MODULE- 3

Introduction
To compete in an economy which is opening up, it is
imperative for the Indian banks to observe the latest
technology and modify it to suit their environment. Like
any other social sector, the banking sector is also
undergoing a rapid transformation. Technology has
become central to banking. This is one of the major
reasons why new private and multinational banks have
been able to survive, thrive and adapt in an increasingly
competitive space.
Cont…
Centralized operations and process automation using
core banking applications and IP based network improve
efficiency and productivity levels tremendously. Core
banking applications help a bank in shifting from ‘branch
banking’ to “Bank Banking”. IP based networks let a
bank offer multiple services over the same network,
resulting cost savings.
Data warehousing can assist in providing better
transaction experiences for customers over different
transaction channels.
Data mining help banks analyse and measure
customer transaction patterns and behavior.
Technological developments in Indian
banking
Technology has played a significant role in the efficiency
of the financial system in recent years. Improved customer
service has become very important for survival and growth in
the emerging deregulated financial market for banks. The
banks are competing with each other to offer multifarious and
diversified services to customers to widen their client base.
Automation of various banking services using the latest
technology emphases to provide superior customer services.
Technology is also playing a key role in bank’s strategy
for gaining a competitive
edge.
Modern Technology in Banking
 Universal Banking
 Home Banking
 Mobile Banking (M- Banking)
 Automated Teller Machine (ATM)
 Core Banking Solutions (CBS)
 Electronic Payments System
Universal Banking
 Universal Banking is a combination of Commercial
Banking, investment banking, development banking,
insurance and many other financial activities.
 It is a place where all financial products are available
under one roof. So, a universal banks is a bank which
offers commercial bank functions plus other functions
such as Merchant banking, Mutual funds, Factoring,
Credit cards, Housing Finance, Auto loans, Retail
loans, Insurance, etc.
Advantages of Universal Banking
 Investors trust
 Economics of scale
 Resources utilization
 Profitable diversification
 Easy marketing
 One-stop shopping
Disadvantages of Universal
Banking
 Different rules and regulations
 Effect of failure on banking system
 Monopoly
 Conflict of interest
 Home Banking

 The practice of conducting banking transaction from

home rather than at branch locations. Home banking
generally refers to either banking over telephone or on
the internet.
 Home Banking, Electronic Banking, E banking,
Internet Banking services/facility may be
interchangeably used.
Facts of electronic banking
 Customer to bank
 Bank to bank
 Electronic central banking
 Internet procurement
Uses of Electronic Banking
 Bill payment service
 Fund transfer
 Credit card customers
 Railway pass (Mumbai, Nasik, Surat and Pune)
 Investing through internet banking
 Recharging a prepaid phone
 Shopping.
Advantages of Electronic
banking
 Online account is simple to open and easy to operate.
 It is quite convenient as you can easily pay your bills,
can transfer funds between accounts, etc. now you do
not have to stand in a queue to pay off your bills, also
you do not have to keep receipts of all the bills as you
can now easily view your transactions.
 It is available all the time, I.e., 24x7. you can perform
your tasks from anywhere and at any time; even in the
night when banks are closed or on holidays. The only
thing you need to have is an active internet
connection.
Cont…
 It is fast and efficient. Funds get transferred from one
account to the other very fast. You can also manage several
accounts easily through internet banking.
 Through internet banking, you can keep an eye on your
transactions and account balance all the time. This facility
also keeps your account safe. This means that by the ease of
monitoring your account at anytime, you can get to know
about any fraudulent activity or threat to your account to
severe damage.
 It also acts as a great medium for the banks to endorse their
products and services. The services include loans,
investment options and many others.
Disadvantages of Electronic
banking
 Understanding the usage of internet banking might be
difficult for a beginner at the first go. Though there are
some sites which offer a demo on how to access online
account, but not all banks offer this facility. So, a
person who is new, might face some difficulty.
 You cannot have access to online banking if you don’t
have an internet connection; thus without the
availability of internet access, it may not be useful.
 Security of transcations is a big issue. Your account
information might be hacked by unathorised people
over the internet.
Cont…
 Password security is the must. After receiving your
password, do change it and memorize it otherwise
your account may be misused by someone who gets to
know your password inadvertently.
 You cannot use it, in case, bank’s server is down
 Another issue is that sometimes it becomes difficult to
note whether your transaction was successful or not. It
may be due to the loss of net connectivity in between
or due to slow connection, or the bank’s server is
down.
Mobile Banking
 Mobile banking (also known as M- Banking, SMS
Banking, etc.)is a term used for performing balance
checks, account transactions, payments, etc., via a
mobile device such as mobile phone.
 Mobile banking is the hottest area of development in
the banking sector and is expected to replace the
credit/debit card system in future. In past two years,
mobile banking users have increased three times if it is
compared with the use of either debit card or credit
card.
Banking services made possible
through mobile banking
 Account balance enquiry
 Account statement enquiry
 Cheque status enquiry
 Cheque book requests
 Fund transfer between accounts
 Credit/debit alerts
 Minimum balance alerts
 Bill payment alerts
 Bill payment
 Recent transaction history requests
 Information requests like interest rates, exchange rates
etc.
Classification of mobile banking
services
 Push based or pull based
Push is when bank sends out information based
upon agreed set of rules. Pull is when the customer
explicitly requests a service or information from the
bank.
 Transaction based or enquiry based
It renders two kinds of service. A request for the
bank statement is an enquiry based service. A request for
the transfer of funds to some other account is a
transaction based service.
Technologies enabling mobile
banking.
 Interactive voice response (IVR)
 Short messaging service (SMS)
 Wireless access protocol (WAP)
 Standalone mobile application clients.
Advantages of Mobile Banking
 It utilizes the mobile connectivity of telecom operators and
therefore does not require an internet connection.
 With mobile banking, users of mobile phones can perform
several financial functions conveniently and securely from
their mobile.
 people can check their account balance, review recent
transaction, transfer funds, pay bills, deposit cheques,
manage investments, etc.
 Mobile banking is available round the clock 24/7/365.
 Mobile banking is said to be even more secure than online/
internet banking.
Disadvantages of Mobile Banking
Mobile banking users are at risk of receiving fake SMS
messages and scams.
The loss of a person’s mobile device often means that
criminals can gain access to mobile banking PIN and
other sensitive information.
Modern mobile device like smart phone and tablets
are better suited for mobile banking than old models
of mobile phones and devices.
Regular users of mobile banking over time can
accumulate significant charges from their banks.
Automated Teller Machine(ATM)
 An automated teller machine is a computerized
telecommunications device that provides the
customers of a financial institution with access to
financial transactions in a public space without the
need for a human clerk or bank letter.
 ATM is designed to perform the most important
function of the bank. It is operated by plastic card with
its special features. The plastic card is replacing
cheque, personal attendance of the customer, banking
hour’s restrictions and paper based verification.
Working of ATMs
 For availing the services of an ATM, a customer need to have an
ATM card, Debit card, or Credit card, as well as personal
identification number(PIN).
 PIN is issued to the customers along with the card. PIN is a
randomly generated sequence of digits. Only the customer
knows the PIN and has to secure it.
 A magnetic strip is fixed on the back of the cards that holds
information about the customers pin and the account number.
When the customer swipes the card, the account number is
validated by the ATM and if the ATM finds the number is valid,
it then prompts the customer to enter the PIN.
 Customers can choose given on ATM menu and proceed with the
transactions provided by the ATMs.
Advantages of ATMs
 To the customer:
 Provide 24x7 and 365 days a year service.
 Offer quicker and efficient service.
 Allow privacy in transaction.
 Are error free.
 Enable cardholder to access cash at any location regardless
of where they maintain their accounts.
 Offer flexibility of cash withdrawal to the customer.
 Enable fund transfers across branches or banks, in a linked
accounts.
 Offer anywhere banking facility.
 To the Banks:
 Is an alternative to extended banking hours.
 Is cheaper if transactions are large in number, thereby,
reducing footfall at the branches.
 Alternative to opening new branches.
 Reduces operating expenses of the banks.
 Helps banks to avoid transportation of cash and cash
handling by the employees.
 Increases market penetration.
Core Banking Solution (CBS)
Core banking refers to a centralized computerization
model in which branches are connected to a central
host. It incorporates branch automation modules and
on-line multiple delivery channels under one roof.
CBS provides a list of benefits such as anywhere-
any-time banking, electronic clearing services,
electronic fund transfer systems, cheque processing,
automated teller machines, internet banking and
mobile banking etc.
Framework of CBS
 It enables banks to interconnect all their branches which
then enable customers to operate their accounts and avail
banking services from any branch of the bank in the
country, regardless of where he maintains his account.
 The customer need not operate only through his home
branch but can go to the nearest branch for banking
services. He or she is no longer a customer of a branch
but a customer of the bank.
 it helps them to build better MIS and enables them to
cross sell products.
 All private and foreign banks are on the CBS platform.
Cont…
 To get statement of account.
 To transfer funds from his account to some other account-
his own or of third party, provided both accounts are in
CBS branches.
 To obtain Demand Drafts or Banker’s Cheques from any
branch on CBS-account shall be online debited to his
account.
 Customers can continue to use ATMs and other delivery
channels, which are also interfaced with CBS platform.
Advantages
 For customer
Transaction of business from any branch or ATM
Lower incidence of errors.
Better fund management due to immediate availability of
fund.
 For banks
Standardization of process within the bank.
Better customer service leading to retention of
customers.
Available of accurate data and better use of available
infrastructure.
Better MIS and reporting to external agencies.
Increased business volume
Offering multiple delivery channels like ATM, Debit card,
Credit card etc..
Reducing operational cost (manpower saving).
Centralizing the back-end processes and reporting.
Creating customer profile database through cross selling
Adoption of risk management by taking care of risk
monitoring and risk reporting systems.
Electronic Payment System
 E – payment is a subset of an e-commerce transaction
to include electronic payment for buying and selling
goods or services offered through the internet. An
electronic payment is any kind of non-cash payment
that doesn’t involve a paper check. Methods of
electronic payments include credit cards, debit cards
and the ACH( automated clearing house)network.
Types of Electronic Payment.
 Electronic fund transfer
 Payment cards(they contain stored financial value that can be transferred from the
customers computer to the businessman’s computer. )

 Credit cards
 Smart cards (pocket sized card that stores personal and financial information)
 Electronic money(this a standard money converted into an electronic format to
pay for online purchase.)

 Online payment(for the payment of electricity bill, phone bill etc)

 Electronic wallets(similar to smart cards as they include stored financial value for
online payments)

 Electronic gifts (they are one way of sending electronic currency or gift certificates
from one individual to another. The receiver can spend these gifts in their favorite online
stores provided they accept this type of currency)
Debit cards
Debit card is a plastic card which provides an
alternative payment method to cash or a cheque. However,
banks only issue to the people if they hold an account with
them. When a debit card is used to make a payment, the
total amount is charged is instantly reduced from the bank
balance. A debit card is also accepted at outlets with
electronic swipe-machines that can check and deduct
amounts from the bank balance on- line.
Although many debit cards are of the Visa or Master
card brand, there are many other types of debit card, for
example Switch and Solo in The United Kingdom, Carte
Bleue in France, Laser in Ireland, EC electronic cash in
Germany and EFTPOS cards in New Zealand and Australia.
Advantages
 Limited to existing funds
 Avoid cheque writing
 Quick transactions
 No extra charge
 No need to carry cash
Disadvantages
 Refused transactions
 Lower levels of security
 Shorter time to report the fraud
Credit cards
 A credit card is a plastic card having a magnetic stripe,
issued by a bank or business authorising the holder to buy
goods or services on credit.
 Also called charge card, this card allows consumers to
purchase products or services without cash and to pay for
them at a later date.
 Every month, the sponsor provides a bill which tallies the
card activity during the previous 30 days.
 Depending on the terms of the card, the customer may
pay interest charges on the amount that they do not pay
for on a monthly basis.
How banks make money
 The banks and companies that sponsor credit cards profit
in three ways.
 Primarily they make money from the interest payments
charged on the unpaid balance.
 Secondarily by charging an annual fee for the use of the
card.
 Finally by, sponsors make profit by charging service fees
for late payments.
Advantages of Credit cards
 No cash involved
 Enable customer to buy expensive products
immediately and make impulse purchases.
 Once transaction confirmed, payment to supplier
guaranteed.
 Credit card holders can use card to obtain cash from a
cash machine. ( although they pay interest on
withdrawals from the moment they make the
transaction ).
Disadvantages
 Risk of fraud.
 Card holders may spend more than they can afford.
 Cost of processing the transaction.
 Interest can be high if card is not paid-off in full each
month.
 Cash withdrawals are expensive.
 Because the method of calculating interest is
complicated, people may find the interest charges
higher than they first thought.
Smart cards
 A smart card or Integrated Circuit Card (ICC) is a pocket sized card
embedded integrated circuits which can process information. There
are two broad categories
 Memory cards
 Microprocessor cards
Smart card is a plastic card embedded with a computer chip that stores
and transacts data between users. This data is associated with either
value or information or both and is stored and processed within the
card’s chip, either a memory or microprocessor. The card data is
transacted via a reader that is part of a computing system. Smart card
enhanced systems are in use today throughout several key applications,
including healthcare, banking, entertainment and transportation.
Thus having a smart card is like having a PC in wallet. With their
ability to store up to 80 times more information than magnetic stripe
cards, smart cards will allow card companies to deliver more
personalized products and services providing consumers with custom-
tailored cards to suit their individual lifestyle.
Features of Smart Cards
 Smart cards can be used for storing personal information
like name/address, driving license details, medical records,
eg: blood group, any history of heart disease, blood
pressure, diabetes or allergy problems which can prove very
useful in emergencies, and any other information which is
required to be stored.
 These cards can be used as a personal identification device
anywhere, e.g., for making hotel bookings or purchase
airlines ticket.
 Smart card can be used for carrying out financial
transactions like the payment of telephone and electricity
bills, road toll taxes.
Advantages of Smart Cards
 Cannot be easily duplicated
 Can store many type of information
 Convenience(portable and do not occupy much space)
 Could include high security
 Low cost to issuers and users
 High accuracy of information
Disadvantages of Smart Cards
 Lack of universal standards for their design and
utilization
 Low consumer acceptance
 Fees applied with the use of a card
 It gives liability issues if stolen or lost
MICR Technology( Magnetic Ink
Character Recognition)
 Under Magnetic Ink Character Recognition (MICR)
Technology, cheques are processed at high speed on
machines. Banks issue Cheques, Drafts and Other
payment instructions in MICR format using the
special quality paper and specifications. On MICR
instruments, there is a code line at bottom containing
information printed in magnetic ink to enable
mechanical processing. The code contains the
following information.
Cont…
 First six numbers indicate the cheque number.
 Next three numbers indicate city code.
 Next three numbers indicate bank code.
 Next three numbers indicate branch code.
 After some space, there is a number for transaction code
– whether savings or current account transaction.
 When this magnetized portion is placed under MICR
equipment, it allows instant readability and
identification.
Features
 Common machine language
 MICR characters are printed in the form of either an E-
13B or CMC-7 font.
 It is specially designed magnetic ink printed characters
can be recognised by high speed magnetic recognition
equipment.
 The readable characteristics provides the information
needed for processing the cheque.
Advantages
 Easy readability and high security
 Small deciphering error rate.
(for eg: there is typically only one read error for every 20000 to 30000 checks processed by a
MICR scanner)

 Enhances security.
Disadvantages:
Readers and encodes are very expensive
The system can only accept a few different character sets.
 it requires special printing devices to produce the text.
The printers run on cartridges that cost far more than
plain ink toner cartridges.
MICR characters are very limited to only 14 characters.
Any damage or any printing out of the precise format
specifications will cause failure to read properly.
MICR scanner machines are relatively expensive and
needs constant maintenance.
Cheque Truncation/ Electronic
Cheque
 Cheque truncation is the process in which the image
of the relevant data of a cheque is electronically
captured and transmitted to enable payment of that
cheque to the payee’s account and simultaneously
debiting the account of the drawer without the
physical movement of the cheque itself.
Steps involved in E-cheque
Truncation
1) The buyer accesses the seller’s server to select the goods
and services.
2) The buyer purchases the goods/services by sending an
electronic cheque to the seller’s server. The cheque may
be sent through email.
3) The seller forwards the cheque to his bank electronically.
4) The seller’s bank forwards the e-cheque to the accounting
server for payer authentication and clearing.
5) The accounting server works with the buyer’s bank, clears
the cheque, and transfers the money to the seller’s bank.
The seller’s banks update the seller’s account.
Steps involved in E-cheque
Truncation
6) The buyer’s banks updates the buyer’s account.
7)The accounting server forwards the cheque to the
buyer’s bank and updates the buyer’s account.
8) The buyer’s bank transfers the money to the
accounting server.
9)The accounting server sends the transaction money to
the seller’s bank which updates the seller’s account.
Advantages of Electronic
cheques
 Saving in time
 Reduction in paper handling costs
 Reduction in bounced cheque
 Reduce the time
 No need for long queues
 Does not require secure storage
Disadvantages
 Dependent system
 No surety
 Time consuming
Electronic Clearing Services(ECS)
 ECS is an electronic mode of funds transfer from one
bank account to another bank account using the
services of clearing house. This mode of remittance is
normally used for bulk transfers from one account to
many account or vice versa using the services of a ECS
centre at a ECS location.
 Eg: payment of interest, salary, pension, electricity,
telephone, water charge etc.
Types of ECS
 ECS Credit system:
The mode of remittance is normally used for bulk
transfers from one account to many accounts or vice versa.
This can be used both for payment like salary, dividend, loan
installments etc or for collection of amounts the ultimate
beneficiaries. of the user institution.
 ECS Debit system:
It is useful for payment of telephone expenses, water bill,
cess or tax collections that are periodical or repetitive in
nature to the user institution.
Electronic Funds Transfer(EFTs)
 Electronic Fund transfer refers to the computer-based
systems used to perform financial transactions
electronically. Electronic funds transfer is used to
settle credit card transactions by transferring funds
between the seller and the bank, which has issued the
credit card to the customer. A clearing house would
settle the accounts of the sending bank and the
receiving bank.
Advantages of EFT
 Avoiding of printing MICR cheques
 Avoiding postal delays
 Avoiding postage
 Avoiding reconciliation problems
 Avoiding loss of instruments
 Avoiding fraud and burden on the clearing system
 Faster access to funds
National Electronics Funds Transfer
System (NEFT)
• The acronym “NEFT” stands for National Electronic Funds
Transfer.

• Funds are transferred to the credit account with the other

participating Bank using RBI's NEFT service.

• RBI acts as the service provider and transfers the credit to the
other bank's account.

 NEFT operate on a deferred net settlement (DNS) basis which

settles transactions in batches.

 In DNS, the settlement takes place at a particular point of time.

All transactions are held up till that time
Difference between EFT and NEFT
 RBI –EFT is confined to 15 centres in india, whereas
NEFT is centralized.
 Thus NEFT can be regarded as an improvement over
the existing EFT systems of RBI.
 Both these systems work on Net settlement methods.
RTGS(Real Time Gross Settlement
 The acronym 'RTGS' stands for Real Time Gross Settlement

 RTGS system is a funds transfer mechanism where transfer of money

takes place from one bank to another on a 'real time' and on 'gross'
basis

 This is the fastest possible money transfer system through the

banking channel

 Settlement in 'real time' means payment transaction is not subjected

to any waiting period. The transactions are settled as soon as they
are processed

 'Gross settlement' means the transaction is settled on one to one

basis without bunching with any other transaction

 Considering that money transfer takes place in the books of the

Reserve Bank of India, the payment is taken as final and irrevocable
Meaning
Real-time gross settlement systems (RTGS) are
specialist funds transfer systems where the transfer of money
or securities takes place from one bank to another on a "real
time" and on a "gross" basis.
Why RTGS / NEFT
 Lower cost of transaction of RTGS/NEFT as compared to cost
of transaction and remittance through draft

 Draft Issue to Payment – long process, cancellation, duplicate

draft issue, revalidation, IOR issues, frauds, Staff
accountability

 Customer Benefit – Immediate credit

 Low transaction time, no printing, shorten the queues

 Drafts will be phased out in the coming years

RTGS/NEFT
 For a funds transfer to go through RTGS/NEFT, both the sending
bank branch and the receiving bank branch would have to be
RTGS/NEFT enabled

 In rare cases of system failure at RBI/Banks respective softwares,

manual intervention is required to clear the Blocked funds

 NEFT transactions are settled in batches based on the following

timings:

 11 settlements on weekdays - at 09:00, 11:00, 12:00, 13:00, 15:00

and 17:00 hrs.

 5 settlements on Saturdays - at 09:00, 11:00 and 12:00 hrs.

Processing Charges/Service
Charges for RTGS/NEFT transactions
Amount Service Charge

RTGS From Rs.2 lakh upto

Rs.5 lakh Not exceeding Rs 30/-
Rs. 5 lakh & above Not exceeding Rs 55/-

NEFT Upto Rs.1 lakh Rs.5/-

Rs.1 lakh & 2 lakh Rs.15/- maximum
and above 2 lakh Rs 25/- maximum
 Inward transactions charges for RTGS/NEFT– Free, no charge
to be levied
Essential Information needed
The essential information that the remitting customer would have
to furnish to a bank for the remittance to be effected

 Amount to be remitted

 Account number which is to be debited

 Name of the beneficiary bank

 Name of the beneficiary customer

 Account number of the beneficiary customer

 Sender to receiver information, if any

 The IFSC Number of the receiving branch