E Banking a Complete Project

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NEED FOR THIS STUDY

Since the 80s, there has been turbulence in the banking and finance industryworldwide 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 todays 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.

PRE E-BANKING SCENARIO IN INDIA

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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 organizations 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)

On IT Adoption

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The Indian banking sector woke up to the world of

technology in early 1990s.The banking sector in Indiahas 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 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

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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 ornon-

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 problems. Overcoming these obstacles, therefore, would be

the biggest challenge by itself."

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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 banks

branch.

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 banks 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.

THE INTERNET A DISTRIBUTION CHANNEL

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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)

Areas of Use of the Internet in Financial Institutions

Generally we may distinguish four classes of Internet use in financial institutions:

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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 customerdata)

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 touse 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.

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.

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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.

This is Electronic Banking The New Era.

WHAT IS E-BANKING?

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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 Citibanks 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 its 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 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.

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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.

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.

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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.

24/7 service - Bank online 24 hours a day, 7 days a week and 52

weeks a year.

Below is a detailed review of features found in Internet banking around the world.

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

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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 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

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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

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.

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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.

These features and many others help customers save time, simplify their lives and

provide greater value than conventional banking.

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.

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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) 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

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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.

Real time Settlement Systems

A real time (orcontinuous) 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

characteristicsGross Net

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Designated time

(deferred)

Designated time

gross settlement

Designated time net

settlement (DNS)

Continuous (real -

time)

Real time gross

settlement (RTGS)(Not applicable)*

* 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.

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, whileincluding 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.

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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

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

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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.

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.

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

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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 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

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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.

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.

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 wouldnt 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

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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 banks computers and data

from being accessed by any outsider. This firewall is located at the point where the

banks 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

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

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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.

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

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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).

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.

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- 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.

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:

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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' (ICICIs 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 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 anInternet Service Provider(ISP)

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IS E-BANKING FOR YOU?

For months, you received mailers and statement inserts promoting your banks

Internet banking capabilities. You kept thinking to yourself, "What does this do for

me?" and "does it really work?" Youre not alone. Millions of consumers across

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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?

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? If 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

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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.

Do you trade stocks online? Many online brokers are now beginning to offer

products similar to online banks. So if you do already trade stocks online, consider

moving your banking online too, since many brokers may offer very attractive

deals for your banking business -- the objective is to keep your money within their

group.

PAYING SAFE

When you bank online, make sure your transactions are secure, your personal

information is protected, and your fraud sensors are sharpened. Although you can't

control fraud or deception on the Internet, you can take steps to recognize it, avoid

it, and report it. Here's how:

Use a secure browser - software that encrypts or scrambles the purchase

information you send over the Internet - to guard the security of your online

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transactions. Most computers come with a secure browser already installed.

You also can download some browsers for free over the Internet.

Keep records of your online transactions. Read your e-mail - merchantsmay send you important information about your purchases.

Be prompt about reviewing your monthly bank and credit card statements

for any billing errors or unauthorized purchases. Notify your credit card

issuer or bank immediately if your credit card or checkbook is lost or

stolen.

Read the policies of Web sites you visit - especially the disclosures about a

Web site's security, its refund and return policies, and its privacy policy on

collecting and using your personal information. Some Web sites'

disclosures are easier to find than others are - look at the bottom of the

home page, on order forms, or in the "About" or "FAQs" section of a site. If

you can't find a privacy policy, consider shopping elsewhere.

Keep your personal information private. Don't disclose your personal

information - your address, telephone number, Social Security number, or

e-mail address - unless you know who's collecting the information, why

they're collecting it, and how they'll use it.

Give payment information only to businesses you know and trust, and only

in appropriate places like order forms.

Never give your password to anyone online, even your Internet service

provider.

Evaluate The Site - Make sure the online banking site you are considering

has depth (many pages), and is well designed. Unless you know a bank is

legitimate, don't accept a poorly designed site with broken images. If you

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are unsure as to whether a online bank is legitimate look for a different

bank.

Go to the bank, don't let the bank come to you - Don't accept unsolicitedemail recommendations for online banks. You should search for the bank;

don't let a bank search for you. In this way you won't be the victim of a web

site masquerading as a bank when they are not. In the past few years

hackers have gotten email addresses of customers of some financial service

companies and sent email to them inviting them to fraudulent sites in order

to try to get personal information from them. PayPal experienced this

problem, when con-artists sent a email asking consumer to go to the web

site to review a large payment in their account. They gave the url of

PayPa1.com instead of the correct url PayPal.com (They substituted a 1 for

the L). Know your banks online address and go directly to it.

Don't choose an obvious password or username - Don't use variations of

any obvious people, numbers, or things related to your life. Do use a

combination of random numbers and letters. Many banks will provide a

random password and/or user name for you; use these. If possible change

the password to one only you know, and change it online over a secure

connection into the bank's official web site.

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

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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.

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.

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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.

WINNING ONLINE STRATEGY

Perhaps most banks have already launched online banking, but customers aren't

exactly bringing down their Web server with a heavy demand for the service. How

do you successfully sell Internet banking to your customers, and why might it be in

your bank's best interest to do so?

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Here are four guiding principles that can help any bank construct a winning online

strategy:

Know thy customers (and what they want and need)

Before you construct your online offering, carefully assess your customer base and

its needs to determine whether

a) They wantInternet banking;

b) They expectInternet banking; and

c) They would use Internet banking.

The only way you can meet their expectations is if you know what their

expectations are.

If you're inclined to believe your customers don't really want Internet banking or

are not "ready" for it, consider the "health club effect." Numerous studies have

shown that the existence of workout facilities in a hotel can play a major role in a

customer's choice of one hotel over another, yet when it comes right down to it,

only a tiny percentage of guests actually utilize the exercise rooms. Why would the

availability of a service the customer will probably never use influence his choice?

It's all about options and the warm fuzzy feeling a traveler has in knowing that if he

should awaken full of energy, with a desire to be proactive about his health, the

right equipment will be just a few steps away.

Just as the hotel guest entertains the fantasy of virtuous exercise

habits, so do some bank customers find comfort in knowing that

if they should decide to embrace the wired world, they will find

the Internet doors to their account information wide open. Don't

underestimate the impact of your online offerings on customers that do not directly

take advantage of them. I overheard a conversation in a bookstore recently that

could only be described as "My bank's cooler than your bank." Imagine. Bank

offerings as status symbols!

Analyze key factors about your customers:

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Are they mobile, such as students or frequent travelers? Is the ability to

engage in distance-banking important to them?

Do they frequently use debit cards? Could they benefit from online tracking

of debit card transactions? Do they have hectic schedules that would preclude visits to the bank's

offices?

Are they computer-savvy?

Are a significant number of them using money management software

already, such as Microsoft Money or Intuit's Quicken?

Do they like to have control?

To what extent does your target market consist of business customers?

Large business or small businesses?

What features would be most important to them? The ability to view online

statements? See imaged copies of individual items? Transfer funds between

accounts? Do online bill paying? Download statements to their computer?

Assess customer needs -- and desires -- to help you plan the features your Internet

offerings should have.

Think long and hard about the benefits of Internet banking to the bank.

What is your goal in implementing online banking? What are you trying to

accomplish?

Can you position your bank as a market leader and attract customers by

implementing Internet banking?

Is the competitive marketplace driving you to implement Internet

banking as a defensive measure to avoid losing customers to

competitors who offer it?

Can Internet banking be used to increase satisfaction and loyalty?

Could Internet banking provide long-term cost savings?

Can you solidify the bond you have with your customers by offering

online banking? Keep student customers even after they graduate and

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move away? In this increasingly mobile society, can your bank serve as

an anchor for customers who find employment in another locale?

Do you need to offer Internet banking now in order to lay the

foundation for product/service offerings such as online bill paymentand bill presentment?

Can you provide superior customer service via the Internet by using it

to:

provide online loan applications, permit a self-service way for the

customer to access account information, order checks, place stop

payments, review account agreement provisions, shop for banking

products, conduct comprehensive reviews of all business with the bank;

offer how-to information that customers can learn from, like tutorials

on the home mortgage application process, checking account basics,

and how to keep a credit report clean.

Can you cross-sell other banking products and services through this

channel? Does it provide unique marketing opportunities?

Can you appeal to customers in a wider geographic area than you can

attract with your brick and mortar offices?

Can you establish a different image online than your bank has in the

"real" world, thus appealing to a whole new customer demographic?

Once you have resolved the issue of what you are striving to

achieve, you can build a site and an Internet banking offering that

works to accomplish those goals. Don't believe for a minute that

all Internet banking sites are created equal. Your online presence can --

and should -- be distinct and original.

Choose your Internet banking solution provider(s) carefully.

Don't ride the wrong horse into the Internet banking arena. You run the risk of

ending up with a circus pony instead of a stallion. You cannot stake your reputation

on a company whose product is unreliable or does not compare favorably to the

competition. Internet customers are notoriously demanding -- and critical. They

want service fast and they don't want a site that is lame.

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Make sure the solution provider you choose can provide

reliable and dependable service. Downtime results in angry

customers and reduction in use. Your institution's reputation

suffers when customers cannot reach your site. It's like having an "Out of Order"

sign on your ATM.

Make the sign-up/registration as easy as possible, yet don't minimize security or

compromise your ability to accurately determine exactly who you're dealing with.

Test drive! Before you make your choice of a software solution, arrange to have a

large number of your staff members try it out. Having someone else give you a

demonstration is not what I'm talking about. I'm talking about having real people

sit down under the same sorts of conditions your customers will be using the

product -- at modem speeds, typically, with a wide range of computer types,

monitor settings and different browser versions. Rather than having a vendor

representative walk your employees through the process of using the software,

have the employees try to figure it out themselves. Those are the conditions your

customers will likely be coping with. Figure out what other institutions have used

the vendors you're considering and open online accounts with them to test drive the

service under true market conditions, rather than making a decision based upon

demos alone.

Ask the following questions:

Is it intuitive?

Does it do what the user wants and expects it to do?

Do the pages load quickly enough?

Is it "forgiving"? In other words, does it allow the user to recover from

mistakes?

Is it reassuring, in terms of conveying a sense of security?

What is the frustration factor? How many times do the testers think they

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should take a particular path to accomplish something, only to discover

that's not the correct choice?

Is the overall experience of the user a positive one?

Think long and hard about the features your customers want (that you're willing to

pay for!) Test the waters. You can move slowly, if that's your style. For example,

first offer online banking without bill payment. Then add online bill payment when

you feel more comfortable with it.

Be sure you choose a vendor who can supply the features that are important to you.

Do your homework! Internet banking is an area that will constantly be evolving.

You'll want a solutions provider who values careful innovation.

Once you have it, PROMOTE it!

You've made a major investment -- both in time and money. Make the investment

count -- promote it heavily. Pull out all the stops. Increase awareness of your new

Internet banking product in every way possible.

Have buttons made up for your employees to wear, touting your new

Internet banking product.

Post eye-catching signs in all your banking offices.

Put banner ads on your Web site, particularly if you already have Web

traffic.

Run ads that let customers and prospective customers know about the

new service.

Play up the features of the new service in special statement stuffers.

Mention the service on your drive-in envelopes.

Draft a press release. This is news!

Seek out opportunities for employees with public speaking skills to

speak about banking on the Net.

Get all your employees online first, so that they are knowledgeable about how it

works and what the benefits are. Encourage the employees to become Net Nerds!

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Consider offering a low interest/no interest loan to employees to help them buy

computers for their homes.

Take the "Would you like fries with that burger?" approach with customers.

Develop the habit of asking if they'd like to sign up for

Internet banking any time they use (or sign up for) any other

service.

Consider incentivizing in painless ways. What can you offer to customers who

open an online banking account? There are lots of things you can offer that won't

cost you anything.

Collaborate with local merchants. Form alliances. Co-market.

Promote Net use in general. Have a Net-enabled computer at the bank and schedule

demonstrations. Walk your customers through the process with a fictional account.

Offer programs in your community on using the Internet, and make your Internet

banking product one component of the program.

Plan an Open House Internet class at the bank, free to all customers. Along with

punch and cookies, serve up some solid suggestions for using the Net.

Think of ways to add value to your Internet banking pages. For example, you could

have a "newsletter" type of content on your Internet banking site, with content that

is regularly updated. Topics could include such things as teaching kids about

money, planning for retirement, how to know if it's time to refinance your

mortgage, how to tell whether buying or leasing a car makes the most sense. Add

pertinent calculators to make the site truly interactive.

Utilize your Web pages to humanize the bank, tell about what the bank is doing to

help the community.

Make cross-selling easy. For example:

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When John DSouza logs in, if his safe deposit lease is about to expire,

have a message pop up on the screen telling him so and give him the option

to click a button to renew automatically;

When rates go up on CDs or down on loans, brag about it online.

If you offer discount brokerage services, target customers who might be

interested and make it easy for them to sign up or learn more.

Consider providing Internet specials, complete with printable coupons. For

example, you could offer Rs5.00 off their next cheque order, Rs20.00 off

their first year's safe deposit box rental, etc.

Start with the consumer side first. Work the kinks out. Then roll out the service toyour commercial customers.

Stress the benefits of online banking -- from customer control and convenience on

down.

Don't scare customers away by overpricing the service. Done right,

Internet banking can make you money by saving money, but you

can't reap the cost savings if your customers aren't using it.

Offer online banking to all your customers. Don't make assumptions about which

ones will want it or need it, and don't reserve it for your "best" customers.

Typically, it's not the best customers who flood your customer service department

with time-consuming inquiries about balances, deposits received, stop payments,

check posting and the like. It's the customers who live on a shoestring for whom

checking the balance can be a daily activity.

The Bottom Line

Nicole is six years old. Since she was a baby, she has ridden with her mother

through the bank's drive-in. Each time, the nice teller has given her a lollipop.

Nicole already knows that this is the bank she wants an account at -- they know

how to make her happy. Your challenge is to figure out how to construct the virtual

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equivalent of giving candy at the drive-through. When you figure out how to

deliver a service online that brings a smile and a pleasant experience to the

customer -- a service that delivers what the customer wants, you will achieve

success in selling Internet banking.

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 Corps 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 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.

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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 Swedens 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 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

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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

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.

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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.

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THE ASIAN PERSPECTIVE

Will Internet banking ever take off in Asia? Although much of the region is wired,

obstacles remain. Customers are concerned about security; the banking products

available so far tend to be unexciting; and in the wake of Asia's recent economic

crisis, many smaller banks have been preoccupied with the more urgent issue of

survival. But some evidence suggests that on-line banking will succeed if the basic

features, especially bill payment, are handled correctly.

Meanwhile, human tellers and automated teller machines

continue to be the banking channels of choice, and only a tiny

minority has recourse to Internet banking. Among middle-

and high-income people questioned in a McKinsey survey, only

2.6 percent reported banking over the Internet last year. In

India, Indonesia, and Thailand, the figure was as low as 1 percent; in Singapore

and South Korea, it ranged from 5 to 6 percent.

Overall, Internet banking accounted for fewer than 0.1 percent of these customers'

banking transactionsa figure unchanged from 1999. (By contrast, telephone

transactions have doubled since then, to 0.6 percent.) The Internet is used more

often for opening new accounts, but again the numbers are small: fewer than 0.3

percent of respondents used it for that purpose, except in China and the Philippines,

where the figures climbed to 0.7 and 1.0 percent, respectively.

Bankers can't blame limited access to the Internet for the slow uptake: 42 percent

of respondents said that they had access to computers and 7 percent to the Internet.The chief problem in Asia and throughout emerging markets is security, which

more than half of the respondents reported as their main reason for declining to

open on-line banking or investment accounts. Respondents also said that they

preferred to havepersonal contactwith their banks.

Access to high-quality products is an issue as well. Most banks in Asia are only

beginning to offer Internet banking services, and many of the services are basic

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compared with those available in other parts of the world. Citibank, which has

marketed a range of Internet banking products in the United States for years, didn't

add bill payment to its Hong Kong service until last yearand even then, for only

11 companies.

Nonetheless, Internet banking appears to have a future in Asia. When the responses

to the McKinsey survey were analysed, the following three segments were

uncovered:

1. Lead users: In the group studied, 38 percent of the respondents said that

they intended to open an on-line account in the near future. These lead

users undertake one-third more transactions a month than do other users

and tend to employ all banking channels more often.

2. Followers: The responses of an additional 20 percent suggested that they

would eventually open an on-line account, especially if their primary

institution offered it and there were no bank charges.

3. Rejecters: Only 42 percent showed little interest in or an aversion to

Internet banking. These respondents also had a preference for consolidation

and simplicitythat is, for owning fewer banking products and dealing

with fewer financial institutions.

Conducting complex activitiesfor instance, trading securities or

applying for insurance, credit cards, and loansover the

Internet appealed to no more than 13 percent of the lead

users and the followers. One-third of the lead users and the

followers preferred to undertake basic functions, such as ascertaining account

balances and transferring money between accounts, over the Internet. Some of

these basics are hard to supply, however. Bill payment, for example, was the most

popular feature, cited by 40 percent of respondents, but the service is difficult for

banks to provide because it requires a high level of security and involves arranging

transactions with a variety of players.

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Functions Preferred by Asian Users (Diag. 4)

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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 31st 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.

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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.

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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 (Diag. 5)

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.

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Age Breakdown of Users in India 2000 (Diag. 6)

Online Gender Divide in India 2000 (Diag. 7)

Cybercafes are popular gathering places among young, novice Indian internet

users. The popularity of these cybercafs 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 cybercafs 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.

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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.

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 (Diag. 8)

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.

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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.

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 succ

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E Banking a Complete Project