Dynamic Environment of Electronic Services in Indian Banking Sector By Anant Bhushan

Paper Presentation at National Conference 2011 On Contemporary Issues In Banking

Organized By: Department Of Commerce,Manipal University,Manipal On 15th February, 2011

Banking systems around the world face diverse challenges by nature of their businesses. While developed economies like the United States, struggle with real estate markets, banks in some parts of Europe are left to deal with high funding costs arising due to sovereign risks. Some of the Japanese banks have low capital, weak profitability, and a high exposure to Japanese government bond markets. In emerging economies, the banking sector in the recent past has been shaped by a good deal of activity in terms of privatization, consolidation and entry of foreign banks.

Banking in 2050: How big will the emerging markets get? A report by PricewaterhouseCoopers,2006 Banks from emerging economies will start to make major acquisitions in developed markets to gain better access to capital markets and to acquire expertise and know-how.

In March 2006, PricewaterhouseCoopers published a report highlighting the rapid growth and increasing global significance of what they called the E7 emerging economies: China, India, Brazil, Russia, Mexico, Indonesia and Turkey.

The banking sector continues to be one of the prime drivers of economic growth. Strong fundamentals in the banking sector, supported by increased credit and growth of assets have resulted in increased profitability. Banks today, have increasingly realised the need to

outgrow plain vanilla offerings, and deliver products which are cost-effective, flexible and tailored to the needs of the rural customer. Moreover, a focus on inclusive growth has taken centre-stage involving huge investments in technology. India is one of the five countries classified as big emerging market economies apart from China, Indonesia, Brazil and Russia. A study by World Bank predicts that by 2020 the share of these five biggest emerging markets in the world output will double to 16.1% from 7.8% in 1992.

INFORMATION TECHNOLOGY - THE GROWTH OF E-BANKING SERVICES The information technology (IT) revolution of the last 2 decades of the 20th century led to a proliferation of personal computers (PCs), servers, modems and other associated electronic data terminal equipment. The use of high bandwidth fibre optic cabling to provide integrated services coupled with modems and switching devices has improved speed of connection via the Internet and the growth in Internet Service Providers (ISPs) has increased accessibility. Indeed, it is estimated that there will be an explosive increase in demand to transmit data over telecommunication networks during this decade and the next. So much so that research and development in the fibre optic field is working hard in the area of silicon technology to improve system performance through higher-speeds and large-scale integration. This rapid growth and expansion of IT and telecommunication networks and interconnectivity encouraged the introduction of electronic services and nonmore so than in the retail trade and in the provision of electronic banking.

ELECTRONIC BANKING (E-BANKING) It is an umbrella term for the process by which a customer may perform banking transactions electronically without visiting a brick-and-mortar institution. The following terms all refer to one form or another of electronic banking: personal computer (PC) banking, Internet banking, virtual banking, online banking, home banking, remote electronic banking, and phone banking. The concept and scope of E-banking is still evolving. It facilitates an effective payment and accounting system thereby enhancing the speed of delivery of banking services considerably. While E-banking has improved efficiency and convenience, it has also posed several challenges to the regulators and supervisors. Several initiatives taken by the government of India, as well as the Reserve Bank of India (RBI), have facilitated the development of Ebanking in India. The government of India enacted the IT Act, 2000, which provides legal recognition to electronic transactions and other means of electronic commerce. The strategy for banks is to provide value-added products to customers utilizing the Internet extensively. Today Indian banking sector has e-banking as major business process which attracts a lot of attention for survival in the market. Lets study the scenario with help of Concentric Circles Model which focuses on changing banking relationship after organisation has seen an opportunity.

NEED EMERGING CHALLENGES MAIN CONCERNS

NEED The Electronic banking is changing the banking industry and is having the major effects on banking relationships. Exceptional rates on Deposits Checking with low or no monthly fee, free bill payment facility and rebates on ATM surcharges low rates credit cards Easy online applications for all accounts, including personal loans and mortgages 24X7 account access irrespective of point of access Demand of personal attention to customer Improving Quality customer service

EMERGING CHALLENGES Information technology analyst firm, the Meta Group, once reported that "financial institutions who don't offer home banking by the year 2000 will become marginalized." By the year of 2002, a large sophisticated and highly competitive Electronic Banking Market will develop which will be driven by

Demand side pressure due to increasing access to low cost electronic services. Emergence of open standards for banking functionality. Customer awareness Need of transparency. Global players Integration of bank services with E-commerce or even disintermediation of services through direct electronic payments (E- Cash), as there can be a threat or opportunity depending upon efficiency of the transaction channel Convenience in international transactions due to the fact that the Internet along with general deregulation trends, eliminate geographic boundaries. Increasing number of security issues which lowers employee and customer confidence

MAIN CONCERNS The Information Technology Act, 2000 does not address this issue. India should take cue from nations, which have favoured ad hoc enactment of sectoral laws over omnibus legislation. Along with these issues, the contradictory issues present in the Banking Regulations Act, 1949, the Reserve Bank of India Act, 1934 and the Foreign Exchange Management Act, 1999 need also to be looked into. On the technological front the Indian Internet banking system is facing many hurdles. The problems include operational risks, security risks, system architecture risks, reputational risks and legal risks. Phishing is another issue that needs attention.

In a survey conducted by the Online Banking Association, member institutions rated security as the most important issue of online banking. There is a dual requirement to protect customers privacy and protect against fraud. Banking Securely: Online Banking via the World Wide Web provides an overview of Internet commerce and how one company handles secure banking for its financial institution clients and their customers. Some basic Information on the transmission of confidential data is presented in Security and Encryption on the Web. PC Magazine Online also offers a primer: How Encryption Works. A multi-layered security architecture comprising firewalls, filtering routers, encryption and digital certification ensures that your account information is protected from unauthorized access: Firewalls and filtering routers ensure that only the legitimate Internet users are allowed to access the system. Encryption techniques used by the bank (including the sophisticated public key encryption) would ensure that privacy of data flowing between the browser and the Infinity system is protected. Digital certification procedures provide the assurance that the data you receive is from the Infinity system.

FUTURE CHALLENGES- BIRD'S-EYE VIEW The Indian banks are hopeful of becoming a global brand as they are the major source of financial sector revenue and profit growth but to be fair, e-banking in India mostly consists of ramping up infrastructure that has been present in countries like the U.S. since well the before the Internet caught on. Indian banks have scaled up in automated teller machine (ATM) controllers, call centres, networks and switches, notwithstanding the fact that each ATM costs the bank up to $8,510, and each swiping machine it provides to merchant establishments costs $745. INDIAN BANKS AND DEVELOPMENTS The banking industry in India is facing unprecedented competition from nontraditional banking institutions, which now offer banking and financial services over the Internet. The deregulation of the banking industry coupled with the emergence of new technologies, are enabling new competitors to enter the financial services market quickly and efficiently. Indian banks are going for the retail banking in a big way. However, much is still to be achieved. Throughout the country, the Internet Banking is in the nascent stage of development ( Awareness level amongst customers is low, red-tapism of bank unions). In general, these Internet sites offer only the most basic services. 55% are so called 'entry level' sites, offering little more than company information and basic marketing materials. Only 8% offer 'advanced transactions' such as online funds transfer, transactions & cash management services. Foreign & Private banks are much advanced in terms of the number of sites & their level of development.

The potential of e-banking is huge. With the increase in connectivity, the number of users will explode. It would obviously take much time before the online banking could be called a fully alternative banking mode to the conventional one. Legal and cross-border risks can be avoided through proper customer identification devices, information screening techniques, periodic reviews on compliance with various laws, and gaining knowledge of various national laws (applicable) and guide the customers through their cross-border dealings. The compliance part and policy regulation part should be assured by the RBI and the need for a data protection law cannot be denied. The security issues can be tackled by having the bank's systems technologically equipped to evade operational and security risks. Reputational risks can be prevented by testing of the system before implementation, developing contingency plans (to handle system disruptions, system hackers, security lapses and virus attacks) and creating back-up facilities. Customer education and awareness also need to be addressed, as unless the customers are taken into confidence and made comfortable with the working of online banking all the technological development will go in vain. The financial services penetration in India continues to be healthy, thus the banking industry is also not far behind. As a result of this, the profit for the Indian banking industry will surely surge ahead. The profit pool of the Indian banking industry has augmented from US$ 4.8 billion in 2005 to US$ 20 billion in 2010 and is further probable to cross US$ 40 billion by 2015. This growth and expansion pace would be driven by the chunk of middle class population. The increase in the number of private banks, the domestic credit market of India is estimated to grow approximately to US$ 23 trillion by 2050.