Chapter 1 Introduction

1.1 Introduction Web Banking or Internet Banking is a term used to describe banking transactions that are performed via a secured Internet application. Web Banking transactions include such things as paying bills,

transferring funds, viewing account statements and paying down loans and mortgages.

Although Web Banking has been popular among young Internet-savvy people for many years, its popularity is expected to grow rapidly as Internet usage grows internationally and people discover the many advantages that it provides.

Internet banking also refers to systems that enable bank customers to access Accounts and general information on bank products and services through a personal computer (PC) or other intelligent device. Internet banking products and services can include wholesale products for Corporate customers as well as retail and fiduciary products for consumers. Ultimately, the products and services obtained through Internet banking may mirror products and services offered through other bank delivery channels. Some examples of wholesale products include-: Cash management Wire transfer Automated clearinghouse (ACH) transactions Bill presentment and payment

Some examples of retail and fiduciary products and services include-: 1

Balance enquiry Funds transfer Downloading transaction information Bill presentment and payment Loan presentation Investment activity Other value added services

Other Internet banking services may include providing Internet access as an Internet Service Provider (ISP). The OCC has determined that a national bank subsidiary may provide home banking services through an Internet connection to the banks home banking system and, incidental to that service, may also Provide Internet access to bank customers using that service. Historically, banks have used information systems technology to process checks (item processing), drive ATM Machines (transaction processing), and produce reports (management Information systems).

In the past, the computer systems that made the information systems operate were rarely noticed by customers. Today, Web sites, electronic mail, and electronic bill presentment and payment systems are an important way for banks to reach their customers.

National banks have experimented with various forms of online banking formany years. Some of the early experiments involved closed systems where the customers accessed banks through a dial-in or cable TV connection. These systems limited a banks potential customer base because they required outof area customers to either incur long-distance charges on their phone bills or subscribe to a particular cable TV service to access the bank. With the widespread growth of the Internet, customers can use this technology anywhere in the world to access a banks network. The Internet, as an enabling 2

technology, has made banking products and services available to more customers and eliminated geographic and proprietary systems barriers. With an expanded market, banks also may have opportunities to expand or change their product and service offerings.

1.2 Objective of study The main objective of this study is to address the limitations of the manual banking. The development of Internet banking contains following activities which try to automate the entire process keeping in view of the database integration approach. Following are the objectives of Internet banking-: The administrators have grates accessibility in collecting the consistent information that is very much necessary for the system to exist and coordinate. 1. The system at any point of time can give the customers information related to their-: Accounts and accounts status The balance enquiry The funds transfer standards The cheque book request

The system can provide information relating to different types of accounts that are existing within the bank.

The system can provide the bank administration with information on the number of customers who are existing in the system.

The system at any point of time can provide the information related to executed transactions by the customers.

The system with respect to the necessities can identify all the history details of the trial participants along with their outcome of the results.

The system with respect to the necessities can provide the status of research and development process that is under schedule within the organization currently.

1.3 Scope of the study

E-banking was, first of all, adopted by private and foreign banks. However, gradually public sector banks also became part of this competition. ICICI bank and HDFC Bank were the beginners to starts e-banking in India. ICICI Bank initially started only few limited-banking services. This bank took part in e-trading also. Now, this bank is providing various e-banking services to consumers. Other banks are also following this bank. The internet banking was adopted in 1996-98; however, it became more popular in 1999. At that time only few public sector banks were far behind in adopting internet banking technology. Although, today almost all public sector banks are providing internet services to its consumers, but they have yet to go a long way to catch up with the private sector banks.

Consumers in India are getting used to internet banking services slowly and steadily. Initially banks provided only few internet banking services such as getting information about interest rates, checking account balances and computing loan eligibility. Thereafter, some more services were added such as online bill payment, transfer of fund between accounts, cash management etc. Apart from this the bank also introduced the facility of debit and credit cards for marking online payments, banks have also increased their profits by such internet services.

According to a report on Internet banking 2001, the numbers of internet users in India was 9 likes, but the number was expected to grow to 90 lakhs by 2003. By 1998 only 1% of the internet banking services enhanced tremendously. If their uses kept on rising like this, then the future people wont go in banks rather they would avail all banking services while sitting at their homes or offices. The future of internet banking in India is bright because it would enable banks to complete in the banking industry. 5

1.4Methodology Primary data Data that is collected from the first hand experience is known as primary data. Primary data has not been published yet and is more reliable, authentic and objective. Primary data has not been changed or altered by human beings therefore its validity is greater than secondary data.

Secondary data Secondary data is the data that is collected by someone other than the user. Common sources for secondary data for social science include census, surveys, organizational records and data collected through qualitative methodologies or primary data, by contrast are collected by the investigator conducting the research. Secondary data analysis save time that would otherwise be spent collecting data and particularly in case of quantitative data, provides larger and higher-quality databases that would be unfeasible for any individual researcher to collect on their own. In addition to that, analyst of social and economic change considers secondary data essential, since it is impossible to conduct a new survey that can adequately capture past change and/or developments. In this project I have used secondary data for its completion. The secondary data mediums that have been used in the project are: Internet Magazines Newspapers Books

I have used secondary data for making this project. I have made the use of internet, several magazines, newspapers etc to get information on the use of internet banking and its success.

Chapter 2 Conceptual framework

2.1 Internet banking- a global way to bank Today we are in the era of globalization. Multinational organizations worldwide have adopted globalization as their first strategic choice. Advancement in technology has facilitated globalization too. Same holds true for banking industry. Technological advancement, changes and innovations have always leveraged the standards of mankind. It has given new dimensions to society. It has also altered the way services can be offered. Information Technology has been a major driving force of economies worldwide during the last 2 decades. Its impact has been readily felt in banking industry also. With the invention of computer, operations and database management became quite handy. When ARPANET project of Defense Academy of US began, a new technology was born with the advent of internet. The two technological breakthroughs computers and internet has radically changed the way world can interact and business could be done. Metamorphosis and clubbing of these technologies gave rise to the growth of ITeS (Information Technology enabled Services) across the globe. There has been a marked improvement particularly in the area of maintenance, storage, availability and transfer of data. world has literally shrunk to become a "global village". IT has played a crucial role in the financial services. Internet has proved a magic wand for financial services and products, banking in particular. Banking sector has been early adopter of technology to offer latest modes for transacting business. Banks have transformed themselves and are offering The

services through internet. From computerization to networking to ATMs and now E-Banking, banks have moved up the value chain. This phenomenon of offering services through internet is referred as internet banking. The current article discusses internet banking in India and focuses upon key

challenges before banking industry.

2.2 Concept 7

Internet banking refers to the use of internet as a remote delivery channel for banking services. Web based or internet banking is poised to become the future face of banking services. The number of visits to the bank can be minimized effectively by operating from the internet account. Thus the number of contacts required to perform a transaction and solve a problem has been reduced through online banking. The usual branches of banks have culminated into PC networks, whereby the consumer can draw all the benefits and services of the bank at a single click of the mouse. Table 1 Year 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 Users 1,400,000 2,800,000 5,500,000 7,000,000 16,500,000 22,500,000 39,200,000 50,600,000 40,000.000 42,000,000 Population 1,094,870,677 1,094,870,677 1,094,870,677 1,094,870,677 1,094,870,677 1,094,870,677 1,094,870,677 1,112,225,812 1,112,225,812 1,129,667,528 % presentation 0.1 % 0.3 % 0.5 % 0.7 % 1.6 % 2.1 % 3.6 % 4.5 % 3.6 % 3.7 %

The number of individuals utilising internet services has increased considerably. In 2006, about 12% of the 38.5 million internet users in India were banking online1 and the figure for online banking was estimated to rise to 16 million by 2007-080. The internet population itself is set to grow to 100 million by 2007-08.

2.3 Technology in Internet Banking The technological development in banking can be traced as follows:1960 - Mechanised banking introduced. 1970 - Introduction of computer based banking industry. 1980 - Introduction of computer-linked communication based banking.

Advent of computer technology has created a major impact on working of banks. The computerization and subsequent development in history of Indian banks can be traced back to 1966 when Indian Bankers Association (IBA) along with exchange banks association signed first wage settlement with the unions, which accounted for the use of IBM or ICT accounting machines for inter-branch reconciliation etc.

IN 1970s, SBI installed a ledger-posting machine along with a mainframe computer at selected branches. A committee on computerization and mechanisation was appointed by RBI in 1983 under chairmanship of Dr. C. Rangrajan. Its objective was to chalk out a plan for mechanization of Indian banking industry. It was recommended that computerization and installation of Advanced Ledger Posting Machines (ALPM) at branch, regional and head offices of banks will bring around a new era in banking. Narsimhan committee in 1991 paved way for reform phase in banking. Saraf committee was constituted by RBI in 1994 that recommended the use of Electronic Fund Transfer System (EFT), introduction of electronic clearing services and extension of Magnetic Ink Character Recognition (MICR) beyond metropolitan cities and branches.

The rate of adoption of IT by foreign and private sector bank in the country has been significant over the last five years, which can be attributed to fierce competition and the internet phenomena worldwide. The arrival of private and multinational banks with their superior state of the art technology based services pushed the Indian banks to follow the suit by going in for the latest technologies to meet the threat of competitors and retain their customer base.

Technology was the rational for bank introducing ATM and POS (Point of sales) in 1970s, telephone banking in 1980s and internet banking in 1990s. In Mumbai, Shared Payment Network System (SPNS) was set up in February 1997. It was a network of 28 ATMs with 11 banks. The ATM card was branded

as 'SWADHAN'.

SPNS could link with international hubs such as VISA and MASTERCARD.

CITIBANK a US multinational was first bank in India to offer ATM card facility in 1985. "The last four years have seen dramatic changes, making customers' convenience critical aspect of banking. Indian metros are surging ahead in online banking usage. Today the delivery channel of banks include direct dial up connections, private networks, public networks etc. and the devices include telephone, Personal Computers including Automated Teller Machines, etc. Technology has thus

initiated a paradigm shift from branch banking to 'Anywhere Anytime' banking. Thanks to technology, today banks are able to manage in much better way, thereby gaining greater efficiency in operations.

2.4 Impact of Technology

The major impact of technological revolution in banking can be stated in terms of: 1. Paradigm shift from traditional banking to customized banking as the services can be delivered via computer and 2. Convenient banking i.e. "Anytime, Anywhere banking". A customer can check balance by logging into banks website through a user name and password. In this way he can enquire balance, status of Cheque, perform funds transfers, order drafts, request issue of cheque books etc.

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It has been observed that customers who adopt online banking are typically more profitable to the bank, stay with the bank longer and use more products strengthening the bank customer relationship. Information Technology and Internet banking has bridged the information gap, which was interestingly because of human involvement. Banks can make the information of products and services available on their site, which is, an advantageous proposition. Prospective customer can gather all the information from the website and thus if he comes to the branch with queries it will be very specific and will take less time of employee. Customer can visit these websites and can compare the services offered by a bank with that of another. Customer can get all the information, by saving money and time. The trend thus emerging out is that of virtual corporate system where the human role is minimized to maximum effect. The overall banking size and structure has increased considerably. It can also be accredited to the current market characteristics. More private players and multinational banks are establishing their base in India. Earlier nationalized bank dominated the scenario. Now after deregulation private banks have emerged as a powerful force. For example with over a million customer accounts, 600 branches and a network of 2,000 ATMs across country ICICI bank leads the way in private bank category. As a result, there is a fierce competition among these players for capturing the savings of individuals and current accounts of organizations. This has been spearheaded by the liberalization in the insurance industry. Insurance industry is giving fierce competition through their offerings on various policies. This sudden surge has necessitated the use of technology in offering better services competitively. Most of the banks have coupled IT with their offering to add value.

Several banks have been positioning themselves as a one-stop shop financial service provider with a fairly exhaustive range of products, including deposit products, loans, credit cards, debit cards, depository (custody services), investment advice, bill payments and various transactional services. 11

These apart, banks have also been entering into the business of selling third-party products such as mutual funds and insurance to the retail customers. To provide their customers greater flexibility and convenience as well as to reduce servicing costs, banks have been investing to computerize their branches and in new delivery channels such as ATMs, phone banking, internet banking and mobile banking.

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2.5 Modes of Distribution

Banks have been early adopter of technology. They were wise enough to understand the innovative mode for offering services. Private Banks played a major role in reviving the banking spirit in India. It was they who initiated the change. Today banking services can be delivered through following modes:-

2.5.1 Internet Banking, Web Banking, PC Banking and e-Banking Popularity of PC and easy access to internet and World Wide Web (www) has facilitated banks to use internet as a delivery channel and receiving instructions. Today all private banks and most of the nationalized banks are offering web based banking services. It is this form of banking that is generally referred as Internet Banking.

2.5.2 Phone Banking / Mobile Banking (M - Banking) There has been a rapid advancement and acceptance of mobile services in India. Penetration rate of mobiles and landlines have increased considerably. Banks have lapped up these opportunities and are offering mobile banking. Account status can be enquired just by a SMS (Short Message Service).

2.5.3 Plastic Money ATM card, Credit card, Debit Card etc Banks have installed ATM that is connected via V-SAT. The customer can perform following operation through ATM cash withdrawal, balance enquiry, mini statement of previous transactions (last 5 to 10 transactions), order cheque books, deposit cash and obtain product information. Nowadays banks are offering value added services too, through ATMs.

Punjab National Bank (PNB) is offering recharge of prepaid mobile card. Often these banks tie with other banks to use their ATM like:1. HDFC and SBI; 13

2. PNB, UTI and Global Trust Bank.

In this manner, the banks increase their 'Point of Cash Delivery'. have are becoming preferred medium of payment. channels for bank customers.

Apart from this credit, debit card

Thus technology has created various delivery

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2.6 Role of IT in banking

The use of information technology in banking is now inherent in banking industry. A customer can log on banks website and access his account. He can perform following functions online: Balance enquiry, Transfer of funds and online payment. A survey done by Booz and Allan has revealed that internet is the most economical way of banking. Internet banking can be categorized in following stages: 1. Information Kiosks -: Traditional information on banking products and services are available on the website of the bank. 2. Basic I-Banking -: Here, bank sets up infrastructure for internet banking and for accessing basic services like opening an account, paying utility bills and checking the balance. 3. Virtual medium -: Here internet is taken as an official medium for financial transactions. Buying and selling activities can be undertaken through banks payment gateway technology.

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2.7 Challenges in Internet Banking

Internet banking in India is in its earliest stage of development. Most of them are offering basic services only. Limited no. of banks are offering full services and of these most are private banks with HDFC and ICICI leading the market. The deregulation of banking industry coupled with the emergence of new banking technologies is enabling new competitors to enter the financial services market quickly and efficiently.

Indian internet banking faces following challenges: Proper understanding of the customer - i.e. proper identification of their needs and wants. For this a massive survey must be undertaken may be in collaboration with other banks. There is need for transparency in offering services as customers awareness has grown considerably. Breach of privacy: online transactions enter straightaway into the records revealing the identity of customer. Thus black money cannot be transferred with ease. Bandwidth: Though companies claim to offer good speed and high bandwidth, still there are problems in accessing high speed on net. Internet banking can go high only on the wings of proper infrastructure comprising telecommunications and bandwidth. Computer literacy in India is still very low and that is a barrier in fast acceptance of Internet banking. The mindset of the Indian customer needs to be changed. Customer has to be protected against being "net-jacked" i.e. he needs to be protected from fraud. Threats can be Cracking login and passwords is a common way of fiddling with the data. Denial of services: Directing millions of queries can block computer network.

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2.8 Growth in Internet Banking

Numerous factors including competitive cost, customer service, and Demographic considerations are motivating banks to evaluate their technology and assess their electronic commerce and Internet banking strategies. Many researchers expect rapid growth in customers using online Banking products and services. The challenge for national banks is to make sure the savings from Internet banking technology more than offset the costs and risks associated with conducting business in cyberspace. Marketing strategies will vary as national banks seek to expand their markets and employ lower cost delivery channels. Examiners will need to understand the strategies used and technologies employed on a bank-by-bank basis to assess the risk. Evaluating a banks data on the use of their Web sites, may help examiners determine the banks strategic objectives, how well the bank is meeting its Internet banking product plan, and whether the business is expected to be profitable. Some of the market factors that may drive a banks strategy include the following-: 2.8.1 Competition Studies show that competitive pressure is the chief driving force behind increasing use of Internet banking technology, ranking ahead of cost reduction and revenue enhancement, in second and third place respectively. Banks see Internet banking as a way to keep existing customers and attract new ones to the bank.

2.8.2 Cost Efficiencies National banks can deliver banking services on the Internet at transaction costs far lower than traditional brick-and-mortar branches. The actual costs to execute a transaction will vary depending on the delivery channel used. For example, according to Booz, Allen & Hamilton, as of mid- 1999, the cost to deliver manual transactions at a branch was typically more than a dollar, ATM and call center transactions cost

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about 25 cents, and Internet transactions cost about a penny. These costs are expected to continue to decline. National banks have significant reasons to develop the technologies that will help them deliver banking products and services by the most cost-effective channels. Many bankers believe that shifting only a small portion of the estimated 19-billion payments mailed annually in the U.S. to electronic delivery channels could save banks and other businesses substantial sums of money. However, national banks should use care in making product decisions. Management should include in their decision making the development and ongoing costs associated with a new product or service, including the technology, marketing, maintenance, and customer support functions. This will help management exercise due diligence, make more informed decisions, and measure the success of their business venture.

2.8.3 Geographical Reach Internet banking allows expanded customer contact through increased geographical reach and lower cost delivery channels. In fact some banks are doing business exclusively via the Internet they do not have traditional banking offices and only reach their customers online. Other financial institutions are using the Internet as an alternative delivery channel to reach existing customers and attract new customers.

2.8.4 Branding Relationship building is a strategic priority for many national banks. Internet banking technology and products can provide a means for national banks to develop and maintain an ongoing relationship with their customers by offering easy access to a broad array of products and services. By capitalizing on brand identification and by providing a broad array of financial services, banks hope to build customer loyalty, cross-sell, and enhance repeat business. 2.8.5 Customer Demographics 18

Internet banking allows national banks to offer a wide array of options to their banking customers. Some customers will rely on traditional branches to conduct their banking business. For many, this is the most comfortable way for them to transact their banking business. Those customers place a premium on person-to-person contact. Other customers are early adopters of new technologies that arrive in the marketplace. These customers were the first to obtain PCs and the first to employ them in conducting their banking business. The demographics of banking customers will continue to change. The challenge to national banks is to understand their customer base and find the right mix of delivery channels to deliver products and services profitably to their various market segments.

2.9 Types of Internet Banking

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Understanding the various types of Internet banking products will help examiners assess the risks involved. Currently, the following three basic kinds of Internet banking are being employed in the marketplace:

2.9.1 Informational This is the basic level of Internet banking. Typically, the bank has marketing information about the banks products and services on a stand-alone server. The risk is relatively low, as informational systems typically have no path between the server and the banks internal network. This level of Internet banking can be provided by the bank or outsourced. While the risk to a bank is relatively low, the server or Web site may be vulnerable to alteration. Appropriate controls therefore must be in place to prevent unauthorized alterations to the banks server or Web site.

2.9.2 Communicative This type of Internet banking system allows some interaction between the banks systems and the customer. The interaction may be limited to electronic mail, account inquiry, loan applications, or static file updates (name and address changes). Because these servers may have a path to the banks internal networks, the risk is higher with this configuration than with informational systems. Appropriate controls need to be in place to prevent, monitor, and alert management of any unauthorized attempt to access the banks internal networks and computer systems. Virus controls also become much more critical in this environment. some interaction between the banks systems and the customer. The interaction may be limited to electronic mail, account inquiry, loan applications, or static file updates (name and address changes). Because these servers may have a path to the banks internal networks, the risk is higher with this configuration than with informational systems.

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Appropriate controls need to be in place to prevent, monitor, and alert management of any unauthorized attempt to access the banks internal networks and computer systems. Virus controls also become much more critical in this environment.

2.9.3 Transactional This level of Internet banking allows customers to execute transactions. Since a path typically exists between the server and the banks or outsourcers internal network, this is the highest risk architecture and must have the strongest controls. Customer transactions can include accessing accounts, paying bills, transferring funds, etc.

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2.10 Overall Description of Internet banking

The following sections describe the general factors that affect the product and its requirements. Customer must have a valid User Id and password to login to the system. After the valid user logs in he is shown the list of accounts he has with the bank. On selecting the desired account he is taken to a page which shows the present balance in that particular account number, user can request details of the last nnumber of transactions he has performed. User can make a funds transfer to another account in the same bank. User is provided with a transaction password which is different from the login password.

User can transfer funds from his account to any other account with this bank. If the transaction is successful a notification should appear to the customer, in case it is unsuccessful, a proper message should be given to the customer as to why it failed. User can request for cheque book/change of address/stop payment of cheque. User can view his monthly as well as annual statements. He can also take print out of the same. Appropriate help is provided as and when requested by the user.

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2.11 Users of the system (e- banking)

In this online internet banking system, the users are-: Administrator He is the super user responsible for managing system users, taking system backup, generating reports, maintaining organization details, Starting Sessions and ending Sessions and also manages various requests from different Types of users. Providing User Name, Password and other information required for the users to start an account. Starting Sessions: The Administrator creates the system users and will be assigned with the different roles. He is also responsible to start the session when a particular user wants to use the system every time. (It is automatically managed setup). Managing Data Backup: The Administrator is responsible for managing entire details by taking the backup periodically. He also takes the Backup of the database in order to prevent loss of data on system crashes or in order to prevent malfunctioning. He can take a backup of entire database or a particular section. Crash Recovery: The Administrator manages the crash recovery at the time of system crash or failure occurs. Ending session: The administrator is responsible for ending the session when the particular user logged out of the system(It is automatically managed setup).

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Customer (Normal/others) Ordinary customers have a user name & password with which they can login intotheir account. They can perform all the transactions such as funds transfer, balance enquiry, cheque book request, etc by sitting at their home on internet. Login: User can login to the system by providing appropriate username and password provided by the administrator. Selecting the Account: After logging in the user is provided with a screen showing the details of accounts and he selects one of the accounts in order to perform the transaction. Balance Enquiry: He can view the balance left in his account, if once he has entered into his account. Funds Transfer: Upon the request the user can transfer funds from his account to other accounts. Request for cheque book: He can request for cheque book. Mini statements: He also can take a mini statement print out upon his requirement.

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Corporate The corporate users include Industrialists, Entrepreneur, Organizations and Academicians etc. They have a corporate id along with username & password. The organization will have an administrator to maintain all the details of their employees. He deposits salaries of the employees into the accounts of the corresponding employees. These employees can perform all the transactions that ordinary customer does. Login: Corporate can login to the system by providing appropriate username, password and along with Corporate-ID provided by the administrator. Selecting the Account: After logging in the user is provided with a screen showing the details of accounts and he selects one of the accounts in order to perform the transaction. Balance Enquiry: He can view the balance left in his account, if once he has entered into his account. Funds Transfer: Upon the request the user can transfer funds from his account to other accounts. Request for cheque book : He can request for cheque book. Mini statements: He also can take a mini statement print out upon his requirement. Internal administrator: Every corporation will be having its own internal administrator who is responsible for maintaining details of their employees, deposits salaries of the employees into their accounts.

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2.12 Factors affecting adoption of Internet banking

Table 2 Factors Rotated Factor % of Variance Loading Accessibility Internet Access Internet Connection speed Reluctance Willingness to adopt technology enhancement. Level of awareness of current trends. Attitude towards change Costs Cost of Computers Cost of Internet connection Trust in One's Bank Banks reliability in correcting erroneous transactions. Trust in the bank to compensate for losses due to security infringements. Banks response rate to queries. Security Concerns Clear and understandable instructions Security of Internet transaction Length of Internet experience Convenience Time saving Convenient way of doing bank transactions
Ease of Use

13.35 0.809 0.730 12.96 0.859 0.782 0.617 12.86 0.873 0.870 11.08 0.831

0.772 0.618 10.42 0.888 0.677 0.608

9.90 0.911 0.795 8.38 0.739 0.608

Ease of performing Internet banking transaction Ease of Navigation in the banks site 26

Thus the pertinent factors which seem to affect the adoption of Internet bank can be summarised as Internet accessibility, reluctance to change, cost of computers and Internet access, trust in one's bank, security concerns, convenience and ease of use. It is however, interesting to note that awareness of Internet banking products and services did not seem to affect the adoption of Internet banking services. This may be due to the fact these respondents being Internet users are probably already quite aware of Internet banking services. Finally, the seven factors accounted for about 78% of the total variance.

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2.13 Future of Internet banking

2.13.1 The impact of E-transaction and authentication issues in banking It's hardly great news that there has been tremendous growth in the use of the Internet and other electronic facilities to process financial transactions. According to the Federal Deposit Insurance Corp., transactional Web sites have more than doubled each year for the past six years, growing from one in 1995 to nearly 2,500 in 2000. This growth is a reflection of the fact that over the past few years, financial leaders have been considering various ways in which to allow their customers to transact business using the Internet. This objective is now reaching beyond the financial services industry into non-electronic business segments, such as the building supply industry. Furthermore, this growth is likely to continue to climb as the number of Internet users, Internet connection speed, and the number of transactional Web sites continues to increase. The number of adults using PC banking is also growing. With this growth, there is an increased awareness of the benefits of using online transaction processing, thereby fueling the thought that all business should be electronically facilitated. Gartner predicts that worldwide business-to-business (B2B) e-commerce will total $3.6 trillion by 2003 and $8.5 trillion in 2005. Online financial activity had a slower start, but has had steady growth, from 6 million users in 1998 to 27.5 million users in 2000. During 2000, only 30 percent of the Internet-capable households were using some form of Internet banking, indicating that there is tremendous room for increased use.

2.13.2 The e-Commerce Value Chain Consider that the consumer and the merchant are on either ends of the electronic commerce value chain, with the authentication network and transaction processor (bank) in the middle. Banks have traditionally been the trusted agents, have the largest customer base, and have received the initial benefits from electronic commerce. Value has begun a steady migration to the ends of the value chain. Customers can 28

receive and pay bills from one point using products from multiple issuers. Merchants can influence and enhance the consumer experience by providing innovative and time-saving means of doing business. Merchants can add value to the payment process, for example, by offering discounted prices for electronic payment. Merchants can also reduce their costs by receiving electronic payments, which results in reducing and sometimes eliminating the need for data entry, as well as reducing the error rate and the time to investigate and correct the data. By increasing and effectively managing cash flow, merchants may also be able to reduce costs associated with lines of credit.

2.13.3 Trends in the Use of Electronic Transactions Financial institutions are developing new means of processing their current transaction base. Two traditional areas of service have been check processing and lockbox services. These areas are also undergoing transformation to electronic processing functionality.

2.13.4 Cheque Truncation Almost every individual and business has used, and possibly still uses, checks to initiate payment for goods or services. A trend currently in development is called check truncation. In this payment processing method, a payment starts as a check and ends up as an electronic payment transaction. These transaction services operate as follows: At the point of sale (POS), the merchant's clerk rings the sale and swipes the customer's check in a magnetic ink code reader (MICR). The MICR information and the related transaction (sale) information are transmitted to a site where the MICR information is converted into electronic transaction format. A request is sent to the paying bank for verification, and an approval transaction is returned from the bank to the store POS system. 29

 The customer signs the authorization document, and the clerk voids and returns the customers check.

2.13.5 Lockbox Truncation Many businesses contract with banks and other financial institutions to provide lockbox services. These services provide a central collection point and faster processing for payments. Lockbox truncation works as follows: The billing merchant or service provider notifies the customer of the truncation service and obtains authorization for use. The customer mails the check payment to the vendor. The vendor captures the cheque and other information from the MICR line on the cheque Vendor truncates the check (using the service described with POS systems) and transmits payment as an automated clearinghouse (ACH) debit transaction. The entry flows through the ACH network and is posted to the customer account. These types of services enable the financial institutions to electronically process traditionally generated transactions, thus speeding up payment.

2.13.6 Certifications Financial institutions may wish to provide some increased level of assurance that the information contained on their Web sites is protected from unauthorized use or loss due to unforeseen circumstances. An independent review of management's assertions related to these areas may provide customers with that desired level of assurance. Many organizations are obtaining these reviews from certified public accountants and other consulting organizations. The resulting certification is often evidenced by a seal that is placed on the financial institution or merchant Web site which, when accessed, indicates the assertions made, the process followed for the certification, and qualification information about the certification issuing firm. 30

2.13.7 E- Transaction Authentication Issues Transaction authentication has been a topic of discussion since early in the evolution of e-commerce. Use of digital signatures is becoming widely accepted and has attracted the attention of legislators.

2.13.8 Digital Signatures On October 1, 2000, the Electronic Signatures in National and Global Commerce Act was signed. This act states that an agreement, contract, or transaction signed electronically is enforceable in a court of law. Accordingly, financial services institutions can now legally transact business using electronic signatures, allowing transactions such as mortgages, funds transfers, opening and closing of accounts, benefits enrollment, and beneficiary designations to occur in an electronic environment. The law defines an electronic signature as "an electronic sound, symbol, or process attached to or logically associated with a contract or other record and executed or adopted by a person with the intent to sign the record." Fortunately, the legislation does not attempt to define acceptable technologies except to indicate that the technologies must be mutually acceptable to the transacting parties. Since a valid signature can be as simple as a digital image of a signature (enabled through an electronic pen and pad) or as complex as today's public key infrastructure (PKI) and associated encryption methods, the technology decision maker must define relevant business objectives and understand the risks, such as cost and unauthorized use associated with alternative implementations. There are possible additional benefits to the implementing organization. These include reduced transaction timelines, reduction in paper processing costs, facilitation of customer migration to the Internet as a business channel, and increased online transaction security. When compared to physical signatures, e-signature technologies are, in general, a more secure authentication method. Many financial institutions are studying the possible implementation of a public

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key infrastructure (PKI) system that will allow them to exchange electronic information securely with unknown parties. PKI is the delivery channel for public key cryptography, a method that allows the parties to a transaction to keep a communication private through the use of a two-part key made up of public and private components. To encrypt messages, the published public keys of the recipients are used. To decrypt the messages, the recipients use their unpublished private keys, known only to them. Quite simply, if the signer's private key is not compromised, which can happen by releasing the password or allowing access to the device containing the private key, a document cannot be digitally signed.

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2.14 Use of Latest trends by banking institutions

2.14.1 Financial liberalization Financial liberalization leads to the rise of non banks like finance companies, mutual funds, investment banks, insurance companies and even non-financial firms as purveyors of liquidity and risk management services. Disintermediation erodes banks' share and role because banks evolved within a culture of very cautions credit risk-taking. This culture has been encouraged or even demanded by regulators for which banks have erected expensive credit, audit and risk management departments. The rise of secondary markets for bank loans not only helps satisfy the liquidity needs of non-traditional investors but also conscripts banks' role. Globalisation is a result of liberalization and disintermediation. It encourages consolidation and concentration within the industry. Mergers and acquisitions will be anointed on the industry and a large number of small banks disappear into a small number of large banks. Technological innovation has rendered "information" as a serious input in the financial services industry. Home banking, banking by e-mail, the rise of electronic money, the increased use of electronic highway, etc., though remain unmatched by non bank competition, and have to become banks' forte for survival. In the late 1990s, the plastic cards market in India, comprising credit cards, smart cards, debit cards, charge cards, stored value cards and others picked up momentum like never before, growing at an annual rate of 25%. Though initially, there were only two players, (HDFC and Citibank), the debit card market base grew considerably through 1999 and reached the 3 million mark in March 2000). The usage figures indicated a very healthy growth of the market in future, as seven out of 10 cardholders were reportedly using their card regularly. The annual spending through debit cards in India reached over Rs.5 billion. The growth of debit cards was all the more impressive considering the fact that credit cards, introduced in the country in the early 1980s, had managed to reach the 100 million-user base level only in 2000. Thus, the 33

debit card user base had reached one-third of the credit card user base in just around one - tenth of the time.

The global card market is dominated by two US-based players, Visa and Master Card. Visa introduced its first credit card, Bank of America card in 1958, which went on to become a great success, acquiring universal merchant acceptance. Visa's card base increased significantly through the decades and reached the one billion mark in 2000. MasterCard International was established in the 1970s. The first MasterCard was issued in 1988, in Soviet Union. By 2000, MasterCard was issued in 1988, in Soviet Union. By 2000, Master Card had over 30 offices around the world in various countries like India, Thailand, Chile, US, China, Europe, South Korea, Taiwan and others. In the 1990s, having covered a majority of US and European markets, Master Card and Visa shifted their focus to the East, especially the Asia Pacific region. By 2000, MasterCard and Visa had established their debit cards as well in the Asia Pacific region. In 2000, Visa debit cards reached the 48 million mark in the Asia Pacific region, while the MasterCard debit card base touched the 37 million mark. MasterCard's credit card base touched 80 million during the period.

Credit cards are electronic cards that enable the holders to pay for their purchases without physically carrying cash. The issuer of the cards gives a short-term loan to the cardholders, enabling them to make purchases and pay for them later, by giving them an interest free credit period of 30 to 50 days. Credit cards bear many numbers that stand for different features. Usually, the first digit in the credit card number denotes the card system it uses, for example, the digit 3 stands for travel / entertainment cards, 4 for Visa cards and 5 for Master Card. The structure of the card number differs with the card system. For example Diners Club card numbers start with 38 and American Express card numbers with 37. For American Express, digits three and four signify card type and currency, five to eleven, the account number, twelve to fourteen, the card number in the account and fifteen, the check digit. Similarly for 34

Visa, digits two to six denote the bank code, seven to twelve, the account number and thirteen to sixteen, a check digit.

The reverse side of the credit card carries the magnetic stripe, also known as a magnetic stripe. The magnetic stripe is built from minute iron-based magnetic particles embedded in a plastic like film. Each particle is a bar magnet, about 20 millionths of an inch in size. The tiny bar magnets can be magnetized in both the north and south directions, which enables writing of the stripe. The stripe contains three tracks, each track one-tenth of an inch wide. The ISO / IEC standard 7811 is the typical magnetic stripe technology used by the banks. Generally, credit cards only use tracks one and two. The third track is a read / write track that includes the encrypted Personal Identification Number (PIN), currency units, country code and the amount authorized. This third track is used less as its usage is not standardized among banks.

2.14.2 Debit Cards Debit Cards, also called `check cards', appear similar to an ATM or a credit card. Though debit card serves the same purpose as a credit card, unlike a credit card, it does not offer any credit facility, but entails a debit to the holder's bank account every time it is used. In other words, the debit card works like a cheque book, giving the holder access to his bank account at all hours. It makes sure the holder spends only the balance available in his account and also keeps track of his purchases.

There are two types of debit cards - direct debit cards (on-line debit cards) and deferred debit cards (offline debit cards). In the case of direct debit cards, the money is electronically transferred from the cardholder's account to the merchant's account, on entry to the holder's PIN in the store's terminal. In the case of deferred debit cards, the transaction gets recorded in the merchant's terminal and is executed in two-three days following the actual transaction. Currently, only direct debit cards are in use in India. 35

The debit card design is similar to that of any credit card or an ATM card and follows the same process of authentication. A typical debit card transaction includes the following steps. When the card is presented for payment at the payment counter, it is swiped through the reader. The card gets connected to the cardholder's bank account and the holder is required to enter his ATM PIN to forward the transaction. The bank debits the cardholder's account with the value of the goods or services purchased, fee, charges cash and other payments made by the cardholder through the card. The transactions appear in the account statement of the accounts related to the card.

Citibank and HSBC were the pioneers in the Indian credit card market in the 1980s. Over the next two decades, the number of players increased to more than ten in 2000. The credit card market registered a healthy annual growth rate of over 25% during 1987 - 2001. Besides Citibank and HSBC, the other leading players in the market were SBI, ICICI, Bank of India and Standard Chartered Bank. A wide variety of cards were introduced in the market during this period ranging from gold, silver and smart to global, affinity to secure cards.

The credit card issuers principally targeted the uppers and middle classes. However, while the middle class population was around 300 million in 2001, the total credit card users amounted to only over 10 million. Identifying the vast potential for growth in the middle class segment, many players entered the fray. This intensified the competition, and forced the players to enhance their product and service offerings (through co-branded cards), enhance their card technologies, expand their reach through increased number of card operating outlets and extend the card facilities to smaller cities, apart from the metros and tourist centers. 2.14.3 Smart cards

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Smart cards were first introduced in France in 1984. A Smart card is a credit card sized plastic card containing an integrated circuit chip, with memory capacity and high computing ability. In a smart card permanent data is stored in non-volatile memory and to an extent into volatile memory. Smart card's self-containment enables it to work independent of other external resources, thus offering high security protection and authentication. The smart card serves many purposes - it can serve as an identity card for a cardholder, a medical card that contains the medical history of the holder and as a credit card / debit card, facilitating off-line transactions. In future single card, with the help of a multi-functional smart card, is expected to replace the conventional magnetic strip card. The single card is referred to as an electronic purse or a wallet. The smart card principally contains a plastic card that has an integrated circuit and a printed circuit. The principal ability of the smart card lies in its circuit chip (made of silicon), which includes a microprocessor, non static random access memory (RAM) and read only memory (ROM) and electrically erasable programmable read only memory (EEPROM). The EEPROM works even in the absence of power. The smart card is programmed to ask for user authentication before it provides access to the data. The working of the smart card involves many aspects of encryption, along with the authentication process similar to the credit cards. The microprocessor embedded in the card and the encryption technology help in the functioning of the card. The transaction in which a smart card is used involves the following steps: The cardholder has to establish his identify every time a transaction is made. For identity verification, the card and the card reader exchange a sequence of encrypted signs / countersigns to confirm the identity. After the identity has been verified, the transaction is executed in encrypted form to prevent discrepancies or fraud. Major advantages provided by the smart card technology as compared to magnetic-stripe technology include : 37

Enhanced security that makes it impossible to tamper with the data on the card, and the capability of the card to verify the authenticity of the cardholders.

Higher storage capacity than cards using traditional magnetic - stripe technology. Ability to the card to divide storage area and apply separate security to each area. Services as a multiple purpose card and connect the cardholder with various service-providers.

2.15 Government reforms in respect to Internet banking

Financial Sector Reform

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The central regulator took a series of steps over the last few years, including adopting international accounting standards, strengthening the financial system and improving supervision and governance. In a bid to promote India as a regional financial centre, `special licenses or `restricted licenses' were permitted. These licenses attempted to move away from the one-size-fits-all banking license towards offering licenses to carry out specific activities such as investment banking, debt restructuring, offshore banking and credit card issuance. This enabled banks and non-banks to build a portfolio of activities around their competence and choice rather than attempt broad market participation, as was the case before.

Raising the Sustenance Barrier Strong prudential and supervisory norms along with new Basel Committee guidelines required many Indian Banks to bring in additional capital, and conform to rising regulatory standards. Through a series of market driven actions and regulator interventions, the banks had to merge, reduce scope and scale of operations or transform themselves to adopt new roles.

Government Divestment The government's decision to divest its stake in most public sector banks (PSBS), either through the capital markets or through strategic sales, forced most public sector banks to develop a business case for their existence. Some PSBs had foreseen the impending changes and had taken initiatives to build upon their core strengths of reach and a large customer base. They invested in technology and changed the way they were doing business to emerge stronger and more efficient. A few PSBs that had not reacted quickly to these changes, found business unsustainable and had to divest operations i.e., branches and portfolios selectively, or in some cases, merged their operations with stronger banks.

Globalisation 39

Implementation of the WTO accord and the subsequent liberalization of rules for foreign banks have had a significant impact on the banking sector. Although not too many new banks entered the market, the existing foreign banks grew bigger by purchasing market share wherever they perceived value. The new banks were mostly specialists, which focused on particular segments using special licenses as their entry vehicles. Some foreign banks exited India as part of their global rationalization and decision to concentrate on their core competence or local markets.

Co-operative Ban Reform A series of scams and the subsequent erosion of public confidence, a few years ago, affected the cooperative banking sector. Relief came when the government enacted the `Demutualization of Cooperatives Act'. Financial incentives were given to banks that converted their ownership structure into a limited company structure. Some cooperative banks were forced to close down while others were taken over by more efficient banks.

The new financial landscape has been a key impetus for banks to start looking at new business models to survive. Over the last few years, the increasing need to enhance fee-based income, improve quality of service and reduce cost of operations has forced most banks to rethink their business models. They have had to focus on core competence, collaborate with other players to offer products and services to customers and partner with a new breed of service providers to perform non-core activities ranging from processing to technology management.

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Chapter 3 Summary and Conclusion 3.1 Results of the study

With the help of this study we could spread awareness about Internet banking. With the increasing trends people are adopting Internet banking rapidly. As this provides the people with several services while sitting at their places or anywhere in the world. With the help of Internet banking people not only can access their bank accounts but they can also avail other services like online payments, online shopping etc.

E-commerce has been the key trend of business in the past decade. The importance of e-commerce has also grown to a level that every company is looking at the possibilities, associated cost, and implications.

In the banking industry, customers are characterized by increasingly empowered and financially literate consumers (). Hence relationship marketing has been the key focus in all-banking industries. mentioned that of the many different factors influencing strategies of banks and there is two main strategic forces, deregulation and information technology, where the information technology affects the bank activities to a level of changing the whole strategic plan of individual banks.

Presently, there are a lot of changes already occurring within the industry such as escalating competition, changing consumer behaviors and needs, globalization, deregulation, and the emergence of new financial services models. In general, customers are increasingly interacting through remote technological channels, such as the telephone and/or the Internet and how to maintain customer relationships are potentially of key importance for retail banking. This study showed that Internet accessibility, awareness, attitude towards change, computer and Internet access costs, trust in one's bank, security concerns, ease of use and convenience are the major factors 41

affecting the adoption of Internet bank services in Malaysia. The factors identified are in line with findings reported in previous studies mentioned earlier in the paper.

Evidence also indicates that there are greater promotional efforts on the part of banks to create greater awareness of Internet banking and its benefits is important for the success of Internet banking services patronage. The level of such promotional activities at present is not surprising considering the fact that Internet banking is only slightly over six months old in Malaysia and only four out of the ten main banking groups are currently offering this service.

The demographic differences between Internet bank users and the non-users were not very evident in this study, particularly with reference to age and educational background. This may be due to the fact that the sample respondents were basically already Internet users and thus they would have some similar characteristics. However, in view of the security concerns and the risk involved in Internet banking transactions, the more affluent members of the sample appear to have a greater inclination towards Internet banking. Furthermore the fact that 20 percent of the sample respondents had already adopted Internet banking services is encouraging and is indicative of a bright future for Internet banking in Malaysia. .

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3.2 Limitations
Identity Confirmation Federal regulations require that financial institutions confirm each customer's identity. This may present a logistical issue, as copying and faxing documents is sometimes necessary.

Security Concerns With hacking and identity theft on the rise, Internet banking customers have to place a certain amount of trust in the bank that their account information and personal information are safe.

Customer Service If you bank at a traditional bank, you can go to the bank and speak to someone face to face about your problem but, with an Internet bank, you will likely spend a lot of time on the phone being passed around and placed on hold.

Accessibility If the Internet goes down in your area or the area of the banking office, you will be unable to access your accounts. This includes being unable to withdraw money from ATMs or to use your debit card.

Fees Many Internet banks don't have ATMs, which means you will have to pay ATM fees. This can cost you more money than paying the regular monthly fees at a brick and mortar bank.

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3.3 Suggestions and recommendations

The reason that not many people have started using Internet banking is because they do not trust the services of the bank through the net. Some human beings prefer to trust others like them and may have some difficulty in trusting a machine, especially in the matters of money. They may always have a doubt about whether their money is safe, while being processed through Internet banking. .

In addition to this, a few cases of forgery have been reported in online banking. There are some frauds or proxy websites, which can hack information (user name and password), entered by a person for some transaction, and later misuse it. In such cases, people lose their money without knowing and by the time, they get the bill, huge loses may have been incurred. .

Another reason is that it may take some time, to get the Internet account started, as it requires a lot of paper work. Some people avoid using Internet banking services because they find it difficult to understand how it works. Also, the fact that a wrong click can cause monetary losses may be a deterrent. Internet banking can also pose a problem, if the network is down in one's area. This may cause difficulty, if the person has to do an important transaction. .

One very common disadvantage of online banking is when a person has some problem or query. In a normal bank, if one faces some problem, one can go to some employee of the bank to solve it. However, in the case of Internet banking, one will find oneself making endless calls to the customer service department. There have been cases, where the person is put on hold or has been passed around from one person to another. Although, Internet banking has certain disadvantages, one can avail of its customer-friendly services, if one is a little careful. One should never give away one's password to any unknown person and to make the experience of Internet banking a smooth process, one must use sites that are familiar and reliable.

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