in the five decades since independence

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In the five decades since independence, banking in India has evolved through four distinct

phases. During Fourth phase, also called as Reform Phase, Recommendations of the Narasimham

Committee (1991) paved the way for the reform phase in the banking. Important initiatives with

regard to the reform of the banking system were taken in this phase. Important among these have

been introduction of new accounting and prudential norms relating to income recognition,

provisioning and capital adequacy, deregulation of interest rates & easing of norms for entry in

the field of banking.

Entry of new banks resulted in a paradigm shift in the ways of banking in India. The growing

competition, growing expectations led to increased awareness amongst banks on the role and

importance of technology in banking. The arrival of foreign and private banks with their superior

state-of-the-art technology-based services pushed Indian Banks also to follow suit by going in for

the latest technologies so as to meet the threat of competition and retain their customer base.

Indian banking industry, today is in the midst of an IT revolution. A combination of regulatory and

competitive reasons have led to increasing importance of total banking automation in the Indian

Banking Industry.

Information Technology has basically been used under two different avenues in Banking. One is

Communication and Connectivity and other is Business Process Reengineering. Information

technology enables sophisticated product development, better market infrastructure,

implementation of reliable techniques for control of risks and helps the financial intermediaries to

reach geographically distant and diversified markets.

In view of this, technology has changed the contours of three major functions performed by

banks, i.e., access to liquidity, transformation of assets and monitoring of risks. Further,

Information technology and the communication networking systems have a crucial bearing on the

efficiency of money, capital and foreign exchange markets.

The Software Packages for Banking Applications in India had their beginnings in the middle of80s, when the Banks started computerising the branches in a limited manner. The early 90s saw

the plummeting hardware prices and advent of cheap and inexpensive but high-powered PCs and

servers and banks went in for what was called Total Branch Automation (TBA) Packages. The

middle and late 90s witnessed the tornado of financial reforms, deregulation, globalisation etc

coupled with rapid revolution in communication technologies and evolution of novel concept of

'convergence' of computer and communication technologies, like Internet, mobile / cell phones

etc.

MILESTONES

In India, banks as well as other financial entities entered the world of information technology and

with Indian Financial Net (INFINET). INFINET, a wide area satellite based network (WAN) using

VSAT (Very Small Aperture Terminals) technology, was jointly set up by the Reserve Bank and

Institute for Development and Research in Banking Technology (IDRBT) in June 1999.

The Indian Financial Network (INFINET) which initially comprised only the public sector banks was

opened up for participation by other categories of members.

The first set of applications that could benefit greatly from the use of technological advances in



the computer and communications area relate to the Payment systems which form the lifeline of

any banking activity. The process of reforms in payment and settlement systems has gained

momentum with the implementation of projects such as NDS ((Negotiated Dealing System), CFMS

(Centralised Funds Management System) for better funds management by banks and SFMS

(Structured Financial Messaging Solution) for secure message transfer. This would result in funds

transfers and funds-related message transfer to be routed electronically across banks using the

medium of the INFINET. Negotiated dealing system (NDS), which has become operational since

February 2002 and RTGS (Real Time Gross Settlement system) scheduled towards the end of 2003

are other major developments in the area.

Internet has significantly influenced delivery channels of the banks. Internet has emerged as an

important medium for delivery of banking products & services. Detailed guidelines of RBI for

Internet Banking has prepared the necessary ground for growth of Internet Banking in India.

The Information Technology Act, 2000 has given legal recognition to creation, trans-mission 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.

As stated in RBI's Annual Monetary and Credit Policy 2002-2003: "To reap the full benefits of such

electronic message transfers, it is necessary that banks bestow sufficient attention on the

computerisation and networking of the branches situated at commercially important centres on a

time-bound basis. Intra-city and intra-bank networking would facilitate in addressing the "last

mile" problem which would in turn result in quick and efficient funds transfers across the

country".



MILESTONES














medium of the INFINET. Negotiated dealing system (NDS), which has become operational sinceFebruary 2002 and RTGS (Real Time Gross Settlement system) scheduled towards the end of 2003








1881.






country".



An Assignment OnServices Marketing

(The role of technology in improving/impeding services quality, in a banking and financial

sector.)Submitted by

Saurabh Goel08bs0003002INTRODUCTION

In the five decades since independence, banking in India has evolved through four distinct

phases. During Fourth phase, also called as Reform Phase, Recommendations of the Narasimham

Committee (1991) paved the way for the reform phase in the banking. Important initiatives with

regard to the reform of the banking system were taken in this phase. Important among these have

been introduction of new accounting and prudential norms relating to income recognition,

provisioning and capital adequacy, deregulation of interest rates & easing of norms for entry in

the field of banking.Entry of new banks resulted in a paradigm shift in the ways of banking in

India. The growing competition, growing expectations led to increased awareness amongst banks

on the role and importance of technology in banking. The arrival of foreign and private banks with

their superior state-of-the-art technology-based services pushed Indian Banks also to follow suit

by going in for the latest technologies so as to meet the threat of competition and retain their

customer base.Indian banking industry, today is in the midst of an IT revolution. A combination ofregulatory and competitive reasons, have led to increasing importance of total banking

automation in the Indian Banking Industry.ROLE OF TECHNOLOGY

Information Technology has basically been used under two different avenues in Banking. One is

Communication and Connectivity and other is Business Process Reengineering. Information

technology enables sophisticated product development, better market infrastructure,

implementation of reliable techniques for control of risks and helps the financial intermediaries to

reach geographically distant and diversified markets.In view of this, technology has changed the

contours of three major functions performed by banks, i.e., access to liquidity, transformation of

assets and monitoring of risks. Further, Information technology and the communication

networking systems have a crucial bearing on the efficiency of money, capital and foreign

exchange markets.Internet has significantly influenced delivery channels of the banks. Internethas emerged as an important medium for delivery of banking products & services. Detailed

guidelines of RBI for Internet Banking has prepared the necessary ground for growth of Internet

Banking in India.The Information Technology Act, 2000 has given legal recognition to creation,

trans-mission 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.As stated in RBI's Annual Monetary and Credit Policy 2002-2003:

"To reap the full benefits of such electronic message transfers, it is necessary that banks bestow

sufficient attention on the computerisation and networking of the branches situated at

commercially important centres on a time-bound basis. Intra-city and intra-bank networking would

facilitate in addressing the "last mile" problem which would in turn result in quick and efficient

funds transfers across the country".

ADVANTAGES OF TECHNOLOGY

1.From both customer and banking perspectives it shows that the Internet is a convenience tool

available whenever and wherever customers need it. It is also found that the Internet has

improved the factors in service quality like responsiveness, communication and access. It is

concluded that the Internet has an important and positive effect on customer perceived banking



services and the service quality has been improved since the Internet has been used in banking

sector.

2.

It's generally secure. But make sure that the website you're using has a valid security certificate.

This lets you know that the site is protected from cyber-thieves looking to steal your personal andfinancial information.

3.

It gives twenty-four-hour access. When the neighborhood

bank

closes, you can still access your account and make transactions online. It's a very convenient

alternative for those that can't get to the bank during normal hours because of their work

schedule, health or any other reason.

4.

It allows us to access our account from virtually anywhere. If we're on a business trip or

vacationing away from home, we can still keep a watchful on our money and financial

transactions – regardless of our location.5.Conducting business online is generally faster than

going to the bank. Long teller lines can be time-consuming, especially on a Pay Day. But online,

there are no lines to contend with. You can access your account instantly and at your leisure.

6.

Many features and services are typically available online. For example, with just a few clicks you

can apply for

loans

, check the progress of your

investments

, review interest rates

and gather other important information that may be spread out over several different brochures in

the local bank.7.Technology has opened up new markets, new products, new services and

efficient delivery channels for the banking industry. Online electronics banking, mobile banking

and internet banking are just a few examples.

8.

Information Technology has also provided banking industry with the wherewithal to deal with the

challenges the new economy poses. Information technology has been the cornerstone of recent

financial sector reforms aimed at increasing the speed and reliability of financial operations and

of initiatives to strengthen the banking sector.

9.



The IT revolution has set the stage for unprecedented increase in financial activity across the

globe. The progress of technology and the development of worldwide networks have significantly

reduced the cost and time of global funds transfer.10.It is information technology which enables

banks in meeting such high expectations of the customers who are more demanding and are also

more techno-savvy compared to their counterparts of the yester years. They demand instant,

anytime and anywhere banking facilities.11.IT has been providing solutions to banks to take care

of their accounting and back office requirements. This has, however, now given way to large scale

usage in services aimed at the customer of the banks.12. IT also facilitates the introduction of new

delivery channels--in the form of Automated Teller Machines, Net Banking, Mobile Banking and

the like. 13.Use of de-mat account and online trading enables a person to buy and sell shares any

time. The share trading companies and AMC‘s can give improved and faster service with help of

technology.14.There are many useful features and services available online besides for the usual

transactions. For example, you can apply for credit cards, manage investments, and pay bills

through your online account portal. You can also perform more mundane tasks such as ordering

new checks, requesting additional deposit slips, or reporting a lost or stolen debit card.Certainly

the above mentioned advantages if technology have improved the quality of service in a banking

and financial sector.TECHNOLOGY PRODUCTS IN A BANKING SECTOR:

1.Net Banking

2.

Credit Card Online

3.

Instant Alerts4.Mobile Banking5.e-Monies Electronic Fund Transfer6.Online Payment of Excise &

Service Tax7.Phone Banking8.Bill Payment9.Shopping10.Ticket Booking11.Railway Ticket

Booking through SMS12.Prepaid Mobile Recharge13.Smart Money Order14.Card to Card Funds

Transfer15.Funds Transfer (eCheques)16.Anywhere Banking17.Internet Banking18.Mobile

Banking

19.

Bank @ Home ―Express Delivery‖DISADVANTAGES OF TECHNOLOGY

1.

Yes, online banking is generally secure, but it certainly isn't

always

secure.

Identity theft

is

running rampant, and banks are by no means immune. And once your information is

compromised, it can take months or even years to correct the damage, not to mention possibly

costing you thousands of dollars, as well. This generally does not happen in case of traditional

method of banking.



2.

Some online banks are more stable than others. Not all online setups are an extension of a brick-

and-mortar bank. Some operate completely in cyberspace, without the benefit of a branch that you

can actually visit if need be. With no way to physically check out the operation, you must be sure

to thoroughly do your homework about the bank's background before giving them any of your

money.

3.

Before using a banking site that you aren't familiar with, check to make sure that their deposits

are

FDIC

-insured. If not, you could possibly lose all of your deposits if the bank goes under, or its major

shareholders decide to take an extended vacation in Switzerland.4.Customer service can be below

the quality that you're used to. Some people simply take comfort in being able to talk to another

human being face-to-face if they experience a problem. Although most major banks employ a

dedicated customer service department specifically for online users, going through the dreaded

telephone menu can still be quite irritating to many. Again, some are considerably better (or

worse) than others.5.Not all online transactions are immediate. Online banking is subject to the

same business-day parameters as traditional banking. Therefore, printing out and keeping

receipts is still very important, even when banking online.6.If your bank operates only online or

simply does not have a branch office in your local area, you will not be able to reach a

representative in person for discussion of account issues. Normally this is not a problem, but

sometimes customer service by telephone or email can be spotty and may prove to be more of a

hassle if you have a serious issue that is not easily resolved. Some banks are better than others in

this department, so you will need to do some research if this is an important consideration for

you.7.Using online banking effectively requires some basic computer literacy and familiarity with

navigating the Internet. While this is not a problem for people like me, those who are afflicted withtechnophobia or are simply inexperienced with this particular genre may not be comfortable with

this concept. There are also a significant number of people who are suspicious of anything having

to do with the Internet because it is outside of their comfort zone. Others are simply too stubborn

to acquire the relevant knowledge and skills.



INFORMATION TECHNOLOGY IN THE BANKING ANDFINANCIAL SECTORSMARCH 25, 1996

BACKGROUND BREIFING PAPER OF THETELECOMMUNICATIONS INFOTECHNOLOGY

FORUM(please attribute any quotation)Information Technology in the Banking and Financial

ServicesSector

Smartcards, banks and telephones

A brief historical introduction; what this suggests about the future

Banks first started using computers linked to telecommunications systems in a big way inthe

1970s and 1980s, when local area networks allowed them to start automatingaccounts—and thus

to introduce automatic teller machines (ATMs) which customerscould use to find out how much

money was in their accounts and make cash withdrawals.ATMs appeared to offer two things:— A

competitive advantage: better service for customers.— Savings on staff costs, as tellers were

replaced with machines.The first of these is undoubtedly true. A network of ATMs operating 24

hours a daytakes the necessity out of planning when to get money for individuals—it is hard

toimagine anyone accepting a bank without an ATM network for their day-to-day financialneeds

(though judging by the queues in some banks, some people do not seem to haverealised quitewhat can be done with an ATM card).The second, however, has not really happened, at least in the

way it was originallyimagined. What has happened is that on the one hand staff have been freed

up for otherthings—such as handling the huge array of financial services banks now offer

comparedwith a couple of decades ago—and on the other IT has taken on a life of its own

asbanks think of new ways to wire themselves and their customers. In Hong Kong this hasmeant

people being able to pay everything from their electricity to their tax bill byphone—just press in

the numbers—or pay for goods with money direct from theiraccounts—the EPOS system, now

widely available. Although banks still talk aboutreducing the number of their branches—perhaps

in Hong Kong because of itsaggressively high rents, rather than staff costs—this does not appear

to be happening(those queues again).With further technological advantages banks can now take

ATM cards a step further—enter the smartcard, a card with a chip on it, that can store much more

information on it,and do much more with this information. The world's best-known smartcard isMondex.

Tell me about Mondex. What is it, apart from a portentous name?

Mondex is a smartcard system that aims at replacing cash, developed by British banksNatWest

and Midland (owned by HSBC) and telecoms operator BT. Most of itstechnology is developed by

Japan's Hitachi, which manufactures the card's chips andbalance readers. Transactions are

handled off-line—with the money being stored on thecards and transferred off them direct to

another party. In theory the card will also be ableto do all sorts of other transactions: giving other

cards money either through anaccompanying electronic wallet, down telephone lines or via

personal computers.Mondex is being tested in the English town of Swindon, with 30,000 people,

and manyshops, car parks and phone boxes wired to handle the card. New uses for the cardarebeing added, the latest being local buses in January this year.Just this month (March 1996)

computer company Unisys and card and related equipmentmaker Keycorp joined the party,

signing an agreement with Mondex to provide servers,card readers, point of sales equipment and

the software needed to use all these.BT plans eventually to stop using conventional phonecards

and replace them withsmartcards. If Mondex takes off, then it would probably be linked to this

system.



Is it going to happen anywhere outside a dismal West country town, last heard ofmaking steam

engines about 150 years ago?

Europe is leading the way at the moment—for two reasons. First, telecommunicationscosts are far

lower in the USA, so there is less commercial pressure for companies todevelop a means of off-

line transaction there. And second, credit cards are ubiquitous inthe USA—and competition

makes them cheap.Interestingly France is leading the way in Europe, with about 85% of all thesmartcardsthere; perhaps that investment in Mintel systems was worth it.

What about Asia?

Mondex is also getting a fair amount of international exposure, not least through HSBC,which has

plans to get the system running through Hongkong Bank and Hang Seng Bank(both of which it

owns) in 1997,. or maybe earlier? Hongkong Bank is also currentlytalking with Bank of China in

Hong Kong about getting it in on the party, and also hasrights to franchise the system in other

countries around the region. China is another likelyadvocate of some form of smartcard. Its

Golden Card project is the most ambitious of allits various Golden projects aimed at building a

nationwide series of information networks.The Chinese government's motive for rolling out these

networks is principally because itbelieves it can gain greater control over even the most far-flungcorners of the country.That is to say, it takes very seriously the idea that telecommunications will

soon bedistance insensitive—officials will be able to monitor and control events in Guangdong

aswell as in Beijing.

Could smartcards make cash and/or credit cards redundant?

Smartcards could replace cash for many transactions involving small amounts of money.But then

you have to ask what is the disadvantage of cash. Why carry a card aroundwhen you can carry a

few hundred Hong Kong dollars? Fair enough, but why are creditcards so useful? The answer is

they aren't if you don't travel a lot. A card which candeduct money straight from your account

(such as Hong Kong's EPOS) works very well,and involves none of the extra costs of a credit card

(the insurance, the risk of forgettingto pay your bill on time and having to hand over all thatinterest, etc). Combined withcash, readily available from an ATM on your same card, it is possible

to see how asmartcard could fall flat on its face.Where credit cards come into their own is going

abroad, where a Visa card, MasterCard,American Express or Diner‘s Card saves all the hassles of

having to change money,apart from small trivial amounts for taxis, cups of coffee, etc. And the

transaction cost issmall.What about phone cards? Well, what about mobile phones? Which

threatens phoneboxesmore?Think about it: what makes a smartcard attractive? Lower transaction

costs—importantwhere you have to pay for phone calls for verification (eg Britain), but less so

where localcalls are free (eg Hong Kong). And just think how much the minimum charge is

whenyou stuff a credit card into a phone in an airport. In the latter case the competitiveadvantage

a smartcard would offer would be cost: no need to verify the card, and soincur the cost of making

the phone call to the card centre.Then there is the business related to loyalty cards, ie cards tied

to stores—Marks &Spencer, Lane Crawford, Park N Shop, Wellcome. In Britain, loyalty cards are

provingpopular and successful with merchants, particularly when they are tied in to specialoffers.

One organization that is doing particularly well in this area is the CooperativeSociety—which not

only is as a chain of stores, but also is a bank: the perfect tie in for asmart card.

Could smartcards make banks redundant?



Not at their core business—lending money. But what about retail services? An electroniccash

system such as Mondex does not require a centralized clearing facility to handletransactions: the

"money" goes direct from card to recipient.Does this threaten jobs in banks? Not necessarily—

look at automatic teller machines—asmentioned above, their introduction freed up staff to do

other things. (Ironically,smartcards could make ATMs redundant: if you can load your card at

home—or indeedanywhere—through a telephone/computer, then you would not need to go out

onto thestreet and push it into a machine.)Also, remember that people will still want to do

something with their money: it will notearn interest on a card. Smartcards are ideal for regular

small cash transactions, and theoccasional large one.

Could smartcards—or at least the technology they incorporate—make bankingcentres redundant?

Or: Are Hong Kong's days numbered? And if they are, whyshould Shanghai benefit?

Here the answer is to think of what consumers want, rather than what they need, andwhat are the

facilities that will provide this.Shanghai is building a brand new stock exchange building in

Pudong - replacing its currentstock exchange, housed in the former ballroom of a colonial hotel -

as part of its bid toreestablish itself as the financial centre of Asia. Ironically, the reason the

currentexchange can operate at all, despite the makeshift nature of its facilities, is because it is

ahighly wired exchange—trading is electronic, so it does not need a trading hall at all, letalone the

building of large, new premises. Most people who trade on the exchange do sofrom remote

sites—though ones still in Shanghai. Of course, they need not be inShanghai, but that is where

people want to be. In other words, the technology alone willnot determine what people want and

set out to achieve. If Shanghai does emerge as afinancial centre it will be because people believe

they can do business there. (In much thesame way, it is not technology that has made companies

move out of Central in HongKong to other areas, but technology that allows them to. What has

driven them out—orpersuaded them to leave—is above all high rents.)

Smartcards and privacy; or could smartcards make governments redundant?

If information can be stored on a smartcard, why would it need to be stored elsewhere?Take, for

example, medical information about an individual: if this could be stored in acard, and onlyaccessed by a hospital when someone visited a doctor there, not onlywould the individual be

able to visit any hospital near at hand when they needed to (sayon holiday) but their privacy could

be preserved.Looked at another way, transactions direct from one card to another would

beuntraceable—privacy would be protected, but so would illegal acts, such as moneylaundering,

as would legal transactions liable to be taxed. Issues here include the amountof money that could

be stored on a card (Hongkong Bank is in discussion with the HongKong Monetary Authority on

this issue concerning Mondex cards). Also, who else wouldbe able to get access to money.

Would it be much easier to transfer it to another countryand take advantage of better interest

rates? Would tax evasion become an even biggerproblem if people could transfer money at will

around the world without governmentsbeing able to track them?Wired magazine has speculated

that on-line gambling could be the killer entertainmentapplication of the future: already this ishappening. Football magazines in Asia advertisebetting in Europe that can be conducted with a

credit card: at least such transactions gothrough the bank that issued the card and so could be

subjected to monitoring; if thetransaction was done directly with a smartcard there would be no

separate record.Similarly without restrictions on currency transfers (and there are few in many

countries:the biggest being the impracticality of changing money—ie a trip to the bank, plus

thetransaction fees) then it is possible to see how individuals using smartcards tied tocomputers

and automated currency trading could deal fruitfully on forex markets.(An interesting point to bear

in mind is that taxation has traditionally been tied to thingsgovernments can easily find, ie



property and jobs—patches of land and factories cannotmove, therefore it is easy for tax officials

to locate the owners and take taxes off them;electronic commerce is far harder to monitor:

someone living in Britain, say, could tradeon the Hong Kong stock exchange, realize capital gains

and dividends, without theauthorities in Britain either being aware or even being in much of a

position to find out.)The probability is that a lot of governments would want to regulate the use of

smartcardsvery closely. Indeed it is this possibility that makes them so attractive to the

Chinesegovernment. In a closed system this would seem a possibility. But how closed will

futuresystems be? Could a country restrict access? Given China's growing integration into

theinternational economy it would certainly have to accept payments from smartcardnetworks,

and the desire to transform cities like Shanghai into international bankingcentres means that

sooner or later China‘s ability to police channels of funds transfer willbe undermined. This woul d

effectively end a country‘s ability to pursue a domesticmonetary policy independent of world

market forces.Can, or should, a Government attempt to put off the day when it has to abandon

specifiedmonetary goals? Imagine also an Internet packed with virtual malls where some

peoplecould only window shop—why? Because their government told them so.

Is on-line security really an issue?

If someone is cracking the code of your smartcard, or intercepting your credit cardnumber, yes

security is a problem. But how many of us already cash in our pockets readyto be picked, and

easily give our card numbers to merchants and by telephone and by mailwithout further thought?

Probably the greater risk issue concerns legally bindingtransactions, such as commercial

contracts, letters of credit, etc. Encryption technology isthe sophisticated way to tackle the

problem, cryptographic technology the simplest, andpossibly the safest, but maybe not

sophisticated enough for the major commercial deals.Visa International and MasterCard are

racing each other to establish an industry standardfor encryption, Visa in conjunction with

Microsoft and MasterCard in a pact withNetscape. He who controls the little black encryption box

controls the monopoly rent orroyalties on every little transaction that passes through the network.

(Mr Rupert Murdockhad similar ideas for cable TV in China!). Cryptography or ‗blinding‘

technology is lessexciting but rather more practical for the average consumer. The cardholderregisterswith the issuer and receives a PIN number in exchange. The PIN enables the issuingbank

to certify an electronic payment or e-cash without reference to whom it was issued.E-cash

becomes as anonymous as paper money or coins. The European-based DigiCash,is an example.

The European Commission has sponsored its own version, CAFE.Mondex and other smart cards

use similar principles. Its as safe as houses, which ofcourse get broken into from time to time.

What telecom facilities are banks looking for?

High-speed 64 Kbts and above, all the way to 2 Mbts, readily leased circuits with lots

ofredundancy, packet switching and frame relay, compensation service agreements andabove all

a telco that goes out of the way to serve the customer. Not much really, oh butjust one more thing.

A regulator that permits the bank to self-provision, by-pass, callbackand anything else. In short,telcos and the regulator should treat the banks with the sameflexibility and understanding that the

banks have traditionally shown their own customers... no, rephrase that, just like the banks are

learning

to treat their own customers.



Banking and IT

John Ure Director of the Telecommunications Research Project University of Hong Kong Banking

and Financial Services iin Shanghai Workshop 18th March 1996 The Evolution of Banking and

Financial Information Technology

1. The first applications of the computer age within banking were the use of mainframes, and laterminicomputers, to process data such as customer accounts, bank inventories, personnel records,

and accounting packages - which ultimately evolved into spreadsheets. Although 70% of banking

applications expenditure in the US remain mainframe based, this reflects an old embedded base.

Client/server systems expenditure are the fastest growing at 29% p.a. 2. The idea of direct

customer services was less clear, but the first ATM (Automatic Teller Machine) came into

commercial use in 1968. By 1995 in Europe over 100,000 were in use. In Hong Kong there are two

networks, the Hong Kong Bank system which had around 800 ATMs in September 1994 (

Business Asia

Survey) and the Jetco network linking the other clearing banks with about 1,150 ATMs.

These are ‗private‘ or corporate wide

-area networks run over leased circuits. If we denote

these networks as ‗C‘ for corporate we can describe the ATM system as:

C - C that is transactions, such as EFT (Electronic Funds Transfer) or communications take place

just within the corporate WAN. 3. The next step in providing direct customer services came

logically in the extended use of debit and credit cards in the shops of merchants through EPOS

(Electronic Point of Sale) technology. In Hong Kong there are over 5,000 terminals, an increasing

number of them handheld wireless applications. The authentication and direct debit functions of

EPOS use the PSTN (Public Switched Telephone Network) to connect into the corporate

networks of banks and credit card companies. If we denote the PSTN as ‗P‘ then we can

describe the interconnection of merchant system to the corporate system as: C - P - C 4. The

latest step is the introduction of smartcard technology. Here, for example, money can be

downloaded from the ATM into the card, and then transferred by smartphone

across the PSTN to another person‘s smartcard and finally transferred to a merchant or

into another bank account. A description of this process would be as follows: C-P-P-C 5. We do

not have time here to develop this model further, although it would interesting to see how it enters

the general model of the circulation of commodity money and capital. What we can point out is

that the opportunities for entry into this extended system of transactions opens up the logicalpossibility of new financial service providers offering specialist services at different points in the

chain, especially where the chains cross (nodal points) and the need for specialist carrier

networks and for specialist network management. We could begin to model this as follows: C-C C-

P-P-C C-P-P-C C-C

The Shape of Things To Come



1. Two diametrically opposed views have been put forward concerning the future shape of the

banking business. Everyone agrees that information technology will change its shape. Deloitte

Touche Tohmatsu International

The Future of Retail Banking

argues that because branch banking is so expensive and telephone banking so cheap bycomparison - around 40% per customer cheaper - retail banks will cut the number of branches by

50% by the year 2000. In contrast, Dominic Casserley, director, McKinsey & Co. (HK)has argued

that technology will be used to maximize revenues rather than to minimize costs, and foresees

direct banking services as complementary to rather than as a substitutes for branches. Support

for this view may come from past experience. Technology freed up bank labour, but to extend

personal customer services - such as direct enquiries, processing loan requests, etc - rather than

cut staffing costs. 2, An alternative analysis is to consider the economics of the banking market.

The DTT study found that profitability of small and large banks in the UK was similar. This was

explained by the fact that while economies of scale exist in some operations, a large branch

network is very expensive to maintain. Some activities, such as cheque clearing and credit card

and debit card authentication and settlements, are most efficiently handled in volume and at

national level. Other activities, such as personal banking services and correspondence, either

require individual attention by a professional bank manager or are labour intense and are better

handled at the local branch level. Electronic banking, such as telephone banking, is typically half

the cost per customer to the bank than branch service, and also has marketing advantages. Hence

it will proliferate. The shape of banking in the future will involve direct banking in the form of

telephone banking, personal and commercial banking and financial management using home or

office PC, kiosk banking where the public can access a telephone line, a PC, a fax machine, a

smartphone all in one location to carry out their transactions. 3. Increasingly, electronic

commerce will take over from cash transactions and paper-based contract signing. This is a major

challenge for banks, but it could also be a major threat. Non-banking institutions - ie. those which

do not have authorization to issue new money - already have the potential to create e-cash or

electronic money and create extended credit. For example, merchants issue Loyalty Cards whichprovide credit to their customers. The rise of Internet combined with the smartcard and an

international telephone circuit offers the scope for e-money and credit creation beyond the control

of nation states, far less within the control of banks. 4. To become competitive in the global

market banks will have to develop rapidly their capabilities in electronic money matters and

electronic commerce. But they have opportunities. The first is they have, or are building out, their

own highly reliable networks. Without wishing to do so, they are becoming quasi-

telecommunications companies. The second, is they can provide a high level of professional

support for customer services, which perhaps remains their key advantage, but only if they

develop it before new entrants attract customers away.

Making It All Work

1. This brings me to the final issue: how can banks develop their customer services to the point

where customer loyalty is strong and where customer switching costs are high? As banks lose

their monopoly - either by de-regulation or as a consequence of technology - how can they remain

the dominant players? And how can a city like Shanghai regain its competitive advantage as a

world banking and financial centre? 2. Building the infrastructure is obviously the first critical

step, but two questions follow: (a) does it all work together? are the networks well integrated

within banks, between banks, between banks and customers? (b) who can use these networks?

for example, can foreign banks utilize these networks, and will they be able to use them to access



customers when the rules and regulations of China permit foreign banks to compete for renminbi

deposit taking? This is a question to be asked of foreign banks as well as the

Shanghai authorities, because Shanghai‘s goal of achieving world status as a banking and

financial centre can be helped by foreign banks explaining their needs and requirements in terms

of telecoms facilities and data communications available, and in terms of what they are permittedto do with those facilities and what services they can offer over them. 3. Some idea of what needs

to be done to make it all work can be got from looking at the experience of other successful

places. Expenditure patterns provides a clue. In the US the fastest growing category of

expenditure on IT is on network services, with a compound annual growth rate or CAGR of 19%.

This is followed by outsourcing at CAGR 18%. The largest market by year 2000 is forecast to be

software applications ($68 billion) followed by professional services ($48 billion). Manufacturing,

banking and finance are the leading sectors, spending $43 billion and $33 billion respectively by

the year 2000. (INPUT forecast)

Current Bank IT Spending: Retail Banking = 55% - (a) consumer & branch automation = $1billion, but only 7% p.a. (b) Call center automation services have a growth rate of 26% p.a.

Wholesale = 25%- (a) $315 million, growing at 10% p.a. Admin & Support in both = 20%

By year 2000 it is forecast that banking applications expenditure will reach

$800 million p.a. The fastest growth area however is outsourcing of systems and project

installation and data communications and management. Systens integration is a key component

of outsourcing business. Appendix 3 Types of Systems Integration 3 (a) Solutions support: the

systems integrator provides delivery of service and may take responsibility for selecting, buying

and installing equipment.This is the fastest growing area, especially as banks merge and grow in

size, in business scope and geographical location. (b) Team project support: the systems

integrator has responsibility for project implementation, but this is only one part of an overallsystem. As banks extend the scope of their business and IT networks they are tending to cut

down on the total number of systems integrators they use on service contracts to avoid too many

problems of project co-ordination - integrating the integrators! (c) Individual development

support: where banks want a specialist to advise and assist them. The most popular type ($451

million in 1995) This is the slowest growth at around 7% p.a. Another way of looking at it: 1. Staff

supplement approach: hiring individuals or assigning responsibilities to staff for short durations,

leaving the implementation of systems to the bank. The advantage to the bank is the low cost

involved in switching between staff for different expertise and services, and the ease of cutting

back on expenditure (by ending the contract or reassigning staff responsibilities) when required.

Spending in 1995 totalled $695 million and was growing at 6% p.a. 2. Project based approach:

where the service provider/systems integrator assumes responsibility, working under contract for

periods of months to several years. This occurs where work is usually of critical importance to anentire LOB (line of business) or department within the bank. Switching costs are higher if the bank

wants to change service providers, but an integrated system approach is assured. Spending in

1995 totalled $878 million and was growing at 13% p.a. 3. Ongoing services approach: this is

typically a long-term relationship, say 10-15-20 years. The service provider-bank relationship

becomes a working partnership, but the switching costs to the bank are high.This approach is

more popular. Spending in 1995 totalled $1.4 billion and was growing at 12% p.a.

Article by Diogo Teixeira,



The A mercan Banker

, 1996 Outsourcing and service contracts $969 million (<33%) Systems Integration, applications

and maintenance > $1 bn (>33%) 18% p.a Key buying criteria (a) technical skills of

hardware/software vendors, and (b) track record/experience As banks devote greater resources

to planning IT systems prior to implementation this expenditure, which constitutes 8% of total IT

system expenditure, is rising at 20% p.a. Services connected with systems implementationconstitute 49% of IT expenditure, and this grows at 15% p.a, with expenditure on services for

systems modification grows at only 8% annually. Maintenance expenditures are growing very

slowly. Outsourcing 90% on mainframes and 10% on minicomputers; spending on networking

technologies is fastest such as data warehousing (25% p.a.) document management (19% p.a.)

and image processing (18% p.a) Systems Integration 3 types (a) Solutions support: the systems

integrator provides delivery of service and may take responsibility for selecting, buying and

installing equipment.This is the fastest growing area, especially as banks merge and grow in size,

in business scope and geographical location. (b) Team project support: the systems integrator

has responsibility for project implementation, but this is only one part of an overall system. As

banks extend the scope of their business and IT networks they are tending to cut down on the

total number of systems integrators they use on service contracts to avoid too many problems of

project co-ordination - integrating the integrators! (c) Individual development support: where

banks want a specialist to advise and assist them. The most popular type ($451 million in 1995)

This is the slowest growth at around 7% p.a. Another way of looking at it: 1. Staff supplement

approach: hiring individuals or assigning responsibilities to staff for short durations, leaving the

implementation of systems to the bank. The advantage to the bank is the low cost involved in

switching between staff for different expertise and services, and the ease of cutting back on

expenditure (by ending the contract or reassigning staff responsibilities) when required. Spending

in 1995 totalled $695 million and was growing at 6% p.a. 2. Project based approach: where the

service provider/systems integrator assumes responsibility, working under contract for periods of

months to several years. This occurs where work is usually of critical importance to an entire LOB

(line of business) or department within the bank. Switching costs are higher if the bank wants to

change service providers, but an integrated system approach is assured. Spending in 1995totalled $878 million and was growing at 13% p.a. 3. Ongoing services approach: this is typically a

long-term relationship, say 10-15-20 years. The service provider-bank relationship becomes a

working partnership, but the switching costs to the bank are high.This approach is more popular.

Spending in 1995 totalled $1.4 billion and was growing at 12% p.a.

Smartcards

Europe vs USA - telco costs less in USA, therefore authentication costs less. France has around

85% of all smartcards in use. Smartcard Forum in USA has around 200 members

Worldwide Semiconductor Revenues in Smartcards 1994 = $45 million 2000 (E) = $1,065 millionBanking 45% 38% Mobile Phone 27% 19% Pay TV 22% 6% Pay phonecards 2% 2% ID

Cards 2% 14% Transport 2% 7% Health 9% Road Tolls 5% [

Electronic Business Today

Dec. 1995] Security Issues 1. Personal savings and consumption - cryptography/PIN

numbers/electronic 2. Corporate and state commercial transactions - encryption techniques 3.



Faking credits on smartcards = a loss to the banks 4. Stealing PINs and codes = a personal loss

5. Biometrics (finger print; voice-recognition; even eyeball measurements)



Trust in e-Commerce: New Perspectives

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Researchers in the fields of management, information systems, organizational psychology, marketing,and social science are showing an increasing awareness of how trust contributes towards the success ofmany types of virtual environments. In fact, it has been contended that the influence of trust oninteractions is even more crucial in global electronic commerce than in the physical marketplace as by itsvery nature electronic commerce environments inhibit the development of trust. Consequently,academics, vendors, government bodies, and consumer groups desire to understand the factors thatinfluence the development of consumer trust in electronic commerce, as such understanding cancontribute substantially towards the success of the online environment. more...

Internet Banking: Theoretical & Strategic Perspective















The banking sector occupies a critical position in the global economy. In the recent years a fundamental

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force for change in the financial services sector is information technology (IT), which is breachinggeographical, industrial, and regulatory barriers, creating new products, services, market opportunities,and developing more information and system oriented business and management processes. Coupledwith innovative business thinking, technology is rapidly changing the way personal financial services aredesigned and delivered. The famous quote by Bill Gates that banking is vital to a healthy economy butbanks themselves are not, highlights the crucial nature of the electronic forces that are affecting thebanks more than any other sector. The question arises as to whether this sector will be able to takeadvantage of new significant opportunities resulting from these developments, or whether it will have tostruggle to maintain its current principal role in the economy? more...

e-business Impact on Supply Chain and Business Process: Analysis and BestPractice















The phenomenal growth of the Internet has lead businesses around the globe to believe in the promise of

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utilizing the Internet to manage their supply chains and to facilitate procurement processes. Electronicsupply chain, or e-supply chain, is the utilization of electronic means and information technology,specifically the Internet, to bring together widely dispersed buyers and suppliers, to improve coordination,and to manage upstream and downstream channels. E-business allow companies to move toward real-time operation by sharing information and interlacing processes with trading partners more...

Advancing @ the Speed of Technology:E-Business Strategies for ModernCorporations











The Internet promises unprecedented opportunities for businesses. Given the intense competition in the

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business world, the effective coordination and efficient maintenance of information exchange take onincreased importance. Most organizations have implemented several strategies to improve effectivenessand enhance efficiencies through the utilization of IT. However, E-business application has givencompanies new means to can expand their markets and attract and retain more customers whileproviding better customer service in an enhanced coordination organizational environment. more...

Information Technology and Banking in the 21

st

Century

Information Technology











Information is a key operational factor of any organisation. How it is collected, collated, stored, and

retrieved is critical to the survival of a business - especially in the banking industry. In recent times,

changes have occurred in the banking industry creating increased opportunities as well as additional

risks for the banks. Areas that were traditionally considered to be the domains of the banks are

increasingly coming under pressure from non-bank financial institutions. In addition, customers are now

better informed and demand a wider range of high quality products - as well as prompt and effective

services. Ideally, each financial institution should be able to support its operations with an application

system that utilises the most advanced technology available today and is designed from bottom-up to

be fully integrated.

Who are getting left behind?

The continued use of banking software systems that were developed over a decade ago, based on

technology that is at the end of their lifecycle indicates that a number of banks have failed to develop

I.T. strategies to keep up with the environment in which they now have to operate. Significant progress

in I.T. methodology and development tools has dramatically reduced the costs of developing and

deploying I.T. solutions. Financial institutions can now deploy customised solutions that anticipate

changes in the market and cater for their objectives as opposed to the ‘one size fits all’ solutions

currently being marketed by a number of vendors.

The New Players

The use of innovative I.T. solutions by smaller organisations like credit unions and building societies

would allow them to mitigate the competitive advantage the bigger banks with bigger I.T. budgets have.

By being able to bring new products and services to market quickly and at a lower cost, the smaller

organisations can win and retain a larger share or the customer’s wallet. Credit unions and building

societies are changing from transaction facilitators to providers of a broad range of financial services.They have responded to the changing market by focusing on building better personal relationships with

their customers. This means they now require better I.T. solutions that support their product and service

offerings aimed at retaining the loyalty of its customer base. Credit unions and building societies now

face strategic decisions on how to:

•

Improve existing products and services, as well as introducing innovative new ones

•

Develop or acquire technology that support these products and services

•



Grow their customer base organically or merge with other institutions

The Way Forward

Decision makers in the financial services sector have come to realise that in an increasingly

homogenised marketplace, innovation and forward-thinking are the best ways to increase market-share

and overall success. Choosing the right technology, product and I.T. partner is a crucial step in realising

these goals.

in the five decades since independence

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