Trends in Banking

Product Innovation
Investment products
Gold / silver coins
Marketing of insurance product
Credit cards and debit cards
Innovative services
Automatic Teller Machines
Facilitate issue of capital market products

Internet Banking
Web site information of banks.
Bank products and services.
Web transactions.
Submission

of

applications,

instructions,

account

balance queries etc.

Website enabling complete transactions.
Account operations such as transfer of funds, payment
of bills, payment for other bank products.

Virtual Banks
Do not have a physical presence in a country however
offer their services to customers.
Electronic delivery channels provide banking services.
Internet services of banking products.
Termed as i-banking.

Features of Internet Banking

Performance beyond physical borders.
Security of banking transactions.
Changing / updating technology frequently.
Additional risk to the banking system.
Changes in risk control measures to cope with technology
risk.
Strategic business models to cope with the new entrants.

Regulation of Internet Banking

Legal issues
Jurisdiction of services offered
Security issues
Money transfer
Technology issues
Loopholes in technology and change in technology
Operational issues
Control and supervision of banking operations

Benefits from Internet Banking

Less cost of services when compared to traditional
banking practices.
Helps banks to offer several products desired by
customers.
Banks can offer their services efficiently.
Large base of customers have shifted to internet usage
and hence banks benefit through access of such
customer base.

Comparative Cost Structure

Data Source: India research, May 29, 2000, Kotak Securities

Illustrative Banks offering Internet based Services

in India
ICICI bank
HDFC bank
Axis bank
City bank
Bank of Punjab
Bank of Madura
Federal bank
Allahabad bank
State bank of India

Electronic Fund Transfer

Facilitates one-to-one fund transfer
Customers through the accounts are provided services
to transfer funds across banks and branches
Transfer of funds across individual, firm or corporate
level account holdings

National Electronic Funds Transfer (NEFT)

Bank branches are NEFT enabled
Reserve Bank of India associates itself with the NEFT
enabling of banks
Customers with accounts in the bank branches are
allowed to transfer funds through NEFT
Cash restriction on fund transfers is Rs.50,000 per
transaction
NEFT also enables fund transfer without bank account
after required details are furnished by the customers

Operating Details of NEFT

Settlement of funds between receiving and paying banks
takes place centrally from Mumbai.
Bank branches participating with NEFT can be located
anywhere in the country.
Customer through an application form provides details of
the required transfer.
Customer operating through a net banking facility can also
initiate the fund transfer through their bank.
Through the Indian Financial System Code (IFSC) the
bank branch participant is identified and is used in the
transfer of funds.

Benefits of using NEFT

No physical transfer of cheque or demand draft
Possibility of loss of funds in transfer is not there
Transaction cost is less when compared with other
payment methods
Service is enabled through internet banking / email /
mobile and thus minimizes the effort of the transfer
Real time transfer of funds

Risks Associated with Innovative Banking Services

Operational risk
Transactional risk associated with processing
transactions, data integration, data confidentiality.

of

Security risk
Financial transaction movement through unauthorized
access.
Technology risk
Inappropriate choice of technology, such as file transfer
protocol, hyper text transfer protocol, telnet use.

Risks Associated with Innovative Banking Services

Reputation risk
Customer confidence
management.

and

bank

customer

relationship

Legal risk
Compliance of legal rules and regulations imposed by the
country in which the bank is operating.
Fraud
Criminal and fraudulent activities that are encountered in a
banking transaction.
International Transaction risk
Bankers inability to track foreign customers resulting in credit
risk for the banks.