E-BANKING

DEFINITION OF E-BANKING
Electronic banking, also known as electronic funds transfer (EFT), is simply the use
of electronic means to transfer funds directly from one account to another, rather than
by cheque or cash. You can use electronic funds transfer to
• !a"e your paycheck deposited directly into your bank or credit union checking
account.
• #ithdraw money from your checking account from an $T% machine with a
personal identification number (&'(), at your con"enience, day or night.
• 'nstruct your bank or credit union to automatically pay certain monthly bills from
your account, such as your auto loan or your mortgage payment.
• !a"e the bank or credit union transfer funds each month from your checking
account to your mutual fund account.
• !a"e your go"ernment social security benefits check or your ta) refund deposited
directly into your checking account.
• *uy groceries, gasoline and other purchases at the point+of+sale, using a check
card rather than cash, credit or a personal check.
• ,se a smart card with a prepaid amount of money embedded in it for use instead
of cash at a pay phone, e)pressway road toll, or on college campuses at the
library-s photocopy machine or bookstores.
• ,se your computer and personal finance software to coordinate your total
personal financial management process, integrating data and acti"ities related to
your income, spending, sa"ing, in"esting, recordkeeping, bill+paying and ta)es,
along with basic financial analysis and decision making.
1
E-BANKING
2
E-BANKING
VARIOUS FORMS OF E-BANKING:
INTERNET BANKING:
Internet Banking lets you handle many banking transactions "ia your personal
computer. For instance, you may use your computer to "iew your account balance,
request transfers between accounts, and pay bills electronically.
'nternet banking system and method in which a personal computer is connected by a
network ser"ice pro"ider directly to a host computer system of a bank such that
customer ser"ice requests can be processed automatically without need for
inter"ention by customer ser"ice representati"es. The system is capable of
distinguishing between those customer ser"ice requests which are capable of
automated fulfillment and those requests which require handling by a customer
ser"ice representati"e. The system is integrated with the host computer system of the
bank so that the remote banking customer can access other automated ser"ices of the
bank. The method of the in"ention includes the steps of inputting a customer banking
request from among a menu of banking requests at a remote personnel computer.
transmitting the banking requests to a host computer o"er a network. recei"ing the
request at the host computer. identifying the type of customer banking request
recei"ed. automatic logging of the ser"ice request, comparing the recei"ed request to
a stored table of request types, each of the request types ha"ing an attribute to indicate
whether the request type is capable of being fulfilled by a customer ser"ice
representati"e or by an automated system. and, depending upon the attribute,
directing the request either to a queue for handling by a customer ser"ice
representati"e or to a queue for processing by an automated system.
AUTOMATED TELLER MACHINES (ATM):
3
E-BANKING
$n unattended electronic machine in a public place, connected to a data system and
related equipment and acti"ated by a bank customer to obtain cash withdrawals and
other banking ser"ices. $lso called automatic teller machine, cash machine. $lso
called money machine.
$n automated tee! ma"#$%e or automat$" tee! ma"#$%e (ATM) is an electronic
computeri/ed telecommunications de"ice that allows a financial institution-s
customers to directly use a secure method of communication to access their bank
accounts, order or make cash withdrawals (or cash ad"ances using a credit card) and
check their account balances without the need for a human bank teller (or cashier in
the ,0). %any $T%s also allow people to deposit cash or cheques, transfer money
between their bank accounts, top up their mobile phones- pre+paid accounts or e"en
buy postage stamps.
1n most modern $T%s, the customer identifies him or herself by inserting a plastic
card with a magnetic stripe or a plastic smartcard with a chip, that contains his or her
account number. The customer then "erifies their identity by entering a passcode,
often referred to as a &IN (&ersonal Identification Number) of four or more digits.
,pon successful entry of the &'(, the customer may perform a transaction.
'f the number is entered incorrectly se"eral times in a row (usually three attempts per
card insertion), some $T%s will attempt retain the card as a security precaution to
pre"ent an unauthorised user from disco"ering the &'( by guesswork. 2aptured cards
are often destroyed if the $T% owner is not the card issuing bank, as non+customer-s
identities cannot be reliably confirmed.
The 'ndian market today has appro)imately more than 34,555 $T%6s.
TELE BANKING:
,ndertaking a host of banking related ser"ices including financial transactions from
the con"enience of customers chosen place anywhere across the 781*E and any
time of date and night has now been made possible by introducing on+line
4
E-BANKING
Telebanking ser"ices. *y dialing the gi"en Telebanking number through a landline or
a mobile from anywhere, the customer can access his account and by following the
user+friendly menu, entire banking can be done through 'nteracti"e 9oice :esponse
('9:) system. #ith sufficient numbers of hunting lines made a"ailable, customer call
will hardly fail. The system is bi+lingual and has following facilities offered
• $utomatic balance "oice out for the default account.
• *alance inquiry and transaction inquiry in all
• 'nquiry of all term deposit account
• ;tatement of account by Fa), e+mail or ordinary mail.
• 2heque book request
• ;top payment which is on+line and instantaneous
• Transfer of funds with 2*; which is automatic and instantaneous
• ,tility *ill &ayments
• :enewal of term deposit which is automatic and instantaneous
• 9oice out of last fi"e transactions.
SMART CARD:
$ smart card usually contains an embedded <+bit microprocessor (a kind of computer
chip). The microprocessor is under a contact pad on one side of the card. Think of the
microprocessor as replacing the usual magnetic stripe present on a credit card or debit
card.
The microprocessor on the smart card is there for security. The host computer and
card reader actually =talk= to the microprocessor. The microprocessor enforces access
to the data on the card.
5
E-BANKING
The chips in these cards are capable of many kinds of transactions. For e)ample, a
person could make purchases from their credit account, debit account or from a stored
account "alue that-s reload able. The enhanced memory and processing capacity of
the smart card is many times that of traditional magnetic+stripe cards and can
accommodate se"eral different applications on a single card. 't can also hold
identification information, which means no more shuffling through cards in the wallet
to find the right one ++ the ;mart 2ard will be the only one needed.
;mart cards can also be used with a smart card reader attachment to a personal
computer to authenticate a user.
;mart cards are much more popular in Europe than in the ,.;. 'n Europe the health
insurance and banking industries use smart cards e)tensi"ely. E"ery 7erman citi/en
has a smart card for health insurance. E"en though smart cards ha"e been around in
their modern form for at least a decade, they are >ust starting to take off in the ,.;.
DEBIT CARD:
?ebit cards are also known as check cards. ?ebit cards look like credit cards or $T%
(automated teller machine) cards, but operate like cash or a personal check. ?ebit
cards are different from credit cards. #hile a credit card is a way to =pay later,= a
debit card is a way to =pay now.= #hen you use a debit card, your money is quickly
deducted from your checking or sa"ings account.
?ebit cards are accepted at many locations, including grocery stores, retail stores,
gasoline stations, and restaurants. You can use your card anywhere merchants display
your card-s brand name or logo. They offer an alternati"e to carrying a checkbook or
cash.
6
E-BANKING
E-CHE'UE:
• $n e+2heque is the electronic "ersion or representation of paper cheque.
• The 'nformation and 8egal Framework on the E+2heque is the same as that of
the paper cheque6s.
• 't can now be used in place of paper cheques to do any and all remote
transactions.
• $n E+cheque work the same way a cheque does, the cheque writer =writes=
the e+2heque using one of many types of electronic de"ices and =gi"es= the e+
2heque to the payee electronically. The payee =deposits= the Electronic 2heque
recei"es credit, and the payee-s bank =clears= the e+2heque to the paying bank.
The paying bank "alidates the e+2heque and then =charges= the check writer-s
account for the check
7
E-BANKING
OTHER FORMS OF ELECTRONIC BANKING
• ?irect ?eposit
• Electronic *ill &ayment
• Electronic 2heck 2on"ersion
• 2ash 9alue ;tored, Etc.
8
E-BANKING
BENEFITS(CONCERNS OF E-BANKING
BENEFITS OF E-BANKING
Fo! Ba%)*:
&rice+ 'n the long run a bank can sa"e on money by not paying for tellers or for
managing branches. &lus, it-s cheaper to make transactions o"er the 'nternet.
2ustomer *ase+ The 'nternet allows banks to reach a whole new market+ and a well
off one too, because there are no geographic boundaries with the 'nternet. The
'nternet also pro"ides a le"el playing field for small banks who want to add to their
customer base.
Efficiency+ *anks can become more efficient than they already are by pro"iding
'nternet access for their customers. The 'nternet pro"ides the bank with an almost
paper less system.
2ustomer ;er"ice and ;atisfaction+ *anking on the 'nternet not only allow the
customer to ha"e a full range of ser"ices a"ailable to them but it also allows them
some ser"ices not offered at any of the branches. The person does not ha"e to go to a
branch where that ser"ice may or may not be offer. $ person can print of information,
forms, and applications "ia the 'nternet and be able to search for information
efficiently instead of waiting in line and asking a teller. #ith more better and faster
options a bank will surly be able to create better customer relations and satisfaction.
'mage+ $ bank seems more state of the art to a customer if they offer 'nternet access.
$ person may not want to use 'nternet banking but ha"ing the ser"ice a"ailable gi"es
a person the feeling that their bank is on the cutting image.
Fo! Cu*tome!*:
9
E-BANKING
*ill &ay *ill &ay is a ser"ice offered through 'nternet banking that allows the
customer to set up bill payments to >ust about anyone. 2ustomer can select the person
or company whom he wants to make a payment and *ill &ay will withdraw the
money from his account and send the payee a paper check or an electronic payment
1ther 'mportant Facilities E+ banking gi"es customer the control o"er nearly e"ery
aspect of managing his bank accounts. *esides the 2ustomers can, *uy and ;ell
;ecurities, 2heck ;tock %arket 'nformation, 2heck 2urrency :ates, 2heck *alances,
;ee which checks are cleared, Transfer %oney, 9iew Transaction !istory and a"oid
going to an actual bank. The best benefit is that 'nternet banking is free. $t many
banks the customer doesn-t ha"e to maintain a required minimum balance. The second
big benefit is better interest rates for the customer.
10
E-BANKING
CONCERNS +ITH E-BANKING
$s with any new technology new problems are faced.
Cu*tome! *u,,o!t + banks will ha"e to create a whole new customer relations
department to help customers. *anks ha"e to make sure that the customers recei"e
assistance quickly if they need help. $ny ma>or problems or disastrous can destroy
the banks reputation quickly an easily. *y showing the customer that the 'nternet is
reliable you are able to get the customer to trust online banking more and more.
La-* + #hile 'nternet banking does not ha"e national or state boundaries, the law
does. 2ompanies will ha"e to make sure that they ha"e software in place software
market, creating a monopoly.
Se"u!$t. customer always worries about their protection and security or accuracy.
There are always question whether or not something took place.
Ot#e! "#ae%/e* lack of knowledge from customers end, sit changes by the banks,
etc
E-BANKING GLOBAL &ERS&ECTIVE
The ad"ent of 'nternet has initiated an electronic re"olution in the global banking
sector. The dynamic and fle)ible nature of this communication channel as well as its
ubiquitous reach has helped in le"eraging a "ariety of banking acti"ities. (ew
banking intermediaries offering entirely new types of banking ser"ices ha"e emerged
as a result of inno"ati"e e+business models. The 'nternet has emerged as one of the
11
E-BANKING
ma>or distribution channels of banking products and ser"ices, for the banks in ,; and
in the European countries.
'nitially, banks promoted their core capabilities i.e., products, ser"ices and ad"ice
through 'nternet. Then, they entered the e+commerce market as pro"iders@distributors
of their own products and ser"ices. %ore recently, due to ad"ances in 'nternet
security and the ad"ent of rele"ant protocols, banks ha"e disco"ered that they can
play their primary role as financial intermediators and facilitators of complete
commercial transactions "ia electronic networks especially through the 'nternet.
;ome banks ha"e chosen a route of establishing a direct web presence while others
ha"e opted for either being an owner of financial ser"ices centric electronic
marketplace or being participants of a non+financial ser"ices centric electronic
marketplace.
The trend towards electronic deli"ery of banking products and ser"ices is occurring
partly as a result of consumer demand and partly because of the increasing
competiti"e en"ironment in the global banking industry. The 'nternet has changed the
customers- beha"iors who are demanding more customi/ed products@ser"ices at a
lower price. %oreo"er, new competition from pure online banks has put the
profitability of e"en established brick and mortar banks under pressure. !owe"er,
"ery few banks ha"e been successful in de"eloping effecti"e strategies for fully
e)ploiting the opportunities offered by the 'nternet. For traditional banks to define
what niche markets to ser"e and decide what products@ser"ices to offer there is a need
for a clear and concise 'nternet commerce strategy.
*anking transactions had already started taking place through the 'nternet way back
in 3AAB. The 'nternet promised an ideal platform for commercial e)change, helping
banks to achie"e new le"els of efficiency in financial transactions by strengthening
customer relationship, promoting price disco"ery and spend aggregation and
increasing the reach. Electronic finance offered considerable opportunities for banks
to e)pand their client base and rationali/e their business while the customers recei"ed
"alue in the form of sa"ings in time and money.
12
E-BANKING
7lobal E+banking industry is co"ered by the following four sections
• E-0a%)$%/ S"e%a!$o: 't discusses the actual state, prospects, and issues
related to E+banking in $sia with a focus on 'ndia, ,; and Europe. 't also deals
with the impact of E+banking on the banking industry structure.
• E-0a%)$%/ St!ate/$e*: 't re"eals the key strategies that banks must
implement to deri"e ma)imum "alue through the online channel. 't also brings
guidance for those banks, which are planning to build online businesses.
• E-0a%)$%/ T!a%*a"t$o%*: 't discusses how 'nternet has radically transformed
banking transactions. The section focuses on cross border transactions, *C*
transactions, electronic bill payment and presentment and mobile payments. 'n
spite of all the hype, E+banking has been a non+starter in se"eral countries.
• E-0a%)$%/ T!e%d*: 't discuses the inno"ation of new technologies in banks.
13
E-BANKING
E-BANKING SCENARIO :
The banking industry is e)pected to be a leading player in E+business. #hile the
banks in de"eloped countries are working primarily "ia 'nternet as non+branch banks,
banks in the de"eloping countries use the 'nternet as an information deli"ery tool to
impro"e relationship with customers.
'n early C553, appro)imately D5 percent of E+business in ,0 was concentrated in the
financial ser"ices sector, and with the e)pected 35+fold increase of the *ritish E+
business market by C55B, the share of the financial ser"ices will further increase.
$round one fifth of Finish and ;wedish bank customers are banking online, while in
,;, according to ,(2T$?, online banking is growing at an annual rate of D5
percent and the number of online accounts has appro)imately reached 3B million by
C55D.
*anks ha"e established an 'nternet presence with "arious ob>ecti"es. %ost of them
are using the 'nternet as a new distribution channel. Financial ser"ices, with the use
of 'nternet, may be offered in an equi"alent quantity with lower costs to the more
potential customers. There may be contacts from each corner of the world at any time
of day or night. This means that banks may enlarge their market without opening new
branches. The banks in ,; are using the #eb to reach opportunities in three different
categories i.e., to market information, to deli"er banking products and ser"ices, and to
impro"e customer relationship.
'n $sia, the ma>or factor restricting growth of E+banking is security, in spite of
se"eral countries being well connected "ia 'nternet. $ccess to high+quality E+banking
products is an issue as well. %a>ority of the banks in $sia are >ust offering basic
ser"ices compared with those of de"eloped countries. ;till, E+banking seems to ha"e
a future in $sia. 't is considered that E+banking will succeed if the basic features,
especially bill payment, are handled well. *ill payment was the most popular feature,
cited by E5 percent of respondents of the sur"ey. !owe"er, pro"iding this ser"ice
14
E-BANKING
would be difficult for banks in $sia because it requires a high le"el of security and
in"ol"es arranging transactions with a "ariety of players.
'n C553, o"er B5 percent of the banks in the ,; were offering E+banking ser"ices.
!owe"er, large banks appeared to ha"e a clear ad"antage o"er small banks in the
range of ser"ices they offered. ;ome banks in ,; were targeting their 'nternet
strategies towards business customers. $part from affecting the way customers
recei"ed banking ser"ices. E+banking was e)pected to influence the banking industry
structure. The economics of E+banking was e)pected to fa"or large banks because of
economies of scale and scope, and the ability to ad"ertise hea"ily. %oreo"er, E+
banking offered entry and e)pansion opportunities that small banks traditionally
lacked.
'n Europe, the 'nternet is accelerating the reconfiguration of the banking industry into
three separate businesses production, distribution and ad"ice. This reconfiguration is
being further dri"en by the 'nternet, due to the combined impact of
• The emergence of new and more focused business models
• (ew technological capabilities that reduces the banking relationship and
transaction costs.
• !igh degree of uncertainty o"er the impact that new entrants will ha"e on
current business models.
Though E+banking in Europe is still in the e"olutionary stage, it is "ery clear that it is
ha"ing a significant impact on traditional banking acti"ities. ,nlike in the ,;, though
large banks in the Europe ha"e a competiti"e edge due to their ability to in"est
hea"ily in new technologies, they are still not ready to embrace E+banking. !ence,
medium+si/ed banks and start+ups ha"e an important role to play on the E+banking
front if they can take concrete measures quickly and effecti"ely.
15
E-BANKING
E-BANKING STRATEGIES:
Though E+banking offers "ast opportunities, yet e"en less than one in three banks
ha"e an E+banking strategy in place. $ccording to a study, less than 3B percent of
banks with transactional websites will reali/e profits directly attributable to those
sites. !ence, banks must recogni/e the seriousness of the challenge ahead and
de"elop a strategy that will enable them to le"erage the opportunities presented by the
'nternet.
(o single E+banking strategy is right for e"ery banking company. *ut whether they
adopt an offensi"e or a defensi"e posture, they must constantly re+e"aluate their
strategy. 'n the fast+paced e+economy, banks ha"e to keep up with the constantly
e"ol"ing business models and technology inno"ations of the 'nternet space. Early e+
business adopter like #ells Fargo not only entered the E+banking industry first but
also showed fle)ibility to change as the market de"eloped. (ot many banks ha"e been
as e+business+sa""y. *ut the pressure is now building for all banks to de"elop sound
e+business strategies that will attract and retain increasingly discriminating customers.
The ma>or problem with the banks, which ha"e already in"ested huge amounts in
their online initiati"es, is that their online offerings remain unprofitable. Though
banks ha"e enrolled some e)isting customers in their online programs, they are not
getting customers in large numbers. This has made banks wonder whether there is
any "alue in the online channel. Fust enrolling customers for online banking may not
be sufficient until and unless they use the site acti"ely. *anks must make efforts to
increase their site usage by customers and effecti"ely co+ordinate the online channel
with branches and call centers. Then only they will be able to deri"e ma)imum "alue
that includes cost reduction, cross+selling opportunities, and higher customer
retention.
2ustomers ha"e some rational reasons for staying offline. ;ome of these reasons
include usability features of the site, concerns about security and frequent complaints
that signing up is complicated and time+consuming. *anks can sol"e these problems
16
E-BANKING
by refocusing in"estment on impro"ing the site-s basic functionality and user+
friendliness, and a"oiding ad"anced features that most customers neither understand
nor "alue. ?e"eloping ad"anced features that appeal to a relati"ely small numbers of
customers, creates far less "alue than strengthening core capabilities and getting
customers to use them. *anks must make efforts to familiari/e customers with their
sites and show them how easy and efficient the online channel is to use.
'ntegrating the online channel with the rest of the bank is another important issue that
banks must focus upon. This is important because nearly all the "alue of the online
channel is reali/ed offline G in cross sales completed in other channels and in cost
reductions. $n acti"ely used online channel should also ser"e as a medium to sell
banking ser"ices for the branch staff, the call center, and the relationship manager.
'ntegrated channels working together are far more effecti"e than a group of channels
working without any coordination.
To facilitate this integration, banks must formulate paths that people in "arious
customer segments are likely to take among the channels. The interactions in each
channel can then be worked around these paths. For e)ample, a call center
representati"e must work out which channel(s) the customer used before coming to
her, and which channel(s) the customer is likely to "isit ne)t. Each channel must ha"e
entry and e)it points that must welcome customers and then send to other channels.
!ence, the o"erall goal of banks is to create a seamless multichannel e)perience.
1n the other hand, those banks that are planning to build their online businesses will
ha"e to understand se"eral strategic issues like do they ha"e the right business model
for E+bankingH !ow should they price their E+banking products and ser"icesH
*ankers planning to mo"e into E+banking ha"e to e)plore different options, make
in"estments and ha"e to de"elop a "ariety of partnerships. They ha"e to put their time
and efforts to identify the best opportunities. 'n the case of traditional banks, if they
are too aggressi"e in using price incenti"es to build their e+business, they risk the
profitability of their traditional business. !owe"er, if they do not offer sufficient price
incenti"es for customers to bank online, their efforts to build a sound e+ banking
business may not fructify.
17
E-BANKING
*anks ha"e to be creati"e in rethinking organi/ational structures and management
processes. Traditional banks that are conser"ati"e in nature may find it difficult to
attract and retain online talent. %oreo"er, getting people in the traditional business to
help build an e+enterprise would not be an easy task. To make all this happen,
requires a ma>or re"ision of incenti"e systems, planning and budgeting processes, and
management roles. *anks can e)ploit the opportunities pro"ided by the 'nternet if
they demonstrate courage, use their imagination, and take decisi"e action.
#hile most of the banks ha"e started focusing on E+banking acti"ities, a new
challenge in the form of mobile banking has emerged. %+*anking is both an
additional opportunity for banks to offer their online ser"ices and an additional
channel from which to access new customers and cross+sell to e)isting customers.
:apidly changing lifestyles of customers and their demand for more speed and
con"enience has subdued the role of branch banking to a certain e)tent. #ith the
proliferation of new technologies, disintermediation of traditional channels is being
witnessed. *anks can go beyond their traditional role as a channel for
banking@financial ser"ices and can become pro"iders of personali/ed information.
They can successfully le"erage m+banking to
• &ro"ide personali/ed products and ser"ices to specific customers and thus
increase customer loyalty.
• E)ploit additional sources of re"enue from subscriptions, transactions and
third+party referrals.
%+*anking gi"es banks the opportunity to significantly e)pand their customer
relationships pro"ided they position themsel"es effecti"ely. To le"erage these
opportunities, they must form structured alliances with ser"ice affiliates, and acquire
competiti"e ad"antage in collecting, processing and deploying customer information
18
E-BANKING
E-BANKING TRANSACTIONS:
The introduction of new technologies has radically transformed banking transactions.
'n the past, customers had to come physically into the bank branch to do banking
transactions including transfers, deposits and withdrawals. *anks had to employ
se"eral tellers to physically make all those transactions. $utomatic Teller %achines
($T%s) were then introduced which allowed people to do their banking on their own,
practically anytime and anywhere. This helped the banks cut down on the number of
tellers and focus on managing money. The 'nternet then brought another "enue with
which customers could do banking, reducing the need for $T%s. 1nline banking
allowed customers to do financial transactions from their &2s at home "ia 'nternet.
(ow, with the emergence of #ireless $pplication &rotocol (#$&) technology, banks
can use the infrastructure and applications de"eloped for the 'nternet and mo"e it to
mobile phones. (ow people no longer ha"e to be tied to a desktop &2 to do their
banking. The #$& interface is much faster and con"enient than the 'nternet, allowing
customers to see account details, transaction details, make bill payments, and e"en
check credit card balance.
The cost of the a"erage payment transaction on the 'nternet is minimum. ;e"eral
studies found that the estimated transaction cost through mobile phone is3D cents, a
fully computeri/ed bank using its own software is CD cents, a telephone bank is BE
cents, a bank branch, I3.C4, an $T%, C4 cents, and on the 'nternet it costs >ust 3J
cents. $s a result, the use of the 'nternet for commercial transactions started to gain
momentum in 3AAB. %ore than C,555 banks in the world now ha"e transactional
websites and the growth of online lending solutions is making them more cost
efficient. :ecent de"elopments are now encouraging banks to target small businesses
as a separate lending category online.
*anks are increasingly building payment infrastructure with "arious security
mechanisms (;;8, ;ET) because there is tremendous potential for profit, as more and
more payments will pass through the 'nternet. !owe"er, the challenge for banks is to
offer a payments back+bone system that will be open enough to support multiple
19
E-BANKING
payment instruments (credit cards, debit cards, direct debit to accounts, e+checks,
digital money etc.) and scalable enough to allow for a stable ser"ice regardless of the
workload.
The market for Electronic *ill &resentment and &ayment (E*&&) is growing.
$ccording to a study, 3< million households in the ,; are e)pected to pay their bills
online by C55J compared to C million households in C553. $s more number of bill
payers are getting online, se"eral banks are making efforts to find ways to meet the
growing needs of E*&&. Established banks can emerge as key online integrators of
customer bills and can capitali/e on this high potential market. 7rowing with the
popularity of E*&& is also the paying of multiple bills at a single site known as bill
aggregation. 1ffering online bill payment and aggregation will increase the
competiti"eness and attracti"eness of E+banking ser"ices and will allow banks to
generate ser"ice+fee income from the billers.
'n the *C* segment, the customer "alue proposition for online bill payment is more
compelling. *C* e+commerce is e)pected to grow from IE5D bn in C555 to IC.4 tn by
C55E, and more than half of all transactions will be routed through online *C*
marketplaces. There is a need for automated payment systems to reduce cost and
human error, and enhance cash+flow management. To meet this need, a group of
banks and non+financial institutions led by 2itibank and #ells Fargo ha"e formed a
company called Financial ;ettlements %atri) (F;%)). 't pro"ides business buyers
and sellers with access to secure payment processing, in"oicing and other ser"ices
that participating financial ser"ices firms offer.
$ *C* marketplace would pro"ide minimum "alue to its customers if it >ust matches
buyers and sellers, lea"ing the financial aspects of transactions to be handled through
traditional non+'nternet channels. !ence, the marketplace must be capable of
pro"iding the payments processing, treasury management ser"ices,
payables@recei"ables data flows, and credit solutions to complete the full cycle of a
commercial transaction on the 'nternet. The web+based *C* e+commerce offers
tremendous opportunities for banks, payment technology "endors and e+commerce
companies to form strategic alliances. This new form of collaboration between
20
E-BANKING
partners with complementary core competencies may pro"e to be an effecti"e
business model for e+business.
21
E-BANKING
E-BANKING TREND:
'nternet banking is gaining ground. *anks increasingly operate websites through
which customers are able not only to inquire about account balances and interest and
e)change rates but also to conduct a range of transactions. ,nfortunately, data on
'nternet banking are scarce, and differences in definitions make cross+country
comparisons difficult. E"en so, one finds that 'nternet banking is particularly
widespread in $ustria, 0orea, the ;candina"ian countries, ;ingapore, ;pain, and
;wit/erland, where more than 4B percent of all banks offer such ser"ices (see chart).
The ;candina"ian countries ha"e the largest number of 'nternet users, with up to one+
third of bank customers in Finland and ;weden taking ad"antage of E+banking.
'n the ,nited ;tates, 'nternet banking is still concentrated in the largest banks. 'n
mid+C553, EE percent of national banks maintained transactional websites, almost
double the number in the third quarter of 3AAA. These banks account for o"er A5
percent of national banking system assets. The larger banks tend to offer a wider
array of electronic banking ser"ices, including loan applications and brokerage
22
E-BANKING
ser"ices. #hile most ,.;. consumers ha"e accounts with banks that offer 'nternet
ser"ices, only about D percent of them use these ser"ices.
To date, most banks ha"e combined the new electronic deli"ery channels with
traditional brick and mortar branches (=brick and click= banks), but a small number
ha"e emerged that offer their products and ser"ices predominantly, or only, through
electronic distribution channels. These ="irtual= or 'nternet+only banks do not ha"e a
branch network but might ha"e a physical presence, for e)ample, an administrati"e
office or nonbranch facilities like kiosks or automatic teller machines. The ,nited
;tates has about J5 "irtual banks. $sia has C, launched in C555 and C553. and the
European ,nion has se"eralKeither as separately licensed entities or as subsidiaries
or branches of brick and mortar banks.
23
E-BANKING
THE INDIAN E1&ERIENCE
'ndia is still in the early stages of E+banking growth and de"elopment. 2ompetition
and changes in technology and lifestyle in the last fi"e years ha"e changed the face of
banking. The changes that ha"e taken place impose on banks tough standards of
competition and compliance. The issue here is L -#here does 'ndia stand in the
scheme of E+banking.- E+banking is likely to bring a host of opportunities as well as
unprecedented risks to the fundamental nature of banking in 'ndia.
The impact of E+ *anking in 'ndia is not yet apparent. %any global research
companies belie"e that E+banking adoption in 'ndia in the near future would be slow
compared to other ma>or $sian countries. 'ndian E+banking is still nascent, although
it is fast becoming a strategic necessity for most commercial banks, as competition
increases from pri"ate banks and non banking financial institutions.
?espite the global economic challenges facing the 'T software and ser"ices sector,
the outlook for the 'ndian industry remains optimistic.
The :eser"e *ank of 'ndia has also set up a =#orking 7roup on E+banking to
e)amine different aspects of E+banking. The group focused on three ma>or areas of E+
banking i.e. (3) Technology and ;ecurity issues (C) 8egal issues and (J) :egulatory
and ;uper"isory issues. :*' has accepted the guidelines of the group and they
pro"ide a good insight into the security requirements of E+banking.
The importance of the impact of technology and information security cannot be
doubted. Technological de"elopments ha"e been one of the key dri"ers of the global
economy and represent an instrument that if e)ploited well can boost the efficiency
and competiti"ity of the banking sector. !owe"er, the rapid growth of the 'nternet has
introduced a completely new le"el of security related problems. The problem here is
that since the 'nternet is not a regulated technology and it is readily accessible to
millions of people, there will always be people who want to use it to make illicit
gains. The security issue can be addressed at three le"els. The first is the security of
24
E-BANKING
customer information as it is sent from the customer-s &2 to the #eb ser"er. The
second is the security of the en"ironment in which the 'nternet banking ser"er and
customer information database reside. Third, security measures must be in place to
pre"ent unauthori/ed users from attempting to long into the online banking section of
the website.
From a legal perspecti"e, security procedure adopted by banks for authenticating
users needs to be recogni/ed by law as a substitute for signature. 'n 'ndia, the
'nformation Technology $ct, C555, in section J(C) pro"ides for a particular
technology ("i/., the asymmetric crypto system and hash function) as a means of
authenticating electronic record. $ny other method used by banks for authentication
should be recogni/ed as a source of legal risk..
:egarding the regulatory and super"isory issues, only such banks which are licensed
and super"ised and ha"e a physical presence in 'ndia will be permitted to offer E+
banking products to residents of 'ndia. #ith institutions becoming more and more
global and comple), the nature of risks in the international financial system has
changed. The :egulators themsel"es who will now be paying much more attention to
the qualitati"e aspects of risk management ha"e recogni/ed this.
Though the 'ndian 7o"ernment has announced cyber laws, most corporate are not
clear about them, and feel they are insufficient for the growth of E+commerce. 8ack
of consumer protection laws is another issue that needs to be tackled, if people ha"e
to feel more comfortable about transacting online.
Ta)ation of E+commerce transaction has been one of the most debated issues that are
yet to be resol"ed by 'ndia and most other countries. The e)plosi"e growth of e+
commerce has led many e)ecuti"es to question how their companies can properly
administer ta)es on 'nternet sales. #ithout sales ta), online sellers get a price
ad"antage o"er brick and mortar companies. #hile e+commerce has been causing loss
of ta) re"enues to the 7o"ernment, many politicians continue to insist that the (et
25
E-BANKING
must remain ta)+free to ensure continued growth, and that collecting sales ta)es on
(et commerce could restrict its e)pansion.
$ permanent ban on custom duties on electronic transmissions, international ta) rules
that are neutral, simple and certain and simplification of state and local sales ta)es.
The 2entral *oard of ?irect Ta)es, which submitted its report in ;eptember C553,
recommended that e+commerce transaction should be ta)ed >ust like traditional
commerce.
$lso :*' is about to become the first 7o"ernment owned digital signature 2ertifying
$uthority (2$) in 'ndia. The mo"e is e)pected to initiate the electronic transaction
process in the banking sector and will ha"e farreaching results in terms of cost and
speed of transactions between go"ernment+ owned banks.
Thus efficiency, growth and the need to satisfy a growing tech+sur"ey consumer base
are three clear rationales for implementing E+banking in 'ndia. The four forces+
customers, technology, con"ergence and globali/ation ha"e the most important effect
on the 'ndian financial sector and these changes are forcing banks to
redefine their business models and integrate technology into all aspect of operation.
COM&UTERISATION OF BANKS IN INDIA - ISSUES 2 EVENTS
'n the Eighteenth and (ineteenth 2enturies the 'ndustrial re"olution brought
profound changes in the life style of man. %any acti"ities that were hitherto
performed by man employing his hands and his finger skill came to be carried at great
speed and efficiency by machines. %an continued to carry out only those functions
that needed his thinking process to be in"ol"ed.
26
E-BANKING
The 'ndustrial :e"olution on account of mass production of goods and ser"ices
brought large commercial and business organi/ations, transcending national
boundaries that employed se"eral thousands of persons for performing routine,
repetiti"e clerical tasks, relating to record keeping, maintaining accounts,
attending@answering correspondence, preparing "ouchers, in"oices, bills and multiple
of such other functions. This created white+collar employment for educated persons
by leaps and bounds.
2lerical task is defined as a routine and repetiti"e performance in"ol"ing, adding,
subtracting, multiplying, di"iding numbers, and duplicating data@information from
one source to another. The tools employed are =a pen, ink and paper=, the knowledge
of arithmetic tables, the basic knowledge of a language and minimum acquaintance
with rules M procedures of the organisation that are followed day in day out and
rele"ant to the >ob of the particular employee. Two plus two is four. 't is always four.
;hould we need an educated worker to compute this task again and againH $ business
needed human agents to attend to production, marketing, finance etc. depicting high+
le"el tasks. *ut more and more people were employed for performing low le"el tasks.
!owe"er as time went on the internal chorus of record keeping multiplied
geometrically as commerce and industry grew in si/e and "olume. The ci"il ser"ices
of the 7o"ernment and ser"ice+based organi/ations came in the fore+front to inherit
this o"erload of white+collar employment. To quote a concrete e)ample a ma>or
nationalised bank in 'ndia, which employed merely J555 workers in the Fifties
(around the time ' entered its ser"ice in 3AB4), came to engage o"er 45,555
employees towards the end of the century, i.e. year 3AAD+A4,when ' retired from
ser"ice from that bank.
The 7o"ernment of 'ndia and the ;tates including go"ernment owned bodies
employed as many as 355 lakh >unior employees at the clerical and subordinate le"el.
;uch employees by "irtue of their strength of numbers organise themsel"es into
powerful trade unions, and aggressi"ely utilise the bargaining power without
reference to the input benefit the organi/ation is deri"ing from them and the
producti"ity they are pro"iding.
27
E-BANKING
'n this world of human beings necessity is the mother of in"entions. $fter 3B years of
educational studies, an indi"idual should not be employed for routine repetiti"e tasks.
This makes him dull and feel the work monotonous without >ob satisfaction. !e turns
back and di"erts his loyalty to an informal group i.e. the trade union. !e feels happy
once in a month on pay day, but on other days his work lea"es him nothing to re>oice.
There are neither opportunities nor challenges to bring in his inno"ati"e or creati"e
genius. $s years passes the clerical employment results in the indi"idual losing
efficiency and producti"ity to progressi"ely depict a trend of progress in re"erse.
The ad"ent of mechanical calculating de"ices and later electronic computing in the
#est heralded a new age, that dispensed with this white collar and white+elephant
employment progressi"ely. This e"ol"ed in the west three decades before, but the
ad"ent of this e"olution in 'ndia is only now taking place.
To quote again a concrete e)ample+ the statistics of two banking institutions in 'ndia,
the largest and the ne)t large in si/e can be fruitfully compared. These are the ;tate
*ank of 'ndia, that was until recently employing C.J 8akh workers, for a turn o"er of
:s.JD,555 2rores (?eposit CB555 N $d"ances 33555 2rores + latest).
'2'2' bank has at present less than 3555 branches and around 35555 employees. 't
has a turno"er of :s.CJ555 2rores (?eposits 3D N $d"ances 4 thousand 2rores). The
bank started functioning from the year 3AA4 and has gained the (o.C position in
status in 'ndia after ;*' in "olume of business turno"er within B years of its
operation. 't will be interesting to know that 2%? of '2'2' *ank draws annual
emoluments of :s.3B5 8akhs, while 2%? of ;*' around :s.E to B 8acs. '2'2' is a
new age high+tech and fully computerised bank, while ;*' retained its manual
operations in totality up to 3AAJ and maintained the work force of that time up to
C553, though it is partially computerised starting from the year 3AAJ.
The per employee turno"er for '2'2' bank is :s.C.J 2rores, that for ;*' is :s.3.BD
8akhs. The gap accounts for the difference between manual operations and high+tech
banking.
28
E-BANKING
'f we pro>ect the future in respect of ;tate owned banks, which employ presently
nearly 35 8akh employees, computerisation is destined to bring about rapid changes.
*y about the year C535 the present turno"er of commercial banks in 'ndia may
double or e"en treble to around :s.J5 to E5 8akh 2rores, but these *anks will ha"e
no need of 4B percent (today CB percent of the work force is subordinate staff, B5
percent is clerical staff and CB percent is the officers) of the e)isting workforce by
C535. 1nly in "ery few hinterland rural pockets there may be a possibility of a need
of the present structure of workforce. The ob>ecti"e of the recently administered 9:;
is to prepare for this reality of the first decade of the (ew %illennium, where banking
will be more tech based and less people based.
2omputerisation brings transparency, impro"es customer care and customer+ser"ice
tremendously and reduces substantially scope for corruption or e)tending undue
fa"our to particular constituents and une"en ser"ice to others.
CHALLENGES FACED IN COM&UTERISATION
2omputerisation is e)pensi"e and needs huge in"estment in hardware and software
and subsequent maintenance. The (ational ;tock E)change, 'ndia-s (o.3 user in
computerised ser"ice has spent :s.3<5 2rores to enable in"estors and brokers across
the country to trade securities online. The rate of obsolescence in respect of both
hardware and software is considerable. (ew and better products are emerging in the
market, whose use would enable a ri"al organi/ation to throw a challenge.
2omputer crimes are committed widely in the #est. 'ndia is no less potentially
e)posed to this risk, when turno"er under 'nternet banking increases. 't is easier to
enforce security of information and accountability of performers in a manual system.
*ut it needs elaborate steps to incorporate these features in the electronic system.
The structure of legal system is so far based on manual record keeping. 't has to
pro"ide for electronic data to be accepted legally as e"idence and in contracts.
29
E-BANKING
'ndian banking has accepted computerisation since 3AAJ, more out of sheer
compulsion and necessity to cope up increasing o"erload and incompatibility of the
manual system to sustain further growth. The following pages you are presented a
series of articles discussing the "arious facets of this momentous e"ent and its far+
reaching effects anticipated to unfold in the coming decade.
ROLE OF RBI IN COM&UTERISATION OF BANKS IN INDIA
2omputerisation became popular in the western countries right from the ;i)ties. %ain
Frames were e)tensi"ely used both by the &ublic 'nstitutions and %a>or &ri"ate
1rgani/ations. 'n the ;e"enties %ini 2omputer became popular and &ersonal
2omputers in early Eighties, followed by introduction of se"eral software products in
high le"el language and simultaneous ad"ancement in networking technology. This
enabled the use of personal computers e)tensi"ely in offices M commercial
organisations for processing different kinds of data.
!owe"er in 'ndia organised Trade ,nions were against introduction of computers in
&ublic 1ffices. 2omputerisation was restricted to ma>or scientific research
organi/ations and Technical 'nstitutes and defence organi/ations. 'ndian :ailways
first accepted computerisation for operational efficiency.
The Electronics 2orporation of 'ndia 8td. was set up in 3AD4 with the ob>ecti"e of
research M de"elopment in the fields of Electronic 2ommunication, 2ontrol,
instrumentation, automation and 'nformation Technology. 2%2 8td (2omputer
%aintenance 2orporation of 'ndia 8td.) was established in 3A4D to look after
maintenance operations of %ain Frame 2omputers installed in se"eral organi/ations
in 'ndia, to ser"e the gap, when '*% left 'ndia, due to the directi"e of the then
2entral 7o"ernment.
'n the &ri"ate ;ector the first ma>or "enture was T2; (Tata 2onsultancy ;er"ices)
which started functioning from 3AD<. 'n the year 3A<5 a few batch+mates of ''T ?elhi
pioneered the effort to start a ma>or education centre in 'ndia to impart training in
'nformation Technology and their efforts resulted in the setting up of (''T in 3A<3.
30
E-BANKING
$ptech 2omputer Education was established in 3A<D following the e)periment of
(''T.
*efore large scale computerisation, computer education became popular in 'ndia and
co"eted by bright students, when se"eral Engineering 2olleges and Technical
'nstitutes introducing &ost 7raduate ?egree courses in 2omputer Engineering. The
booming hardware and software industry in the #est attracted 'ndian students and
many of them migrated for better opportunities to the ,.;.$. and settled there. #e
ha"e today the parado) of 'ndia being one of the ma>or powers possessing di"erse
talents in fields of software de"elopment, but at the same time, we are still a decade
back to the using computerised ser"ice e)tensi"ely in the country and bringing the
facility to the realms of the common man.
:apid de"elopment of business and industry brought manual operations of data, a
saturation point. This acted as a o"erload on the growing banking operations.
7o"ernment owned banks in general found the =house+keeping= unmanageable.
;e"eral heads of accounts in particular inter+bank clearing and inter+branch
reconciliation of accounts went totally out of control.
8ow producti"ity pushed cost of wages high and employees realised that unless they
agreed for computerisation further impro"ement in their wage structure was not
possible.
'n the year 3AAJ, the Employees- ,nions of *anks signed an agreement with *ank
%anagements under the auspices of 'ndian *anks- $ssociation ('*$). This agreement
was a ma>or break through in the introduction of computerised applications and
de"elopment of communication networks in *anks.
The first initiati"es in the area of bank computerisation, howe"er, stemmed out of the
landmark report of the two committees headed by the former 7o"ernor of the :eser"e
*ank of 'ndia and currently 7o"ernor of $ndhra &radesh, !is E)cellency,
?r.2.:angara>an. *oth the reports had strongly recommended computerisation of
banking operations at "arious le"els and suggested appropriate architecture.
31
E-BANKING
'n the -se"enties, there was a four+fold increase in the number of branches, fi"e+fold
increase in ad"ances and a si)+fold increase in deposits-. %echanisation was seen as
the best solution to the =problems inherent in the manual system of operations, their
ad"erse impact on customer ser"ices and the gra"e dangers to banks in the conte)t of
increasing incidence of frauds.
The first of these 2ommittees, "i/. the 2ommittee on the %echani/ation of the
*anking 'ndustry (3A<E) was set up for the first time to suggest a model for
mechanisation of bank branches, regional @ controlling offices and !ead 1ffice
necessitated by the e)plosi"e growth in the geographical spread of banking following
nationali/ation of banks in 3ADA.
'n the first phase of computerisation spanning the fi"e years ending 3A<A, banks in
'ndia had installed E44D $8&%s at the branch le"el, CJJ mini computers at the
:egional@2ontrolling office le"els and trained o"er C555 programmers@systems
personnel and o"er 3C555 ?ata Entry Terminal 1perators. The :eser"e *ank too had
embarked upon an ambitious program to bring about state+of+the+art technology in the
clearing process and had introduced %'2: clearing at E centres and computeri/ed
clearing settlement at A centres.
$gainst this backdrop, the 2ommittee on 2omputerisation in *anks was set up once
again under ?r.:angara>an-s 2hairmanship to draw up a perspecti"e plan for
computerisation in banks. 'n its report submitted in 3A<A, the 2ommittee
acknowledged the gains of the initial efforts and sought to mo"e away from the stand+
alone dedicated systems to an on+line transaction processing en"ironment in branch
banking. 't recommended that the thrust of bank computerisation for the following B
years should be to fully computerise the operations at both the front and back offices
of large branches then numbering around CB55.
32
E-BANKING
RECOMMENDATIONS OF COMMITTEE ON TECHNOLOG3
U&GRADATION
The :eser"e *ank continued to be in"ol"ed in shaping the technology "ision of the
banking system. Following the recommendations of the 2ommittee on Financial
;ector :eforms, (which is popularly known as the second (arasimham committee), a
2ommittee on Technology ,pgradation was set up by the :*' for the *anking ;ector
in 3AAE. This committee has representation from banks, 7o"ernment, technical
institutions and the :*'. $mong other things, this committee looked into issues
relating to
• Encryption of &ublic ;witching Telephone (etwork (&;T() lines
• $dmission of electronic files as e"idence
• :ecord keeping
• %odalities for a satellite based #$( for banks and financial institutions with
the necessary security systems by banks and other financial institutions, to
ultimately de"elop a sound and an efficient payments system
• %ethods by which technological upgradation in banks and financial
institutions could be effected and in the conte)t study the feasibility of
establishment of standards, designing payments system backbone and standards
relating to security le"els, messages and smart cards.
The 2ommittee realised the urgent need for training, research and de"elopment
acti"ities in the *anking Technology area. *anks and Financial 'nstitutions started
setting up Technology based training centres and colleges. !owe"er, a need was felt
for an ape) le"el 'nstitute which could be a Think+tank and *rain Trust for *anking
Technology.
The committee recommended a "ariety of payment applications which can be
implemented with appropriate technology upgradation and de"elopment of a reliable
33
E-BANKING
communication network. The committee also suggested setting up of an 'nformation
Technology 'nstitute for the purpose of :esearch and ?e"elopment as well as
2onsultancy in the application of technology to the *anking and Financial sector of
the country. $s recommended by the 2ommittee, '?:*T was established by :*' in
3AAD as an autonomous centre for ?e"elopment and :esearch in *anking Technology
at !yderabad.
34
E-BANKING
CASE STUD3 4 ICICI
'2'2' is one of the leading pri"ate sector banks in 'ndia, which combines financial
strength with a reputation for inno"ation and a uni"ersal culture that embraces
change. 1n %arch J3, C55C '2'2' formally merged with '2'2' bank and emerged as
'ndia-s first ,ni"ersal *ank. The strategy of '2'2' bank after the merger with '2'2'
8td. is that of building a di"ersified portfolio. The merged entity will continue to be
into pro>ect finance and the focus will be to tap the potential in retail financing.
'2'2' bank offers a wide spectrum of domestic and international banking ser"ices to
facilitate trade, in"estment, cross border business, treasury and foreign e)change
ser"ices). '2'2' bank has
been quick to reali/e that E+ banking has changed from a somewhat e)perimental
deli"ery "ehicle into an increasingly mainstream one for deli"ery of broad spectrum
of banking products and ser"ices. *asic E+ banking ser"ices are rapidly changing
from competiti"e differentiator to competiti"e necessity.
The group has le"eraged on a number of tie+ups to come up with its "arious offering.
For its 'nternet banking offering the '2'2' bank uses 'nfinity from 'nfosys, for its
credit card business its uses 9ision &lus from &ay ;ys, ,;$, for #$& ser"ices the
tie+up with cellular ser"ice pro"iders 1range and $irtel helps reach out to these users,
while the #$& technology is being implemented by the in+house '2'2' 'nfotech
ser"ice. To le"erage the (et for its marketing initiati"es '2'2' bank and ;atyam 'nfo
way ha"e >ointly set up a =21%= company to promote banking products on the (et.
The bank has also entered into agreements with leading corporate like *&8,
:ediff.com., ,sha %artin and Tata 2ommunications for * to 2 solutions in a bid to
further strengthen its 'nternet banking product ffering and ser"ices. $lso '2'2' has
>oined hands with a consortium led by 2ompaq to take the lead in offering a solution
to the 'ndian e+commerce community. This consortium offers a *C* and *C2
ecommerce payment gateway within 'ndia.
35
E-BANKING
The *ank has been offering phone banking free of charge and was first to launch an
'nternet *anking ser"ice in the country named 'nfinity. 'nfinity now pro"ides a host
of online banking solutions to retail as well as corporate customers. '2'2'-s constant
endea"our in pro"iding more "alue to the customers has resulted in 'nfinity being the
front+runner amongst online banking offerings in the country. $lso, in keeping with
the customers need for increased security, 2orporate 'nfinity now pro"ides multiple
le"els of authentication besides user '?@ password and includes security tokens.
'2'2' also stri"es to be a center for leading research on financial engineering in 'ndia,
particularly in the area of "aluation of securities, risk management and deri"ati"es.
*y le"eraging on the groups resources '2'2' pro"ides custom tailored solution that
can support e"en the most comple) business strategy.
'2'2' is now mo"ing all its operations into the era of -"irtual integration-. (ot only
has this drastically reduced costs, but it has also increased and impro"ed its ser"ices
to customers. 3E<< %oney C 'ndia offers a unique facility by '2'2' of transferring
funds to 'ndia. $dditional modules were added+gifting and reminders to broaden its
scope and enhance '2'2'-s relationship with customers.
The table below gi"es the ;#1T analysis of '2'2'.
36
E-BANKING
CHALLENGES OF THE 5E-BANKING REVOLUTION5
Electronic banking is the wa"e of the future. 't pro"ides enormous benefits to
consumers in terms of the ease and cost of transactions. *ut it also poses new
challenges for country authorities in regulating and super"ising the financial system
and in designing and implementing macroeconomic policy.
Electronic banking has been around for some time in the form of automatic teller
machines and telephone transactions. %ore recently, it has been transformed by the
'nternet, a new deli"ery channel for banking ser"ices that benefits both customers and
banks. $ccess is fast, con"enient, and a"ailable around the clock, whate"er the
customer-s location (see illustration abo"e). &lus, banks can pro"ide ser"ices more
efficiently and at substantially lower costs. For e)ample, a typical customer
37
E-BANKING
transaction costing about I3 in a traditional =brick and mortar= bank branch or I5.D5
through a phone call costs only about I5.5C online.
Electronic banking also makes it easier for customers to compare banks- ser"ices and
products, can increase competition among banks, and allows banks to penetrate new
markets and thus e)pand their geographical reach. ;ome e"en see electronic banking
as an opportunity for countries with underde"eloped financial systems to leapfrog
de"elopmental stages. 2ustomers in such countries can access ser"ices more easily
from banks abroad and through wireless communication systems, which are
de"eloping more rapidly than traditional =wired= communication networks.
The flip side of this technological boom is that electronic banking is not only
susceptible to, but may e)acerbate, some of the same risksKparticularly go"ernance,
legal, operational, and reputationalKinherent in traditional banking. 'n addition, it
poses new challenges. 'n response, many national regulators ha"e already modified
their regulations to achie"e their main ob>ecti"es ensuring the safety and soundness
of the domestic banking system, promoting market discipline, and protecting
customer rights and the public trust in the banking system. &olicymakers are also
becoming increasingly aware of the greater potential impact of macroeconomic policy
on capital mo"ements.
NE+ CHALLENGES FOR REGULATORS
This changing financial landscape brings with it new challenges for bank
management and regulatory and super"isory authorities. The ma>or ones stem from
increased cross+border transactions resulting from drastically lower transaction costs
and the greater ease of banking acti"ities, and from the reliance on technology to
pro"ide banking ser"ices with the necessary security.
Re/uato!. R$*) *ecause the 'nternet allows ser"ices to be pro"ided from anywhere
in the world, there is a danger that banks will try to a"oid regulation and super"ision.
#hat can regulators doH They can require e"en banks that pro"ide their ser"ices from
a remote location through the 'nternet to be licensed. 8icensing would be particularly
38
E-BANKING
appropriate where super"ision is weak and cooperation between a "irtual bank and
the home super"isor is not adequate. 8icensing is the norm, for e)ample, in the
,nited ;tates and most of the countries of the European ,nion. $ "irtual bank
licensed outside these >urisdictions that wishes to offer electronic banking ser"ices
and take deposits in these countries must first establish a licensed branch.
?etermining when a bank-s electronic ser"ices trigger the need for a license can be
difficult, but indicators showing where banking ser"ices originate and where they are
pro"ided can help. For e)ample, a "irtual bank licensed in country O is not seen as
taking deposits in country Y if customers make their deposits by posting checks to an
address in country O. 'f a customer makes a deposit at an automatic teller machine in
country Y, howe"er, that transaction would most likely be considered deposit taking
in country Y. :egulators need to establish guidelines to clarify the gray areas between
these two cases.
Le/a R$*): Electronic banking carries heightened legal risks for banks. *anks can
potentially e)pand the geographical scope of their ser"ices faster through electronic
banking than through traditional banks. 'n some cases, howe"er, they might not be
fully "ersed in a >urisdiction-s local laws and regulations before they begin to offer
ser"ices there, either with a license or without a license if one is not required. #hen a
license is not required, a "irtual bankKlacking contact with its host country
super"isorKmay find it e"en more difficult to stay abreast of regulatory changes. $s
a consequence, "irtual banks could unknowingly "iolate customer protection laws,
including on data collection and pri"acy, and regulations on soliciting. 'n doing so,
they e)pose themsel"es to losses through lawsuits or crimes that are not prosecuted
because of >urisdictional disputes.
%oney laundering is an age+old criminal acti"ity that has been greatly facilitated by
electronic banking because of the anonymity it affords. 1nce a customer opens an
account, it is impossible for banks to identify whether the nominal account holder is
conducting a transaction or e"en where the transaction is taking place. To combat
money laundering, many countries ha"e issued specific guidelines on identifying
customers. They typically comprise recommendations for "erifying an indi"idual-s
39
E-BANKING
identity and address before a customer account is opened and for monitoring online
transactions, which requires great "igilance.
'n a report issued in C555, the 1rgani/ation for Economic 2ooperation and
?e"elopment-s Financial $ction Task Force raised another concern. #ith electronic
banking crossing national boundaries, whose regulatory authorities will in"estigate
and pursue money laundering "iolationsH The answer, according to the task force, lies
in coordinating legislation and regulation internationally to a"oid the creation of safe
ha"ens for criminal acti"ities.
O,e!at$o%a R$*): The reliance on new technology to pro"ide ser"ices makes
security and system a"ailability the central operational risk of electronic banking.
;ecurity threats can come from inside or outside the system, so banking regulators
and super"isors must ensure that banks ha"e appropriate practices in place to
guarantee the confidentiality of data, as well as the integrity of the system and the
data. *anks- security practices should be regularly tested and re"iewed by outside
e)perts to analy/e network "ulnerabilities and reco"ery preparedness. 2apacity
planning to address increasing transaction "olumes and new technological
de"elopments should take account of the budgetary impact of new in"estments, the
ability to attract staff with the necessary e)pertise, and potential dependence on
e)ternal ser"ice pro"iders. %anaging heightened operational risks needs to become
an integral part of banks- o"erall management of risk, and super"isors need to include
operational risks in their safety and soundness e"aluations.
Re,utat$o%a R$*): *reaches of security and disruptions to the system-s a"ailability
can damage a bank-s reputation. The more a bank relies on electronic deli"ery
channels, the greater the potential for reputational risks. 'f one electronic bank
encounters problems that cause customers to lose confidence in electronic deli"ery
channels as a whole or to "iew bank failures as systemwide super"isory deficiencies,
these problems can potentially affect other pro"iders of electronic banking ser"ices.
'n many countries where electronic banking is becoming the trend, bank super"isors
ha"e put in place internal guidance notes for e)aminers, and many ha"e released risk+
management guidelines for banks.
40
E-BANKING
:eputational risks also stem from customer misuse of security precautions or
ignorance about the need for such precautions. ;ecurity risks can be amplified and
may result in a loss of confidence in electronic deli"ery channels. The solution is
consumer educationKa process in which regulators and super"isors can assist. For
e)ample, some bank super"isors pro"ide links on their websites allowing customers
to identify online banks with legitimate charters and deposit insurance. They also
issue tips on 'nternet banking, offer consumer help lines, and issue warnings about
specific entities that may be conducting unauthori/ed banking operations in the
country.
THE MACROECONOMIC CHALLENGES
*ut the challenges are not limited to regulators. $s the ad"ent of E+banking quickly
changes the financial landscape and increases the potential for quick cross+border
capital mo"ements, macroeconomic policymakers face se"eral difficult questions.
• 'f electronic banking does make national boundaries irrele"ant by facilitating
capital mo"ements, what does this imply for macroeconomic managementH
• !ow is monetary policy affected when, for e)ample, the use of electronic
means makes it easier for banks to a"oid reser"e requirements, or when business
can be conducted in foreign currencies as easily as in domestic currencyH
• #hen offshore banking and capital flight are potentially only a few mouse
clicks away, does a go"ernment ha"e any leeway for independent monetary or
fiscal policyH
• !ow will the choice of the e)change rate regime be affected, and how will E+
banking influence the targeted le"el of international reser"es of a central bankH
• 2an a go"ernment afford to make any mistakesH #ill the spread of electronic
banking impose harsh market discipline on go"ernments as well as on businessesH
The answers to these questions fall into two emerging strands of thought. First, the
technological re"olutionKparticularly the e)pansion of electronic money but also,
41
E-BANKING
more broadly, electronic ad"ances in banking practicesKcould result in a decoupling
of households- and firms- decisions from the purely financial operations of the central
bank. Thus, the ability of monetary policy to influence inflation and economic
acti"ity would be threatened.
;econd, as electronic banking e)pands, financial transaction costs can decline
significantly. The result would be tantamount to a reduction in the =sand in the
wheels= of the financial sector machinery, making capital flows e"en easier to effect,
with a potential erosion of the effecti"eness of domestic monetary policy. 'n this
regard, proponents of the Tobin ta)Kwhich would ta) short+term capital flows to
increase their cost and, thereby, the sand in the wheelsKwould feel that electronic
banking makes an e"en more compelling case for introducing such a ta).
#hile electronic banking can pro"ide a number of benefits for customers and new
business opportunities for banks, it e)acerbates traditional banking risks. E"en though
considerable work has been done in some countries in adapting banking and
super"ision regulations, continuous "igilance and re"isions will be essential as the
scope of E+banking increases. 'n particular, there is still a need to establish greater
harmoni/ation and coordination at the international le"el. %oreo"er, the ease with
which capital can potentially be mo"ed between banks and across borders in an
electronic en"ironment creates a greater sensiti"ity to economic policy management.
To understand the impact of E+banking on the conduct of economic policy,
policymakers need a solid analytical foundation. #ithout one, the markets will
pro"ide the answer, possibly at a high economic cost. Further research on policy+
related issues in the period ahead is therefore critical.
42
E-BANKING
RISK MANAGEMENT &RINCI&LES FOR ELECTRONIC BANKING
BASEL COMMITTEE RECOMMENDATIONS
2ontinuing technological inno"ation and competition among e)isting banking
organisations and new entrants ha"e allowed for a much wider array of banking
products and ser"ices to become accessible and deli"ered to retail and wholesale
customers through an electronic distribution channel collecti"ely referred to as E+
banking. !owe"er, the rapid de"elopment of E+banking capabilities carries risks as
well as benefits.
The *asel 2ommittee on *anking ;uper"ision e)pects such risks to be recognised,
addressed and managed by banking institutions in a prudent manner according to the
fundamental characteristics and challenges of E+banking ser"ices. These
characteristics include the unprecedented speed of change related to technological and
customer ser"ice inno"ation, the ubiquitous and global nature of open electronic
networks, the integration of E+banking applications with legacy computer systems
and the increasing dependence of banks on third parties that pro"ide the necessary
information technology. #hile not creating inherently new risks, the 2ommittee
noted that these characteristics increased and modified some of the traditional risks
associated with banking acti"ities, in particular strategic, operational, legal and
reputational risks, thereby influencing the o"erall risk profile of banking.
*ased on these conclusions, the 2ommittee considers that while e)isting risk
management principles remain applicable to E+banking acti"ities, such principles
must be tailored, adapted and, in some cases, e)panded to address the specific risk
management challenges created by the characteristics of E+banking acti"ities. To this
end, the 2ommittee belie"es that it is incumbent upon the *oards of ?irectors and
banks- senior management to take steps to ensure that their institutions ha"e re"iewed
and modified where necessary their e)isting risk management policies and processes
to co"er their current or planned E+banking acti"ities. The 2ommittee also belie"es
that the integration of E+banking applications with legacy systems implies an
integrated risk management approach for all banking acti"ities of a banking
institution.
43
E-BANKING
To facilitate these de"elopments, the 2ommittee has identified fourteen :isk
%anagement &rinciples for Electronic *anking to help banking institutions e)pand
their e)isting risk o"ersight policies and processes to co"er their E+banking acti"ities.
These :isk %anagement &rinciples are not put forth as absolute requirements or e"en
=best practice.= The 2ommittee belie"es that setting detailed risk management
requirements in the area of E+banking might be counter+producti"e, if only because
these would be likely to become rapidly outdated because of the speed of change
related to technological and customer ser"ice inno"ation. The 2ommittee has
therefore preferred to e)press super"isory e)pectations and guidance in the form of
:isk %anagement &rinciples in order to promote safety and soundness for E+banking
acti"ities, while preser"ing the necessary fle)ibility in implementation that deri"es in
part from the speed of change in this area. Further, the 2ommittee recognises that
each bank-s risk profile is different and requires a tailored risk mitigation approach
appropriate for the scale of the E+banking operations, the materiality of the risks
present, and the willingness and ability of the institution to manage these risks. This
implies that a =one si/e fits all= approach to E+banking risk management issues may
not be appropriate.
For a similar reason, the :isk %anagement &rinciples issued by the 2ommittee do not
attempt to set specific technical solutions or standards relating to E+banking.
Technical solutions are to be addressed by institutions and standard setting bodies as
technology e"ol"es. !owe"er, this :eport contains appendices that list some
e)amples current and widespread risk mitigation practices in the E+banking area that
are supporti"e of the :isk %anagement &rinciples.
2onsequently, the :isk %anagement &rinciples and sound practices identified in this
:eport are e)pected to be used as tools by national super"isors and implemented with
adaptations to reflect specific national requirements and indi"idual risk profiles where
necessary. 'n some areas, the &rinciples ha"e been e)pressed by the 2ommittee or by
national super"isors in pre"ious bank super"isory guidance. !owe"er, some issues,
such as the management of outsourcing relationships, security controls and legal and
reputational risk management, warrant more detailed principles than those e)pressed
44
E-BANKING
to date due to the unique characteristics and implications of the 'nternet distribution
channel.
The :isk %anagement &rinciples fall into three broad, and often o"erlapping,
categories of issues that are grouped to pro"ide clarity
3. *oard and %anagement 1"ersight.
C. ;ecurity 2ontrols. and
J. 8egal and :eputational :isk %anagement.
45
E-BANKING
REGULATOR3 TOOLS TO OVERCOME CHALLENGES
There are four key tools that regulators need to focus on to address the new
challenges posed by the arri"al of E+banking.
Ada,tat$o%: 'n light of how rapidly technology is changing and what the changes
mean for banking acti"ities, keeping regulations up to date has been, and continues to
be, a far+reaching, time+consuming, and comple) task. 'n %ay C553, the *ank for
'nternational ;ettlements issued its =:isk %anagement &rinciples for Electronic
*anking,= which discusses how to e)tend, adapt, and tailor the e)isting risk+
management framework to the electronic banking setting. For e)ample, it
recommends that a bank-s board of directors and senior management re"iew and
appro"e the key aspects of the security control process, which should include
measures to authenticate the identity and authori/ation of customers, promote
nonrepudiation of transactions, protect data integrity, and ensure segregation of duties
within E+banking systems, databases, and applications. :egulators and super"isors
must also ensure that their staffs ha"e the rele"ant technological e)pertise to assess
potential changes in risks, which may require significant in"estment in training and in
hardware and software.
Le/a$6at$o%: (ew methods for conducting transactions, new instruments, and new
ser"ice pro"iders will require legal definition, recognition, and permission. For
e)ample, it will be essential to define an electronic signature and gi"e it the same
legal status as the handwritten signature. E)isting legal definitions and permissionsK
such as the legal definition of a bank and the concept of a national borderKwill also
need to be rethought.
Ha!mo%$6at$o%: 'nternational harmoni/ation of electronic banking regulation must
be a top priority. This means intensifying cross+border cooperation between
super"isors and coordinating laws and regulatory practices internationally and
domestically across different regulatory agencies. The problem of >urisdiction that
arises from =borderless= transactions is, as of this writing, in limbo. For now, each
46
E-BANKING
country must decide who has >urisdiction o"er electronic banking in"ol"ing its
citi/ens. The task of international harmoni/ation and cooperation can be "iewed as
the most daunting in addressing the challenges of electronic banking.
I%te/!at$o%: This is the process of including information technology issues and their
accompanying operational risks in bank super"isors- safety and soundness
e"aluations. 'n addition to the issues of pri"acy and security, for e)ample, bank
e)aminers will want to know how well the bank-s management has elaborated its
business plan for electronic banking. $ special challenge for regulators will be
super"ising the functions that are outsourced to third+party "endors.
47
E-BANKING
LOOKING FOR+ARD
$n old 2hinese saying goes If you don't know where you are going - you will never
get there. 7lobally, the financial sector is metamorphosing under the impact of
competiti"e, regulatory and technological forces. The banking sector is currently in a
transition phase with re+alignment, mergers and entry of new players from different
industry is becoming common. %any countries including 'ndia are de+regulating their
banking sector and go"ernment policies no longer form an entry barrier to banks
competitors. '2'2' *ank, '?*' *ank, !?F2 *ank and recently 0otak %ahindra
*ank are prime e)amples of these.
Technology has le"eled the playing field the bargaining power of consumers is
increasing, switching costs are becoming lower and consumer loyalties are harder to
retain. &rimary goal of the banking sector including e"ery *ank is mainly to make
profit, which in turn is ploughed back to increase business and reach, and pay
di"idends or share profits to the stakeholders. This is perfectly correct, yet generic
goal. %ore o"er the product (schemes) differentiation is "ery difficult for banks as
most of the products sold are constrained by legal or industry regulations. (ow, if
you are already thinking about Technology as a tool in *anking you could probably
set some of these goals
• ;elling financial products and ser"ices
• 2utting operational costs
• *randing M %arket recognition
• 0eeping profitable customers
E"ery day more and more people are turning to the Technology for their personal
banking. 't is a safe, con"enient way to shop for financial ser"ices, maintain bank
accounts and conduct business CE hours a day. E"ery one of us has always en>oyed a
special relationship with their neighborhood bank. #hy are so many people suddenly
choosing their personal computers as the new way to "iew and manage their moneyH
Puite simple + because it is a "aluable option to ha"e. *ank customers can sa"e time
48
E-BANKING
by banking online. There is no need to stand in one more line to perform the most
basic transactions when they can be done quickly from the desktop &2 anytime, day
or night. *ut e"en with more complicated transactions or in"estment decisions,
people like ha"ing direct control o"er their finances themsel"es. They find it
con"enient to access all of their financial information in one place. Ease of use is one
of the most important factors. (a"igation through online banking should be simple
and intuiti"e. *anks need to appeal to customers who may not be technologically
sophisticated, and should not require an engineering degree to get started or use the
ser"ice. 2ustomers also choose banks whose online ser"ices are reliable. %ost *anks
now offers a comprehensi"e range of financial products and ser"ices, including a
F:EE checking account and internet bill paying ser"ices. 'n addition, an array of
checking accounts are a"ailable in which you may also request a F:EE check card.
!ence most *anks of following Electronic *anking or 'nternet *anking F:EE ha"e
following ser"ices
7et your balance details, 1btain your last J transaction details, :equest a cheque
book, ;top a cheque payment, Enquire cheque status, :equest an account statement,
7et Fi)ed ?eposit details, *ill payment details for electricity, mobile phone and
telephone ser"ices, 2on"enience of setting an operati"e account, ?esignate a
particular account linked to your customer id as the operati"e account. 2ustomer
;er"ice a"ailable CE hours a day, 4 days a week E+banking *enefits
*enefits for the bank should always reflect benefits for the customer of banking
ser"ices.
CUTTING O&ERATIONAL COSTS
2utting transaction costs results in higher profit margin for the banks. The enclosed
chart clearly indicates the benefits of E+banking o"er traditional methods banking.
Ba%)$%/ Met#od u*ed Co*t ,e! T!a%*a"t$o% 7o! Ba%)
3 %anual, personal
:s. E5 L 355@+ depending on *ank
49
E-BANKING
!igher for Foreign *anks, as salaries and
o"erheads are higher
C $T%s :s. C5+J5@+ only
J 'nternet @ &2 :s. <@+ only
E Telephone *anking :s. 3B@+ only
$s e"ery *ank wants to be profitable E+banking is becoming necessity for sur"i"al.
Electronic banking pro"ides enormous benefits to consumers in terms of the ease and
cost of transactions
Ta)$%/ o8e! "u*tome!* 7!om "om,et$t$o%
*anks seeking new customers can use ad"antages of new distribution channels and
acquire most profitable customer from their competition. 't is a fact that people using
E+banking are the ones who consider time as money and are the one with loads of
money. %a>ority of banks see <5Q of their business coming >ust C5Q of the client
base. This C5Q customer base is "ulnerable if the bank does not appreciate their time.
Bu$d$%/ *t!o%/e! "u*tome! !eat$o%*
1ffering new ser"ices, results in impro"ed customer e)perience and stronger
customer retention.
B$//e! *#a!e $% "u*tome!9* -aet
't is well known fact that customers tend to keep their finances in one place. *anks
holding customer accounts therefore ha"e opportunity to cross sell different products
and ser"ices. :ecent studies show that banks in the ,;$ lost C5Q of their most
"aluable customers in fa"or of non+bank F' fle)ible enough to offer di"ersified
ser"ices and products.
50
E-BANKING
Ide%t$7.$%/ ,!o7$ta0e "u*tome!*
2ustomers using E+banking ser"ices ha"e higher balances than a"erage branch teller
customers. 'n"estments are more than twice higher than the a"erage.
Co%"u*$o%
From all of this, we ha"e learnt that information technology has empowered
customers and businesses with information needed to make better in"estment
decisions. $t the same time, technology is allowing banks to offer new products,
operate more efficiently, raise producti"ity, e)pand geographically and compete
51
E-BANKING
globally. $ more efficient, producti"e banking industry is pro"iding ser"ices of
greater quality and "alue.
E+banking has become a necessary sur"i"al weapon and is fundamentally changing
the banking industry worldwide. Today, the click of the mouse offers customers
banking ser"ices at a much lower cost and also empowers them with unprecedented
freedom in choosing "endors for their financial ser"ice needs. (o country today has a
choice whether to implement E+banking or not gi"en the global and competiti"e
nature of the economy. The in"asion of banking by technology has created an
information age and commoditi/ation of banking ser"ices. *anks ha"e come to reali/e
that sur"i"al in the new e+economy depends on deli"ering some or all of their banking
ser"ices on the 'nternet while continuing to support their traditional infrastructure.
The rise of E+banking is redefining business relationships and the most successful
banks will be those that can truly strengthen their relationship with their customers.
#ithout any doubt, the international scope of E+banking pro"ides new growth
perspecti"es and 'nternet business is a catalyst for new technologies and new business
processes. #ith rapid ad"ances in telecommunication systems and digital technology,
E+banking has become a strategic weapon for banks to remain profitable. 't has been
transformed beyond what anyone could ha"e foreseen CB years ago.
Two years ago, E+banking was a strategic ad"antage, nowadays. it is a business
reality, if not a necessity.
52