E-Banking and Its Contribution to Indian Economy

Transcription

1 IJMTP, VOLUME 4, NUMBER 1, JANUARY-JUNE, 2012 : E-Banking and Its Contribution to Indian Economy K. Anjana * Traditional banks offer many services to their customers, including accepting customer money deposits, providing various banking services to customers, and making loans to individuals and companies. Compared with traditional channels of offering banking services through physical branches, e-banking uses the Internet to deliver traditional banking services to their customers, such as opening accounts, transferring funds, and electronic bill payment. It is an umbrella term for the process by which a customer may perform banking transactions electronically without visiting a brick-and-mortar institution. The following terms all refer to one form or another of electronic banking: personal computer (PC) banking, Internet banking, virtual banking, online banking, home banking, remote electronic banking, and phone banking. PC banking and Internet or online banking are the most frequently used designations. It should be noted, however, that the terms used to describe the various types of electronic banking are often used interchangeably. Internet banking, sometimes called online banking, is an outgrowth of PC banking. Internet banking uses the Internet as the delivery channel by which to conduct banking activity, for example, transferring funds, paying bills, viewing checking and savings account balances, paying mortgages, and purchasing financial instruments and certificates of deposit. An Internet banking customer accesses his or her accounts from a browser- software that runs Internet banking programs resident on the bank s World Wide Web server, not on the user s PC. Net Banker defines a true Internet bank as one that provides account balances and some transactional capabilities to retail customers over the World Wide Web. Internet banks are also known as virtual, cyber, net, interactive, or web banks. To date, more banks have established an advertising presence on the Internet- primarily in the form of informational or interactive web sites-than have created transactional web sites. However, a number of Banks that do not yet offer transactional Internet banking services have indicated on their * Faculty Member, P.G. Centre, Kadur Kuvempu University.

2 62 K. ANJANA web sites that they will offer such banking activities in the future. Online banking (or Internet banking) allows customers to conduct financial transactions on a secure website operated by their retail or virtual bank, credit union or building society. Internet banking is changing the banking industry and is having the major effects on banking relationships. Banking is now no longer confined to the branches were one has to approach the branch in person, to withdraw cash or deposit a cheque or request a statement of accounts. In true Internet banking, any inquiry or transaction is processed online without any reference to the branch (anywhere banking) at any time. Providing Internet banking is increasingly becoming a need to have than a nice to have service. The net banking, thus, now is more of a norm rather than an exception in many developed countries due to the fact that it is the cheapest way of providing banking services. E-banking can be offered in two main ways. First, an existing bank with physical offices can also establish an online site and offer e-banking services to its customers in addition to the regular channel. For example, Citibank is a leader in e-banking, offering walk-in, face-to-face banking at its branches throughout many parts of the world as well as e-banking services through the World Wide Web. Citibank customers can access their bank accounts through the Internet, and in addition to the core e-banking services such as account balance inquiry, funds transfer, and electronic bill payment, Citibank also provides premium services including financial calculators, online stock quotes, brokerage services, and insurance. E-banking from banks like Citibank complements those banks physical presence. Generally, e-banking is provided without extra cost to customers. Customers are attracted by the convenience of e-banking through the Internet, and in turn, banks can operate more efficiently when customers perform transactions by themselves rather than going to a branch and dealing with a branch representative. In addition to traditional banks that have both a physical and online presence, there are several e-banks that exist only on the Internet, allowing users to work with a virtual bank. Net Bank is such an Internet-only bank. Without physical branches, Net Bank can cut operating costs and can potentially offer higher deposit rates to its customers and waive many fees normally charged by a bank with a large network of physical branches. The challenge for Internet-only banks is to provide quality customer services without physical offices. One way in which Net Bank is dealing with this issue is via an agreement with the MAC ATM Network (automated teller machine network), thus providing its customers access to nearly 18,000 ATMs across the United States. Net Bank customers can deposit and withdraw funds from their Net Bank accounts through these ATMs, and in addition, customers can also deposit and receive funds through wire transfer.

3 E-BANKING AND ITS CONTRIBUTION TO INDIAN ECONOMY 63 E-banking services are delivered to customers through the Internet and the web using Hypertext Mark up Language (HTML). In order to use e- banking services, customers need Internet access and web browser software. Multimedia information in HTML format from online banks can be displayed in web browsers. The heart of the e-banking application is the computer system, which includes web servers, database management systems, and web application programs that can generate dynamic HTML pages. Bank customers account and transaction information is stored in a database, a specialized software that can store and process large amounts of data in high speed. The function of the web server is to interact with online customers and deliver information to users through the Internet. When the web server receives a request such as an account inquiry from an online customer, it requires an external web application program to process the request. C, Visual Basic, VBScript, and Java are some of the languages that can be used to develop web application programs to process customer requests, interact with the database, and generate dynamic responses. Then, the web server will forward the response HTML files to e-banking customers. Several banks, such as NationsBank, also use state-of-the-art imaging systems, allowing customers to view images of checks and invoices over the Internet. One of the main concerns of e-banking is security. Without great confidence in security, customers are unwilling to use a public network, such as the Internet, to view their financial information online and conduct financial transactions. Some of the security threats include invasion of individuals privacy and theft of confidential information. Banks with e-banking service offer several methods to ensure a high level of security: (1) identification and authentication, (2) encryption, and (3) firewalls. First, the identification of an online bank takes the form of a known Uniform Resource Locator (URL) or Internet address, while a customer is generally identified by his or her login ID and password to ensure only authenticated customers can access their accounts. Second, messages between customers and online banks are all encrypted so that a hacker cannot view the message even if the message is intercepted over the Internet. The particular encryption standard adopted by most browsers is called Secure Socket Layer (SSL). It is built in the web browser program and users do not have to take any extra steps to set up the program. Third, banks have built firewalls, which are software or hardware barriers between the corporate network and the external Internet, to protect the servers and bank databases from outside intruders. For example, Wells Fargo Bank connected to the Internet only after it had installed a firewall and made sure the firewall was sufficiently impenetrable. The range of e-banking services is likely to increase in the future. Some banks plan to introduce electronic money and electronic checks. Electronic money can be stored in computers or smart cards and consumers can use the electronic money to purchase small value items over the Internet. Electronic

4 64 K. ANJANA checks will look similar to paper checks, but they can be sent from buyers to sellers over the Internet, electronically endorsed by the seller, and forwarded to the seller s bank for electronic collection from the buyer s bank. Further, banks seek to offer their customers more products and services such as insurance, mortgage, financial planning, and brokerage. This will not only deliver more value to the customers but also help banks to grow business and revenues. Internet banks generally have lower operational and transactional costs than do traditional brick-and-mortar banks; they are often able to offer lowcost checking and high-yield Certificates of deposit. Internet banking is not limited to a physical site; some Internet banks exist without physical branches, for example, Tele-bank (Arlington, Virginia) and Bank net (UK). Further, in some cases, web banks are not restricted to conducting transactions within national borders and have the ability to make transactions involving large amounts of assets instantaneously. According to industry analysts, electronic banking provides a variety of attractive possibilities for remote account access, including: Availability of inquiry and transaction services around the clock; worldwide connectivity; Easy access to transaction data, both recent and historical; and Direct customer control of international movement of funds without intermediation of financial institutions in customer s jurisdiction. DEFINITION OF E-BANKING E-banking is defined as the automated delivery of new and traditional banking products and services directly to customers through electronic, interactive communication channels. E-banking includes the systems that enable financial institution customers, individuals or businesses, to access accounts, transact business, or obtain information on financial products and services through a public or private network, including the Internet. Customers access e-banking services using an intelligent electronic device, such as a personal computer (PC), personal digital assistant (PDA), automated teller machine (ATM), kiosk, or Touch Tone telephone. While the risks and controls are similar for the various e-banking access channels, this booklet focuses specifically on Internet-based services due to the Internet s widely accessible public network. Accordingly, this booklet begins with a discussion of the two primary types of Internet websites: informational and transactional. FEATURES Online banking solutions have many features and capabilities in common, but traditionally also have some that are application specific.

5 E-BANKING AND ITS CONTRIBUTION TO INDIAN ECONOMY 65 The common features fall broadly into several categories- Transactional (e.g., performing a financial transaction such as an account to account transfer, paying a bill, wire transfer... and applications... apply for a loan, new account, etc.) Electronic bill presentment and payment - EBPP Funds transfer between a customer s own checking and savings accounts, or to another customer s account Investment purchase or sale Loan applications and transactions, such as repayments of enrolments Non-transactional (e.g., online statements, check links, co browsing, chat) Bank statements Financial Institution Administration - Support of multiple users having varying levels of authority Transaction approval process Wire transfer INTERNET BANKING IN INDIA The Reserve Bank of India constituted a working group on Internet Banking. The group divided the internet banking products in India into 3 types based on the levels of access granted. They are: (i) Information Only System: General purpose information like interest rates, branch location, bank products and their features, loan and deposit calculations are provided in the banks website. There exist facilities for downloading various types of application forms. The communication is normally done through . There is no interaction between the customer and bank s application system. No identification of the customer is done. In this system, there is no possibility of any unauthorized person getting into production systems of the bank through internet. (ii) Electronic Information Transfer System: The system provides customerspecific information in the form of account balances, transaction details, and statement of accounts. The information is still largely of the read only format. Identification and authentication of the customer is through password. The information is fetched from the bank s application system either in batch mode or off-line. The application systems cannot directly access through the internet. (iii)fully Electronic Transactional System: This system allows bi-directional capabilities. Transactions can be submitted by the customer for online

6 66 K. ANJANA update. This system requires high degree of security and control. In this environment, web server and application systems are linked over secure infrastructure. It comprises technology covering computerization, networking and security, inter-bank payment gateway and legal infrastructure. Automated Teller Machine (ATM) ATM is designed to perform the most important function of bank. It is operated by plastic card with its special features. The plastic card is replacing cheque, personal attendance of the customer, banking hours restrictions and paper based verification. There are debit cards. ATMs used as spring board for Electronic Fund Transfer. ATM itself can provide information about customers account and also receive instructions from customers - ATM cardholders. An ATM is an Electronic Fund Transfer terminal capable of handling cash deposits, transfer between accounts, balance enquiries, cash withdrawals and pay bills. It may be on-line or 0ff-line. The on-line ATN enables the customer to avail banking facilities from anywhere. In off-line the facilities are confined to that particular ATM assigned. Any customer possessing ATM card issued by the Shared Payment Network System can go to any ATM linked to Shared Payment Networks and perform his transactions. Credit Cards/Debit Cards The Credit Card holder is empowered to spend wherever and whenever he wants with his Credit Card within the limits fixed by his bank. Credit Card is a post paid card. Debit Card, on the other hand, is a prepaid card with some stored value. Every time a person uses this card, the Internet Banking house gets money transferred to its account from the bank of the buyer. The buyers account is debited with the exact amount of purchases. An individual has to open an account with the issuing bank which gives debit card with a Personal Identification Number (PIN). When he makes a purchase, he enters his PIN on shops PIN pad. When the card is slurped through the electronic terminal, it dials the acquiring bank system - either Master Card or VISA that validates the PIN and finds out from the issuing bank whether to accept or decline the transactions. The customer can never overspend because the system rejects any transaction which exceeds the balance in his account. The bank never faces a default because the amount spent is debited immediately from the customer s account. Smart Card Banks are adding chips to their current magnetic stripe cards to enhance security and offer new service, called Smart Cards. Smart Cards allow thousands of times of information storable on magnetic stripe cards. In addition, these cards are highly secure, more reliable and perform multiple

7 E-BANKING AND ITS CONTRIBUTION TO INDIAN ECONOMY 67 functions. They hold a large amount of personal information, from medical and health history to personal banking and personal preferences. YOU CAN AVAIL AIL THE FOLLO OLLOWING SERVICES THROUGH E-BANKING Bill Payment Service You can facilitate payment of electricity and telephone bills, mobile phone, credit card and insurance premium bills as each bank has tie-ups with various utility companies, service providers and insurance companies, across the country. To pay your bills, all you need to do is complete a simple one-time registration for each biller. You can also set up standing instructions online to pay your recurring bills, automatically. Generally, the bank does not charge customers for online bill payment. Fund Transfer You can transfer any amount from one account to another of the same or any another bank. Customers can send money anywhere in India. Once you login to your account, you need to mention the payees account number, his bank and the branch. The transfer will take place in a day or so, whereas in a traditional method, it takes about three working days. ICICI Bank says that online bill payment service and fund transfer facility have been their most popular online services. Credit Card Customers With Internet banking, customers can not only pay their credit card bills online but also get a loan on their cards. If you lose your credit card, you can report lost card online. Railw ailway y Pass ass Indian Railways has tied up with ICICI bank and you can now make your railway pass for local trains online. The pass will be delivered to you at your doorstep. But the facility is limited to Mumbai, Thane, Nashik, Surat and Pune. INVESTING THROUGH INTERNET BANKING You can now open an FD online through funds transfer. Now investors with interlinked demat account and bank account can easily trade in the stock market and the amount will be automatically debited from their respective bank accounts and the shares will be credited in their demat account. Moreover, some banks even give you the facility to purchase mutual funds directly from the online banking system. Nowadays, most leading banks offer both online banking and demat account. However if you have your demat account with independent share

8 68 K. ANJANA brokers, then you need to sign a special form, which will link your two accounts. RECHARGING YOUR PREPAID PHONE Now just top-up your prepaid mobile cards by logging in to Internet banking. By just selecting your operator s name, entering your mobile number and the amount for recharge, your phone is again back in action within few minutes. SHOPPING With a range of all kind of products, you can shop online and the payment is also made conveniently through your account. You can also buy railway and air tickets through Internet banking. INDIAN BANKS ON WEB The banking industry in India is facing unprecedented competition from nontraditional banking institutions, which now offer banking and financial services over the Internet. The deregulation of the banking industry coupled with the emergence of new technologies, are enabling new competitors to enter the financial services market quickly and efficiently. Indian banks are going for the retail banking in a big way. However, much is still to be achieved. This study which was conducted by students of IIML shows some interesting facts: Throughout the country, the Internet Banking is in the nascent stage of development (only 50 banks are offering varied kind of Internet banking services). In general, these Internet sites offer only the most basic services. 55% are so called entry level sites, offering little more than company information and basic marketing materials. Only 8% offer advanced transactions such as online funds transfer, transactions & cash management services. Foreign & Private banks are much advanced in terms of the number of sites & their level of development. Benefits of E-banking Benefits to Consumers: General consumers have been significantly affected in a positive manner by E-banking. Many of the ordinary tasks have now been fully automated resulting in greater ease and comfort. Customer s account is extremely accesses able with an online account. Customer can withdraw can at any time through ATMs that are now widely available throughout the country. Beside withdrawing cash customers can also have mini banks statements, balance inquiry at these ATMs

9 E-BANKING AND ITS CONTRIBUTION TO INDIAN ECONOMY 69 Through Internet Banking customer can operate his account while sitting in his office or home. There is no need to go to the bank in person for such matter. E banking has also greatly helped in payment of utility bill. Now there is no need to stand in long queues outside banks for his purpose. - All services that are usually available from the local bank can be found on a single website. The Growth of credit card usage also owes greatly to E-banking. Now a customer can shop worldwide without any need of carrying paper money with him. Banks are available 24 hours a day, seven days a week and they are only a mouse click away. Benefits to Banking Industry Banking industry has also received numerous benefits due to growth of E- Banking infrastructure. There are highlighted below: The growth of E-banking has greatly helped the banks in controlling their overheads and operating cost Many repetitive and tedious tasks have now been fully automated resulting in greater efficiency, better time usage and enhanced control. The rise of E-banking has made banks more competitive. It has also led to expansion of the banking industry, opening of new avenues for banking operations. Electronic banking has greatly helped the banking industry to reduce paper work, thus helping them to move the paper less environment. Electronic banking has also helped bank in proper documentation of their records and transactions. The reach and delivery capabilities of computer networks, such as the Internet, are far better than any branch network. Benefits to General Economy Electronic Banking as already stated has greatly serviced both the general public and the banking industry. This has resulted in creation of a better enabling environment that supports growth, productivity and prosperity. Besides many tangible benefit in form of reduction if cost, reduced delivery time, increased efficiency, reduced wastage, e-banking electronically controlled and thoroughly monitored environment discourage many illegal and illegitimate practices associated with banking industry like money laundering, frauds and embezzlements. Further E-banking has helped banks in better monitoring of their customer base. This it is a useful tool in the hand of the bank to device suitable commercial packages that are in conformity

10 70 K. ANJANA with customer needs. As e banking provide opportunity to banking sector to enlarge their customer base, a consequence to increase the of volume of credit creation which results in better economic condition, Besides all this E-banking has also helped in documentation of the economic activity of the masses. Advantage of Internet Banking Banking from home You can make transfers and other changes while the bank is closed Most banks (if not all) work through an encrypted channel with your information You can download a file that holds your account information to easily reconcile your statement with your financial management software (QuickBooks, MS Money, Key Money, Gnu Cash, etc.) It is easy to view recent transactions and monitor your account Some e-savings accounts have really high APY rates (because they don t have to cover the costs of maintaining paperwork Disadvantages If the bank s server is down, you can t use it Some places will charge you for online access (many don t, however) There s always the possibility of a cracker gaining access to your account Your internet connection must be working in order for you to have access Many banks don t show you how to use online banking very well, and those are usually the ones with the non-intuitive interface and cluttered design, which makes it pretty easy for you to screw up something IMPACT CT OF E-BANKING ON TRADITIONAL SERVICES One of the issues currently being addressed is the impact of e-banking on traditional banking players. After all, if there are risks inherent in going into e-banking there are other risks in not doing so. It is too early to have a firm view on this yet. Even to practitioners the future of e-banking and its implications are unclear. It might be convenient nevertheless to outline briefly two views that are prevalent in the market. The view that the Internet is a revolution that will sweep away the old order holds much sway. Arguments in favour are as follows: E-banking transactions are much cheaper than branch or even phone transactions. This could turn yesterday s competitive advantage - a large branch network - into a comparative disadvantage, allowing e-banks to undercut bricks-and-mortar banks. This is commonly known as the beached dinosaur theory.

11 E-BANKING AND ITS CONTRIBUTION TO INDIAN ECONOMY 71 E-banks are easy to set up so lots of new entrants will arrive. Old-world systems, cultures and structures will not encumber these new entrants. Instead, they will be adaptable and responsive. E-banking gives consumers much more choice. Consumers will be less inclined to remain loyal. E-banking will lead to an erosion of the endowment effect currently enjoyed by the major UK banks. Deposits will go elsewhere with the consequence that these banks will have to fight to regain and retain their customer base. This will increase their cost of funds, possibly making their business less viable. Lost revenue may even result in these banks taking more risks to breach the gap. Portal providers are likely to attract the most significant share of banking profits. Indeed banks could become glorified marriage brokers. They would simply bring two parties together e.g. buyer and seller, payer and payee. The products will be provided by monolines, experts in their field. Traditional banks may simply be left with payment and settlement business even this could be cast into doubt. Traditional banks will find it difficult to evolve. Not only will they be unable to make acquisitions for cash as opposed to being able to offer shares, they will be unable to obtain additional capital from the stock market. This is in contrast to the situation for Internet firms for whom it seems relatively easy to attract investment. There is of course another view which sees e- banking more as an evolution than a revolution. E-banking is just banking offered via a new delivery channel. It simply gives consumers another service (just as ATMs did). Like ATMs, e-banking will impact on the nature of branches but will not remove their value. Experience in Scandinavia (arguably the most advanced e-banking area in the world) appears to confirm that the future is clicks and mortar banking. Customers want full service banking via a number of delivery channels. The future is therefore Martini Banking (any time, any place, anywhere, anyhow). Traditional banks are starting to fight back. The start-up costs of an e-bank are high. Establishing a trusted brand is very costly as it requires significant advertising expenditure in addition to the purchase of expensive technology (as security and privacy are key to gaining customer approval). E-banks have already found that retail banking only becomes profitable once a large critical mass is achieved. Consequently many e-banks are limiting themselves to providing a tailored service to the better off. Nobody really knows which of these versions will triumph. This is something that the market will determine. However, supervisors will need to pay close attention to the impact of e-banks on the traditional banks, for example by surveillance of:

12 72 K. ANJANA strategy customer levels earnings and costs advertising spending margins funding costs merger opportunities and threats, both in the UK and abroad. INTERNET BANKING VERSUS TRADITIONAL METHOD In spite of so many facilities that Internet banking offers us, we still seem to trust our traditional method of banking and is reluctant to use online banking. But here are few cases where Internet banking will turn out to be a better option in terms of saving your money. Stop payment done through Internet banking will not cost any extra fees but when done through the branch, the bank may charge you Rs 50 per cheque plus the service tax. Through Internet banking, you can check your transactions at any time of the day, and as many times as you want to. On the other hand, in a traditional method, you get quarterly statements from the bank and if you request for a statement at your required time, it may turn out to be an expensive affair. The branch may charge you Rs 25 per page, which includes only 30 transactions. Moreover, the bank branch would take eight days to deliver it at your doorstep. If the fund transfer has to be made outstation, where the bank does not have a branch, the bank would demand outstation charges. Whereas with the help of online banking, it will be absolutely free for you. As per the Internet and Mobile Association of India s report on online banking 2006, There are many advantages of online banking. It is convenient, it isn t bound by operational timings, there are no geographical barriers and the services can be offered at a miniscule cost. CONCLUSION And so in conclusion e-banking creates issues for banks and regulators alike. For our part we will continue our work, both national and international, to identify and remove any unnecessary barriers to e-banking. For their part, banks should: Have a clear and widely disseminated strategy that is driven from the top and takes into account the effects of e-banking, together with an effective process for measuring performance against it. Take into account the effect that e-provision will have upon their business risk exposures and manage these accordingly.

13 E-BANKING AND ITS CONTRIBUTION TO INDIAN ECONOMY 73 Undertake market research, adopt systems with adequate capacity and scalability, undertake proportional advertising campaigns and ensure that they have adequate staff coverage and a suitable business continuity plan. Ensure they have adequate management information in a clear and comprehensible format. Take a strategic and proactive approach to information security, maintaining adequate staff expertise, building in best practice controls and testing and updating these as the market develops. Make active use of system based security management and monitoring tools. In conclusion, to be a true E-bank, each bank must identify its own unique targets, focus and style. Banks need to realize that E-banking is more than simply banking on the Internet. E-banking is more than having a web site. E- banking is about building a web business for your bank. References Bracken, Ben (2006), The e-commerce Solution Guide - Esay UK e-commerce on a Budget. Retrieved July 30, Chaudhury, Abijit; Jean-Pierre Kuilboer (2002), E-Business and e-commerce Infrastructure. Mc Graw- Hill.ISBN Kessler, M. (2003), More Shoppers Proceed to Checkout Online. Retrieved January 13,2004 Furst, Karen, William W. Lang, and Daniel E. Nolle (2000), Special Studies on Technology and Banking. Office of the Comptroller of the Currency Quarterly Journal 19, No. 2: Kalakota, Ravi, and Andrew B. Whinston (1997), Electronic Commerce: A Manager s Guide. Reading, MA: Addison-Wesley Longman. Wenninger, John (2000), The Emerging Role of Banks in E-Commerce. Federal Reserve Bank of New York Current Issues 6, No. 3 : 1 6.