Application of Electronic Commerce in Banking Sector

Prepared by Ankita Doshi Shivangi khambhati Sweta Nim Sonal Patel Niriksha Shah (9) (19) (29) (39) (49)

Under the guidance of

Prof. Sanjay Ghosh

New City light Road, Sr. no 149, Near Ashirad Villa, B/H Heena Bungalows, Bharthana, Vesu, Surat – 395007

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1. Introduction

1.1 Internet Banking

Internet banking refers to systems that enable bank customers to get access to accounts and general information on bank products and services through the use of the bank’s web-site, without the intervention or inconvenience of sending letters, faxes, original signatures and telephone confirmations. Banking on the Internet is not the same as online banking over dedicated telephone lines, since the Internet provides universal connection from any location world-wide, and is universally accessible from any Internet-linked computer. Since its development, the Internet has been used for research and educational purposes and in fact, the developers actively discouraged anyone from using it for commercial purposes. However, as companies began to use the Internet, especially the World Wide Web, it has become a new environment for doing business. Banks are among those commercial entities that have established themselves on the Internet. As customer demand grows for more innovative services and products, banks are using state-of-heart technology to improve their delivery channels. Convenient banking is extremely important to today’s customer and people are looking for ways to meet their banking needs without actually visiting a branch.

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1.2 E-Commerce

Electronic commerce, commonly known as e-commerce or e-commerce, consists of the buying and selling of products or services over electronic systems such as the Internet and other computer networks. The amount of trade conducted electronically has grown extraordinarily since the spread of the Internet. A wide variety of commerce is conducted in this way, spurring and drawing on innovations in electronic funds transfer, supply chain management, Internet marketing, online transaction processing, electronic data interchange (EDI), inventory management systems, and automated data collection systems. A small percentage of electronic commerce is conducted entirely electronically for virtual items such as access to premium content on a website, but most electronic commerce involves the transportation of physical items in some way. Online retailers are sometimes known as e-retailers and online retail is sometimes known as e-tail. Almost all big retailers have electronic commerce presence on the World Wide Web. Electronic commerce is generally considered to be the sales aspect of ebusiness. It also consists of the exchange of data to facilitate the financing and payment aspects of the business transactions. E-commerce is usually associated with buying and selling over the Internet, or conducting any transaction involving the transfer of ownership or rights to use goods or services through a computer-mediated network.

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1.3 Forces fueling E-Commerce

There are at least three major forces fuelling e-commerce: economic forces, marketing and customer interaction forces, and technology, particularly multimedia convergence.

Economic forces: One of the most evident benefits of e-commerce is economic efficiency resulting from the reduction in communications costs, low-cost technological infrastructure, speedier and more economic electronic transactions with suppliers, lower global information sharing and advertising costs, and cheaper customer service alternatives. Economic integration is either external or internal. External integration refers to the electronic networking of corporations, suppliers, customers/clients, and independent contractors into one community communicating in a virtual environment (with the Internet as medium). Internal integration, on the other hand, is the networking of the various departments within a corporation, and of business operations and processes. This allows critical business information to be stored in a digital form that can be retrieved instantly and transmitted electronically.

Market forces: Corporations are encouraged to use e-commerce in marketing and promotion to capture international markets, both big and small. The Internet is likewise used as a medium for enhanced customer service and support. It is a lot easier for companies to provide their target consumers with more detailed product and service information using the Internet.

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Technology forces: The development of ICT is a key factor in the growth of ecommerce. For instance, technological advances in digitizing content, compression and the promotion of open systems technology have paved the way for the convergence of communication services into one single platform.

1.1 Traditional

applications of e-commerce in online banking are:

Transactional (e.g., performing a financial transaction such as an account to account transfer, paying a bill, wire transfer and applications apply for a loan, new account, etc.)
○ ○

Electronic bill presentment and payment - EBPP Funds transfer between a customer's own checking and savings accounts, or to another customer's account

○ ○ 

Investment purchase or sale Loan applications and transactions, such as repayments

Non-transactional (e.g., online statements, check links, co browsing, chat)

Bank statements

 Financial Institution Administration - features allowing the financial institution to manage the online experience of their end users  ASP/Hosting Administration - features allowing the hosting company to administer the solution across financial institutions

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1.1 Features commonly unique to business banking include
• •

Support of multiple users having varying levels of authority Transaction approval process

1.1 Features commonly unique to Internet banking include

Personal financial management support, such as importing data into a personal finance program such as Quicken, Microsoft Money or TurboTax. Some online banking platforms support account aggregation to allow the customers to monitor all of their accounts in one place whether they are with their main bank or with other institutions

1. Traditional applications of e-commerce in online banking

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1.1 Electronic bill presentment and payment
 BILL PRESENTATION The bill presentation process involves the biller generating a periodic report from its billing system, the notification of the bill to the customer for goods or services previously rendered.


Arrows Show the flow of information with respect to money. Above shown model hold true for all the transactions.
1.1 Funds transfer between a customer's own checking and savings accounts, or to

another customer's account
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1.2 Investment purchase or sale 1.3 Loan applications and transactions, such as repayments

2. Conclusion

 Electronic Commerce and Banking

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“Banking is vital to a healthy economy. Banks are not”. This quote succinctly captures the structural and operational tumult occurring in the financial services industry. Banking as a business can be subdivided into five broad types: retail, domestic wholesale, international wholesale, investment, and trust. Of all these types, retail and investment banking are most affected by online technological innovations and are the ones that stand to profit most from electronic commerce. The role of electronic commerce in banking is multifaceted impacted by changes in technology, rapid deregulation of many parts of finance, the emergence of new banking institutions, and basic economic restructuring. Given these environmental changes, banks are reassessing their cost and profit structures. Many banks feel that in order to be profitable they need to reduce operating expenses and maintain strict cost control. This philosophy is evident in the many mergers and acquisitions occurring in the banking industry. The challenge behind bank restructuring lies in adequately operational-zing the notion of cost control. Technology is the predominant solution for controlling costs. Banks are increasingly turning toward technology to help reduce operating costs and still provide adequate customer service. Innovation and technology are becoming the key differentiators in the financial services business. Advance in networking, processing, and decision analytics have allowed institutions to lower service costs. Technology has also accelerated the pace of product innovation. For example, sophisticated arbitrage instruments like derivatives are changing the nature of investment banking.

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Technology is enabling the development of new products and services. For example, technology is capable of replacing or expediting tedious financial exercises like check writing, filing taxes, and transferring funds. Although large businesses have automated these tasks, many small businesses and most households still do them manually. This is not surprising; large businesses have been undergoing computerization for more than thirty years, whereas PCs have been entering households in significant numbers only in the last few years. Technology is changing the interaction between banks and consumers. In particular, technological innovations have enabled the following capabilities:
    

Online delivery of bank brochures and marketing information Electronic access to bank statements Ability to request the transfer of funds between accounts Electronic bill payment and presentment Ability to use multiple financial software products with “memory” (thus eliminating the need to re-enter the same data) Online payments— encrypted credit cards for transferring payment instructions between merchant, bank, customer; and finally, micro payments (or nickel-anddime transactions using electronic cash and electronic checks).

These online capabilities increase the facility and speed of retail banking. However, new technology is a double-edged sword. While it enables banks to be more competitive through huge investments, it also enables new competition from fast-moving, nonbanking firms. This trend can be seen in the area of online payments, where recent innovations have pro-vided an opportunity for nonbanks to break into the banking business, threatening the banking stronghold on one of the last key services provided by banks.

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The present nature of online payments is a clear indication that if the banking industry fails to meet the demand for new products, there are many industries that are both willing and able to fill the void. Technology also creates problems in the product development life-cycle. In the past, banks had the luxury of long roll-out periods because successful investment in retail banking required a large monetary commitment for product development. This financial requirement pre-vented new participants from entering the market and was a key determinant of success. Instead of a single institution doing everything, technology allows the creation of a “virtual financial institution” made up of firms, each contributing the best-of-breed software or products to the overall product. The impetus for drastic change in the banking industry does not come from forces within banking; it is from competitive pressure outside the industry.

Changing Dynamics in Banking Industry

In recent years, there has been a major change in the way banks strive for increased profitability. In the past, the banking industry was chiefly concerned with asset quality and capitalization; if the bank was performing well along these two dimensions, then the bank would likely be profitable. Today,


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Performing well on asset quality and capitalization is not enough. Banks need to find new ways to increase revenues in a “mature market” for most traditional banking services, particularly consumer credit. A thorough understanding of this competitive environment is needed before banks can determine their online strategy. Five distinct factors contribute to the new competitive environment: ➢ Changing consumer needs driven by online commerce ➢ Optimization of branch networks in order to reduce costs,
➢ Changing demographic trends and potential new consumer markets

➢ Cross-industry competition caused by deregulation, and ➢ New online financial products  Changing Consumer Needs Consumer requirements have changed substantially in the last decade. Customers want to access account-related information, download account data for use with personal finance software products, transfer funds between accounts, and pay bills electronically. Along with these services, banks must be able to supply/guarantee the privacy and confidentiality that customer’s demand, which is not a trivial matter to implement on the part of the banks.

Many consumer requirements are based on a simple premise

Customers and financial institutions both seek closer and more multifaceted relationships with one another. Customers want to be able to bank at their convenience, including over the weekend or late at night. Bankers want more stable and long term relationships with their customers. From the bank’s perspective, developing and maintaining this relationship is difficult.

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Although financial products are essentially information products and financial institutions are highly automated, there is a gulf between automated information and the bank’s ability to reach the consumer in a unified way. This gulf is filled with established methods, such as branches, postage and mail, advertising, and people on telephones. These methods can be costly and impersonal. Electronic banking provides a method of communication that will enable the bank customer to be reached, served, and sold products and services in their homes and offices whenever it is convenient for them-twenty-four hours a day, seven days a week.  Technology-based Financial Services Products The growing importance of computer technology is another factor complicating predictions about the future structure of banking. Some observers believe that additional development of electronic cash, such as smart cards, could stimulate further banking consolidation. They point to the fact that the start-up costs associated with electronic payments technologies can be high, in part because electronic cash requires large investments in computer software and other resources to establish a network of secure electronic transactions. Such large fixed costs have led these observers to warn that a few financial services providers those with the resources to absorb those costs-could come to dominate the payments system. In contrast, the development of electronic banking might actually in-crease competition in banking markets and lower bank operating costs. Electronic banking offers an inexpensive alternative to branching to expand a bank’s customer base, and many banks are using electronic banking to in-crease service to their customers. Many banks have started Web sites on the Internet, and many plan to offer banking services over the Internet. Some banks are already offering certain banking services over the telephone. Smart cards and other forms of electronic cash could be the key to

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consumer acceptance of home banking, eventually allowing banks to reduce the number of their physical branches.

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