NEED FOR THIS STUDY
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 today‘s scenario and hence it needs to be constantly updated and studied.
Due to the vastness of this subject, it is impossible to include every single detail, hence wherever necessary, annexure have been attached.
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 organization‘s performance and set the decision-making 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 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. Says P. Seshadri Rao, a financial consultant based in Hyderabad, "The basic reason for getting the nod for computerisation was the competition from private banks. 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 3
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."
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," observes Narayan.
Commenting on the reasons for public sector banks being laggards in the adoption of technology, State Bank of Mysore managing director Sitarama Murty says: "The private banks started with a clean slate. They hired technology savvy people. On the other hand, public sector banks didn't have those advantages. We need to follow the public sector bank's rules and regulation while hiring people. We can't appoint computer professional in the top management directly."
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. I think 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," comments a senior official with Andhra Bank. Explains P.K. Seshadrinathan, CTO of SSI Technologies: "The key obstacles to introduction of IT are nonintegration or non-networking of branches, and a lack of corporate 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." 4
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 cost-effective but also useful for a bank to have a separate division that takes care of IT in totality."
Faced with deregulation, privatisation and globalisation, 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 bank‘s 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 bank‘s 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.
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 Generally we may distinguish four classes of Internet use in financial institutions: Information presentation Information presentation together with two way (asynchronous)
communication (e.g. email to request further information) Interaction with user (e.g. execution of programs with individual customer data) Transaction banking (e.g. electronic payments)
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. 7
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. 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 Citibank‘s 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, a combination 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."
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 it‘s 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. No
more taking precious time off from work to get a demand draft made or a Chequebook issued.
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.
Online systems allow customers to plug into a host of banking services from a personal computer by connecting with the bank's computers over telephone wires. The convenience can be compelling. Not only is travel time reduced, but ATM machines, telephone banking or banking by mail are often unnecessary. And, technology continues to make online banking, once attempted only by computer enthusiasts, easier for the average consumer.
Banks use a variety of names for online banking services, such as PC banking, home banking, electronic banking or Internet banking.
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 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 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 12
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.
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 These tools help remove some of the mystery involved in so many account options and costs.
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.
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 non-consumer 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.
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.
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
Continuous (real time)
* 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.
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, e-cash 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 being as anonymous as cash. 18
No transaction confirmations are necessary, meaning the 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 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.
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 significant amounts of data including prepaid stored value. The 20
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.
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 wouldn‘t 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 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 bank‘s computers and data from being accessed by any outsider. This firewall is located at the point where the bank‘s 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 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.
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).
BENEFITS 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.
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: Investment of time upfront can be formidable. The data entry is necessary before the numbers can be massaged and money managed successfully. Online bill payment is an example of an effort that requires setting up which leads to ultimate convenience. Switching software or banks can mean re-entry of data, although Internetbased 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. 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' (ICICI‘s 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 bank‘s Internet banking capabilities. You kept thinking to yourself, "What does this do for me?" and "does it really work?" You‘re 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 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, 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.
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. Don't choose an obvious password or username - Don't use variations of any obvious people, numbers, or things related to your life. Do use a combination of random numbers and letters. Many banks will provide a random password and/or user name for you; use these. If possible change the password to one only you know, and change it online over a secure connection into the bank's official web site.
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 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 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 a 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
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 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. I overheard a conversation in a bookstore recently that could only be described as "My bank's cooler than your bank." Imagine. Bank offerings as status symbols!
Analyze key factors about your customers: Are they mobile, such as students or frequent travelers? Is the ability to engage in distance-banking important to them? Do they frequently use debit cards? Could they benefit from online tracking of debit card transactions? Do they have hectic schedules that would preclude visits to the bank's offices? Are they computer-savvy? Are a significant number of them using money management software already, such as Microsoft Money or Intuit's Quicken? Do they like to have control? To what extent does your target market consist of business customers? Large business or small businesses? What features would be most important to them? The ability to view online statements? See imaged copies of individual items? Transfer funds between accounts? Do online bill paying? Download statements to their computer? Assess customer needs -- and desires -- to help you plan the features your Internet offerings should have.
Think long and hard about the benefits of Internet banking to the bank. What is your goal in implementing online banking? What are you trying to accomplish? Can you position your bank as a market leader and attract customers by implementing Internet banking? Is the competitive marketplace driving you to implement Internet banking as a defensive measure to avoid losing customers to competitors who offer it? Can Internet banking be used to increase satisfaction and loyalty?
Could Internet banking provide long-term cost savings? Can you solidify the bond you have with your customers by offering online banking? Keep student customers even after they graduate and move away? In this increasingly mobile society, can your bank serve as an anchor for customers who find employment in another locale? Do you need to offer Internet banking now in order to lay the foundation for product/service offerings such as online bill payment and bill presentment? Can you provide superior customer service via the Internet by using it to: provide online loan applications, permit a self-service way for the customer to access account information, order checks, place stop payments, review account agreement provisions, shop for banking products, conduct comprehensive reviews of all business with the bank; offer how-to information that customers can learn from, like tutorials on the home mortgage application process, checking account basics, and how to keep a credit report clean. Can you cross-sell other banking products and services through this channel? Does it provide unique marketing opportunities? Can you appeal to customers in a wider geographic area than you can attract with your brick and mortar offices? Can you establish a different image online than your bank has in the "real" world, thus appealing to a whole new customer demographic? Once you have resolved the issue of what you are striving to achieve, you can build a site and an Internet banking offering that works to accomplish those goals. Don't believe for a minute that all Internet banking sites are created equal. Your online presence can
-- and should -- be distinct and original.
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.
Make the sign-up/registration as easy as possible, yet don't minimize security or compromise your ability to accurately determine exactly who you're dealing with.
Test drive! 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.
Ask the following questions: Is it intuitive? Does it do what the user wants and expects it to do? Do the pages load quickly enough? Is it "forgiving"? In other words, does it allow the user to recover from mistakes? Is it reassuring, in terms of conveying a sense of security?
What is the frustration factor? How many times do the testers think they should take a particular path to accomplish something, only to discover that's not the correct choice? 37
Is the overall experience of the user a positive one?
Think long and hard about the features your customers want (that you're willing to pay for!) Test the waters. You can move slowly, if that's your style. For example, first offer online banking without bill payment. Then add online bill payment when you feel more comfortable with it.
Be sure you choose a vendor who can supply the features that are important to you. Do your homework! Internet banking is an area that will constantly be evolving. You'll want a solutions provider who values careful innovation.
Once you have it, PROMOTE it! You've made a major investment -- both in time and money. Make the investment count -- promote it heavily. Pull out all the stops. Increase awareness of your new Internet banking product in every way possible. Have buttons made up for your employees to wear, touting your new Internet banking product. Post eye-catching signs in all your banking offices. Put banner ads on your Web site, particularly if you already have Web traffic. Run ads that let customers and prospective customers know about the new service. Play up the features of the new service in special statement stuffers. Mention the service on your drive-in envelopes. Draft a press release. This is news! Seek out opportunities for employees with public speaking skills to speak about banking on the Net. Get all your employees online first, so that they are knowledgeable about how it works and what the benefits are. Encourage the employees to become Net Nerds! Consider offering a low interest/no interest loan to employees to help them buy computers for their homes.
Take the "Would you like fries with that burger?" approach with customers. Develop the habit of asking if they'd like to sign up for Internet banking any time they use (or sign up for) any other service.
Consider incentivizing in painless ways. What can you offer to customers who open an online banking account? There are lots of things you can offer that won't cost you anything.
Collaborate with local merchants. Form alliances. Co-market.
Promote Net use in general. Have a Net-enabled computer at the bank and schedule demonstrations. Walk your customers through the process with a fictional account. Offer programs in your community on using the Internet, and make your Internet banking product one component of the program.
Plan an Open House Internet class at the bank, free to all customers. Along with punch and cookies, serve up some solid suggestions for using the Net.
Think of ways to add value to your Internet banking pages. For example, you could have a "newsletter" type of content on your Internet banking site, with content that is regularly updated. Topics could include such things as teaching kids about money, planning for retirement, how to know if it's time to refinance your mortgage, how to tell whether buying or leasing a car makes the most sense. Add pertinent calculators to make the site truly interactive.
Utilize your Web pages to humanize the bank, tell about what the bank is doing to help the community.
Make cross-selling easy. For example: When John D‘Souza logs in, if his safe deposit lease is about to expire, have a message pop up on the screen telling him so and give him the option to click a button to renew automatically; 39
When rates go up on CDs or down on loans, brag about it online. If you offer discount brokerage services, target customers who might be interested and make it easy for them to sign up or learn more. Consider providing Internet specials, complete with printable coupons. For example, you could offer Rs5.00 off their next cheque order, Rs20.00 off their first year's safe deposit box rental, etc.
Start with the consumer side first. Work the kinks out. Then roll out the service to your commercial customers.
Stress the benefits of online banking -- from customer control and convenience on down.
Don't scare customers away by overpricing the service. Done right, Internet banking can make you money by saving money, but you can't reap the cost savings if your customers aren't using it.
Offer online banking to all your customers. Don't make assumptions about which ones will want it or need it, and don't reserve it for your "best" customers. Typically, it's not the best customers who flood your customer service department with time-consuming inquiries about balances, deposits received, stop payments, check posting and the like. It's the customers who live on a shoestring for whom checking the balance can be a daily activity.
The Bottom Line Nicole is six years old. Since she was a baby, she has ridden with her mother through the bank's drive-in. Each time, the nice teller has given her a lollipop. Nicole already knows that this is the bank she wants an account at -- they know how to make her happy. Your challenge is to figure out how to construct the virtual equivalent of giving candy at the drive-through. When you figure out how to deliver a service online that brings a smile and a pleasant experience to the customer -- a service that delivers what the customer wants, you will achieve success in selling Internet banking. 40
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 sources I found predicting the number of online banking users in the next several disagreed slightly. CyberDialogue says that 24.2 million people will be using the virtual bank by 2002. The International Data Corp‘s 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 to 29 per cent by 2003.
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% by 2003.
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 nonbanks 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 Sweden‘s 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 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, 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 ecommerce 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. Most banks use outside vendors in addition to in-house services.
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 middleand 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 transactions—a 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 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 year—and 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 simplicity—that is, for owning fewer banking products and dealing with fewer financial institutions.
Conducting complex activities—for instance, trading securities or applying for insurance, credit cards, and loans—over 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. 46
Functions Preferred by Asian Users (Diag. 4)
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 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.
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, mediasavvy 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 population. Thus, the next two diagrams show that Internet banking in India is here at the right time.
Age Breakdown of Users in India – 2000 (Diag. 6)
Online Gender Divide in India – 2000 (Diag. 7)
Cybercafes are popular gathering places among young, novice Indian internet users. The popularity of these cybercafés 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 cybercafés 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, 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.
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.
The Internet and PC penetration is increasing by leaps and bounds. Therefore, we see that everything points towards success of E-banking in India.
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 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 ) 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 Electronicfunds-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 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 inter-city clearing. Regional Grid Clearing connecting important commercial centres/district headquarters in a region to the nearest MICR centre under one way clearing. 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 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 This 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. 58
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."
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 59
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.
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 60
acquiring transaction of other banks card 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 Sales terminals. The cards facilitate remotely. the customers to effect the transactions on their own accounts
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.
2. How to address the issue of internationalization i.e. how to take in and make ebanking 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 Bank‘s 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 ebankers 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‘ 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 bank‟s customers? The real trouble is that Internet Bank doesn‘t 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 non-traditional players would just fasten this whole process. E.g. Times Bank and IDBI Bank.
4. How to focus innovation potential onto designing new products and services facilitated by Internet delivery?
STRATEGY FOR INDIAN BANKS
Internet banking would drive us into an age of creative destruction due to nonphysical 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"? 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 bank‘s 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 participant‘s 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.
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 eshopping, 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, 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 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.
Transfer funds to other Citibank 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! This is Citibank‘s online banking service – ―Suvidha”. An interview with the Mr.Sandip Patil, Business Development Manager – Ecommerce & Ebanking – Global Corporate Banking – Citibank. Why would a bank start e-banking? Why did Citibank start? Banking business is heavily dependent on information and distribution and ebanking 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.
Citibank is a pioneer in using technology to deliver banking values and has a history of doing it across 100 plus countries for decades together for the reasons mentioned above. 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 3-5 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 Citibank 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, statutory payments, accounts receivable, payment gateways, etc 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, self-occupied 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. We are rated no.1 in Indian market by the latest Business World and are no 1 globally rated by Euromoney, Asian banker, Finance Asia, etc.
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 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. How will Internet banking customers access their information during these times? 71
This is an essential process in system cycle and most of the players handle this cycle in off-hours (from 11 p m onwards). Daytime the system is always available. The EOD process can take 1 or 2 hours, which can go upto 5-6 hours on month ends and 9-10 hours on year-end. This involves finalization of books of the bank i.e., post all internal entries like accruals, portfolio MTM, etc 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.
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 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 a 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 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 WAPbased 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."
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 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.
While the novelty of the service will attract customers to bank online, right now only customer service will determine whether Net banks get the thumbs up.
In concluding one may state that Indian banking in the new millennium is likely to be driven by mergers, universal banking and Internet technology. While mergers will confer economies of scale, universal banking will dismantle the barriers between the traditional dichotomies of financial services. While one realizes the fact that the Internet is likely to convert banking into a commodity one has to take into account that thirty years of solitude has steeped Indian Banks into a morass of inefficiency, slothfulness and complacency. If Indian banks refuse to visualize this trend they may well be consigned to history. However, if they react proactively Indian Banks stand to gain a lot from the opportunities that E-banking offers.
The verdict is that customers are more demanding than ever and their demands will continue to grow at a faster and more aggressive pace. 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.
However, it is not that the branch network will disappear. Customers will always find solace in the sense of assurance that a blue-chip brand is embodied by a physical presence, especially in financial services. It is just that the ability to check a financial portfolio at a whim has great appeal. So customers will not disregard the practice of occasionally dropping into the branch for a face-to-face interaction with a friendly teller but they will avail of -- and demand -- the ability to access their up-to-date product portfolio through whatever channel they choose.
It also needs to be stated that the on-going process of reforms cannot be successful without a supporting and complementary legal framework which can provide for both strong internal governance in the financial system as well as external discipline by market forces, as suggested by the Narasimham
Committee. Also, an effective system needs to be put in place to tackle money laundering and financial frauds.
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 Ebanking. 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 segment-either through PCs or through other Internet access devices. Also, support for local languages from IT vendors will help reduce the digital gap," says Senthil Kumar of I-flex Solutions.
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," observes Singhal of Polaris.
Not all feel the same way though. Countering Singhal's claims, Seshadrinathan of SSI says, "Frankly speaking, the progress has been slow. Foreign and private banks have adopted E-banking well, but public sector and old style banks are a little slow and I foresee a year or so for them to adopt IT in a significant way. One interesting phenomenon that is emerging is the forging of strategic partnerships between banking and IT industries. Banks are looking out for IT partners for effective IT-enabling." 78
In closing, online banking is just one aspect of the new online financial world. Such areas as stock trading, taxes, college planning, retirement, debt management, and mortgage/insurance are being greatly affected by the growth of the Internet. From the company‘s standpoint, those that do not keep up with the changing face of financial services will be "lunch", and those that do will profit enormously. The trick is to react in "Internet time". From the customer‘s standpoint, greater connectivity from home will mean more time for more pleasurable pursuits. The Internet has no doubt changed the nature of personal finance forever, hopefully for the better.
And the ball is just getting rolling!