6 - Internet Banking - Furture Banking

Prepared by Uday Naickar
INTERNET BANKING
Uday Naickar BMS - Finance
INTERNET BANKING
ORIGIN
In 1990 the Wells Fargo Bank, based in California USA, introduced the world's first online banking service. Since the introduction of the first service many banks have started their electronic banking services with access available via your PC, mobile phone or an interactive TV.
DEFINITION
The term Internet banking refers to the use of the Internet as a remote delivery channel for banking services. Services include the traditional ones, such as opening an account or transferring funds to different accounts, and new banking services, such as electronic online payments (allowing customers to receive and pay bills on a banks web site).
WHAT IS INTERNET BANKING?

Internet banking refers to a system that enables bank customers to access accounts and general information on bank products and services through a Personal computer (PC) and the Internet. Internet banking products and services can include 1.Wholesale products for corporate customers. Cash management. Wire transfer. Automated clearinghouse (ACH) transactions. Bill presentment and payment. 2.Retail and fiduciary products for consumers. Balance inquiry. Funds transfer. Downloading transaction information. Bill presentment and payment. Loan applications. Investment activity. Other value-added services 3.Other Internet banking services Uday Naickar BMS - Finance 2
Prepared by Uday Naickar Internet access as an Internet Service Provider (ISP). Information systems technology
INTERNET BANKING
Ultimately, the products and services obtained through Internet banking may mirror products and services offered through other bank delivery channels.
PRODUCT AND SERVICES OFFERED THROUGH INTERNET BANKING The product and services offered by the banks on the Internet can be divided into three types: Informational kiosks: it provides information regarding various products and services offered by the bank to its customer and others in general. The banks site receives and answers queries of customer through e-mails. Basic Internet banking: It enables the customers to open new accounts check account balance and pay utility bills. E-commerce banking: Banks function as electronic market place enabling customers to use their accounts for money transfers, bills payment, purchase and sale of securities and online real time purchases and payments.
EXAMPLE Citibank
See up-to-date account information View transaction details View account statement for up to 12 months Order demand drafts to couriered free to over 200 locations Order a cheque book Stop payments Request a deposit slip Pay utility bills Email queries
ICICI Bank Account information - Summary of accounts and transactions Uday Naickar BMS - Finance 3
Prepared by Uday Naickar Bill payment Funds transfer including third-party transfers Request for cheque book, stop payment, account opening, Reporting loss of ATM card Online e-shopping payments Communication with Account Manager
INTERNET BANKING
Personalized viewing of content updates personal finance, select articles on ecommerce, information technology, lifestyles, travel and news.
HDFC Bank
Real-time account information including transactions Transfer money between accounts Bill payment facility Third party funds transfer within HDFC bank Request for Demand Draft/Bankers Cheque Stop payment requests Opening fixed-deposit accounts Sending messages to the bank via e-mail
Global Trust Bank Account information and transaction details Depository accounts Fund transfer between branches Requests for Cheque Books, Demand Drafts\ Bankers Cheque, Term Deposit Account Opening, Renewal of Term Deposits and Change of Address Email queries Customize content as per the viewing preferences
Prepared by Uday Naickar Global E-banking practices
INTERNET BANKING
Deposit Products online including Checking Savings, Money Market and Certificate of Deposits Check Accounts Information, Receive airlines mileage for banking with certain banks co promotion Receive and pay e-bills online Download account information to the personal finance management software . Access financial planning tools to calculate loan payments/ tax burden View time-trend of various financial indicators, including interest rates Transfer funds between accounts Interactive tools to help customers find an account that best suits their needs Single login provides access to multiple accounts held at a Bank Internal transfers from deposit A/c to loan A/c, Including Credit Cards Online mortgaging View a/c balances and transfer money through Web-enabled Cell Phones or PDAs.
IMPORTANCE OF INTERNET BANKING

COMPETITION: Banks feel the need to offer I-banking services today just to keep up with the competitors and to be able to retain their existing customers.
NEW MARKETS: The Internet is not only a low cost approach to determine new distribution channels but also to establish a presence in new and up coming markets.
CUSTOMER SERVICE: I-banking offers banks an opportunity to improve on their customer service by collecting and managing information pertaining to their customers and their individualistic preferences.
REVENUE POTENTIAL: I-banking also provides an opportunity to build on their relationships with their existing customers. For Example, bank Web portals could offer purchasing services for business travel or insurance to generate more revenue.
INTERNET BANKING
REDUCE COSTS: E-banking is an opportunity for banks to reduce their overhead costs as the need for physical branches is drastically cut down. The running cost of an ordinary bank account for 50-60 per cent of their revenues, whereas the running cost of Internet banking are a mere 15-20 per cent of revenues. For example, in India, Net banking is estimated to cost just Rs. 2 per transaction compared to the RS. 43 incurred while banking at the branch.
TYPES OF INTERNET BANKING

More and more banks are transforming their businesses by using Internet technology to develop or expand relationships with their customers. The extent to which the Internet is used in a bank depends on the relative maturity of the bank in regard to Internet technology. Banks offer Internet banking in two main ways. An existing bank with physical offices, ordinarily termed a brick-and mortar bank, can establish a web site and offer Internet banking to its customers as an addition to its traditional delivery channels. An alternative is to establish either a virtual, branchless or Internet-only bank. The computer server or bank database that lies at the heart of a virtual bank may be housed in an office that serves as the legal address of such a bank or at some other location. Virtual banks provide customers with the ability to make deposits and withdrawals via automated teller machines (ATMs) or through other remote delivery channels owned by other institutions. Currently, there are three basic kinds of Internet banking are being employed in the marketplace:
INFORMATIONAL This is the basic level of Internet banking. Typically, the bank has marketing information about the banks products and services on a stand-alone server. Risks associated with these operations are relatively low, as informational systems typically have no path between the server and the banks internal network. This level of Internet banking can be provided by the bank or can be outsourced. While the risk to a bank is relatively low, the data on the server or web site may be vulnerable to alteration. Appropriate controls, therefore, must be in place to prevent unauthorised alterations of the data on the banks server or web site. Uday Naickar BMS - Finance 6
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COMMUNICATIVE This type of Internet banking system allows some interaction between the banks systems and the customer. The interaction may be limited to electronic mail, account inquiry, loan applications or static file updates (name and address changes). Because these servers ordinarily have a direct path to the banks internal networks, the operational risk is higher with this configuration than with informational systems. Controls should be in place to prevent, monitor and alert management of any unauthorised attempt to access the banks internal networks and computer systems. Virus detection and prevention controls are also important in this environment.
INFORMATIONAL
TYPE OF INTERNET BANKING
TRANSACTIONAL
COMMUNICATIVE
TRANSACTIONAL This level of Internet banking allows customers to directly execute transactions with financial implications. There are two levels of transactional Internet banking, each with a different risk profile. The basic transactional site only allows a transfer of funds between the accounts of one customer and the bank. The advanced transactional site provides a means for generating payments directly to third parties outside of the bank. This can take the form of bill payments via a bank official check or electronic funds transfer/automated clearing house entries. Many banks are also offering payments from consumer to consumer using either payment method. When the transfers of funds are allowed to a point outside of the bank, the operational risk increases. Unauthorised access in this Uday Naickar BMS - Finance 7
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environment can lead or give rise to fraud. Since a communication path is typically complex and may include passing through several public servers, lines or devices between the customers and the banks internal networks, this is the highest risk architecture and must have the strongest controls.
ADVANTAGES AND DISADVANTAGES

ADVANTAGES OF INTERNET BANKING Convenience: Unlike your corner bank, online banking sites never close; they're available 24 hours a day, seven days a week, and they're only a mouse click away. Ubiquity: If you're out of state or even out of the country when a money problem arises, you can log on instantly to your online bank and take care of business, 24/7. Transaction speed: Online bank sites generally execute and confirm transactions at or quicker than ATM processing speeds. Efficiency: You can access and manage all of your bank accounts, including IRAs, CDs, even securities, from one secure site. Effectiveness: Many online banking sites now offer sophisticated tools, including account aggregation, stock quotes, rate alerts and portfolio managing programs to help you manage all of your assets more effectively. Most are also compatible with money managing programs such as Quicken and Microsoft Money.
DISADVANTAGES OF INTERNET BANKING Start-up may take time: In order to register for your bank's online program, you will probably have to provide ID and sign a form at a bank branch. If you and your spouse wish to view and manage your assets together online, one of you may have to sign a durable power of attorney before the bank will display all of your holdings together. Learning curve: Banking sites can be difficult to navigate at first. Plan to invest some time and/or read the tutorials in order to become comfortable in your virtual lobby. Bank site changes: Even the largest banks periodically upgrade their online programs, adding new features in unfamiliar places. In some cases, you may have to re-enter account information.
INTERNET BANKING
The trust thing: For many people, the biggest hurdle to online banking is learning to trust it. Did my transaction go through? Did I push the transfer button once or twice? Best bet: always print the transaction receipt and keep it with your bank records until it shows up on your personal site and/or your bank statement.
INTERNET BANKING
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Prepared by Uday Naickar PORTERS 5-FORCES IN INTERNET BANKING
INTERNET BANKING
Porter identified the five competitive forces, which tend to drive down the profitability of any industry as comprising Threat of competitors Barriers to entry Bargaining power of suppliers Bargaining power of buyers and Threat of substitutes. The application of the Porters Model to the banking industry clearly shows that this sector has reached the mature stage of its lifecycle. The trend towards electronic delivery of products and services is particularly important to the banking industry, where the shift is partly as a result of the consumers demand, but is also partly a result of the competitive environment. Some specific factors that have conspired to create the new competitive environment for banking include: changing consumer needs and perceptions, globalization, technological innovations, and competition from non-banking entities and increasingly, consumers expect online services from their financial institutions. Large organizations initially introduced Electronic Banking or Internet banking to simplify their salary and payroll problems.
BARRIERS TO ENTRY: Barriers to an entry in banking industry no longer exist. Competitors can come from any industry to disintermediate banks. Product differentiation is very difficult for banks, since most products sold in retail banking are constrained by legal or industry regulations, and, are therefore, readily limited.
BARGAINING POWER OF SUPPLIERS: Theoretically, the bargaining power of suppliers would be high in this industry, as there are a small number of fairly large players in the industry. But, the development of online banks and financial intermediaries in areas such as mobile banking or home banking has lowered the bargaining power of the suppliers.
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HIGH THREATS OF NEW ENTRANTS
LOW BARGAINING POWER
NEW ENTRANTS
HIGH BARGAINING POWER
SUPPLIERS
COMPETITORS
BUYERS
SUBSTITUTES
LOW THREATS OF SUBSTITUTES
BARGAINING POWER OF CONSUMERS: Bargaining power of Consumers is increasing. Switching costs are becoming lower with Internet Banking gaining momentum and as a result consumers loyalties are harder to retain.
THREAT OF SUBSTITUTES: Competition from the non-banking financial sector is increasing rapidly. Sony and Software giants such as Microsoft are attempting to replace the banks as intermediaries.
ADVANTAGE
Customer Consumers can use their computers and a telephone modem to dial in from home or any site where they have access to a computer. The services are available seven days a week, 24 hrs a day Transactions are executed and confirmed almost instantaneously. Uday Naickar BMS - Finance 12
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Also, the range of transactions available is fairly broad. Consumers can do everything from simply checking on an account balance to applying for a mortgage. Time saving and convenient.
Organizations Improve customer access Facilitate the offering of more services Increase customer loyalty Attract new customers Increase customer satisfaction Reduction in costs, as the need for physical branches is reduced 24x7 client servicing for general services Reduction in cost, as the need for manpower is reduced Transparent and fast response Directly reflected on the account statement, need for data entry is eliminated.
BENEFITS OF INTERNET BANKING

BANKS Price: In the long run a bank can save on money by not paying for tellers or for managing branches. Plus, it's cheaper to make transactions over the Internet.
Customer Base: The Internet allows banks to reach a whole new market- and a well off one too, because there are no geographic boundaries with the Internet. The Internet also provides a level playing field for small banks who want to add to their customer base.
Efficiency: Banks can become more efficient than they already are by providing Internet access for their customers. The Internet provides the bank with an almost paper less system.
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Customer Service and Satisfaction: Banking on the Internet not only allows the customer to have a full range of services available to them but it also allows them some services not offered at any of the branches. The person does not have to go to a branch where that service may or may not be offer. A person can print of information, forms, and applications via the Internet and be able to search for information efficiently instead of waiting in line and asking a teller. With more better and faster options a bank will surly be able to create better customer relations and satisfaction.
Image: A bank seems more state of the art to a customer if they offer Internet access. A person may not want to use Internet banking but having the service available gives a person the feeling that their bank is on the cutting image.
CHANGING THE RULES

ENTRY TO MARKET: The Internet has helped demolish one of the biggest entry barriers to the banking market the need for a large bank network. The lower start-up costs and maintenance of the Internet Bank Branch makes it more attractive for start-up banks and for those wishing to break into new markets.
ONLINE SERVICING: Many new banking services for corporations will soon become available via the Internet and those already online will be greatly improved. With advances in technology, more and more corporations will be able to access the most upto-date rates, select and confirm their deal, submit settlement instructions and confirmations via the Web and finally, check their accounts as the transaction is carried out. TURNING THE POWER OF THE INTERNET INWARD: I-banking technology alone cannot only enhance what the bank can do for its customer, but it can also help the employees do their jobs effectively. For example: Union Bank of California has turned the search power of the Internet inward by creating information portals. These corporate
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Web pages allow employees to create customized desktops with information relevant to their jobs.
NEW BANKS: The Internet has inspired many corporations to throw their own hat into the banking arena although they appear to be primarily with the retail-banking sector at present. In Japan, 7-Eleven, Itochu and Sony have announced plans to venture into banking. The success or failure of these new banks is hugely dependent on their branding efforts, the proposition offered and its strategic execution.
THE DOS OF NET BANKING

RELATIONSHIP: Banks and other financial institutions in India cannot go completely virtual, physical branches help forge a relationship with the customer that a virtual bank cannot. Most customers in India prefer direct and personal contact with their bankers.
PERSONALIZATION: Banking Solutions become truly personalized when they are able to respond to the changing customer needs. For Example, Software that might tell you which credit card balance to pay off first, or alert you in advance when your Cheque will bounce. This level of personalization is still lacking in the banking solutions offered by Indian banks.
INTEGRATION: Another importance aspect is integrating customer service interface and channels, so that the customer deals with a single channel that caters to diverse needs such as kiosks, ATMs, Web TV, mobile phones, pagers and branch counters. Banks need to be one stop shops for an entire range of personal finance products from loans and insurance to mutual funds and even tax savings instruments. This is being done by account aggregators such as E-Balance and Vertical One that lets you log into the website and track information as diverse as bank and credit card balances, value of investments, and frequent-flier miles from several sites, each of which has its own username and password. Uday Naickar BMS - Finance 15
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INNOVATION: Nowadays, banks need to depend on product innovation, expanding their range of their products and service offerings. Apart from just online accounts, ebanks would need to tailor specific products for the Internet, like online bill presentment or credit card with instant online approval. Many Internet Banks like Egg have taken the lead in offering innovative products like Egg card a credit card that features an introductory zero percent interest rates.
HOW INTERNET BANKING SECTION WORKS

Individual or corporate Internet banking customer logins with approved user name and password or via smart card. Customer request is sent to banks web server and passed to Internet banking. Customers login is authenticated and a response is sent back to the customer. Customer selects a banking function, such as Account Balance Inquiry. The request for balance is transmitted from the browser (Cipher Strength 128- bit) to the banks web server. Internet banking generates a transaction request based on the message received. The transaction request is sent to the transaction application services. The application services route the transaction to the back-end system holding the customers account information. Customers account information is identified, and a response is created and sent back to Internet banking. Internet banking converts the message into HTML and presents it as confirmation to the banking customer via a web page.
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SECURITY
Security is the paramount issue, since access via dial-up telephone and the Internet both represent an opening of the computer system to outside world and potentially unauthorized users. Remote banking activities may also be conducted through other interactive devices, such as automated teller machines, telephones, and televisions. Therefore proper System security required to be implemented to safe guard against unauthorized access to the financial institutions networks, systems, and databases. Bank should control user access to prevent a security compromise of internal systems. Customer data must be protected from unauthorized access or alteration during transmission over public networks. Bank should develop methods to maintain confidentiality, ensure the intended person receives accurate information, and prevent eye dropping by others. In addition, to ensure non-repudiation, undeniable proof of participation by both the sender and the receiver in a transaction must be created. Most Indian enterprises equate security with anti-virus or firewall solutions. It is only natural that business customers show concern about sending their personal details and account numbers over the Internet. The security measures are implemented partly by the bank and partly by the customers themselves through their own vigilance. Security is divided into FOUR levels
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INFORMATION SECURITY: Information security enables information to be shared, while ensuring protection of information and computing assets. It comprise of three basic components: Confidentiality: protecting sensitive information from unauthorised disclosure or intelligible interception. Integrity: safeguarding the accuracy and completeness of information and software. Availability: ensuring that information and vital service are available to users when required.
TRANSACTION SECURITY: The data exchanged between the bank and a customer is coded or encrypted using secure servers with 40/128 bit SSL1 servers, which sit behind firewalls. The likelihood of a computer hacker breaking through these security measures is very remote.
ACCESS SECURITY: On registration, normally two levels of security are used each time the customer accesses their account details with a user ID and password. A third level of authentication can be built in also, to protect misuse, for example querying the users date-of-birth.
ACCOUNT HOLDERS VIGILANCE: However tight the banks security system is, it is not sufficient on its own. Business customers need to play their part too and exercise caution when banking online like not divulging their pin number or password to any third party, or by not leaving their pin lying around.
KEY SECURITY FOR BANKS AND CUSTOMER

Authorization - Authorization involves the pre-determination of permissible activities. Customers have access only to their own accounts and perform only authorized functions.
Access Controls - Traditional access controls, such as user identification, passwords, and personal identification numbers (PINs), should be implemented for PC banking Uday Naickar BMS - Finance 18
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customers. However, since the effectiveness of these controls is greatly influenced by the customer, there should be proper steps to educate the customer in this area.
Authentication - Authentication is used to verify and recognize the identity of parties to a transaction. Financial institutions may communicate with customers they never physically meet resulting in opportunities for misrepresentation. Digital certificates are being explored as methods of authentication in the PC banking environment. Authentication is the primary component of non-repudiation. Transactions on the Internet or any other telecommunication network must be secure to achieve a high level of public confidence. In cyberspace, as in the physical world, customers, banks, and merchants need assurances that they will receive the service as ordered or the merchandise as requested, and those they know the identity of the person they are dealing with. Banks typically use symmetric (private key) encryption technology to secure messages and asymmetric (public/private key) cryptography to authenticate parties. Asymmetric cryptography employs two keys a public key and a private key. These two keys are mathematically tied but one key cannot be deduced from the other. For example, to authenticate that a message came from the sender, the sender encrypts the message using their private key. Only the sender knows the private key. But, once sent, the message can be read only using the senders public key. Since the message can only be read using the senders public key, the receiver knows the message came from the expected sender. Internet banking systems should employ a level of encryption that is appropriate to the level or risk present in the systems. But stronger levels of encryption may slow or degrade performance. Therefore there should be balance in security needs with performance and cost issues.
Secure Data Storage - Confidential information or highly sensitive data should be stored securely. Management should consider storing sensitive data in encrypted form and implementing stringent access controls.
Encryption - The Internet banking services work with both Netscape and Microsoft Internet Explorer browsers that support 128-bit encryption, which is the most popular Uday Naickar BMS - Finance 19
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form of encryption generally available today. Encryption technology disguises information to hide its meaning and enhances confidentiality by restricting information access to only intended users. Encryption-based methods can also be used to verify message authenticity and accuracy. Information is encrypted and decrypted with a cipher and key using specialized computer hardware or software. Secrecy of the key and complexity of the cipher are crucial for the success of encryption controls. Encryption is the process of converting information into a more secure format for transmission. This means that plain text is converted to scrambled code while transmitted, and then decrypted back to plain text at the receiving end of the transmission. It is comparable to writing a letter, converting it to a code, putting it in an envelope and mailing it. The process of converting the information to a code helps to safeguard your privacy, as long as no one can intercept the envelope and decipher the code. Currently, there are 2 levels of encryption generally available in web browsers: 40-bit encryption, and 128-bit encryption. The 128-bit browser offers the highest level of encryption generally available in North America today and provides the best protection when transmitting confidential data over the Internet. Firewalls - A firewall is hardware and software placed between two networks. The intent is for all network traffic, regardless of the direction of flow, to pass through this firewall. The firewall then can check all traffic to make sure it is authorized and prevent unwanted traffic from entering the system. The firewall also can check the traffic to determine whether it contains any unauthorized attachments, such as viruses. Firewalls need to be efficient to catch any traffic that is unauthorized in order to prevent potential harm to the institution. Firewalls are physical devices, software programs, or both, that enhance security by monitoring and limiting access to computer facilities. They create a security barrier between two or more networks to protect the institutions computer system from unauthorized entry. Filtering routers may be incorporated into the firewall system to screen data traffic and direct messages to certain locations.
Digital signature: A mathematical encryption technique that associates a specific person with a given computer file and indicates that the file has not been altered since that Uday Naickar BMS - Finance 20
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person signed it; should not be confused with making an electronic representation of a written signature. Digital signatures were accorded legal acceptance by the IT ACT. The controller of certifying authorities, set up to implement the act, has issued licenses to four players who can issues digital signatures. These are Safescrpt limited, National informatics center, Institute for Development and Research in Banking Technology and Tata Consultancy Services. Government of India is planning to extend this facility to leading nationalized bank of India.
TYPES OF ONLINE ATTACKS Banks and service providers need to guard against various types of online attacks. The object of an attack may vary. Attackers may try to exploit known vulnerabilities in particular operating systems. They also may try repeatedly to make an unauthorized entry into a Web site during a short time frame thus denying service to other customers. Types of attacks may include:
Sniffers Also known as network monitors, this is software used to capture keystrokes from a particular PC. This software could capture logon IDs and passwords.
Guessing Passwords Using software to test all possible combinations to gain entry into a network. Brute Force A technique to capture encrypted messages then using software to break the code and gain access to messages, user IDs, and passwords.
Random Dialing This technique is used to dial every number on a known bank telephone exchange. The objective is to find a modem connected to the network. This could then be used as a point of attack.
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Prepared by Uday Naickar Social Engineering
INTERNET BANKING
An attacker calls the banks help desk impersonating an authorized user to gain information about the system including changing passwords.
Trojan Horse A programmer can embed code into a system that will allow the programmer or another person unauthorized entrance into the system or network.
Hijacking Intercepting transmissions then attempting to deduce information from them. Internet traffic is particularly vulnerable to this threat. Hacker A computer operator who breaks into a computer without authorization, for malicious reasons, just to prove it can be done, or other personal reasons.
BUDGETING FOR INTERNET BANKING

One of the problems for the bank is that any information technology project is the cost escalation. When banks are planning to implement an IT project they must take a detailed look at the costs involved. If cost is not calculated properly, the cost calculation can overshoot by 100 to 200 percent. And if the IT project is in crores of rupees, one cannot overemphasise the consequences. Important banking projects these days -such as centralized core banking and Internet Banking. Easily come in this price range.
PRODUCT COST STRUCTURE: The cost structure in any proposal from a vendor will have three components. First components are One-time license fee, which the vendor will charge the bank for Internet banking. Second component is the annual maintenance charge or the Annual License Fee. This can vary from 10 to 20 percent of the software cost. This usually includes all the enhancements of the product that the vendor will release from time to time. Uday Naickar BMS - Finance 22
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Third component will be the professional service charges. Service charges will be applicable to all activities in which the professional of the vendor will be working on banks Internet banking or IT project. The last component is most prone to cost surprises.
PROFESSIONAL SERVICE CHARGES: In the contract of implementation and support this rate will be marked as per-day fee for vendor professionals and allowance. Whenever bank want to implement a core banking system, or internet banking system, it will have to be approved by your Board of Directors, simply because of the financial implication ie if bank finds that the entire budget is over but the project is only 50 percent complete. The main culprit here is the professional fee for consultants. It is not always necessary that the vendor engineers are the most proficient ones. In fact most of the vendors send only the second or third line of consultants / engineers for implementation IT projects. This means that while the vendor consultants are refining their skills on their product, bank keep paying more and more. Or banks become their training ground. Besides, the professional service effort is always an estimated effort; bank cannot bind the vendor once the work Agreement is signed off. In situations where the system integration has to be done between two different systems, such as in the case of Internet banking, which have to be connected to the core banking system-using APIs (Application Programming Interface), the risk of cost escalation on this account increases many folds.
The one-way bank has adopted to solve such a problem is to provide a fixed charge for professional services. Bank mainly selected the Internet banking product through a quotation process from a number of vendors. And bank insists on a fixed charge for the professional services. Another alternative banks follow is to have a man-days budget with a variation capital incorporated in the contract. FIXED MANPOWER BUDGET: If bank manage to achieve a professional services cost capitalization, will need to show some discipline. The worst area where banks let vendors down and compel them to be dishonest is the decision making process. When an IT project is launched, manpower resources are committed to it. These resources are highly Uday Naickar BMS - Finance 23
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paid besides having huge overhead costs. The decision making process in most of the banks is such that in spite of the budget having been approved for the IT project, for every decision - be it for a business requirements specifications or be it for an item of expenditure- days and sometimes weeks are lost. This will throw any project plan and manpower budget out of gear. And a vendor, who has calculated and committed the price quotation on a reasonably tight budget, will incur heavy losses. Hence, if bank manage to get a fixed manpower budget in the contract, bank should have a foolproof decisionmaking and expenditure sanction machinery in place for the IT project.
The essence here is that unless bank finds a way to control the professional services charge for the project, bank entire financial estimates for the project is at the risk of going for a toss. At the same time if vendor commits bank a fixed professional service charge, and bank do not support vendor with an efficient decision making system for the it project, the vendor will have no option but to abandon the project mid-way. Both the conditions have equally unpleasant consequences for bank.
HIDDENCOSTS Rather these are unforeseen costs, some of the banks normally fail to see at the beginning when they are planning for Internet banking budget. Some of the Internet banking expenditure items that is left out at the time of initial budgeting. Individually, these appear to be small; together they become a substantial part of the total cost. And if bank miss out on these, bank wisdom in estimation is going to be questioned later on. 1.Hardware and Software for Backup System and Test System 2. Firewall System - Hardware, OS, Software 3. Firewall for back up system 4. Encryption mechanism 5. Web Server Certificates. 6. Leased line and backup connection costs 7. Security policy design, validation and auditing costs. 8. Disaster Recovery Center ( DRC) costs 9. Risk Management and Contingency Plan Uday Naickar BMS - Finance 24
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10. Costs of hiring / buying computers for project implementation and UAT. 11. Costs involved in hiring consultant(s) for techno-legal planning. 12. Process Change Management 13. Setting up new Data Centre or expanding the existing one 14. Leased line and encryption of data between Data Centre and DRC. 15. New support resources and their training. 16. Telephone bills, Transport and hotel charges for consultants. 17. Additional costs due to people working late, working on holidays and weekends.
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The banking industry is expected to be a leading player in E-business. While the banks in developed countries are working primarily Internet as non-branch bank, banks in the developing countries use the Internet as an information delivery tool to improve relationship with customer. Banks have established an Internet presence with various objectives. Most of them are using the Internet as new distribution channel. Financial services, with the use of Internet, may be offered in an equivalent quantity with lower costs to the more potential customers. There may be contacts from each corner of the world at any time of day or night. This means that banks may enlarge their market without opening new branches. The banks in the US are using the web to reach opportunities in three different categories to market information, to deliver banking products and services, and to improve customer relationship.
UK In early 2001, approximately 60% of E-business in the Uk was concentrated in the financial services sector, and with the expected 10- fold increase of the British e-business market in 2004, the share of the financial service will further increase. Around one fifth of finish and Swedish bank customer are banking online, while in the US, according to UNCTAD, online banking is growing at annual rate of 60% and the number of online accounts reached 15million in 2003. Various well know banks are as follows: Barclays http://www.barclays.co.uk/ Abbey National http://www.abbeynational.co.uk/ Cahoot http://www.cahoot.co.uk/ Smile http://www.smile.co.uk/ Nationwide http://www.nationwide.co.uk/
ASIA In Asia, the major factor restricting growth of I banking is security, in spite of several counties being well connected via Internet. Access to high-quality E-banking products is an issue as well. Majority of banks an Asia are just offering basic service compared with those of developed countries. CITIBANK, which has marketed a range of I-banking Uday Naickar BMS - Finance 27
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products in the US for years, didnt ad bill payment to its Hong Kong service until last year and even then, for only 11 companies. HSBC, leading bank in Hong Kong, introduced Ibanking last summer. Still, I-banking seems to have a future in Asia. Ibanking will succeed if the basic features, especially bill payment, are handled well. Bill payment was the most popular feature, cited by 40% of respondent. However, providing this services would be difficult for banks in Asia because it requires a high level of security and involves arranging transactions with a variety of players.
US In 2001, over 50% of the banks in the US were offering I-banking service. However, large banks appeared to have a clear advantage over small banks in the range of services they offered. Some banks in the US were targeting their Internet strategies towards business customers. Apart from affecting the way customers received baking services, Ibanking was expected to influence the banking industry structure. The economy of Ibanking was expected to favor large banks because of economies of scale and scope, and to advertise heavily. Moreover, I-banking offered entry and expansion opportunities that small banks traditionally lacked. Citibank http://www.citibank.com/ Egg http://www.egg.com/ Intelligent Finance http://www.if.com/ Natwest http://www.natwest.com/ First Direct http://www.firstdirect.com/
EUROPE In Europe, the Internet is accelerating the reconfiguration of the banking industry into three separate businesses i.e. production, distribution and advice. This reconfiguration is being further driven by the Internet, due to the combined impact of Emergence of new and more focused business models in the banking sector. New technological capabilities that reduces baking relationship and transaction costs.
28
INTERNET BANKING
High degree of uncertainty over the impact that new entrants will have on current business models in the banking sector. Through I-banking in the Europe is still in the evolutionary stage, it is clear that it is having a significant impact on traditional banking activities. Unlike in the US, through large banks in the Europe have a competitive edge due to their ability to invest heavily in new technologies, they are still not ready to embrace I-banking. Hence, medium- sized banks and start-ups have an important role to play on the I-banking front if they can take concrete measure quickly and effectively. PAYPAL (GLOBAL ONLINE BANKING) Founded in 1998, PayPal, an eBay Company, enables any individual or business with an email address to securely, easily and quickly send and receive payments online. PayPal's service builds on the existing financial infrastructure of bank accounts and credit cards and utilizes the world's most advanced proprietary fraud prevention systems to create a safe, global, real-time payment solution. PayPal has quickly become a global leader in online payment solutions with 50 million account members worldwide. Available in 45 countries around the world, buyers and sellers on eBay, online retailers, online businesses, as well as traditional offline businesses are transacting with PayPal. Located in San Jose, California, PayPal was acquired by eBay Inc. in October 2002.PayPal offers three types of accounts: Personal, Premier, and Business CORE FEATURES Send Money, Request Money, Auctions, Tools Website, Payments, Money Market Virtual Debit Card Account, Insurance Downloadable customer service Log, Email-based PREMIUM FEATURES All the Core Features, Do business as yourself, under a corporate name, or group name, Accept unlimited credit card payments, Payment Receiving,
Preferences, Subscriptions, ATM/Debit Card, Mass Payments, Multi-User Access, *For Business Accounts, Advanced
Downloadable logs, PayPal Shops 7 day-a-week toll free customer service
29
INTERNET BANKING
30
INTERNET BANKING
INTERNET BANKING ----------- INDIA
HISTORY OF INDIAN BANKING

Indias banking system dates back to 1870 when the Bank of Hindustan was set up. During British colonisation, three banks were set up under the Presidencys act of 1876, and these later amalgamated in 1921 to form the Imperial Bank of India. Princely states also had private banks. During World War II and Independence from British rule in 1947, the Reserve Bank of India (RBI) was established as an Apex bank under government control. In 1955, the RBI acquired control of the Imperial Bank of India, which was rechristened the State Bank of India, and took control over the state run private banks. By 1960, a merger of weak banks brought the number of banks down to 85. In 1969, most banks with higher deposits were nationalised. Fuelled by a sentiment of patriotism and bonding following independence, most Indians preferred to use nationalised banks, rather than private banks. Rigid controls by the RBI on the banking sector and closed markets fuelled the growth of these banks, although bureaucracy limited their activities. Private institutions and money lenders were not encouraged by the average Indian consumer, as the national sentiment was strongly inclined towards democratic socialism. However, this sentiment also gave birth to the concept of co-operative banks, run essentially by various unions with common objectives, for example, the milk producers union and agricultural unions. They were organised along the lines of cooperative management, with a no profit, no loss basis. The early 1980s set the pace for computerisation and mechanisation, following the formation of the Rangarajan Committee, which had a mandate to develop a phased plan over 1985-89 to automate banking processes and was supported by the growth of branch banking and the easy availability of PCs. The second Rangarajan Committee which was formed in 1988, drew up a comprehensive plan to computerise the banks and for an extension of automation to other areas like funds transfer, SWIFT, ATMs etc. Towards the end of the 1980s, the deregulation process was gaining momentum with the growing high tech sector in India. Deregulation has become an important mechanism for generating competition in the banking system in many developing countries. Uday Naickar BMS - Finance 31
INTERNET BANKING
The impact of liberalisation on commercial banks in the early years of deregulation, with particular emphasis on the period covering 1986-1991. The results indicated that publicly owned banks were more efficient. However, towards the end of the study period, foreign banks appeared to catch up, perhaps due to their branching into metropolitan areas and better adaptation to the competitive environment. There were changes taking place within India itself, such as the impact of global trends, technological innovations, and a growing generation of technically skilled youth who were driven by rational views, moving away from the older generation with their nationalist attitudes, making further modification of attitudes and actions inevitable. The 1990s were a period of rapid development in the technology-based industries, and de-regulation of the market following the removal of protection by the government, leading to the growth of entrepreneurial activity on the part of many banks. The Narasimham Committee report in 1992 introduced new reforms, followed by the Banking Regulations Act in 1993, enabling new private banks to enter the arena. In 1996, full foreign investment was allowed. In 1997, the Tarapore Committee report on capital account convertibility launched a new mandate to support the full convertibility of the rupee by the turn of 2000. These developments were supported by the growing levels of expertise in information technology; venture capitalism and increasing amounts of foreign investment. In the current banking system of India, the major participants in the financial system are the commercial banks, the financial institutions (FI), non-bank financial companies (NBFCs) and other market intermediaries such as stockbrokers and moneylenders. The banking segment in India functions under the umbrella of the Reserve Bank of India the regulatory, central bank. Broadly it consists of Commercial Banks and Co-operative banks, which include scheduled and unscheduled banks. The Commercial banks are further divided into public sector (with major shareholders such as the Government of India or the RBI), private sector banks and foreign banks. IBA (the Indian Banking Association) regulates the bulk of the Indian commercial banks, with certain stipulations such as minimum deposit bases to open ATMs. Most public sector banks with unions are members of the IBA, although membership is not compulsory. There is also a consumer protection authority that safeguards the interests of the individual user.
32
INTERNET BANKING
GROWTH OF INTERNET IN INDIA

Indias Internet population is estimated growth of 29 million in March 2003 from 10.7 million in 2002. Indias Internet scenario is still plagued by low PC penetration, high cost of Internet access hardware and low telephone penetration.
(Figures in thousand)
Mar-01 Mar-02 2,003 449 1,554 6,709 Mar-03 2,228 528 1,700 8,482 Mar-04 2,784 659 2,125 10,650 Mar-05 3,653 890 2,763 13,486
PC SALES
Household Business PC POPULATION Household Business PC PENETRATION (Per 000population) INTERNET PENETRATION Business % Household %
1,882 416 1,466 5,070
780 4,290 4.94
1,205 5,504 6.41
1,693 6,789 7.81
2,295 8,335 9.63
3,102 10,385 11.92
38 80
40 85
50 90
60 92
70 95
INTERNET SUBSCRIBERS Business Household NUMBER USER Business Household Uday Naickar BMS - Finance
1,130
1,763
3,661
4,403
6,674
511 622 OF 6,668
739 1,024 10,684
2,137 1,523 29,000
2,292 2,111 31,723
3,727 2,947 52,875
5,114 1,554
8,124 2,561
25,649 3,351
27,501 4,222
48,455 4,420 33
INTERNET BANKING
Source: Nasscom
The above table highlights the key statistic that sum up the scenario for Internet usage and penetration in India. Indias Internet user base is growing at a rapid pace. Indias home and small business segments will drive growth in the Internet user base in the near future. This rapid growth in user base is likely to result in significant growth in the Internet advertising, Ecommerce and Internet banking. However, India still lags behind other countries such as china (internet penetration of 46 per 000people), Japan (450) and Philippines, in terms of Internet penetration and usage.
INDIAN EXPERIENCES
India is still in the early stages of Internet banking growth and development. While it is plagued by infrastructure problems, slow uptake of Internet access and PCs, poor telecommunication network policies and slow paced regulatory initiatives, the rapidly growing software industry in India and ever increasing demand from the IT professionals have been promoting and supporting the online banking concept. The formerly information poor nation is becoming a high tech intellectual center enabling banks to capitalise on the brainpower available in the country. Banking in the country is witnessing a sea change as the sector seeks new applications with the demand from and facilities provided by the growing info tech professional sector. Competition and
changes in technology and lifestyle in the last five years have changed the face of banking. The changes that have taken place impose on banks tough standards of competition and compliance. Internet banking is likely to bring a host of opportunities as well as unprecedented risks to the fundamental Nature of banking in India. The impact of I-Banking in India is not yet apparent. Many global research companies believe that Internet banking adoption in India in the near future would be slow compared to other major Asian countries. Indian I-banking is still nascent, although it is fast becoming a strategic necessity for most commercial banks, as competition increases from private banks and non-banking financial institutions. 34
INTERNET BANKING
The private banks have been quick to capitalise on this attitude, by forming alliances with utility service providers (mainly Credit cards, mobile operators and phone services), and offering services on the Internet.
FIRST INTERNET BANK IN INDIA

Private and foreign banks have been the early adopters of I-banking while the Public sector banks are also beginning to hold on to the competition. ICICI Bank and HDFC Bank have taken a lead in introducing Internet banking in India. ICICI was the first bank to initiate the Internet banking revolution in India as early as 1997 under the brand name Infinity ICICI Bank is the first one to have introduced Internet banking for a limited range of services such as access to account information and recently, funds transfer between its branches. ICICI is also getting into e trading, thus offering a broader range of integrated services to the customer. Other banks also followed the suit. However, 199698 was the period of Internet banking adoption while the Internet banking usage gained importance only in 1999. After ICICI, Citibank, IndusInd Bank, Global Trust Bank, HDFC Bank, Federal Bank was the early ones to adopt the technology in 1999. Large public sector banks like SBI and UTI initially slow to adopt online banking and Bank of Baroda too planning to invest around Rs 250 crore for its online banking operations.
INTERNET BANKING SERVICES

Around 51 banks are offering a variety of Internet services. While 55% offer entry-level services, 8% offer advanced transactions such as online transfer, the other 37% is still in the process of catching up with Internet banking. The public sector banks, which constitute about 65% of the sector, are still plagued by union issues, inertia in the lower ranks and a general apathy towards technological innovations, especially the Internet. Foreign banks have a wider variety of I-Banking services with their existing high technology linkages and infrastructure. However, the newly formed private banks seem to be pulling ahead of the foreign and public sector banks, especially in the I Banking sector. To start with, they did not have the issue of legacy systems and processes that plagued the public sector banks and therefore, did not have to restructure. As observed, the private banks have had the benefit of being innovation leaders, supported by Uday Naickar BMS - Finance 35
INTERNET BANKING
technology. The private banks have also been acquiring the older and weaker banks thus growing in size. In addition to this, the new generation of IT professionals demands innovative services, while supporting their growth. The public sector banks are trying to catch up in this competitive environment, but they still have a long way to go.
INDIAN CONSUMER
The average Indian consumer was initially driven by national sentiment to use nationalised banks, an approach which also acted as a stability measure. But social and economic changes in India now mean there is an increasing number of better educated, better off and more financially sophisticated professionals who have no cultural problems with credit. The uptake of I-Banking usage is fairly low and is concentrated in urban areas. Lack of skill in using an Internet banking, and inaccessibility have been identified as major causes for this slow uptake by the majority of banks. Personal attention is still required before the critical mass of the literate population is reached.
SECURITY AND IT
RBI has issued guidelines to banking and finance companies advising them to secure their information assets. For banks, data translates to money and illicit data tampering could result in losses. Not to mention damage to reputation and defection of customer. The legal challenges of Internet banking in India include information security and regulatory compliance. The IBA recently launched EFT (electronic funds transfer) and ECS (electronic clearing system) as major electronic banking products. EFT is the safest and fastest way to transfer money, regardless of bank, branch, or city. ECS enables deposit of dividends into the shareholders account, if the bank account is given. The geographical spread lacking in EFT has led to the increasing popularity of ECS. In September 2000, the Institute of Development and Research in Banking Technology (IDBRT) implemented its long-awaited EFT and real-time gross settlement (RTGS) system, with services available throughout India. The Indian Financial Network (Infinet), a VSAT-based communication backbone for the national payment system, was equipped with a full transponder on the INSAT-3B satellite to carry out its operations.
36
INTERNET BANKING
SECURITY ENVIRONMENT: COUNTRY COMPARISON LAW IPR Copyright Patent Data Protection Data protection laws Vertical specific laws CYBER Digital signatures Hacking Privacy Yes Yes Yes Yes** Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Comprehensive No framework 2004 No No No Yes Yes Yes No Yes Yes* Yes Yes 2005 Yes No Yes No Yes No Yes Yes Yes No INDIA CHINA PHILIPPINES IRELAND US EU
According to NASSCOM estimates, in 2002-2003, the financial service sector accounted for the largest share of Indian software and services export at around 39%. IT spending by banking is driven by initiatives to meet regulatory requirements, manage customer relationships, manage risks, reduce costs and attract new customers. Banks are trying to provide web-based trade support, value-added transaction services, basic online transaction services, and basic online information services, to attract and retain customers. IT spending by US banks will reach US$ 60 billion in 2007 growing by more than 5% between 2002 and 2007. top area of IT spending in the Us banking industry are enterprise integration projects, followed by security and enterprise portals, knowledge management and CRM.
37
INTERNET BANKING
India compares well with competing outsourcing destinations on the security matrix. India has a cyber cell to deal with cyber crimes and digital signatures are recognized under the IT act, 2000. Though there are no explicit privacy related laws, the Supreme Court recognizes the right to privacy under article 21 of the constitution.
ROLE OF RBI
Like most of other activities in banking RBI also set up two committees in quick succession to accelerate the pace of automation of operations in the banking sector. In the early 80s, a high level committee was formed under the chairmanship of Dr. C. Rangarajan, then Governor of RBI, to draw up a phased plan for computerization and mechanization in the banking industry over a five year time frame of 1985-89. The focus by this time was on customer service and two models of branch automation were developed and implemented. Having gained experience in the earlier mode of computerization, the second Rangarajan committee constituted in 1988 drew up a detailed perspective plan for computerization of banks and for extension of automation to other areas like funds transfer, e-mail, BANKNET, SWIFT, ATMs, Internet banking etc. The Government of India enacted the Information Technology Act, 2000, generally known as IT Act, 2000, with effect from the 17th October 2000 to provide legal recognition to electronic transactions and other means of Electronic Commerce. Reserve bank of India had set up a Working Group on Internet Banking to examine different aspects of Internet banking (I-banking). The Group had focused on three major areas of Ibanking.
1.Technology And Security Issues The importance of the impact of technology and information security cannot be doubted. Technological developments have been one of the key drivers of the global economy and represent an instrument that if exploited well can boost the efficiency and competitivity of the banking sector. However, the rapid growth of the Internet has introduced a completely new level of security related problems. The problem here is that since the Internet is not a regulated technology and it is readily accessible to millions of people, there will always be people who want to use it to make illicit gains. The security issue Uday Naickar BMS - Finance 38
INTERNET BANKING
can be addressed at three levels. The first is the security of customer information as it is sent from the customer's PC to the Web server. The second is the security of the environment in which the Internet banking server and customer information database reside. Third, security measures must be in place to prevent unauthorized users from attempting to long into the online banking section of the website.
2.Legal Issues From a legal perspective, security procedure adopted by banks for authenticating users needs to be recognized by law as a substitute for signature. In India, the Information Technology Act, 2000, in section 3(2) provides for a particular technology (viz., the asymmetric crypto system and hash function) as a means of authenticating electronic record. Any other method used by banks for authentication should be recognized as a source of legal risk.
3.Regulatory And Supervisory Issues The regulatory and supervisory issues, only such banks which are licensed and supervised and have a physical presence in India will be permitted to offer E-banking products to residents of India. With institutions becoming more and more global and complex, the nature of risks in the international financial system has changed. The Regulators themselves who will now be paying much more attention to the qualitative aspects of risk management have recognized this. Though the Indian Government has announced cyber laws, most corporate are not clear about them, and feel they are insufficient for the growth of E-commerce. Lack of consumer protection laws is another issue that needs to be tackled, if people have to feel more comfortable about transacting online. RBI had accepted the recommendations of the Working Group and accordingly issued guidelines on Internet banking in India for implementation by banks. The Working Group has also issued a report on Internet banking covering different aspects of I-banking. Considerable progress has been made in consolidating the existing payment systems and in upgrading technology with a view to establishing an efficient, integrated and secure Uday Naickar BMS - Finance 39
INTERNET BANKING
system functioning in a real-time environment. Major projects under implementation are electronic clearing, centralized funds management, structured financial messaging solutions and the Indian Financial Network (INFINET). Facilities under Electronic Funds Transfer (EFT) have been upgraded and their spatial reach expanded with multiple settlements in a day. Foreign exchange clearing has been initiated through the Clearing Corporation of India Limited (CCIL). Adequate security features are being incorporated into the EFT. Preparatory work for the real time gross settlement (RTGS) is complete. Also RBI is about to become the first Government owned digital signature Certifying Authority (CA) in India. The move is expected to initiate the electronic transaction process in the banking sector and will have far-reaching results in terms of cost and speed of transactions between government- owned banks. Thus efficiency, growth and the need to satisfy a growing tech-survey consumer base are three clear rationales for implementing E-banking in India. The four forces-customers, technology, convergence and globalization have the most important effect on the Indian financial sector and these changes are forcing banks to redefine their business models and integrate technology into all aspect of operation.
40
INTERNET BANKING
STATISTICAL REPRESENTED OF INTERNET BANKING IN INDIA In India, slowly but steadily, the Indian customer is moving towards Internet banking. A number of banks have either adopted Internet Banking or are on the threshold of adopting it. The banks started Internet banking initially with simple functions such as getting information about interest rates, checking account balances and computing loan eligibility. Then the services were extended to online bill payment, transfer of funds between accounts and cash management services for corporate. Recently, banks have started to facilitate payment for e-commerce transactions by directly debiting bank accounts or through credit cards. It will add to the revenues of the banks. Internet banking product and services are divided into category Basic: 1) Account inquiry. 2) Funds transfer. 3) Electronic bill presentment and payment. Premium: 1) Brokerage. 2) Cash management. 3) Credit applications. 4) Credit and debit cards. 5) Customer correspondence. 6) Demat holdings. 7) Financial advice 8) Foreign exchange trading. 9) Insurance. 10) Online trading. 11) Opening accounts 12) Requests and intimations. 13) Tax services. 14) E-shopping. 15) Standing instructions. 16) Investments. 17) Asset management services etc.
PROFILE OF BANKS
Presently there are 30 private sector banks (21 old and 9 new), 27 public sector banks and 36 foreign banks operating in India. The current state of Internet banking services offered by private, public and foreign banks operating in India. Almost all the banks are having websites; however, only 48 banks are providing transactional banking services in one form or the other which represents nearly 17 percent of total Scheduled commercial banks operating in India. Table 1.1 and 1.2 shows the adoption rates of the Internet banks.
41
INTERNET BANKING
Internet Banking and Scheduled Commercial Banks Table 1.1 Number Percentage of All Scheduled Commercial Banks (289) 31.1 16.6
Banks with Web Sites Banks with Transactional Sites
90 48
Adoption Rates of Internet Banks TABLE 1.2 (As on March 31, 2004) Number of Banks Number of Banks Number of Banks With Websites With Transactional Sites 28 9 19 27 35 15 (50.0) 9 (100.0) 6 (28.6) 13 (48.1) 20 (55.6)
Private Banks New* Old**
Sector 30 9 21 27 36
Public Sector Banks Foreign Banks
All Banks 93 90 Source: www.banknetindia.com/banklinks.htm percentage. * Includes banks established after the liberalization reforms as recommended by Narsimham Committee in 1991. ** Includes banks established before the liberalization reforms as recommended by Narsimham Committee in 1991. 48 (51.6) Figures in bracket denote
42
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As evidenced from Table 1.2, number of banks offering Internet banking services in one form or the other are 48.
FOREIGN BANKS
Table 1.3 Position of Foreign banks providing Internet Banking in India No. Banks Of Banks with Banks providing Banks providing Accessible Web sites Internet banking Internet Banking in Web sites India 35 25 20 16
36
There are 25 foreign banks offering Internet banking services in different countries in one form or the other. However, the Internet banking services of four foreign banks out of 20 which are providing Internet banking services in India were not accessible through their websites either due to language problem or the other. As all the 16 banks offering Internet banking services in India are fully transactional banks therefore it was assumed that the other 4 banks are also fully transactional banks. However, services offered by Internet banks in India in the presently, only 16 foreign banks.
CLASSIFICATION OF INTERNET BANKING WEBSITES

*Entry Level Internet Banks include those banks, which are not providing any transactional service. **Partly transactional Internet banks include those banks providing less than BASIC services. ***Fully transactional Internet banks include those banks providing BASIC plus PREMIUM services of Internet banking. Figures in bracket denote the percentage of number of fully transactional web sites to total number of commercial banks in India.
43
Prepared by Uday Naickar Table 1.4
INTERNET BANKING
Classification of Internet Banking Websites Entry Transactional Websites Total Number of Level Websites* Partly Bank Websites Fully Transactional** Transactional*** All Banks Foreign banks Private Sector Banks Public Sector Banks 42 15 14 0 34(36.6%) 20(55.6%) 90 35
13
10(33.3%)
28
14
4 (14.8%)
27
Internet banking in true sense, which represents only 36 percent of total commercial banks (Table 1.4). Out of total public sector banks nearly 15 percent banks offer fully transactional banking services while 33 percent of private sector banks and 55 percent of foreign banks are offering fully transactional Internet banking services.
RANGE OF SERVICES OFFERED BY TRANSACTIONAL INTERNET BANKS

As shown in Table 15, nearly 68 percent of the transactional banks provide BASIC services of Internet banking. 96 percent of the transactional banks provide account balance enquiry service. More than 70 percent of the transactional banks offer the services of funds transfer between accounts and electronic bill payment. However foreign transactional banks are more likely to provide these services as compared to private and public transactional banks. More number of Foreign and private banks also provide third party fund transfer facility as compared to public sector banks. A look at Internet banking services beyond balance enquiry, funds transfer and bill payment reveals the pattern of what is offered by banks of different categories. As far as 44
INTERNET BANKING
the services of providing customer correspondence are concerned there is no difference among the banks. Nearly 41 percent of the banks provide the service of new account set up. However private sector and public sector banks lag behind foreign banks in providing this service. Similarly in respect of the services of online trading, Demat holdings and E-shopping the private sector banks out performed the foreign as well as public sector banks. It is a determinant of how well the private sector banks compete with the foreign and public sector banks for business customers. Table 1.5 also contains information on the extent to which particular business lines- loan applications, credit card payment, financial planning, online insurance, brokerage, financial planning, linking of accounts i.e. one can view all the accounts in the same bank in one statement, providing market news and net worth statement online and investment trading- were offered. A large number of foreign banks offer these services than the private and public sector banks. However foreign transactional banks are inefficient in providing the services like Demat holdings, E-shopping and the services of providing standing instructions and handling requests and intimations. However there are some new Internet banking services which are offered by foreign banks including recurring transfer of funds between the accounts, providing the net worth statement to the customers and the services of financial planning. The position of public sector banks is worst in case of providing the range of Internet services and products. No public sector bank provide the services of Demat Holdings, Brokerage, Investments, Online Remittance of Funds, Tax advisory service, Financial Planning, Linking A/cs, Online Market News, Online Trading, Foreign Exch. Trading, Tds Enquiry, One View a/c and providing Net Worth Statement. Nearly 75 percent of the foreign transactional banks provide demonstration of the Internet banking on their web sites. While 60 percent of private and nearly 62 percent of public sector banks did so. All the transactional banks provide customer correspondence for the purpose of gaining new and retaining their existing online customers.
45
INTERNET BANKING
Table 1.5 Range of Services Offered by Transactional Internet Banks (Percentage of transactional banks offering selected services) Service Type of service All banks Foreign Private Code sector Sector Banks Banks 1 Balance Enquiry 95.5 100.0 93.3 2 Funds Transfer 77.3 100.0 86.7 3 Bills Payment 75.0 100.0 73.3 4 Third Party Transfer 45.5 50.0 53.3 5 Opening accounts 40.9 75.0 26.7 6 Receive Alerts 29.5 31.25 40.0 7 Requests& Intimations 79.5 68.75 93.3 8 Cash Management 9.1 6.25 6.7 Online 9 E-Shopping 38.6 43.75 53.3 10 Credit Card Payment 22.7 31.25 13.3 11 Standing Instructions 81.8 68.75 93.3 12 Loan Applications 29.5 43.75 33.3 13 Customer 100.0 100.0 100.0 Correspondence 14 Insurance 6.8 12.5 6.7 15 Demat Holdings 25.0 18.75 53.3 16 Brokerage 4.5 6.25 6.7 17 Investments 22.7 37.5 26.7 18 Online Remittance of 11.4 12.5 20.0 Funds 19 Tax advisory service 13.6 6.25 33.3 20 Financial Planning 34.1 56.25 40.0 21 Linking A/cs Online 4.5 6.25 6.7 22 Market News Online 6.8 12.5 6.7 23 Trading Online 18.2 25.0 26.7 24 Foreign Exch. Trading 2.3 0.0 6.7 25 Foreign exch. Rates 27.3 50.0 20.0 update 26 TDS Enquiry 9.1 6.25 20.0 27 One View a/c 4.5 6.25 6.7 28 Net Worth Statement 4.5 12.5 0.0 29 Privacy Statement 84.1 87.5 100.0 30 Demonstration of I 65.9 75.0 60.0 Banking BASIC* 68.2 100.0 66.7 PREMIUM** 68.2 100.0 66.7 Source: www.banknetindia.com/banklinks.htm Uday Naickar BMS - Finance
Public Sector Banks 92.3 38.5 46.2 30.8 15.4 15.4 76.9 15.4 15.4 23.1 84.6 7.7 100.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 7.7 0.0 0.0 0.0 61.5 61.5 30.8 30.8 46
INTERNET BANKING
*BASIC includes balance enquiry, funds transfer and bill payment. **PREMIUM includes BASIC and at least three other services. To gain a clear picture of the range of Internet services available at banks of different sizes, two menus of Internet banking services are defined. BASIC Internet banking is defined as the three core Internet banking services: balance enquiry, funds transfer and bill payment. PREMIUM Internet banking is defined as BASIC plus at least three other services. Foreign banks are offering BASIC as well as PREMIUM Internet banking services. All the foreign transactional banks provide BASIC as well as PREMIUM Internet banking products. While only 67 percent of the private transactional banks and 31 percent of public transactional banks offer PREMIUM and BASIC Internet banking services. The major concern for the adoption of Internet banking presently is the level of security or risk associated with it. Both banks and customers stand to benefit from the collection and integration of large amounts of personal information over the Internet that enhance the ability of the banks to offer a wide range of products according to the individual demands. But the collection, analysis and distribution of information raise questions related to protecting personal privacy. A fundamental step many banks are taking to address on-line privacy is to post a statement of their policies about the collection and use of customer information. The database includes information on the number of transactional banks that had such a statement on their web sites. Table 1.5 shows that most of the transactional banks included a privacy policy statement on their web sites. Indeed, 100 percent of the private sector banks include privacy statement on their web sites. And nearly 88 percent of the foreign banks and 62 percent of public sector banks did so.
47
INTERNET BANKING
48
INTERNET BANKING
COMPARISON OF KEY ATTRIBUTES

The banks offering various through Internet banking accounted for most of the assets in the Indian commercial banking system. As a group, transactional Internet banks had, on average, 187 percent more assets, 115 percent more employees, and 60 percent more offices and 157 percent more deposits than non-Internet national banks. Table 1.1 Comparison of Key Attributes of Internet Banks and Non-Internet Banks Transactional Internet Banks Non-Internet Banks*
Average Size (assets in Rs crores)
23970.17
8336.788
Average Number of Offices per Bank
698
436
Average Number of Employees
12179
5645
Deposits
18252.74
7096.749
Transactional Internet banks as a Percentage of all commercial banks***
Number of Banks
51.6
Assets**
75.4
Deposits Source: www.rbi.org.in
73.3
*Includes banks with non-transactional web sites. ** Rupees value of assets. ***Excluding Regional Rural banks.
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INTERNET BANKING
COMPARISON OF PERFORMANC
Financing Pattern The use of univariate comparisons between Internet and non-Internet bank characteristics. 1.Financing Pattern Table 2.1 Financing Pattern of Internet and Non-Internet Commercial Banks Financing Pattern (In percent) Deposits / Assets Private Sector Banks Internet Banks Non-Internet Banks P-value Public Sector Banks Internet Banks Non-Internet Banks P-value Foreign Banks Internet Banks Non-Internet Banks P-value All Banks Internet Banks Non-Internet Banks P-value 78.0 85.8 (0.41) 7.9 2.1 (0.11) 65.0 87.8 (0.29) 27.1 1.6 (0.10)* Purchased Deposits Funds /
83.1 86.3 (0.94)
2.3 1.6 (0.82)
60.0 56.7 (0.86)
33.0 33.0 (0.18)
50
INTERNET BANKING
In comparing transactional Internet banks to non-Internet banks, as Tables 2.2, 2.3, and 2.4 illustrate, (Q1 2004) differences between Internet and non-Internet banks had begun to emerge in funding, in sources of income and expenditures and in measures of performance. For each pair of observations in a table, a probability (p) value is provided for the hypothesis that the means in the Internet and non-Internet samples are the same. A lower p-value indicates a greater likelihood that the two figures compared represent real differences between categories of banks (Internet vs. non-Internet, etc.). Table 2.1 shows major financing characteristics of Internet and non-Internet banks. Overall, Internet banks generally are less reliant on core deposits for funding and make greater use of purchased funds relative to deposits. However, the difference is significant in case of private sector banks only. Numbers in parentheses are p-values for the difference of means test for Internet and non-Internet bank values in each cell. *** Significant at the 1 percent or better level. ** Significant at the 5 percent level. * Significant at the 10 percent level. On-Internet banks include banks with nontransactional Web sites.
Income and Expenses Differences in the business strategies of Internet and non-Internet banks are also evident in Table 2.3. The first column shows the ratio of non-interest income to net operating revenue, which is a rough proxy for the amount of revenue generated by non-traditional activities. Internet banks generated a substantially higher proportion of their income roughly speaking, about 40 percent more from non-traditional activities compared to nonInternet banks. This pattern is consistent with a business strategy of using the Internet to target businesses and more affluent consumers, with the belief that these customers will be interested not only in loans but also in other services that yield fee income. In addition to revenue enhancement, Internet banking may enable banks to reduce costs of operation, in particular, by allowing them to reduce expenditures on premises and fixed assets. To the extent this may be so, Internet banking could be considered a causal factor in generating lower expenses related to maintaining physical branches. On the Uday Naickar BMS - Finance 51
INTERNET BANKING
other hand, banks with relatively high expenses in maintaining their branch networks may be expected to have the greatest incentive to adopt Internet banking. The adoption of Internet banking would thus be the effect of existing characteristics of banks. Table 2.2 Income and Expenses Non-Traditional Income Expenses
(In percent) Non-Interest Income/ Premises & Fixed Assets Net Operating Revenue / Net Operating Revenue Private Sector Banks Internet Banks Non-Internet Banks p-value Public Sector Banks Internet Banks Non-Internet Banks p-value Foreign Banks Internet Banks Non-Internet Banks p-value All Banks Internet Banks Non-Internet Banks p-value 53.8 45.1 (0.51) 78.5 24.1 (0.11)
36.3 36.4 (0.31)
17.4 19.8 (0.64)
45.0 34.5 (0.38)
30.5 41.2 (0.36)
40.0 37.7 (0.44)
28.1 21.0 (0.55)
The data in Table 2.2 show that, consistent with the first hypothesis, Internet banks in public sector and foreign sector had lower expenses for building and equipment relative to net operating revenue. Among the private sector Internet banks, building and Uday Naickar BMS - Finance 52
INTERNET BANKING
equipment expenditures were higher than for non-Internet banks. This difference may indicate that private sector banks with high costs of maintaining a branch network are motivated to adopt Internet banking by the prospect of future cost savings. However most of the private Internet banks are established after the liberalization process started in 1991. Newness may also be the reason for high cost of building and equipment expenditures. Further research can establish whether Internet banking is likely to reduce costs associated with physical branch networks, and whether relatively high branchrelated expenses are a causal factor in the adoption of Internet banking.
Performance Analysis Table 2.4 compares the profitability, efficiency, and credit quality of Internet banks compared to non-Internet banks as on March 31, 2004. Internet banks in foreign sector are more profitable than non-Internet banks; however, Internet banks in the private sector are significantly less profitable than non-Internet banks. The Internet banks in public sector are also less profitable than non-Internet banks. However there is no significant evidence. Internet banks in private sector also are less efficient than non-Internet banks, as measured by the ratio of non-interest expense to net operating revenue (accounting efficiency, a commonly used measure of cost efficiency). There was no statistically significant difference between the accounting efficiency of Internet and non-Internet banks in all categories. Internet banks dont have better credit quality than non-Internet banks. There is no significant difference between the credit quality of Internet and non-Internet banks, as measured by the ratio of non-current loans to total loans. Numbers in parentheses are p-values for the difference of means test for Internet and non-Internet bank values in each cell. *** Significant at the 1 percent or better level ** significant at the 5 percent level; and * significant at the 10 percent level.Non-Internet banks include banks with nontransactional Web sites.
53
Prepared by Uday Naickar Table 2.3
INTERNET BANKING
Comparison of Performance of Internet Banks and Non-Internet National Banks (Q1 2004) Profitability (In percent) Accounting Efficiency Credit Quality
Return on Equity Private Sector Banks Internet Banks Non-Internet Banks p-value Public Sector Banks Internet Banks Non-Internet Banks p-value Foreign Banks Internet Banks Non-Internet Banks p-value All Banks Internet Banks Non-Internet Banks p-value 17.2 18.3 (0.282) 14.0 21.6 (0.083)*
(In percent) (In percent) Non-Interest Non-Current Expense to Net Loans to Total Operating Revenue Loans
54.2 41.0 (0.719)
71.1 39.0 (0.189)
18.4 19.7 (0.945)
49.0 50.4 (0.714)
39.1 39.8 (0.828)
16.0 0.1 (0.268)
45.5 59.7 (0.721)
48.5 45.8. (0.807)
49.3 49.2 (0.713)
46.1 39.8 (0.463)
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INTERNET BANKING
COMPARISON OF INTERNET BANKING FEATURES BANK ICICI E -shopping Fabmart, Rediff, Sifymall, Magiccart, Malamall, Indiainfoline, Indbazaar, renew VSNL connection Bill pay MTNL, BEST, BPL Mobile, Orange, BSES, Birla AT&T, Airtel, Essar, Bangalore Telecom, Usha Martin Telekom, Spice Telecom, Skycell, RPG cellular, Escotel, Tata Cellular, Tala Teleservices MTNL, Airtel, BPL Mobile, BSES, Orange, MSEB, RPG Cellular, Skycell, Essar, Comman-Usha Martin, Spice Telecom, Tata Cellular, Escotel, Fascel, Birla AT&T, BSNL (6 cities) No bill pay facility currently Features E-mail for communication between user and a/c manager Content on personal finance News updates Forex rates
HDFC
Fabmart.com, Sifymall, Noshutters.com, Mahadiscounts.com, Xpressionmall.com, Shoppershyderabad.com Renew VSNL Internet connection
Leave email instructions
Global Trust Bank IndusInd SBI Citibank
Sifymall
No Fund Transfer facility None Fabmart, Rediff, Sifymall, Mahadiscounts.com
Federal Bank
Rediff, Fabmart.
No bill pay facility currently MTNL, BSES, MSEB Bangalore Telecom, Bangalore Water Supply, Spice Telecom, JT mobiles, Hotline Paging, Maxpage (via credit card and bank account) BSNL (Ernakulam only)
E-mail for communication between user and a/c manager None None E-mail account Pay credit card expenses Loan payment, Forex rates Stock trading Email for communication between user and a/c manager Email for communication between user and 55
UTI
None
BSNL
INTERNET BANKING a/c manager
BANK
Account features
ICICI
HDFC
Global Trust Bank
IndusInd
SBI
Citibank
Federal Bank
UTI
Access Current, Savings account, stop payment request, chequebook request, intimate loss of ATM card etc. Access Current, savings, FD accounts, Balance and statement inquiry, Cheque status enquiry, Stop payment request, Bankers cheque request, chequebook & statement request, Demand Draft Request, FD enquiry, New FD request, TDS enquiry, direct debit Access Current, Savings, FD accounts, Balance and statement inquiry, Cheque status, chequebook request, Demand Draft Request, Pay Order request, FD enquiry. Access Current, Savings, FD account, Balance and statement inquiry, and FD inquiry. Access Current, Savings account, Stop payment request, and chequebook request, Demand Draft Request. Access savings, multi deposit, NRI, mutual funds, loan accounts, account Balance and statement inquiry, chequebook request, Demand Draft Request, EMI loan on Credit Card, pay credit card expenses, New FD request Balance and statement inquiry, Stop payment request, chequebook request, Demand Draft Request, FD inquiry, New FD request. Access Current, Savings, FD accounts, Balance and statement inquiry, chequebook request
Fund transf ers* Yes
Third party Transfer Yes
Yes
Yes
Yes
No
No
No
Yes
No
Yes
Yes
Yes
Yes
Yes
Yes
56
INTERNET BANKING
* Currently fund transfers are offered only between the banks accounts anywhere in India. Interbank transfers are not offered.
57
INTERNET BANKING
58
Prepared by Uday Naickar STATE BANK OF INDIA
INTERNET BANKING
OVERVIEW The State Bank of India has been, over the years, the flagship of Indian banking. State Bank of India is the largest bank in India in terms of profits, assets, deposits, branches and employees. State Bank Of India (SBI) has reported a net profit of Rs 3,681 crore for the financial year to March 31, 2004, posting 19 per cent growth. Bank has declared a dividend of 110 per cent. SBI has reduced its net non-performing asset to 3.48 per cent and it's gross NPA ratio has come down to 7.75 per cent. The banks capital adequacy ratio stands at 13.53 per cent. .
INTERNET BANKING
www.onlinesbi.com is the Internet banking service of the state bank of India. State bank of India is one of the Indias premier commercial bank. This service is available at certain designated branches of SBI. Customer can access the account (s) at he host branch through personal computer, from customer location. The connectivity is offered through SBI website.onlinesbi.com, through Internet gateway. www.onlinesbi.com is a selfservice channel that is available for customer 24hours and 7days a week. This services available to the customer at a free cost. Website is user friendly for the customer.
PRODUCT AND SERVICES Online SBI offers all the main banking services, with the added flexibility of being able to manage customer-banking needs online. Any customer maintaining any account with designated branches can avail online service. To avail any of the services customer should register in onlinesbi.com.
BALANCES This will give customer a detail of accounts and balances.
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Prepared by Uday Naickar QUICK LOOK STATEMENT
INTERNET BANKING
In addition to the balance account, the last 10 transactions on the account could be view by customer.
ACCOUNT STATEMENT Look at all transactions within a specified date range along with the opening and closing balances. Customer can download the statement in PDF or MS-Excel compatible formats.
QUERY ON TRANSACTION DETAILS Customer can view detail transaction of there account by date range, amount or even cheque number! TRANSACTION Customer can transfer funds from any branch of SBI to any other branch at the click of a button. Send demand drafts, credit PPF accounts. More than 1 lakh users are now transacting at OnlineSBI in an extremely secure and safe environment. Some of the transactions are, Funds Transfer: Transfer funds between your own accounts from any branch to any other branch. Demand Drafts: Customer can ask for a DD online and pick it up by customer from the branch. Third Party Transfer: Transfer funds to your trusted third parties whenever customer pleases. Status Enquiry: Customer can enquire the status of Internet transactions through this link. View/Cancel Pending transactions: customer can put through transactions when the branch systems are down. In such cases, bank store the transaction and process it at the earliest possible opportunity. However, you may cancel such transactions whenever you wish before they are put through.
OTHER FUNCTION Uday Naickar BMS - Finance 60
INTERNET BANKING
Open an account, Request for chequebook, Bankers cheque, Stop cheque payment, Issue standing instruction, Renew term deposit and Download statement.
E-PAY E-Pay is online bill payment services, launched by SBI. Bill Payment @ Online SBI (ePay) will pay Telephone, Mobile, Electricity, Insurance and Credit Card bills electronically over Online SBI website. Check & Pay bill online, 24 hours a day, over ePay. Customer can get a Cyber Receipt for the payments done online or scheduled over online SBI. Biller presents bills online or Auto-Pay instructions than bank will pay the bills as and when it falls due. This service is available only in Mumbai and Delhi Customer can get services through e-Pay Registration Form and send the same to branch. Branch will add biller for payment over e-pay
BOOKING RAILWAY TICKETS This facility has been launched from Ist September 2003 in association with IRCTC. The scheme facilitates Booking of Railways Ticket Online. Steps to book railway ticket online 1.Registration Customer required registering on http://www.irctc.co.in. /, and select a train depending on journey.
2.Payment Click on payment option, the user will be redirected to onlinesbi.com. After logging on to the site payment amount, Traveling ID number and railway reference number will be displayed. On selecting the payment amount your account will be debited. User will return to http://www.irctc.co.in. /. PNR No. Will be displayed. User can print the ticket.
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INTERNET BANKING
INDIVIDUAL AND CORPORATE CUSTOMER

This on-line channel enables customers to access their account information and initiate transactions on a 24x7, boundary less basis. 1116 branches, covering 237 centers, are extending Internet banking service to their customers. All functionalities other than Cash and Clearing have been extended to individual retail customers. A separate Internet Banking module for corporate customers has been launched and available at 461 branches. Bulk upload of data for Corporate, Inter-branch funds transfer for Retail customers, Electronic Bill Presentment & Payment, SMS Alerts, E-Poll, IIT GATE Fee Collection, Off-line Customer Registration Process and Railway Ticket Booking are the new features deployed.
INDIVIDUAL CUSTOMER INFRASTRUCTURE Customer should have a pc with minimum configuration of Pentium (P100) chip with 32 MB RAM for logging on to the Internet, a telephone connection and a modem.
AVAIL ONLINE SBI Customer maintaining any account with designated branches can avail onlinesbi.com services.
REGISTERATION PROCEDURE Customer has to enclose application form duly filled or can visit site www.onlinesbi.com and down load the application form. The duly filled in application form may be mailed to the designated branch where account is maintained. Individual customer can also collect printed enrolment form from designated branches. The branch manager will register the name and User-ID and password is send through a courier to the customer. Two user Id and password are give to the customer. One User-ID and password is give to log on to the service and other User-ID and password are to access the service. User-Id and password are alphanumerical. Once user ID and password are given to customer, system and customer can only recognize the password and user-ID. This user-ID and password should be acknowledged to the branch under the customer signature. Thereafter customer Uday Naickar BMS - Finance 62
INTERNET BANKING
can log into www.onlinesbi.com. Individual customer has right to access the account after giving conformity information to the branch for operation of the account.
CORPORATE CUSTOMER State bank of India offers corporate clients, a fully secured Internet based online, real time electronic delivery channel, providing convenient and secure access to there banking information over the Internet. State Bank of India has created 3-level hierarchical design, which is well suited to today's corporate vision of managing global business. To cater Corporate needs, SBI Corporate Internet Banking has offered 3-hierarchical services which as follows:
ADVANTAGE Advantage enables client access account information anywhere anytime. Advantage is also known as khata. Most suited for small firms, companies, institutions banking with one branch of SBI. Financial information can be accessed 24 hours and 7 day a week. Client has the following advantage: Enquiry rights on the accounts. Facility to view account information at a branch of client choice. All the authorized users from the corporate get a complete view of information.
STATE BANK OF INDIA ONLINE SERVICE
ADVANTAGE (Khata)
CORPORATE CLIENTS
FREEDOM (Vistaar)
PRIVILEGE (Vyapaar)
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Prepared by Uday Naickar PRIVILEGE
INTERNET BANKING
Privilege is a second hierarchical level of service provide to corporate client, which is also know as vyapaar. This level of services most suited for small and medium sized organization. This service provided for small group user with discretional access and discretionary rights. In privilege corporate client can do business or financial transaction over Internet and make payment through cyber. Various features of this services as follows: Online transactional features enabled such as fund transfers, third party payments and draft issue. Individual transactions of Rs. 5 lacs and less initiated online. Supports dealings with one branch. Administrator module for better control and security. Banking users who will carry out the banking operations. Small group user allowed to filtered access and delegated rights, which enable administrator to empower employees.
FREEDOM
This service is mainly for large and very large organization who can access to organization account across branches with a single sign on. In this service corporate customer is allowed to operate the business at any geographical location from wherever they desire, freedom to take urgent financial decisions from any situation and also freedom to empower people to conduct business. This all services is provided by bank according to the framework laid down by the bank. Freedom from branch dependence for the customer. Freedom provides an all-round financial or business solution, online.
Benefits Access to firms accounts across the branches with a single sign on. All Online transactional functionalities offered, e.g., fund transfers, third party payments, draft issues etc. Fund transfers and transactions enabled across all Internet Banking enabled branches. Uday Naickar BMS - Finance 64
INTERNET BANKING
Receive payments over the Internet e.g., sales receivables, bills due. Upload bulk transactions by file mode (multiple credit-single debit transactions) e.g., salary payments, vendor payments. System to system Integration to minimize manual intervention. Elaborate user hierarchy with filtered access and delegated rights. Regulator will set up business rules to facilitate financial transactions over Internet. Administrator module for setting up control and security features. Banking Users who will conduct the business transactions. Auditors enabled to audit accounts and transactions done online.
OPERATION BY CORPORATE
Every corporate as there own rules and regulation for the operation of the Internet banking. Company fixes certain rule and regulation because they are association of person. A single person cannot operate the Internet banking of the firm. There is equal distribution of powers to operate the Internet banking. This can prevent concentration of power by one person and also prevent from manipulation of companies finance. Corporate has a hierarchal level to operate the Internet banking. Corporate would have separate department or section. State bank of India integrate polices with the corporate. Corporate operation divided into different level, password and user ID is give to the different level, which is control by head of the organisation. For e.g. To give a cheque of Rs.5 lakh to a suppliers. In the first level I-Banking operating employee prepare the cheque and passed it to the next level of management who in turn will check the issue of cheque, whether the entry is made right or wrong and this level of management pass to another level who would right to make transaction to the suppliers.
65
INTERNET BANKING
SBI INTERNET BANKING TRANNSCATION When customer request for online banking information it is passed to web sever ie Satayam then to the banks I-Banking server through the www interface. These request pass through a firewall before they reach I-banking server. Customer information database is stored on a banks server, which is protected by the use of various security tools in additional to the firewall technology. The www interface is the only media of communication with the I-banking server. I-banking server is the only media of communication with the customer database, thus ensuring the safety of operation and customer data. When the customer request reaches to the I-banking server, it passes the request to the bank server hording customer database or core processing system. The database provides the required information to the I-banking server, which in turn passed on to the web server, through the firewall, from where the customer is able to access it. This sort of architecture, know as he three tiered architecture (comprising of a web server, I-Banking server and customer database protected by firewalls) create a controlled environment, which allows quick incorporation of Internet security technologies. A security analyzer constantly monitors login attempts and recognizes failure that could indicate possible unauthorised attempts to log into an account. When such trends are observed, steps are automatically taken to prevent that account from being used.
TECHNOLOGY AND SECURITY STANDARD
SECURITY State bank of India has tied up with America security agencies to provide a well network security to the customer and for bank. Security procedure is very sophisticated and highly techno-savvy. Almost two and half year of internet banking service provided by state bank of India, there has been no hackers or no virus problem faced by customer and as well as bank. Core system of bank handles all the security, which is also know as hub center. Core processing system is located in Bhandup, which control all Internet banking transaction. Security systems for online SBI are as follows: Uday Naickar BMS - Finance 66
Prepared by Uday Naickar Hosted from level-3 Internet data center
INTERNET BANKING
Well-structured security standards on the processing platform. Strong security in the application products being run on those platforms Protection of communications between the processor and third party vendors.
Logical security Fire wall system, intrusion detection systems. Login through HPIN based password. Different access and transaction password
Verisign site certification Verisign, Inc. delivers intelligent infrastructure services that make the Internet and telecommunications networks more reliable and secure. 1.Identity verified certification it indicate o State bank of India owns or operates the Web site located at www.onlinesbi.com. o Government records confirm State Bank of India as a valid business.
2.Security verified certification it indicate o A Verisign SSL certificate secures this Web site. o Information sent from addresses that begin with https is encrypted before transmission.
State bank of India employees professional hackers to hack the system so that bank can further make a stronger security system.
TECHNOLOGY
SBI has outsourced the technology to Satyam computer system. It provides and supports the Internet banking solution of SBI. Satyam computer system links the bank and the customer.
67
INTERNET BANKING
HOST INTERFACE
It connects the core processing system.
SECURITY TECHNOLOGIES Internet security technologies solve issues of privacy, authentication access control, data integrity, and no repudiation.
BILL PAYMENT State bank of India integrate consumers bank account information with a bill paying process that covers all form of consumers bills. This is a powerful tool for the bank facilities provided by Satyam computer system.
ACTIVE SELLING Active selling involves gaining a better understanding of the customer by analyzing data that is either collected during user sessions or extracted from the SBI core processing systems. Using this data allows SBI to better identify cross-selling opportunities like ATM, mobile banking ECT.
TRANSACTION PROCESSING CAPABILITIES AND BACK-END INTEGRATION This transaction process helps SBI to handle various information or transaction, such as transfers. This system helps to correct the transaction and recover transactions if the application or some component of the system is unavailable or crashes. In high transaction environments, load balancing is essentialespecially during peak volumes.
CORE PROCESSING SYSTEM Core processing system of state bank of India is located in Bhandup. Core processing connects the Satyam computer system and branches of state bank of India. Customer database are stored in the core processing system. Information or transaction is processed and send to the branch and to the customer through Satyam technology.
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Prepared by Uday Naickar COMPUTERIZED BRANCH
INTERNET BANKING
All the 9038 branches of the Bank are now fully computerised in India. In Mumbai almost all branches are computerised for Internet banking services.
SUPPORTING TECHNOLOGY OF STATE BANK OF INDIA

STATE BANK ELECTRONIC PAYMENT Under STEPS, the banks electronic funds transfer system; the Products offered are ETransfer (eT), E-Realisation (eR), eDebit (CMP) and ATM reconciliation. STEPS handle payment messages and reconciliation simultaneously.
SEFT SBI has launched the Special Electronic Fund Transfer (SEFT) Scheme of RBI, to facilitate efficient and expeditious Inter-bank transfer of funds. 323 branches of Bank in various LHO Centres are participating in the scheme. Security of message transmission has been enhanced.
ELECTRONIC PAYMENT SYSTEM State Bank Electronic Payment Systems (STEPS) is a highly innovative and effective payment solution designed, developed and implemented by State Bank of India in selected Fully Computerized Branches. STEPS provide an end-to-end fully automated Electronic Funds Transfer (EFT) to ensure availability of funds at the destination with speed and efficiency. STEPS ensure credit of funds to the beneficiarys account at the other branch on the next day. The coverage already ensures E-T facility at all the major and important centres across the country; the plans are on hand to include all 2,853 FCBs to provide the service. ET offers the value addition to the customer but comes at no extra cost (the exchange payable is normal like a draft or TT). SBI uses the VSAT technology consisting of 162 INFINET VSATs in 113 cities to extend the STEPS service to the customers, and VSAT connectivity is also increasing to cover more areas in the country.
69
Prepared by Uday Naickar INTER-BANK ELECTRONIC FUNDS TRANSFER
INTERNET BANKING
Inter-bank Electronic Funds Transfer facility of the Reserve Bank of India (RBI - EFT) is available with our branches in the clearing zone of Service Branches at Kolkata, Mumbai, New Delhi and Chennai.
WAN The bank has set up a Wide Area Network that provides connectivity to 1419 branches across 49 cities in the first phase. The networking project provides across the board benefits by providing nationwide connectivity for its business applications. Under phase two, Data craft India will undertake turnkey implementation of SBIs corporate backbone also known as SBI Connect from design, provision, supply and project management. It will help the Bank to network an additional 1400 branches of SBI at an additional 251 centres. 1700 branches of our Associates will also be connected in this phase at all the 300 SBI connect centres. In addition ATMs and other electronic delivery channels also will be connected.
BENEFITS TO BANK
Less work to bank No manual work i.e. transaction and recording take place directly. Fewer loads for an employee. No requirement of front line staff. Avoid crowded banking halls. Transaction cost is lowered. Internet banking reduce error in transaction. Reconciliation is faster. Absolute paperless. Speed and empowerment service. Authorizing from desktop.
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INTERNET BANKING
ICICI ------ INTERNET BANKING INITIATIVES
ABOUT ICICI The Industrial Credit and Investment Corporation of India Limited (ICICI) were formed in 1955 at the initiative of the World Bank, the Government of India and representatives of Indian industry. The principal objective was to create a development financial institution for providing medium-term and long-term project financing to Indian businesses. ICICI Bank was originally promoted in 1994 by ICICI Limited and was its wholly owned subsidiary. In 1999, ICICI become the first Indian company and the first bank or financial institution from non-Japan Asia to be listed on the NYSE. ICICI Bank is India's secondlargest bank with total assets of about Rs. 1 trillion and a network of about 540 branches and offices and over 1,000 ATMs. ICICI Bank offers a wide range of banking products and financial services to corporate and retail customers through a variety of delivery channels and through its specialised subsidiaries and affiliates in the areas of investment banking, life and non-life insurance, venture capital, asset management and information technology. ICICI Bank also offers wide spectrum of domestic and international banking services to facilitate trade, investment, and cross-border business, treasury and foreign exchange services. This is in addition to a wide range of deposit services for individuals and corporate. ICICI Bank's equity shares are listed in India on several stock exchanges and its American Depository Receipts (ADRs) are listed on the New York Stock Exchange (NYSE). The Bank is noted for its innovative services and has been active in pioneering new initiatives for its domestic-wide clients. It introduced a variety of financial products via an increasing number delivery channels like the Internet, call center services, Branch Tellers, ATMs and etc. With the liberalisation of the Indian economy in the 90's and regulatory changes, ICICI Bank extended its portfolio of financial services in the area of investment banking, retail banking, private banking, treasury services and of course internet banking. It is characterised by state of- the-art technology and systems, all networked through V-SAT (satellite) technology. The bank has been quick to join the 71
INTERNET BANKING
SWIFT network, a year after its inception, and sign mergers with banks (Bank of Madura) and keeping its image up as an innovation leader.
INTERNET BANKING The bank was first to launch an Internet Banking service in the country, named Infinity. ICICI bank uses Infinity from Infosys, for its credit card business its uses Vision Plus from Pay Sys, USA, for WAP services the tie-up with cellular service providers Orange and Airtel helps reach out to these users, while the WAP technology is being implemented by the in-house ICICI Infotech service. To leverage the Net for its marketing initiatives ICICI bank and Satyam Info way have jointly set up a "COM" company to promote banking products on the Net. TECHNOLOGY AND SECURITY ICICI has announced a tie-up with technology providers such as Compaq, software trainers such as NIIT, and the ISP Satyam Online, to widen its reach. All these alliances are with organisations, which are growing at the rate of 50 percent or more per year. The growth of its own share prices is indicative of the organizations success. In July 2000, it launched Payseal, a payment gateway, which ensures safety and security of online transactions. Payseal interfaces between the Internet shopper, web merchant and banking systems in a secured environment to facilitate online payments. The bank has also entered into agreements with leading corporate like BPL, Rediff.com, Usha Martin and Tata Communications for B to C solutions in a bid to further strengthen its Internet banking product offering and services. Also ICICI has joined hands with a consortium led by Compaq to take the lead in offering a solution to the Indian e-commerce community. This consortium offers a B2B and B2C e-commerce payment gateway within India.
STRATEGY The bank seems to be focusing on the urban young professional, based on the underlying policy of catching them young and growing with them. The banks strategy is based on demand for services such as investment products, payment of utility bills, home loans, etc. by the young professionals concentrated in the metropolitan areas. ICICI bank seeks Uday Naickar BMS - Finance 72
INTERNET BANKING
to branch out through a network of professional and supported mergers with other private sector banks (such as Bank of Madura), which will enable its growth into rural areas. The continuing momentum of Internet growth is expected to aid its expansion. Therefore, strategically, ICICI bank, despite regulatory and infrastructure issues have been able to capitalise on the technological growth momentum and joint ventures with major market share holders in significant growth sectors, to offer a wide range of online banking services, thus boosting its competitive advantage. ICICIs strength has been its ability to attack problems by leveraging its innovation leader status on Internet.
CHALLENGE Being among the first banks to introduce Virtual Financial Institution, ICICI was eager to pursue a click and brick strategy. Established primarily as a wholesale lending institution providing commercial lending facilities for large-scale finance projects, the institution wanted better integrated and flexible universal financial banking software that enabled the bank to address the complete financial services needs of both private and corporate customers. Given the scale of the initiative, there were serious risks to consider:
Business risk
In pursuit of its Click and Brick strategy, the Bank was growing at a speedy rate, with the branch network increasing from 60 to a targeted 250. ICICI faced the additional challenge of supporting both a physical network serving six million households and virtual banking processes and applications into one seamless platform. Furthermore, the necessity to comply with Indians regulatory policies, procedures and practice created major concern as the bank went on an aggressive expansion growth strategy. Technology risk As the entire project focused on a customer centricity, it was critical to have the appropriate level of business intelligence integrated into the new banking system. The Bank also needed to manage the technology risks associated with the migration from its legacy systems to the new technologies necessary to manage the increasing volumes of transactions at net speed.
73
Prepared by Uday Naickar SWOT ANALYSIS OF ICICI STRENGTH First advantage innovation mover as leader WEAKNESSES Slow regulatory in the moving reform banking especially OPPORTUNITIES
INTERNET BANKING
THREATS Market share loss to industry rivals as well as new players
Leverage the first mover advantage
in Internet banking
sector
with net banking. Branded as Infrastructure issues at micro and macro levels. Capitalise innovation image On leader Threat acquired of being by a
technology leader
multinational bank or public sector
corporation Consumer relationships built on demand Online banking Speed due to limitation telecom Higher capital base
carriers Cultural distance and barriers
growth driven by consumer perceptions Advanced Technology And Providing
limiting the spread
Too
many
subsidiaries and High cost of funds
innovative products Services &
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INTERNET BANKING
HDFC --RAPID GROWTH IN INTERNET BANKING
ABOUT HDFC Bank Ltd. is a new-generation, private sector commercial bank in India. Founded in 1994 by India's leading housing company, HDFC Bank initially focused on corporate banking. Within only 1.5 years HDFC Bank was established as the premier bank in this segment, forming relationships with the top 200 corporations in India. HDFC Bank has 4,000 employees and 1.9 million retail customers; and is adding 2,000 new customers every day. With assets of $2.6 billion, it is one of India's leading private sector banks and has averaged return on equity of 23 percent annually over the past five years. The bank's success has not gone unnoticed in the banking and business community. In the year 2000, leading financial magazine Forbes Global named HDFC Bank in its list of "The 300 Best Small Companies" in the world and as one of the "20 for 2001" best small companies in the world. The Economic Times has chosen HDFC Bank for The Economic Times Award for Emerging Company of the Year 2000-01.
REAL-TIME INTERNET BANKING These ratings are due in part to the bank's emphasis on using advanced technology to boost effectiveness, efficiency, and customer convenience. All 160-plus branches are networked using Intel-based servers and 2,500 Intel. Architecture-based desktops, connected to the bank's back-end legacy database server. Customer convenience has been enhanced through online, real-time banking services such as ATMs, IVR-based phone banking, mobile banking and net banking, which it launched to enhance customer convenience by harnessing the power of enabling technology. This awareness and the sheer convenience have created strong customer demand. As a result, HDFC Bank's strategy was to enter Internet banking for the convenience of
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customers, to enhance our rate of customer retention, and ultimately, to lower transaction costs for the bank."
INTERNET BANKING PRODUCT AND SERVICES The bank has deployed three Internet banking solutions, all on Intel architecture making HDFC Bank the first bank in India to offer real-time online transactions. HDFC Bank's Net Banking* solution gives retail customers the convenience of accessing their accounts over the Internet, gaining real-time information such as account details, checkbook balances, and account histories. Net Banking also offers the ability to conduct core financial transactions such as check stop payment, bill payment, and fund transfers between accounts. HDFC Bank's Mobile Banking service gives retail customers account information and real-time transaction capabilities from their cell phones "anywhere, anytime, anyhow" convenience. And corporate Internet banking provides core account and real-time transaction services to the bank's commercial customers, including a link to the bank's business-to-consumer Internet gateway for bill presentment and payment . MEETING BUSINESS-CRITICAL STANDARDS HDFC Bank received many benefits from Internet banking solutions based on highperformance Intel-based servers and software. These include a lower cost of entry than RISC-based solutions, more freedom of choice in choosing vendors, products and partners, and faster solution development due to ease of applications with the large base of skilled technical engineers. HDFC Bank worked closely with solution providers I-flex Solutions Ltd. and SR Singapore Pte Ltd. for its Internet banking solutions, an example of the broad ecosystem of fellow travelers conversant in Intel architecture, software and solutions. These benefits come at no sacrifice to the essential robustness required of any solution in the financial services industry. Intel architecture Internet banking solutions meet business-critical standards of reliability, availability, scalability and manageability. Technology at HDFC Bank. "Cost effectiveness has also been very good. Intel architecture provides a cost-effective growth
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path, from a low cost of entry that can be scaled upward to meet a bank's growth needs. For HDFC time to develop Internet banking solution was less than 12 weeks. Internet banking is relatively new at HDFC Bank, detailed data is not yet available on return on investment, but the early returns indicate that the bank's e-Business solutions have helped to improve customer services, as well as in the acquisition of new customers. For instance, the bank's retail customer base has grown threefold during the two years that Internet banking has been in operation. And on the corporate side, Internet banking is popular and in demand, as many corporate customers are using it to automate their own value chain. HDFC BANK'S ENTERPRISE IT ARCHITECTURE
At HDFC Bank Internet banking exists in the context of a mixed, integrated enterprise IT architecture, featuring solutions deployed on Intel-architecture systems. HDFC Bank's Internet banking solutions feature a 3-tier, layered architecture with distinct layers for presentation, application, and enterprise application integration that interfaces with the bank's host systems. Both the corporate and retail Internet banking transaction processing engines, the Web servers, and the content servers all reside on Intel architecture systems, as do the firewall and several proxy servers. The primary client is Microsoft's Internet Explorer 5.0. INTERNET BANKING SOLUTION The retail Internet banking solution, ITPS, is an Internet transaction processing engine built around Microsoft Transaction Server-based middleware and uses the COM application architecture. This is deployed using a Java* 2 Enterprise Edition (J2EE) class application server, with the architecture layers interfacing with each other via Extensible Markup Language (XML). The application server runs on two 8 ways Intel. Pentium. III Xeon processors with 4GB RAM. The Microsoft* SQL Server* database supporting the application runs out of two 4 way Intel. Pentium. III Xeon processors with 4GB RAM. In the retail space, the mobile Internet banking solution offers two services: GSM-based cell phones utilize Short Message Service (SMS) via Short Message Service Centers Uday Naickar BMS - Finance 77
INTERNET BANKING
(SMSC) provided by the mobile service provider; Intel architecture-based Wireless Application Protocol (WAP) services rely on a micro-browser from Phone.com on the WAP mobile clients. Two-way connections from the mobile service provider to the bank's ITPS Internet transaction processing engine are via the Internet using SSL 3.0 to guarantee security.
DEVELOPING THE SOLUTION

To complement its real-time services available via branch, ATM, phone banking and call center, HDFC Bank decided to Internet-enable its services. At that point, HDFC Bank executives gathered and reviewed information from multiple sources about platforms and software solutions, and took into consideration the advice of I-flex and other trusted solution providers. In evaluating the possible choices, HDFC Bank first looked to the applications and system software that were available on Intel architecture. In the retail space, for instance, I-flex proposed the ITPS Internet banking application that runs on Intel-architecture, and from that point the basic due diligence began. Intel-based solutions offer the performance, reliability, availability, scalability and manageability required of any business-critical solution. Intel architecture also enabled HDFC Bank to take advantage of the latest technology enhancements in Microsoft's product suite, and in the Web application server areas, Java deployment and J2EE-based application servers.
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Prepared by Uday Naickar

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