CHAPTER III

E-BANKING TO INTERNET BANKING – A GLIMPSE

3.1 Introduction

In a developing country like India, banking sector has played a major role in the

overall development of the country. During the period of more than two centuries from

the establishment of first joint stock bank in 1786 till the emergence of e-banking

technologies, the banking sector in India underwent significant changes. Before looking

at the emergence and use of e-banking technologies, it is essential to have a snapshot view

of the major transformation that took place in the banking sector right from the inception

of the first joint stock bank. Therefore, the purpose of this chapter is to have a glimpse of

the changes that took place in the Indian banking sector and the growth of e-banking in

India followed by international and Indian experience in Internet Banking (IB).

Significant changes in the Indian banking sector can be viewed under three distant phases

as given below.

1 Pre-Nationalisation period (Prior to 1969)

2 The Era of nationalization and after (1969 to 1991)

3 Post reform period (After 1991)

3.1.1 Pre-Nationalisation Period (Prior to 1969)

Organised banking in India is more than two centuries old. The banking system in

India traces its root to the General Bank of India, which was established in 1786 as the

first joint stock bank. In 1809, the Bank of Bengal, one of the three presidency banks

established by East India Company, came into being. Two other presidency banks in

Bombay and Madras were established in the years 1840 and 1843 respectively. In 1860,

the concept of limited liability was introduced in banking. In view of limited liability,

several joint stock banks such as Allahabad Bank Ltd, The Aliiance bank of Simla Ltd,

The Oundh bank Ltd, The Punjab National Bank Ltd were established during 1860 to

1900. The swadeshi movement, which started in the early 1900s gave stimulus to the

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growth of indigenous joint stock banks. Thus during the period from 1900 to 1910, banks

like The Peoples Bank of India Ltd, The Bank of India Ltd, The Bank of Baroda Ltd and

The Central bank of India Ltd were established. In 1921, the three presidency banks were

merged to form the Imperial Bank of India.

Until 1935, all the banks were in private sector, set up by individuals and/or

industrial houses. There were no regulatory mechanism for the banking system and these

private sector banks were at liberty to use the funds in the way they wanted which resulted

in failure of many banks between 1900 and 1925. The Central Banking Enquiry

Committee (CBEC) was constituted in 1929 to study the reasons for the failure of banks.

Insufficient capital, poor liquidity of assets, combining non-banking activities with

banking activities, irrational credit policy and incompetent and inexperienced directors

were found to be the reasons for the failure of banks. On the basis of the recommendations

of CBEC, the RBI Act was passed in 1934 and in 1935 Reserve Bank of India was

established. In 1949, the Banking Regulation Act was passed and it gave wide powers to

RBI to regulate, supervise and develop the banking system in the country. In 1955, as per

the recommendation of the All India Rural Credit Survey Committee, the State Bank of

India Act, 1955 was passed and the Imperial Bank of India was renamed State Bank of

India. Later in 1959, the State Bank of India (Subsidiary Bank) Act was passed enabling

SBI to take over 8 princely state associated banks as the subsidiaries (State Bank of

Bikaner and State Bank of Jaipur were two separate banks earlier and merged into one

bank). Today, the legal framework of bank is based on Banking Regulation Act, 1949 and

RBI Act, 1934.

3.1.2 The Era of Nationalization and After (1969 to 1991)

The Indian banking scene underwent significant changes during the period 1969 to

1990. The government of India, on 19th July 1969 nationalised 14 major Indian

commercial banks to enable them to play more efficiently the role of a catalytic agent for

the economic growth by extending banking facilities to the most deserving classes. One

of the objectives of establishment of SBI and nationalization of 14 commercial banks was

to satisfy the banking facilities and credit needs of the rural people. Though, they have

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made some efforts to improve their share in contributing to rural finance, it was far from

satisfactory. It was in this context that Regional Rural banks (RRBs) were started in 1976.

Another wave of nationalization came in 1980, when 6 more banks were brought under

state control. The Indian banking sector has undergone a metamorphosis since the

nationalization of banks. It made a commendable progress in terms of branch expansion,

mobilization of savings, deployment of credit, lending towards priority sectors and so on.

3.1.3 Post Reform Period (After 1991)

Before 1991 Public Sector Banks in India were facing several problems such as

accumulation of losses, mounting NPAs, excessive bureaucratization, red-tapism, poor

customer services and obsolete work technology, and disruptive tactics of trade unions of

bank employees etc. It was in this context that a Committee on Financial System

(Narasimham Committee) was appointed in 1991 and it submitted its report in November

1991. The recommendations of the committee include, among others, free entry of private

sector/ foreign banks. The committee also felt that computerization and mechanization is a

means to improve customer service efficiency. Rigorous use of technology started after

the Rangarajan Committee recommendations pertaining to the branch automation. Since

then the banking sector underwent dramatic changes. Rigorous use of technology

increases efficiency, reduces costs, saves time, improves relationship with customers and

processes transactions quickly.

3.2 Evolution of E-Banking

The transition from the ‗brick and mortar‘ structure to ‗click and order‘ model

started with the emergence of Information Technology and its use in the financial sector.

The use of IT in the banking sector traces its roots to the report of the Rangarajan

Committee appointed in July 1983 on Mechanisation in Banking Industry. The committee

recommended computerization and installation of Advanced Ledger Posting Machines

(ALPM) at the branch, regional and head offices of banks. The RBI advised all banks to

go in for huge computerisation at the branch level. This reduced error in calculations and

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the transactions of the customers became error free and they started getting printed

account statements.

Indian banks made one step forward with the implementation of Total Branch

Automation (TBA) in the late 1980s. Total Branch Automation means total automation of

a particular branch with its own database. The main disadvantage of TBA was that no

data centre was established and therefore customer‘s data was available only at the

branch where the customers have account. Moreover, each branch needed to take the

back up of their data and send the same data by using any storage device to the head

office of the bank.

Information Technology revolution in Indian banking industry gained momentum

with the entry of new private sector banks, which came into existence as per the

recommendations of the Narasimhan committee in 1991. These banks opted to have a

single centralized database instead of having multiple databases for all their branches.

Internet has provided a paradigm shift in the working of banks. With the advent of

Internet it becomes easy for banks to share the databases and maintain a centralised

database at a low cost. Internet facilitated banks to create their own web pages and

customers can access these web pages through the web browsers by sitting at home. This

kicked off online banking way back in 1996. The beginning of empowerment of banking

customers for their own transactions started with the evolution of ATMs as a delivery

channel. With the introduction of new technology in telecommunications like VSAT

(Very Small Aperture Terminals) and VPNs (Virtual Private Network) through internet,

most of the banks started to install Core Banking Solutions (CBS) for running their

business.

Under CBS a customer is no more considered the customer of a branch but he is

the customer of a bank. CBS lets banks offer ‗AAA‘ (Anywhere, Anytime and Anyhow)

services to their clientele. State Bank group brought all their branches under CBS by the

end of 2009 and 85.9 per cent of the branches of all other nationalized banks are brought

under CBS by the end of 2010 (Table 3.1). The emergence of self service banking

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technologies such as ATM, Online Banking and Mobile Banking ushered the concept of

anytime and anywhere banking.

The early adopters of technology in banking were the foreign banks and private

sector banks, especially new generation banks. It has been an uphill task for Public

Sector Banks to join the technology band wagon. Yet, they have managed to harness

technology and most banks have now moved towards 100 per cent computerization and

core banking. Among the Public Sector Banks, it is the State Bank Group that made a

quantum leap in terms of the number of branches computerized. SBI group achieved

almost 100 per cent computerization in 2006 while other nationalized banks could

achieve only 68.5 per cent (Table 3.1). SBI group brought all its branches under Core

banking solution in 2009 while other nationalized banks are yet to achieve this, but are on

the verge of 100 per cent computerization and core banking.

Table 3.1

Computerisation in Public Sector Banks

(Figures in Percentages)

Years

2005 2006 2007 2008 2009 2010

State Bank Group:

Fully computerized branches ( 1+2) 97.2 99.9 100 100 100 100

1.Branches under Core banking

solution 13.2 50.1 67.2 95.0 100 100

2. Branches already fully computerised 84.0 49.8 32.8 5.3 0 0

Other Nationalised Banks:

Fully computerized branches ( 1+2) 60.5 68.5 79.9 92.3 95.7 96.9

1.Branches under Core banking

solution 10.1 20.5 35.4 56.6 81.4 85.9

2. Branches already fully computerised 50.4 48.0 44.5 35.7 14.3 10.9

Source: Report on Trend and Progress of Banking in India – Various years

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The use of technology in banking has resulted in availability of multiple delivery

channels like ATMs, telebanking, internet banking, mobile banking, anywhere and

anytime banking etc. Technology adoption in banks has shifted banking more of a

capital intensive, fixed cost industry from a labour intensive, variable cost industry. Thus,

banking is becoming more of a capital-intensive, fixed-cost industry and less of a labour-

intensive, variable cost industry. With the rapid penetration of mobile phones in India,

banks are now focusing to deliver banking service, via mobile phones, what is often

referred to as Mobile banking. It is not an exaggeration to mention that traditional brick

and mortar bank building and face to face interaction between bank‘s staff and their

customers will soon become relics of the past, replaced by electronic communication.

3.3 The concept of E-Banking

With the interlinking effect of Information Technology, the world is shrinking in

such a way that time and distance has now become non-entities. IT has transformed every

spectrum of human life including the provision of banking services. In the banking sector,

technology and competition have increased the choice of customers regarding banking

products and providers. As a result various electronic delivery channels are increasingly

used by banks for delivering their products and services at the convenience of customers

at low cost. Delivery of banking services to customers at their office or home with the

help of electronic technology is termed as e-banking. E-banking has facilitated bank

customers by providing anytime and anywhere banking service. The concept of e-banking

is discussed in the following sections.

E-banking 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, and phone banking. PC

banking and internet or online banking is the most frequently used designations. It should

be noted, however, that the terms used to describe the various types of e-banking are often

used interchangeably (Dirk de Villiers, 2003 as cited in Ombati et al., 2010).

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According to Karjaluoto et al., (2002) electronic banking is a construct that

consists of several distribution channels. Hiltunen et al., (2004) defines electronic banking

as the delivery of banks information and services by banks to customers via different

delivery platforms that can be used with different terminal devices such as a personal

computer and a mobile phone with browser or desktop software, telephone or digital

television.

Electronic banking is a generic term encompassing internet banking, telephone

banking, mobile banking etc. In other words, it is a process of delivery of banking services

and products through electronic channels such as telephone, internet, cell phone etc.

(Uppal, 2007). E-banking may be identified with three channels Viz., ATM, Internet

banking and Tele banking (Kapoor and Dhingra, 2007). E-banking means offering,

supplying and delivering banking products and services through various electronic

delivery channels via electronic devices (Gupta and Khanna, 2007)

Nitsure (2006) stated the meaning of e-banking in simple words as e-banking

implies provision of banking products and services through electronic delivery channels.

E-banking has been around for quite some time in the form of Automatic Teller Machines

(ATMs) and telephone transactions. In more recent times, it has been transformed by the

internet – a new delivery channel that has facilitated banking transactions for both

customers and banks.

E-banking is a brew of services that embody Internet banking, Mobile banking,

ATM kiosks, Fund Transfer System, Real Time Gross Settlement (payment & allotment

system), Credit/Debit/Smart/Kisan Cards, Cash government services, as well as Data

warehousing, Operational interpretation for Management Information System as well as

Customer Relationship Management (―E-banking‖, 2011, July, 8 ).

Dangwal et al., (2010) stated the meaning of E-banking in a broader way as the use

of technology for accessing banking services electronically be it for paying bills,

transferring funds, viewing accounts or obtaining information and advices. It refers to the

electronic services that are made available to customers through phone, personal

computer, television and internet.

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A perusal of the concept of e-banking as described in the literature reveals that the

term e-banking, is an upper construct that encompasses an array of banking services

delivered through electronic media, be it through phone, PC, TV or internet. Thus the term

E-banking includes Real Time Gross Settlement (RTGS), National Electronic Fund

Transfer (NEFT), Electronic Clearing Service (ECS), Cheque truncation, Automated

Teller Machine (ATM), Tele banking, Internet banking and Mobile banking, among

others. Though the terms multimedia banking, Internet banking, e-banking and online

banking are often used in the literature interchangeably, the concept of e-banking is wider

in scope and application.

3.3.1 Real Time Gross Settlement (RTGS)

The advent Electronic Fund Transfer (EFT) facility has nearly done away with the

time lag in making monetary transactions. The EFT from one account to another is made

by one bank to another through RBI in three ways – RTGS, NEFT and ECS. RTGS is a

mechanism of transferring funds from one bank to another on a ‗real time‘ and on ‗gross‘

basis. A real time settlement means that payment transactions are settled as soon as they

are processed. The system effects final settlement continuously, rather than periodically,

at specified times, provided that the sending bank has sufficient covering balance or credit.

Gross settlement means that the settlement of funds occurs on a transaction by transaction

basis without netting debits against credits. The entries are made in the books of RBI and

an entry once made is final and irrecoverable. Under RTGS, the minimum amount of fund

transfer is Rs. 2 lakhs and there is no limit to the maximum amount. RTGS transactions

are inter bank as well as between customers through bank accounts.

―The existing RTGS system, even with all upgrades, is not in a position to handle

increasing volumes due to various limitations with regard to scalability, flexibility and

adaptability to technological advancements. Further, there have been developments

globally regarding features and functionalities. Therefore, RBI decided to replace the

application to Next Generation RTGS (NG-RTGS), a higher level by using the latest

technology and redefined business requirements‖. (RBI Bulletin, 2011 July, p. 1055). The

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growth of RTGS transactions during the period from 2004-05 to 2011-12 is depicted in

Table 3.2.

Table 3.2

Year-wise RTGS (both interbank and customer) Transactions

Years Volumes (000s) Growth Rate

(%)

Values (Rs.

Crores)

Growth rate

(%)

2004-05 460 4,066,184

2005-06 1,767 284.13 11,540,836 183.82

2006-07 3,876 119.35 18,481,155 60.14

2007-08 5,840 50.67 27,318,330 47.82

2008-09 13,366 128.87 32,279,881 18.16

2009-10 33,241 148.70 39,453,359 22.22

2010-11 49,300 48.31 48,487,234 22.90

2011-12 55,000 11.56 N.F

AAGR 113.08 59.18

Source: Compiled from RBI Annual Reports- Various years. N.F – Not Found

RTGS volumes registered a remarkable 120 times increase in volumes from 2004-

05 to 2011-12 with an AAGR of 113.08 per cent. However, RTGS transactions in value

terms registered 12 times increase with AAGR of 59.18 per cent during the period up to

2010-11. The fast growth in volumes indicates the increasing popularity of RTGS among

the banking customers.

3.3.2 National Electronic Fund Transfer (NEFT)

NEFT, introduced in October 2005, is a nation-wide electronic payment system

that uses a secure mode of transferring funds from one bank branch to another bank

branch. NEFT uses the Public Key Infrastructure (PKI) technology to ensure end-to-end

security and rides on the INdian FInancial NETwork (INFINET) to connect the bank

branches for electronic transfer of funds. For being part of the NEFT funds transfer

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network, a bank branch has to be NEFT-enabled. There is no limit – either minimum or

maximum – on the amount of funds that could be transferred using NEFT. The fund

transfer takes place in hourly batches - there are eleven settlements from 9 am to 7 pm on

week days and five settlements from 9 am to 1 pm on Saturdays. The NEFT system can be

used only for remitting Indian Rupees between the participating bank branches in the

country. Individuals, firms or corporates maintaining accounts with a bank branch can

transfer funds using NEFT. Those who do not have a bank account (walk-in customers)

can also deposit cash at the NEFT-enabled branch with instructions to transfer funds using

NEFT. Such customers have to furnish full details including complete address, telephone

number, etc. But It is necessary for the beneficiary to have an account with the NEFT

enabled destination bank branch in the country. The operation of NEFT system is

described below.

Step-1: An individual / firm / corporate intending to originate transfer of funds through

NEFT has to fill an application form providing details of the beneficiary (like, name of the

beneficiary, name of the bank branch where the beneficiary has an account, IFSC of the

beneficiary bank branch, account type and account number). IFSC or Indian Financial

System Code is an 11 digit alpha-numeric code that uniquely identifies a bank-branch

participating in the NEFT system. The remitter authorizes his/her bank branch to debit his

account and remit the specified amount to the beneficiary. Customers enjoying net

banking facility offered by their bankers can initiate the funds transfer request online.

Some banks offer the NEFT facility even through the ATMs.

Step-2: The originating bank branch prepares a message and sends the message to its

pooling centre (also called the NEFT Service Centre).

Step-3: The pooling centre forwards the message to the NEFT Clearing Centre (operated

by National Clearing Cell, Reserve Bank of India, Mumbai) to be included for the next

available batch.

Step-4: The Clearing Centre sorts the funds transfer transactions destination bank-wise

and prepares accounting entries to receive funds from (debit) the originating banks and

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give the funds to (credit) the destination banks. Thereafter, bank-wise remittance messages

are forwarded to the destination banks through their pooling centre (NEFT Service

Centre).

Step-5: The destination banks receive the inward remittance messages from the Clearing

Centre and pass on the credit to the beneficiary accounts (RBI, 2012, Jan 31)

The difference between NEFT and RTGS is that in NEFT fund transfer takes place

on a Deferred Net Settlement (DNS) basis which settles transactions in batches. But the

RTGS transactions are processed continuously throughout the RTGS business hours.

Table 3.3 portrays the year-wise EFT/NEFT transactions during the period from 2003-04

to 2011-12.

Table 3.3

Year-wise EFT/NEFT Transactions in Volume and Value

Year Volume

(000s)

Growth

Rate (%)

Value

(Rs. Crores)

Growth Rate

(%)

2003-04 801 17,125

2004-05 2,549 218.23 54,601 218.84

2005-06 3,067 20.32 61,288 12.25

2006-07 4,776 55.72 77,446 26.36

2007-08 13,315 178.79 140,326 81.19

2008-09 32,161 141.54 251,956 79.55

2009-10 66,357 106.33 409,507 62.53

2010-11 132,300 99.34 934,149 128.12

2011-12 226,100 70.90 1790,000 91.62

AAGR 111.40 87.56

Source: RBI Annual Reports – Various Years

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EFT/NEFT transactions in volumes registered around 282 times increase with

AAGR of 111.40 per cent and in value terms the increase is 105 times with AAGR of

87.56 per cent. Being a one to one fund transfer mechanism, the magnificent increase in

volumes indicates that more and more customers choose EFT/NEFT to transfer funds

from one place to another.

3.3.3 Electronic Clearing Service (ECS)

ECS is a mode of electronic fund transfer from one bank account to another bank

account through the clearing houses of RBI. This is normally for bulk transfers from one

account to many accounts or vice-versa in the form of ECS-credit and ECS-debit. ECS

(Credit) is used when an institution is required to make bulk or repetitive payments in the

form of dividend to shareholders, interest to investors, salary/pension to employees etc.

The institution (called ECS user) can initiate the transactions after registering themselves

with an approved clearing house. The ECS user has to prepare a list of beneficiaries to

whom payments are to be made and hand over to one of the approved clearing house. The

clearing house makes a single debit to the account of the ECS user through the account of

the sponsor bank (ECS user‘s bank) and credits the accounts of the beneficiary‘s banks for

making onward credit to the accounts of the individual beneficiaries. There is no value

limit on the amount of individual transactions under this service.

ECS (debit) is used when an institution is required to recover an amount, by raising

a debit, at a prescribed frequency from many customers in the form of telephone or

electricity charges, house tax, water tax, loan installments etc. The ECS user has to collect

an authorisation which is called ECS mandate for raising such debits. The ECS user has to

submit the data in specified form through the sponsor bank to the clearing house. The

clearing house would pass on the debit to the destination account holders (customers)

through the clearing system and credit the sponsor bank's account for onward credit to the

account of the ECS user. The growth of ECS transactions in volumes and value terms

during the period from 2003-04 to 2011-12 is exhibited in Table 3.4.

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Table 3.4

Year-wise ECS (Credit) and ECS (Debit) Transactions

Years ECS (Credit ECS (Debit)

Volume

(000s)

GR

(%)

Value

(Rs.

Crores)

GR

(%)

Volume

(000s)

GR

(%)

Value

(Rs.

Crores)

GR

(%)

2003-04 20,300 10,228 7,897 2,254

2004-05 40,051 97.30 20,180 97.30 15,300 93.74 2,921 29.59

2005-06 44,216 10.40 32,324 60.18 35,958 135.02 12,986 344.57

2006-07 69,019 56.10 83,273 157.62 75,202 109.14 25,441 95.91

2007-08 78,365 13.54 782,222 839.35 127,120 69.04 48,937 92.35

2008-09 88,394 12.80 97,487 -87.54 160,055 25.91 66,976 36.86

2009-10 98,550 11.49 117,613 20.64 150,124 -6.20 69,524 3.80

2010-11 117,300 19.02 181,686 54.48 156,700 4.38 73,646 5.93

2011-12 121,500 3.58 187,166 3.02 164,700 5.12 80,000 8.63

AAGR 28.03 143.13 54.52 77.21

Source: Compiled from RBI Annual reports – Various years.

Notes:

ECS (credit) for 2007-08 include transactions for refunds of oversubscribed IPOs by various

companies as mandated by the stock exchange.

It is vivid from Table 3.4 that ECS (Credit) recorded an increase of around 6 times

in volumes with AAGR of 28.03 per cent and 18 times in value terms with AAGR of

143.13 per cent during the period. Similarly ECS (Debit) recorded an increase of 21 times

in volumes with AAGR of 54.52 per cent and around 35 times in value terms with AAGR

of 77.21 per cent during the period. Since ECS is for making bulk payments, it is quite

natural that the growth in value terms is much higher than the growth in volumes.

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3.3.4 Credit Cards and Debit Cards

Credit card is a mechanism by which the card holder can make purchases without

immediate cash payments. It enables the card holders to avail credit facilities from the

issuing banks for a specified period of time without any security. A debit card can be used

to withdraw cash from a bank like an ATM card and it can also be used at stores to pay for

goods and services in place of a cheque. Debit card allows the holder to spend only what

is in his account. Table 3.5 shows the year-wise credit card and debit card transactions

during the period from 2003-04 to 2011-12.

Table 3.5

Year-wise Credit Cards/Debit Cards Transactions in Volume and Value

Year Credit Cards Debit Cards

Volume

GR

(%) Value

GR

(%) Volume

GR

(%) Value

GR

(%)

2003-04 100,179 17,663 37,757 4,874

2004-05 129,472 29.24 25,686 45.42 41,532 10.00 5,361 9.99

2005-06 156,086 20.56 33,886 31.92 45,686 10.00 5,897 10.00

2006-07 169,536 8.62 41,361 22.06 60,177 31.72 8,172 38.58

2007-08 228,203 34.60 57,984 40.19 88,306 46.74 12,521 53.22

2008-09 259,561 13.74 65,356 12.71 127,654 44.56 18,547 48.13

2009-10 234,209 -9.77 61,824 -5.40 170,170 33.31 26,418 42.44

2010-11 265,100 13.19 75,516 22.15 237,100 39.33 35,705 35.15

2011-12 320,000 20.71 100,000 32.42 327,500 38.13 50,000 40.03

AAGR 16.36 25.18 31.72 34.69

Source: RBI Annual Reports- Various Years

The volume of credit card transactions has trebled during the period with an

AAGR of 16.36 per cent and it increased nearly 6 times in value terms with an AAGR of

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25.18 per cent. On the other hand the volume of debit card transactions has shown an

increase of nearly 9 times with AAGR of 31.72 per cent and it has shown 10 times

increase in value terms registering an AAGR of 34.69 per cent.

3.3.5 Cheque Truncation

Cheque truncation is the process of stopping the flow of physical cheque issued by

a drawer at some point en-route to the drawee branch. Instead, an electronic image of the

cheque is transmitted to the drawee branch along with relevant information. Images of

cheques are taken using scanners. It thus obviates the need to move the physical

instruments across branches. It speeds up the process of collection of cheques resulting in

better service to customers, reduces the scope for clearing-related frauds or loss of

instruments in transit, lowers the cost of collection of cheques, and removes

reconciliation-related and logistics-related problems.

3.3.6 Automated Teller Machine (ATM)

A major technological development, which has revolutionized the delivery channel

in the banking sector, has been the Automated Teller Machines (ATMs). ATMs

particularly off site ATMs, act as substitutes for bank branches in offering a means of

anytime cash withdrawal to customers. ATM is a device used by bank customers to

process account transactions. ATMs allow customers to do many branch banking

functionalities like cash withdrawal, mini statement of transactions, application for cheque

books etc. To operate an ATM, the customer should posses a valid ATM card issued by a

bank and need to know a secret PIN (Personal Identification Number) code. The advent of

ATM has made the concept of round the clock banking a reality. The branch business

timings have lost significance to customers after the introduction of ATM and the long

crowd of customers waiting at bank branches for their turn to collect cash is disappearing

with the widespread usage of ATMs.

ATMs were initially introduced as cash dispensers but now banks offer a number

of Value Added Services (VAS) through ATMs such as purchase of mobile recharge cards

and new internet connection, payment of donations to temple and for charity, payment of

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utility bills, purchase and sale of mutual funds, booking airline and railway tickets,

payment of tax, money transfer and internet banking through ATM etc.

HSBC was the first bank to introduce ATM in India in 1987. Later new private

sector banks have taken the lead in introducing ATMs in a big way and the public sector

banks also pursued the installation of ATMs all over the country. ATMs saw a period of

inaction before they were accepted by Indian masses. For instance, in 1998 India had just

500 ATMs but now as per the data provided by the Ministry of Finance, Public Sector

banks in India alone opened 28,039 ATMS between April 2006 and March 2010 (―Bank

ATMs‖, 2010, July 01). The number of ATMs of scheduled commercial Banks in India is

given in Table 3.6. There are 74,505 ATMs in India at the end of March 2011, of which

49,487 are owned by public sector banks.

Table 3.6

Number of ATMs of Scheduled Commercial Banks in India at the end of

March 2011

Bank Group On-site

ATMs

Off-site ATMs Total

ATMs

Off-site ATM

as Percentage

of Total ATM

Public Sector Banks 29,795 19,692 49,487 39.8

Private Sector Banks 10,648 13,003 23,651 55.0

Foreign Banks 286 1,081 1,367 79.1

Total of all Banks 40,729 33,776 74,505 45.3

Source: Report on Trend and Progress of Banking in India, 2010-11

The percentage of ATMs located in rural areas accounted for 9.6 per cent of the

total ATMs in the country at the end of March 2011. The growth in the number of ATMs

in India can be understood from the fact that the population per ATM declined from

43,000 persons in 2007 to 19,700 persons in 2010. In rural areas it declined from 1,25,600

persons in 2007 to 43,500 persons in 2010 and in urban areas it was 15,900 persons in

2007 and in 2010 it was 8,100 persons.

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ATMs with biometric devices are the latest to offer banking services to the rural

masses. Since majority of the rural masses cannot read and write it would be unfair to

given them a PIN to use. ATMs with biometric technology help the ignorant to become

part of the banking community. Biometric technology establishes identification via face,

voice, retina or iris. The finger prints of illiterates are scanned and stored for making

transactions. Fingerprint verifications and voice guided animated screens with one touch

enabled transaction helps the illiterates in eliminating complex navigating menus.

3.3.7 Tele Banking

Tele banking is another form of technology enabled banking service which

provides the facility of 24 hour banking to customers. Most of the banking functions

except cash withdrawals or deposits could be carried out by a customer using a telephone.

Tele banking services function is based on a technology known as Interactive Voice

Response System (IVRS) available with the bank computers. The customer has to dial a

phone number (which is connected to bank computers) provided by the bank at any time

and enquire balances or transaction details and to transfer funds between one account to

another. To guarantee security the customer must first authenticate through a numeric or

verbal password, a process known as authentication. It has been found that customer

acceptance of tele banking channel has been the lowest among the new delivery channels

due to the difficulty in using IVRS and lack of options for withdrawing cash.

3.3.8 Mobile Banking

Mobile banking or M-banking is a delivery channel which opened up during the

late nineties and with the introduction of 3 G mobile telephony that allowed accessing

internet using a mobile phone in the early 2000. Mobile banking is an extension of IB.

Mobile banking is defined as the type of execution of financial services which the

customer uses mobile communication techniques in conjunction with mobile devices

(Pousttchi and Schurig, 2004). In other words, it means the usage of mobile

telecommunication devices for carrying out banking and financial transactions. The bank

in association with the cellular service providers offers this service. For availing this

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service, mobile phone should either be Short Message Service (SMS) or Wireless Access

Protocol (WAP) enabled.

The Reserve bank of India issued operating guidelines to banks for mobile banking

transactions on October 8, 2008, which were reviewed and further relaxed on December 4,

2009. The RBI has authorized 46 banks to offer mobile banking services to their

customers and 33 banks have commenced mobile banking. The services which are being

offered by banks under their mobile banking services are : (i) alert services; (ii) service

requests (cheque book, statement request); (iii) account enquiry; (iv) intra-bank funds

transfer; (v) inter-bank funds transfer - inter-bank mobile payment service by the National

Payments Corporation of India (NPCI); and (vi) value added services, such as, bill pay,

ticketing, etc. The mobile branch guidelines envisage the extension of banking facilities

through a well protected van. The mobile unit would visit the places proposed to be served

by it on specific days/ hours so that its services could be utilised by the customers. Some

banks like Allahabad Bank, UCO Bank, Corporation Bank, have launched the mobile van

bank services (Killawala, 2011, March 01 p.4).

The limit for mobile banking transactions without end-to end encryption has been

increased to Rs. 5000 from the earlier limit of Rs. 1000 with effect from May 4, 2011.

(Killawala, 2011, May 01, p.4). Table 3.7 reveals that mobile banking is now emerging as

a popular e-banking channel in India. Over a period of nearly 2 years, mobile banking

transactions in India have increased by 13 times in volumes and value terms. This shows

the growing interest of Indian customers in mobile banking.

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Table 3.7

Mobile Banking Transactions in India in Volumes and Value Terms

Month/Year Value (Rs. In thousands Volume

May-09 46,542 52,538

Oct-09 69,430 111,623

Mar-10 2,36,246 2,71,920

Oct-10 5,17,689 5,56,003

Feb-11 6,16,191 7,07,496

Source: Compiled from RBI, Mobile banking transactions statistics

3.3.9 Internet Banking (IB)

Internet is gaining popularity as a delivery channel in the banking sector. IB has

become a competitive necessity for banks as competitors are just one click away. With the

increasing use of technology in the banking sector, customers can change their banking

service provider much faster than in the traditional banking set up if they are not satisfied

with the products, prices or services offered by a particular bank. Therefore banks are

competing with each other to reach more and more customers through electronic channels

particularly IB. IB refers to a banking transaction routed through internet. It is a method

of banking that allows a customer to perform banking transactions through a bank‘s

website hosted in the internet. It is also called virtual banking or online banking. It is a

form of self service banking technology.

Internet banking is a product of e-commerce in the field of banking and financial

services. In what can be described as Business-To-Customer (B2C) domain for banking

industry, Internet Banking offers different online services like balance enquiry, requests

for cheque books, recording stop-payment instructions, balance transfer instructions,

account opening and other forms of traditional banking services. Mostly, these are

traditional services offered through Internet as a new delivery channel. A number of

definitions of the concept of IB are found in the literature. A perusal of these definitions

reveals the following;

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Internet banking can be defined as the use of technology to communicate

instructions and receive information from a financial institution where an account is held.

Internet banking includes the system that enables financial institution, customers,

individuals or business to access accounts, transact business or obtain information on

financial products and services through a public or private network, including the internet.

(Prakash and Malik, 2008)

Internet banking refers to systems that enable bank customers to get access to their

accounts and general information on bank products and services through the use of bank‘s

website, without the intervention or inconvenience of sending letters, faxes, original

signatures and telephone confirmations (Henry, 2000 as cited in Dube et. al., 2009).

Chang (2003), Sullivan and Wang (2005) view internet banking as a process

innovation whereby customers handle their own banking transactions without visiting

bank tellers. It also allows non-customers to visit virtual banks via the public network

while Phone banking or PC banking provide only closed networks limited to the existing

client. Internet banking is defined as ―the delivery of banking services through the open-

access computer network (internet) directly to customers‘ home or private address‖ (Lau,

1997 as cited in Yiu et al., 2007).

Pikkarainen et al., (2004) defines internet banking as an ―Internet portal, through

which customers can use different kinds of banking services ranging from bill payment to

making investments‖. Internet banking refers to the use of internet as a remote delivery

channel for banking services. Such services include traditional ones, such as opening a

deposit account or transferring funds among different accounts and new banking services,

such as electronic bill presentment and payment (allowing customers to receive and pay

bills through a bank‘s website). (Furst et al., 2000)

Based on the above definitions, it can be concluded that internet banking is the use

of internet by bank customers for transacting their banking transactions. In other words, it

is the use of internet by banks to deliver banking services to customers irrespective of their

geographical location. It facilitates direct access to account details, enables transfer of

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funds, allows for multiple bills payments, and performs an array of other transactions. It is

the delivery of traditional bricks and mortar banking services via non personal

communication channel, viz, internet. The difference between traditional banking and

internet banking is that, the former takes customers to physical bank branches while the

latter delivers banking services at customers‘ home.

3.3.9.1 Features and Functions in Internet Banking

The features and functions in IB are summarized under the following heads;

Payments

These include; Inter account fund transfer, Payment to other personal account,

Transfer of funds to credit card account, Foreign transfer: Draft or SWIFT, Recharge

Mobile phones, Payment of bills, E-ticketing, Shop online.

Requests/Applications

These include; Balance enquires, Interim statements, Cheque book orders, Stop

lost/stolen cheques, Remove ‗Stop Cheque‘ request, Apply for a credit card limit change,

Change ATM card PIN, Product and rate information, Update personal profile, Apply for

a consumer loan, Download application forms, EMI calculation for loan, Standing order

transactions.

Customer expectations from IB can be conveniently categorized under different

categories, namely, view-only functions, account control functions, new services and

reconciliation functions. The categorization of customer expectations were derived from

studies carried by Gandy and Brierly, (1997); Gandy and Chapman, (1996) and Gandy,

(1998).

View only: (1) Check balances (2) View statements/Account (3) Historical records.

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Account control: (1) Accounts amendment (2) Order cheque books (3) Transfer funds (4)

Pay bills to third parties (5) Standing orders/direct debit (6) Order/Print statements (7)

send messages (8) Pay credit card bills.

New Services: (1) Apply for loans (2) Open current accounts (3) Open savings accounts

(4) Apply for credit cards (5) Apply for mortgages (6) Apply for insurance (7)

Reconciliation/integration.

3.3.9.2 Types of Internet Banking

Diniz (1998), Henry (2000) and Yibin (2003) all cited in Dube et.al., (2009)

identify three functional level/kinds of internet banking that are currently employed in the

market place and these are: Informational, Communicative and Transactional.

Informational (websites)

This has been identified as the first level or basic level of Internet Banking.

Typically the bank has the marketing information about the bank‘s products and services

on a standalone server. The risk is very low as informational systems typically have no

path between the server and the bank‘s internal network. This level of Internet Banking

can be provided by the bank or outsourced. Though the risk is very low, the server or

Web site may be vulnerable to alteration. Therefore banks should take appropriate control

measures to prevent unauthorized alterations to the bank‘s server or Web site.

Communicative/Simple Transactional (Websites)

This type of Internet Banking allows some interaction between the bank‘s systems

and the customer. The interaction is limited to e-mail, account inquiry, loan application or

static file updates (names and address changes). It does not permit any fund transfer. In

this form of Internet Banking, the risk is higher than informational systems because the

servers may have a path to the bank‘s internal networks. Therefore appropriate controls

need to be in place to prevent, monitor and alert management of any unauthorized attempt

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to access the bank‘s internal networks and computer systems. Virus controls also become

much more critical in this environment.

Advanced Transactional (Websites)

This level of Internet Banking allows banks customers to electronically transfer

funds to/from their accounts. Since a path typically exists between the server and the

bank‘s or outsourcer‘s internal network, this is the highest risk architecture and must have

the strongest controls. Customer transactions include accessing accounts, paying bills,

transferring funds etc.

3.3.9.3 Boon Side of Internet Banking

Both customers and banks benefit from the use of internet as a channel for

receiving/ delivering banking services. Some of the advantages of using Internet Banking

as far as customers are concerned are;

Convenience: Customers have access to IB on all days round the clock (24x7) and they

are only a click away from banking services.

Low Transaction Cost: By using IB customers can save cost of banking transactions in

terms of saving in traveling expenses as the customers need not have to be physically

present in a bank branch.

Ubiquity: Transactions can be carried by customers from anywhere around the globe.

Up to Date Information: Customers can have up to date information about their accounts

without the help of bank staff as their accounts are updated as soon as a transaction takes

place.

Transaction Speed: The speed of transactions is faster than traditional banking channel

Effectiveness: IB sites of banks offer facilities such as account aggregation, stock quotes,

rate alerts and portfolio managing programmes to provide the latest information to

customers so that they can safeguard their financial assets more efficiently.

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Customisation: Customers can get banking products tailored to suit their requirements.

3.3.9.4 Bane of Internet Banking

Al-Sukkar and Hassan (2005) and Singh (2004) as cited in Dube et. al., (2009)

identify potential disadvantages of deploying internet banking as summarised below;

Indirect cost to the customer as Internet Banking has certain system requirements

such as accessibility to computers and browsers connectivity which are additional

costs to the customer.

Cash availability – Customers cannot make deposits or withdrawals of hard cash

when using the Internet Banking.

Security concerns – Banks and customers alike are concerned about unauthorized

access to their systems.

3.3.9.5 Impediments to Internet banking

Access to internet is one of the prerequisites for banking over the internet. In

India, there exist the problem of digital divide, where the benefits of technological

developments including Personal Computer (PC) and internet usage still remain as a

mirage for the poor leaving them to bear the high transaction cost of brick and mortar

banking. On the other hand the rich are reaping the benefit of technology including e-

banking and enjoy its fruit in the form of low transaction cost. It is estimated that the

number of poor in India would be 405 million by March 2011 (Chauhan, 2010, May 04).

It means in a country where the poverty rate is still adverse at around 30 per cent of the

population, it is a Herculean task for the government to bring the poor within in the ambit

of technology band wagon. So long as technology and telecommunication services do not

reach all sections of the society, It will be an uphill task for the banks to deliver

technology based banking services, particularly Internet Banking.

Research studies indicated that the usage of IB is polarized towards youth. This is

because of the fact that the youth are more PC literate and tech savvy than the old. The

fact is that there exist market segments that are still not comfortable with e-banking and

prefer brick and mortar banking, as they are habituated and contented with traditional

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banking methods. The need of the hour, for banks, is to literally catch hold of these market

segments and arrange demos to make them convince the ease of use and convenience that

the technology offers to bank customers. If banks take a deliberate effort it is quite sure

that these market segment can be brought within the ambit of IB.

Research studies also indicate that IB customers, knowingly or unknowingly are

not taking precautions to avert their chances of being susceptible to financial fraud.

Trusteer, a customer protection company for online businesses recently reported that the

vast majority of online banking customers reuse their login credentials to access non-

financial and much less secure Web sites. According to its survey nearly 73 per cent of

bank customers use their online account password to access other Web sites, and that 47

per cent use both their online banking user ID and password to login elsewhere on the

Internet. Amit Klein, Head of Research, Trusteer, opined that customers are not aware, or

are choosing to ignore, the security implications of reusing their banking credentials on

multiple Web sites. (―Two thirds‖, 2010, March 15)

3.3.9.6 Need for Promoting Internet Banking in India

Table 3.8 gives the number of people per branch in different countries. It is evident

from the table that the number of customers handled per branch in India is 2.34 to 9.45

times higher than the number of customers handled per branch in developed countries.

Therefore, it is the need of the hour to promote IB in India to control customer traffic in

bank branches, besides a host of benefits that accrue to banks by offering IB services.

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Table 3.8

People per Branch in Different Countries

Country People per Branch

France 1,587

Germanay 1,945

US 2,720

Japan 3,968

Hong Kong 4,545

Sweden 4,672

Canada 6,410

India 15,000

Source: Marakarkandy & Daptardar (2011)

3.3.9.7 Global Internet Banking Trend

ComScore Inc., a global leader in measuring the digital world, reported that

Canada leads all countries in terms of its share of Internet users who access online banking

sites each month at nearly 65 per cent, with the Netherlands a close second at 61 per cent.

North America, Europe and Australia feature prominently among the top ten, all of which

are developed economic markets where individuals are more likely to have bank accounts

and regular Internet access (Figure 3.1)

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Figure: 3.1

Source: ―Top 10..‖, (2010, Oct. 7).

3.3.9.8 Internet Banking – Glimpse from Select Countries

Europe

A study conducted by Deutsche Bank Research revealed that Northern European

countries are home of the most enthusiastic online bankers with adoption rates of 62-77

per cent. The European core (e.g. Germany, France, UK) constitutes a second cluster with

rates between 35 to 54 per cent. The US (41 per cent) would also fit into this group. Most

countries with adoption rates below 32 per cent are in Southern and Eastern Europe

(Ireland is an exception). Finally, there is group of rather poor countries where online

banking has barely taken hold. Currently, every third European uses online banking and

there are no signs of a slowdown in adoption. By 2020, more than 60 per cent of

Europeans may use online banking. It is also found that across Europe, women are less

likely to use online banking than men (Meyer, 2010)

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As per Europe‘s Digital Competitive Report (2010), the use of Internet Banking

varies widely across Europe. In some countries like Austria, Finland, Netherlands,

Sweden, Iceland, Estonia and Norway it is extremely popular among internet users. The

above average users of IB include Belgium, Denmark, Estonia, France, Germany, Latvia,

U.K and Luxembourg. The below average users of IB include The Czech Republic,

Greece, Hungary, Ireland, Italy, Lithuania, Malta, Poland, Portugal, Romania, Slovakia,

Slovenia, Spain, Croatia. The report concludes that other previously less popular services

like Internet Banking is gaining popularity in Europe.

United States

The trend towards Online Banking (OB) among the US is on rise, though the

growth is not spontaneous. In 1996, less than 5 per cent of the US households used OB

and the percentage slowly reached to nearly 40 per cent in 2007, indicating that US

households are not that enthusiastic in the usage of OB (Bob et al., 2007). In 2007 the

proportion of transactions delivered by US banks through various channels like OB, call

centre, branch and ATM were almost same but by 2010 OB gathered momentum and US

banks are delivering 31 per cent of their transactions online and during the 5 years period

from 2006 to 2010, OB recorded a CAGR of 27.2 per cent while other delivery channels

recorded meager CAGRs (Figure 3.2) This indicates that US banks are using OB as their

prime delivery channel and US customers are accepting it.

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Figure 3.2

US Banking Delivery Transactions by Channel (2006 – 2010)

Source: Bob et al., (2007).

South East Asia

ComScore Inc. in a study of internet usage in Southeast Asia found that an

increasing number of consumers across South East Asia turned to online banking

throughout 2010. In each of the six markets included in the study (Malaysia, Hong Kong,

Vietnam, Singapore, Indonesia and the Philippines), visitation to the online banking

category grew by double-digits percentages, outpacing overall internet growth by a factor

of two in most cases (Table 3.9). Malaysia, home to the largest total number of online

banking users in the study, climbed 16 percent to 2.7 million visitors in January 2011.

Hong Kong‘s online banking audience grew 18 percent to 1.5 million visitors,

representing 35.5 percent of the total online population and ranking as the most highly

penetrated online banking market in the region. Indonesia posted the largest percentage

increase, growing 72 percent to 749,000 unique visitors. According to Joe Nguyen,

ComScore vice president for Southeast Asia, ―Although online banking in Southeast Asia

does not exhibit as high a level of penetration as markets in North America or Europe, it is

growing rapidly as more consumers respond to the convenience of the online channel for

conducting banking activities and transactions‖ (―Online banking‖, 2011, March 4).

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Table 3.9

Online Banking Category Visitation by Market

January 2011 vs. January 2010

Total Audience, Age 15+ - Home & Work Locations*

Total Unique Visitors (000)

Jan-2010 Jan-2011 % Change

Malaysia 2,360 2,746 16%

Hong Kong 1,304 1,543 18%

Vietnam 701 949 35%

Singapore 779 889 14%

Indonesia 435 749 72%

Philippines 377 525 39%

Source: ―Online banking..‖, (2011, March 4).

*Excludes visitation from public computers such as Internet cafes or access from mobile phones or PDAs.

India

In India, ICICI bank was the pioneer to introduce IB in 1996. It is the first bank in

India to launch a web site, and then follow it up with Internet Banking. The bank had

launched IB service even before the RBI had formulated guidelines. The period 1996-98

was the adoption phase of IB for most Indian banks. IB in India started picking up in 1999

due to the increased penetration of PCs and decrease in internet charges. After ICICI bank,

IndusInd Bank and HDFC Bank were the early ones to embrace the technology in 1999.

Among the Public Sector banks, State Bank of India, Bank of Baroda, Allahabad

Bank, Syndicate bank and Bank of India were the pioneering banks to offer IB services in

India. SBI launched IB services in July 2001. The other public sector banks to follow

technology adoption are Union Bank of India, Canara Bank and Punjab National Bank.

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The Outlook Money-TNS Study, conducted between October- December 2010, of

India‘s Most Customer Friendly Banks takes a look at the perception of 3,430 customers

across 17 parameters, one such parameter being ‗good internet banking‘ in six major cities

such as Delhi, Mumbai, Kolkata, Chennai, Bangalore and Hyderabad. The study rated

India‘s top 10 banks by net banking and the result is shown in Figure 3.3.

Figure: 3.3

Source: Pankaj (2011, April 20)

It is found from Figure 3.3 that most of the banks appeared in the list are public

sector banks. However, new generation banks like Axis Bank and HDFC Bank figured in

the list with first and fifth position respectively. None of the old private sector banks

found a place in the list.

The trend towards IB is unabated in India. According to a report by global

management consultancy McKinsey & Company, India leads growth among Asian nations

in mobile and internet usage for banking with around 7 per cent of account holders in the

country using internet for banking transactions. The percentage of online users of banking

transactions was just about 1 per cent in the agency's 2007 survey. Branch banking has

fallen by a full 15 per cent between 2007 and 2011 (―India leads‖, 2011, July 25).

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3.4 Summing up

Internationally, the last two decades or so have witnessed significant changes in

the profile of the banking sector. India too has responded to this change. The advent of

internet has led to an electronic revolution in the global banking sector. No other

technology since the invention of electricity has brought about such a gargantuan

transformation in human lives. Rigorous use of technology in the banking sector leads to

the emergence of e-banking. E-banking is becoming immensely popular globally and

India is no exception to it. E-banking developments have vastly altered the banking

landscape in India. Exposure to technology has empowered the retail customers and in

today‘s wired world quick services is demanded by one and all. Therefore, e-banking has

become an indispensable reality for almost all Indian banks.

After the wedding of Indian banks with Information Technology, a large

percentage of the transactions are not taking in the physical premises of the banks. The

rising volumes of e-banking transactions in India may be viewed as an indication that

banking customers, particularly the young, have almost tasted the benefits of e-banking

services. Statistics revealed that IB is one of the fastest rising e- banking services globally

and in India too it is gathering momentum. Though, it is a highly cost effective delivery

channel, the risk associated with this kind of banking should not be overlooked.