6_internet banking - furture banking
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ORIGIN
In 1990 the Wells Fargo Bank, based in California USA, introduced the world's first
online banking service. Since the introduction of the first service many banks have started
their electronic banking services with access available via your PC, mobile phone or an
interactive TV.
DEFINITION
The term Internet banking refers to the use of the Internet as a remote delivery channel
for banking services. Services include the traditional ones, such as opening an account or
transferring funds to different accounts, and new banking services, such as electronic
online payments (allowing customers to receive and pay bills on a banks web site).
WHAT IS INTERNET BANKING?
Internet banking refers to a system that enables bank customers to access accounts and
general information on bank products and services through a
Personal computer (PC) and the Internet.
Internet banking products and services can include
1.Wholesale products for corporate customers.
Cash management.
Wire transfer.
Automated clearinghouse (ACH) transactions.
Bill presentment and payment.
2.Retail and fiduciary products for consumers.
Balance inquiry.
Funds transfer.
Downloading transaction information.
Bill presentment and payment.
Loan applications.
Investment activity.
Other value-added services
3.Other Internet banking services
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Bill payment
Funds transfer including third-party transfers
Request for cheque book, stop payment, account opening,
Reporting loss of ATM card
Online e-shopping payments
Communication with Account Manager
Personalized viewing of content updates personal finance, select articles on e-
commerce, information technology, lifestyles, travel and news.
HDFC Bank Real-time account information including transactions
Transfer money between accounts
Bill payment facility
Third party funds transfer within HDFC bank
Request for Demand Draft/Bankers Cheque
Stop payment requests
Opening fixed-deposit accounts
Sending messages to the bank via e-mail
Global Trust Bank
Account information and transaction details
Depository accounts
Fund transfer between branches
Requests for Cheque Books, Demand Drafts\ Bankers Cheque, Term Deposit Account
Opening,
Renewal of Term Deposits and Change of Address
Email queries
Customize content as per the viewing preferences
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Global E-banking practices
Deposit Products online including Checking Savings, Money Market and Certificate of
Deposits
Check Accounts Information,
Receive airlines mileage for banking with certain banks co promotion
Receive and pay e-bills online
Download account information to the personal finance management software .
Access financial planning tools to calculate loan payments/ tax burden
View time-trend of various financial indicators, including interest rates
Transfer funds between accounts Interactive tools to help customers find an account that best suits their needs
Single login provides access to multiple accounts held at a Bank
Internal transfers from deposit A/c to loan A/c, Including Credit Cards
Online mortgaging
View a/c balances and transfer money through Web-enabled Cell Phones or PDAs.
IMPORTANCE OF INTERNET BANKINGCOMPETITION: Banks feel the need to offer I-banking services today just to keep up
with the competitors and to be able to retain their existing customers.
NEW MARKETS: The Internet is not only a low cost approach to determine new
distribution channels but also to establish a presence in new and up coming markets.
CUSTOMER SERVICE: I-banking offers banks an opportunity to improve on their
customer service by collecting and managing information pertaining to their customers
and their individualistic preferences.
REVENUE POTENTIAL: I-banking also provides an opportunity to build on their
relationships with their existing customers. For Example, bank Web portals could offer
purchasing services for business travel or insurance to generate more revenue.
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REDUCE COSTS: E-banking is an opportunity for banks to reduce their overhead costs
as the need for physical branches is drastically cut down. The running cost of an ordinary
bank account for 50-60 per cent of their revenues, whereas the running cost of Internet
banking are a mere 15-20 per cent of revenues. For example, in India, Net banking is
estimated to cost just Rs. 2 per transaction compared to the RS. 43 incurred while
banking at the branch.
TYPES OF INTERNET BANKING
More and more banks are transforming their businesses by using Internet technology to
develop or expand relationships with their customers. The extent to which the Internet is
used in a bank depends on the relative maturity of the bank in regard to Internet
technology. Banks offer Internet banking in two main ways. An existing bank with
physical offices, ordinarily termed a brick-and mortar bank, can establish a web site and
offer Internet banking to its customers as an addition to its traditional delivery channels.
An alternative is to establish either a virtual, branchless or Internet-only bank. The
computer server or bank database 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 provide customers with the ability to make deposits and withdrawals via
automated teller machines (ATMs) or through other remote delivery channels owned by
other institutions. Currently, there are three basic kinds of Internet banking are being
employed in the marketplace:
INFORMATIONAL
This is the basic level of Internet banking. Typically, the bank has marketing information
about the banks products and services on a stand-alone server. Risks associated with
these operations are relatively low, as informational systems typically have no path
between the server and the banks internal network. This level of Internet banking can be
provided by the bank or can be outsourced. While the risk to a bank is relatively low, the
data on the server or web site may be vulnerable to alteration. Appropriate controls,
therefore, must be in place to prevent unauthorised alterations of the data on the banks
server or web site.
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COMMUNICATIVE
This type of Internet banking system allows some interaction between the banks systems
and the customer. The interaction may be limited to electronic mail, account inquiry, loan
applications or static file updates (name and address changes). Because these servers
ordinarily have a direct path to the banks internal networks, the operational risk is higher
with this configuration than with informational systems. Controls should be in place to
prevent, monitor and alert management of any unauthorised attempt to access the banks
internal networks and computer systems. Virus detection and prevention controls are also
important in this environment.
TRANSACTIONAL
This level of Internet banking allows customers to directly execute transactions with
financial implications. There are two levels of transactional Internet banking, each with a
different risk profile. The basic transactional site only allows a transfer of funds between
the accounts of one customer and the bank. The advanced transactional site provides a
means for generating payments directly to third parties outside of the bank. This can take
the form of bill payments via a bank official check or electronic funds transfer/automated
clearing house entries. Many banks are also offering payments from consumer to
consumer using either payment method. When the transfers of funds are allowed to a
point outside of the bank, the operational risk increases. Unauthorised access in this
TYPEOF
INTERNETBANKING
INFORMATIONAL TRANSACTIONAL
COMMUNICATIVE
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environment can lead or give rise to fraud. Since a communication path is typically
complex and may include passing through several public servers, lines or devices
between the customers and the banks internal networks, this is the highest risk
architecture and must have the strongest controls.
ADVANTAGES AND DISADVANTAGES
ADVANTAGES OF INTERNET BANKING
Convenience: Unlike your corner bank, online banking sites never close; they're
available 24 hours a day, seven days a week, and they're only a mouse click away.
Ubiquity: If you're out of state or even out of the country when a money problem arises,
you can log on instantly to your online bank and take care of business, 24/7.
Transaction speed: Online bank sites generally execute and confirm transactions at or
quicker than ATM processing speeds.
Efficiency: You can access and manage all of your bank accounts, including IRAs, CDs,
even securities, from one secure site.
Effectiveness: Many online banking sites now offer sophisticated tools, including
account aggregation, stock quotes, rate alerts and portfolio managing programs to help
you manage all of your assets more effectively. Most are also compatible with money
managing programs such as Quicken and Microsoft Money.
DISADVANTAGES OF INTERNET BANKING
Start-up may take time: In order to register for your bank's online program, you will
probably have to provide ID and sign a form at a bank branch. If you and your spouse
wish to view and manage your assets together online, one of you may have to sign a
durable power of attorney before the bank will display all of your holdings together.
Learning curve: Banking sites can be difficult to navigate at first. Plan to invest some
time and/or read the tutorials in order to become comfortable in your virtual lobby.
Bank site changes: Even the largest banks periodically upgrade their online programs,
adding new features in unfamiliar places. In some cases, you may have to re-enter
account information.
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The trust thing: For many people, the biggest hurdle to online banking is learning to trust
it. Did my transaction go through? Did I push the transfer button once or twice? Best bet:
always print the transaction receipt and keep it with your bank records until it shows up
on your personal site and/or your bank statement.
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PORTERS 5-FORCES IN INTERNET BANKING
Porter identified the five competitive forces, which tend to drive down the profitability of
any industry as comprising
Threat of competitors
Barriers to entry
Bargaining power of suppliers
Bargaining power of buyers and
Threat of substitutes.
The application of the Porters Model to the banking industry clearly shows that this
sector has reached the mature stage of its lifecycle. The trend towards electronic deliveryof products and services is particularly important to the banking industry, where the shift
is partly as a result of the consumers demand, but is also partly a result of the
competitive environment. Some specific factors that have conspired to create the new
competitive environment for banking include: changing consumer needs and perceptions,
globalization, technological innovations, and competition from non-banking entities and
increasingly, consumers expect online services from their financial institutions. Large
organizations initially introduced Electronic Banking or Internet banking to simplify their
salary and payroll problems.
BARRIERS TO ENTRY: Barriers to an entry in banking industry no longer exist.
Competitors can come from any industry to disintermediate banks. Product
differentiation is very difficult for banks, since most products sold in retail banking are
constrained by legal or industry regulations, and, are therefore, readily limited.
BARGAINING POWER OF SUPPLIERS: Theoretically, the bargaining power of
suppliers would be high in this industry, as there are a small number of fairly large
players in the industry. But, the development of online banks and financial intermediaries
in areas such as mobile banking or home banking has lowered the bargaining power of
the suppliers.
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HIGH THREATS OF
NEW ENTRANTS
LOW BARGAINING HIGH BARGAININGPOWER POWER
LOW THREATS OFSUBSTITUTES
BARGAINING POWER OF CONSUMERS: Bargaining power of Consumers is
increasing. Switching costs are becoming lower with Internet Banking gaining
momentum and as a result consumers loyalties are harder to retain.
THREAT OF SUBSTITUTES: Competition from the non-banking financial sector is
increasing rapidly. Sony and Software giants such as Microsoft are attempting to replace
the banks as intermediaries.
ADVANTAGE
Customer
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 hrs a day
Transactions are executed and confirmed almost instantaneously.
SUPPLIERS
NEWENTRANTS
COMPETITORSBUYERS
SUBSTITUTES
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Also, the range of transactions available is fairly broad. Consumers can do
everything from simply checking on an account balance to applying for a
mortgage.
Time saving and convenient.
Organizations
Improve customer access
Facilitate the offering of more services
Increase customer loyalty
Attract new customers Increase customer satisfaction
Reduction in costs, as the need for physical branches is reduced
24x7 client servicing for general services
Reduction in cost, as the need for manpower is reduced
Transparent and fast response
Directly reflected on the account statement, need for data entry is eliminated.
BENEFITS OF INTERNET BANKING
BANKS
Price: In the long run a bank can save on money by not paying for tellers or for managing
branches. Plus, it's cheaper to make transactions over the Internet.
Customer Base: The Internet allows banks to reach a whole new market- and a well off
one too, because there are no geographic boundaries with the Internet. The Internet also
provides a level playing field for small banks who want to add to their customer base.
Efficiency: Banks can become more efficient than they already are by providing Internet
access for their customers. The Internet provides the bank with an almost paper less
system.
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Customer Service and Satisfaction: Banking on the Internet not only allows the customer
to have a full range of services available to them but it also allows them some services
not offered at any of the branches. The person does not have to go to a branch where that
service may or may not be offer. A person can print of information, forms, and
applications via the Internet and be able to search for information efficiently instead of
waiting in line and asking a teller. With more better and faster options a bank will surly
be able to create better customer relations and satisfaction.
Image: A bank seems more state of the art to a customer if they offer Internet access. A
person may not want to use Internet banking but having the service available gives aperson the feeling that their bank is on the cutting image.
CHANGING THE RULES
ENTRY TO MARKET: The Internet has helped demolish one of the biggest entry
barriers to the banking market the need for a large bank network. The lower start-up
costs and maintenance of the Internet Bank Branch makes it more attractive for start-upbanks and for those wishing to break into new markets.
ONLINE SERVICING: Many new banking services for corporations will soon become
available via the Internet and those already online will be greatly improved. With
advances in technology, more and more corporations will be able to access the most up-
to-date rates, select and confirm their deal, submit settlement instructions and
confirmations via the Web and finally, check their accounts as the transaction is carried
out.
TURNING THE POWER OF THE INTERNET INWARD: I-banking technology alone
cannot only enhance what the bank can do for its customer, but it can also help the
employees do their jobs effectively. For example: Union Bank of California has turned
the search power of the Internet inward by creating information portals. These corporate
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Web pages allow employees to create customized desktops with information relevant to
their jobs.
NEW BANKS: The Internet has inspired many corporations to throw their own hat into
the banking arena although they appear to be primarily with the retail-banking sector at
present. In Japan, 7-Eleven, Itochu and Sony have announced plans to venture into
banking. The success or failure of these new banks is hugely dependent on their
branding efforts, the proposition offered and its strategic execution.
THE DOS OF NET BANKING
RELATIONSHIP: Banks and other financial institutions in India cannot go completely
virtual, physical branches help forge a relationship with the customer that a virtual bank
cannot. Most customers in India prefer direct and personal contact with their bankers.
PERSONALIZATION: Banking Solutions become truly personalized when they are able
to respond to the changing customer needs. 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 personalization is still lacking in the banking solutions offered by
Indian banks.
INTEGRATION: Another importance aspect is integrating customer service interface
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 needto be one stop shops for an entire range of personal finance products from loans and
insurance to mutual funds and even tax savings instruments. This is being done by
account aggregators such as E-Balance and Vertical One that lets you log into the
website 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.
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INNOVATION: Nowadays, banks need to depend on product innovation, expanding
their 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 card 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 rates.
HOW INTERNET BANKING SECTION WORKS
Individual or corporate Internet banking customer logins with approved user name
and password or via smart card.
Customer request is sent to banks web server and passed to Internet banking.
Customers login is authenticated and a response is sent back to the customer.
Customer selects a banking function, such as Account Balance Inquiry.
The request for balance is transmitted from the browser (Cipher Strength 128- bit)
to the banks web server.
Internet banking generates a transaction request based on the message received.
The transaction request is sent to the transaction application services.
The application services route the transaction to the back-end system holding the
customers account information.
Customers account information is identified, and a response is created and sent
back to Internet banking.
Internet banking converts the message into HTML and presents it as confirmation
to the banking customer via a web page.
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SECURITY
Security is the paramount issue, since access via dial-up telephone and the Internet both
represent an opening of the computer system to outside world and potentially
unauthorized users. Remote banking activities may also be conducted through other
interactive devices, such as automated teller machines, telephones, and televisions.
Therefore proper System security required to be implemented to safe guard against
unauthorized access to the financial institutions networks, systems, and databases.
Bank should control user access to prevent a security compromise of internal systems.
Customer data must be protected from unauthorized access or alteration during
transmission over public networks. Bank should develop methods to maintain
confidentiality, ensure the intended person receives accurate information, and prevent eye
dropping by others. In addition, to ensure non-repudiation, undeniable proof of
participation by both the sender and the receiver in a transaction must be created. Most
Indian enterprises equate security with anti-virus or firewall solutions.
It is only natural that business customers show concern about sending their personal
details and account numbers over the Internet. The security measures are implemented
partly by the bank and partly by the customers themselves through their own vigilance.
Security is divided into FOUR levels
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INFORMATION SECURITY: Information security enables information to be shared,
while ensuring protection of information and computing assets. It comprise of three basic
components:
Confidentiality: protecting sensitive information from unauthorised disclosure or
intelligible interception.
Integrity: safeguarding the accuracy and completeness of information and
software.
Availability: ensuring that information and vital service are available to users
when required.
TRANSACTION SECURITY: The data exchanged between the bank and a customer is
coded or encrypted using secure servers with 40/128 bit SSL1 servers, which sit behind
firewalls. The likelihood of a computer hacker breaking through these security measures
is very remote.
ACCESS SECURITY: On registration, normally two levels of security are used each
time the customer accesses their account details with a user ID and password. A third
level of authentication can be built in also, to protect misuse, for example querying the
users date-of-birth.
ACCOUNT HOLDERS VIGILANCE: However tight the banks security system is, it is
not sufficient on its own. Business customers need to play their part too and exercise
caution when banking online like not divulging their pin number or password to any third
party, or by not leaving their pin lying around.
KEY SECURITY FOR BANKS AND CUSTOMER
Authorization - Authorization involves the pre-determination of permissible activities.
Customers have access only to their own accounts and perform only authorized functions.
Access Controls - Traditional access controls, such as user identification, passwords, and
personal identification numbers (PINs), should be implemented for PC banking
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customers. However, since the effectiveness of these controls is greatly influenced by the
customer, there should be proper steps to educate the customer in this area.
Authentication - Authentication is used to verify and recognize the identity of parties to a
transaction. Financial institutions may communicate with customers they never
physically meet resulting in opportunities for misrepresentation. Digital certificates are
being explored as methods of authentication in the PC banking environment.
Authentication is the primary component of non-repudiation. Transactions on the Internet
or any other telecommunication network must be secure to achieve a high level of public
confidence. In cyberspace, as in the physical world, customers, banks, and merchantsneed assurances that they will receive the service as ordered or the merchandise as
requested, and those they know the identity of the person they are dealing with. Banks
typically use symmetric (private key) encryption technology to secure messages and
asymmetric (public/private key) cryptography to authenticate parties. Asymmetric
cryptography employs two keys a public key and a private key. These two keys are
mathematically tied but one key cannot be deduced from the other. For example, to
authenticate that a message came from the sender, the sender encrypts the message using
their private key. Only the sender knows the private key. But, once sent, the message can
be read only using the senders public key. Since the message can only be read using the
senders public key, the receiver knows the message came from the expected sender.
Internet banking systems should employ a level of encryption that is appropriate to the
level or risk present in the systems. But stronger levels of encryption may slow or
degrade performance. Therefore there should be balance in security needs with
performance and cost issues.
Secure Data Storage - Confidential information or highly sensitive data should be stored
securely. Management should consider storing sensitive data in encrypted form and
implementing stringent access controls.
Encryption - The Internet banking services work with both Netscape and Microsoft
Internet Explorer browsers that support 128-bit encryption, which is the most popular
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form of encryption generally available today. Encryption technology disguises
information to hide its meaning and enhances confidentiality by restricting information
access to only intended users. Encryption-based methods can also be used to verify
message authenticity and accuracy. Information is encrypted and decrypted with a cipher
and key using specialized computer hardware or software. Secrecy of the key and
complexity of the cipher are crucial for the success of encryption controls. Encryption is
the process of converting information into a more secure format for transmission. This
means that plain text is converted to scrambled code while 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 a code, putting it in an envelope and mailing it. Theprocess of converting the information to a code helps to safeguard your privacy, as long
as no one can intercept the envelope and decipher the code.
Currently, there are 2 levels of encryption generally available in web browsers: 40-bit
encryption, and 128-bit encryption. The 128-bit browser offers the highest level of
encryption generally available in North America today and provides the best protection
when transmitting confidential data over the Internet.
Firewalls - A firewall is hardware and software placed between two networks. The intent
is for all network traffic, regardless of the direction of flow, to pass through this firewall.
The firewall then can check all traffic to make sure it is authorized and prevent unwanted
traffic from entering the system. The firewall also can check the traffic to determine
whether it contains any unauthorized attachments, such as viruses. Firewalls need to be
efficient to catch any traffic that is unauthorized in order to prevent potential harm to the
institution. Firewalls are physical devices, software programs, or both, that enhance
security by monitoring and limiting access to computer facilities. They create a security
barrier between two or more networks to protect the institutions computer system from
unauthorized entry. Filtering routers may be incorporated into the firewall system to
screen data traffic and direct messages to certain locations.
Digital signature: A mathematical encryption technique that associates a specific person
with a given computer file and indicates that the file has not been altered since that
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person signed it; should not be confused with making an electronic representation of a
written signature.Digital signatures were accorded legal acceptance by the IT ACT. The
controller of certifying authorities, set up to implement the act, has issued licenses to four
players who can issues digital signatures. These are Safescrpt limited, National
informatics center, Institute for Development and Research in Banking Technology and
Tata Consultancy Services. Government of India is planning to extend this facility to
leading nationalized bank of India.
TYPES OF ONLINE ATTACKS
Banks and service providers need to guard against various types of online attacks. Theobject of an attack may vary. Attackers may try to exploit known vulnerabilities in
particular operating systems. They also may try repeatedly to make an unauthorized entry
into a Web site during a short time frame thus denying service to other customers.
Types of attacks may include:
Sniffers
Also known as network monitors, this is software used to capture keystrokes from a
particular PC. This software could capture logon IDs and passwords.
Guessing Passwords
Using software to test all possible combinations to gain entry into a network. Brute Force
A technique to capture encrypted messages then using software to break the code and
gain access to messages, user IDs, and passwords.
Random Dialing
This technique is used to dial every number on a known bank telephone exchange. The
objective is to find a modem connected to the network. This could then be used as a point
of attack.
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Social Engineering
An attacker calls the banks help desk impersonating an authorized user to gain
information about the system including changing passwords.
Trojan Horse
A programmer can embed code into a system that will allow the programmer or another
person unauthorized entrance into the system or network.
Hijacking
Intercepting transmissions then attempting to deduce information from them. Internettraffic is particularly vulnerable to this threat.
Hacker
A computer operator who breaks into a computer without authorization, for malicious
reasons, just to prove it can be done, or other personal reasons.
BUDGETING FOR INTERNET BANKINGOne of the problems for the bank is that any information technology project is the cost
escalation. When banks are planning to implement an IT project they must take a detailed
look at the costs involved. If cost is not calculated properly, the cost calculation can
overshoot by 100 to 200 percent. And if the IT project is in crores of rupees, one cannot
overemphasise the consequences. Important banking projects these days -such as
centralized core banking and Internet Banking. Easily come in this price range.
PRODUCT COST STRUCTURE: The cost structure in any proposal from a vendor will
have three components.
First components are One-time license fee, which the vendor will charge the bankfor Internet banking.
Second component is the annual maintenance charge or the Annual License Fee.This can vary from 10 to 20 percent of the software cost. This usually includes all
the enhancements of the product that the vendor will release from time to time.
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Third component will be the professional service charges. Service charges will beapplicable to all activities in which the professional of the vendor will be working
on banks Internet banking or IT project. The last component is most prone to cost
surprises.
PROFESSIONAL SERVICE CHARGES: In the contract of implementation and support
this rate will be marked as per-day fee for vendor professionals and allowance. Whenever
bank want to implement a core banking system, or internet banking system, it will have
to be approved by your Board of Directors, simply because of the financial implication ie
if bank finds that the entire budget is over but the project is only 50 percent complete.The main culprit here is the professional fee for consultants. It is not always necessary
that the vendor engineers are the most proficient ones. In fact most of the vendors send
only the second or third line of consultants / engineers for implementation IT projects.
This means that while the vendor consultants are refining their skills on their product,
bank keep paying more and more. Or banks become their training ground. Besides, the
professional service effort is always an estimated effort; bank cannot bind the vendor
once the work
Agreement is signed off. In situations where the system integration has to be done
between two different systems, such as in the case of Internet banking, which have to be
connected to the core banking system-using APIs (Application Programming Interface),
the risk of cost escalation on this account increases many folds.
The one-way bank has adopted to solve such a problem is to provide a fixed charge for
professional services. Bank mainly selected the Internet banking product through a
quotation process from a number of vendors. And bank insists on a fixed charge for the
professional services. Another alternative banks follow is to have a man-days budget with
a variation capital incorporated in the contract.
FIXED MANPOWER BUDGET: If bank manage to achieve a professional services cost
capitalization, will need to show some discipline. The worst area where banks let vendors
down and compel them to be dishonest is the decision making process. When an IT
project is launched, manpower resources are committed to it. These resources are highly
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paid besides having huge overhead costs. The decision making process in most of the
banks is such that in spite of the budget having been approved for the IT project, for
every decision - be it for a business requirements specifications or be it for an item of
expenditure- days and sometimes weeks are lost. This will throw any project plan and
manpower budget out of gear. And a vendor, who has calculated and committed the price
quotation on a reasonably tight budget, will incur heavy losses. Hence, if bank manage to
get a fixed manpower budget in the contract, bank should have a foolproof decision-
making and expenditure sanction machinery in place for the IT project.
The essence here is that unless bank finds a way to control the professional services
charge for the project, bank entire financial estimates for the project is at the risk of goingfor a toss. At the same time if vendor commits bank a fixed professional service charge,
and bank do not support vendor with an efficient decision making system for the it
project, the vendor will have no option but to abandon the project mid-way. Both the
conditions have equally unpleasant consequences for bank.
HIDDENCOSTS
Rather these are unforeseen costs, some of the banks normally fail to see at the beginning
when they are planning for Internet banking budget. Some of the Internet banking
expenditure items that is left out at the time of initial budgeting. Individually, these
appear to be small; together they become a substantial part of the total cost. And if bank
miss out on these, bank wisdom in estimation is going to be questioned later on.
1.Hardware and Software for Backup System and Test System
2. Firewall System - Hardware, OS, Software
3. Firewall for back up system
4. Encryption mechanism
5. Web Server Certificates.
6. Leased line and backup connection costs
7. Security policy design, validation and auditing costs.
8. Disaster Recovery Center ( DRC) costs
9. Risk Management and Contingency Plan
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10. Costs of hiring / buying computers for project implementation and UAT.
11. Costs involved in hiring consultant(s) for techno-legal planning.
12. Process Change Management
13. Setting up new Data Centre or expanding the existing one
14. Leased line and encryption of data between Data Centre and DRC.
15. New support resources and their training.
16. Telephone bills, Transport and hotel charges for consultants.
17. Additional costs due to people working late, working on holidays and weekends.
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The banking industry is expected to be a leading player in E-business. While the banks in
developed countries are working primarily Internet as non-branch bank, banks in the
developing countries use the Internet as an information delivery tool to improve
relationship with customer.
Banks have established an Internet presence with various objectives. Most of them are
using the Internet as new distribution channel. Financial services, with the use of Internet,
may be offered in an equivalent quantity with lower costs to the more potential
customers. There may be contacts from each corner of the world at any time of day or
night. This means that banks may enlarge their market without opening new branches.
The banks in the US are using the web to reach opportunities in three different categoriesto market information, to deliver banking products and services, and to improve customer
relationship.
UK
In early 2001, approximately 60% of E-business in the Uk was concentrated in the
financial services sector, and with the expected 10- fold increase of the British e-business
market in 2004, the share of the financial service will further increase. Around one fifth
of finish and Swedish bank customer are banking online, while in the US, according to
UNCTAD, online banking is growing at annual rate of 60% and the number of online
accounts reached 15million in 2003. Various well know banks are as follows:
Barclays http://www.barclays.co.uk/
Abbey National http://www.abbeynational.co.uk/
Cahoot http://www.cahoot.co.uk/
Smile http://www.smile.co.uk/
Nationwide http://www.nationwide.co.uk/
ASIA
In Asia, the major factor restricting growth of I banking is security, in spite of several
counties being well connected via Internet. Access to high-quality E-banking products is
an issue as well. Majority of banks an Asia are just offering basic service compared with
those of developed countries. CITIBANK, which has marketed a range of I-banking
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products in the US for years, didnt ad bill payment to its Hong Kong service until last
year and even then, for only 11 companies. HSBC, leading bank in Hong Kong,
introduced Ibanking last summer. Still, I-banking seems to have a future in Asia. I-
banking will succeed if the basic features, especially bill payment, are handled well. Bill
payment was the most popular feature, cited by 40% of respondent. However, providing
this services would be difficult for banks in Asia because it requires a high level of
security and involves arranging transactions with a variety of players.
US
In 2001, over 50% of the banks in the US were offering I-banking service. However,large banks appeared to have a clear advantage over small banks in the range of services
they offered. Some banks in the US were targeting their Internet strategies towards
business customers. Apart from affecting the way customers received baking services, I-
banking was expected to influence the banking industry structure. The economy of I-
banking was expected to favor large banks because of economies of scale and scope, and
to advertise heavily. Moreover, I-banking offered entry and expansion opportunities that
small banks traditionally lacked.
Citibank http://www.citibank.com/
Egg http://www.egg.com/
Intelligent Finance http://www.if.com/
Natwest http://www.natwest.com/
First Direct http://www.firstdirect.com/
EUROPE
In Europe, the Internet is accelerating the reconfiguration of the banking industry into
three separate businesses i.e. production, distribution and advice. This reconfiguration is
being further driven by the Internet, due to the combined impact of
Emergence of new and more focused business models in the banking sector.
New technological capabilities that reduces baking relationship and transaction
costs.
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High degree of uncertainty over the impact that new entrants will have on current
business models in the banking sector.
Through I-banking in the Europe is still in the evolutionary stage, it is clear that it is
having a significant impact on traditional banking activities. Unlike in the US, through
large banks in the Europe have a competitive edge due to their ability to invest heavily in
new technologies, they are still not ready to embrace I-banking. Hence, medium- sized
banks and start-ups have an important role to play on the I-banking front if they can take
concrete measure quickly and effectively.
PAYPAL (GLOBAL ONLINE BANKING)
Founded in 1998, PayPal, an eBay Company, enables any individual or business with anemail address to securely, easily and quickly send and receive payments online. PayPal's
service builds on the existing financial infrastructure of bank accounts and credit cards
and utilizes the world's most advanced proprietary fraud prevention systems to create a
safe, global, real-time payment solution. PayPal has quickly become a global leader in
online payment solutions with 50 million account members worldwide. Available in 45
countries around the world, buyers and sellers on eBay, online retailers, online
businesses, as well as traditional offline businesses are transacting with PayPal. Located
in San Jose, California, PayPal was acquired by eBay Inc. in October 2002.PayPal offers
three types of accounts: Personal, Premier, and Business
CORE FEATURES PREMIUM FEATURES
Send Money, Request Money, Auctions,
Tools Website, Payments, Money Market
Virtual Debit Card Account, Insurance
Downloadable Log, Email-based
customer service
All the Core Features, Do business as
yourself, under a corporate name, or
group name, Accept unlimited credit card
payments, Payment Receiving,
Preferences, Subscriptions, ATM/Debit
Card, Mass Payments, Multi-User Access,
*For Business Accounts, Advanced
Downloadable logs, PayPal Shops
7 day-a-week toll free customer service
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HISTORY OF INDIAN BANKING
Indias banking system dates back to 1870 when the Bank of Hindustan was set up.
During British colonisation, three banks were set up under the Presidencys act of 1876,
and these later amalgamated in 1921 to form the Imperial Bank of India. Princely states
also had private banks. During World War II and Independence from British rule in 1947,
the Reserve Bank of India (RBI) was established as an Apex bank under government
control. In 1955, the RBI acquired control of the Imperial Bank of India, which was re-
christened the State Bank of India, and took control over the state run private banks. By
1960, a merger of weak banks brought the number of banks down to 85. In 1969, most
banks with higher deposits were nationalised. Fuelled by a sentiment of patriotism and
bonding following independence, most Indians preferred to use nationalised banks, rather
than private banks. Rigid controls by the RBI on the banking sector and closed markets
fuelled the growth of these banks, although bureaucracy limited their activities. Private
institutions and money lenders were not encouraged by the average Indian consumer, as
the national sentiment was strongly inclined towards democratic socialism.
However, this sentiment also gave birth to the concept of co-operative banks, run
essentially by various unions with common objectives, for example, the milk producers
union and agricultural unions. They were organised along the lines of cooperative
management, with a no profit, no loss basis.
The early 1980s set the pace for computerisation and mechanisation, following the
formation of the Rangarajan Committee, which had a mandate to develop a phased plan
over 1985-89 to automate banking processes and was supported by the growth of branchbanking and the easy availability of PCs. The second Rangarajan Committee which was
formed in 1988, drew up a comprehensive plan to computerise the banks and for an
extension of automation to other areas like funds transfer, SWIFT, ATMs etc. Towards
the end of the 1980s, the deregulation process was gaining momentum with the growing
high tech sector in India. Deregulation has become an important mechanism for
generating competition in the banking system in many developing countries.
INTERNET BANKING ----------- INDIA
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The impact of liberalisation on commercial banks in the early years of deregulation, with
particular emphasis on the period covering 1986-1991. The results indicated that publicly
owned banks were more efficient. However, towards the end of the study period, foreign
banks appeared to catch up, perhaps due to their branching into metropolitan areas and
better adaptation to the competitive environment. There were changes taking place within
India itself, such as the impact of global trends, technological innovations, and a growing
generation of technically skilled youth who were driven by rational views, moving away
from the older generation with their nationalist attitudes, making further modification of
attitudes and actions inevitable. The 1990s were a period of rapid development in the
technology-based industries, and de-regulation of the market following the removal ofprotection by the government, leading to the growth of entrepreneurial activity on the part
of many banks. The Narasimham Committee report in 1992 introduced new reforms,
followed by the Banking Regulations Act in 1993, enabling new private banks to enter
the arena. In 1996, full foreign investment was allowed. In 1997, the Tarapore Committee
report on capital account convertibility launched a new mandate to support the full
convertibility of the rupee by the turn of 2000. These developments were supported by
the growing levels of expertise in information technology; venture capitalism and
increasing amounts of foreign investment.
In the current banking system of India, the major participants in the financial system are
the commercial banks, the financial institutions (FI), non-bank financial companies
(NBFCs) and other market intermediaries such as stockbrokers and moneylenders. The
banking segment in India functions under the umbrella of the Reserve Bank of India the
regulatory, central bank. Broadly it consists of Commercial Banks and Co-operative
banks, which include scheduled and unscheduled banks. The Commercial banks are
further divided into public sector (with major shareholders such as the Government of
India or the RBI), private sector banks and foreign banks. IBA (the Indian Banking
Association) regulates the bulk of the Indian commercial banks, with certain stipulations
such as minimum deposit bases to open ATMs. Most public sector banks with unions are
members of the IBA, although membership is not compulsory. There is also a consumer
protection authority that safeguards the interests of the individual user.
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GROWTH OF INTERNET IN INDIA
Indias Internet population is estimated growth of 29 million in March 2003 from 10.7
million in 2002. Indias Internet scenario is still plagued by low PC penetration, high cost
of Internet access hardware and low telephone penetration.
(Figures in thousand)
Mar-01 Mar-02 Mar-03 Mar-04 Mar-05
PC SALES 1,882 2,003 2,228 2,784 3,653
Household 416 449 528 659 890
Business 1,466 1,554 1,700 2,125 2,763
PC
POPULATION
5,070 6,709 8,482 10,650 13,486
Household 780 1,205 1,693 2,295 3,102
Business 4,290 5,504 6,789 8,335 10,385
PC
PENETRATION
(Per
000population)
4.94 6.41 7.81 9.63 11.92
INTERNET
PENETRATION
Business % 38 40 50 60 70
Household % 80 85 90 92 95
INTERNET
SUBSCRIBERS
1,130 1,763 3,661 4,403 6,674
Business 511 739 2,137 2,292 3,727
Household 622 1,024 1,523 2,111 2,947
NUMBER OF
USER
6,668 10,684 29,000 31,723 52,875
Business 5,114 8,124 25,649 27,501 48,455
Household 1,554 2,561 3,351 4,222 4,420
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Source: Nasscom
The above table highlights the key statistic that sum up the scenario for Internet usage
and penetration in India.
Indias Internet user base is growing at a rapid pace. Indias home and small business
segments will drive growth in the Internet user base in the near future. This rapid growth
in user base is likely to result in significant growth in the Internet advertising, E-
commerce and Internet banking.
However, India still lags behind other countries such as china (internet penetration of 46
per 000people), Japan (450) and Philippines, in terms of Internet penetration and usage.
INDIAN EXPERIENCES
India is still in the early stages of Internet banking growth and development. While it is
plagued by infrastructure problems, slow uptake of Internet access and PCs, poor
telecommunication network policies and slow paced regulatory initiatives, the rapidly
growing software industry in India and ever increasing demand from the IT professionals
have been promoting and supporting the online banking concept. The formerly
information poor nation is becoming a high tech intellectual center enabling banks to
capitalise on the brainpower available in the country. Banking in the country is
witnessing a sea change as the sector seeks new applications with the demand from and
facilities provided by the growing info tech professional sector. Competition and
changes in technology and lifestyle in the last five years have changed the face of
banking. The changes that have taken place impose on banks tough standards of
competition and compliance. Internet banking is likely to bring a host of opportunities aswell as unprecedented risks to the fundamental Nature of banking in India. The impact of
I-Banking in India is not yet apparent. Many global research companies believe that
Internet banking adoption in India in the near future would be slow compared to other
major Asian countries. Indian I-banking is still nascent, although it is fast becoming a
strategic necessity for most commercial banks, as competition increases from private
banks and non-banking financial institutions.
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The private banks have been quick to capitalise on this attitude, by forming alliances with
utility service providers (mainly Credit cards, mobile operators and phone services), and
offering services on the Internet.
FIRST INTERNET BANK IN INDIA
Private and foreign banks have been the early adopters of I-banking while the Public
sector banks are also beginning to hold on to the competition. ICICI Bank and HDFC
Bank have taken a lead in introducing Internet banking in India. ICICI was the first bank
to initiate the Internet banking revolution in India as early as 1997 under the brand name
Infinity ICICI Bank is the first one to have introduced Internet banking for a limited
range of services such as access to account information and recently, funds transfer
between its branches. ICICI is also getting into e trading, thus offering a broader range of
integrated services to the customer. Other banks also followed the suit. However, 1996-
98 was the period of Internet banking adoption while the Internet banking usage gained
importance only in 1999. After ICICI, Citibank, IndusInd Bank, Global Trust Bank,
HDFC Bank, Federal Bank was the early ones to adopt the technology in 1999. Large
public sector banks like SBI and UTI initially slow to adopt online banking and Bank of
Baroda too planning to invest around Rs 250 crore for its online banking operations.
INTERNET BANKING SERVICES
Around 51 banks are offering a variety of Internet services. While 55% offer entry-level
services, 8% offer advanced transactions such as online transfer, the other 37% is still in
the process of catching up with Internet banking. The public sector banks, which
constitute about 65% of the sector, are still plagued by union issues, inertia in the lower
ranks and a general apathy towards technological innovations, especially the Internet.
Foreign banks have a wider variety of I-Banking services with their existing high
technology linkages and infrastructure. However, the newly formed private banks seem
to be pulling ahead of the foreign and public sector banks, especially in the I Banking
sector. To start with, they did not have the issue of legacy systems and processes that
plagued the public sector banks and therefore, did not have to restructure. As observed,
the private banks have had the benefit of being innovation leaders, supported by
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technology. The private banks have also been acquiring the older and weaker banks thus
growing in size. In addition to this, the new generation of IT professionals demands
innovative services, while supporting their growth. The public sector banks are trying to
catch up in this competitive environment, but they still have a long way to go.
INDIAN CONSUMER
The average Indian consumer was initially driven by national sentiment to use
nationalised banks, an approach which also acted as a stability measure. But social and
economic changes in India now mean there is an increasing number of better educated,
better off and more financially sophisticated professionals who have no cultural problems
with credit. The uptake of I-Banking usage is fairly low and is concentrated in urban
areas. Lack of skill in using an Internet banking, and inaccessibility have been identified
as major causes for this slow uptake by the majority of banks. Personal attention is still
required before the critical mass of the literate population is reached.
SECURITY AND IT
RBI has issued guidelines to banking and finance companies advising them to securetheir information assets. For banks, data translates to money and illicit data tampering
could result in losses. Not to mention damage to reputation and defection of customer.
The legal challenges of Internet banking in India include information security and
regulatory compliance. The IBA recently launched EFT (electronic funds transfer) and
ECS (electronic clearing system) as major electronic banking products. EFT is the safest
and fastest way to transfer money, regardless of bank, branch, or city. ECS enables
deposit of dividends into the shareholders account, if the bank account is given. The
geographical spread lacking in EFT has led to the increasing popularity of ECS. In
September 2000, the Institute of Development and Research in Banking Technology
(IDBRT) implemented its long-awaited EFT and real-time gross settlement (RTGS)
system, with services available throughout India. The Indian Financial Network (Infinet),
a VSAT-based communication backbone for the national payment system, was equipped
with a full transponder on the INSAT-3B satellite to carry out its operations.
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SECURITY ENVIRONMENT: COUNTRY COMPARISON
LAW INDIA CHINA PHILIPPINES IRELAND US EU
IPR
Copyright Yes Yes Yes Yes Yes Yes
Patent 2005 No No No Yes No
Data
Protection
Data
protection
laws
Comprehensive
framework
2004
No No Yes Yes* Yes
Vertical
specific
laws
No No No Yes Yes Yes
CYBER
Digital
signatures
Yes Yes Yes Yes Yes Yes
Hacking Yes Yes Yes Yes Yes YesPrivacy Yes Yes** Yes Yes Yes Yes
According to NASSCOM estimates, in 2002-2003, the financial service sector accounted
for the largest share of Indian software and services export at around 39%. IT spending
by banking is driven by initiatives to meet regulatory requirements, manage customer
relationships, manage risks, reduce costs and attract new customers. Banks are trying to
provide web-based trade support, value-added transaction services, basic online
transaction services, and basic online information services, to attract and retain
customers. IT spending by US banks will reach US$ 60 billion in 2007 growing by more
than 5% between 2002 and 2007. top area of IT spending in the Us banking industry are
enterprise integration projects, followed by security and enterprise portals, knowledge
management and CRM.
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India compares well with competing outsourcing destinations on the security matrix.
India has a cyber cell to deal with cyber crimes and digital signatures are recognized
under the IT act, 2000. Though there are no explicit privacy related laws, the Supreme
Court recognizes the right to privacy under article 21 of the constitution.
ROLE OF RBI
Like most of other activities in banking RBI also set up two committees in quick
succession to accelerate the pace of automation of operations in the banking sector. In the
early 80s, a high level committee was formed under the chairmanship of Dr. C.
Rangarajan, then Governor of RBI, to draw up a phased plan for computerization and
mechanization in the banking industry over a five year time frame of 1985-89. The focus
by this time was on customer service and two models of branch automation were
developed and implemented. Having gained experience in the earlier mode of
computerization, the second Rangarajan committee constituted in 1988 drew up a
detailed perspective plan for computerization of banks and for extension of automation to
other areas like funds transfer, e-mail, BANKNET, SWIFT, ATMs, Internet banking etc.
The Government of India enacted the Information Technology Act, 2000, generally
known as IT Act, 2000, with effect from the 17th October 2000 to provide legal
recognition to electronic transactions and other means of Electronic Commerce. Reserve
bank of India had set up a Working Group on Internet Banking to examine different
aspects of Internet banking (I-banking). The Group had focused on three major areas of I-
banking.
1.Technology And Security Issues
The importance of the impact of technology and information security cannot be doubted.
Technological developments have been one of the key drivers of the global economy and
represent an instrument that if exploited well can boost the efficiency and competitivity
of the banking sector. However, the rapid growth of the Internet has introduced a
completely new level of security related problems. The problem here is that since the
Internet is not a regulated technology and it is readily accessible to millions of people,
there will always be people who want to use it to make illicit gains. The security issue
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can be addressed at three levels. The first is the security of customer information as it is
sent from the customer's PC to the Web server. The second is the security of the
environment in which the Internet banking server and customer information database
reside. Third, security measures must be in place to prevent unauthorized users from
attempting to long into the online banking section of the website.
2.Legal Issues
From a legal perspective, security procedure adopted by banks for authenticating users
needs to be recognized by law as a substitute for signature. In India, the Information
Technology Act, 2000, in section 3(2) provides for a particular technology (viz., theasymmetric crypto system and hash function) as a means of authenticating electronic
record. Any other method used by banks for authentication should be recognized as a
source of legal risk.
3.Regulatory And Supervisory Issues
The regulatory and supervisory issues, only such banks which are licensed and
supervised and have a physical presence in India will be permitted to offer E-banking
products to residents of India. With institutions becoming more and more global and
complex, the nature of risks in the international financial system has changed. The
Regulators themselves who will now be paying much more attention to the qualitative
aspects of risk management have recognized this. Though the Indian Government has
announced cyber laws, most corporate are not clear about them, and feel they are
insufficient for the growth of E-commerce. Lack of consumer protection laws is another
issue that needs to be tackled, if people have to feel more comfortable about transacting
online.
RBI had accepted the recommendations of the Working Group and
accordingly issued guidelines on Internet banking in India for implementation by banks.
The Working Group has also issued a report on Internet banking covering different
aspects of I-banking.
Considerable progress has been made in consolidating the existing payment systems and
in upgrading technology with a view to establishing an efficient, integrated and secure
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system functioning in a real-time environment. Major projects under implementation are
electronic clearing, centralized funds management, structured financial messaging
solutions and the Indian Financial Network (INFINET). Facilities under Electronic Funds
Transfer (EFT) have been upgraded and their spatial reach expanded with multiple
settlements in a day. Foreign exchange clearing has been initiated through the Clearing
Corporation of India Limited (CCIL). Adequate security features are being incorporated
into the EFT. Preparatory work for the real time gross settlement (RTGS) is complete.
Also RBI is about to become the first Government owned digital signature Certifying
Authority (CA) in India. The move is expected to initiate the electronic transaction
process in the banking sector and will have far-reaching results in terms of cost and speedof transactions between government- owned banks.
Thus efficiency, growth and the need to satisfy a growing tech-survey consumer base are
three clear rationales for implementing E-banking in India. The four forces-customers,
technology, convergence and globalization have the most important effect on the Indian
financial sector and these changes are forcing banks to redefine their business models and
integrate technology into all aspect of operation.
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STATISTICAL REPRESENTED OF INTERNET BANKING IN INDIA
In India, slowly but steadily, the Indian customer is moving towards Internet banking. A
number of banks have either adopted Internet Banking or are on the threshold of adopting
it. The banks started Internet banking initially with simple functions such as getting
information about interest rates, checking account balances and computing loan
eligibility. Then the services were extended to online bill payment, transfer of funds
between accounts and cash management services for corporate. Recently, banks have
started to facilitate payment for e-commerce transactions by directly debiting bank
accounts or through credit cards. It will add to the revenues of the banks. Internet bankingproduct and services are divided into category
Basic:
1) Account inquiry. 2) Funds transfer. 3) Electronic bill presentment and payment.
Premium:
1) Brokerage. 2) Cash management. 3) Credit applications. 4) Credit and debit cards. 5)
Customer correspondence. 6) Demat holdings. 7) Financial advice 8) Foreign exchange
trading. 9) Insurance. 10) Online trading. 11) Opening accounts 12) Requests and
intimations. 13) Tax services. 14) E-shopping. 15) Standing instructions. 16)
Investments. 17) Asset management services etc.
PROFILE OF BANKS
Presently there are 30 private sector banks (21 old and 9 new), 27 public sector banks and
36 foreign banks operating in India. The current state of Internet banking services offered
by private, public and foreign banks operating in India. Almost all the banks are having
websites; however, only 48 banks are providing transactional banking services in one
form or the other which represents nearly 17 percent of total Scheduled commercial
banks operating in India. Table 1.1 and 1.2 shows the adoption rates of the Internet
banks.
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Internet Banking and Scheduled Commercial Banks
Table 1.1
NumberPercentage of AllScheduled CommercialBanks (289)
Banks with Web Sites 90 31.1
Banks with Transactional Sites 48 16.6
Adoption Rates of Internet Banks
TABLE 1.2(As on March 31, 2004)
Number of Banks Number of BanksWith Websites
Number of BanksWith TransactionalSites
Private SectorBanksNew*
Old**
Public Sector Banks
Foreign Banks
All Banks
30
9
21
27
36
93
28
9
19
27
35
90
15 (50.0)
9 (100.0)
6 (28.6)
13 (48.1)
20 (55.6)
48 (51.6)
Source: www.banknetindia.com/banklinks.htm Figures in bracket denote
percentage.
* Includes banks established after the liberalization reforms as recommended by
Narsimham Committee in 1991.
** Includes banks established before the liberalization reforms as recommended
by Narsimham Committee in 1991.
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As evidenced from Table 1.2, number of banks offering Internet banking services
in one form or the other are 48.
FOREIGN BANKS
Table 1.3
Position of Foreign banks providing Internet Banking in India
No. OfBanks
Banks withWeb sites
Banks providingInternet banking
Banks providingInternet Banking inIndia
AccessibleWeb sites
36 35 25 20 16
There are 25 foreign banks offering Internet banking services in different countries in one
form or the other. However, the Internet banking services of four foreign banks out of 20
which are providing Internet banking services in India were not accessible through their
websites either due to language problem or the other. As all the 16 banks offering Internet
banking services in India are fully transactional banks therefore it was assumed that the
other 4 banks are also fully transactional banks. However, services offered by Internet
banks in India in the presently, only 16 foreign banks.
CLASSIFICATION OF INTERNET BANKING WEBSITES
*Entry Level Internet Banks include those banks, which are not providing any
transactional service.
**Partly transactional Internet banks include those banks providing less than
BASIC services. ***Fully transactional Internet banks include those banks providing BASIC plus
PREMIUM services of Internet banking.
Figures in bracket denote the percentage of number of fully transactional web
sites to total number of commercial banks in India.
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Table 1.4
Classification of Internet Banking Websites
Transactional WebsitesEntryLevel Websites* Partly
Transactional**FullyTransactional***
Total Number ofBank Websites
All Banks 42 14 34(36.6%) 90
Foreignbanks
15 0 20(55.6%) 35
Private
SectorBanks 13 5 10(33.3%) 28
PublicSectorBanks
14 9 4 (14.8%) 27
Internet banking in true sense, which represents only 36 percent of total
commercial banks (Table 1.4). Out of total public sector banks nearly 15 percent
banks offer fully transactional banking services while 33 percent of private sector
banks and 55 percent of foreign banks are offering fully transactional Internetbanking services.
RANGE OF SERVICES OFFERED BY TRANSACTIONAL INTERNET
BANKS
As shown in Table 15, nearly 68 percent of the transactional banks provide BASIC
services of Internet banking. 96 percent of the transactional banks provide account
balance enquiry service. More than 70 percent of the transactional banks offer theservices of funds transfer between accounts and electronic bill payment. However foreign
transactional banks are more likely to provide these services as compared to private and
public transactional banks. More number of Foreign and private banks also provide third
party fund transfer facility as compared to public sector banks.
A look at Internet banking services beyond balance enquiry, funds transfer and bill
payment reveals the pattern of what is offered by banks of different categories. As far as
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the services of providing customer correspondence are concerned there is no difference
among the banks.
Nearly 41 percent of the banks provide the service of new account set up. However
private sector and public sector banks lag behind foreign banks in providing this service.
Similarly in respect of the services of online trading, Demat holdings and E-shopping the
private sector banks out performed the foreign as well as public sector banks. It is a
determinant of how well the private sector banks compete with the foreign and public
sector banks for business customers.
Table 1.5also contains information on the extent to which particular business lines- loan
applications, credit card payment, financial planning, online insurance, brokerage,financial planning, linking of accounts i.e. one can view all the accounts in the same bank
in one statement, providing market news and net worth statement online and investment
trading- were offered. A large number of foreign banks offer these services than the
private and public sector banks.
However foreign transactional banks are inefficient in providing the services like Demat
holdings, E-shopping and the services of providing standing instructions and handling
requests and intimations. However there are some new Internet banking services which
are offered by foreign banks including recurring transfer of funds between the accounts,
providing the net worth statement to the customers and the services of financial planning.
The position of public sector banks is worst in case of providing the range of Internet
services and products. No public sector bank provide the services of Demat Holdings,
Brokerage, Investments, Online Remittance of Funds, Tax advisory service, Financial
Planning, Linking A/cs, Online Market News, Online Trading, Foreign Exch.
Trading, Tds Enquiry, One View a/c and providing Net Worth Statement.
Nearly 75 percent of the foreign transactional banks provide demonstration of the Internet
banking on their web sites. While 60 percent of private and nearly 62 percent of public
sector banks did so. All the transactional banks provide customer correspondence for the
purpose of gaining new and retaining their existing online customers.
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Table 1.5
Range of Services Offered by Transactional Internet Banks
(Percentage of transactional banks offering selected services)
ServiceCode
Type of service All banks ForeignsectorBanks
PrivateSectorBanks
PublicSectorBanks
1 Balance Enquiry 95.5 100.0 93.3 92.3
2 Funds Transfer 77.3 100.0 86.7 38.5
3 Bills Payment 75.0 100.0 73.3 46.2
4 Third Party Transfer 45.5 50.0 53.3 30.8
5 Opening accounts 40.9 75.0 26.7 15.4
6 Receive Alerts 29.5 31.25 40.0 15.4
7 Requests& Intimations 79.5 68.75 93.3 76.9
8 Cash ManagementOnline
9.1 6.25 6.7 15.4
9 E-Shopping 38.6 43.75 53.3 15.4
10 Credit Card Payment 22.7 31.25 13.3 23.1
11 Standing Instructions 81.8 68.75 93.3 84.6
12 Loan Applications 29.5 43.75 33.3 7.7
13 CustomerCorrespondence
100.0 100.0 100.0 100.0
14 Insurance 6.8 12.5 6.7 0.0
15 Demat Holdings 25.0 18.75 53.3 0.0
16 Brokerage 4.5 6.25 6.7 0.0
17 Investments 22.7 37.5 26.7 0.0
18 Online Remittance ofFunds
11.4 12.5 20.0 0.0
19 Tax advisory service 13.6 6.25 33.3 0.0
20 Financial Planning 34.1 56.25 40.0 0.0
21 Linking A/cs Online 4.5 6.25 6.7 0.0
22 Market News Online 6.8 12.5 6.7 0.0
23 Trading Online 18.2 25.0 26.7 0.0
24 Foreign Exch. Trading 2.3 0.0 6.7 0.0
25 Foreign exch. Rates
update
27.3 50.0 20.0 7.7
26 TDS Enquiry 9.1 6.25 20.0 0.0
27 One View a/c 4.5 6.25 6.7 0.0
28 Net Worth Statement 4.5 12.5 0.0 0.0
29 Privacy Statement 84.1 87.5 100.0 61.5
30 Demonstration of IBanking
65.9 75.0 60.0 61.5
BASIC* 68.2 100.0 66.7 30.8
PREMIUM** 68.2 100.0 66.7 30.8
Source: www.banknetindia.com/banklinks.htm
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*BASICincludes balance enquiry, funds transfer and bill payment.
**PREMIUM includes BASIC and at least three other services.
To gain a clear picture of the range of Internet services available at banks of different
sizes, two menus of Internet banking services are defined. BASIC Internet banking is
defined as the three core Internet banking services: balance enquiry, funds transfer and
bill payment. PREMIUM Internet banking is defined as BASIC plus at least three other
services. Foreign banks are offering BASIC as well as PREMIUM Internet banking
services. All the foreign transactional banks provide BASIC as well as PREMIUM
Internet banking products. While only 67 percent of the private transactional banks and
31 percent of public transactional banks offer PREMIUM and BASIC Internet bankingservices.
The major concern for the adoption of Internet banking presently is the level of security
or risk associated with it. Both banks and customers stand to benefit from the collection
and integration of large amounts of personal information over the Internet that enhance
the ability of the banks to offer a wide range of products according to the individual
demands. But the collection, analysis and distribution of information raise questions
related to protecting personal privacy. A fundamental step many banks are taking to
address on-line privacy is to post a statement of their policies about the collection and use
of customer information. The database includes information on the number of
transactional banks that had such a statement on their web sites.
Table 1.5 shows that most of the transactional banks included a privacy policy statement
on their web sites. Indeed, 100 percent of the private sector banks include privacy
statement on their web sites. And nearly 88 percent of the foreign banks and 62 percent
of public sector banks did so.
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COMPARISON OF KEY ATTRIBUTES
The banks offering various through Internet banking accounted for most of the assets in
the Indian commercial banking system. As a group, transactional Internet banks had, on
average, 187 percent more assets, 115 percent more employees, and 60 percent more
offices and 157 percent more deposits than non-Internet national banks.
Table 1.1
Comparison of Key Attributes of Internet Banks and Non-Internet Banks
Transactional
Internet Banks
Non-Internet
Banks*
Average Size (assets in Rs crores) 23970.17 8336.788
Average Number of Offices per Bank 698 436
Average Number of Employees 12179 5645
Deposits 18252.74 7096.749
Transactional Internet banks as a
Percentage of all commercial banks***
Number of Banks 51.6
Assets** 75.4
Deposits 73.3
Source: www.rbi.org.in
*Includes banks with non-transactional web sites.
** Rupees value of assets.
***Excluding Regional Rural banks.
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COMPARISON OF PERFORMANC
Financing Pattern
The use of univariate comparisons between Internet and non-Internet bank
characteristics.
1.Financing Pattern
Table 2.1
Financing Pattern of Internet and Non-Internet Commercial Banks
Financing Pattern
(In percent)
Deposits / Assets Purchased Funds /Deposits
Private Sector Banks
Internet Banks
Non-Internet Banks
P-value
65.0
87.8
(0.29)
27.1
1.6
(0.10)*
Public Sector Banks
Internet Banks
Non-Internet Banks
P-value
83.1
86.3
(0.94)
2.3
1.6
(0.82)
Foreign Banks
Internet Banks
Non-Internet Banks
P-value
60.0
56.7
(0.86)
33.0
33.0
(0.18)All Banks
Internet Banks
Non-Internet Banks
P-value
78.0
85.8
(0.41)
7.9
2.1
(0.11)
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In comparing transactional Internet banks to non-Internet banks, as Tables 2.2, 2.3, and
2.4 illustrate, (Q1 2004) differences between Internet and non-Internet banks had begun
to emerge in funding, in sources of income and expenditures and in measures of
performance.
For each pair of observations in a table, a probability (p) value is provided for the
hypothesis that the means in the Internet and non-Internet samples are the same. A lower
p-value indicates a greater likelihood that the two figures compared represent real
differences between categories of banks (Internet vs. non-Internet, etc.). Table 2.1shows
major financing characteristics of Internet and non-Internet banks. Overall, Internet banks
generally are less reliant on core deposits for funding and make greater use of purchasedfunds relative to deposits. However, the difference is significant in case of private sector
banks only. Numbers in parentheses are p-values for the difference of means test for
Internet and non-Internet bank values in each cell.
*** Significant at the 1 percent or better level.
** Significant at the 5 percent level.
* Significant at the 10 percent level. On-Internet banks include banks with non-
transactional Web sites.
Income and Expenses
Differences in the business strategies of Internet and non-Internet banks are also evident
in Table 2.3. The first column shows the ratio of non-interest income to net operating
revenue, which is a rough proxy for the amount of revenue generated by non-traditional
activities. Internet banks generated a substantially higher proportion of their income
roughly speaking, about 40 percent more from non-traditional activities compared to non-
Internet banks. This pattern is consistent with a business strategy of using the Internet to
target businesses and more affluent consumers, with the belief that these customers will
be interested not only in loans but also in other services that yield fee income.
In addition to revenue enhancement, Internet banking may enable banks to reduce costs
of operation, in particular, by allowing them to reduce expenditures on premises and
fix