Project of E-Banking

DEFINITION OF E-BANKING
Electronic banking, also known as electronic funds transfer (EFT), is simply the use of
electronic means to transfer funds directly from one account to another, rather than by
cheque or cash. You can use electronic funds transfer to
!"a#e your paycheck deposited directly into your bank or credit union checking account.
!$ithdraw money from your checking account from an %T& machine with a personal
identification number ('()), at your con#enience, day or night.
!(nstruct your bank or credit union to automatically pay certain monthly bills from your
account, such as your auto loan or your mortgage payment.
!"a#e the bank or credit union transfer funds each month from your checking account to
your mutual fund account.
!"a#e your go#ernment social security benefits check or your ta* refund deposited
directly into your checking account.
!+uy groceries, gasoline and other purchases at the point,of,sale, using a check card
rather than cash, credit or a personal check.
!-se a smart card with a prepaid amount of money embedded in it for use instead of cash
at a pay phone, e*pressway road toll, or on college campuses at the library.s photocopy
machine or bookstores.
!-se your computer and personal finance software to coordinate your total personal
financial management process, integrating data and acti#ities related to your income,
spending, sa#ing, in#esting, recordkeeping, bill,paying and ta*es, along with basic
financial analysis and decision making.

VARIOUS FORMS OF E-BANKING
INTERNET BANKING
(nternet +anking lets you handle many banking transactions #ia your personal computer.
For instance, you may use your computer to #iew your account balance, request transfers
between accounts, and pay bills electronically.
(nternet banking system and method in which a personal computer is connected by a
network ser#ice pro#ider directly to a host computer system of a bank such that customer
ser#ice requests can be processed automatically without need for inter#ention by
customer ser#ice representati#es. The system is capable of distinguishing between those
customer ser#ice requests which are capable of automated fulfillment and those requests
which require handling by a customer ser#ice representati#e. The system is integrated
with the host computer system of the bank so that the remote banking customer can
access other automated ser#ices of the bank. The method of the in#ention includes the
steps of inputting a customer banking request from among a menu of banking requests at
a remote personnel computer/ transmitting the banking requests to a host computer o#er a
network/ recei#ing the request at the host computer/ identifying the type of customer
banking request recei#ed/ automatic logging of the ser#ice request, comparing the
recei#ed request to a stored table of request types, each of the request types ha#ing an
attribute to indicate whether the request type is capable of being fulfilled by a customer
ser#ice representati#e or by an automated system/ and, depending upon the attribute,
directing the request either to a queue for handling by a customer ser#ice representati#e
or to a queue for processing by an automated system.
%-T0&%TE1 TE22E3 &%4"()E5 (%T&)
%n unattended electronic machine in a public place, connected to a data system and
related equipment and acti#ated by a bank customer to obtain cash withdrawals and other
banking ser#ices. %lso called automatic teller machine, cash machine/ %lso called money
machine.
%n automated teller machine or automatic teller machine (%T&) is an electronic
computeri6ed telecommunications de#ice that allows a financial institution.s customers to
directly use a secure method of communication to access their bank accounts, order or
make cash withdrawals (or cash ad#ances using a credit card) and check their account
balances without the need for a human bank teller (or cashier in the -7). &any %T&s
also allow people to deposit cash or cheques, transfer money between their bank
accounts, top up their mobile phones. pre,paid accounts or e#en buy postage stamps.
0n most modern %T&s, the customer identifies him or herself by inserting a plastic card
with a magnetic stripe or a plastic smartcard with a chip, that contains his or her account
number. The customer then #erifies their identity by entering a passcode, often referred to
as a '() ('ersonal (dentification )umber) of four or more digits. -pon successful entry
of the '(), the customer may perform a transaction.
(f the number is entered incorrectly se#eral times in a row (usually three attempts per
card insertion), some %T&s will attempt retain the card as a security precaution to
pre#ent an unauthorised user from disco#ering the '() by guesswork. 4aptured cards are
often destroyed if the %T& owner is not the card issuing bank, as non,customer.s
identities cannot be reliably confirmed.
The (ndian market today has appro*imately more than 89,::: %T&;s.
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-ndertaking a host of banking related ser#ices including financial transactions from the
con#enience of customers chosen place anywhere across the <20+E and any time of
date and night has now been made possible by introducing on,line Telebanking ser#ices.
+y dialing the gi#en Telebanking number through a landline or a mobile from anywhere,
the customer can access his account and by following the user,friendly menu, entire
banking can be done through (nteracti#e =oice 3esponse ((=3) system. $ith sufficient
numbers of hunting lines made a#ailable, customer call will hardly fail. The system is bi,
lingual and has following facilities offered
! %utomatic balance #oice out for the default account.
! +alance inquiry and transaction inquiry in all
! (nquiry of all term deposit account
! 5tatement of account by Fa*, e,mail or ordinary mail.
! 4heque book request
! 5top payment which is on,line and instantaneous
! Transfer of funds with 4+5 which is automatic and instantaneous
! -tility +ill 'ayments
! 3enewal of term deposit which is automatic and instantaneous
! =oice out of last fi#e transactions.
5&%3T 4%31
% smart card usually contains an embedded >,bit microprocessor (a kind of computer
chip). The microprocessor is under a contact pad on one side of the card. Think of the
microprocessor as replacing the usual magnetic stripe present on a credit card or debit
card. The microprocessor on the smart card is there for security. The host computer and
card reader actually ?talk? to the microprocessor. The microprocessor enforces access to
the data on the card. The chips in these cards are capable of many kinds of transactions.
For e*ample, a person could make purchases from their credit account, debit account or
from a stored account #alue that.s reload able. The enhanced memory and processing
capacity of the smart card is many times that of traditional magnetic,stripe cards and can
accommodate se#eral different applications on a single card. (t can also hold
identification information, which means no more shuffling through cards in the wallet to
find the right one ,, the 5mart 4ard will be the only one needed.
5mart cards can also be used with a smart card reader attachment to a personal computer
to authenticate a user. 5mart cards are much more popular in Europe than in the -.5. (n
Europe the health insurance and banking industries use smart cards e*tensi#ely. E#ery
<erman citi6en has a smart card for health insurance. E#en though smart cards ha#e been
around in their modern form for at least a decade, they are @ust starting to take off in the
-.5.
1E+(T 4%31
1ebit cards are also known as check cards. 1ebit cards look like credit cards or %T&
(automated teller machine) cards, but operate like cash or a personal check. 1ebit cards
are different from credit cards. $hile a credit card is a way to ?pay later,? a debit card is a
way to ?pay now.? $hen you use a debit card, your money is quickly deducted from your
checking or sa#ings account.
1ebit cards are accepted at many locations, including grocery stores, retail stores,
gasoline stations, and restaurants. You can use your card anywhere merchants display
your card.s brand name or logo. They offer an alternati#e to carrying a checkbook or
cash.
E,4"EA-E
! %n e,4heque is the electronic #ersion or representation of paper cheque.
! The (nformation and 2egal Framework on the E,4heque is the same as that of the
paper cheque;s.
! (t can now be used in place of paper cheques to do any and all remote
transactions.
! %n E,cheque work the same way a cheque does, the cheque writer ?writes? the e,
4heque using one of many types of electronic de#ices and ?gi#es? the e,4heque to the
payee electronically. The payee ?deposits? the Electronic 4heque recei#es credit, and the
payee.s bank ?clears? the e,4heque to the paying bank. The paying bank #alidates the e,
4heque and then ?charges? the check writer.s account for the check

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! 1irect 1eposit
! Electronic +ill 'ayment
! Electronic 4heck 4on#ersion
! 4ash =alue 5tored, Etc.

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For +anks
'rice, (n the long run a bank can sa#e on money by not paying for tellers or for managing
branches. 'lus, it.s cheaper to make transactions o#er the (nternet.
4ustomer +ase, The (nternet allows banks to reach a whole new market, and a well off
one too, because there are no geographic boundaries with the (nternet. The (nternet also
pro#ides a le#el playing field for small banks who want to add to their customer base.
Efficiency, +anks can become more efficient than they already are by pro#iding (nternet
access for their customers. The (nternet pro#ides the bank with an almost paper less
system.
4ustomer 5er#ice and 5atisfaction, +anking on the (nternet not only allow the customer
to ha#e a full range of ser#ices a#ailable to them but it also allows them some ser#ices
not offered at any of the branches. The person does not ha#e to go to a branch where that
ser#ice may or may not be offer. % person can print of information, forms, and
applications #ia the (nternet and be able to search for information efficiently instead of
waiting in line and asking a teller. $ith more better and faster options a bank will surly
be able to create better customer relations and satisfaction.
(mage, % bank seems more state of the art to a customer if they offer (nternet access. %
person may not want to use (nternet banking but ha#ing the ser#ice a#ailable gi#es a
person the feeling that their bank is on the cutting image.
For 4ustomers
+ill 'ay +ill 'ay is a ser#ice offered through (nternet banking that allows the customer
to set up bill payments to @ust about anyone. 4ustomer can select the person or company
whom he wants to make a payment and +ill 'ay will withdraw the money from his
account and send the payee a paper check or an electronic payment
0ther (mportant Facilities E, banking gi#es customer the control o#er nearly e#ery
aspect of managing his bank accounts. +esides the 4ustomers can, +uy and 5ell
5ecurities, 4heck 5tock &arket (nformation, 4heck 4urrency 3ates, 4heck +alances,
5ee which checks are cleared, Transfer &oney, =iew Transaction "istory and a#oid
going to an actual bank. The best benefit is that (nternet banking is free. %t many banks
the customer doesn.t ha#e to maintain a required minimum balance. The second big
benefit is better interest rates for the customer.

40)4E3)5 $(T" E,+%)7()<
%s with any new technology new problems are faced.
4ustomer support , banks will ha#e to create a whole new customer relations department
to help customers. +anks ha#e to make sure that the customers recei#e assistance quickly
if they need help. %ny ma@or problems or disastrous can destroy the banks reputation
quickly an easily. +y showing the customer that the (nternet is reliable you are able to get
the customer to trust online banking more and more.
2aws , $hile (nternet banking does not ha#e national or state boundaries, the law does.
4ompanies will ha#e to make sure that they ha#e software in place software market,
creating a monopoly.
5ecurity customer always worries about their protection and security or accuracy. There
are always question whether or not something took place.
0ther challenges lack of knowledge from customers end, sit changes by the banks, etc
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The ad#ent of (nternet has initiated an electronic re#olution in the global banking sector.
The dynamic and fle*ible nature of this communication channel as well as its ubiquitous
reach has helped in le#eraging a #ariety of banking acti#ities. )ew banking
intermediaries offering entirely new types of banking ser#ices ha#e emerged as a result of
inno#ati#e e,business models. The (nternet has emerged as one of the ma@or distribution
channels of banking products and ser#ices, for the banks in -5 and in the European
countries.
(nitially, banks promoted their core capabilities i.e., products, ser#ices and ad#ice through
(nternet. Then, they entered the e,commerce market as pro#idersBdistributors of their own
products and ser#ices. &ore recently, due to ad#ances in (nternet security and the ad#ent
of rele#ant protocols, banks ha#e disco#ered that they can play their primary role as
financial intermediators and facilitators of complete commercial transactions #ia
electronic networks especially through the (nternet. 5ome banks ha#e chosen a route of
establishing a direct web presence while others ha#e opted for either being an owner of
financial ser#ices centric electronic marketplace or being participants of a non,financial
ser#ices centric electronic marketplace.
The trend towards electronic deli#ery of banking products and ser#ices is occurring partly
as a result of consumer demand and partly because of the increasing competiti#e
en#ironment in the global banking industry. The (nternet has changed the customers.
beha#iors who are demanding more customi6ed productsBser#ices at a lower price.
&oreo#er, new competition from pure online banks has put the profitability of e#en
established brick and mortar banks under pressure. "owe#er, #ery few banks ha#e been
successful in de#eloping effecti#e strategies for fully e*ploiting the opportunities offered
by the (nternet. For traditional banks to define what niche markets to ser#e and decide
what productsBser#ices to offer there is a need for a clear and concise (nternet commerce
strategy.
+anking transactions had already started taking place through the (nternet way back in
8CCD. The (nternet promised an ideal platform for commercial e*change, helping banks to
achie#e new le#els of efficiency in financial transactions by strengthening customer
relationship, promoting price disco#ery and spend aggregation and increasing the reach.
Electronic finance offered considerable opportunities for banks to e*pand their client base
and rationali6e their business while the customers recei#ed #alue in the form of sa#ings in
time and money.
<lobal E,banking industry is co#ered by the following four sections
! E,banking 5cenario (t discusses the actual state, prospects, and issues related to
E,banking in %sia with a focus on (ndia, -5 and Europe. (t also deals with the impact of
E,banking on the banking industry structure.
! E,banking 5trategies (t re#eals the key strategies that banks must implement to
deri#e ma*imum #alue through the online channel. (t also brings guidance for those
banks, which are planning to build online businesses.
! E,banking Transactions (t discusses how (nternet has radically transformed
banking transactions. The section focuses on cross border transactions, +E+ transactions,
electronic bill payment and presentment and mobile payments. (n spite of all the hype, E,
banking has been a non,starter in se#eral countries.
! E,banking Trends (t discuses the inno#ation of new technologies in banks.

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The banking industry is e*pected to be a leading player in E,business. $hile the banks in
de#eloped countries are working primarily #ia (nternet as non,branch banks, banks in the
de#eloping countries use the (nternet as an information deli#ery tool to impro#e
relationship with customers.
(n early E::8, appro*imately F: percent of E,business in -7 was concentrated in the
financial ser#ices sector, and with the e*pected 8:,fold increase of the +ritish E,business
market by E::D, the share of the financial ser#ices will further increase. %round one fifth
of Finish and 5wedish bank customers are banking online, while in -5, according to
-)4T%1, online banking is growing at an annual rate of F: percent and the number of
online accounts has appro*imately reached 8D million by E::F.
+anks ha#e established an (nternet presence with #arious ob@ecti#es. &ost of them are
using the (nternet as a new distribution channel. Financial ser#ices, with the use of
(nternet, may be offered in an equi#alent quantity with lower costs to the more potential
customers. There may be contacts from each corner of the world at any time of day or
night. This means that banks may enlarge their market without opening new branches.
The banks in -5 are using the $eb to reach opportunities in three different categories
i.e., to market information, to deli#er banking products and ser#ices, and to impro#e
customer relationship.
(n %sia, the ma@or factor restricting growth of E,banking is security, in spite of se#eral
countries being well connected #ia (nternet. %ccess to high,quality E,banking products is
an issue as well. &a@ority of the banks in %sia are @ust offering basic ser#ices compared
with those of de#eloped countries. 5till, E,banking seems to ha#e a future in %sia. (t is
considered that E,banking will succeed if the basic features, especially bill payment, are
handled well. +ill payment was the most popular feature, cited by G: percent of
respondents of the sur#ey. "owe#er, pro#iding this ser#ice would be difficult for banks in
%sia because it requires a high le#el of security and in#ol#es arranging transactions with
a #ariety of players.
(n E::8, o#er D: percent of the banks in the -5 were offering E,banking ser#ices.
"owe#er, large banks appeared to ha#e a clear ad#antage o#er small banks in the range of
ser#ices they offered. 5ome banks in -5 were targeting their (nternet strategies towards
business customers. %part from affecting the way customers recei#ed banking ser#ices/
E,banking was e*pected to influence the banking industry structure. The economics of E,
banking was e*pected to fa#or large banks because of economies of scale and scope, and
the ability to ad#ertise hea#ily. &oreo#er, E,banking offered entry and e*pansion
opportunities that small banks traditionally lacked.
(n Europe, the (nternet is accelerating the reconfiguration of the banking industry into
three separate businesses production, distribution and ad#ice. This reconfiguration is
being further dri#en by the (nternet, due to the combined impact of
! The emergence of new and more focused business models
! )ew technological capabilities that reduces the banking relationship and
transaction costs.
! "igh degree of uncertainty o#er the impact that new entrants will ha#e on current
business models.
Though E,banking in Europe is still in the e#olutionary stage, it is #ery clear that it is
ha#ing a significant impact on traditional banking acti#ities. -nlike in the -5, though
large banks in the Europe ha#e a competiti#e edge due to their ability to in#est hea#ily in
new technologies, they are still not ready to embrace E,banking. "ence, medium,si6ed
banks and start,ups ha#e an important role to play on the E,banking front if they can take
concrete measures quickly and effecti#ely.

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Though E,banking offers #ast opportunities, yet e#en less than one in three banks ha#e an
E,banking strategy in place. %ccording to a study, less than 8D percent of banks with
transactional websites will reali6e profits directly attributable to those sites. "ence, banks
must recogni6e the seriousness of the challenge ahead and de#elop a strategy that will
enable them to le#erage the opportunities presented by the (nternet.
)o single E,banking strategy is right for e#ery banking company. +ut whether they adopt
an offensi#e or a defensi#e posture, they must constantly re,e#aluate their strategy. (n the
fast,paced e,economy, banks ha#e to keep up with the constantly e#ol#ing business
models and technology inno#ations of the (nternet space. Early e,business adopter like
$ells Fargo not only entered the E,banking industry first but also showed fle*ibility to
change as the market de#eloped. )ot many banks ha#e been as e,business,sa##y. +ut the
pressure is now building for all banks to de#elop sound e,business strategies that will
attract and retain increasingly discriminating customers.
The ma@or problem with the banks, which ha#e already in#ested huge amounts in their
online initiati#es, is that their online offerings remain unprofitable. Though banks ha#e
enrolled some e*isting customers in their online programs, they are not getting customers
in large numbers. This has made banks wonder whether there is any #alue in the online
channel. Hust enrolling customers for online banking may not be sufficient until and
unless they use the site acti#ely. +anks must make efforts to increase their site usage by
customers and effecti#ely co,ordinate the online channel with branches and call centers.
Then only they will be able to deri#e ma*imum #alue that includes cost reduction, cross,
selling opportunities, and higher customer retention.
4ustomers ha#e some rational reasons for staying offline. 5ome of these reasons include
usability features of the site, concerns about security and frequent complaints that signing
up is complicated and time,consuming. +anks can sol#e these problems by refocusing
in#estment on impro#ing the site.s basic functionality and user,friendliness, and a#oiding
ad#anced features that most customers neither understand nor #alue. 1e#eloping
ad#anced features that appeal to a relati#ely small numbers of customers, creates far less
#alue than strengthening core capabilities and getting customers to use them. +anks must
make efforts to familiari6e customers with their sites and show them how easy and
efficient the online channel is to use.
(ntegrating the online channel with the rest of the bank is another important issue that
banks must focus upon. This is important because nearly all the #alue of the online
channel is reali6ed offline I in cross sales completed in other channels and in cost
reductions. %n acti#ely used online channel should also ser#e as a medium to sell
banking ser#ices for the branch staff, the call center, and the relationship manager.
(ntegrated channels working together are far more effecti#e than a group of channels
working without any coordination.
To facilitate this integration, banks must formulate paths that people in #arious customer
segments are likely to take among the channels. The interactions in each channel can then
be worked around these paths. For e*ample, a call center representati#e must work out
which channel(s) the customer used before coming to her, and which channel(s) the
customer is likely to #isit ne*t. Each channel must ha#e entry and e*it points that must
welcome customers and then send to other channels. "ence, the o#erall goal of banks is
to create a seamless multichannel e*perience.
0n the other hand, those banks that are planning to build their online businesses will ha#e
to understand se#eral strategic issues like do they ha#e the right business model for E,
bankingJ "ow should they price their E,banking products and ser#icesJ +ankers
planning to mo#e into E,banking ha#e to e*plore different options, make in#estments and
ha#e to de#elop a #ariety of partnerships. They ha#e to put their time and efforts to
identify the best opportunities. (n the case of traditional banks, if they are too aggressi#e
in using price incenti#es to build their e,business, they risk the profitability of their
traditional business. "owe#er, if they do not offer sufficient price incenti#es for
customers to bank online, their efforts to build a sound e, banking business may not
fructify.
+anks ha#e to be creati#e in rethinking organi6ational structures and management
processes. Traditional banks that are conser#ati#e in nature may find it difficult to attract
and retain online talent. &oreo#er, getting people in the traditional business to help build
an e,enterprise would not be an easy task. To make all this happen, requires a ma@or
re#ision of incenti#e systems, planning and budgeting processes, and management roles.
+anks can e*ploit the opportunities pro#ided by the (nternet if they demonstrate courage,
use their imagination, and take decisi#e action.
$hile most of the banks ha#e started focusing on E,banking acti#ities, a new challenge
in the form of mobile banking has emerged. &,+anking is both an additional opportunity
for banks to offer their online ser#ices and an additional channel from which to access
new customers and cross,sell to e*isting customers. 3apidly changing lifestyles of
customers and their demand for more speed and con#enience has subdued the role of
branch banking to a certain e*tent. $ith the proliferation of new technologies,
disintermediation of traditional channels is being witnessed. +anks can go beyond their
traditional role as a channel for bankingBfinancial ser#ices and can become pro#iders of
personali6ed information. They can successfully le#erage m,banking to
! 'ro#ide personali6ed products and ser#ices to specific customers and thus
increase customer loyalty.
! E*ploit additional sources of re#enue from subscriptions, transactions and third,
party referrals.
&,+anking gi#es banks the opportunity to significantly e*pand their customer
relationships pro#ided they position themsel#es effecti#ely. To le#erage these
opportunities, they must form structured alliances with ser#ice affiliates, and acquire
competiti#e ad#antage in collecting, processing and deploying customer information

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The introduction of new technologies has radically transformed banking transactions. (n
the past, customers had to come physically into the bank branch to do banking
transactions including transfers, deposits and withdrawals. +anks had to employ se#eral
tellers to physically make all those transactions. %utomatic Teller &achines (%T&s) were
then introduced which allowed people to do their banking on their own, practically
anytime and anywhere. This helped the banks cut down on the number of tellers and
focus on managing money. The (nternet then brought another #enue with which
customers could do banking, reducing the need for %T&s. 0nline banking allowed
customers to do financial transactions from their '4s at home #ia (nternet. )ow, with the
emergence of $ireless %pplication 'rotocol ($%') technology, banks can use the
infrastructure and applications de#eloped for the (nternet and mo#e it to mobile phones.
)ow people no longer ha#e to be tied to a desktop '4 to do their banking. The $%'
interface is much faster and con#enient than the (nternet, allowing customers to see
account details, transaction details, make bill payments, and e#en check credit card
balance.
The cost of the a#erage payment transaction on the (nternet is minimum. 5e#eral studies
found that the estimated transaction cost through mobile phone is8F cents, a fully
computeri6ed bank using its own software is EF cents, a telephone bank is DG cents, a
bank branch, K8.E9, an %T&, E9 cents, and on the (nternet it costs @ust 8L cents. %s a
result, the use of the (nternet for commercial transactions started to gain momentum in
8CCD. &ore than E,::: banks in the world now ha#e transactional websites and the
growth of online lending solutions is making them more cost efficient. 3ecent
de#elopments are now encouraging banks to target small businesses as a separate lending
category online.
+anks are increasingly building payment infrastructure with #arious security mechanisms
(552, 5ET) because there is tremendous potential for profit, as more and more payments
will pass through the (nternet. "owe#er, the challenge for banks is to offer a payments
back,bone system that will be open enough to support multiple payment instruments
(credit cards, debit cards, direct debit to accounts, e,checks, digital money etc.) and
scalable enough to allow for a stable ser#ice regardless of the workload.
The market for Electronic +ill 'resentment and 'ayment (E+'') is growing. %ccording
to a study, 8> million households in the -5 are e*pected to pay their bills online by E::L
compared to E million households in E::8. %s more number of bill payers are getting
online, se#eral banks are making efforts to find ways to meet the growing needs of E+''.
Established banks can emerge as key online integrators of customer bills and can
capitali6e on this high potential market. <rowing with the popularity of E+'' is also the
paying of multiple bills at a single site known as bill aggregation. 0ffering online bill
payment and aggregation will increase the competiti#eness and attracti#eness of E,
banking ser#ices and will allow banks to generate ser#ice,fee income from the billers.
(n the +E+ segment, the customer #alue proposition for online bill payment is more
compelling. +E+ e,commerce is e*pected to grow from KG:F bn in E::: to KE.9 tn by
E::G, and more than half of all transactions will be routed through online +E+
marketplaces. There is a need for automated payment systems to reduce cost and human
error, and enhance cash,flow management. To meet this need, a group of banks and non,
financial institutions led by 4itibank and $ells Fargo ha#e formed a company called
Financial5ettlements&atri* (F5&*). (t pro#ides business buyers and sellers with access
to secure payment processing, in#oicing and other ser#ices that participating financial
ser#ices firms offer.
% +E+ marketplace would pro#ide minimum #alue to its customers if it @ust matches
buyers and sellers, lea#ing the financial aspects of transactions to be handled through
traditional non,(nternet channels. "ence, the marketplace must be capable of pro#iding
the payments processing, treasury management ser#ices, payablesBrecei#ables data flows,
and credit solutions to complete the full cycle of a commercial transaction on the (nternet.
The web,based +E+ e,commerce offers tremendous opportunities for banks, payment
technology #endors and e,commerce companies to form strategic alliances. This new
form of collaboration between partners with complementary core competencies may
pro#e to be an effecti#e business model for e,business.

E,+%)7()< T3E)1
(nternet banking is gaining ground. +anks increasingly operate websites through which
customers are able not only to inquire about account balances and interest and e*change
rates but also to conduct a range of transactions. -nfortunately, data on (nternet banking
are scarce, and differences in definitions make cross,country comparisons difficult. E#en
so, one finds that (nternet banking is particularly widespread in %ustria, 7orea, the
5candina#ian countries, 5ingapore, 5pain, and 5wit6erland, where more than 9D percent
of all banks offer such ser#ices (see chart). The 5candina#ian countries ha#e the largest
number of (nternet users, with up to one,third of bank customers in Finland and 5weden
taking ad#antage of E,banking.

(n the -nited 5tates, (nternet banking is still concentrated in the largest banks. (n mid,
E::8, GG percent of national banks maintained transactional websites, almost double the
number in the third quarter of 8CCC. These banks account for o#er C: percent of national
banking system assets. The larger banks tend to offer a wider array of electronic banking
ser#ices, including loan applications and brokerage ser#ices. $hile most -.5. consumers
ha#e accounts with banks that offer (nternet ser#ices, only about F percent of them use
these ser#ices.
To date, most banks ha#e combined the new electronic deli#ery channels with traditional
brick and mortar branches (?brick and click? banks), but a small number ha#e emerged
that offer their products and ser#ices predominantly, or only, through electronic
distribution channels. These ?#irtual? or (nternet,only banks do not ha#e a branch
network but might ha#e a physical presence, for e*ample, an administrati#e office or
nonbranch facilities like kiosks or automatic teller machines. The -nited 5tates has about
L: #irtual banks/ %sia has E, launched in E::: and E::8/ and the European -nion has
se#eralMeither as separately licensed entities or as subsidiaries or branches of brick and
mortar banks.

T"E ()1(%) EN'E3(E)4E
(ndia is still in the early stages of E,banking growth and de#elopment. 4ompetition and
changes in technology and lifestyle in the last fi#e years ha#e changed the face of
banking. The changes that ha#e taken place impose on banks tough standards of
competition and compliance. The issue here is O .$here does (ndia stand in the scheme of
Ebanking.. E,banking is likely to bring a host of opportunities as well as unprecedented
risks to the fundamental nature of banking in (ndia.
The impact of E, +anking in (ndia is not yet apparent. &any global research companies
belie#e that Ebanking adoption in (ndia in the near future would be slow compared to
other ma@or %sian countries.(ndian E,banking is still nascent, although it is fast becoming
a strategic necessity for most commercial banks, as competition increases from pri#ate
banks and non banking financial institutions.
1espite the global economic challenges facing the (T software and ser#ices sector, the
outlook for the (ndian industry remains optimistic.
The 3eser#e +ank of (ndia has also set up a ?$orking <roup on E,banking to e*amine
different aspects of E,banking. The group focused on three ma@or areas of E,banking i.e.
(8) Technology and 5ecurity issues (E) 2egal issues and (L) 3egulatory and 5uper#isory
issues. 3+( has accepted the guidelines of the group and they pro#ide a good insight into
the security requirements of E,banking.
The importance of the impact of technology and information security cannot be doubted.
Technological de#elopments ha#e been one of the key dri#ers of the global economy and
represent an instrument that if e*ploited well can boost the efficiency and competiti#ity
of the banking sector. "owe#er, the rapid growth of the (nternet has introduced a
completely new le#el of security related problems. The problem here is that since the
(nternet is not a regulated technology and it is readily accessible to millions of people,
there will always be people who want to use it to make illicit gains. The security issue
can be addressed at three le#els. The first is the security of customer information as it is
sent from the customer.s '4 to the $eb ser#er. The second is the security of the
en#ironment in which the (nternet banking ser#er and customer information database
reside. Third, security measures must be in place to pre#ent unauthori6ed users from
attempting to long into the online banking section of the website.
From a legal perspecti#e, security procedure adopted by banks for authenticating users
needs to be recogni6ed by law as a substitute for signature. (n (ndia, the (nformation
Technology %ct, E:::, in section L(E) pro#ides for a particular technology (#i6., the
asymmetric crypto system and hash function) as a means of authenticating electronic
record. %ny other method used by banks for authentication should be recogni6ed as a
source of legal risk..
3egarding the regulatory and super#isory issues, only such banks which are licensed and
super#ised and ha#e a physical presence in (ndia will be permitted to offer E,banking
products to residents of (ndia. $ith institutions becoming more and more global and
comple*, the nature of risks in the international financial system has changed. The
3egulators themsel#es who will now be paying much more attention to the qualitati#e
aspects of risk management ha#e recogni6ed this.
Though the (ndian <o#ernment has announced cyber laws, most corporate are not clear
about them, and feel they are insufficient for the growth of E,commerce. 2ack of
consumer protection laws is another issue that needs to be tackled, if people ha#e to feel
more comfortable about transacting online.
Ta*ation of E,commerce transaction has been one of the most debated issues that are yet
to be resol#ed by (ndia and most other countries. The e*plosi#e growth of e,commerce
has led many e*ecuti#es to question how their companies can properly administer ta*es
on (nternet sales. $ithout sales ta*, online sellers get a price ad#antage o#er brick and
mortar companies. $hile e,commerce has been causing loss of ta* re#enues to the
<o#ernment, many politicians continue to insist that the )et must remain ta*,free to
ensure continued growth, and that collecting sales ta*es on )et commerce could restrict
its e*pansion.
% permanent ban on custom duties on electronic transmissions, international ta* rules that
are neutral, simple and certain and simplification of state and local sales ta*es. The
4entral +oard of 1irect Ta*es, which submitted its report in 5eptember E::8,
recommended that e,commerce transaction should be ta*ed @ust like traditional
commerce.
%lso 3+( is about to become the first <o#ernment owned digital signature 4ertifying
%uthority (4%) in (ndia. The mo#e is e*pected to initiate the electronic transaction
process in the banking sector and will ha#e farreaching results in terms of cost and speed
of transactions between go#ernment, owned banks.
Thus efficiency, growth and the need to satisfy a growing tech,sur#ey consumer base are
three clear rationales for implementing E,banking in (ndia. The four forces,customers,
technology, con#ergence and globali6ation ha#e the most important effect on the (ndian
financial sector and these changes are forcing banks to
redefine their business models and integrate technology into all aspect of operation.
40&'-TE3(5%T(0) 0F +%)75 ()1(% , (55-E5 P E=E)T5
(n the Eighteenth and )ineteenth 4enturies the (ndustrial re#olution brought profound
changes in the life style of man. &any acti#ities that were hitherto performed by man
employing his hands and his finger skill came to be carried at great speed and efficiency
by machines. &an continued to carry out only those functions that needed his thinking
process to be in#ol#ed.
The (ndustrial 3e#olution on account of mass production of goods and ser#ices brought
large commercial and business organi6ations, transcending national boundaries that
employed se#eral thousands of persons for performing routine, repetiti#e clerical tasks,
relating to record keeping, maintaining accounts, attendingBanswering correspondence,
preparing #ouchers, in#oices, bills and multiple of such other functions. This created
white,collar employment for educated persons by leaps and bounds.
4lerical task is defined as a routine and repetiti#e performance in#ol#ing, adding,
subtracting, multiplying, di#iding numbers, and duplicating dataBinformation from one
source to another. The tools employed are ?a pen, ink and paper?, the knowledge of
arithmetic tables, the basic knowledge of a language and minimum acquaintance with
rules P procedures of the organisation that are followed day in day out and rele#ant to the
@ob of the particular employee. Two plus two is four. (t is always four. 5hould we need an
educated worker to compute this task again and againJ % business needed human agents
to attend to production, marketing, finance etc. depicting high,le#el tasks. +ut more and
more people were employed for performing low le#el tasks.
"owe#er as time went on the internal chorus of record keeping multiplied geometrically
as commerce and industry grew in si6e and #olume. The ci#il ser#ices of the <o#ernment
and ser#ice,based organi6ations came in the fore,front to inherit this o#erload of white,
collar employment. To quote a concrete e*ample a ma@or nationalised bank in (ndia,
which employed merely L::: workers in the Fifties (around the time ( entered its ser#ice
in 8CD9), came to engage o#er 9:,::: employees towards the end of the century, i.e. year
8CCF,C9,when ( retired from ser#ice from that bank.
The <o#ernment of (ndia and the 5tates including go#ernment owned bodies employed
as many as 8:: lakh @unior employees at the clerical and subordinate le#el. 5uch
employees by #irtue of their strength of numbers organise themsel#es into powerful trade
unions, and aggressi#ely utilise the bargaining power without reference to the input
benefit the organi6ation is deri#ing from them and the producti#ity they are pro#iding.
(n this world of human beings necessity is the mother of in#entions. %fter 8D years of
educational studies, an indi#idual should not be employed for routine repetiti#e tasks.
This makes him dull and feel the work monotonous without @ob satisfaction. "e turns
back and di#erts his loyalty to an informal group i.e. the trade union. "e feels happy once
in a month on pay day, but on other days his work lea#es him nothing to re@oice. There
are neither opportunities nor challenges to bring in his inno#ati#e or creati#e genius. %s
years passes the clerical employment results in the indi#idual losing efficiency and
producti#ity to progressi#ely depict a trend of progress in re#erse.
The ad#ent of mechanical calculating de#ices and later electronic computing in the $est
heralded a new age, that dispensed with this white collar and white,elephant employment
progressi#ely. This e#ol#ed in the west three decades before, but the ad#ent of this
e#olution in (ndia is only now taking place.
To quote again a concrete e*ample, the statistics of two banking institutions in (ndia, the
largest and the ne*t large in si6e can be fruitfully compared. These are the 5tate +ank of
(ndia, that was until recently employing E.L 2akh workers, for a turn o#er of 3s.LF,:::
4rores (1eposit ED::: Q %d#ances 88::: 4rores , latest).
(4(4( bank has at present less than 8::: branches and around 8:::: employees. (t has a
turno#er of 3s.EL::: 4rores (1eposits 8F Q %d#ances 9 thousand 4rores). The bank
started functioning from the year 8CC9 and has gained the )o.E position in status in (ndia
after 5+( in #olume of business turno#er within D years of its operation. (t will be
interesting to know that 4&1 of (4(4( +ank draws annual emoluments of 3s.8D: 2akhs,
while 4&1 of 5+( around 3s.G to D 2acs. (4(4( is a new age high,tech and fully
computerised bank, while 5+( retained its manual operations in totality up to 8CCL and
maintained the work force of that time up to E::8, though it is partially computerised
starting from the year 8CCL.
The per employee turno#er for (4(4( bank is 3s.E.L 4rores, that for 5+( is 3s.8.DF
2akhs. The gap accounts for the difference between manual operations and high,tech
banking.
(f we pro@ect the future in respect of 5tate owned banks, which employ presently nearly
8: 2akh employees, computerisation is destined to bring about rapid changes. +y about
the year E:8: the present turno#er of commercial banks in (ndia may double or e#en
treble to around 3s.L: to G: 2akh 4rores, but these +anks will ha#e no need of 9D
percent (today ED percent of the work force is subordinate staff, D: percent is clerical
staff and ED percent is the officers) of the e*isting workforce by E:8:. 0nly in #ery few
hinterland rural pockets there may be a possibility of a need of the present structure of
workforce. The ob@ecti#e of the recently administered =35 is to prepare for this reality of
the first decade of the )ew &illennium, where banking will be more tech based and less
people based.
4omputerisation brings transparency, impro#es customer care and customer,ser#ice
tremendously and reduces substantially scope for corruption or e*tending undue fa#our to
particular constituents and une#en ser#ice to others.
4"%22E)<E5 F%4E1 () 40&'-TE3(5%T(0)
4omputerisation is e*pensi#e and needs huge in#estment in hardware and software and
subsequent maintenance. The )ational 5tock E*change, (ndia.s )o.8 user in
computerised ser#ice has spent 3s.8>: 4rores to enable in#estors and brokers across the
country to trade securities online. The rate of obsolescence in respect of both hardware
and software is considerable. )ew and better products are emerging in the market, whose
use would enable a ri#al organi6ation to throw a challenge.
4omputer crimes are committed widely in the $est. (ndia is no less potentially e*posed
to this risk, when turno#er under (nternet banking increases. (t is easier to enforce
security of information and accountability of performers in a manual system. +ut it needs
elaborate steps to incorporate these features in the electronic system.
The structure of legal system is so far based on manual record keeping. (t has to pro#ide
for electronic data to be accepted legally as e#idence and in contracts.
(ndian banking has accepted computerisation since 8CCL, more out of sheer compulsion
and necessity to cope up increasing o#erload and incompatibility of the manual system to
sustain further growth. The following pages you are presented a series of articles
discussing the #arious facets of this momentous e#ent and its far,reaching effects
anticipated to unfold in the coming decade.
302E 0F 3+( () 40&'-TE3(5%T(0) 0F +%)75 () ()1(%
4omputerisation became popular in the western countries right from the 5i*ties. &ain
Frames were e*tensi#ely used both by the 'ublic (nstitutions and &a@or 'ri#ate
0rgani6ations. (n the 5e#enties &ini 4omputer became popular and 'ersonal 4omputers
in early Eighties, followed by introduction of se#eral software products in high le#el
language and simultaneous ad#ancement in networking technology. This enabled the use
of personal computers e*tensi#ely in offices P commercial organisations for processing
different kinds of data.
"owe#er in (ndia organised Trade -nions were against introduction of computers in
'ublic 0ffices. 4omputerisation was restricted to ma@or scientific research organi6ations
and Technical (nstitutes and defence organi6ations. (ndian 3ailways first accepted
computerisation for operational efficiency.
The Electronics 4orporation of (ndia 2td. was set up in 8CF9 with the ob@ecti#e of
research P de#elopment in the fields of Electronic 4ommunication, 4ontrol,
instrumentation, automation and (nformation Technology. 4&4 2td (4omputer
&aintenance 4orporation of (ndia 2td.) was established in 8C9F to look after
maintenance operations of &ain Frame 4omputers installed in se#eral organisations in
(ndia, to ser#e the gap, when (+& left (ndia, due to the directi#e of the then 4entral
<o#ernment.
(n the 'ri#ate 5ector the first ma@or #enture was T45 (Tata 4onsultancy 5er#ices) which
started functioning from 8CF>. (n the year 8C>: a few batch,mates of ((T 1elhi pioneered
the effort to start a ma@or education centre in (ndia to impart training in (nformation
Technology and their efforts resulted in the setting up of )((T in 8C>8. %ptech 4omputer
Education was established in 8C>F following the e*periment of )((T.
+efore large scale computerisation, computer education became popular in (ndia and
co#eted by bright students, when se#eral Engineering 4olleges and Technical (nstitutes
introducing 'ost <raduate 1egree courses in 4omputer Engineering. The booming
hardware and software industry in the $est attracted (ndian students and many of them
migrated for better opportunities to the -.5.%. and settled there. $e ha#e today the
parado* of (ndia being one of the ma@or powers possessing di#erse talents in fields of
software de#elopment, but at the same time, we are still a decade back to the using
computerised ser#ice e*tensi#ely in the country and bringing the facility to the realms of
the common man.
3apid de#elopment of business and industry brought manual operations of data, a
saturation point. This acted as a o#erload on the growing banking operations.
<o#ernment owned banks in general found the ?house,keeping? unmanageable. 5e#eral
heads of accounts in particular inter,bank clearing and inter,branch reconciliation of
accounts went totally out of control.
2ow producti#ity pushed cost of wages high and employees realised that unless they
agreed for computerisation further impro#ement in their wage structure was not possible.
(n the year 8CCL, the Employees. -nions of +anks signed an agreement with +ank
&anagements under the auspices of (ndian +anks. %ssociation ((+%). This agreement
was a ma@or break through in the introduction of computerised applications and
de#elopment of communication networks in +anks.
The first initiati#es in the area of bank computerisation, howe#er, stemmed out of the
landmark report of the two committees headed by the former <o#ernor of the 3eser#e
+ank of (ndia and currently <o#ernor of %ndhra 'radesh, "is E*cellency,
1r.4.3angara@an. +oth the reports had strongly recommended computerisation of
banking operations at #arious le#els and suggested appropriate architecture.
(n the .se#enties, there was a four,fold increase in the number of branches, fi#e,fold
increase in ad#ances and a si*,fold increase in deposits.. &echanisation was seen as the
best solution to the ?problems inherent in the manual system of operations, their ad#erse
impact on customer ser#ices and the gra#e dangers to banks in the conte*t of increasing
incidence of frauds.
The first of these 4ommittees, #i6. the 4ommittee on the &echani6ation of the +anking
(ndustry (8C>G) was set up for the first time to suggest a model for mechanisation of bank
branches, regional B controlling offices and "ead 0ffice necessitated by the e*plosi#e
growth in the geographical spread of banking following nationali6ation of banks in 8CFC.
(n the first phase of computerisation spanning the fi#e years ending 8C>C, banks in (ndia
had installed G99F %2'&s at the branch le#el, ELL mini computers at the
3egionalB4ontrolling office le#els and trained o#er E::: programmersBsystems personnel
and o#er 8E::: 1ata Entry Terminal 0perators. The 3eser#e +ank too had embarked
upon an ambitious program to bring about state,of,the,art technology in the clearing
process and had introduced &(43 clearing at G centres and computeri6ed clearing
settlement at C centres.
%gainst this backdrop, the 4ommittee on 4omputerisation in +anks was set up once
again under 1r.3angara@an.s 4hairmanship to draw up a perspecti#e plan for
computerisation in banks. (n its report submitted in 8C>C, the 4ommittee acknowledged
the gains of the initial efforts and sought to mo#e away from the stand,alone dedicated
systems to an on,line transaction processing en#ironment in branch banking. (t
recommended that the thrust of bank computerisation for the following D years should be
to fully computerise the operations at both the front and back offices of large branches
then numbering around ED::.

3E40&&E)1%T(0)5 0F 40&&(TTEE 0) TE4")020<Y -'<3%1%T(0)
The 3eser#e +ank continued to be in#ol#ed in shaping the technology #ision of the
banking system. Following the recommendations of the 4ommittee on Financial 5ector
3eforms, (which is popularly known as the second )arasimham committee), a
4ommittee on Technology -pgradation was set up by the 3+( for the +anking 5ector in
8CCG. This committee has representation from banks, <o#ernment, technical institutions
and the 3+(. %mong other things, this committee looked into issues relating to
! Encryption of 'ublic 5witching Telephone )etwork ('5T)) lines
! %dmission of electronic files as e#idence
! 3ecord keeping
! &odalities for a satellite based $%) for banks and financial institutions with the
necessary security systems by banks and other financial institutions, to ultimately de#elop
a sound and an efficient payments system
! &ethods by which technological upgradation in banks and financial institutions
could be effected and in the conte*t study the feasibility of establishment of standards,
designing payments system backbone and standards relating to security le#els, messages
and smart cards.
The 4ommittee realised the urgent need for training, research and de#elopment acti#ities
in the +anking Technology area. +anks and Financial (nstitutions started setting up
Technology based training centres and colleges. "owe#er, a need was felt for an ape*
le#el (nstitute which could be a Think,tank and +rain Trust for +anking Technology.
The committee recommended a #ariety of payment applications which can be
implemented with appropriate technology upgradation and de#elopment of a reliable
communication network. The committee also suggested setting up of an (nformation
Technology (nstitute for the purpose of 3esearch and 1e#elopment as well as
4onsultancy in the application of technology to the +anking and Financial sector of the
country. %s recommended by the 4ommittee, (13+T was established by 3+( in 8CCF as
an autonomous centre for 1e#elopment and 3esearch in +anking Technology at
"yderabad.

4%5E 5T-1Y O (4(4(
(4(4( is one of the leading pri#ate sector banks in (ndia, which combines financial
strength with a reputation for inno#ation and a uni#ersal culture that embraces change.
0n &arch L8, E::E (4(4( formally merged with (4(4( bank and emerged as (ndia.s first
-ni#ersal +ank. The strategy of (4(4( bank after the merger with (4(4( 2td. is that of
building a di#ersified portfolio. The merged entity will continue to be into pro@ect finance
and the focus will be to tap the potential in retail financing.
(4(4( bank offers a wide spectrum of domestic and international banking ser#ices to
facilitate trade, in#estment, cross border business, treasury and foreign e*change
ser#ices). (4(4( bank has
been quick to reali6e that E, banking has changed from a somewhat e*perimental
deli#ery #ehicle into an increasingly mainstream one for deli#ery of broad spectrum of
banking products and ser#ices. +asic E, banking ser#ices are rapidly changing from
competiti#e differentiator to competiti#e necessity.
The group has le#eraged on a number of tie,ups to come up with its #arious offering. For
its (nternet banking offering the (4(4( bank uses (nfinity from (nfosys, for its credit card
business its uses =ision 'lus from 'ay 5ys, -5%, for $%' ser#ices the tie,up with
cellular ser#ice pro#iders 0range and %irtel helps reach out to these users, while the $%'
technology is being implemented by the in,house (4(4( (nfotech ser#ice. To le#erage the
)et for its marketing initiati#es (4(4( bank and 5atyam (nfo way ha#e @ointly set up a
?40&? company to promote banking products on the )et. The bank has also entered into
agreements with leading corporate like +'2, 3ediff.com., -sha &artin and Tata
4ommunications for + to 4 solutions in a bid to further strengthen its (nternet banking
product ffering and ser#ices. %lso (4(4( has @oined hands with a consortium led by
4ompaq to take the lead in offering a solution to the (ndian e,commerce community. This
consortium offers a +E+ and +E4 ecommerce payment gateway within (ndia.
The +ank has been offering phone banking free of charge and was first to launch an
(nternet +anking ser#ice in the country named (nfinity. (nfinity now pro#ides a host of
online banking solutions to retail as well as corporate customers. (4(4(.s constant
endea#our in pro#iding more #alue to the customers has resulted in (nfinity being the
front,runner amongst online banking offerings in the country. %lso, in keeping with the
customers need for increased security, 4orporate (nfinity now pro#ides multiple le#els of
authentication besides user (1B password and includes security tokens.
(4(4( also stri#es to be a center for leading research on financial engineering in (ndia,
particularly in the area of #aluation of securities, risk management and deri#ati#es. +y
le#eraging on the groups resources (4(4( pro#ides custom tailored solution that can
support e#en the most comple* business strategy.
(4(4( is now mo#ing all its operations into the era of .#irtual integration.. )ot only has
this drastically reduced costs, but it has also increased and impro#ed its ser#ices to
customers. 8G>> &oney E (ndia offers a unique facility by (4(4( of transferring funds to
(ndia. %dditional modules were added,gifting and reminders to broaden its scope and
enhance (4(4(.s relationship with customers.
The table below gi#es the 5$0T analysis of (4(4(.

4"%22E)<E5 0F T"E ?E,+%)7()< 3E=02-T(0)?
Electronic banking is the wa#e of the future. (t pro#ides enormous benefits to consumers
in terms of the ease and cost of transactions. +ut it also poses new challenges for country
authorities in regulating and super#ising the financial system and in designing and
implementing macroeconomic policy.
Electronic banking has been around for some time in the form of automatic teller
machines and telephone transactions. &ore recently, it has been transformed by the
(nternet, a new deli#ery channel for banking ser#ices that benefits both customers and
banks. %ccess is fast, con#enient, and a#ailable around the clock, whate#er the customer.s
location (see illustration abo#e). 'lus, banks can pro#ide ser#ices more efficiently and at
substantially lower costs. For e*ample, a typical customer transaction costing about K8 in
a traditional ?brick and mortar? bank branch or K:.F: through a phone call costs only
about K:.:E online.
Electronic banking also makes it easier for customers to compare banks. ser#ices and
products, can increase competition among banks, and allows banks to penetrate new
markets and thus e*pand their geographical reach. 5ome e#en see electronic banking as
an opportunity for countries with underde#eloped financial systems to leapfrog
de#elopmental stages. 4ustomers in such countries can access ser#ices more easily from
banks abroad and through wireless communication systems, which are de#eloping more
rapidly than traditional ?wired? communication networks.
The flip side of this technological boom is that electronic banking is not only susceptible
to, but may e*acerbate, some of the same risksMparticularly go#ernance, legal,
operational, and reputationalMinherent in traditional banking. (n addition, it poses new
challenges. (n response, many national regulators ha#e already modified their regulations
to achie#e their main ob@ecti#es ensuring the safety and soundness of the domestic
banking system, promoting market discipline, and protecting customer rights and the
public trust in the banking system. 'olicymakers are also becoming increasingly aware of
the greater potential impact of macroeconomic policy on capital mo#ements.
)E$ 4"%22E)<E5 F03 3E<-2%T035
This changing financial landscape brings with it new challenges for bank management
and regulatory and super#isory authorities. The ma@or ones stem from increased cross,
border transactions resulting from drastically lower transaction costs and the greater ease
of banking acti#ities, and from the reliance on technology to pro#ide banking ser#ices
with the necessary security.
3egulatory 3isk +ecause the (nternet allows ser#ices to be pro#ided from anywhere in
the world, there is a danger that banks will try to a#oid regulation and super#ision. $hat
can regulators doJ They can require e#en banks that pro#ide their ser#ices from a remote
location through the (nternet to be licensed. 2icensing would be particularly appropriate
where super#ision is weak and cooperation between a #irtual bank and the home
super#isor is not adequate. 2icensing is the norm, for e*ample, in the -nited 5tates and
most of the countries of the European -nion. % #irtual bank licensed outside these
@urisdictions that wishes to offer electronic banking ser#ices and take deposits in these
countries must first establish a licensed branch.
1etermining when a bank.s electronic ser#ices trigger the need for a license can be
difficult, but indicators showing where banking ser#ices originate and where they are
pro#ided can help. For e*ample, a #irtual bank licensed in country N is not seen as taking
deposits in country Y if customers make their deposits by posting checks to an address in
country N. (f a customer makes a deposit at an automatic teller machine in country Y,
howe#er, that transaction would most likely be considered deposit taking in country Y.
3egulators need to establish guidelines to clarify the gray areas between these two cases.
2egal 3isk Electronic banking carries heightened legal risks for banks. +anks can
potentially e*pand the geographical scope of their ser#ices faster through electronic
banking than through traditional banks. (n some cases, howe#er, they might not be fully
#ersed in a @urisdiction.s local laws and regulations before they begin to offer ser#ices
there, either with a license or without a license if one is not required. $hen a license is
not required, a #irtual bankMlacking contact with its host country super#isorMmay find
it e#en more difficult to stay abreast of regulatory changes. %s a consequence, #irtual
banks could unknowingly #iolate customer protection laws, including on data collection
and pri#acy, and regulations on soliciting. (n doing so, they e*pose themsel#es to losses
through lawsuits or crimes that are not prosecuted because of @urisdictional disputes.
&oney laundering is an age,old criminal acti#ity that has been greatly facilitated by
electronic banking because of the anonymity it affords. 0nce a customer opens an
account, it is impossible for banks to identify whether the nominal account holder is
conducting a transaction or e#en where the transaction is taking place. To combat money
laundering, many countries ha#e issued specific guidelines on identifying customers.
They typically comprise recommendations for #erifying an indi#idual.s identity and
address before a customer account is opened and for monitoring online transactions,
which requires great #igilance.
(n a report issued in E:::, the 0rgani6ation for Economic 4ooperation and
1e#elopment.s Financial %ction Task Force raised another concern. $ith electronic
banking crossing national boundaries, whose regulatory authorities will in#estigate and
pursue money laundering #iolationsJ The answer, according to the task force, lies in
coordinating legislation and regulation internationally to a#oid the creation of safe ha#ens
for criminal acti#ities.
0perational 3isk The reliance on new technology to pro#ide ser#ices makes security and
system a#ailability the central operational risk of electronic banking. 5ecurity threats can
come from inside or outside the system, so banking regulators and super#isors must
ensure that banks ha#e appropriate practices in place to guarantee the confidentiality of
data, as well as the integrity of the system and the data. +anks. security practices should
be regularly tested and re#iewed by outside e*perts to analy6e network #ulnerabilities
and reco#ery preparedness. 4apacity planning to address increasing transaction #olumes
and new technological de#elopments should take account of the budgetary impact of new
in#estments, the ability to attract staff with the necessary e*pertise, and potential
dependence on e*ternal ser#ice pro#iders. &anaging heightened operational risks needs
to become an integral part of banks. o#erall management of risk, and super#isors need to
include operational risks in their safety and soundness e#aluations.
3eputational 3isk +reaches of security and disruptions to the system.s a#ailability can
damage a bank.s reputation. The more a bank relies on electronic deli#ery channels, the
greater the potential for reputational risks. (f one electronic bank encounters problems
that cause customers to lose confidence in electronic deli#ery channels as a whole or to
#iew bank failures as systemwide super#isory deficiencies, these problems can
potentially affect other pro#iders of electronic banking ser#ices. (n many countries where
electronic banking is becoming the trend, bank super#isors ha#e put in place internal
guidance notes for e*aminers, and many ha#e released risk,management guidelines for
banks.
3eputational risks also stem from customer misuse of security precautions or ignorance
about the need for such precautions. 5ecurity risks can be amplified and may result in a
loss of confidence in electronic deli#ery channels. The solution is consumer educationMa
process in which regulators and super#isors can assist. For e*ample, some bank
super#isors pro#ide links on their websites allowing customers to identify online banks
with legitimate charters and deposit insurance. They also issue tips on (nternet banking,
offer consumer help lines, and issue warnings about specific entities that may be
conducting unauthori6ed banking operations in the country.
T"E &%430E40)0&(4 4"%22E)<E5
+ut the challenges are not limited to regulators. %s the ad#ent of E,banking quickly
changes the financial landscape and increases the potential for quick cross,border capital
mo#ements, macroeconomic policymakers face se#eral difficult questions.
! (f electronic banking does make national boundaries irrele#ant by facilitating
capital mo#ements, what does this imply for macroeconomic managementJ
! "ow is monetary policy affected when, for e*ample, the use of electronic means
makes it easier for banks to a#oid reser#e requirements, or when business can be
conducted in foreign currencies as easily as in domestic currencyJ
! $hen offshore banking and capital flight are potentially only a few mouse clicks
away, does a go#ernment ha#e any leeway for independent monetary or fiscal policyJ
! "ow will the choice of the e*change rate regime be affected, and how will E,
banking influence the targeted le#el of international reser#es of a central bankJ
! 4an a go#ernment afford to make any mistakesJ $ill the spread of electronic
banking impose harsh market discipline on go#ernments as well as on businessesJ
The answers to these questions fall into two emerging strands of thought. First, the
technological re#olutionMparticularly the e*pansion of electronic money but also, more
broadly, electronic ad#ances in banking practicesMcould result in a decoupling of
households. and firms. decisions from the purely financial operations of the central bank.
Thus, the ability of monetary policy to influence inflation and economic acti#ity would
be threatened.
5econd, as electronic banking e*pands, financial transaction costs can decline
significantly. The result would be tantamount to a reduction in the ?sand in the wheels? of
the financial sector machinery, making capital flows e#en easier to effect, with a potential
erosion of the effecti#eness of domestic monetary policy. (n this regard, proponents of the
Tobin ta*Mwhich would ta* short,term capital flows to increase their cost and, thereby,
the sand in the wheelsMwould feel that electronic banking makes an e#en more
compelling case for introducing such a ta*.
$hile electronic banking can pro#ide a number of benefits for customers and new
business opportunities for banks, it e*acerbates traditional banking risks. E#en though
considerable work has been done in some countries in adapting banking and super#ision
regulations, continuous #igilance and re#isions will be essential as the scope of E,
banking increases. (n particular, there is still a need to establish greater harmoni6ation
and coordination at the international le#el. &oreo#er, the ease with which capital can
potentially be mo#ed between banks and across borders in an electronic en#ironment
creates a greater sensiti#ity to economic policy management. To understand the impact of
E,banking on the conduct of economic policy, policymakers need a solid analytical
foundation. $ithout one, the markets will pro#ide the answer, possibly at a high
economic cost. Further research on policy,related issues in the period ahead is therefore
critical.

3(57 &%)%<E&E)T '3()4('2E5 F03 E2E4T30)(4 +%)7()<
+%5E2 40&&(TTEE 3E40&&E)1%T(0)5
4ontinuing technological inno#ation and competition among e*isting banking
organisations and new entrants ha#e allowed for a much wider array of banking products
and ser#ices to become accessible and deli#ered to retail and wholesale customers
through an electronic distribution channel collecti#ely referred to as E,banking. "owe#er,
the rapid de#elopment of E,banking capabilities carries risks as well as benefits.
The +asel 4ommittee on +anking 5uper#ision e*pects such risks to be recognised,
addressed and managed by banking institutions in a prudent manner according to the
fundamental characteristics and challenges of E,banking ser#ices. These characteristics
include the unprecedented speed of change related to technological and customer ser#ice
inno#ation, the ubiquitous and global nature of open electronic networks, the integration
of E,banking applications with legacy computer systems and the increasing dependence
of banks on third parties that pro#ide the necessary information technology. $hile not
creating inherently new risks, the 4ommittee noted that these characteristics increased
and modified some of the traditional risks associated with banking acti#ities, in particular
strategic, operational, legal and reputational risks, thereby influencing the o#erall risk
profile of banking.
+ased on these conclusions, the 4ommittee considers that while e*isting risk
management principles remain applicable to E,banking acti#ities, such principles must be
tailored, adapted and, in some cases, e*panded to address the specific risk management
challenges created by the characteristics of E,banking acti#ities. To this end, the
4ommittee belie#es that it is incumbent upon the +oards of 1irectors and banks. senior
management to take steps to ensure that their institutions ha#e re#iewed and modified
where necessary their e*isting risk management policies and processes to co#er their
current or planned E,banking acti#ities. The 4ommittee also belie#es that the integration
of E,banking applications with legacy systems implies an integrated risk management
approach for all banking acti#ities of a banking institution.
To facilitate these de#elopments, the 4ommittee has identified fourteen 3isk
&anagement 'rinciples for Electronic +anking to help banking institutions e*pand their
e*isting risk o#ersight policies and processes to co#er their E,banking acti#ities.
These 3isk &anagement 'rinciples are not put forth as absolute requirements or e#en
?best practice.? The 4ommittee belie#es that setting detailed risk management
requirements in the area of E,banking might be counter,producti#e, if only because these
would be likely to become rapidly outdated because of the speed of change related to
technological and customer ser#ice inno#ation. The 4ommittee has therefore preferred to
e*press super#isory e*pectations and guidance in the form of 3isk &anagement
'rinciples in order to promote safety and soundness for E,banking acti#ities, while
preser#ing the necessary fle*ibility in implementation that deri#es in part from the speed
of change in this area. Further, the 4ommittee recognises that each bank.s risk profile is
different and requires a tailored risk mitigation approach appropriate for the scale of the
E,banking operations, the materiality of the risks present, and the willingness and ability
of the institution to manage these risks. This implies that a ?one si6e fits all? approach to
E,banking risk management issues may not be appropriate.
For a similar reason, the 3isk &anagement 'rinciples issued by the 4ommittee do not
attempt to set specific technical solutions or standards relating to E,banking. Technical
solutions are to be addressed by institutions and standard setting bodies as technology
e#ol#es. "owe#er, this 3eport contains appendices that list some e*amples current and
widespread risk mitigation practices in the E,banking area that are supporti#e of the 3isk
&anagement 'rinciples.
4onsequently, the 3isk &anagement 'rinciples and sound practices identified in this
3eport are e*pected to be used as tools by national super#isors and implemented with
adaptations to reflect specific national requirements and indi#idual risk profiles where
necessary. (n some areas, the 'rinciples ha#e been e*pressed by the 4ommittee or by
national super#isors in pre#ious bank super#isory guidance. "owe#er, some issues, such
as the management of outsourcing relationships, security controls and legal and
reputational risk management, warrant more detailed principles than those e*pressed to
date due to the unique characteristics and implications of the (nternet distribution
channel.
The 3isk &anagement 'rinciples fall into three broad, and often o#erlapping, categories
of issues that are grouped to pro#ide clarity
8. +oard and &anagement 0#ersight/
E. 5ecurity 4ontrols/ and
L. 2egal and 3eputational 3isk &anagement.

3E<-2%T03Y T0025 T0 0=E340&E 4"%22E)<E5
There are four key tools that regulators need to focus on to address the new challenges
posed by the arri#al of E,banking.
%daptation (n light of how rapidly technology is changing and what the changes mean
for banking acti#ities, keeping regulations up to date has been, and continues to be, a far,
reaching, time,consuming, and comple* task. (n &ay E::8, the +ank for (nternational
5ettlements issued its ?3isk &anagement 'rinciples for Electronic +anking,? which
discusses how to e*tend, adapt, and tailor the e*isting risk,management framework to the
electronic banking setting. For e*ample, it recommends that a bank.s board of directors
and senior management re#iew and appro#e the key aspects of the security control
process, which should include measures to authenticate the identity and authori6ation of
customers, promote nonrepudiation of transactions, protect data integrity, and ensure
segregation of duties within E,banking systems, databases, and applications. 3egulators
and super#isors must also ensure that their staffs ha#e the rele#ant technological e*pertise
to assess potential changes in risks, which may require significant in#estment in training
and in hardware and software.
2egali6ation )ew methods for conducting transactions, new instruments, and new
ser#ice pro#iders will require legal definition, recognition, and permission. For e*ample,
it will be essential to define an electronic signature and gi#e it the same legal status as the
handwritten signature. E*isting legal definitions and permissionsMsuch as the legal
definition of a bank and the concept of a national borderMwill also need to be rethought.
"armoni6ation (nternational harmoni6ation of electronic banking regulation must be a
top priority. This means intensifying cross,border cooperation between super#isors and
coordinating laws and regulatory practices internationally and domestically across
different regulatory agencies. The problem of @urisdiction that arises from ?borderless?
transactions is, as of this writing, in limbo. For now, each country must decide who has
@urisdiction o#er electronic banking in#ol#ing its citi6ens. The task of international
harmoni6ation and cooperation can be #iewed as the most daunting in addressing the
challenges of electronic banking.
(ntegration This is the process of including information technology issues and their
accompanying operational risks in bank super#isors. safety and soundness e#aluations. (n
addition to the issues of pri#acy and security, for e*ample, bank e*aminers will want to
know how well the bank.s management has elaborated its business plan for electronic
banking. % special challenge for regulators will be super#ising the functions that are
outsourced to third,party #endors.

2007()< F03$%31
%n old 4hinese saying goes (f you don.t know where you are going , you will ne#er get
there. <lobally, the financial sector is metamorphosing under the impact of competiti#e,
regulatory and technological forces. The banking sector is currently in a transition phase
with re,alignment, mergers and entry of new players from different industry is becoming
common. &any countries including (ndia are de,regulating their banking sector and
go#ernment policies no longer form an entry barrier to banks competitors. (4(4( +ank,
(1+( +ank, "1F4 +ank and recently 7otak &ahindra +ank are prime e*amples of
these.
Technology has le#eled the playing field the bargaining power of consumers is
increasing, switching costs are becoming lower and consumer loyalties are harder to
retain. 'rimary goal of the banking sector including e#ery +ank is mainly to make profit,
which in turn is ploughed back to increase business and reach, and pay di#idends or share
profits to the stakeholders. This is perfectly correct, yet generic goal. &ore o#er the
product (schemes) differentiation is #ery difficult for banks as most of the products sold
are constrained by legal or industry regulations. )ow, if you are already thinking about
Technology as a tool in +anking you could probably set some of these goals
! 5elling financial products and ser#ices
! 4utting operational costs
! +randing P &arket recognition
! 7eeping profitable customers
E#ery day more and more people are turning to the Technology for their personal
banking. (t is a safe, con#enient way to shop for financial ser#ices, maintain bank
accounts and conduct business EG hours a day. E#ery one of us has always en@oyed a
special relationship with their neighborhood bank. $hy are so many people suddenly
choosing their personal computers as the new way to #iew and manage their moneyJ
Auite simple , because it is a #aluable option to ha#e. +ank customers can sa#e time by
banking online. There is no need to stand in one more line to perform the most basic
transactions when they can be done quickly from the desktop '4 anytime, day or night.
+ut e#en with more complicated transactions or in#estment decisions, people like ha#ing
direct control o#er their finances themsel#es. They find it con#enient to access all of
their financial information in one place. Ease of use is one of the most important factors.
)a#igation through online banking should be simple and intuiti#e. +anks need to appeal
to customers who may not be technologically sophisticated, and should not require an
engineering degree to get started or use the ser#ice. 4ustomers also choose banks whose
online ser#ices are reliable. &ost +anks now offers a comprehensi#e range of financial
products and ser#ices, including a F3EE checking account and internet bill paying
ser#ices. (n addition, an array of checking accounts are a#ailable in which you may also
request a F3EE check card. "ence most +anks of following Electronic +anking or
(nternet +anking F3EE ha#e following ser#ices
<et your balance details, 0btain your last L transaction details, 3equest a cheque book,
5top a cheque payment, Enquire cheque status, 3equest an account statement, <et Fi*ed
1eposit details, +ill payment details for electricity, mobile phone and telephone ser#ices,
4on#enience of setting an operati#e account, 1esignate a particular account linked to
your customer id as the operati#e account. 4ustomer 5er#ice a#ailable EG hours a day, 9
days a week E,banking +enefits
+enefits for the bank should always reflect benefits for the customer of banking ser#ices.
4-TT()< 0'E3%T(0)%2 405T5
4utting transaction costs results in higher profit margin for the banks. The enclosed chart
clearly indicates the benefits of E,banking o#er traditional methods banking.
+anking &ethod used 4ost per Transaction for +ank
8 &anual, personal 3s. G: O 8::B, depending on +ank
"igher for Foreign +anks, as salaries and o#erheads are higher
E %T&s 3s. E:,L:B, only
L (nternet B '4 3s. >B, only
G Telephone +anking 3s. 8DB, only
%s e#ery +ank wants to be profitable E,banking is becoming necessity for sur#i#al.
Electronic banking pro#ides enormous benefits to consumers in terms of the ease and
cost of transactions
Taking o#er customers from competition
+anks seeking new customers can use ad#antages of new distribution channels and
acquire most profitable customer from their competition. (t is a fact that people using E,
banking are the ones who consider time as money and are the one with loads of money.
&a@ority of banks see >:R of their business coming @ust E:R of the client base. This
E:R customer base is #ulnerable if the bank does not appreciate their time.
+uilding stronger customer relations
0ffering new ser#ices, results in impro#ed customer e*perience and stronger customer
retention.
+igger share in customer;s wallet
(t is well known fact that customers tend to keep their finances in one place. +anks
holding customer accounts therefore ha#e opportunity to cross sell different products and
ser#ices. 3ecent studies show that banks in the -5% lost E:R of their most #aluable
customers in fa#or of non,bank F( fle*ible enough to offer di#ersified ser#ices and
products.

(dentifying profitable customers
4ustomers using E,banking ser#ices ha#e higher balances than a#erage branch teller
customers. (n#estments are more than twice higher than the a#erage.
4onclusion
From all of this, we ha#e learnt that information technology has empowered customers
and businesses with information needed to make better in#estment decisions. %t the
same time, technology is allowing banks to offer new products, operate more efficiently,
raise producti#ity, e*pand geographically and compete globally. % more efficient,
producti#e banking industry is pro#iding ser#ices of greater quality and #alue.
E,banking has become a necessary sur#i#al weapon and is fundamentally changing the
banking industry worldwide. To day, the click of the mouse offers customers banking
ser#ices at a much lower cost and also empowers them with unprecedented freedom in
choosing #endors for their financial ser#ice needs. )o country today has a choice whether
to implement E,banking or not gi#en the global and competiti#e nature of the economy.
The in#asion of banking by technology has created an information age and
commoditi6ation of banking ser#ices. +anks ha#e come to reali6e that sur#i#al in the new
e,economy depends on deli#ering some or all of their banking ser#ices on the (nternet
while continuing to support their traditional infrastructure.
The rise of E,banking is redefining business relationships and the most successful banks
will be those that can truly strengthen their relationship with their customers.
$ithout any doubt, the international scope of E,banking pro#ides new growth
perspecti#es and (nternet business is a catalyst for new technologies and new business
processes. $ith rapid ad#ances in telecommunication systems and digital technology, E,
banking has become a strategic weapon for banks to remain profitable. (t has been
transformed beyond what anyone could ha#e foreseen ED years ago.
Two years ago, E,banking was a strategic ad#antage, nowadays/ it is a business reality, if
not a necessity.