6_internet Banking - Furture Banking

7/30/2019 6_internet Banking - Furture Banking

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Prepared by Uday Naickar INTERNET BANKING

Uday NaickarBMS - Finance

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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

Documents

6_internet Banking - Furture Banking