EXECUTIVE SUMMARY

E-banking usage has seen an explosive growth in most of the

Asian economies like India, China and Korea. In fact Korea boasts
about a 70% e-banking penetration rate and with its tech-savvy
populace has seen one of the most aggressive rollouts of e-banking
services.

Still, the main reason that E-banking scores over Internet

Banking is that it enables ‘Anywhere Banking'. Customers now don't
need access to a computer terminal to access their banks, they can
now do so on the go – when they are waiting for their bus to work,
when they are traveling or when they are waiting for their orders to
come through in a restaurant.

The scale at which E-banking has the potential to grow can be

gauged by looking at the pace users are getting e-banking in these big
Asian economies. According to the Cellular Operators' Association of
India (COAI) the e-banking subscriber base in India hit 40.6 million
in the August 2004. In September 2004 it added about 1.85 million
more. The explosion as most analysts say, is yet to come as India has
about one of the biggest untapped markets. China, which already
witnessed the e-banking boom, is expected to have about 300 million
e-banking users by the end of 2004. South Korea is targeted to reach
about 42 million e-banking users by the end of 2005. All three of these
countries have seen gradual roll-out of e-banking services, the most
 2

aggressive being Korea which is now witnessing the roll-out of some

of the most advanced services like using e-banking to pay bills in
shops and restaurants.

E-banking nowadays is the common trend here in our country.

No more falling in line in banks, no more waiting tons of hours in the
bank, no more days and weeks of waiting. All can be done with one
card, one gadget. It’s easy, it works, and most importantly, people like
it. But still, some people are having a hard time using this kind of
technology mostly people who are used to do things the old traditional
way. With the use of advertising, people are now motivated to use E-
banking because again, it eliminates the hassle encountered when
using the old process of banking.

In this paper, the group will cover security issues and different
impacts regarding the traditional banking method. The group is
concerned about the issues presented because the group thinks that
these issues are very important and relevant today, a lot of people save
money and really trust banks with their money. In addition, the group
wants this research paper to be read by many students who are in no
knowledge about certain issues about banking. Lastly, the group will
provide and recommend different solutions about the issues regarding
E-Banking.

In order for customers to use their banks online services they

need to have a personal computer and Internet connection. Their
 3

personal computer becomes their virtual banker who will assist them
in their banking errands.

Attaining information about accounts and loans, Conducting

transfers amongst different accounts, even between external banks,
Paying bills, Buying and selling stocks and bonds by depot, Buying
and selling fund shares39 These services that are offered by e-banking
are changing and being improved because of the intense competition
between the banks online. Banking industry must adapt to the
electronics age, which in its turn is changing all the time. EFT
transactions require authorization and a method to authenticate the
card and the card holder. Whereas a merchant may manually verify
the card holder's signature, EFT transactions require the card holder's
PIN to be sent online in an encrypted form for validation by the card
issuer. Other information may be included in the transaction, some of
which is not visible to the card holder for instance magnetic stripe
data and some of which may be requested from the card holder for
instance the card holder's address or the CVV2 security value printed
on the card. EFT transactions are activated during e-banking
procedures. Various methods of e-banking include: Telephone
banking Online banking Short Message Service SMS banking Mobile
banking Interactive-TV banking. Independent of location or time, you
can execute your payments and stock market orders and you get
detailed information on your accounts and custody accounts.
 4

INTRODUCTION

The last time that technology had a major impact in helping

banks service their customers was with the introduction of the
Internet banking. Internet Banking helped give the customer's
anytime access to their banks. Customer's could check out their
account details, get their bank statements, perform transactions like
transferring money to other accounts and pay their bills sitting in the
comfort of their homes and offices.

However the biggest limitation of Internet banking is the

requirement of a PC with an Internet connection, not a big obstacle if
we look at the US and the European countries, but definitely a big
barrier if we consider most of the developing countries of Asia like
China and India. E-banking addresses this fundamental limitation of
Internet Banking, as it reduces the customer requirement to just a e-
banking phone.

E-banking usage has seen an explosive growth in most of the

Asian economies like India, China and Korea. In fact Korea boasts
about a 70% e-banking penetration rate and with its tech-savvy
populace has seen one of the most aggressive rollouts of e-banking
services.
 5

Still, the main reason that E-banking scores over Internet

Banking is that it enables ‘Anywhere Banking'. Customers now don't
need access to a computer terminal to access their banks, they can
now do so on the go – when they are waiting for their bus to work,
when they are traveling or when they are waiting for their orders to
come through in a restaurant.

The scale at which E-banking has the potential to grow can be

gauged by looking at the pace users are getting e-banking in these big
Asian economies. According to the Cellular Operators' Association of
India (COAI) the e-banking subscriber base in India hit 40.6 million
in the August 2004. In September 2004 it added about 1.85 million
more. The explosion as most analysts say, is yet to come as India has
about one of the biggest untapped markets. China, which already
witnessed the e-banking boom, is expected to have about 300 million
e-banking users by the end of 2004. South Korea is targeted to reach
about 42 million e-banking users by the end of 2005. All three of these
countries have seen gradual roll-out of e-banking services, the most
aggressive being Korea which is now witnessing the roll-out of some
of the most advanced services like using e-banking to pay bills in
shops and restaurants.

E-banking nowadays is the common trend here in our country.

No more falling in line in banks, no more waiting tons of hours in the
bank, no more days and weeks of waiting. All can be done with one
card, one gadget. It’s easy, it works, and most importantly, people like
it. But still, some people are having a hard time using this kind of
 6

technology mostly people who are used to do things the old traditional
way. With the use of advertising, people are now motivated to use E-
banking because again, it eliminates the hassle encountered when
using the old process of banking.

In this paper, the group will cover security issues and different
impacts regarding the traditional banking method. The group is
concerned about the issues presented because the group thinks that
these issues are very important and relevant today, a lot of people save
money and really trust banks with their money. In addition, the group
wants this research paper to be read by many students who are in no
knowledge about certain issues about banking. Lastly, the group will
provide and recommend different solutions about the issues regarding
E-Banking.

In order for customers to use their banks online services they

need to have a personal computer and Internet connection. Their
personal computer becomes their virtual banker who will assist them
in their banking errands.

Attaining information about accounts and loans, Conducting

transfers amongst different accounts, even between external banks,
Paying bills, Buying and selling stocks and bonds by depot, Buying
and selling fund shares39 These services that are offered by e-banking
are changing and being improved because of the intense competition
between the banks online. Banking industry must adapt to the
electronics age, which in its turn is changing all the time. EFT
 7

transactions require authorization and a method to authenticate the

card and the card holder. Whereas a merchant may manually verify
the card holder's signature, EFT transactions require the card holder's
PIN to be sent online in an encrypted form for validation by the card
issuer. Other information may be included in the transaction, some of
which is not visible to the card holder for instance magnetic stripe
data and some of which may be requested from the card holder for
instance the card holder's address or the CVV2 security value printed
on the card. EFT transactions are activated during e-banking
procedures. Various methods of e-banking include: Telephone
banking Online banking Short Message Service SMS banking Mobile
banking Interactive-TV banking. Independent of location or time, you
can execute your payments and stock market orders and you get
detailed information on your accounts and custody accounts.

Financial Regulators are generally viewed as the professional

party poopers at any upbeat conference like this, warning of dire
consequences ahead for any who stray from the virtuous path of
prudence and regulatory compliance. I will do my best to meet your
possibly reasonable but miserable expectations later on. But before I
do please allow me to dwell briefly on what we in the FSA consider
being the potentially very positive aspects of E Commerce for firms,
consumers – and even for regulators!

A few examples:

For Firms E Commerce brings:

 different and arguably lower barriers to entry;

 8

 opportunities for significant cost reduction;

 the capacity to rapidly re-engineer business processes;
 greater opportunities to sell cross border.

Each and all of these potential benefits provides for increased

competition and the ability to wrest market leadership from
established players.

For consumers the potential benefits are:

 more choice;
 greater competition and better value for money;
 more information;
 better tools to manage and compare information;
 faster service.

And there are potential benefits even for regulators:

 better, more flexible, user friendly information for consumers

and others on our own web-site;
 better, almost indestructible audit trails;
 potential to monitor advertising and advice activity more easily;
 more cost effective and efficient use of regulatory tools (for
example the use of our extra net over the Y2K period).

But of course there are also risks. The risks to firms –

specifically banks I will cover later. For consumers the biggest risks
are probably information overload and not understanding whom they
 9

are dealing with and on what terms. This can range from dealing with
a perfectly respectable company from another jurisdiction, but not
understanding for example the different legal environment,
compensation schemes and ombudsman arrangements, through to
being vulnerable to scams and frauds.

For regulators one key danger is a failure to understand

changing risk profiles and vulnerabilities of individual firms and also
changes to market structures and interactions. Another very
important risk is that our own regulatory framework could somehow
inhibit desirable innovations by not adapting quickly enough.

We are very conscious of this in the FSA and are trying very
hard to be E-neutral (a recent example of this is the proposed Conduct
of Business Sourcebook). We have also selected E-commerce as one of
our regulatory themes for this year and are very active in international
fore – but more of that later.

India is marching towards m-commerce - a world where you can

make all payments by keying in instructions on your e-banking. In
India, however, there is a limitation on the availability of functions
that can be deployed by banking customers.

Most e-banking transactions today are ‘information-based’ --

customers engage in m-banking services like balance enquiry, last
three transactions, "alerts" for strange activities in bank accounts etc.
Some banks like IDBI Bank are also offering bill-payment services to
customers through m-banking.
 10

However, actual cash transactions like fund-transfer, payment

of bills at a restaurant among others have not yet been introduced in
India. There are many reasons for this.

Firstly, as m-banking is currently SMS-based, the transaction

delivery time is not guaranteed since it is dependent on factors like
SMSC (short message service centre) congestion and network strength
in the area where the customer is located. Secondly, there is an issue
of repudiation as till date there are no clear guidelines on wireless
payments.

In the very near future, one can see m-banking leaping into a
new phase. With the advent of Java-enabled e-bankingdevices, the
shape of m-banking services is in for a change. One would also be
ensured the same amount of security and comfort as one would be
when using internet banking.

DEFINITIONS

Definition of E-banking

(I) "E-banking" is a banking service for customer to make

enquiry, transfer, remittance, donation, and spending and
bill payment according to the customer's short message
instructions sent through mobile. Result will be sent back to
customer by short message.
 11

(II) "Registered Customer" refers to customers who have

registered E-banking Service through www.icbc.com.cn or at
ICBC business offices.
(III) "Non-registered Customer" refers to customers who have not
registered E-banking service.

(IV) "Registered E-banking Number" is the e-banking number

given and confirmed by customer when registering E-
banking Service.

(V) "Default Payment Card" is a registered card designated by

customer when registering E-banking Service. Customers do
not need to input card number when making enquiry or
transfer of this default payment card.

(VI) "Payment Password" is the password set up and confirmed by

customer when registering E-banking Service. Customer
must enter this payment password when making enquiry,
remittance, bill payment, consumption and cancellation.

E-banking Services applied through registering e-banking number

or through registering e-banking number and payment password are
all considered as customers' actions. Customers held responsible for
the banking transactions through the above-mentioned number and
password. For security purpose, customers should safely keep the e-
banking and payment password. Timely stop the e-banking or cancel
 12

E-banking Service once the e-banking is lost. Customers should delete

the payment password from the e-banking after making transactions
through E-banking. It is recommended that payment password should
be different from the payment password of Internet Banking.
 13

HISTORY OF E-BANKING

In countries like Korea, two SIM Card is used in e-banking. One

for the telephonic purpose and the other for banking. Bank account
data is encrypted on a smart-card chip. About 3.3 million transactions
were reported by Bank of Korea in 2004. In a move that will take the
frontiers of banking transactions beyond the ATM and internet, full-
fledged banking transactions through e-banking have been introduced
by ICICI Bank. The bank has now kicked off a e-banking service,
where a customer can replicate all transactions through e-banking
similar to an internet banking transaction. Till now, customers were
only able to get all information like balance in the account and e-
banking alerts through e-banking.

The past few years have seen customers migrating from branch
banking to a host of non-branch channels like ATMs, call centre and
internet banking. In case of ICICI Bank, around 55% of the
transactions now happen through ATMs, 22% through the internet,
12% through call centre and the remaining through branches.
Incidentally, around five years ago, transactions through internet
banking was a minuscule 2%. Through the new platform Mobile, all
internet banking transactions can now be done on e-banking.
Customers can now transfer funds to ICICI Bank and non-ICICI Bank
accounts, pay their utility bills and insurance premium and do a host
of other operations. The application covers savings accounts, demat,
credit card and loan accounts.
 14

According to ICICI Bank ED V Vaidyanathan said, the new

service will help to give more power to the customer. They can now
transact from practically anywhere. He expects the new service to see
transactions of over 40% over a period of time.

Both GPRS and non-GPRS customers would be able to use the

service. Customers will be required to enter four-digit PIN to enter the
e-banking application, which will prevent unauthorized use of the
service.

Currently, ICICI Bank has 13 million customers, Of which, there

are 2.5-million active customers. It also has 7-million registered
customers for SMS alerts. The bank currently sends around 20 million
alerts a month. Citi and HSBC have this service in other parts of the
world. Some of these banks are now looking at launching these
services here. Until now, e-banking services, which were provided by
banks, have been SMS-enabled. Moreover, these were push-services
like SMS alerts and balance enquiries. There have also been security
concerns plaguing the introduction of such services since the SMS
route, through which the information travels, is totally unsecured.

Aditya Menon, Chief IT officer of Obopay India — a e-

bankingpayments solutions company — said many banks have been
working on a mobile-payment solution. Obopay is working with six
other banks to provide a service that will enable bank customers to
transfer funds to anyone who has a e-bankingphone and a bank
account. In fact, banks like Corporation Bank and Union Bank of
India also have similar products in the pipeline.
 15

The first e-banking and payment initiative was announced

during 1999. The first major deployment was made by a company
called Pay box (largely supported financially by Deutsche Bank). The
company was founded by two young German's (Mathias Entemann
and Eckart Ortwein) and successfully deployed the solution in
Germany, Austria, Sweden, Spain and the UK. At about 2003 more
than a million people were registered on Pay box and the company
was rated by Gartner as the leader in the field. Unfortunately
Deutsche Bank withdraws their financial support and the company
had to reorganize quickly. All but the operations in Austria closed
down.

Another early starter and also identified as a leader in the field

was a Spanish initiative (backed by BBVA and Telephonica), called
Mobi Pago. The name was later changed to Mobi Pay and all banks
and e-banking operators in Spain were invited to join. The product
was launched in 2003 and many retailers were acquired to accept the
special USSD payment confirmation. Because of the complex
shareholding and the constant political challenges of the different
owners, the product never fulfilled the promise that it had. With no
marketing support and no compelling reason for adoption, this
initiative is floundering at the moment.

Many other large players announced initiatives and ran pilots

with big fanfare, but never showed traction and all initiatives were
ultimately discontinued. Some of the early examples are the famous
vending machines at the Helsinki airport supported by a system from
 16

Nokia. Siemens made announcements in conjunction with listed and

high-flying German e-commerce company, Brocket. Brocket also won
the lucrative Vodafone contract in 2002, but crashed soon afterwards
when it runs out of funds. Israel (as can be expected) produced a large
number of e-banking payment start-ups. Of the many, only one
survived - Trivet. Others like Advantech and Patty disappeared after a
number of pilots but without any successful production deployments.

Initiatives in Norway, Sweden and France never got traction.

France Telecom launched an ambitious product based on a special e-
banking with an integrated card reader. The solution worked well, but
never became popular because of the unattractive, special phone that
participants needed in order to perform these payments. Since 2004,
e-banking and payment industry has come of age. Successful
deployments with positive business cases and big strategic impact
have been seen recently.
 17

ADVANTAGES AND DISADVANTAGES

Advantages

 The biggest advantage that e-banking offers to banks is that it

significantly cuts down the costs of providing service to the
customers.

 For example: An average teller or phone transaction costs about

$2.36 each, whereas an electronic transaction costs only about
$0.10 each. Additionally, this new channel gives the bank ability
to cross-sell up-sell their other complex banking products and
services such as vehicle loans, credit cards etc.

 For service providers, E-banking offers the next surest way to

achieve growth.

 Countries like Korea where e-banking penetration is nearing

saturation, e-banking is helping service providers increase
revenues from the now static subscriber base. Also service
providers are increasingly using the complexity of their
supported e-banking services to attract new customers and
retain old ones.
 18

Disadvantages

 Back in days when Internet was introduced, it was a boon to the

financial industry as it reduced all volumes by opening another
self service channel for servicing customers.

 With e-banking that advantage is not there as already

investments are made to reduce call volumes using Internet and
Internet is one of the technologies that is ever spreading in
customer community. Almost 80% of the people in US already
have internet connection. E-banking would be another value
added service that can be provided by financial institutions, it
may only bring good will.

 Depending on the technological direction for enabling E-

banking companies either has to spend enormous amount of
money in matching customers' expectation or maintaining
another stream of technology applications.

 Technology still has security issues and software distribution

issues.

The Federal Trade Commission received 301,835 fraud complaints

and 214,905 identity theft complaints in 2003. Bank fraud accounted
for 17 percent — more than 36,000 — of the identity theft complaints.
That represents just the victims who actually filed a complaint with
 19

the agency. The FTC estimate there was 10 million identity theft
victims that year. Already lot of banks are either providing e-banking
services or getting ready to provide e-banking services.

Second we would like to evaluate what are the real potential

opportunities for the bank, in spite of the negativity around the
technology and business value, For sure US is yet to catch up with the
number of users using e-banking. Data at customers fingertips is still
a potential opportunity, not even most of the Internet banking sites
are able to provide one customer view Intelligent applications that
enable customers to bank, trade, make intelligent credit/investment
decisions is still a sector unexplored. More than Customers bank
workforce itself can benefit a lot from developing productivity
applications.
 20

DEVELOPMENT OF E-BANKING

So, these are some of the particular risks arising in E-banking

that we have hitherto identified in the UK domestic environment –
though I suspect that many of my regulator colleagues outside the UK
would share many of these views. I would like to move on to the
international side.

Supervision in today’s global environment can only ever be

effective if it has an international dimension. This is especially the
case with e-banking because of its non-territorial nature, the ease with
which customers outside the home country can access the site and the
opportunity to buy several types of product. Of course, regulators have
long had to deal with the regulatory problems of international
banking. They had set up mechanisms for cross-border supervision;
agreements over home/host responsibilities (especially within the
Community), bilateral agreement for information sharing and general
standards by which they expect all banks, including those offshore
territories, to abide. In principle, the expectation is that this general
mechanism for international supervision will be robust enough to
work just as well in the e-banking as the physical environment.

Nevertheless, it will not be quite as easy as that! Inevitably the

nature of e-banking raises particular issues in the application of the
general approach outlined here. E-banking makes it even more
necessary to develop a cohesive international approach to regulation –
not only in the field of prudential regulation where Basel has made
 21

much progress, but also in the areas of conduct of business for

consumer protection.

The Basel Committee E-Banking Group believes that Basel

"should provide the international supervisory community with a
broad set of advisory guidance with respect to electronic banking,"
thereby providing a basis for domestic regulation and supporting
consumer and industry education. Globally, such guidance would
assist international co-operation and act as a foundation for a
coherent approach to supervising e-banking. It could facilitate
international e-banking by creating consumer confidence in sound
banks based in different, possibly less satisfactory, regimes and might
dissuade host supervisors from imposing additional, potentially
draconian, regulation on such banks. The Group identified:

 Authorization,
 prudential standards,
 transparency,
 privacy,
 money laundering, and
 cross border supervision

as issues on which they felt that there is need for further work, both at
the analytical and policy level before any such guidance could be
developed. The FSA is involved in the Basel Group and will be
contributing to the work, participating in the drafting of papers and
hosting both the group’s next meeting and a roundtable for its
members and a number of European banks and service providers. We
 22

welcome any contributions from the industry to this debate; and have
indeed been actively soliciting them.

Cross-border issues

There are also significant cross-border issues.

We foresee difficulties for depositors identifying the jurisdiction

within which e-banks offering services in the UK are based, given the
potential absence of physical presence and the ability for e-banks to
move to a new jurisdiction relatively rapidly. These concerns have
prompted a considerable amount of debate and analysis in the
international supervisory community. Within Europe home v host
state supervision is a particularly important issue. Banks may tend to
seek authorization wherever the tax, compliance and costs are lowest,
as location will become less of a critical issue since services may easily
be provided on a cross-border basis. E-banking is likely therefore to
significantly increase the usage of the 2BCD passport (that is the
Community equivalent of your passport, but for a bank), thereby
making it even more crucial that all European regulators undertake
supervision in a satisfactory (and harmonised) manner and that
communication between regulators is adequate.

A number of initiatives with implications for home and host

state supervision are being discussed, for example the draft e-
commerce and distance marketing directives and the Rome and
Brussels conventions. The debate is far from being resolved and a
considerable degree of uncertainty remains. For example within the e-
 23

commerce Directive ‘home’ and ‘host’ have been replaced with ‘home’
and ‘country of origin’, the implications of which are as yet unclear.
The current drafting (agreed at Council) is sufficiently vague to
potentially allow numerous regulators to assert jurisdiction over an
Internet service, thereby nullifying the main advantage of the
Directive, home state regulation. However we would expect that a
suitable compromise on the point will be worked out so as to avoid
this outcome. Certainly this is what we at the FSA are working
towards.
 24

CHALLENGES AND OPPORTUNITIES

E-banking is a generic term for delivery of banking services and

products through electronic channels, such as the telephone, the
internet, the cell phone, etc. The concept and scope of E-banking is
still evolving. It facilitates an effective payment and accounting system
thereby enhancing the speed of delivery of banking services
considerably. While E-banking has improved efficiency and
convenience, it has also posed several challenges to the regulators and
supervisors. Several initiatives taken by the government of India, as
well as the Reserve Bank of India (RBI), have facilitated the
development of E-banking in India. The government of India enacted
the IT Act, 2000, which provides legal recognition to electronic
transactions and other means of electronic commerce. The RBI has
been preparing to upgrade itself as a regulator and supervisor of the
technologically dominated financial system. It issued guidelines on
risks and control in computer and telecommunication system to all
banks, advising them to evaluate the risks inherent in the systems and
put in place adequate control mechanisms to address these risks. The
existing regulatory framework over banks has also been extended to
E-banking. It covers various issues that fall within the framework of
technology, security standards, and legal and regulatory issues. This
book — containing 12 scholarly articles — will benefit those interested
in the technological developments of E-banking in India

Electronic banking is the wave of the future. It provides

enormous benefits to consumers in terms of the ease and cost of
 25

transactions. But it also poses new challenges for country authorities

in regulating and supervising the financial system and in designing
and implementing macroeconomic policy.

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 (see illustration above). Plus, banks can
provide services more efficiently and at substantially lower costs. For
example, a typical customer transaction costing about $1 in a
traditional "brick and mortar" bank branch or $0.60 through a phone
call costs only about $0.02 online.

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 networks.

The flip side of this technological boom is that electronic

banking is not only susceptible to, but may exacerbate, some of the
same risks-particularly governance, Legal, operational, and
 26

reputational-inherent 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.

MACROECONOMIC CHALLENGES

But the challenges are not limited to regulators. As the advent of

e-banking quickly changes the financial landscape and increases the
potential for quick ross-border capital movements, macroeconomic
policymakers face several cdifficult questions.

 If electronic banking does make national boundaries

irrelevant by facilitating capital movements, what does
this imply for macroeconomic management?
 How is monetary policy affected when, for example, the
use of electronic means makes it easier for banks to avoid
reserve requirements, or when business can be conducted
in foreign currencies as easily as in domestic currency?
 When offshore banking and capital flight are potentially
only a few mouse clicks away, does a government have any
leeway for independent monetary or fiscal policy?
 27

 How will the choice of the exchange rate regime be

affected, and how will e-banking influence the targeted
level of international reserves of a central bank

Can a government afford to make any mistakes? Will the spread

of electronic banking impose harsh market discipline on governments
as well as on businesses?

The answers to these questions fall into two emerging strands of

thought. First, the technological revolution-- particularly the
expansion of electronic money but also, more broadly, electronic
advances in banking practices-- could result in a decoupling of
households' and firms' decisions from the purely financial operations
of the central bank. Thus, the ability of monetary policy to influence
inflation and economic activity would be threatened.

Second, as electronic banking expands, financial transaction

costs can decline significantly. The result would be tantamount to a
reduction in the "sand in the wheels" of the financial sector
machinery, making capital flows even easier to effect, with a potential
erosion of the effectiveness of domestic monetary policy. In this
regard, proponents of the Tobin tax--which would tax short-term
capital flows to increase their cost and, thereby, the sand in the
wheels-- would feel that electronic banking makes an even more
compelling case for introducing such a tax.

CHALLENGES

Key challenges in developing a sophisticated e-banking application

 28

1. Interoperability

There is a lack of common technology standards for e-banking.

Many protocols are being used for e-banking – HTML, WAP,
SOAP, XML to name a few. It would be a wise idea for the vendor
to develop a e-banking application that can connect multiple
banks. It would require either the application to support multiple
protocols or use of a common and widely acceptable set of
protocols for data exchange.

There are a large number of different e-bankingphone devices

and it is a big challenge for banks to offer e-banking solution on
any type of device. Some of these devices support J2ME and others
support WAP browser or only SMS.

Overcoming interoperability issues however have been localized,

with countries like India using portals like R-World to enable the
limitations of low end java based phones, while focus on areas such
as South Africa have defaulted to the USSD as a basis of
communication achievable with any phone.

The desire for interoperability is largely dependent on the banks

themselves, where installed applications (Java based or native)
provide better security, are easier to use and allow development of
more complex capabilities similar to those of internet banking
while SMS can provide the basics but becomes difficult to operate
with more complex transactions.

2. Security
 29

Security of financial transactions, being executed from some

remote location and transmission of financial information over the
air, are the most complicated challenges that need to be addressed
jointly by e-banking application developers, wireless network
service providers and the banks' IT departments.

The following aspects need to be addressed to offer a secure

infrastructure for financial transaction over wireless network:

 Physical part of the hand-held device. If the bank is offering

smart-card based security, the physical security of the device
is more important.
 Security of any thick-client application running on the device.
In case the device is stolen, the hacker should require at least
an ID/Password to access the application.
 Authentication of the device with service provider before
initiating a transaction. This would ensure that unauthorized
devices are not connected to perform financial transactions.
 User ID / Password authentication of bank’s customer.
 Encryption of the data being transmitted over the air.
 Encryption of the data that will be stored in device for later /
off-line analysis by the customer.

3. Scalability & Reliability

Another challenge for the CIOs and CTOs of the banks is to scale-
up the e-banking infrastructure to handle exponential growth of
 30

the customer base. With e-banking, the customer may be sitting in

any part of the world (true anytime, anywhere banking) and hence
banks need to ensure that the systems are up and running in a true
24 x 7 fashion. As customers will find e-banking more and more
useful, their expectations from the solution will increase. Banks
unable to meet the performance and reliability expectations may
lose customer confidence.

4. Application distribution

Due to the nature of the connectivity between bank and its

customers, it would be impractical to expect customers to regularly
visit banks or connect to a web site for regular upgrade of their e-
banking application. It will be expected that the e-banking
application itself check the upgrades and updates and download
necessary patches (so called Over the Air updates). However, there
could be many issues to implement this approach such as
upgrade / synchronization of other dependent components.

5. Personalization

It would be expected from the e-banking application to support

personalization such as:

 Preferred Language
 Date / Time format
 Amount format
 Default transactions
 Standard Beneficiary list
 31

 Alert.

IMPACT OF E-BANKING ON
TRADITIONAL SERVICES
 32

One of the issues currently being addressed is the impact of e-

banking on traditional banking players. After all, if there are risks
inherent in going into e-banking there are other risks in not doing so.
It is too early to have a firm view on this yet. Even to practitioners the
future of e-banking and its implications are unclear. It might be
convenient nevertheless to outline briefly two views that are prevalent
in the market. The view that the Internet is a revolution that will
sweep away the old order holds much sway. Arguments in favor are as
follows:

 E-banking transactions are much cheaper than branch or even

phone transactions. This could turn yesterday’s competitive
advantage - a large branch network, into a comparative
disadvantage, allowing e-banks to undercut bricks-and-mortar
banks. This is commonly known as the "beached dinosaur"
theory.

 E-banks are easy to set up so lots of new entrants will arrive.

‘Old-world’ systems, cultures and structures will not encumber
these new entrants. Instead, they will be adaptable and
responsive. E-banking gives consumers much more choice.
Consumers will be less inclined to remain loyal.

 E-banking will lead to an erosion of the ‘endowment effect’

currently enjoyed by the major UK banks.
 33

Deposits will go elsewhere with the consequence that these

banks will have to fight to regain and retain their customer base. This
will increase their cost of funds, possibly making their business less
viable. Lost revenue may even result in these banks taking more risks
to breach the gap. Portal providers, are likely to attract the most
significant share of banking profits. Indeed banks could become
glorified marriage brokers. They would simply bring two parties
together – e.g. buyer and seller, payer and payee. The products will be
provided by monoclines, experts in their field. Traditional banks may
simply be left with payment and settlement business – even this could
be cast into doubt. Traditional banks will find it difficult to evolve. Not
only will they be unable to make acquisitions for cash as opposed to
being able to offer shares, they will be unable to obtain additional
capital from the stock market. This is in contrast to the situation for
Internet firms for whom it seems relatively easy to attract investment.
There is of course another view which sees e-banking more as an
evolution than a revolution. E-banking is just banking offered via a
new delivery channel. It simply gives consumers another service (just
as ATMs did). Like ATMs, e-banking will impact on the nature of
branches but will not remove their value. Traditional banks are
starting to fight back.

The start-up costs of an e-bank are high. Establishing a trusted

brand is very costly as it requires significant advertising expenditure
in addition to the purchase of expensive technology (as security and
privacy are key to gaining customer approval). E-banks have already
found that retail banking only becomes profitable once a large critical
 34

mass is achieved. Consequently many e-banks are limiting themselves

to providing a tailored service to the better off.
Nobody really knows which of these versions will triumph. This is
something that the market will determine. However, supervisors will
need to pay close attention to the impact of e-banks on the traditional
banks, for example by surveillance of: strategy customer levels
earnings and costs advertising spending margins funding costs
merger opportunities and threats.

Before talking about the issues of risks and responses to E

banking, I would like to spend a little time considering the wider
question of what the e-banking revolution might mean for the future.
I take "E" to mean anything electronic whether it be Internet,
television, telephone or all three.

One of the issues currently being addressed is the impact of e-

banking on traditional banking players. After all, if there are risks
inherent in going into e-banking there are other risks in not doing so.
It is too early to have a firm view on this yet. Even to practitioners the
future of e-banking and its implications are unclear. It might be
convenient nevertheless to outline briefly two views that are prevalent
in the market.

The view that the Internet is a revolution that will sweep away
the old order holds much sway. Arguments in favor are as follows E-
banking transactions are much cheaper than branch or even phone
transactions. This could turn yesterday’s competitive advantage - a
large branch network - into a comparative disadvantage, allowing e-
 35

banks to undercut bricks-and-mortar banks. This is commonly known

as the "beached dinosaur" theory. E-banks are easy to set up so lots of
new entrants will arrive. ‘Old-world’ systems, cultures and structures
will not encumber these new entrants. Instead, they will be adaptable
and responsive. E-banking gives consumers much more choice.
Consumers will be less inclined to remain loyal. E-banking will lead to
an erosion of the ‘endowment effect’ currently enjoyed by the major
UK banks. Deposits will go elsewhere with the consequence that these
banks will have to fight to regain and retain their customer base. This
will increase their cost of funds, possibly making their business less
viable. Lost revenue may even result in these banks taking more risks
to breach the gap.

Portal providers are likely to attract the most significant share of

banking profits. Indeed banks could become glorified marriage
brokers. They would simply bring two parties together – e.g. buyer
and seller, payer and payee. The products will be provided by
monoclines, experts in their field. Traditional banks may simply be
left with payment and settlement business – even this could be cast
into doubt.

Traditional banks will find it difficult to evolve. Not only will

they be unable to make acquisitions for cash as opposed to being able
to offer shares, they will be unable to obtain additional capital from
the stock market. This is in contrast to the situation for Internet firms
for whom it seems relatively easy to attract investment. There is of
course another view which sees e-banking more as an evolution than a
revolution. E-banking is just banking offered via a new delivery
 36

channel. It simply gives consumers another service (just as ATMs

did). Like ATMs, e-banking will impact on the nature of branches but
will not remove their value.

Experience in Scandinavia (arguably the most advanced e-

banking area in the world) appears to confirm that the future is ‘clicks
and mortar’ banking. Customers want full service banking via a
number of delivery channels. The future is therefore ‘Martini Banking’
(any time, any place, anywhere, anyhow).

Traditional banks are starting to fight back.

The start-up costs of an e-bank are high. Establishing a trusted

brand is very costly as it requires significant advertising expenditure
in addition to the purchase of expensive technology (as security and
privacy are key to gaining customer approval).

E-banks have already found that retail banking only becomes

profitable once a large critical mass is achieved. Consequently many e-
banks are limiting themselves to providing a tailored service to the
better off.

Nobody really knows which of these versions will triumph. This

is something that the market will determine. However, supervisors
will need to pay close attention to the impact of e-banks on the
traditional banks, for example by surveillance of:

 strategy
 customer levels
 earnings and costs
 37

 advertising spending
 margins
 funding costs
 Merger opportunities and threats, both in the UK and abroad.

RISKS IN E-BANKING

There are risks involved in e-banking. They are as follows:

 38

1) Strategic Risk –

A financial institution’s 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 e-banking
planning and investment decisions can increase a financial
institution’s strategic risk. On strategic risk E-banking is relatively
new and, as a result, there can be a lack of understanding among
senior management about its potential and implications. People with
technological, but not banking, skills can end up driving the
initiatives. E-initiatives can spring up in an incoherent and piecemeal
manner in firms. They can be expensive and can fail to recoup their
cost. Furthermore, they are often positioned as loss leaders (to
capture market share), but may not attract the types of customers that
banks want or expect and may have unexpected implications on
existing business lines.

Banks should respond to these risks by having a clear strategy

driven from the top and should ensure that this strategy takes account
of the effects of e-banking, wherever relevant. Such a strategy should
be clearly disseminated across the business, and supported by a clear
business plan with an effective means of monitoring performance
against it. On strategic risk E-banking is relatively new and, as a
result, there can be a lack of understanding among senior
management about its potential and implications. People with
technological, but not banking, skills can end up driving the
initiatives. E-initiatives can spring up in an incoherent and piecemeal
 39

manner in firms. They can be expensive and can fail to recoup their
cost. Furthermore, they are often positioned as loss leaders (to
capture market share), but may not attract the types of customers that
banks want or expect and may have unexpected implications on
existing business lines.

Banks should respond to these risks by having a clear strategy

driven from the top and should ensure that this strategy takes account
of the effects of e-banking, wherever relevant. Such a strategy should
be clearly disseminated across the business, and supported by a clear
business plan with an effective means of monitoring performance
against it.

2) Business risks –

Business risks are also significant. Given the newness of e-

banking, nobody knows much about whether e-banking customers
will have different characteristics from the traditional banking
customers. They may well have different characteristics. This could
render existing score card models inappropriate, this resulting in
either higher rejection rates or inappropriate pricing to cover the risk.
Banks may not be able to assess credit quality at a distance as
effectively as they do in face to face circumstances.

It could be more difficult to assess the nature and quality of

collateral offered at a distance, especially if it is located in an area the
bank is unfamiliar with (particularly if this is overseas). Furthermore
 40

as it is difficult to predict customer volumes and the stickiness of e-

deposits (things which could lead either to rapid flows in or out of the
bank) it could be very difficult to manage liquidity.

Of course, these are old risks with which banks and supervisors
have considerable experience but they need to be watchful of old risks
in new guises. In particular risk models and even processes designed
for traditional banking may not be appropriate.
Transaction/operations risk - Transaction/Operations risk arises from
fraud, processing errors, system disruptions, or other unanticipated
events resulting in the institution’s 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 institution’s
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
institution’s 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.
 41

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
institution’s established risk tolerance level. Business risks are also
significant. Given the newness of e-banking, nobody knows much
about whether e-banking customers will have different characteristics
from the traditional banking customers. They may well have different
characteristics – eg I want it all and I want it now. This could render
existing score card models inappropriate, thus resulting in either
higher rejection rates or inappropriate pricing to cover the risk. Banks
may not be able to assess credit quality at a distance as effectively as
they do in face to face circumstances. It could be more difficult to
assess the nature and quality of collateral offered at a distance,
especially if it is located in an area the bank is unfamiliar with
(particularly if this is overseas). Furthermore as it is difficult to
predict customer volumes and the stickiness of e-deposits (things
which could lead either to rapid flows in or out of the bank) it could be
very difficult to manage liquidity.

3) Credit risk –
 42

Generally, a financial institution’s 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 customer’s 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; 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; Monitoring any increased
volume of, and possible concentration in, out-of-area lending.
Liquidity, interest rate, price/market risks - Funding and investment-
related risks could increase with an institution’s 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
 43

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:

 Potential increase in dependence on brokered funds or other

highly rate-sensitive 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;

 Potential increase in volatility of funds should e-banking

security problems negatively impact customer confidence or the
market’s perception of the institution.

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.
 44

4) Operations risk-

The reliance on new technology to provide services makes security

and system availability the central operational risk of electronic
banking. Security threats can come from inside or outside the system,
so banking regulators and supervisors must ensure that banks have
appropriate practices in place to guarantee the confidentiality of data,
as well as the integrity of the system and the data. Banks' security
practices should be regularly tested and reviewed by outside experts
to analyze network vulnerabilities and recovery preparedness.
Capacity planning to address increasing transaction volumes and new
technological developments should take account of the budgetary
impact of new investments, the ability to attract staff with the
necessary expertise, and potential dependence on external service
providers. Managing heightened operational risks needs to become an
integral part of banks' overall management of risk, and supervisors
need to include operational risks in their safety and soundness
evaluations.

There are three types of operation risks. They are as follows:

 volume forecasts
 management information systems and
 Outsourcing.

Accurate volume forecasts have proved difficult - One of the key

challenges encountered by banks in the Internet environment is how
to predict and manage the volume of customers that they will obtain.
Many banks going on-line have significantly misjudged volumes.
 45

When a bank has inadequate systems to cope with demand it may

suffer reputational and financial damage, and even compromises in
security if extra systems that are inadequately configured or tested are
brought on-line to deal with the capacity problems.

As a way of addressing this risk, banks should:

 undertake market research,

 adopt systems with adequate capacity and scalability,
 undertake proportionate advertising campaigns, and
 Ensure that they have adequate staff coverage and develop a
suitable business continuity plan.

In brief, this is a new area, nobody knows all the answers, and
banks need to exercise particular caution.

The second type of operations risk concerns management

information systems. Again this is not unique to E-banking. I have
seen many banks venture into new areas without having addressed
management information issues. Banks may have difficulties in
obtaining adequate management information to monitor their e-
service, as it can be difficult to establish/configure new systems to
ensure that sufficient, meaningful and clear information is generated.
Such information is particularly important in a new field like e-
banking. Banks are being encouraged by the FSA to ensure that
management have all the information that they require in a format
that they understand and that does not cloud the key information with
superfluous details.
 46

Finally, a significant number of banks offering e-banking services

outsource related business functions, e.g. security, either for reasons
of cost reduction or, as is often the case in this field, because they do
not have the relevant expertise in-house. Outsourcing a significant
function can create material risks by potentially reducing a bank’s
control over that function. Outsourcing is of course neither new nor
unmanageable but banks should be mindful of the FSA’s guidance on
outsourcing, which addresses these risks.

5) Regulatory risk-

Because the Internet allows services to be provided from anywhere

in the world, there is a danger that banks will try to avoid regulation
and supervision. What can regulators do? They can require even
banks that provide their services from a remote location through the
Internet to be licensed. Licensing would be particularly appropriate
where supervision is weak and cooperation between a virtual bank
and the home supervisor is not adequate. Licensing is the norm, for
example, in the United States and most of the countries of the
European Union. A virtual bank licensed outside these jurisdictions
that wishes to offer electronic banking services and take deposits in
these countries must first establish a licensed branch.

Determining when a bank's electronic services trigger the need for

a license can be difficult, but indicators showing where banking
services originate and where they are provided can help. For example,
a virtual bank licensed in country X is not seen as taking deposits in
country Y if customers make their deposits by posting checks to an
address in country X. If a customer makes a deposit at an automatic
 47

teller machine in country Y, however, that transaction would most

likely be considered deposit taking in country. Regulators need to
establish guidelines to clarify the gray areas between these two cases.

6) Legal risk-

Electronic banking carries heightened legal risks for banks. Banks

can potentially expand the geographical scope of their services faster
through electronic banking than through traditional banks. In some
cases, however, they might not be fully versed in a jurisdiction's local
laws and regulations before they begin to offer services there, either
with a license or without a license if one is not required. When a
license is not required, a virtual bank--lacking contact with its host
country supervisor--may find it even more difficult to stay abreast of
regulatory changes. As a consequence, virtual banks could
unknowingly violate customer protection laws, including on data
collection and privacy, and regulations on soliciting. In doing so, they
expose themselves to losses through lawsuits or crimes that are not
prosecuted because of jurisdictional disputes.

Money laundering is an age-old criminal activity that has been

greatly facilitated by electronic banking because of the anonymity it
affords. Once a customer opens an account, it is impossible for banks
to identify whether the nominal account holder is conducting a
transaction or even where the transaction is taking place. To combat
money laundering, many countries have issued specific guidelines on
identifying customers. They typically comprise recommendations for
verifying an individual's identity and address before a customer
 48

account is opened and for monitoring online transactions, which

requires great vigilance.

In a report issued in 2000, the Organization for Economic

Cooperation and Development's Financial Action Task Force raised
another concern. With electronic banking crossing national
boundaries, whose regulatory authorities will investigate and pursue
money laundering violations? The answer, according to the task force,
lies in coordinating legislation and regulation internationally to avoid
the creation of safe havens for criminal activities.

7) Reputational risk-

Breaches of security and disruptions to the system's availability can

damage a bank's reputation. The more a bank relies on electronic
delivery channels, the greater the potential for reputational risks. If
one electronic bank encounters problems that cause customers to lose
confidence in electronic delivery channels as a whole or to view bank
failures as system wide supervisory deficiencies, these problems can
potentially affect other providers of electronic banking services. In
many countries where electronic banking is becoming the trend, bank
supervisors have put in place internal guidance notes for examiners,
and many have released risk-management guidelines for banks. This
is considerably heightened for banks using the Internet. For example
the Internet allows for the rapid dissemination of information which
means that any incident, either good or bad, is common knowledge
within a short space of time. The speed of the Internet considerably
 49

cuts the optimal response times for both banks and regulators to any
incident.

Any problems encountered by one firm in this new environment

may affect the business of another, as it may affect confidence in the
Internet as a whole. There is therefore a risk that one rogue e-bank
could cause significant problems for all banks providing services via
the Internet. This is a new type of systemic risk and is causing concern
to e-banking providers. Overall, the Internet puts an emphasis on
reputational risks. Banks need to be sure that customers’ rights and
information needs are adequately safeguarded and provided for.
Breaches of security and disruptions to the system's availability can
damage a bank's reputation. The more a bank relies on electronic
delivery channels, the greater the potential for reputational risks. If
one electronic bank encounters problems that cause customers to lose
confidence in electronic delivery channels as a whole or to view bank
failures as system wide supervisory deficiencies, these problems can
potentially affect other providers of electronic banking services. In
many countries where electronic banking is becoming the trend, bank
supervisors have put in place internal guidance notes for examiners,
and many have released risk-management guidelines for banks.

Reputational risks also stem from customer misuse of security

precautions or ignorance about the need for such precautions.
Security risks can be amplified and may result in a loss of confidence
in electronic delivery channels. The solution is consumer education--a
process in which regulators and supervisors can assist. For example,
some bank supervisors provide links on their websites allowing
 50

customers to identify online banks with legitimate charters and

deposit insurance. They also issue tips on Internet banking, offer
consumer help lines, and issue warnings about specific entities that
may be conducting unauthorized banking operations in the country.

Money laundering is an age-old criminal activity that has been

greatly facilitated by electronic banking because of the anonymity it
affords. Once a customer opens an account, it is impossible for banks
to identify whether the nominal account holder is conducting a
transaction or even where the transaction is taking place. To combat
money laundering, many countries have issued specific guidelines on
identifying customers. They typically comprise recommendations for
verifying an individual's identity and address before a customer
account is opened and for monitoring online transactions, which
requires great vigilance.

REGULATORY TOOLS AND SECURITY

There are four key tools that regulators need to focus on to address
the new challenges posed by the arrival of e-banking.

 Adaptation-

In light of how rapidly technology is changing and what

the changes mean for banking activities, keeping regulations up
to date has been, and continues to be, a far-reaching, time-
 51

consuming, and complex task. In May 2001, the Bank for

International Settlements issued its "Risk Management
Principles for Electronic Banking," which discusses how to
extend, adapt, and tailor the existing risk-management
framework to the electronic banking setting. For example, it
recommends that a bank's board of directors and senior
management review and approve the key aspects of the security
control process, which should include measures to authenticate
the identity and authorization of customers, promote non
repudiation of transactions, protect data integrity, and ensure
segregation of duties within e-banking systems, databases, and
applications. Regulators and supervisors must also ensure that
their staffs have the relevant technological expertise to assess
potential changes in risks, which may require significant
investment in training and in hardware and software.

 Legalization-

New methods for conducting transactions, new

instruments, and new service providers will require legal
definition, recognition, and permission. For example, it will be
essential to define an electronic signature and give it the same
legal status as the handwritten signature. Existing legal
definitions and permissions--such as the legal definition of a
 52

bank and the concept of a national border--will also need to be

rethought.

 Harmonization-

International harmonization of electronic banking

regulation must be a top priority. This means intensifying cross-
border cooperation between supervisors and coordinating laws
and regulatory practices internationally and domestically across
different regulatory agencies. The problem of jurisdiction that
arises from "borderless" transactions is, as of this writing, in
limbo. For now, each country must decide who has jurisdiction
over electronic banking involving its citizens. The task of
international harmonization and cooperation can be viewed as
the most daunting in addressing the challenges of electronic
banking.

 Integration-

This is the process of including information technology

issues and their accompanying operational risks in bank
supervisors' safety and soundness evaluations. In addition to the
issues of privacy and security, for example, bank examiners will
want to know how well the bank's management has elaborated
its business plan for electronic banking. A special challenge for
regulators will be supervising the functions that are outsourced
to third-party vendors.
 53

Security is one of the most discussed issues around e-banking.

E-banking increases security risks, potentially exposing hitherto
isolated systems to open and risky environments. Security breaches
essentially fall into three categories; breaches with serious criminal
intent (fraud, theft of commercially sensitive or financial
information), breaches by ‘casual hackers’ (defacement of web sites or
‘denial of service’ - causing web sites to crash), and flaws in systems
design and/or set up leading to security breaches (genuine users
seeing / being able to transact on other users’ accounts). All of these
threats have potentially serious financial, legal and reputational
implications.

Many banks are finding that their systems are being probed for
weaknesses hundreds of times a day but damage/losses arising from
security breaches have so far tended to be minor. However some
banks could develop more sensitive "burglar alarms", so that they are
better aware of the nature and frequency of unsuccessful attempts to
break into their system. The most sensitive computer systems, such as
those used for high value payments or those storing highly
confidential information, tend to be the most comprehensively
secured. One could therefore imply that the greater the potential loss
to a bank the less likely it is to occur, and in general this is the case.
However, while banks tend to have reasonable perimeter security,
there is sometimes insufficient segregation between internal systems
and poor internal security. It may be that someone could breach the
lighter security around a low value system. It is easy to overemphasize
the security risks in e-banking. It must be remembered that the
 54

Internet could remove some errors introduced by manual processing

(by increasing the degree of straight through processing from the
customer through banks’ systems). This reduces risks to the integrity
of transaction data (although the risk of customers incorrectly
inputting data remains). As e-banking advances, focusing general
attention on security risks, there could be large security gains.
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

 sufficient staff with information security expertise

 active use of system based security management and

monitoring tools

 strong business information security controls.

These are the issues line supervisors will be raising with their
banks as part of their on-going supervision. Security issues are a
major source of concern for everyone both inside and outside the
 55

banking industry. E-banking increases security risks, potentially

exposing hitherto isolated systems to open and risky environments.
Both the FSA and banks need to be proactive in monitoring and
managing the security threat.

Security breaches essentially fall into three categories; breaches

with serious criminal intent (e.g. fraud, theft of commercially sensitive
or financial information), breaches by ‘casual hackers’ (e.g.
defacement of web sites or ‘denial of service’ - causing web sites to
crash), and flaws in systems design and/or set up leading to security
breaches (e.g. genuine users seeing / being able to transact on other
users’ accounts). All of these threats have potentially serious financial,
legal and reputational implications. Many banks are finding that their
systems are being probed for weaknesses hundreds of times a day but
damage/losses arising from security breaches have so far tended to be
minor. However some banks could develop more sensitive "burglar
alarms", so that they are better aware of the nature and frequency of
unsuccessful attempts to break into their system.

The most sensitive computer systems, such as those used for high
value payments or those storing highly confidential information, tend
to be the most comprehensively secured. One could therefore imply
that the greater the potential loss to a bank the less likely it is to occur,
and in general this is the case. However, while banks tend to have
reasonable perimeter security, there is sometimes insufficient
segregation between internal systems and poor internal security. It
may be that someone could breach the lighter security around a low
value system, e.g. a bank’s retail web site, and gain entry to a high
 56

value system via the bank’s internal network. We are encouraging

banks to look at the firewalls between their different systems to
ensure adequate damage limitation should an external breach occur.
As ever though, the greatest threat so far has been from the enemy
within – i.e. your own employees, contractors and so on.

It is easy to overemphasize the security risks in e-banking. It must

be remembered that the Internet could remove some errors
introduced by manual processing (by increasing the degree of straight
through processing from the customer through banks’ systems). This
reduces risks to the integrity of transaction data (although the risk of
customer’s incorrectly inputting data remains). As e-banking
advances, focusing general attention on security risks, there could be
large security gains.

So what should banks be doing? Our view is that 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
 sufficient staff with information security expertise
 57

 active use of system based security management and

monitoring tools
 strong business information security controls
 These are the issues line supervisors will be raising with
their banks as part of their on-going supervision; or, for
new applicants, will need to be given adequate assurances
about.

TYPES OF E-BANKING:
Following are the types of e-banking
 Internet banking
 Mobile banking
 ATM
 Telephone banking

Internet Banking:

Internet banking refers to the use of the Internet as a remote

delivery channel for banking services. Such services include
traditional ones, such as opening a deposit account or transferring
 58

funds, among different accounts, and new banking services, such as

electronic bill payment, allowing customers to receive and pay bills via
a bank’s website. Banks offer Internet banking in two main ways. An
established bank with physical offices can establish a website 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 located 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 ATMs or other remote delivery channels owned by
other institutions.

Features:
Internet banking has following features
1) Time and Space-
By eliminating the limitations of time and distance, electronic
financial transactions can make cross-border transactions easier
and thus make it possible to provide services to customers on a
global scale. In effect, online finance may eventually lead to
complete globalization of financial services, making the national
borders irrelevant.
2) Electronic financial transactions-
Electronic financial transactions have helped create new
services such as the “virtual financial site” that includes services
 59

crossing the traditional borders between financial services as well

as “aggregation” that allows consumers to obtain consolidated
information about their financial accounts in one place.

 Electronic bill presentment and payment - EBPP

 Funds transfer between a customer's own checking and
savings accounts, or to another customer's account
 Investment purchase or sale
 Loan applications and transactions, such as repayments

3) Security-
Since electronic financial transactions, especially those in
online retail banking, are being conducted on open networks
centered on the Internet, many challenges arise in terms of
transaction security, consumer protection and privacy. The
existing systems of financial regulation and supervision are being
amended to reflect the changes in technology. Online banking
user interfaces are secure sites and traffic of all information -
including the password - is encrypted, making it next to
impossible for a third party to obtain or modify information after
it is sent. However, encryption alone does not rule out the
possibility of hackers gaining access to vulnerable home PCs and
intercepting the password as it is typed in (keystroke logging).
There is also the danger of password cracking and physical theft
of passwords written down by careless users.

Many online banking services therefore impose a second

layer of security. Strategies vary, but a common method is the use
of transaction numbers, or TANs, which are essentially single use
 60

passwords. Another strategy is the use of two passwords, only

random parts of which are entered at the start of every online
banking session. This is however slightly less secure than the TAN
alternative and more inconvenient for the user. A third option is
providing customers with security token devices capable of
generating single use passwords unique to the customer's token
(this is called two-factor authentication or 2FA). Another option is
using digital certificates, which digitally sign or authenticate the
transactions, by linking them to the physical device (e.g.
computer, mobile phone, etc). Other banks have responded not
with security tokens or digital certificates, but by setting up a
combination of controls that recognize a customer's computer, ask
additional challenge questions for risky behavior, and monitor for
fraud lucent behavior

4) Electronic Fund Transfer-

Electronic funds transfer or EFT refers to the computer-based

systems used to perform financial transactions electronically. The
term is used for a number of different concepts:

 cardholder-initiated transactions, where a cardholder makes use

of a payment card
 electronic payments by businesses, including salary payments
 electronic check (or cheque) clearing

5) Card Based EFT-

 61

EFT may be initiated by a cardholder when a payment card such as

a credit card or debit card is used. This may take place at an
automated teller machine (ATM) or point of sale (EFTPOS), or when
the card is not present, which covers cards used for mail order,
telephone order and internet purchases.

Transaction types

A number of transaction types may be performed, including

the following:

 Sale: where the cardholder pays for goods or service.

 Refund: where a merchant refunds an earlier payment made
by a cardholder.
 Withdrawal: the cardholder withdraws funds from their
account, e.g. from an ATM. The term Cash Advance may also be
used, typically when the funds are advanced by a merchant
rather than at an ATM.
 Deposit: where a cardholder deposits funds to their own
account (typically at an ATM).
 Cashback: where a cardholder withdraws funds from their
own account at the same time as making a purchase.
 Inter-account transfer: transferring funds between linked
accounts belonging to the same cardholder
 Payment: transferring funds to a third party account
 Inquiry: a transaction without financial impact, for instance
balance inquiry, available funds inquiry, linked accounts
inquiry, or request for a statement of recent transactions on the
account.
 62

 Administrative: this covers a variety of non-financial

transactions including PIN change. The transaction types
offered depend on the terminal. An ATM would offer different
transactions from a POS terminal, for instance

Online banking puts the power of banking into the hands of the
customer and allows the customers to self-service themselves with
all their banking needs, just as customers have become used to
getting money from an ATM instead of going to the cash desk in
the bank. With this online service, customers can view their
account details, review their account history, transfer funds, order
checks, pay bills, re-order checks and get in touch with the
customer care department of the bank. In most cases, there is no
special software to install other than a web browser and many
banks do not charge for this service

Mobile Banking:
Mobile banking is a term used for performing balance
checks, account transactions, payments etc. via a mobile device such
as a mobile phone. Mobile banking today (2008) is most often
performed via SMS or the Mobile Internet but can also use special
programs downloaded to the mobile device.

Mobile Banking can be said to consist of three inter-related concepts:

 Mobile Accounting
 Mobile Brokerage
 Mobile Financial Information Services
 63

Most services in the categories designated Accounting and

Brokerage are transaction-based. The non-transaction-based services
of an informational nature are however essential for conducting
transactions The accounting and brokerage services are therefore
offered invariably in combination with information services.
Information services, on the other hand, may be offered as an
independent module.

Trends in mobile banking:

The advent of the Internet has revolutionized the way the
financial services industry conducts business, empowering
organizations with new business models and new ways to offer 24x7
accessibility to their customers. The ability to offer financial
transactions online has also created new players in the financial
services industry, such as online banks, online brokers and wealth
managers who offer personalized services, although such players still
account for a tiny percentage of the industry. Over the last few years,
the mobile and wireless market has been one of the fastest growing
markets in the world and it is still growing at a rapid pace. According
to the GSM Association and Ovum, the number of mobile subscribers
exceeded 2 billion in September 2005, and now exceeds 2.5 billion (of
which more than 2 billion are GSM).According to a study by financial
consultancy Clement, 35% of online banking households will be using
mobile banking by 2010, up from less than 1% today. Upwards of 70%
of bank center call volume is projected to come from mobile phones.
Mobile banking will eventually allow users to make payments at the
 64

physical point of sale. "Mobile contact less payments” will make up

10% of the contact less market by 2010.Many believe that mobile
users have just started to fully utilize the data capabilities in their
mobile phones. In Asian countries like India, China, Indonesia and
Philippines, where mobile infrastructure is comparatively better than
the fixed-line infrastructure, and in European countries, where mobile
phone penetration is very high (at least 80% of consumers use a
mobile phone), mobile banking is likely to appeal even more. This
opens up huge markets for financial institutions interested in offering
value added services. .Mobile devices, especially smart phones, are the
most promising way to reach the masses and to create “stickiness”
among current customers, due to their ability to provide services
anytime, anywhere, high rate of penetration and potential to grow.

Features:

Mobile banking can offer services such as the following:

Account Information

Alerts on account activity or passing of set thresholds

1. Monitoring of term deposits

2. Access to loan statements
3. Access to card statements
4. Mutual funds / equity statements
5. Insurance policy management
6. Pension plan management
7. Status on cheque, stop payment on cheque
 65

Payments & Transfers

1. Domestic and international fund transfers
2. Micro-payment handling
3. Mobile recharging
4. Commercial payment processing
5. Bill payment processing
6. Peer to Peer payments

Investments
1. Portfolio management services
2. Real-time stock quotes
3. Personalized alerts and notifications on security prices

Support
1. Status of requests for credit, including mortgage approval, and
insurance coverage
2. Check (cheque) book and card requests
3. Exchange of data messages and email, including complaint
submission and tracking
4. ATM Location

Content Services
1. General information such as weather updates, news
2. Loyalty-related offers
3. Location-based services

Based on a survey conducted by Forrester, mobile banking will be

attractive mainly to the younger, more "tech-savvy" customer
segment. A third of mobile phone users say that they may consider
 66

performing some kind of financial transaction through their mobile

phone. But most of the users are interested in performing basic
transactions such as querying for account balance and making bill
payment.

ATM:

An automated teller machine (ATM) is a computerized

telecommunications device that provides the customers of a financial
institution with access to financial transactions in a public space
without the need for a human clerk or bank teller. On most modern
ATMs, the customer is identified by inserting a plastic ATM card with
a magnetic stripe or a plastic smartcard with a chip, that contains a
unique card number and some security information. Security is
provided by the customer entering a personal identification number
(PIN).

Mechanical cash dispenser was developed and built by Luther

George Simian and installed in 1939 in New York City by the City
Bank of New York, but removed after 6 months due to the lack of
customer acceptance.

The ATM got smaller, faster and easier over the years.
Thereafter, the history of ATMs paused for over 25 years, until De La
Rue developed the first electronic ATM, which was installed first in
Enfield Town in North London on 27 June 1967 by Barclays Bank..
This instance of the invention is credited to John Shepherd-Barron,
although various other engineers were awarded patents for related
 67

technologies at the time. Shepherd-Barron was awarded an OBE in

the 2005 New Year's Honors List. The first person to use the machine
was Rag Varney of "On the Buses" fame, a British Television
programmed from the 1960s. The first ATMs accepted only a single-
use token or voucher, which was retained by the machine. These
worked on various principles including radiation and low-coercively
magnetism that was wiped by the card reader to make fraud more
difficult. The idea of a PIN stored on the card was developed by the
British engineer John Rose in 1965.

ATMs first came into wide UK use in 1973; the IBM 2984 was
designed at the request of Lloyds Bank. The 2984 CIT (Cash Issuing
Terminal) was the first true Cash point, similar in function to today's
machines; Cash point is still a registered trademark of Lloyds TSB in
the U.K. All were online and issued a variable amount which was
immediately deducted from the account. A small number of 2984s
were supplied to a USA bank.

Using an ATM, customers can access their

bank accounts in order to make cash withdrawals (or credit card cash
advances) and check their account balances. ATMs are known by
various casual terms including automated banking machine, money
machine, cash machine, hole-in-the-wall.
 68

Telephone banking:

The Enhanced Telephone is a telephone developed by Citibank

in the late 1980s for customers to do banking and other financial
transactions from their home. The official launch date was February
26-27, 1990.The first version of the Enhanced Telephone, the 99A
model, was beige and featured a monochrome CRT screen. Because of
its chunky appearance, several developers dubbed it the "sawed-off ski
boot. The physical hardware was manufactured by Transaction
Technologies Incorporated (TTI).The second version of the Enhanced
Telephone, the P100 model, was manufactured by Philips Electronics
and featured an LCD screen and sleeker styling. The font was
developed by Bit stream Inc. Software for the Enhanced Telephone
was written in a proprietary language called HAL (Home Application
Language).The Enhanced Telephone ultimately failed to become a
viable product because by the time it was introduced, home banking
via PCs was becoming more common. As the World Wide Web
became popular in the early 1990s, the Enhanced Telephone was
rendered obsolete. The Philips P100 phone lived on and to this day
variations of it are used for other applications

Online lenders make loans to consumers via computer

websites, online. Online lenders generally provide loan information,
 69

application forms, email or instant message assistance right on their

website. The online applications are generally transmitted over an
encrypted web page for security. Ideally an online lender will provide
a telephone number prominently offering offline assistance to
consumers also

Telephone banking is a service provided by a financial

institution which allows its customers to perform transactions over
the telephone. Most telephone banking uses an automated phone
answering system with phone keypad response or voice recognition
capability. To guarantee security, the customer must first authenticate
through a numeric or verbal password or through security questions
asked by a live representative (see below). With the obvious exception
of cash withdrawals and deposits, it offers virtually all the features of
an automated teller machine: account balance information and list of
latest transactions, electronic bill payments, funds transfers between a
customer's accounts, etc. Usually, customers can also speak to a live
representative located in a call centre or a branch, although this
feature is not guaranteed to be offered 24/7. In addition to the self-
service transactions listed earlier, telephone banking representatives
are usually trained to do what was traditionally available only at the
branch: loan applications, investment purchases and redemptions,
cheque book orders, debit card replacements, change of address, etc.
Banks which operate mostly or exclusively by telephone are known as
phone bank.
 70

MARKETING FOR E-BANKING

E-banking is poised to become the big killer e-banking

application arena. However, Banks going e-banking the first time
need to tread the path cautiously. The biggest decision that Banks
need to make is the channel that they will support their services on.

E-banking through an SMS based service would require the

lowest amount of effort, in terms of cost and time, but will not be able
to support the full breath of transaction-based services. However, in
markets like India where a bulk of the e-banking population users'
phones can only support SMS based services, this might be the only
option left.

On the other hand a market heavily segmented by the type and

complexity of e-banking usage might be good place to roll of WAP
based e-banking applications. A WAP based service can let go of the
need to customize usability to the profile of each e-banking, the trade-
off being that it cannot take advantage of the full breadth of features
that a e-banking might offer.
 71

E-banking application standalone clients bring along the burden

of supporting multiple e-banking device profiles. According to the
Gartner Group, a leading wireless computing consulting organization,
e-banking services will have to support a minimum of 50 different
device profiles in the near future. However, currently the best user
experience, depending on the capabilities of a e-banking, is possible
only by using a Standalone client.

E-banking has the potential to do to the e-banking what E-mail

did to the Internet. E-banking Application based banking is poised to
be a big m-commerce feature, and if South Korea's foray into mass e-
banking is any indication, e-banking could well be the driving factor
to increase sales of high-end e-banking. Nevertheless, Bank's need to
take a hard and deep look into the e-banking usage patterns among
their target customers and enable their e-banking services on a
technology with reaches out to the majority of their customers.
 72

DIFFERENCE BETWEEN TRADITIONAL

AND E BANKING:
Internet banking works much like traditional banking. The
primary difference is you are accessing your account and information,
making payments and reconciling statements using your computer
rather than paper or the phone to complete transactions. Instead of
going down to your local branch office when you bank online you can
accomplish multiple tasks at once with the click of a button.

Online banking is rapidly becoming more and more popular as

consumers recognize the advantages online banking has to offer. For
one most banks charge fewer fees if you take advantage of their online
banking services. You can also stop receiving paper statements if you
like in many cases and conduct 95% of your business over the Web
when you take advantage of Internet banking

The E-banking-Service will only be available for e-banking and

data connections which meet the required specifications and
configurations as may be specified by the Bank from time to time and
you agree to procure and maintain a e-banking and data connection
which meet these requirements at your own expense.

User Guidance on the operation of the E-banking-Service will be

made available to you. You must follow all relevant User Guidance
 73

whenever you access or operate the E-banking-Service. The Bank may

inform you from time to time about changes to the way you should
access or operate the E-banking-Service. You must observe all such
changes when accessing or operating the E-banking-Service.

The E-banking Services are intended to be available 7 days a week,

24 hours a day but there is no warranty that the same will be available
at all times. You further agree that the Bank shall be entitled at any
time, at the Bank's sole discretion and without prior notice, to
temporarily suspend the operation of the E-banking-Service for
updating, maintenance and upgrading purposes, or any other purpose
whatsoever that the Bank deems fit, and in such event, the Bank shall
not be liable for any loss, liability or damage which may be incurred as
a result.
 74

TRENDS IN E-BANKING
The advent of the Internet has revolutionized the way the
financial services industry conducts business, empowering
organizations with new business models and new ways to offer 24x7
accessibility to their customers.

The ability to offer financial transactions online has also created

new players in the financial services industry, such as online banks,
online brokers and wealth managers who offer personalized services,
although such players still account for a tiny percentage of the
industry.

Over the last few years, the e-banking and wireless market has
been one of the fastest growing markets in the world and it is still
growing at a rapid pace. According to the GSM Association and Ovum,
the number of e-banking subscribers exceeded 2 billion in September
2005, and now exceeds 2.5 billion (of which more than 2 billion are
GSM).

According to a study by financial consultancy Clement, 35% of

online banking households will be using e-banking by 2010, up from
less than 1% today. Upwards of 70% of bank center call volume is
projected to come from e-banking. E-banking will eventually allow
users to make payments at the physical point of sale. "E-banking
contact less payments” will make up 10% of the contact less market by
2010.[2]

Many believe that e-banking users have just started to fully

utilize the data capabilities in their e-banking. In Asian countries like
 75

India, China, Bangladesh, Indonesia and Philippines, where e-

banking infrastructure is comparatively better than the fixed-line
infrastructure, and in European countries, where e-banking
penetration is very high (at least 80% of consumers use a e-banking),
e-banking is likely to appeal even more.

This opens up huge markets for financial institutions interested

in offering value added services. With e-banking technology, banks
can offer a wide range of services to their customers such as doing
funds transfer while traveling, receiving online updates of stock price
or even performing stock trading while being stuck in traffic.
According to the German e-banking operator Mobilcom, e-banking
will be the "killer application" for the next generation of e-banking
technology.

E-banking devices, especially smart phones, are the most

promising way to reach the masses and to create “stickiness” among
current customers, due to their ability to provide services anytime,
anywhere, high rate of penetration and potential to grow. According
to Gartner, shipment of smart phones is growing fast, and should top
20 million units (of over 800 million sold) in 2006 alone.

In the last 4 years, banks across the globe have invested billions
of dollars to build sophisticated internet banking capabilities. As the
trend is shifting to e-banking, there is a challenge for CIOs and CTOs
of these banks to decide on how to leverage their investment in
internet banking and offer e-banking, in the shortest possible time.
 76

The proliferation of the 3G (third generation of wireless) and

widespread implementation expected for 2003–2007 will generate
the development of more sophisticated services such as multimedia
and links to m-commerce services.

Internet banking is gaining ground. Banks increasingly operate

websites through which customers are able not only to inquire about
account balances and interest and exchange rates but also to conduct
a range of transactions. Unfortunately, data on Internet banking are
scarce, and differences in definitions make cross-country comparisons
difficult. Even so, one finds that Internet banking is particularly
widespread in Austria, Korea, the Scandinavian countries, Singapore,
Spain, and Switzerland, where more than 75 percent of all banks offer
such services (see chart). The Scandinavian countries have the largest
number of Internet users, with up to one-third of bank customers in
Finland and Sweden taking advantage of e-banking.

In the United States, Internet banking is still concentrated in the

largest banks. In mid-2001, 44 percent of national banks maintained
transactional websites, almost double the number in the third quarter
of 1999. These banks account for over 90 percent of national banking
system assets. The larger banks tend to offer a wider array of
electronic banking services, including loan applications and brokerage
services. While most U.S. consumers have accounts with banks that
offer Internet services, only about 6 percent of them use these
services.

To date, most banks have combined the new electronic delivery

channels with traditional brick and mortar branches ("brick and click"
 77

banks), but a small number have emerged that offer their products
and services predominantly, or only, through electronic distribution
channels. These "virtual" or Internet-only banks do not have a branch
network but might have a physical presence, for example, an
administrative office or nonbranch facilities like kiosks or automatic
teller machines. The United States has about 30 virtual banks; Asia
has 2, launched in 2000 and 2001; and the European Union has
several-either as separately licensed entities or as subsidiaries or
branches of brick and mortar banks
 78

E-BANKING, BENEFIT FOR RURAL

INDIA

Thousands of people from rural areas across 12 states are likely

to get their social security pension and wages paid under the National
Rural Employment Guarantee Act (NREGA) scheme with the help of
mobiles over the coming few months.

In Andhra Pradesh alone, for instance, 250,000 people have

registered for e-banking services. The state government is rolling out a
programmed to enroll three million people by the end of 2008.

E-banking pilots and full-scale operations are being conducted

across 12 states, and the entire ecosystem is being managed by the
government with the help of the Reserve Bank of India, banks, leading
telecom operators and technology implementation partners.

The ecosystem is important since banking regulations in India

currently do not allow cash for exchange of another 'unit' such as
'airtime' in the case of mobiles. Only banks and the Indian Post
(through money orders) are currently allowed such transfers.

E-banking, which is catching up fast in the cities and hinterland,

is not only helping the government to take a step forward towards
fulfilling its aim of having one bank account for every household, but
also saving it crores of rupees by way of reduced transaction costs.
 79

While the government incurs a transaction cost of Rs 12-13 for

every Rs 100 it shells out, e-banking helps it reduce the cost to a mere
Rs 2. RBI estimates that around 40 per cent of Indians lack access to
formal financial services and is largely 'unbanked'.

For instance, the AP government has tied up with banks like the
State Bank of [Get Quote] India [Get Quote], Union Bank of India
[Get Quote], Axis Bank, Andhra Bank [Get Quote], State Bank of
Hyderabad, Andhra Pradesh Garmin Vikas Bank, and Punjab
National Bank [Get Quote].

A Little World (ALW), a technology implementation partner,

has collaborated with NXP Semiconductors to design a e-banking for
the AP government that encloses an RFID card, and works with
ALW's micro-banking platform ZERO.

The e-banking acts as a branch of the bank by storing a database

of customers. It also has a smartcard, which biometrically stores the
identity of the customer such as name, address, photograph,
fingerprint templates and relevant details of the savings or loan
accounts held by the issuing bank.

Customers get a secure electronic identity via phone or

smartcard, while agents take deposits and dispense cash. ALW works
with the banks on a revenue-sharing basis.
 80

Anurag Gupta, founder director & CEO of ALW, says: "We have
carried out pilot projects with SBI in villages located in some of the
most inaccessible and difficult terrains of the country such as
Pithoragarh in Uttarakhand, Mizoram, Meghalaya, and remote
villages in Andhra Pradesh."

Lokanath Panda, director, ALW, also pointed out that SBI had
tied up with the Indian Post to extend banking services especially in
unbanked/under-banked areas. "Select post offices will make
available to the public SBI's deposit and loan products, and ALW is
the technology partner."

ALW is also conducting a pilot programme with SKS

Microfinance and the Bank of India to provide a e-banking service
that works on BSNL SIM cards.

New Delhi-based Ekgaon Technologies too has developed a

system for tracking transactions made by self-help groups. It has
partnered with the likes of CARE, World Vision and the World Bank
to conduct a pilot, which it plans to extend to 14 Indian states.

Bharti Airtel [Get Quote], too, is in the process of tying up with

two leading banks to extend its e-bankingremittance services to rural
areas, according to its president (E-bankingServices), Sanjay Kapoor.
 81

Airtel has already partnered with the Indian Farmers' Fertilizers

Cooperative Limited (IFFCO) to set up IFFCO Kisan Sanchar Limited
in Rajasthan.

Under this initiative, the cooperative department will provide e-

bankinghandsets to farmers at marginal price through its outlets in
the rural areas. These handsets would be loaded with green SIM
cards, which will flash daily updates on agricultural practices and
weather forecast free of cost.

While he did not provide details, Kapoor hinted that the

partnership deal would be extended to e-banking services too. Kapoor
reasons that with 55 per cent of the mobiles being internet-enabled, e-
banking would help bridge the digital divide.

Reliance Communications [Get Quote], on its part, allows ICICI

Bank [Get Quote] account holders with Reliance handsets (even the
low-end Rs 1,000 ones - with or without Internet connectivity) to
make intra-bank (to ICICI account holders) money transfers. It has
already tied up with HDFC [Get Quote] to offer Reliance mPay - a
virtual credit card.

E-BANKING SUGGESTION

 Micro payments
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In the more affluent economies, a good infrastructure for a

cashless environment is already prevalent and most people have
bank accounts and access to both debit and credit facilities. These
factors are incentives in the developing countries to move the
population at large away from cash with introductions of low cost
solutions such as micro-payments to further efficiency gains.

 SMART Money

The service was launched in December 2000 in co-operation

with First E-Bank, which has since been acquired by Banco de Oro,
and MasterCard, one of the world’s leading payment services
providers. According to SMART, SMART Money was the world’s
first re-loadable electronic cash wallet, linked together by their
cellular network. Once cash has been transferred to the SMART
Money account, it can be used in thousands of shops and
restaurants. The cash value can also be used to load airtime, pay
utility bills, or transfer money from one SMART Money card to
another.

 G-Cash

The service was launched in October 2004, with an initial set of

three anchors services; international and domestic remittance, P2P
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(phone-to-phone or person-toperson) transfers and payments for

retail purchases. With G-Cash, all of Globe’s subscribers are m-
Commerce-enabled. As users do not need to have a card or bank
account to be part of the service, G-Cash is able to provide M-
Commerce capability to a previously underserved segment of the
market, including those who currently do not do banking. Unlike
Smarts approach whereby it operates the service jointly with BDO,
GLOBE on its own maintains records of all transactions and
arranges settlement between the retailers and the G-Cash
customers. G-Cash provides services through close to 4,900 retail
outlets nationwide and more than 500 G-Cash partners.

 E-banking Remittance

Migrant remittances, which are personal flows from migrants to

their friends and families, have become a major source of external
development finance, and in the process, play an effective role in
reducing poverty. Capitalizing on the benefits of such a system,
remittance services can become cheaper and more convenient, thus
improving financial access of migrants, their beneficiaries and the
financial intermediaries in the origin countries.

 Microfinance through E-banking Technology

Currently, a major constraint to microfinance is the high cost of

operating in remote areas. Many institutions are now working
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toward low-cost delivery options such as Internet banking and

cashless transactions to help the rural poor. The e-bankingdevices
that could be a more efficient tool for such transactions. For people
in such rural areas, using computers is often a problem due to
faulty Internet connections and frequent power failures. Hence,
providing micro credits through a e-bankingplatform (SMS-based)
could be the best way to reach out to the poor.

RBI GUIDELINES FOR E-BANKING

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The Reserve Bank of India on Friday released its final operative

guidelines for e-banking. The central bank has decided to keep the
limit on the ticket-size for e-banking at Rs 2,500 per transaction,
and Rs 5,000 per day. Banks have also been allowed to put in place
a monthly transaction limit, depending on the bank’s risk
perception of the customer. While the guidelines will enable
lenders such as State Bank of India and Axis Bank to go ahead with
their launch of mobile-banking services, the central bank has
decided to restrict the services only to holders of debit and credit
cards. The card user base in the country is 80 million, with 55
million debit card users and 25 million credit card users. Only
Indian rupee-based domestic services shall be provided on the
mobile- payment platform, and the use of mobile-banking for
cross-border transactions have been strictly prohibited. Banks
which are based, licensed and supervised in India will be allowed to
offer such services. Further, only banks which have implemented
the core banking platform will be allowed to offer e-banking. At the
same time, the RBI has recommended that all e-banking
transactions are validated through a two-factor authentication
system, thereby complying with the latest security and encryption
standards.

PROGRESS OF E-BANKING
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If technological revolution is at its peak, One of the important

sectors of the economy where technology is at it helm of affairs
with respect to customer service is banking. Over the years has
banking rise above from a traditional brick-and mortar model of
customers queuing for services in the banks to modern day banking
where banks can reach at any point for their services.
In today’s business, technology has been on the predominant
indicators of growth and competitiveness. Entry of new banks
resulted in a paradigm shift in the ways of banking. The banking
industry today is in the midst of an IT revolution. The combination
of regulatory and competitive reasons have led to increasing
importance of total banking automation in the banking Industry. .
Information Technology has basically been used under two
different avenues in banking.

One is Communication and Connectivity and other is Business

Process Reengineering, both basically focusing on increasing its
customer reach. Information technology enables sophisticated
product development, better market infrastructure,
implementation of reliable techniques for control of risks and helps
the financial intermediaries to reach geographically distant and
diversified markets The latest revolution seems to happen with
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respect to e-banking an attempt to leverage on the synergies of e-

banking technology in telecom and information technology in the
banking services.

Today, Banks have welcomed wireless and e-banking technology

into their boardroom to offer their customers the freedom of
paying bills, planning payments while stuck in traffic jams, to
receive updates on the various marketing efforts while present at a
party to provide more personal and intimate relationships. E-
banking can be classified as Push vs. Pull and Transaction vs.
Enquiry that is briefly given below Push Based, Pull Based o
Transaction some of the other features where e-banking has lent its
hand are Fund Transfer & Bill Payment where the customers have
the freedom of maintaining account through mobile. E-banking has
also welcomed other financial services like share trading.

The latest Information technology revolution enables

sophisticated Enquiry Based banking services for Credit/Debit
Alerts. Some of the other outcomes of the Revolution in the
banking industry are Minimum Balance Alerts, Account Balance
Enquiry, Account Statement Enquiry, Cheque Status Enquiry,
Cheque Book Requests and Bill Payment Alerts. The last time that
technology had a major impact in helping banks service their
customers was with the introduction of the Internet banking.
However the biggest limitation of Internet banking is the
requirement of a PC with an Internet connection, not a big obstacle
if we look at the US and the European countries, but definitely a
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big barrier if we consider most of the developing countries of Asia

like China and India. E-banking addresses this fundamental
limitation of Internet banking, as it reduces the customer
Requirement to just a e-banking. E-banking usage has seen an
explosive growth in most of the Asian economies like India, China
and Korea. The main reason that E-banking scores over Internet
banking is that it enables ‘Anywhere Banking'.

Customers now don't need access to a computer terminal to

access their banks, they can now do so on the go – when they are
waiting for their bus to work, when they are traveling or when they
are waiting for their orders to come through in a restaurant. The
scale at which E-banking has the potential to grow can be gauged
by looking at the pace users are getting e-banking in these big
Asian economies. Revolution of E-banking phones in banking
service. According to the Cellular Operators’ Association of India
(COAI) the e-banking subscriber base in India crossed the 50
million mark in October 2005, which stood at 50.87 million. The
explosion as most analysts say, the worldwide number of cellular
subscribers will surpass 2 billion in 2005—up from 11M in 1990
and 750M in 2000. Worldwide cellular subscribers are forecasted
to reach 3.2B by the end of 2010.Among the leaders in e-banking
technologies, most aggressive being Korea which is now witnessing
the roll-out of some of the most advanced services using 3G
technologies, like using e-banking phones to pay bills in shops and
restaurants. The growth of e-banking technology over the last few
years has enriched the progress of the e-banking services.
 89

Technologies like IVR, SMS, WAP, J2ME, and J2EE & BREW have
revolutionized the use the e-banking phones in banking services.
Though all the above predictions on cellular base, the Use of e-
banking technology with respect to banking services is at a very
infant stage.

There are a lot of challenges and issues relating to content,

security, coverage, technology and connectivity speed are to be
sorted out with respect to e-banking technologies. Objectives of the
Report:1. To study the technological readiness in relation to the
challenges faced by the players particularly the banks with respect
to e-banking in order to enhance global competitiveness by
embracing technology and banking services.2. To study and
awareness, expectation and acceptance levels of the Customers
with respect to its use and effectiveness of e-banking

E-BANKING STATUS IN INDIA

Today there are a lot of financial institutions providing various

financial services: banks, internet banks, payment systems and so
on. But competition always existed and today it is more than just
 90

existing: it's fierce as never before. In view of this fact, new and
new services are appearing. Some of them are good, while other
ones are not. But there is one service that hit the bull's eye: e-
banking. So today this industry is developing in a fly pace.

In India e-banking also found its admirers and develops greatly.

Two important yet quite unrelated events in the evolution of e-
banking payments in India occurred in 2008.

First, the new credit policy of the RBI came along with
guidelines for facilitating e-banking payments. Second, Dr Raghu
Raghuraman's CSFR report states that ''E-banking is the most
promising front end technology'' for broadening the access of
finance in the country.

These two taken together are defining moments in the (a)

recognition of e-banking now as an accepted channel for banking &
commerce, and (b) clearing the way for its rapid and mass
deployment across the country by the Financial sector.

Technology related regulations can never keep up with the fast

pace nature of tech innovations and progress, nor fully define it.
Regulation here has to have a light touch, so as not to throttle
innovation, yet which serves public interest.

The use of e-banking for financial and non financial transactions

has had a chequered past. Several initiatives over the last ten years
 91

(overseas) have come and gone, and as we speak several more

initiatives into the future related to NFC, contact less are emerging.
The difference between now and then is that mobiles have come
along way. They find themselves in the hands of a third of
humanity, and have pipped the internet in penetration! Several
initiatives in Sub Saharan Africa, Eastern Europe and Far East
have been popular and working well for the last few years. So its
time has come, and the RBI guidelines are the recognition of
homegrown initiatives over the last year or so which have
pioneered the new paradigm.

E-banking payments are a wireless consumer product or service.

In short a benefit - convenience, as is, search, escalators, ATM's,
etc. Methods and approaches for e-banking commerce will differ
across region, country and even service providers. As each
stakeholder has its own assessment of what works best and what
value proposition appeals to the consumer.

The key takeaways from the guidelines are that appropriate

levels of security and safeguards need to be adopted. Those already
have been done by all banks which do deploy these services. So,
whether it be a SMS, USSD, GPRS, Smart phone, WAP - all such
delivery mediums are acceptable.

Basic principles of PIN management, customer confidentiality,

KYC, ALM, customer registration, risk mitigation, consumer
protection, etc are applicable. Just as they would apply to credit
 92

cards, ATM cards, ATM's, collection boxes, internet banking,

internet e commerce, telephone banking, cheque books, bank web
site, etc. Which is not to say that there is a fool proof system for any
of these, but they are as 'safe' as long they generate enough 'trust'
and convenience to offset perception (and actual) of risk so as to be
pervasive in the financial system. After all a wallet with cash is only
as safe as you keep it. Neither cash nor wallet can be pilfer
(tamper) proof!

Indian banks and payment service providers have been by and

large dovetailing their e-banking payment initiatives under the
umbrella of e-banking even before the guidelines were out. The
banking system has already been in conformity with these
suggested guidelines, which now have the sanction of the Reserve
Bank.

Banks' own operating experience and other payments a system

prevalent have provided the necessary grist for the RBI mill, and as
time goes on hopefully these will evolve and become far more
enabling for stakeholders, rather than favor one approach or
another or cripple themselves in strangulated regulations.

On the financial inclusion side if we go strictly by Dr Raghuraman's

recommendations of creating a 'national electronic financial
inclusion system' (NEFIS) then the backbone of such a system
would be its is ability to carry out small value transactions (Rs100)
at limited transaction cost (sub Re1). And the only way that can be
 93

done on a mass acceptable basis is via SMS, which is the single

most pervasive feature in e-banking technology revolution, cutting
across all SEC's, geographies, handset vendors, MNO;s etc.

CORPORATE EXAMPLE OF E-BANKING

IN INDIA

Barclay Bank launched Hello Money

 94

Barclays Bank recently launched ‘Hello Money’, a e-banking

service that enables one to do an entire range of things — enquiry,
funds transfer, bill payments and requests for financial statements.
Until this product arrived, the best ‘e-banking’ one could do was to
check bank balance or phone-in instructions to the banker. But with
Hello Money, a customer of Barclays can, for example, pay his
electricity bills via the e-banking. Click a few keys and the account is
debited, the bill is paid — all without any human interface. Over time,
Barclays intends to enlarge the scope of this service to include
payments to a whole lot of other things, such as for purchase of an air
ticket.

ANZ Bank has launched a new e-banking

ANZ Bank has launched a new Java- based e-banking

application to give ANZ customers the opportunity to perform a
selection of banking transactions from their e-banking.

Registered ANZ customers will be able to make payments and

transfer money from their accounts using M-Banking and request
statements as SMS messages. To ensure the security of its customers'
accounts, ANZ have implemented SSL (Secure Sockets Layer)
encryption similar to regular Internet banking, and transactions from
an account can only be performed on a single pre- registered e-
banking handset and only after password authentication.
 95

CASE STUDIES

LG Telecom, South Korea

In terms of the evolution of services being offered on e-banking

applications, South Korea is showing the way.
 96

The big push came when LG Telecom Ltd., the smallest of Korea's
three e-banking service providers teamed up with the Kookmin bank
to launch the ‘Bank on' service. Under this scheme e-banking users
were able to use smart chips embedded in cell phones for accessing all
of the transaction and enquiry based services. The chip-based service
automated the authentication of users when they accessed their
bank's financial services to make the whole process much faster and
convenient. The icing on the cake came with the ability of these chip
enabled cell phones to be used simultaneously as cash cards. By
October 2004 there were already about 100,000 infrared readers
adapted to take payment directly from e-banking handsets in Korea.

Users can now use their cell phones to pay for everything, from
restaurant bills, travel tickets, merchandise and even haircuts.

Reliance Infocomm, India

When Reliance Infocomm, India rolled out its CDMA network,

(at the time the e-banking market in India was still in its infancy, and
data services were almost never heard off) it made sure that all
handsets supported Java. The Reliance application platform, also
known as R-World brought Java compatibility even to the lower end
phones.
 97

Reliance used a novel way to overcome the memory limitations of

lower-end e-banking which hampered deploying of multiple
standalone J2ME based clients. Instead of storing applications
statically on their cell phones, users access a single menu based
application called R-World, which connects them to the Reliance
servers. Using the menu based user interface, e-banking users select
the application, which they want to run and download them over-the-
air to their cell phones. These applications are then executed locally
on the mobiles.

From mid-2004 Reliance tied up with two of the popular private

sector banks, HDFC and ICICI, to provide a host of their enquiry and
transaction based e-banking services through its R-World
environment.

CONCLUSION

For service providers, E-banking offers the next surest way to

achieve growth. Countries like Korea where e-banking penetration is
 98

nearing saturation, e-banking is helping service providers increase

revenues from the now static subscriber base. Also service providers
are increasingly using the complexity of their supported e-banking
services to attract new customers and retain old ones. For the fact is
that one day, in most of the world emerging markets, more people will
use e-banking telephones than use fixed telephone lines. Businesses
that are based on e-banking financial serviced will thus be a natural fit
for these economies. What is more, there is no need to wait for the
next generation e-banking networks; these businesses can be built
using today's technology. But to capture this significant opportunity,
financial firms and telecommunications companies will have to forge
partnerships with one another and, possibly, with merchants and
retail chains as well.

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 some countries 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.
 99

Further research on policy-related issues in the period ahead is

therefore critical.

In conclusion e-banking creates issues for banks and regulators

alike. For their part, banks should: Have 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. Take
a strategic and proactive approach to information security,
maintaining adequate staff expertise, building in best practice
controls and testing and updating these as the market develops. Make
active use of system based security management and monitoring
tools. Ensure that crisis management processes are able to cope with
Internet related incidents. One of the benefits that banks experience
when using e-banking is increased customer satisfaction.

This due to that customers may access their accounts whenever,

from anywhere, and they get involved more, this creating
relationships with banks. Banks should provide their customers with
convenience, meaning offering service through several distribution
channels (ATM, Internet, physical branches) and have more functions
available online. Other benefits are expanded product offerings and
 100

extended geographic reach. This means that banks can offer a wider
range and newer services online to even more customers than possible
before. The benefit which is driving most of the banks toward e-
banking is the reduction of overall costs. With e-banking banks can
reduce their overall costs in two ways: cost of processing transactions
is minimized and the numbers of branches that are required to service
an equivalent number of customers are reduced. With all these
benefits banks can obtain success on the financial market. But e-
banking is a difficult business and banks face a lot of challenges. And
so in conclusion e-banking creates issues for banks and regulators
alike. For our part we will continue our work, both national and
international, to identify and remove any unnecessary barriers to e-
banking. For their part, banks should: Have 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. Take
a strategic and proactive approach to information security,
maintaining adequate staff expertise, building in best practice
controls and testing and updating these as the market develops. Make
active use of system based security management and monitoring
tools. Ensure that crisis management processes are able to cope with
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Internet related incidents. I started my talk today by noting potential

benefits as well as the risks in e-banking. I end in the same way.
Certainly there are risks. But there are also opportunities, and
significant potential benefits for consumers, banks and regulators. We
see no problems in principle with mitigating and managing the risks
both for new entrants and existing players. As regulators we need to
ensure that our approaches are adequate to deal with the risks without
getting in the way of the innovations and benefits that E-banking
brings to firms and consumers. We are very mindful of this as we
develop our rules and guidance but will be looking also to you in the
industry to help us to achieve the right balance

BIBLIOGRAPHY

 http:/www.bis.org/pub/bcbs76.htm
 102

 http:/www.allbusiness.com/technology/technology-
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 E-banking in India – challenges and opportunities by Uppal,

R.K and Jantana, Rimpi

 Business objects learning solution to power e- business

intelligence, editura business object 2001