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Competition and the constant changes in technology and lifestyles have changed the face of banking. Nowadays, banks are seeking alternative ways to provide and differentiate amongst their varied services. Customers, both corporate as well as retail, are no longer willing to queue in banks, or wait on the phone, for the most basic of services. They demand and expect to be able to transact their financial dealings where and when they wish to. With the number of computers increasing every year, the electronic delivery of banking services is becoming the ideal way for banks to meet their clients expectations. Online banking or e-banking can be defined as online systems which allow customers to plug into a host of banking services from a personal computer by connecting with the banks computer over the telephone wires. Technology continues to make online banking easier for the average consumer. Banks are using a variety of names for online banking services, such as PC banking, home banking, electronic banking or

E-BANKING Internet banking. Regardless of the given name, these systems certainly offer specific advantages over the traditional banking methods.

E- Banking can be defined as delivery of banks services to a customer at his office or home using Electronic Technology. The quality, range and price of these electronic services decide a banks competitive position in the industry.

Technology in banking has been used in four major ways: To handle a greatly expanded customer base To reduce substantially the real; cost of handling payments To liberate the banks from the traditional constraints on time and place To introduce new products and services.

What is electronic banking?

Electronic banking is the wave of the future. It provides enormous benefits to consumers in terms of the ease and cost of transactions. But it also poses new challenges for country authorities in regulating and supervising the financial system and in designing and implementing macroeconomic policy.


E- Commerce Conducting business through electronic network

E- Finance Providing financial services through electronic channels

E Money Stored value or prepaid payment mechanism.

E-Banking Providing banking products and services

Other financial services or products Insurance, online brokering etc.

Internet Banking

Telephone Banking

Other electronic delivery channels

Electronic banking has been around for some time in the form of automatic teller machines and telephone transactions. More recently, it has been transformed by the Internet, a new delivery channel for banking services that benefits both customers and banks. Access is fast, convenient, and available around the clock, whatever the customer's location plus, banks can provide services more efficiently and at substantially lower costs.

E-BANKING Electronic banking also makes it easier for customers to compare banks' services and products, can increase competition among banks, and allows banks to penetrate new markets and thus expand their geographical reach. Some even see electronic banking as an opportunity for countries with underdeveloped financial systems to leapfrog developmental stages. Customers in such countries can access services more easily from banks abroad and through wireless communication systems, which are developing more rapidly than traditional wired communication network.





Client prepares a Cheque

Client logs on to Banks web site

He goes to bank

Keys in the user Name & password

Deposits the Cheque in bank

Gives instructions Online

Next day the Money is transferred

Money is transferred Same day




Client prepares a Cheque

Client logs on to Banks web site

He goes to bank

Keys in the user Name & password

Deposits the Cheque in bank

Gives instructions Online

Next day the Money is transferred

Money is transferred Same day


COMPETITION: Banks feel the need to offer e-banking services today just to keep up with the competitors and to be able to retain their existing customers.

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


To Customer
Anywhere banking- no matter wherever the customer is in the world, on- line banking is just a web- site away. Balance enquiry, request for services, issuing instructions etc. from anywhere in the world are possible. Consumers can use their computers and a telephone modem to dial in from home or any site where they have access to a computer. Anytime banking- managing funds in real time and most importantly, 24 hours a day, 7 days a week. Convenience acts as a tremendous psychological benefit all the time. Cash or card free banking through PC banking. E- Banking expands the domain of access to banking services. Brings down cost of banking to the customer over a period of time. Cash withdrawal from any branch/ATM. On line purchase of goods and services including on line payment for the same. Transactions are executed and confirmed almost instantaneously. Also, the range of transactions available is fairly broad. Consumers can do everything from simply checking on an account balance to applying for a mortgage.


To Bank

Innovative, secure, addresses competition and presents the bank as technology driven in the banking sector market. Reduces customer visits to the branch and thereby human intervention.

This impact tells upon establishment costs of the bank. Inter-branch reconciliation is immediate thereby reducing chances of fraud and misappropriation. On- line banking an effective medium of promotion of various schemes of the bank, a marketing tool indeed. E-Banking site can act as a revenue earner through promotion activity by consumer corporate. Integrated customer data paves wave for individualized and customized services. E-Banking provides competitive advantage to the bank.

E-Banking provides unlimited network to the bank and is not limited to the number of branches. By connecting all the branches through WAN (wide area network), anywhere banking facility can be provided. Helps in establishing better customer relationship and retaining and attracting customer. ATM can be better monitored and planned by establishing a centralized data warehousing and using latest data mining tools. Load of branches can be considerably reduced by establishing centralized data base and by taking over some of the accounting functions.


To Merchants, Traders etc.

Increase in business because of increased purchasing power of the credit card

holders and ease with which purchasing can be done. Less need for merchants or traders to provide credit facility to their customers. Making e-commerce a reality and globalizing the trade. Development of global and loyal clientele base. Assured immediate payment /

settlement. Avoid all the cost and risk problems involved in handling cash. Providing services of international standard at low transaction cost.

To Government and Nation

Globalization of trade and e-commerce. Providing global market to the national products and services. Establishment of e-commerce in India will promote exports and increase inflow of foreign exchange. Promotion of e-commerce and e-banking will eliminate the risk of carrying heavy cash. E-banking and e-commerce will improve transparency in transaction.




ENTRY TO MARKET: The Internet has helped demolish one of the biggest entry barriers to the banking market the need for a large bank network. The lower start-up costs and maintenance of the Internet Bank Branch makes it more attractive for start-up banks and for those wishing to break into new markets.

ONLINE SERVICING: Many new banking services for corporations will soon become available via the Internet and those already online will be greatly improved. With advances in technology, more and more corporations will be able to access the most up-to-date rates, select and confirm their deal, submit settlement instructions and confirmations via the Web and finally, check their accounts as the transaction is carried out.

TURNING THE POWER OF THE INTERNET INWARD: E-banking technology alone cannot only enhance what the bank can do for its customer, but it can also help the employees do their jobs effectively.

NEW BANKS: The Internet has inspired many corporations to throw their own hat into the banking arena although they appear to be primarily with the retail-banking sector at present.




Internet banking, both as a medium of delivery of banking services and as a strategic tool for business development, has gained wide acceptance internationally and is fast catching up in India with more and more banks entering the fray. India can be said to be on the threshold of a major banking revolution with net banking having already been unveiled. A recent questionnaire, to which 46 banks responded, has revealed that at present, 11 banks in India are providing Internet banking services at different levels, 22 banks propose to offer Internet banking in near future while the remaining 13 banks have no immediate plans to offer such facility. Further incentives provided by banks would dissuade customers from visiting physical branches, and thus get hooked to the convenience of arm-chair banking. The facility of accessing their accounts from anywhere in the world by using a home computer with Internet connection, is particularly fascinating to Non-Resident Indians and High Net worth Individuals having multiple bank accounts. Costs of banking service through the Internet form a fraction of costs through conventional methods. Rough estimates assume teller cost at Re.1 per transaction, ATM transaction cost at 45 paise, phone banking at 35 paise, debit cards at 20 paise 12

E-BANKING and Internet banking at 10 paise per transaction. The cost-conscious banks in the country have therefore actively considered use of the Internet as a channel for providing services. Fully computerized banks, with better management of their customer base are in a stronger position to cross-sell their products through this channel. In India, the Internet banking market is in the earliest stages of development. Only 51 banks are currently offering any kind of Internet banking services. Out of which 55% are Entry Level sites, offering little more than company information and basic marketing materials. Only 8% offer advanced transactional services, such as online fund transfer, transactions and cash management services. In general, the foreign and private banks are far ahead of the Public Sector or Cooperative Banks in terms of the number of sites and their level of development. Classification of current Internet banking sites ENTRY LEVEL: Offers general information on the institution. Essentially a glorified brochure with no interactive capabilities. Example: General product information, company news, press releases. BASIC LEVEL: Increased functionality, offering all Entry Level items plus basic interactive tools and some origination capabilities. Examples: Download on account applications and email to customer service. INTERMEDIATE LEVEL: Allow account access, tracking and viewing. Have the skeletal features of a complete Internet bank. Examples: Check balances online, submit account applications electronically and reporting.



ADVANCED LEVEL: Complete Internet bank offering full functionality and security. Customers can securely move money to and from accounts online. Examples: Inter-account transfers, trading and electronic exchanges.

Stage Information Websites

Services Provided Websites provide information on the financial services offered in the banks branches.

Banks Most of the banks in India.

Electronic and Internet Banking

Customers can do basic banking transactions like opening an account, payment of utility bills, checking their balance and transactions.

Some of private sector banks and foreign banks.

E-commerce and ebanking

Banks become electronic market place where customer can buy and sell through banks payment gateway.

A few new private sector banks and foreign banks.




The first step was taken in 1992-93 when the government issued guidelines for entry of private sector banks. Immediately financial institutions set up private sector banks major among them being: ICICI Bank Ltd. HDFC Bank Ltd. UTI Bank Ltd. IndusInd Bank Ltd. Backed by the muscle power of the parent financial institution, these banks proved to be a major threat to existing banks. Competition also resulted in: Elimination of niche areas as more and more private sector and foreign banks stepped up activity in the retail banking area which till then was considered to be the bread and butter for smaller co-operative banks. Use of information technology in a major way to provide easy and convenient banking services to customers. The state of art technology introduced by some of the private sector banks and its impact on the customer has compelled the public sector and smaller co-operative banks to also automate operations in a major way. The reserve bank of India too has now published guidelines for technology up gradation in banks.








Intense competition has forced banks to rethink the way they operated their business. They have to reinvent and improve their products and services to make them more beneficial and cost effective. Technology in the form of electronic banking has made it possible to find alternate banking practices at lower costs. More and more people using electronic banking products and services and because a larger section of banks future customer base will be made up of computer literate customers, the banks must be able to offer these customer products and services that allow them to do their banking by electronic means. If they fail to do this they will, simply, not survive.

Automated Teller Machine (ATM)

The ATM was one of the earliest electronic banking products, being introduced in the mid 1970s. it provided customers with the ability to withdraw or deposit funds, check account balances, transfer funds and check statement information. As is the case with any new technology, it took some time before customers became familiar with the ATM and came to accept it as an alternative way of doing their banking.



Electronic Funds Transfer (EFT)

Electronic funds transfer (EFT) is another electronic banking product that facilitates transfer of funds from any branch of a bank to any other branch of any bank in the shortest time.

Telephone Banking
Telephone banking is only a new electronic banking product. However, it is fast becoming one of the most popular products. Customer can perform a number of transactions from the convenience of their own home or office, in fact from anywhere they have access to phone. Customer can check balances and statements information, transfer funds from one account to another, pay certain bills and other statements or cheque books.

Personal Computer Banking

Personal computer banking or PC banking is also a fast growing area in electronic banking. PC banking lets customers access information on their accounts through a dial up connection with their bank. Customers can perform basically all the transactions that are available with telephone banking. They also have the ability, in some cases, to download information and process it in their own financial management software.



Internet Banking
Internet banking is an improvement over PC banking. This is because internet banking is also done over a highly accessible public network. The bank can set up their system, much the same as PC banking. It is accessible to anyone using the internet, not just the banks customers. One of the main reasons electronic banking products were introduced was that the banks were losing their market share. Electronic banking has assisted the banks in retaining their customers and their market share by reducing costs in many areas, especially those associated with providing service to the customer and to enhance their image. Most banks are trying to get customers to use electronic banking because it saves them money. If a customer comes into a branch to perform a routine task such as checking a balance or withdrawing funds, it passes on a cost to the bank. The cost of providing these routine transactions in a traditional branch environment is far greater than providing a same service by electronic means. Another benefit of electronic banking is that the ability to obtain accurate information quickly and easily has increased dramatically. It is beneficial to the banks as it increases their productivity and it also improves the delivery of quality service to the customer. The availability of the services can be extended to 24 hours a day. Customers can make informed decisions due to the accuracy of the information available to him.



PRODUCTS AND SERVICES OFFERED Banks in India are at different stages of the web-enabled banking cycle. Initially, a bank, which is not having a web site, allows its customer to communicate with it through an e-mail address; communication is limited to a small number of branches and offices which have access to this e-mail account. As yet, many scheduled commercial banks in India are still in the first stage of Internet banking operations. With gradual adoption of Information Technology, the bank puts up a website that provides general information on the banks, its location, services available e.g. loan and deposits products, application forms for downloading and e-mail option for enquiries and feedback. It is largely a marketing or advertising tool. For example, Vijaya Bank provides information on its web-site about its NRI and other services. Customers are required to fill in applications on the Net and can later receive loans or other products requested for at their local branch. A few banks provide the customer to enquire into his demat account (securities/shares) holding details, transaction details and status of instructions given by him. These web sites still do not allow online transactions for their customers. Some of the banks permit customers to interact with them and transact electronically with them. Such services include request for opening of accounts, requisition for cheque books, stop payment of cheques, viewing and printing statements of accounts, movement of funds between accounts within the same bank, querying on status of


E-BANKING requests, instructions for opening of Letters of Credit and Bank Guarantees etc. These services are being initiated by banks like ICICI Bank Ltd., HDFC Bank Ltd. Citibank, Global Trust Bank Ltd., UTI Bank Ltd., Bank of Madura Ltd., Federal Bank Ltd. etc. Recent entrants in Internet banking are Allahabad Bank (for its corporate customers through its Allnet service) and Bank of Punjab Ltd. State Bank of India has announced that it will be providing such services soon. Certain banks like ICICI Bank Ltd., have gone a step further within the transactional stage of Internet banking by allowing transfer of funds by an account holder to any other account holder of the bank. Some of the more aggressive players in this area such as ICICI Bank Ltd., HDFC Bank Ltd., UTI Bank Ltd., Citibank, Global Trust Bank Ltd. and Bank of Punjab Ltd. offer the facility of receipt, review and payment of bills on-line. These banks have tied up with a number of utility companies. The Infinity service of ICICI Bank Ltd. also allows online real time shopping mall payments to be made by customers. HDFC Bank Ltd. has made e-shopping online and real time with the launch of its payment gateway. It has tied up with a number of portals to offer business-to-consumer (B2C) e-commerce transactions. The first online real time e-commerce credit card transaction in the country was carried out on the Easy3shoppe.com shopping mall, enabled by HDFC Bank Ltd. on a VISA card. Banks like ICICI Bank Ltd., HDFC Bank Ltd. etc. are thus looking to position themselves as one stop financial shops. These banks have tied up with computer training companies, computer manufacturers, Internet Services Providers and portals


E-BANKING for expanding their Net banking services, and widening their customer base. ICICI Bank Ltd. has set up a web based joint venture for on-line distribution of its retail banking products and services on the Internet, in collaboration with Satyam Infoway, a private ISP through a portal named as icicisify.com. The customer base of www.satyamonline.com portal is also available to the bank. Setting up of Internet kiosks and permeation through the cable television route to widen customer base are other priority areas in the agendas of the more aggressive players. Centurion Bank Ltd. has taken up equity stake in the teauction.com portal, which aims to bring together buyers, sellers, registered brokers, suppliers and associations in the tea market and substitute their physical presence at the auctions announced. Banks providing Internet banking services have been entering into agreements with their customers setting out the terms and conditions of the services. The terms and conditions include information on the access through user-id and secret password, minimum balance and charges, authority to the bank for carrying out transactions performed through the service, liability of the user and the bank, disclosure of personal information for statistical analysis and credit scoring also, non-transferability of the facility, notices and termination, etc. The race for market supremacy is compelling banks in India to adopt the latest technology on the Internet in a bid to capture new markets and customers. HDFC Bank Ltd. with its Freedom- the e-Age Saving Account Service, Citibank with Suvidha and ICICI Bank Ltd. with its Mobile Commerce service have tied up with cellphone operators to offer Mobile Banking to their customers. Global Trust Bank


E-BANKING Ltd. has also announced that it has tied up with cellular operators to launch mobile banking services. Under Mobile Banking services, customers can scan their accounts to seek balance and payments status or instruct banks to issue cheques, pay bills or deliver statements of accounts. It is estimated that, cellular phones will have become the premier Internet access device, outselling personal computers. Mobile banking will further minimise the need to visit a bank branch.

By the year 2006, a large sophisticated and highly competitive Internet Banking market will develop. Several factors will drive the increase: There is a lot of room to expand Increase in Internet usage to drive demand side pressure Emergence of open standards for banking functionality Growing customer awareness and need for transparency Global players in the fray Faster Response time Cost of Operations are less




The Indian scenario

See up-to-date account information View transaction details View account statement for up to 12 months Order demand drafts to couriered free to over 200 locations Order a cheque book Stop payments Request a deposit slip Pay utility bills Email queries

Account information - Summary of accounts and transactions Bill payment Funds Transfer including third-party transfers Request for cheque book, stop payment, account opening, Reporting loss of ATM card 23

E-BANKING Online e-shopping payments Communication with Account Manager Personalized viewing of content updates personal finance, select articles on ecommerce, information technology, lifestyles, travel and news.

Real-time account information including transactions Transfer money between accounts Bill payment facility Third party funds transfer within HDFC bank Request for Demand Draft/Bankers Cheque Stop payment requests Opening fixed-deposit accounts Sending messages to the bank via e-mail

Global Trust Bank

Account information and transaction details Depository accounts Fund transfer between branches Requests for Cheque Books, Demand Drafts\ Bankers Cheque, Term Deposit Account Opening, Renewal of Term Deposits and Change of Address


E-BANKING Customize content as per the viewing preferences


The speed and flexibility that online banking offers has resulted in a significant spurt in internet banking in India. Pursuant to the recommendations of the working group in internet banking, the RBI notified guidelines applicable to e-banking within the country. These guidelines expand the existing regulatory framework to include ebanking and cover all entities that offer online banking products to residents in India. This changing financial landscape brings with it new challenges for bank management and regulatory and supervisory authorities. The major ones stem from increased cross-border transactions resulting from drastically lower transaction costs and the greater ease of banking activities, and from the reliance on technology to provide banking services with the necessary security. The Reserve Bank of India (RBI) has created a comprehensive document which lays down number of security-related guidelines and strategies for banks to follow in order to offer Internet banking. The guidelines broadly talk about the types of risks associated with Internet banking, the technology and security standards, legal issues


E-BANKING involved, and regulatory and supervisory concerns. Any bank that wants to offer Internet banking must follow these guidelines and adhere to them as a legal necessity.

The document broadly categorizes levels of E- banking services into three types:

The basic level service in which the banks' websites disseminate information on different products and services to customers. It may receive and reply to customers' queries through e-mail.

Simple transactional websites which allow customers to submit their instructions, applications for different services, and queries on their account balances. They do not permit any fund-based transactions on their accounts.

The third level of Internet banking services offered by fully-transactional websites which allow customers to operate on their accounts for transfer of funds, payment of different bills, subscribing to other products of the bank, and to transact purchase and sale of securities.

Security the Key ConcernIt's evident from the document and from a general study of the business case of Ebanking, that security is perhaps the biggest concern. Connectivity issues to remote locations are also very important, but the need to be secure is far more pressing. The document says that security issues include questions of adopting internationally accepted state-of-the-art minimum technology standards for access control,


E-BANKING encryption/decryption (minimum key length), firewalls, verification of digital signature, and Public Key Infrastructure (PKI).

The concerns and guidelines about security are discussed in detail in the report. The key components of security concerns are

Authentication: The assurance of identity of the person in a deal Authorization: A party doing a transaction is authorized to do so Privacy: The confidentiality of data and information relating to any deal Data integrity: Assurance that the data has not been altered Non-repudiation: A party to the deal cannot deny that it originated the communication or data.

Thus to avoid the above mentioned security risk RBI laid down some guidelines. Some of which are: Only banks licensed under Banking Regulation Act having a physical presence are permitted to offer e-banking services. E-banking products should include Indian currency products only. With regard to cross-border transactions wherein an Indian bank transacts with a foreign resident and vice versa, existing restrictions would continue to apply, except where permitted by FEMA. Prior approval of RBI is required to offer internet banking. Banks that already offer such services would require post facto approval. 27


The RBI guidelines are very exhaustive and extremely comprehensive Experts at Global E-Secure Limited, a security solutions company say that none of the Indian banks which offer Internet banking facilities have an IT security policy as stipulated by the RBI. While banks have been asked to file monthly reports to show compliance to the guidelines, most of them have sought time to satisfy the security policy criterion. The RBI is insisting on a written document, signed by the Board of Directors to make the banks aware that IT security is not just an IT concern, but something that could affect overall business as well. If these areas are not addressed, the bank may suffer operational risk, reputational risk, legal risk, money laundering risk, and strategic risk.




The flip side of this technological boom is that electronic banking is not only susceptible to, but may exacerbate, some of the same risksparticularly governance, legal, operational, and reputationalinherent in traditional banking. In addition, it poses new challenges. In response, many national regulators have already modified their regulations to achieve their main objectives: ensuring the safety and soundness of the domestic banking system, promoting market discipline, and protecting customer rights and the public trust in the banking system. Policymakers are also becoming increasingly aware of the greater potential impact of macroeconomic policy on capital movements. Banks may face different forms of risks due to shift to the electronic medium. These include:

Dominance of technology companies


E-BANKING In future technology providers may dictate banks with respect to the terms and conditions at which: Retail services will be made available to the customers electronically Cost of providing the retail services

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Fear of losing primary relationship with customers

The standard interface in E-banking is a web browser and a mouse. Thus, the personto-person contact is replaced by a computer link. With customers using computers to give instructions to their bankers and to conduct all routine banking businesses, banks may lose the personal contact with their clients. This may remove the human element in banking business.

Electronic security
Most of the retail banking products, in the electronic era will be delivered through shared networks like the ATM and the Internet. In view of this, security of the information will become increasingly important. Moreover, the legal rights and obligations of the banks and the customers in the event of security failure and the resultant potential loss incurred by the customers assume importance. Hence, security of bank information from the hackers is very important.

The risks involved in the security aspect are:


E-BANKING Earlier, many banks had established web sites which gave general information about the bank and the various services offered. This represented a limited type of electronic banking, which was relatively risk free as the web sites were not linked to the banks internal systems. These internal systems hold actual account information of the banks customers. Many banks have now established fully transactional web sites for their retail banking services. Using these sites, customers can obtain account information, transfer funds among accounts, file various applications, make payments and transact other routine business. These transactional sites increase the risks as they provide a path to the banks internal network and systems holding confidential information about the customers account. In order to ensure security of online banking transactions, banks must: Construct firewalls to protect inside information from hackers Customer account information must be made available by means of passwords and encryption technology Safety of information must be assured during its transmission via the Internet Proper authority to conduct E-business-Banks must provide a certification, that they have the authority to conduct E-business. While conducting banking business via the Internet, both the banker and the customer must be guaranteed of dealing with only the authorized party. This guarantee may be given in the form of digital certificates.


E-BANKING Along with new business opportunities and benefits for customers from e-banking, come various risks that must be addressed by bank management and regulatory supervisory authorities. Some risks are-:

TRANSACTION/OPERATIONS RISK Transaction/Operations risk arises from fraud, processing errors, system disruptions, or other unanticipated events resulting in the institutions inability to deliver products or services. This risk exists in each product and service offered. The level of transaction risk is affected by the structure of the institutions processing environment, including the types of services offered and the complexity of the processes and supporting technology. In most instances, e-banking activities will increase the complexity of the institutions activities and the quantity of its transaction/operations risk, especially if the institution is offering innovative services that have not been standardized. Since customers expect e-banking services to be available 24 hours a day, 7 days a week, financial institutions should ensure their e-banking infrastructures contain sufficient capacity and redundancy to ensure reliable service availability. Even institutions that do not consider e-banking a critical financial service due to the availability of alternate processing channels, should carefully consider customer expectations and the potential impact of service disruptions on customer satisfaction and loyalty.


E-BANKING The key to controlling transaction risk lies in adapting effective polices, procedures, and controls to meet the new risk exposures introduced by e-banking. Basic internal controls including segregation of duties, dual controls, and reconcilements remain important. Information security controls, in particular, become more significant requiring additional processes, tools, expertise, and testing. Institutions should determine the appropriate level of security controls based on their assessment of the sensitivity of the information to the customer and to the institution and on the institutions established risk tolerance level. CREDIT RISK Generally, a financial institutions credit risk is not increased by the mere fact that a loan is originated through an e-banking channel. However, management should consider additional precautions when originating and approving loans electronically, including assuring management information systems effectively track the

performance of portfolios originated through e-banking channels. The following aspects of on-line loan origination and approval tend to make risk management of the lending process more challenging. If not properly managed, these aspects can significantly increase credit risk. Verifying the customers identity for on-line credit applications and executing an enforceable contract; Monitoring and controlling the growth, pricing, underwriting standards, and ongoing credit quality of loans originated through e-banking channels;


E-BANKING Monitoring and oversight of third-parties doing business as agents or on behalf of the financial institution (for example, an Internet loan origination site or electronic payments processor); Valuing collateral and perfecting liens over a potentially wider geographic area; Collecting loans from individuals over a potentially wider geographic area; and Monitoring any increased volume of, and possible concentration in, out-ofarea lending. LIQUIDITY, INTEREST RATE, PRICE/MARKET RISKS Funding and investment-related risks could increase with an institutions e-banking initiatives depending on the volatility and pricing of the acquired deposits. The Internet provides institutions with the ability to market their products and services globally. Internet-based advertising programs can effectively match yield-focused investors with potentially high-yielding deposits. But Internet-originated deposits have the potential to attract customers who focus exclusively on rates and may provide a funding source with risk characteristics similar to brokered deposits. An institution can control this potential volatility and expanded geographic reach through its deposit contract and account opening practices, which might involve face-to-face meetings or the exchange of paper correspondence. The institution should modify its policies as necessary to address the following e-banking funding issues:


E-BANKING Potential increase in dependence on brokered funds or other highly ratesensitive deposits; Potential acquisition of funds from markets where the institution is not licensed to engage in banking, particularly if the institution does not establish, disclose, and enforce geographic restrictions; Potential impact of loan or deposit growth from an expanded Internet market, including the impact of such growth on capital ratios; and Potential increase in volatility of funds should e-banking security problems negatively impact customer confidence or the markets perception of the institution. COMPLIANCE/LEGAL RISK Compliance and legal issues arise out of the rapid growth in usage of e-banking and the differences between electronic and paper-based processes. E-banking is a new delivery channel where the laws and rules governing the electronic delivery of certain financial institution products or services may be ambiguous or still evolving. Specific regulatory and legal challenges include: Uncertainty over legal jurisdictions and which states or countrys laws govern a specific e-banking transaction, Delivery of credit and deposit-related disclosures/notices as required by law or regulation, Retention of required compliance documentation for on-line advertising, applications, statements, disclosures and notices; and 35

E-BANKING Establishment of legally binding electronic agreements.

Laws and regulations governing consumer transactions require specific types of disclosures, notices, or record keeping requirements. Some of the legal requirements and regulatory guidance that frequently apply to e-banking products and services include: Institutions that offer e-banking services, both informational and transactional, assume a higher level of compliance risk because of the changing nature of the technology, the speed at which errors can be replicated, and the frequency of regulatory changes to address e-banking issues. The potential for violations is further heightened by the need to ensure consistency between paper and electronic advertisements, disclosures, and notices. STRATEGIC RISK A financial institutions board and management should understand the risks associated with e-banking services and evaluate the resulting risk management costs against the potential return on investment prior to offering e-banking services. Poor ebanking planning and investment decisions can increase a financial institutions strategic risk. Early adopters of new e-banking services can establish themselves as innovators who anticipate the needs of their customers, but may do so by incurring higher costs and increased complexity in their operations. Conversely, late adopters may be able to avoid the higher expense and added complexity, but do so at the risk of not meeting customer demand for additional products and services. In managing


E-BANKING the strategic risk associated with e-banking services, financial institutions should develop clearly defined e-banking objectives by which the institution can evaluate the success of its e-banking strategy. In particular, financial institutions should pay attention to the following: Adequacy of management information systems (MIS) to track e-banking usage and profitability; Costs involved in monitoring e-banking activities or costs involved in overseeing e-banking vendors and technology service providers; Design, delivery, and pricing of services adequate to generate sufficient customer demand; Retention of electronic loan agreements and other electronic contracts in a format that will be admissible and enforceable in litigation; Costs and availability of staff to provide technical support for interchanges involving multiple operating systems, web browsers, and communication devices; Competition from other e-banking providers; and Adequacy of technical, operational, compliance, or marketing support for ebanking products and services. REPUTATION RISK An institutions decision to offer e-banking services, especially the more complex transactional services, significantly increases its level of reputation risk. Some of the ways in which e-banking can influence an institutions reputation include: 37

E-BANKING Loss of trust due to unauthorized activity on customer accounts, Disclosure or theft of confidential customer information to unauthorized parties (e.g., hackers), Failure to deliver on marketing claims, Failure to provide reliable service due to the frequency or duration of service disruptions, Customer complaints about the difficulty in using e-banking services and the inability of the institutions help desk to resolve problems, and Confusion between services provided by the financial institution and services provided by other businesses linked from the website.


It is easy to overemphasise the security risks in e-banking. As e-banking advances, focusing general attention on security risks, there could be large security gains.To deal with these emerging threats effectively, financial institutions need as a minimum to have: A strategic approach to information security, building best practice security controls into systems and networks as they are developed A proactive approach to information security, involving active testing of system security controls (e.g. penetration testing), rapid response to new threats and vulnerabilities and regular review of market place developments


E-BANKING Sufficient staff with information security expertise Active use of system based security management and monitoring tools Strong business information security controls A clear and widely disseminated strategy that is driven from the top and takes into account the effects of e-banking, together with an effective process for measuring performance against it. Take into account the effect that e-provision will have upon their business risk exposures and manage these accordingly. Undertake market research, adopt systems with adequate capacity and scalability, undertake proportional advertising campaigns and ensure that they have adequate staff coverage and a suitable business continuity plan. Ensure they have adequate management information in a clear and comprehensible format. Ensure that crisis management processes are able to cope with Internet related incidents





The future of e-banking will be closely linked to spread of Internet. Technology will drive penetration and not a government ordinance. A simple telephone line will bring access and then rapid developments will take place. Kiosks and ATMs assisted by a single customer centric banker will usher in a banking revolution. Technology can enable offering of a complete range of products on multiple platforms and provide a paradigm shift in delivery of banking service to the individual. With the rapid advances in the telecommunication systems and digital technology, it is difficult to predict how E- Banking will improve and expand over the coming years. For example, Internet Banking via mobile phones using Wireless Application Protocol (WAP) or banking services through the TV screen via the new interactive TV channels may become established. It is likely that the number of customers wanting to utilize online banking will increase which could lead to high street banks offering personalized services and better online customer care. To combat computer crime and increase security levels, banks may consider new security measures such as iris, voice and fingerprint recognition, smart cards and electronic signatures. However, with the number of computers increasing every year, the electronic delivery of services is rapidly becoming popular in the banking sector. The Indian experience of E-banking is gradually merging with its international counterparts. While the private sector and the multi-national banks have been first and expeditiously adopting Internet technology in client servicing, there is a gradual trend towards the major public sectors and numerous co-operative units to move in the same direction. A mix


E-BANKING of policy support and security assurance should propel E-banking adoption further in India.



Like any other product or service, E-Banking is not a one-time activity. The bank has to persuade its customers to use the service to achieve cost advantage. Since many customers do not use Internet banking, the bank has to enrich its services by additional payment tie-ups so that customers have more options. In this case, data security needs to be very thorough. While electronic banking can provide a number of benefits for customers and new business opportunities for banks, it exacerbates traditional banking risks. Even though considerable work has been done in adapting banking and supervision regulations, continuous vigilance and revisions will be essential as the scope of e-banking increases. In particular, there is still a need to establish greater harmonization and coordination at the international level. Moreover, the ease with which capital can potentially be moved between banks and across borders in an electronic environment creates a greater sensitivity to economic policy management. To understand the impact of e-banking on the conduct of economic policy, policymakers need a solid analytical foundation. Without one, the markets will provide the answer, possibly at a high economic cost. Further research on policy-related issues in the period ahead is therefore critical.



Books Referred:

Banking in 21st Century I. V. Trivedi Indian Banking in Electronic Era S. S. Kaplan and N. S. Choubey


Outlook India India Today


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