Shri chinai college of commerce &economics

Andheri (e) Mumbai-400069

Project on

IT in banking industry

Project by

PARESH J SUDRA

T.Y .B.COM (BANKING& INSURANCE)

ROLL NO -48

Project guide

PROF. NISKIKANT JHA

UNIVERSITY OF MUMBAI

ACADEMIC YEAR

2007-2008

ACKNOWLEDGEMENT

I am most thankful to my internal guide, Prof.

NISHIKANT JHA., for his guidance through out the

project and for encouraging me all the time. I value very

much that he has been extremely available, even when his

work schedule was very tight. I also value his generosity.

There are many people to whom I feel obliged for

their comments on the contents of the project. I thank to

Prof. Mrs.Kruttika K.Sontakke, Prof. Parina Sangha.

I am also grateful to my college friends: HITESH

D. PADHIYAR, VINAY MALVAN, PANJAB SINGH.

DECLARATION

I MR PARESH J. SUDRA student of T.Y.B.COM (BANKING & INSURANCE), SHRI CHINAI COLLEGE OF COMMERCE & ECONOMICS. Here by declare that I have completed this project on IT IN BANKING INDUSTRY in the academic year 2007-08. the information is true and original to the best on my knowledge.

( STUDENT OF STUDENT) (paresh j. sudra)

CERTIFICATE

I PRO. NISHIKANT JHA here by certified that PARESH J. SUDRA STUDENT OF T.Y.BCOM (BANKING & INSURANCE) SHRI CHINAI COLLEGE OF COMMERCE & ECONOMICS SEMESTER 5TH has completed project on IT IN BANKING INDUSTRY in the academic year 2007-08. The information submitted is true & original to the best of my knowledge.

SIGNATURE OFPROJECT GUIDE

TABLE OF CONTENT

1. INTRODUCTION

a) OBJECTIVES OF THE STUDY

b) LIMITATIONS OF THE STUDY

c) RESEARCH METHODOLOGY

2. E-BANKING: IN NASCENT STAGE IN INDIA

3. ELECTRONIC CHEQUES & EVIDENTIARY VALUE

4. THE FUTURE OF PLASTIC MONEY

5. LEADING ISSUES IN BANKING TECHNOLOGY

6. TECHNOLOGY & FRAUDS

7. CREDIT CARD FRAUD ON INTERNET

8. INFORMATION TECHNOLOGY RISK IN BANKING:

MANAGEMENT & MEASUREMENT

9. PRIMARY DATA & ANALYSIS

10.SECONDARY DATA & ANALYSIS

11. FINDINGS & CONCLUSIONS

12. SUGGESTIONS & RECOMMENDATIONS

13. BIBLIOGRAPHY

1. INTRODUCTION

The Indian Banking system has an old age legacy. Earlier

there were indigenous bankers who consisted mainly of unorganized

moneylenders, mahajans and sahukars. Later, when British came to

India they brought with themselves the concept of organized

banking. British while leaving India left behind large number of

small and privately held banks. In 1964, the first major banking

reform took place when 14 banks were nationalized. It led to the

rising of Indian Public Sector Banks. The second banking reform

was witnessed in 1990s when Indian Banking Sector underwent

complete change after the recommendations of the Narsimhan

Committee. Private and MNC banks entered banks entered into the

Indian Banking arena and challenged the monopoly of the PSU

banks. The Private and MNC banks brought new technologies and

technology intensive services with themselves. They rendered

quality service, which PSU banks were not providing, to service

starved Indian customers. There were a series of technological

innovations and up-gradations, e.g., ATMs, Internet Banking, credit

cards and online banking, etc. Private banks and MNC banks had to

provide something extra and it was their service, which attracted a

bulk of customer from the PSU banks. Indian customers were

lacking the world-class service in baking; they were accustomed to

the PSU (Sarkari) culture and the service of Private and MNC banks

was a delight for them.

When private and MNC banks initiated the world class

service to their customers and started snatching customers from

Public Sector Banks, Public sectors banks were bound to follow the

path of Private Banks. The PSU banks felt the heat and realized their

mistake. They also followed the Private Banks in their technology

initiatives and services.

The Indian Banking Sector with the progress in Technology is

facing the biggest challenged of rapidly changing customer

expectations against the backdrop of LPG (Localization,

Privatization and Globalization). Retail banking clients today

demand more care and extra facilities. They want more mobility of

investments, interactive accounts, and better segmentation of

banking products to cater to different segmental needs, convenience

and untimely hour services. Even the PSU culture could not adjust to

the pace of the new technology and changes. At present also it is

moulding and adapting itself to new needs and the dynamism of the

environment.

Technology is helping the Indian Banks to cater to customer

needs in a much more efficient manner continuous and error free

services to customers. With the help of computerization and the use

of modern software, which can be called the gift of technology, the

banks have been able to provide single window system to their

customers. In a single window system, all the needs of the customers

are taken care at a single counter. It is like a multipurpose counter

where one can deposit cheque, receive payments and deposit cash

etc. This has been made possible only due to the use of technology.

Earlier one had to move from one counter to the other counter for

different sort of works. Thus this type of service not only helps in

better customer service but also minimizes the customer service time

as it avoids duplication of work and unnecessary hassles to the

customers. With the use of technology, banks are trying to minimize

there per customer service cost. According to industry estimates,

assume teller cost Re.1 per transaction, ATM transactions cost

Re.0.45, phone banking at Re.0.35, debit cards at Re.0.20 and

Internet banking at Re.0.10 per transaction. So, now the emphasis is

more on net banking then on real banking or brick and mortar

banking. Indian Banking system is moving from real banking realm

to virtual banking realm. Banks are establishing more and more

ATMs at different convenient locations and interconnecting these

ATMs not only with their networks but also with their partner banks.

Network with whom they have got mutual understanding for sharing

ATMs. With the least cost of Internet banking, banks are paying

higher emphasis on Internet banking.

As per IDC estimates, the total number of registered users for

Internet banking in India is over two million. But this figure needs to

be adjusted for dormant users and multiple accounts (a user having

accounts with more than one bank). India has one million active

Internet Users populations. Thus, this is just around 0.1% of the total

population; to represents 15% of the India’s Internet user (most of

the people in India use internet from cyber café). Thus, indicating

that the concept of Internet banking is surely catching on. India is far

behind in the use of Internet banking than the other Asian countries

like Korea and Singapore where nearly 10% of their population is

banking over the Internet but India is fast catching up. In India, the

biggest drawback for Internet banking is the Internet penetration

among the masses. We lack the infrastructure facility for providing

Internet services but with the IT ministry keen on expanding the

Internet penetration the day is not too far when greater part of our

population would be using the Internet banking facilities.

In India, ICICI bank was the pioneer to introduce Internet

Banking. And later Citibank, HDFC Bank and other banks followed

the suit. PSU banks have lagged far behind in adoption of the

Internet banking facilities. But State Bank of India, which entered

the arena of ATM banking quite late, was able to expand at a rapid

pace and cover almost all the cities of India. Now ATM banking has

become an integral part of traditional cheque or withdrawal based

banking. These services have helped the PSU banks to maintain their

customers. Now money is transferred more in electronic form than

in physical form. With the cost of PC fast declining and the

government’s initiative in providing the infrastructural facilities for

net banking and the faster developments in the telecommunication

sector would be helping in the adoption of new technology and IT-

based banking services. Some authors’ view that the Internet

banking is just the extension of the traditional banking services

because it is the same service with customer friendly technological

interface. So, it is the value addition to the existing services. Banks

are reaping following benefits with the use of technology:

With low investment, banks would be able to satisfy large

customer base. The technology has allowed the banks to move

from brick and mortar building to virtual interface which cost

less in comparison to the rising real estate prices which in turn

leads to increase investment. Low investment in turn helps in

satisfying large client base.

With modern facilities more and more customers get

attracted to the banks and they are viewed as technology

savvy and modern or state-of-the –art banks. Brand image of

the banks also get enhanced thus building their goodwill and

brand equity. Even customers want to be associated with the

brand personality of the banks.

With the increase in quality and competition, the

customers are having several choices among which to choose

instead of Hobson’s choice in some case. Now banking

services have become customer centric instead of service

centric or bank centric approaches as in earlier cases. Now, it

is the customers market rather than a sellers (bankers) market.

All the services are customer driven.

Network sharing by different banks is enabling the banks

to reduce their investment (sharing of ATMs of partner banks)

and provide better services to the customers. This is also

helping them in delivering quick services and it also reduces

the risk of fraudulent practices as verification becomes quite

easier and quick.

These practices are leading to lower service cost per

customer. Thus leading to enhance profitability for the banks,

which in turn enhances the corporate image of the banks.

With the use of technology banks are in a position to

obtain the customer database with a press of key and this

helps the bank to maintain high profile customers because it is

an accepted marketing principle that 80% of the revenue are

generated by 20% customers (20:80 principle). Thus, the

modern technology helps in tracking the key customers and

provides them better services or customized services.

The alternative channels of service helps the bankers to

add new products to their portfolio and it helps them to device

new products according to customer needs. The banks can

provide customized value added services or tailor-made

service to each customer based on his/her requirement, e.g.,

foreign money transfer service, electronic money etc.

It helps the banks to manage their funds in a much better

way as the technology provides round the clock interface to

the outside world and thus it helps in hedging the risk of the

banks at real time. Banks are able to minimize the risk and

maximize returns by investing in different avenues and they

have greater control over the fund investments.

Technology helps in increasing the labor productivity

because it increases the output per labor to multifold. Earlier

works had to be performed manually and it used to take days

to complete in minutes or in seconds. So, it helps in updating

the customer status as well as increased labor productivity.

The customer service cost decreases and the productivity

of the staff increases and this adds to the profitability of the

banks. This helps the banks to take care of even larger

customer base and this will ultimately ass up too the bottom-

line of the banks.

Public sector banks have been shy in implementing new

technology brick mortar banking in comparison to the technology

driven banking while the client base of Private and MNC banks are

mostly young people who are technology-savvy and who like to

interface more with the technology than man. Aged people are not

comfortable with the technological interface. They feel complexity

and uncomfortable with technology intensive services.

With the present avenues being saturated and greater

competition due to the entry of more players in the arena, the banks

are diversifying into new areas where they can use their financial

expertise in financial consultancy, insurance sectors, and fee-based

earnings instead of fund-based earnings. The mushrooming of the

multichannel, multifunction, self-service electronic delivery

channels is fast replacing the brick and mortar branches (real to

virtual). There is a need to redefine the business model of the Indian

banking sector so that to optimize the resources and deliver world

class service in the light of modern day technology. Today’s concept

is to minimize the visit of the customer to the bank and let him use

the technology or let technology handle him-this is the new survival

mantra in the cutthroat scenario for banks.

OBJECTIVES OF THE STUDY

The objectives of the project “The Study Of Application of

Information Technology In Banking Sector” includes the following:

-

To know the present condition of technology in Indian

banking sector.

To know about the electronic payment system.

To know about the hackers and frauds in online banking.

To know about the risk management policies of Indian

banking sector.

To know about the electronic banking sector.

LIMITATIONS OF THE STUDY

The scope of the project “ The Study Of Application Of

Information Study In Banking Sector” has been restricted to some

extent i.e. the project does not include the following: -

Supervision of Electronic Banking by Reserve Bank Of India

Information Technology in Banks in International Scenario

Software Application to Protect from Hackers & Frauds

Case Studies Related To Hackers & Frauds

RESEARCH METHODOLOGY

COLLECTION OF PRIMARY DATA:-

The primary data has been collected from various sources

which are as follows:

Questionnaire method.

Surveys in banks.

Surveys in banks related offices such as agent’s office etc.

COLLECTION OF SECONDARY DATA:

The secondary data has been collected from various sources

which are as follows:

Various books related to information technology.

Brochures of various banks.

Weekly journals.

Articles in newspapers.

SAMPLE FRAME:

The data has been analyzed using ten samples of employees of

three different banks viz., Bank of Maharashtra, HDFC Bank and

ICICI Bank.

2.E-BANKING: IN NASCENT STAGE IN INDIA

To keep pace with the changing environment worldwide, Indian

banking industry is fast adopting technology. It has embraced

many new features like Internet banking, ATMs, Phone banking

etc. With the help of new technology, banks are now able to

offer products and services, which were difficult or impossible

with traditional banking. But the banks in India still have to go a

long way before making themselves technology savvy.

With IT integration, a paradigm shift in the banking norms is on

cards. Banking fundamentals are thus facing major overhauls/

reengineering/ restructuring.

Two major trends have emerged in the transition of traditional

banking to high-tech banking:

Advancements and restructuring through mergers, acquisition

and alliances.

Universal banking where one stop shop provides all related

products and services to a customer.

At this point, it should be emphasized that mergers, acquisitions,

alliances, and adoption of Universal Banking concept are just

outcomes of IT-banking integration.

Banking and IT

Advancements and innovations in IT industry have created a

revolution in the communication and distribution system of various

products and services through Web networking. Networking, as we

know has connected people around the globe, thus creating a

revolution in modern business activities.

Integration of these technological advances and existing

banking structures has changed and will change the definition and

faces of global banking. Internet banking has made banking a

commodity where quality is measured by efficient servicing and

effective pricing and timeliness.

However, PC banking is not new. Bank of Scotland Started

offering its Home Office Banking Services (HOBS), more than a

decade ago, although it was only in 1996 that it was upgraded to

make software work with the now dominant windows operating

systems. HOBS later joined hands with TSB, which in 1996

launched banking services accessible through the CompuServe

online network, nationwide.

Technology Solutions for Indian Banks

Two types of technology stock bank products are available in

the market.

Hardware products like ATMs and

Software products like branch connectivity, cluster-banking

software, and trade finance software.

3. ELECTRONIC CHEQUES AND EVIDENTIARY VALUE

The advancement in technology has led to the creation of

electronic cheques, particularly in a business environment. Different

countries have a choice of cheque systems, which are governed by

the laws applicable to each country’s jurisdiction. The authentication

of these electronic instruments is proposed to be endorsed by digital

signature. In India, the enactment of the Information Technology

Act, 2000 obligated amendments to The Negotiable Instruments Act,

1881 in order to impart legal validity to such electronic instruments.

The authors in this article elucidate the amended provisions and

examine the evidentiary value of such electronic instruments.

The electronic cheque or simply the e-cheque is gradually

replacing the longstanding paper cheque. The Negotiable

Instruments (Amendments and Miscellaneous Provisions) Act, 2002

was amended to include the phrase “electronic cheque” in the

definition of a cheques in Section 6 reads as “ A ‘cheque’ is a bill of

exchange drawn on a specified banker and not expressed to be

payable otherwise than on demand and it includes the electronic

form. “Explanation I. – For the purpose of this section, the

expression-

“A cheque in the electronic form” means a cheque which

contains the exact mirror image of a paper cheque and is generate,

written and signed in a secure system ensuring the minimum safety

standards with the use of digital signature (with or without

biometrics signature) and asymmetric cryptosystem.”

An electronic cheque simply means a cheque in the electronic

form, which is an exact replica of a physical cheque. It contains all

the information that is found on a physical cheque, but it is “signed

digitally” or “endorsed”.

In an attempt to provide authentication, an apparatus

commonly known as “signature” was evolved as a proof asserting

intention. This involved appending a unique identifier to a message

to identify the sender/recipient. Conventionally, handwritten

signatures are affixed paper-based cheques. These signatures affixed

using ink are used as an authentication tool to identify that the

person signing the document has read and understood the contents.

In the anonymous digital world, where individuals may not actually

communicate with each other, much emphasis is placed on the

authentication of the electronic information. Therefore, it becomes

necessary for evolving a secure authentication tool, which led to the

promotion of digital signatures.

DIGITAL SIGNATURE – HOW IT OPERATES

It is a data string, which associates a message in the digital

form with some originating entry. It is created and verified by means

of cryptography, the branch of applied mathematics that concerns

itself with transforming messages into apparently meaningless forms

and back again. It uses a scheme or mechanism consisting of

signature generation algorithm with a method for formatting data

into message to produce a digital signature, and a related signature

verification algorithm with the method to recover data from the

message to authenticate a digital signature.

It is important to note that, the Information Technology Act,

2000, in Section 3(2) provides for a particular asymmetric

cryptosystem and hash function as a means of authentication should

be recognized as a source of legal risk.

The digital signature mechanism follows an “asymmetric

cryptosystem”. In this method of creating and verifying a digital

signature, there are two basic technical processes or functions:

“Public key encryption”, where encryption is the process by which

information is scrambled by the use of a code and “hash”.

The process of a creation and verification of digital signatures

using hash algorithm involves the following steps:

Create a data unit that is to be signed, e.g., precisely an

encircled portion of data in digital form, which can be a text

document, software or any other digital information.

Generate hash value called “Message Digest” or “Fingerprint”

of the message. A hash function is a process that creates a

relatively small number (called message digest) that

represents a much larger amount of electronic data.

This hash value is computed from the data unit- a number

using a hash algorithm, which creates the compressed digital

signature. Digital signatures use a “one way hash function”

and the important thing about such a hash value is that it is

nearly impossible to derive the original data unit without

knowing the data unit used to create the hash value.

Therefore, if the data unit is changed or otherwise tampered

with, the hash value will no longer correspond to this data unit

and produces an error message.

Encrypt hash value with the private key of the signatory.

Encryption is a process of disguising a message in such a way

so as to conceal its meaning and substance. It also consists of

a procedure of converting plain text to a cipher text. Hence,

the plain text refers to the original digital file, whereas the

ciphertext refers to the disguised file.

Final step in the verification process, which involves the

regeneration of the hash value on the basis of the same data

unit and the same algorithm. The determined hash value is

again computed with rhea public policy key, which is then

compared with the signature attached to the data unit. If the

product is matching, it will verify the signatory’s private key,

which is used to sign and guarantee that the data unit has not

been altered.

In this context, digital signatures are created when the drawer

of the cheque runs, the cheque through a one-way function creating

a message digest. The private key used by the drawer of the cheque

is known only to him. The drawer encrypts the resulting message

digest by using an asymmetric cryptosystem will allow the paying

banker to verify the signature by using it to decrypt the cheque.

EVIDENTIARY VALUE OF DIGITAL SIGNATURE ON E-

CHEQUES

Generally, authentication is achieved by what is known as

security procedure, but from the legal perspective, the security

procedure requires to be recognized by the law as a substitute for

signature.

With the emergence of cyberspace it became necessary to

amend certain provision of the Indian Evidence Act to make

electronic evidence admissible in courts of law. Accordingly, the

second schedule to the Information Technology Act has amended

the Indian Evidence Act, 1872 to remove any obstacle to the legal

acceptance and validity of electronic evidence.

According to the amended Section 3 of the Evidence Act,

electronic records stand on par with paper-based documents and will

be deemed as documentary evidence in a court of law.

While Section 22(A) of the Information Technology Act

amends Section 17 of the Indian Evidence Act, 1872 to provide that

oral admission as to the contents of the electronic records are

relevant, the written admission of the content of any document or

electronic record can be proved under Section 65 of the Evidence

Act.

Section 39 of the Indian Evidence Act provides, “when any

statement of which evidence is given forms part of a longer

statement, or is contained in a document which forms part of a book,

or is contained in part of electronic record or of a connected series of

letters or papers, evidence shall be given of so much and no more of

the statement, conversation, document, electronic record, book or

series of letters or papers as the court considers necessary in that

particular case to the full understanding of the nature and effect of

the statement, and of the circumstances under which it was made.” It

can be inferred from this provision that where entry of an electronic

cheque forms a part of an electronic record, only that part which is

relevant may be taken as evidence before the court. Again what part

is relevant depends on the discretion of the court. The court must

exercise this discretion judicially to determine such relevance.

Accordingly, Section 5 of the Information Technology Act

2000 prescribes, “ Where any law provides that information or any

other matter shall be authenticated by affixing the signature or any

other document shall be signed or bear the signature of any person

then, not withstanding any document contained in such law, such

requirement shall be deemed to have been satisfied, if such

information or matter is authenticated by means of digital signature

affixed in such manner as may be prescribed by the Central

Government.”

Explanation- For the purposes of this section, “signed”, with

its grammatical variations and cognate expression, shall, with

reference to a person, mean affixing of his handwritten signature or

any mark on any document and the expression “signature” shall be

constructed accordingly”.

This provision explicitly explains that a digital signature is

legally recognized as the method of authentication. The authority to

use digital signatures in the government and its agencies is accorded

in Section 6 of the Information Technology Act, 2000, which reads

as-

“ 1) Where any law provides for-

a) This filing of any form, application or any other document

with any office, authority, body or agency owned or

controlled by the appropriate government in a particular

manner.

b) The issue or grant of any license, permit, sanction or approval

by whatever name called in a particular manner.

c) The receipt or payment of money in a particular manner, then,

notwithstanding anything contained in any other law for the

time beginning in force, such requirement shall be deemed to

have been satisfied if such filing, issue, grant, receipt or

payment, as the case may be, is effected by means of such

electronic form as may be prescribed by the appropriate

government”.

The words in Section 6(1)(C) “ the receipt or payment of

money in a particular manner … is affected by means of such

electronics forms as may be prescribed by appropriate government”

may be understood to include e-cheque.

A system of digital signature like handwritten signature is use

to protect confidential information. Form the legal perspective, two

presumptions that could be raised in respect of digital signature are:

Signatory’s personal participation in the Act of signing

or any person authorized by him.

The intention of the signatory to endorse or approve

authorship of a text and the fact that the signatory had been

at a given place and time.

The presence of intention has an integral part of a signature is

essential as lack of intention could be raised with regard to

circumstances including fraud and unconscionable conduct.

To regulate the use of digital signature, the Central Government

is empowered to lay down rules under Section 10 of the Information

Technology Act, 2000 that reads, “The central government may, for

the purposes of this Act, by rules, prescribe-

The type of a digital signature;

The manner and format in which the digital signature

shall be affixed;

The manner or procedure which facilitates identification

of the person affixing the digital signature;

Control processes and procedures to ensure adequate

integrity, security and confidentiality or electronic

records or payments; and

Any other matter which is necessary to give legal effect

to digital signature.”

In India, evidentiary value of the digital signature has been in

question for long. A genre of evidence dominating the digital

transaction world leads to be recognized by the Indian Evidence Act,

1872, by making the necessary amendments there in.

The IT Act 2000 provides for specific evidentiary value for

secure records and secure digital signatures. Subsequently, sub-

section (2) to Section 85B of the Indian Evidence Act has been

inserted to be in consonant with the IT Act to provide that, “ In any

proceedings, involving secure digital signature, the court shall

presume unless the contrary is proved that-

The secured digital is affixed by the subscriber with the

intention of signing or approving the electronic records;

Except in the case of a secure electronic record or a secured

digital signature, nothing in this Section shall create any

presumption relating to authenticity an integrity of the

electronic record or any digital signature.”

The section limits its opinion to a secure digital signature by

indicating that there shall be no presumption relating to authenticity

and integrity of a digital signature except where it is a secure digital

signature. If, by application of a security procedure agreed to by the

parties concerned it can be verified that a digital that a digital

signature, at the time it was affixed, was-

Unique to the subscriber affixing it

Capable of identifying such a subscriber

Created in a manner or using means under the exclusive

control of the subscriber and is linked to the electronic

record to which it relates in such a manner that if the

electronics record was altered the digital signature would be

invalidated then such a digital signature shall be deemed to

be a secure digital signature.

As distinct from such a secure digital signature, Section 67A

of the Indian Evidence Act provides for proof as to the digital

signature, and Section 73A prescribes the method by which such a

digital signature may be proved. According to Section 67A of the

Indian Evidence Act, “ Except in case of a secure digital signature, if

the digital signature of any subscriber is alleged to have been affixed

to an electronic record the fact that such digital signature is the

digital signature of the subscriber must be proved.”

The Information Technology Act by inserting a new Sub-

Section A to Section 47 recognizes opinions of third parties not

relevant as evidence unless specifically provided for Section 47A

reads as, “ When the court has to form an opinion as to the digital

signature of any person, the opinion of the certifying authority,

which has issued the Digital Signature Certificate, is an relevant

fact”. An opinion of third parties is in admissible and as evidence

except in certain cases when the court requires an opinion of experts.

With this insertion, opinion of third parties became relevant.

4. THE FUTURE OF PLASTIC MONEY

Use of plastic Money is growing at an unprecedented rate in

India. Lesser number of installed Point-of sale (PoS) terminals is the

major obstacle in the growth of debt cards; smart card has many

innovative features, which may spurt the use of cards in India. Smart

card is safer to use in electronic form than the present form of cards

“ Credit card business is a volume game and initially highly

capital intensive.”

- A senior banker

Plastic money is growing by leaps and bounds in India.

Today, many banks are offering cards. Though the foreign banks

have a dominant share, aggressive entry of the Indian banks like

SBI, ICICI and HDFC Bank may soon change the rules of the game.

Today, SBI-GE is the third largest issuer of credit cards.

The credit card market in India is projected to grow at the rate

of 20-25% per annum in the coming years. There are currently

around 3.8 million credit card users compared to 3.0 million in 1990.

Visa credit card grew by 46.4% in India while the growth in Asia

Pacific was only 6% for Q3 of 2003. The competition among banks

has been growing and they are offering so many add-on incentives

like waiver of first year annual fee, discount on retail stores,

personal loans etc., to woo the customers.

Debit card is another segment, which is catching up fast.

There are only 80,000 to 90,000 merchants having point-of-sale

(PoS) terminals installed and majority of them are located in metros,

which is the major obstacle to the growth of debit cards. To increase

the usage of debit cards, banks should concentrate on increasing

installation of PoS terminals in semi-urban and rural areas.

Smart Card: A Future Card

Smart cards are the wave of the future for consumer use,

commercial use and terminal network security. Smart cards are in

much wider use in Europe than in US.

A smart card is a plastic card with an imbedded computer

chip that has been stored inside the card. It has the capacity to store

up to 80 times more information than other magnetic stripe cards.

This mini-computer using an intelligent chip, stores payment

information similar to a magnetic stripe card, but it also includes

additional information such as online authorization controls, credit

limits, stored value (gift card), reward points (loyalty), Personal

Identification Number (PIN), etc. Smart cards can be contact less,

suggesting that the chip transfers data via a built-in antenna without

physically touching the smart card reader.

There are over 3 billion smart cards in use currently. Today,

smart cards are used worldwide and it is the most flexible payment

option available in the world. Smart cards have been used in Europe

for over 10 years and now they are the accepted mode of payment.

In developing countries and continents such as Africa and Asia, the

use of smart cards has been growing rapidly. In the US, major

retailers, banks and processors are preparing to accept global cards

and some are adding smart gift cards and promotional application to

build loyalty for the growth of their business. American Express and

Financial Institutions have issued over 21 million PIN-secured smart

cards to their customers. By the end of 2005, there will be over 100

million smart cards to their customers. By the end of 2005, there will

be over 100 million smart cards in use in the United States.

In order to accept smart cards, the business must have an

EMV ready smart card Point-of-Sale (PoS) terminal. Merchants can

be standalone PoS smart card terminals or smart card readers that are

integrated with cash registers. Currently, over 90% PoS terminals

are not EMV smart card ready.

Smart Cards and Internet Payment

Issues of security and fraud are major drawbacks to using

credit and debit cards over the Internet. Unlike the hand-written

receipts, there are no signed sales receipts associated with today’s e-

commerce transactions. Without such evidence, it is difficult as

much as 84% of all electronic commerce transactions.

At the same time, consumers are holding back on making

Internet purchases due to lingering security concerns. According to

Master Card, 90% of Internet non-buyers worry that their personal

and financial information may fall into the hands of hackers. It is

this reluctance that is the real barrier to building an online business.

Using smart cards along with a strong Internet authentication will

help overcome these issues.

American Express, Master Card and Visa smart cards

currently support Internet authentication and payment using built-in

digital certificates and digital signatures. For smart cards to be

successful, the cardholders must connect an EMV approved smart

card reader to their PCs. Smart cards have the capacity to replace the

thirty plus years old magnetic stripe cards.

5. LEADING ISSUE IN BANKING TECHNOLOGY

Many Indian banks are adopting the information technology

not merely as a frill, but as a dire need. It is helping the banks in

many core and diversified functions. Technology is key business

enabler in six critical areas of banks. These are augmentation profit

pool, operation efficiency, customer management, product

innovation, distribution and reach, and efficient payment and

settlement system. For the success of any IT program, integration of

IT and business strategy is crucial factor.

Banking basics have undergone radical shifts, thanks to the

advent of modern technology, increasing pace of globalization and

the need for stronger fundamentals to operate in the fiercely

competitive environment. The digital divide among Indian banks

that was quite discernible before the millennium has considerably

narrowed down with many banks taking to technology not merely as

a frill, but as a dire necessity. Technology today catalyzes many core

and diversified functions in banks, including issues like transaction

automation and multiple delivery channels, product innovation, data

warehousing and effective MIS, secured storage mechanisms and a

real-time based payment and settlement system.

Seen in the present context, technology is a key business

enabler in six critical areas of banking.

Augmenting Profit Pool; Operational Efficiency; Customer

Management; Product Innovation; Distribution and Reach; Efficient

Payment and Settlement.

Augmenting Profit Pool

Sustained profits and profitability have been major yardsticks

for assessing the true health of banks in a fiercely competitive and

compelling business environment. Technology has proved, at least

in case of new generation banks and major public sector banks to be

a major profit driver. With progressive decline in interest rates,

banks’ spreads have come under pressure, which per se, affects their

profitability. However, technology had a favorable effect in terms of

reducing the operating cost and improving the burden to a

considerable extent. Technology also enable commissioning of new

products like Net banking, mobile banking and other forms of 24X7

banking like ATMs and Networked services across branches like

anywhere banking, electronic funds transfer, customer relationship

management, call centers across the banks. Hi-tech and hi-touch

services, it goes without saying, have also enlarged the clientele base

in banks and commanded considerable customer loyalty.

Technology has created an enabling environment for banks to

diversify into various fee-based activities like bancassurance and

funds transfer arrangements.

Operational Efficiency

Operational efficiency, in terms of optimum utilization of

resources, has been one of the most positive offshoots of

technological application in banks. Thanks to greater technological

application, banking system has seen a near consistent improvement

in the intermediation efficiency and consequent decline in

transaction cost. Yet, technology application has been by and large

confined, especially in the state-owned banks, towards cost saving

and improved service standards through product innovation. While

savings in cost and improvement in service quality could turn out to

be short-term in nature, it is essential that technology is leveraged as

a long-term and efficient cross-functional application. It is also time

that the focus of technology shifts from product innovation to

process innovation commonly referred to as Business Process

Reengineering (BRP), for banks to gain long-term operational

efficiency.

Customer Management

Technology also spells significant benefits on the realm of

customer research and management. In a predominantly buyers’

market and high propensity if customers to switch service providers,

customer management need no longer be a front office function, but

a bank-wide obsession. Many banks have duly realized the

significance of such functions and introduced new models like the

High Net Worth clients’ branch, imbued with state of the art

technology, exquisite ambience and quickest possible processing of

transactions. Customer management is a very sensitive issue entity

hears only from 4% of its dissatisfied customer, while 96% of its

customers quietly go away of which 91% never come back.

Technology, thus, already implemented the tech aided e-CRM

application as strategic tool to retain as well as expand their

customer base. The bottom line is that banking products are getting

commodities and price wars are slowly leading to a zero-sum game.

In such a scenario, technology backed customer orientation will hold

the key to take service standards anywhere near to world-class.

Product Research

In the field of product research as well, technology plays a

decisive role, in terms of swift product innovation, an active R&D

set up effective pricing of products to protect banks’ margins and

safeguard customers’ interests. Banking product life cycles are

getting shorter day by day and more than delivery, product servicing

defines competitive edge for banks. Marked to market product

processes are equally important for sustained improvement in the

value chain of services and command ‘top of the mind recall’ from

the customers. Technology also aids product profitability research

and review, which have not adequate attention in many of the banks.

Distribution Reach

The thumb rule for strategic management masters is that

structure must follow strategy in any business reorganization.

Technology, thus, calls for attendant restructuring endeavors that

will be in tune with the level of technology application. For instance,

many banks need to put in a place a leaner structure and remove

intermediate decision-making tiers. That is how one can see that

many of the regional outfits of banks are slowly being dismantled

while branch expansion is not being accorded the thrust it used to be

given earlier. Rightsizing of human and physical overheads is a

major strategy adopted by many banks wherein the role of the earlier

brick and mortar banking is slowly getting dissipated. In turn,

devices like Internet and mobile banking. Technology, thus,

facilitates downsizing of overheads cost without compromising

much on clientele reach. Public sector in the rural and semi-urban

areas. Many of these branches are not performing to their potential

mainly because of their typical business mix, cost diseconomies and

lack of technology-based services offered in these branches.

Technology can facilitate the branch rationalization exercise such as

setting up mobile branches and satellite branches, especially in the

rural areas, and bring many of those into the “Performing” category

without affecting the extent of client reach.

Efficient Payment and Settlement

Innovation in technology and worldwide revolution in

information and communication technology have emerged as

dynamic sources of productivity growth. This is true about banking

as well as its relationship with technology has become symbiotic

fundamentally. Payment system is probably the most important

mechanism in the banking sector where technology’s interactive

dynamics is getting manifested in an increasing measure each day.

Banking system has adopted a holistic approach for designing

a modern, robust, efficient and integrated payment system. The

approach to the modernization of the payment and settlement system

has been basically three pronged – consolidation, development and

integration. Consolidation of the payment system has revolved round

strengthening computerized cheque clearing and expanding the

reach of electronic clearing services through state-of-the-art

technology. Critical elements under the developmental strategy

related to the opening of new clearing houses, interconnectivity of

clearing houses through INFINET and optimizing the development

of resources the Negotiated Dealing System, Structured Financial

Messaging System (SFMS) and the recently introduced Real-Time

Gross Settlement (RTGS) system. Integration is the next stage that

the banking system is currently going through which is premised on

a high degree of standardization within a bank and seamless

interfaces across banks, leading to Straight Through Processing

(STP) of transaction on a regular basis. Further, cheque truncation

system will also pave way to expedite settlement of payments

process.

However, so far as integration is concerned, Indian banks

still have a fair distance to traverse. In order to efficiency leverage

an integrated payment and settlement systems, banks, especially

those in the public sector, need to address certain core issues

expeditiously. These include the following:

Toning up of infrastructure in terms of standardization and

build up security features like firewalls, Intrusion Detecting

System (IDS) and implementing a security policy.

Total inter-branch connectivity.

Popularization of electronic funds transfer mechanism.

Institute collaborative arrangements, including outsourcing

of IT expertise.

In addition to the above, banking sector is also confronted

with a classic dilemma. It relates to differentiating between and

mapping the role of business vis-à-vis the role of information

technology, a feature typifying an enterprise wide technology

initiative. This is where the significance of integrating business and

IT plans comes to the fore.

Integration of IT and Business Strategy

Many banks, especially those in the public sector, are

embarking on a comprehensive set of IT initiatives encompassing

total branch automation, core banking solution, networking of

ATMs, Internet and mobile banking, data warehousing and a

comprehensive MIS backed decision support system. Contrary to

popular perception, such initiatives are not merely because of

competitive pressure from the foreign and new generation private

banks. The avowed goal of these initiatives was to improve overall

efficiency in terms of lower intermediation cost, swifter decision-

making process, grater customer convenience and effective internal

control, including an objective risk management mechanism. It goes

without saying that the fast pace of globalization and progressive

move towards reaching global operational benchmarks also

catalyzed the technology drive dividends to these banks although the

need of the hour is to consolidate the gains so far and address the

weak links.

One such weak link relates to lack of integration between

the IT strategies which, it is felt, is applicable to many of our banks.

Technology introduction can offer significant benefits only when

they are in total alignment with business strategies. Especially, in

public sector banks, a phased approach is desirable in view of the

heterogeneous nature of their branch architecture and vast area

specific differentials in their branch functioning. In the current

context, business strategies may differ from bank to bank, yet a core

set of business objectively will, for sure, be common to all the

banks. Such commonalities call for at least an open technology plan,

in board consonance with the business objectives, and the same can

be fine-tuned on an ongoing basis to suit the business model.

Recently, a study was conducted by National Institute of Bank

Management, at the behest of RBI, for suggesting a methodology to

integrate IT and business plans in banks. The study has proposed an

‘Enterprise Maturity Model’, for attaining total convergence of

technology and business strategies with focus on selected, generic

business strategies. The model suggests solutions not merely for

business and technology, but for issues related to human resources

and customers who form an integral part of banks’ strategic road

map.

The suggestions in the study promise to be useful benchmarks

for banks in their complete switchover to the virtual mode.

Application of the model can help banks to develop effective

Executive Information System as effective decision support,

integration of varied workflow processes, objective customer

analysis and most importantly, devise simulative and real-time based

tools to track business, profits and profitability. Effective and an

objective technology application system will also enable a business

process reengineering mechanism that will considerably enhance the

real technological capabilities of banks.

Core Banking Solution

In the light of ongoing emphasis on business process

reengineering, one comes across many banks assiduously pursuing a

centralized server-based system, better known as Core Banking

Solution (CBS). CBS offers, among others, benefits like privilege of

single window service to customer in order to facilitate a shift from

“customer of the branch” to “customer of the bank” concept, online

transfer of funds, longer business hours, lower transaction costs,

slimmer staff structure at branches, effective monitoring of business,

comprehensive MIS as a policy support and above al, improved

visibility of the banks implementing CBS. A robust MIS also

supports vital functions like ALM, risk management, product

profitability and customer profitability analyses leading ultimately to

efficient portfolio management in banks. CBS also leads to

significant mileage in terms of staff and other overhead costs. Staff

rendered surplus on account of CBs can also be put for marketing

and recovery functions, which warrant dedicated staff in the present

context.

One major issue in CBS relates to security aspects and a host

of operational risks that banks are confronted with. Be it system

failure or planned hacking or any kind of human error, centralized

system is perennially susceptible to failure which may prove to be

endemic across the financial system and result in vital data erosion.

Retrieval of the same may also cost dearly to the banks and their

associates. Security aspects like implementing a robust security

policy, firewalls, IDS are, therefore, indispensable for preventing

any systematic problem. There are even cases where multi-point

security has not been able to check the fraudulent practices. Thus,

security aspects need to be examined threadbare before putting core

banking in place.

6. TECHNOLOGY AND FRAUDS

ATM CRIMES FRAUDS:

ATM crimes and frauds are rising throughout the world.

ATM industry and money other organizations are fighting with them

in many ways like, by issuing security tips, making ATMs more

innovative etc. In India, where the use of ATMs is growing by

exponential, banks have to take benefit from international

experiences and safeguard their customers from frauds.

ATM crimes and frauds are mounting day by day. Even

though they make up a small percentage of criminal activities they

are not less important. Criminals are raiding millions every year.

Popular Ways to Card Frauds:

Some of the popular techniques used to carry out ATM

crime are:

Through Card Jamming ATM’s card reader is tampered with

in order to trap a customer’s card. Later on the criminal

removes the card.

Card Skimming is the illegal way of stealing the card’s

security information from the card’s magnetic stripe.

Card Swapping, through this customer’s card is swapped for

another card without the knowledge of cardholder.

Website Spoofing, here a new fictitious site is made which

looks authentic to the user and customers are asked to give

their card number, PIN and other information, which are used

to reproduce the card for removing the cash.

Global Measures to Fight the Frauds

To guard against these frauds ‘The Global ATM Security

Alliance (GASA)’, which was formed in June 2003, has issued the

customers guide and some tips to prevent against card-related

frauds.

The World’s Top 20 tips for ATM Use to Enhance the ATM

customer Experience and Security

CHOOSING AN ATM

Tip 1: Where possible, use ATMs with which you are most familiar.

Alternatively, choose well-lit, well-placed ATMs where you feel

comfortable.

Tip 2: Scan the whole ATM area before you approach it. Avoid

using the ATM altogether if there are any suspicious-looking

individuals around or if it looks too isolated or unsafe.

Tip 3: Avoid opening your purse, bag or wallet while in the queue

for the ATM. Have your card ready in your hand before you

approach the ATM.

Tip 4: Notice if anything looks unusual or suspicious about the ATM

indicating it might have been altered. If the ATM appears to have

any attachments to the card slot or keypad, do not use it. Check for

unusual instructions on the display screen and for suspicious blank

screens. If you suspect that the ATM has been interfered with,

proceed to another ATM and inform the bank.

Tip 5: Avoid ATMs which have messages or signs fixed to them

indicating that the screen directions have been changed, especially if

the message is posted over the card reader. Banks and other ATM

owners will not put up messages directing you to specific ATMs,

nor would they direct you to use an ATM, which has been altered.

USING AN ATM

Tip 6: Is especially cautious when strangers offer to help you at an

ATM, even if your card is stuck or you are experiencing difficulty

with the transaction. You should not allow anyone to distract you

while you are at the ATM.

Tip 7: Check that other individuals in the queue keep an acceptable

distance from you. Be on the lookout for individuals who might be

watching you enter your PIN.

Tip 8: Stand close to the other ATM and shield the keypad with your

when keying in your PIN (you may wish to use the knuckle of your

middle finger to key in the PIN).

Tip 9: Follow the instructions on the display screen, e.g., do not key

in your PIN until the ATM request you to do so.

Tip 10: If you feel the ATM is not working normally, press the

cancel key and withdraw your card and then proceed to another

ATM, reporting the matter to your financial institution.

Tip 11: Never force your card into the card slots.

Tip 12: Keep your printed transaction record so that you can

compare your ATM receipts to your monthly statement.

Tip 13: IF your card gets jammed, retained or lost, or if you are

interfered with at an ATM, report this immediately to the bank

and/or police using the help line provided or nearest phone.

Tip 14: Do not be in a hurry during the transaction, and carefully

secure your card and in your wallet, handbag or pocket before

leaving the ATM.

MANAGING YOUR ATM USE

Tip 15: memorize your PIN (if you must write it down, do so in a

distinguished manner and never carry it with your card).

Tip 16: NEVER disclose your PIN to anyone, whether to family

member, bank staff or police.

Tip 17: Do not use obvious and guessable numbers for your date of

birth.

Tip 18: Change your PIN periodically, and, if you think it may have

been compromised, change it immediately.

Tip 19: Set your daily ATM withdrawal limit at your branch at

levels you consider reasonable.

Tip 20: Regularly check your account balance and bank statements

and report any discrepancies to your bank immediately.

While the ATM industry is aggressively addressing ATM-

related frauds and crimes, few in the industry know about these

extraordinary efforts. Some of the important works are given below:

From time to time the Electronic Funds Transfer Association

(EFTA) with the help of ATMIA is publishing tips on PIN

security.

To combat the cross-border crimes, GASA is working in

association with Interpol, the Metropolitan Police Flying

Squad for New Scotland Yard and leading card issuers.

ATMIA is educating the people and ATM industry about

most effective way of fighting ATM crimes and frauds and

honoring with award that contributes significantly counter the

fraud.

Fair Isaac Card Alert – it is a service, which analyzes millions

of daily transaction, identifies the suspicious transactions and

sends the card number and related information of suspicious

transaction to the concerned bank. This services has helped a

lot in solving many card-related frauds including high-profile

skimming cases.

Leading ATM manufacturers are producing innovative

ATMs, which are helping to counter the frauds. Biometric

technology is one of the examples, which removes the need of

Personal Identification Numbers (PINs).

Biometric systems identify or authenticate a person’s

identity using different alternatives like face expressions,

fingerprint, hand geometry, voice, retina, etc.

INTERNET BANKING AND FRAUDS

Fraudsters are using innovative ways like Web and Mail spoofing,

attacking the bank’s server etc. to break the security walls and

commit fraud. There is a need for arrangements, which help

presence of integrity, confidentiality and authorization of

information.

“Thieves are not born, but made out of

opportunities”

This quote exactly reflects the present environment

related to technology, where it is changing very fast. By the time

regulators come up with preventive measures to protect customers

from innovative frauds, either the environment itself changes or new

technology emerges. This helps criminals to find new areas to

commit the fraud.

Some common Internet banking frauds and their causes have

been discussed here.

Attacking the Bank’s Server

In this case, the fraudster takes control of the server of the

bank and by visiting the bank’s website carries out transaction

through impersonation.

These attacks are due to bad programming, which mostly

prevail in general purpose software. Such attacks are called buffer-

over-flow attacks. Due to buffer-over-flow defects in the software,

fraudster can use the commands on the server without providing

essential information like password etc.

Mail Spoofing

In the mail spoofing or e-mail forgery, the fraudster sends

the information to bank customers in such a form that it seems that

information is from the authentic bank source. One such incident

happened with ICICI Bank customers to disclose passwords and

other information. The e-mail said:

“For security purpose your account has been randomly chosen

for verification. To verify your account information we are asking

you to provide us with all the data we are requesting. Otherwise, we

will not be able to verify your identity and access to your account

will be denied. Please click on the link below to get to the ICICI

secure page and verify your account details. Thank you.”

Mail spoofing happens due to lack of criteria to verify the source

address authenticity. Anyone can set up a mail server and can

forge a mail posing as an authentic source.

Web Spoofing

In Web Spoofing, customers of the bank are lured to log in at

the fraudster’s website, which is similar to the bank’s website. Once

the customer provides sensitive information, they can be stolen

easily by the fraudster, who uses the stolen sensitive information like

password and username etc., to carry out the transaction on the bank

as a real customer.

In the whole case, the only loser is the customer because he

does not have any means to prove that it was not he who did those

transactions, but the fraudster.

Ignorance of the customer to intercept Universal Resource

Locator (URL) is the major cause of Web spoofing. Look at the

following two URLs

http://secure.bankname.com/carloanfind/carloans.asp

http://secure.bankname.com?

@569857125/carloanfind/carloans.asp

It is very difficult for a normal customer to understand the

difference between these two URLs. He can be easily cheated

because the first URL will drive him to the original site while the

second one to the fraudster’s site.

Denying Service from Bank’s Server

The fraudster’s intent here is not to commit any fraud but to

create inconvenience for the banks. The customer here literally

cannot access the services of the bank.

Intervention of fraudster’s with Transmission Control

Protocol/Internet Protocol (TCP/IP), the computer communication

languages, Router Poisoning that help the customers to reach

different parts of the network and Domain Name System (DNS)

service, that helps the two computers to communicate through IP

number are some reasons for such inconvenience.

It is clear that to plug all the loopholes is very difficult for

any regulator. This is a challenge to the mission of fast automation.

It is essential on the part of the banks, the regulators and the service

providers to create a source and safe automation environment that

has the confidence and trust of the customers.

7. CREDIT CARD FRAUD ON INTERNET

Credit card fraud has become regular on Internet. All the agencies

involved in the transaction, cardholders, online merchants and the

card issuers suffer losses. However, it is the online merchant who

suffers the most. This article examines the nature of credit card

fraud, types of credit card frauds, and the effects. This article also

discusses the preventive measures.

Internet commerce is growing very fast. From a customer base of

28.8 million spending US$12 bn in 1999, Internet Commerce has

grown exponentially during the past few years and is still growing.

But, unfortunately, the growth is not on the expected lines. The

credit card fraud, which has become common, has retarded the e-

commerce growth. A 1999 survey by US National consumer’s

league reported that 7% of customers were victims of the credit card

fraud; recent surveys indicate that one out of three online customers

have become victims to this kind of fraud. Customers, credit card

companies, banks and merchants are battling this problem; still this

crime is on ascendancy.

Common Types of Card Frauds

There are different types of frauds involving credit cards. The

fraudulent activities start from the application process itself.

Application Fraud:

In application fraud, the fraudster obtains personal

confidential information of the other person needed in the credit card

applications, like social security number, date of birth using a

variety of means. Internet search engines and databases are making

these tasks easier. Using this information, he fills in an application

for a credit card and after receiving it, uses it as if he is the true

holder. The person in whose name the card is issued might come to

know about this only after the damage is done.

Counterfeit Cards:

In this, a criminal gains access to a valid card number and

other information. For example, the salesperson at the supermarket

briefly takes possession of the customer’s card during payment

process, which he runs on a terminal. But without the knowledge of

the cardholder, the salesman can also run it on another machine,

which can capture all the details in the card. Using this information

and tools like embossing machines, a fraudster can create a

counterfeit card. This process is known as ‘skimming’ and simple

hand-held devices are now available for the purpose. Further, the

information skimmed can also be used for purchases on the Internet

or Telephone.

Account Takeover: In account takeover, the fraudster first all

the personal confidential information about the other person. Then

impersonating as the other person, he informs the bank that there is a

change in his residential or office address. Next, he informs them

that his credit card is lost and request for a new card on the new

address. After receiving the card, the criminal successfully takes

over the account.

Stolen and Lost Cards:

By far, this is the most common form of fraud in the market

place. When the criminal has access to a stolen or lost card, he also

gains access to all the personal information. Apart from using this

card fraudulently, the criminal can also use the information to

‘broaden’ the fraud by applying for new cards or fabricating new

ones.

Other Forms:

From the point of view of a merchant, credit card frauds can

be divided into three ways. There are organized fraud, opportunistic

fraud and cardholder fraud. The advantages offered by Internet are

also attracting the criminals in a big way. In an organized criminal

activity, the gang’s obtain credit cards using any of the means

discussed above. They normally identify a drop location like a

vacant house or warehouse, spend the card up to the maximum limit,

and ask the merchandise to be dropped at this selected location.

These gangs have a thorough understanding of the system and take

advantage of the fact that there is normally a time gap of more on to

the next card. Opportunistic fraud is committed normally by

amateurs who get an opportunity of handling credit cards, like

waiters in restaurants. Cardholder fraud involves the cardholder

himself who might claim that he never placed the order or he never

received the goods. It could also involve one of his family members

or friends who used the card without his knowledge.

Bust Out Fraud:

According to Daniel Buttafogo of Juniper, an Internet-based

credit card company, in this fraud, true customers gradually build up

as much available credit card and then ‘bust out’ with large

purchases of items that could easily resold like jewelry or draw large

cash advances etc. Here the fraudster will draw bad checks on one

account to pay when this cannot be done any longer, the customer

does a vanishing act. This kind of fraud is the most difficult to catch,

as the customer exhibits exemplary behavior till the last moment.

Friendly Fraud / Denial of Receiving Product:

Friendly fraud occurs when the actual cardholder carries out a

transaction but later denies or claims that his card was stolen or used

without his authorization. Customers might deny receipt or signing

or even ordering the product.

Nature of E-Commerce Transactions:

In e-commerce transaction, face-to-face contact between the

merchant and customer is absent and this causes most of the credit

card frauds. In online transactions, after filling in the online order

form, the customer is expected to give his credit card number to

conclude the transaction. In real world, after the purchase, the

customer hands over the credit card, which the merchant swipes

using a terminal. The merchant also obtains the signature of the

customer on the credit card receipt. He also verifies the charge

authorization. In case of fraudulent use of a card like using a stolen

card, the merchant or the customer are reimbursed by the credit card

company. In online transactions, the card is not present during the

transaction and there is no signature of the customer on the receipt.

These transaction, treated as card not present transactions, in which

the card issuing companies do not reimburse the merchant. In

reality, speed, which is the most important benefit of the Internet,

facilitates the fraud. A physical transaction takes several minutes;

where as Internet transaction takes only a few seconds. Real-time

transaction reduces the overheads, but at the same time, increase the

number of fraudulent transactions. For example, a fraudster can give

the same fraudulent card number to a number of e-business sites

simultaneously and there is no way the merchants can know about it.

8. INFORMATION TECHNOLOGY RISK IN BANKING:

MANAGEMENT & MEASUREMENT

Information Technology (IT) is not merely a technical function, but a

management process, which needs to be managed effectively. To measure the

IT risk in banks there are various methodologies available. All of them at large

follow the same primary steps like threat analyst etc. for technology risk

assessment; American Banker Association has recommended various resources.

Risk management approach had widely the baseline approach

in which a baseline/ standard set of polices and practices are

followed in taking business decision without considering the

criticality of the business asset or decision. In business sense, risk is

the probability of getting loss from taking or not taking a business

decision. The loss can be tangible or intangible. Risks can be

avoided, controlled, shared, transferred and accepted. Risks can be

controlled through objectives, policies and procedures.

Risk management approach enables the management to give

appropriate treatment to the business assets and decisions based on

their criticality to business goals and business continuity. While the

basic concepts remain the same, Information Technology introduces

new vulnerabilities as well as new techniques for risk management.

As such, technology risk management, while following the

fundamentals, needs to address these new vulnerabilities.

Technology Risk Management

Information Technology Risk is the risk that can arise due to

use or non-use of technology in business or for business. The

primary objective of an organization and its ability to conduct

business. The business of IT in business is to see that the business

continues. IT risks management has to ensure that this purpose is

achieved. As such IT risk management process should not be treated

as a mere technical function carried out by the IT people and should

not just confine to IT assets. It is essentially a management function.

However, the role of IT people is also vital because IT security and

IT risk management are interrelated and an effective risk

management process is an important component of a successful IT

security program.

The broad objective of performing IT risk management is to

enable the organization to achieve its business goals by better

securing the IT systems and enabling management to make well-

informed risk management decisions in areas where technology is

involved.

IT risk management is to the process that helps to balance the

operational and economic costs of risk mitigation measures and

achieve gains by protecting the IT systems and data that support

their organization’s goals. A well-structured risk management

methodology, when used effectively, can help management identify

appropriate controls for providing the mission-essential security

capabilities.

Various organizations worldwide have come out with risk

management frameworks, policies, standards and principles that are

quite useful in IT risk management and measurement.

The committee set up Bank for International Settlement (BIS)

has identified fourteen Risk Management Principles for Electronic

Banking to help banking institutions expand their existing risk

management policies and processes to cover their electronic banking

activities.

Similarly, the Committee of sponsoring Organizations of the

Tread way Commission (COSO) Board and Project Advisory

Council took on the responsibility to expand and address the

remodeled components of internal control. The end product of this is

the COSO Enterprise Risk Management (ERM) Framework.

The Information Systems Audit and Control Association

(ISACA) has developed a framework called Control Objectives for

Information and related Technologies (COBIT) which helps in IT

risk management.

The ERM and COBIT frameworks provide a useful evaluation

tool for informing management, directors and other stakeholders

about a process, procedure and policy to identify, measure, prioritize

and respond to finding risk.

In India, RBI has been providing much guidance in this area

to Indian banks. There is a good number of references and

guidelines provide in the reports of various RBI Committees. The

report of the RBI Committee on computer audit provide a

comprehensive checklist covering many technology-related areas,

which is useful in Technology Risk Assessment.

Technology Risk Assessment/Measurement

Risk assessment/measurement is a process used to identify

and evaluate risks and their potential effect/exposure. Risk exposure

is equal to the amount of probability multiplied with impact on

business.

Risk management covers three processes: Risk assessment,

risk mitigation, and evaluation. Risk assessment is the first process

in the risk management methodology and also is necessary for the

extent of the potential threat and the risk associated with an IT

system throughout is System Development Life Cycle (SDLC). The

output of IT risk assessment process helps to identify appropriate

controls for reducing or eliminating risk during the risk mitigation

process.

Unlike financial risk, technology risk cannot be easily

quantified or measured. But, banks can gain financial and

operational benefits by conducting an effective Technology Risk

Assessment (TRA). These include enhancing corporate governance

over IT activities, proactively identifying vulnerabilities and

implementing risk business imperatives, and efficiently using

corporate risk management resource, including audit, in ensuring a

cost-benefit control environment.

Threats to an IT system must be analyzed in conjunction with

the potential vulnerabilities and the controls in place for the IT

system to determine the likelihood of a future adverse event and its

impact. Impact refers to the magnitude of harm that could be caused

by a threat. The level of impact is governed by the potential impact

on organizational goals and, in turn, determines the level of

criticality of an IT asset/resource.

Technology Risk Assessment (TRA) Methodologies

The quality of the technology risk assessment affects the

effectiveness of risk-based decision of management. With the

increasing interest in operational risk management and concerns

about corporate governance, may proprietary enterprise risk-

management methods/solutions came in the market to help banks to

meet the assessment challenge. Since these methodologies are

mostly developed for and by traditional risk managers, they are

generally weak in areas relating to technology, although they

provide an adequate perspective from a credit, financial, and

environmental standpoint.

Risk assessment methodology generally follows the following

primary steps:

Threat and Vulnerability Identification

Probability/Likelihood Determination

Impact Analysis

Risk Determination

Control Recommendations

Results Documentation

Technology Risk Assessment (TRA) methodologies are not

much different from general risk assessment methodologies and

they, too, follow these steps. However, the risk assessment tools

would be different in case of technology risk because to assess

adequately and to prioritize technology risk, the risk assessment

tools must be supplemented with methodologies specifically geared

to technology.

As in the case of enterprise risk assessment tools, ready-made

methods and tools developed by vendors can be used for TRA also.

However, a number of challenges are involved in using these ready-

made tools like vendor methodologies which may not continuously

update the TRA throughout the year due to the costs involved; the

outsourced methodology/tool may not understand the bank’s specific

issues, etc.

The American Bankers Association lists the following

recommended resources for TRAs:

International Standards Organization (ISO) 17799 (ISO

Standards)

Control Objectives for Information Technology (COBIT)

SysTrust

Operationally Critical Threat, Asset and Vulnerability

Evaluation (OCTAVE)

National Institute of Standards and Technology (NIST)

These resources are inexpensive to implement and serve the

purpose in most cases. They are based on extensive research from

government and professional security experts and are vendor neutral.

These methodologies enjoy excellent reputation among corporate

governance experts.

A summary description of each of the above TRA methods is

as follows:

ISO Standards

The ISO along with the International Electro-technical

Commission forms the specialized system for worldwide

standardization. The stated purpose of the ISO standards is to

“provide a common basis for developing organizational security

standards and effective security management practice and to provide

confidence in inter organizational dealings.” Originally, developed

in Britain, it is a favored TRA approach in Europe. The standard is

often referenced and leveraged by other prominent methods and

covers 10 areas namely, Security policy, Communications and

operations management, Organizational security, Access control,

Asset classification and control, System development and

maintenance, Personal security, Business continuity management,

Physical and environment security, and Compliance.

COBIT

COBIT has been developed as a generally applicable and

accepted standard for good IT security and control practices that

provides a reference framework for IT governance. COBIT is

sponsored by the IT Governance Institute, established by the

Information Systems Audit and Control Association (ISACA), and

addresses risk from both the business and technology perspectives. It

is an internationally recognized tool, incorporating both operation

management and audit concerns, which have been adopted in

organizations including the US House of Representatives, Charles

Schwab & Co., and Swift.

The framework compromises 34 high-level control objectives

belonging to four domains. For each control objective, audit

procedures and management guidelines are provided. The latter

guidelines uniquely provide COBIT with a business management

perspective; maturity models, critical success factors, key goal

indicators, and key performance indicators are provided for each of

the high-level control objectives.

COBIT focuses on processes and their ownership. It provides

excellent methodology for various parts of an organization to have

the same perspective at IT risk management. However, COBIT is

more of a general assessment tool and detailed issues are to be

considered in the form of audit programs. As such some consider it

to be too theoretical.

Sys Trust

The American Institute of Certified Public Accountants

(AICPA) and the Canadian Institute of Chartered Accountants

(CICA) introduced a service to provide assurance on the reliability

of systems. The purpose of this service, known as Sys Trust, is to

increase the comfort of management, customers and business

partners with the systems that support a business or particular

activity. The service considers four principles to evaluate whether a

system is reliable.

Availability: The system is available for operation and use at

times set forth in service level statements or agreements.

Security: The system is protected against unauthorized

physical and logical access.

Integrity: System processing is complete, accurate, timely

and authorized.

Maintainability: The system can be updated when required

in a manner that continues to provide for system availability,

security and integrity.

Although, SysTrust was not necessarily developed as a risk

management tool, many organizations have found that the SysTrust

principles could be adopted as an effective RA tool since the

principle provide a stake holder’s perspective on the impact of

technology on business activities. The AICPA/CICA is currently

considering a new version of the SysTrust tool that would also

incorporate e-commerce activities. Under the revision, five

principles would replace the four above. Principles consider would

include security, availability, processing integrity, online privacy

and confidentiality.

SysTrust provides good high-level questions for an overview

on overall reliability but may not provide detailed methods for

intended objectives. It is more of an executive level assessment

perspective rather than at operational level. However, it also has

provision for third party assessment and covers security also.

OCTAVE

Developed by the Software Engineering Institute (SEI) at

Carnegie Mellon University, OCTAVE is a comprehensive, self-

directed approach to TRA. It differs from traditional TRAs in that it

first determines which information assets really need to be protected

and then evaluates the technology infrastructure to determine the

vulnerability of those assets. OCTAVE presents an exciting TRA to

ORMs because the SEI is home to the CERT alerts and other

information relating to managing security vulnerabilities. This

robustness of tools, workshops, and publications relating to

OCTAVE significantly enhances an effective assessment by the

ORM.

Specially, OCTAVE uses a three-phased approach to identify

the technology risk management needs of an enterprise:

Build asset-based threat profiles: Identify important

information assets, the threats to those assets, security and current

risk mitigation strategies.

Identify infrastructure vulnerabilities: Examine technology

infrastructure for vulnerabilities that can be compromised.

Develop security strategy and plans: Based on the results of

the first two phases, develop a strategy-based on business priorities

to mitigate risks.

OCTAVE is a full methodology with supporting tools and

leverages from a combination of academic research and industry

practices but, it is geared to larger institutions and the use of it

without formal training is difficult.

NIST

The Information Technology Laboratory (ITL) at the NIST in

USA is a body, which provides technical leadership for the nation’s

measurement and standards infrastructure. These include developing

standards and guidelines for the cost-effective security and privacy

of sensitive unclassified information in federal computer systems.

Like the other organizations mentioned previously, NIST

provides a detailed checklist of IT-related risk mitigation strategies

that should be assessed as a part of a TRA. In addition to its detailed

coverage of security issues, the checklist enables to determine if risk

is managed by using five “levels of effectiveness”.

1. Control objectives documented in a security policy.

2. Security controls documented as procedures.

3. Procedures have been implemented.

4. Procedures and security controls are tested and reviewed.

5. Procedures and security controls are fully integrated in to a

comprehensive program.

However, this is mostly followed by big government

organizations and following these methodologies could be too

burdensome in a smaller organization.

9. PRIMARY DATA & ITS ANALYSIS

The primary data has been collected through surveys in banks (questionnaire) viz., Bank of Maharashtra, ICICI bank, HDFC bank.

Q.1) I.T. in banks is much more advanced than traditional banking? Agree Disagree Fifty-Fifty

ANALYSIS: -

Bank of Maharashtra

ICICI HDFC

AGREE 96% 98% 100%DISAGREE 3% 2% 0%FIFTY-FIFTY 1% 0% 0%

GRAPH: -

EXPLANATION: -It is cleared from questionnaire method that every one agrees

to the statement “I.T. in banks is much more advance than traditional banking”. Approximately ninety eight percent of bank employees agree to the above statement.

Q.2) The ratio of online transaction v/s manual transaction.

1:2 2:1 Equal Can’t Say

ANALYSIS: -

Bank of Maharashtra ICICI HDFC

1:2 30% 0% 0%

2:1 60% 100% 100%

Equal 0% 0% 0%

Can’t Say 10% 0% 0%

GRAPH: -

EXPLANATION: -

According to the above data collected it is clear that

approximately ten percentage of employees says that the ratio of

online transaction v/s manual transaction is 1:2, eighty seven

percentage says it is 2:1, zero percent says it is equal & three percent

cant say anything.

Q.3) Information technology in banks encouraging online frauds.

Yes No To some extent

ANALYSIS: -

Bank of Maharashtra ICICI HDFC

Yes 90% 92% 98%

No 6% 5% 1%

To some extent 4% 3% 1%

GRAPH: -

EXPLANATION: -

According to the above data collected it is clear that

approximately ninety three percent of employees says yes, four

percent says no and three percent says to some extent.

Q.4) Type of banking facility that will be friendly to illiterate customer.

Online banking Manual-banking Both

ANALYSIS: -

Bank of Maharashtra ICICI HDFC

Online banking 2% 0% 0%

Manual banking 97% 98% 100%

Both 1% 2% 0%

GRAPH: -

EXPLANATION: -

According to the above data collected it is clear that

approximately ninety seven percent of employees says that manual

banking type of facility is friendly to illiterate customers, two

percent says online banking and one percent says both online as well

as manual banking is friendly to the illiterate customers.

Q.5) In what way I.T. in banks affects the work of the employees.

Increases the work Decreases the work Same at both levels

ANALYSIS: -

Bank of Maharashtra ICICI HDFC

Increases the work 45% 30% 40%

Decreases the work 50% 63% 55%

Same at both levels 5% 7% 5%

GRAPH: -

EXPLANATION: -

According to the above data collected it is clear that

approximately thirty eight percent says I.T. in banks increases the

work of the employees, fifty six percent says decreases the work and

six percent says it is same at both the levels.

Q.6) Does I.T. in banks increasing the cost of banking operations /

banking transaction.

Yes No Equal

ANALYSIS: -

Bank of Maharashtra ICICI HDFC

Yes 98% 94% 100%

No 2% 5% 0%

Equal 0% 1% 0%

GRAPH: -

EXPLANATION: -

According to the above data collected it is clear that approximately eighty seven percent of employees says yes i.e. I.T. increases the cost of banking operations or banking transactions, two percent says no and one percent says equal.

10. SECONDARY DATA AND ANALYSIS

Indian Scenario

Major players in the Indian Market

Banks No. of cards in lakhs

Citibank

Stan Chart

SBI-GE

2002 2003

16

14

9

20

18

13

According to an analyst, it is estimated that the Indian smart

card industry is growing around 45% annually, would reach the size

of $6 bn by 2010. In the next five years, the number of smart cards

being used in the country can touch 400 million from around 50

million cards today.

To standardize the smart card, the Government has recently

standardized the technical aspects of smart cards. An operating

system called “SCOSTA” (Smart Card Operating System for

Transport Application) developed by IIT Kanpur has been chosen as

the standard operating system for transport-related projects. India is

planning to issue smart card based identity cards to citizens. State

Governments are also planning to issue smart card based driving

licenses. Kerala recently tried a ration card project at

Thiruvananthapuram. But the lack of resources with state

governments may halt many such projects. States like Kerala have

stopped several smart card related projects due to resources crunch.

“ It is the market for SIM cards for mobile phone that is

growing faster in India-at about 70-80% annually. Once the National

Identity Card project is launched, the demand for smart cards will

skyrocket,” opines Sanjay Dharwadkar, Head of Systems Marketing,

Smart Chip Ltd.

11. FINDINGS AND CONCLUSIONS

According to the survey conducted in Bank of Maharashtra, ICICI Bank & HDFC Bank, the following points are concluded:

1. I.T. in banking sector is much more advanced than traditional banking.

2. Online transactions are widely used than manual transactions.3. Manual banking facility is more friendly to illiterate

customers.4. I.T. in banks to some extents reduces the work of employees.5. I.T. in banks to some extent encourages online frauds.6. Online banking is much more costlier than manual banking. It

increases the cost of banking operations.7. Online banking facility can lead to progress of the banking

sector.

12. SUGGESTIONS AND RECOMMENDATIONS

1. Some highly advanced softwares / programs should be

implemented in banking sector in order to prevent hackers and

frauds.

2. Online banking operations cost or banking transaction cost

should be reduced so that middle class customer can have access to

online banking facility.

3. Further research can be done in topics related to this project viz.,

software application in banking sector, technology and frauds.

4. Awareness programs related to online banking for middle class

people.

BIBLIOGRAPHY

REFERENCE RELATED TO BOOKS

Katuri Nageshwara Rao & Yashpaul Pahuja, (2005), ‘IT

IN BANKS – EMERGING TRENDS’

Kamlesh k Bajaj & Debjani Nag, ‘ELECTRONIC

COMMERCE- THE CUTTING EDGE OF BUSINESS’,

Delhi, Tata McGraw Hill Publishing Co. Ltd.

JOURNALS AND MAGAZINES

Ravi Kumar Sharma, ‘PROFESSIONAL BANKER’,

Nov.2005.

RESEARCH REPORTS

THE EFFECT OF INFORMATION AND

COMMUNICATION ON THE BANKING SECTOR AND

PAYMENT SYSTEM

-BY ARBUSSA REIXACH

INTERNET BANKING

COMPTROLLERS HANDBOOK

INTERNET

www.banknetindia.com

www.microsoft.com