L1 Retail Banking v1.1

L1 Course in Retail Banking
(Liability Products, CRM, Channels & Limited coverage of Asset Products)
Version : 1.1
Date : 28- July - 2009
Cognizant Technology Solutions

500 Glenpointe Centre West
Teaneck, NJ 07666
Ph: 201-801-0233
www.cognizant.com
Introduction to Retail Banking
TABLE OF CONTENTS
1. INTRODUCTION .................................................................................................................. 5
1.1. SCOPE & PURPOSE ...................................................................................................................... 5
1.2. ASSETS & LIABILITIES – AN INTRODUCTION ......................................................................................... 5
1.3. RETAIL BANKING ......................................................................................................................... 6
1.4. RETAIL BANKING MARKET .............................................................................................................. 7
1.5. BANKING REGULATION AND KEY REGULATORY BODIES.......................................................................... 11
1.6. SOME U.S. RETAIL BANKING REGULATIONS:...................................................................................... 14
1.7. REGULATORY SCENARIO IN THE UNITED KINGDOM .............................................................................. 16
1.8. EUROPEAN UNION BANKING REGULATIONS....................................................................................... 16
1.9. TYPES OF GLOBAL BANKING INSTITUTIONS ......................................................................................... 17
2. RETAIL BANKING PRODUCTS & INSTRUMENTS ........................................................ 21
2.1. GENERIC FEATURES & FACILITIES .................................................................................................... 21
2.2. RETAIL BANKING LIABILITY PRODUCTS .............................................................................................. 23
2.3. RETAIL BANKING ASSET PRODUCTS – SOME CONCEPTS ......................................................................... 29
2.4. CREDIT MONITORING ................................................................................................................. 30
2.5. INVESTMENT PRODUCTS .............................................................................................................. 31
2.6. RETAIL BANKING PAYMENT INSTRUMENTS ........................................................................................ 32
2.6.2. CHECK CLEARING AND PROCESSING ................................................................................................ 34
2.6.3. ITEM/RETURNS PROCESSING ....................................................................................................... 34
2.6.3.3. REJECTED / RETURN ITEMS ..................................................................................................... 36
2.6.3.4. CHECK CLEARING ................................................................................................................. 36
2.6.3.5. CORRESPONDENT BANKS........................................................................................................ 37
2.6.3.6. THE FEDERAL RESERVE’S CHECK COLLECTION NETWORK .................................................................. 37
2.6.3.7. CLEARING HOUSE ................................................................................................................ 37
2.6.3.8. ELECTRONIC CHECKS ............................................................................................................. 38
2.6.3.9. CHECK TRUNCATION ....................................................................................................... 39
2.6.3.10. AUTOMATED CLEARING HOUSE (ACH) ....................................................................................... 39
2.6.3.11. ECCHO & IMAGE EXCHANGES ................................................................................................ 40
2.7. PAYMENTS .............................................................................................................................. 44
2.7.1. FOUR-CORNER PAYMENTS MODEL ................................................................................................ 45
2.7.2. WIRES / FUND TRANSFER SERVICES ............................................................................................... 46
2.7.3. TYPES OF PAYMENTS SYSTEMS .............................................................................................. 46
2.7.3.1. BY PAYMENT INSTRUMENT: .................................................................................................... 46
2.7.3.2. BY DOMAIN: ...................................................................................................................... 47
2.7.3.3. BY VALUE: ......................................................................................................................... 47
2.7.4. PAYMENTS LANDSCAPE .............................................................................................................. 48
2.7.5. GENERIC PAYMENT FLOW....................................................................................................... 49
2.7.6. UK PAYMENT SYSTEMS – BACS (BANKS AUTOMATED CLEARING SYSTEM) ................................................ 50
2.7.7. FASTER PAYMENTS SERVICE (FPS)................................................................................................. 51
2.7.8. SOCIETY FOR WORLDWIDE INTERBANK FINANCIAL TELECOMMUNICATION (SWIFT) ..................................... 51
2.7.8.1. SEPA ............................................................................................................................... 53
2.7.9. ELECTRONIC BILL PRESENTMENT & PAYMENT (EBPP) MODELS ............................................................. 54
2.7.9.1. ALTERNATIVE PAYMENT SOLUTIONS................................................................................. 57
3. RETAIL BANKING CHANNELS ....................................................................................... 61
3.1. BRANCH BANKING ..................................................................................................................... 61
3.2. ATM BANKING:........................................................................................................................ 67
Cognizant Confidential Page 2 of 130

3.3. PHONE BANKING....................................................................................................................... 72

3.4. INTERNET BANKING.................................................................................................................... 76
3.5. MOBILE BANKING...................................................................................................................... 82
3.6. ELECTRONIC FUNDS TRANSFER AT POINT OF SALE (EFT POS) ................................................................. 85
4. FEE BASED SERVICES.................................................................................................... 87
4.1. ACCOUNT MANAGEMENT ............................................................................................................ 87
4.2. INVESTMENT ADVISORY SERVICES ................................................................................................... 89
4.3. INSTRUMENTS .......................................................................................................................... 90
4.4. MONEY TRANSFER AND PAYMENT FEES ........................................................................................... 91
4.5. SAFE BOX ............................................................................................................................... 91
4.6. UTILITY PAYMENTS .................................................................................................................... 91
5. PRODUCT MANAGEMENT & SALES .............................................................................. 92
5.1. OPERATIONAL MODEL ................................................................................................................ 92
5.2. BASIC SALES PROCESS ................................................................................................................. 95
5.3. DATABASE MARKETING ............................................................................................................... 96
5.4. DE-DUPLICATION....................................................................................................................... 97
5.5. CAMPAIGN MANAGEMENT........................................................................................................... 97
5.5.1. MULTI CHANNEL MARKETING CAMPAIGNS ...................................................................................... 97
5.6. DIRECT MARKETING ................................................................................................................... 97
5.7. TELESALES – INBOUND & OUTBOUND ............................................................................................. 98
5.8. DIRECT SELLING AGENTS (DSA) ..................................................................................................... 98
5.9. SALES FORCE AUTOMATION ......................................................................................................... 99
5.9.1. SALIENT FEATURES OF SALES FORCE AUTOMATION SYSTEM ................................................................... 99
5.10. CRM ..................................................................................................................................... 99
5.11. E-COMMERCE ........................................................................................................................ 100
6. TRENDS IN RETAIL BANKING ...................................................................................... 101
6.1. BRANCH BANKING – SERVICE TO SALES .......................................................................................... 101
6.2. CHECK IMAGING & IMAGE EXCHANGES – HOME BANKING................................................................... 101
6.3. MOBILE BANKING - INCREASED MARKET ........................................................................................ 103
6.4. SOCIAL NETWORKING & INTERNET BANKING ................................................................................... 103
6.5. WEB 2.0 .............................................................................................................................. 103
6.6. WEB ANALYTICS ..................................................................................................................... 106
6.7. INCREASED FOCUS ON THE SMALL BUSINESS MARKET.......................................................................... 107
6.8. FINANCIAL CRISIS .................................................................................................................... 107
6.9. BANCASSURANCE .................................................................................................................... 108
6.10. FINANCIAL CRIME .................................................................................................................... 109
6.11. MERGERS & ACQUISITIONS IN RETAIL BANKING................................................................................ 110
6.12. CORE RENEWAL ...................................................................................................................... 113
6.13. PHONE BANKING – VOICE BIOMETRICS .......................................................................................... 115
6.14. TECHNOLOGY MODEL OF MODERN DAY RETAIL BANKS ........................................................................ 118
7. APPENDIX ....................................................................................................................... 120
7.1. KEY TERMS USED IN RELATION TO LOAN (ASSET) PRODUCTS: ................................................................ 120
7.2. KEY BANK HOLDING COMPANIES IN THE US .................................................................................... 127
7.3. PAYMENT SYSTEMS -GLOBAL ...................................................................................................... 128
7.4. GLOSSARY ............................................................................................................................. 129
Table of Figures
Figure 1: Assets and Liabilities in Banking ............................................................................................................ 6

Figure 2: Retail Banking Structure ........................................................................................................................ 7
Figure 3: Leading Retail Banks market value 2007 v/s 2009 ($bn) ....................................................................... 8
Figure 4: Change in leading Retail Bank ranking 2008 and 2009 .......................................................................... 9
Figure 5: Retail Banking - Over all processes ...................................................................................................... 11
Figure 6: Structure of UK Financial Regulation mechanism ............................................................................... 16
Figure 7: Parameters for Credit Monitoring ....................................................................................................... 30
Figure 8: POP check conversion process ............................................................................................................ 39
Figure 9: ACH Payment process .......................................................................................................................... 40
Figure 10: Short term initiatives in BITS/ECCHO/NACHA/NOCH ........................................................................ 42
Figure 11: Opportunity and Vehicle for Transition ............................................................................................. 43
Figure 12: Average of Images received per day ................................................................................................. 43
Figure 13: Process flow diagram check processing ............................................................................................ 44
Figure 14: Four corner payment model .............................................................................................................. 45
Figure 15: Payment solutions by Value .............................................................................................................. 47
Figure 16: Payment landscape............................................................................................................................ 48
Figure 17: Generic Payment flow ....................................................................................................................... 49
Figure 18: MT103 core format............................................................................................................................ 52
Figure 19: SEPA countries ................................................................................................................................... 53
Figure 20: SEPA features .................................................................................................................................... 53
Figure 21: Sample EBPP ...................................................................................................................................... 55
Figure 22: Alternate Payments - Market Share .................................................................................................. 57
Figure 23: Sample Branch in a Bank ................................................................................................................... 62
Figure 24: New Channels .................................................................................................................................... 65
Figure 25: Transaction on self Bank ATM ........................................................................................................... 69
Figure 26: Transaction on Other bank ATM ....................................................................................................... 70
Figure 27: Phone Banking Architecture .............................................................................................................. 73
Figure 28: Phone Banking process ...................................................................................................................... 74
Figure 29: Steps involved in interaction of customer through IVR ..................................................................... 75
Figure 30: Processing cost per transaction ......................................................................................................... 77
Figure 31: Data on Online Banking adoption...................................................................................................... 78
Figure 32: Internet Banking functional model .................................................................................................... 78
Figure 33: Allocation of Benefits from Internet Banking .................................................................................... 80
Figure 34: Major entities in Mobile Banking ...................................................................................................... 83
Figure 35: Mobile Banking High Level Process ................................................................................................... 84
Figure 36: Activities in a Retail bank ................................................................................................................... 92
Figure 37: Basic Sales Process ............................................................................................................................ 95
Figure 38: Sample E-commerce - Twitter ......................................................................................................... 100
Figure 39: Branch Banking - Service to Sales .................................................................................................... 101
Figure 40: Growth in Online Commerce ........................................................................................................... 103
Figure 41: Functionalities in Web 2.0 ............................................................................................................... 104
Figure 42: Sample Blogs.................................................................................................................................... 105
Figure 43: Sample Tagging and Search Engine Marketing ................................................................................ 105
Figure 44: Sample Podcasts .............................................................................................................................. 106
Figure 45: Sample Video on Demand ............................................................................................................... 106
Figure 46: Shifts in Bancassurance Market ....................................................................................................... 109
Figure 47: M&A during 2003 - 2009 ................................................................................................................ 111
Figure 48: IVR transactions in future ................................................................................................................ 117
Figure 49: Integration Banking enterprise ........................................................................................................ 119

1. Introduction
1.1. Scope & Purpose
This document introduces the retail banking market, the regulations that shape this market, the
product offerings and the processes that support these offerings. The objective is to provide an
operational knowledge of this space that will help in working in retail banking related projects. It is
assumed that the reader would have completed the Banking L0 and takes off with that
understanding. A few concepts from the retail banking sections of the L0 are reviewed.
This L1 on Retail Banking will deal with retail liabilities products and channels. The reader is
expected to go through other L1s from Consumer Lending and Cards for those topics. For detailed
understanding of payment networks please refer to the Cards and Payment and Wholesale banking
L1s. This document has a snapshot of certain European payment networks; however there are
specialized courses on European Payments which can be used for in depth understanding.
While the emphasis is predominantly on the US market, other products, processes and regulations
have been included as per the relevance to our business.
1.2. Assets & Liabilities – An Introduction
Assets in general are those things that help an entity in generating income. For Banks, they are
those products which have potential earnings in the form of interest income. Such assets are called
loans and are held as receivables on the books of a bank as these are payable by the borrower to
the bank in a future date. These products include various kinds of loans and credit lines that a bank
offers.
Liability products are those deposits the bank has accepted from its customers and is a payable to
its customers on demand. It incurs a cost on these borrowings. Demand deposits (including savings
deposits) and Term Deposits would fall under this category, as the bank has an obligation to make a
payment back to the depositors on demand or at the end of their term as the case may be. The
diagram below shows the Assets, Liabilities and the concepts of Interest incomes and expenses.

Figure 1: Assets and Liabilities in Banking
1.3. Retail Banking
A bank is a financial institution predominantly for receiving, keeping, and lending money. Banking
can be broadly divided into Retail Banking, Corporate Banking and Investment Banking based on
the segment of customers whose needs it addresses. This was covered in detail in the BFS L0. This
document deals with the Retail customers comprising
Individuals (Consumer Banking)

Small Businesses (SME / Business Banking)
Retail banking is a typical mass-market banking where individual customers use local branches of
banks. This conventional view is changing with the rapid proliferation of channel offerings in form
of ATMs, Internet Banking, Mobile Banking etc, but the focus is on the retail consumers and mom
and pop shops and small businesses. Services offered include savings and checking accounts, CD’s,
Mortgages, personal loans, auto loans, debit cards, credit cards etc. While the individual’s
requirement from a bank would be to perform simple banking transactions like deposits &
withdrawals and safekeeping of savings (with a bit of interest income thrown in); the small business
will in addition require banking functions to handle cash, manage receipts and payments, trade
support, borrowings etc.

The picture below shows the various areas of retail banking and its relationship with other parts of
the bank:
Figure 2: Retail Banking Structure
1.4. Retail Banking Market
The global retail banking market was valued at over $3 Trillion in 2007, with the top 10 banks
representing about 19.8% of this total. The impact of the recent global financial crisis has altered
the retail banking landscape. Throughout 2008, the market lost an estimated $720bn in write-
downs and losses, leaving the size of the retail banking market at the start of 2009 reduced by 35%
to $1.3 Trillion approximately. The US subprime mortgage crisis aftermath, expansion of direct and
online banking and cross-border consolidation are the main forces affecting retail banking at
present.

Figure 3: Leading Retail Banks market value 2007 v/s 2009 ($bn)
Market Share Increases of the top ten global banks
In 2008, the leading ten retail banks worldwide held a total market share of approximately 20%.
The market size is assumed to be contracted by approximately 35%. However, the leading ten
global retail banks when ranked by total 2008 revenue actually increased their market share to
approximately 37%. This is in part due to the current instability of the retail banking sector; those
who managed to increase their revenues and ride the financial crisis have entered the top ten by
virtue of their positive strategy, and increased market share at a time when the market is rapidly
contracting.

Figure 4: Change in leading Retail Bank ranking 2008 and 2009
Comparison based on total revenue depicts an appreciable change in the world’s leading banks
between 2007 and 2009. HSBC dominates the retail banking market in 2009 when assessed by total
revenue. After a series of ruptures, Citigroup saw their total revenues fall by almost 40%, while
Wachovia filed for bankruptcy and was purchased by Wells Fargo, Societe Generale disappeared
altogether and a number of new arrivals have emerged as leading institutions. Bank of America put
in a strong performance with a year-on-year increase of 10.8%, while JP Morgan Chase and Wells
Fargo also gained little ground on their mergers with Washington Mutual and Wachovia
respectively.
Impact of Financial Crisis on Retail banking market development
The US is likely to lose its dominance of the retail banking market, while European banks
are growing in stature and are better placed to take advantage of opportunities 2009
onwards. However, concerns are rising in the UK over aggressive government intervention.
Separation of retail and investment banking activity is required to prevent a future crisis.
Reducing proprietary activities that present particularly high risks has become a key
regulatory issue for the retail banking industry.
The key challenges facing the banking industry over 2009-2010 are shortages of capital
liquidity / lack of funding, high credit costs, and global price volatility. A process of de-
leveraging in most major banks will also result in increased pressure on balance sheets.
Some of the recent proposals from Senator Dodd relating to reduction of overdraft fees is
revamping the basic fabric of depository banking services and is very much an impending
regulatory and market disruptive issue.
Smaller banks and new entrants will have a strategic advantage in the current financial
climate.
Recent data from the US suggests continued lending from smaller banks, as larger rivals
retrench.

Successful banks can use three distribution strategies to grow beyond the traditional retail banking
business model in high-income markets:
 “Better sell”, to better fit diverse clients’ needs;

 “Larger offer”, extending the offering to non-financial products and services; and
 “Indirect business”, selling through other distributors.
This makes the Retail banks of tomorrow move towards being the Trust Operator, Discount Bank,
and General Broker. Many banks even admit to having their own projects using the first two
models. Discount Bank, General Broker, and Open Source Banks are potentially the most disruptive
models in the retail banking business, because these models could cause their two worst fears to
come true—a price war and competition for client relationships.
Information Technology has a huge impact in making these models a success. It is with this
backdrop that this L1 is created, to help understand the various functions of retail banking better
so that we can be part of many bank’s transformation. We work with some of the Top retail banks
in the US, UK and APAC and have the responsibility of understanding the future vision of these
banks as they discover themselves and reinvent their offerings and processes through technology.
The retail banking practice is organized along the model of the retail banking products and
processes. This L1 is organized along this high level model of the retail banks. Some areas such as
AML, KYC which are enterprise-wide compliance are dealt with in the GRC L1s and are not covered
here.

Figure 5: Retail Banking - Over all processes
1.5. Banking Regulation and Key Regulatory Bodies
Most developed countries have a central bank whose functions are broadly similar and control the
country’s economy by providing appropriate interventions. The oldest, Sweden’s Riksbank, has
existed since 1668 and the Bank of England since 1694. Napoleon I established the Banque de
France in 1800, and the Bank of Canada began operations in 1935. The German Bundesbank was
re-established after World War II. More recently, some functions of the Banque de France and the
Bundesbank have been assumed by the European Central Bank, formed in 1998.
Regulator functions - The Central Bank
In addition to being the corporate entity with responsibility for central banking services, the Central
Bank also has extensive other functions, including following related functions:
a) Setting up and Monitoring Monetary policy operations;
b) Securing and Maintaining Financial Stability;
c) Carrying out objective Economic analysis;
d) Establishment and maintenance of Currency and Payment systems;
e) Control and Monitoring of Investment of foreign and domestic assets;

f) Granting of licenses’/permissions for banks to carry out business;

g) Supervision of banking activity and auditing the same periodically;
h) Insurance of bank deposits.
The U.S.A.
In the United States, banking is regulated at both the state and the federal level. Depending on a
banking organization's charter-type and organizational structure, it may be subject to numerous
federal and state banking regulators. The U.S. maintains separate securities, commodities, and
insurance regulatory agencies (which are separate from the bank regulatory agencies) at the
federal and state level as well.
Federal Regulatory Authorities
A bank's primary federal regulator could be the Federal Deposit Insurance Corporation (FDIC), the
Federal Reserve Board (FRB), and the Office of the Comptroller of the Currency (OCC) or the Office
of Thrift Supervision (OTS). The recent Obama regulations are contemplating merging the OCC and
the OTS. Within the Federal Reserve Board, there are 12 districts centered on 12 regional Federal
Reserve Banks, each of which carries out the Federal Reserve Board's bank regulatory
responsibilities in its respective district. Credit Unions in the United States are subject to certain
similar bank-like regulations and are supervised by the National Credit Union Administration.
State regulatory Authorities
State-chartered banks are also subject to the regulation and supervision of the state regulatory
agency of the state in which they were chartered. State regulation of state-chartered banks applies
in addition to federal regulation.
Important US Banking Regulatory Bodies
Organization/Body Description & Role
Board of Governors of the Conducts US Monetary Policy; Supervises US Banks; Provides

Federal Reserve System Central Bank’s Financial Services.
(FRB)
Federal Deposit Insurance Insures deposits, examines and supervises financial institutions,
Corporation (FDIC) and manages receiverships, by developing and implementing
sound public policies to maintain the stability and public
confidence in the nation’s financial system.
Financial Crimes Provides a government-wide multi-source financial intelligence

Enforcement Network and analysis network; Includes regulatory responsibilities for
(Office of the U.S. Treasury) administering the Bank Secrecy Act, for preventing corruption of
the U.S. financial system, broadened by The USA PATRIOT Act of
2001, post 9/11 to focus on terrorist financing as well as money
laundering.
Office of the Comptroller of Charters, regulates, and supervises all national banks and federal
the Currency (OCC) branches and agencies of foreign banks for their banking
operations, by conducting on-site.
Office of Thrift Supervision Supervises savings associations and their holding companies
(OTS) (subsidiaries), as the federal bank regulator, every 12-to-18
months, in order to maintain their safety and soundness and
compliance with consumer protection laws and regulations.
National Credit Union Acts as an independent federal agency that charters and
Association (NCUA) supervises federal credit unions and operates the National Credit
Union Share Insurance Fund (NCUSIF) insuring the savings of 80
million account holders in all federal credit unions and many
state-chartered credit unions.
Federal Financial Prescribes uniform principles, standards, and report forms for
Institutions Examination federal examination of financial institutions by the FRB, the FDIC,
Council (FFIEC) the NCUA, the OCC, and the OTS.
Securities and Exchange Protects investors, maintains fair, orderly, and efficient markets,
Commission (SEC) and facilitates capital formation that is necessary to sustain
economic growth; Oversees the key participants in the securities
world, including securities exchanges, securities brokers and
dealers, investment advisors, and mutual funds and is concerned
primarily with promoting the disclosure of important market-
related information, maintaining fair dealing, and protecting
against fraud.
U.S. House Committee on Oversees all components of the US's housing and financial
Banking and Financial services sectors including banking, insurance, real estate, public
Services and assisted housing, and securities; Ensures enforcement of
housing and consumer protection laws such as the U.S. Housing
Act, the Truth in Lending Act, the Housing and Community
Development Act, the Fair Credit Reporting Act, the Real Estate
Settlement Procedures Act, the Community Reinvestment Act, &
financial privacy laws.
U.S. Senate Committee on Its areas of jurisdiction include, but are not limited to: banking,
Banking, Housing and Urban insurance, financial markets, securities, housing, urban
development and mass transit, international trade and finance,
Affairs and economic policy
1.6. Some U.S. Retail Banking Regulations:
Regulation Name Main Purpose / Intent
Banking Act of 1933 Attempted to make banking safer and less prone to speculation, by
(Glass -Steagall) separating the activities of the banks and securities firms (i.e.
separation of commercial banking from investment banking),
introduction of the FDIC insurance and inclusion of ‘Regulation Q’,
which prohibited paying interest on commercial demand deposits and
capped the interest rate on savings deposits as a reaction to the
financial market crash of 1929.
Banking Act of 1935 Established the FDIC as a permanent agency of the government
whose key function is to provide Deposit Insurance, a measure that
promotes financial stability, implemented in many countries to
protect bank depositors, in full or in part, from losses caused by a
bank's inability to pay its debts (repay depositors) when due.
Gramm-Leach-Bliley Provided a prudential framework for the affiliation of banks,

(GLB) Act securities firms, insurance companies, and other financial service
providers to enhance competition in the financial services industry.
USA PATRIOT ACT It vests the Secretary of the Treasury with regulatory powers to
(Uniting and combat corruption of U.S. financial institutions for foreign money
Strengthening America laundering purposes, requiring that anyone who transports more
by Providing than $10,000 into or out of the US, must report that fact to the
Appropriate Tools Treasury Department and Banks to file suspicious activity reports
Required to Intercept (SARs) with the Treasury Department’s Financial Crimes Enforcement
and Obstruct Terrorism Network (FinCEN) for any transactions involving more than $5,000
Act of 2001) which they suspect may be derived from illegal activity. Anti- Money
Laundering (AML) Laws too fall under this category, aimed at
curtailing the flow of cash or other valuables derived from, or
intended to facilitate, the commission of a criminal offence. AML
systems help to keep track of basic transaction details like the
transactions amount, the cumulative amount of transfers over a
period of time, transactions following a pattern over a period of time
etc. These checks and validations are both on online real time basis
and off line mode. Know Your Customer (KYC) is the fundamental
principle of all anti-money laundering initiatives, which in financial
services translates into substantial requirements for gathering
information about and fact-checking the identity of clients when they
open an account. Such due diligence may involve performing

Regulation Name Main Purpose / Intent

internet-searches, visiting the client’s offices and obtaining
references, as well as reviewing audited financial statements and
annual reports.
Check Clearing for the Designed to foster innovation in the payments system and to enhance
21ST Century Act its efficiency by creating a new negotiable instrument called a
(CHECK21 ACT) substitute check, which would permit banks to truncate original
checks, to process check information electronically, and to deliver
substitute checks to banks that want to continue receiving paper
checks, thus aimed at reducing some of the legal impediments to
check truncation.
The Electronic Facilitates the use of electronic records and signatures in interstate
Signatures in Global & and foreign commerce by ensuring the validity and legal effect of
National Commerce contracts entered into electronically.
Act (ESIGN)
The Expedited Funds Also, known as Regulation CC, standardizes hold periods on deposits
Availability Act (EFA or made to commercial banks and to regulate institutions' use of deposit
EFAA) holds.
The Electronic Fund Also, known as Regulation E, provides a basic framework establishing
Transfer Act (EFTA) the rights, liabilities and responsibilities of participants involved in
electronic fund transfers to and from consumer asset accounts like a
checking, savings, share, or money market account.

1.7. Regulatory Scenario in the United Kingdom
The Financial Services Authority (FSA) is an independent non-governmental body, given statutory
powers by the Financial Services and Markets Act 2000. The FSA is a company limited by guarantee
and financed by the financial services industry. The major objectives of FSA are:
Promoting efficient, orderly and fair markets;
Helping retail consumers achieve a fair deal; and
Improving our business capability and effectiveness
Structure of U.K. Financial Regulation Mechanism
Department of HM (Her Majesty’s)

Trade and Industry Treasury
Financial Services
Banking Act 1987
Act 1986
Insurance Companies
Act 1982
Securities and
Bank of England
Investments Board
Personal Investments
Investment Management
Authority Retail
Regulatory Organisation
Regulator
Securities and
Futures Authority
Insurance Financial Securities

Banks Fund Managers
Companies Advisors Houses
Figure 6: Structure of UK Financial Regulation mechanism
1.8. European Union Banking Regulations
The primary objective of the ECB (expansion) is to maintain price stability within the Euro zone, or
in other words to keep inflation low. The key tasks of the ECB are to define and implement the
monetary policy for the Euro zone, to conduct foreign exchange operations, to take care of the
foreign reserves of the European System of Central Banks and promote smooth operation of the
money market infrastructure under the Target payments system. It has the exclusive right to
authorize the issuance of euro banknotes. It contributes to maintaining a stable financial system
and monitoring the banking sector.
1.9. Types of Global banking institutions
The various types of banks are explained below:
Bank Type Description

Commercial bank A bank or a division of a bank that mostly deals with
deposits and loans from corporations or large businesses
Community Banks Locally operated financial institutions that empower
employees to make local decisions to serve their
customers and the partners
Community development banks Regulated banks that provide financial services and
credit to under-served markets or populations
Savings banks associated with national postal systems
Postal savings banks
Private Banks Banks that manage the assets of high net worth
individuals
Offshore banks Banks located in jurisdictions with low taxation and
regulation. Many offshore banks are essentially private
banks
Savings bank In Europe, savings banks take their roots in the 19th or
sometimes even 18th century. Their original objective
was to provide easily accessible savings products to all
strata of the population. In some countries, savings
banks were created on public initiative; in others,
socially committed individuals created foundations to
put in place the necessary infrastructure. Nowadays,
European savings banks have kept their focus on retail
banking: payments, savings products, credits and
insurances for individuals or small and medium-sized
enterprises. Apart from this retail focus, they also differ
from commercial banks by their broadly decentralized
distribution network, providing local and regional
outreach—and by their socially responsible approach to
business and society.
Building societies and Landesbanks These are institutions created for the members of the
society. They do not look for commercial gains and are
for the purpose of making credit available to their
members at reasonable rates.
Ethical banks Banks that prioritize the transparency of all operations
and make only what they consider to be socially-
responsible investments


Islamic banks Banks that follow a system of banking or banking activity
that is consistent with the principles of Islamic law
(Sharia) and implement its practical application through
the development of Islamic economics. The peculiarity
of “Sharia” is that it prohibits the payment of fees for
the renting of money (Riba / usury - the charging of
interest on loans.) for specific terms, as well as investing
in businesses that provide goods or services considered
contrary to its principles (Haraam / forbidden - refers to
anything that is prohibited by the faith). Islamic banking
will address the same purpose as conventional banking
except that it needs to operate in accordance with the
specific set of rules of “Sharia”, known particularly as
“Fiqh al-Muamalat” (Islamic rules on transactions). The
two basic principles of Islamic banking are the sharing of
profit and loss and the prohibition of riba (usury). The
most common Islamic concepts in Banking are profit
sharing (Mudharabah), safekeeping (Wadiah), joint
venture (Musharakah), cost plus (Murabahah), and
leasing (Ijarah). One typical example of adoption of
Islamic “Sharia” principles for modern Banking Product is
the following example. Some Islamic banks, especially in
a dual-banking system like in Malaysia, have
implemented an innovative approach for home loans,
called “Musharaka al-Mutanaqisa”, which allows for a
floating rate in the form of rental. The bank and
borrower form a partnership entity, both providing
capital at an agreed percentage to purchase the
property. The partnership entity then rent out the
property to the borrower and charges the market
determined rent. The bank and the borrower will then
share the proceeds from this rent based on their mutual,
current equity share of the partnership. At the same
time, the borrower in the partnership entity also buys
the bank's share on the property at agreed installments
until the full equity is transferred to the borrower and
the partnership is ended. If default occurs, both the
bank and the borrower receive the proceeds from an
auction of the mortgaged property, based on the current
equity. This method allows for floating rates according
to current market rate such as the BLR (base lending
rate). Other Retail Banking Institutions - Credit unions,
savings and loans, mutual funds, and brokerages offer
checking and savings services similar to what retail
banks offer.
Credit Unions Credit unions are non-profit, member-owned, financial


cooperatives. They are operated entirely by and for their
members. When a customer deposits money in a credit
union, he/she becomes a member of the union because
his/her deposit is considered partial ownership to the
credit union. To join a credit union, a customer
ordinarily must belong to a participating organization,
such as a college alumni association or labor union
Co-operative Banks A co-operative bank is a financial entity which belongs to
its members, who are at the same time the owners and
the customers of their bank. Co-operative banks are
often created by persons belonging to the same local or
professional community or sharing a common interest.
Depending on countries, control and supervision can be
implemented directly by state entities or delegated to a
co-operative federation or central body. Even if their
organizational rules can vary according to their
respective national legislations, co-operative banks
share common features.
While the accounts are similar to bank accounts, the names are different:
 share draft accounts (like checking accounts),
 share accounts (like savings accounts), and
 Share certificate accounts (like certificate of deposit accounts).
For nearly all credit unions, the National Credit Union Share Insurance Fund insures most of the
deposits up to $100,000. Deposit Interest rates tend to be higher and fees tend to be lower than at
commercial banks, because they exist to serve their member-owners rather than to maximize
profits. On the downside, credit unions usually have very few branch offices and ATMs. However,
to compensate for this, in most states credit unions have formed surcharge-free ATM networks
among themselves.
Brokerage
Another substitute for a bank account is a cash-management account at a brokerage. A customer

will earn money-market rates, which will usually be significantly higher than the interest the bank
would pay.
The fees will generally be less than what the bank would charge, and the fees might be waived
entirely if the customer has a substantial portfolio at the brokerage. If the customer overdraws the
account, the interest rate will be lower than what the bank would charge, and in addition it's
usually tax-deductible because it's considered margin interest.
The customer will be able to perform all the basic banking functions, such as check writing and
using a debit card at any ATM. However, there are a few downsides. Very few brokerages have
ATM networks, so when the customer uses an ATM the customer will be charged by that ATM's
owner and possibly also by the brokerage's bank partner (if the brokerage itself isn't a bank). Also,
as with credit unions, brokerages lack some of the bells and whistles that commercial banks offer.
Some brokerages don't allow the customer to drop by a branch to deposit checks, some don't offer
automatic bill paying, and some don't accept checks written to the customer from someone else.
Mutual Funds
A final banking alternative is a money market account at a mutual fund company. They offer basic
features such as check writing, but lack a lot of the other services banks offer. The rates tend to be
significantly higher than those offered by banks. However, the accounts aren't FDIC insured against
losses.
Banks
Although banks offer a wide variety of accounts, they can be broadly divided into the following
categories:
Savings accounts
Checking accounts
Money market deposit accounts, and
Certificates of deposit accounts
All these type of accounts are insured by the FDIC (in most cases, up to $100,000 per account).
Thrift Institutions
A thrift institution (savings and loan association – S & L) is a financial institution which specializes in
accepting savings deposits and making mortgage loans. They are often mutually held (often called
mutual savings banks); meaning that the depositors and borrowers are members with voting rights
and has the ability to direct the financial and managerial goals of the organization.
It is possible for such a bank to be stock-based and even publicly traded. This means, however, that
it truly no longer is an association and depositors and borrowers no longer have any managerial
control.

2. Retail Banking Products & Instruments
Retail Banks receive money from the customers (deposits) and also lend money to the customers
(loans). The money received from the customers are kept in the bank through various types of
deposits (Liability Products) earmarked as Customer Accounts. An account is thus a bucket which
holds various cash-flows related to a customer under a particular deposit product. So a Checking
account is in effect a cash-flow aggregate for a person who has opted for a simple deposit product
on which he can place his money with the bank , enjoy none or a very small interest but can write
checks on the account balance.
The money is lent to the customers through various products like mortgages, personal loans,
student loans etc (Asset Products). This chapter covers the generic features of the product and
various products like Savings account, Checking account etc. These products differ from one
another in terms of interest rate offered by the bank and liquidity (the convenience to withdraw or
use funds in the account as and when required by the customer) and other facilities. This section of
the document covers the following portions of the retail wheel
2.1. Generic Features & facilities
Retail banking products offer some or all of the features and facilities that are detailed below.
Banks earn revenue by charging for the features and /or facilities offered in a product.
Attribute / Feature Description

Banks pay interest to depositors for placing their money in the
Interest Rate bank.
The interest rate offered will depend largely on the term of
deposit and withdrawal options.
If there is an option to withdraw funds from the account at any
time, then interest rate offered will be less
Liquidity It refers to the availability of funds or ability to withdraw funds
In certain type of accounts, Customer can withdraw funds at
anytime of the day, any amount and any number of times a day.
So, higher the liquidity, lower will be the interest rate. Broadly,
there are two variations with regard to liquidity a) funds can be
withdrawn at any time (Demand Deposits (DDA)
b) Funds are held for defined term and so funds cannot be
withdrawn within the term or can be withdrawn on severe
penalty (Term Deposits / TDA)


Minimum balance Minimum balance refers to the minimum amount that should
be maintained in the account, either on monthly or quarterly
basis. Products that stipulate higher minimum balance will pay
higher interest and /or offer more features and facilities
Overdraft Protection Overdraft protection, colloquially known as bounce protection,
is a financial service offered by banking institutions primarily in
the United States.
Overdraft protection advances money to cover a check written
on an account that does not have sufficient funds. This prevents
the check from bouncing, which in general carries negative
financial consequences in the way of large fines and reduced
spending limits
Statements Statements are provided to customers detailing all the
transactions performed in the account for a specific time
period. Banks provide statements free of cost or charge the
customer depending on the product. Statements can be issued
monthly, quarterly or in any other frequency. In case the
customer requests for a statement in between the statement
cycle, customer can be charged for such a request.
Other Facilities Checks – Instruments used to withdraw funds from the account
or to make payments. Certain product restrict the number of
checks that can be used in a period
Debit Cards / ATM Cards - Banks offer ATM card to withdraw

funds from account and also perform certain other transactions
like check deposit; balance enquiry etc through ATMs and Point
of Sales machines (PoS).
Deposit Slips – Used to make Cash and Check deposits into an

account
Wire Transfers – Payments done through electronic fund

transfers. There can be restrictions on accounts on how many
and what value of fund transfers are allowed on an account

2.2. Retail banking Liability Products
The products offered to the customers will vary between countries. However the underlying
principles remain the same. The products are mix and match of the features and facilities
mentioned above.
Demand deposits /accounts
Checking Account
Negotiable Order for Withdrawal (NOW)
Super NOW
Savings Account /Deposits
Savings Account
Money Market Deposit Accounts
Automatic Service Transfer Account
Certificate of Deposits – Term Deposit
Investment Retirement Account (IRA)

IRA
Roth IRA
Spousal IRA
Each product addresses certain requirements of customer. The detailed features of the products
are elaborated in this chapter.
There are also other variations of these products and packaged specifically to target a particular
segment. For example: the student checking account is specifically designed for students and will
have a mix and match of the above features.
Similarly Express accounts are designed for people who prefer to bank by ATM, telephone or
personal computer, this account usually boasts unlimited check writing, low minimum balance
requirements, and low or no monthly fees. However, the customer pays fees for using a teller.
These accounts are especially popular with students and younger customers who are on the go and
don't want to spend a lot of time on banking transactions. Lifeline accounts offer the basic features
of checking account with a low fee tariff structure.
2.2.1. Demand Deposits

A demand account (or demand deposit, demand deposit account) is a deposit account held at a
bank or other financial institution, the funds deposited in which are payable on demand. The
primary purpose of demand accounts is to facilitate cashless payments by means of check, bank
draft, direct debit, electronic funds transfer, etc.
A demand account is commonly known as:

a checking account (United States banks)
Saving Account (India)
a current account (United Kingdom banks and India)
a check account (New Zealand banks)
There are various flavors of demand deposits like
Standard checking accounts

Negotiable Order for Withdrawal (NOW)
Super NOW
Direct Deposit Account
2.2.2. Standard Checking Accounts
Standard Checking accounts do not pay interest, allow unrestricted liquidity and stipulates a
minimum balance. The product is used extensively by individuals and business for managing the
day to day banking operational needs like deposits, withdrawals, payments and all other
transactions. The product depending on the bank may involve account maintenance charges and
offer facilities like internet banking, check facility, statements, deposit slip etc.
2.2.3. Negotiable Order for Withdrawal (NOW)
In some cases, checking accounts may pay interest. Checking accounts that pay interest are
sometimes referred to as Negotiable Order for Withdrawal or NOW account in order to
differentiate them from the older 'standard' checking account.
2.2.4. Super NOW
Super NOW are accounts that pay higher interest rate than NOW but also stipulate a higher
minimum balance. Some banks package the product and market it to specific groups like Students,
small businesses, salaried individuals etc. Depending on the need of the specific groups, certain
features may be offered and also charged accordingly. Increasingly, products are being created
based on the channels through which the account will be operated. For example Internet based
checking account will not allow customers to walk into the branch to perform a transaction.
2.2.5. Savings Deposit / Accounts

Savings Deposits are accounts maintained by banks, savings and loan associations & credit unions.
As the name suggests, these accounts are treated as “Savings“ and hence are interest bearing
accounts. The variants of the savings product differ in interest rate, flexibility to withdraw funds
using checks etc. Some variants of savings products are:
Regular Savings Account
Money Market Savings Account
2.2.6. Regular Savings Account
In these accounts, withdrawals are allowed, but do not have the flexibility of using checks to do so.
Funds in these accounts cannot be used directly and so will have to be transferred to transactions
deposits (or checkable deposits) for performing any further transactions. Some savings accounts
have a passbook, in which transactions are logged in a small booklet that the customer keeps, while
others have a monthly or quarterly statement detailing the transactions. Some savings accounts
charge a fee, every time the customer’s balance falls below a specified minimum.
Besides the fact that the customer will be less likely to spend it, putting the money in a savings
account is safer because it is insured (up to $100,000) through the Federal Deposit Insurance
Corporation (FDIC). This means that even if the bank or credit union goes out of business (which is
not very rare!) the customer’s money will still be there.
The FDIC is an independent agency of the federal government that was created in 1933 because
thousands of banks had failed in the 1920s and early 1930s. Not a single person has lost money in a
bank or credit union that was insured by the FDIC since it was constituted.
Interest on savings accounts is usually compounded daily and paid monthly. Sometimes, but not
always, banks charge fees for having a savings account. The fee may be low -- like a dollar a month -
- or it may be higher or it could even be based on the customer’s balance. Some of the
characteristics of a savings account include:
Fees and services charges on the account

Minimum balance requirements
Interest rate paid on the balance
Periodic Statements
Each month, the bank (or credit union) sends the customer a statement of his/her account either in
the mail or by e-mail depending on the preferences. The statement will list all the transactions as
well as any fees charged to the account and interest that the money deposited in the account has
earned.
2.2.7. Money Market Deposit account
Money Market Deposit Account is a variance of the savings deposit/account. These accounts invest
the balance in short-term debt such as commercial paper, Treasury Bills, or CDs. The rates they
offer tend to be slightly higher than those on interest-bearing checking accounts, but they usually
require a higher minimum balance to start earning interest. However the interest rates will depend
on the performance of the investments made using these funds.
These accounts provide only limited check writing privileges (three transfers by check, and six total
transfers, per month), and often impose a service fee if the balance falls below a certain level.
Another difference is that, similar to a checking account, many money market accounts will let the
accountholder write up to three checks each month. Like other bank accounts, the Federal Deposit
Insurance Corporation (FDIC) insures the money in a money market account.
2.2.8. Automatic Service Transfer Account

Automatic Service Transfer Account is a variance of savings product where in funds will be
transferred from savings to checking account automatically when checks are issued on the current
account. Hence this product offers higher interest rate on the savings account and also the
flexibility like check book of the checking account.

2.2.9. Direct Deposit Account

Direct deposit is a banking option that allows for the transfer of funds without the hassle
associated with paper checks. Direct deposit is very common in the United States. In fact, research
that over 145 million Americans use direct deposit on a regular basis. Many businesses offer their
employees the option of using direct deposit to receive their paychecks. The IRS allows taxpayers
to receive refunds via direct deposit. Social Security, unemployment compensation, and other
government benefits may also be available with the direct deposit option.
The deposit of funds directly into a bank account as a form of payment. Common uses for direct
deposit include paychecks and tax refunds.
The benefits of direct deposit

There are no checks to be lost or stolen.
Payments reach your account the day the check is issued -- even if you are out of town, sick
or unable to get to your financial institution.
Many banks offer free or lower-cost checking for customers with direct deposit because it
saves them the cost of processing paper checks.
Direct deposit can help you avoid bouncing checks because the deposit is direct and on
time.
It can save you trips to the bank and help you avoid long lines at tellers or ATMs.
The federal government and many employers will deposit your check a day early if the
regular payday falls on a holiday.
2.2.10. Term Deposits

Term deposits are generally for a certain period of time and pay higher interest rate than checking
and savings account. The customer will have the option to withdraw the funds during the term of
the deposit and incase the customer chooses to withdraw the funds; the bank may pay a reduced
interest rate.
2.2.11. Certificate of Deposits

Certificate of deposit or CD is, in the United States, a time deposit, a familiar financial product,
commonly offered to consumers by banks, and credit unions. Such CDs are similar to savings
accounts in being insured by the FDIC for banks or by the NCUA for credit unions and thus virtually
risk-free; they are "money in the bank." They are different from savings accounts in that the CD has
a specific, fixed term often three months, six months, or one to five years and, usually, a fixed
interest rate. It is intended that the CD be held until maturity, at which time the money may be
withdrawn together with the accrued interest. There may be a penalty for early withdrawal, so this
type of account is generally not used if the customer thinks that money may be required before the
time period is over (the "maturity date").The interest rate is generally more when the term of the
deposit is longer and the interest rate is more than that offered for savings account.
2.2.12. Recurring Deposits
There are other types of deposit products that are offered in different markets. One such product is
recurring deposit that is not available in the US market. This product is offered in some of the
European markets like UK and in India. In this product, a certain sum of money is deposited in a

frequency, usually month, for a period of time, like a year or two, and the customer receives a total
amount including the interest at the end of the term.
2.2.13. Retirement Products
A self-directed, tax-deferred retirement investment account established by employed workers who

earn a salary, wage, or self-employment income. An IRA account can be with a bank, mutual fund,
insurance company, or another trustee.
Apart from the retirement accounts that are established by the individuals, there are retirement
plans where in both the employer and employee makes contribution. Some of the plans are 401(k),
403(b), and 457 plans.
401(k) plan is the regular corporate sponsored retirement ;
403(b) plan is a retirement plan for University, civil government, and not-for-profit employees. It
has the same characteristics and benefits of a 401(k)
457 plan is for public employees and the plan is held in trust by the State of North Carolina
The retirement plans and the IRA essentially encourage individuals to save more for life after
retirement by offering tax exceptions to these plans and accounts. Some of the retirement
accounts are explained below:
2.2.14. Traditional IRA
Deposits for traditional IRAs are tax deductible and the investment earnings in the account are not
taxable until withdrawn. Different rules apply depending on the type of IRA account. Money is
deposited before tax, money accumulates tax free on earnings until withdrawn at retirement, at
which point the money is taxed.
2.2.15. Roth IRA
A Roth IRA is an individual retirement account (IRA) in the United States that provides tax-free
growth. Money is taxed before deposit, and then accumulates tax-free on the earnings, and can be
withdrawn tax-free. As with all IRAs, there are specific eligibility and filing status requirements
required by the U.S. Internal Revenue Service. A Roth IRA's main advantage is its tax structure.
Contributions are made post-tax, but the growth is tax free and does not require individuals to pay
taxes again on this money.
It is commonly believed that the advantage of a Roth IRA over a traditional IRA is its tax-free
growth. But in fact, given the same effective pre-tax contribution each year, the results are the
same. This is because the money that would have been taxed post-growth is effectively taxed pre-
growth, and the growth is proportionally less. The real advantage is that the actual contribution
limits are the same for a traditional IRA and a Roth IRA, so an individual can contribute more, in
pre-tax dollars, to a Roth IRA than to a traditional IRA. It is named after its chief legislative sponsor,
the late U.S. Senator William Roth.
2.2.16. Spousal IRA
An Individual Retirement Account (IRA) established by a working spouse for his or her non-working
spouse. Spousal IRAs were created by the Tax Reform Act of 1976.
There are also other type of IRAs like Conduit IRA, SEP IRA (Self employed) etc.
Starting with the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA), many of the
restrictions of what type of funds could be rolled into an IRA and what type of plans IRA funds
could be rolled into were significantly relaxed. Additional acts made some further relaxations of
restrictions. Essentially most retirement plans can be rolled into IRAs after meeting certain criteria,
and most retirement plans can accept funds from an IRA.
IRAs can be funded with most types of securities, and some non security financial instruments.
There are a few things that cannot be funded into an IRA. They include collectibles including
valuable coins or bullion and life insurance. IRAs cannot generally hold real estate unless it is held
as a form of security such as a real estate investment trust, or REIT. The United States Supreme
Court held on April 4, 2005 that IRAs are not subject to seizure during bankruptcy. They held that
because rights to withdrawals are based on age, IRAs should receive the same protection as other
retirement plans.

2.3. Retail banking Asset Products – Some Concepts

Secured Lending Making loans in which the borrower hypothecates/pledges some
asset (e.g. a car or property). Usually the asset will be purchased
by the Loan and will serve as collateral to the loan. In the event
that the borrower defaults in the repayments, the creditor takes
possession of the asset, and may sell it in the open market,
regaining fully or partly, the amount originally lent to the
borrower.
From the creditor's perspective, this forms a category of debt in
which a lender has been granted a portion of the bundle of
rights to specified property. Popular examples are: Housing
Loans / Mortgages, Auto Loans, Consumer Financing (mostly for
white goods purchases).
Unsecured Lending No specific collateral is required for the borrowing instead the
creditor may satisfy the debt against the borrower/ his or her
resources rather than just the borrower's loan collateral.
Personal loans (Against salaries / receivables), Clean Loans /
overdrafts, Educational Loans (mostly – especially, if the
disbursal amounts are not huge).
Fixed Rate / Adjustable Fixed Rate products have an interest rate that will not vary
Rates throughout the tenor of the Loan.
Adjustable or Floating rate products will have their interest rate
pegged to an index, whose variation will determine the loan
interest rate.
Amortization It is the process of collecting back the principal, interest, fees
and charges that are involved in a loan across the repayment
tenor of the loan
Tenor The duration of the loan
Loan Loss or Provisioning When a loan is not repaid due to various reasons, the bank has
to provision the loss it will incur in writing off the loan. This is
termed as Loan loss or Loan Provisioning
Refinance When an existing loan is more expensive than the current
prevailing interest rates for lending, the borrower gets an
opportunity to refinance this loan at a cheaper rate by going to a
different lender. There is usually a refinance charge that will be
paid by the borrower or the refinancing entity.
Secondary Market In order to grow the availability of credit. The loan portfolio of a
bank is securitized and sold to other financial institutions. The
interest repayments represent the additional income the buyer
of the portfolio will get. The market where these securities are
traded in the secondary market with Investment Banks, Fannie
Mae and other market participants. These products are the
more infamous Asset Backed and Mortgage Backed Securities
2.4. Credit Monitoring
There are several independent agencies / organizations in the U.S. to provide consumer and
business - related credit intelligence, on the basis of which the financial institutions offer their
customers preferential rates of interests for their various financial needs. A credit score is a
number that summarizes the borrower’s credit risk, based on a snapshot of their credit report at a
particular point in time. A credit score helps lenders evaluate the would-be borrower’s credit
report and estimate their credit risk. The chief providers of such credit rating are:
 Equifax: A global leader for over 100 years, in information solutions to deliver innovative solutions
in the areas of consumer and business credit intelligence, portfolio management, fraud detection,
decisioning technology, and marketing tools, with the highest integrity and reliability. It empowers
individual consumers to manage their personal credit information, protect their identity, and
maximize their financial well-being by leveraging one of the largest sources of consumer and
commercial data, along with advanced analytics and proprietary technology, to create customized
insights that enrich both the performance of businesses and the lives of consumers.
 FICO, Experian, Equifax, Trans-union: The most widely used credit scores in the U.S. are FICO®
scores, the credit scores created by Fair Isaac Corporation. Lenders can buy FICO® scores from all
three major credit reporting agencies – Experian*, Equifax and Trans-Union. Lenders use FICO®
scores to help them make billions of credit decisions every year. Fair Isaac develops FICO® scores
based solely on information in consumer credit reports maintained at the credit reporting agencies.
The Borrowers credit score influences the credit that’s available to them and the terms (interest
rate, etc.) that lenders offer them. It’s a vital part of their credit health. Lenders may look at
information such as the amount of debt a borrower can reasonably handle given his/her income,
his/her employment history, and his/her credit history, as reflected by their FICO Score. FICO®
scores range from 300-850, higher the better. Most lenders in the U.S. base their credit approval on
them and higher FICO scores mean lower interest rates, while the median FICO® score in the U.S. is
723. FICO® scores are calculated based on the borrower’s rating in five general categories as below:
Figure 7: Parameters for Credit Monitoring

2.5. Investment Products
Retail banks provide Financial Advice and Planning Services to their High Net Worth Customers /
Individuals – HNWI/HNIs, in formulating their Investment Strategy, so as to maximize the returns
they obtain on the Corpus of Funds that they entrust their Retail Bank to manage. Some key
products they counsel customers on are:
Investment Types Fixed Income Investments Stock Market Retirement Planning

possible Investments
 Exchange Funds  Collateralized Mutual Funds  403 (b) Plan
 Real estate Mortgage Obligations  Equity funds  410 (K) Plan
 Commodities  Debt-Linked Securities (stocks) - Large
 Fixed Annuities
 For-ex  FDIC-Insured
Cap, Medium Cap,
Small Cap &  Variable Annuities
Certificates of Deposit
 Arts and
 Auction Market
Growth (capital  Rollover IRAs
Collectibles appreciation)
Securities based or Income Estate Planning
 Hedge Funds
 (Dividend) based

Callable CDs,  Charitable Gift
Managed Futures Certificates of Deposit  Fixed-income Annuity Services
 Private Equity (CDs), CD Rates funds (bonds)
 Community
 Structured Credit  Convertible Securities  Money market Charitable Fund
 Structured  Corporate Debt funds
 Endowment Fund
Investments  Corporate Inflation-
Short term Cash
Equivalents  Family
Insurance Investments Linked Notes
Foundation
  FDIC-Insured
 Whole life
Fixed Annuity
Money Market
Services
Insurance Products  Floating-Rate Notes Accounts  Philanthropic
 Term insurance  Agency Securities  Money Market
Financial Planning
Services
Products  Mortgage-Backed Funds
 Planned Giving
Securities  Tax-Advantaged Consulting
 Municipal Bonds Money Fund Services
 U.S. Treasury Inflation  Restricted Stock
Indexed Securities Sale
 U.S. Treasury Securities  Trusts and Estate
 Variable-Rate Preferred  Dynasty Trust
Stock
 Personal Trust
 Zero Coupon Services
Instruments
 Transfer on Death
Services
 Business
Succession
Planning

2.6. Retail Banking Payment Instruments
Financial Instruments are used to move and /or transfer funds from one account to another. The
account can be of the same person or different individuals. Instruments are also modes of
payment. Some of the common instruments are as follows:
Check
Cashier’s check
Certified Check
Travelers Check
The above mentioned instruments are stored and tracked very diligently in banks. Banks maintain
an inventory of all these instruments with number assigned to each instrument. The number helps
to retrieve information like cleared instruments, unclear instruments, lost and stolen instruments
etc. This section addresses the following sections in the retail wheel
2.6.1. Checks & Check Processing
A negotiable instrument is a specialized type of contract which obligates a party to pay a certain
sum of money on specified terms. The two primary classes of negotiable instruments are as
follows:
Promissory Notes
Bill of exchange
Promissory Note is a written promise by the maker to pay certain sum of money to the payee; and
Bill of exchange is a written order by the drawer to the drawee to pay a certain sum of money to
the payee. The most common type of bill of exchange is the check.
The only difference between a promissory note and a bill of exchange is that in case of promissory
note ,the maker of a note makes the payment to the payee personally, rather than ordering a third
party to do so.
A check is a bill of exchange and is an instrument instructing a financial institution to pay a specific
amount of a specific currency from an account holders specific demand account held in that bank.
The receiver of the check is payee and the amount will be either credited into the payee account or
the payee can encash the check from the maker’s bank (drawer). The details of check processing
are covered in the payments chapter.
Typically, the format of a check consists of date, the party to whom it is payable, the amount that is
payable, the identification of the bank it is drawn upon and the account number of that bank, and a
signature or other identification indicating the check was authorized by the depositor. While in
many cases, checks are more and more being displaced by electronic transactions including direct
deposit, ATM, credit card purchases, billions of checks are still written every year in the United
States alone.
2.6.1.1. Cashier’s Check
A cashier's check is a check issued by a bank on its own account for the amount paid to the bank by
the purchaser. The check will also state the payee/beneficiary and the name of the party
purchasing the check (the remitter). The check is received as cash since it is guaranteed by the bank
and does not depend on the account of a private individual or business. Cashiers' checks are
commonly used when payment must be credited immediately upon receipt for business, real
estate transfers, tax payments and the like. A draft is drawn on a bank and payable on demand.
A Cashier’s check is a draft in which the bank is both the drawer and drawee. A Teller’s check is a
draft drawn by one bank on another bank
Demand Draft and Pay order are instruments that are similar to Cashier’s check. In case of Pay
order, both the drawer and drawee banks are within the same clearing zone while demand drafts
can also be paid outside the clearing zone of the drawer bank. Pay order and demand drafts are
terminologies used in India.
2.6.1.2. Certified Check
A check certified by a bank to show that sufficient fund is available in the account for the value of
the drawn check.
2.6.1.3. Travelers Check
A traveler's check is a preprinted, fixed-amount check designed to allow the person signing it to
make an unconditional payment to someone else as a result of having paid the issuer (usually a
bank) for that privilege. As traveler's checks can usually be replaced if lost or stolen, they are often
used by people on vacation in place of cash. The use of credit cards has, however, rendered them
less important than they previously were; there are few places that do not accept credit cards but
do traveler's checks – in fact, nowadays, many places do not accept the latter.
Traveler's checks are available in several currencies such as U.S. dollars, sterling, and Euros;
denominations usually being 20, 50, or 100 of whatever currency, and are usually sold in pads of
five or ten checks, e.g., 5 x €20 for €100. Traveler's checks do not expire, and unused checks can be
kept by the purchaser as long as the purchaser wishes until it is spent.
The purchaser of a supply of traveler's checks effectively gives an interest-free loan to the issuer,
which is why it is common for banks to sell them "commission free" to their customers. The
commission, where it is charged, is usually 1% of the total face value sold. The largest volume issuer
of traveler's checks is American Express, the first to develop the product in the late 19th century.

2.6.2. Check clearing and Processing
Checks are written orders, the Bank customers use to instruct the bank or other depository
institution to pay money or to transfer funds from his/her account to the check holder. The check
collection system in the United States is efficient, but the collection process a check goes through
may be rather complicated. Funds on local checks must be made available to the payee within two
business days according to the Expedited Funds Availability Act of 1987. Non-local checks must be
made available within five business days. Certain circumstances permit longer holds due to the high
risk of fraud, such as new accounts, deposits over $5,000, repeatedly overdrawn accounts and/or
emergencies.
A check written on a particular bank and cashed by or deposited into the same bank would be
handled and processed within that bank. Checks of this type—called “on-us” checks—account for
nearly one-third of all checks. The remaining two-thirds are known as “transit checks” because they
must move between different banks, sometimes passing through several banks in different parts of
the country. A check includes the names of the payer and the payee, the account number, amount
of the check, and the name of the paying financial institution. The (Magnetic Ink Character
Recognizer) MICR line at the bottom of the check enables high-speed reader/sorter equipment to
process checks. Before financial institutions process checks, they encode the amount of the check
in magnetic ink at the bottom of the check.
2.6.3. Item/Returns Processing
Item processing operations play a critical role in an institution’s ability to receive record and
process customer transactions in an accurate, reliable and timely manner. It converts data into an
electronic format which can be captured in the institution’s system and then used in an automated
environment. It is a function institutions can perform internally or outsource, in a centralized or a
decentralized manner.
Item processing systems convert data from source documents, including checks and customer
transaction tickets, to formats that can be processed electronically. Three common methods for
capturing source document data for information systems are:
Item Magnetic Ink Character Recognition (MICR) Capture – MICR encoded documents are
pre-coded to industry standards with account number and other transaction information,
except for the dollar amounts. The item processing phase encodes (prints) a dollar amount
on items.
Optical Character Recognition (OCR) – OCR reads data that is printed or typed with a
special type font.
Direct Item Entry – Direct Item Entry involves manually entering data into systems. Herein,
user enters data from source documents like teller terminals, ATM, POS terminals, PCs etc
into application files or onto magnetic media for subsequent capture and processing.

MICR Encoding
MICR encoded documents are pre-coded with transit number, account number and other
transaction information except for the dollar amounts. The dollar amount is typically encoded
during the proof phase of item processing. The MICR encoding area at the bottom of a check /
deposit slip meets national standards accepted by all financial institutions using data
processing equipment.
MICR-encoded items can be machine-read and processed with little or no human intervention.
Large blocks or trays of MICR-encoded documents can be passed through a high speed
reader/sorter where the MICR information on the checks and transactions tickets is captured
by the computer for processing.
2.6.3.1. Item Processing Technological Overview
Technological advances continue moving data capture stage closer to the transaction initiator
(i.e. customer). This trend has changed the item processing characteristics from a labor
intensive process to a technology operations process. There are several different types of item
processing techniques followed by different IT systems which have been listed below:
Batch – In batch processing, various institution departments accumulate and process

debits and credits through the proof and capture methods. Items are converted to
electronic format through a reader/sorter. Batch processing creates electronic batch
files that are forwarded to the computer throughout the day or at the end of the day
for creating a transaction file of the current day’s activities. A new master file is created
by updating the prior day’s master file with the current day’s transaction file.
Real Time Data Entry - This involves instantaneous updating of the master files or
programs. An institution maintains a daily transaction file as back-up and a form of
control.
Memo Post – Herein, an institution updates information on transactions throughout
the day but still uses a batch system for actual posting. With this system, institutions
post transactions to a copy of the master file either individually or in batches, as
deemed appropriate throughout the day, thus allowing a more accurate reflection of
transactions and account balances. At the end of the day, the memo-post file is deleted
and actual posting occurs through normal batch processing.
2.6.3.2. Proof Operations Workflow
A typical single pocket proof / reader / sorter operations workflow includes:
The teller and departmental work is bundled in batches with a ticket showing the dollar total of
all the items in the batch. Some financial institutions define batch processing based on a
certain number of items rather than a specific time of day.

Proof operators process the transactions. The item-processing center MICR encodes, proves,
and balances the teller and departmental work before receipt by operations for batch
processing.
Proof operators consolidate batches into blocks and prepare block tickets for the total of all
batches in the block.
Proof operators process trays of block work through high-speed reader/sorters and the
computer to capture the item information and transaction tickets. The reader/sorter sorts the
items and transaction tickets into different pockets based on the type of item it is.
At the end of the workday, operations staff review financial and item capture report totals to
ensure they balance and reconcile.
All unprocessed items are returned to the originating branch or department for research and
correction. Until corrected, return items are charged to a temporary control account (e.g., un-
posted debit/credit account, suspense items, etc.). Once the return item is corrected the
temporary control entries are reversed and the item is posted to the proper customer or detail
account.
When proof operations are complete, the transaction information in batches is transmitted
directly or indirectly through magnetic media (i.e. disk or tape) to the computer for processing.
In small branches and departments lacking proof equipment, tellers or other branch personnel
develop batch control totals on transactions by running adding machine dollar totals. An
independent person reviews the batch totals and prepare control totals for all batches on a
transmittal form. One method of establishing control in item capture is to limit the size of each
batch of entries for data processing to no more than 150-300 items. For auditing purposes,
small batches are easier to handle and reconcile.
2.6.3.3. Rejected / Return Items
The operations department maintains a list of rejected / return items which are then sent to
the reconcilement clerks. This hard copy listing of return items shall contain the following:
 Batch number
 Block number
 Item capture number each item is sequentially numbered for tracing purposes)
 Account number
 Dollar amount of each item
 Batch and block dollar control totals
 Out of balance dollar amounts
2.6.3.4. Check Clearing

Check Clearing refers to the movement of a check from the depository institution at which it was
deposited back to the institution on which it was written and the corresponding movement of
funds in the opposite direction. Financial institutions clear and settle checks in different ways
depending on whether the checks are “on-us” checks (checks deposited at the same institution on
which they are drawn) or interbank checks (the payer and payee have accounts at different
financial institutions). On-us checks do not require interbank clearing or settlement. Interbank
checks can clear and settle through direct presentment, a correspondent bank, a clearinghouse, or
other intermediaries such as the Federal Reserve Banks.
Financial institutions can also clear checks through a Federal Reserve Bank or an independent
clearinghouse, where they have formed voluntary associations that establish an exchange for
checks drawn on those financial institutions. Typically, financial institutions participating in check
clearing houses use the Federal Reserve’s National Settlement Service to effect settlement for
checks exchanged each business day. There are approximately 150 check clearinghouse
associations in the United States. Smaller depository institutions typically use the check collection
services of correspondent banks or the Federal Reserve Banks.
2.6.3.5. Correspondent Banks
Most banks maintain accounts at other banks for the purpose of collecting checks. A correspondent
bank accepts checks from the bank with which it has a relationship and processes those checks the
same way it processes those for its depositors. It credits the depositing bank’s account and
forwards the checks to the bank on which they were drawn.
2.6.3.6. The Federal Reserve’s Check Collection Network
The Federal Reserve is the largest nationwide processor of transit checks, handling about a quarter
of all checks in the United States at 45 Federal Reserve check-processing facilities across the
country. All financial institutions that accept deposits can purchase Federal Reserve check
collection and other payments services. The Federal Reserve is required by law to charge these
institutions a fee for its services to cover its expenses. But the Fed’s large volume of checks,
extensive automation, and speedy processing allow it to keep check collection costs and services
prices low.
Checks are moved efficiently across the country from one Federal Reserve check processing region
to another using the Fed’s check relay network, an air and ground transportation network of
private vendors managed by the Federal Reserve Bank of Atlanta. The Reserve Banks also are linked
electronically to a settlement fund that keeps track of the districts’ net balances as they exchange
checks for settlement.
2.6.3.7. Clearing House
Banks in large cities often form associations called clearinghouses for exchanging checks drawn
against the members. A clearinghouse may have fewer than a dozen members, but these banks are
usually the largest in the area. Clearinghouse members group the checks of other member banks,
exchange them at a specified time each day, and settle accounts with each other. Clearinghouses

can often collect and process locally drawn checks faster and more efficiently than do intermediary
services, such as correspondent banks and the Federal Reserve’s check collection network. The
essentially simple process of exchange and settlement, however, has been complicated in recent
decades by the sheer volume of transactions now involved and the variety of new payment
instruments developed to meet the needs of advanced nations’ commerce and facilitate their
integration into the world economy. To maintain its traditional efficiency while minimizing risk, the
progressive Clearing Houses have turned to electronic technology. The electronic checks and check
clearing is discussed later in the section.
2.6.3.8. Electronic Checks
An electronic check is a transaction that starts at the cash register with a paper check for payment,
but the payment is converted to an electronic debit, which is processed via the ACH network.
Thousands of retailers are offering this service, and hundreds of thousands of checks are being
converted everyday from paper checks to electronic checks. This new electronic check conversion
service offers retailers, financial institutions and consumers an efficient new method to handle
payments at the point of purchase. The consumer still hands a check to the retailer – but the
retailer hands the check back after capturing payment information, obtaining authorization from
the customer and stamping the check VOID. Then the payment flows through the national
automated clearing house network (ACH) to the check writer’s account.
Specifically, here’s how an electronic check payment flows:
The customer hands the retailer the check intended to pay for the purchase. Currently,
only checks drawn on consumer accounts can be converted.
The retailer determines that the check is eligible for conversion and then runs the check
through magnetic ink character recognition (MICR) reader.
MICR encoded information, the routing number, account number and check serial number,
is captured by the MICR reader. In addition, the retailer keys in the payment amount and
the name of the retailer is either keyed in or added by the reader.
The retailer may choose to run the payment information, including the retailer’s name,
through an internal or external database to authorize, verify or guarantee the payment, to
determine if the routing number can be used for ACH payments, or to determine if the
customer’s address is on file.
After the customer information is recorded and if used, approval by the database is
obtained, the terminal prepares a written authorization, which is then signed by the
customer. Authorization must contain specific information specified in NACHA Operating
Rules, under which ACH Network operates.
The retailer or its processor formats payment information as an ACH debit entry.
The payment is included in a batch of ACH entries transmitted to the retailer’s bank. The
bank transmits the batch of payments to the ACH Network, which routes each payment to
the bank on which the converted check is drawn. The paying bank posts the check (debit)
to the customer’s account, and the customer receives information about the payment on
their statement.

Point of Purchase (POP) Check Conversion
Customer Signs Check Information Retailer’s (Collecting) Bank

Authorization flows through (ODFI) Enters Information
Retailer’s System Into ACH Network
ACH Network
Consumer Receives Consumer’s (Paying) Bank

Check Information on (RDFI) Posts ACH Entry to
Statement Consumer’s Account
Figure 8: POP check conversion process
The Electronic check service has several benefits both for the consumer writing it and for the
financial institution processing it. Some of the major benefits are
It results in faster and less paper-intensive collection of funds.
It helps to improve efficiency in the deposit process for retailers and their financial
institutions.
It stems the growth of paper check processing.
It benefits consumers by speeding checkout, providing more information about the
transaction on their account statement, and removing the consumer from any negative file
much quicker
It enhances collection of checks that bounce for NSF or uncollected funds because
collection can be started more quickly than with paper checks.
2.6.3.9. Check Truncation
When a check is "truncated," that means an image is created from the original paper check and the
original paper check is then removed from the check collection or return process. The Check
Clearing for the 21st Century Act (Check 21) is designed to foster innovation in the payments
system and to enhance its efficiency by reducing some of the legal impediments to check
truncation. The law facilitates check truncation by creating a new negotiable instrument called a
substitute check, which would permit banks to truncate original checks, to process check
information electronically, and to deliver substitute checks to banks that want to continue
receiving paper checks.
2.6.3.10. Automated Clearing House (ACH)

Automated Clearing House (ACH) is an electronic network for financial transactions in the United
States. ACH processes large volumes of both credit and debit transactions, which are originated in
batches. Rules and regulations governing the ACH network are established by NACHA-The
Electronic Payments Association (formerly the National Automated Clearing House Association) and
the Federal Reserve (Fed).
The ACH Network is a highly reliable and efficient nationwide batch-oriented electronic funds
transfer system governed by the NACHA OPERATING RULES which provide for the interbank
clearing of electronic payments for participating depository financial institutions. The Federal
Reserve and Electronic Payments Network act as ACH Operators, central clearing facilities through
which financial institutions transmit or receive ACH entries.
ACH payments include:

Direct Deposit of payroll,
Social Security and other
government benefits, and tax
refunds;
Direct Payment of consumer
bills such as mortgages,
loans, utility bills and
insurance premiums;
Business-to-business
payments;
E-checks;
E-commerce payments;
Federal, state and local tax Figure 9: ACH Payment process
payments.
Originator
Any individual, corporation or other entity that initiates entries into the Automated Clearing House
Network.
Originating Depository Financial Institution (ODFI)

A participating financial institution that originates ACH entries at the request of and by (ODFI)
agreement with its customers. ODFI's must abide by the provisions of the NACHA Operating Rules
and Guidelines
Receiving Depository Financial Institution

Any financial institution qualified to receive ACH entries that agrees to abide by the NACHA
Operating Rules and Guidelines
Receiver
An individual, corporation or other entity who has authorized an Originator to initiate a credit or
debit entry to a transaction account held at an RDFI.
2.6.3.11. ECCHO & Image Exchanges

ECCHO (Electronic Check Clearing House Organization) is a not-for-profit, mutual benefit, national
clearinghouse that is 100 percent owned by its member institutions. Any depository financial
institution (DFI), regardless of size, is eligible for membership in ECCHO. ECCHO was created in
1990 by banks as a cooperative venture to encourage the use of electronic systems to enhance the
check collection system. In the early years the focus was on electronic check presentment (ECP).
Since the passage of Check Clearing for the 21st Century Act (Check 21), ECCHO’s primary focus has
been the use of image exchange to improve the efficiency of check payments.
ECCHO’s primary activities can be divided among three functions:
 Rules development and maintenance
 Industry education and
 Industry advocacy
ECCHO has close to 1800 members consisting of all the large Depository Financial Institutions. A
sample of the large and permanent members is given below.
DFI Name DFI Name
Bancorp South Bank Bank of America
Branch Banking & Trust Co. Citibank
Comerica Deutsche Bank
First Tennessee Bank Frost National Bank
HSBC Bank USA JPMorgan Chase
KeyBank, N.A. Marshall & Ilsley Bank
PNC Bank, N.A. RBS Citizens N.A.
SunTrust The Bank of New York Mellon Corporation
U.S. Bank, N.A. U.S. Central Credit Union
Union Bank N.A. Wells Fargo & Company, N.A.
Zion’s Bancorporation

ECCHO proposes to work primarily (although not exclusively) with three national
organizations to provide the leadership necessary to support the transition to electronic
payments: BITS, NACHA and NOCH.
Figure 10: Short term initiatives in BITS/ECCHO/NACHA/NOCH
Paper checks continue to transition to electronic images at an extraordinary rate with

almost 70% of all institutions now receiving images. With 72 percent of total non-cash
payments in the U.S. tendered in the form of checks, banks enjoy a tremendous market advantage
over non-banks in the battle for control of the payments system [Figure 2]. Through a strategy that
incorporates electronic check presentment, electronic returns, truncation and related payment
initiatives; the banking industry can retain its position of competitive superiority and
simultaneously create significant new value without immediately overhauling the entire payments
system.

Figure 11: Opportunity and Vehicle for Transition
ECCHO's short term vision includes four parallel initiatives, which together offer the potential for
improved, industry-wide earnings of $2-3 billion per year. Those initiatives are:
a. Electronification of the check collection process - Annual value $850 million

b. Electronification of notices of check returns - Annual value $450 million
c. Truncating paper checks at the bank of first deposit - Annual value $600 million
d. Creating new cash management product opportunities - Annual value $700 million
Figure 12: Average of Images received per day
Annualized Transaction Value of 18 Trillion covering 87% of the Institutions in the US.
Substitute Check: A paper reproduction at the receiver’s end of the original checks, processed from
the image transmitted, that
o Contains an image of the front and back of the original check;

o Bears a MICR line containing all the information appearing on the MICR line of the original
check, except as provided under generally applicable industry standards for substitute

checks to facilitate the processing of substitute checks (regulations may contain

exceptions);
o Conforms, in paper stock, dimension, and otherwise, with generally applicable industry
standards for substitute checks; and
o Is suitable for automated processing in the same manner as the original check.
The high level processes involved in an image based check processing system are given below:
Figure 13: Process flow diagram check processing
2.7. Payments
Payment System refers to the rules, institutions and technical mechanisms used for the settlement
of financial transactions in an economy. Financial institutions accept, collect, and process a variety
of payment instruments, and participate in clearing and settlement systems. A payments system
facilitates the exchange of goods and services between the buying party and the selling party in any
transaction. Payments are crucial to any banking system and its often an area where distinctions
b/w retail and wholesale fades. It is with a conscious decision that some aspects of non retail
payments have been included for completeness sake. However the Wholesale payments L1 should
be used for specific learning.
Retail payments usually involve transactions between consumers and businesses. Although there is
no definitive separation line between retail and wholesale payments, retail payment systems
generally have higher transaction volumes and lower average per transaction dollar values than
wholesale payments systems.
Consumers generally use retail payments in one of the following ways:

Purchase of Goods and Services
Bill Payments
P2P Payments
Cash Withdrawals and Advances
An important trend is shift from paper to electronic payments. Recent research has found that
consumer use of electronic payments has risen significantly in recent years, and the trend will only
accelerate.
2.7.1. Four-Corner Payments Model
Payer (Consumer) Payee (Merchant)
Clearinghouse
2
3
6 4
5 7
Financial Institution Financial Institution

or Third Party or Third Party
Figure 14: Four corner payment model
Key Entities in a Payment Process

Beneficiary (Payee) Target of the payment , receiver of funds
Payer Originator of the transaction who has to pay the beneficiary
Beneficiary Financial FI where the beneficiary maintains its account , target of the funds inflow
Institution
Payer Financial FI where the payer maintains its accounts , source of funds
Institution
Automated Clearing Central location where funds are cleared and settled between the FI’s of the
House (ACH)
payer and the beneficiary
Payment Service Provider Institution which provides an interface on behalf of and to the beneficiary
and the payer like presenting bills, clearing funds and authorization to
facilitate the payment
Correspondent FI Members of clearing systems who for a fee will make payments into the
clearing system for non-member FIs in a Cross Border payment transaction.

Regulator Overseeing body which monitors and regulates the financial services industry
Payment Message Institution which facilitates the exchange of secure financial messages over a
Service Provider
shared network
This diagram reflects the general flow of transactions and participants, in many cases, other third
parties may facilitate one or more processing functions. The above diagram displays the clearing
and settlement process for retail payments using a standard four-corner payments model. While
the flow of information, data, and funds is different for each payment instrument, there is a
common set of participants for retail payments.
The solid lines depict the flow of information and the dashed lines represent the flow of funds. The
initiator of the payment, typically a consumer in retail payments, is located in the upper left-hand
corner of the diagram. The recipient of the payment, typically a merchant, is in the upper right-
hand corner of the diagram. The bottom two corners of the model represent the relationship of the
consumer and merchant to their financial institution. In some cases, third-party service providers
will act on behalf of financial institutions. The payments networks or clearinghouse organizations
that route the transactions between financial institutions are in the middle of the chart. In some
instances, for example Check clearing, a financial institution may exchange Check items directly
with another financial institution bypassing the clearinghouse.
2.7.2. Wires / Fund Transfer Services
A wire transfer is a transaction that a customer can initiate via their bank, authorizing the bank to
transfer funds across a network administered by hundreds of banks around the world. A wire
transfer provides for immediate, irrevocable availability of funds by eliminating the uncertainties of
mail and check collection time. There are wire transfer networks / systems that are only domestic,
others that are international.
2.7.3. TYPES OF PAYMENTS SYSTEMS
Please see the appendix for major Payments systems by Geography:
2.7.3.1. By Payment Instrument:
Types Description
Credit transfers Instruction from payer to his bank to credit beneficiaries account
Direct Debits Preauthorized debits on the payer’s bank account which are initiated by
the beneficiary. Often used for recurring payments
Payment cards (debit or Holder of the card may charge his/her account at the bank (debit card) or
credit cards) draw on a line of credit (credit card) up to an authorized limit
Cheque Written order from one party (the drawer) to another (the drawee,
normally a bank), requiring the drawee to pay a sum on demand to the
drawer or to a third party specified by the drawer. Primarily used in the US
and some European countries like France
Electronic money (e- It is a monetary value (claim on the issuer) which is stored in an electronic
Types Description
money) device and accepted as means of payment by undertakings other than the
issuer. E.g.: pre-paid cards
2.7.3.2. By Domain:
Types Description
Retail payments Consumer payments of relatively low value and urgency e.g. Credit Card
Transactions/Payments, Direct Debit, E-Bill Payments, Debit Card
Transactions/Payments
Wholesale Used primarily by financial institutions in which large values of funds are
payments transferred between parties
Retail transfer Small value normally individual transfers like ATM transactions or cash
withdrawals
2.7.3.3. By Value:
Figure 15: Payment solutions by Value

2.7.4. Payments Landscape
CORE BANKING
PAYMENT INITIATION CENTRALIZED ENTERPRISE BACK OFFICE
CHANNEL INTEGRATION
CHANNELS PAYMENT HUB APPLICATIONS
Application Forex
Translation Trade Finance
Interface Management
Private Network/
Internet Channel Transaction
VPN Account
interface Management Treasury Enterprise General Ledger
Management CRM Management
Back Office
Internal Voice Routing
Interface
Department Response Loans / Deposits / Credit / Positions
Enterprise Risk Enterprise
Workflow / Rules Management Management Compliance
Fax /
Call Center
E-Mail
Business Service Management PAYMENT BACK OFFICE
Telex Branch Network

Enrichment /
TRANSACTION DATA BASE Investigation Billing
Repair
Reconciliation Clearing
REPORTING
Review / Release
EXTERNAL PAYMENT
INFRASTRUCTURE
BACS CHAPS SWIFT Net
ACH CLS TARGET 2
Figure 16: Payment landscape

2.7.5. Generic Payment Flow
Manual Queue &

Repair and
Resend
6'
Initiation Channel
2' 4'
5'
Clearing &
Fraud Check , OFAC
Settlement
and AML Checks
Channels
1 1'
6
3
2
Core Payment Processing System
Generates Messages
Outbound
MT 103 /202 Message N/w
Gateway
940 - Stmt / 910 - Advice
Payment Gateways
Validation of Messages, Tags
5
Confirmation Advice
4
1. Message Validation , Msg
Tags , Authentic, AML etc,
2. Manual Intervention –
Customer Validn / Signatory
3. Balance & Limits Checks
4. Currency Conversion
5. Fees & Charges
6. Accounting Entries
Figure 17: Generic Payment flow
The generic payment message flow consists of the following steps:
1. The Payment Message gets initiated through a Banking channel at the Sender’s end and is sent
to the appropriate Payment Gateway, wherein its initial validation occurs and relevant tags for
aiding further processing gets added.
1’. This step represents a bi-directional flow of information, whereby the Gateway will interactively
validate the incoming Payment Message, before attaching the required tags for further processing.
2. On successful validation at this stage, the Payment Gateway forwards the message to the Fraud
Checking engines for OFAC & AML checks, to mitigate operational risks for the Bank.
2’. This step involves Manual Intervention (Queue, Repair & Send) to verify any rejected messages,
for possible simple rectifications that are obviously evident, to render the defective message
complying to the base format required in the next step of processing. This activity is commonly
done at any further stages of processing as reflected by the activities 4’, 5’, and 6’.
3 & 4. This vetted message is then fed in to a “Core Payment Processing System” to generate the
Financial Messages (like the SWIFT Messages), after validating – (in step 4) the Message, Tags, AML
checks, and performing Manual Interventions such as Customer Validation / Signature verification,
as well as Balance & Limits Checks, Currency Conversion, Fees & Charges calculation, application of
suitable accounting entries.
5. This payment message is then sent to the Outbound Gateway, which sends it to the Clearing &
Settlement Channels (in step 6) for effecting credit to the receiver’s / beneficiary’s account.
2.7.6. UK Payment Systems – BACS (Banks Automated Clearing System)
The main private sector body for the UK Payments Industry is the Association for Payment Clearing
Services (APACS), set up in 1985. APACS is a non-statutory association providing a forum for the
major banks and building societies to discuss non-competitive issues relating to money
transmission. Three operational clearing companies currently fall under the APACS umbrella:
 CHAPS Clearing Company;
 BACS Ltd; and
 Cheque and Credit Clearing Company Ltd.
While Chaps is focused towards high value corporate payments the other two are retail-oriented
payments clearing arrangements in the United Kingdom. The BACS system offers an ACH service
handling electronic payment orders, whilst the Cheque and Credit Clearing Company processes
paper items such as cheques and credit vouchers. For both these clearings there is a two-tier access
structure with direct settlement members and “indirect” participants. Settlement between direct
members occurs across accounts held at the Bank of England. The key features of the BACS are:
Low Value retail payments Direct Debit, Direct Credit, Standing Order and Remote Payments
Sterling and Euro transactions
Direct Users Commercial and public sector bodies ,large DD Collectors e.g.
Insurance , utility companies
Indirect Users Small organizations that submit payment instructions to BACS via
intermediaries
3 Day settlement cycle Input on first day, processed on the second day and cleared on
the third day
Multilateral Net Settlement Occurs across accounts at the Bank of England via the CHAPS
between BACS direct members RTGS processor
Float Income Banks have historically earned two days float on standing orders
and remote banking payments due to the 3 days BACS cycle

2.7.7. Faster Payments Service (FPS)
Faster Payments, the first new payments service to be introduced in the UK for more than 20 years,
enables electronic payments and standing order payments, typically made via the internet or
phone, to be processed in hours rather than days. FPS has been designed to be faster than the
three working days cycle of Bankers Automated Clearing System (BACS) and cheaper than Clearing
House Automated Payment System (CHAPS) - catering to high value transactions only. The Central
infrastructure set-up of FPS was awarded to IPL (Immediate payment Limited), a JV of Voca and
Link, who have since merged to form VocaLink. FPS is focused on lower value transactions for
consumers and small businesses. Since the service began, it has processed more than 125 million
payments with a value of £46bn. FPS has seen £1bn of transactions processed in one day for the
first time, on 2 March 2009.
2.7.8. Society for Worldwide Interbank Financial Telecommunication (SWIFT)
SWIFT's global network handles approximately 3.5 million messages daily with an average daily
transaction total of several trillion US dollars. Messages are securely and reliably exchanged
between banks and other financial institutions. SWIFT also markets software and services to
financial institutions, much of it for use on the “SWIFTNet” Network, based on the ISO 9362 bank
identifier codes, popularly known as "SWIFT codes".
Popular SWIFT Message Categories, Formats (relevant to Retail banking) and their Overview:
Category 1 – Customer Payments & Cheques

MT MT Name Purpose
101 Request for Transfer Requests to debit a customer’s account
held at another institution
102 / 102+ Multiple Customer Credit Conveys multiple payment instructions
Transfer between financial institutions
103 / 103+ / 103 Single Customer Credit Instructs a funds transfer
REMIT Transfer

Figure 18: MT103 core format

2.7.8.1. SEPA
The Single Euro Payments Area (SEPA) is a

European Payments Council (EPC) developed
payment scheme and framework. It has
enabled citizens, companies and other
economic participants to make and receive
payments in EUROS, within Europe regardless
of their location, - swiftly, cheaply and safely,
thus reaping the full benefits of the Economic
and Monetary Union (EMU) and of the Single
Market in general.
Key components of SEPA (relevant to Retail

Banking): Figure 19: SEPA countries
SEPA Credit Transfer (SCT)
 It deals with Euro credit transfers from one

account in the SEPA area to another
 It mandates no additional cross border charges
for European Standard Payments, limited to
retail payments, between two EU accounts.
 Standard cross border payments to be
processed in same time as domestic payments
(maximum of 3 business days)

Figure 20: SEPA features
 Priority euro payments (Prieuro) to be
processed within 4 hours using RTGS or Real Time Net Settlement for urgent & high value
payments.
 Following SCT payment types are supported –
 Regular Transfer
 Salary Payments
 Tax Payments
 Social Security Payments
 Pension Payments
 Custom Payments

2.7.9. Electronic Bill Presentment & Payment (EBPP) Models
Consumer EBPP is focused on retail payments. There are three common EBPP models being
promoted in the market today.
Biller Direct
The billing organization makes bills available on its own web site and invites its customers
to view and pay their bills directly from this site. Typically, the biller sends an email
message to their consumers alerting them to a new bill.
The customers then log onto the biller site via a secure connection, review their billing
information, and enter payment instructions (usually for a pre-established payment
mechanism, such as an Online Banking Account, credit card, etc)
A variation on this model allows the biller to send summary bill data in the email message
with an embedded hyperlink back to its web site for bill detail and marketing messages.
The consumer can then respond immediately to the bill by clicking on the link, which takes
the consumer back to the biller site for reviewing bill detail and setting up payment.
The biller direct model is the simplest and best-defined EBPP model in use today. The major
disadvantage of this model is that the consumer must visit a different web site for payment of each
bill. In addition many bills are cycled at different times during the month so consumers must log-on
at different times to pay them or keep track of the e-mail notifications.
Biller Consolidation Model
The biller consolidation model is inherently more complicated, primarily because one or more third
parties act as intermediaries to route billing and payment data - bill consolidators and biller service
providers.
Bill consolidators receive billing data from numerous billers, aggregate and sort it by consumers
enrolled in EBPP programs, then send it to distribution points based upon where individual
consumers are enrolled. These distribution sites are commonly banks, but can also be Internet
portal sites such as AOL, Quicken.com, and Yahoo! Finance and even the United States Postal
Service.
Biller service providers play a similar role on the billing side, but usually partner with a consolidator
for payment processing. Biller service providers also tend to target small to mid-sized billers with a
low-cost fully outsourced solution.
After consumers log into their EBPP service sites (banks and portals), review their bills and schedule
payments, payment instructions are sent back to the consolidator for processing. Due to the
prevalence of pay anyone services, roughly half of all payments processed by consolidators are
fulfilled by printing and mailing paper checks. The rest go through electronic channels (ACH,
MasterCard RPS, EFT networks, etc.)
Thick and Thin
The main difference in these model variations has to do with the amount of billing data transmitted
to the consolidator for storage and customer access. The so-called "thick consolidation" model
refers to the transmission of full bill detail to the consolidator, while in the "thin consolidation"
model only summary-level data is transmitted. In this model, if the consumer wants to access bill
detail, she/he hyperlinks back to the biller's site. Other variations include different payment
methods supported, degrees of control over payment offerings and channels, biller administration
functions, marketing capabilities, and pricing.
Figure 21: Sample EBPP
Consumer Consolidation Model

The consumer consolidator model is the only one that currently enables consumers to view all their
bills via the web, if they so choose. This is accomplished through a 'low-tech' approach of routing all
paper bills to a service center for scanning into pdf formats, which can then be viewed online.
There are generally no interactive capabilities with the bills and all additional bill content
(statement stuffers, regulatory notices, etc.) are trashed. The service provider's site has a handy
user interface for organizing and viewing bills and entering payment options. Some even offer
storage of historical bills online or on a CD. After the consumer views his/her bills and sends
payment instructions back to service provider, the service provider then transmits these
instructions to a bank or other payment processor for fulfillment.
Interface and Payment Options For companies planning or implementing EBPP

Have consumer go to our web site 72.3%
Use e-mail for bill presentment 65.4%
Provide access through a bank or bank consortium 48.3%
Provide access through third party 36.6%
Allow use of ACH debits for payment 79.8%
Allow use of credit card for payment 72.8%
Key Model Characteristics and their Comparison
Feature Biller Direct Biller Consolidation Consumer Consolidation

Enrollment Various - controlled by Single - controlled by Single - controlled by
responsibilities individual billers bank or portal consumer service
provider (CSP)
Biller control over Tight Varies based on Same as paper billing,

bill/embedded consolidator software except inserts are
messages discarded
Points of distribution Biller web site Numerous banks/portals CSP/portal sites
Integration with Little to none Can be extensive, based Must employ screen-
customer bank account on bank/portal online scraping techniques
banking software
Control over payment Biller (ACH, credit card) Consolidator (paper, CSP (paper, ACH, credit
methods ACH, EFT)? may include card)
good or guaranteed
funds availability
Pricing model Biller software license/ Biller set-up fee, bank Consumer subscription
installation fees transaction fee, fee
consumer subscription
fee
Customer service Biller Shared biller/ Shared CSP/biller

ownership consolidator/bank
Main Advantages Complete control Multiple bills can be Serves as a

over all aspects of the viewed and paid from a transitional model that
billing/payment single web site, giving a will build awareness
process for Billers; distinct advantage to and comfort with EBPP
consumer; services to some
The biller maintains consumers;
direct relationships Costs for billers are
with its customers, significantly lower than Represents the only
without the the direct model as method presently by
involvement of a third both banks and billers which consumers can
party processor have limited roles in receive all their bills
implementation of this electronically and
Consumers privacy model subsequently pay them
concerns are minimized from a single location
Depending on the
consolidator's pricing

Feature Biller Direct Biller Consolidation Consumer Consolidation

model, banks can
present bills from
numerous billers with
minimal investment
Main Disadvantages Model is the least Both banks and billers Unlikely to be a long-
desirable from the face potential term method due to
consumer's disintermediation from inherent limitations in
perspective; their customers the paper billing
process;
The consumer must both banks and billers
enroll to receive, then face potential loss of Consumers do not
receive and also valuable opportunities receive bills any faster
authorize payment to generate new (in some cases more
arrangements revenues from EBPP slowly) and
individually for each of services
the electronic bills with The value of the bill is
each of their billers Customer service improved little over the
separately, issues can also be a paper version, since it
problem, since no one has no interactive
entity has ownership of capabilities
the entire process
2.7.9.1. Alternative Payment Solutions
To reach consumers around the world, merchants must have the ability to accept payments via
methods other than cash and credit cards. According to a Forrester Research report, in many
regions—like the European Union (EU)—merchants need to accept at least four different systems
of payment to even reach 80% of the consumers.
Alternative payment methods offset the inherent deficiencies of the credit card, namely its relative
difficulty of use online, high cost of acceptance by the
merchant, and susceptibility to fraud. Alternative
payments are projected to reach 30% of online payments
by 2012 as consumers increasingly choose free payment
solutions for offering convenience and security
advantages, while merchants continue to steer consumers
to low-cost payment alternatives. The major benefits for a
Bank in adopting the Alternate Payments methods are:
• Creates new low-risk revenue stream

• Offsets payment card customer attrition to other Figure 22: Alternate Payments - Market
alternative payment providers Share
• Protects/extends bank’s core transaction consumer
relationships
Online commerce is projected to continue its rapid growth, from $226 billion in 2007 to $361 billion
in 2010. While currently more than 80% of online payments are made with a credit card or a
signature debit card, that number has declined in recent years as entrepreneurs have brought to
market alternative solutions that address the shortcomings of the traditional payment card as an
online payment vehicle. Javelin estimates that alternative payments will account for 30% of the
growing online payment pie by 2012.
 Paypal, e-Bay, Bill Me Later: Bill Me Later is a convenient and secure way to pay on the web or
over the phone. Bill Me Later lets users pay without using a credit card. At checkout, after their
Online Shopping spree, users have to provide their birthday and the last four digits of their
social security number, accept the terms and their purchase and the transaction is complete.
It’s that easy! There are no codes to find or account numbers to remember. The Bill Me Later,
Inc. network includes more than 1000 online stores, catalogs and travel partners. On
November 7, 2008, eBay Inc. (NASDAQ: EBAY) completed its acquisition of Bill Me Later, Inc. for
approximately $820 million in cash and approximately $125 million worth of outstanding
options, net of option exercise proceeds. The acquisition extends eBay's leadership in
payments by combining Bill Me Later with eBay's PayPal.
 Google: As the number of Google services has increased, they have continued to build on their
core payment features and migrate to a standard process for people to buy their services with
a Google Account. Examples of this migration include enabling users to buy Google Video
content, Google Earth licenses, and Google Store items with their Google Accounts. They also
just began offering similar functionality on Google Base. To see some items on Google Base
that are accepting payments via Google go to base.google.com and search for a list of items
with the payment method that is accepted as ‘payment through google’. On selecting the item,
the payment site will redirect to the Google account details, wherein the user will have the
option to specify or update their credit card details as well as their delivery address details. This
means that as a user of Google Payments they won’t need to re-enter this information when
making a purchase on Google Base, or any of the other services from Google that will be taking
advantage of the new system. In addition on their account page they will see a history of items
that they have purchased and they will be able to check the delivery status of items being
delivered, as well as information about the seller of items they have purchased.
 Microsoft : Microsoft Points is part of the MSN payment strategy that enables efficient micro-
payments like prepaid purchase for cash based consumers (kids/teens, Immigrants, emerging
and developing markets) and provides a mechanism to acquire and directly reward loyal
customers (direct revenue sharing). There is no efficient way to sell low priced (E.g. $0.05 –
$5.00) digital content or services online today and the dominant buyer of these types of goods
(music, games, ring tones) buy with cash and today it is difficult to use cash online. Thus it
introduces and defines a new impulse purchase user experience on the web. Points does not
replace other payment options but adds a new instrument with very unique characteristics and
capabilities to Consumers’ suite of payment options.
 Interac (CertaPay) Email Money Transfer: CertaPay (Desjardins Group) and the five largest
banks (CIBC, RBC Royal Bank, Scotia bank, Bank of Montreal or TD Canada Trust) in Canada
have launched the world's first real-time, bank-to-bank, email money transfer (EMT) system. It
is a simple, convenient, and secure way to send and receive money directly from one bank
account to another. All one needs is access to online banking through a participating financial
institution, and he/she can send money to anyone with an email address and a bank account in
Canada — without sharing any personal or financial information. It's a great alternative to
cheques and cash. Email is only used to notify the recipient and to provide them with
instructions on how to deposit money. The sender’s financial institution and their recipient’s
financial institution transfer funds using established and secure banking procedures. However,
an Interac Email Money Transfer transaction cannot be reversed, since it’s just like sending
cash. If the recipient of the funds has already deposited the transfer, then the sender must
obtain a refund directly from the recipient.
 M-payments: MOBILE WALLET system is an innovative and revolutionary breakthrough mobile

commerce solution that offers the conveniences of cash-less shopping, as well as making
remote payments via any mobile phone, where financial and merchandising transactions are
done at the touch of the fingertips. It is a safe and secure place where Consumers can store
information of their credit and debit cards. It provides them with a user-friendly way to pay for
goods and services, using their WAP-enabled mobile device, on either WAP or the Internet with
a selection of online shops.
When registering for Mobile Wallet, the customer can store details of up to 8 payment cards
and 8 delivery addresses. During registration they will need to select their own 4-digit PIN. This
is the code they will use to confirm transactions via WAP on their mobile phone. Transactions
via the Web will be confirmed by inputting an SMS code sent to their phone. M-Wallet also
addresses the needs of companies that wish to innovatively market their goods and services.
The following activities can be completed using Mobile Wallet

Bill Payments
Prepaid Airtime Replenishment
Prepaid Shopping Cards
Money Order / Transfers
Coupons
Person-to-Person Transactions
Gift / Loyalty Cards
Ticketing
Point-of-Sale Transactions
 NFC (Near Field Communication) – NFC is a new, short-range wireless connectivity technology
that evolved from a combination of existing contactless identification and interconnection
technologies. Products with built-in NFC will dramatically simplify the way consumer devices
interact with one another, helping people speed connections, receive and share information
and even make fast and secure payments. NFC is both a “read” and “write” technology.
Communication between two NFC-compatible devices occurs when they are brought within
four centimeters of one another: a simple wave or touch can establish an NFC connection,
which is then compatible with other known wireless technologies such as Bluetooth or Wi-Fi.
“Near-Field-Communication (NFC) swipe card handset is used in M-payment functions called

“wave-to-pay”. For E.g. Pay-By-Mobile offers convenience for those who use public
transportation. It’s possible to use a handset swipe card to buy a ticket. This wave-to-pay has
replaced the former public transportation IC card. Using the swipe card handset for shopping
eliminates the need to carry cash. All you need is the wave-to-pay handset (phone), to buy a
ticket and do your shopping.

3. Retail Banking Channels
The landscape of retail banks has changed dramatically over the past 10 years. Shifting customer
demographics and developments in new technology are bringing major changes to retail banking.
Throughout the world, financial service providers are looking towards a new concept of ‘anytime,
anywhere, anyhow’ banking, which demands that retail banks of the future find better ways of
delivering a complete set of lifestyle-based financial services which simplify their customers’ lives
and allow them more personal time — an increasingly precious commodity. Financial institutions
are looking to improve their delivery of product and service through the most cost-effective means.
Traditional brick and mortar offices are being replaced with convenience centers or in-store
outlets, ATM, telephone banking, Internet and other less expensive options. At the same time the
conventional branch banking is also taking a new facelift in developed markets and leverages latest
in technology, media and banking.
3.1. Branch Banking
Throughout much of the last decade, retail banks have re-engineered their organizations to
improve efficiency and move customers to lower cost, automated channels, such as ATMs and
Internet Banking. However, banks are now realizing that one of their best assets for building
profitable customer relationships is the branch — branches are in fact a key channel for customer
retention and profit growth. The following parts of the retail wheel is addressed in this section
Today 70% of customers use more than one contact channel, but even as channels proliferate,
customers remain loyal to branches. According to a Financial Insights report, 51% of customers say
they prefer branch banking. As a result, the industry is renewing its focus on the branch level,
looking for ways to integrate branch activities with other banking channels, boost productivity,
enhance customer service, and cut costs.
In addition to a blurring of distinctions between channels, revitalized branch networks have re-
emerged as combined centers for advice-based product sales and service, as well as more
traditional banking transactions. Customers want more than just a place to complete transactions.
They want a full-service center for all their needs -- from banking products to brokerage services.
To maximize the value of this resource, banks are transforming their branches from transaction
processing centers into customer-centric into financial sales and service centers. This
transformation helps to achieve bottom line business benefits, such as increased customer
profitability, retention of most profitable customers, increased branch revenue, increased staff
productivity, and reduced operational costs.

Figure 23: Sample Branch in a Bank
Functions of a Branch
The branches of a bank are generally authorized by regulators to perform all the normal banking
functions. Some of the functions of the branch are listed below:
Account Opening
o All types of account like Savings, Current, Time deposits
Account Transactions
o Cash transactions – Cash deposit, cash withdrawal
o Account to Account transfers
o Renewal of time deposits
o Monitoring of account balances and transactions
o Apply for Loans
Remittances
o Mail transfers, Telegraphic transfers, electronic funds transfer, Demand Drafts etc
o Payments through checks
Safe Box Facility
o Safe Keeping of Valuables
Fee based income
o Foreign Exchange Business
o Money exchange
o Issuance of Travelers Checks
o Bancassurance – Sales of insurance and other products
o Sales channel through strong customer relations built
o Advisory role in selling investment products
Customer Servicing and Relationship Management

Customer & Account Teller applications usually offer the following types of features and
Service functions:
Customer identification
Customer and account inquiries
Multiple transactions for single customer
Interfaces to third-party fraud and signature verification

Customer Servicing and Relationship Management

applications
Interfaces to check-order vendors
Transactions Teller functionality includes the following types of transaction processing
for supported accounts.
Cash advances
Currency and coin orders
Deposits, including commercial deposits
Fee collection
Foreign currency exchange
Payments
Stop payments
Transfers
Wire transfers
Cash Withdrawals
Peripheral Support Interfaces to a variety of peripherals enable the teller to automate some
tasks. Peripherals to which teller applications interface include:
Check and money order printers
MICR readers
Magnetic stripe readers
Passbook printers
Personal identification number (PIN) pad
Teller cash and coin dispensers
Check image and data capture devices
Multi Branch Banking & Core banking

Banks are now looking to provide “Multi Branch Banking” service to customers through a network
of the Bank’s branches. Under this service, the customer of one branch is able to transact on her
account, from any other networked branch of the Bank. Typical services provided through “Multi
Branch Banking” include
Cash Deposits
Cash Payments
Transfer of funds
Balance Inquiry
Marking Stop Payment of a Check
Core Banking - Processes, products
Core banking refers to the basic deposits, loans and payment functions of a bank that are core to
its business. It also refers to the use of pre-built packages which can perform these functions and
do most of the accounting, GL reporting and central bank reporting. There are several packages
that enable these. Temenos T24, Oracle FLEXCUBE, Infosys Finacle are a few popular core banking
packages. These are large distributed applications that enable banks to handles accounts resident
in any branch to be operated upon from elsewhere. It reduces a lot of time in processing funds.
Overall core banking packages act as Bank out of a Box. In recent time several large players in the
US such as Fiserv, Fidelity, and Metavante offer their core banking in a hosted model. This enables
small banks to afford these powerful applications by paying for transactional usage rather than
incur a huge investment upfront or a huge implementation and regulatory maintenance efforts.
Cognizant has a formal partnership with Temenos for its T24 and TCB products. The Temenos CoE
offers specialized courses on Core banking and Accounting.

The Emergence of New Channels
Figure 24: New Channels
Historically, individuals have interacted with their banks by visiting the nearest branch. Some
transactions may have involved the transfer of documents by post and perhaps the wealthiest and
most important customers may have been able to solicit a response by telephone. However, as
with most industries, the face-to-face approach prevailed. In the 1970s the automated teller
machine (ATM) began to proliferate. Machines that were connected via networks to a bank’s
central computers and used a plastic card with a magnetic strip to identify customer accounts soon
replaced early off-line versions.
By the early 1990s, dedicated call centers were providing bank customers with a range of services
and by the mid to late 1990s Internet banking was becoming popular. Now, even more channels for
the delivery of financial services are emerging, including third generation mobile telephony devices
and digital television. As technology makes the dissemination of information easier, an increasing
variety of distribution channels are starting to make the source of retail banking products
transparent.
The ever-increasing use of multiple retail banking delivery channels is helping banks to provide
their customers with fast, easy ways to manage their finances. Customers are now banking more
than ever on their home PCs and at ATMs that provide them with convenient hours and access.
However, this increased use of multiple, easily accessed banking capabilities has not necessarily
steered customers away from more traditional means like branches and call centers. Instead, the
availability of new retail banking channels has created a more versatile, multi-channel using
consumer with higher expectations of its financial services provider.
There is now a process of choice for the retail-banking customer; which delivery channel to use and
for which banking transaction. The retail banking industry today is using delivery channels, which
range from branch banking, telephone banking, ATM banking, Internet banking to mobile banking
and interactive TV.
What’s in it for the bank?
The promise of lower transaction costs, increased sales productivity, and more convenient service
has lured banks into setting up new delivery channels. Earlier, vast brick and mortar branch
network had been considered as an inherent advantage of established banks and new entrants
were at a huge disadvantage vis-à-vis the established players in terms of customer reach. However,
post 1990s new players are effectively taking on the branch network advantage of the established
players by optimally leveraging technology and cost-effective delivery channels.
Banks may invest heavily in new delivery channels, but the success and sustainability of these
channels critically lie in the ability to convert that investment into lower distribution costs.
The steps to be followed in making a new distribution channel successful:
Understand customers’ current channel/transaction behavior and their underlying attitude

Use sophisticated experimental customer research to assess the economic impact of tactics
designed to change that behavior;
Develop an integrated channel migration plan which blends economic and non-economic
incentives to ensure that right initiatives are targeted at the right customers;
Protect sales effectiveness by utilizing the ability of non-branch channels to select amongst
prospects and differentiate the marketing message;
Design non-branch channels to emphasize personalized interaction to counteract
decreased loyalty among remote customers;
Develop tracking mechanisms to allow you to assess and revise your migration strategy on
an ongoing basis.

3.2. ATM Banking:
The U.S. payments system is going through a period of rapid change. Paper checks are increasingly
giving way to electronic forms of payment, which themselves are being transformed as new
products, new players, and new industry structures arise. Some of the most dramatic changes are
being seen in the automated teller machine (ATM) and debit card industry. Installation of ATMs has
been particularly rapid in recent years. In U.S. alone they have grown as shown to the right here
and also the Volume of ATM transactions has seen a drastic increase in the U.S. from 11 Billion
USD in 1997 to 15 Billion USD in 2007. Much of the acceleration is due to placing ATMs in locations
other than bank offices. These off-premise ATMs accounted for only 36 percent of total U.S. ATMs
in 1996, but accounted for 57 percent in 2007 and is the third most preferred channel after Branch
and Online.
On the debit card side of the industry, growth has been extremely rapid in point-of-sale (PoS) debit
card transactions. With an annual growth rate of 32 percent from 1995 to 2002, POS debit is the
fastest growing type of payment in the United States. In 2007 it accounted for nearly 12 percent of
all retail non-cash payments, a fivefold increase in just five years. Automated Teller Machines
(ATMs) have made banking available 24 hours a day, 7 days a week. ATM banking is also
considerably cheaper than other methods of payment, such as issuing checks or doing transactions
over the counter inside the bank. ATM and debit card transactions take place within a complex
infrastructure. To the consumer and merchant, they appear to be seamless and nearly
instantaneous. But, in fact, a highly complex telecommunications infrastructure links consumers,
merchants, ATM owners, and banks. The common attribute of all ATM and debit card transactions
is that the transaction is directly linked to the consumer’s bank account—that is, the amount of a
transaction is deducted (debited) against the funds in that account. An ATM card is typically a dual
ATM/debit card that can be used for both ATM and debit card transactions. Many ATM/debit cards
offer the consumer both types of debit card transactions, online and offline.
Apart from the monthly service fee that is charged on a customer’s bank accounts, he/she may also
be charged a fee for every transaction done at an ATM. But it is a lot cheaper to bank at an ATM
than it is to do your banking at a teller inside the bank. This is the banks' way of encouraging
consumers to use ATMs. Fees vary between banks and according to the type of transaction. For
cash withdrawals and cash deposits, the fees depend on the amount involved in the transaction,
while there tend to be set fees for account payments and money transfers, irrespective of the
amount involved. Mini statements and balance inquiries are generally free if you use your bank's
own ATM network (it doesn't have to be the ATM outside your specific branch), but a fee is
charged for these transactions at the ATMs of other banks because your bank will have to pay the
other bank because you used the other bank's ATM.
There are three types of ATM systems: proprietary, shared/regional, and national/international.

 A proprietary system is operated by a financial institution that purchases or leases ATMs,

acquires the necessary software or develops it in-house, installs the system and markets it, and
issues cards of its own design (proprietary systems are less prevalent today).
 A shared/regional system is a network that comes into being when customers of one or more
financial institutions have access to transaction services at ATMs owned or operated by other
financial institutions. A common type of sharing is the joint venture with other financial
institutions, featuring common access and cooperative control.
 A national/international system is also a network, one that enables an ATM machine in New
York to connect with another in Los Angeles. Through service agreements with regional and
proprietary networks, national networks link ATM machines coast to coast.
Typical services provided through ATMs include:
 Cash withdrawal against Account ATM/ Credit/ Debit Card: The maximum amount that can be
withdrawn in a day is restricted by the respective bank guidelines
 Money Transfer between accounts: An individual can transfer money between his/her different
accounts.
 Cash/ Check Deposits – Remote deposit capture through Image ATMs
 Utility Bill Payments
 Balance enquiry /Account Statements
 Marketing: Advertising new products from Banks/ Others.
 Cross-selling. ATMs can help market bank products such as home mortgages and insurance
policies.
 One-to-One marketing. ATMs can be used for customer relationship management (CRM)
strategies.
ATMs also provide additional options like selection of language of choice, change of pin code,
request for new check books, drafts etc.
Kiosk Banking/ Super ATM’s/ Web ATM’s:
With advancement in technology and increased acceptance of ATM banking, banks have tried to
explore further interactive options to enhance the user experience while transacting through the
ATM terminals. Super ATM’s, Kiosk Banking and Web ATM’s have been born out of such
experiments. These terminals serve as a multi function machine going beyond the basic cash
deposit withdrawal features of the standard ATM’s. Among other things, the new ATMs are
capable of cashing checks, printing statements, copies of canceled checks and maps and issuing
money orders, postage stamps or phone cards. Also certain ATM’s are Web-enabled, providing the
customers convenience of online banking without having to use the Internet.
ATM – Business Process Flow
Transaction on Self Bank ATM

Bank Customer on self Bank ATM
8
1 Cash
Customer – Cash Withdrawal Dispensed
Request confirmation
Inputs:-
1. Card Number
2. Expiry Date ATM
3. ATM PIN
4. Transaction Amount
2
Card Verification at 7
Base24 Cash
1. BIN Withdraw 9
2. Card Number confirmation
3. Expiry Date Cash
/ order to
Dispensed
ATM
Card PIN confirmation
3 Verification
Request
4
HSM Card PIN
(Host Security Verification SWITCH
Response
Module)
6
Account Debit
Confirmation
Response
5
Account Debit
Request
Inputs:-
1. Account Number
2. Transaction
Amount
Core
Banking Application
Figure 25: Transaction on self Bank ATM
An ATM terminal is connected to its bank’s server through a Host Server. HOST Server is like an
Internet Service Provider, which acts as an intermediary between the bank and its ATMs. When a
user wants to use an ATM, he inserts the ATM Card in the card reader and punches the PIN by
means of a keypad. This information is transmitted to Host Server, which in turn directs it to the
respective bank to seek authentication. In a typical cash withdrawal transaction, host server causes
an Electronic Funds Transfer (EFT) to take place from the customer's bank account to the host
server’s account. After the completion of EFT, host server sends an approval code to ATM to
dispense cash to the user. Hence the funds are immediately debited from the user’s bank account.
In typical cash deposit transaction; however, none of the above complex processes take place. The
deposit is merely fed into a bin within the safe. The bank employee, along with an armed guard,
retrieves the envelopes and takes them to the tellers who process them like any other deposit.
Thus, the credit for an ATM deposit generally happens a day later.

Transaction on Other Bank ATM
Other Bank Customer on self Bank ATM
1
Customer – Cash Withdrawal
Request
Inputs:-
1. Card Number ATM
2. Expiry Date
3. ATM PIN 7 8
4. Transaction Amount 2
Cash Cash Dispensed
ATM Terminal / Card BIN Withdraw confirmation
Card Processor Verification at confirmation
Keys encryption / / order to 4
SWITCH 3
De-cryption in ATM Cash Withdrawal
whole process Cash Withdrawal Request to
Request to Card Customer’s Bank
Processor
Card
Processor
6 5
Customer Account Customer Account Concerned
HSM SWITCH Debit Response to Debit Response to Bank
(Host Security SWITCH Card Processor Switch
Module) 9
Card Processor Card Processor
Settlement 10 Settlement account GL
account GL Entry Entry response
request
Core
Banking Application
Figure 26: Transaction on Other bank ATM
ATM Card Types
The three types of cards that can be used in an ATM are:
ATM Cards – (also called as a client card, bank card, or cash card) ATM cards are issued by
banks to their customers to be used solely at the banks’ ATM counters for performing
various banking transactions. These are linked to the customer’s bank account.
Debit Cards – A Debit card is essentially an ATM card linked to the customer’s bank
account. Besides containing all the usual features of a regular ATM card, it has an
additional feature that it can also be used at merchant locations to make any payment
(provided the amount does not exceed the bank balance of the card holder). The amount is
immediately debited from the user’s bank account.
Credit Cards – A Credit card is a card that can be used at merchant locations to avail credit
offered by the bank. A certain percentage (varies from bank to bank) of the credit limit can
be withdrawn by the customer through an ATM using the credit card.

A typical debit or credit card has the user’s name, the card number, the card validity, the issuing
bank’s logo and the interchange logo (e.g. VISA, MasterCard, Cirrus, Maestro, Plus, etc.). A Space
for signature of the cardholder is available on the reverse of the card. Whereas, in an ATM card, the
credit company’s logo is not present since it cannot be used at any location other than the issuing
bank’s ATM.
Classification of an ATM
There are basically three models of ATMs- Lobby, Wall and Drive-in. These have been explained
below:
The lobby type ATM is placed in a secure place, but the facial opens into the lobby of the
banking hall, hotel, airport, and shopping malls etc. This type of system is generally
installed in a crowded or busy place where there is frequent usage.
In the wall type model, the facial of the ATM is located in a closed lobby. The access to the
lobby is restricted. In order to have access, the cardholder will have to insert his card in a
lock on the door of ATM room.
In case of drive-in model, the facial is on the road front. It is specifically designed for the
convenience of the customer adding flexibility to operate without getting out of his car/any
vehicle.
Advantages of an ATM
A comprehensive ATM network is beneficial to any bank for the following reasons:
Offers round-the-clock banking services to the customers, thereby increasing customer
loyalty towards the bank.
Reduces branch traffic for a bank, thereby enabling the bank employees to focus on
customer service and enhancing business of the bank.
Cost per transaction done through an ATM is much lower than that done via the branch
channel.
The waiting time for the customers is reduced.
ATMs are used extensively to advertise and promote a bank’s products and services.
When a non-customer uses the ATM of a particular bank for his/her banking transactions
pertaining to some other bank, the bank (whose ATM has been used) usually charges a fee.
Fraudulent Practices in an ATM
a) In the most common form of fraud, the user’s PIN is observed by a fraudster watching from
behind, as the user transacts and then fraudster flicks the users ATM card outside the ATM
premises away from the ATM’s security cameras.
b) Another high-tech modus operandi constitutes of the installation of a magnetic card reader
over the ATM’s card slot and the use of a wireless camera to record the users PIN. These
are then used to gain unauthorized access to the user’s accounts.

c) Then, there are “Phantom Withdrawals” happening in the ATM, where money has been
withdrawn but neither the bank nor the customer admits liability. Banks claim that these
are the result of fraud by customers and experts attribute them to dishonest insiders
within the bank.
Steps for ATM Security
ATMs keep your personal identification number (PIN) and other information safe by using
encryption software such as Triple DES (Data Encryption Standard)
It is important to use a well-lit, public ATM machine at night.
Your ATM PIN should be a number that you can easily remember, but that would not be
readily available to thieves
3.3. Phone Banking
Phone Banking enables one to conduct virtually the entire spectrum of banking transactions
without traveling to and from the bank. It greatly helps banks in reducing time for transaction,
reducing activities in banking branches and of course save money. With phone banking, banks are
equipped to deliver true 24 hours services and 7 days in a week, 365 days a year, number of
transactions could be done by tipping your customers’ fingers executed through phone. Timeless,
borderless and very efficient to deliver are the characteristic of phone banking services. The
following areas of the retail wheel will be covered in this section
Tele banking can be carried out through an ordinary phone. Typical services provided through
Telephone Banking include:
 Perform inquiry on accounts, Check account balances
 Fund Transfers
 Request for Check book / Statements / Demand Drafts
 Make bill payments
 Stop checks
 Arrange standing orders
 Tele Sales – Inbound and Outbound
Phone Banking – Business Process Flow and Architecture
The Tele Banking process is essentially an IVR (Interactive Voice Response) system based on an
open platform. The latter is extremely rugged to enable 24x7 operations. In addition, it is suitable
for future needs due to its modularity and expandability. The IVR system employs a parity toolkit
with programming GUI-based tools enabling easy and rapid development of applications. In
addition, the system can be customized to suit the requirements of banks with multilingual
capabilities and provides voice as well as fax functionality.
Figure 27: Phone Banking Architecture
*PSTN – Public Switched Telephone Network (similar to internet)

*TCP/IP – Transmission Control Protocol / Internet Protocol
The phone banking process is explained below:
 Customers calls Tele-banking number.

 Call received by IVR system port.
 Greeted by welcome message and offers choice of languages.
 Asks for ID and TPIN for identification.
 IVR system authenticates caller by transmitting the query to host.
 Customer can opt for other transaction by choosing the options offered.
 Through phone banking customers can avail a number of facilities.
 IVR refers to a computerized system which allows phone caller to listen to several options
from the menu and select the required one.
 Customers’ issues if not resolved by tele-banking executive, it can be further escalated to
Phone-banking manager.
 Extremely rugged to enable 24/7 operations.

Customer
Telecom
Provider
Network
1-800-
CALL
Vector Routing
Agent
PBX/EPBX
Vector Routing
Agent
Agent
Routing
Agent
Genesys (Multi
Site/Virtual Transactions Customers & Loans
Queue Accounts
Monitoring)
INFLAG
Custom
IVR1 IVR2 Server of Front End
IVR3
Genesys Application
Call Terminate
Figure 28: Phone Banking process

Typical steps in the interaction by the Customer through IVR are as below:
Figure 29: Steps involved in interaction of customer through IVR

Source: ICICI Bank LTD Site
Interactive Voice Response or IVR
This tool is most commonly used in bank contact centers. Interactive voice response, or IVR, refers
to a computerized system which allows a phone caller to listen to several options from a menu and
select the required one, and interact with the computer phone system. Typically, the system
presents a pre-recorded voice prompting the caller to press various numbers for required service
on the telephone keypad. Using IVR, simple transactions can be conducted automatically without
any need for the operator to intervene. Often IVR goes with another technology called CTI
(Computer Telephone Integration), which matches IVR in banking domain. The IVR responds to
caller-entered digits or speech recognition in a manner similar to the response of a computer to the
mouse or keystrokes. IVR, when combined with database computers, allows callers to interact with
databases, they can then check current information and complete certain transactions.
Examples of IVR are credit card enquiry in bank, balance enquiry, personal loan enquiry, enquiry
regarding the transactions etc.
BENEFITS OF USING IVRS ARE AS FOLLOWS:

Increase in the number of customers served in stipulated time
Cost reduction
Better service to the customer
Helps in profiling the customer
3.4. Internet Banking
Internet banking enables a customer to do banking transactions through the bank's website in the
Internet. This is also called online banking, virtual banking, or net banking, or anywhere banking.
For banks, the biggest advantage is reduced operational costs, compared to any other form of
banking distribution channel. Against $1.07 for branch banking, it costs only $0.13 in Internet
banking. It is still cheaper than ATM where the cost is around 30 cents. The additional advantage is
that the bank need not invest in infrastructure and staff management. The following sections of the
retail wheel will be covered in this section:
“PC Banking” allows an owner of personal computers to access account information using a
modem connection to a traditional bank or financial service provider’s corporate computer
network. This access allows consumers to
 transfer funds within an established bank,
 to pay bills, and
 to transact other traditional financial services
without entering a traditional branch office but requires installation of the PC banking software.
Internet banking essentially encompasses two broad aspects, “PC Banking” and “Internet Banking.
“Transactional web sites” are defined as bank web sites that allow customers to transact business.
This may include
 accessing accounts,
 transferring funds,
 applying for a loan,
 establishing an account, or
 performing more advanced activities.
($ per 1.2
transaction)
1
0.8
0.6
0.4
0.2
0
Branch Phone ATM Online Internet
(teller) (mix) (PC)
Figure 30: Processing cost per transaction
Source: Booz-Allen & Hamilton, JP Morgan (2003)
Internet banking allows banks to minimize transactions costs in their business operations.
Transactions costs - the costs of delivering products (e.g., checking and savings account services,
credit and debit cards) to their customers - are a significant drag on profit margins in business and
reduce the overall efficiency of an enterprise.
Costs fitting into this category include the expense of buildings, personnel, and whatever physical
infrastructure is necessary for the delivery of retail banking services through a network of
branches. Because Internet banking notionally requires a lower personnel level for the delivery of
basic financial services, it offers a potentially dramatic reduction in bank operating costs and a
parallel potential increase in profitability.
Some of the benefits of internet banking are:

Greater reach to customers
Quick time of response
Easy access to information
Quick understanding of customer needs
Reduced cost of operations

Figure 31: Data on Online Banking adoption
These Internet banking services are offered by traditional as well as new age banks as a
delivery channel to reach more and more customers, and offer new services to existing
customers. Typical services provided through Internet Banking include
Internet Banking Functional Model

Management
Account
Account Account Account

Opening Management Aggregation
Archival services
Services
Banking
Self-Help
Online Service – Statements, Alerts, Secure,
Product
Security, Privacy,
Channel Checks & E-mail & Blogs Disclosures
Brochures
Documents
Payments
Healthcare, Commercial P2P/B2B Cash

Bill Payments Payments Management
Taxes Wires
Personal
Calendar based
Finance
Savings, Goal Spend

Cashflows
Tracking Analysis
Analysis
Figure 32: Internet Banking functional model
 Account Services

o Open Accounts online and submit documents mandatory through mail or personal
visit subsequently
o Check up-to-date account balance summaries & running totals
o View / download / print transactions or statements & request paper statements
o Carry out funds transfers within as well as outside the Branch / Bank
o View / Cancel Direct Debits
o Contact customer service / Get your queries answered
o Receive alerts when
 Account balance crosses a threshold limit
 Account becomes overdrawn
 CD is about to mature
 Check clears / account is debited / credited
 A new statement is available
 A transfer fails
 Payment Services
o Transfer funds between your accounts
o Transfer money to a different account
o Schedule future transfers
o Make loan / mortgage payments
o Make bill payments
o Schedule automatic recurring bill payment
o Set up new Payees and Standing Orders
o Stop checks, Order new check books
 Personal Finances
o View the progress towards some personal set savings goal
o View analysis on spending pattern for accounts like savings, checking or credit
cards
o Aggregation of accounts of all types into a third party site like mint or a banking
online site like Money Manager from ANZ
o PFM has a huge ROI in terms of cross-sell deeper relations etc.

Figure 33: Allocation of Benefits from Internet Banking
(Source: Celent Communications,2006)
Risks Associated with Online Banking

 The services provided are governed by the vendor (hardware and software) provided by
the vendors. The risks associated with the functionality of vendor products used in internet
banking are among the risk pertaining to online banking.
 Security and data integrity when data is transferred over on the internet for online banking.
 Authentication, Identity Verification, and Authorization over on the internet has more
complexities than in other channels of banking
 Permissibility, Compliance, Legal Issues, and Computer Crimes
Security Issues with Internet Banking

The major concern for banks is security and technology issues. When we say security, it is the
security of the customers’ accounts, security of bank’s funds, security of the banks system, the
reputation of the bank and the security of each and every transaction that takes place within the
bank. With so much at stake, banks can ill-afford complacency and its usual laid-back approach,
particularly in light of the growing number of phishing, and ID theft scams.
In some countries, for personal online banking applications, protection through single password
authentication is not considered secure. Several Internet banking services hence also have a second
layer of security. Transaction numbers (TANs) which are single use passwords are the most
common technique. Another method is using two passwords, some parts of which may be entered
at the beginning of an online banking session.

Security is the primary focus and hence it is pertinent that the architecture, which the bank
eventually uses, offers optimum security. The architecture for Internet Banking should be able to
integrate with the existing architecture, if any, of the bank. The two types of banking solutions
(architecture) that are commonly prevalent are Centralized (core) Banking solution and Distributed
Banking Solution. Any bank would opt for one of the two architectures depending on the various
constraints that it is faced with. Irrespective of the Banking architecture, the Internet Banking
should be integrated into it and the points that should be ensured are:
 Confidentiality
 Integrity
 Authentication
 Authorization
 Availability
 Non-repudiation
Ways to achieve Internet Banking Security
A multi-layered security infrastructure could include firewalls, filtering routers, encryption and
digital certification. The combination of these tools helps prevent unauthorized access. Each of
these tools works in the following manner:
Firewalls and filtering routers – They allow only legitimate Internet users to access the
system. This system controls the transfer of data from one network of computers to other
by using a firewall-proxy combination. This prevents the data from being accesses by
unauthorized personnel.
Encryption techniques – These are used to “hide” data being transmitted by the online
systems. The process uses a software called cipher to make the content unreadable to
anyone, and can be read by the person in possession of the key.
Digital certification – These are a set of procedures which assure that the data being
received is from legitimate sources and “certify” the systems. It ensures that the user
sending the message / content is the same who he or she claims to be. However, one
needs to apply to the “Certificate Authority” to get the access to digital signature.
The high level processes can be classified into those supporting the various online banking services
offered to customers, namely Account Management and Bill Payment, and internal processes of
the bank required to manage the online delivery channel.

3.5. Mobile Banking
m-Banking (Mobile Banking) is provided by the Bank, in association with cellular service providers.
Mobile Banking could either be done through SMS , WAP or mobile applications . In SMS m-
Banking, the customer does not call the bank. Instead, he/she keys in short key words, on the
mobile and transmits this information to the Bank via SMS. The Bank responds to this SMS enabling
the customer to get the required information without any manual exercise. Unlike SMS m-banking,
WAP enabled m-banking, actually allows the customer to log on to the bank's website and perform
transactions, similar to Internet banking.
Mobile Banking is a new emerging financial services channel allowing consumers to conduct
financial services through their existing mobile phone interface. Mobile Banking (also known as M-
Banking, m-Banking) is generally used to indicate activities like
 balance checks,
 account transactions,
 payments etc.
via a mobile device such as a mobile phone. Mobile banking today is most often performed via
SMS, the WAP enabled mobile internet and exceedingly standard applications downloaded to the
mobile device.
M Banking comprises delivery of account information, and provision of facilities to carry out
transactions with the help of a mobile device. Mobile Banking currently is predominantly
addressing the retail customers, though there are some banks offering Wholesale services across
customer segments.
Mobile Banking services can be classified based on the technology supporting M Banking initiative.
These can be SMS based, Downloadable application or WAP (Wireless Application Protocol) based.
SMS stands for Short Messaging Service where the user sends a predefined message to a
predefined short code (Example BAL to 6666 may return the latest balance details for the
registered mobile banking user). In case of Downloadable application the user can download the
bank’s mobile banking application by visiting his/her bank’s website, provided the application is
compatible with customer’s handset and wireless carrier. A WAP based solution is much like surfing
a bank’s custom built website for mobile banking. This is useful only for those handsets which are
enabled for browsing.
The biggest advantage that mobile banking offers to banks is that it drastically 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. It needs to be seen as part of the multi channel strategy
a bank adopts in accessing its customers.

For service providers, Mobile banking offers the next surest way to achieve growth. Countries like
Korea where mobile penetration is nearing saturation, mobile banking is helping service providers
increase revenues from the now static subscriber base. Also service providers are increasingly using
the complexity of their supported mobile banking services to attract new customers and retain old
ones. Alternate payments using NFC and hence mobile based solutions in increasing transaction
volume and drawing more throughput from these service provider networks.
Tower Group estimates that mobile banking usage will grow from 10 million active users in 2009 to
over 53 million active users in 2013, representing a compound annual growth rate of 51.8 percent
as the mobile channel is increasingly being perceived by consumers and banks as a way for people
to track and control their financial status in a more immediate manner especially during the
economic crisis and acts as a bridge to much more feature-rich, value-added mobile payments
solutions.
Major Business Entities
Customer Merchant Banks

 Personalized service  Network operator independent solutions
 Faster transaction time
 Minimal learning curve  Payment applications designed by the bank
 Low or zero cost in using the system
 Trust, privacy and security  Exceptional branding opportunities for banks
 Integration with existing payment
 Ubiquitous – anywhere, anytime and any currency  Better volumes in banking – more card payments
systems
 Low or zero cost of usage and less cash transactions
 High security
 Interoperability between different network operators, banks and  Customer loyalty
 Being able to customize the service
devices  Security
 Real time status of the mobile
 Anonymity of payments like cash payment service
 Person to person transfers
Telecom Network Providers
 Security
(AT&T, Sprint, Verizon, T-Mobile )
 Generating new income by increase in traffic
 Increased Average Revenue Per User (ARPU) and
Software and Service Provider
reduced churn (increased loyalty)
(mFoundry, Monetise, Metavante)
 Become an attractive partner to content providers
 Large Markets
 Revenue Sharing Model
 m-enabling core applications
 Low time to market
Mobile Device Manufacturer
 Highly secure platform
(Nokia, RIM, Apple, Microsoft)
 Large market adoption with embedded mobile
payment application
 Low time to market
Intermediaries
 Increase in Average Revenue Per User (ARPU)
 Support one or different parties in the banking process
 Provide the institutional infrastructure for mobile markets
 Integrating functionality of different business models Advertisers
 Guide and monitor long-term complex processes Mobile Banking  Sustainable revenue model
 Greater access from network operators to
understand user behavior and preferences
 Handsets' ability to locate their users and provide
ads keyed to that location
 Hardware improvements such as large screens for
greater impact of ads
Security & Authentication Providers  Faster networks capable of downloading complex
 Secure Transactions graphics and videos
 Protect underlying infrastructure
 Confidentiality of sensitive/customer information Regulators
 Convenience  Consumer Protection policies
 Integrity  AML laws and Counter financing terrorism
 Availability Government  Fulfill KYC norms
 Non-repudiation  Revenue through taxation of  flexible complaint handling system
 Compatibility and interoperability m-payments  Ensure money supply by back funds
 Revenue per transaction  Standards & Technology  Secure Banking platform
 Legal requirements  Security  Transparency, liquidity, cash management
 Consumer Protection  Secure payment systems
Figure 34: Major entities in Mobile Banking
Mobile Banking - High Level Processes

Mobile Banking is a new emerging financial services channel allowing consumers to conduct
financial services through their existing mobile phone interface. In the US market, three different
mobile banking technology standards for deployment have emerged. They are
1-way and 2-way Short messaging service (SMS) deployments, leveraging the mobile
phone’s inherent text messaging capabilities

Mobile wireless application protocol (WAP) deployments, leveraging the mobile phone’s
web browser
Java or Brew downloadable client applications which can be downloaded on the phone
(some will eventually be preloaded on the phone).
The three technology approaches differ on several fronts including cost of deployment,
functionality and richness of interface they can offer, convenience and current popularity in US
market. However majority of phones in the US market support all three deployment technologies
and existing handset technology is no longer a limitation
Generate secure
message and
send via TCP <<extend>>
<<extend
Entry of account >> Money transfer
gets <<extend>> <<extend>

>
Perform
transaction
Request <<extend>>
balance
verifies delivers Start mobile
<<extend>> application
Transaction Starts
Verify and read
acknowledgement
secure message
reply
retrieves
Client
Figure 35: Mobile Banking High Level Process
Mobile Banking Services

The Mobile Banking services are further divided as Inquiry based and Transaction based Services or
Existing and Emerging Services. These have been explained below:
 Inquiry Based Mobile Banking In these services customer is mainly inquiring on the various
types of requirements that one has from his/her bank. The various types of inquiry services that a
customer may look forward to from his bank are further explained below.
Account Balance Information: Gives access to all the accounts, including interest checking (and line
of credit for overdraft), money market savings and my linked credit cards. Account updates occur
most instantaneously.
Cheque Status Inquiry: Gives information on the status of a cheque which has been issued by the
client, whether the same has been cleared, bounced or is under clearance.
Account Statement Inquiry: Gives the summary of transactions done in past on the account for a
fixed number of transactions or for a given time frame.

Credit /Debit Alert: The bank send alerts to the customers as and when the account is debited or
credited for an amount which is above the threshold limit as preset by the customer.
Minimum Balance Alert: The bank send alerts to customers when the customer’s account balance
goes below the threshold limit that one needs to maintain in his account.
Bill Payment Alert: The bank would send an alert to the customer informing him of the pending
bills that are forthcoming/due for payment
Interest Rate / Exchange Rate Details: The client can request for the latest deposit/interest rates
for savings or loans also can get the latest exchange rates for cross border money transfer
The Branch/ATM Locator: Lets the user quickly search for a nearby ATM or branch by entering a
ZIP code or address, which is pretty handy when the customer is travelling.
Emerging Mobile Banking Services
 Security Trading: Mobile banking is now also getting extended to cover services which are
beyond the regular transactional banking to cover areas like share trading and investments. The
services that are covered under this section are described below.
Portfolio Details: This Facility allows the user to keep track of his portfolio maintained by the bank.
It will give him the daily movement of the portfolio which will allow him to make a informed
decision on his investments
Stock Quotes: User can get the regular quotes of the various market Indices and also of the
individual stocks that he or she may want to track.
Important Alerts-Tips: The bank may send out important messages or tips on the stocks that it is
monitoring to various registered customers as per his or her requirements.
Market Statistics: As a bank or a brokerage firm the research and analysis department comes up
with various market statistics which are useful for the users to take decision on his investments, the
user may request for the desired statistics as and when required.
Buy/Sell Request: This is becoming the single most reason why mobile banking facility is picking up
in this area because security trading is most time sensitive and users would want to buy and sell
stocks even while on the move.
 Paper Cheque deposit and bill payments: This service enables existing bank customers to take
images of signed cheques and transmit them using the mobile. At the backend the software hosted
at bank’s premises validates the genuineness and quality of cheque and notifies the customer
accordingly.
The ubiquity of mobile devices, coupled with customers' craving for information on the go, is
creating the perfect opportunity for banks to extend the reach of their banking services using the
most personal possession for consumers—the mobile phone. At a time when every customer
counts, mobile banking is an avenue for banks to reach new audiences and grow their business
3.6. Electronic Funds Transfer at Point of Sale (EFT POS)
EFTPOS, Electronic Funds Transfer Point of Sale, refers to the technology that allows a retailer to
directly debit a customer's bank account by using a debit card. The debit card, generally the same
as an ATM card, is swiped through a EFTPOS reading device just like a credit card. The customer
must enter his or her PIN number, generally requested once the amount of the sale has been
entered into the EFTPOS device. Then the EFTPOS equipment contacts the store's bank
electronically about the transaction. A message is also sent to the customer's bank. Unless there is
reason for the EFTPOS transaction not to be completed, the funds will then be transferred between
the two accounts. The EFTPOS transaction takes a matter of only a few seconds. Confirmation of
the EFTPOS transaction is sent to the store and passed on to the customer in the form of a printed
EFTPOS transaction record.
There are many advantages to using an EFTPOS for the retailer and customer alike. The retailer is
paid 'instantly' without having to accept actual cash. Though cash is certainly preferable over credit
cards with surcharges, or personal checks that can bounce, there are many security liabilities
surrounding the handling of large amounts of cash. Cash must be manually counted by the cashier
at the POS, counted again when the register is balanced out, and finally collected by an armed
service or personally deposited. With EFTPOS, the money is wired directly into the retailer's bank
account, bypassing those liabilities while saving manual resources.
The customer also comes out ahead using EFTPOS, due to its considerable convenience. A shopper
need not have cash on hand, credit cards, or a checkbook to make a purchase. This is especially
convenient for unplanned or impulse buying. EFTPOS customers have the option of asking the store
for cash in addition to the purchases. This has the advantage for the customer of saving a trip to a
bank or cash machine, and it also reduces bank charges as only one EFTPOS transaction is counted.
Furthermore, if an item needs to be returned to the store, an EFTPOS sale affords the patron an
instant cash refund, notwithstanding store policy. Contrast this with personal checks which require
a customer to wait two weeks or more before a cash refund can be offered. Finally, EFTPOS saves
the consumer money by sparing personal checks and ATM fees to withdraw cash.
EFTPOS is extremely popular in the United States, the United Kingdom, Germany, Australia, New
Zealand, and Canada.

4. Fee based Services
As a result of the banking industry's intense competition, rapid rate of product development,
evolving technology, and continuing consolidation, most Banking businesses have started to offer
several fee based services which were earlier being provided as part of the overall relationship with
a customer. Fee based service today account for a substantial portion of a Bank’s revenue. This also
acts as consistent earnings contributor as the interest income of the banks is subject to
macroeconomic conditions and regulations.
Bank Management sets fees and charges for banking services to ensure that the bank is adequately
compensated for the services it provides. When setting fees and charges, Bankers take into
consideration the possible exposure to loss, which may be incurred for providing the service, the
effort required of the Bank and the amount of time required performing the service properly.
Some of the more common fee based services being offered by Banks to retail customers today are
described in this section. Although most of these services are related to Payments they can broadly
be categorized under the following broad headings
 Account Management
 Investment Advisory Services
 Instruments
 Payments
 Collection Services (Lock Box)
 Other Services (Safe Box / Utility Payments)
4.1. Account Management
Fee charged on Accounts
The average price of maintaining a bank checking account is currently about $200 a year. Although
different Banks may offer a customer the same services in terms of the accounts they support and
the facilities provided through those accounts, the fees that may be charged may differ
considerably from one Bank to the other. If one account pays sufficiently higher rates than another,
it might more than offset the additional fees that account charges.
Here are some of the most common fees associated with Bank accounts:
Maintenance fees: Some Banks may charge a small annual fee for maintaining the customer’s
account. The maintenance fee might also vary from customer to customer for the same Bank
and based on certain transactions this can be reduced. If the customer uses direct deposit for
the paychecks, or if branch visits and/or transactions are limited one could reduce his
maintenance fees
Low-balance penalty: While most Banks offer "free" checking if the customer maintains a
substantial balance , other Banks might charge a penalty if the account balance falls below a
pre-defined threshold.

The threshold limit might be based on the account’s average daily balance, the lowest balance
in the month, or the balance on a certain day of the month, so it is up to the customer to satisfy
the threshold criterion so that there is no low-balance penalty for his/her account.
Minimum Balance Fees – Nothing for Checking , more for MM and Savings
ATM surcharges, "Foreign" ATM fees: Banks may also charge their customers for ATM usage.
In most cases, if the customer is using an ATM, which is not owned by the Bank, the Bank
charges a surcharge, part or all of which is paid by the Bank to the Bank owning the ATM.
Other fees charged in other bank ATMs include:
 Statement request from ATM – Small fee ranging from 0.5 $ to 2 $ per request
 Deposits made at an ATM – Most Banks allow a fixed number of deposits per month
depending on the type of account maintained. Beyond the minimum number of deposits,
Banks charge a small fee of $ 2 to $ 5 per deposit
 Balance enquiries – Depending on the Bank the fee varies from $ 0.5 to $ 1 per enquiry
 Most of the other services at an ATM are charged at a nominal rate
 ATM Card replacement fee
Returned check: A Bank may also charge a Customer for a check that has been presented by
the Customer, if the check bounces.
Bounced check: If a Customer has written a check for an amount, which cannot be covered by
the available funds in the customer’s account, an insufficient funds fee (NSF) will usually be
imposed by the Bank. The only recourse to this is if the Customer gets an overdraft protection.
Overdraft protection: Instead of getting charged for bouncing a check, overdraft protection will
in effect provide the account holder with an instant loan. The interest rate charged for the
overdrawn amount is the fee for utilizing this feature and will be extremely high, but if it is paid
off quickly it is usually much less expensive than the bounced check fee.
Check printing: Some banks offer free checks for first-time account holders, account holders
with a large minimum balance, senior citizens, students, and certain others. Most of the other
Banks, however, charge a small fee for making checks available to the customers.
Per-check charges: Some Bank accounts include a certain number of checks per month and
charge a fee for the number of checks used above the free check limit.
Closed account: Some banks charge a fee if the Customer closes an account that hasn't been
utilized for a sufficiently long time (usually two years).
Direct Deposit Slips: If the customer uses a deposit/withdrawal slip for the cash deposit or
withdrawal, a fee is charged.
Others
 Excessive Transaction Fee – A nominal amount per statement cycle for exceeding the
authorized number of Money Market or Savings Account transactions per statement cycle
 Duplicate Statement Fee – Usually a $5 to $ 10 charge if the customer requests a duplicate
statement from the Bank
 Inactivity Fee – A nominal amount if the average minimum balance is not maintained and if
there is no account activity for a specific period of time
 Not Sufficient Funds (NSF) Fee – Typically $15 to $ 25 per item
 Stop Payment Fee – Typically $10 to $25 per request. A fee is also charged if the customer
wants to start using his/her account again
 Foreign Currency Charges – If the customer requests payment in foreign currency a small
fee is charged
4.2. Investment Advisory Services
Retail Banks also provide Wealth Management services to some of their designated affluent
customers. Within this spectrum Banks provide relationship-based advisory, sales, service and
product solutions to the full spectrum of wealth-building clients.
Banks deliver a wide selection of investment products and services - full-service brokerage,
discount brokerage, asset management, private banking, trust services, and a broad selection of
investment and credit services through its branch-based sales force.
Banks have dedicated financial consultants at their branch offices who provide need based advisory
services to the customers. These financial consultants design and implement a unique asset
allocation strategy for each customer that is determined based on the customer’s investment
objectives, which could be any of the following
 Capital Appreciation
 Reliable Income
 Wealth preservation
In addition to providing these Investment Advisory Services, Banks also cater to the needs of
customers by providing tailor made solutions through the various products they have on offer.
These products / services may include one or more of the following
 Stocks - If the customer wishes to implement a portion of his/her investment plan using
individual stocks, the financial consultant can recommend equities, or analyze the existing
portfolio and make recommendations.
 Bonds – The financial consultant would advise to invest in a broad array of fixed income
products including U.S. Treasury and Federal Agency bonds, corporate bonds, municipal
bonds and mortgage backed securities.
 Mutual Funds – The financial consultant can recommend mutual funds selected by the
Bank’s mutual fund research team using a proprietary mutual fund screening and selection
model.

 Annuity and Insurance Services - To assist the customers in tax and retirement planning,
the financial consultant provides alternatives from many of the industry's annuity
providers. Help is also provided in addressing protection, estate planning and other
insurance related concerns through insurance programs, available from firms evaluated
and approved by the Bank’s Insurance Group.
 Managed Mutual Fund Portfolios - Through the bank’s managed mutual funds portfolio
program, the consultant determines asset allocation strategy that best matches with the
customer’s long term needs and attitudes toward risk, and structures a professionally
managed mutual fund portfolio.
 Professional Portfolio Management - The consultant works with the customer to combine
a mix of investments with appropriate strategies tailored to suit the customer’s specific
needs to help the customer grow and preserve his/her assets.
 Retirement Planning Services - The financial consultant works with the customer to
establish the appropriate tax-advantaged retirement account for either business or
personal use, including IRAs, SEP-IRAs, Qualified Retirement Plans and Money Purchase and
Profit Sharing plans.
The Banks earn fees for each transaction as a percentage of the value of the transaction from the
seller of the products such as the Insurance Company, Asset Management company etc and could
charge the customer as well for the advice rendered based on the value of the portfolio.
4.3. Instruments
Banks charge the customer for various instruments that the Bank provides towards effecting
transfer of monies from the customer to any beneficiary. The charges levied by the Bank depend on
the type of Instrument as well as the amount of monies that is transferred. The instruments that
are used for this purpose are
 Bank Drafts
 Most Banks do not charge a fee if the amount is drawn from the customer’s account with
the Bank
 Domestic Currency Bank Drafts
o A specific percentage of Draft amount or about $ 1-2
 Foreign Currency Bank Drafts
o $ 15 - $ 25
 Certified Check
 Most Banks charge about $ 5 to $ 7 per check. If the amount is high the fee is a specific
percentage of the check amount
 Cashier's Check
 For Bank customers – free for some account types although there is a limit on the
number of such checks. Beyond the limit there is a fee of $ 2 to $ 4 per check.

 For non-customers – fee varies from $ 2 to $ 4

The salient features of this instrument are dealt with in Section 5 of this document.
4.4. Money Transfer and Payment Fees
Banks charge the customers for wire transfer authorizing the bank to transfer funds across a
network administered by hundreds of banks around the world. Banks charge the customers on a
per transaction basis with a floor price. The charges could either be based directly on the amount
transferred or be based on slabs that are pre-defined by the Bank. Banks normally use the following
Wire Transfers:
 FEDWIRE
 CHIPS
The working details of these are covered under the Payment section.
4.5. Safe Box
A Customer may lease a safe box from a Bank for safekeeping valuables, important documents,
securities etc. Safe box services offered by Banks are safe, ensure privacy and convenience. Usually
Banks maintain a safe box warehouse, which is built according to the standards for a bank vault.
The Banks lease the boxes to customers with no obligation of confirming the amount and the value
of the goods. Safe box holders may visit the Bank vault at any convenient time during the Bank’s
business hours, with their safe boxes being at their full disposal. Bank charges fees for holding safe
boxes in accordance with the applicable fee schedule and depending on their size.
4.6. Utility Payments
A customer may use Bill Pay facility that is offered to pay all bills pertaining to various utility
services such as telephone, electricity, insurance as well as certain local taxes. The features of this
facility are:
 Setting up one-time or recurring payments.

 Hassle Free payment of bills
 View pending and recent payments and up to 6 months of payment history.
 In case of online bill payments
o Get email alerts to manage payments.
o Track expenses with personalized reports.
The Bank generally clubs this service as a value add to one of the various packages that it offers or
it may charge a fee for this service depending on certain criteria such as maintaining a minimum
amount in the checking account.

5. Product Management & Sales
5.1. Operational Model
The activities of a retail bank can be classified into front office, middle office and back office
operations. The following parts of the retail wheel will be covered in this section:
Front office operations Involve direct interfacing with the customer

Back office operations Processes and systems which support the functioning of the
front office and take these transactions through accounting,
settlements, fulfillment, customer communications etc
Middle office functions Realm of product management, risk management and
compliance.
Right from the time a customer opens an account with a bank, the relationship is managed through
various activities carried out in the front and back offices. In fact, the mere act of getting customers
involves a thorough coordination between the various arms of the bank. The following section
outlines the different front office functions and their associated back office functions. (mortgage
processing activities not in focus).
FRONT OFFICE OPERATIONS
Contact Management
Campaign Management Complaints Management
Cross Sell & Up Sell Initiatives Customer Retention
Campaign Effectiveness Email Management
Sales force Automation Exception Processing
Sales & Marketing Customer Analytics & Servicing
Account Origination & On Boarding
MIDDLE OFFICE OPERATIONS
Risk Parameters Set Up

Product Structuring Monitoring & Case Management
Legal & Compliance Approval AML & Central Bank Reporting
Product Distribution MIS & Audit
Product Management Management & Control
BACK OFFICE OPERATIONS
Account Maintenance Account Maintenance

Transaction Processing Transaction Processing
Collections Collections
Reconciliation Reconciliation
Account Closure Account Closure
Core Processing Information Distribution
Support Services
Figure 36: Activities in a Retail bank

Sales and Marketing

Customer Campaign Management – Direct Customer contact through Sales lead
Acquisition managers
Cross-Sell & Up-Sell Initiatives - Selling Bancassurance & Wealth Products to
existing customers
Campaign Effectiveness - Direct Marketing and selling campaigns via all
available Channels and targeted offerings to specific markets.
Sales Force Automation – Deploy information systems to automatically record
all the stages in a sales process through combined use of a contact
management system, a sales lead tracking system, a sales forecasting system,
an order management system and product knowledge system.
Customer Analytics & Servicing

Customer Contact Management – Track calendars, integrate email and personal file
Management information (phone numbers and addresses), with task lists and histories of
interactions and enable people to keep track of their associates and tasks.
Complaints Management – Track how they handle, manage, respond to, and
report customer and channel partners complaints through real-time visibility
provided by the customer complaint management software that track each
complaint through its lifecycle from recording and initiation to investigation,
reporting, and closure.
Customer Retention – Adopt a tactically-driven marketing approach based on
customer behaviors like action-oriented activities such as making purchases
and visiting web sites, with an intention to keep customer attrition rates low
and sell more to existing customers, to reduce sales overheads.
Middle Office
Product Management
Product Product Structuring – Product Offering becomes more responsive to unique
Design and consumer tastes and derivative products grow to meet the unique configurations
Distribution demand, more as an outcome of competition.
Product Distribution - reduces distribution costs, facilitates the distribution of
products to consumers and makes online shopping of banking products practical.
Legal & Compliance Approval – Ensure adherence and reporting requirements
for obtaining approval for complying with certain qualitative or corporate
governance requirements for the new products designed.
Management and Control

Risk Risk Parameters Set Up – Configure threshold levels for all types of controls
Management designed to track near violations of regulatory benchmarks and stipulations, to
and ensure compliance levels well within acceptable limits.
Compliance
Reporting Monitoring & Case Management – Ensure constant monitoring of these set
threshold levels and reporting of any violations on a case by case basis with
suitable risk management of them, to mitigate the operational losses.
AML & Central Bank Reporting – monitoring of all suspected transactions for
Anti Money-Laundering (AML) requirements and ensuring timely and accurate
generation, collation and forwarding of regulatory reports to Central Bank and

any other designated regulatory body.
MIS & Audit – Provides up to date snapshot of key information to top
management to facilitate speedy and correctly-informed decisions and extracts
all required reports necessary to diligently audit the entire operations of the
Bank, in terms of both financial as well as I.T Security aspects.
Back Office
Core Processing
Product Account Maintenance – Address Customer servicing issues related to their
Design and accounts maintenance like Customer request management - recording change in
Distribution customer information, mode of payment, Managing & recording product
enhancements like rate & product change, top-ups, Recording activity of loan
installments collection through ECS / check, Processing loan foreclosure
activities, Printing & dispatch of deposit interest payout related checks, Customer
correspondence, Reconciliation & MIS, Resolving queries from branches/ front
offices, etc.
Transaction Processing (TP) – Ensure that information processing that is divided
into individual, indivisible operations, called transactions, succeed or fail as a
complete unit; and do not remain in an intermediate state. Their design is to
maintain a computer system (typically, but not limited to, a database or some
modern file systems) in a known, consistent state, by ensuring that any
operations carried out on the system, that are interdependent, are either all
completed successfully or all cancelled successfully. Key criteria used to validate
TP is ACID criteria (Atomicity, Consistency, Isolation, Durability)
Collections – help in improving all aspects of the credit and collection process, to
increase cash flow and reduce bad debt through collection of past due accounts,
outsourcing collection, and bankruptcy/liquidation collections for collections of
entire portfolios.
Reconciliations – Provide transactions reconciliation services for accurate
accounting and reduced operational risk provisioning

5.2. Basic Sales Process
BASIC SALES CYCLE

Raw leads are generated by
cold calls, promotion
activities, marketing
campaigns, trade shows etc
RAW LEAD 1
6
Lead conversion is not the Next step to develop

end, next step is to maintain CUSTOMER relations with them by
good relations with the
RELATIONSHIP ESTABLISH giving a sales meet or
customers by providing sales call
them services, resolving MANAGEMENT RELATIONSHIP
their queries, updates,
information etc.
BASIC SALES 2
5
PROCESS
In the sales meet or call

LEAD NEED sales officer needs to
CONVERSION RECOGNITION understand the customer’s
requirements by probing
Now if the customer is

satisfied with the
solution provided then
the deal is closed
FORMULATE 3
4
SOLUTION
Next step after understanding

customer’s requirement is to
provide a appropriate product
matrix that should satisfy his needs
Figure 37: Basic Sales Process
Raw Lead from Campaigns & Database Marketing (Step 1) : The first step i.e. client acquisition
and sales leads come from either marketing processes such as trade shows, direct marketing,
advertising, Internet marketing, promotions or from sales person prospecting activities such as cold
calling.
Lead Qualification (Step 2) : For a sales lead to qualify as a sales prospect, or equivalently to move
a lead from the process step sales lead to the process sales prospect, qualification must be
performed and evaluated. Typically this involves identifying by direct interrogation the lead's
product applicability, availability of funding, and time frame for purchase. This is also the entry
point of a sales tunnel, sales funnel or sales pipeline.
Need Identification (Step 3): It is very important for a sales person to understand customers
requirement, this information he can get through probing, salesperson will attempt to help the
buyer identify and quantify a business need or a "gap" between where the client is today and
where they would like to be in the future. Based on that gap, the need can be clarified to
determine if the solution will fill all, or part of the overall gap.

Proposal (Step 4) : Now In any step of the sales process prospects drop out of it, and from the
large number of initially interested persons on the narrow end of orders only a fraction of the
initially interested people remain and actually place an order. The structure may start at various
process steps (e.g. a sales lead, or later, a sales offer) to a deal closed.
The key to sales success is to make sure that each respective layer never goes empty - it really is
that simple.
Lead Conversion (Step 5): The most important thing for conversion of lead is a proper and
systematic product demonstration. A salesperson should possess a thorough knowledge. Apart
from product knowledge sales person should be able to gain the confidence by handling customer’s
objections, and to prove that the solution to provide or the product given is the best.
Some Related Terminology
Term Description
Prospect A potential customer who meets certain minimum qualifications.
Customer A customer is the most important person in any business. A customer
is not dependent on us. We are dependent on him
Campaign Campaign management is the planning, executing, tracking and
Management analysis of direct marketing campaigns.
Multi channel Multichannel marketing is offering customers more than one way to
marketing buy something - for example, from a Web site as well as in retail
stores.
Direct Marketing The practice of delivering promotional messages directly to potential
customers on an individual basis as opposed to through a mass
medium.
E-mailers Is a form of direct marketing which uses electronic mail as a means of
communicating commercial or fundraising messages to an audience.
Telesales The sale of products or services to customers over the telephone.
Telephone selling may be used as an alternative and cheaper method.
Lead Generation The process of identifying prospective customers and qualifying their
likelihood to buy, in advance of making a sales call.
Lead Qualification Marketing activities focused on evaluating the readiness, willingness,
and ability of a lead to buy.
Call -centre Is a centralized office used for the purpose of receiving and
transmitting a large volume of requests by telephone.
5.3. Database Marketing
This Is a form of using databases of customers or potential customers to identify potential leads
based on certain demographics. Databases are usually purchased from vendors such as Dun &
Bradstreet or from Utility companies, Telecom companies which sell these.
The "database" is usually name, address, and transaction history details from internal sales or
delivery systems, or a bought-in compiled "list" from another organization, which has captured that
information from its customers. Typical sources of compiled lists are online registrations., charity
donation forms, application forms for any free product or contest, product warranty cards,
subscription forms, and credit application forms.
As a consequence, database of customers also tend to be heavy users of data warehouses, because
having a greater amount of data about customers increases the likelihood that a more accurate
model can be built. This is an important step in Lead Generation.
5.4. De-duplication
De-duplication essentially refers to the elimination of repeated data. It is a valid issue in many
banks, especially due to a lot of M & A activity on Bank’s side and customer’s side. Typical problem
deals with identifying prospects who are actually existing customers. This could be an issue due to
improper tagging or due to M & A, incorrect relationship maintenance – while the subsidiary is a
customer, the parent may not be as the relationship between customers is not known.
Trillium is a typical system used for de-duplication. This involves checking new Database marketing
leads against existing customers and removing duplicates.
5.5. Campaign Management
A Campaign is a focused attempt to sell process. Once the de-duplicated leads are identified, then a
campaign is organized. This is to solicit these leads with certain offerings. Some promotions (special
offerings on reduced price, added value) are packaged and offered in a time boxed period to a
select list of customers.
Affinium campaign management tool allows one to select a set of criteria to choose the lead pool
for a particular campaign.
5.5.1. Multi Channel Marketing Campaigns
This refers to using several methods to sell products and services and has become popular since the
advent of the Web, because it adds a prominent new channel to traditional storefronts and catalog
sales. One positive consideration of multichannel marketing is that each channel will work to
reinforce the other. It allows a business more opportunities to interact with customers - to collect
more information about the customer and make it possible to develop mailing lists for future
promotions and branding campaigns.
5.6. Direct Marketing
It involves sending a promotional message directly to consumers, rather than via a mass
intervening medium and includes methods such as Direct Mail, e-mail, door hangers, package
inserts, magazines, newspapers, radio, television, email, internet banner ads, digital campaigns,
pay-per-click ads, billboards, transit ads and Telemarketing with consumers or businesses, usually
unsolicited.
For E.g.: If the advertisement asks the prospect to take a specific action, for instance call a free
phone number or visit a website, then the effort is considered to be direct response advertising.

Direct marketing is attractive as conversion can be measured directly. For example, if a marketer
sends out one million solicitations by mail, and ten thousand customers can be tracked as having
responded to the promotion, the marketer can say with some confidence that the campaign led
directly to the responses. However there is opinion that Direct marketing being unsolicited also
irritates customers and is counter-productive – especially telemarketing calls.
Direct marketers and government bodies provide "opt out" lists, Do Not Call, Do Not Solicit
registries. These are to be followed to the letter in several consumer driven economies.
5.7. Telesales – Inbound & Outbound
Inbound leads are the most precious and high value leads as they are business contacts who have
found the banks products and are looking for more information or have already expressed some
sort of interest in that product or solution. Inbound call center services handle direct response from
advertisements about products in the following types of media:
 Print Media
 Direct Mail
 Internet Marketing
 Direct Response Television (DRTV)
 TV Commercials and Infomercials
 Network Television
 Cable Television
 Radio
Some key benefits from inbound call center operations are:
 Increase ROI from investments in sales & marketing activities

 Increase in leads conversion rates
 Increase sales from up-sells and cross-sells
 Driving and measuring results using advanced technology
 Lower handling costs with effective solutions
 Assistance with strategizing for optimizing customer acquisition and retention
 Providing recommendations based on volume and requirements
 Multi-language support
 Guidance on customer acquisition and retention programs
Outbound Telemarketing Services refer to initiating call center calls to contact and market the
Banking Products to prospective customers based on some database of existing or new to-be
customers for lead qualification, conversion, contact management etc.
5.8. Direct Selling Agents (DSA)
Outsourcing has become an important method of delivery of banking services. Changes and
improvement in IT has also speeded up the process of outsourcing. Whereas banks employ banking
professionals to carry out their activities, outsourcing agencies employ people with specialized skills
such as IT, Marketing, Appraisal (cards) etc. to deliver bank products. It is desirable that these

agencies/ firms and their employees possess a certain level of knowledge on banking. Such
knowledge is essential to avoid possible operational risks on account of outsourcing. They work in
origination steps of collecting credit card application details, direct contact to customers etc and
sometimes are critical to lead conversion.
5.9. Sales Force Automation
Sales force automation refers to automating all the actions related to sales of an organization or
business. This is a coordination of applications that chiefly center on scheduling and contact
management. Aall contact that has been made with a given customer, the purpose of the contact,
and any follow up that might be required. This ensures that sales efforts are not duplicated,
eliminating the risk of irritating customers.
5.9.1. Salient features of Sales Force Automation system
 Assigning Sales folks/ Relationship Managers to meet prospects and Customers

 Keeping a track of Book of Business (Prospect/Target List)
 Contact management.
 Reporting on Sales & Conversion
 Targets , Actual & Incentive Management
While Siebel, Siebel Analytics can do these functions, there are specialized systems like CLIC which
are popular especially in the US or Incentive management. The actual sales databases are in
systems such as Goldmine and are closely protected by the sales team. Many customers and
prospects are more devoted to the Relationship managers than the Bank.
5.10. CRM
Customer relationship management (CRM) consists of the processes a company uses to track and
organize its contacts with its current and prospective customers. CRM software is used to support
these processes; information about customers and customer interactions can be entered, stored
and accessed by employees in different company departments. Typical CRM goals are to improve
services provided to customers, and to use customer contact information for targeted marketing.
CRM is a combination of policies, processes, and strategies implemented by an organization to
unify its customer interactions and provide a means to track customer information. It involves the
use of technology in attracting new and profitable customers, while forming tighter bonds with
existing ones.
CRM includes many aspects which relate directly to one another :
 Front office operations — Direct interaction with customers, e.g. face to face meetings,
phone calls, e-mail, online services etc.
 Back office operations — Operations that ultimately affect the activities of the front
office (e.g., billing, maintenance, planning, marketing, advertising, finance,
manufacturing, etc.)

 Business relationships — Interaction with other companies and partners, such as

suppliers/vendors and retail outlets/distributors, industry networks (lobbying groups,
trade associations). This external network supports front and back office activities.
 Analysis — Key CRM data can be analyzed in order to plan target-marketing campaigns,
conceive business strategies, and judge the success of CRM activities (e.g., market
share, number and types of customers, revenue, profitability).
Siebel is an undisputed leader in the large Bank segment. Microsoft Dynamics is useful for its
integration with MS-Office. Large banks like Wells-Fargo have proprietary CRM systems. It’s
possible for large banks to have CRM systems at an LoB level.
5.11. E-Commerce
E-Commerce is electronic commerce, which means doing commercial activities using internet. It
deals with providing information, products, services and allowing payments through electronic
media where the supplier and customer are remotely located. Electronic payments through Credit
cards, Debit Cards, e-checks, e-wallets, PayPal, online banking are predominant. Security is a
concern in these transactions. Large banks like Wachovia have specialized e-commerce focus
groups which do a lot of soliciting and sales through e-commerce. E-Commerce relies on customer
behavior, website analysis, interactions like liveperson chat etc.
 Makes the marketplace seamless and Big – e-Bay , Amazon

 Reduced Cost of Customer Acquisition translating to lesser prices and competitiveness
 Highly specialized businesses
 Reduced inventories and overhead by facilitating “pull”-type supply chain
management.
 Exclusive customization of goods and services
 Twitter, social networking sites have made this space more exciting and robust.
Figure 38: Sample E-commerce - Twitter

6. Trends in Retail Banking
Banking is known worldwide for predictable business practices and measurable evolution. At the
same time, the industry is facing sweeping and unprecedented change. The lines between financial
service segments are blurring, creating new opportunities while exposing institutions to new
channels. Customers demand new levels of personal service and expect it fast. The competition is
only a mouse click or street corner away.
These issues, compounded by mega-mergers, decreasing margins, regulatory changes, and fierce
competition, have lead to some very tough challenges for the banking industry. Some of the key
trends in retail banking include:
6.1. Branch Banking – Service to Sales
Multi-channel integration is garnering the attention of a growing number of banks. Although it is

far from becoming a mainstream exercise, it is moving away from the early-adopter phase to being
a feasible initiative for most banks to undertake. The question is not if but when. Second-wave
adopters are moving gradually, due to the complexity and cost of integration. Many of these banks
are gaining additional fortitude to move forward by relying on third-party solution providers.
Internet banking and call center platforms are proving to be ripe targets for integration.
Figure 39: Branch Banking - Service to Sales
6.2. Check Imaging & Image Exchanges – Home Banking
In the five years since Congress passed the Check Clearing Act for the 21st Century Act enabling
check scanning and remote deposit capture, the industry has moved from early adopters of the
technology marketing the service to a few major customers to growing acceptance by all sizes of
banks and customers. Small to medium-sized banks are increasingly signing up as clients to
outsourced or hosted services for check imaging and remote deposit capture since banks of all sizes
have quickly realized that offering check imaging and remote deposit capture solutions to
customers has enabled them to grow business, cost effectively. This helps the banks to concentrate
on their core business and not expend resources on emerging IT services area.
Below are the few trends seen in the implementation of Check Imaging:
1. Commercial customers utilize the installed remote deposit merchant capture system at
their place of business for personal deposits. The case for this style of variation is owner
operators, sole proprietors, professional offices where the principal is also the individual
depositing the retail items. No new or additional technology, just the business profile of the
customer set up to include the personal accounts of the individual. They capture check
payments as images and electronically forward them to the bank for immediate posting to
their accounts. Additionally there is also interest in developing interfaces to document
scanners instead of specialized scanners which would help in reducing hardware
investments
2. Home business or a private banking customer utilize an application that uses a flatbed
scanner or an All-In-One (printer-fax-scanner) to scan the check image as the first step. The
customer enters the appropriate MICR line information along with the check amount. The
image is then passed to the financial institution’s remote deposit application and ultimately
to the DDA system. The customer retains the original check and destroys it at some point.
Alternatively some financial institutions may opt to provide the private banking customer
with a low end check scanner and avoid the image quality and optical character recognition
issues that can be a product of the flatbed option. Additional developments in this space is
introduction of online check viewing for Internet Home Banking customers
3. Another trend increasingly being looked into is utilizing cell phones for check image
capture. The technology then squares up the image, and with the same input aspects of the
flatbed scanner forwards the check photo to the remote deposit application for processing
Check imaging has lots of advantages which is resulting in high rate of adoption. The few
advantages are extended deposit cut off times, reduced time spent on deposit preparation and
paper handling, lower transaction costs, elimination of daily trips to the bank and also lower ATM
fraud cost, by eliminating empty envelope fraud which accounts for more than half of all ATM
deposit fraud
A trend which could have an adverse impact on the adoption and development of this technology is
the consistent decline in check volumes due to the use of alternative payment methods, primarily
electronic and internet based. Also since paper-based checks are costly for banks to process in
comparison to electronic payments, banks in many countries now discourage the use of checks,
either by charging for checks or by making the alternatives more attractive to customers. Checks
are also more costly for the issuer and receiver of a check. In particular the handling of money
transfer requires more effort and is time consuming. That is to say that not only is traction
increasing on electronic payments, it also signals the emerging trend of not using paper based

payments at all. Experts are of the view that Retail Remote deposit is a great idea with very limited
market in future.
6.3. Mobile Banking - Increased Market
Banks will adopt the following best practices as they take the next step in their mobile strategies:
Leverage other delivery channels to create synergies with the self-service model and utilize the
full spectrum of device capabilities.
Develop smart integration models that give banks new segmentation and personalization
capabilities for true one-to-one customer outreach based on customers' relationship desires.
Think outside the bank's customer base to capture new customers such as current unbanked
customers with no bank accounts, ethnic markets and new generational users, such as the
Generation Y segment, which desires self-service, innovation and paperless electronic transactions
with no need for human interaction.
Create tight relationships between mobile banking and ATM vendors to build stronger ties with
customers that currently do not have a relationship with a bank.
6.4. Social Networking & Internet Banking
Banks are increasingly convinced that Internet

banking ROI can extend beyond simple cost-to-
serve equations and direct revenue models.
Driven by enhancements in user-friendliness,
Internet banking ROI now encompasses
generating revenues indirectly by improving
customer satisfaction with Internet banking,
which in turn, has proven to translate into
greater customer retention and higher
balances. Banks' demands also include lowering
cost-to-serve through self-service features with
broad appeal (e.g., check image access and e-
statements) and customer support features that
not only improve customer service
representatives' effectiveness but also their
efficiency (e.g., online chat). Twitter has been
leveraged by banks to keep their customers
informed and help solve brief queries from their
Figure 40: Growth in Online Commerce
customers.
6.5. Web 2.0
"Web 2.0" refers to what has been perceived as a second generation of web development and web
design. It is characterized as facilitating communication, information sharing, interoperability, and
collaboration on the World Wide Web. It has led to the development and evolution of web-based
communities, hosted services, and web applications. Examples include social-networking sites,
video-sharing sites, wikis, blogs, etc. Although the term suggests a new version of the World Wide
Web, it does not refer to an update to any technical specifications, but rather to cumulative
changes in the ways software developers and end-users utilize the Web. Web 2.0 is the business
revolution in the computer industry caused by the move to the Internet as a platform, and an
attempt to understand the rules for success on that new platform. The sometimes complex and
continually evolving technology infrastructure of Web 2.0 includes server-software, content-
syndication, messaging-protocols, standards-oriented browsers with plug-ins and extensions, and
various client-applications.
 Community Pulse feature  Smart search

 Blogs  Account Auto add
 Wikis  RSS feeds
 Social bookmarking/tagging
 Podcast
 Video on Demand
 Message Board Sharing & Convenience
Collaboration
 Mashup  Add/remove widgets

 Auctions Operational Customer
Needs  Add remove screens
 Community based deal Efficiency Experience  User defined navigation tabs
finders  Drag & drop facility
 Product placement in  Look & feel, large buttons
Personal finance tools
 Specialty financial search Operational
Instruction
 Live Chat
Technology Enablers
WS, SOA
XML, XSLT
RSS, Atom
AJAX
RDF, OWL
XHTML
Figure 41: Functionalities in Web 2.0
Banks that embrace a fast implementation of WEB 2.0 technologies can expect a quick return-on-
investments in the following areas:
 customer interactions - Transparency, customer participation,

 online banking
 mergers, acquisitions and split-ups
 e-Compliance
 reducing costs of their own internal IT
 de-layering the organization and
 Virtualization of their internal and external relationships and value chains.
Web 2.0 technologies could be the next step in quickly reducing internal and external interaction
costs. So a big leap forward in comparison with traditional “BPM” and workflow based process
automation.

Blogs
Figure 42: Sample Blogs
Tagging and Search Engine Marketing
Figure 43: Sample Tagging and Search Engine Marketing

Podcasts & RSS Feeds
Figure 44: Sample Podcasts
Video On Demand
Figure 45: Sample Video on Demand
6.6. Web Analytics
Measurement is a crucial part of a successful search marketing campaign, but understanding and
using web analytics tools can be daunting. There's no question that understanding user behavior
can help Banks’ improve the performance of their search marketing campaign. What kinds of ads
are people clicking? What pages are people choosing from organic search results? And what are
people doing once they land on their site?
Virtually all web hosting services provide rudimentary analytics that can help Banks begin to
understand what users are doing on their site. And Yahoo, Google and other providers of search
ads also offer tools that let Banks test and refine their search advertising campaigns.

But the real power comes when Banks can begin to use multiple sources of web analytics, blending
and extracting information that answers more precise questions and helps them formulate more
sophisticated search marketing strategies.
And that's the rub: While web analytic and measurement tools are very powerful, they all do
different things, and all require a certain investment in time and money to get the most out of
them. In the Web analytics 1.0 world, which still encompasses more than 95 percent of all
enterprise-size organizations, it's all about creating reports. How did we do last week? How did we
do last month? It's like looking in the rearview mirror. These reports aren't actionable, and they're
often very one-sided -- in most cases only behavioral Web analytics. They aren't based on specific
business goals. And they aren't segmented, typically only looking at aggregate information.
Web Analytics 2.0 is:
(1) the analysis of qualitative and quantitative data from Bank’s website and their competition,
(2) to drive a continual improvement of the online experience that their customers, and potential
customers have,
(3) which translates into Bank’s desired outcomes?
Some top traits of our most successful clients in terms of understanding their customers and
prospects:
o Analyze data based on overall business goals.
o Link attitudinal, behavioral, and competitive data to form insights.
o Focus on opportunities and recommendations, not just reporting.
o Monetize all key site behaviors.
o Prioritize based on greatest business impact.
o Maintain an ongoing optimization process.
o Have a knowledge base of successes and failures in terms of tests and experiments.
o Understand customer experiences online and off-.
o Analyze Web performance on the site and elsewhere. This means looking at blogs, social
media, and the like.
6.7. Increased focus on the Small Business market
Until recently, small businesses have been chronically underserved by banks. The classic example is
the application of a retail Internet banking solution to serve these businesses, which has been the
leading cause of low adoption to date. Banks, however, are increasingly recognizing they could
garner a larger share of small businesses' financial services spending if they implement appropriate
technology. In an effort to better serve them and attract their business, banks will deploy at an
increasing rate Internet banking solutions built specifically for small businesses. Small business
online banking adoption is therefore expected to grow beyond its current 12 percent level to reach
over 20 percent by 2005.
6.8. Financial Crisis

Subprime lending, also called “near-prime / non-prime / second chance lending” involves financial
institutions lending in ways which do not meet "prime" standards to an extent which puts the loans
into the riskiest category of consumer loans typically sold in the secondary market. This financial
term was popularized by the media during the "Financial Crisis / Credit Crunch" of 2007-08.
Subprime lending encompasses a variety of credit types, including mortgages, auto loans, and
credit cards. The impact of these products and the derivatives built on top of these mortgage
portfolios were central to the 2008 crash. It had catastrophic impact of failure of banks, near
financial bankruptcy of countries and overwhelming interventions by central banks and
governments. Some banks and thrifts that failed were taken over by other banks or FDIC. The TARP
bailout plan and several stimulus packages introduced in various countries has been a shot in the
arm for tiding the liquidity pressures. Increased emphasis on risk management, the stress tests on
various bank capitals showed their capital structures and balance sheets needed a lot of rebuilding
and led to large capital raising by many banks which has finally saved many bank balance sheets –
at least temporarily. In the UK, FSA has introduced a deposit guarantee program as it saw several of
its countrymen face financial failure when some Iceland banks collapsed.
6.9. Bancassurance
An area that is weathering the financial crisis well is bancassurance – where banks and insurers get
together to provide insurance to bank customers. While many insurers see bancassurance as a
source of additional custom, others see it as a competitive threat from banks. Consequently, some
insurers have been selling banking products, a distribution method known as “assurbanking”.
Standard Life, for example, set up Standard Life Bank 10 years ago, to offer savings accounts and
mortgages, and still does. On the other hand, Prudential, which set up its Egg bank at about the
same time, mainly to convert maturing policies into cash deposits, eventually sold the business to
Citi because it wasn’t generating enough shareholder value.
Assurbanking can optimize the use of insurers’ distribution networks and increase the frequency of
their contact with customers. However, the economics of assurbanking are not as compelling as
bancassurance because basic banking products have lower margins than typical insurance
products. Also insurers enter the banking market as secondary players, they often capture only a
customer’s second or third account, which generates little value. Whether it’s a bank selling
insurance or an insurer selling banking products, both methods of distribution are destined to
continue, proof that the traditional demarcation lines between the banking and insurance sectors
have well and truly blurred.
Bancassurance is on the rise. Worldwide, insurers have been successfully leveraging bancassurance
to gain a foothold in markets with low insurance penetration and a limited variety of distribution
channels. Penetration of bancassurance varies across different markets. Europe has the highest
bancassurance penetration rate. In contrast, penetration is lower in North America despite years of
investment, has a lower penetration rate than China and India, partly reflecting regulatory
restrictions. In Asia, however, bancassurance is gaining in popularity, particularly in China, where
restrictions have been eased. Social and cultural factors, as well as regulatory considerations and
product complexity, play a significant role in determining how successful bancassurance is in a
particular market. It is the emerging countries that will continue to see significant expansion of this
channel. Both bankers and insurers are bullish about the future outlook of bancassurance and
expect that it would contribute about 50 per cent or more in the life segment in the year 2010 in
Asia. The expected shifts in Bancassurance markets are depicted in the image below.
Figure 46: Shifts in Bancassurance Market
6.10. Financial Crime
Increasing financial crimes against banks and bank customers is becoming prevalent. There are
more reports of bank fraud, identity theft, check and credit/debit card fraud, and countless other
financial crimes, many times involving celebrities and leaders. This means that banks and bankers
must be even more vigilant for red flags and telltale signs of problems. More than ever, it is
imperative that more attention is paid to the principles of prevention, deterrence, detection, due
diligence, safety, profit protection and the avoidance of loss. New rules and regulatory
enforcement impose additional expectations for specialized areas, such as identity theft, privacy,
and financial crime. Consequences from lapses in security against check fraud and other financial
crime can result in harm to customers and to the bank’s bottom line. The IMF estimates that
between 2 and 5 percent of the global GDP may be involved in money laundering thereby making it
the world’s largest industry.
The Holistic View
Financial institutions will approach financial crimes from a holistic paradigm rather than from an
incident-based mindset. This can be changed by re-examining and modifying the existing
architecture and substituting it with streamlined policies and procedures. Traditional monitoring
techniques used by banks mean that their data is segregated, resulting in an inability to internally
cross-reference information from different payments channels, such as card fraud information with
money laundering figures. By amalgamating fraud information into a single view, the bank can take
a more holistic, enterprise wide approach to the criminal activity that they are trying to combat and
therefore create a sophisticated picture of the irregular account activity that is occurring. By
maximizing the use of its information, a bank will be able to take greater control of financial crime.
The bank will also have a far greater understanding of its customer base, resulting in the ability to
provide a better overall service. Better education about fraud and sharing best practices in industry
forums can help alleviate the problem holistically
Right Mix of Risk and AML Technologies
Using the right mix of risk and AML technologies with an enterprise approach minimizes a bank's
risk exposure. This could include fraud prevention and identification of suspicious activity that
might reveal identity theft and account takeover. In order to truly understand risk and gather
information cost-effectively, banks must be able to see all transactions throughout the organization
in real-time, include those through a teller or broker, over the internet, the phone or through
credit/debit cards at an ATM. With adaptive profiling the solution can look for potential risks and
identify transactions that are unusual or potentially suspicious. Enterprise-wide risk management
solutions look for any form of unusual behavior enabling banks to make more informed risk
assessment and identify known and emerging laundering schemes and determine organizational
risk.
With the rise of internet banking and 24-hour account access, proactive multi-channel monitoring
can enable a bank to identify and isolate unusual transactions early in the lifecycle to prevent fraud
or laundering before it occurs.
Investing in technology to meet compliance obligations is considered a cost with zero return but
investing in an enterprise business model for risk management will support long-term business
transformation. By choosing an anti-money laundering solution that can be used as a starting point
for automating risk management, banks can gain a comprehensive set of tools to control risk
through early detection, meet regulatory requirements and increase their return on investment. By
linking AML into a wider fraud detection strategy, financial institutions will benefit from more
effective detection and therefore increased fraud loss savings.
6.11. Mergers & Acquisitions in Retail Banking
Over the past 10 years there have been over 7,500 cases of Mergers & Acquisitions (M&A) in the
financial industry, with a total transaction amount of $1.7 trillion. This has lead to a structure that is
continuously evolving. The primary objectives for M&A are:
Economies of scale &scope

Limited ability to grow organically
Increase shareholder value
Need to rapidly open/address new markets
Challenge of building local relationships
To attract the attention of potential customers through expanding the size of the
As a strategic method of survival
Bank consolidation has been going on in the U.S. and Europe for years now, encouraged by
regulators. These deals have been reasonably successful. A few notable examples over the last

decade would be of the construction of big banks like Wells Fargo & Co., BofA, Wachovia, and Bank
One.
Though not all transactions are always successful, they are also impacted by other external factors
such as the state of the world economy. A few examples of M&A deeply impacted by the financial
crisis of 2008 are Bank of America Corp. and Merrill Lynch & Co., Lloyds TSB Bank plc and HBOS,
and RBS and ABN Amro. Their inabilities to predict the financial crisis lead to loss of shareholder
value. Though it must be emphasized that the Lloyds and BofA acquisitions were made with the
active encouragement of regulators to absorb institutions that needed to be shut down or bought.
From a listless start in early 2000, Mergers and acquisitions in the financial sector took off in 2004
with an estimated transaction value of $130 billion. 2006 was again significant in M&A marking the
third-best year on record in terms of deal value. The $108.6 billion in total 2006 deal value buried
2005's $29.1 billion total, but still fell well short of 2004's $130 billion. The all time high record of
$288.5 billion-was set in 1998, a landmark year in bank acquisitions. In 2008 with the acquisition of
Washington Mutual by JP Morgan Chase and Wachovia by Wells Fargo, $1.1 trillion of banking
assets had been consolidated in the space of one week. Putting this in perspective, the total assets
purchased in the 828 transactions announced in the three years of 2005 through 2007 totaled just
$998 billion.
From late 2007, traditional merger and acquisition activity slowed markedly as global financial
markets froze during the third quarter and bank stock prices did not stabilize at a reasonable level.
Prices reflected a high level of conservatism by buyers and the poor quality of some sellers. Bank
failures in the first half of 2008 had been limited in number and with the government providing
capital and guarantees to the industry, systemic risk decreased. In fact, the vast majority of
community banks were profitable and well-capitalized which enabled them to weather the
economic crisis without assistance. The notable examples of M&A in late 2007 to early 2008 were
government/regulator assisted transactions to stabilize and tackle the financial crisis.
Figure 47: M&A during 2003 - 2009

(http://www.reuters.com/news/globalcoverage/Worldwide-Mergers-and-Acquisitions-Q2-2009)
Expectations in 2009
The first quarter of 2009 sustained further declines in merger and acquisition activity and pricing
due to plummeting economic activity and the lack of clarity surrounding the government’s
response to the financial crisis. The majority of the transactions announced involved sellers in need
of a quick exit and opportunistic buyers. The second half of the year will be characterized by
gaining momentum, with financial markets starting to reopen and value considerations to stabilize.
This will not be the same type of financial services M&A that has occurred in the past – this time
around it will be smaller and faster, target different sectors and locations, and will be driven by
different imperatives.
In 2009 merger activity is likely to be divided into distinct groups: institutions with non-fatal levels
of problem assets seeking a way out, government-assisted transactions, and healthy institutions for
which the timing is right to sell. The trend that is most likely to be seen in the banking sector would
be the disposal of non-core businesses, such as banks' insurance assets. The most notable example
is the purchase of the previously bank-owned Asiban by the French group Groupama.
Despite the credit-market meltdown, the Tiburon report predicts that as many as 200 mergers and
acquisitions among financial services firms will take place by 2013, with an aggregate value of
approximately $1 trillion. The money would be even greater, were it not for the fact that larger
firms can buy smaller companies at a discount. The Asia-pacific region has had a lesser impact of
the financial crisis as compared to the western world. According to a survey, 42% of all financial
services respondents said their company plans to make an acquisition in the year ahead. By
jurisdiction, Taiwan and China claimed to be the most acquisition-hungry, with 70% and 68% of
respondents respectively saying they would be looking to pick off cheap assets both domestically
and overseas in the year ahead. Respondents in Japan and Hong Kong, however, noted that they
were only 25% and 22% likely to look to strategic acquisitions this year. Meanwhile, respondents in
Australia and China are both actively looking to take advantage of opportunities to grow their
business (both 63%), while those in Singapore (37%) and Japan (26%) seem to be more inclined to
sit on the sidelines until calm returns to the economic landscape. Somewhat surprisingly, only 22%
of survey participants said their companies had frozen all investment. Rather, expansion was cited
by 48% of respondents as the key to their business strategy, with more than a third of respondents
saying that they would be looking to enter into new markets or business lines.
Chinese and Japanese companies may be the most active buyers particularly outbound M&A in
2009 and 2010. Japanese companies have the advantage of cash reserves, lower cost of borrowing
and advantage of the strong yen to make purchases abroad. Tokyo- based Mitsubishi UFJ Financial
Group Inc., Japan’s biggest bank, invested $9 billion in Morgan Stanley, the largest outlay made by
a Japanese company outside the country in 2009, according to Bloomberg data. Companies in
China’s financial services sector had previously been some of the most acquisitive in the region
with one of the largest foreign buying sprees on record. Some of the more notable deals were
China Merchant Bank’s takeover of Hong Kong bank Wing Lung for US$4.6bn, ICBC’s US$5.5bn
acquisition of 20% of the shares in Standard Bank and Minsheng Bank’s purchase of up to 20% of
shares in US bank UCBH Holdings.
A summary of the trends for the second half of 2009 and early 2010 are as follows:
Despite a sharp fall-off in the number of M&A transactions, few financial institutions
particularly Asia based will actively explore opportunities to expand
Greater emphasis on disposal of noncore assets
Firms will adopt a cautious approach, focusing on strengthening existing capabilities rather
than transformative deals
Domestic competition is increasingly important as a motivating factor in M&A
M&A is likely to be aimed at improving offerings to expand customer base and stay
competitive
Difficulty in valuing assets will remain a major obstacle to deals
While expansion is on the cards, restructuring will continue apace
6.12. Core Renewal
New banking requirements and customer demands are challenging traditional banking practices.
Banks now find it increasingly difficult to meet their time-to-market requirements in the
increasingly competitive environment. Existing legacy core banking systems are increasingly
incompatible with new business requirements and do not provide a foundation for future growth.
Adding new functionality to these legacy systems— whether new products, the capability to extract
information for external requirements such as Basel II, ways to access customer information for
cross-selling, and so forth—often entails considerable expense since legacy core systems were not
originally designed to be regularly or substantially changed. In fact, over time so much additional
capability has been heaped on these core systems, coupled with requirements to exchange data
with so many other applications, that any further change to the core systems architecture can bring
unforeseen consequences. In short, making changes to legacy core systems is difficult and
introduces potential new risk factors.
Banks have been nursing along their legacy core systems for three decades or more, spurring
predictions of a landslide of core replacements. What is now expected to happen instead is core
renewal, where selected parts of the core system will be upgraded, service-enabled, or perhaps
migrated to a modern platform, while other parts of the core system remain untouched. The next
level of core banking is creating products that rely on multiple core systems. New types of products
that combine features of loans and deposit products or loans and securities could be launched.
Offset mortgages, for example, may drive the need for coupling a mortgage system with a DDA
system. Once banks have moved to a SOA, they will be able to mix and match granular services to
create new types of products and out-innovate their competitors to offer superior returns. This has
gained focus now due to SOA which has now come to a level of maturity where such renewal is
technically achievable. Leading edge banks are beginning to implement such renewal with technical
success and business results that justify the investment.
The key trends emerging in core renewals are:
1. Many banks identify enabling more rapid time-to-market as the most important business
driver, followed by streamlining end-to-end processes. This reflects that banks’ existing
core systems are becoming a constraint on their business, limiting their responsiveness and
flexibility.
2. The financial crisis has slowed down the core renewal trend as banks have been forced to
reprioritize especially banks impacted by crisis lead M&A activity. The financial crisis has

forced banks to study the effects of the new regulations, liquidity crunch and business
environment since any core replacement over a period of 5 years is estimated to cost up to
$300 - $400 million.
3. High costs were identified by at least half the banks across all regions as a business barrier
to core systems replacement. Long project timeframes also came up as a significant barrier.
Banks in the UK and Nordics were also concerned by the lack of a strong business case.
4. Reducing costs were chosen by banks in every region as the most important technology
issue, particularly in Germany where weak economic conditions have proved the need for
as lower cost operations as possible.
5. Lack of documentation for the current system was identified by the least number of both
upper and lower tier banks as an important technology barrier, while upper tier banks did
not differentiate much between the other options. However, nearly two thirds of lower tier
banks saw the need for customization of the new system as a technology barrier.
6. Banks in the UK and Iberian regions seem to be feeling the least pressure with regards to
core systems replacement or re-platforming, while those in Eastern Europe are expecting
to make investments in this area within less than 4 years.
7. European banks have been the most aggressive system replacers and are expected to
spend more on core banking systems than any other region over the next few years. Banks
in Germany, Central and Eastern Europe are the most likely to go for a vendor replacement
solution, while those in France, Spain and Italy are predominantly planning to re-engineer
to enable componentization.
8. Core replacement remains a moderate priority for many U.S. and Canadian banks, but is
expected to become a high priority as new efficiencies become harder to identify. Most
U.S. banks are investing in ways to extend their legacy cores by componentization. Only a
handful of the largest North American banks have begun replacement projects, including
Citibank, Bank of America and Scotia bank.
9. While demand exists for new core systems in Asia-Pacific, the sense of urgency is not
comparable to other parts of the world. Countries in this region have very large
populations but are not generally faced with the same complexity and volumes of
transactions, lessening their need for more advanced systems. Solution providers are
expecting a lot of growth potential in India, Singapore and China. As foreign companies
increasingly enter this market, there will be a growing need for new technologies.
10. Similar to other parts of the world, Latin American banks have experienced consolidation
over the last few years. Several large foreign banks have begun to dominate the market,
increasing competition among smaller local institutions. These smaller banks, in many
cases, are fighting to remain competitive and to operate efficiently, leaving little room in
their budgets for costly core replacement initiatives. For these banks, the more common
and affordable option is to deploy middleware layers and focus on improving the
integration of existing systems and channels. Most of the spending in this region,
therefore, will be done by the larger multinational banks that have money to spend and are
already using more advanced technologies in their home branches.
Investing in new core systems is not yet a priority for most banks, but will become increasingly
important as a growing number of banks slowly begin to realize that their currently antiquated
systems are no longer adequately meeting their needs. The market is already beginning to see signs
of change as a handful of the world-s largest institutions have begun to move to modern, next-
generation solutions. These implementations are being closely observed by other banks and their
success is likely to lead to greater momentum within the industry. Those that have taken on these
projects have already begun to reap the benefits of greater efficiency, easier access to information
and the ability to add new applications without the fear of system crashes. While the costs as well
as the risks are high, banks are confident that the ultimate benefits will be far greater.
6.13. Phone Banking – Voice Biometrics
Voice biometrics is a technology that captures an utterance from a live caller, compares it to
previously stored voiceprint and produces a score. Voice biometrics is generally used in conjunction
with business rules. The underlying premise for voice authentication is that each person's
voice differs in pitch, tone, and volume enough to make it uniquely distinguishable. Several factors
contribute to this uniqueness: size and shape of the mouth, throat, nose, and teeth, which are
called the articulators and the size, shape, and tension of the vocal cords. The chance that all of
these are exactly the same in any two people is low. The manner of vocalizing further distinguishes
a person’s speech: how the muscles are used in the lips, tongue and jaw. Speech is produced by air
passing from the lungs through the throat and vocal cords, then through the articulators. Different
positions of the articulators create different sounds. This produces a vocal pattern that is used in
the analysis. Voice recognition has shown success rates as high as 97%. Much of this success can be
explained by the way a voice is analyzed when sample speech is requested for validation.

The advantages of voice biometrics are:
Well suited for remote authentication

o No specialized client hardware required
o Works from any phone
o Supports mobility
Cost effective to implement
o Leverages Web and IVR investments
o Integrates with existing authentication infrastructure
User friendly
o Natural feeling
o Does not require behavioral changes
It is expected to become a mainstream technology in the next three to five years. There is barely a
major bank in the US, UK or Australia today that isn’t evaluating speaker verification and banks in
India are also expected to follow suit. And, once the first banks take the plunge, we will see rapid
and broad adoption across a whole range of industries. In North America and Europe, regulatory
compliance has been the biggest motivation for financial institutions to adopt biometrics. Some
prominent government regulations include:
o The 2005 Federal Financial Institutions Examination Council (FFIEC) guidelines
o The Sarbanes-Oxley Act of 2002 (Section 404)
o The Basel II Accord
Regulatory activity has resulted in increased demand for secure authentication of banking
accounts, stronger employee audit trails, and risk mitigation. Although the regulations do not
endorse any specific technology, biometrics is emerging as the favored choice owing to its
capability of being able to accurately link any transaction with an individual’s unique traits.
The consumer confidence in traditional authentication is also a major factor in adoption of voice
biometrics. As per a survey in early 2009, 75% of respondents believed that traditional
authentication methods such as PINS and passwords were vulnerable. Given the consumer interest
in adoption of voice biometrics, banks are increasing implementing voice biometrics in addition to
other traditional authentication methods.

The graph below depicts the trend line for the increase in IVR transaction in future.
Figure 48: IVR transactions in future
Source: Tower Group
Most financial institutions have adopted biometrics for operational and employee-facing
applications. Wider deployment in the financial industry is anticipated as the number of successful
credible reference sites increases and financial institutions realize the cost-efficiencies and benefits
of biometric technologies in comparison to alternate security technologies. A number of banks in
Europe have deployed voice verification technology to enable remote authentication of customers
for telephone banking. In 2006, Netherlands based ABN AMRO deployed a telephone-banking
customer verification solution utilizing voice biometrics in its contact centers. This installation is
considered to be one of the largest deployments of biometrics in the financial services vertical.
From an end-user perspective, it is imperative to publicize the benefits that biometrics can offer in
terms of convenience, cost efficiencies and time efficiencies. With biometrics, the ability of
financial institutions to provide more value to their customers, while complying with regulations,
can provide them with a competitive advantage. What matters today is that voice biometric
technology is here, it works and companies that are adopting it now are gaining meaningful
competitive advantages.

6.14. Technology Model of modern day retail banks
In order to fully appreciate the radical disruptions several new technologies have brought
about into the retail banking world, it is essential to understand the basic Business-IT
model that maps various retail banking businesses to the underlying IT paradigms. It is with
this intent of bridging the domain back to our problem space – IT that this section has been
devoted to.
Portals and Content management serve as enablers of data distribution. Be it end customer
channels, internal websites, specific knowledge management assets – portals with a typical
intranet /bank website has become the standard approach to look for information.
Deployment of Web 2.0 widgets has become an expected user friendly mode of
collaboration and communication.
Business agility though Rule engines, business process modelers has become crucial to
remain on top of fast paced market and regulatory changes. STP, Imaging are some tools
employed to drive operational efficiencies and remove the old world mortar and brick
models of origination. Data warehouses have given way to business intelligence networks.
And solid data models, core applications and back office systems are the pillars upon which
these technology components sit and consume data and provide several business critical
information nuggets.

Figure 49: Integration Banking enterprise

7. Appendix
7.1. Key terms used in relation to Loan (Asset) Products:
 Signature Loans
A Signature Loan is a fixed term, unsecured loan to be used for a specific purpose, usually having a
maximum as well as a minimum limit. Signature Loans are issued in their entirety upon receipt of a
signed activation letter from the applicant / borrower, within a certain specified time period from
its approval by the Bank or Credit Union. Therefore, they do not need a co-signer or collateral for
their sanction and are usually provided keeping in mind good credit history. An unblemished credit
history with a positive credit report will be the leading contender for signature loans. Signature
loans also have another name for them - Character Loans.
These can be applied for any purpose. Student college loans, home re-modeling, dream vacation,
debt consolidation - all can be funded by signature loans. The loan amount also depends on the
borrower’s ability to repay. The term for signature loans is usually 60 months. They can offer an
excellent aid for the purpose of education as financial funding to meet the increasing cost of
education. Interest will begin to accrue upon issuance of the loan proceeds / disbursal of loan
amount, which will occur in stages to match the educational program schedule.
 Overdrafts
An overdraft occurs when withdrawals from a bank account exceed the cleared / available balance
for withdrawal, which leaves the account in a negative balance – then the account is said to be
"overdrawn". If a prior agreement between the account provider (Bank) and the account holder
(Customer) for such an overdraft protection plan exists, and the amount overdrawn is within this
authorized “overdraft limit”, then interest is normally charged at the prior agreed rate. However, if
the balance exceeds the agreed “overdraft limit” and/or terms, then additional fees may be
charged and higher interest rates applied.
Depending on the credit worthiness of the customer, banks provide the facility of overdraft to the
account. These accounts are referred as Overdrafts. An overdraft is an instant extension of credit
from a lending institution. Hence the customer can use the funds of the bank (overdraft) over and
above the customers own funds in an account. The customer is required to pay interest on the daily
outstanding balance of the loan much like any other loan.
There are various types of overdraft depending on the purpose for which the overdraft is provided.
Broadly, the overdraft can be secured or unsecured. In case of secured overdraft, customer offers
some security (collateral) to the bank to increase the credit worthiness. In case of unsecured
overdrafts, as the name suggests, customer will not be able to offer any security. Generally as there
is no security, the interest rate for unsecured overdrafts will be higher than secured overdrafts, and
will be extended to selected customers who have a good credit standing for long with the bank.

However, the difference between Overdrafts and Cash Credit facilities is very subtle and relates to
the operation of the account. In the case of a Cash Credit facility, a proper limit (which fluctuates in
relation with the collateral value) is sanctioned, which normally is a certain percentage of the value
of the commodities/debts pledged by the account holder with the Bank. Overdraft, on the other
hand, is allowed against a host of other securities including financial instruments like fixed deposits,
shares, units of mutual funds, surrender value of life insurance policies and debentures etc. Some
overdrafts are even granted against the perceived "net worth" of an individual. Such overdrafts are
called Clean Overdrafts.
 Personal Loans
Personal Loans are usually general purpose “Consumption loans”, which necessarily do not
generate a tangible asset. Its purpose can be as diverse as spending on a vacation, financing the
education of self / children, performing family functions like weddings, etc, or any other financial
needs of the borrower like debt consolidation, emergency medical bills, unexpected car repairs,
home improvements, unforeseen appliance maintenance, etc. Its key features are: simple
procedure, minimal documentation, quick approval, flexible repayment options, repayment with
convenient and affordable EMIs, lower interest rates, no prepayment penalties and terms tailored
to fit one’s needs and budget. There can be secured personal loans and unsecured personal loans.
In fact the trend now is that major Banks and Credit Unions have built comprehensive risk profiles
for their considerably long standing Customers and have pre-sanctioned Personal Loan limits
tagged to such long-standing customers, which will be disbursed after such minimal documentation
as signing a single document / sending a particular format message from their registered mobile
number. In addition to these, some Banks have such Personal Loans covered with insurance
providers, whereby, in case of death or disability of the borrower due to an accident, the principle
outstanding will be paid by the insurance company and in case of loss of borrower’s job, and the
insurance company will pay the EMIs for usually, up to 3 months. However the premium for this
cover will be additionally loaded as part of the EMIs’.
 Educational Loans
Educational Loans are mostly meant for studying abroad, which often requires financial assistance
for extra expenses such as travel, accommodations and course materials, which can make it a
greater financial commitment. Even though scholarships and grants are always available, but even
if one is lucky enough to receive one of them, it will still not cover all their expenses. That is where
an Educational Loan will help. However, in these days when quality education has become very
exorbitant, even within the home countries, this need for financing of higher education has
become very imperative and much utilized by the Bank’s customers and their wards.
 Home Loans
Home Loans are provided for a wide range of loan programs for: Purchasing a home, Refinancing a
home, Obtaining equity from a home, Home improvement, Debt consolidation, etc. Home Equity
Loans and Home Equity Line of Credits (also known as HELOCs - A home equity line of credit is a
mortgage loan, which is usually in a subordinate position a "second mortgage", that allows the
borrower to access the line of credit during the "draw" period, usually 5 or 10 years. One of the
best parts of a home equity line of credit is that the variable interest rate is typically lower than a
credit card and the interest paid can be tax deductible) are solutions for accessing available equity
that may be available on customers’ homes. This equity could be used for any purpose such as
making home improvements or consolidating debt. Loan products could be for new home
purchases as well as second, vacation, and investment homes, or trading up to a larger home.
 Mortgages
A Retail mortgage loan is a loan secured by residential property through the use of an agreement
which evidences the existence of the loan and the noting of encumbrance of that realty through
the granting of a mortgage, in its property records, that secures it.
A bank or a financial institution can provide financing (a loan) to a home buyer or builder either to
purchase or secure against the property, such as, either directly or indirectly through
intermediaries. Features of mortgage loans such as size of the loan, maturity of loan, interest rate,
repayment method, and other characteristics can vary considerably.
Mortgage loans are generally structured as long-term loans, whose periodic payments are similar
to an annuity and calculated according to time value of money formulae. The most basic
arrangement would require a fixed monthly payment over a period of ten to thirty years,
depending on local conditions. Over this period the principal component of the loan (the original
loan) would be slowly paid down through amortization.
Lenders may also, in many countries, sell the mortgage loan to other small investors, who are
interested in receiving the future stream of cash payments from the borrower, often in the form of
a security (by means of a securitization). In the United States, the largest firms securitizing loans
are Fannie Mae and Freddie Mac, which are government sponsored enterprises.
There are many types of mortgages used worldwide, but several factors broadly define the
characteristics of a mortgage. Two basic types of amortized mortgage loans are fixed rate mortgage
(FRM) and adjustable rate mortgage (ARM) (also known as a floating or variable rate mortgage).
Major variable characteristics of Mortgages are:
Interest: interest may be fixed for the life of the loan or kept variable (marked to market),
and change at certain pre-defined periods;
Term: mortgage loans generally have a maximum term, that is, the number of years after
which an amortizing loan will be repaid. Some mortgage loans may have no amortization,
or require full repayment of any remaining balance at a certain date, or even negative
amortization.

Payment amount and frequency: in some cases, the amount paid per period (usually
monthly) and the frequency of payments may change or the borrower may have the option
to increase or decrease the amount paid.
Prepayment: some types of mortgages may limit or restrict prepayment of all or a portion
of the loan, or require payment of a penalty to the lender for prepayment.
 Auto Loans – Cars, Boats, RVs

Auto Loans are available for acquiring a new or used vehicle, such as a car, boat or even a
recreational vehicle (RV) (it refers to an enclosed piece of equipment synchronously used as both a
vehicle and a temporary travel home and intended for everything from brief leisure activities such
as vacations and camping, to full-time living, for which they are often parked in special trailer
parks). The Banks will finance a major portion (at times up to 90 – 95 % of basic cost) of the total
invoice value of the vehicle, while the Customer needs to contribute the rest as the margin. The
payment will be always made directly to the vehicle supplier and a hypothecation charge registered
with the transport vehicle regulatory body of the place, against that vehicle. Even the insurance
taken on this vehicle will have the “Bank Clause” in place to safeguard the Bank’s interests in case
of a claim arising on the vehicle. The repayment will be through pre-defined EMIs’ and will usually
factor in the insurance costs too, which will be obtained by the Bank, during the entire duration of
the Loan.
 Dealer Floor Plan and Holdbacks

A dealer has to pay for every vehicle they order at the time of ordering and not when they actually
sell them. This means that in order to have a wide variety of new vehicles with the selection of
options that will be, hopefully, what the customers want, the dealers have to finance this large
inventory, either through a bank or through their manufacturer's financial division. This is called a
'floor plan.' To provide help to their dealers, who provide this selection for potential customers, the
manufacturers give the dealers a check, every ninety days for the interest the dealer has to pay to
the bank, on the first ninety days on these loans. As the holdback is only applicable to the first
ninety days a vehicle is on a lot, not all vehicles will have this holdback available. The longer a car
sits on a lot, the more of the potential holdback is lost to interest payments the dealer has to pay.
Once the initial 90 days are up, then the dealer is paying from his own account to keep the car
there. Holdbacks are paid out irrespective of whether, a customer leases, finances, or purchases a
vehicle, with cash. In addition, not all manufacturers offer a holdback adding to the financing
confusion. It is in these situations that the Banks step in to finance the Car dealers in sustaining
their sales operations, by facilities similar to Cash Credits or Business Overdrafts.
 White-goods Loans
Banks and financial Institutions offer Loans for a wide range of white goods and lifestyle products,
viz. air-conditioners, computer systems, high-end TVs, audio & video systems, washing machines,
refrigerators, microwave ovens, furniture, gym products. Attractive schemes are formulated to
match the cash flows of individuals, availing these loans, especially the salaried individuals. The
payments are structured in the form of easy equated monthly installments (EMIs). The sanctions
and disbursements are usually very fast and swift. These schemes are often offered at very
attractive terms and rates. The security is usually hypothecation charge over the asset financed and
the personal guarantee of the borrower. Additionally, the white good purchased is covered by
adequate insurance to protect the financing institutions interests, in case of accidental damage or
malfunctioning, during its economic life.
 Credit Lines
It is an arrangement in which a bank or lender extends a specified amount of unsecured credit to a
specified borrowers usually, to their credit-worthy customers to overcome liquidity problems, for a
specified time period. It may take several forms such as cash credit, overdraft, demand loan, export
packing credit, term loan, discounting or purchase of commercial bills, etc.
 Index Rates
The Index is the variable component of the interest rate and typically will be set according to one
month U.S. Prime Rate (Prime) or the one or three-month London Interbank Offer Rate (LIBOR).
This Index will go up and down during the life of the loan, and the Index reset frequency indicates
the frequency with which the Index can be changed. The Margin is the fixed component of the
interest rate and varies by borrower, based largely on the credit of the co-signer. Once the Margin
is set, it stays in place for the life of the loan, or in some cases it changes according to a preset
schedule. So for example a borrower's interest rate could be set at LIBOR (the Index) plus 3.5% (the
Margin), and the actual interest rate will go up and down with the LIBOR, but will always be 3.5%
more than the LIBOR.
o Amortization or Repayment Schedules

Amortization or amortization means to decrease an amount gradually or in installments, especially
in order to write off expenditure or liquidate a debt over a period of time. Repayment Schedule
also shows the number of payments needed to pay off a loan. This is commonly used in following
references:
 Amortization (in business) is the allocation / dispersion of a lump sum amount to different
time periods, particularly for loans and other forms of finance, including related interest or
other finance charges.
 Amortization schedule refers to a table detailing each periodic payment on a loan (typically
a mortgage loan), as generated by an amortization calculator.
 Negative amortization reflects an amortization schedule where the loan amount actually
increases through not paying the full interest charged at periodic intervals.
 Amortization of capital expenditures of certain capital (long-term) assets as provided under
accounting rules, particularly intangible assets and deferred charges, in a manner that is
analogous to depreciation. This necessitates that assets with limited life have to be written
down over the period benefited. The amortization entry is to debit amortization expense
and credit the intangible asset. Also, unlimited life intangibles are subject to an annual
impairment charge.

o Loan Provisioning
This refers to the often regulatory need to make separate allocations from the Banks or financial
institutions interest earnings or overall profits towards identified delinquencies in troubled assets,
wherein the repayments are expected to become / already are overdue. It is defined as “An
expense set aside as an allowance for bad loans (customer defaults, or reduced cash flows due to
terms of a loan having been renegotiated, etc). It is also know as a "valuation allowance" or
"valuation reserve". A central feature of provisioning systems is typically to refer to losses that have
already been incurred or are anticipated with a high degree of confidence. Specific provisioning
requirements are often designed for certain portfolio segments, such as small loans (consumer and
credit card lending) or loans exposed to sovereign risk.
o Refinance
Refinancing refers to the replacement of an existing debt obligation with a debt obligation bearing
different terms, which usually, are more advantageous to the Borrower. It may be undertaken to:
 reduce interest rate/interest costs (by refinancing at a lower rate),
 extend the repayment time, to pay off other debt(s),
 reduce the periodic payment obligations (at times by taking a longer-term loan),
 reduce or alter risk (such as by refinancing from a variable to a fixed-rate loan),
 raise cash for investment, consumption, or the payment of a dividend.
The most common consumer refinancing is for a home mortgage. In the context of personal (as
opposed to corporate) finance, refinancing a loan or a series of debts can assist in paying off high-
interest debt such as credit card debt, with lower-interest debt such as that of a fixed-rate home
mortgage. This can allow a lender to reduce borrowing costs by more closely aligning the cost of
borrowing with the general creditworthiness and collateral security available from the borrower.
Another use of refinancing is to reduce the risk associated with an existing loan. Interest rates on
adjustable-rate loans and mortgages shift up and down based on the movements of the various
indices used to calculate them. By refinancing an adjustable-rate mortgage into a fixed-rate one,
the risk of interest rates increasing dramatically is removed, thus ensuring a steady interest rate
over time. However, this flexibility comes at a price as lenders typically charge a risk premium for
fixed rate loans.
o Secondary Marketing
The secondary market, also known as the aftermarket, is the financial market where previously
issued securities and financial instruments such as stock, bonds, options, and futures are bought
and sold. However, with respect to Retail Banks, this is more relevant in terms of selling and buying
classes of homogenous assets (loan portfolios) that have been brought together using
“Securitization”. Financial Institutions sell their loan asset portfolios to other small investors, who
are interested in receiving the future stream of cash payments from their borrowers, often in the
form of a security that is traded on the financial market, this process being called “Secondary
Marketing”.
 Credit Cards
It is a small plastic card, whose shape and size are as specified by the ISO/IEC 7810 standard - ID-1,
issued by the Banks and Credit Unions, to their customers, who become users of this system of
payments. They entitle its holder to buy goods and services based on the holder's promise to pay
for them later, in full or in part, by a specified future date. In effect, the issuer of the card grants a
line of credit to the consumer (or the user) from which the user can borrow money for payments to
a merchant or as a cash advance, directly to the user.
 Charge Cards
A charge card is different from a credit card, in that it requires the entire outstanding balance to be
paid in full, each month / billing cycle, whereas in contrast, credit cards allow the consumers to
'revolve' their balance, but at the additional cost of having interest charged on balance
outstanding.

7.2. Key Bank Holding Companies in the US
Listed below are the Top 50 bank holding companies (BHCs) as of 03/31/2009. To be included
among the Top 50, a bank holding company should not only qualify by asset size (displayed in
millions) but also have submitted at least five years of FR Y-9C data and be engaged in significant
banking activities
Rank Institution Name Location Total Assets

(in Billions
USD)
1 BANK OF AMERICA CORPORATION CHARLOTTE, NC 2,323
2 JPMORGAN CHASE & CO. NEW YORK, NY 2,079
3 CITIGROUP INC. NEW YORK, NY 1,822
4 WELLS FARGO & COMPANY SAN FRANCISCO, CA 1,285
5 THE GOLDMAN SACHS GROUP, INC., NEW YORK, NY 925
6 MORGAN STANLEY NEW YORK, NY 626
7 HSBC NORTH AMERICA HOLDINGS INC. METTAWA, IL 401
8 TAUNUS CORPORATION NEW YORK, NY 368
9 THE PNC FINANCIAL SERVICES GROUP, INC., PITTSBURGH, PA 286
10 U.S. BANCORP MINNEAPOLIS, MN 263
11 THE BANK OF NEW YORK MELLON CORPORATION, NEW YORK, NY 203
12 SUNTRUST BANKS, INC. ATLANTA, GA 179
13 CAPITAL ONE FINANCIAL CORPORATION MCLEAN, VA 177
14 CITIZENS FINANCIAL GROUP, INC. PROVIDENCE, RI 167
15 STATE STREET CORPORATION BOSTON, MA 144
16 BB&T CORPORATION WINSTON-SALEM, NC 143
17 REGIONS FINANCIAL CORPORATION BIRMINGHAM, AL 141
18 TD BANKNORTH INC. PORTLAND, ME 128
19 AMERICAN EXPRESS COMPANY NEW YORK, NY 120
20 FIFTH THIRD BANCORP CINCINNATI, OH 119
21 KEYCORP CLEVELAND, OH 98
22 BANCWEST CORPORATION HONOLULU, HI 79
23 NORTHERN TRUST CORPORATION CHICAGO, IL 78
24 HARRIS FINANCIAL CORP. WILMINGTON, DE 69
25 UNIONBANCAL CORPORATION SAN FRANCISCO, CA 68
For recent listing please visit:

http://www.ffiec.gov/nicpubweb/nicweb/Top50Form.aspx
Rank Top 5 European Banks - Name (city, state) Consolidated assets

Rank Top 5 European Banks - Name (city, state) Consolidated assets
1. HSBC (Britain) 119.5 (Bn Euros)
2. Banco Santander (Spain) 70.5 (Bn Euros)
3. ABN Amro (Netherlands) 67.3 (Bn Euros)
4. Unicredito Italiano (Italy) 64.8 (Bn Euros)
5. Intesa Sanpaolo (Italy) 58.5 (Bn Euros)
7.3. Payment Systems -Global
Country Payment Type

Canada LVTS (Large Value Transfer System) ,
ACSS (Automated Clearing Settlement System),
IACH (International Automated Clearing House)
USA FedWire,
FedACH,
CHIPS(Clearing House Interbank Payments System),
CLS (Continuous Linked Settlement),
EPN (Electronic Payments Network)
Germany RPS (Retail Payment System)
United BACS (Banks Automated Clearing System);
Kingdom CHAPS (Clearing House Automated Payment System);
FPS (Faster Payments Service);
ACH (Automated Clearing House)
Australia APCS (Australian Paper Clearing System);
BECS (Bulk Electronic Clearing System);
CECS (Consumer Electronic Clearing Stream);
HVCS (High-Value Clearing System)
ACDES (Australian Cash Distribution and Exchange System)
Japan BCCSs (Bill and Cheque Clearing Systems);
Zengin System (Zengin Data Telecommunication System);
FXYCS (Foreign Exchange Yen Clearing System); and
BOJ-NET (Bank of Japan Financial Network System) Funds Transfer System

7.4. Glossary
Terminology Description
Asset Anything owned which can produce future economic benefit
Liability Something which is owed to another party
Retail banking Banking, with individual as the customer
Stock Also referred to as ‘share’, it is a share of ownership in an organization
Bond A debt security, wherein the issuer owes the holder a debt and is obligated
to pay the holder the principal and the interest
Mutual funds A professionally managed fund wherein investors pool in their money and
thus share the risks, as well as, the rewards
Bancassurance Insurance products sold through banks
Mortgages Loans given to customers for purchase of house
Student Loans Loans given specifically to students for the purpose of education
Personal Loans Loans that are given to customers without a specific purpose. These loans
carry higher interest rate as there is no security offered by the customer
Credit Worth Credit worth is the risk rating of the customer. The credit rating is done
based on various factors like the previous credit behavior, financials,
collateral
Collateral Security provided by the borrower to the bank for availing a loan
MICR MICR is a process by which various details of the check like the drawer
bank, amount etc will be read through a reader. The reader will convert
the bar code into digital form.
Real-time Gross- Settlement of transactions as and when they are ordered rather than
Settlement running a batch process at the end of the day.
Banknotes A piece of paper money (especially one issued by a central bank)
Remittance The sending of money (usually at a distance)
Debit The process of deducting money from someone’s account
Credit The process of addition (deposit) of money to some1’s account
Drawer One that draws an order for the payment of money
Drawee The party on which an order for the payment of money is drawn
Payee Is the receiver of the check
Liabilities A liability is a financial obligation, debt, claim, or potential loss
Commodity A product which trades on a commodity exchange; this would also include
foreign currencies and financial instruments and indexes
Monetary policy The regulation of the money supply and interest rates by a central bank,
such as the Federal Reserve Board in the U.S., in order to control inflation
and stabilize currency. Monetary policy is one the two ways the
government can impact the economy. By impacting the effective cost of
money, the Federal Reserve can affect the amount of money that is spent
by consumers and businesses
Cash reserves Cash deposits, short-term bank deposits, money market instruments, and
Treasury Bills
Redeem The return of an investor's principal in a security, such as a bond, preferred
stock or mutual fund shares, at or prior to maturity
Money-market Rates Prevailing rate in money markets
Market capitalization Market capitalization represents the aggregate value of a company or
stock. It is obtained by multiplying the number of shares outstanding by
their current price per share. For example, if XYZ company has 15,000,000
shares outstanding and a share price of $20 per share then the market
capitalization is 15,000,000 x $20 = $300,000,000
Terminology Description
M&As Merger and Acquisition activities
Direct deposit The deposit of funds directly into a bank account as a form of payment.
Common uses for direct deposit include paychecks and tax refunds
Compounded daily The process of calculating interest and adding it to existing principal and
interest at finite time intervals, such as daily, monthly or yearly
Demographics Socioeconomic groups, characterized by age, income, sex, education,
occupation, etc., that comprise a market niche
Call centers Customer care center where in customer call up to get their queries
answered.
Stock market Stock market instruments are regular shares, bonds and other derivatives
Instruments which are traded in a stock market
Legacy systems Old systems that run on mainframes

Direct credits Money deposited by the payee directly into the beneficiary account

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(Liability Products, CRM, Channels & Limited coverage of Asset Products)

Cognizant Technology Solutions

Cognizant Confidential Page 2 of 130

3.3. PHONE BANKING....................................................................................................................... 72

Figure 1: Assets and Liabilities in Banking ............................................................................................................ 6

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1.2. Assets & Liabilities – An Introduction

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Figure 1: Assets and Liabilities in Banking

1.3. Retail Banking

Individuals (Consumer Banking)

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Figure 2: Retail Banking Structure

1.4. Retail Banking Market

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Market Share Increases of the top ten global banks

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Figure 4: Change in leading Retail Bank ranking 2008 and 2009

Impact of Financial Crisis on Retail banking market development

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 “Better sell”, to better fit diverse clients’ needs;

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Figure 5: Retail Banking - Over all processes

1.5. Banking Regulation and Key Regulatory Bodies

Regulator functions - The Central Bank

Cognizant Confidential Page 11 of 130

f) Granting of licenses’/permissions for banks to carry out business;

Federal Regulatory Authorities

State regulatory Authorities

Important US Banking Regulatory Bodies

Organization/Body Description & Role

Board of Governors of the Conducts US Monetary Policy; Supervises US Banks; Provides

Financial Crimes Provides a government-wide multi-source financial intelligence

Organization/Body Description & Role

Organization/Body Description & Role

Affairs and economic policy

1.6. Some U.S. Retail Banking Regulations:

Regulation Name Main Purpose / Intent

Gramm-Leach-Bliley Provided a prudential framework for the affiliation of banks,

Cognizant Confidential Page 14 of 130

Regulation Name Main Purpose / Intent

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1.7. Regulatory Scenario in the United Kingdom

Structure of U.K. Financial Regulation Mechanism

Department of HM (Her Majesty’s)

Insurance Financial Securities

Figure 6: Structure of UK Financial Regulation mechanism

1.8. European Union Banking Regulations

1.9. Types of Global banking institutions

The various types of banks are explained below:

Bank Type Description

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Bank Type Description

Credit Unions Credit unions are non-profit, member-owned, financial

Bank Type Description

Another substitute for a bank account is a cash-management account at a brokerage. A customer

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2. Retail Banking Products & Instruments

2.1. Generic Features & facilities

Attribute / Feature Description

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Attribute / Feature Description