EXECUTIVE SUMMARY

“E-banking”- The execution of financial services via internet, reducing cost

and increase in convenience for the customer to access the transaction. e-
banking is an umbrella term for the process by which a customer may perform
banking transactions electronically without visiting a brick-and-mortar
institution. The following terms all refer to one form or another of electronic
banking: personal computer (PC) banking, Internet banking, virtual banking,
online banking, home banking, remote electronic banking, and phone
banking. PC banking and Internet or online banking are the most frequently
used designations. It should be noted, however, that the terms used to
describe the various types of electronicbanking are often used
interchangeably.

The ever increasing speed of internet enabled phones & personal assistant,
made the transformation of banking application to mobile devices, this
creative a new subset of electronic banking i.e. mobile banking. In 1999 &
2000 mobile banking as an established channels, still seems to be a distant
prospect.

The internet is revolutionizing the way the financial industry conducts

business online, has created new players who offer personalize services
through the web portals. This increase to find new ways and increase
customer loyalty to add the value to this product and services.

Banks also enables customers lifestyle needs by changing and increasing

preference for speed and convenience are eroding the traditional affinity
between customer and branch offices as a new technology disinter mediates
traditional channels, delivering the value proposition hinges on owing or
earning the customer interface and bringing the customer a complete solution
which satisfies their needs. Smart card is a new trend which provides the
opportunity to build an incremental revenue stream by providing an ideal

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platform for extended application and services. Banks are well positioned to
play central role unit in future M-commerce market. Banks have strong
relationships with corporate and business customers and a wide experience in
providing them with corporate banking services. Bank provides a multimedia
of small and large retailers with acquiring functionality in credit card
transactions. Customers have trusted relationships with banks and a lower
propensity to switch banking providers.

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NEED FOR THIS STUDY

Since the 80s, there has been turbulence in the banking and finance industry
worldwide as the pace of changes continues to accelerate. Changes are
being driven, above all by competition, technology and customer demand.
The Internet – both an opportunity and threat for banks - will intensify these
effects.

The globalisation process and the opening up of the Indian economy; have
given reason for the banking sector to rethink its existing strategies. The
penetration of computers and growth in Internet usage is making the
customers crave for more – more services, more convenience! People want to
put their PC to as many uses as possible. E-Banking is one such use; and a
very important one at that.

These reasons and more have given rise to the need for such a project.
Although many researches and projects have been conducted on this topic
before, this project is not redundant because e-banking is a very dynamic
subject in today’s scenario and hence it needs to be constantly updated and
studied.

Due to the vastness of this subject, it is impossible to include every single

detail, hence wherever necessary, annexure have been attached.

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INTRODUCTION

Traditional banks offer many services to their customers, including accepting

customer money deposits, providing various banking services to customers,
and making loans to individuals and companies. Compared with traditional
channels of offering banking services through physical branches, e-banking
uses the Internet to deliver traditional banking services to their customers,
such as opening accounts, transferring funds, and electronic bill payment.

E-banking can be offered in two main ways. First, an existing bank with
physical offices can also establish an online site and offer e-banking services
to its customers in addition to the regular channel. For example, Citibank is a
leader in e-banking, offering walk-in, face-to-face banking at its branches
throughout many parts of the world as well as e-banking services through the
World Wide Web. Citibank customers can access their bank accounts through
the Internet, and in addition to the core e-banking services such as account
balance inquiry, funds transfer, and electronic bill payment, Citibank also
provides premium services including financial calculators, online stock quotes,
brokerage services, and insurance.

E-banking from banks like Citibank complements those banks' physical

presence. Generally, e-banking is provided without extra cost to customers.
Customers are attracted by the convenience of e-banking through the
Internet, and in turn, banks can operate more efficiently when customers
perform transactions by themselves rather than going to a branch and dealing
with a branch representative.

E-banking services are delivered to customers through the Internet and the
web using Hypertext Markup Language (HTML). In order to use e-banking
services, customers need Internet access and web browser software.
Multimedia information in HTML format from online banks can be displayed in
web browsers. The heart of the e-banking application is the computer system,
which includes web servers, database management systems, and web
application programs that can generate dynamic HTML pages.

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One of the main concerns of e-banking is security. Without great confidence
in security, customers are unwilling to use a public network, such as the
Internet, to view their financial information online and conduct financial
transactions. Some of the security threats include invasion of individuals'
privacy and theft of confidential information. Banks with e-banking service
offer several methods to ensure a high level of security: (1) identification and
authentication, (2) encryption, and (3) firewalls. First, the identification of an
online bank takes the form of a known Uniform Resource Locator (URL) or
Internet address, while a customer is generally identified by his or her login ID
and password to ensure only authenticated customers can access their
accounts. Second, messages between customers and online banks are all
encrypted so that a hacker cannot view the message even if the message is
intercepted over the Internet. The particular encryption standard adopted by
most browsers is called Secure Socket Layer (SSL). It is built in the web
browser program and users do not have to take any extra steps to set up the
program. Third, banks have built firewalls, which are software or hardware
barriers between the corporate network and the external Internet, to protect
the servers and bank databases from outside intruders. For example, Wells
Fargo Bank connected to the Internet only after it had installed a firewall and
made sure the firewall was sufficiently impenetrable.

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PRE E-BANKING SCENARIO IN INDIA

Traditional Banking
Traditionally the relationship between the bank and its customers has been on
a one-to-one level via the branch network. This was put into operation with
clearing and decision-making responsibilities concentrated at the individual
branch level. The head office had responsibility for the overall clearing
network, the size of the branch network and the training of staff in the branch
network. The bank monitored the organization’s performance and set the
decision-making parameters, but the information available to both branch staff
and their customers was limited to one geographical location.

Traditional Banking Structure (Diag.1)

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ON IT ADOPTION
The Indian banking sector woke up to the world of technology in early 1990s.
The banking sector in India has been dominated by the public sector banks,
who hold between them more than 80% of the total asset base. New private
sector banks and foreign banks have tended to concentrate their efforts more
on the top 23 centres, which house the cream of the country's urban
customers. These banks have taken the lead in technology adoption and have
succeeded in building up a substantial base of technology savvy, high-end
customers.

Making an observation about the adoption of technology by the banks, P.C.

Narayan, vice-president (IT and retail banking) of Global Trust Bank Ltd, says,
"The rate of adoption of IT by foreign and private sector banks in the country
has been significant over the last five years. This can be attributed largely to
intense competition as well as the Internet phenomenon worldwide. A number
of banks in the public sector have also accelerated the pace of IT deployment,
largely because of the competitive pressure brought upon them by private
sector banks and foreign banks."

Though in the beginning the employees resisted computerisation (especially

in nationalised banks), the management finally succeeded in convincing its
employees about the benefits and need for adoption of technology. Says P.
Seshadri Rao, a financial consultant based in Hyderabad, "The basic reason
for getting the nod for computerisation was the competition from private
banks. Once the gates were opened to the private sector to operate banks,
they started with a bang, thereby forcing nationalised banks to reconsider
their way of doing business."

A SBI official in Delhi echoes the same sentiments: "Needless to say,

competition from foreign banks was one of the motivating factors for us to

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switch to computers. But housekeeping scored over everything else.
Maintaining books and regular tasks like computing interest at the end of the
calendar year was tedious. The quantum of database was so huge that
computerisation was the only way out. Banks would have certainly started
downing their shutters had banking software not taken over the reins."

In sharp contrast, most of private banks like GTB, HDFC and ICICI started
their operations with the use of technology. And with these new banks wooing
the customers by offering what was till then an unknown phenomenon-
customer service-the nationalised banks were forced to take remedial steps.
"The compulsion for private banks to adopt a very high level of IT was driven
by their desire to contain their operating cost at the lowest levels and at the
same time be able to offer a wide variety of products and services in the
quickest possible time," observes Narayan.

Commenting on the reasons for public sector banks being laggards in the
adoption of technology, State Bank of Mysore managing director Sitarama
Murty says: "The private banks started with a clean slate. They hired
technology savvy people. On the other hand, public sector banks didn't have
those advantages. We need to follow the public sector bank's rules and
regulation while hiring people. We can't appoint computer professional in the
top management directly."

Computerisation of all branches, especially in semi-urban and rural areas, is

still a far cry for public sector banks. "This calls for huge investments and
retraining of staff. I think these factors are inhibiting most of the banks to take
technology to rural areas. But since IT is becoming an integral and inevitable
part of the banking system, rural banks' computerisation should also happen
very soon," comments a senior official with Andhra Bank. Explains P.K.
Seshadrinathan, CTO of SSI Technologies: "The key obstacles to introduction
of IT are non-integration or non-networking of branches, and a lack of
corporate network. Computerisation has been introduced but each branch
acts as an island. And, of course, cultural/social issues continue to pose

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problems. Overcoming these obstacles, therefore, would be the biggest
challenge by itself."

However, the nationalised banks have taken to computerisation in the right

earnest. Today most of them have their own in-house IT department which
not only takes care of deployment and implementation issues but is also into
developing specific and customised applications for the bank. From SBI to
Canara Bank, everyone is expanding its IT division and making huge
investments to develop the division as a profit centre by itself. According to an
SBI official, "It makes more sense to have our own division which understands
our needs and comes out with a solution. It is not just cost-effective but also
useful for a bank to have a separate division that takes care of IT in totality."

Faced with deregulation, privatisation and globalisation, the Indian banks are
slowly looking at various options to stay ahead in the rat race.

This has resulted in the following recent trends:

Phone Banking
This means carrying out of banking transaction through the telephone. A
customer can call up the banks help line or phone banking number to conduct
transactions like transfer of funds, making payments, checking of account
balance, ordering cheques, etc,. This also eliminates the customer of the
need to visit the bank’s branch.

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ATM (Automatic Teller Machine)

An ATM is basically a machine that can deliver cash to the customers on

demand after authentication. An ATM does the basic function of a bank’s
branch, i.e., delivering money on demand. Hence setting of newer branches is
not required thereby significantly lowering infrastructure costs. These
machines also hold the keys to future operational efficiency.

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THE INTERNET – A DISTRIBUTION CHANNEL

Distribution channels are physical capacities to build up customer contacts in

a systematic way in order to inform, counsel and sell products and services.
The Internet is a so-called electronic distribution channel. Combined with self-
service terminals and telecommunication equipment electronic distribution
channels are technical channels within the class of media distribution
channels. Another example for a media distribution channel is direct mail.

Today, media distribution channels are an important way of distributing

information and managing standard transactions. Counseling is mostly done
in branch offices or by field workers. Together, personal and media
distribution channels are called internal distribution channels. On the other
side there are external distribution channels like salesman or franchising
partners. The following figure visualizes this classification.

Distribution Channels of Financial Institutions (Diag. 2)

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Areas of Use of the Internet in Financial Institutions

Generally we may distinguish four classes of Internet use in financial

institutions:
 Information presentation
 Information presentation together with two way (asynchronous)
communication (e.g. email to request further information)
 Interaction with user (e.g. execution of programs with individual
customer data)
 Transaction banking (e.g. electronic payments)

Information may be provided in connection with one or two way

communication. One-way communication means that the institution uses the
Internet only as a presentation medium for its products and services. The
simplest way to use two-way communication is to allow users to send
electronic mails to the server in order to ask for further information or make
suggestions with respect to the Internet site.

Interaction with customers requires quick information exchange. Information

provided by the user controls the information offered by the server. If the
customer is identified and authenticated connecting to operative systems of
the financial institution may be possible. Then, often very little information has
to be provided by the customer since data stored in the databases of the
financial institution may be used.

Presentation of product information may be used to initiate new contacts.

Implemented product models permit the construction of optimal insurance or
financing contracts by using simpler components. Using mathematical models
the customer may analyze his portfolios. To do so, he may use simulation
techniques, what-if-analysis and other similar techniques.

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Most Internet presentations by financial institutions fall into one of these three
categories (actually most of them are within the first two groups). If actual
contracting is desired transaction management is necessary.

There are a large number of different financial transactions, like e.g. customer
payments, securities transactions applications for loans or insurance
acquisitions, funds transfer, etc.

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THE NEW ERA

WHAT IS E-BANKING?

A non-resident Indian (NRI) in Paris has an easy way to access money in this
fashion capital of the world. His Citibank account in India can be accessed
through an ATM in Paris, which in turn transmits information to Citibank’s
central hub in the US. The Indian rupees are converted to US dollars, which
are in turn converted into French Francs at the current exchange rate, the
Indian account is debited and the Francs made available to the NRI. Welcome
to the era of technology banking!

Traditionally, banks have used branch networks and distributed PC software

as their delivery channels to reach business customers. However, in the
recent past, a combination of distinctive factors require that banks rethink their
strategy. These factors include demands on time as a limited resource, rising
real estate expense, changing human resource and information technology
infrastructure and, most of all, fierce competition. All of these factors are
forcing banks to provide services to their business customers anytime,
anywhere, anyhow in what is termed as “boundary-less banking."

There is no denying the fact that in the past two decades information
technology has been the most rapidly changing industry in the world. But
more than the rate of change, what is remarkable is the way IT has changed
the paradigms of business in other industries. One industry that has really felt
the impact of IT has been the banking sector.

What is E-banking? Electronic Banking in simple terms means, it does not

involve any physical exchange of money, but it’s all done electronically, from
one account to another, using the Internet. Internet banking is just like normal
banking, with one big exception. You don't have to go to the bank for
transactions. Instead, you can access your account any time and from any
part of the world, and do so when you have the time, and not when the bank

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is open. For busy executives, students, and homemakers, e-banking is a
virtual blessing. No more taking precious time off from work to get a demand
draft made or a Chequebook issued.

Banks offer Internet banking in two main ways. An existing bank with physical
offices can establish a Web site and offer Internet banking to its customers in
addition to its traditional delivery channels.

A second alternative is to establish a ‘‘virtual,’’ ‘‘branchless,’’ or ‘‘Internet-only’’

bank. The computer server 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 may offer their customers the ability to
make deposits and withdraw funds via automated teller machines (ATMs) or
other remote delivery channels owned by other institutions.

Online systems allow customers to plug into a host of banking services from a
personal computer by connecting with the bank's computers over telephone
wires. The convenience can be compelling. Not only is travel time reduced,
but ATM machines, telephone banking or banking by mail are often
unnecessary. And, technology continues to make online banking, once
attempted only by computer enthusiasts, easier for the average consumer.

Banks use a variety of names for online banking services, such as PC

banking, home banking, electronic banking or Internet banking.

Can one imagine life without paper cash? Money has always been part of
human emotions. And although it is difficult to imagine that all those years of
savings at the bank is now just a whole bunch of bits and bytes, it is becoming
a reality and the sooner people adjust to it, the better it is.

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SERVICES OF E-BANKS

Internet banks offer a variety of features and perks, rushing to lure online
customers. The race is on to increase market share and create customer
loyalty with features that make online banking friendlier, more useful, and less
expensive. E-Banking lures customers with ‘convenience’.

The three broad facilities that e-banking offers are:

• Convenience - Complete your banking at your convenience, in the

comfort of your home or at any place you can access the Net.

• No more Qs - There are no queues at an online bank.

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 • 24/7 service - Bank online 24 hours a day, 7 days a week and 52
weeks a year.

FEATURES FOUND IN INTERNET BANKING

• Online applications
Consumers can begin their banking relationship with an online application. No
need to waste time driving to a local branch to begin a banking relationship.
Consumers can fill out and submit electronically all necessary information
needed to open a checking, savings account or even a fixed deposit. When
the application is submitted, the bank will mail you a signature card for its
records and request you to mail or wire your initial funds. Some firms like
American Express and CompuBank enable customers applying for an
account to fund their new account electronically via a credit card or cheque
from another banking institution. There are some firms such as Wingspan and
USA BancShares.com that enable customers to digitally sign their
applications.

• Account Access
Internet banking customers now have the ability to view their accounts online,
including checking, savings, loans and credit cards. No need to wait for your
monthly statements or wait in queue for the next available customer service
representative. Account access enables customers to view most recent
activity on accounts, including cleared checks, deposits, ATM transactions
and balances as of previous days activities. Customers no longer have to hold
on to the cleared checks, since their bank will store them for them online.

• Account transfers
Internet banking customers have the ability to transfer funds to and from their
accounts online. With a simple online form, customers can move money from
a checking account to a savings account and vice versa within the safety and
convenience of their home –- without having to visit the ATM. Funds

17
transferred online are updated in less than three hours. In addition, customers
can set up recurring transfers to accounts. A recurring transfer will take place
on the customer specified date, with a specified amount.

• Bill Payment
Online bill payment enables customers to pay anyone, friends or family, as
well as a pay their bills electronically. As an add on feature to Internet
banking, bill payment enables customers to send paper checks to anyone or
an electronic check to any institution that accepts electronic bill payments. To
use bill payment, customers are required to set up their payees online.
Customers then have the ability to set up recurring, automatic payments to a
specific biller on a specified day or just a one-time payment. Arrange
payments three to five days, before the due date, to ensure timely delivery. It
is important to note that not all banks provide bill payment as a free feature.

• Benefits at participating online merchants

The banks partner with online merchants to offer discounts when a purchase
is made with the card.

• 24/7 customer service

Although it is easy to yield to the temptation of allowing the Internet to replace
expensive branch personnel and overhead, many banks have found that an
customer service staff ready at any hour is well worth the expense. This can
be especially true as customers transition to online banking and need help
learning the features. Offering telephone and email contacts is a basic level of
service. Offering live chat assistance is the exceptional level.

• Access to old transactions

Choices made in designing the Internet interface may include how much
history will be available online. Some banks have chosen to show only 30-45
days, while others offer a history of six months or a year.

• Categorize transactions and produce reports

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Functionality is king as online banking customers using these features enjoy a
Web interface that delivers the utility of a money management software
application.

• Export your banking data

Most banks offering the management interface also allow easy downloading
of financial information into files that can be imported into Microsoft Money
and Intuit's Quicken.

• Interactive guides & tools to help selection of proper product

Although online, interactive guides through a bank's products, adds
complexity to the programming it also serves the bank by assisting potential
customers in choosing new products or services. Interactive Tools to design a
savings plan, choose a mortgage, obtain online insurance quotes all tied to
applications These tools help remove some of the mystery involved in so
many account options and costs.

• Loan status and credit card account information

Bank customers are familiar with reviewing their checking account
information, but many banks are adding the ability to look at one's loan status
and credit card information as well. Access to as many accounts held at the
bank seems to be the goal.

• View digital copies of checks

This, again, is removing a down side to online banking. It makes images of
checks available as replacement for sending out cancelled checks or sheets
of printed check images.

Online forms for ordering checks, stop payment, etc.

Convenience is popular and if a customer visits his or her online account
frequently it only makes sense to allow the ability to reorder checks or perform
certain other commands through the same interface.

19
These features and many others help customers save time, simplify their lives
and provide greater value than conventional banking.

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ONLINE PAYMENT SYSTEMS

What is a Payment System?

Payment means the transfer of money. In its simplest form, a payment
system is an agreed upon way to transfer value between a buyer and a seller
in a transaction. When coupled with rules and procedures, the payment
system provides an infrastructure for transferring money from one entity in the
economy to another. Payment systems can be distinguished by the
mechanisms used to transfer value in an exchange of goods or services.

Electronic Payment Systems

Electronic payment systems exist in a variety of forms, which can be divided
into two groups: wholesale payment systems and retail payment systems.
Wholesale payment systems exist for non-consumer transactions--
transactions initiated among and between banks, corporations, governments,
and other financial service firms.

Retail electronic payment systems encompass those transactions involving

consumers. These transactions involve the use of such payment mechanisms
as credit cards, automated teller machines (ATMs), debit cards, point-of-sale
(POS) terminals, home banking, and telephone bill-paying services.

Wholesale Payment Systems

Wholesale payment systems are also called Large Value Payment Systems.
Large value funds transfer systems are usually distinguished from retail funds
transfer systems that handle a large volume of payments of relatively low
value. The average size of transfers through large value funds transfer
systems is substantial and the transfers are typically more time critical.

There are two types of wholesale payment systems – net settlement systems
and gross settlement systems. Large Value funds transfer systems can also
be classified according to the timing (and frequency) of settlement. Systems
can in principle be grouped into two types - designated time (or deferred)
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settlement systems and real-time (or continuous) settlement systems,
depending on whether they settle at pre specified points in time or on a
continuous basis.

Net Settlement Systems

In a net settlement system, the settlement of funds transfers occurs on a net
basis according to the rules and procedures of the system. A participating
bank's net position is calculated, on either a bilateral or a multilateral basis, as
the sum of the value of all the transfers it has received up to a particular point
in time minus the sum of the value of all the transfers it has sent. The net
position at the settlement time, which can be a net credit or debit position, is
called the net settlement position.

Gross Settlement System

In a gross settlement system, on the other hand, the settlement of funds
occurs on a transaction by transaction basis, that is, without netting debits
against credits.

Designated Time Settlements

Designated time (or deferred) settlement system is one in which final
settlement occurs at one or more discrete, pre specified settlement times
during the processing day. Designated time settlement systems in which final
settlement takes place only once, at the end of the processing day, are called
end of day settlement systems. Currently, net settlement systems for large
value transfers are typically end of day net settlement systems that settle the
net settlement positions by means of transfers of central bank money from net
debtors to net creditors.

In some countries, there are systems in which the final settlement of transfers
occurs at the end of the processing day without netting the credit and debit
positions - on a transaction by transaction basis or on the basis of the
aggregate credit and aggregate debit position of each bank. Such systems
are often called end of day gross settlement systems.
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Real time Settlement Systems
A real time (or continuous) settlement system is defined as a system that can
effect final settlement on a continuous basis during the processing day. RTGS
i.e. Real Time Gross Settlement systems, as defined below, fall into this
category.

Types of large value funds transfer system (Diag. 3)

Settlement
Gross Net
characteristics

Designated time Designated time Designated time net

(deferred) gross settlement settlement (DNS)

Continuous (real - Real time gross

(Not applicable)*
time) settlement (RTGS)

* By definition, netting involves the accumulation of a number of

transactions so that credits can be netted against debits and this is
incompatible with genuinely continuous settlement.

Retail Payment Systems

Retail payment systems are also called small value payment systems.

An important emerging mechanism for enabling small-value payment systems

is electronic money. Electronic money is a payment mechanism that is a
direct substitute for traditional cash; value is transferred electronically to pay
for goods and services at vending machines, retail establishments, over
networks, or through direct person-to-person exchanges.

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Electronic money offers some features that make it an attractive alternative
over other payment mechanisms. Electronic money does not have to be
designed to faithfully emulate all the properties of paper cash. It can be
implemented to preclude some features of paper cash, such as complete
anonymity, while including other desirable attributes of paper cash, such as
full divisibility, assignment of limits and constraints, and links to the current
owner.

The following are some types of electronic money available over the net
worldwide.

First Virtual
The account is set up by phone using a traditional credit card number and a
First Virtual account number is issued. Clients provide their credit card
numbers to First Virtual over the phone or other non-Internet method, and are
issued a personal account number to make purchases over the Internet. This
payment mechanism allows the user to order goods online and then charges
the user's credit card company on behalf of the online merchant. The
merchant reports the transaction amount with the First Virtual account
number. First Virtual then confirms the purchase with the customer via email.
No special software is required for either purchaser or merchant.

DigiCash

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David Chaum, a mathematician and privacy expert, founded DigiCash. This
provider creates e-cash, proprietary electronic cash tokens, which are
marketed as being the equivalent of cash. An account is established at a
DigiCash-licensed bank with real money. Once established, the customer can
withdraw e-cash that is stored on the user computer's hard drive. Using
proprietary software, e-cash can be spent with an Internet merchant or with
anyone else whose computer is set up to deal in e-cash. Using public-key
cryptography, the digital tokens are said to be secure and can be registered
and verified by the issuer without revealing to whom it was originally issued. In
effect, these digital cash transactions are capable of being as anonymous as
cash. No transaction confirmations are necessary, meaning the merchant can
immediately ship the product.

CyberCash
This payment mechanism consists of a downloadable software package using
public-key encryption that is designed to assure the security of credit card
transactions over the Internet. The system protects the customer's
authentication data. An account is set up and acts as an Internet front end to
any existing credit card that is designated. When a purchase is made,
proprietary software is used that sends the purchase and account information
in encrypted form to the account provider. The provider in turn sends the
information to the appropriate financial organization for processing.

• NetCash
This concept is similar to e-cash, except that it does not require any special
software to use. NetCash is transmitted across the Internet using an
encryption scheme known as PGP (pretty good privacy). To get NetCash, a
party must send a check or money order to the company's headquarters. The
company returns electronic coupons via e-mail.

NetChex
This payment mechanism is similar to CyberCash for checking accounts.

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 • Millicent
The Millicent method is developed by Digital Equipment Corporation (DEC) to
manage small and smallest payments (e.g. payment for getting information
from the Internet about news and stock quotations or payment for small
programs like Java-applets)

The customer buys a broker scrip with a defined value by using his credit card
or by debiting a suitable bank or broker account. Such scrip is like a telephone
card. At the time of purchase the customer exchanges parts of the scrip into a
dealer's scrip. This scrip is then send to the dealer. The dealer collects all
scrips and exchanges them into "real" money.

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ELECTRONIC CHECKING ACCOUNTS

Several organizations and coalitions of organizations have been trying to

create ways of using existing checking accounts over the Internet. In most of
those efforts, the consumer uses his or her checking account with a bank or
service and then draws down those funds using special electronic checks and
digital signatures. Generally, those programs are not as close to a major
commercial introduction as are those based on credit cards or electronic scrip.
Many observers feel that electronic checks, despite a slow start, could
become a widely used method for making payments.

Credit Cards
The credit card is usually a four-party card which involves two banks in each
transaction, the cardholder's bank (the issuer of the card) and the retailer's
bank. The retailer hands over the credit card slips to its own bank for
payment, less a discount, typically about 2-3%. The retailer's bank then
passes the slips on to a clearing system. The clearing system presents each
slip for payment to the bank that issued the card on which it was written. The
issuing bank collects from the cardholder. All of these exchanges are now
done by wire.

Debit Cards
With a debit card, the payment comes right out of your checking account. The
card is issued by the entity that holds your money on deposit, probably a

27
bank, but possibly a money market fund. When you present your card,
money is transferred from your account to the merchants account that day.

Stored Value Card Scheme or Smart Cards

Smart card technology represents a real change in how and where
information is processed. The smart card is a credit card-sized payment
mechanism with an integrated circuit chip embedded within the card. The
embedded chip enables the card to contain significant amounts of data
including prepaid stored value. The embedded chip can also hold programs
that interact with data either contained on the chip or external to the chip.
These programs can be permanent and unchangeable or can be modified
when the card is connected to a network. Data can be stored, updated, and
retrieved both when the card is issued and throughout its life. However,
because of the embedded chip, the smart card operates as a stand alone
payment mechanism--in effect, a direct substitute for cash--without requiring
online network connections. This stored value can be accessed and altered
by terminals at a merchant's establishment or at remote locations. A
consumer with a smart card can go to a bank or ATM and have the card
loaded with a certain amount of value. The consumer can then proceed to
make purchases, up to the amount of stored value, in the same manner as if
currency were being used. At each terminal, the device reads the smart card
to determine that there is sufficient value available and deducts the amount of
the transaction. When the card's value has been exhausted, the consumer
can return to the bank or ATM to replenish the value.

The strength of this scheme is that it avoids the need to identify the user and
access the user's bank account or credit card in order to verify funds
availability because the only funds available are those that are on the card.
This eliminates the problem of retailers who are reluctant to accept payment
by check due to concerns about funds availability.

28
Mondex
Mondex is owned by Master Card and National Westminster Bank of London
and is being tested in several countries. Mondex uses a smart card to store
electronic cash that can be used to pay for goods and services in the same
way as cash but with some key benefits over traditional cash.

29
ONLINE SECURITY SYSTEMS

The concern of security remains the largest barrier to the growth of online
banking. Most people seem to believe that it is a hacker jungle out there, and
stay very wary of trying to simplify their lives by using cyberspace.

Most institutions providing online banking services are very security

conscious. After all, they wouldn’t want to open their computers to a
stampeding public, would they? The security measures that organizations
take over the Web are simply invincible, unlike the surveillance cameras and
lobby guards posted in many banks. If the general public is not aware of, or
does not understand, the many features put into place to guard their finances,
then people remain skeptical.

Depending on how online accounts are accessed, security can be guaranteed

in a variety of ways. Moreover, when a bank offers online service, it is not
opening its mainframe computers to the world. Usually, the bank installs a
group of separate computers that stand between the mainframe computer and
the network that will deliver data to your PC. At several points along the way,
protection is built in.

Some of the most common security features are firewalls, data encryption,
and passwords/personal identification numbers.

Firewalls
A firewall is a computer or software that protects the bank’s computers and
data from being accessed by any outsider. This firewall is located at the point
where the bank’s world connects with the rest of the world. This firewall is
basically a gatekeeper, checking each attempt at delivery of data with a list of
strict specifications; any criteria not met; does not make it past the firewall.

Public Key Infrastructure

30
Public key infrastructure can be defined as a solution to ensure secure
electronic business communication incorporating signatures and encryption
technology.

Every user in a PKI transaction owns a pair of keys: A public key known to
everybody and a private key known only to the owner. The keys have 2 main
characteristics. One, they are complimentary sets of passwords. This means
that a document encrypted by a public key can only be decrypted by a private
key and vice-versa. Two, the keys are a unique pair.

Lets now see how PKI compares with existing security technologies. Anti-
virus is merely for integrity, Firewalls give authentications and confidentiality,
Access is similar to firewalls; encryption ensures confidentiality. Thus PKI
emerges as the only solution that guarantees all the four pillars of security and
trust viz. authentication, non-repudiation, integrity and confidentiality.

Encryption

Encryption is the process of converting information into a more secure format

for transmission. In other words the plain text is converted to scrambled code
while being 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
code, putting it in an envelope and mailing it with the recipient descrambling
the code.

31
Currently, there are 2 levels of encryption generally available in web
browsers: 40-bit encryption, and 128-bit encryption. Most commonly available
browsers use 40-bit encryption. However, the 128-bit browser offers the
highest level of encryption and provides the best protection when transmitting
confidential data over the Internet. The difference between these two types of
encryption is one of capability. 128-bit encryption is exponentially more
powerful than 40-bit encryption.

Digital Signatures
Digital signatures essentially use encryption to scramble information in a way
that only the party who issued the certificate (usually the online store or a
trusted third party) can decrypt and read.

By using digital signatures, consumers are reassured that any sensitive

information they send across the Web, such as postal addresses and credit
card details, is protected from interception along the way. Meanwhile, online
merchants can be more confident that the customer placing the purchasing
order is indeed entitled to use the payment card in question. Security experts
believe that digital signatures will encourage more consumers to purchase
goods online.

Access Codes
The access codes used to identify you to the online banking system are called
passwords, and are further protected by using PINs (Personal Identification
Numbers).

32
BENEFITS OF E-BANKING

Consumers are embracing the many benefits of Internet banking.

The following are a few advantages that e-banking gives to customers:

• 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 hours a day.

• Transactions are executed and confirmed quickly, although not

instantaneously. Processing time is comparable to that of an ATM
transaction.

• In general, the customer will find lower fees and higher interest rates
for deposits due to the reduced cost of operating online and not
needing numerous physical bank branches.

• And the range of transactions available is fairly broad. Customers can

do everything from simply checking on an account balance to applying
for a mortgage.

• The interface is very user-friendly and often intuitive. Additionally,

business customers will most likely use the Internet for more than cash
management, and they will be accustomed to a similar "look and feel"
among all applications that they use.

33
DISADVANTAGES OF E-BANKING

The most obvious disadvantage is: Technophobes need not apply i.e. if you
are still not comfortable using a computer, e-banking is not for you.

The other disadvantages are:

• Investment of time upfront can be formidable. The data entry is

necessary before the numbers can be massaged and money managed
successfully. Online bill payment is an example of an effort that
requires setting up which leads to ultimate convenience.

• Switching software or banks can mean re-entry of data, although

Internet-based systems are less impacted by this. But competition
seems to be minimizing this problem. The personal finance
management software Microsoft Money enables users of competing
software to import data easily.

• Like anything that deals with the transfer of large amounts of money,
security is a major factor of Online Banking. It is taken very seriously
during Online Banking procedures.

• With a system as complex as Online Banking, some errors are

inevitable. i.e.: An interrupted online session; late arrival of payments
etc. A mistake made by either the user or the bank in question, can
affect both, causing problems. For Example: An 'Infinity' (ICICI’s Online
Banking Brand name) customer from Bangalore (who did not want to
be named) paid his cell phone bill through the bank, only to receive
another bill the following month, with late fees. The amount had been
debited from his account but not passed on to the cellular operator.

• When dealing with computers, there is always the concern of the

system crashing, viruses entering the system or a power cut. These

34
 are larger problems and are not as easily solved. In all three cases,
many people would be affected, information may be lost and a back-up
plan would have to be initiated.

• Need an account with an Internet Service Provider (ISP)

35
BENEFITS TO THE BANK

Why should a bank ‘bank online’? 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.

The bank has an opportunity to generate revenue, decrease operational and

transactional costs, increase productivity, and attract new customers.

Ability to increase Revenue

Financially, the bank can benefit a great deal from providing their customers
with an online banking service. The bank has the ability to increase revenue
by generating user and transaction fees for the use of a bill payment product
and has the option of charging an account access fee for the use of the online
system. Online banking provides an excellent promotional opportunity to
generate revenue by helping the bank to cross-sell products such as credit
cards, loans, certificate of deposits, and other financial services.

Save Money
In addition to making money, the bank can save money with an Internet
banking system. Online banking can actually decrease operating costs by
reducing the daily reproduction and distribution of paper-drawn transactions
and delivering and processing statements for accounts, credit cards, and bills.
Performing transactions via the Internet also provides cost savings, as
indicated by a study done by Booz, Allen & Hamilton that shows a transaction
over the phone costs $.54, at an ATM it costs $.27 and via the Internet the
cost is $.01. Using the Internet to perform transactions greatly reduces the
cost to the bank.

36
Improves Productivity
Internet banking improves productivity as well. Bank representatives are able
to process data more quickly and efficiently; track account activity with
automated reports, help customers achieve daily tasks via the Internet, and
reduce time spent handling service problems. There can be a dramatic
reduction in the number of customer service calls, as some banks that are
providing this service has proven.

• Marketing & Competitive Tool

Internet banking also offers the bank an exceptional marketing and
competitive tool. Large banks such as Nations Bank and Wells Fargo, in the
United States, have already capitalized on the Internet as a mechanism to
attract new customers. The majority of people using the Internet are middle to
high income and polls indicate that 50% of the people online are either in
professional or managerial positions. These people are also the ones who
want to have the convenience of online banking for home or business use.
This is an excellent opportunity for the community bank to keep their
hometown customers from looking to national institutions for an online
product.

Innumerable services are available via the Internet today. Internet banking
provides a higher level of convenience that both commercial and retail
customers desire to have. With this service, the bank not only has the
opportunity to manage their business better, but can also help their customers
achieve a much more efficient process of managing their finances.

37
WORLD SCENARIO

So the online revolution is upon us. It seems that everyone is taking to the
Internet. According to research done by CyberDialogue, there were 53.5
million cybercitizens in 1999. Approximately 6.3 million of these people were
banking online in 1999, as well. This was up from 6 million using online
banking services in 1998. The sources I found predicting the number of online
banking users in the next several disagreed slightly. CyberDialogue says that
24.2 million people will be using the virtual bank by 2002. The International
Data Corp’s research showed that 32 million users would be using the Web to
visit their bank by 2003. In any scenario, a great majority of current users are
aware of online banking, and a large number of those people plan to begin
using online banking in the next 12 months.

A global survey by Cap Gemini Ernst and Young revealed that while 45 per
cent of transactions are currently made via branches, brokers or agencies,
this is predicted to decrease to 29 per cent by 2003.

The experience of various countries, as far as e-banking is concerned, is

discussed here.

United States Of America

In the USA, the number of financial institutions and commercial banks with
transactional web sites is 1275 or 12% of all banks and thrifts. Approximately
78% of all commercial banks with more than $5 billion in assets, 43% of
banks with $500 million to $5 billion in assets, and 10% of banks under $500
million in assets have transactional web-sites. Of the 1275-thrifts/commercial
38
banks offering transactional Internet banking, 7 could be considered ‘virtual
banks’. 10 traditional banks have established Internet branches or divisions
that operate under a unique brand name. Internet transactions are expected
to increase from 3% currently to 12% by 2003.

United Kingdom
Most banks in U.K. are offering transactional services
through a wider range of channels including Wireless
Application Protocol (WAP), mobile phone and T.V. A
number of non-banks have approached the Financial
Services Authority (FSA) about charters for virtual banks or
‘clicks and mortar’ operations. There is a move towards banks establishing
portals.

Sweden & Finland

Swedish and Finnish markets lead the world in terms of Internet penetration
and the range and quality of their online services. Merita Nordbanken (MRB)
leads in “log-ins per month” with 1.2 million Internet customers, and its
penetration rate in Finland (around 45%) is among the highest in the world for
a bank of ‘brick and mortar’ origin. Standinaviska Easkilda Banken (SEB) was
Sweden’s first Internet bank, having gone on-line in December 1996. It has
1,000 corporate clients for its Trading Station – an Internet based trading
mechanism for forex dealing, stock-index futures and Swedish treasury bills
and government bonds. Swedbank is another large-sized Internet bank.
Almost all of the approximately 150 banks operating in Norway had
established “net banks”.

Australia
Internet Banking in Australia is offered in two forms: web-based and through
the provision of proprietary software. Initial web-based products have focused
on personal banking whereas the provision of proprietary software has been

39
targeted at the business/corporate sector. Most Australian-owned banks and
some foreign subsidiaries of banks have transactional or interactive web sites.
Online banking services range from Financial Institutions’ websites providing
information on financial products to enabling account management and
financial transactions. Customer service offered online includes account
monitoring (electronic statements, real-time account balances), account
management (bill payments, funds transfers, applying for products on-line)
and financial transactions (securities trading, foreign currency transactions).
Electronic Bill Presentment and Payment (EBPP) are at an early stage.
Generally, there are no ‘virtual’ banks licensed to operate.

New Zealand
Major banks in New Zealand offer Internet banking service to customers;
operate as a division of the bank rather than as a separate legal entity.
Reserve Bank of New Zealand applies the same approach to the regulation of
both Internet banking activities and traditional banking activities. There are
however, banking supervision regulations that apply only to Internet banking.
Supervision is based on public disclosure of information rather than
application of detailed prudential rules. These disclosure rules apply to
Internet banking activity also.

Singapore
The Monetary Authority of Singapore (MAS) has reviewed its current
framework for licensing, and for prudential regulation and supervision of
banks, to ensure its relevance in the light of developments in Internet banking,
either as an additional channel or in the form of a specialized division, or as
stand-alone entities (Internet Only Banks), owned either by existing banks or
by new players entering the banking industry. The existing policy of MAS
already allows all banks licensed in Singapore to use the Internet to provide
banking services. MAS is subjecting Internet banking, including IOBs, to the
same prudential standards as traditional banking.

Hong Kong

40
There has been a spate of activity in Internet banking in Hong Kong. Two
virtual banks are being planned. It is estimated that almost 15% of
transactions are processed on the Internet. During the first quarter of 2000,
seven banks have begun Internet services. Banks are participating in strategic
alliances for e-commerce ventures and are forming alliances for Internet
banking services delivered through Jetco (a bank consortium operating an
ATM network in Hong Kong). A few banks have launched transactional mobile
phone banking earlier for retail customers.

Japan
Banks in Japan are increasingly focusing on e-banking transactions with
customers. Internet banking is an important part of their strategy. While some
banks provide services such as inquiry, settlement, purchase of financial
products and loan application, others are looking at setting up finance portals
with non-finance business corporations. Most banks use outside vendors in
addition to in-house services.

41
THE INDIAN PERSPECTIVE

The experiences of the west are the clear indicators that Internet Banking is
not far off for India. The Internet usage, combined with aggressive moves by
new Internet players in this highly fragmented industry will have profound
effects on financial services.

But are the Indian banks ready for this sudden change? Where do we stand
as of today? Would future be as diverse as today or would traditional banks
painfully lose incremental revenue growth opportunities to a host of
aggressive players that may rapidly consolidate the new revenue
opportunities in the business. And what exactly do the banks need to do to
meet the challenges of “Banking Business without Barriers.” Lets try and find
out.

Internet Banking Scenario

The lead in Internet banking in India has been taken by the new private sector
banks and foreign banks, and the four banks which offer Internet banking
facilities in a significant way are ICICI Bank , HDFC Bank , Citibank and
Global Trust Bank. Banks like UTI Bank, IndusInd, SBI also offer net banking
facilities in a limited way.
( - Annexure I)
( - Annexure II)

The current base of online banking customers has been estimated at 4.2
Lakhs, which is 8.7% of the overall Internet user base. The user base as of
December 2002 has been estimated under alternative scenarios: The
conservative scenario puts the user base as of 31 st December, 2002 at 41.0
Lakhs (14.7% of the Internet user base), while the more optimistic forecast
puts the user base at 73.0 Lakhs with an overall penetration of 26.2%. ICICI,
HDFC and Citibank have emerged as the early leaders in online banking, with
ICICI being the clear leader.

42
Research revealed that close to 40% of adult Internet users have accounts
with one of the four major Internet banks offline. However, only 10.8% of adult
Internet users are banking online.

In terms of activities, there is still a reluctance to actually conduct financial

transfers online, and the bulk of online banking activity is restricted to
checking balances and statements online. Barely 30% of online bankers have
paid bills online or transferred funds online.

Specific aspects of the Indian banking scenario which are pertinent to note
are:
• The low ATM penetration
• A regulatory framework which is not conducive to net only banks
• The relative lack of inter branch networking and e-readiness of major
public sector banks, which control a bulk of the deposit and branch
network base
• The relative nascence of the Internet itself
• The entry of many new players
• The recent IT Act which accepts the legal validity of digital signatures
• Plans of Indian public sector banks to provide e banking services by
2002
• The rapid growth of the Internet

The last 4 points – from entry of new players to rapid growth are factors,
which should enable the growth of online banking in India.

43
INTERNET USAGE IN INDIA

It is necessary to discuss the Internet usage pattern in India and to see the
growth to make a case for e-banking in India.

According to eMarketer, India has roughly 1.8 million active Internet users (in
the year 2000). This number, however, is set to grow as Internet connections
become more prevalent throughout the country. One thing we must address is
the fact that the country's income distribution is highly unequal, thus only a
small fraction of the population can be considered a target for potential
Internet use. This part of the population, however, is well-educated,
cosmopolitan, media-savvy and is an early adopter of new electronic devices
and new technology.

Internet Usage Statistics In India

Internet usage in India tends to follow the same pattern as other developing
nations, with a majority of users being young and male. They also tend to be
more educated. It is seen worldwide that internet banking is mostly used by
people between the age 24 – 40. It is also seen that most internet banking
usage is by male population. Thus, the next two diagrams show that Internet
banking in India is here at the right time.

44
Cybercafes are popular gathering places among young, novice Indian internet
users. The popularity of these cybercafés is playing a major part in fuelling the
internet development in India. The cafes provide easy entry points for novice
users. In a new study, internet research firm NetSense found that almost 40%
of the users accessing the internet via cybercafés have less than one year of
surfing experience.

Overall, one can make the following comments about internet usage in India.
 Cybercafes in India play a critical role in introducing new users to the
internet. Over time, however, as users become more comfortable with
the internet, they tend to access the internet more from home.

 Indian users show stronger preferences for e-mail and web surfing than
shopping. Their hesitancy to shop online could stem from two major
factors:
1. Shopping tends to be an enjoyable family activity; shopping
online is too impersonal.
2. Indians fears of using credit cards online are preventing
business-to-consumer activities from proliferating.

 In terms of SEC
- 52 % of users are from SEC A
- 25 % from SEC B
- C contributes 17 % with the rest scattered in D & E

 The majority of Internet users use it for e-mail.

 The phenomena is mainly attributed to the top 7 metros i.e. Mumbai,

Delhi, Calcutta, Chennai, Bangalore,

 Internet in India is still in infancy.

45
  As of December 2000, there was a PC base of 5 million PCs. Out of
these, there were more than 3.7 million machines that had Pentium I
and above processors (i.e. machines which could be effectively used
for Internet).

 The prognostications for the future reveal a potential Internet access

figure of a mammoth 50 million, by December 31, 2003.

Growth in Internet Subscribers in India

While current Internet statistics at first glance might appear a bit modest
(we're still lagging behind stalwarts China, Japan and Taiwan), they do
represent a gradual quickening in the pace of our grand Internet marathon.
Crystal ball gazing by Nasscom has unveiled an even more impressive
Internet usage scenario. The survey has revealed that there is still a current
pending demand of an additional one million Internet connections at current
cost considerations. The good news is that with improvements in bandwidth
and penetration of Internet through PCs as well as cable TV, the Internet user
base in India will expand by leaps and bounds.

In fact, by the end of 12 months, India should have Internet through the cable
reaching at least 16 key cities across the country.

46
The cable route in fact is being touted as a significant pathway for the
proliferation of the Internet in India. India already boasts of 37 million cable
connections (expected to jump to 100 million by 2008), which could
additionally be converted into Internet connections.

The Internet and PC penetration is increasing by leaps and bounds.

Therefore, we see that everything points towards success of E-banking in
India.

47
RBI INITIATIVE

Information technology and the communication networking systems have a

crucial bearing on the efficiency of money, capital and foreign exchange
markets and have manifold implications for the conduct of monetary policy. In
India, banks as well as other financial entities have entered the world of
information technology and computer networking with INFINET.

The Indian Financial Network (INFINET), a wide area satellite based network
using VSAT technology, was jointly set up by the Reserve Bank and Institute
for Development and Research in Banking Technology (IDRBT) at Hyderabad
to facilitate connectivity within the financial sector. The network was
inaugurated in June 1999.

The INFINET was planned to cover, in a phased manner, 100 commercially

important centres and serve as the communication backbone of the proposed
Integrated Payment and Settlement System (IPSS).

The Indian Financial Network (INFINET), which initially comprised only the
public sector banks, was opened up for participation by other categories of
members. 26 public sector banks achieved the level of 70 per cent of
business captured through computerisation by June 2001.

Banks and financial institutions had taken a decision to adopt SWIFT  . -like
message formats for putting all their funds based applications on the Internet.
This initiative would not only help standardisation in banks but would as well
help cross border Straight Through Processing so as to ultimately integrate
our financial system with other cross border financial systems.

48
Committees

Rangarajan Committee ( I )
In the early 80s, a high level committee was formed under the chairmanship
of Dr. C Rangarajan, then Governor of the Reserve Bank of India, to draw up
a phased plan for computerisation and mechanisation in the Banking Industry
over a five year time frame of 1985-89. The focus by this time (justifiably) was
on customer service and two models of branch automation were developed
and implemented
 front office mechanisation where front desk operations were
computerised while back office work was done manually and
 back office automation covering mechanisation of General Ledger and
back office operations while the front office work was done manually;

Both the models provided the customer with error-free accounting, regular
statements of accounts etc. Considering the contemporary level of
computerisation, these were major achievements but did not go far enough
and the pace of their implementation was tardy, to say the least, with not a
little opposition from trade unions.

Rangarajan Committee ( II )
Having gained experience in the earlier mode of computerisation, the second
Rangarajan Committee constituted in 1988 drew up a detailed perspective
plan for computerisation of in Banks and for extension of automation to other
areas like funds transfer, electronic mail, BANKNET, SWIFT, ATMs etc.
 Around 2000 to 2500 large branches located at high activity (urban and
metropolitan) centres to be fully computerised
 Regional Offices / Zonal Offices/Head Offices
 Inter- and intra bank transactions using the BANKNET set up by the
RBI; and

49
  Installation of a network of cash dispensers / ATMs at strategic
locations such as airports/railway stations etc., on a shared basis by
banks.
The Committee also made studied recommendations on the 'Single Window
Concept; 'all bank credit cards', credit clearing/GIRO system, office
automation, etc. In fact this report was the most comprehensive road map for
Bank Automation considering the state of the technology at that time.

Vasudevan Committee
To further upgrade the existing technology in the banking sector and also to
suggest measures for implementation, the Reserve Bank appointed a
"Committee on Technology Upgradation in the Banking Sector ". The
Committee in its Report, submitted in July 1999, recommended a new
legislation on Electronic-funds-transfer system to facilitate multiple payment
systems to be set up by banks and financial institutions.

Law
The Information Technology Act, 2000 has given legal recognition to creation,
transmission and retention of an electronic (or magnetic) data to be treated as
valid proof in a court of law, except in those areas, which continue to be
governed by the provisions of the Negotiable Instruments Act, 1881.

Payment System Legislation in the form of amendments to various Acts as

also the need for framing new legislation for the regulation of multiple
electronic payments is under consideration of RBI. Several measures to
ensure the authenticity of the message across the Internet have been
suggested by the Working Group on Internet Banking.

Electronic Payment Mechanisms

With the advancement of technology, new delivery mechanisms have been
introduced in the financial markets, giving rise to potential risks. These risks

50
have to be tackled. This calls for modernisation of Payment Systems to
increase efficiency and reduce risk.

In order to improve payment flows, the RBI has been taking measures with
the employment of appropriate technology from time to time. The bank has
put in the following solutions (managed by RBI, SBI and the nationalised
banks) in this regard:
• Mechanised clearing of cheques using MICR technology first at Metros
managed by RBI and subsequently at other centres managed by some
public sector banks.
• Inter-city clearing among MICR centres at the 4 Metros (two-way) and
other offices of RBI with these four Metros under one-way inter-city
clearing.
• Regional Grid Clearing connecting important commercial
centres/district headquarters in a region to the nearest MICR centre
under one way clearing.
• Electronic Clearing Services (Debit, Credit, RAPID) for clearing of bulk
payments like dividend warrants, utility payments like electricity bills,
etc.
• Floppy input-based clearing.
• High-value clearing (floppy based)

Lack of a reliable communication infrastructure in our country hampered

modernisation of payment systems and consequently clearing and payment
instructions, which are of non-local nature takes unduly long time. With
INFINET, the RBI VSAT network for banks this bottleneck maybe removed
and steps are being initiated to use INFINET to improve the payment flows. It
has been decided to consolidate on the steps already taken and leapfrog in
areas like Real Time Gross Settlement (RTGS) System and graduate to an
integrated national payments system in the long run. As a step towards
achieving this, pilots have been started for implementing Electronic Data
Interchange in major sectors.

51
RTGS
RBI has initiated measures to set up a Large Value Funds Transfer and
Settlement System on a Real Time Basis (or Real Time Gross Settlement
System). Such a system will be extremely critical in the development of a
stable and efficient financial infrastructure.

The RTGS architecture would consist for an Apex Level Server that would
have a persistent queuing system to receive the messages and execute
instructions subject to specified fulfillment conditions. This would connect
through a network to various Bank Level Servers for the member banks.
These bank level servers would be connected to their branches through the
VSAT network.

The RTGS will provide the infrastructure for a real time nationwide dynamic
funds management by the user institutions. Such a system has the potential
for integrating the money markets and security markets across the country.
The potential volume, nature and type of transactions that are likely to flow
through the above network may relate to forex, money market securities, inter
bank claims, large corporate flows etc.

Electronic Fund Transfer

This is a system that IBA offers that is better-applied and waiting for
appreciation. EFT is probably the safest and fastest way to transfer money
from your account to another individual in another city regardless of which
bank she uses.

All the transferor needs is her account number. A maximum of Rs0.1mn can
be transferred for a flat fee of Rs25. The bank has discretionary powers to
raise the limit for select customers. Or a customer can break up the
transactions in to multiples of upto Rs0.1mn. The money sent is credited
overnight and can be withdrawn by the receiver the day after transfer.

52
The hitch, it is not well known and secondly, the facility is only available in the
four metros! Plus, money sent from abroad cannot be transferred through
EFT.

Disclosing other advantages of the EFT, an official of the IBA's department of

information technology, says, "The facility can be availed of even if the branch
from where you are sending the amount is not fully computerized. The details
of the transfer have to be sent to the RBI which in turn notifies the receiving
bank to credit the individual with the mentioned amount."

Electronic Clearing Systems

Never mind the vagaries of the stock market. For those who are and will
always make equity investments a way of life the ECS has made that life a lot
easier as far as dividend payments go. All a person has to do is provide the
company with details about the bank where the deposits should be made. The
firm can then directly deposit the dividends into the shareholder's account.
The maximum that a company can deposit is Rs0.1mn, though here too, the
bank has the discretion to raise that ceiling.

Dividends, Interest on Bonds/Debentures, Salary, Pension, etc can now be

credited directly to the beneficiaries’ bank accounts through ECS (CREDIT)
services. Similarly, you can make payments of Telephone Bills, Electricity

53
Charges, School Fees, Credit Card Dues, Tax Payments etc. using
ECS(DEBIT) services.

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SWADHAN - Shared Payment Network System (SPNS)

To provide anytime, anywhere banking, in consonanace with the views of the

Managing Committee , IBA (Indian Banks Association) set up a network of
ATMs in Mumbai.

SPNS as envisaged by the IBA is a large network of ATMs, Cash Dispensers

spread originally over the city of Mumbai, Vashi and Thane connected to a
central host. Today, the network has expanded to connect ATMs all over
India. The banks which participate in this network would issue cards to the
customers for transacting on this network.

The objective behind forming the Shared Payment

Network System is to provide 24 hours, 365 days/year
electronic banking service to the customer anywhere
in the country through state of the art electronic fund
transfer system to be shared by different participating
banks. The SWADHAN-SPNS project is the first of its kind in India. The
SWADHAN-SPNS went on live on 1st February, 1997 with 4 ATMs of 4
Banks. Currently there are 350 ATMs of 36 banks connected to the network.
(i.e. as on December 15th, 2000)

Shared Payment Network System would be capable to offer the following

services:
Cash Transactions, Extended hours service, Across the bank payments,
Utility payments, Balance enquiry, Printing of statement of accounts, Cheque
Deposit, Request for Cheque book Standing Instructions and Statement of
account, Point of Sale (EFT/POS) facilities

Debit/Smart Cards
RBI has issued guidelines to the banks for issuing debit cards and smart
cards as alternative payment instruments to ease pressure on physical cash.

55
Debit cards are plastic cards issued by banks to customers who could use
them for paying for their purchases at specified Point of Sales terminals. The
cards facilitate the customers to effect the transactions on their own
accounts remotely.

Smart card has an integrated circuit with a microchip embedded in it so that it

could perform calculations, maintain records, act as electronic purse. The
cards can either be exhaustible or rechargeable.

The RBI guidelines issued include criteria on the eligibility of customers to

whom the cards can be issued, payment of interest on the balances
transferred to the smart/debit cards, treatment of liability in respect of
outstanding/unspent balances on the smart/debit cards, security aspects and
other terms and conditions for issue of these cards by the banks.

CHALLENGES FOR INDIAN E-BANKS

The challenges that Indian banks are facing are:

1. How to manage multiple distribution channels?

Internet banking is bound to become the most important channel in next few
years. Even the traditional banking would move towards Internet technology
with open standards and low cost. Although all traditional channels would not
die down in a day and success would depend on how the banks generate
synergy in these two vastly different channels. The services provided in all
types of distribution channels must be in tandem with each other and must be
in synergy.

2. How to address the issue of internationalization i.e. how to take in and

make e-banking an integral part of one's attitudes or beliefs?

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The real challenge for Internet banking is to penetrate the customer base of
banks. According to IDBI Bank’s head (e-commerce and new product
initiatives) J Venkataramanan, the maximum usage of Internet banking is for
accessing account balances and making bill payments. For most customers,
there's nothing more reassuring than watching their cheques getting credit on
a paper ledger. Then, there is the question of how real is real time. For
instance, while you can requisition for, say, a new set of cheques any time of
the day, the request will get processed only during the banking hours.

Perhaps, the biggest of all concerns for e-banking customers is the security
issue. People still aren't comfortable having information about their life's hard-
earned money saved on a server they don't know about. A physical pass-
book is still preferred. While e-bankers use multiple firewalls, filtering routers,
128-bit encryption and digital certification for safe and confidential
transactions, there are still chances of a snafu.

Another problem is that an on-line service that merely mimics an off-line one
doesn't give customers an adequate inducement to move a significant portion
of their banking on-line. As a result, most customers tend to treat on-line
banking as no more than an extra channel to check their balances and
transaction histories, and they continue to do the rest of their business at the
ATM or the teller window. A vicious cycle ensues.

Also, there is no more security and customer loyalty. With Internet, the
gateway to low cost international expansion around, tackling the virtual
competition would be a key. Competition is just a ‘click’ away. Customers
would be loyal as long as the rates offered are competitive.

At the same time, banks would have to manage different product portfolios, at
different yet competitive prices to different corporates across the world. The
issue of offering services in multiple geographies / customers – due to

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increased global access and competition may ask for new virtual alliances
between small local banks and the global players.

3. How to address the emergence of value-focused specialist competitors that

are competing for specific value components currently dominated by banks
and now are increasingly gaining access to the bank’s customers?

The real trouble is that Internet Bank doesn’t really need to be a bank. It can
even be a group of innovative persons with no bank branch at all, just working
through alliances and leading the field because of their superior capabilities
through focus and innovation advantage.

The entry of multiple non financial institutions and other non-traditional players
would just fasten this whole process. E.g. Times Bank and IDBI Bank.

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STRATEGY FOR INDIAN BANKS

Internet banking would drive us into an age of creative destruction due to non-
physical exchange, complete transparency giving rise to perfectly electronic
market place and customer supremacy. The question to be asked right now is
"What the Indian Banks should do"?

Most banks today are pursuing what might be described as a ‘fortress’

strategy, defending themselves against new entrants while waiting for more
clarity in the online world. The fortress strategy has the benefit of relying on
traditional sources of advantage; it plays to the strengths of current legacy
banks. The risk, of course, is that these sources of advantage may not be
enough to keep out new entrants that rely on a totally different business
model.

Banks must today at least hedge by experimenting with the web business
model. But it calls for profound organizational changes if it is to be executed
successfully. It needs the banks to fundamentally re-assess their
opportunities for adding value and hence re-define their roles in the new
paradigm.

Banks must first determine what kind of web to target. Customer webs focus
on maximizing a bank’s share of wallet of a target customer segment while
Market webs seek to aggregate a critical mass of buyers and sellers within
one transaction category.

Within any web that it might target, there are a number of possible roles a
bank could play. Web shapers are the one or two companies that own a
shaping platform, take initiative to mobilize other companies around it, and
define a set of standard practices or policies to coordinate participant’s
activities. Banks that choose not to be Web shaper would be adapters and
would need to define a clear niche that will help them differentiate themselves

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from other participants. Some adapters may become influencers, working
closely with shapers to ensure the overall success of their web.

Indian banks still have a few important lessons in customer service that they
would do well to pay heed to.

• Customer Relationship

Banks and other financial institutions cannot go completely virtual - they need
physical branches after all. This is probably one area where Internet banking
in India scores over the 'stand alone' Internet banks of the West. Several
Internet banks like E-trade have acquired ATM networks like Card Capture
Services to offer consumers a way to deposit and access their money through
ATMs.

Physical branches help forge a 'relationship' with the customer that a virtual
bank cannot. Although most online consumers utilise account tracking, bill pay
and e-shopping, they would prefer direct, personal contact with their banker
when shopping for financial products.

• Personalisation
Banking solutions become truly personalised when they are able to respond
to the changing customer needs, and this is possible using strong data mining
and target marketing capabilities.

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
personalisation is still lacking in the banking solutions offered by Indian banks.

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 • Integration
Another important aspect is integrating customer service interfaces 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 have to get their acts together. If the SmartCards,
and the Online Banking, and the ATM's, and the Branches don't work
together, there's no real benefit in having the electronic tools.

Customers shouldn't have to go to one site to just pay their utility bill and
phone bill and then have to go offline to pay their cable and credit card bills.
They should be able to check the value of their investment portfolio, updated
daily, in their personal balance sheet, include all their other assets and other
personal finance.

Banks must learn to aggregate their customers' different on-line financial-

services relationships. The purpose of aggregation is not to engage in blatant
cross-selling or to achieve "100 percent share of wallet" but rather to develop
a picture of the consumer's entire balance sheet. Any institution that gains
such a view can provide superior convenience and advice.

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-saving
instruments. This is being done by 'account aggregators' such as Yodlee,
Corillian, eBalance and VerticalOne that let you log in to one Web site, enter
your username and password, 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.

• Innovation
Today's value-added product could easily be tomorrow's commodity. That is
why banks would need to depend more on product innovation, expanding the
range of their products and service offerings. Apart from just online accounts,
e-banks would need to tailor specific products for the Internet, like online bill

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presentment or credit cards 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 rate.

• Migrate old customers and go after new ones

In building an on-line business, a bank's off-line customer base is a huge
asset, for it will be harder for competitors to pick off the bank's current
customers than for the banks to get them on-line. But to do so, banks must
make one-time offers and then constantly provide incentives such as free
services (for example, bill payment and on-line trades) for increased
balances.

Banks must also move swiftly to acquire new on-line customers. Most of the
early attempts to do so, carried out in partnership with Internet portals, have
flopped-largely because the banks failed to offer any differentiation in pricing
or any other very compelling lure. Yet here, too, banks have an advantage.
Despite significant increases in revenue from on-line relationships, credit card
companies and brokerage firms have spent so much money building their on-
line customer base that some would question whether they will ever profit
from these efforts. Most banks already have a powerful retail distribution
network that should allow them both to migrate their customers and to acquire
new ones at much lower cost.

Banks will have to reinvent their role and the way they deliver value-
leveraging new technology as well as their existing assets-to remain their
customers' financial institution of choice.

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WHERE IS E-BANKING IN INDIA HEADED?

There will be a large-scale shift to online banking in the next decade as banks
go the extra mile in technology developments to keep up with the competition
It is believed the low transaction cost will make banking on the Net irresistible,
but also that this will require institutions to carefully consider and plan
customer relations programs.

It is believed that everything will be determined by content and context, and

where execution will be key. From a customer and service provider
perspective, this is where the world is moving-it is going to be real-time, on-
line, personalisation for both marketing and the service experience. If existing
banks don't want to disappear, it is this challenge that they need to embrace
in order to win and survive.

Internet usage is expected to grow with cheaper bandwidth cost. The

Department of Telecommunications (DoT) is moving fast to make available
additional bandwidth, with the result that Internet access will become much
faster in the future. This is expected to give a fillip to Internet banking in India.

The setting up of a Credit Information Bureau for collecting and sharing credit
information on borrowers of lending institutions online would give a fillip to
electronic banking. The recommendations of the Vasudevan Committee on
Technological Up gradation of Banks in India have also been circulated to
banks for implementation. In this background, banks are moving in for
technological up gradation on a large scale. Internet banking is expected to
get a boost from such developments. Other major developments will be:

Inter Bank Fund Transfers

Today, e-banking operations mainly consist of providing information viz.
requesting check books, statements, fund transfer, even online share trading
(with reference to a particular branch) but the next two or three years are
likely to see a huge change in the entire banking value chain. It would be

63
possible to process any inquiry or transaction online without any reference to
the branch at any time rather like 'anywhere banking' - a service already being
offered by HDFC, ICICI and Citibank.

Interbank fund transfers between different banks is a feature that is not

offered by any of the e-banking services in India. "At present, we have no
plans to offer third-party transfer outside the bank. Globally, this is not allowed
due to security reasons. Also, the other banks also have to allow
transfer/debit of funds into/out of their NetBanking system. According to
HDFC, the RBI needs to set up a clearinghouse to route these transfers, and
thus enable such transactions.

M-Banking
Today, with mobile being the 'in-thing', banks are not far behind to position
themselves for this new medium to ring in customers and convenience. Most
of them are talking about helping people access information of their accounts
and even do transactions while on the move-calling this M-banking (mobile
banking).

Almost all major banks have SMS-enabled mobile banking. The use of WAP-
based applications for Internet banking is an increasing trend especially in the
Asia Pacific region, though it doesn't seem likely that it will catch on in India
given the miniscule populace of WAP-enabled phone users.

"We have plans to offer WAP-enabled FedNet soon" says Nair of Federal
Bank. "WAP-enabled banking will become popular and affordable to a larger
number of users if the cost of the devices drop and airtime tariff come down."

Account Aggregation
A new wave called 'Account Aggregation' is slowly sweeping through the
online banking/brokerage industry. Account aggregation -- or account
consolidation -- provides consumers with the ability to access the information

64
about all of their financial transactions sourced from different web sites, at a
single web site.

Now you can obtain updates of all of your investments (from banks, mutual
funds, online brokers), and liabilities (car loans, credit card loans, bank loans)
at a single point. That way you don't need to remember multiple login IDs, and
passwords, and also don't need to consolidate this information yourself.
Further, at the same site you shall be able to get 'payment due' reminders,
online payment services and even query your transactions to find, say how
much you spent on entertainment last year. They could also provide you with
e-mail, book your airline tickets and more.

True Relationship Banking

The future will provide the bank with the ability to allow account access and
control privileges at the customer level. This means that all accounts in a
relationship will be accessible via the Internet while only a subset of these
accounts will be viewable and accessible for a third party (such as son or
daughter who is away at school). It allows your tax consultant to view
accounts in your relationship pertinent to performing their service. And,
business customers will see their entire commercial relationship bank.

Integration
Service Providers will integrate and market their offerings across different
channels. The strategic and executional battles of the future are going to be
fought for Channel Integration.

The beauty of integration is that one channel does not displace another. They
feed on each other to create incremental value for the customer, as well as
the institution. The incremental value comes from two distinct sources. Firstly,
you reduce inefficiencies. You don't send people junk mail because you know
that they are not likely to buy a particular product or service today. That
results in net saving for the economy. Secondly, you persuade people at the
right time (the right time from the customer's perspective, not from the service

65
provider's perspective) to opt for a tailor made offering. This too increases
value. Actually, this has to do with the Internet itself, and more to with the
underlying technologies of the Internet which allow incremental efficiency, and
empowers the customer to make more enlightened and timely choices.

While the novelty of the service will attract customers to bank online, right now
only customer service will determine whether Net banks get the thumbs up.

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SUMMARY OF FINDINGS AND CONCLUSION

In concluding one may state that Indian banking in the new millennium is likely
to be driven by mergers, universal banking and Internet technology. While
mergers will confer economies of scale, universal banking will dismantle the
barriers between the traditional dichotomies of financial services. While one
realizes the fact that the Internet is likely to convert banking into a commodity
one has to take into account that thirty years of solitude has steeped Indian
Banks into a morass of inefficiency, slothfulness and complacency. If Indian
banks refuse to visualize this trend they may well be consigned to history.
However, if they react proactively Indian Banks stand to gain a lot from the
opportunities that E-banking offers.

The verdict is that customers are more demanding than ever and their
demands will continue to grow at a faster and more aggressive pace. Service
providers have to think about the way they have approached things in the past
and reposition themselves for the future. If they are to be able to meet the
needs of the customers tomorrow, it will largely be through the Internet as a
key delivery channel.

However, it is not that the branch network will disappear. Customers will
always find solace in the sense of assurance that a blue-chip brand is
embodied by a physical presence, especially in financial services. It is just
that the ability to check a financial portfolio at a whim has great appeal. So
customers will not disregard the practice of occasionally dropping into the
branch for a face-to-face interaction with a friendly teller but they will avail of --
and demand -- the ability to access their up-to-date product portfolio through
whatever channel they choose.

It also needs to be stated that the on-going process of reforms cannot be

successful without a supporting and complementary legal framework which
can provide for both strong internal governance in the financial system as well
as external discipline by market forces, as suggested by the Narasimham

67
Committee. Also, an effective system needs to be put in place to tackle
money laundering and financial frauds.

In India, E-banking is in a nascent stage and people are still wary of the
concept and its usage-the biggest inhibitors being security and user
identification/authentication. "I wouldn't describe E-banking in India in its
present form a huge success. The technology and concepts are gaining
acceptance. People are beginning to see the convenience and benefits of E-
banking. I believe that in a few years' time it will not only be the acceptable
mode of banking but also, more importantly, be the preferred mode of
banking. In all this the key is faster penetration of the Internet in the home
segment-either through PCs or through other Internet access devices. Also,
support for local languages from IT vendors will help reduce the digital gap,"
says Senthil Kumar of I-flex Solutions.

At the moment, the concept is totally dependent on the availability of

bandwidth and further reduction in Internet access charges. The banks are
hopeful that these would be taken care of and in the near future large
numbers would start using Internet for banking purposes.

"E-banking and M-banking are very much a reality now. They are the newer
delivery channels. Though the acceptance level may not be high among the
masses, nevertheless the segment of population adopting these delivery
channels have a huge purchasing power and banks in no way can afford to
ignore their convenience," observes Singhal of Polaris.

Not all feel the same way though. Countering Singhal's claims,
Seshadrinathan of SSI says, "Frankly speaking, the progress has been slow.
Foreign and private banks have adopted E-banking well, but public sector and
old style banks are a little slow and I foresee a year or so for them to adopt IT
in a significant way. One interesting phenomenon that is emerging is the
forging of strategic partnerships between banking and IT industries. Banks are
looking out for IT partners for effective IT-enabling."

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In closing, online banking is just one aspect of the new online financial world.
Such areas as stock trading, taxes, college planning, retirement, debt
management, and mortgage/insurance are being greatly affected by the
growth of the Internet. From the company’s standpoint, those that do not keep
up with the changing face of financial services will be "lunch", and those that
do will profit enormously. The trick is to react in "Internet time". From the
customer’s standpoint, greater connectivity from home will mean more time
for more pleasurable pursuits. The Internet has no doubt changed the nature
of personal finance forever, hopefully for the better.

And the ball is just getting rolling!

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QUESTIONAIRE
IS E-BANKING FOR YOU?

For months, you received mailers and statement inserts promoting your
bank’s Internet banking capabilities. You kept thinking to yourself, "What does
this do for me?" and "does it really work?" You’re not alone. Millions of
consumers across the country have wrestled with the same questions. The
following set of questions will help a customer decide if e-banking is really
beneficial to him.

• Do you value your time?

Traditional banks bind you to their opening and closing times to do

transactions. If you are often stretched for time to do your banking, then you
are an ideal candidate to try banking online. You can do it at your
convenience, and at any time of the day.

• Would you like to reduce your banking fees?

What a question to ask? But most people don't realize that on an average a
checking account costs hundreds of rupees per year, in transaction costs,
lower yields and ongoing fees. Many online banks now offer free unlimited
checking accounts.

• Are you equipped to transact online?

Do you have access to a computer, have the devices to go online, and have
an Internet Service Provider (ISP) service. Since you intend to bank online,
access to such a computer is key to your ability to bank.

• Are you comfortable with transacting online?

If you are already browsing online, you must be familiar with secure Internet
protocols that are used to transfer information over the Internet in an
encrypted fashion. Do you feel secure transferring or paying money online?

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 • How frequently do you go to your bank branch?

If you rarely need certified cheques, drafts and foreign exchange or many
such services that require use of bank tellers, then you may be better served
banking online. If your nearest bank branch is miles away, then elect to try out
banking online.

• Do you get paid via direct deposit? I

f you do then you may be able to get a very good deal from your online bank,
many of whom will waive charges if you get your pay deposited directly into
your bank account with them.

• Do you mail a lot of cheques towards your bill payments?

Making cheque payments towards your bills costs not only postage, but also
valuable time. In addition, traditional banks will charge you for every
transaction. Using online banking you can pay your bills online, often with the
ability to make scheduled payments when you want them -- very much like
issuing a post-dated check. No more delayed payments lost in the mail.

• Do you use personal finance software?

If you use Microsoft Money 2000, or Quicken 2000 you will love banking
online, since these packages support banking online. You can download bank
statements directly from your bank's website. That makes the task of
maintaining records, and financial planning a lot easier.

• Are you comfortable banking at an ATM (Automated Teller Machine)?

You may be one of those people who rarely need to go to your bank branch
because you are already 'ATM friendly'. Many online banks offer you the
ability to do your banking from ATMs where you can deposit checks and
withdraw money, and they offer rebates on a limited number of transactions at
ATMs.

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APPENDIX I

Risk Management of Outsourced Technology Services

Banks need to understand the risks associated with outsourcing

arrangements for technology services, and must ensure that effective risk
management practices are implemented. Financial institutions increasingly
rely on services provided by third parties to support an array of technology-
related functions. While such outsourcing can help manage costs, obtain
necessary expertise and improve services, it also introduces risks that banks
and other financial institutions should address. In this context, it is therefore
necessary to implement an appropriate and effective risk management
process.

Following a complete risk assessment, management of each bank should

evaluate service providers to determine their ability, both operationally and
financially, to meet the bank’s needs. Factors such as the third party’s
technical and industry expertise, operations and controls, and financial
position should be considered when performing due diligence tests. Such
needs, objectives and necessary controls should be communicated to the
potential service provider.
Banks should also implement an oversight program to monitor third party
controls, conditions and performance.

In charting the performance of the service provider a

financial institution should:

• Adopt appropriate procedures for evaluating decisions to outsource

ebanking systems;

• Conduct appropriate risk analysis and due diligence prior to selecting

an ebanking service provider;

72
• Ensure the execution of periodic independent audits of outsourced
operations;

• Assess the service by a regular report, documenting performance, as

well as the speed of problem-solving and follow-up;

• Monitor the contract in the event of any compliance and revision needs;

• Assess the internal capacity necessary to evaluate and oversee

outsourcing relationships;
• Implement necessary controls and reporting processes;

• Ensure that the responsibility for the administration of the service

provider relationship should be assigned to personnel with appropriate
expertise to monitor and manage the relationship;
• Ensure the presence of contingency plans, such as the availability of
alternative service providers, costs and resources required if such a
change and

• Define performance expectations under both normal and contingency

Circumstances.

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APPENDIX II
Brief Overview of Digital Signatures and Certification Authorities
(CAs)

All e-banking systems should be constructed to ensure that they interact with
a valid database, and that no individual user has the authority to change their
access privileges within the e-banking authorisation database. The
certification authority –a third-party agent – offers such safeguards. A CA
system involves the use of mainframe and personal computers,
communications networks, and supporting software systems to provide
electronic authentication services. The basic operational elements of a
certification authority system are similar to an electronic banking system, with
many possible configurations of computer software, hardware, and
telecommunication links with its users.

Digital certificate systems, which represent one form of electronic

authentication services, employ digital signatures that are created with public
key cryptography. Although public key cryptography (PKI) - also known as
asymmetric key cryptography - is not a new technology, it is relatively new to
the financial services industry. Public key cryptography adds a layer of
security beyond that of symmetric key systems by associating two keys or
algorithms with the encryption/decryption process: a public and a private key.
Although the public/private key pair is related functionally, the mathematical
function associated with the public key is not identical to that function
associated with the private key.

Electronic information transmitted under PKI technology generally ensures the

content and sender of the information received has not been intercepted or
altered. The private key is an algorithm known only to its owner; the public key
is published for general use. Only the intended reader, the owner of the
associated private key, would have the ability to decrypt and gain access to a
message received. Message encryption is a separate software application.
associated with any given digital signature to the region’s public key.
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BIBLIOGRAPHY

1. www.google.com
2. www.citibank.com

BOOKS

1. E-banking: the global perspective –Gupta Vivek

2. E-Commerce in Indian banking – Bhasin
3. Banking and Finance – C.M.Chaudhary
4. Banking in The New Millennium – Rajshekhar N.

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