The Role of Technology in Building Sustainable Banking

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1 The Role of Technology in Building Sustainable Banking Thought Paper Universal Banking Solution Systems Integration Consulting Business Process Outsourcing

2 The role of technology in building sustainable banking The meaning of sustainable development The World Commission on Environment and Development s (the Brundtland Commission) report defines sustainable development as the development that meets the needs of the present without compromising the ability of future generations to meet their own needs. Sustainable development is the only way out of the socio-ecological impasse that the world is at today. It is high time that sustainability intent came out of the boardroom to infuse the smallest aspect of business activity. The urgency of the situation is highlighted by international agencies, such as the United Nations, which has named environmental sustainability as one of the key Millennium Development Goals to be achieved by Financial institutions responsibility towards sustainable banking As the engine driving money supply and the economic fate of nations, financial institutions have a big obligation to ensure that their actions are not against the greater good. Hence, they must weigh not only the financial implications of every decision, but also its impact on sustainability issues, such as biodiversity, climate change, human rights etc. In fact, this is also a matter of self-interest, because while social and environmental risks may not add to financial risk in the short term, there s a high likelihood that they will over a longer period of time, to compromise the well-being of individual financial institutions and the financial system as a whole. Clearly, sustainable banking is emerging as the ideal path for tomorrow s banking enterprise. On a positive note, there is no doubt that banks have become more sustainability-conscious in recent years. Many have joined different groups (described in the next section), which are pushing the sustainable banking agenda. Before funding large projects (typically exceeding US$ 10 million), financial institutions do consider their socioecological circumstances, such as whether they involve aggressive deforestation or large-scale human displacement. However, they do not subject small transactions, which form the bulk of their business volume, to similar due diligence. And that is something to think about in future. Ongoing initiatives A number of global agencies are working tirelessly with Governments to promote the voluntary adoption of sustainability principles and policies within their domestic financial industries. Some of the key initiatives are the Finance Initiative of the United Nations Environment Programme (UNEP-FI) on sustainable financing; the Collevecchio Declaration by the member Banks on Financial Institutions and Sustainability; the Equator Principles, pertaining to social and environmental risks in project financing, which have been adopted by 70 odd financial institutions; the Global Alliance for Banking on Values (GABV) representing smaller banks; and CERES (Coalition for Environmentally Responsible Economies) Global Reporting Initiative to develop globally accepted reporting guidelines on the economic, social, and environmental performance of companies, Governments and Non Government Organizations. Also, the Financial Times, in collaboration with the International Finance Corporation (IFC), recognizes banks, which have excelled at sustainability initiatives every year. 02 Thought Paper

3 Technology s role in sustainable banking As key partners, technology solution providers also have a stake in their clients sustainable development agenda. Even as Governments, Statutory/Non Government bodies and the financial sector pursue different initiatives, technology vendors can add perceptible value to sustainable banking by supporting innovation of processes, products, channels and policies. Process innovation for sustainable banking: As a first step, a technology solution can support a bank s sustainability program by providing flexibility for the Banks to innovate on processes. For instance, it can contribute to the ecological cause by supporting electronic dissemination of all banking communication statements, mailers, campaigns et al to customers. The account origination solution could accept electronic documentation from customers opening an account or originating a loan. Direct Banking is a great example of sustainable banking, as it not only does away with reliance on paper, but also resource-draining physical interfaces, such as branches. That being said, technology can and must do a lot more. Take the example of UNEP- FI, whose signatories abide by its Statement, which requires among other things, a commitment to best practices in environmental management, development of products and services that promote sustainable development, conduct of regular internal reviews and measurement of progress versus sustainability goals. Subscribers to the Equator Principles must apply them to all loans of US$ 10 million or more. The point to note is that sustainability mandates are not standardized and vary across organizations. Hence, banking technology solutions must be flexible enough so that each bank can align them to any particular voluntary body or develop guidelines in-house. Also, technology vendors must take a long-term view of the situation. Someday not far away, even smaller financing proposals might be scrutinized for their impact on the environment or on societal welfare; therefore, banking technology providers must gear their solutions to easily capture the sustainability reporting data of each and every transaction. Going a step forward, they could look at incorporating this information into the bank s credit rating processes so that a business customer s credit score reflects both financial health and sustainability quotient. Last but not least, they should enable the capturing of sustainability related data from across the bank s ecosystem, for the purpose of sustainability reporting. Product and channel innovation for sustainable banking: Typically, sustainable development has three dimensions: social, economic and environmental. A bank might contribute to social welfare by extending support to marginalized groups, or they might render economic assistance by way or subsidies or waivers. They can also promote sustainability by improving the lives of those who are currently outside the financial mainstream. It is estimated that globally, 2.5 billion people lack access to basic banking services; it is no coincidence that a majority of them also lack essential amenities such as safe drinking water and sanitation. It stands to reason that an improvement in the economic circumstances of these people will also result in a better quality of life. And this is where banks and their technology solution partners become all the more relevant. For some years now, financial inclusion has been a top priority of all the regions with large unbanked populations. But it was not viable for their banks to extend their reach into unbanked markets using the traditional branch banking model. The arrival of new technologies, notably the Internet and mobile, has given banks alternative, low cost channels of distribution. Technology vendors must seize this chance to promote financial inclusion (and consequently sustainability) by developing specific solutions residing on handheld devices that banking agents can use to enroll customers, capture their data Thought Paper 03

4 and later upload the same into the bank s main database. Another way in which technology vendors can support sustainability initiatives is by provisioning for flexibility in their applications, to enable banks develop innovative products to promote sustainable development, such as a loan at a preferential rate of interest for solar lamp manufacturers. Besides product innovation, technology vendors can also leverage channel innovation in the above cause. With mobile penetration hitting high double digits even in the poorest areas, banks can collaborate with network operators to provide access to mobile financial services to even those without a bank account. Banks should be able to track the channel usage of their customers and incentivize them accordingly. The technology vendors thus have a responsibility to make this a reality by devising robust and scalable delivery platforms. Policy innovation for sustainable banking: Every bank should have a set of policies for sustainable development, prescribing actions such as the installation of a minimum number of solar ATMs annually or the elimination of paper statements. Their technology solutions partner must lend support by rendering their own offerings compatible with these and future policy initiatives. The bank s various sustainability initiatives would ultimately percolate across all levels within its organization vide its technological infrastructure. Hardware solution providers should come up with energy efficient components to support Banks who want to switch over to energy efficient data centers. Similarly, if a bank decides to promote a culture of sustainability by rewarding employees actions, their loyalty management solution provider must be able to quickly modify the solution to record and recognize various instances of sustainable behavior. On their part, a bank can also decide only to work with pro-sustainability technology partners. They can enforce this policy by asking prospective vendors to declare in their response to the RFP, the extent to which their organization and technologies are supportive of sustainable development. This would enable them to assess the compatibility of the vendor s solutions with their own socio-environmental goals, at an initial stage of engagement. Contributing to a sustainable future Today s banks are more than mere financial intermediaries; they are custodians of the larger interests of society. It is also acknowledged that sustainable banking is the way to go. Being the engine of growth, banks need to spruce up their sustainability goals. Every bank needs to wake up to the reality and firm up their roadmap for sustainable banking. They could choose to align with voluntary bodies on sustainable banking namely, the UNEP- FI, Equator Principles, and GRI etc. or develop a sustainable banking policy guideline by themselves. Technology plays a crucial role in taking banks towards their sustainability goals. Armed with the flexibility and analytical capability of their technology landscape, banks can add muscle to their sustainable banking practice in the course of time. 04 Thought Paper

5 References gabv.org/ Anish Kanayi Consultant - Product Strategy, Infosys Thought Paper 05

6 About Finacle Finacle from Infosys partners with banks to transform process, product and customer experience, arming them with accelerated innovation that is key to building tomorrow s bank. For more information, contact finacleweb@infosys.com Infosys Limited, Bangalore, India, Infosys believes the information in this publication is accurate as of its publication date; such information is subject to change without notice. Infosys acknowledges the proprietary rights of the trademarks and product names of other companies mentioned in this document.