Chapter One

Introduction

1.1 INDUSTRY PROFILE The Banking Regulation Act 1949 defines banking as accepting the purpose of lending or investment, of deposits of money from the public, repayable on demand or otherwise and withdraw able by cheque, draft, order otherwise. The essential function of a bank is to provide services related to the storing of value and the extending credit. The evolution of banking dates back to the earliest writing, and continues in the present where a bank is a financial institution that provides banking and other financial services. Currently the term bank is generally understood an institution that holds a banking license. Banking licenses are granted by financial supervision authorities and provide rights to conduct the most fundamental banking services such as accepting deposits and making loans. There are also financial institutions that provide certain banking services without meeting the legal definition of a bank, a so called nonbank. Banks are a subset of the financial services industry. The word Bank is derived from the Italian word banco signifying a bench, which was erected in the market place, where it was customary to exchange money; the first bench having been established in Italy A.D. 808. The basic functions of banks are to accept deposits, lend money and act as collecting and paying agents. The Bank of Barcelona in Spain (1401) was perhaps the first institution that could be called a bank in this sense. The terms bankrupt and "broke" are similarly derived from banca rotta, which refers to an out of business bank, having its bench physically broken. Money lenders in Northern Italy originally did business in open areas, or big open rooms, with each lender working from his own bench or table.

Typically, a bank generates profits from transaction fees on financial services or the interest spread on resources it holds in trust for clients while paying them interest on the asset.

1.2 INDIAN BANKING SYSTEM The Reserve Bank of India (RBI) is India's central bank. It is the sole authority for issuing bank notes and the supervisory body for banking operations in India. It supervises and administers exchange control and banking regulations, and administers the government's monetary policy. It is also responsible for granting licenses for new bank branches. Though the banking industry is currently dominated by public sector banks, numerous private and foreign banks exist. India's government-owned banks dominate the market. Their performance has been mixed, with a few being consistently profitable. Several public sector banks are being restructured, and in some the government either already has or will reduce its ownership. 1.3 WHAT IS CUSTOMER PERCEPTION? Customer Perception is an important component of an organizations relationship with their customers. Customer satisfaction is a mental state which results from the customers comparison of expectations prior to a purchase with performance perception after a purchase. Strong customer service helps an organization to reach up to customers expectations. Customer Perception on Service: Customer Service is the service provided in support of a companys core products. Customer Service most often includes answering questions, taking orders, dealing with billing issues,

handling complaints, and perhaps scheduling maintenance or repairs. Customer Service can occur on site, or it can occur over the phone or via the internet. Many companies operate customer service call centers, often staffed around the clock. Typically there is no charge for customer service. Quality customer service is essential to building customer relationships. It should not, however, be confused with the services provided for sale by a company. Services tend to be more intangible than manufactured products. There is a growing market for services and increasing dominance of services in economies worldwide. There are generally two types of customer expectations. The highest can be termed as desired service: the level of service the customer hopes to receive. The threshold level of acceptable service which the customers will accept is adequate service. Yet there is hard evidence that consumers perceive lower quality of service overall and are less satisfied. Possible reasons may be: With more companies offering tiered service based on the calculated profitability of different market segments, many customers are in fact getting less service than they have in past. Increasing use by companies of self-service and technology-based service is perceived as less service because no human interaction or human personalization is provided. Technology-based services (Automated Voice Systems, Internet-Based Services, Technology Kiosks) are hard to implement, and there are many failures and poorly designed systems in place. Customer expectations are higher because of the excellent service they receive from some companies. Thus they expect the same from all and are frequently disappointed. Organizations have cut costs to the extent that they are too lean and are too understaffed to provide quality service.

 The intensely competitive job market results in less skilled people working in frontline service jobs; talented workers soon get promoted or leave for better opportunities. Many companies give lip service to customer focus and service quality; but they fail to provide the training, compensation, and support needed to actually deliver quality service. Delivering consistent, high-quality service is not easy, yet many companies promise it.

1.4 Measuring Customer Perception in the Banking Industry Banking operations are becoming increasingly customer dictated. The demand for 'banking super malls' offering one-stop integrated financial services is well on the rise. The ability of banks to offer clients access to several markets for different classes of financial instruments has become a valuable competitive edge. Convergence in the industry to cater to the changing demographic expectations is now more than evident. Banc assurance and other forms of cross selling and strategic alliances will soon alter the business dynamics of banks and fuel the process of consolidation for increased scope of business and revenue. The thrust on farm sector, health sector and services offers several investment linkages. In short, the domestic economy is an increasing pie which offers extensive economies of scale that only large banks will be in a position to tap. With the phenomenal increase in the country's population and the increased demand for banking services; speed, service quality and customer satisfaction are going to be key differentiators for each bank's future success. Thus it is imperative for banks to get useful feedback on their actual response time and customer service quality aspects of retail banking, which in turn will help them take positive steps to maintain a competitive edge. The working of the customer's mind is a mystery which is difficult to solve and understanding the nuances of what perception the customer

has to attain satisfaction is, a challenging task. This exercise in the context of the banking industry will give us an insight into the parameters of customer satisfaction and their measurement. This vital information will help us to build satisfaction amongst the customers and customer loyalty in the long run which is an integral part of any business. The customer's requirements must be translated and quantified into measurable targets. This provides an easy way to monitor improvements, and deciding upon the attributes that need to be concentrated on in order to improve customer satisfaction. We can recognize where we need to make changes to create improvements and determine if these changes, after implemented, have led to increased customer satisfaction. 1.5 The Need to Measure Customer Perception: Satisfied customers are central to optimal performance and financial returns. In many places in the world, business organizations have been elevating the role of the customer to that of a key stakeholder over the past twenty years. Customers are viewed as a group whose satisfaction with the enterprise must be incorporated in strategic planning efforts. Forward-looking companies are finding value in directly measuring and tracking customer satisfaction as an important strategic success indicator. Evidence is mounting that placing a high priority on customer satisfaction is critical to improved organizational performance in a global marketplace.

With better understanding of customers' perceptions, companies can determine the actions required to meet the customers' needs. They can identify their own strengths and weaknesses, where they stand in comparison to their competitors, chart out path future progress and improvement. Customer satisfaction measurement helps to promote an increased focus on customer outcomes and stimulate improvements in the work practices and processes used within the company.

When buyers are powerful, the health and strength of the company's relationship with its customers its most critical economic asset is its best predictor of the future. Assets on the balance sheet basically assets of production are good predictors only when buyers are weak. So it is no wonder that the relationship between those assets and future income is becoming more and more tenuous. As buyers become empowered, sellers have no choice but to adapt. Focusing on competition has its place, but with buyer power on the rise, it is more important to pay attention to the customer.

What is banking?
Banks act as payment agents by conducting checking or current accounts for customers, paying cheques drawn by customers on the bank, and collecting cheques deposited to customers' current accounts. Banks also enable customer payments via other payment methods such as Automated Clearing

House (ACH), Wire transfers or telegraphic transfer, EFTPOS, and automated teller machine (ATM). Banks borrow money by accepting funds deposited on current accounts, by accepting term deposits, and by issuing debt securities such

as banknotes and bonds. Banks lend money by making advances to customers on current accounts, by making installment loans, and by investing in marketable debt securities and other forms of money lending. Banks provide different payment services, and a bank account is considered indispensable by most businesses and individuals. Non-banks that provide payment services such as remittance companies are normally not considered as an adequate substitute for a bank account.

E-Banking Electronic banking is one of the truly widespread avatars of E-commerce the world over. Various authors define E-Banking differently but the most definition depicting the meaning and features of E-Banking are as follows: 1. Banking is a combination of two, Electronic technology and Banking. 2. Electronic Banking is a process by which a customer performs banking Transactions electronically without visiting a brick-and-mortar institutions. 3. E-Banking denotes the provision of banking and related service through Extensive use of information technology without direct recourse to the bank by the customer.

Bank Information technology

Customer

Figure 1: E-banking principle

NEED FOR E-BANKING

One has to approach the branch in person, to withdraw cash or deposit a cheque or request a statement of accounts. In true Internet banking, any inquiry or transaction is processed online without any reference to the branch (anywhere banking) at any time. Providing Internet banking is increasingly becoming a "need to have" than a "nice to have" service. The net banking, thus, now is more of a norm rather than an exception in many developed countries due to the fact that it is the cheapest way of providing banking services. Banks have traditionally been in the forefront of harnessing technology to improve their products, services and efficiency. They have, over a long time, been using electronic and telecommunication networks for delivering a wide range of value added products and services. The delivery channels include direct dial up connections, private networks, public networks etc and the devices include telephone, Personal Computers including the Automated Teller Machines, etc. With the popularity of PCs, easy access to Internet and World Wide Web (WWW), Internet is increasingly used by banks as a channel for receiving instructions and delivering their products and services to their customers. This form of banking is generally referred to as Internet Banking, although the range of products and services offered by different banks vary widely both in their content and sophistication.

Figure 2: Electronic banking & its components

EVOLUTION OF E-BANKING
The story of technology in banking started with the use of punched card machines like Accounting Machines or Ledger Posting Machines. The use of technology, at that time, was limited to keeping books of the bank. It further developed with the birth of online real time system and vast improvement in telecommunications during late 1970s and 1980s.it resulted in a revolution in the field of banking with

convenience banking as a buzzword. Through Convenience banking, the bank is carried to the doorstep of the customer. The 1990s saw the birth of distributed computing technologies and Relational Data Base Management System. The banking industry was simply waiting for these technologies. Now with distribution technologies, one could configure dedicated machines called front-end machines for customer service and risk control while communication in the batch mode without hampering the response time on the front-end machine.

Traditional banking Gunpowder

Virtual or E-banking Nuclear charged

Personalized services, time consuming, limited access

Real time transactions, integrated platform, all time access

Figure 3: Transition from traditional to E-banking Intense competition has forced banks to rethink the way they operated their business. They had to reinvent and improve their products and services to make them more beneficial and cost effective. Technology in the form of E-banking has made it possible to find alternate banking practices at lower costs. More and more people are using electronic banking products and services because large section of the banks future customer base will be made up of computer literate customer, the banks must be able to offer these customer products and services that allow them to do their banking by electronic means. If they fail to do

this will, simply, not survive. New products and services are emerging that are set to change the way we look at money and the monetary system.

Figure 4: E-Banking transaction mechanism

E-BANKING PRODUCTS
Automated Teller Machine (ATM): These are cash dispensing machine, which are frequently seen at banks and other locations such as shopping centers and building societies. Their main purpose is to allow customer to draw cash at any time and to provide banking services where it would not have been viable to open another branch e.g. on university campus. An automated teller machine or automatic teller machine (ATM) is a computerized telecommunications device that provides a financial institutions custome rs a method of financial\ transactions in a public space without the need for a human clerk or bank teller. On most modern ATMs, the customer identifies him or herself by inserting a plastic ATM card with a magnetic stripe or a plastic smartcard with a chip that contains his or her card number and some security information, such as an expiration date or CVC (CVV). Security is provided by the customer entering a personal identification number (PIN). Using an ATM, customers can access their bank accounts in order to make cash withdrawals (or credit card cash advances) and check their account balances. Many ATMs also allow people to deposit cash or checks, transfer money between their bank accounts, pay bills, or purchase goods and services. Some of the advantages of ATM to customers are:1. Ability to draw cash after normal banking hours 2. Quicker than normal cashier service 3. Complete security as only the card holder knows the PIN 4. Does not just operate as a medium of obtaining cash. 5. Customer can sometimes use the services of other bank ATMs.

Telebanking or Phone Banking: Telephone banking is relatively new Electronic Banking Product. However it is fastly becoming one of the most popular products. Customer can perform a number of transactions from the convenience of their own home or office; in fact from anywhere they have access to phone. Customers can do following:1. Check balances and statement information 2. Transfer funds from one account to another 3. Pay certain bills 4. Order statements or cheque books 5. Demand draft request This facility is available with the help of Voice Response System (VRS). This system basically, accepts only TONE dialed input. Like the ATM customer has to follow particular process, initially account number and telephone PIN are fed for the process to start. Also the VRS system provides the users within additional facilities such as changing existing password with the new desired, information about new products, current interest rates etc. Mobile Banking: Mobile banking comes in as a part of the banks initiative to offer multiple channel banking providing convenience for its customer. A versatile multifunctional, free service that is accessible and viewable on the monitor of mobile phone. Mobile phones are playing great role in Indian banking- both directly and indirectly. They are being used both as banking and other channels.

E-cheque: An e-Cheque is the electronic version or representation of paper cheque. The Information and Legal Framework on the E-Cheque is the same as that of the paper cheques. It can now be used in place of paper cheques to do any and all remote transactions. An E-cheque work the same way a cheque does, the cheque writer "writes" the e-Cheque using one of many types of electronic devices and "gives" the e- Cheque to the payee electronically. The payee "deposits" the Electronic Cheque receives credit, and the payee's bank "clears" the e-Cheque to the paying bank. The paying bank validates the e-Cheque and then "charges" the check writer's account for the check.

Internet Banking: The advent of the Internet and the popularity of personal computers presented both an opportunity and a challenge for the banking industry. For years, financial institutions have used powerful computer networks to automate millions of daily transactions; today, often the only paper record is the customers receipt at the point of sale. Now that their customers are connected to the Internet via personal computers, banks envision similar advantages by adopting those same internal electronic processes to home use. Banks view online banking as a powerful value added tool to attract and retain new customers while helping to eliminate costly paper handling and teller interactions in an increasingly competitive banking environment. In India first one to move into this area was ICICI Bank. They started web based banking as early as august 1997.

TYPES OF INTERNET BANKING OR E-BANKING Understanding the various types of Internet banking will help examiners assess the risks involved. Currently, the following three basic kinds of Internet banking are being employed in the marketplace. 1. 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. The risk is 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 banks or outsourced. While the risk to a bank is relatively low, the server or web site may be vulnerable to alteration. Appropriate controls therefore must be in place to prevent unauthorized alterations to the banks server or web site. 2. Communicative- this type of Internet banking systems and the customer. The interaction between the banks system and the customer. The interaction may be limited to electronic mail, account enquiry, loan applications, or static file updates (name and address change). Because these servers may have a path to the banks internal networks, the ri sk is higher with this configuration than with informational systems. Appropriate controls need to be in the place to prevent, monitor, and alert management of any unauthorized attempt to access the banks internal networks and computer systems. Virus controls also become much more critical in this environment.
3. Transactional- this level of Internet banking allows customers to execute

transactions. Since a path typically exists between the server and the bank or outsourcers internal network, this is the highest risk architecture and must have the strongest controls. Customer transactions can include accessing accounts, paying bills, transferring funds etc.

ADVANTAGES OF INTERNET BANKING Convenience- Unlike your corner bank, online banking sites never close; theyre available 24 hours a day, seven days a week, and theyre only a mouse click away. Ubiquity- If youre 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 alert and portfolio managing program to help you manage all of your assets more effectively. DISADVANTAGES OF INTERNET BANKING Start-up may take time-In order to register for your banks 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 their 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 curves- 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.

E- BANKING SERVICES 1. Online bill payment service: Each bank has tie-ups with various utility companies, service providers and insurance companies, across the country. It facilitates the payment of electricity and telephone bills, mobile phone, credit card and insurance premium bills. To pay bills, a simple one-time registration for each biller is to be completed. Standing instructions can be set, online to pay recurring bills, automatically. Onetime standing instruction will ensure that bill payments do not get delayed due to lack of time. Most interestingly, the bank does not charge customers for online bill payment. 2. Fund transfer: Any amount can be transferred from one account to another of the same or any another bank. Customers can send money anywhere in India. Payees account number, his bank and the branch is needed to be mentioned after logging in the account. The transfer will take place in a day or so, whereas in a traditional method, it takes about three working days. ICICI Bank says that online bill payment service and fund transfer facility have been their most popular online services. 3. Credit card customers: Credit card users have a lot in store. With Internet banking, customers can not only pay their credit card bills online but also get a loan on their cards. Not just this, they can also

apply for an additional card, request a credit line increase and God forbid if you lose your credit card, you can report lost card online. 4. Investing through Internet banking: Opening a fixed deposit account cannot get easier than this. An FD can be opened online through funds transfer. Online banking can also be a great friend for lazy investors. Now investors with interlinked demat account and bank account can easily trade in the stock market and the amount will be automatically debited from their respective bank accounts and the shares will be credited in their demat account. Moreover, some banks even give the facility to purchase mutual funds directly from the online banking system. So it removes the worry about filling those big forms for mutual funds, they will now be just a few clicks away. Nowadays, most leading banks offer both online banking and demat account. However if the customer have their demat account with independent share brokers, then need to sign a special form, which will link your two accounts. 5. Recharging your prepaid phone: Now there is no need to rush to the vendor to recharge the prepaid phone, every time the talk time runs out. Just top-up the prepaid mobile cards by logging in to Internet banking. By just selecting the operator's name, entering the mobile number and the amount for recharge, the phone is again back in action within few minutes.

6. Shopping at your fingertips: Leading banks have tie ups with various shopping websites. With a range of all kind of products, one can shop online and the payment is also made conveniently through the account. One can also buy railway and air tickets through Internet banking.

List of some banks operating E-Banking in India & their technology vendors

Bank Name ABN AMRO Bank Abu Dhabi Commercial Bank Bank of India Citibank Corporation Bank Deutsche Bank Federal Bank Global Trust Bank HDFC Bank HSBC ICICI Bank IDBI Bank IndusInd Bank Punjab National Bank Standard Chartered Bank State Bank of India UTI Bank

Technology Vendor Infosys (Bank Away) Infosys (Bank Away) I-flex Orbitech (now Polaris) I-flex

Service offering NetBanking

ADCB NetLink BOIonline Citibank Online CorpNet db direct Sanchez FedNet Infosys (BankAway) ibank@gtb i-flex/ Satyam NetBanking Online@hsbc Infosys, ICICI Infotech Infinity Infosys (Bank Away) i-net banking CR2 Indus Net Infosys (Bank Away) Internet Banking Me Standard Chartered In-House Online Satyam/Broad vision onlinesbi.com Infosys (Bank Away) I connect

THE INDIAN SCENARIO Drivers of change Advantages previously held by large financial institutions have shrunk considerably. The Internet has leveled the playing field and afforded open access to customers in the global marketplace. Internet banking is a cost-effective delivery channel for financial institutions. Consumers are embracing the many benefits of Internet banking. Access to one's accounts at any time and from any location via the World Wide Web is a convenience unknown a short time ago. Thus, a bank's Internet presence transforms from 'brouchreware' status to 'Internet banking' status once the bank goes through a technology integration effort to enable the customer to access information about his or her specific account relationship. The six primary drivers of Internet banking includes, in order of primacy are: 1. Improve customer access 2. Facilitate the offering of more services 3. Increase customer loyalty 4. Attract new customers 5. Provide services offered by competitors 6. Reduce customer attrition From the perspective of banking products and services being offered through Internet, Internet banking is nothing more than traditional banking services delivered through an electronic communication backbone, viz, Internet. But, in the process it has thrown open issues which have ramifications beyond what a new delivery channel would normally envisage and, hence, has compelled regulators world over to take note of this emerging channel.

Some of the distinctive features of E-banking are: 1. It removes the traditional geographical barriers as it could reach out to customers of different countries / legal jurisdiction. This has raised the question of jurisdiction of law / supervisory system to which such transactions should be subjected, 2. It has added a new dimension to different kinds of risks traditionally associated with banking, heightening some of them and throwing new risk control challenges, 3. Security of banking transactions, validity of electronic contract, customers privacy, etc., which have all along been concerns of both bankers and supervisors have assumed different dimensions given that Internet is a public domain, not subject to control by any single authority or group of users, 4. It poses a strategic risk of loss of business to those banks who do not respond in time, to this new technology, being the efficient and cost effective delivery mechanism of banking services, 5. A new form of competition has emerged both from the existing players and new players of the market who are not strictly banks.