Chapter-4: E-Banking and M-banking

Learning things: To introduce about various updated services of commercial banks and how these
services are provided to customer. The risks which are associated with these services must be known to
customers.

Introduction: Banking is a changing industry. Beginning from the roadside of the Lombardy
Street of Italy to the modern exquisite building, the evolution and technological improvement of
banks never stop. In the early period of banking people used to use their fingers/hands for
computing. Later, many innovation devices were devised and used to batter banking services.
Every bank tries to use the latest technology to provide its customers high quality banking
facilities. Electronic banking brings unprecedented changes in the world wide banking sector.

Electronic banking: Electronic banking is a modern computerized system of providing

banking services by the banks to their customers. By using the modern technologies, banks have
become able to provide their existing services more quickly, more accurately and more
conveniently. It has created revolution in the service delivery of the banking industry.
According MR. Ellen H. lipis “Electronic banking systems are electronic systems that transfer
money and record data relating to these transfers, electronic banking services are developing
tools in the overall banking services delivery system.
Here e-banking is viewed as the means of providing traditional services in a modern or newer
way. It is a technology based banking system where transactions between the banker and
customer are done without any use of paper documents. It is hoped that in the near future, this
technology based banking system will bring a radical change in the concepts of economic and
political sovereignty. So at last we say that Electronic banking is modern technology or satellite
based computerized system of banking by which banks become able to provide quicker, more
accurate and convenient banking services to the customers and maintain inter-relation among
them.

History and Development of Electronic Banking:

In the 1961, the first National City Bank of New York introduced successfully the certificate of deposit
under electronic system for the first time. The primary stages of the e-banking are the Electronic Fund
Transfer System (EFTS). The main elements of the EFTS are the automate teller machine (ATM), point
of sale (POS), Terminals and the automated clearing house (AMCH).

In 1967, the Barclays Bank of UK established cash dispenser at first. The working procedure of this
machine was quite different from the machine used now. In those days, there were no magnetic cards.
Bank gave paper voucher to its clients and when the clients would insert these vouchers in the machine 10
pounds would come out. Later on, plastic cards were used. Within one year of the establishment of cash
dispenser by Barclays bank, France, Sweden and Switzerland started “National Cash Dispenser
Network”. In 1969, Japan and USA started the use of these types of machines produced by them. The
machines of that time were in off-line; there was no connection with the computer.
In 1972 Lloyd’s Bank of UK established the very first on-line “cash point” machine. They supplied
plastic cards to their customers. There were magnetic stripes on those cards. As results, the client’s
accounts or the client could be identified. In this on-line system, every machine was connected with the
central computer.

The machines, which are used at present, are the outcome of the research performed in the last 30 years.
In today’s machine, there is a full graphics screen monitor like color computer and transaction in different
currencies can be conducted from the same machine. The cost of establishing these machines is also
reducing. Now-a-days, only TK 50-60 lac is needed to establish a machine.

The next development of banking is virtual banking, which is also known as “No man Banks”

Virtual Banking

Electronic Banking

Modern Banking

Traditional
Banking

Figure: Development stage of banking services

Objectives of electronic banking: By introducing newer services, banks are able to

provide better services than before, which improve the banker- customer relationship. In the
banking industry, technology is welcomed both by the banker and their customers. Among the
technology based services, e-banking is the latest and now playing a prime role. The main
objectives of electronic banking are outlined below:
From the banker’s view point:
 Provide retail services at reduced cost through branch network.
 Reduction of administration expenses by reducing the number of workers with the help of
electronic banking.
 Reduction of the volume of the paper work with the help of electronic banking.
 Increase the income through different types of fees like debit card fee, credit card fee, etc.
 Strengthening the position in the competitive environment.
 Expending the services in the remote area.
From clients view point:

 Receive timely and instant information such as balance sheet, account statement,
transaction statement.
 Ability to deposits and withdraw of money flawlessly within short time.
 Advantageously making payment for the goods and services.
 Easily transfer fund anywhere in the world.
 Enjoying utmost protection of the accounts maintained under electronic banking.

Types of Electronic Banking Services: Electronic banking services may be

 Retail electronic banking services
 Wholesale electronic banking services

Retail electronic banking services:

 ATM (Automated Teller Machine)

 Debit card
 Credit card
 Point of sale services
 Home banking
 Retail automated clearing house

ATM (Automated Teller Machine): ATM is most widely used and popular electronic banking
services. With this automated computing machine, clients can deposits or withdraw any time of
24 hours a day. Through the ATM bank can render banking services to customers’ door. Thus
customer can save their time and the transactions seem to be easy to them. On the other hand,
banks earn profit by providing services at a lower cost. For operating ATM banks supply plastic
card to their customer.

Debit card: Debit card is one type of special plastic card issued by the banks or financial
institution to the depositors, which hold magnetic coded number. Money can be withdrawn from
deposit account and fund can be easily transferred in electronic way with this card. It is used as
an alternative of cash or cheque.

Credit card: Credit card issued by bank to their creditworthiness customers. With the help of this
card customer purchase products, goods commodities without instant payment and can
withdrawn advance cash from banks. If customer deposits money in excess of the balance in his/
her account to cover the purchase amount, the card issuing bank will not charge any interest on
the money used by credit card. But if the grace period, which is usually 15 days, exceeds, the
customer will be required to pay interest on the excess amount paid by the bank. At present,
VISA, MASTER card, American express etc are the most popular credit cards.
Point of sale services: With POS, financial institutions provide services to the place advantageous
to their clients. In this system, the account of the service provider and receiver are
simultaneously debited and credited. Point of Sale (POS) service is an innovative electronic
money transferring system that allows the customers of bank to pay for their purchases through
their ATM and credit card at any POS enabled retailer.

Home banking: Home banking frees customers of visiting branches and most transactions will be
automated to enable them to check their account activities transfer fund and to open L/C sitting
in their own desk with the help of a PC and a telephone. For example: HSBC is giving Hexagon
facilities to their individual and corporate customer.

Retail automated clearing house: It is an integrated process of service by which payments of

different financial institutions are cleared and exchanged in electronic way. It is the distribution
place of paperless transactions. The participants of ACH system are the members of automated
clearing house association. ACH exchanges electronic transactions within a specific
geographical area.

Wholesale electronic banking services

 Cash management
 Wire transfer
 Corporate automated clearing house

Internet Banking: Generally banking services offered over the Internet is called internet
banking. In broader sense Internet Banking is the system that allows you to put in or take out
money from a bank account by using the internet. So we say internet banking refers to the use of
the Internet to obtain account status information or carry out transactions on an account with a
financial institution. Normally banking transactions and fund transfer related activities like
auditing, payments of bills, investments, stock exchange activities and many other activities can
be done using these internet banking systems.

Risk in Electronic Banking: Following are the risk inherent in electronic banking:

Operational security risk: External and internal security issues pose perhaps the greatest threat to the
growth of e-banking. Banks also face the threat of viruses that can be placed in the banking network.

Legal risk: Legal risks can arise due to violation of laws, rules and regulations. In the world of e-banking,
there is considerable ambiguity and uncertainty regarding legal rights. Bank involved in electronic
payments, must determine whether such transactions impact reserve requirements.

Reputation risk: Any problems with either security or legal issues can significantly impact the reputation
of the bank. This is especially important in the banking industry where public confidence is associated.
Reputation risk can range from problems of customer dissatisfaction with online services to security
breaches and fraud.

Traditional banking risks: Interest rate risk, liquidity risk, credit risk etc.

Problems of e-banking:
 Customer location
 Security
 Unemployment problems
 Confidentiality
 Customer hesitation
Problems of e-banking in Bangladesh:
 Inefficiency and lack of adequate knowledge of the bank management about e-banking.
 Lack of proper strategic plan to gain and retain market share of the indigenous banks.
 Absence of international communication channel.
 Lack of integrated plan among the banks and the central bank.
 Inefficient clearing house facilities.
 Lack of attractive remuneration to the technocrats.
 Locally develop s/w cannot contribute much in expanding e-banking services.
 Lack of comprehensive legal structure.

Mobile banking: Mobile banking is a system that allows customer of a financial institution to conduct a
number of financial transactions through a mobile phone. That is, mobile banking is a banking process
that provides financial services to unbanked communities efficiently at affordable cost without bank
branch. When banking and financial services such as cash-in, cash-out, utility payment etc through
mobile device i.e. mobile phone then it is called mobile banking.

Benefits of mobile banking:

 Real time on line banking

 Available anytime, anywhere thought the country.
 It is convenient, affordable and secure.
 More effective in developing savings.
 Much safer, speedy and safeguard against fraudulent transactions.

Mobile banking services: Generally mobile banking services may include----

Account information:
 Mini-statements and checking of account history.
 Alerts on account activity.
 Monitoring of term deposits.
 Access to loan statements insurance policy management.

Transaction:
  Funds transfers between the customer’s linked accounts
 Paying third parties including bill payments and third party fund transfers
 Check remote deposits.
Investment:
 Portfolio management services.
 Personalized alerts and notifications on security price.
Support:
 Status of requests for credit, including mortgage approval, and insurance coverage.
 Cheque book and card requests.
 Exchange of data messages and email, including compliant submission and tracking.

Challenges for Mobile Banking Service:

Lack of infrastructure facilities: Connectivity remains low in rural and geographically

secluded areas like mountainous regions or regions with low population densities.
Handset operability: there are a large number of different mobile phone devices and it is a big
challenge for banks to offer mobile banking solution on any type of devices. Some devices
support Java and others support WAP browser, or only SIM.
Security:
Reliability:
Illiteracy :

The common features of electronic banking in Bangladesh are as follows: - Electronic

banking idea developed in Bangladesh since 1992 through several multinational banks. But most
of the local and foreign banks are maintained electronic banking in their all branches. Here the
researcher fined some common features of electronic banking in Bangladesh
. 1. 24- hours cash deposit & withdrawal facility
2. Quick cash withdrawal without having queue
3. Account activities enquiry in any moment
4. Statement request through ATM/Debit/Credit Card
5. Transfer own funds to other account number in same bank
6. Present Balance enquiry
7. More than16-hours shopping facilities
8. Deposit or Mail cash or cheque(s) (Cross cheque) through mechanical device.
9. Changing Personal Identity Number
10. Cash deposit which will originally deposit very next day of deposit that means do not need to
go to the branch for every occasion.
11. Mini statement which contain 8-10 previous transaction records
12. can able to pay utilities bill
13. Withdraw money by using VISA, PLUS, MASTER, MAESTRO and other credit card
14. Withdraw money from dollar account which gives taka by converting foreign currency
Mobile banking: The standard package of activities that mobile banking covers are: mini-
statements and checking of account history; alerts on account activity or passing of set
thresholds; monitoring of term deposits; access to loan statements; access to card statements;
mutual funds/equity statements; insurance policy management; pension plan management; status
on cheque, stop payment on cheque; ordering check books; balance checking in the account;
recent transactions; due date of payment; PIN provision, change of PIN and reminder over the
internet; blocking of (lost/stolen) cards; domestic and international fund transfers; micro-
payment handling; mobile recharging; commercial payment processing; bill payment processing;
peer to peer payments; withdrawal at banking agent; and deposit at banking agent. Despite huge
prospects, only a few banks adopted mobile banking in Bangladesh during the last year. The
number of active mobile money transfer accounts stood at 5.7 cores at the end of august, when
Tk. 32,182.96 core was moved according to a monthly report of Bangladesh Bank.

E-banking refers to systems that enable bank customer to access accounts and general
information on bank products and services through a personal computer or other intelligence
device.

Benefits from the customers’ point of view: The main benefit from the bank customers’ point
of view is significant saving of time by the automation of banking services processing and
introduction of an easy maintenance tools for managing customer’s money. The main benefits of
e-banking are as follows:
a. Increased comfort and timesaving-transactions can be made 24 hours a day,
without requiring the physical interaction with the bank.
b. Quick and continuous access to information. Corporations will have easier access
to information as, they can check on multiple accounts at the click of a button.
c. Better cash management. E-banking facilities speed up cash cycle and increases
efficiency of business processes as large variety of cash management instruments
is available on Internet sites of banks.
d. Private customers seek slightly different kind of benefits from e-banking.
e. Reduced costs: This is in terms of the cost of availing and using the various
banking products and services.
f. Convenience: All the banking transactions can be performed from the comfort of
the home or office or from the place a customer wants to Speed.
g. The response of the medium is very fast; therefore customers can actually wait till
the last minute before concluding a fund transfer.
 h. Fund’s management. Customers can download their history of different accounts
and do
b. “what-if” analysis on their own PC before affecting any transaction on the web.
Constraints of E-banking in Bangladesh:

 At present there is no proper infrastructure for performing electronic banking

activities in Bangladesh.
 Slow update of internet access and PCs
 Poor telecommunication network policies and slow paced regulatory initiatives.
 Very minimum number of users of internet
 The banking infrastructure in terms of electronic payments and inter-bank
connectivity is poor.
 Limitations of supportive legal system
 Absence of cyber law
 Absence of electronic fund transfer legislation
 Absence of need based business plan for online banking
 ATMS may have network problems, unavailability and shortage on money.
 High price of computer hardware and banking software.
 Lack of awareness at government level of e-banking issue

Operational Security Risk: External and internal security issues pose perhaps the greatest threat
to the growth of e banking. Banks also face the threat of viruses that can be placed in the bank
network, or a scenario where a hacker obtains confidential information and then cyber-exhorts
the bank with an offer to sell the information back to the bank.
 Legal Risk: legal risks can arise due to violations of laws, rules, and regulations. In the world
of electronic commerce, where technology and business arc in a state of constant flux, there is
considerable ambiguity and uncertainty regarding legal rights. Banks involved in electronic
payments, such as stored value cards, must determine whether such transactions impact reserve
Requirements. Yet other risks of cross-border regulatory compliance arise as the Internet blurs
national boundaries for commerce and payments.
 Reputation Risk: Any problems with either security or legal issues can significantly impact the
reputation of the bank. This is especially important in the banking industry where public
confidence is long touted as paramount. Reputation risk can range from problems of customer
dissatisfaction with online services to security breaches and fraud. For instance, identity
misrepresentation, or “spoofing”, where bank customer’s arc directed toward a false site, can
lead to an irreparable loss of trust between the customers and the bank.
 Traditional banking risks: Finally, the traditional banking risks such as interest rate risk, credit
risk, or liquidity risk can be exacerbated for a bank that has a significant online lending and/or
transactions presence. In May 2001, the Basel Committee has identified 14 risk management
principles for electronic banking to help banking institutions expand their existing risk
oversight policies and processes to cover their e-banking activities, (Basel Committee report on
banking supervision, 2001, publications no. 82).