011, RBI mandated adoption of CBS by all RRBs across India

• SEBI’s nod on SME exchange

Encourage Digital

Transactions

Compliance Regulations

Financial Inclusion Initiatives

Security

• RBI mandated that all the banks should automate the process of filing regulatory reports (ADF Regulations)

• In 2011, RBI issued draft guidelines on implementation of Basel III capital regulations

• In 2011, RBI issued guidelines on CDS*, directing market participants to report such trades within 30 minutes to the Clearing Corporation's online repository

• An RBI committee earlier issued recommendations to banks to enhance cyber security and has also threatened actions against those who would not comply

In April 2011, RBI released Guidelines on Information security, Electronic Banking, Technology Risk Management and Cyber Frauds detailing guidelines to its affiliates under nine subject areas including: IT Governance, Information Security, IT Operations, IT Services Outsourcing, IS Audit, Cyber Frauds, Business Continuity Planning, Customer Education and Legal Issues

Recent Regulations & Guidelines Influencing IT Adoption

Encouraging Customer

Friendliness

• In order to encourage mobile transactions, RBI removed the limit cap for transactions of INR 50,000 in Dec-11

• In Oct-11, IRDA allowed health insurance portability for policy holders

• IRDA has also asked LIC to complete all claims-related investigations within the stipulated time-frame of six months

• SEBI allowed mobile trading for equities in 2010

8

There has been a marked growth in maturity of IT adoption by the BFSI customers over the past few years

IT Adoption Evolution in BFSI

1.6 1.0 2.7

4.3

9.4

2008 2009 2010 2011 2012*

Year-wise Number of Deals Tracked (indexed to 2007)

Source: Press Releases, News Updates, Zinnov Analysis Note: *2012 deals tracked till April; based on pro-rata value

2008 & Earlier 2009-10 Present

0%

47%

10% 11%

32% 7%

31%

27% 4%

31% 4%

31%

35%

11% 19%

Key Solutions in Demand (Level-wise)

• Gradual IT adoption around core applications like CBS

• Mobility solns./ online payment • Use cases of solns. like BI/ cloud

starting to emerge

• Replacements of legacy systems (e.g. CBS, collab.)

• Focus solns. (e.g. Treasury soln.)

• Minimal IT adoption observed • RRBs (sponsored by larger banks)

starting to adopt CBS

• Continued investments in CBS • Increasing traction for public

cloud

Large Banks/ FSI Firms

Regional Banks/ Smaller FSI Firms

Complete Outsourcing/ Managed Services Core Modern IT

Non-core Security/ System Solution/ Networking

Modern IT Modern IT Modern IT

9

A host of key focus areas is driving the adoption of IT in the vertical

Source: Zinnov Analysis Note:

Core Banking Solution

1

2

3

4

5 6

7

8

9

Business Enabling Solutions

Peripheral Applications/ Solutions

Security and Compliance

Cloud and Virtualization Business Intelligence

Mobile Banking/ Mobility Solutions

Social Networking/ Online Solutions

IT Adoption Trends in

BFSI Vertical

Services Driven Market

10

While CBS continues to be a key area of focus, players are investing in solutions which can help them in solving targeted business issues

Core Banking Solutions

1

Regulatory Guidelines and Growth Driving CBS Adoption among RRBs and Co-operative Banks

Business Enabling Solutions

2

• The Regional Rural Banks and co-operative banks (driven by larger entities like Canara Bank and NABARD) have emerged as an attractive segment for CBS adoption in past few quarters – Wipro to implement Finacle for Canara Banks RRBs (900 branches)

• 11 Co-operative Banks in Gujarat partner with TCS for core banking solutions

Larger Banks Adopting CBS 2.0

• Kotak Mahindra has replaced its existing CBS with a newer version to become future ready – Infosys Finacle

• IndusInd bank recently implemented Infosys Finacle CBS

• Nawanagar Co-operative Bank adopted CBs on cloud (IBM Implements OMNIenterprise)

Indian BFSI players are looking for solutions which can help them in better aligning their business processes

Source: Press Releases, News Updates, Zinnov Analysis Note: *Enterprise Project Management

• Axis Bank implemented the Microsoft EPM* soln. to help manage its project workflow, improve project reporting, and resource forecasting

• FedBank and NABARD adopted Loan Management Solns. to manage loan services (FedBank: IBM server and Nucleus Software, NABARD: Polaris)

• ICICI Prudential and IndusInd Bank have adopted BPM and Workload Automation respectively to automate their processes - Newgen

• Cosmos Co-operative Bank has adopted a solution help it in reducing NPAs and keep a check on them – IndiSoft worked with Cosmos to conceptualize the product as Infosys Finacle was not efficient for NPA

11

Non-core applications and security/ compliance solutions are expected to continue witnessing demand in the sector

Peripheral Applications/ Solutions

3

Security and Compliance

4

F&A Solutions

Collaboration

CRM

• IDBI Bank deployed Oracle Hyperion Planning to create budgets and rolling forecasts that are linked to its balance sheet and profit and loss models

• Aditya Birla Services replaced its old Lotus Domino Platform for collaboration with Microsoft® Exchange Server 2010 and Microsoft Office SharePoint® Server 2007

• ICICI Securities deployed a CRM solution for the management of Sales and Lead Management requirements across its various business divisions - CDC

• HDFC Bank deployed a treasury solution to help manage the transaction processing systems – TCS Bancs

Compliance

Security

RBI guidelines such as enabling Automated Data Flow in the banks are driving key IT investments to be made/ planned

• A Japanese bank's Indian arm deployed WKFS FRSGlobal ADF soln. to meet the ADF regulations – Wolters Kluwer

• While Yes Bank is planning to pilot ADF soln., 4 Indian banks have already adopted WKFS ADF Soln.

• Bajaj capital adopted solutions from Juniper to improve network efficiency as well as increase security standards

• Axis Bank has deployed SatNav's a-mantra FM Product to map all its offices in great detail to capture property information, the layouts of each location, etc.

Source: Press Releases, News Updates, Zinnov Analysis Note: 12

New technologies such as cloud/ virtualization and Business Intelligence (as a result of ADF) are picking up

Cloud and Virtualization

5

Business Intelligence

6

Virtualization

Cloud Computing

• Players like Kotak Mahindra life Insurance, Reliance General Insurance, IndiaFirst Life Insurance have adopted VMware based virtualization solutions to help improve efficiencies of their data centers

• Dhanlakshmi Bank has opted to move all of its non-core banking applications to Hitachi USP VM which allowed it to adopt virtualization and reuse old storage boxes

• Nawanagar Cooperative Bank has engaged with IBM to deploy CBS on a hosted cloud services model

• ShamRao Vithal Bank partnered with NetApp to offer cloud based solutions to other co-operative banks in its region

• Some larger banks like Yes Bank has shown their inclination towards adopting private cloud for their organizations

BI is emerging as an attractive proposition for BFSI players to develop targeted customer insights

• IndusInd Bank has selected iCreate’s Biz$core Business Intelligence (BI) solution as a key component of its enterprise Business Intelligence strategy

• Similar adoption by HDFC bank, Dhanalaksmi Bank etc.

• Yes Bank has built an in-house BI solution for better understanding of customers and their behavioral patterns

Source: Press Releases, News Updates, Zinnov Analysis Note: 13

Need for mobile banking and social networking have emerged as essential for the next generation services in the vertical

Mobile Banking/ Mobility Solutions

7

Social Networking/ Online Solutions

8

Mobile Banking

Mobility Solutions

• Union Bank of India and SBI have introduced mobile payment services in partnership with players like Nokia and Reliance Comm.

• HDFC Bank partnered with Vodafone to get access to telco’s select retailers to act as HDFC's sub-agents through which customers can deposit and withdraw cash through their mobile phone without having to go to bank branches

• Reliance General Insurance adopted a mobile insurance POS platform which equips the RGICL affiliated insurance agents to sell policies directly at the customer's doorstep – GoDB Tech

• United Bank of India pull-based SMS enquiry services using Sybase 365 to automate customer enquiry processes

Social Networking

Online Solutions

• Reliance Securities partnered with Atom Technologies to deploy an enhanced payment system to enable traders to make online payment via debit card to their brokerage accounts

• ICICI Securities partnered with Microsoft to launch an online trading portal on Microsoft’s Silverlight 4.0 platform

BFSI players are looking at connecting with their customers through popular social media portals such as Facebook

• ICICI Bank launched a Facebook application enabling its customers to directly perform banking transactions

• Many banks including HDFC Bank and Axis Bank have created pages on Facebook to understand their fans as well as promote their banking products

Source: Press Releases, News Updates, Zinnov Analysis Note: 14

BFSI vertical continues to offer significant opportunities for IT Services providers in India

Product License to Services Split Rational/ Other Insights

CBS 1:2 to 2.5 The longer the client is engaged, vendor makes money on multi-site roll out, upgrades, feature

customization etc.

CRM 1:1 One time implementation 1:1. With CRM there is very limited cross or up-sell opportunities

Collaboration 1:0.25 If the client enters into a services agreement with the partner the upsell could be 100% for services

revenue

Virtualization 1:1 Complete stack opportunity could go up to 1:12 (including hardware, software, services, network, etc.)

MW/ Platform 1:0.5 Professional services cost varies with choice of tier 1/ tier 2 SI. Also heavy discounts on licenses in India

System Mgmt. 1:0.6 Current adoption in mature industries. Extremely critical jobs. Lack of internal expertise

Mobility Apps 1:1 to 2 Heavy need of customization/ backend integration. OPEX models getting popular – might reduce the

one time license cost

IT Services Earning Opportunities from BFSI Customers

Complete IT Infrastructure Management • Mannapuram Finance engaged IBM for 10 years to build and

manage the entire IT infrastructure including all applications • RBI signed a USD 55 mn, 10 year deal for CBS with Polaris

which included SI and maintenance services

Upgradation • Players are engaging their existing IT partners for new projects

For instance, Bank of Baroda engaged its existing IT partner, HP, for the assessment and refresh of the bank's applications and IT infrastructure

ATM Managed Services • Axis Bank signed an ATM managed services deal with Diebold

under which the IT vendor will support the bank with services such as ATM incident monitoring, vendor management, cash forecasting and replenishment services, caretaker services, etc.

Software Testing • SBI General Insurance contracted Maveric Systems to provide

Software Testing and Validation services • RBI engaged with ThinkSoft for software testing of its financial

services applications

Recent Deals

Services Driven Market

9

Source: Interview with Key Ecosystem Stakeholders; Press Releases, News Updates, Zinnov Analysis Note: 15

Differentiated pricing structures provide impressive margins for IT services players

Business as Usual (70%)

New Technology Adoption (30%)

Software Hardware Services Software Hardware Services

Product + AMC (~70%) ~30% Product + System Integration/Consulting

Margin Range = 5-10%

Enterprise IT Spend

Shared Resources Deployed Margin Range = 15-20%

Product Margin Range = 5-10%

SI/Consulting Margin 25-40%

IS Outsourcing Support and Training

Customer Application Development

System Integration

IT Consulting Application Management

Source: Company Annual Reports; Press Releases & Shareholder Presentations; Zinnov Interactions with Senior Stakeholders Across Vendors; Zinnov Analysis Note:

Services Driven Market

9

16

However, a variety of challenges are currently restraining the adoption of IT

Lack of standardization of processes and change management in public sector

banks

Limited internal IT talent and constrained budgets for smaller BFSI players

Fragmented industry amongst a number of service providers

Increasing security threats with the consumerization of IT

Regulatory compliance around data sharing and privacy

Key Industry Challenges for IT Adoption

Lack of success stories for emerging technologies like cloud computing, Big

Data etc.

Source: Zinnov Analysis Note: 17

The supply side ecosystem is gradually evolving to meet the requirements from the demand side

Large and Mid-sized BPOs ~200

Mid and Small size Software Products ~1,100 players

Mid-sized 55-60 players

Large 20 players

Percentage contribution to

total domestic IT-BPO revenues

~60 per cent

~25 per cent

~5-6 per cent

~2 per cent

~5-8 per cent

Smaller Firms Providing IT Services and BPO ~11,000 players

MNCs ~150 Indian Product Companies ~400 Startups ~500-550

Supply Side Ecosystem in India

Large companies

Annual domestic revenues > INR 10 billion

Mid-size companies

Annual domestic revenues INR 1 billion to INR 10 billion

Smaller companies

Annual revenues < INR 1 billion

Web-development firms and freelancers ~5,000

Value added resellers ~4,000

Individual app-developers and freelancers ~1,600 Small & Micro BPO service providers ~500

Source: Zinnov Database of IT-BPO Companies in India; Primary Interviews with Stakeholders in the Indian IT Ecosystem; Zinnov Analysis Note: 18

Foreign companies continue to dominate the domestic IT market

Domestic Market

Share by Revenues

• HP • Dell • IBM • HCL Infosystems • Acer • Cisco

• Microsoft • SAP • Oracle • Vmware • Tally • Ramco

• IBM • Wipro Infotech • TCS • HCL Technologies • 3i Infotech • CMS Infosystems

Foreign 63%

Indian 37%

Foreign 32%

Indian 68%

Foreign 84%

Indian 16%

Foreign 84%

Indian 16%

A Number of Key Players are Actively Focusing on the BFSI Vertical:

Source: Zinnov Analysis Note: 19

Peer group companies focused on BFSI vertical are undertaking a host of initiatives to penetrate the Indian BFSI market

Channel Partner Strategies

Focus on developing efficient channel partner network

Key Initiatives by the Suppliers

Source: Press Releases, News Updates, Interview with Key Ecosystem Stakeholders, Zinnov Analysis Note:

IT Alliances by Peer Companies

Forging alliances to launch relevant solutions for BFSI customers

Organizational Alignment

Aligning organizational structure as per industry’s needs

Expanding Presence

Expand organizational presence in India

Target Customer Segments

Renewed focus on SMB/ Tier-II level customers

Keeping Pace with Compliances

Launch products to cater to new regulatory compliances

Next Generation Products

Mobility solutions; cloud computing; BI; data analytics

20

Going forward, the IT market in BFSI vertical is continue to grow

IT Spending in BFSI, USD billion

Cloud Computing and Virtualization

IT-enabled Business Transformation Solutions & Services

Simplified Banking Service Accessibility

Ban

kin

g 2

.0

Social Computing

Enhanced Security & Compliance Adherence

New Payment and Settlement Solutions and Systems

2.7 3.1

3.5

FY12 FY13E FY14E

Source: Primary Interviews with the CIOs; Zinnov Analysis Note: 21

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