Final Proj Content

VIVEK COLLEGE OF COMMERCE
CHAPTER 1
INTRODUCTION
The commercial banking business has changed dramatically over the past 25
years, due in large part to technological change. Advances in telecommunications,
information technology, and financial theory and practice have jointly transformed
many of the relationship focused intermediaries of yesteryear into data-intensive
risk management operations of today. Consistent with this, we now find may
commercial banks embedded as part of global financial institutions that engage in
a wide variety of financial activities.
To be more specific, technological changes relating to telecommunications and
data processing have spurred financial innovations that have altered bank products
and services and production processes. For example, the ability to use applied
statistics cost-effectively (via software and computing power) has markedly
altered the process of financial intermediation. Retail loan applications are now
routinely evaluated using credit scoring tools, rather than using human judgement.
Such an approach makes underwriting much more transparent to third parties and
hence facilities secondary markets for retail credits (e.g., mortgages and credit
card receivables) via securitization. Statistically based risk measurement tools are
also used to measure and manage other types of credit risks- as well as interest rate
risks-on an ongoing basis across entire portfolios. Indeed, tools like value-at-risk
are even used to determine the appropriate allocation of risk-based capital for
actively managed portfolios.
It will describe how technological change has spurred financial innovations that
have driven the aforementioned changes in commercial banking over the past 25
years. In this respect, the analysis distinguishes itself by reviewing the literature
on a large number of new banking technologies and synthesizing these studies in
the context of the broader economics literature on innovation.
INNOVATION IN BANKING PRODUCT 1

The various innovations in banking and financial sector are ECS, RTGS, EFT,
NEFT, ATM, Retail Banking, Debit & Credit cards, free advisory services,
implementation of standing instructions of customers, payments of utility bills,
fund transfers, internet banking, telephone banking, mobile banking, selling
insurance products, issue of free cheque books, travel cheques and many more
value added services.
The Role of Finance and Financial Innovation
The primary function of a financial system is to facilitate the allocation and
deployment of economic resources, both spatially and across time, in an uncertain
environment. This function encompasses a payments system with a medium of
exchange; the transfer of resources from savers to borrowers; the gathering of
savings for pure time transformation and the reduction of risk through insurance
and diversification.
The operation of a financial system involves real resource costs employed by
financial intermediaries and by financial facilitators (e.g., mortgage brokers).
Much of these resources are expended in the data collection and analyses in which
financial market participants engage, so as to deal with problems of asymmetric
information. There are also uncertainties about future states of the world that
generate risks, which for risk-averse individuals represent costs. In this
environment, new production process or new organisational forms.
Hence, a Financial Innovation as something new that reduces costs, reduce risks or
provides an improved product/service/instrument that better satisfies financial
system participants demands. Financial innovations can be grouped as new
products (e.g., subprime mortgage) or services (e.g., Internet banking) or new
organisational forms (e.g., Internet-only banks).
The Centrality of finance in an economy and its importance for economic growth
naturally raises the importance of financial innovation and its diffusion. Since
finance is a facilitator of virtually all production activity and much consumption
activity, improvements in the financial sector will have direct positive

ramifications throughout an economy. Further, since better finance can encourage

more saving and investment and can also encourage more productive investment
decisions, these indirect positive effects from financial innovation and further to
its value for an economy.
Given its importance, an understanding of the conditions that encourage
innovation would appear to be worthwhile. After all, observed streams of
innovations are clearly not uniform across all enterprises, across all industries or
across all time periods. The general innovation literature in economics has sought
to uncover the environmental conditions that affect the stream of innovations-
focusing on hypotheses concerning roughly five structural conditions: the market
power of enterprises, the size of enterprises, technological opportunity,
appropriability and product marketdemand conditions. Of course, when
environmental changes occur, we expect to observe an initial wave of financial
innovations followed by a new equilibrium flow consistent with the new
environmental conditions. Over the past 25 years, each of these above
environmental conditions was markedly altered resulting in substantial changes
to the commercial banking industry.
Financial Innovation and Banking
The literature pertaining to several specific financial innovations appearing over
the past 25 years or so that were specifically driven by technological change. The
major discussion is focusing on the lines of: new products & services, new
production
Products:
Mortgage loans are one suite of products that have experienced a great deal of
change over the past 25 years in the United States. In 1980, long-term fully
amortizing fixed-rate mortgages were the norm and this product was offered
primarily by thrift institutions. Moreover, these loans required substantial down
payments and a good credit history and the accumulated equity was relatively
illiquid.

These characteristics have markedly evolved. The first big change occurred in the
early 1980s with the widespread introduction of various types of adjustable-rate
mortgages (ARMs), which had previously been banned by federal regulators. The
Tax Reform Act of 1986, which ended federal income tax deductions for non-
mortgage consumer debt, spurred substantial growth in home equity lending. One
mortgage innovation more directly tied to technological change is subprime
lending, which was originally predicated on the use of statistics for better risk
measurement and risk-based pricing to compensate for these higher risks.
However, the subprime mortgage crisis has uncovered significant shortcomings in
the underlying strategically
Subprime Mortgages: Subprime mortgage lending, broadly defined, relates to
borrowers with poor credit histories or high leverage as measured by either
debt/income or loan-to-value. This market grew rapidly in the U.S during the first
decade of the twenty-first century averaging about 20% of residential mortgage
orginations between 2004 and 2006. At the end of 2007, subprime mortgages
outstanding stood at $940 billion; down from over $1.2 trillion outstanding the
previous year (Inside Mortgage Finance 2008).
Since the onset of the subprime mortgage crisis, research has attempted to identify
various sources of the problem. Mayer, Pence and Scherlund (forthcoming)
provide an overview of the attributes of subprime mortgages outstanding during
this time and investigate why delinquencies and defaults increases so substantially.
These authors, as will as Gerarbi, Lehnert, Sherlund, and Willen (forthcoming),
point to significant increase in borrower leverage during the mid-2000s, as
measured by combined loan-to-value (CLTV) ratios, which was soon followed by
falling house prices.
Services:
Recent service innovations primarily relate to enhanced account access and new
methods of payment-each of which better meets consumer demands for

convenience and ease. Automated Teller Machines (ATMs), which were

introduced in the early 1970s and diffused rapidly through the 1980s, significantly
enhanced retail bank account access and value by providing customers with
around the clock access to funds. ATM cards were then largely replaced through
the 1980s and 1990s by debit cards, which bundle ATM access with the ability to
make payment from a bank account at the point of sale. Over the past decade,
remote access has migrated from the telephone to the personal computer. Online
banking, which allows customers to monitor accounts and originate payments
using "electronic bill payment," is now widely used. Stored-value, or prepaid,
cards have also become ubiquitous.
Debit Cards: Debit cards are essentially "pay-now" instruments linked to a
checking account whereby transactions can happen either instantaneously using
online (PIN based) methods or in the near future with offline (signature based)
methods. Consumers typically have the choice of using online or offline methods,
and their selection often hinges on the respective benefits. Online debit allows the
cardholder also to withdraw cash at the point-of-sale, and offline provides float.
According to ATM & Debit News (2007), there were approximately 26.5 billion
debit transactions in the U.S. during 2006. This is up from 6.5 billion transactions
in 1999
Prepaid cards: As the name implies, prepaid cards are instruments whereby
cardholders "pay early" and set aside funds in advance for future purchases of
goods and services. (By contrast, debit cards are "pay-now", and credit cards are
"pay later"). The monetary value of the prepaid card resides either of the card or at
a remote database. According to Mercator Advisory Group, prepaid cards
accounted for over $180 billion in transaction volume in 2006.
Prepaid cards can be generally delineated as either "closes" systems (e.g., a
retailer-specific gift card, like Macy's or Best Buy) or "open" systems (e.g., a
payment-network branded card, like Visa or MasterCard). Closed-system prepaid

cards have been effective as a cash substitute on university campuses, as well as

for mass transit systems and retailers.
Production Processes
The past 25 years have witnessed important changes in banks production
processes. The use of electronic transmission of bank-to-bank retail payments,
which had modest beginnings in the 1970s, has exploded owing to greater retail
acceptance, online banking and check conversion. In terms of intermediation,
there has been a steady movement toward a reliance on statistical models. For
example, credit scoring has been increasingly used to substitute for manual
underwriting and has been extended even into relationship-oriented products like
small business loans. Similar credit risk measurement models are also used when
creating structured financial products through "securitization". Statistical
modelling has also become central in the overall risk management processes at
banks through portfolio stress testing and value-at-risk models each of which is
geared primarily to evaluating portfolio value in the face of significant changes in
financial asset returns in the business innovation.

CHAPTER 2
HISTORY OF INNOVATION IN BANKING PRODUCT
The financial crisis has led to calls for a return to old-fashioned banking. But it's
easy to forget that once upon a time current accounts cost money, you needed to
be nominated to even get an account, there were no cash machines and banks
could be intimidating places.
We all know what a bank manager looks like. Staring down his nose over half-
moon spectacles, this custodian of high street finance is not happy with the state of
your account.
And yet this stereotypical manager ceased to be the key figure in banking some
time ago and, despite being vaunted in the press as a bulwark against foolish
lending practices, is little more than a folk memory for many.
Particularly for people under the age of 30, the nearest they get to the old-style
manager is watching Dad's Army, whose Captain Mainwaring acts as a miserly
check on the finances of Walmington-on-Sea.
Starting in the late 1960s and through the 1970s and intensifying during the
deregulation of the 1980s, banks changed. The world of banking before this was
unrecognisable.
In 1975, Neville Tarratt featured in a BBC Money Programme that followed a day
in his life as a manager at a Barclays branch in Stratford-upon-Avon.
The programme shows MrTarratt interviewing a young couple about their
prospects for a loan, visiting local businesses and even spending some time on the
golf course.
'Know your customer'
Having retired in 1982 after 41 years service and remained as a Barclays
customer, MrTarratt, now 83, has seen things change.

"The difference now is the decline of the old-fashioned bank manager, the
manager who was known to everyone in town. The other thing is that you can't
ring the branch anymore. My big maxim was 'know your customer'. I don't think
they do now."
Knowing the lives of customers inside out made decisions on loans much easier.
"You were the focal point of local business affairs, you were part of the local
community. You knew whether someone was spending a lot of time at local
bookies or whether they were off with somebody else's wife."
Brian Capon, who spent the 1970s as an assistant manager at Midland branches in
Northamptonshire, remembers this very different banking world, one where many
people did not have accounts.
"It was very strict. You couldn't get an account unless you were introduced by two
existing customers."
With advertising and cut-throat competition still far off, families tended to stick to
the same bank.
"Let's say you had an account and a particular family member went to university.
They came in to open an account - father would bring the offspring in and
introduce them to the manager who would give them a pep talk and warn them not
to get overdrawn."
Shop front
The High Street banks still boast of the numbers of "local business managers" they
have, but there's no doubt control has been centralised.
Banks want you to call an 0845 number. They don't want you to call your local
branch. In many ways branches act as a shop front for a range of products, rather
than the centre of services.
It's not a situation that pleases Ronald Ibbotson, who joined the (now defunct)
Martins Bank group in 1949 and managed the Barclays branch in Amesbury,
Wiltshire, between 1972 and 1986.

The key for him was a presence in a local community that enabled informed
financial decisions to be made about people who wanted credit.
"Now it's run more or less by computers and IT programmes. If you fit in one of
these boxes you're fine.
"I made a lot of loans to people who wouldn't have been granted them had they
gone into a bank today. I knew them, I knew what they were capable of repaying. I
used to go and visit their businesses and see what they did, what they made and
how they seemed. Today risk management is done by computers."
Family snapshot
And those computers can sometimes struggle to match the assessment that
somebody with a close connection to both families and businesses can make.
"The bank manager would know the family financial background," says Mr
Capon, who now works for the British Bankers' Association.
"He had a complete snapshot of your finances. If you had shares the dividends
would be paid through the bank. Nowadays people can have accounts in all sorts
of different institutions."
But of course, while it's easy to be nostalgic about an era when banks had some
idea of what the people they were lending to were like, there were plenty of
downsides to old-school banking.
"There was no such thing as free banking," says Mr Capon. "If you had a bank
account you paid for it. And in those days you had to pay stamp duty on cheques
and withdrawals - two old pennies straight to the government."
And the convenience we have today was a distant dream in the banks of yore.
Cash machines made their debut in the UK in the 1960s but ubiquity did not come
for many years.
Erratic machines
In the 1980s the advert for Halifax's Cardcash account showed the power of the
idea of convenience. A young chap rises on a Sunday morning - with The
Commodores' Easy Like Sunday Morning playing - finds there is no milk in the

fridge, his cat is hungry and he has no money in his wallet. No fear - he's off in a
moment, out of his warehouse conversion to the cash machine. The message is
clear - convenience is here and it's a minor miracle .Mr Ibbotson, 75, remembers
the first cash machine installed in Southampton being an erratic beast.
"Sometimes it worked, sometimes it didn't. If it didn't it used to have a little notice
saying the nearest machine is in Winchester [14 miles] or Portsmouth [18 miles].
It was a source of embarrassment."And, as Mr Capon recalls, if you weren't an
early cash card adopter getting money out could sometimes be a difficult thing.
You might struggle to cash cheques at branches other than your own, and might
have to make special arrangements every time you left town.
"A lot of people think those were the days, but how many people want to go back
to those days where you were limited to Monday to Friday 9am-3.30pm?"
The 1980s also saw banks move into mortgages, competing with building
societies. Mr Ibbotson remembers being regularly taken to lunch by the local
building society manager to give an assessment of potential housebuyers. That
symbiotic relationship soon ended."It was a very big change and it immediately
alienated your local building societies."There will be many who do not miss the
paternalistic aura of the old-fashioned bank manager. Many want banks to
compete for our business. And there are many who prefer the big windows,
spangly carpets and colourful displays of the new banks to the dusty austerity of
the old banks.
"You go to the front door of the bank nowadays and it is a much better banking
atmosphere," says Mr Capon. "It is very easy to look back into the past with rose-
tinted spectacles."

CHAPTER 3:
NEED FOR INNOVATION IN BANKING PRODUCT
Within financial institutions, theres a significant focus on implementing

technology to meet consumer needs. Providing features such as digital banking,
digital customer engagement, and even mobile payment processing is a clear path
to improving the consumers interactions.However, it is even more vital that
financial institutions embrace technology aimed at improving workforce
conditions. In todays banking world, its essential to implement technology
behind the scenes.
What people, skills, and technology are necessary in the digital bank?
Creating a digital bank means moving employees towards the use of data and
streamlined, digital tools. What does a digital workplace mean for bank employees
and the banking workplace as a whole?
Simplification and automation
A key change to a digital bank is implementation of more automation to simplify
day-to-day tasks. Not only should customer interactions be digitized, but the
whole end-to-end process should also be automated, eliminating monotonous mid-
and back-office activities with very little value add. The overall mantra of the
digital bank should be the best back office is no back office. Automation will
streamline processes, greatly reducing the amount of time and cost required to
handle standard transactions.To become a digital bank, companies need to
simplify their processes and utilize software that allows a high level of straight-
through processing.
Even more important, by removing employees from trivial and mundane tasks,
employees can become far more beneficial to the company by moving to higher-
value tasks. They can contribute better skills and more resources when back-office
processes are digitalized. It simply makes sense.

Put information closer to the customer

When mobile banking technology is in place, channel consistency becomes even
more important. Customers will visit their bank less frequently, but when they do,
bank employees need to know what information has been presented elsewhere.
For example, suppose the bank has launched a new campaign targeting first-time
home buyers using mobile marketing. When the information is relayed through
mobile means, everyone has instant access to it. That means a customer
who comes in to cash a check can get a free interest rate consultation
(after they have been shown how to cash in the check with their mobile device).
Because bank employees have easy access to key data from the customer, they can
promote and communicate consistently.Digital bank employees need to have the
most important customer-related information and analysis at hand all of the time.
Thats not always as simplistic as it sounds. Continuously meeting consumer
needs requires staff engagement.
Online Banking: As households and firms rapidly adopted internet access during
the late-1990s, commercial banks established an online presence. According to De
Young (2005), the first bank websites were launched in 1995: and by 2002 nearly
one-half of all U.S. banks and thrifts operated transactional websites. As of 2007,
bank call report data suggests that 77.0 percent of commercial banks offer
transactional websites (and these banks control 96.8 percent of commercial bank
deposits).The primary line of research relating to online banking has been aimed
at understanding the determinants of bank adoption and how the technology has
affected bank performance. In terms of online adoption.Furst, Lang, and Nolle
(2002) find that U.S. national banks (by the end of the third quarter of 1999) were
more likely to offer transactional websites if they were: larger, younger, affiliated
with a holding company, located in an urban area, and had higher fixed expenses
and non-interested income. Turning to online bank performance, De Young, Lang,
and Nolle (2007) report that internet adoption improved U.S. community bank
profitability primarily through deposit-related charges. In a related study,

Hernando and Nieto (2007) find that, over time, online banking was associated
with lower costs and higher profitability for a sample of Spanish banks. Both
papers conclude that the internet channel is a complement to rather than a
substitute for physical bank branches.

CHAPTER 4:
TYPES INNOVATION IN BANKING PRODUCT
1.E- BANKING
With the trend of globalization all over the world, it
is difficult for any nation whether big or small, developed, to remain isolated from
what is happening around. The growth of e-commerce and Internet has
transformed the world into the GLOBAL VILLAGE. Fast development in
electronic technology has concerned the computers to take over the bank counters
and to convert brick banking into electronic banking. Usage of technology by
banks is due to challenge of competition, rising consumer expectations and
shrinking margins of banks, which lead to reduction in cost, and enhancement of
productivity, efficiency and customer convenience.
Meaning:
E-banking means,application of electronic technology towards
transfer of funds through an electronic terminal, computer or magnetic tape
to conduct various transactions like cash receipts, payments, transfer of funds
etc.
It is often known as banking on net. It does not involve any physical
exchange of money, but its all done electronically, from one account to another,
using the Internet. With the advent of e banking, customers are benefited by
unlimited accessibility through the network of Automated Teller Machines,
personal computers or even through mobile phones. Customer can perform various
banking transactions such as balance enquires, bill payments, and transaction
histories, transfer money between accounts, without having to step to office of the
branch.

Features of E- banking:
Anywhere any time banking: customers can avail banking
facility while sitting at their home/office.
Globalization of service: E-Banking has a special feature of globalising banks
services all over.
Intense competition: E-Commerce is a product of handling intense competition
among various banks.
Cash less banking: E-Commerce also provides feature of cash less banking as
cash is not require in raw form but electronic cash like debit or credit cards may
serve the purpose.
Promptness: Another feature of E-Commerce is provides promptness in services.
Process of E-Banking/ procedure of E-Banking

E-Banking process can be explained with the help of following diagram and
explanation as under:
LOG ON TO
website VerificationO
f password
Final
Approval
Credit Card Processing Of

request information
To make the use of E-Banking user has to go to the World Wide Web and log on
to the website.
Next step follows verification of user ID and password by the website server.

As soon as password is approved on the server, then processing of information

will start on the web.In this step, credit card number will be demanded for online
transaction.If all security measures are completed then the transaction is approved
accordingly.
Advantages of E-Banking:
Importance of E-Banking can be explained from four aspects:
Advantages
To To merchant
To banks To
customer Govt. Trader
Benefits to banks
Reduction in cost: E-Banking is helpful to banks by reducing the cost of various
transactions as compared to traditional cost by way of ATMs Telephone banking.
Global coverage: E-Banking provides global network coverage of banks services
i.e. through the concept of Anywhere Anytime Banking.
Good customer relationship: E-Banking helps in attracting and retaining the
customer by properly handling their grievances.
Reduction in paper work: E-Banking helps in eliminating endless paper based
bank statements, spreadsheets, bulky books of accounts, ledger including the use
of calculator.
Reduction in frauds and misappropriations: Through E-Banking frauds and
misappropriations can be reduced as inter branch reconciliation is possible through
internet.
Benefits to customers
Anytime banking: E-banking provides 24 hours, 365 days services to customers.

Anywhere banking: customers can avail any sort of banking services from
anywhere around the globe from sitting at anyplace.
Prompt services: Customer can avail the services of details regarding their
accounts and transactional details instantly.
On line purchase: Customer can buy product of bank or invest in any scheme
without actually insisting the bank branch but only through online.
Saving in time: With the help of E-banking there is no need for bank customers to
stand in queue for hours to complete financial transactions.
Benefits to government
Transparency in transactions: E-Banking provides transparency in transactions
i.e. access to information is possible easily.
Global market: With the help of E-Banking products of our country will get
global market to be popularized properly.
Risk of carrying cash: E-Banking provides the facility of cash less banking
which helps in growth of economy.
Benefits to merchant traders

Promotion of business: with the help of E-Banking business of merchants traders
will be promoted because of increased purchasing power of credit holder.
Immediate settlement: E-Banking helps settlement, and payment of cash is
possible by the customer.
Avoids risks: it helps merchants bankers also as there is no risk of handling cash.
Limitations of E Banking:
Problems of security: Security and privacy aspects are major issue in case of E-
Banking transaction. Various sites are not properly locked at to ensure weather
customers money is safe in cyber world or not.

High cost: The infrastructural cost of providing E-Banking facility is very high.
The banks not only have to automate front-end services but also back office
services, which involves high cost.
Lack of awareness: Another great hindrance is lack of awareness because
effective and wide media efforts in publishing Internet banking need to be
emphasized.
Lack of computerization: Lack of computerization and low density of telephone
lines is also a bottleneck for online banking. In India, out of 65000 bank branches,
only 5000 branches are computerized.
Wrong assumption by people: Many people are away from net banking on the
assumption that it is more expensive than the traditional method of dealing with
bank transactions. They still prefer going to bank to perform transactions.
Types of E-Banking services

E-banking
Services
ATM Card E-cheque Mobile Telephone EFT
Banking Banking
Automatic Teller Machine (ATM): ATM facility was started in early 1990s by
foreign banks like HSBC, City bank. ATM is made to work 24
Hrs a day. For the purpose of withdrawing cash from ATM machine, plastic
currency and debit cards are used.
Credit Cards: Credit card is another facility produced by E-Banking. Credit card
is a product with the help of which a customer can avail various facilities or buy

products/services without making immediate payment and that payment could be

made at later stage of time.
Mobile Banking: Mobile banking provides customer to access their account on
mobile phone screen. Routine banking transactions can be performed by just
punching a few buttons on the mobile.
Telephone Banking: Tele banking is another main service provide by e-banking
Tele banking is a service where banks get various phone calls during their working
hours. It helps the user to transact various transactions while remaining at home.
Electronic Fund Transfer (EFT): E-Banking has given a system of
electronically transferring funds .i.e. EFT which involves transfer of funds from
bank account of one customer to bank account of another customer electronically.
This is done through electronic data interchange (EDI).
Electronic Cheques: E-cheque is a system, which provides more security and
reduction in overall cost. E-cheque facilitates on line payment. It needs no
clearance charges. Issue of E-cheque is more familiar in various advanced
countries.
2. MOBILE BANKING
There are rapid changes in the financial services environment, which has led to
increased competition by few players and product innovations. Recent innovations
in tele communications have opened up an additional channel for electronic
banking.
Meaning:
Banks have noticed and availed the opportunity that exists between banking and
mobile telephony. SMS (short messaging services)
and GSM(global system mobile)of mobile can be used for banking transactions.
The mobile banking enables the customers to bank anywhere and at any time.

These wireless devices may give services as hand held PCs. Mobile devices are
enabled now days to perform many activities which earlier have been available
only as internet services.
Issues relating to M-Banking

Cost saving: SMS offers revenue opportunities for operators by changing SMS
into higher value added applications. The service offerings in SMS banking are
numerous and highly cost saving.
Simple to operate: The success of M- Banking is due to its user-friendly interface
and range of services it offers.
Market research: Proper understanding of specific market is key in the success
of mobile banking. Research on available payment methods, user habits and key
players is required to be done. Players will have to be creative to make users
perceive it as beneficial.
Services:
Global system mobile (GSM) is not just about voice communications but also
supports wireless personal digital assistant and other devices, just as it supports
telephony. SMS tariffs should be lowered in order to capture the markets and to
exploits the potential for commercial transactions over mobile device.
Many services and schemes are being piloted and some are already available. Few
are mentioned here under:
Balance enquiry can be made, Requesting for providing bank
statement,Requesting countermanding cheque payments (stop
cheque),Chequebook request can be made.
Cheque clearance alerts are given to customers,Sending account balances every
time one makes a withdrawal, which helps in finding out if some one else is using
your ATM card.
Limitations /problems in M-Banking:
Possibility of error is higher than in internet banking.

The data transmission is very slow.

M-banking services are risky and not secure trials and pilots are still on
World Wide Web to developed enhanced security.
M-banking services are not enough versatile.
The information knowledge available related to M-Banking is not sufficient.
Some non-users of mobile banking perceive it
to be complicated due to lack of guidance
available.
M Banking is not just a service reserved for
international banks but for any financial
institution wishing to take it. There is a great
opportunity to exploit the combination of fast
growing consumer device the mobile phone
with the richness of internet protocols that
will surpass a similar revolution imitated by
pc related banking M-Banking has a lot to
offer banks and to its customers, but its
success depend upon of variety of services,
security and user friendly interface its make it easy, cheaper it simple to use.
3. ATM
ATM facility was started in early 1990s by foreign banks like HSBC, City bank.
ATM is made to work 24 Hrs a day. For the purpose of withdrawing cash from
ATM machine, plastic currency and debit cards are used. The account number and
credit limit of customers are magnetically embedded on a strip of the tape on the
back of card.
ATM enables user to perform banking transactions by actually interacting with
the human teller. This is one of the unattended or unmanned devices usually

located on or off the banks premises. Its function is to receive and dispense cash
and to handle routine financial transactions.
The operation mechanism is that card is inserted into the ATM; the terminal reads
the tape data to processes, which activates the accounts. According to the
instructions, the details are displayed on the screen and by checking a few keys of
the keyboard the user can direct the computer to carry out the financial
transactions.
An automated teller machine (ATM) is a computerized telecommunications
device that provides the customers of a financial institution with access to
financial transactions in a public space without the need for a human clerk or bank
teller. On most modern ATMs, the customer is identified by inserting a plastic
ATM card with a magnetic stripe or a plastic smartcardwith a chip, that contains a
unique card number and some security information, such as an expiration date or
CVC (CVV). Security is provided by the customer entering a personal
identification number (PIN).
Using an ATM, customers can access their bank in order to accounts make cash
withdrawals (or credit card cash advances) and check their account balances as
well as purchasing mobile cell phone prepaid credit. ATMs are known by various
other names including automated banking machine, money machine, bank
machine, cash machine, hole-in-the-wall, cashpoint, Bancomat (in various
countries in Europe and Russia), and Any Time Money (in india).

Working of ATM
Insertion of Transmission of Tape Activation

Card into ATM
data to Processor of account
Actual Clicking of keys Display of details
Transaction of keyboard on screen
Operation by
ATM will give various options on the screen like:
user
Balance enquiry
Mini statement
Deposits
Cash withdrawals etc.
Banks have launched the operation of accepting payments for utility services
like electricity and telephone bills etc. Banking on the net is only an extension of
the ATM and tele banking services.
Various facilities produced by ATMs:

Cash withdrawals
Personal identification number (PIN) change
On line balance enquiry
Transfer of funds between accounts linked to ones card
Request for cheque book
Request for account statement
4. DEBIT CARDS

Debit cards combine the functions of ATM cards and checks. When you pay with
a debit card, the money is
automatically deducted from your
checking account. Many banks
issue a combined ATM/debit card
that looks just like a credit card and
can be used in places where credit
cards are accepted. But don't be
mistaken -- they are not credit
cards. The money you spend comes out of your checking account immediately.
Debit and check cards, as they have become widespread, have revealed
numerous advantages and disadvantages to the consumer and retailer alike.
Advantages are as follows (most of them applying only to a some countries,
but the countries to which they apply are unspecified):
A consumer who is not credit worthy and may find it difficult or impossible
to obtain a credit card can more easily obtain a debit card, allowing him/her
to make plastic transactions.
Use of a debit card is limited to the existing funds in the account to which it
is linked, thereby preventing the consumer from racking up debt as a result
of its use, or being charged interest, late fees, or fees exclusive to credit
cards.
For most transactions, a check card can be used to avoid check writing
altogether. Check cards debit funds from the user's account on the spot,
thereby finalizing the transaction at the time of purchase, and bypassing the
requirement to pay a credit card bill at a later date, or to write an insecure
check containing the account holder's personal information.
Like credit cards, debit cards are accepted by merchants with less
identification and scrutiny than personal checks, thereby making
transactions quicker and less intrusive. Unlike personal checks, merchants

generally do not believe that a payment via a debit card may be later
dishonored.
Unlike a credit card, which charges higher fees and interest rates when a
cash advance is obtained, a debit card may be used to obtain cash from an
ATM or a PIN-based transaction at no extra charge, other than a foreign
ATM fee.
The Debit card has many disadvantages as opposed to cash or credit:
Some banks are now charging over-limit fees or non-sufficient funds fees
based upon pre-authorizations, and even attempted but refused transactions
by the merchant (some of which may not even be known by the client).
Many merchants mistakenly believe that amounts owed can be "taken" from
a customer's account after a debit card (or number) has been presented,
without agreement as to date, payee name, amount and currency, thus
causing penalty fees for overdrafts, over-the-limit, amounts not available
causing further rejections or overdrafts, and rejected transactions by some
banks.
In some unspecified countries, debit cards offer lower levels of security
protection than credit cards. Theft of the users PIN using skimming devices
can be accomplished much easier with a PIN input than with a signature-
based credit transaction. However, theft of users' PIN codes using skimming
devices van be equally easily accomplished with a debit transaction PIN
input, as with a credit transation PIN input, and theft using a signature-
based credit transation is equally easy as theft using a signature-based debit
transaction.
In many places, laws protect the consumer from fraud a lot less than with a
credit card. While the holder of a credit card is legally responsible for only a
minimal amount of a fraudulent transaction made with a credit card, which
is often waived by the bank, the consumer may be held liable for hundreds
of dollars in fraudulent debit transactions. The consumer also has a much

shorter time (usually just two days) to report such fraud to the bank in order
to be eligible for such a waiver with a debit card, whereas with a credit card,
this time may be up to 60 days. A thief who obtains or clones a debit card
along with its PIN may be able to clean out the consumer's bank account,
and the consumer will have no recourse.
When a transaction is made using a credit card, the bank's money is being
spent, and therefore, the bank has a vested interest in claiming its money
where there is fraud or a dispute. The bank may fight to void the charges of
a consumer who is dissatisfied with a purchase, or who has otherwise been
treated unfairly by the merchant. But when a debit purchase is made, the
consumer has spent his/her own money, and the bank has little if any
motivation to collect the funds.
In some unspecified coutriesand for certain types of purchases, such as
gasoline, lodging, or car rental, the bank may place a hold on funds much
greater than the actual purchase for a fixed period of time. However, this
isn't the case in other countries, such as Sweden. Until the hold is released,
any other transactions presented to the account, including checks, may be
dishonored, or may be paid at the expense of an overdraft fee if the account
lacks any additional funds to pay those items.
While debit cards bearing the logo of a major credit card are accepted for
virtually all transactions where an equivalent credit card is taken, a major
exception (in some unspecified countries only, is at car rental facilities. In
some unspecified countries, car rental agencies require an actual credit card
to be used, or at the very least, will verify the creditworthiness of the renter
using a debit cardThere are currently two ways that debit card transactions
are processed: online debit (also known as PIN debit) and offline debit (also
known as signature debit). In some countries including the United States
and Australia, they are often referred to at point of sale as "debit" and

"credit" respectively, even though in either case the user's bank account is
debited and no credit is
involved.
Some cards are
blocked from making either
online or offline transactions,
while other cards are enabled
for both kinds of
transactions.
Online debit ("PIN debit"
or "debit")
Online debit cards require electronic authorization of every transaction and the
debits are reflected in the users account immediately. The transaction may be
additionally secured with the personal identification number (PIN) authentication
system and some online cards require such authentication for every transaction,
essentially becoming enhanced automatic teller machine (ATM) cards. One
difficulty in using online debit cards is the necessity of an electronic authorization
device at the point of sale(POS) and sometimes also a separate PIN pad to enter
the PIN, although this is becoming commonplace for all card transactions in many
countries. Overall, the online debit card is generally viewed as superior to the
offline debit card because of its more secure authentication system and live status,
which alleviates problems with processing lag on transactions that may have been
forgotten or not authorized by the owner of the card. Banks in some countries,
such as Canada and Brazil, only issue online debit cards.
5. CREDIT CARD
A credit card is a system of payment named after the small plastic card issued to
users of the system. A credit card is different from a debit card in that it does not
remove money from the user's account after every transaction. In the case of credit
cards, the issuer lends money to the consumer (or the user). It is also different

from a charge card (though this name is sometimes used by the public to describe
credit cards), which requires the balance to be paid in full each month. In contrast,
a credit card allows the consumer to 'revolve' their balance, at the cost of having
interest charged. Most credit cards are the same shape and size, as specified by the
ISO 7810 standard.
The issuer of the card grants a line of credit to the consumer (or the user) from
which the user can borrow money for payment to a merchant or as a cash advance
to the user. A credit card is different from a charge card, where a charge card
requires the balance to be paid in full each month. In contrast, credit cards allow
the consumers to 'revolve' their balance, at the cost of having interest charged.
Most credit cards are issued by local banks or credit unions.Credit cards are issued
after an account has been approved by the credit provider, after which cardholders
can use it to make purchases at merchants accepting that card.When a purchase is
made, the credit card user agrees to pay the card issuer. The cardholder indicates
his/her consent to pay, by signing a receipt with a record of the card details and
indicating the amount to be paid or by entering a Personal identification number
(PIN). Also, many merchants now accept verbal authorizations via telephone and
electronic authorization using the Internet, known as a 'Card/Cardholder Not
Present' (CNP) transaction.

Electronicverification systems allow merchants to verify that the card is valid and
the credit card customer has sufficient credit to cover the purchase in a few
seconds, allowing the verification to happen at time of purchase. The verification
is performed using a credit card payment terminal or Point of Sale (POS) system
with a communications link to the merchant's acquiring bank. Data from the card
is obtained from a magnetic stripe or chip on the card; the latter system is in the
United Kingdom and Ireland commonly known as Chip and PIN, but is more
technically an EMV card.
Other variations of verification systems are used by e-Commerce merchants to
determine if the user's account is valid and able to accept the charge. These will
typically involve the cardholder providing additional information, such as the
security code printed on the back of the card, or the address of the cardholder.
Each month, the credit card user is sent a statement indicating the purchases
undertaken with the card, any outstanding fees, and the total amount owed. After
receiving the statement, the cardholder may dispute any charges that he or she
thinks are incorrect (see Fair Credit Billing Act for details of the US regulations).
Otherwise, the cardholder must pay a defined minimum proportion of the bill by a
due date, or may choose to pay a higher amount up to the entire amount owed. The
credit provider charges interest on the amount owed if the balance is not paid in
full (typically at a much higher rate than most other forms of debt). Some financial
institutions can arrange for automatic payments to be deducted from the user's
bank accounts, thus avoiding late payment altogether as long as the cardholder has
sufficient funds.
Interest charges
Credit card issuers usually waive interest charges if the balance is paid in full each
month, but typically will charge full interest on the entire outstanding balance
from the date of each purchase if the total balance is not paid.
For example, if a user had a $1,000 transaction and repaid it in full within this
grace period, there would be no interest charged. If, however, even $1.00 of the

total amount remained unpaid, interest would be charged on the $1,000 from the
date of purchase until the payment is received.
The credit card may simply serve as a form of revolving credit, or it may
become a complicated financial instrument with multiple balance segments each at
a different interest rate, possibly with a single umbrella credit limit, or with
separate credit limits applicable to the various balance segments. Usually this
compartmentalization is the result of special incentive offers from the issuing
bank, to encourage balance transfers from cards of other issuers. In the event that
several interest rates apply to various balance segments, payment allocation is
generally at the discretion of the issuing bank, and payments will therefore usually
be allocated towards the lowest rate balances until paid in full before any money is
paid towards higher rate balances. Interest rates can vary considerably from card
to card, and the interest rate on a particular card may jump dramatically if the card
user is late with a payment on that card or any other credit instrument, or even if
the issuing bank decides to raise its revenue.
Advantages: The main advantages are as follows:
Advantages
To customers Grace period To merchants
Benefits to customers:
Because of intense competition in the credit card industry, credit card providers
often offer incentives such as frequent flyer points, gift certificates, or cash back
(typically up to 1 percent based on total purchases) to try to attract customers to
their programs.
Low interest credit cards or even 0% interest credit cards are available. The only
downside to consumers is that the period of low interest credit cards is limited to a

fixed term, usually between 6 and 12 months after which a higher rate is charged.
However, services are available which alert credit card holders when their low
interest period is due to expire. Most such services charge a monthly or annual fee.
Grace period
A credit card's grace period is the time the customer has to pay the balance before
interest is charged to the balance. Grace periods vary, but usually range from 20 to
40 days depending on the type of credit card and the issuing bank. Some policies
allow for reinstatement after certain conditions are met.
Usually, if a customer is late paying the balance, finance charges will be
calculated and the grace period does not apply. Finance charges incurred depend
on the grace period and balance; with most credit cards there is no grace period if
there is any outstanding balance from the previous billing cycle or statement (i.e.
interest is applied on both the previous balance and new transactions). However,
there are some credit cards that will only apply finance charge on the previous or
old balance, excluding new transactions.
Benefits to merchants
For merchants, a credit card transaction is often more secure than other forms of
payment, such as checks, because the issuing bank commits to pay the merchant
the moment the transaction is authorized, regardless of whether the consumer
defaults on the credit card payment (except for legitimate disputes, which are
discussed below, and can result in charges back to the merchant). In most cases,
cards are even more secure than cash, because they discourage theft by the
merchant's employees and reduce the amount of cash on the premises. Prior to
credit cards, each merchant had to evaluate each customer's credit history before
extending credit. That task is now performed by the banks which assume the credit
risk.
For each purchase, the bank charges the merchant a commission (discount fee) for
this service and there may be a certain delay before the agreed payment is received

by the merchant. The commission is often a percentage of the transaction amount,

plus a fixed fee.
Parties involved
Cardholder: The holder of the card used to make a purchase; the consumer.
Card-issuing bank: The financial institution or other organization that issued the
credit card to the cardholder. This bank bills the consumer for repayment and
bears the risk that the card is used fraudulently. American Express and Discover
were previously the only card-issuing banks for their respective brands, but as of
2007, this is no longer the case.
Merchant: The individual or business accepting credit card payments for products
or services sold to the cardholder
Acquiring bank: The financial institution accepting payment for the products or
services on behalf of the merchant.
Independent sales organization: Resellers (to merchants) of the services of the

acquiring bank.
Merchant account: This could refer to the acquiring bank or the independent
sales organization, but in general is the organization that the merchant deals with.
Credit Card association: An association of card-issuing banks such as Visa,
MasterCard, Discover, American Express, etc. that set transaction terms for
merchants, card-issuing banks, and acquiring banks.
Transaction network: The system that implements the mechanics of the
electronic transactions. May be operated by an independent company, and one
company may operate multiple networks. Transaction processing networks
include: Cardnet, Nabanco, Omaha, Paymentech, NDC Atlanta, Nova, TSYS,
Concord EFSnet, and VisaNet.
Affinity partner: Some institutions lend their names to an issuer to attract
customers that have a strong relationship with that institution, and get paid a fee or
a percentage of the balance for each card issued using their name. Examples of

typical affinity partners are sports teams, universities, charities, professional

organizations, and major retailers.
The flow of information and money between these parties always through the
card associations is known as the interchange.
Features:
As well as convenient, accessible credit, credit cards offer consumers an easy way
to track expenses, which is necessary for both monitoring personal expenditures
and the tracking of work-related expenses for taxation and reimbursement
purposes. Credit cards are accepted worldwide, and are available with a large
variety of credit limits, repayment arrangement, and other perks (such as rewards
schemes in which points earned by purchasing goods with the card can be
redeemed for further goods and services or credit card cashback).
Some countries, such as the United States, the United Kingdom, and France, limit
the amount for which a consumer can be held liable due to fraudulent transactions
as a result of a consumer's credit card being lost or stolen.
Problems
A smart card, combining credit card and debit card properties. The 3 by 5 mm
security chip embedded in the card is shown enlarged in the inset. The contact
pads on the card enable electronic access to the chip.
The low security of the credit card system presents countless opportunities for
fraud. This opportunity has created a huge black market in stolen credit card
numbers, which are generally used quickly before the cards are reported stolen.
The goal of the credit card companies is not to eliminate fraud, but to "reduce it to
manageable levels". This implies that high-cost low-return fraud prevention
measures will not be used if their cost exceeds the potential gains from fraud
reduction.
Most internet fraud is done through the use of stolen credit card information which
is obtained in many ways, the simplest being copying information from retailers,
either online or offline. Despite efforts to improve security for remote purchases

using credit cards, systems with security holes are usually the result of poor
implementations of card acquisition by merchants.
For example, a website that uses SSL to
encrypt card numbers from a client may simply email
the number from the webserver to someone who
manually processes the card details at a card
terminal. Naturally, anywhere card details become
human-readable before being processed at the acquiring bank, a security risk is
created.
6. INTERNET BANKING
Online banking (or Internet banking) allows customers to conduct financial
transactions on a secure website operated by their retail or virtualbank, credit
union or building society.
Features:
Online banking solutions have many features and capabilities in common, but
traditionally also have some that are application specific.
The common features fall broadly into several categories
Transactional (e.g., performing a financial transaction such as an account to
account transfer, paying a bill, wire transfer... and applications... apply for a loan,
new account, etc.)
Electronic bill presentment and payment - EBPP
Funds transfer between a customer's own checking and savings accounts, or to
another customer's account
Investment purchase or sale
Loan applications and transactions, such as repayments
Non-transactional (e.g., online statements, check links, cobrowsing, chat)
Bank statements

Financial Institution Administration - features allowing the financial institution to

manage the online experience of their end users
ASP/Hosting Administration - features allowing the hosting company to
administer the solution across financial institutions
Security
Security token devices

Protection through single passwordauthentication, as is the case in most secure
Internet shopping sites, is not considered secure enough for personal online
banking applications in some countries. Basically there exist two different
security methods for online banking.
The PIN/TAN system where the PIN represents a password, used for the login and
TANs representing one-time passwords to authenticate transactions. TANs can be
distributed in different ways, the most popular one is to send a list of TANs to the
online banking user by postal letter. The most secure way of using TANs is to
generate them by need using a security token. These token generated TANs
depend on the time and a unique secret, stored in the security token (this is called
two-factor authentication or 2FA). Usually online banking with PIN/TAN is done
via a web browser using SSL secured connections, so that there is no additional
encryption needed.
Signature based online banking where all transactions are signed and encrypted
digitally. The Keys for the signature generation and encryption can be stored on
smartcards or any memory medium, depending on the concrete implementation.

Attacks
Most of the attacks on online banking used today are based on deceiving the user
to steal login data and valid TANs. Two well known examples for those attacks
are phishing and pharming. Cross-site scripting and keylogger/Trojan horses can
also be used to steal login information.
A recent FDIC Technology Incident Report, compiled from suspicious activity
reports banks file quarterly, lists 536 cases of computer intrusion, with an average
loss per incident of $30,000. That adds up to a nearly $16-million loss in the
second quarter of 2007. Computer intrusions increased by 150 percent between the
first quarter of 2007 and the second. In 80 percent of the cases, the source of the
intrusion is unknown but it occurred during online banking, the report states.[4]
Counter measures
There exist several countermeasures which try to avoid attacks. Digital certificates
are used against phishing and pharming, the use of class-3 card readers is a
measure to avoid manipulation of transactions by the software in signature based
online banking variants. To protect their systems against Trojan horses, users
should use virus scanners and be careful with downloaded software or e-mail
attachments.

CHAPTER 5
INNOVATION IN BANKING BRANCHES
1. UNIVERSAL BANKING
Universal banking is bank engaged in diverse kind of banking activities. Under the
universal banking system the banks do broad based and comprehensive activities.
R.H. Khan committee had recommended the concept of universal banking. As per
universal banking financial institutions and banks are allowed to undertake all
kinds of activities of banking, development financing and related activities subject
to compliance of statutory and other requirements prescribed by RBI, Govt. and
related legal acts.
Meaning: Universal banking is a multipurpose and multi functional financial
superstore providing both banking and financial services. A universal bank may
undertake multifarious services under one roof, which includes:
Receiving money on current or deposit accounts and lending of money for
trade, industries, exports, agriculture etc.
Mortgage financing; project financing infrastructure lending, asset
securitisation, leasing, factory etc.
Remittance of funds, custodial services, credit/debit cards, collection of
cheque/bills etc.
Corporate advisory services, insurance depository service, merchant
banking (brokerage, underwriting new debt and equity shares) foreign
exchange operations.
Therefore in universal banking under one roof, corporate can get loans and
avail, other financial services, while individuals can bank and borrow.

The few objectives of universal banking are as follows:

To help in bringing harmony in the role of financial institutions and banks.
To offer world-class financial services to the clients by using information
technology and cross selling.
To reduce per customer cost.
To increase per customer revenue.
To take benefit of economies of scale.
To compete with international banks by expanding business beyond the
national boundaries.
RBI Guidelines:
According to RBI guidelines of April 2001, financial institutions have an option to
convert into a bank provided they ensure compliance with following provisions.
Reserve provisions (CRR/SLR): A financial institution will have to
comply with CRR and SLR provisions after its conversion into a universal
banking.
Permissible activities: In case an activity, which is not permissible for a
bank under section 6(1) of B.R.Act 1949, is presently undertaken by
financial institution, such activity will have to be stopped after its
conversion into a universal banking.
Composition of board: The section 10(A) of B.R. Act 1949 requires that at
least 51% of that total number of directors should have special knowledge
and experience. This provision has to be complied with constituting the
board after transformation from financial institution to a bank.
Benefits of universal banking
The benefits of universal banking are as follows:
Benefits
To Organization To Customers To Shareholders

To the organization:
When a bank diversifies its activities as a universal bank it can use its existing
expertise in one type of financial service in providing the other types. So, it entails
less cost in performing all the functions by one entity instead of separate
specialized bodies. A bank possesses information on the risk characteristics of its
clients, which it can use to pursue other activities with the same clients.
A bank has an existing network of branches, which can acts as shops for
selling products like insurance. This way a big bank can reach the remotest client
without having to recourse to an agent. Many financial services are interlinked
activities, e.g. insurance and lending. A bank can use its instruments in one
activity to exploit the other, e.g. in case of project lending to the same firm which
has purchased insurance from the bank.
To the customers:
Universal banking being a one-stop shops for all varied services, some a lot of
transaction costs and increases the speed of economic activity. The wide range of
financial products and services offered by universal banks are preferred by the
customers than the specialized banks due to comprehensive service provided by
these banks.
To the shareholders:
One manifestation of universal banking is a bank holding stakes in a firm. When a
lender has a stake in the firm he is in a better position to monitor the firm to
safeguard his interest, which sends a good signal about the financial health the
firm to the investors. This situation is beneficial from investors point of view.
All these benefits have to be weighed out against the problems. The main
drawbacks are that:
Universal banking leads to a loss in economies of specialization.
Problem of the bank indulging in too many risky activities. To account for
this, appropriate regulation can be devised, which will ultimately benefit all
the participants in the market, including the banks themselves.

In spite of these problems, there is a lot of interest expressed by banks and

financial institutions in universal banking. In India, too a lot of
opportunities are there to be exploited. Banks mainly the financial
institutions are aware of it, and most of the groups have plans to diversify in
big way. Even though there might not be profits forthcoming in the short
run due to the switching costs incurred in moving to a new business.
2. OFFSHORE BANKING
Offshore banking refers to the banking business related to borrowing and lending
funds abroad and meeting the special needs of international investors. An offshore
bank is a bank located outside the resident country of the depositor. These banks
are not subject to domestic monetary and fiscal regulations. Moreover offshore
banks are also exempted from the regulations, which govern the branches of
foreign banks. Rather they are situated in a low tax jurisdiction that provides,
financial and legal advantages. These advantages may include strong privacy, low
or no taxation protection against local political or financial instability.
Services/functions
The important functions or financial services, which offshore banking units
can provide, are:
Deposit taking
Project financing
Syndication of loans
Issuing short-term instruments like negotiable certificates to deposits.
Carry merchant banking activities in foreign currency denominated bonds.
Electronic funds transfer
Foreign exchange
Letter of credit and trade finance
Investment management and investment custody
Trustee services

Corporate administration
Although every bank does not provide each service. Banks try to polarize between
retail services (which are low cost) and private banking (which tries to bring
personalized suite of services to the client).
Benefits/advantages
The main advantages of offshore banking are:
Economic and political stability: Offshore banking provides economically
politically stable jurisdictions especially for those resident in areas where there is a
risk of political turmoil, and who fear their assets may be seized or disappear.
Although, developed economies with regulated banking system offer same
advantages in terms of stability.
Payment of higher interest rates: Some of these banks which function at a lower
cost base provide higher interest rates than the legal rates prevailing in their home
countries due to lack of government intervention and lower overheads.
Tax benefits: Generally the interest paid by offshore banks is without tax
deduction. This acts as a benefit for individuals who do not pay tax on worldwide
income, or who do not pay tax until the tax return is agreed.
Special banking services: Certain offshore banks offer special banking services
not offered else where such as anonymous bank accounts, higher or lower rate
loans based on risk and investment opportunities.
Development of remote areas/nation: offshore banking helps even
geographically remote nations to generate investment and create growth in their
economies.
Disadvantages
There are some limitations of offshore banking are as follows:
Involved in crime: Off shore banking has been found associated with the
underground economy and organized crime through money lending. After

September 11, 2001 these banks have been accused of helping various organized
crime gangs, terrorist groups.
Encourages tax evasion:Offshore banks encourages tax evasion by giving people
seeking tax evasion an attractive place to deposit their hidden income.
Difficult physical access: As offshore banks are often remotely situated therefore
the physical access is difficult. Access to information can be difficult, however in
a global tele communication networks this does not seen to be a big problem as
information can be set up on line, by phone or by mail.
Developing countries may face financial disturbance: sometimes developing
countries may face problem due to speed at which money can be transferred in and
out of their economy. This hot money coming from offshore accounts can be
definitely increase problems of financial and economic disturbance in developing
countries.
3. RETAIL BANKING
The coming up of middle class with substantial purchasing power in India during
the last decade has given rise to its desire to spend according to the changing life
style. This has offered the Indian banking system, a ready market, for mobilization
and development of their funds. Given the rising purchasing power of this class,
there is huge untapped potential for business.
Meaning: Retail banking is activity devised in past few years and now used
extensively. It represents any banking, which is not wholesale based. It includes
any business that is conducted through branch network, which is mainly focused
towards personal sector. It encompasses all institutions that provide a related range
of banking servicesmoney deposit, credit services and some form of financial
advice.
Retail banking today is characterized by three areas:
Multiple products (deposits, credit cards, insurance, investment)
Multiple channels of distribution (call center, branch internet)
Multiple customer groups (consumer, small business)
Need for retail banking

Economic prosperity and the consequent increase in the purchasing power of
consumer.
Technological factors also added to the requirement convenience of using credit
cards, internet and phone banking anywhere and anytime banking has also flood
customers into banking.
Decline in interest rates have also contributed to increase retail banking.
With the large corporate borrowers having diversified the sources to fund their
financial requirements, frequent reduction in cash reserve ratio resulting in
pumping in of liquidity, declining bank rate leading to decline in spreads un-
attractive yields on government securities etc. have all forced banks to be in search
of alternative opportunity to deploy their funds.
Segments in retail banking:
There are three segments in retail banking which included:
Deposit products (convenient deposit schemes such as flexi deposits)
Loan products (such as housing loans, education loans, conveyance loans,
personal loans for diverse purposes such as medical expenses, travel abroad)
Other productsBesides there are a number of value added services such as free
collection of outstation instrument, concession in service fee in case of
remittances, issue of free ATM cards, waiver of fee on credit cards and utility
services such as payment of water, electricity and phone bills.
Developments in retail banking in India:
Commercial banks in India are involving more and more in retail banking as it is
now an attractive market segment having lot of opportunities for growth and
profit. Retail banking refers to housing loans for purchasing durables, auto loans,
credit cards and educational loans.The loan values can average between Rs.20000
to Rs.1 crore. These loans are of period of 5 to 7 years, with an exception of
housing loan being granted up to 15 years. The speed of growth of retail banking

can be accelerated by growth in banking technology and automation of banking

processes.
Although the retail banking offers phenomenal opportunities for growth and
profits but how far it is able to lead to growth will depend on the capacity of banks
to meet these opportunities profitably. There is need for constant innovation to
revalidate and upgrade existing internal systems. Banks can now use retail as
growth trigger. This requires product differentiation, innovation, product pricing
technological up gradation, cost reduction and cross selling.
4. WHOLESALE BANKING
Wholesale banking is the provision of services by banks to the like of large
corporate clients, mid-sized companies, real estate developers and investors,
international trade finance businesses, institutional customers (such as pension
funds and government entities/agencies), and services offered to other banks or
other financial institutions. In essence, wholesale banking services usually involve
high value transactions.Wholesale banking contrasts with retail banking, which is
the provision of banking services to individuals.
(Wholesale finance means financial services, which are conducted between
financial services companies and institutions such as banks, insurers, fund
managers, and stockbrokers.)Modern wholesale banks are engaged in: finance
wholesaling, underwriting, market making, consultancy, mergers and acquisitions,
fund management.

CHAPTER 6
RECENT TRENDS IN BANKING INNOVATION 2016
Data Monetization
Banks are recognising that their data analytics can leverage market opportunity,
for example Ned Bank in South Africa offering merchants far more business
insights through market intelligence services. Customers are willing to pay for
this, and the banks that offer such services are stickier.
Social Value Chain
Banks dont need to do all the work as customer can, and they want to. Many
banks are engaging customers in crowd sourcing ideas, with Widiba (Italy) picked
as a great example. Wideband asked customers to design the features of the next
generation bank which have now been delivered.
Robot force
There are a few gimmicky robot services out there, particular in Japan where
robots replaced tellers (I thought we had done the same in the UK until the teller
moved and I realised then they were human), but its not just robo-advisors that
are taking off. After all, take a look at UBS who offer a real-time portfolio
analytics services on a personalised basis to all of their high net worth clients
through IBMs Watson (DBS do the same).
The Banking of Things (BoT)
We know the Internet of Things is coming, and it will need BoT based upon
the ValueWeb to support it, but things are already emerging in this space. US
Bank offers a link to light bulbs to flash you when something is happening on your
account whilst Bradesco offers a connection between your car and your bank
account. But the example that Lukas showed was ASB from New Zealand who
have created a fun way to inform children about money called Clever Kash.
Intermediate Everything

Its funny how Ive about banks being disintermediated since the 1990s and yet
theyre still here and theyre now bigger. I dont believe banks will
be disintermediated or, as we now call it, unbundled. Banks instead are
reintermediating and rebundling everything and this trend proves it. There are
various examples of this, specifically the idea of predictive analytics and
partnering to remind you that you that its your partners birthday today, for
example. The idea here a stretch for most banks is that the bank will not only
know its their birthday, but will tell you what you brought them for Christmas
and for last years present, and suggest things they might like this year. I cant
believe this one right now, but apparently Alfa Bank (Russia), CBA (Australia),
Santander (Spain) and Caixa (Brazil) are already well on the road to making this
happen.
Distributed Payments
How about banking as a status symbol? Show off my contactless bracelet (La
Caixa, Spain), biometric tracker (RBC Canada and HBOS UK), wearable suit
(Heritage Bank, Australia), and wearable everything (Barclays UK) and
more. Hmmm just seems to me that I can pay for something with just the flick
of finger these days.
Talking Transactions
We used to have boring transactional statements, but many banks are bringing
transactions alive by integrating features and apps with other plug and play
services, like Google Maps, Facebook and Instagram. An example of brining
things to life is the Moven app, which alerts the user when theyre spending and
getting above their budget limits by breaking the glass on their phone.
Love those SMEs

SME Small to Medium Enterprises or, if you prefer, small companies have
been relatively unloved by banks in the past. They are high risk until established

and, even then, unless they get to a certain size more than $100 million revenues
they can cause credit risk concerns. Those concerns can be overcome by
partnering with the new mentors like Funding Circle or by doing things like the
Kumsal services from Deniz Bank, Turkey. This is a platform that supports small
businesses gain digital reach by offering a comprehensive suite of support from
digital marketing to communications to operations to an overall online presence.
Non-stop, Always On
The 24*7 bank is here, and it doesnt cut the mustard to be 9 till 5
anymore. Equally, some banks are becoming more than just 24*7 by offshoring,
with banks such as Standard Bank, South Africa, offering a single dashboard to let
relationship managers connect with their clients via any media the client prefers to
use including WeChat.
Everything is personal
I like this one as Ive talked 1:1 Marketing since the 1990s, but its finally
happening, with one-size fits all only applying to scarves these days. The fact is
that we now have a fully enabled digital customer platform where back office
cloud and analytics can deliver real-time experiences through APIs anywhere,
anytime. The example EFMA chose for this category is Idea Bank, Poland, who
offer an entire financial ecosystem for their clients from cloud-based internet
banking to an Uber-styled ATM.

CONCLUSION
Over the last three decades the role of banking in the process of financial
intermediation has been undergoing a profound transformation, owing to changes
in the global financial system. It is now clear that a thriving and vibrant banking
system requires a well developed financial structure with multiple intermediaries
operating in markets with different risk profiles. Taking the banking industry to
the heights of international excellence will require a combination of new
technologies, better processes of credit and risk appraisal, treasury management,
product diversification, internal control and external regulations and not the least,
human resources. Fortunately, we have a comparative advantage in almost all
these areas. Our professionals are at the forefront of technological change and
financial developments all over the world. It is time to harness these resources for
development of Indian banking in the new century.The BANKING sector in India
has become stronger in terms of capital and the number of customers. It has
become globally competitive and diverse aiming, at higher productivity and
efficiency. Exposure to worldwide competition and deregulation in Indian
financial sector has led to the emergence of better quality products and services.
Reforms have changed the face of Indian banking and finance. The banking sector
has improved manifolds in terms of Technology, Deregulation, Product
&Services, Information Systems, etc. "With new opportunities unfolding Banking
Sector, India is emerging as a global power in banking services in the next two
decade."

BIBLIOGRAPHY
Banking Law and Practice by Sharma publications.

Banking theory and practices by kalyani publishers.
Principles of banking by AIBA (All India banking associations)
WEBLIOGRAPHY
www.wikepeadia.com
www.google.com
www.lycos.com
www.central bank of india.com
Value notes.com
White papers.com
Banknetindia.com
Finance biz.com
Gahoo yoogle.com

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VIVEK COLLEGE OF COMMERCE

INNOVATION IN BANKING PRODUCT 1

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ramifications throughout an economy. Further, since better finance can encourage

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convenience and ease. Automated Teller Machines (ATMs), which were

INNOVATION IN BANKING PRODUCT 5

cards have been effective as a cash substitute on university campuses, as well as

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HISTORY OF INNOVATION IN BANKING PRODUCT

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NEED FOR INNOVATION IN BANKING PRODUCT

Within financial institutions, theres a significant focus on implementing

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Put information closer to the customer

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TYPES INNOVATION IN BANKING PRODUCT

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Process of E-Banking/ procedure of E-Banking

Credit Card Processing Of

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As soon as password is approved on the server, then processing of information

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Benefits to merchant traders

INNOVATION IN BANKING PRODUCT 17

Types of E-Banking services

ATM Card E-cheque Mobile Telephone EFT

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products/services without making immediate payment and that payment could be

INNOVATION IN BANKING PRODUCT 19

Issues relating to M-Banking

INNOVATION IN BANKING PRODUCT 20

The data transmission is very slow.

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Insertion of Transmission of Tape Activation

Actual Clicking of keys Display of details

Transaction of keyboard on screen

Various facilities produced by ATMs:

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To customers Grace period To merchants

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by the merchant. The commission is often a percentage of the transaction amount,

Independent sales organization: Resellers (to merchants) of the services of the

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typical affinity partners are sports teams, universities, charities, professional

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Financial Institution Administration - features allowing the financial institution to

Security token devices

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