Basics of E Banking by Pranay Sheth

CONCEPTS OF E-BANKING
Concepts of E-Banking
A PROJECT SUBMITTED IN PART COMPLETION OF
MASTER IN FINANCE MANAGEMENT
TO
TIMSR
BY
Pranay Seth
UNDER THE GUIDANCE OF

PROF. Akshay Damani
THAKUR INSTITUTE OF MANAGEMENT STUDIES &

RESEARCH
BATCH 2010-13
KANDIVALI (EAST)
MUMBAI
CERTIFICATE
1
This is to certify that the study presented by Mr. Pranay H Seth to

Thakur Institute of Management Studies & Research in part
completion of Master In Financial Management under Concepts of
E-Banking has been done under my guidance in the year 2010-13
The Project is in the nature of original work that has not so far been
submitted for any other course in this institute or any other
institute.
Reference of work and relative sources of information
have been given at the end of the project
(Pranay Seth)
(Prof. Akshay Damani)
Signature of the Candidate
Signature of the
Guide
Forwarded through the Research Guide
ACKNOWLEDGEMENTS
A real artist never displays his work until he has a feel of its soul. I
acknowledge the guidance and owe a depth of gratitude to my
project guide, Prof. Akshay Damani for her valuable comments,
support and encouragement without which compiling this project
would have been impossible.
Acknowledgements have been made throughout the project as a
mark of gratitude towards these scholars whose works I have
utilized to clarify much of what I wanted to say.
Finally, I express my sense of gratitude and appreciation to my
family and friends who, as ever, have been my greatest source of
strength. Without their active cooperation and support this project
would have been much harder to compile.
To all these people and others unnamed, I sincerely say Thank
You.
Pranay Seth.
EXECUTIVE SUMMARY
3
The project report has been prepared on the most important topic
in the present business scenario, where most of the organizations
are trying their best to survive and grow in the competitive world.
Survival the fittest is the only mantra in this kind of business
scenario.
In such an event, during the past few years, banks have been
among the fastest growing sectors in the country.
However, under the current economic scenario, financial services
companies that rapidly expanded operations increasing their
services online.
PURPOSE AND OBJECTIVE OF THE STUDY

4
I have been working with an Money Transfer Firm, and my domain

expertise has been in International Banking. Since International
Banking is growing at a rapid pace globally, the need for the
banking softwares also grows at a steady pace. Such need has lead
to an increase of capital investment however have made banking
more smooth and interesting. I wanted to study the business model
and apply my knowledge and get an in-depth understanding of the
global needs across business units. Further, the criticality of serving
better, required that I take this up as a detailed project and give it
my focused attention so as to reduce the manual banking and
move ahead with internet banking which is also known as EBanking. Hence I have taken this as my final project assignment.
CONTENT LIST
Sr.No
Topic
Page No
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Need for this study

Pre E- Banking scenario in India
Internet A distribution channel
What is E- Banking
Services of E-Banks
Online payment systems
Online security systems
Advantages of E-Banking
Disadvantages of E-Banking
Is E-Banking for you?
Paying safe
Benefits to the Bank
Winning online Strategy
World Scenario
The Asian perspective
The Indian perspective
Internet usage in India
RBI initiatives
Challenges for Indian banks
Strategy for Indian banks
Where is E-Banking in India
headed?
Conclusion
Recommendation
Bibliography
NEED FOR THIS STUDY
1
2
6
8
10
14
22
25
26
27
29
31
33
35
39
42
44
48
57
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Since the 80s, there has been turbulence in the banking and
finance industry worldwide as the pace of changes continues to
accelerate.
Changes are being driven, above all by competition,
technology and customer demand.
The Internet both an
opportunity and threat for banks - will intensify these effects.

The globalisation process and the opening up of the Indian
economy; have given reason for the banking sector to rethink its
existing strategies. The penetration of computers and growth in
Internet usage is making the customers crave for more more
services, more convenience! People want to put their PC to as many
uses as possible. E-Banking is one such use; and a very important
one at that.
These reasons and more have given rise to the need for such a
project.
Although many researches and projects
have been
conducted on this topic before, this project is not redundant

because e-banking is a very dynamic subject in todays scenario
and hence it needs to be constantly updated and studied.
PRE E-BANKING SCENARIO IN INDIA
Traditional Banking
Traditionally the relationship between the bank and its customers
has been on a one-to-one level via the branch network. This was
put into operation with clearing and decision-making responsibilities
concentrated at the individual branch level. The head office had
responsibility for the overall clearing network, the size of the branch
network and the training of staff in the branch network. The bank
monitored the organizations performance and set the decisionmaking parameters, but the information available to both branch
staff and their customers was limited to one geographical location.
Traditional Banking Structure (Diag.1)
On IT Adoption
The Indian banking sector woke up to the world of technology in
early 1990s. The banking sector in India has been dominated by the
public sector banks, who hold between them more than 80% of the
8
total asset base. New private sector banks and foreign banks have
tended to concentrate their efforts more on the top 23 centres,
which house the cream of the country's urban customers. These
banks have taken the lead in technology adoption and have
succeeded in building up a substantial base of technology savvy,
high-end customers.
Making an observation about the adoption of technology by the
banks, P.C. Narayan, vice-president (IT and retail banking) of Global
Trust Bank Ltd, says, "The rate of adoption of IT by foreign and
private sector banks in the country has been significant over the
last five years. This can be attributed largely to intense competition
as well as the Internet phenomenon worldwide. A number of banks
in the public sector have also accelerated the pace of IT
deployment, largely because of the competitive pressure brought
upon them by private sector banks and foreign banks."
Though in the beginning the employees resisted computerisation
(especially
in
nationalised
banks),
the
management
finally
succeeded in convincing its employees about the benefits and need

for adoption of technology. Once the gates were opened to the
private sector to operate banks, they started with a bang, thereby
forcing nationalised banks to reconsider their way of doing
business."
A SBI official in Delhi echoes the same sentiments: "Needless to
say, competition from foreign banks was one of the motivating
factors for us to switch to computers. But housekeeping scored over
everything else. Maintaining books and regular tasks like computing
interest at the end of the calendar year was tedious. The quantum
of database was so huge that computerisation was the only way
out. Banks would have certainly started downing their shutters had
banking software not taken over the reins."
9
In sharp contrast, most of private banks like GTB, HDFC and ICICI
started their operations with the use of technology. And with these
new banks wooing the customers by offering what was till then an
unknown phenomenon-customer service-the nationalised banks
were forced to take remedial steps. The compulsion for private
banks to adopt a very high level of IT was driven by their desire to
contain their operating cost at the lowest levels and at the same
time be able to offer a wide variety of products and services in the
quickest possible time.
Computerisation of all branches, especially in semi-urban and rural
areas, is still a far cry for public sector banks. "This calls for huge
investments and retraining of staff. These factors are inhibiting
most of the banks to take technology to rural areas. But since IT is
becoming an integral and inevitable part of the banking system,
rural banks' computerisation should also happen very soon. The key
obstacles
to
networking
of
introduction
of
branches,
and
IT
a
are non-integration
lack
of
corporate
or
non-
network.
Computerisation has been introduced but each branch acts as an

island. And, of course, cultural/social issues continue to pose
problems. Overcoming these obstacles, therefore, would be the
biggest challenge by itself.
However, the nationalised banks have taken to computerisation in
the right earnest. Today most of them have their own in-house IT
department
which
not
only
takes
care
of
deployment
and
implementation issues but is also into developing specific and

customised applications for the bank. From SBI to Canara Bank,
everyone is expanding its IT division and making huge investments
to develop the division as a profit centre by itself. According to an
SBI official, "It makes more sense to have our own division which
understands our needs and comes out with a solution. It is not just
10
cost-effective but also useful for a bank to have a separate division
that takes care of IT in totality."
Faced with deregulation, privatization and globalization, the Indian
banks are slowly looking at various options to stay ahead in the rat
race. This has resulted in the following recent trends:
Phone Banking
This means carrying out of banking transaction through the
telephone. A customer can call up the banks help line or phone
banking number to conduct transactions like transfer of funds,
making payments, checking of account balance, ordering cheques,
etc,. This also eliminates the customer of the need to visit the
banks branch.
ATM (Automatic Teller Machine)
An ATM is basically a machine that can deliver cash to the
customers on demand after authentication. An ATM does the basic
function of a banks branch, i.e., delivering money on demand.
Hence
setting
of
newer
branches
is
not
required
thereby
significantly lowering infrastructure costs. These machines also hold

the keys to future operational efficiency.
11
THE INTERNET A DISTRIBUTION CHANNEL
Distribution channels are physical capacities to
build up customer contacts in a systematic way in
order to inform, counsel and sell products and services. The
Internet is a so-called electronic distribution channel. Combined
with self-service terminals and telecommunication equipment
electronic distribution channels are technical channels within the
class of media distribution channels. Another example for a media
distribution channel is direct mail.
Today, media distribution channels are an important way of
distributing
information
and managing
standard
transactions.
Counseling is mostly done in branch offices or by field workers.

Together, personal and media distribution channels are called
internal distribution channels. On the other side there are external
distribution channels like salesman or franchising partners. The
following figure visualizes this classification.
Distribution Channels of Financial Institutions (Diag. 2)
Areas of Use of the Internet in Financial Institutions
12
Information may be provided in connection with one or two way
communication. One-way communication means that the institution
uses the Internet only as a presentation medium for its products
and services. The simplest way to use two-way communication is to
allow users to send electronic mails to the server in order to ask for
further information or make suggestions with respect to the Internet
site.
Interaction with customers requires quick information exchange.
Information provided by the user controls the information offered by
the server. If the customer is identified and authenticated
connecting to operative systems of the financial institution may be
possible. Then, often very little information has to be provided by
the customer since data stored in the databases of the financial
institution may be used.
Presentation of product information may be used to initiate new
contacts. Implemented product models permit the construction of
optimal
insurance
or
financing
contracts
by
using
simpler
components. Using mathematical models the customer may

analyze his portfolios. To do so, he may use simulation techniques,
what-if-analysis and other similar techniques.
Most Internet presentations by financial institutions fall into one of
these three categories (actually most of them are within the first
two
groups).
If
actual
contracting
is
desired
transaction
management is necessary.
There are a large number of different financial transactions, like e.g.
customer payments, securities transactions applications for loans or
insurance acquisitions, funds transfer, etc.
13
This is Electronic Banking The New Era.
WHAT IS E-BANKING?
A non-resident Indian (NRI) in Paris has an easy way to access
money in this fashion capital of the world. His Citibank account in
India can be accessed through an ATM in Paris, which in turn
transmits information to Citibanks central hub in the US. The Indian
rupees are converted to US dollars, which are in turn converted into
French Francs at the current exchange rate, the Indian account is
debited and the Francs made available to the NRI. Welcome to the
era of technology banking!
Traditionally, banks have used branch networks and distributed PC
software as their delivery channels to reach business customers.
However, in the recent past, combinations of distinctive factors
require that banks rethink their strategy. These factors include
demands on time as a limited resource, rising real estate expense,
changing
human
resource
and
information
technology
infrastructure and, most of all, fierce competition. All of these

factors are forcing banks to provide services to their business
customers anytime, anywhere, anyhow in what is termed as
boundary-less banking."
14
There is no denying the fact that in the past two decades
information technology has been the most rapidly changing
industry in the world. But more than the rate of change, what is
remarkable is the way IT has changed the paradigms of business in
other industries. One industry that has really felt the impact of IT
has been the banking sector.
What is E-banking? Electronic Banking in simple terms means, it
does not involve any physical exchange of money, but its all done
electronically, from one account to another, using the Internet.
Internet banking is just like normal banking, with one big exception.
You don't have to go to the bank for transactions. Instead, you can
access your account any time and from any part of the world, and
do so when you have the time, and not when the bank is open. For
busy executives, students, and homemakers, e-banking is a virtual
blessing..
Banks offer Internet banking in two main ways. An existing bank
with physical offices can establish a Web site and offer Internet
banking to its customers in addition to its traditional delivery
channels.
A second alternative is to establish a virtual, branchless, or
Internet-only bank. The computer server that lies at the heart of
a virtual bank may be housed in an office that serves as the legal
address of such a bank, or at some other location. Virtual banks
may offer their customers the ability to make deposits and
withdraw funds via automated teller machines (ATMs) or other
remote delivery channels owned by other institutions.
Banks use a variety of names for online banking services, such as
PC banking, home banking, electronic banking or Internet banking.
15
Can one imagine life without paper cash? Money has always been
part of human emotions. And although it is difficult to imagine that
all those years of savings at the bank is now just a whole bunch of
bits and bytes, it is becoming a reality and the sooner people adjust
to it, the better it is.
SERVICES OF E-BANKS
Internet banks offer a variety of features and perks, rushing to lure
online customers. The race is on to increase market share and
create customer loyalty with features that make online banking
friendlier, more useful, and less expensive. E-Banking lures
customers with convenience.
The three broad facilities that e-banking offers are:
Convenience
Complete
your
banking
at
your
convenience, in the comfort of your home or at any

place you can access the Net.
No more Qs - There are no queues at an online bank.
24/7 service - Bank online 24 hours a day, 7 days a
week and 52 weeks a year.
Below is a detailed review of features found in Internet banking
around the world.
Online applications
Consumers can begin their banking relationship with an online
application. No need to waste time driving to a local branch to
begin a banking relationship. Consumers can fill out and submit
electronically all necessary information needed to open a checking,
savings account or even a fixed deposit. When the application is
submitted, the bank will mail you a signature card for its records
16
and request you to mail or wire your initial funds. Some firms like
American Express and CompuBank enable customers applying for
an account to fund their new account electronically via a credit card
or cheque from another banking institution. There are some firms
such as Wingspan and USA BancShares.com that enable customers
to digitally sign their applications.
Account Access
Internet banking customers now have the ability to view their
accounts online, including checking, savings, loans and credit cards.
No need to wait for your monthly statements or wait in queue for
the next available customer service representative. Account access
enables customers to view most recent activity on accounts,
including cleared checks, deposits, ATM transactions and balances
as of previous days activities. Customers no longer have to hold on
to the cleared checks, since their bank will store them for them
online.
Account transfers
Internet banking customers have the ability to transfer funds to and
from their accounts online. With a simple online form, customers
can move money from a checking account to a savings account and
vice versa within the safety and convenience of their home without having to visit the ATM. Funds transferred online are
updated in less than three hours. In addition, customers can set up
recurring transfers to accounts. A recurring transfer will take place
on the customer specified date, with a specified amount.
Bill Payment
Online bill payment enables customers to pay anyone, friends or
family, as well as a pay their bills electronically. As an add on
feature to Internet banking, bill payment enables customers to send
paper checks to anyone or an electronic check to any institution
17
that accepts electronic bill payments. To use bill payment,
customers are required to set up their payees online. Customers
then have the ability to set up recurring, automatic payments to a
specific biller on a specified day or just a one-time payment.
Arrange payments three to five days, before the due date, to
ensure timely delivery. It is important to note that not all banks
provide bill payment as a free feature.
Benefits at participating online merchants

The banks partner with online merchants to offer discounts when a
purchase is made with the card.
24/7 customer service
Although it is easy to yield to the temptation of allowing the
Internet to replace expensive branch personnel and overhead,
many banks have found that an customer service staff ready at any
hour is well worth the expense. This can be especially true as
customers transition to online banking and need help learning the
features. Offering telephone and email contacts is a basic level of
service. Offering live chat assistance is the exceptional level.
Access to old transactions
Choices made in designing the Internet interface may include how
much history will be available online. Some banks have chosen to
show only 30-45 days, while others offer a history of six months or
a year.
Categorize transactions and produce reports
Functionality is king as online banking customers using these
features enjoy a Web interface that delivers the utility of a money
management software application.
18
Export your banking data
Most banks offering the management interface also allow easy
downloading of financial information into files that can be imported
into Microsoft Money and Intuit's Quicken.
Interactive guides & tools to help selection of proper
product
Although online, interactive guides through a bank's products, adds
complexity to the programming it also serves the bank by assisting
potential
customers
in
choosing
new
products
or
services.
Interactive Tools to design a savings plan, choose a mortgage,

obtain online insurance quotes all tied to applications.
Loan status and credit card account information
Bank customers are familiar with reviewing their
checking account information, but many banks are
adding the ability to look at one's loan
status and credit card information as well. Access to as
many accounts held at the bank seems to be the goal.
View digital copies of checks
This, again, is removing a down side to online banking. It makes
images of checks available as replacement for sending out
cancelled checks or sheets of printed check images.
Online forms for ordering checks, stop payment, etc.
Convenience is popular and if a customer visits his or her online
account frequently it only makes sense to allow the ability to
reorder checks or perform certain other commands through the
same interface.
These features and many others help customers save time, simplify
their lives and provide greater value than conventional banking.
19
ONLINE PAYMENT SYSTEMS

What is a Payment System?
Payment means the transfer of money.
In its simplest form, a
payment system is an agreed upon way to transfer value between a

buyer and a seller in a transaction. When coupled with rules and
procedures, the payment system provides an infrastructure for
transferring money from one entity in the economy to another.
Payment systems can be distinguished by the mechanisms used to
transfer value in an exchange of goods or services.
Electronic Payment Systems

Electronic payment systems exist in a variety of
forms,
which
can
be
divided
into
two
groups:
wholesale payment systems and retail payment

systems. Wholesale payment systems exist for nonconsumer transactions--transactions initiated among and between
banks, corporations, governments, and other financial service firms.
Retail electronic payment systems encompass those transactions
involving consumers. These transactions involve the use of such
payment mechanisms as credit cards, automated teller machines
(ATMs), debit cards, point-of-sale (POS) terminals, home banking,
and telephone bill-paying services.
20
Wholesale Payment Systems

Wholesale payment systems are also called Large Value Payment
Systems.
Large
value
funds
transfer
systems
are
usually
distinguished from retail funds transfer systems that handle a large

volume of payments of relatively low value. The average size of
transfers through large value funds transfer systems is substantial
and the transfers are typically more time critical.
There are two types of wholesale payment systems net
settlement systems and gross settlement systems. Large Value
funds transfer systems can also be classified according to the
timing (and frequency) of settlement. Systems can in principle be
grouped into two types - designated time (or deferred) settlement
systems
and
real-time
(or
continuous)
settlement
systems,
depending on whether they settle at pre specified points in time or

on a continuous basis.
Net Settlement Systems
In a net settlement system, the settlement of funds transfers occurs
on a net basis according to the rules and procedures of the system.
A participating bank's net position is calculated, on either a bilateral
or a multilateral basis, as the sum of the value of all the transfers it
has received up to a particular point in time minus the sum of the
value of all the transfers it has sent. The net position at the
settlement time, which can be a net credit or debit position, is
called the net settlement position.
Gross Settlement System
In a gross settlement system, on the other hand, the settlement of
funds occurs on a transaction by transaction basis, that is, without
netting debits against credits.
21
Designated Time Settlements
Designated time (or deferred) settlement system is one in which
final settlement occurs at one or more discrete, pre specified
settlement times during the processing day. Designated time
settlement systems in which final settlement takes place only once,
at the end of the processing day, are called end of day settlement
systems. Currently, net settlement systems for large value transfers
are typically end of day net settlement systems that settle the net
settlement positions by means of transfers of central bank money
from net debtors to net creditors.
In some countries, there are systems in which the final settlement
of transfers occurs at the end of the processing day without netting
the credit and debit positions - on a transaction by transaction basis
or on the basis of the aggregate credit and aggregate debit position
of each bank. Such systems are often called end of day gross
settlement systems.
Real time Settlement Systems
A real time (or continuous) settlement system is defined as a
system that can effect final settlement on a continuous basis during
the processing day. RTGS i.e. Real Time Gross Settlement systems,
as defined below, fall into this category.
Types of large value funds transfer system (Diag. 3)
Settlement
characteristics
Designated
time (deferred)
Gross
Net
Designated time
gross
settlement
22
Designated time net

settlement (DNS)
Real time gross
Continuous
settlement
(real time)
(Not applicable)*
(RTGS)
* By definition, netting involves the accumulation of a number

of transactions so that credits can be netted against debits and
this is incompatible with genuinely continuous settlement.
Retail Payment Systems

Retail payment systems are also called small value payment
systems.
An
important
emerging
mechanism
for
enabling
small-value
payment systems is electronic money. Electronic money is a

payment mechanism that is a direct substitute for traditional cash;
value is transferred electronically to pay for goods and services at
vending machines, retail establishments, over networks, or through
direct person-to-person exchanges.
Electronic money offers some features that make it an attractive
alternative over other payment mechanisms. Electronic money
does not have to be designed to faithfully emulate all the properties
of paper cash. It can be implemented to preclude some features of
paper cash, such as complete anonymity, while including other
desirable attributes
of paper cash, such as full divisibility,
assignment of limits and constraints, and links to the current owner.

The following are some types of electronic money available over
the net worldwide.
23
First Virtual
The account is set up by phone using a traditional credit card
number and a First Virtual account number is issued. Clients
provide their credit card numbers to First Virtual over the phone or
other non-Internet method, and are issued a personal account
number to make purchases over the Internet. This payment
mechanism allows the user to order goods online and then charges
the user's credit card company on behalf of the online merchant.
The merchant reports the transaction amount with the First Virtual
account number. First Virtual then confirms the purchase with the
customer via email. No special software is required for either
purchaser or merchant.
DigiCash
David Chaum, a mathematician and privacy expert, founded
DigiCash. This provider creates e-cash, proprietary electronic cash
tokens, which are marketed as being the equivalent of cash. An
account is established at a DigiCash-licensed bank with real money.
Once established, the customer can withdraw e-cash that is stored
on the user computer's hard drive. Using proprietary software, ecash can be spent with an Internet merchant or with anyone else
whose computer is set up to deal in e-cash. Using public-key
cryptography, the digital tokens are said to be secure and can be
registered and verified by the issuer without revealing to whom it
was originally issued. In effect, these digital cash transactions are
capable
of
confirmations
being
are
as
anonymous
necessary,
as
meaning
cash.
the
No
transaction
merchant
can
immediately ship the product.

CyberCash
This payment mechanism consists of a downloadable software
package using public-key encryption that is designed to assure the
24
security of credit card transactions over the Internet. The system
protects the customer's authentication data. An account is set up
and acts as an Internet front end to any existing credit card that is
designated. When a purchase is made, proprietary software is used
that sends the purchase and account information in encrypted form
to the account provider. The provider in turn sends the information
to the appropriate financial organization for processing.
NetCash
This concept is similar to e-cash, except that it does not require any
special software to use. NetCash is transmitted across the Internet
using an encryption scheme known as PGP (pretty good privacy). To
get NetCash, a party must send a check or money order to the
company's headquarters. The company returns electronic coupons
via e-mail.
NetChex
This payment mechanism is similar to CyberCash for checking
accounts.
Millicent
The Millicent method is developed by Digital Equipment Corporation
(DEC) to manage small and smallest payments (e.g. payment for
getting information from the Internet about news and stock
quotations or payment for small programs like Java-applets)
The customer buys a broker scrip with a defined value by using his
credit card or by debiting a suitable bank or broker account. Such
scrip is like a telephone card. At the time of purchase the customer
exchanges parts of the scrip into a dealer's scrip. This scrip is then
send to the dealer. The dealer collects all scrips and exchanges
them into "real" money.
25
Electronic Checking Accounts
Several organizations and coalitions of organizations have been
trying to create ways of using existing checking accounts over the
Internet. In most of those efforts, the consumer uses his or her
checking account with a bank or service and then draws down
those funds using special electronic checks and digital signatures.
Generally, those programs are not as close to a major commercial
introduction as are those based on credit cards or electronic scrip.
Many observers feel that electronic checks, despite a slow start,
could become a widely used method for making payments.
Credit Cards
The credit card is usually a four-party card which involves
two banks in each transaction, the cardholder's bank (the
issuer of the card) and the retailer's bank.
The retailer
hands over the credit card slips to its own bank for payment, less a
discount, typically about 2-3%. The retailer's bank then passes the
slips on to a clearing system. The clearing system presents each
slip for payment to the bank that issued the card on which it was
written. The issuing bank collects from the cardholder. All of these
exchanges are now done by wire.
Debit Cards
With a debit card, the payment comes right out of your checking
account. The card is issued by the entity that holds your money on
deposit, probably a bank, but possibly a money market fund. When
you present your card, money is transferred from your account to
the merchants account that day.
Stored Value Card Scheme or Smart Cards
Smart card technology represents a real change in how and where
information is processed. The smart card is a credit card-sized
payment mechanism with an integrated circuit chip embedded
within the card. The embedded chip enables the card to contain
26
significant amounts of data including prepaid stored value. The
embedded chip can also hold programs that interact with data
either contained on the chip or external to the chip. These
programs can be permanent and unchangeable or can be modified
when the card is connected to a network. Data can be stored,
updated, and retrieved both when the card is issued and
throughout its life. However, because of the embedded chip, the
smart card operates as a stand alone payment mechanism--in
effect, a direct substitute for cash--without requiring online network
connections. This stored value can be accessed and altered by
terminals at a merchant's establishment or at remote locations. A
consumer with a smart card can go to a bank or ATM and have the
card loaded with a certain amount of value. The consumer can then
proceed to make purchases, up to the amount of stored value, in
the same manner as if currency were being used. At each terminal,
the device reads the smart card to determine that there is sufficient
value available and deducts the amount of the transaction. When
the card's value has been exhausted, the consumer can return to
the bank or ATM to replenish the value.
The strength of this scheme is that it avoids the need to identify the
user and access the user's bank account or credit card in order to
verify funds availability because the only funds available are those
that are on the card. This eliminates the problem of retailers who
are reluctant to accept payment by check due to concerns about
funds availability.
Mondex
Mondex is owned by Master Card and National Westminster Bank of
London and is being tested in several countries. Mondex uses a
smart card to store electronic cash that can be used to pay for
goods and services in the same way as cash but with some key
benefits over traditional cash.
27
ONLINE SECURITY SYSTEMS

The concern of security remains the largest barrier to the growth of
online banking. Most people seem to believe that it is a hacker
jungle out there, and stay very wary of trying to simplify their lives
by using cyberspace.
Most institutions providing online banking services are very security
conscious. After all, they wouldnt want to open their computers to
a stampeding public, would they? The security measures that
organizations take over the Web are simply invincible, unlike the
surveillance cameras and lobby guards posted in many banks. If the
28
general public is not aware of, or does not understand, the many
features put into place to guard their finances, then people remain
skeptical.
Depending on how online accounts are accessed, security can be
guaranteed in a variety of ways. Moreover, when a bank offers
online service, it is not opening its mainframe computers to the
world. Usually, the bank installs a group of separate computers that
stand between the mainframe computer and the network that will
deliver data to your PC. At several points along the way, protection
is built in.
Some of the most common security features are firewalls, data
encryption, and passwords/personal identification numbers.
Firewalls
A firewall is a computer or software that protects the banks
computers and data from being accessed by any outsider. This
firewall is located at the point where the banks world connects with
the rest of the world. This firewall is basically a gatekeeper,
checking each attempt at delivery of data with a list of strict
specifications; any criteria not met; does not make it past the
firewall.
Public Key Infrastructure
Public key infrastructure can be defined as a solution to ensure
secure electronic business communication incorporating signatures
and encryption technology.
Every user in a PKI transaction owns a pair of keys: A public key
known to everybody and a private key known only to the owner.
The keys have 2 main characteristics. One, they are complimentary
sets of passwords. This means that a document encrypted by a
29
public key can only be decrypted by a private key and vice-versa.
Two, the keys are a unique pair.
Lets now see how PKI compares with existing security technologies.
Anti-virus is merely for integrity, Firewalls give authentications and
confidentiality, Access is similar to firewalls; encryption ensures
confidentiality. Thus PKI emerges as the only solution that
guarantees
all
the
four
pillars
of
security
and
trust
viz.
authentication, non-repudiation, integrity and confidentiality.

Encryption
Encryption is the process of converting information into a more
secure format for transmission. In other words the plain text is
converted to scrambled code while being transmitted, and then
decrypted back to plain text at the receiving end of the
transmission. It is comparable to writing a letter, converting it to
code, putting it in an envelope and mailing it with the recipient
descrambling the code.
Currently, there are 2 levels of encryption generally available in
web browsers: 40-bit encryption, and 128-bit encryption. Most
commonly available browsers use 40-bit encryption. However, the
128-bit browser offers the highest level of encryption and provides
the best protection when transmitting confidential data over the
Internet. The difference between these two types of encryption is
one of capability. 128-bit encryption is exponentially more powerful
than 40-bit encryption.
Digital Signatures
Digital
signatures
essentially
use
encryption
to
scramble
information in a way that only the party who issued the certificate
(usually the online store or a trusted third party) can decrypt and
read.
30
By using digital signatures, consumers are reassured that any

sensitive information they send across the Web, such as postal
addresses and credit card details, is protected from interception
along the way. Meanwhile, online merchants can be more confident
that the customer placing the purchasing order is indeed entitled to
use the payment card in question.
Security experts believe that
digital signatures will encourage more consumers to purchase

goods online.
Access Codes
The access codes used to identify you to the online banking system
are called passwords, and are further protected by using PINs
(Personal Identification Numbers).
ADVANTAGES OF E-BANKING
Consumers are embracing the many benefits of Internet banking.
The following are a few advantages that e-banking gives to
customers:
-
Consumers can use their computers and a telephone modem to
dial in from home or any site where they have access to a

computer.
-
The services are available seven days a week, 24 hours a day.
31
-
Transactions are executed and confirmed quickly, although not
instantaneously. Processing time is comparable to that of an ATM

transaction.
-
In general, the customer will find lower fees and higher interest
rates for deposits due to the reduced cost of operating online and
not needing numerous physical bank branches.
-
And
the
range
of
transactions
available
is
fairly
broad.
Customers can do everything from simply checking on an account

balance to applying for a mortgage.
-
The
interface
is
very
user-friendly
and
often
intuitive.
Additionally, business customers will most likely use the Internet for
more than cash management, and they will be accustomed to a
similar "look and feel" among all applications that they use.
DISADVANTAGES OF E-BANKING
The most obvious disadvantage is: Technophobes need not apply
i.e. if you are still not comfortable using a computer, e-banking is
not for you.
The other disadvantages are:
Switching software or banks can mean re-entry of data, although
Internet-based systems are less impacted by this. But competition
seems to be minimizing this problem. The personal finance
management software Microsoft Money enables users of competing
software to import data easily.
32
Like anything that deals with the transfer of large amounts of
money, security is a major factor of Online Banking. It is taken very
seriously during Online Banking procedures.
With a system as complex as Online Banking, some errors are
inevitable. i.e.: An interrupted online session; late arrival of
payments etc. A mistake made by either the user or the bank in
question, can affect both, causing problems. For Example: An
'Infinity' (ICICIs Online Banking Brand name) customer from
Bangalore (who did not want to be named) paid his cell phone bill
through the bank, only to receive another bill the following month,
with late fees. The amount had been debited from his account but
not passed on to the cellular operator.
When dealing with computers, there is always the concern of the
system crashing, viruses entering the system or a power cut. These
are larger problems and are not as easily solved. In all three cases,
many people would be affected, information may be lost and a
back-up plan would have to be initiated.
Need an account with an Internet Service Provider (ISP)
IS E-BANKING FOR YOU?
For months, you received mailers and statement inserts promoting
your banks Internet banking capabilities. You kept thinking to
yourself, "What does this do for me?" and "does it really work?"
Youre not alone. Millions of consumers across the country have
wrestled with the same questions. The following set of questions
will help a customer decide if e-banking is really beneficial to him.
Do you value your time? Traditional banks bind you to their
opening and closing times to do transactions. If you are often
33
stretched for time to do your banking, then you are an ideal
candidate to try banking online. You can do it at your convenience,
and at any time of the day.
Would you like to reduce your banking fees? What a question
to ask? But most people don't realize that on an average a checking
account costs hundreds of rupees per year, in transaction costs,
lower yields and ongoing fees. Many online banks now offer free
unlimited checking accounts.
Are you equipped to transact online? Do you have access to a
computer, have the devices to go online, and have an Internet
Service Provider (ISP) service. Since you intend to bank online,
access to such a computer is key to your ability to bank.
Are you comfortable with transacting online? If you are
already browsing online, you must be familiar with secure Internet
protocols that are used to transfer information over the Internet in
an encrypted fashion. Do you feel secure transferring or paying
money online?
How frequently do you go to your bank branch? If you rarely
need certified cheques, drafts and foreign exchange or many such
services that require use of bank tellers, then you may be better
served banking online. If your nearest bank branch is miles away,
then elect to try out banking online.
Do you get paid via direct deposit? If you do then you may be
able to get a very good deal from your online bank, many of whom
will waive charges if you get your pay deposited directly into your
bank account with them.
Do you mail a lot of cheques towards your bill payments?
Making cheque payments towards your bills costs not only postage,
34
but also valuable time. In addition, traditional banks will charge you
for every transaction. Using online banking you can pay your bills
online, often with the ability to make scheduled payments when
you want them -- very much like issuing a post-dated check. No
more delayed payments lost in the mail.
Do you use personal finance software? If you use Microsoft
Money 2000, or Quicken 2000 you will love banking online, since
these packages support banking online. You can download bank
statements directly from your bank's website. That makes the task
of maintaining records, and financial planning a lot easier.
Are you comfortable banking at an ATM (Automated Teller
Machine)? You may be one of those people who rarely need to go
to your bank branch because you are already 'ATM friendly'. Many
online banks offer you the ability to do your banking from ATMs
where you can deposit checks and withdraw money, and they offer
rebates on a limited number of transactions at ATMs.
Do you trade stocks online? Many online brokers are now
beginning to offer products similar to online banks. So if you do
already trade stocks online, consider moving your banking online
too, since many brokers may offer very attractive deals for your
banking business -- the objective is to keep your money within their
group.
PAYING SAFE
When you bank online, make sure your transactions
are
secure, your personal information is protected, and your fraud

sensors are sharpened. Although you can't control fraud or
35
deception on the Internet, you can take steps to recognize it, avoid
it, and report it. Here's how:
Use a secure browser - software that encrypts or scrambles the
purchase information you send over the Internet - to guard the
security of your online transactions. Most computers come with a
secure browser already installed. You also can download some
browsers for free over the Internet.
Keep records of your online transactions. Read your e-mail merchants may send you important information about your
purchases.
Be prompt about reviewing your monthly bank and credit card
statements for any billing errors or unauthorized purchases. Notify
your credit card issuer or bank immediately if your credit card or
checkbook is lost or stolen.
Read the policies of Web sites you visit - especially the
disclosures about a Web site's security, its refund and return
policies, and its privacy policy on collecting and using your personal
information. Some Web sites' disclosures are easier to find than
others are - look at the bottom of the home page, on order forms,
or in the "About" or "FAQs" section of a site. If you can't find a
privacy policy, consider shopping elsewhere.
Keep your personal information private. Don't disclose your
personal information - your address, telephone number, Social
Security number, or e-mail address - unless you know who's
collecting the information, why they're collecting it, and how they'll
use it.
36
Give payment information only to businesses you know and
trust, and only in appropriate places like order forms.
Never give your password to anyone online, even your Internet
service provider.
Evaluate The Site - Make sure the online banking site you are
considering has depth (many pages), and is well designed. Unless
you know a bank is legitimate, don't accept a poorly designed site
with broken images. If you are unsure as to whether a online bank
is legitimate look for a different bank.
Go to the bank, don't let the bank come to you - Don't accept
unsolicited email recommendations for online banks. You should
search for the bank; don't let a bank search for you. In this way you
won't be the victim of a web site masquerading as a bank when
they are not. In the past few years hackers have gotten email
addresses of customers of some financial service companies and
sent email to them inviting them to fraudulent sites in order to try
to get personal information from them. PayPal experienced this
problem, when con-artists sent a email asking consumer to go to
the web site to review a large payment in their account. They gave
the url of PayPa1.com instead of the correct url PayPal.com (They
substituted a 1 for the L). Know your banks online address and go
directly to it.
BENEFITS TO THE BANK

Why should a bank bank online? Advantages previously held by
large financial institutions have shrunk considerably. The Internet
has leveled the playing field and afforded open access to customers
37
in the global marketplace. Internet banking is a cost-effective
delivery channel for financial institutions.
The bank has an opportunity to generate revenue, decrease
operational and transactional costs, increase productivity, and
attract new customers.
Ability to increase Revenue
Financially, the bank can benefit a great deal from providing their
customers with an online banking service. The bank has the ability
to increase revenue by generating user and transaction fees for the
use of a bill payment product and has the option of charging an
account access fee for the use of the online system. Online banking
provides an excellent promotional opportunity to generate revenue
by helping the bank to cross-sell products such as credit cards,
loans, certificate of deposits, and other financial services.
Save Money
In addition to making money, the bank can save money with an
Internet banking system. Online banking can actually decrease
operating costs by reducing the daily reproduction and distribution
of
paper-drawn
transactions
and
delivering
and
processing
statements for accounts, credit cards, and bills. Performing

transactions via the Internet also provides cost savings, as
indicated by a study done by Booz, Allen & Hamilton that shows a
transaction over the phone costs $.54, at an ATM it costs $.27 and
via the Internet the cost is $.01. Using the Internet to perform
transactions greatly reduces the cost to the bank.
Improves Productivity
Internet
banking
improves
productivity
as
well.
Bank
representatives are able to process data more quickly and

efficiently; track account activity with automated reports, help
38
customers achieve daily tasks via the Internet, and reduce time
spent handling service problems. There can be a dramatic reduction
in the number of customer service calls, as some banks that are
providing this service has proven.
Marketing & Competitive Tool
Internet banking also offers the bank an exceptional marketing and
competitive tool. Large banks such as Nations Bank and Wells
Fargo, in the United States, have already capitalized on the Internet
as a mechanism to attract new customers. The majority of people
using the Internet are middle to high income and polls indicate that
50% of the people online are either in professional or managerial
positions. These people are also the ones who want to have the
convenience of online banking for home or business use. This is an
excellent opportunity for the community bank to keep their
hometown customers from looking to national institutions for an
online product.
Innumerable services are available via the Internet today. Internet
banking
provides
higher
level
of
convenience
that
both
commercial and retail customers desire to have. With this service,

the bank not only has the opportunity to manage their business
better, but can also help their customers achieve a much more
efficient process of managing their finances.
WINNING ONLINE STRATEGY
39
Perhaps most banks have already launched online banking, but
customers aren't exactly bringing down their Web server with a
heavy demand for the service. How do you successfully sell Internet
banking to your customers, and why might it be in your bank's best
interest to do so?
Here are four guiding principles that can help any bank construct a
winning online strategy:
Know thy customers (and what they want and need)
Before you construct your online offering, carefully assess your
customer base and its needs to determine whether
a) They want Internet banking;
b) They expect Internet banking; and
c) They would use Internet banking.
The only way you can meet their expectations is if you know what
their expectations are.
If you're inclined to believe your customers don't really want
Internet banking or are not "ready" for it, consider the "health club
effect." Numerous studies have shown that the existence of
workout facilities in a hotel can play a major role in a customer's
choice of one hotel over another, yet when it comes right down to
it, only a tiny percentage of guests actually utilize the exercise
rooms. Why would the availability of a service the customer will
probably never use influence his choice? It's all about options and
the warm fuzzy feeling a traveler has in knowing that if he should
awaken full of energy, with a desire to be proactive about his
health, the right equipment will be just a few steps away.
Just as the hotel guest entertains the fantasy of virtuous exercise
habits, so do some bank customers find comfort in knowing that if
they should decide to embrace the wired world, they will find the
40
Internet doors to their account information wide open. Don't
underestimate the impact of your online offerings on customers
that do not directly take advantage of them.
Choose your Internet banking solution provider(s) carefully.
Don't ride the wrong horse into the Internet banking arena. You run
the risk of ending up with a circus pony instead of a stallion. You
cannot stake your reputation on a company whose product is
unreliable or does not compare favorably to the competition.
Internet customers are notoriously demanding -- and critical. They
want service fast and they don't want a site that is lame.
Make sure the solution provider you choose can provide reliable and
dependable service. Downtime results in angry customers and
reduction
in
use.
Your
institution's
reputation
suffers
when
customers cannot reach your site. It's like having an "Out of Order"
sign on your ATM.
Before you make your choice of a software solution, arrange to
have a large number of your staff members try it out. Having
someone else give you a demonstration is not what I'm talking
about. I'm talking about having real people sit down under the
same sorts of conditions your customers will be using the product -at modem speeds, typically, with a wide range of computer types,
monitor settings and different browser versions. Rather than having
a vendor representative walk your employees through the process
of using the software, have the employees try to figure it out
themselves. Those are the conditions your customers will likely be
coping with. Figure out what other institutions have used the
vendors you're considering and open online accounts with them to
test drive the service under true market conditions, rather than
making a decision based upon demos alone.
41
WORLD SCENARIO
So the online revolution is upon us. It seems that everyone is taking

to the Internet. According to research done by CyberDialogue, there
were 53.5 million cybercitizens in 1999. Approximately 6.3 million
of these people were banking online in 1999, as well. This was up
from 6 million using online banking services in 1998.. The
International Data Corps research showed that 32 million users
would be using the Web to visit their bank by 2003. In any scenario,
a great majority of current users are aware of online banking, and a
large number of those people plan to begin using online banking in
the next 12 months.
A global survey by Cap Gemini Ernst and Young revealed that while
45 per cent of transactions are currently made via branches,
brokers or agencies, this is predicted to decrease drastically.
The experience of various countries, as far as e-banking is
concerned, is discussed here.
United States Of America
In the USA, the number of financial institutions and commercial
banks with transactional web sites is 1275 or 12% of all banks and
thrifts. Approximately 78% of all commercial banks with more than
$5 billion in assets, 43% of banks with $500 million to $5 billion in
assets, and 10% of banks under $500 million in assets have
transactional web-sites. Of the 1275-thrifts/commercial banks
offering transactional Internet banking, 7 could be considered
virtual banks. 10 traditional banks have established Internet
branches or divisions that operate under a unique brand name.
Internet transactions are expected to increase from 3% currently to
12%.
42
United Kingdom
Most
banks
in
U.K.
are
offering
transactional
services through a wider range of channels including

Wireless Application Protocol (WAP), mobile phone
and T.V. A number of non-banks have approached
the Financial Services Authority (FSA) about charters
for virtual banks or clicks and mortar operations. There is a move
towards banks establishing portals.
Sweden & Finland
Swedish and Finnish markets lead the world in terms of Internet
penetration and the range and quality of their online services.
Merita Nordbanken (MRB) leads in log-ins per month with 1.2
million Internet customers, and its penetration rate in Finland
(around 45%) is among the highest in the world for a bank of brick
and mortar origin. Standinaviska Easkilda Banken (SEB) was
Swedens first Internet bank, having gone on-line in December
1996. It has 1,000 corporate clients for its Trading Station an
Internet based trading mechanism for forex dealing, stock-index
futures
and
Swedish
treasury
bills
and
government
bonds.
Swedbank is another large-sized Internet bank. Almost all of the

approximately 150 banks operating in Norway had established net
banks.
Australia
Internet Banking in Australia is offered in two forms: web-based and
through the provision of proprietary software. Initial web-based
products have focused on personal banking whereas the provision
of proprietary software has been targeted at the business/corporate
sector. Most Australian-owned banks and some foreign subsidiaries
43
of banks have transactional or interactive web sites. Online banking
services range from Financial Institutions websites providing
information on financial products to enabling account management
and financial transactions. Customer service offered online includes
account
monitoring
(electronic
statements,
real-time
account
balances), account management (bill payments, funds transfers,

applying for products on-line) and financial transactions (securities
trading, foreign currency transactions). Electronic Bill Presentment
and Payment (EBPP) are at an early stage. Generally, there are no
virtual banks licensed to operate.
New Zealand
Major banks in New Zealand offer Internet banking service to
customers; operate as a division of the bank rather than as a
separate legal entity. Reserve Bank of New Zealand applies the
same approach to the regulation of both Internet banking activities
and traditional banking activities. There are however, banking
supervision regulations that apply only to Internet banking.
Supervision is based on public disclosure of information rather than
application of detailed prudential rules. These disclosure rules apply
to Internet banking activity also.
Singapore
The Monetary Authority of Singapore (MAS) has reviewed its current
framework
for
licensing,
and
for
prudential
regulation
and
supervision of banks, to ensure its relevance in the light of

developments in Internet banking, either as an additional channel
or in the form of a specialized division, or as stand-alone entities
(Internet Only Banks), owned either by existing banks or by new
players entering the banking industry. The existing policy of MAS
already allows all banks licensed in Singapore to use the Internet to
provide banking services. MAS is subjecting Internet banking,
44
including IOBs, to the same prudential standards as traditional
banking.
Hong Kong
There has been a spate of activity in Internet banking in Hong Kong.
Two virtual banks are being planned. It is estimated that almost
15% of transactions are processed on the Internet. During the first
quarter of 2000, seven banks have begun Internet services. Banks
are participating in strategic alliances for e-commerce ventures and
are forming alliances for Internet banking services delivered
through Jetco (a bank consortium operating an ATM network in
Hong Kong). A few banks have launched transactional mobile phone
banking earlier for retail customers.
Japan
Banks in Japan are increasingly focusing on e-banking
transactions with customers. Internet banking is an
important part of their strategy. While some banks
provide services such as inquiry, settlement, purchase
of financial products and loan application, others are looking at
setting up finance portals with non-finance business corporations.
45
THE ASIAN PERSPECTIVE

Will Internet banking ever take off in Asia? Although much of the
region is wired, obstacles remain. Customers are concerned about
security; the banking products available so far tend to be
unexciting; and in the wake of Asia's recent economic crisis, many
smaller banks have been preoccupied with the more urgent issue of
survival. But some evidence suggests that on-line banking will
succeed if the basic features, especially bill payment, are handled
correctly.
Meanwhile, human tellers and automated teller machines continue
to be the banking channels of choice, and only a tiny minority has
recourse to Internet banking. Among middle- and high-income
people questioned in a McKinsey survey, only 2.6 percent reported
banking over the Internet last year. In India, Indonesia, and
Thailand, the figure was as low as 1 percent; in Singapore and
South Korea, it ranged from 5 to 6 percent.
Overall, Internet banking accounted for fewer than 0.1 percent of
these customers' banking transactionsa figure unchanged from
1999. (By contrast, telephone transactions have doubled since
then, to 0.6 percent.) The Internet is used more often for opening
new accounts, but again the numbers are small: fewer than 0.3
percent of respondents used it for that purpose, except in China
and the Philippines, where the figures climbed to 0.7 and 1.0
percent, respectively.
Bankers can't blame limited access to the Internet for the slow
uptake: 42 percent of respondents said that they had access to
46
computers and 7 percent to the Internet. The chief problem in Asia
and throughout emerging markets is security, which more than half
of the respondents reported as their main reason for declining to
open on-line banking or investment accounts. Respondents also
said that they preferred to have personal contact with their banks.
Access to high-quality products is an issue as well. Most banks in
Asia are only beginning to offer Internet banking services, and
many of the services are basic compared with those available in
other parts of the world. Citibank, which has marketed a range of
Internet banking products in the United States for years, didn't add
bill payment to its Hong Kong service until last yearand even
then, for only 11 companies.
Nonetheless, Internet banking appears to have a future in Asia.
When the responses to the McKinsey survey were analysed, the
following three segments were uncovered:
1. Lead users: In the group studied, 38 percent of the respondents
said that they intended to open an on-line account in the near
future. These lead users undertake one-third more transactions a
month than do other users and tend to employ all banking channels
more often.
2. Followers: The responses of an additional 20 percent suggested
that they would eventually open an on-line account, especially if
their primary institution offered it and there were no bank charges.
3. Rejecters: Only 42 percent showed little interest in or an
aversion to Internet banking. These respondents also had a
preference for consolidation and simplicitythat is, for owning
fewer
banking
products
and
dealing
institutions.
47
with
fewer
financial
Conducting complex activitiesfor instance, trading securities or
applying for insurance, credit cards, and loansover the Internet
appealed to no more than 13 percent of the lead users and the
followers. One-third of the lead users and the followers preferred to
undertake basic functions, such as ascertaining account balances
and transferring money between accounts, over the Internet. Some
of these basics are hard to supply, however. Bill payment, for
example, was the most popular feature, cited by 40 percent of
respondents, but the service is difficult for banks to provide
because it requires a high level of security and involves arranging
transactions with a variety of players.
Functions Preferred by Asian Users (Diag. 4)
48
THE INDIAN PERSPECTIVE

The experiences of the west are the clear indicators that Internet
Banking is not far off for India. The Internet usage, combined with
aggressive moves by new Internet players in this highly fragmented
industry will have profound effects on financial services.
But are the Indian banks ready for this sudden change? Where do
we stand as of today? Would future be as diverse as today or would
traditional
banks
painfully
lose
incremental
revenue
growth
opportunities to a host of aggressive players that may rapidly

consolidate the new revenue opportunities in the business. And
what exactly do the banks need to do to meet the challenges of
Banking Business without Barriers. Lets try and find out.
Internet Banking Scenario
The lead in Internet banking in India has been taken by the new
private sector banks and foreign banks, and the four banks which
offer Internet banking facilities in a significant way are ICICI Bank ,
HDFC Bank, Citibank and Global Trust Bank. Banks like UTI Bank,
IndusInd, SBI also offer net banking facilities in a limited way.
( - Annexure I)
( - Annexure II)
The current base of online banking customers has been estimated
at 4.2 Lakhs, which is 8.7% of the overall Internet user base. The
user base as of December 2002 has been estimated under
alternative scenarios: The conservative scenario puts the user base
as of 31st December, 2002 at 41.0 Lakhs (14.7% of the Internet user
49
base), while the more optimistic forecast puts the user base at 73.0
Lakhs with an overall penetration of 26.2%. ICICI, HDFC and
Citibank have emerged as the early leaders in online banking, with
ICICI being the clear leader.
Research revealed that close to 40% of adult Internet users have
accounts with one of the four major Internet banks offline. However,
only 10.8% of adult Internet users are banking online.
In terms of activities, there is still a reluctance to actually conduct
financial transfers online, and the bulk of online banking activity is
restricted to checking balances and statements online. Barely 30%
of online bankers have paid bills online or transferred funds online.
Specific aspects of the Indian banking scenario which are pertinent
to note are:
The low ATM penetration
A regulatory framework which is not conducive to net only banks
The relative lack of inter branch networking and e-readiness of
major public sector banks, which control a bulk of the deposit and
branch network base
The relative nascence of the Internet itself
The entry of many new players
The recent IT Act which accepts the legal validity of digital
signatures
Plans of Indian public sector banks to provide e banking services
by 2002
The rapid growth of the Internet
The last 4 points from entry of new players to rapid growth are
factors, which should enable the growth of online banking in India.
50
INTERNET USAGE IN INDIA
It is necessary to discuss the Internet usage pattern in India and to
see the growth to make a case for e-banking in India.
According to eMarketer, India has roughly 1.8 million active Internet
users (in the year 2000). This number, however, is set to grow as
Internet connections become more prevalent throughout the
country. One thing we must address is the fact that the country's
income distribution is highly unequal, thus only a small fraction of
the population can be considered a target for potential Internet use.
This
part
of
the
population,
however,
is
well-educated,
cosmopolitan, media-savvy and is an early adopter of new

electronic devices and new technology.
Internet Usage Statistics In India (Diag. 5)
Internet usage in India tends to follow the same pattern as other

developing nations, with a majority of users being young and male.
They also tend to be more educated. It is seen worldwide that
internet banking is mostly used by people between the age 24 40.
It is also seen that most internet banking usage is by male
51
population. Thus, the next two diagrams show that Internet banking
in India is here at the right time.
Age Breakdown of Users in India (Diag. 6)
Online Gender Divide in India (Diag. 7)
Cybercafes are popular gathering places among young, novice

Indian internet users. The popularity of these cybercafs is playing
a major part in fuelling the internet development in India. The cafes
provide easy entry points for novice users. In a new study, internet
research firm NetSense found that almost 40% of the users
accessing the internet via cybercafs have less than one year of
surfing experience.
Overall, one can make the following comments about internet
usage in India.
Cybercafes in India play a critical role in introducing new users to
the
internet.
Over
time,
however,
52
as
users
become
more
comfortable with the internet, they tend to access the internet
more from home.
Indian users show stronger preferences for e-mail and web
surfing than shopping. Their hesitancy to shop online could stem
from two major factors:
1. Shopping tends to be an enjoyable family activity; shopping
online is too impersonal.
2. Indians fears of using credit cards online are preventing
business-to-consumer activities from proliferating.
In terms of SEC
- 52 % of users are from SEC A
- 25 % from SEC B
- C contributes 17 % with the rest scattered in D & E
The majority of Internet users use it for e-mail.
The phenomena is mainly attributed to the top 7 metros i.e.
Mumbai, Delhi, Calcutta, Chennai, Bangalore,
Internet in India is still in infancy.
As of December 2000, there was a PC base of 5 million PCs. Out
of these, there were more than 3.7 million machines that had
Pentium I and above processors (i.e. machines which could be
effectively used for Internet).
The prognostications for the future reveal a potential Internet
access figure of a mammoth 50 million, by December 31, 2003.
53
Growth in Internet Subscribers in India (Diag. 8)
While current Internet statistics at first glance might appear a bit

modest (we're still lagging behind stalwarts China, Japan and
Taiwan), they do represent a gradual quickening in the pace of our
grand Internet marathon.
Crystal ball gazing by Nasscom has unveiled an even more
impressive Internet usage scenario. The survey has revealed that
there is still a current pending demand of an additional one million
Internet connections at current cost considerations. The good news
is that with improvements in bandwidth and penetration of Internet
through PCs as well as cable TV, the Internet user base in India will
expand by leaps and bounds.
In fact, by the end of 12 months, India should have Internet through
the cable reaching at least 16 key cities across the country.
The cable route in fact is being touted as a
significant pathway for the proliferation of the
Internet in India. India already boasts of 37 million
cable connections (expected to jump to 100 million by 2008),
which could additionally be converted into Internet connections.
54
The Internet and PC penetration is increasing by leaps and bounds.
Therefore, we see that everything points towards success of Ebanking in India.
RBI INITIATIVES
INFINET
Information technology and the communication networking systems
have a crucial bearing on the efficiency of money, capital and
foreign exchange markets and have manifold implications for the
conduct of monetary policy. In India, banks as well as other financial
entities have entered the world of information technology and
computer networking with INFINET.
The Indian Financial Network (INFINET), a wide area satellite based
network using VSAT technology, was jointly set up by the Reserve
Bank and Institute for Development and Research in Banking
Technology (IDRBT) at Hyderabad to facilitate connectivity within
the financial sector. The network was inaugurated in June 1999.
The INFINET was planned to cover, in a phased manner, 100
commercially important centres and serve as the communication
backbone of the proposed Integrated Payment and Settlement
System (IPSS).
The Indian Financial Network (INFINET), which initially comprised
only the public sector banks, was opened up for participation by
other categories of members. 26 public sector banks achieved the
level of 70 per cent of business captured through computerisation
by June 2001.
Banks and financial institutions had taken a decision to adopt
SWIFT. -like message formats for putting all their funds based
applications on the Internet. This initiative would not only help
55
standardisation in banks but would as well help cross border
Straight Through Processing so as to ultimately integrate our
financial system with other cross border financial systems.
( - Annexure III)
Committees
Rangarajan Committee ( I )
In the early 80s, a high level committee was formed
under the chairmanship of Dr. C Rangarajan,
then Governor of the Reserve Bank of India, to
draw up a phased plan for computerisation
and mechanisation in the Banking Industry over a five year time
frame of 1985-89. The focus by this time (justifiably) was on
customer service and two models of branch automation were
developed and implemented
front office mechanisation where front desk operations were
computerised while back office work was done manually and
back office automation covering mechanisation of General
Ledger and back office operations while the front office work was
done manually;
Both the models provided the customer with error-free accounting,
regular statements of accounts etc. Considering the contemporary
level of computerisation, these were major achievements but did
not go far enough and the pace of their implementation was tardy,
to say the least, with not a little opposition from trade unions.
Rangarajan Committee ( II )
56
Having gained experience in the earlier mode of computerisation,
the second Rangarajan Committee constituted in 1988 drew up a
detailed perspective plan for computerisation of in Banks and for
extension of automation to other areas like funds transfer,
electronic mail, BANKNET, SWIFT, ATMs etc.
Around 2000 to 2500 large branches located at high activity
(urban and metropolitan) centres to be fully computerised
Regional Offices / Zonal Offices/Head Offices
Inter- and intra bank transactions using the BANKNET set up by
the RBI; and
Installation of a network of cash dispensers / ATMs at strategic
locations such as airports/railway stations etc., on a shared basis by
banks.
The Committee also made studied recommendations on the 'Single
Window Concept; 'all bank credit cards', credit clearing/GIRO
system, office automation, etc. In fact this report was the most
comprehensive road map for Bank Automation considering the
state of the technology at that time.
Vasudevan Committee
To further upgrade the existing technology in the banking sector
and also to suggest measures for implementation, the Reserve
Bank appointed a "Committee on Technology Upgradation in the
Banking Sector". The Committee in its Report, submitted in July
1999, recommended a new legislation on Electronic-funds-transfer
system to facilitate multiple payment systems to be set up by
banks and financial institutions.
( - Annexure IV)
Law
The Information Technology Act, 2000 has given legal
recognition to creation, transmission and retention of an
electronic (or magnetic) data to be treated as valid
proof in a court of law, except in those areas, which
57
continue to be governed by the provisions of the Negotiable
Instruments Act, 1881.
Payment System Legislation in the form of amendments to various
Acts as also the need for framing new legislation for the regulation
of multiple electronic payments is under consideration of RBI.
Several measures to ensure the authenticity of the message across
the Internet have been suggested by the Working Group on Internet
Banking.
RBI has also laid down guidelines for electronic banking.
( - Annexure V)
Electronic Payment Mechanisms
With the advancement of technology, new delivery mechanisms
have been introduced in the financial markets, giving rise to
potential risks. These risks have to be tackled. This calls for
modernisation of Payment Systems to increase efficiency and
reduce risk.
In order to improve payment flows, the RBI has been taking
measures with the employment of appropriate technology from
time to time. The bank has put in the following solutions (managed
by RBI, SBI and the nationalised banks) in this regard:
Mechanised clearing of cheques using MICR technology first at
Metros managed by RBI and subsequently at other centres
managed by some public sector banks.
Inter-city clearing among MICR centres at the 4 Metros (two-way)
and other offices of RBI with these four Metros under one-way intercity clearing.
Regional
Grid
Clearing
connecting
important
commercial
centres/district headquarters in a region to the nearest MICR centre

under one way clearing.
58
Electronic Clearing Services (Debit, Credit, RAPID) for clearing of
bulk
payments like dividend warrants, utility payments like
electricity bills, etc.

Floppy input-based clearing.
High-value clearing (floppy based)
Lack of a reliable communication infrastructure in our country
hampered modernisation of payment systems and consequently
clearing and payment instructions, which are of non-local nature
takes unduly long time. With INFINET, the RBI VSAT network for
banks this bottleneck maybe removed and steps are being initiated
to use INFINET to improve the payment flows. It has been decided
to consolidate on the steps already taken and leapfrog in areas like
Real Time Gross Settlement (RTGS) System and graduate to an
integrated national payments system in the long run. As a step
towards achieving this, pilots have been started for implementing
Electronic Data Interchange in major sectors.
RTGS
RBI has initiated measures to set up a Large Value Funds Transfer
and Settlement System on a Real Time Basis (or Real Time Gross
Settlement System). Such a system will be extremely critical in the
development of a stable and efficient financial infrastructure.
The RTGS architecture would consist for an Apex Level Server that
would have a persistent queuing system to receive the messages
and execute instructions subject to specified fulfillment conditions.
This would connect through a network to various Bank Level
Servers for the member banks. These bank level servers would be
connected to their branches through the VSAT network.
The RTGS will provide the infrastructure for a real time nationwide
dynamic funds management by the user institutions. Such a system
59
has the potential for integrating the money markets and security
markets across the country. The potential volume, nature and type
of transactions that are likely to flow through the above network
may relate to forex, money market securities, inter bank claims,
large corporate flows etc.
Electronic Fund Transfer

T
his is a system that IBA offers that is better-applied and

waiting for appreciation. EFT is probably the safest and
fastest way to transfer money from your account to
another individual in another city regardless of which
bank she uses.

All the transferor needs is her account number. A maximum of
Rs0.1mn can be transferred for a flat fee of Rs25. The bank has
discretionary powers to raise the limit for select customers. Or a
customer can break up the transactions in to multiples of upto
Rs0.1mn. The money sent is credited overnight and can be
withdrawn by the receiver the day after transfer.
The hitch, it is not well known and secondly, the facility is only
available in the four metros! Plus, money sent from abroad cannot
be transferred through EFT.
Disclosing other advantages of the EFT, an official of the IBA's
department of information technology, says, "The facility can be
availed of even if the branch from where you are sending the
amount is not fully computerized. The details of the transfer have
to be sent to the RBI which in turn notifies the receiving bank to
credit the individual with the mentioned amount."
60
Electronic Clearing Systems

Never mind the vagaries of the stock market. For those who are and
will always make equity investments a way of life the ECS has made
that life a lot easier as far as dividend payments go. All a person
has to do is provide the company with details about the bank where
the deposits should be made. The firm can then directly deposit the
dividends into the shareholder's account. The maximum that a
company can deposit is Rs0.1mn, though here too, the bank has
the discretion to raise that ceiling.
Dividends, Interest on Bonds/Debentures, Salary, Pension, etc can
now be credited directly to the beneficiaries bank accounts through
ECS (CREDIT) services. Similarly, you can make payments of
Telephone Bills, Electricity Charges, School Fees, Credit Card Dues,
Tax Payments etc. using ECS(DEBIT) services.
Apart from being a free service, from four metros the facility can
now be availed of in 15 cities (those that have regional RBI offices)
including Ahmedabad, Pune, Thiruvananthapuram and Nashik.
SWADHAN - Shared Payment Network System (SPNS)
To provide anytime, anywhere banking, in consonanace with the
views of the Managing Committee , IBA (Indian Banks Association)
set up a network of ATMs in Mumbai.
SPNS as envisaged by the IBA is a large network of ATMs, Cash
Dispensers spread originally over the city of Mumbai, Vashi and
Thane connected to a central host. Today, the network has
expanded to connect ATMs all over India. The banks which
participate in this network would issue cards to the customers for
transacting on this network.
61
The objective behind forming the Shared Payment Network System
is to provide 24 hours, 365 days/year electronic banking service to
the customer anywhere in the country through state of the art
electronic
fund
transfer
system
to
be
shared
by
different
participating banks. The SWADHAN-SPNS project is the first of its

kind in India. The SWADHAN-SPNS went on live on 1st February,
1997 with 4 ATMs of 4 Banks. Currently there are 350 ATMs of 36
banks connected to the network. (i.e. as on December 15th, 2000)
Shared Payment Network System would be capable to offer the
following services:
Cash Transactions, Extended hours service, Across the bank
payments, Utility payments, Balance enquiry, Printing of statement
of accounts, Cheque Deposit, Request for Cheque book Standing
Instructions and Statement of account, Point of Sale (EFT/POS)
facilities
Advantages of SPNS:
Cash holding at home can be reduced.
Direct improvement in customer services.
Benefits of standardization.
Cost of service is minimized.
Improved centralized control ensures ongoing compatibility with
national and international standards and systems.
Easier
technology
absorption
and
building
the
base
for
indigenous development capability.

Under SWADHAN, a member bank enjoys the benefit of maximum
ATMs with minimum investment. Also each member bank earns
revenue in the form of acquiring transaction of other banks card
62
holders. Anytime banking and anywhere banking became a reality
under the SWADHAN-SPNS.
What is SWADHAN ? SWADHAN is a registered trademark for
electronic
banking services, owned by Indian Banks' Association, on behalf of
its members and only institutions which are members of the
SWADHAN-Shared Payment Network System are permitted to use it.
Benefits to Customers :
Easy access to cash, Day & Night, on Weekends/Holidays.
Fast Service. No need to wait in queues.
Convenience of Location : ATMs can be placed in any convenient
location in the city.
Privacy in transaction.
Free from errors.
Flexibility in withdrawals.
Less crowding at Bank Counters.
24 hours, 365 days service.
Benefits to Banks :
Increases market penetration.
Provides an alternative to extended hours.
Debit/Smart Cards
RBI has issued guidelines to the banks for issuing debit
cards
and
smart
cards
as
alternative
payment
instruments to ease pressure on physical cash.

Debit cards are plastic cards issued by banks to customers who
could use them for paying for their purchases at specified Point of
63
Sales terminals. The cards facilitate
the customers to effect the
transactions on their own accounts remotely.

Smart card has an integrated circuit with a microchip embedded in
it so that it could perform calculations, maintain records, act as
electronic
purse.
The
cards
can
either
be
exhaustible
or
rechargeable.
The RBI guidelines issued include criteria on the eligibility of
customers to whom the cards can be issued, payment of interest on
the balances transferred to the smart/debit cards, treatment of
liability
in
respect
of
outstanding/unspent
balances
on
the
smart/debit cards, security aspects and other terms and conditions

for issue of these cards by the banks.
CHALLENGES FOR INDIAN E-BANKS

The challenges that Indian banks are facing are:
1. How to manage multiple distribution channels?
Internet banking is bound to become the most important channel in
next few years. Even the traditional banking would move towards
Internet technology with open standards and low cost. Although all
traditional channels would not die down in a day and success would
depend on how the banks generate synergy in these two vastly
different channels. The services provided in all types of distribution
channels must be in tandem with each other and must be in
synergy.
64
2. How to address the issue of internationalization i.e. how to take

in and make e-banking an integral part of one's attitudes or beliefs?
The real challenge for Internet banking is to penetrate the customer
base of banks. According to IDBI Banks head (e-commerce and new
product initiatives) J Venkataramanan, the maximum usage of
Internet banking is for accessing account balances and making bill
payments. For most customers, there's nothing more reassuring
than watching their cheques getting credit on a paper ledger. Then,
there is the question of how real is real time. For instance, while
you can requisition for, say, a new set of cheques any time of the
day, the request will get processed only during the banking hours.
Perhaps, the biggest of all concerns for e-banking customers is the
security issue. People still aren't comfortable having information
about their life's hard-earned money saved on a server they don't
know about. A physical pass-book is still preferred. While e-bankers
use multiple firewalls, filtering routers, 128-bit encryption and
digital certification for safe and confidential transactions, there are
still chances of a snafu.
Another problem is that an on-line service that merely mimics an
off-line one doesn't give customers an adequate inducement to
move a significant portion of their banking on-line. As a result, most
customers tend to treat on-line banking as no more than an extra
channel to check their balances and transaction histories, and they
continue to do the rest of their business at the ATM or the teller
window. A vicious cycle ensues.
Also, there is no more security and customer loyalty. With Internet,
the gateway to low cost international expansion around, tackling
the virtual competition would be a key. Competition is just a click
65
away. Customers would be loyal as long as the rates offered are
competitive.
At the same time, banks would have to manage different product
portfolios, at different yet competitive prices to different corporates
across the world.
The issue of offering services in multiple
geographies / customers due to increased global access and

competition may ask for new virtual alliances between small local
banks and the global players.
3. How to address the emergence of value-focused specialist
competitors that are competing for specific value components
currently dominated by banks and now are increasingly gaining
access to the banks customers?
The real trouble is that Internet Bank doesnt really need to be a
bank. It can
even be a group of innovative persons with no bank branch at all,
just working
through alliances and leading the field because of their superior
capabilities
through focus and innovation advantage.
The entry of multiple non financial institutions and other nontraditional players would just fasten this whole process. E.g. Times
Bank and IDBI Bank.
STRATEGY FOR INDIAN BANKS
Internet banking would drive us into an age of creative destruction
due to non-physical exchange, complete transparency giving rise to
perfectly electronic market place and customer supremacy. The
question to be asked right now is "What the Indian Banks should
do"?
66
Most banks today are pursuing what might be described as a

fortress strategy, defending themselves against new entrants
while waiting for more clarity in the online world.
The fortress
strategy has the benefit of relying on traditional sources of

advantage; it plays to the strengths of current legacy banks. The
risk, of course, is that these sources of advantage may not be
enough to keep out new entrants that rely on a totally different
business model.
Banks must today at least hedge by experimenting with the web
business model. But it calls for profound organizational changes if
it
is
to
be
executed
successfully.
It
needs
the
banks
to
fundamentally re-assess their opportunities for adding value and

hence re-define their roles in the new paradigm.
Banks must first determine what kind of web to target. Customer
webs focus on maximizing a banks share of wallet of a target
customer segment while Market webs seek to aggregate a critical
mass of buyers and sellers within one transaction category.
Within any web that it might target, there are a number of possible
roles a bank could play. Web shapers are the one or two companies
that own a shaping platform, take initiative to mobilize other
companies around it, and define a set of standard practices or
policies to coordinate participants activities. Banks that choose not
to be Web shaper would be adapters and would need to define a
clear niche that will help them differentiate themselves from other
participants.
Some adapters may become influencers, working
closely with shapers to ensure the overall success of their web.

Indian banks still have a few important lessons in customer service
that they would do well to pay heed to.
67
Customer Relationship
Banks and other financial institutions cannot go completely virtual they need physical branches after all. This is probably one area
where Internet banking in India scores over the 'stand alone'
Internet banks of the West. Several Internet banks like E-trade have
acquired ATM networks like Card Capture Services to offer
consumers a way to deposit and access their money through ATMs.
Physical branches help forge a 'relationship' with the customer that
a virtual bank cannot. Although most online consumers utilise
account tracking, bill pay and e-shopping, they would prefer direct,
personal contact with their banker when shopping for financial
products.
Personalisation
Banking solutions become truly personalised when they are able to
respond to the changing customer needs, and this is possible using
strong data mining and target marketing capabilities.
For example, software that might tell you which credit card balance
to pay off first, or alert you in advance when your cheque will
bounce. This level of personalisation is still lacking in the banking
solutions offered by Indian banks.
Integration
Another important aspect is integrating customer service interfaces
and channels, so that the customer deals with a single channel that
caters to diverse needs such as kiosks, ATMs, Web TV, mobile
phones, pagers, and branch counters. Banks have to get their acts
together. If the SmartCards, and the Online Banking, and the ATM's,
68
and the Branches don't work together, there's no real benefit in
having the electronic tools.
Customers shouldn't have to go to one site to just pay their utility
bill and phone bill and then have to go offline to pay their cable and
credit card bills. They should be able to check the value of their
investment portfolio, updated daily, in their personal balance sheet,
include all their other assets and other personal finance.
Banks must learn to aggregate their customers' different on-line
financial-services relationships. The purpose of aggregation is not
to engage in blatant cross-selling or to achieve "100 percent share
of wallet" but rather to develop a picture of the consumer's entire
balance sheet. Any institution that gains such a view can provide
superior convenience and advice.
Banks need to be 'one-stop shops' for an entire range of personal
finance products- from loans and insurance to mutual funds and
even tax-saving instruments. This is being done by 'account
aggregators' such as Yodlee, Corillian, eBalance and VerticalOne
that let you log in to one Web site, enter your username and
password, and track information as diverse as bank and credit-card
balances, value of investments, and frequent-flier miles from
several sites, each of which has its own username and password.
Innovation
Today's value-added product could easily be tomorrow's commodity.
That is why banks would need to depend more on product
innovation, expanding the range of their products and service
offerings. Apart from just online accounts, e-banks would need to
tailor specific products for the Internet, like online bill presentment
or credit cards with instant online approval. Many Internet banks
like Egg have taken the lead in offering innovative products like Egg
69
card - a credit card that features an introductory zero-percent
interest rate.
Migrate old customers and go after new ones
In building an on-line business, a bank's off-line customer base is a
huge asset, for it will be harder for competitors to pick off the
bank's current customers than for the banks to get them on-line.
But to do so, banks must make one-time offers and then constantly
provide incentives such as free services (for example, bill payment
and on-line trades) for increased balances.
Banks must also move swiftly to acquire new on-line customers.
Most of the early attempts to do so, carried out in partnership with
Internet portals, have flopped-largely because the banks failed to
offer any differentiation in pricing or any other very compelling lure.
Yet here, too, banks have an advantage. Despite significant
increases
in
revenue
from
on-line
relationships,
credit
card
companies and brokerage firms have spent so much money

building their on-line customer base that some would question
whether they will ever profit from these efforts. Most banks already
have a powerful retail distribution network that should allow them
both to migrate their customers and to acquire new ones at much
lower cost.
Banks will have to reinvent their role and the way they deliver
value-leveraging new technology as well as their existing assets-to
remain their customers' financial institution of choice.
WHERE IS E-BANKING IN INDIA HEADED?

There will be a large-scale shift to online banking in the next
decade as banks go the extra mile in technology developments to
70
keep up with the competition It is believed the low transaction cost
will make banking on the Net irresistible, but also that this will
require institutions to carefully consider and plan customer relations
programs.
It is believed that everything will be determined by content and
context, and where execution will be key. From a customer and
service provider perspective, this is where the world is moving-it is
going to be real-time, on-line, personalisation for both marketing
and the service experience. If existing banks don't want to
disappear, it is this challenge that they need to embrace in order to
win and survive.
Internet usage is expected to grow with cheaper bandwidth cost.
The Department of Telecommunications (DoT) is moving fast to
make available additional bandwidth, with the result that Internet
access will become much faster in the future. This is expected to
give a fillip to Internet banking in India.
The setting up of a Credit Information Bureau for collecting and
sharing credit information on borrowers of lending institutions
online
would
give
fillip
to
electronic
banking.
The
recommendations of the Vasudevan Committee on Technological Up

gradation of Banks in India have also been circulated to banks for
implementation. In this background, banks are moving in for
technological up gradation on a large scale. Internet banking is
expected to get a boost from such developments.
Other major
developments will be:
Inter Bank Fund Transfers

Today, e-banking operations mainly consist of providing information
viz. requesting check books, statements, fund transfer, even online
71
share trading (with reference to a particular branch) but the next
two or three years are likely to see a huge change in the entire
banking value chain. It would be possible to process any inquiry or
transaction online without any reference to the branch at any time
rather like 'anywhere banking' - a service already being offered by
HDFC, ICICI and Citibank.
Interbank fund transfers between different banks is a feature that is
not offered by any of the e-banking services in India. "At present,
we have no plans to offer third-party transfer outside the bank.
Globally, this is not allowed due to security reasons. Also, the other
banks also have to allow transfer/debit of funds into/out of their
NetBanking system. According to HDFC, the RBI needs to set up a
clearinghouse to route these transfers, and thus enable such
transactions.
M-Banking
Today, with mobile being the 'in-thing', banks are not far behind to
position themselves for this new medium to ring in customers and
convenience. Most of them are talking about helping people access
information of their accounts and even do transactions while on the
move-calling this M-banking (mobile banking).
Almost all major banks have SMS-enabled mobile banking. The use
of WAP-based applications for Internet banking is an increasing
trend especially in the Asia Pacific region, though it doesn't seem
likely that it will catch on in India given the miniscule populace of
WAP-enabled phone users.
"We have plans to offer WAP-enabled FedNet soon" says Nair of
Federal Bank. "WAP-enabled banking will become popular and
affordable to a larger number of users if the cost of the devices
drop and airtime tariff come down."
72
Account Aggregation
A new wave called 'Account Aggregation' is slowly sweeping
through the online banking/brokerage industry. Account aggregation
-- or account consolidation -- provides consumers with the ability to
access the information about all of their financial transactions
sourced from different web sites, at a single web site.
Now you can obtain updates of all of your investments (from banks,
mutual funds, online brokers), and liabilities (car loans, credit card
loans, bank loans) at a single point. That way you don't need to
remember multiple login IDs, and passwords, and also don't need to
consolidate this information yourself. Further, at the same site you
shall be able to get 'payment due' reminders, online payment
services and even query your transactions to find, say how much
you spent on entertainment last year. They could also provide you
with e-mail, book your airline tickets and more.
True Relationship Banking
The future will provide the bank with the ability to allow account
access and control privileges at the customer level. This means that
all accounts in a relationship will be accessible via the Internet
while only a subset of these accounts will be viewable and
accessible for a third party (such as son or daughter who is away at
school). It allows your tax consultant to view accounts in your
relationship pertinent to performing their service. And, business
customers will see their entire commercial relationship bank.
Integration
73
Service Providers will integrate and market their offerings across
different channels. The strategic and executional battles of the
future are going to be fought for Channel Integration.
The beauty of integration is that one channel does not displace
another. They feed on each other to create incremental value for
the customer, as well as the institution. The incremental value
comes from two distinct sources. Firstly, you reduce inefficiencies.
You don't send people junk mail because you know that they are
not likely to buy a particular product or service today. That results
in net saving for the economy. Secondly, you persuade people at
the right time (the right time from the customer's perspective, not
from the service provider's perspective) to opt for a tailor made
offering. This too increases value. Actually, this has to do with the
Internet itself, and more to with the underlying technologies of the
Internet which allow incremental efficiency, and empowers the
customer to make more enlightened and timely choices.
Transfer funds to other HSBC accounts, order drafts to be couriered

to over 200 locations absolutely FREE, pay your bills online, check
account information, view your statement on the net stop
payments, order cheque books and more!
An interview with the Mr.Rakesh Shetty, Vice President,
Information Technology, India Area Management Office.
(HSBC BANK)
Why would a bank start e-banking? Why did HSBC start?

74
Banking
business
is
heavily
dependent
on
information
and
distribution and e-banking provides tremendous value in this

respect. E-banking establishes a different standards of service to
the customer set and allows a bank to differentiate in the market
place.
Also, it allows the bank to cut processing costs and allows efficient
usage of technology to reduce errors, thus increasing service
standards.
HSBC is a pioneer in using technology to deliver banking values.
What is the process for starting an online branch? Are
there Legal procedures?
Indian Banking Act does not recognize an online branch. However,
automation of transactions is recognized under guidelines of
payment gateways or IT act. Essentially, banking remains under
purview of RBI and online branches do not seem feasible for next 35 years. Existing banks are free to offer e-banking, which can be
viewed as online banking services.
What is the main Cost area? What is the approximate cost
for starting an online branch?
Costs are a function of various factors like infrastructure, capacity,
technology, and security standards. However, for the predicted
usage level, this can be less than half of off-line banking
What are the facilities that HSBC provides?
All banking facilities that are provided in off-line world are
available online (subject to prevalent regulations) e.g.,
balances, information, statements, DD/Pay order, bulk
payments,
bill
payments,
vendor
payments,
payments, accounts receivable, payment gateways, etc

75
statutory
Benefits to customer individual and wholesale

Benefits to individual customers are in the nature of optimizing his
decision
making
process
and
also,
accelerated
service.
For
corporate customers, the benefits are in the nature of automating

processes, reducing back-office work (reduced costs) and online
service (information) With ERP systems coming up faster, wholesale
customer systems can communicate with banking system and
avoid all possible delays.
Who is a typical target customer in India? (Age group,
income, etc.)
Retail: Working middle class, High net worth individuals, selfoccupied people
Wholesale: Manufacturing companies, service companies, financial
institutions
What kind of e-banking do you do? Retail and wholesale?
Which one is more? Why?
We offer all types of electronic banking under retail and wholesale.
In India, usage of retail banking is more in number (in million
instructions p. a.). However, the base of usage is extremely high.
Corporate banking is undergoing revolutionary trends with almost
20% of instructions undergoing e-Banked.
Disadvantages
None.
What have been the major complaints by customers?
Availability of network i.e., Internet infrastructure in India
What systems of online payment do u follow?
Internet Based Payment Gateway
76
What are the security measures?

128-bit SSL security, dynamic passwords
How did you develop the e-banking backend technology?
Vendor? Or self? Why?
We have an internal technology division with more than 5000
people. We do also have more than 200 vendors developing various
products for us.
Which technology should the banks/financial institutions
be adopting?
Banks should be adopting web-based technologies (simple to use,
simple to change, universal, cheaper), web-based connectivity
(wider reach, lower costs), Open standards of communications
(XML, OFX, EDIs Banking)
The application areas can range from online banking services
(transaction initiation, product information) to CRM to mobile
banking to ERP integrated services
Another very important consideration is the maintenance time
necessary for daily updates to be performed by the host system.
What is the most imp factor of success in online?
Commitment to eBanking along with a deeper understanding of
customer needs. This can come only when you have a very big
base of customers, best people, experience of operating in various
countries and a service attitude.
77
CONCLUSION
In India, E-banking is in a nascent stage and people are still wary of

the concept and its usage-the biggest inhibitors being security and
user identification/authentication. "I wouldn't describe E-banking in
India in its present form a huge success. The technology and
concepts are gaining acceptance. People are beginning to see the
convenience and benefits of E-banking. I believe that in a few
years' time it will not only be the acceptable mode of banking but
also, more importantly, be the preferred mode of banking. In all this
the key is faster penetration of the Internet in the home segmenteither through PCs or through other Internet access devices. Also,
support for local languages from IT vendors will help reduce the
digital gap.
At the moment, the concept is totally dependent on the availability
of bandwidth and further reduction in Internet access charges. The
banks are hopeful that these would be taken care of and in the near
future large numbers would start using Internet for banking
purposes.
"E-banking and M-banking are very much a reality now. They are
the newer delivery channels. Though the acceptance level may not
be high among the masses, nevertheless the segment of population
adopting these delivery channels have a huge purchasing power
and banks in no way can afford to ignore their convenience.
78
The Internet has no doubt changed the nature of personal finance
forever, hopefully for the better.
Recommendation
Since the customers are more demanding than ever and their
demands will continue to grow at a faster and more aggressive
pace, e-banking is recommended. Service providers have to think
about the way they have approached things in the past and
reposition themselves for the future. If they are to be able to meet
the needs of the customers tomorrow, it will largely be through the
Internet as a key delivery channel.
79
BIBLIOGRAPHY
I, Pranay H Seth, ON PERSONAL WOULD LIKE TO THANK ALL THE

AUTHORS AND WRITERS WHO HAVE WRITTEN LAKHS OF BOOKS
AND MILLION PAGES ON E BANKING AND ITS LAWS ETC WHICH HAS
MAKE THE WORK OF OURS, THAT IS, THE STUDENTS SO MUCH
EASY.
I WOULD LIKE TO THANK THE LIBRARY OF THE Thakur Institute of
Management Studies and Research FOR ALLOWING US TO SURF
THROUGH THE BOOKS IN THEIR LIBRARY FILLED WITH TONNES OF
VALUABLE INFORMATION.
I WOULD ALSO LIKE TO THANK THE OWNER OF THE FOLLOWING
WEBSITES
1. www.banknetindia.com
2. www.hsbc.co.in
3. www.msnsearch.co.in
I WOULD LIKE TO THANKS THE SENIORS OF Thakur Institute of

Management Studies and Research FOR BEING KIND AND HELPFUL
WHENEWER ASKED FOR. I WOULD ALSO LIKE TO THANKS ALL MY
FRIENDS AND FAMILY.
80

Basics of E Banking by Pranay Sheth

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CONCEPTS OF E-BANKING

UNDER THE GUIDANCE OF

THAKUR INSTITUTE OF MANAGEMENT STUDIES &

This is to certify that the study presented by Mr. Pranay H Seth to

Reference of work and relative sources of information

have been given at the end of the project

(Prof. Akshay Damani)

Signature of the Candidate

PURPOSE AND OBJECTIVE OF THE STUDY

I have been working with an Money Transfer Firm, and my domain

Need for this study

NEED FOR THIS STUDY

Changes are being driven, above all by competition,

technology and customer demand.

The Internet both an

opportunity and threat for banks - will intensify these effects.

Although many researches and projects

conducted on this topic before, this project is not redundant

PRE E-BANKING SCENARIO IN INDIA

succeeded in convincing its employees about the benefits and need

Computerisation has been introduced but each branch acts as an

implementation issues but is also into developing specific and

significantly lowering infrastructure costs. These machines also hold

Counseling is mostly done in branch offices or by field workers.

components. Using mathematical models the customer may

This is Electronic Banking The New Era.

infrastructure and, most of all, fierce competition. All of these

convenience, in the comfort of your home or at any

Benefits at participating online merchants

Interactive Tools to design a savings plan, choose a mortgage,

ONLINE PAYMENT SYSTEMS

In its simplest form, a

payment system is an agreed upon way to transfer value between a

Electronic Payment Systems

wholesale payment systems and retail payment

Wholesale Payment Systems

distinguished from retail funds transfer systems that handle a large

depending on whether they settle at pre specified points in time or

Designated time net

Real time gross

* By definition, netting involves the accumulation of a number

Retail Payment Systems

payment systems is electronic money. Electronic money is a

of paper cash, such as full divisibility,

assignment of limits and constraints, and links to the current owner.

immediately ship the product.

ONLINE SECURITY SYSTEMS

authentication, non-repudiation, integrity and confidentiality.

By using digital signatures, consumers are reassured that any

Security experts believe that

digital signatures will encourage more consumers to purchase

Consumers can use their computers and a telephone modem to

dial in from home or any site where they have access to a

The services are available seven days a week, 24 hours a day.

Transactions are executed and confirmed quickly, although not

instantaneously. Processing time is comparable to that of an ATM

Customers can do everything from simply checking on an account

secure, your personal information is protected, and your fraud

BENEFITS TO THE BANK

statements for accounts, credit cards, and bills. Performing

representatives are able to process data more quickly and

commercial and retail customers desire to have. With this service,

WINNING ONLINE STRATEGY