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Chapter 1: - E-Banking
1.1 Introduction of E-Banking 1.2 Meaning of E-Banking 1.3 Functions of E-Banking 1.4 Types of E-Banking 1.5 Advantages of E-Banking 1.6 Limitations of E-Banking
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Introduction of E-Banking: -
The acceleration in technology has produced an extraordinary effect upon our economy in general has had a particularly profound impact in expanding the scope and utility of financial products over the last ten years. Information technology has made possible the creation, valuation, and exchange of complex financial products on a global basis and even that just in recent years. Derivatives are obviously the most evident of the many products that technology has inspired, but the substantial increase in our calculation has permitted a variety of other products and, most beneficially, new ways to unbundled risk. What is really quite extraordinary is that there is no sign that this process of acceleration in financial technology is approaching an end. We are moving at an exceptionally rapid pace, fueled not only by the enhanced mathematical applications produced by our ever rising computing capabilities but also by our expanding telecommunications capabilities and the associated substantial broadening of our markets. All the new financial products that have been created in recent years contribute economic value by unbundling risks and reallocating them in a highly calibrated manner. The rising share of finance in the business output of India and other countries is a measure of the economic value added by the ability of these new instruments and techniques to enhance the process of wealth creation. The reason of course, is that information is critical to the evaluation of risk. The less that is known about the current state of a market or a venture, the less
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the ability to project future outcomes and, hence, the more those potential outcomes will be discontinued. 1.2 Meaning of E-Banking: E-bank is the electronic bank that provides the financial service for the individual client by means of Internet.
1.3 Functions of E-Banking: At present, the personal e-bank system provides the following services: 1. Inquiry about the information of account: -
The client inquires about the details of his own account information such as the card’s / account’s balance and the detailed historical records of the account and downloads the report list.
2. Card accounts’ transfer: -
The client can achieve the fund to another person’s Credit Card in the same city.
3. Bank-securities accounts transfer: -
The client can achieve the fund transfer between his own bank savings accounts of his own Credit Card account and his own capital account in the securities company. Moreover, the client can inquire about the present balance at real time.
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The transaction of foreign exchange: -
The client can trade the foreign exchange, cancel orders and inquire about the information of the transaction of foreign exchange according to the exchange rate given by our bank on net.
The B2C disbursement on net: -
The client can do the real-time transfer and get the feedback information about payment from our bank when the client does shopping in the appointed web-site.
Client service: -
The client can modify the login password, information of the Credit Card and the client information in e-bank on net.
Account management: -
The client can modify his own limits of right and state of the registered account in the personal e-bank, such as modifying his own login password, freezing or deleting some cards and so on.
Reporting the loss if the account: -
The client can report the loss in the local area (not nationwide) when the client’s Credit Card or passbook is missing or stolen.
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1.4 Types of E-Banking: 1. Deposits, withdrawals, inter-account transfer and payment of linked accounts at an ATM; 2. Buying and paying for goods and services using debit cards or smart cards without having to carry cash or a cheques book; 3. Using a telephone to perform direct banking- make a balance enquiry, inter-account transfers and pay linked accounts; 4. Using a computer to perform direct banking- make a balance enquiry, inter-account transfers and pay linked
1.5 Advantages of E-Banking: -
1. Account Information: Real time balance information and summary of day’s transaction.
2. Fund Transfer: Manage your Supply-Chain network, effectively by using our online hand transfer mechanism. We can effect fund transfer on a real time basis across the bank locations.
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3. Request: Make a banking request online.
4. Account information: The complete database that the banks has about our company is available to us at our terminal. It provides us:
Current balance in our account on real-time basis. Day’s transactions in the account. Details of cash credit limit, drawing power, amount utilized, etc. 5. Downloading of account statements as an excel file or text file. The statements can be integrated with your ERP systems for auto-reconciliation.
6. Fund Transfers: Manage our Supply-Chain network, effectively by using our online fund transfer mechanism. We can effect fund transfer on a real time basis across the bank locations. The product facilities.
(a) One-to-one fund transfer between two linked account.
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(b) Bulk fund transfers; In bulk fund transfers, we upload a flat file containing payment / collection information. Our systems take care of processing the entire file and once the file is processed file to our ERP for auto reconciliation. 7. The real life situation of user-wise limits and multilevel signatories can be mapped in the net-based fund transfer module too. We can specify user-wise cap for fund transfer and the number of approvals needed for each fund transfer. The fund transfer will not take place unless the required number of signatories has approved it. 8. With a power of Attorney from our dealers, we can link the dealer’s accounts to our account in order to have an online fund transfer, saving us time and money involved with cheques collections systems. Alternatively, the dealer can credit our account through this channel. Similarly, we could also effect vendor and other payments online. 9. Customers can also submit the following requests online: Registration for account statements by e-mail daily / weekly / fortnightly / monthly basis. (1) Stop payment or cheques (2) Cheque book replenishment (3) Demand Draft / Pay-order
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(4) Opening of fixed deposit account (5) Opening of Letter of credit 10.The company does not have to spend anything extra to avail such facilities. All it requires is an Internet connectivity. The product enables the company to pro-actively manage its cash flows, ease reconciliation efforts as all the MIS is available at the click of the mouse.
11.Customers can Integrate the System with his own ERP: The customer can download the account statements either as a text file or as an excel file. The bank can help him in integrating the account statements and bulk payments files with his ERP system. The bank may charge a nominal fee depending upon the nature of work involved.
12.Bill Payment through Electronic Banking: Internet has thus ushered the concept of anytime and anywhere banking. To the individual the onerous task of visiting several places to settle his service bills like telephone, water, electricity, etc., can be overcome through the electronic Bill Pay service provided by the bank. He can pay his regular monthly bills (telephone, electricity, mobile phone, insurance, etc.) right from his desktop. No more missed deadlines, no more loss of interest. He can schedule his bills in advance, and thus avoid missing the bill deadlines as well as earn extra interest on his money.
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13.The Electronic Shopping Mall: The customer can also make his shopping payment through the Bank’s secure website-so that he can shop online without any security worries, as the bank can provide online real time shopping mail services through partner shopping sites.
14.Effecting Personal Investments through Electronic Banking: The bank’s website can also allow the customer to invest in shares, mutual funds and other financial products.
15.Investing in Mutual funds: Electronic banking also brings the customer the same convenience while investing in Mutual fundsHassle free and Paperless Investing. He can invest in mutual funds without the hassles of filling application forms or any other paperwork. He needs to provide no signatures or proof of identify for investing. Once he places a request for investing in a particular fund, there are no manual processes involved. His bank funds are automatically debited or credited while simultaneously crediting or debiting his unit holdings.
16.Initial Public Offers Online: The customer could also invest in initial public offers online without going through the hassles of filling ANY application form / paperwork. Get in-depth analyses of new initial public offers issues, which are about to hit the
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market and analysis on these. Initial public offer calendar, recent initial public offers listings, prospectus / offer documents, and initial public offer analysis are few of the features, which help a customer to keep on top of the initial public offers markets.
17.Other benefits: The e-banking provides some other benefits also.
They are: (1) Convenience. (2) Speed of concluding transactions. (3) Safety-banking from own home. (4) Economy- banking without visiting your bank. (5) Cheaper service fees. (6) Seamless Integration with existing environment (IDMIntelligent Data Module). (7) Highly Scaleable. (8) Easy Customization.
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(9) Lower Costs of both Installation and Maintenance. (10)Platform Independence. (11)Round-the-Clock and Cross-Border Availability. (12)Remote Authorization.
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1.6 Limitation of E-Banking: -
1. Safety situations around ATMs.
2. Abuse of bank cards by fraudsters at ATMs.
3. Danger of giving your card number when buying on-line.
The modern technology has influenced the financial sector to a large extent. It increases the competitive efficiency of the firms and provides sophistication to the end users. It makes everyone fittest to survive.
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Chapter 2: - Internet Banking
2.1 Internet Banking a) Introduction b) Banking service though Internet c) The Indian Scenario d) Product & Service offered e) The future scenario 2.2 Risk & Rewards a) Operational Risk b) Security Risk c) System architecture & design d) Reputational Risk e) Legal Risk f) Money Laundering Risk g) Cross Border Risks h) Strategic Risk i) Other Risk j) Risk of unfair competion
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2.1 Internet Banking:a) Introduction: The delivery channels include direct dialup connections, private networks, public networks, etc. with the popularity of computers, easy access to Internet and World Wide Web (WWW), Internet is increasingly used by banks as a channel for receiving instructions and delivering their products and services to their customers. This form of banking is generally referred to as Internet Banking, although the range of products and services offered by different banks vary widely both in their content and sophistication. b) Banking Services through Internet: i. The Basic Level Service is the banks’ web sites which disseminate information on different products and services offered to customers and members of public in general. It may receive and reply to customer’s queries through e-mail, ii. In the next level are Simple Transactional Web sites which allows customers to submit their instructions, applications for different services, queries in their account balances, etc. but do not permit any fund-based transactions on their accounts, iii. The third level of Internet banking service are offered by Fully Transactional Web sites which allow the customers to operate
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on their accounts for transfer of funds, payment of different bills, subscribing to other products of the bank and to transact purchase and sale of securities, etc. The above forms of Internet banking service the customer or by new banks, who deliver banking service primarily through Internet or other electronic delivery channels as the value added services. Some of these banks are known as ‘Virtual’ banks or ‘Internet only’ banks and may not have physical presence in a country despite offering different banking services.
c) The Indian Scenario: The entry of India banks into Net Banking • Internet banking, both as a medium of delivery of banking services and as a strategic tool for business development. • At present, the total internet users in the country are estimated at 9 lakh. However, this is expected to grow exponentially to 90 lakh by 2003. only about 1 percent of Internet users did banking online in 1998. This is increased to 16.7 percent in March 2000 (India Research, May 29, 2000, Kotak Securities). • Cost of banking service through the Internet from a fraction of costs through conventional methods. Rough estimates assume teller cost at Re.1 per transaction, ATM transaction cost at 45 paise, phone banking at 35 paise, debit cards at 20 paise and Internet banking at 10 paise per transaction.
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d) Product and Services Offered: Banks in India are at different stages of the web-enabled banking cycle. Initially, a bank, which is not having a web site, allows its customer to communicate with it through an e-mail address’ communication is limited to a small number of branches and offices which have access to this e-mail count. With gradual adoption of Information Technology, the bank puts up a web site that provides general information on deposits products, application forms for downloading and e-mail option for enquiries and feedback. Vijaya Bank provides information on its website about its NRI and other services. Customers are required to fill in applications on the Net and can later receive loans or other products requested for at their local branch. A few banks provide the customer to enquire into his demat account (security/shares) holding details, transaction details and status of instructions given by him. These web sites still do not allow online transactions for their customers. Some of the banks permit customers to interact with them and transact electronically with them. Such services include request for opening of accounts, requisition for cheque books, stop payment of cheques, viewing and printing statements of
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accounts, movement of funds between accounts within the same bank, querying on status or requests, instructions for opening of Letter of Credit and Bank Guarantees, etc. These services are being initiated by banks like ICICI Bank Ltd., Citibank, Global Trust Bank Ltd., UTI Bank Ltd., Bank of Citibank Bank of Madura Ltd., Federal Bank Ltd., etc. Some of the more aggressive players in this area such as ICICI Bank Ltd., HDFC Bank Ltd., UTI Bank Ltd., Citibank, Global Trust Bank Ltd., and Bank of Punjab Ltd., offer the facility of receipt, review and payment of bills online. The ‘Infinity’ service of ICICI Bank Ltd. Also allows online real time shopping all payments to be made by customers. HDFC Bank Ltd. Has made e-shopping online and real time with the launch of its payment gateway. Banks providing internet banking services have been entering into agreements with their customers setting out the terms and conditions of the services.
The terms and conditions include information on the access through user-ID and secret password, minimum balance and charges, authority to the bank for carrying out transactions performed through the service, liability of the user and the bank,
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disclosure of personal information for statistical analysis and credit scoring also, non-transferability of the facility, notices and termination, etc.
e) The Future Scenario: -
o Compared to banks abroad, India banks offering online services still have a long way to go. For online banking to reach a critical mass, there has to be sufficient number of users and the sufficient infrastructure in place. o Various security options like line encryption, branch connection encryption, firewalls, digital certificates, automatic sign-offs, random pop-ups and disaster recovery sites are is in place or are being looked at, there is as yet no Certification Authority in India offering Public Key Infrastructure, which is absolutely necessary for online banking. o The communication bandwidth available today in India is also not enough to meet the needs of high priority services like online banking and trading. o Banks offering online facilities also need to calculate their downtime losses, because even a few minutes of downtime in a week could mean substantial losses.
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o Users of Internet Banking Services are required to fill up the application froms online and send a copy of the same by mail or fax to the bank. o A contractual agreement is entered into by the customer with the bank for using the Internet banking services. o Domestic customers for whom other access points such as ATMs, telebanking, personal contact, etc. are available, are often hesitant to use the Internet banking services offered by Indian banks. Internet Banking, as an additional delivery channel, may, therefore, be attractive/ appealing as a value added service to domestic customers. Non-resident Indians, for whom, it is expensive and time consuming to access their bank accounts maintained in India find net banking very convenient and useful. o Cyber crimes are, therefore, difficult to be identified and controlled. o In order to promote Internet banking services, it is necessary that the proper legal infrastructure is in place. o The Department of Telecommunications (DoT) is moving fast to make available additional bandwidth, with the result that internet access will become much faster in the future. o Reserve Bank of India has constituted a group to examine different issues relating to i-banking and recommend technology,
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security legal standards and operational standards keeping in view the international best practices. In the following paragraphs a generic set of risks discussed as the basis for formulating general risk control guidelines. 2.2 Risk & Rewards: -
a) Operational Risk: Operational risk, also referred to as transactional risk is the most common form of risk associated with i-banking. It takes the from of inaccurate processing of transactions, nonenforceability of contracts, compromises in data integrity, data privacy and confidentiality, unauthorized access / intrusion to bank’s systems and transaction, etc. Such risks can arise out of weaknesses in design,
implementation and monitoring of banks information system. Besides inadequacies in technology, human factors like negligence by customers and employees, fraudulent activity of employees and crackers/ hackers, etc. can become potential source of operational risk.
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b) Security Risk: Security risk arises on account of unauthorized access to a bank’s critical information stores like accounting system, risk management system, portfolio management system, etc. Other related risks are loss of reputation, infringing customers’ privacy and its legal implications, etc. Attackers could be hackers, unscrupulous vendors, disgruntled employee or even pure thrill seekers. In addition to external attacks banks are exposed to security risk from internal sources e.g. employee fraud. Employee being familiar with different systems and their weaknesses become potential security threats in a loosely controlled environment. They can manage to acquire the authentication data in order to access the customer accounts causing losses to the bank. Unless specifically protected, all data/ information transfer over the internet can be monitored or read by unauthorized persons.
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c) System architecture and design: Banks face the risk of wrong choice of technology, improper system design and inadequate control processes. Numerous protocols are used for communication across internet. Each protocol is designed for specific types of data transfer. A system allowing communications with all protocols, say HTTP (Hyper Text Transfer Protocol), FTP (File Transfer Protocol), telnet, etc. is more prone to attack than one designed to permit say, only HTTP. Many banks rely on outside service providers to implement, operate and maintain their e-banking system. Security related operational risk include access control, use of firewalls, cryptographic techniques, public key encryption, digital signature, etc.
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d) Reputational Risk: -
Reputational risk is the risks of getting significant negative public opinion, which may result in a critical loss of funding or customers. Such risks arise from actions which cause major loss of the public confidence in the banks’ ability to perform critical functions or impair bank-customer relationship. It may be due to banks’ own action or due to third party’s action. The main reasons for this risk may be system or product not working to the expectations of the customers, significant security breach (both due to internal and external attack), inadequate information to customers about product use and problem resolution procedures, significant problems with communication networks that impair customers’ access to their funds or account information especially if, there are, no alternative means of account access.
e) Legal Risk: -
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Legal risk arises from violation of, or non-conformance with laws, rules, regulations, or prescribed practices, or when the legal rights and obligations of parties to a transaction are not well established. A customer, inadequately informed about his rights and obligations, may not take proper precautions in using Internet banking products or services, leading to disputed transactions, unwanted suits against the bank or other regulatory sanctions.
f) Money Laundering Risk: o As internet banking transactions are conducted remotely banks may find it difficult to apply traditional method for detecting and preventing undesirable criminal activities. Application of money laundering rules may also be inappropriate for some forms of electronic payments. o To avoid this, banks need to design proper customer identification and screening techniques, develop audit trails, conduct periodic compliance reviews, frame policies in internet transactions.
g) Cross-Border Risks: -
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Internet banking is based on technology that, by its very nature, is designed to extend the geographic reach of banks and customers. Such market expansion can extend beyond national borders. This causes various risks. Such considerations may expose banks to legal risks associated with non-compliance of different national laws and regulations, including consumer protection laws, record keeping and reporting requirements, privacy rules and money laundering laws. The foreign-based service provider or foreign participants in internet banking are sources of country risk to the extent that foreign parties become unable to fulfil their obligations due to economic, social or political factors.
h) Strategic Risk: For reducing such risk, banks need to conduct proper survey, consult experts from various fields, establish achievable goals and monitor performance. Also they need to analyze the availability and cost of additional resources, provision of adequate supporting staff, proper training of staff and adequate insurance coverage.
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i) Other Risk: Traditional banking risks such as credit risk, liquidity risk, interest rate risk and market risk are also present in internet banking.
These risks get intensified due to the very nature of internet banking on account of use of electronic channels as well as absence of geographical limits. Credit risk: Is the risk that a counterparty will not settle an obligation for full value, either when due or at any time thereafter. Banks may not be able to properly evaluate the creditworthiness of the customer while extending credit through remote banking procedures, which could enhance the credit risk. Another facility of internet banking is electronic money. It brings various types of risks associated with it. If a bank purchases e-money from an issuer in order to resell it to a customer, it exposes itself to credit risk in the event of the issuer defaulting on its obligation to redeem electronic money.
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E-B@NKING Liquidity risk: It is important for a bank engaged in electronic
money transfer activities that it ensures that funds are adequate to cover redemption and settlement demands at any particular time. Failure to do so, besides exposing the bank to liquidity risk, may even give rise to legal action and reputational risk.
j) Risk of unfair competion: Internet banking is going to intensify the competition among various banks. The open nature of internet may induce a few banks to use unfair practices to take advantage over rivals. Any leaks at network connection or operating system, etc. may allow them to interfere in a rival bank’s system. Thus, one can find that along with the benefits internet banking carries various risks for bank itself as well as banking system as a whole.
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Chapter 3: - Internet Banking: Challenges for Banks & Regulators.
3.1 Internet Banking in the United States • New Risks 3.2 The Basel Committee’s Electronic Banking Group 3.3 e-Finance Oversight 3.4 Security Controls
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3.5 Legal & Reputational Risk Management
3.1 Internet Banking in the United States: • An average industry estimates indicates the about 13 million US households banked online by the end of 2000 – twice as many as in the pervious years. • At the beginning of 2001, 37% of all US national banks, including nearly all of the largest national banks, were offering full transactional capabilities online – a near twofold increase in little over a year. • Banks offering Internet-based transaction service – and there are more of them each day – should be well positioned to compete in the financial markets of the future.
New Risks: Internet banking poses risks that are different from those that bank supervisors customarily dealt with in assessing credit, market, or interest rate risk.
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First, banks must manage the unprecedented speed of technological change, and assess how it relates to their technology investments and their ability to provide consistently high-quality customer service. Second, bank are increasingly dependent on third parties to provide the necessary information technology. Security is another area of significant risk. So far, relatively few financial institutions have reported being victimized by online security violations.
3.2 The Basel Committee’s Electronic banking Group: o The Basel Committee on Banking Supervision has taken the lead in this area through the creation of its Electronic Banking Group (EBG) in late 1999 – a group whose members represent 17 Central banks and bank supervisory agencies. o The major focus of the EBG’s work has been to develop risk management guidance for Internet banking that will guide bankers and promote effective and consistent bank supervision around the world. o The EBG has identified fourteen Risk Management Principles for Electronic Banking to promote sound risk
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management of e-banking. These principles are intended to help banking institutions expand their existing oversight policies and processes to cover their e-banking activities.
3.3 e-Finance Oversight: The EBG has dedicated considerable time and effort to communicating supervisory expectations and guidance for home country supervisors to oversee cross-border Internet banking activity conducted by their local institutions. In February of this year, the Financial Stability Forum’s Contact Group on E-Finance held its first formal meeting. This group was formed to promote enhanced information-sharing among the various international sector-based working groups dealing with e-finance supervisory issues – e-banking, e-trading, retail payments systems, e-commerce, and so on.
3.4 Security Controls: Authentication of e-banking customers. Nonrepudiation and accountability for e-banking
transaction of duties.
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Appropriate measures to ensure segregation of duties. Proper authorization controls within e-banking systems, databases and applications. Data integrity of e-banking transactions, records and information. Establishment of clear audit trails for e-banking transactions. Confidentiality of key bank information.
3.5 Legal & Reputational Risk Management: Appropriate disclosure for e-banking services. Privacy of customer information. Capacity, business continuity and contingency planning to ensure availability of e-banking systems and services.
Incident response planning. The complete EBG Report on Risk
Management Principles for Electronic Banking can be obtained at the Bank for International Settlements’ web site at www.bis.org.
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Chapter 4: - What do Computers do in Banks
The different uses of Information Technology: a) Single Window System b) Any Time Banking c) Automated Teller machine d) Shared Payment Network System e) Customer Service f) Telebanking g) Home Banking h) Electronic Fund Transfer i) Plastic Cards as Media for Payment 1. Credit Card
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2. Debit Card 3. Smart Card 4. ATM Card j) Intra-bank and Inter-bank Applications
4.1 The different uses of Information Technology: a) Single Window System (SWS): o The cashier or teller who accepts the cash, keys in the data from his terminal after receipt of the amount. o The amount is straight away posted to the system. o If the customer wishes to update passbook the same is also updated through the security form printer/pass book printer. o If a customer wishes to obtain a draft, the clerk keys in the details of the account to be debited and the particulars of the drafts to be issued on the machine. o The customer’s account is debited and security form printer prints out draft and clerk can hand over the same to customer duly signed.
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b) Any Time Banking: This refers to banking service available 24 hours a day and 365 days a year. Such facility is made available to the customer through the Automated Teller machine. Banking, being a service industry, is primarily driven by customers needs. Each customer is willing to pay a price for the services provided it is made available to him when he wants and where he wants. In the present day of server competion, banking services are driven by technology, which is more oriented towards providing better services to the customer. The concept of banking hours has been changed from the fixed 4 hours to 24 hours. This has been made possible through use of ATMs. Even under the manual service, the banks have stated to extend the service from the traditional 4 hours to 5 hours and even up to 12 hours say from 8 AM to 8 PM. Some banks have introduced the practice of Sunday Banking or Holiday Banking.
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c) Automated Teller Machine (ATM): ATM is a machine in the nature of a computer in general sense, but is dedicated to do certain types of specific jobs only. The hardware and the proprietary i.e. the software used in one machine can not be used in one machine. d) Shared Payment Network System (SPNS): The SPNS, named SWADHAN, has been sponsored by the Indian Bank’s Association (IBA). It is a network of ATMs, points of sale terminals and Cash Dispensers with a view to pool the resources of the banks and underlines the spirit of competition through cooperation.
It became operational in Mumbai on 1st February 1997 and in
two years about 150 ATMs were owned and installed by 38 banks including foreign banks, public and private sector Indian commercial banks as also cooperative banks. The biggest advantage of the network is that the ATM cards issued by different banks can used at any member banks ATM. Banks can have as many ATM as they want and follow some standards set by the SPNS committee.
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The heart of the network is the Switch and its main components are: Tandem Mainframe Computer, BASE 24 Software, Motorola networking equipments and the leased lines.
e) Customer Services: The following customer services are offered through the system: i. ii. iii. iv. v. vi. vii. Cash withdrawal (up to a specified limit) Cheque/Cash deposit (the receipt being only for the deposit of the envelope containing cash but not for the amount therein) Enquiry about balances Printing of statement of accounts Request for cheque book and standing instructions. Transfer of funds PIN change
f) Telebanking: From the conventional banking, where the services were provided manually across the table, it has come to a stage where the customer is not required to visit the bank enquiry of balance
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in the account, sending a remittance, to get a statement of account, etc. The concept has become so popular that in USA customers do not visit the bank for 97% of their transactions and these are done from either customer’s residence or office using a telephone or a home PC. In telebanking the customer is required to open the account with the bank initially by visiting the bank. Telebanking services are, generally, provided by the bank over the telephone on a special number. The number at the bank is connected to a terminal in the bank, which is either handled manually or is automated by connecting the same to the computer network. Where the system is automated, two types of technology are used.
g) Home Banking: • Under home banking the customer is served at his residence and there is no need for the customer to visit the bank’s premises for a number of routine transactions.
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• If the customer needs some information the same can be got by contacting the bank over the phone as described in the telebanking. • If the customer wants to put through transaction and wishes to see his account or to get a statement of his account, he may have to use a PC. • This type of facility is available with a town, city or metropolitan area. • Under such a situation the customer should have a:
PC Modem Telephone line A compatible software for the home PC • The home banking service can be broadly classified under two groups, one without using the information technology and another using information technology. • When customer contacts the bank o the phone no specific technology is involved and the service of telebanking are provided to him.
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h) Electronic Fund Transfer (EFT): o In India the fund transfers are basically done through Mail Transfer, Draft or Telegraphic Transfer. o In case of Telegraphic Transfer (TT) again the Department of Telecommunication was the sole provider of Telephone, Telex and Telegram facilities. o With the process of liberalization private operators have started providing alternative voice communication channels through mobile phones and vast communication as an alternative channels for data communication. o It was normal for any TT to be credited to the beneficiary’s account after delay of 2 to 4 days o The different forms of EFT prevalent in the use are: EFT through Electronic Data Interchange BANKNET RBINET IDRBT VSAT Network EFT from Point of Sales Electronic Cash SWIFT- Global System for Funds Transfer Electronic Clearing Settlement
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i) Plastic Cards as Media for Payment: There are four types of plastic cards being used ad media for making payments. These are: 1. Credit Card 2. Debit Card 3. Smart Card 4. ATM Card 1. Credit Cards: The credit card enables the cardholders to: Purchase any item like clothes, jewellery, railway/air tickets, etc. Pay bills for dining in a restaurant or boarding and lodging in a hotel Avail of any service like car rental, etc. 2. Debit Card: A debit card is issued on payment of a specified amount by the issuing company like a telephone company to a customer on cash payment or on debiting his account by a bank. Thus it is like an electronic purse, which can be read and debited by the required amount.
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It may be noted that while through a credit card, the customer first makes a purchase or avails service and pays later on, but for getting the debit card, a customer has to first pay the due amount and then make a purchase or avail the service. For this reason, debit card are not as popular as credit cards. 3. Smart Cards: Smart Cards have a built-in microcomputer chip, which can be used for storing and processing information. For example, a person can have a smart card from a bank with the specified amount stored electronically on it. As he goes on making transactions with the help of the card, the balance keeps on reducing electronically. When the specified amount is utilized by the customer, he can approach the bank to get his card validated for a further specified amount. Such cards are used for paying small amounts like telephone calls, petrol bills, etc. In India, a smart card, suiting Indian banking environment, is being developed and tested at IIT, Mumbai, in collaboration with the RBI and SBI. The card is being used as an experimental tool for promoting cashless society in and around the IIT Campus. The latest smart card being developed will combine all the features of electronic purses, credit cards and ATM cards.
4. ATM Cards: The card contains a PIN (Personal Identification Number) which is selected by the customer or conveyed to the customer and enables him
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to withdraw cash up to the transaction limit for the day. He can also deposit cash or cheque.
Function of ATM Card: The customer has to enter the card into the machine slot. The machine first reads for hot carding of the card number, i.e. it checks whether the card has already been cancelled or placed on the rejection list. Rejection can be because of the reason like lost card or stolen card. The machine then reads the PIN and asks for the PIN from the customer. If the PIN matches, it present the main menu on the screen. The menu contains options from which the withdrawal option is selected. The ATM then checks whether the amount is under the day limit magnetically inscribed by the customer. Accordingly, the ATM dispenses cash. It then releases the card and a printed statement comes out of the slot.
5. Intra-Bank & Inter-Bank applications: Computerization is now all pervasive in banks. Almost all the activities in a bank can be performed more efficiently with the help of computers. Broadly, we can divide the applications of computerization in banks in two types
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A) Intra-Bank Applications: i. ii. iii. iv. v. vi. vii. viii. ix. x. xi. xii. Funds transfer and payment message Banks owned ATM/Credit Card and other application on the corporate network Inter-Branch Reconciliation Quick disposal of loan/investment proposal Funds information from clearing centers to the fund management office for optimal allocation of funds. Cash Management Product Treasury Management Any Branch Banking Asset Liability Management E-mail Software distribution in the bank Organizational bulletin boards may contain the following: a. Circulars b. News letters, phone and address directories c. Undesirable parties d. Missing security items e. Confidential circular on attempted frauds. xiii. xiv. xv. Human Resources Development and Personnel Administration Auditing and Inspecting computerized branches using the network Organizational database may include a. Statutory returns b. Control returns c. Standardized returns xvi. Management Information Systems
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a. Borrower’s profile b. Branch profile c. Employee analysis d. Product/service profile e. Business profile of branches. xvii. Apart from providing efficient service to customers the financial network will also fulfill the following objectives: a. Timely information to top management b. Helping in development of new products c. Speedy communication among branches and with the controlling offices. B) Inter-Bank Applications: i. Electronic Funds Transfer a. Retail EFT (Small value credit transfer) on net settlement basis. b. Wholesale EFT (Large value credit transfer) on Real Time Gross Settlement (RTGS) basis for time critical payments. ii. Clearing and settlement systems for securities – Delivery vs. Payment (DVP). The final delivery of securities will occur if and only if final payment occurs. iii. Transferring balance from net settlement systems to RTGS Server at periodic intervals. The net obligation could be from: a. Local paper-based clearing b. Inter-city paper-based clearing (including IT discounting facilities) c. Bulk payments – ECS (Debit, Credit, RAPID) including intercity.
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d. Shared ATM networks e. Smart cards and other pre-paid/pre-authorized debit cards iv. v. vi. Exchange of defaulting borrowers list among RBI and banks EDI services to the extent they pertain to payment cycle to EDI (Electronic Data Interchange) Consolidation of current account balance from the existing DAD (Deposit Accounts Department in RBI Offices) applications synchronously/asynchronously to facilitate balance enquiry by banks on all India/center-wise basis and if necessary to activate transfer of funds among DADs at different centers. vii. viii. ix. x. xi. Reporting of government account transactions Reporting of BSR (Basic Statistical Returns) etc. to RBI Asset Liability Management Intranet in RBI to enable banks to get circulars, press releases etc. Returns to be submitted by the banks to Departments of Banking Supervision (DBS) for off-site supervision and monitoring.
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Chapter 5: Credit Card Frauds
5.1 Credit Card Frauds • Meaning • Defrauder
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• Aware of Credit Card • Advantages of Credit Card • Credit Card Frauds 5.2 The Prevention of Frauds • Duplicate Card • White plastics • Banker’s Role • Cyber Laws • Altering Sale terminals • Internet Relays • Monitoring Deposit • Risk Management • Central Credit Card Clearing House • Loss of Credit Cards in Transit • Fraud Consciousness • Physical Evidence • Check the handwriting 5.3 How to Accept the Master Card 5.4 How to get reimbursed
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5.1 Credit Card Frauds: Meaning: A credit card is a money transaction device without using cash or fiduciary documents. Defrauder: The defrauder has been slow to exploit the credit card, for making a fast buck. In USA, he made 15 million dollars. through the cards, in 1981. in 1982 his earning through the card, rose to 50 million dollars. in 1983, the fraudulent card brought over 100 million dollars to its creators. The fraudulent card industry is rising higher and higher to
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dizzy height every year. Like other countries if the genuine credit card has come in India, the fraudulent credit card cannot be far behind. Aware of Credit Card: The credit card, as already seen, is a money transaction device. The institutions issuing the credit card give the card holders authority to obtain money, goods, services or any other thing of value, on credit. They guarantee payment of debit so raised. These institutions are banks and other financial institutions, clubs and travel agencies and departmental stores, etc. Credit Cards, Bob Cards, Master Cards, Visa Cards, express Cards, Euro Cards have wide circulation. Some of them have wide circulation. Some of them have world-wide circulation..
Advantages of Credit Cards: Following types of safety measures are being introduced increasingly in the credit card manufacture. They can be adopted with advantages 1. Simultaneous printing on both sides of the cards,; creating some superimposed graphics, patterns, digits or writings. 2. Multi-layered laminates incorporating lateen images which may distinguish the genuine from the forged. 3. Intricate graphics and distinctive letter and digit designs. 4. Laser printing to engrave the letter and digits on the credit card. 5. Three dimensional insignia, logo of high artistic quality on the credit card. 6. Encoded information track in magnetic inks on magnetic stripe.
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7. Cards inserted in the imprinter head, designed and manufactured to rigid specification to permit limited tolerance to admit only genuine credit cards. 8. Secure Signature Panel. 9. 3- Dimensional hologram. 10.U.V. fluorescent images and designs. 11.Micro printing 12. Optically illusive figures, designs, etc. 13.heavy duty embossing logo.
Credit Card Frauds: Credit card frauds manifest themselves in a number of ways: 1. Genuine cards are manipulated. 2. Genuine cards are altered. 3. Counterfeit cards are created. 4. Fraudulent telemarketing is done with credit cards. 5. Genuine cards are obtained on fraudulent applications in the names/addresses of other persons and used.
It is feared that with the expansion of E-Commerce, M-Commerce, and Internet facilities being available on massive scale, the fraudulent fund freaking via credit cards will increase tremendously. The shape it takes will be limited only by the ingenuity of the future.
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5.2 The Prevention of Frauds Duplicate Card: The duplicate fraudulent credit cards are those where the defrauders have made sincere efforts to duplicate the original cards through photomechanical processes. They follow the footsteps of the original manufactures of the genuine credit cards to produce as close a replica of the genuine card as possible, employing similar materials and similar processes of printing and embossing, besides magnetic encodings. White Plastic: The counterfeit credit cards known as ‘white plastics’ are imitations of credit cards in general aspect. Banker’s Role: The credit card industry is one of the fastest growing activities of the banking industry. The artist has to be there (where the money is). The banks have to suffer losses.
Cyber Laws: -
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Information Technology Ministry be approached for stringent laws against credit card crimes. Altering Sales terminals: Internet E-Mail should be utilized on the pattern of Hot Box organized about a decade ago, suitably modified to benefit from the advances the information technology has made since them. Internet Relays: Computers should be pressed into service via internet connection by suitably upgrading the Television System Vertical blanking Intervals for notifying the fraudulent cards in the market.
Monitoring Deposit: Monitoring system can help locate the unscrupulous merchants who use or allow the use of ‘white plastics’ and fraudulent cards, knowing fully well their fraudulent nature for making a fast back. Risk Management: To meet the menace one of the top card companies has imitated risk management service to identify these high risk centers where daily all the inter-change transactions of the areas are scrutinized and the credit card number are checked against those which have been declared fraudulent, stolen or lost.
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Central credit Card Clearing House: There should be a joint list of credit card holders on central basis with their addresses and other details, if any. New applicants to any bank for credit cards should be checked: • If he is holding card from other issuers. • If he has held a card at other times. If so, when? Why did he discontinue? • If he has applied to more than one credit card issuers • The new card holder’s business transactions should be watched for some time.
Loss of Credit cards in Transit: It must be prevented. It is simple for either the customer to collect personally or the banker should deliver it personally, or it should be sent by courier and confirmation obtained on telephone, in addition to the paper receipt.
Fraud Consciousness: The problem of credit card frauds must be brought to the notice of users as well as of the servers at sale terminals.
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Proper training in the check up of the credit card in its various aspects has no substitute and in view of the huge issues the same is indispensable.
Physical Evidence: Immediately on the discovery of fraud all the physical evidence available should at once be taken into possession and the case reported to the police for investigation.
Check the Handwriting: Handwriting (in signatures) is available on sale drafts and on credit cards. The comparison of hand-writing inter se and with that of the suspect and of genuine card holders, can lead to the identity or nonidentity of alleged writer.
How to accept: Master Card International guarantees payment of all Master Card Travelers Cheques if the following procedures are followed: -
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• Watch the customer signs each cheque in ink on the countersignature line. • Compare this signature to the original signature. Ensure they look the same. • If a cheque is already countersigned, or if you doubt the two signatures are the same, ask the customer to sign the cheque again on the back for comparison. Also, request identification such as a passport, driving license or similar document, and write the details on the back of the cheque. • If a cheque is presented by anyone other than the original purchaser, treat it the same way you would a personal check from a third party. You should know the customer and be able to contact the customer if there’s problem.
How to get Reimbursed: • Stamp or write your company name on the front of the cheque where it says, “Issuer will pay to the order of…..” and also endorse at the back of the cheque. • Deposit cheques in your bank as cash items. US dollar Master Card Travelers Cheques, regardless of location of issuer, are cleared and paid in the US. • Do not send cheque directly to the issuing institution.
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Chapter 6: - Banks Control in Online Banking
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6.1 Will Banks Control Online Banking: • Internet Banking in India • Real threats • Online
6.2 Banking in the Cyberworld: • Internet Purchases without Payment Gateways • Risk of Gateway
6.1 Will Banks Control Online Banking: Internet Banking in India: Online banking is expected to explode in the ext few years. We will be entering the age of non-physical exchange of cash aided by complete transparency leading to perfectly competitive electronic market place and inevitably to customer supremacy. Growth in online banking will be driven by the following reasons: Increasing access to low cost electronic services
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Emergence of open standards in the banking industry Improved customer awareness Entry of global majors in the market Integration of banking services with e-commerce and emergence of e-cash Convenient international transactions as Internet eliminates geographic boundaries Shift from one-stop shopping to unbundled product purchases
Internet Banking – An Overview: Internet Banking sites can be segregated into four categories from Level I, which offer just minimum functionalities such as access to one’s deposit account data, to Level IV sites that offer sophisticated services. To be successful, an Internet bank must offer: High rates on deposits 24 hour access Free checking and bill payment facilities with rebates on ATM surcharges Credit cards with low rates Simple and easy online applications for all accounts including personal loans Innovative products High quality customer service
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Real Threats: A majority of leading online brokers are beginning to offer banking products and services as part of their overall offers. They are actively seeking to capture “excess” balances in existing checking and saving accounts by offering better rates. There are other threats to banks as well. Several leading system providers have developed “bank-in-a-box” solution – unbranded, electronic, full-service, virtual-bank system – that can be bought, branded, and offered to consumer by any authorized company that wishes to provide banking service.
Online: An online service that merely mimics an offline one has a second problem as well; it doesn’t give customers an adequate inducement to move a significant portion of their banking online. As a result, most customers tend to tend to treat online banking as no more than an extra channel to check their balance and transaction
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histories, and they continue to do the rest of their business at the ATM or the teller window. A vicious offering increase the banks’ total costs. This makes the banks reluctant to make further large investments in the online channel, which thus, does nothing to move customers away from tellers and ATMs. In fact, consumers didn’t stop using tellers to the extent that banks has hoped, but they also used ATMs so frequently that the reduction in cost per use was more than offset by the higher volume of transactions.
The study of information systems through broad band connection, satellite, a network or through a view chat. This online information systems provides information about all aspects, Information providing on the demand of the subscriber. This online information systems may be of study program, a graduation program or sharing of data through internets, extranet and internet. Sharing of Data: The data base store data and information extracted from selected operational and external databases. The database has most needed information by a manager or any end users. This database can be accessed by the ONLINE ANALYTICAL POCESSING (OLAP) systems. This network model can access a data element by several paths. In an organization departmental records can be related to more than one employee record.
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Thus in an organization data can be shared through internet, internet and extranet. ONLINE LEARNING: This online information system provides online courses through internet, broad band satellite connection. The recent online course is provided by XLRI, (Xavier Labour Relations Institute) joined hands with Hughes Escorts communication limited. Their main course is on BUSINESS MANAGEMENT. Hughes Escorts is the Indian Operations of US – based communication major, Hughes network systems, which is a wing of Hughes electronic. This job is being done by Directing Global education which is joint venture between Hughes network systems and one touch knowledge systems. This job arrangement with Hughes Escorts to offer Management training on satellite platform will take expertise of XLRI faculty beyond the borders of their concern. This information has live videos, voice and transmission to classes through Hughes broadband satellite network. Interaction is through voice and data. This course is conducted across through four metros, Trichy, Bangalore, Hyderabad, Chandigarh, Pune, Kochi, Coimbatore and Madurai. This course is targeted at working executives
COUNTRY STUDIES: This country studies by online service is from 1988 onwards. In this, the study of every country is made. B-B (Business – Business E-Commerce). Despite all the buzz, we still don’t know about what makes B-B. there is a growing relation that B-B
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will take years to mature, and the rate of adoption – even if companies deliver a huge value equation improvement – will be gradual because it requires system and individuals to act in fundamentally new ways. The next thing after B-B is enabling technologies to incorporate more sophisticated back-end integration system, financing options and logistical support. In India, NASSCOM puts the value of online B-B transactions at Rs. 400 crore in 1999-00 of total E – Commerce of Rs. 450. But the question is how much B-B-E-Commerce is really happening in India? It is hard to quantify in terms of real numbers with no established data available in specific reverence to the Indian context. But there is a possibility of this business assuming a huge proportion in future. B-B has been happening all through and a new channel has been opened with the advent of the Internet. Obviously organizations will switch over to this channel for the cost – effectiveness it provides. The market is emerging in the country and it will be a boom time in the next year.
6.2 Banking in the Cyberworld: Internet Purchases without Payment Gateway: The dangers are three-fold • Since a manual process requires human intervention, risk of information leakage exists.
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• No exchange of Digital ID, so no authentication of the merchant – risk of bogus merchant. • No exchange of Digital Certificate to authenticate card holder – risk of repudiation of transaction by the card holder.
The benefits which the user would get by using the Internet payment gateway are • Card details travel encrypted on the Net (if encryption facility available on the gateway). • On-line status of order, if the gateway has on-line authorization. • Secure Merchant identification, so that fraudulent web sites posing as genuine merchants get weeded out
What’s a Payment Gateway? A payment gateway is software that supports multiple payment models simultaneously in a safe and secure manner. Funds can be transferred through credit, debit and smart cards, cheques, electronic payment wallets and even direct debits through a central payment switch.
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Put simply, a payment gateway enables on-line commercial transactions on the internet on a secure system, which have firewalls against hacking.
Risk of Gateways: • Currently, in India – HDFC Bank and ICICI – have launched payment gateways for business to customer (B2C) transactions. • Payments can be effected through credit cards or through directly debiting the account of the customers of the respective banks. • Some payment mechanisms on the Internet are not safe, as they are in the open-loop where a merchant portal can see the credit card number. • This is unsafe for credit card holder and is susceptible to fraud as his number can be physically seen. • The dust is yet to settle in the B2C payment gateways, but action is already heating up in the business to business (B2B) arena.
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• Besides HDFC Bank and ICIC, Global Tele-System and a few other non-bank companies are toying the idea of launching payment gateways for inter bank and B2B transactions. • No prizes for guessing who are they targeting, Nationalized banks, of course.
Recommendations: • Technological development has been nothing less than explosion. Banks have been harnessing such technological
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innovations on one hand and adapting themselves to such changes on the other hand. • The most significant event has been development of semiconductor technology, which has resulted in spectacular expansion of automation. • Processing, storage and transmission of information is very essence of banking and financial services. • The electronic technology has bought revolutionary changes in these areas. The elimination of paper as medium for processing and storage of transactions / information has been a great event. Large volume of information can be processed, stored and retrieved very economically at terrific speed, which is not possible manually. • The space required for managing enormous volume of information has been reduced dramatically. • With the revolution in telecommunication technology,
information can be made accessible from remote distance at lightening speed. The final output of information after manipulation and analysis can be printed by printer at high speed directly from computers. • Thus, the computer now has the ability to retrieve data or update files instantaneously. Subsequently with the development in
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telecommunication, Local Area Network (LAN)/Wide Area Network (WAN) have been established.
Suggestions: To prevent online banking from remaining an expensive additional channel that does little to retain footloose customers, banks must act quickly.
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The first and most obvious step they should take is to see to it that the basic problem fueling dissatisfaction have been addressed. After repairing this basic deficiency, banks must ensure that there services is competitive. Obviously, it should include checking, savings and brokerage services, which anchor customers to the institution. In addition, to meet the challenge of online brokerage and other new entrants, banks would need to add “supermarkets” selling products such as mortgage, mutual funds and insurance.
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Technology innovation and fierce competition among existing banks have enable a wide array of banking products and services, being made available to retail and wholesale customer through an electronic distribution channel, collectively referred to as e-banking. The integration of e-banking application with legacy system implies an integrated risk management approach for all banking activities of a banking institution. Latest recommendations of Basle Committee recognize that each bank’s risk profile is different and requires a tailored risk mitigation approach appropriate for the scale of e-banking operations, the materiality of the risks present and the willingness and ability of the institution to manage their risks. This implies that a “one size fits all” approach to e-banking risk management issues may not be appropriate.
Banks have traditionally been in the forefront of harnessing technology to improve product and efficiency. Technology is altering the relationships between banks and its internal and external customers. Technology has also eroded the entry barriers faced by many industries. With one time investment, technology has brought about superior products and channel management with a special focus on customer relationship. The incremental costs incurred for expansion and diversification are also more beneficial. The major driving force behind the rapid spread of e-banking is its acceptance as an extremely cost effective delivery channel. But on the flipside, it is associated with risks such as reputation risk, security risk, cross-border risk and strategic risk, which are unique to e-banking. Banks need to have an effective disaster recovery plan along with
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comprehensive risk management tool is significant not only to the bank but also to the banking system as a whole. All these issues underscore the importance of sound supervisory policies and high level of international co-operation among the bank regulators. The Basle Committee on banking Supervision has taken the lead in this area through the creation of its Electronic Banking Group – a group comprising 17 central banks and bank supervisory agencies in the late 1999. The main focus of this group has been to develop sound risk management practices.
Internet has created plenty of opportunities for players in the banking sector. While the new entrants have the advantage of latest technology, the good-will of the established banks gives them a special opportunity to lead the online world. By merely putting existing service online won’t help the banks in holding their customer close. Instead, banks must learn to capitalize their customer’s different online financialservices relationships. The article “Will Banks Control Online Banking?” focuses on how banks have to reinvent their role to remain as their customers’ preferred bank.
Coming home, India is on threshold of a major banking revolution with the invasion of net banking. With the concept of payment gateway coming in, banks are vying with one another for the lion’s share in the market. Highlighting the benefits of payment gateway over the openloop payment mechanism, the article “Banking in the Cyber worlds”
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gives a brief report of the tug of war between the two major Indian ebanking players.
ROLE AND SIGNIFICANCE :
If computerization has today become a byword in banking, its sustained growth is wholly due to its role as an enabler in the smooth
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and efficient conduct of a whole range of banking practices. Computers were originally destined for a minor role in banks, primarily intended to facilitate accounting transactions. Subsequently, once its superiority was firmly established, it grew in status as a tool for a management information information and a host of other inventions. Although the accounting aspect is still quite important and relevant, IT has a far greater role to play to day to day banking operations, especially in decision making process. Further, facilities like ATM, Anywhere Banking, Internet as well as Mobile Banking have been increasing their presence. It has, to be conceded that ‘ Information Technology’ is not the end in itself, but is useful tool in the hands of the management to leverage business prospects in its favour and enchance efficiency. Banks now have come under great pressure to reduce operational costs to safeguard their bottom lines. With banking tuning more and more customer-centric with every passing day, technology as an enabler has helped banks to launch a whole array of customer-centric products such as ATMs, Debit Cards, 24 hour Anywhere Banking. The nomenclature ‘Banking Accounts’ have also yielded to more sophisticated term ‘banking relationship’. Customer Relations Management is now a very potent and potential concept. E-Banking also has a role to play in ensuring a fair return to shareholders, by facilitating in ensuring greater profits to the banking sector. The recent emerging trends in self-service channels, namely ATM,s, Call-centers, Internet and mobile banking would increase the use of E-banking as this offer the twin benefit i.e convenience to the customers and reduction and cost of operation to the banks. E- banking can increase the easy access of internet facilities among the masses which would rise the comfort level for transacting via the web. The popularity of internet banking likely depends upon inculcating in customers about their security and personal privacy of their money and assests.
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• O’ Brien James. A, Management Information System, Galgotia Publication • Muedic & Ross, Management Information System • Lucae, Management Information System • Sen, Management Information System • Indian Banking, S. Natarahan and R. Parameswaran • Banking – In the New Millennium, ICFAI University
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