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    Internet bankingsss Internet bankingsss Document Transcript

    • 1
    • 1.1 Purpose of the study The main purpose of this study to get an overview of the internet banking sector in the Indian economy and study as to how it has helped change the banking habits of various individuals 1.2 Research Objectives of the study Objectives of a project tell us why project has been taken under study. It helps us to know more about the topic that is being undertaken and helps us to explore future prospects of the topic. Basically it tells what all have been studied while making the project. The various research objectives of the study are:1. To study the internet banking facilities offered by the banks to its customers2. To study as to how much internet banking has penetrated in the minds of the customers3. To gain insights about functioning of internet banking.4. To explore the future prospects of internet banking.5. To study the benefits that are provided to the individual under internet banking 2
    • 1.3 Research Methodology Research is a process through which we attempt to achieve systematically and with the support of data the answer to a question, the resolution of a problem, or a greater understanding of a phenomenon. This process, which is frequently called research methodology, has eight distinct characteristics:1. Research originates with a question or problem.2. Research requires a clear articulation of a goal.3. Research follows a specific plan of procedure.4. Research usually divides the principal problem into more manageable subproblems.5. Research is guided by the specific research problem, question, or hypothesis.6. Research accepts certain critical assumptions.7. Research requires the collection and interpretation of data in attempting to resolve the problem that initiated the research.8. Research is, by its nature, cyclical; or more exactly, helical. Descriptive research is used in this project report in order to know about cash management services to clients and determining their level of satisfaction. This is the most popular type of research technique, generally used in survey research design and most useful in describing the characteristics of consumer behavior. The method used were following: 3
    •  Questionnaire method Direct Interaction with the clients. 1.3.1 Research Design: - There are three kinds of research designs namely; • Exploratory • Descriptive • CausativeIn my project, a Descriptive Research was initiated because it was generally astudy which was carried out to describe the market characteristics of variousairlines, and of Indian Airlines in particular, as well as the buying behaviour oftravellers.Situation Analysis: - Conducting a situational analysis means analysing thecompany, its market, its competition and the industry in general. The situationanalysis is a background investigation. It involves obtaining information about thecompany and its business environment by means of library, research. 1.3.2 MODE OF DATA COLLECTION  Primary Data: - The sources of Primary data were questionnaires and personal interviews. 4
    •  Secondary data: - the sources of secondary data were internet, books and newspaper articles.1.3.3 Sample designDoing research via sampling was important because of impossibility of findingall of a population, as well as other restrictive parameters like cost, time etc. Oursampling decision should be in-coordination with the research and dataobjectives. The method opted for taking samples was `Non-probabilitysampling’. It was a `Purposive Non-probability sampling/ Judgement Sampling’was used. The key assumption underlined this type of sampling is that, withsound judgement or expertise, and an appropriate strategy, one can carefully andconsciously choose the elements to be included in the sample, so that samplescan be developed that are suitable for one’s needs.Sample Size: - 801.3.4 METHOD OF DATA COLLECTION1.3.4.1 Instruments for data collection: -The research instruments used for this survey were structuredquestionnaires. The questionnaires were designed to find thesatisfaction levels of internet banking users. 5
    • Questionnaire: -A questionnaire consists of a set of questions prepared torespondents for their answers. Because of its flexibility, thequestionnaire is by far the common instrument used to collectprimary data. Closed Ended as well as Open Ended questionnairewere used in my market research . Drafting of a Questionnaire: -The formulation of the questionnaire, i.e., the structure and thedisguise to be used in the questionnaire depends upon the kind ofinformation that is desired. Questionnaire was prepared over aperiod of 5 days by intensive brainstorming. Valuable adviceregarding changes was given by my project guide, Ms. Richa Dabas,has resulted in the formulation of the questionnaire through whichresponses were collected and analysed. A copy of the questionnairehas been attached as an annexure to the project.Since my objective was to derive out the maximum information outof the passengers without making the whole exercise boring andtroublesome, I decided to keep majority of the questionnaire close-ended. 6
    • In order to generate and sustain the interest of the respondents, theinitial questions pertained to the gathering of simple information likethe knowledge of inetrenet banking, the choice of their bank and themain areas of their transactions. Since, I had to balance the twinobjectives of gathering maximum information and at the same timeretaining the interest of the customers, I was compelled to squeezein a lot of questions and club them up in a single question. 7
    • 1.3.5 LIMITATIONSThe following are the limitations with this report1. MORE FAITH ON THE CONVENTIONAL BANKING SYSTEM. People have more faith on the conventional banking system rather than the internet banking2. BUSY SCHEDULE. People were mostly unwilling to talk because of their heavy schedule or they get annoyed with the phone calls or even if they are asked about this face to face.3. RISKY PROFILE. Some people think that transferring money is having a lot of risk and rather a waste of time so they don’t want to transfer their money in from their respective accounts4. FRAUD The very common difficulty in online trading is Fraud which can be faced by any customer. Fraud can take place in many ways like stolen of Password, online fund transfer to some other account, 8
    • hacking etc. So some strict guidelines or actions should be taken by RBI in order to stop this kind of fraud which prevails online.5. SLOW WEB INTERFACE Sometimes, customers have to face the problem of slow interface which is not satisfactory from the customer’s point of view. Sometimes the network fails in middle of their transaction making them worried as to whether their transactions got completed of not.6. LACK OF KNOWLEDGE Customers who do transfers online face the problem of proper knowledge regarding the use of their accounts. And all the services which the banks provide them with their accounts. 9
    • 10
    • ABOUT TH E TOPIC Electronic banking, also known as electronic funds transfer (EFT), is simply the use of electronic means to transfer funds directly from one account to another, rather than by cheque or cash. You can use electronic funds transfer to:• Have your paycheck deposited directly into your bank or credit union checking account.• Withdraw money from your checking account from an ATM machine with a personal identification number (PIN), at your convenience, day or night.• Instruct your bank or credit union to automatically pay certain monthly bills from your account, such as your auto loan or your mortgage payment.• Have the bank or credit union transfer funds each month from your checking account to your mutual fund account.• Have your government social security benefits check or your tax refund deposited directly into your checking account.• Buy groceries, gasoline and other purchases at the point-of-sale, using a check card rather than cash, credit or a personal check. 11
    • • Use a smart card with a prepaid amount of money embedded in it for use instead of cash at a pay phone, expressway road toll, or on college campuses at the librarys photocopy machine or bookstores.• Use your computer and personal finance software to coordinate your total personal financial management process, integrating data and activities related to your income, spending, saving, investing, recordkeeping, bill-paying and taxes, along with basic financial analysis and decision making. 12
    • 13
    • VARIOUS FORMS OF E-BANKING:INTERNET BANKING:Internet Banking lets you handle many banking transactions via yourpersonal computer. For instance, you may use your computer toview your account balance, request transfers between accounts, andpay bills electronically.Internet banking system and method in which a personal computeris connected by a network service provider directly to a hostcomputer system of a bank such that customer service requests canbe processed automatically without need for intervention bycustomer service representatives. The system is capable ofdistinguishing between those customer service requests which arecapable of automated fulfillment and those requests which requirehandling by a customer service representative. The system isintegrated with the host computer system of the bank so that theremote banking customer can access other automated services of thebank. The method of the invention includes the steps of inputting acustomer banking request from among a menu of banking requestsat a remote personnel computer; transmitting the banking requests toa host computer over a network; receiving the request at the hostcomputer; identifying the type of customer banking requestreceived; automatic logging of the service request, comparing thereceived request to a stored table of request types, each of therequest types having an attribute to indicate whether the request typeis capable of being fulfilled by a customer service representative orby an automated system; and, depending upon the attribute,directing the request either to a queue for handling by a customer 14
    • service representative or to a queue for processing by an automatedsystem.AUTOMATED TELLER MACHINES (ATM):An unattended electronic machine in a public place, connected to adata system and related equipment and activated by a bank customerto obtain cash withdrawals and other banking services. Also calledautomatic teller machine, cash machine; Also called moneymachine.An automated teller machine or automatic teller machine(ATM) is an electronic computerized telecommunications devicethat allows a financial institutions customers to directly use a securemethod of communication to access their bank accounts, order ormake cash withdrawals (or cash advances using a credit card) andcheck their account balances without the need for a human bankteller (or cashier in the UK). Many ATMs also allow people todeposit cash or cheques, transfer money between their bankaccounts, top up their mobile phones pre-paid accounts or even buypostage stamps.On most modern ATMs, the customer identifies him or herself byinserting a plastic card with a magnetic stripe or a plastic smartcardwith a chip, that contains his or her account number. The customerthen verifies their identity by entering a passcode, often referred toas a PIN (Personal Identification Number) of four or more digits.Upon successful entry of the PIN, the customer may perform atransaction.If the number is entered incorrectly several times in a row (usuallythree attempts per card insertion), some ATMs will attempt retainthe card as a security precaution to prevent an unauthorised user 15
    • from discovering the PIN by guesswork. Captured cards are often destroyed if the ATM owner is not the card issuing bank, as non- customers identities cannot be reliably confirmed. The Indian market today has approximately more than 17,000 ATM’s. TELE BANKING: Undertaking a host of banking related services including financial transactions from the convenience of customers chosen place anywhere across the GLOBE and any time of date and night has now been made possible by introducing on-line Telebanking services. By dialing the given Telebanking number through a landline or a mobile from anywhere, the customer can access his account and by following the user-friendly menu, entire banking can be done through Interactive Voice Response (IVR) system. With sufficient numbers of hunting lines made available, customer call will hardly fail. The system is bi-lingual and has following facilities offered• Automatic balance voice out for the default account.• Balance inquiry and transaction inquiry in all• Inquiry of all term deposit account• Statement of account by Fax, e-mail or ordinary mail. 16
    • • Cheque book request• Stop payment which is on-line and instantaneous• Transfer of funds with CBS which is automatic and instantaneous• Utility Bill Payments• Renewal of term deposit which is automatic and instantaneous• Voice out of last five transactions. SMART CARD: A smart card usually contains an embedded 8-bit microprocessor (a kind of computer chip). The microprocessor is under a contact pad on one side of the card. Think of the microprocessor as replacing the usual magnetic stripe present on a credit card or debit card. The microprocessor on the smart card is there for security. The host computer and card reader actually "talk" to the microprocessor. The microprocessor enforces access to the data on the card. The chips in these cards are capable of many kinds of transactions. For example, a person could make purchases from their credit account, debit account or from a stored account value thats reload able. The enhanced memory and processing capacity of the smart card is many times that of traditional magnetic-stripe cards and can accommodate several different applications on a single card. It can also hold identification information, which means no more shuffling through cards in the wallet to find the right one -- the Smart Card will be the only one needed. 17
    • Smart cards can also be used with a smart card reader attachment toa personal computer to authenticate a user.Smart cards are much more popular in Europe than in the U.S. InEurope the health insurance and banking industries use smart cardsextensively. Every German citizen has a smart card for healthinsurance. Even though smart cards have been around in theirmodern form for at least a decade, they are just starting to take off inthe U.S.DEBIT CARD:Debit cards are also known as check cards. Debit cards look likecredit cards or ATM (automated teller machine) cards, but operatelike cash or a personal check. Debit cards are different from creditcards. While a credit card is a way to "pay later," a debit card is away to "pay now." When you use a debit card, your money isquickly deducted from your checking or savings account.Debit cards are accepted at many locations, including grocery stores,retail stores, gasoline stations, and restaurants. You can use yourcard anywhere merchants display your cards brand name or logo.They offer an alternative to carrying a checkbook or cash. 18
    • E-CHEQUE:• An e-Cheque is the electronic version or representation of paper cheque.• The Information and Legal Framework on the E-Cheque is the same as that of the paper cheque’s.• It can now be used in place of paper cheques to do any and all remote transactions.• An E-cheque work the same way a cheque does, the cheque writer "writes" the e-Cheque using one of many types of electronic devices and "gives" the e-Cheque to the payee electronically. The payee "deposits" the Electronic Cheque receives credit, and the payees bank "clears" the e-Cheque to the paying bank. The paying bank validates the e-Cheque and then "charges" the check writers account for the check 19
    • OTHER FORMS OF ELECTRONIC BANKING• Direct Deposit• Electronic Bill Payment• Electronic Check Conversion• Cash Value Stored, Etc. 20
    • BENEFITS/CONCERNS OF E-BANKINGBENEFITS OF E-BANKINGFor Banks:Price- In the long run a bank can save on money by not paying fortellers or for managing branches. Plus, its cheaper to maketransactions over the Internet.Customer Base- The Internet allows banks to reach a whole newmarket- and a well off one too, because there are no geographicboundaries with the Internet. The Internet also provides a levelplaying field for small banks who want to add to their customerbase.Efficiency- Banks can become more efficient than they already areby providing Internet access for their customers. The Internetprovides the bank with an almost paper less system.Customer Service and Satisfaction- Banking on the Internet not onlyallow the customer to have a full range of services available to thembut it also allows them some services not offered at any of thebranches. The person does not have to go to a branch where thatservice may or may not be offer. A person can print of information,forms, and applications via the Internet and be able to search forinformation efficiently instead of waiting in line and asking a teller.With more better and faster options a bank will surly be able tocreate better customer relations and satisfaction. 21
    • Image- A bank seems more state of the art to a customer if theyoffer Internet access. A person may not want to use Internet bankingbut having the service available gives a person the feeling that theirbank is on the cutting image.For Customers:Bill Pay: Bill Pay is a service offered through Internet banking thatallows the customer to set up bill payments to just about anyone.Customer can select the person or company whom he wants to makea payment and Bill Pay will withdraw the money from his accountand send the payee a paper check or an electronic paymentOther Important Facilities: E- banking gives customer the controlover nearly every aspect of managing his bank accounts. Besides theCustomers can, Buy and Sell Securities, Check Stock MarketInformation, Check Currency Rates, Check Balances, See whichchecks are cleared, Transfer Money, View Transaction History andavoid going to an actual bank. The best benefit is that Internetbanking is free. At many banks the customer doesnt have tomaintain a required minimum balance. The second big benefit isbetter interest rates for the customer. 22
    • CONCERNS WITH E-BANKINGAs with any new technology new problems are faced.Customer support - banks will have to create a whole newcustomer relations department to help customers. Banks have tomake sure that the customers receive assistance quickly if they needhelp. Any major problems or disastrous can destroy the banksreputation quickly an easily. By showing the customer that theInternet is reliable you are able to get the customer to trust onlinebanking more and more.Laws - While Internet banking does not have national or stateboundaries, the law does. Companies will have to make sure thatthey have software in place software market, creating a monopoly.Security: customer always worries about their protection andsecurity or accuracy. There are always question whether or notsomething took place.Other challenges: lack of knowledge from customers end, sitchanges by the banks, etc 23
    • E-BANKING GLOBAL PERSPECTIVEThe advent of Internet has initiated an electronic revolution in theglobal banking sector. The dynamic and flexible nature of thiscommunication channel as well as its ubiquitous reach has helped inleveraging a variety of banking activities. New bankingintermediaries offering entirely new types of banking services haveemerged as a result of innovative e-business models. The Internethas emerged as one of the major distribution channels of bankingproducts and services, for the banks in US and in the Europeancountries.Initially, banks promoted their core capabilities i.e., products,services and advice through Internet. Then, they entered the e-commerce market as providers/distributors of their own productsand services. More recently, due to advances in Internet security andthe advent of relevant protocols, banks have discovered that they canplay their primary role as financial intermediators and facilitators ofcomplete commercial transactions via electronic networks especiallythrough the Internet. Some banks have chosen a route of establishinga direct web presence while others have opted for either being anowner of financial services centric electronic marketplace or beingparticipants of a non-financial services centric electronicmarketplace.The trend towards electronic delivery of banking products andservices is occurring partly as a result of consumer demand andpartly because of the increasing competitive environment in theglobal banking industry. The Internet has changed the customersbehaviors who are demanding more customized products/services ata lower price. Moreover, new competition from pure online bankshas put the profitability of even established brick and mortar banksunder pressure. However, very few banks have been successful in 24
    • developing effective strategies for fully exploiting the opportunities offered by the Internet. For traditional banks to define what niche markets to serve and decide what products/services to offer there is a need for a clear and concise Internet commerce strategy. Banking transactions had already started taking place through the Internet way back in 1995. The Internet promised an ideal platform for commercial exchange, helping banks to achieve new levels of efficiency in financial transactions by strengthening customer relationship, promoting price discovery and spend aggregation and increasing the reach. Electronic finance offered considerable opportunities for banks to expand their client base and rationalize their business while the customers received value in the form of savings in time and money. Global E-banking industry is covered by the following four sections:• E-banking Scenario: It discusses the actual state, prospects, and issues related to E-banking in Asia with a focus on India, US and Europe. It also deals with the impact of E-banking on the banking industry structure.• E-banking Strategies: It reveals the key strategies that banks must implement to derive maximum value through the online channel. It also brings guidance for those banks, which are planning to build online businesses.• E-banking Transactions: It discusses how Internet has radically transformed banking transactions. The section focuses on cross border transactions, B2B transactions, electronic bill payment and presentment and mobile payments. In spite of all the hype, E- banking has been a non-starter in several countries. 25
    • • E-banking Trends: It discuses the innovation of new technologies in banks. 26
    • E-BANKING SCENARIO:The banking industry is expected to be a leading player in E-business. While the banks in developed countries are workingprimarily via Internet as non-branch banks, banks in the developingcountries use the Internet as an information delivery tool to improverelationship with customers.In early 2001, approximately 60 percent of E-business in UK wasconcentrated in the financial services sector, and with the expected10-fold increase of the British E-business market by 2005, the shareof the financial services will further increase. Around one fifth ofFinish and Swedish bank customers are banking online, while in US,according to UNCTAD, online banking is growing at an annual rateof 60 percent and the number of online accounts has approximatelyreached 15 million by 2006.Banks have established an Internet presence with various objectives.Most of them are using the Internet as a new distribution channel.Financial services, with the use of Internet, may be offered in anequivalent quantity with lower costs to the more potentialcustomers. There may be contacts from each corner of the world atany time of day or night. This means that banks may enlarge theirmarket without opening new branches. The banks in US are usingthe Web to reach opportunities in three different categories i.e., tomarket information, to deliver banking products and services, and toimprove customer relationship.In Asia, the major factor restricting growth of E-banking is security,in spite of several countries being well connected via Internet.Access to high-quality E-banking products is an issue as well.Majority of the banks in Asia are just offering basic services 27
    • compared with those of developed countries. Still, E-banking seems to have a future in Asia. It is considered that E-banking will succeed if the basic features, especially bill payment, are handled well. Bill payment was the most popular feature, cited by 40 percent of respondents of the survey. However, providing this service would be difficult for banks in Asia because it requires a high level of security and involves arranging transactions with a variety of players. In 2001, over 50 percent of the banks in the US were offering E- banking services. However, large banks appeared to have a clear advantage over small banks in the range of services they offered. Some banks in US were targeting their Internet strategies towards business customers. Apart from affecting the way customers received banking services; E-banking was expected to influence the banking industry structure. The economics of E-banking was expected to favor large banks because of economies of scale and scope, and the ability to advertise heavily. Moreover, E-banking offered entry and expansion opportunities that small banks traditionally lacked. In Europe, the Internet is accelerating the reconfiguration of the banking industry into three separate businesses: production, distribution and advice. This reconfiguration is being further driven by the Internet, due to the combined impact of:• The emergence of new and more focused business models• New technological capabilities that reduces the banking relationship and transaction costs.• High degree of uncertainty over the impact that new entrants will have on current business models. Though E-banking in Europe is still in the evolutionary stage, it is very clear that it is having a significant impact on traditional 28
    • banking activities. Unlike in the US, though large banks in theEurope have a competitive edge due to their ability to invest heavilyin new technologies, they are still not ready to embrace E-banking.Hence, medium-sized banks and start-ups have an important role toplay on the E-banking front if they can take concrete measuresquickly and effectively. 29
    • E-BANKING STRATEGIES:E-banking offers vast opportunities, yet even less than one in threebanks have an E-banking strategy in place. According to a study,less than 15 percent of banks with transactional websites will realizeprofits directly attributable to those sites. Hence, banks mustrecognize the seriousness of the challenge ahead and develop astrategy that will enable them to leverage the opportunities presentedby the Internet.No single E-banking strategy is right for every banking company.But whether they adopt an offensive or a defensive posture, theymust constantly re-evaluate their strategy. In the fast-paced e-economy, banks have to keep up with the constantly evolvingbusiness models and technology innovations of the Internet space.Early e-business adopter like Wells Fargo not only entered the E-banking industry first but also showed flexibility to change as themarket developed. Not many banks have been as e-business-savvy.But the pressure is now building for all banks to develop sound e-business strategies that will attract and retain increasinglydiscriminating customers.The major problem with the banks, which have already investedhuge amounts in their online initiatives, is that their online offeringsremain unprofitable. Though banks have enrolled some existingcustomers in their online programs, they are not getting customers inlarge numbers. This has made banks wonder whether there is anyvalue in the online channel. Just enrolling customers for onlinebanking may not be sufficient until and unless they use the siteactively. Banks must make efforts to increase their site usage bycustomers and effectively co-ordinate the online channel withbranches and call centers. Then only they will be able to derive 30
    • maximum value that includes cost reduction, cross-sellingopportunities, and higher customer retention.Customers have some rational reasons for staying offline. Some ofthese reasons include usability features of the site, concerns aboutsecurity and frequent complaints that signing up is complicated andtime-consuming. Banks can solve these problems by refocusinginvestment on improving the sites basic functionality and user-friendliness, and avoiding advanced features that most customersneither understand nor value. Developing advanced features thatappeal to a relatively small numbers of customers, creates far lessvalue than strengthening core capabilities and getting customers touse them. Banks must make efforts to familiarize customers withtheir sites and show them how easy and efficient the online channelis to use.Integrating the online channel with the rest of the bank is anotherimportant issue that banks must focus upon. This is importantbecause nearly all the value of the online channel is realized offline_ in cross sales completed in other channels and in cost reductions.An actively used online channel should also serve as a medium tosell banking services for the branch staff, the call center, and therelationship manager. Integrated channels working together are farmore effective than a group of channels working without anycoordination.To facilitate this integration, banks must formulate paths that peoplein various customer segments are likely to take among the channels.The interactions in each channel can then be worked around thesepaths. For example, a call center representative must work out whichchannel(s) the customer used before coming to her, and whichchannel(s) the customer is likely to visit next. Each channel musthave entry and exit points that must welcome customers and then 31
    • send to other channels. Hence, the overall goal of banks is to createa seamless multichannel experience.On the other hand, those banks that are planning to build their onlinebusinesses will have to understand several strategic issues like dothey have the right business model for E-banking? How should theyprice their E-banking products and services? Bankers planning tomove into E-banking have to explore different options, makeinvestments and have to develop a variety of partnerships. Theyhave to put their time and efforts to identify the best opportunities.In the case of traditional banks, if they are too aggressive in usingprice incentives to build their e-business, they risk the profitabilityof their traditional business. However, if they do not offer sufficientprice incentives for customers to bank online, their efforts to build asound e- banking business may not fructify.Banks have to be creative in rethinking organizational structures andmanagement processes. Traditional banks that are conservative innature may find it difficult to attract and retain online talent.Moreover, getting people in the traditional business to help build ane-enterprise would not be an easy task. To make all this happen,requires a major revision of incentive systems, planning andbudgeting processes, and management roles. Banks can exploit theopportunities provided by the Internet if they demonstrate courage,use their imagination, and take decisive action.While most of the banks have started focusing on E-bankingactivities, a new challenge in the form of mobile banking hasemerged. M-Banking is both an additional opportunity for banks tooffer their online services and an additional channel from which toaccess new customers and cross-sell to existing customers. Rapidlychanging lifestyles of customers and their demand for more speedand convenience has subdued the role of branch banking to a certainextent. With the proliferation of new technologies, disintermediation 32
    • of traditional channels is being witnessed. Banks can go beyond their traditional role as a channel for banking/financial services and can become providers of personalized information. They can successfully leverage m-banking to:• Provide personalized products and services to specific customers and thus increase customer loyalty.• Exploit additional sources of revenue from subscriptions, transactions and third-party referrals. M-Banking gives banks the opportunity to significantly expand their customer relationships provided they position themselves effectively. To leverage these opportunities, they must form structured alliances with service affiliates, and acquire competitive advantage in collecting, processing and deploying customer information 33
    • E-BANKING TRANSACTIONS:The introduction of new technologies has radically transformedbanking transactions. In the past, customers had to come physicallyinto the bank branch to do banking transactions including transfers,deposits and withdrawals. Banks had to employ several tellers tophysically make all those transactions. Automatic Teller Machines(ATMs) were then introduced which allowed people to do theirbanking on their own, practically anytime and anywhere. Thishelped the banks cut down on the number of tellers and focus onmanaging money. The Internet then brought another venue withwhich customers could do banking, reducing the need for ATMs.Online banking allowed customers to do financial transactions fromtheir PCs at home via Internet. Now, with the emergence of WirelessApplication Protocol (WAP) technology, banks can use theinfrastructure and applications developed for the Internet and moveit to mobile phones. Now people no longer have to be tied to adesktop PC to do their banking. The WAP interface is much fasterand convenient than the Internet, allowing customers to see accountdetails, transaction details, make bill payments, and even checkcredit card balance.The cost of the average payment transaction on the Internet isminimum. Several studies found that the estimated transaction costthrough mobile phone is16 cents, a fully computerized bank usingits own software is 26 cents, a telephone bank is 54 cents, a bankbranch, $1.27, an ATM, 27 cents, and on the Internet it costs just 13cents. As a result, the use of the Internet for commercial transactionsstarted to gain momentum in 1995. More than 2,000 banks in theworld now have transactional websites and the growth of online 34
    • lending solutions is making them more cost efficient. Recentdevelopments are now encouraging banks to target small businessesas a separate lending category online.Banks are increasingly building payment infrastructure with varioussecurity mechanisms (SSL, SET) because there is tremendouspotential for profit, as more and more payments will pass throughthe Internet. However, the challenge for banks is to offer a paymentsback-bone system that will be open enough to support multiplepayment instruments (credit cards, debit cards, direct debit toaccounts, e-checks, digital money etc.) and scalable enough to allowfor a stable service regardless of the workload.The market for Electronic Bill Presentment and Payment (EBPP) isgrowing. According to a study, 18 million households in the US areexpected to pay their bills online by 2003 compared to 2 millionhouseholds in 2001. As more number of bill payers are gettingonline, several banks are making efforts to find ways to meet thegrowing needs of EBPP. Established banks can emerge as keyonline integrators of customer bills and can capitalize on this highpotential market. Growing with the popularity of EBPP is also thepaying of multiple bills at a single site known as bill aggregation.Offering online bill payment and aggregation will increase thecompetitiveness and attractiveness of E-banking services and willallow banks to generate service-fee income from the billers.In the B2B segment, the customer value proposition for online billpayment is more compelling. B2B e-commerce is expected to growfrom $406 bn in 2000 to $2.7 tn by 2004, and more than half of alltransactions will be routed through online B2B marketplaces. Thereis a need for automated payment systems to reduce cost and humanerror, and enhance cash-flow management. To meet this need, agroup of banks and non-financial institutions led by Citibank andWells Fargo have formed a company called 35
    • FinancialSettlementsMatrix (FSMx). It provides business buyers andsellers with access to secure payment processing, invoicing andother services that participating financial services firms offer.A B2B marketplace would provide minimum value to its customersif it just matches buyers and sellers, leaving the financial aspects oftransactions to be handled through traditional non-Internet channels.Hence, the marketplace must be capable of providing the paymentsprocessing, treasury management services, payables/receivables dataflows, and credit solutions to complete the full cycle of acommercial transaction on the Internet. The web-based B2B e-commerce offers tremendous opportunities for banks, paymenttechnology vendors and e-commerce companies to form strategicalliances. This new form of collaboration between partners withcomplementary core competencies may prove to be an effectivebusiness model for e-business. 36
    • E-BANKING TREND:Internet banking is gaining ground. Banks increasingly operatewebsites through which customers are able not only to inquire aboutaccount balances and interest and exchange rates but also to conducta range of transactions. Unfortunately, data on Internet banking arescarce, and differences in definitions make cross-countrycomparisons difficult. Even so, one finds that Internet banking isparticularly widespread in Austria, Korea, the Scandinaviancountries, Singapore, Spain, and Switzerland, where more than 75percent of all banks offer such services (see chart). TheScandinavian countries have the largest number of Internet users,with up to one-third of bank customers in Finland and Swedentaking advantage of E-banking. 37
    • In the United States, Internet banking is still concentrated in thelargest banks. In mid-2001, 44 percent of national banks maintainedtransactional websites, almost double the number in the third quarterof 1999. These banks account for over 90 percent of nationalbanking system assets. The larger banks tend to offer a wider arrayof electronic banking services, including loan applications andbrokerage services. While most U.S. consumers have accounts withbanks that offer Internet services, only about 6 percent of them usethese services.To date, most banks have combined the new electronic deliverychannels with traditional brick and mortar branches ("brick andclick" banks), but a small number have emerged that offer theirproducts and services predominantly, or only, through electronicdistribution channels. These "virtual" or Internet-only banks do nothave a branch network but might have a physical presence, forexample, an administrative office or nonbranch facilities like kiosksor automatic teller machines. The United States has about 30 virtualbanks; Asia has 2, launched in 2000 and 2001; and the EuropeanUnion has several—either as separately licensed entities or assubsidiaries or branches of brick and mortar banks. 38
    • THE INDIAN EXPERIENCEIndia is still in the early stages of E-banking growth anddevelopment. Competition and changes in technology and lifestylein the last five years have changed the face of banking. The changesthat have taken place impose on banks tough standards ofcompetition and compliance. The issue here is – Where does Indiastand in the scheme of Ebanking. E-banking is likely to bring a hostof opportunities as well as unprecedented risks to the fundamentalnature of banking in India.The impact of E- Banking in India is not yet apparent. Many globalresearch companies believe that Ebanking adoption in India in thenear future would be slow compared to other major Asiancountries.Indian E-banking is still nascent, although it is fastbecoming a strategic necessity for most commercial banks, ascompetition increases from private banks and non banking financialinstitutions.Despite the global economic challenges facing the IT software andservices sector, the outlook for the Indian industry remainsoptimistic.The Reserve Bank of India has also set up a "Working Group on E-banking to examine different aspects of E-banking. The groupfocused on three major areas of E-banking i.e. (1) Technology andSecurity issues (2) Legal issues and (3) Regulatory and Supervisory 39
    • issues. RBI has accepted the guidelines of the group and theyprovide a good insight into the security requirements of E-banking.The importance of the impact of technology and informationsecurity cannot be doubted. Technological developments have beenone of the key drivers of the global economy and represent aninstrument that if exploited well can boost the efficiency andcompetitivity of the banking sector. However, the rapid growth ofthe Internet has introduced a completely new level of securityrelated problems. The problem here is that since the Internet is not aregulated technology and it is readily accessible to millions ofpeople, there will always be people who want to use it to make illicitgains. The security issue can be addressed at three levels. The first isthe security of customer information as it is sent from the customersPC to the Web server. The second is the security of the environmentin which the Internet banking server and customer informationdatabase reside. Third, security measures must be in place to preventunauthorized users from attempting to long into the online bankingsection of the website.From a legal perspective, security procedure adopted by banks forauthenticating users needs to be recognized by law as a substitute forsignature. In India, the Information Technology Act, 2000, insection 3(2) provides for a particular technology (viz., theasymmetric crypto system and hash function) as a means ofauthenticating electronic record. Any other method used by banksfor authentication should be recognized as a source of legal risk.. 40
    • Regarding the regulatory and supervisory issues, only such bankswhich are licensed and supervised and have a physical presence inIndia will be permitted to offer E-banking products to residents ofIndia. With institutions becoming more and more global andcomplex, the nature of risks in the international financial system haschanged. The Regulators themselves who will now be paying muchmore attention to the qualitative aspects of risk management haverecognized this.Though the Indian Government has announced cyber laws, mostcorporate are not clear about them, and feel they are insufficient forthe growth of E-commerce. Lack of consumer protection laws isanother issue that needs to be tackled, if people have to feel morecomfortable about transacting online.Taxation of E-commerce transaction has been one of the mostdebated issues that are yet to be resolved by India and most othercountries. The explosive growth of e-commerce has led manyexecutives to question how their companies can properly administertaxes on Internet sales. Without sales tax, online sellers get a priceadvantage over brick and mortar companies. While e-commerce hasbeen causing loss of tax revenues to the Government, manypoliticians continue to insist that the Net must remain tax-free toensure continued growth, and that collecting sales taxes on Netcommerce could restrict its expansion.A permanent ban on custom duties on electronic transmissions,international tax rules that are neutral, simple and certain and 41
    • simplification of state and local sales taxes. The Central Board ofDirect Taxes, which submitted its report in September 2001,recommended that e-commerce transaction should be taxed just liketraditional commerce.Also RBI is about to become the first Government owned digitalsignature Certifying Authority (CA) in India. The move is expectedto initiate the electronic transaction process in the banking sectorand will have far-reaching results in terms of cost and speed oftransactions between government- owned banks.Thus efficiency, growth and the need to satisfy a growing tech-survey consumer base are three clear rationales for implementing E-banking in India. The four forces-customers, technology,convergence and globalization have the most important effect on theIndian financial sector and these changes are forcing banks toredefine their business models and integrate technology into allaspect of operation. 42
    • COMPUTERISATION OF BANKS INDIA - ISSUES &EVENTSIn the Eighteenth and Nineteenth Centuries the Industrial revolutionbrought profound changes in the life style of man. Many activitiesthat were hitherto performed by man employing his hands and hisfinger skill came to be carried at great speed and efficiency bymachines. Man continued to carry out only those functions thatneeded his thinking process to be involved.The Industrial Revolution on account of mass production of goodsand services brought large commercial and business organizations,transcending national boundaries that employed several thousands ofpersons for performing routine, repetitive clerical tasks, relating torecord keeping, maintaining accounts, attending/answeringcorrespondence, preparing vouchers, invoices, bills and multiple ofsuch other functions. This created white-collar employment foreducated persons by leaps and bounds.Clerical task is defined as a routine and repetitive performanceinvolving, adding, subtracting, multiplying, dividing numbers, andduplicating data/information from one source to another. The toolsemployed are "a pen, ink and paper", the knowledge of arithmetictables, the basic knowledge of a language and minimumacquaintance with rules & procedures of the organisation that arefollowed day in day out and relevant to the job of the particularemployee. Two plus two is four. It is always four. Should we needan educated worker to compute this task again and again? Abusiness needed human agents to attend to production, marketing,finance etc. depicting high-level tasks. But more and more peoplewere employed for performing low level tasks. 43
    • However as time went on the internal chorus of record keepingmultiplied geometrically as commerce and industry grew in size andvolume. The civil services of the Government and service-basedorganizations came in the fore-front to inherit this overload ofwhite-collar employment. To quote a concrete example a majornationalised bank in India, which employed merely 3000 workers inthe Fifties (around the time I entered its service in 1957), came toengage over 70,000 employees towards the end of the century, i.e.year 1996-97,when I retired from service from that bank.The Government of India and the States including governmentowned bodies employed as many as 100 lakh junior employees atthe clerical and subordinate level. Such employees by virtue of theirstrength of numbers organise themselves into powerful trade unions,and aggressively utilise the bargaining power without reference tothe input benefit the organization is deriving from them and theproductivity they are providing.In this world of human beings necessity is the mother of inventions.After 15 years of educational studies, an individual should not beemployed for routine repetitive tasks. This makes him dull and feelthe work monotonous without job satisfaction. He turns back anddiverts his loyalty to an informal group i.e. the trade union. He feelshappy once in a month on pay day, but on other days his workleaves him nothing to rejoice. There are neither opportunities norchallenges to bring in his innovative or creative genius. As yearspasses the clerical employment results in the individual losingefficiency and productivity to progressively depict a trend ofprogress in reverse.The advent of mechanical calculating devices and later electroniccomputing in the West heralded a new age, that dispensed with thiswhite collar and white-elephant employment progressively. This 44
    • evolved in the west three decades before, but the advent of thisevolution in India is only now taking place.To quote again a concrete example- the statistics of two bankinginstitutions in India, the largest and the next large in size can befruitfully compared. These are the State Bank of India, that was untilrecently employing 2.3 Lakh workers, for a turn over of Rs.36,000Crores (Deposit 25000 + Advances 11000 Crores - latest).ICICI bank has at present less than 1000 branches and around 10000employees. It has a turnover of Rs.23000 Crores (Deposits 16 +Advances 7 thousand Crores). The bank started functioning from theyear 1997 and has gained the No.2 position in status in India afterSBI in volume of business turnover within 5 years of its operation. Itwill be interesting to know that CMD of ICICI Bank draws annualemoluments of Rs.150 Lakhs, while CMD of SBI around Rs.4 to 5Lacs. ICICI is a new age high-tech and fully computerised bank,while SBI retained its manual operations in totality up to 1993 andmaintained the work force of that time up to 2001, though it ispartially computerised starting from the year 1993.The per employee turnover for ICICI bank is Rs.2.3 Crores, that forSBI is Rs.1.56 Lakhs. The gap accounts for the difference betweenmanual operations and high-tech banking.If we project the future in respect of State owned banks, whichemploy presently nearly 10 Lakh employees, computerisation isdestined to bring about rapid changes. By about the year 2010 thepresent turnover of commercial banks in India may double or eventreble to around Rs.30 to 40 Lakh Crores, but these Banks will haveno need of 75 percent (today 25 percent of the work force issubordinate staff, 50 percent is clerical staff and 25 percent is theofficers) of the existing workforce by 2010. Only in very fewhinterland rural pockets there may be a possibility of a need of the 45
    • present structure of workforce. The objective of the recentlyadministered VRS is to prepare for this reality of the first decade ofthe New Millennium, where banking will be more tech based andless people based.Computerisation brings transparency, improves customer care andcustomer-service tremendously and reduces substantially scope forcorruption or extending undue favour to particular constituents anduneven service to others.CHALLENGES FACED IN COMPUTERISATIONComputerisation is expensive and needs huge investment inhardware and software and subsequent maintenance. The NationalStock Exchange, Indias No.1 user in computerised service has spentRs.180 Crores to enable investors and brokers across the country totrade securities online. The rate of obsolescence in respect of bothhardware and software is considerable. New and better products areemerging in the market, whose use would enable a rival organizationto throw a challenge.Computer crimes are committed widely in the West. India is no lesspotentially exposed to this risk, when turnover under Internetbanking increases. It is easier to enforce security of information andaccountability of performers in a manual system. But it needselaborate steps to incorporate these features in the electronic system.The structure of legal system is so far based on manual recordkeeping. It has to provide for electronic data to be accepted legallyas evidence and in contracts.Indian banking has accepted computerisation since 1993, more outof sheer compulsion and necessity to cope up increasing overloadand incompatibility of the manual system to sustain further growth. 46
    • The following pages you are presented a series of articles discussingthe various facets of this momentous event and its far-reachingeffects anticipated to unfold in the coming decade.ROLE OF RBI IN COMPUTERISATION OF BANKS ININDIAComputerization became popular in the western countries right fromthe Sixties. Main Frames were extensively used both by the PublicInstitutions and Major Private Organizations. In the Seventies MiniComputer became popular and Personal Computers in earlyEighties, followed by introduction of several software products inhigh level language and simultaneous advancement in networkingtechnology. This enabled the use of personal computers extensivelyin offices & commercial organizations for processing different kindsof data.However in India organised Trade Unions were against introductionof computers in Public Offices. Computerisation was restricted tomajor scientific research organizations and Technical Institutes anddefence organizations. Indian Railways first acceptedcomputerisation for operational efficiency.The Electronics Corporation of India Ltd. was set up in 1967 withthe objective of research & development in the fields of ElectronicCommunication, Control, instrumentation, automation andInformation Technology. CMC Ltd (Computer MaintenanceCorporation of India Ltd.) was established in 1976 to look aftermaintenance operations of Main Frame Computers installed inseveral organisations in India, to serve the gap, when IBM left India,due to the directive of the then Central Government.In the Private Sector the first major venture was TCS (TataConsultancy Services) which started functioning from 1968. In the 47
    • year 1980 a few batch-mates of IIT Delhi pioneered the effort tostart a major education centre in India to impart training inInformation Technology and their efforts resulted in the setting upof NIIT in 1981. Aptech Computer Education was established in1986 following the experiment of NIIT.Before large scale computerisation, computer education becamepopular in India and coveted by bright students, when severalEngineering Colleges and Technical Institutes introducing PostGraduate Degree courses in Computer Engineering. The boominghardware and software industry in the West attracted Indian studentsand many of them migrated for better opportunities to the U.S.A.and settled there. We have today the paradox of India being one ofthe major powers possessing diverse talents in fields of softwaredevelopment, but at the same time, we are still a decade back to theusing computerised service extensively in the country and bringingthe facility to the realms of the common man.Rapid development of business and industry brought manualoperations of data, a saturation point. This acted as a overload on thegrowing banking operations. Government owned banks in generalfound the "house-keeping" unmanageable. Several heads of accountsin particular inter-bank clearing and inter-branch reconciliation ofaccounts went totally out of control.Low productivity pushed cost of wages high and employees realisedthat unless they agreed for computerisation further improvement intheir wage structure was not possible.In the year 1993, the Employees Unions of Banks signed anagreement with Bank Managements under the auspices of IndianBanks Association (IBA). This agreement was a major breakthrough in the introduction of computerised applications anddevelopment of communication networks in Banks. 48
    • The first initiatives in the area of bank computerisation, however,stemmed out of the landmark report of the two committees headedby the former Governor of the Reserve Bank of India and currentlyGovernor of Andhra Pradesh, His Excellency, Dr.C.Rangarajan.Both the reports had strongly recommended computerisation ofbanking operations at various levels and suggested appropriatearchitecture.In the seventies, there was a four-fold increase in the number ofbranches, five-fold increase in advances and a six-fold increase indeposits. Mechanisation was seen as the best solution to the"problems inherent in the manual system of operations, their adverseimpact on customer services and the grave dangers to banks in thecontext of increasing incidence of frauds.The first of these Committees, viz. the Committee on theMechanization of the Banking Industry (1984) was set up for thefirst time to suggest a model for mechanisation of bank branches,regional / controlling offices and Head Office necessitated by theexplosive growth in the geographical spread of banking followingnationalization of banks in 1969.In the first phase of computerisation spanning the five years ending1989, banks in India had installed 4776 ALPMs at the branch level,233 mini computers at the Regional/Controlling office levels andtrained over 2000 programmers/systems personnel and over 12000Data Entry Terminal Operators. The Reserve Bank too hadembarked upon an ambitious program to bring about state-of-the-arttechnology in the clearing process and had introduced MICRclearing at 4 centres and computerized clearing settlement at 9centres.Against this backdrop, the Committee on Computerisation in Bankswas set up once again under Dr.Rangarajans Chairmanship to draw 49
    • up a perspective plan for computerisation in banks. In its reportsubmitted in 1989, the Committee acknowledged the gains of theinitial efforts and sought to move away from the stand-alonededicated systems to an on-line transaction processing environmentin branch banking. It recommended that the thrust of bankcomputerisation for the following 5 years should be to fullycomputerise the operations at both the front and back offices of largebranches then numbering around 2500. CHALLENGES OF THE "E-BANKING REVOLUTION"Electronic banking is the wave of the future. It provides enormousbenefits to consumers in terms of the ease and cost of transactions.But it also poses new challenges for country authorities in regulatingand supervising the financial system and in designing andimplementing macroeconomic policy.Electronic banking has been around for some time in the form ofautomatic teller machines and telephone transactions. More recently,it has been transformed by the Internet, a new delivery channel forbanking services that benefits both customers and banks. Access isfast, convenient, and available around the clock, whatever thecustomers location (see illustration above). Plus, banks can provideservices more efficiently and at substantially lower costs. Forexample, a typical customer transaction costing about $1 in atraditional "brick and mortar" bank branch or $0.60 through a phonecall costs only about $0.02 online.Electronic banking also makes it easier for customers to comparebanks services and products, can increase competition amongbanks, and allows banks to penetrate new markets and thus expand 50
    • their geographical reach. Some even see electronic banking as anopportunity for countries with underdeveloped financial systems toleapfrog developmental stages. Customers in such countries canaccess services more easily from banks abroad and through wirelesscommunication systems, which are developing more rapidly thantraditional "wired" communication networks.The flip side of this technological boom is that electronic banking isnot only susceptible to, but may exacerbate, some of the same risks—particularly governance, legal, operational, and reputational—inherent in traditional banking. In addition, it poses new challenges.In response, many national regulators have already modified theirregulations to achieve their main objectives: ensuring the safety andsoundness of the domestic banking system, promoting marketdiscipline, and protecting customer rights and the public trust in thebanking system. Policymakers are also becoming increasingly awareof the greater potential impact of macroeconomic policy on capitalmovements.NEW CHALLENGES FOR REGULATORSThis changing financial landscape brings with it new challenges forbank management and regulatory and supervisory authorities. Themajor ones stem from increased cross-border transactions resultingfrom drastically lower transaction costs and the greater ease ofbanking activities, and from the reliance on technology to providebanking services with the necessary security.Regulatory Risk: Because the Internet allows services to beprovided from anywhere in the world, there is a danger that bankswill try to avoid regulation and supervision. What can regulators do?They can require even banks that provide their services from a 51
    • remote location through the Internet to be licensed. Licensing wouldbe particularly appropriate where supervision is weak andcooperation between a virtual bank and the home supervisor is notadequate. Licensing is the norm, for example, in the United Statesand most of the countries of the European Union. A virtual banklicensed outside these jurisdictions that wishes to offer electronicbanking services and take deposits in these countries must firstestablish a licensed branch.Determining when a banks electronic services trigger the need for alicense can be difficult, but indicators showing where bankingservices originate and where they are provided can help. Forexample, a virtual bank licensed in country X is not seen as takingdeposits in country Y if customers make their deposits by postingchecks to an address in country X. If a customer makes a deposit atan automatic teller machine in country Y, however, that transactionwould most likely be considered deposit taking in country Y.Regulators need to establish guidelines to clarify the gray areasbetween these two cases.Legal Risk: Electronic banking carries heightened legal risks forbanks. Banks can potentially expand the geographical scope of theirservices faster through electronic banking than through traditionalbanks. In some cases, however, they might not be fully versed in ajurisdictions local laws and regulations before they begin to offerservices there, either with a license or without a license if one is notrequired. When a license is not required, a virtual bank—lackingcontact with its host country supervisor—may find it even moredifficult to stay abreast of regulatory changes. As a consequence,virtual banks could unknowingly violate customer protection laws,including on data collection and privacy, and regulations onsoliciting. In doing so, they expose themselves to losses through 52
    • lawsuits or crimes that are not prosecuted because of jurisdictionaldisputes.Money laundering is an age-old criminal activity that has beengreatly facilitated by electronic banking because of the anonymity itaffords. Once a customer opens an account, it is impossible forbanks to identify whether the nominal account holder is conductinga transaction or even where the transaction is taking place. Tocombat money laundering, many countries have issued specificguidelines on identifying customers. They typically compriserecommendations for verifying an individuals identity and addressbefore a customer account is opened and for monitoring onlinetransactions, which requires great vigilance.In a report issued in 2000, the Organization for EconomicCooperation and Developments Financial Action Task Force raisedanother concern. With electronic banking crossing nationalboundaries, whose regulatory authorities will investigate and pursuemoney laundering violations? The answer, according to the taskforce, lies in coordinating legislation and regulation internationallyto avoid the creation of safe havens for criminal activities.Operational Risk: The reliance on new technology to provideservices makes security and system availability the centraloperational risk of electronic banking. Security threats can comefrom inside or outside the system, so banking regulators andsupervisors must ensure that banks have appropriate practices inplace to guarantee the confidentiality of data, as well as the integrityof the system and the data. Banks security practices should beregularly tested and reviewed by outside experts to analyze networkvulnerabilities and recovery preparedness. Capacity planning toaddress increasing transaction volumes and new technological 53
    • developments should take account of the budgetary impact of newinvestments, the ability to attract staff with the necessary expertise,and potential dependence on external service providers. Managingheightened operational risks needs to become an integral part ofbanks overall management of risk, and supervisors need to includeoperational risks in their safety and soundness evaluations.Reputational Risk: Breaches of security and disruptions to thesystems availability can damage a banks reputation. The more abank relies on electronic delivery channels, the greater the potentialfor reputational risks. If one electronic bank encounters problemsthat cause customers to lose confidence in electronic deliverychannels as a whole or to view bank failures as systemwidesupervisory deficiencies, these problems can potentially affect otherproviders of electronic banking services. In many countries whereelectronic banking is becoming the trend, bank supervisors have putin place internal guidance notes for examiners, and many havereleased risk-management guidelines for banks.Reputational risks also stem from customer misuse of securityprecautions or ignorance about the need for such precautions.Security risks can be amplified and may result in a loss ofconfidence in electronic delivery channels. The solution is consumereducation—a process in which regulators and supervisors can assist.For example, some bank supervisors provide links on their websitesallowing customers to identify online banks with legitimate chartersand deposit insurance. They also issue tips on Internet banking, offerconsumer help lines, and issue warnings about specific entities thatmay be conducting unauthorized banking operations in the country. 54
    • THE MACROECONOMIC CHALLENGES But the challenges are not limited to regulators. As the advent of E- banking quickly changes the financial landscape and increases the potential for quick cross-border capital movements, macroeconomic policymakers face several difficult questions.• If electronic banking does make national boundaries irrelevant by facilitating capital movements, what does this imply for macroeconomic management?• How is monetary policy affected when, for example, the use of electronic means makes it easier for banks to avoid reserve requirements, or when business can be conducted in foreign currencies as easily as in domestic currency?• When offshore banking and capital flight are potentially only a few mouse clicks away, does a government have any leeway for independent monetary or fiscal policy?• How will the choice of the exchange rate regime be affected, and how will E-banking influence the targeted level of international reserves of a central bank?• Can a government afford to make any mistakes? Will the spread of electronic banking impose harsh market discipline on governments as well as on businesses? The answers to these questions fall into two emerging strands of thought. First, the technological revolution—particularly the expansion of electronic money but also, more broadly, electronic advances in banking practices—could result in a decoupling of households and firms decisions from the purely financial operations of the central bank. Thus, the ability of monetary policy to influence inflation and economic activity would be threatened. 55
    • Second, as electronic banking expands, financial transaction costscan decline significantly. The result would be tantamount to areduction in the "sand in the wheels" of the financial sectormachinery, making capital flows even easier to effect, with apotential erosion of the effectiveness of domestic monetary policy.In this regard, proponents of the Tobin tax—which would tax short-term capital flows to increase their cost and, thereby, the sand in thewheels—would feel that electronic banking makes an even morecompelling case for introducing such a tax.While electronic banking can provide a number of benefits forcustomers and new business opportunities for banks, it exacerbatestraditional banking risks. Even though considerable work has beendone in some countries in adapting banking and supervisionregulations, continuous vigilance and revisions will be essential asthe scope of E-banking increases. In particular, there is still a needto establish greater harmonization and coordination at theinternational level. Moreover, the ease with which capital canpotentially be moved between banks and across borders in anelectronic environment creates a greater sensitivity to economicpolicy management. To understand the impact of E-banking on theconduct of economic policy, policymakers need a solid analyticalfoundation. Without one, the markets will provide the answer,possibly at a high economic cost. Further research on policy-relatedissues in the period ahead is therefore critical. 56
    • REGULATORY TOOLS TO OVERCOME CHALLENGESThere are four key tools that regulators need to focus on to addressthe new challenges posed by the arrival of E-banking.Adaptation: In light of how rapidly technology is changing andwhat the changes mean for banking activities, keeping regulationsup to date has been, and continues to be, a far-reaching, time-consuming, and complex task. In May 2001, the Bank forInternational Settlements issued its "Risk Management Principles forElectronic Banking," which discusses how to extend, adapt, andtailor the existing risk-management framework to the electronicbanking setting. For example, it recommends that a banks board ofdirectors and senior management review and approve the keyaspects of the security control process, which should includemeasures to authenticate the identity and authorization of customers,promote nonrepudiation of transactions, protect data integrity, andensure segregation of duties within E-banking systems, databases,and applications. Regulators and supervisors must also ensure thattheir staffs have the relevant technological expertise to assesspotential changes in risks, which may require significant investmentin training and in hardware and software.Legalization: New methods for conducting transactions, newinstruments, and new service providers will require legal definition,recognition, and permission. For example, it will be essential todefine an electronic signature and give it the same legal status as thehandwritten signature. Existing legal definitions and permissions—such as the legal definition of a bank and the concept of a nationalborder—will also need to be rethought. 57
    • Harmonization: International harmonization of electronic bankingregulation must be a top priority. This means intensifying cross-border cooperation between supervisors and coordinating laws andregulatory practices internationally and domestically across differentregulatory agencies. The problem of jurisdiction that arises from"borderless" transactions is, as of this writing, in limbo. For now,each country must decide who has jurisdiction over electronicbanking involving its citizens. The task of internationalharmonization and cooperation can be viewed as the most dauntingin addressing the challenges of electronic banking.Integration: This is the process of including informationtechnology issues and their accompanying operational risks in banksupervisors safety and soundness evaluations. In addition to theissues of privacy and security, for example, bank examiners willwant to know how well the banks management has elaborated itsbusiness plan for electronic banking. A special challenge forregulators will be supervising the functions that are outsourced tothird-party vendors. 58
    • CASE STUDIES State bank of India State Bank of India is India’s largest bank with a branch network of over 11000 branches and 6 associate banks located even in the remotest parts of India. State Bank of India (SBI) offers a wide range of banking products and services to corporate and retail customers. OnlineSBI is the Internet banking portal for State Bank of India. The portal provides anywhere, anytime, online access to accounts for State Bank’s Retail and Corporate customers. The application is developed using the latest cutting edge technology and tools. The infrastructure supports unified, secure access to banking services for accounts in over 11,000 branches across India. The Retail banking application is an integration of several functional areas, and enables customers to:• Issue Demand Drafts online• Transfer funds to own and third party accounts• Credit beneficiary accounts using the VISA Money Transfer, RTGS/ NEFT feature• Generate account statements• Setup Standing Instructions• Configure profile settings• Use eTax for online tax payment• Use ePay for automatic bill payments• Interface with merchants for railway and airline reservations 59
    • • Avail DEMAT and IPO services The OnlineSBI corporate banking application provides features to administer and manage corporate accounts online. The corporate module provides roles such as Regulator, Admin, Uploader, Transaction Maker, Authorizer, and Auditor. These roles have access to the following functions:• Manage users, define rights and transaction rules on corporate accounts• Access accounts in several branches with a single sign-on mechanism• Upload files to make bulk transactions to third parties, supplier, vendor and tax collection authorities.• Use online transactional features such as fund transfer to own accounts, third party payments (both Inter and Intra bank), and draft issues• Make bill payments over the Internet.• Authorize, modify, reschedule and cancel transactions, based on rights assigned to the user• Generate account statement• Enquire on transaction details or current balance In addition to the above the Internet banking application also provides the following value added services:• Tax payments to central and state governments through site to site integration.• Supply Chain Finance( e-VFS- Electronic Vendor Finance Scheme)• Direct Debit Facility• E Collection Facilities for:• Core Banking Transactions 60
    • • Inter Bank Transactions for incoming RTGS/NEFT Transactions• Internet Banking Transactions for SBI & Associate Banks• Direct Debit facility where suppliers can directly debit their customer’s account through Internet Banking ICICI Bank In a major development in the Internet world, ICICI Bank, the banking subsidiary of ICICI Ltd. (NYSE: IC and IC.D) and Satyam Infoway Ltd. (NASDAQ: SIFY) announced the setting up of a new “.COM” company for on-line distribution of retail banking products and services on the Internet. This landmark agreement marks the coming together of India’s first Internet Banking provider, ICICI Bank, and India’s largest private ISP and mega-Portal, Satyam Infoway, to create a unique partnership between a major Bank and a mega-Portal. The marriage between banking and portals is expected to be a win-win potent combination, which is expected to result in improved customer orientation, lower distribution cost, long-term customer relationships with ease of banking wherever and whenever the customer wants it and enhanced profitability. The range of retail banking products to be distributed through the portal would include savings accounts, current accounts, fixed deposits, bill payments and other retail banking products that ICICI Bank may offer through this on-line channel. The surge in demand for e-commerce related services stems from the rapid growth in Internet penetration in the country and a 61
    • fundamental change in the business paradigm. The two companieswould therefore also explore several opportunities to complementeach other’s strengths to capitalist on the opportunities in e-commerce. This would include providing a platform for tradefacilitation and payments over the Internet using innovative bankingproducts of ICICI Bank. SIFY has a buyer to seller ordering/sellingwebsite,, which is on-line except for thepayments that are still physical. ICICI Bank has developed anInternet based ‘business to business’ payment module for purchasersand sellers to effect payments online. A synergistic offering of thesetwo products would be made so that such customers/users cancomplete the entire transaction and payments online.The two companies would expect to co-operate wherever feasible toextend the reach and channels for distribution of financial productsfrom ICICI Bank and Internet products from SIFY. ICICI Bank, as apart of its “Click and Brick” strategic focus would set up ATMs atthe Satyam Access Points and Cyber Cafes, thereby increasing itsreach across the country. It would also offer Satyam Internetterminals at its branches, enabling visitors to surf the Internet,thereby attracting new customers to branches. The two companiesshall examine further business opportunities, which wouldeffectively synergies the financial services strength of ICICI Bankand its Affiliates and the technological expertise of Satyam Infowayand its Affiliates. ICICI Bank and Satyam Infoway through thispartnership will play a strategic role in providing revolutionary e-commerce solutions in India.The memorandum of understanding was signed today between Mr.H.N Sinor, Managing Director & CEO of ICICI Bank and Mr. R.Ramraj, Managing Director of Satyam Infoway.ICICI is a diversified financial services company offering a widerange of products and services to corporate and retail customers in 62
    • India. ICICI Bank, a subsidiary company has been the pioneer ofInternet banking in India. ICICI Bank has been gearing itself for theopportunities that would be created from the e-Commercerevolution.Satyam Infoway Ltd. Is the leading integrated Internet and e-commerce company operating in India. SatyamOnline, the mostcomprehensive portal site of Indian origin is one of the key offeringsfrom SIFY in the business to consumer segment. Recently it enteredinto an agreement to acquire IndiaWorld Communications PrivateLimited, which would result in the integration of IndiaWorld’spopular websites like, and withSIFY’s portals. The combined portal would be the largest Indiarelated Internet portal. 63
    • 64
    • ANALYSIS1. Are you aware of net banking services offered by the banks? (a) Yes (b) No 65
    • Analysis of the above diagramIt is good for the banks as most of the respondents were aware of theinternet banking and all the services provided under internetbanking2. In which company bank do you have your acccount? (a) Axis bank (b) Standard Chartered Bank (c) HSBC Bank (d) HDFC Bank (e) State Bank of IndiaAnalysis of the above diagram 66
    • It was witnessed that today public sector bank State bank of Indiahas the largest customer base but the private banks are also catchingup and after State bank of India HDFC has the highest customerbase .Multi-national banks are also making their presence noticeablein the Indian scenario3. Do you feel safe in disclosing your details on net? (a) Yes (b) NoAnalysis of the above diagramThis question witnessed a fifty fifty answer from most of therespondents, few of the respondents felt safe in disclosing their 67
    • details but still there were a lot people who felt unsafe in disclosingand feared their personal information may used by some otherperson4. Are you satisfy with your bank services? (a) Yes (b) NoAnalysis of the above diagramIt is very interesting to see that most of the respondents are happyfrom the services their respective bank is providing ,the rest of therespondents felt there is a scope of improvement still they were alsohappy 68
    • 5. What are your main transactions you would prefer to do bynet (a) Money transfers (b) Checking of your current balance (c) Create Fixed Deposits Online (d) Request a Demand Draft (e) Pay Bills (f) Order a Cheque Book (g) Request Stop Payment on a Cheque 69
    • Analysis of the above diagramIt is interesting to see that a respondent would like to do all thetransactions which one does personally on a visit to the bank. Thus,internet banking has a promising future ahead6. Are you aware of the benefits of net banking which are available (a) Yes (b) No 70
    • Analysis of the above diagramIt is pretty amazing to see that most of the respondents are aware ofthe benefits of internet banking 71
    • 7. Are you aware of the methods which can be undertaken to make any kind of fraud (a) Yes (b) No Analysis of the above diagram It’s pretty tragic but most of the respondents are unaware of the techniques which can be taken up for any type of fraud 72
    • 8. Are you aware of all the methods which can be taken up to secure your transaction (a) Yes (b) NoAnalysis of the above diagramEven with the increasingly knowledge of internet banking most ofthe respondents are unaware the softwares and methods taken up bythe bank to secure each and every transaction. 73
    • 9. Does your bank educate you about the internet banking services being offered? (a) Yes (b) NoAnalysis of the above diagramMost of the respondents felt that they are not properly educated ofinternet banking and its benefits to them. 74
    • 10. Would you prefer using net banking instead of visiting your bank every now and then? (a) Yes (b) No Analysis of the above diagram It was witnessed that most of the respondents preferred using internet banking over there conventional banking system. Thus , internet banking has a bright future ahead 11. What benefits do you see in internat banking? 75
    • (a) Convenience (b) Speed (c) Transparency (d) TimeAnalysis of the above diagramMost of the respondents felt that the transparency provided byinternet banking is the highest motivating factor for an individualto use internet banking ,rest speed convenience and time are alsothe other motivating factors 76
    • FINDINGS 77
    • An old Chinese saying goes: If you dont know where you are going - you will never get there. Many people suddenly choosing their personal computers as the new way to view and manage their money. why? Quite simple - because it is a valuable option to have.(refer question no. 1) Every day more and more people are turning to the Technology for their personal banking. It is a safe, convenient way to shop for financial services, maintain bank accounts and conduct business 24 hours a day.(refer question no. 3) Now, if you are already thinking about Technology as a tool in Banking you could probably set some of these goals:  Selling financial products and services  Cutting operational costs  Branding & Market recognition  Keeping profitable customers Bank customers can save time by banking online. There is no need to stand in one more line to perform the most basic transactions when they can be done quickly from the desktop PC anytime, day or night.(refer question no. 11) 78
    •  Moreover complicated transactions or investment decisions, people like having direct control over their finances themselves. They find it convenient to access all of their financial information in one place. Ease of use is one of the most important factors. Navigation through online banking should be simple and intuitive. Customers also choose banks whose online services are reliable. (refer question no.9) Most Banks now offers a comprehensive range of financial products and services, including a FREE checking account and internet bill paying services.(refer question no.5) In addition, an array of checking accounts are available in which you may also request a FREE check card. Hence most Banks of following Electronic Banking or Internet Banking FREE Benefits for the bank should always reflect benefits for the customer of banking services.  Cutting operational cost 79
    •  Cutting transaction costs results in higher profit margin for the banks. The enclosed chart clearly indicates the benefits of E- banking over traditional methods banking. As every Bank wants to be profitable E-banking is becoming necessity for survival. Electronic banking provides enormous benefits to consumers in terms of the ease and cost of transactions Taking over customers from competition Banks seeking new customers can use advantages of new distribution channels and acquire most profitable customer from their competition. It is a fact that people using E-banking are the ones who consider time as money and are the one with loads of money. Majority of banks see 80% of their business coming just 20% of the client base. This 20% customer base is vulnerable if the bank does not appreciate their time. Building stronger customer relations 80
    •  Offering new services, results in improved customer experience and stronger customer retention. Bigger share in customer’s wallet It is well known fact that customers tend to keep their finances in one place. Banks holding customer accounts therefore have opportunity to cross sell different products and services. Recent studies show that banks in the USA lost 20% of their most valuable customers in favor of non-bank FI flexible enough to offer diversified services and products. Identifying profitable customers Customers using E-banking services have higher balances than average branch teller customers. Investments are more than twice higher than the average. 81
    • 82
    • SUGGESTIONS To prevent online banking from remaining an expensive additional channel that does little to retain footloose customers, banks must act quickly. The first and most obvious step they should take is to see to it that the basic problem fueling dissatisfaction have been addressed. In addition, to meet the challenge of online brokerage and other new entrants, banks would need to add “supermarkets” selling products such as mortgage, mutual funds and insurance. The banks should take up responsibility of educating the customers and all the benefits of internet banking There is a need felt for the banks to promote the online banking services and proper promotional activities are not taking place. Banks need to appeal to customers who may not be technologically sophisticated, and should not require an engineering degree to get started or use the service. 83
    • 84
    • CONCLUSIONFrom all of this, we have learnt that information technology hasempowered customers and businesses with information needed tomake better investment decisions. At the same time, technology isallowing banks to offer new products, operate more efficiently, raiseproductivity, expand geographically and compete globally. A moreefficient, productive banking industry is providing services ofgreater quality and value.E-banking has become a necessary survival weapon and isfundamentally changing the banking industry worldwide. Today, theclick of the mouse offers customers banking services at a muchlower cost and also empowers them with unprecedented freedom inchoosing vendors for their financial service needs. No country todayhas a choice whether to implement E-banking or not given theglobal and competitive nature of the economy. The invasion ofbanking by technology has created an information age andcommoditization of banking services. Banks have come to realizethat survival in the new e-economy depends on delivering some orall of their banking services on the Internet while continuing tosupport their traditional infrastructure.The rise of E-banking is redefining business relationships and themost successful banks will be those that can truly strengthen theirrelationship with their customers. 85
    • Technology innovation and fierce competition among existing bankshave enable a wide array of banking products and services, beingmade available to retail and wholesale customer through anelectronic distribution channel, collectively referred to as e-banking.Banks have traditionally been in the forefront of harnessingtechnology to improve product and efficiency. Technology isaltering the relationships between banks and its internal and externalcustomers. Technology has also eroded the entry barriers faced bymany industries. With one time investment, technology has broughtabout superior products and channel management with a specialfocus on customer relationship. The incremental costs incurred forexpansion and diversification are also more beneficial.The major driving force behind the rapid spread of e-banking is itsacceptance as an extremely cost effective delivery channel. But onthe flipside, it is associated with risks such as reputation risk,security risk, cross-border risk and strategic risk, which are uniqueto e-banking. Banks need to have an effective disaster recovery planalong with comprehensive risk management tool is significant notonly to the bank but also to the banking system as a whole. Internethas created plenty of opportunities for players in the banking sector.While the new entrants have the advantage of latest technology, thegood-will of the established banks gives them a special opportunityto lead the online world. By merely putting existing service onlinewon’t help the banks in holding their customer close. Instead, banksmust learn to capitalize their customer’s different online financial-services relationships 86
    • BIBLIOGRAHY• HDFC BANK-• State bank of India-• Internet Banking in India-Part I- Dr A. K. Mishra• Hsbc bank :-• THE BUSINESS LINE.• ICICI BANK –• Bank netindia-• Ez articles:- Banking&id=353450• Express cmputers:• E-finance by Vasant C Joshi, Annexure 87
    • QUESTIONNAIRE Dear Respondent, I am student of Rukmini Devi Institute of Advanced Studies; I am doing this research to compare different services provided by bank to its clients.1. Are you aware of net banking services offered by the banks? (a) Yes (b) No2. In which company bank do you have your acccount? (a) Axis bank (b) Standard Chartered Bank (c) HSBC Bank (d) HDFC BANK (e) STATE BANK FOF INDIA 3. Do you feel safe in disclosing your details on net? 88
    • (a) Yes (b) No4. Are you satisfy with your bank services? (a) Yes (b) No5. What are your main transactions you would prefer to do bynet (a) Money transfers (b) Checking of your current balance (c) Create Fixed Deposits Online (d) Request a Demand Draft (e) Pay Bills (f) Order a Cheque Book (g) Request Stop Payment on a Cheque6. Are you aware of the benefits of net banking which are available 89
    • (a) Yes (b) No7. Are you aware of the methods which can be undertaken to make any kind of fraud (a) Yes (b) No8. Are you aware of all the methods which can be taken up to secure your transaction (a) Yes (b) No9. Does your bank educate you about the netbanking services being offered? (a) Yes (b) No 90
    • 10. Would you prefer using net banking instead of visiting your bank every now and then? (a) Yes (b) No11. What benefits do you see in internat banking? (a) Convenience (b) Speed (c) Transparency (d) Time Personal Information Name: Age: Sex: ( ) Male ( ) Female Phone No: Occupation: 91