xxxi

Chapter I

INTRODUCTION

1.1. HISTORY OF BANKING IN INDIA

The banking system of India should not only be hassle free but also be able to

meet new challenges posed by technology and any other external and internal

factors. Without a sound banking system, India cannot have a healthy economy.

During the past three decades Indian banking system had several outstanding

achievements to its credit, the most striking being its extensive reach. It is no longer

confined to metropolitans or cosmopolitans in India. In fact, it has reached even the

remote corners of the country. This is one of the main reasons for the growth of

Indian economy.

The Narasimham Committee report suggested wide ranging reforms for the

banking sector in 1992 to introduce internationally accepted banking practices under

Basel norms. The amendment of Banking Regulation Act in 1993 saw the entry of

new private sector banks. Current banking system in India works under the umbrella

of RBI, which acts as a regulatory central body. The major participants in the

financial system are the commercial banks, the financial institutions (FI's),

non-banking financial companies (NBFCs) and other market intermediaries such as

stockbrokers and moneylenders. Further commercial banks are divided into public

sector commercial banks like State Bank of India, Punjab National Bank, Private

sector banks like HDFC, ICICI and Co-operative banks.1

Financial Sector Reforms has introduced many more products and facilities

in the banking sector in its reforms measure. In 1991, under the chairmanship of

M. Narasimham, a committee was set up by his name which worked for the

liberalization of banking practices. The country is flooded with foreign banks and

1 http://banknetindia.com.

xxxii their ATM stations. Efforts are being put to give a satisfactory service to customers.

Phone banking and net banking have also been introduced. The entire system has

become more convenient and swift. Time is given more importance than money.

India woke up to the call of global financial reforms a decade ago. Narasimham

Committee-I gives its first recommendation to improve the efficiency of the Indian

financial sector. The approach was to ensure that the financial service industry

operates on the basis of operational flexibility and functional autonomy with a view

to enhancing efficiency, productivity and profitability.2

Narasimham Committee-II gives recommendations focusing on strengthening

the structure of banking system and bringing about structural improvement. In 1996,

full foreign investment was allowed. In 1997, the Tarapore Committee report on

capital account convertibility launched a new mandate to support the full

convertibility of the rupee by the turn of 2000. These developments were supported

by the growing levels of expertise in information technology, venture capitalism and

increasing amounts of foreign investments.3

Government has taken bold steps since 1991 to give banking a whole new

shape. Reserve Bank of India (RBI) set up a 'Working Group on Internet Banking' to

examine the different aspects of E-banking. It focused on three major areas of

Internet banking that is (i) technology and security issues, (ii) legal issues and (iii)

regulatory and supervisory issues. It provides legal recognition to electronic

transaction and other means of E-Commerce.

1.2. MODERN TECHNOLOGY IN BANKING4

1.2.1. Computerization in bank

2 Rakesh Mohan. "Valedictory address." Bangalore India: The Bank Economist Conference held on

29th December 2002. 3 Y.V. Reddy. "Capital Inflows and Self Reliance Redefined." Twenty Seventh Frank Moraes

Lecturer, July 17th 2000 (Accessed on 7th January 2007). 4 N.S. Toor (2008). Computer and Banking, Handbook of Banking Information. 27th edn. New

Delhi: Skylark Publication, Chapter 07, pp.7.1-7.25.

xxxiii

The process of computerization in Indian banks started in early 80s

when the first committee on computerization i.e. Rangarajan Committee gave

its recommendations in the year 1984. The 2nd report of Rangarajan

Committee in the year 1989 gave the much needed pace to expedite the

computerization. The Saraf Committee (1994) recommendations for

remittance facility for customers called EFT and suitable legislation on the

pattern of EFT Act 1978 of us and introduction of ECS for electronic payment

of dividend, interest payment in bulk, cheque truncation system. The Shere

Committee (1994) recommendations for introduction of a country-wide intra-

bank fund transfer system and introduction of more EFTs by banks and the

Vasudevan Committee (1998) recommended that the communication

infrastructure and use of INFINET, standardization and security, out sourcing

of technology and services, computerization of government transaction. The

major objective of computerization, can be improved customer service,

quicker decision making and increased profits and productivity.

1.2.2. Banking through technology

A combination of computers and communication technologies is at

present enabling international banks and financial institutions to expand their

reach and offer technology based products to a wide spectrum of clientele

which was unthinkable in olden days. Banks being essentially the processors

of information in large quantities, use the information technology (IT).

Indian banks have started entering recently in the areas such as:

(i) Collection, storage and processing of information in administrative offices;

(ii) Toning up book-keeping efficiency at branches by computerizing back

office operations; (iii) Full branch computerization; (iv) Setting up automated

teller machines (ATMs).

xxxiv

New private sector banks adopted the IT in a big way in order to

capture corporate business. They use IT as a tool for designing and marketing

aggressively a wide variety of retail banking products to capture the business

of well-to-do customers in urban/metro centres. The customers in these

centres expect faster remittance facilities, automated teller machines and

anywhere banking facilities, telephone banking, home banking, credit card

facility, personal loans.

1.2.2.1. Branch automation

Total branch automation is the real time online banking where the

transaction is entered through terminal, transaction is recorded, verified,

authenticated and then all corresponding updations are done instantly.

1.2.2.2. Core Banking Solutions (CBS)

Core Banking Solutions or Centralised Banking Solutions is the

process which is completed in a centralized environment that is under which

the information relating to the customers account (that is financial dealings,

profession, income and family members) is stored in the Central Server of the

bank (that is available to all the networked branches) instead of the branch

server. CBS with a view to build relationship with the customer based on the

information with the customer based on the information captured and offering

to the customer, the customized financial products according to their need.

The CBS process is advantageous both to the customers and the banks.

1.2.2.3. Magnetic Ink Character Recognition (MICR)

The MICR technology is very popular world wide and in this system,

the instruments such as cheque, draft, payorder, gift cheques and traveler

cheques can be read directly without the need for transcribing the data on

punched cards or paper tapes. The information is printed on the instrument

xxxv

with a special type of ink which is made up of magnetic material. On insertion

of the instrument in the machine, the printed information is magnetized and

read by the machine.

1.2.2.4. Computer security

The computer security should focus on important aspects such as

proper integration, accessibility, control and auditability. The banks can

provide guards, video surveillance, biometric methods, locking up machines

and terminals. The security can also be ensured by using logical methods such

as user ID and password, use of smart cards, cryptography i.e. data encryption.

1.2.3. Different kinds of networks in banking

1.2.3.1. SWIFT

The Society for Worldwide Inter-bank Financial Telecommunications

(SWIFT) was formed during 1973 with its headquarters at Brussels and started

functioning in May 1977. RBI, 27 Public Sector Banks and a number of other

banks obtained its membership. It provides rapid, secure, reliable and cost-

effective mode of transmitting the financial message worldwide to more than

125000 offices of SWIFT members. It is taken care of through use of key

authentication mechanism, encryption and checksum. It is the responsibility of

the Regional Processor (in India at Mumbai).

1.2.3.2. Indian Financial Network (INFINET)

It is the satellite based VSAT network developed by Institute for

Development and Research in Banking Technology (IDRBT-Hyderabad, an

RBI sponsored organization) is fast and secures intra-bank and inter-bank

communication system.

1.2.3.3. Internet

xxxvi

Internet is global network of networks enabling computers of all kinds

to directly and transparently communicate and share services throughout the

world. The World Wide Web (WWW) is an imaginary space of information.

1.3. ELECTRONIC BANKING (E-BANKING)

With the advancement of technology, banking sector has become

more easy, fast, accurate and also time saving. ATMs, Mobile Banking, SMS

Banking and Net Banking are only the tip of an ice-berg. Finland was the first

country in the world to have taken a lead in e-banking. In India, it was ICICI Bank

which initiated

E-banking as early as 1997 under the brand name infinity. E-banking is a genetic

term encompassing internet banking, telephone banking, and mobile banking. In

other words, it is a process of delivery of e-banking services and products through

electronic channels such as telephone, internet, cell phone. E-banking is an umbrella

term for the process by which a customer may perform banking transactions

electronically without visiting a brick-and-mortar institution.5 Delivery of banks

services to a customer at his office or home by using electronic technology is called

E-banking. The quality, range and price of these electronic services decide a banks

competitive position in the industry. E-banking is defined as the automated delivery

of new and traditional banking products and services directly to customers through

electronic, interactive communication channels. E-banking is a convenient and

secure way to access customer account 24 hours a day, 7 days a week, through the

Internet.

E-banking products and services mainly include two types of products. First

wholesale products for corporate customers second retail and fiduciary for consumer.

Some examples of wholesale products and services include: cash management, wire

transfer, and bill presentment and payment. Examples of retail products and services

include: Balance inquiry, funds transfer, downloading, transaction information, bill

presentment and payment through cards, loan applications, investment activity, and

other values.

5 http://www.bankersonline.com/technology/gurus_tech081803d.html.

xxxvii

In olden days accepting of deposits and sanctioning loans and advances to

customers were the main functions of banks but to-day banks perform many new

functions such as agency function, financing of foreign trade, credit creation. For

performing all these functions efficiently many new e-banking products such as

credit card, debit card, ATM are used by banks.6 To-day, in view of global business,

the individual is not the icing. This will take the customer and banks are edging their

way towards cyberspace with innovative services taken to retain these customers.

1.3.1. Concept of e-banking

The concept and scope of e-banking is still evolving. E-banking facilitates an

effective payment and accounting system thereby enhancing the speed of delivery of

banking services considerably. While e-banking has improved efficiency and

convenience, it has also posed several challenges to the regulators and supervisors.

Several initiatives taken by the Government of India as well as the Reserve Bank of

India (RBI) have facilitated the development of e-banking in India.7 Daniel defines

electronic banking as the delivery of banks' information and services to customers

via different delivery platforms that can be used with different terminal devices such

as a personal computer and a mobile phone with browser or desktop software,

telephone or digital television.8 According to Karjaluoto, electronic banking is a

construct that consists of several distribution channels. It should be noted that

e-banking is a larger concept than banking via the Internet.9

The Internet is a main delivery channel for electronic banking and its value to

customers and banks is continuously increasing.10 The face of the banking sector has

6 V. Gupta (2007). E-banking: Animator from Udaipur: An Evaluation from Marketing Perspective.

http://animatorfromudaipurindia. blogspot.com/2007/10/e-banking.html 7 Reserve Bank of India (2001). Available at www.rbi.org.in. 8 E. Daniel. Provision of electronic banking in the UK and the Republic of Ireland. International

Journal of Bank Marketing, Vol.17, no.2 (1999), pp.72-82. 9 H. Karjaluoto. Electronic Banking in Finland: Consumer Beliefs, Attitudes, Intentions, and

Behaviours. Unpublished Doctoral Dissertation, Finland: University of Jyvaskyla, (2002), pp.195. 10 M. Mattila. Essay on customers in the dawn of interactive banking. Unpublished Doctoral

Dissertation, Studies in Business and Economics, Finland: University of Jyvaskyla (2001), pp.154.

xxxviii changed rather considerably in recent years. One of the major contributors to this

changing face has been the increasing use of the internet and other electronic

channels for effecting banking and financial transactions. To-day, banks offer

services like internet banking, mobile-banking, payment of bills on credit

cards, ATM withdrawals which have had a major impact on the economic growth

especially because they have led to the reduction of transaction time or increased the

reach of banking and financial sector to sections of people previously unexposed to

banking and financial services. All these new range of services are offered under the

umbrella of e-banking.

1.3.2. Impact and role of ebanking

Impact has become quite clear that the advent and proliferation of E-banking

has played a sizeable and significant role in promoting economic growth and

development in India. One of the major and visible benefits of the increased use of

electronic banking is that of assisting in financial inclusion. It has been seen that the

use of electronic banking has widened the reach of banks to the people previously

excluded from the banking system thereby improving the quality of living of such

people by providing access to banking and financial services. New products such as

payroll cards are being offered today which would help bring poor people within the

banking system. It has become well recognized that the use of e-banking helps in

increasing the transparency of the banking system. This has become especially

important due to the latest international initiatives in relation to anti-money

laundering. The movement from paper based payment systems to electronic means

of payment that the funds being transferred are easily trackable. This also adds to the

accountability of funds in an economy.

In a developing economy like India, e-banking has helped in modernizing the

financial systems, creating economic transparency and contributing to greater

predictability, liquidity and stability. But what has been the most important

advantage and the main reason for migration to electronic banking from traditional

paper based banking is that of the improved operational efficiency brought about by

its use. Reduction in transaction times and transaction costs has helped companies,

xxxix governments and other end users of e-banking products to improve their operational

efficiencies to a great extent. VISA has estimated that electronic payment networks,

by increasing the efficiency and velocity of payments has the potential to create cost

savings of at least 1 percent of the GDP annually over paper based systems in any

given economy.11

E-banking will have two-fold effect, first, it will reach the remote consumer

and second it will create the awareness among consumer about benefits of

investment in different financial products. Investment in a turn or boost the financial

markets and economy. A research shows that a large urban population uses Internet

for gathering information about different financial products like personal loan, credit

card, insurance etc., thus reducing cost of printing, promotion and distribution.

1.4. E-BANKING PRODUCTS

To-day many types of e-banking products use by different banks for

providing better and quick services to their consumers. The important are described

below

1.4.1. Automated Teller Machine (ATM)12

These are the cash dispensing machines, which are frequently seen at banks

and other locations such as shopping centers, petrol bunks and building societies.

Their main purpose is to allow customers to draw cash any time and provide banking

services where it is not possible to open another branch of the bank. Because this

system allows customers to withdraw money any time from the bank it is popularly

known as Any Time Money

1.4.2. Debit card

A debit card is mainly used for two purposes - first for making cash purchase

and second for cash withdrawal. The debit cardholder should have an account with

the bank and the limit of the cardholder is determined by the amount standing in their

bank account. When the holder makes a purchase, the merchant establishment

swipes the card on the electronic data capture machine which then debits the account

11 http://www.corporate.visa.com. 12 E-banking (2007). op. cit.

xl of the holder. It is different from credit card, where the holder is charged much after

the purchase (20 to 50 days). Presently, banks are issuing ATM-cum-Debit card in

India.

xli 1.4.3. Mobile banking

Mobile banking (also known as M-banking, SMS banking) is a term used for

performing balance checks, account transactions, payments, etc. via a mobile device

such as a mobile phone. Mobile banking today (2007) is most often performed via

SMS or the mobile internet but can also use special programs called clients

downloaded to the mobile device. Mobile banking is defined as, Mobile Banking

refers to provision and availment of banking and financial services with the help of

mobile telecommunication devices. The scope of offered services may include

facilities to conduct bank and stock market transactions, to administer accounts and

to access customized information.13

1.4.4. Tele banking service

This facility is started for attracting customers who have no time to visit

banks. From this facility a customer can get information such as Account balance,

due balance and total balance, date of issue cheque, bill payment, and slip payment.

Any branch of commercial bank, which is computerized, can provide this facility

with the help of suitable software. Mainly this facility is provided with the help of a

Voice Response System (VRS). This system basically, accepts only TONE dialed

input (i.e. from callers phone instruments for dialing necessary numbers) and

suitable voice response messages /information to the caller (i.e. Account holder to

acquire the desired account details).

1.4.5. Smart card

This technique has been adopted for the last 25 years. Ronals Monero, a

French Journalist invented this so the French use it for performing their day-to-day

work is just like an electronic purse in which funds are collected in the form of

electronic wallets. Smart cards are being offered to consumers for small purchases. It

is very portable, quick and easy way for using our money. The smart card transaction

is normally lesser value. A cup of coffee, a newspaper, lunch or bus fare is typical

smart-card transactions. When we make purchase with smart card at that moment,

13 N.S. Toor (2008). op. cit.

xlii the money is transferred from our card to the merchant. There is no delay waiting for

an authorization or signing a receipt.14

1.4.6. Electronic Clearing Service (ECS)

Two types of services are mainly included in the ECS

1.4.6.1. Electronic credit clearing

Under this system, companies who have to make bulk payments to a large

number of beneficiaries prepare the credit instructions on the magnetic media and

submit the same to Reserve Bank of India through their bankers. RBI processes the

data, arrives at inter-bank settlement and provides bank and branch wise reports

containing the details of payments to facilitate fast payment to the beneficiaries.

1.4.6.2. Electronic debit clearing

In fact, a branch prepare a floppy file through a table top MICR reader of all

such transfer advices and this floppy is received by the service branch which

consolidates for onward submission to the clearing house. Then the RBI debits the

individual bank and credits the sponsor bank of the utility company. Now-a-days this

scheme exists in seventy four locations in India including the four Metropolitan

cities of Mumbai, Delhi, Chennai, and Kolkata.15

1.4.7. Electronic Fund Transfer (EFT)

RBIs, EFT system is result of the Shere Committee recommendations. EFT

came into force from 2nd Feb. 1996. It was introduced by Reserve Bank of India to

help banks offering their customers, money transfer service from one account of a

bank branch to another account of any banks. EFT system is an improvement over

the existing system of demand draft mail transfer as funds are transferred in a day or

Two. With the help of EFT individuals and corporate can transfer funds without

leaving their premises.

1.4.8. Electronic cheques (E-cheque)

E-cheque technology is software and hardware developed by FSTC member

to (i) Minimize start up expenses (ii) Apply universal industry standards. It is mainly

based on the following technologies: The financial service mark up language, Strong

14 E-banking (2007). op. cit. 15 RBI Report on 2008-09.

xliii digital signatures using any available algorithm, secure hardware tokens such as

smart cards, Digital certificates, and banking and business practices. It is valid u/s 6

of the Negotiable Instrument Act (as per 2002 amendment to NI Act).16

1.4.9 Electronic cash (E-cash)

The electronic cash is also referred as E-cash, net cash or digital cash. It

provides the means to transfer money between parties over a network such as the

Internet. It was started in August 1994. Its main aim is to work with financial

institution and merchant to provide an accessible and acceptable payment system on

Internet.17

1.4.10. Anywhere banking

Anywhere banking is the new system of banking adopted and made popular

by a few foreign banks. It is now adopted by many banks in India. This facility is a

technology based customer friendly service. Under this system, a customer having an

account with any select branch can operate it from other designated branches of the

bank throughout the country. The facility includes cash withdrawal, cash deposit,

transfer of fund, collections of local cheques, intra-city and intercity transactions.

Now distance is no hindrance and banking has become more convenient for

customers.

1.4.11. Real Time Gross Settlement System (RTGS)

RBI has launched the RTGS system to offer secure online fund transfers. It

helps the transmission and settlement of funds as per the customers instructions on a

constant basis. The system has various security levels such as 128 bit cryptography,

access security technology, and firewall technology. The RTGS has been operation

since March 26, 2004 and its implementation places India at par with the best

practices in the world in terms of payment systems.18

16 N.S.Toor (2008). op. cit. 17 E-banking (2007) op. cit. 18 N.S.Toor (2008). Computer and Banking Chapter 7, Hand Book of Banking information,

Skylark Publication, New Delhi, pp.7.1 7.25.

xliv 1.4.12. Cheque Truncation

Cheque Truncation solution is a big milestone in the Indian banking industry.

It enables cheque clearing on the same day, reducing floating time available for

funds. Instead of manually moving the cheque from one bank to another for

payment, we would now use images. This will bring down the time required for

processing. Earlier, it would take two to three days. Cheques would now be cleared

on the same day or the next day, there by bringing efficiency into the entire banking

system. India is doing something very unique because it has a very large cheque

volume. It processes about 1.2 billion instruments annually. The National Capital

Region alone processes 6,00,000 cheques in a day. Countries such as Singapore have

4,00,000 instruments daily. Cheque truncation will benefit both customers and

banks, and help to reduce frauds.19

1.4.13. Internet banking

With the popularity of PCs and easy access to Internet and World Wide Web

(www) is mainly used by banks as a channel for receiving instructions and delivering

their products and services to their customers. This form of banking is generally

referred as Internet banking/OnLine banking. Vinton Cerf, the father of the Internet,

envisioned an online environment populated by billions. The Internet, which was

born in 1969, would certainly catch fire, according to Cerf. estimated that three

billion users would be online by 2010, and the number of devices online could be

anywhere from six billion to 30 billion by 2020. Cerf. prophesied that by 2030, we

will be speaking to our computers and other appliances and they will respond.20

1.4.14. Credit card

Credit cards have got wide spread acceptance in the metros and big cities.

They are gaining popularity for online payments. Credit card is also known as

Plastic Money. It is simply a piece of plastic which enables the holder to purchase

any goods and services, settle hotel bills, hospital bills, railways and railway

19 http://www.rediff.com/money/2008/feb/21inter.htm. 20 V. Perumal and B. Shanmugam. Internet Banking: Boon or Bane? Journal of Internet Banking

and Commerce. vol.9, no.3 (2004). http://www.arraydev.com/commerce/jibc/2004-12/perumal /htm. (Accessed on 26.06.2005).

xlv traveling tickets on credit. Credit Card holder pays the amount of the bank after a

specified period (20-50 days). The bank charges a fixed amount of interest for

overdue. The credit limit to card holder is fixed by taking into account the status of

the applicant. When the cardholder purchases the goods by using his credit card the

merchant puts the customers credit card on the card reader machine and collects all

the information related to the customer in his computer. On the basis of that to the

merchant receives his payment from the bank. After this the merchant presents his

claim in bank and the banks pay the prices of goods to him. Then the bank sends

bills to the customer for paying the prices of purchased goods. After receiving the

statement, the cardholder pays to the bank. In future when the customer makes

another credit purchase this process is run in the same direction.21

Banks issue credit cards. In this operation, when the payment is made, the

card has to be tendered to the PoS. It is processed at the network and if everything is

in order, the authorization slip is printed. We are then expected to sign the same, our

signature should be similar to the one on the Credit Card itself. We make payment

when the statement arrives. In credit card transaction the purchaser gets credit but the

seller gets his payment from the card issuer upon submission of counter-signed slips.

It is also a kind of EFT.

The development of the credit card is one of the most significant phenomena

of the modern financial services scene. Basically, the use of credit card enables one

to take advantage of the two essential aspects of the financial services function the

transmission of payments and the granting of credit. The development of the credit

card allowed, for the first time, the use of these two functions together. A credit card

is a monetary instrument that enables the cardholder to obtain goods and service

without actual payment at the time of purchase. It is also popularly known as plastic

money. The value of purchases made by the cardholder using the card is recovered at

the end of the specified period, usually a month, called the billing cycle. It can be

21 E-banking (2007). op. cit.

xlvi said that a credit card is basically Buy Now Pay Later card that is provided to a

customer.

Need for promotion of credit card

The huge amount of cash in circulation leads to the following drawbacks. The

cost of printing and maintaining the currency is very expensive especially, in low

denomination notes. A high demand for currency results in shortage of currency for

circulation. The high incidence of cash transactions has an undesirable effect of

(a) inability to track transactions (b) leading to loss of revenue in the form of tax

evasion. All these factors point to the immediate need of promoting electronic

payments that is through cards.22

A credit card is a mode of cash-less transaction that allows the user to pay for

goods or services with the actual payment being made in instalments, over a period

of time. Most of the credit cards in the market belong to either Master Card or Visa.

For principal services to the industry they are typically paid 0.025 per cent of the

transaction by the issuing bank. The credit card market in India is about 25 million

with a value turnover of around Rs.2,500 crores. The market is expected to grow by

30 per cent p.a. This would still be a very low penetration of a potential market of 60

million cardholders. The credit card business is a low-margin, high volume business.

Thus, given the low income per card and the high initial investments by the bank,

large volumes in terms of cards issued and the transactions financed are required to

make the operations profitable.23

1.5. EVOLUTION AND GROWTH OF E-BANKING PRODUCTS IN INDIA

India is still in the early stages of e-banking growth and development.

Competition, changes in technology and lifestyle in the last five years have changed

the face of banking. The changes that have taken place impose on banks tough

standards of competition and compliance. The issue here is 'Where does India

22 N. Premavathy (2007). Financial Services and Stock Exchanges. Chennai: Sri Vishnu

Publications, p.5.7. 23 S. Gurusamy (2007). Merchant Banking and Financial Services. Chennai: Vijay Nicole Imprints

Private Limited, p.344

xlvii stand in the scheme of e-banking.' E-banking is likely to bring a host of opportunities

as well as unprecedented risks to the fundamental nature of banking in India. The

impact of e-banking in India is not yet apparent. Many global research companies

believe that e-banking adoption in India in the near future would be slow compared

to other major Asian countries.24

The Government of India enacted the Information Technology Act, 2000,

generally known as IT Act, 2000, with effect from the 17th October 2000 to provide

legal recognition to electronic transactions and other means of electronic commerce.

Considerable progress has been made in consolidating the existing payment systems

and in upgrading technology with a view to establishing an efficient, integrated and

secure system functioning in a real-time environment. Major projects under

implementation are electronic clearing, centralized funds management, structured

financial messaging solutions and the Indian Financial Network (INFINET).

Facilities under electronic funds transfer (EFT) have been upgraded and their spatial

reach expanded with multiple settlements in a day. Foreign exchange clearing has

been initiated through the Clearing Corporation of India Limited (CCIL). Adequate

security features are being incorporated into the EFT.25

In India, approximately one percent of high and middle-income group

banking customers conducted banking on the Internet in 2000 compared to 5 to 6

percent in Singapore and South Korea. In 2001, a Reserve Bank of India survey

revealed that more than 20 major banks were either offering e-banking services at

various levels or planned to do so in the near future. Some of the private and foreign

banks included ICICI Bank, HDFC Bank, IndusInd Bank, IDBI Bank, Citibank,

Global Trust Bank, Bank of Punjab and UTI Bank. In the same year, out of an

24 M. Vij (2001). E-banking: An Emerging Perspective of the Regulation and Taxation Issues. Delhi,

India: University of Delhi, p.1482. 25 Reserve Bank of India (2001). Report on Internet Banking available at www.rbi.org.in. June 22,

2001.

xlviii estimated 0.9 million Internet user base, approximately 17 per cent were reported to

be banking on the Internet.26

According to Nasscom's Internet Survey in 2004 on the Internet usage trends,

the number of active Internet subscribers in India is increased to over 4.4 million and

the user base to over 32 million. In the year 2005 internet user base to over 53

million banking and finance market have got the largest share that is 21 per cent

among the other sectors of economy in using information technology. Thus there is a

lot of scope for banking institutions to expand their Internet banking or e-banking

services to have a more sophisticated customer base. It also found that more than 200

cities and towns in India have Internet connectivity. Thus efficiency, growth and the

need to satisfy a growing tech-survey consumer base are the three clear rationales for

implementing E-banking in India.27

Private and foreign banks have been the early adopters of e-banking while the

Public sector banks are also beginning to hold on to the competition. ICICI Bank and

HDFC Bank have taken a lead in introducing e-banking in India. ICICI Bank is the

first one to have introduced Internet banking for a limited range of services such as

access to account information, correspondence for the first time in 1996 and recently,

funds transfer between its branches.28 ICICI is also getting into e-trading, thus

offering a broader range of integrated services to the customer. Other banks also

followed suit. The Indian banking has exhibited above statistics reveals that India

does have a high growth potential for e-banking.

1.5.1. Growth of value/volume of e-banking transactions in India an analysis

26 V. Gupta (2004). E-Banking Global Perspective, Banking Series. Hyderabad: The ICFAI

University Press, pp.214. ISBN 8178810646 (Accessed on 22nd January 2007). 27 M. Vij. (2001). E-banking: An emerging perspective of the regulatory and taxation issues. India:

University of Delhi, p.1487 (Accessed online on 25th June 2007). 28 D. Rajneesh and C. Padmanabhan (2002). Internet opens new Vistas for Indian

Banks. available at http://www.expresscomputeronline.com/20020916/indtrendl.shtml, September 16 (Accessed as on August 22, 2003).

xlix

As a result of the technological development, the proportions of electronic

transactions both the terms of volume and value have increased sharply.

It is indeed heartening to note that electronic payment in India has seen a huge

growth and that augurs well for the companies and the economy. The following

tables capture the through put of various electronic payment channels in India during

2003-04 to 2008-09 both in terms of value and volume.

TABLE 1.1 Value of transaction through electronic and paper based payment

methods from 2003-04 to 2008-09

(Rs. in crore)

Year EFT/ NEFT

ECS (Credit)

ECS (Debit)

Credit cards

Debit cards

Cheques/ DD*

EP (Total)

2003-04 17,125 10,228 2,254 17,663 4,874 1,15,95,960 52,143

2004-05 54,601 20,180 2,921 25,686 5,361 1,04,58,895 1,08,750

2005-06 61,288 32,324 12,987 33,886 5,897 1,13,29,134 1,46,383

2006-07 77,446 83,273 25,440 41,361 8,172 1,20,42,426 2,35,693

2007-08 1,40,326 7,82,222 48,937 57,959 12,521 1,33,96,066 10,41,992

2008-09 2,51,956 97,487 66,976 65,356 18,547 1,24,61,202 5,00,322

Growth (%)

2007-08 81.19 839.35 92.36 40.13 53.22 11.24 342.10

Growth (%)

2008-09 79.55 -87.54 36.86 12.76 48.13 -06.99 -51.98

Source: RBI, Money and Banking, Monthly Bulletin (May 2009).

l

TABLE 1.2 Volume of transaction through electronic and paper based payment

methods from 2003-04 to 2008-09

(Rs in lakh)

Year EFT/ NEFT

ECS (Credit)

ECS (Debit)

Credit cards

Debit cards

Cheques/ DD*

EP (Total)

2003-04 08.19 203.00 79.00 1,001.79 377.57 10,228 1,670

2004-05 25.49 400.51 153.00 1,294.72 415.32 11,669 2,289

2005-06 30.67 442.16 359.58 1,560.86 456.86 12,868 2,850

2006-07 47.76 690.19 752.02 1,695.36 601.77 13,673 3,787

2007-08 133.15 783.65 1,271.20 2,282.03 883.06 14,606 5,353

2008-09 321.61 883.94 1,600.55 2,595.61 1,276.54 13,959 6,678

Growth(%) 2007-08

178.78 13.57 69.04 34.60 46.74 06.82 41.35

Growth(%) 2008-09

141.61 12.80 25.91 13.74 44.56 -04.43 24.75

Source: RBI, Money and Banking - Monthly Bulletin (May 2009).

* More than 80 per cent of the cheques by volume got cleared in Magnetic Ink Character Recognition (MICR) - Automated Cheque Processing Centres. EP-Electronic Payments, ECS-Electronic Clearing Service, EFT-Electronic Fund Transfer.

This data clearly indicates that all the EPs are growing at phenomenal rate

in India by volume and value of transaction. During the year ending 2008-09,

Electronic Clearing Service (ECS) debit by an incredible 36.86

per cent by value and 25.91 per cent by volume. ECS credit down to -87.54 per cent

by value and grew up 12.80 per cent by volume of transactions. The EFT/NEFT

grew by 79.55 per cent by value and 141.61 per cent by volume, debit cards grew by

48.13 per cent by value and 44.56 per cent by volume, and Credit cards grew by

li 12.76 per cent by value and about 13.74 per cent by volume of transactions. The

paper-based transaction did not grow up alternatively these have negatively grown

up in India for -04.43 per cent by volume and -06.99 per cent by value of transaction.

In recent years, the use of electronic payments has witnessed manifold

increase, partly reflecting increased adoption of technology. The growth volume of

transaction directed through electronic payment method. However decelerated from

41.35 to 24.75 per cent by volume and 342.10 to -51.98 per cent by value in

2008-09.

More strikingly, the value of transactions directed through electronic

payment method declined sharply during 2008-09. The entire decline is due to 87.54

per cent fall in value of transaction in respect of ECS credit. It is noteworthy in

this regard that the sharp rise in ECS credit value during 2007-08 was mainly due to

the refund of the oversubscription amount of IPOs floated by companies using

electronic mode as mandated by the Stock Exchange (cf: RBI Report 2008-09).

Therefore, the decline in value in ECS credit transactions during 2008-09 may be

interpreted more as returning to normal trend rather than a matter of concern. The

volume of ECS credit and more significantly ECS debit continued to show an

increasing trend during 2008-09 in line with the trend witnessed during past few

years. The Indian banking system has been exhibited resilence against the backdrop

of global financial turmoil and slowdown of the Indias economy.

In total during the financial year from 2003-04 to 2008-09, the paper based

transaction did not grow much but electronic banking transaction has grown up

around 9 times (860%) in value three times (300%) in volume. It is concluded that

customers prefers electronic mode of transaction than paper based instruments which

is healthy environment for Indian economic growth.

Further, these are clear indications that corporate India is aware of these

options and are beginning to use them. The banks in India are also aggressive in

promoting these payments options as part of their cash management options as they

lii also benefit from the migration of paper based payments instruments (that are

inherently costly) to EP options which are more cost effective. The EP options also

allow the companies to track the receipts in a more transparent manner and manage

payments and liquidity more efficiently.

Recently, the RBI working group on e-payments has suggested a number of

measures to accelerate the adoption of e-payments in India. These include providing

incentives to electronic transactions by either not having any charges (RBI has

implemented this from April 1, 2009, customers were allowed to use their ATM

cards free of charge to withdraw cash from Automated Teller Machine of any

commercial banks across the country) or keeping them lower than the charges for

paper based instruments and expanding NEFT enabled branches. Therefore, Indian

firms are well advised to quickly adopt electronic payments options to ensure that

their financial transactions costs do not increase. Moving customers to ECS would

provide the firms cost benefit in terms of collecting these payments quicker, give

them regularity in payment and provide the much needed visibility to payments. All

these help in better cash management by the organization.

1.5.2. Growth of Automated Teller Machine (ATM)

The first Automated Teller Machine (ATM) was introduced in the year 1967

by Barclays Bank in Enfield Town, North London. ATM usage is rising among

Indians, and more people are now moving towards it for their banking needs.

According to a 2006 survey by Banknet India, 95 per cent people now prefer this

modern channel to traditional mode of banking. Almost 60 per cent people use an

ATM at least once a week. The number of ATMs installed in the country grew by

almost 19 per cent, from 17,642 in March 2005, to more than 21,000 in March 2006.

Further grew by almost 29 per cent, from 21,000 in March 2006, to more than 27,000

by March 2007. As at the end of March 2009, ATMs of scheduled commercial banks

were increased to 43,651 from 34,789 by March 2008. It represents the growth of

24.47 per cent with number of ATMs of SBI registering a sharp growth of 34.50 per

cent. While, the ATMs installed by new private sector banks and foreign banks were

more than 3 times of their respective branches, the ATMs to branch in the country at

end march 2009, the new private sector banks had the largest share in off-site ATMs,

liii while nationalized banks had the largest share in onsite ATMs in India.29 Further it

reveals that in four years in between 2005 to 2009, the growth of ATM at the rate of

127 per cent. Wide acceptance of ATMs by consumers, introduction of biometric

ATMs, and increasing scope of value-added ATM services will maintain further

growth in the banking industry.

Migration of routine bank transactions like cash withdrawals and balance

enquiries from teller counters to ATMs significantly raises the potential for savings

in employee costs. The cost per transaction at an ATM reduces to Rs.18 from Rs.

40+ at a branch. Now ATMs were not only used to cash withdrawal and balance

enquiry but also Cash /Cheque deposit, Bill payments, Sale of paper based products.

Money Transfers, Recharge Mobiles, Donations to Temples and Advertising.

1.6. E-BANKING GLOBAL SCENARIO

The banking industry is expected to be a leading player in e-business. While

the banks in developed countries are working primarily via Internet as non-branch

banks, banks in the developing countries use the Internet as an information delivery

tool to improve relationship with customers.

In early 2001, approximately 60 per cent of e-business in the UK was

concentrated in the financial services sector, and with the expected ten-fold increase

of the British e-business Market by 2004, the share of the financial services will

further increase. Around one fifth of Finish and Swedish bank customers are banking

online, while in the US, according to UNCTAD, online banking is growing at an

annual rate of 60 per cent and the number of online accounts has reached 15 million

by 2003.30

In Asia, the major factor restricting growth of e-banking is security, in spite

of several countries being well connected via Internet. Access to high-quality

29 RBI Report 2008-09. 30 V. Gupta (2004). E-banking global perspectives. Institute of Chartered Financial Analysts of India

(ICFAI), Hyderabad: University Press. Available online at http://www.flipkart.com.

liv e-banking products is an issue as well. Majority of banks in Asia are just offering

basic services compared with those of developed countries. Still, e-banking seems to

have a future in Asia. According to McKinsey Survey, e-banking will succeed if the

basic features, especially bill payment, are handled well. Bill payment was the most

popular feature cited by 40 per cent of respondents of the survey. However,

providing this service would be difficult for banks in Asia because it requires a high

level of security and involves arranging transactions with a variety of players.

The market for Electronic Bill Presentment and Payment (EBPP) is growing.

According to a study, 56.0 million households in the US pay their bills online by

2008 compared to 29.6 million households in 2003, online household increased by

85 per cent of payer from 50 per cent in the year 2003. Growth of e-commerce is

dependent on e-money which is a new concept. The payment system in US

comfortability with regards to various payment methods, was reported that electronic

cards payment 50 per cent ($3.14 trillion ) in the year 2005.31 As more number of bill

payers is getting online, several banks are making efforts to find ways to meet the

growing needs of EBPP.

1.7. E-BANKING - REDUCED TRANSACTION COSTS

E-banking has been repeatedly shown that as a delivery or distribution

channel, the Internet could bring a substantial advantage for banks. The frequently

quoted Booz-Allen and Hamilton study showed that the cost of a customer walking

into the branch and using a teller is USD1.01, whereas the cost of conducting the

same transaction on the Internet is only USD 0.1 one-tenth of the cost. No doubt the

ATM is 0.27 USD considerably cheaper than a teller, but even so, the Internet is

nearly more than 3 times cheaper than the ATM usage. In short, replacing a teller

with an Internet channel should in theory, show a ten-fold increase in the distribution

revenue for the bank. This reason alone should be sufficient for banks to encourage

this form of distribution channel.

31 www.epaynews.com.

lv

A cost comparison study done by IBM global services consulting group

clearly shows the advantage of using Internet as a medium for banking services over

the other traditional media. As per the recent survey, traditional banks spend 60 per

cent of the revenue generated to run a branch. Whereas the cost of providing same

services via Internet comes out to be only 15 per cent. This is a huge savings for

banks and consumers. Definitely the consumer is the principal beneficiary of the

Internet Banking. They will be access the same services with more efficiency at low

cost. Thus, there is lot of scope for banking institution to expand their internet

banking or e-banking services to have a more sophisticated customer base.

1.8. E-BANKING ISSUES AND CHALLENGES

E-banking utilizes technology to allow a bank's customers and other

stakeholders to interact and transact with the bank seamlessly through a variety of

channels such as the Internet, wireless devices, ATMs and physical branches.

Internet banking is one component of a comprehensive e-banking offering.

E-banking has exploded into the web and the Internet is a powerful and cost effective

medium for business to interact with and service their customers. The number of

online banking services to customers continues to grow and the Internet offers

enormous opportunities for banks, and other financial services to fundamentally

reshape their organizations (US web corporation). Banks can generate revenue

through increased account, access fees and benefit from promotional opportunity to

cross-sell products such as credit cards and loans.

Competition and changes in technology and life styles have changed the face

of banking and banks in the present environment are seeking alternative ways to

provide and differentiate their services. For enabling either information access or

transactions, banks have to put up a website. There is data to suggest that most

hacking activity that happens is targeted at breaking into web-site security.32

32 http://www.infosys.com/finacle/solutions/solutions_ebanking.asp_october_11/2008.

lvi

Banks as well as consumers view the security threat as perhaps the most

serious threat. Denny33 observes that the security of Internet access to client account

is the biggest challenge facing banks. For success in the increasingly competitive

financial services market, banks are finding that a comprehensive online banking

strategy is essential which also provides the essential security requirements. Security

policy should include management commitment, technological support and effective

disseminations of the policy and the security awareness of all users.

Crocin34 observes that the implementation of SET, the standard for secure

electronic transactions on the Internet and its widespread adoption including security

measures like encryption, digital authentication, and verification of on-line identity

increase consumer confidence. To compete in a market transformed by globalization

and technological revolution, banks have been forced to seek alliance and establish

joint ventures to maintain their competitiveness and efficiency.35

E-banking will offer a transparent environment to compare the cost and

quality of services offered by a variety of financial institutions. As a result the focus

is going to shift from generic banking service to customized banking services.

1.9. REGULATION AND CYBERSPACE

Carse36 observes that the development of regulation and supervision of

e-banking is still at an early stage and is evolving. As institutions have become more

global and complex, two issues have become important in risk management and

regulatory framework for e-banking. The important question in this context is

whether a global regulating body is essential for e-banking. The point to take into

33 S. Denny. The electronic commerce challenge. Journal of Internet Banking and Commerce,

vol.3, no.3 (2000). Available online:www.arraydev.com/commerce /JIBC/article/htm (Accessed on 7th January 2001).

34 Mary J. Crocin (1998). Defining net impact: The realignment of banking and finance on the web. In Banking and Finance on the Internet. New York: John Wiley and Sons.Chap.1.

35 S. Denny. The electronic commerce challenge. Journal of Internet Banking and Commerce, vol.3, no.3 (2000), p.3.

36 D. Carse (1999). Keynote speech on The regulatory framework of E-banking. Symposium on Applied R & D enhancing global competitiveness in the next Millennium held on October 2, 1999. Available online at www.info.gov.hk/hkma/eng/speechs/david/ speech_ 081099b.htm.

lvii account here is that regulations based on national boundaries are of little value for

business trading globally on the Internet. The Internet affects too many interests and

raises too many social questions and business need to be aware of regulations in

other countries and how these might apply to them. As cyberspace is inherently

international there are some aspects that will be globally regulated but the primary

part of regulations will be country specific.37

1.10. TAXATION AND E-BUSINESS

An increasing number of countries are now realizing the problems posed by

taxation and e-business transactions. Tax laws of most countries have not kept pace

with the increasing trade in digital products. The problem here is that the tax systems

of most countries were developed when international trade and capital movements

were limited and are thus ill suited for an integrated world economy. Thus, the aim

should be to develop a taxation system for cyberspace that ensures that the full

potential of electronic networks is realized. This will require tax authorities from

around the globe to fluently develop globally accepted principles of taxation.

Industry will also play an important role in developing technically feasible solutions

to tax electronic transactions.

37 H. Engler and J. Essinger (2000). The Future of Banking: London, Reuters Ltd., Pearson

Education, accessible online www.igi_global.com.

lviii 1.11. REVIEW OF LITERATURE

A review has been primarily to identify appropriate methodologies and

a subset of the articles/reports which has been reviewed. A few available literatures

on e-banking products such as Internet banking, Mobile banking, ATMs, Debit cards

and Credit card in India and internationally reflect the current status of e-banking.

There are numerous research and papers that study the evolution and growth of

electronic banking and credit card in India and the world. A review of some of them

are given below, the description has been organized under the following heads:

1.11.1. E-banking

Lustsik38 based on the survey of experts of e-banking in Estonian banks found

that Estonia has achieved significant success in implementation of e-banking and

also on the top of the list in emerging countries. All the major banks are developing

e-business as one of the core strategies for future development.

Al-Jadeed39 in his thesis looks at the emergence and evolution of e-banking

in Saudi Arabia. The methodological approach makes use of the case study strategy

as research strategy, a multiple-case embedded design, as research design strategy.

He suggests that the Saudi Arabian e-banking constituency- building process shows

distinctive processes of socio- technical alignment by each one of the specific Saudi

banks e-banking constituencies in the study.

Goi40 in his article states E-banking has to be a delivery channel that

replicates and replaces many of the physical functions a bank currently performs.

Hence, the e-banking now becomes a virtual banking counter for the individual and

corporate customer to carry out a regular activity.

38 O. Lustsik (2003). E-Banking in Estonia: Reasons and benefits of rapid growth. Kroon and

Economy, vol.3, no.23, pp.27. Lymperopoudos.c_and_Loanis,Portal.acm.org/cititation/cfm? id=1552229. Available at:SSRN_http//:ssrh.com.

39 M.N. Al-Jadeed. A strategic perspective on the emergence and evolution of e-banking in Saudi Arabia. Unpublished Doctoral Thesis, UK: University of Edinburgh, (2007), Chapter Summary pp.14.

40 C.L. Goi E-banking in Malaysia: opportunity and challenges. Journal of Internet Banking and Commerce, vol.10, no.3(2005) pp.8.

lix

Unnithan and Swatman41 in their working paper state that the drivers for

change in the evolution of the banking sector, and the move towards electronic

banking by focusing on two economies Australia and India. The paper found that

Australia is a country with Internet ready infrastructure as far as telecommunication,

secure protocols, PC penetration and consumers literacy is concerned. India, by

comparison, is overwhelmed by weak infrastructure, low PC penetration, developing

security protocols and consumer reluctance in rural sector.

Agarwal et al.,42 explored the role of e-banking in e-democracy. With the

development of asynchronous technologies and secured electronic transaction

technologies, more banks and departments were using Internet for transactional and

information medium. Initiatives such as E-SEVA and FSCs are the milestones

towards achieving comprehensive e-governance.

Yibin43 in his paper, states that e-banking not only improves the access to

finance, particularly for SMEs, but also allows access to finance with better and

more competitive rates, and use online banking as a new delivery tool to improve

access to finance and alleviate financial constraints. As a regulatory authority, it

focuses on core principles and Basle capital Accord.

Sadiq Sohail and Shanmugham44 in their article on an empirical research that

was carried out in Malaysia to study the customers preference for electronic banking

and the factors, which they considered influenced the adoption of electronic banking

41 C.R. Unnithan and P. Swatman. E-banking adaptation and dot.com viability: A comparison of

Australian and Indian experiences in the banking sector. Working paper, School of Management Information Systems, Deakin University, no.14 (2001).

42 N. Agarwal et al. E-banking for comprehensive/E-democracy: An Indian discernment. Journal of Internet Banking and Commerce, vol.8, no.1, (2003) pp.1-8. (Accessed on 2/07/20007. www.arraydev.com/commerce/Jibc/0306.05.htm)

43 M.U. Yibin. E-banking: Status, trends, challenges and policy Issues. The World Bank paper presented at CBRC Seminar on The Development and Supervision of E-banking, Shanghai held on November 24-26, 2003.

44 M. Sadiq Sohail and B. Shanmugham. E-banking and customer preferences in Malaysia. Information Sciences, vol.150, no.3-4 (2003), pp.207-217.

lx give results based on the analysis of data relating to 300 respondents indicate that

while there is no significant differences between the age and educational

qualifications of the electronic and conventional banking users, some differences

exists on other demographic variables. Analysis further reveals that accessibility of

Internet, awareness of e-banking, and customers reluctance to change are the factors

that significantly affected the usage of e-banking in Malaysia.

Guru et al.,45 in their article examined the various electronic channels utilized

by the local Malaysian banks and also accessed the consumers reactions to these

delivery channels. It was found that Internet banking was nearly absent in Malaysian

banks due to lack of adequate legal framework and security concerns. However over

60 percent of the respondents were having Internet access at home and thus

represented a positive indication for PC based and Internet banking in future.

Siam46 in his study aims at examining the effects of electronic banking on

banks profitability in Jordan. This study investigates the reasons behinds providing

electronic banking services through internet, their impact on banking services in

general and banks profitability in particular. The findings of the study are the impact

of electronic banking on banks profitability will be feature of the short run due to the

capital investment by the banks on infrastructure and training but will be positive on

the long run.

Subramanian and Swaminathan47 concluded that customers preferred

electronic mode of transaction than paper based instruments, which is healthy

environment for Indian economic growth. Further, these are clear indications that

corporate India is aware of these options and are beginning to use them. The banks in

India are also aggressive in promoting these payments options as part of their cash

45 B. Guru et al., Electronic banking in Malaysia: A note on evolution of services and consumers

reactions. Journal of Internet Banking and Commerce, vol.5, no.1, (2000).pp.1-12, ISSN:12045357.

46 A.Z. Siam. Role of the electronic banking services on the profits of Jordanian banks. American Journal of Applied Sciences. vol.3, no.9 (2004), pp.1999-2004.

47 S. Subramanian and M. Swaminathan (2009). A Study on Evolution of E-Banking in India. Impact of Economic Crisis in Global Business Scenario. Chennai: Anuragam, pp.229-239.

lxi management options as they also benefit from the migration of paper based

payments instruments (that are inherently costly) to EP options which are more cost

effective. The EP options also allow the companies to track the receipts in a more

transparent manner and manage payments and liquidity more efficiently.

Kassim48 in his study investigates that on the discrepancy between customer's

expectation and perception towards the e-banking services.

Casal et al.,49 in their article looks at customer loyalty and positive word-of-

mouth (WOM) have been traditionally two main goals aimed at by managers. The

purpose of this paper is to characterize both concepts in the e-banking context. The

influence of satisfaction and website usability in developing customer loyalty and

positive WOM in the e-banking business were measured. Their research findings

showed that satisfaction with previous interactions with the bank website had a

positive effect on both customer loyalty and positive WOM.

Yousafzai et al.,50 in their study examine the future growth of

e-banking issues of security and privacy must be removed. In an experimental

setting, this study examines the effectiveness of potential trust-building strategies for

e-banking and their impact on on-line customers' perceptions of trustworthiness of

the bank, by specifically focusing on the information clues presented on the bank's

Web site.

Deutsche Banks Research, E-banking snapshot, retail banking via internet,

banking online boosts and curbs customer loyalty, their projection more than

25 million Germans will uses online banking by 2008. Further online research,

online bank customers are more loyal, the number of contacts with the bank

48 N.M. Kassim, Qatar E-banking service quality: Gaps in the Qatari banking industry. Journal of

Internet Banking and Commerce, vol.10, no.2 (2005), pp.5. Available online: www.arraydev.com/commerce/jibc/2005-08/kassim_try.asp_ISSN:12045357.

49 L.V. Casal et al. Developing customer loyalty and positive word-of-mouth in the e-banking services. International Journal of Bank Marketing, vol.26, no.6, (2008), pp.399-417

50 S.Y. Yousafzai et al. Strategies for building and communicating trust in electronic banking: A field experiment. Psychology and Marketing, vol.22, no.2 (2005), pp.181-201.

lxii increases with online banking. Internet experience and infrastructure are important

drivers of oneline banking. Many consumers consider flashing a golden, platinum, or

black credit card at the point of sale as an uplifting experience.51

Nair52 observes that Indian e-banking is still nascent, although it is fast

becoming a strategic necessity for most commercial banks, as competition increases

from private banks and non banking financial institution

A recent study from Javelin Strategy and Research, a firm based in

Pleasanton, CA, suggests on-line banking, bill payment and electronic bill

presentment can reduce the risk of identity fraud at banks and for consumers by more

than 10 per cent, with a potential savings to banks and other businesses of about $4.8

billion annually. According to the Federal Trade Commission, identity theft has

affected about 27 million people in the U.S. over the last five years and has cost

banks and other businesses about $47 billion annually. Consumers lost $4.9 billion to

identity theft in 2002 alone.53

According to Visa Internationals latest data, an average Indian cardholder

uses their card 9.3 times, spending about Rs.14,700 per year. A number of card

owners do not use their cards and almost 20 - 30 per cent cards are inactive

(less than one usage every quarter). An important fact that should be observed is that

it is only in the past few years that the Indian customer is beginning to accept

Credit. The Indian culture doesnt promote credit, and it is this outlook change

which is the most important development for the credit card industry. ABN Amro,

for instance, backed up their launch of the Freedom Card with research showed that

the Indian middle class views the credit card as a potential debt.54

51 Deutsche Bank Research (2006), Banking online boosts and curbs customer loyalty. Available

online at:www.drresearch.de/prod. 52 A. Nair. Indian Internet Banking still nascent. Asia Internet News (May 12, 1999) . 53 Business Line, Chennai (April 18, 2008). 54 Our Bureau. Credit card holder behaviour. Business Line, Chennai (April 20, 2008).

lxiii

The Indian Banker55 the article on e-payments as the currency of the future,

payment cards, electronic bill presentment and payment (EBPP), internet banking,

mobile banking payment are the some of the other electronic payment mechanisms

that are likely to replace paper based payments in future.

Balakrishnan56 in his article published the adoption of new age electronic

payments systems and use of new practices in inventory and production management

help the companies achieve long-term reduction in working capital management

requirement. It was further stated that moving customers to electronic clearing

service (ECS) would provide the firms cost benefit in terms of collecting these

payments quicker, give them regularity in payment and provide the much needed

visibility to payments.

Devaprakash57 states that branchless banking is the way forward in Indian

context. The future of banks holds much promise, if banking is not class, geography,

and access neutral. It is not only affordable financial services, but well accessible

policy options with efficient outreach mechanisms, scalable financial products and

sustainable institutional process that hold the key to more inclusive banking which

alone can make the financial markets work for the frontier population in the long run.

It is important that the outreach processes, delivery channels, and business models

demonstrate appropriate and relevant solution including leveraging IT based

solutions.

Furst et al.,58 in their U.S. based study found out a significant shift by

consumers and businesses to electronic payments. The gains from technological

advancements in banking and payments are likely to be substantial both from the

55 Cover Story. E-payments as currency of future. The Indian Banker, Monthly Journal, vol.2, no.6

(2007), pp.14-16. 56 M. Balakrishnan. Working capital management Impact of emerging electronic payment options

in India. The Indian Banker, vol.2, no.6 (2007), pp.18-26. 57 R. Devaprakash. Branchless banking way forward in India context. The Indian Banker, vol.3,

no.8 (2008), pp.24-29. 58 K. Furst, Lang, W.W. and Nolle E. Daniel Technological innovation in banking and payments,

industry trends and implication for banks, Office of the Controller of the Currency, Quarterly Journal, vol.17, no.3, September, 1998.

lxiv point of view of individual financial institutions and economy. In this environment,

banks should review and, if necessary, adjust their risk management practices in

tandem with upgrading their technology activities.

1.11.2. Internet banking

Booz-Allen and Hamilton, Inc., in their World Wide Survey59 revealed that a

huge perception gap between Japanese and American/European banks regarding

internet banking.

Egland et al.,60 in their study find out that estimated the number of U.S.

banks offering Internet banking and analyzed the structure and performance

characteristics of these banks who have found no evidence of major differences in

the performance of the group of banks offering Internet banking activities compared

to those that who do not offer such services.

Kurtas61 in his study of investment opportunities in direct and internet

banking and he found that American banks use their web sites not only to provide

classical operations such as fund transfer or account details, but also to provide stock

trading in the world markets, financial calculators, investment advice, and bill

payments. This objective can be generalized to banks in developing economies that

can no longer ignore the internet as a strategic weapon and distribution channel for

their services.

59 Booz-Allen and Hamilton, Inc. A huge perception gap between Japanese and

American/European banks regarding internet banking. Worldwide Survey (April 22, 1997). Available online: http://www.bah.com/press/ebankstudy.html.

60 K.L. Egland et al., Banking over the internet. Quarterly Journal, Office of the Comptroller of the the Currency USA, vol.17, no.4 (1998), pp.25-30. Available online:www.springerlink.com/ index/8105631176171148_pdf.

61 A. Kurtas. Analytical study of investment opportunities in direct and internet banking (Translated). Arab Banks Union Magazine. (June 2000), pp.35.

lxv

Sullivan62 in his study found that Internet banks in Tenth Federal Reserve

District incurred higher expenses but also generated higher fee income and

concluded that the measures of profitability for Internet banks are similar to those of

the non-Internet banks.

De Young63 in his paper investigated that the performance of Internet-only

banks and thrifts in the U.S. The study suggested that the Internet-only banking

model may be feasible when executed efficiently.

In the same year64 who has find out that the average one year old Internet-

only bank earned significantly lower profits than the average one year old branching

bank, due to low business volumes and high non-interest expenses. It supports the

proposition regarding the Internet-only banks, a fast growth but low (or) no profits.

Jasimudin65 in his article found that the banks in Saudi Arabia viewed the

Internet as a key alternative delivery channel.

Diniz66 in his research survey on websites of banks in USA, we can see

American banks using the web to reach opportunities into three different categories

to market information, to deliver banking products and services and to improve

customer relationship.

62 R.J. Sullivan. How has the adoption of internet banking affected performance and risk at banks?

A look at Internet banking in the Tenth Federal Reserve District, Finance Industry Perspectives, Federal Reserve Bank of Kansas City (December 2000). pp.1-16 . Available online: www. kansascity_fed.org.

63 R. De Young. Learning-by-doing, scale efficiencies and financial performance at Internet only banks. Working Papers 2001-06. Federal Reserve Bank of Chicago (2001a)

64 R. De Young . The financial performance of pure play Internet banks. Economic Perspectives, vol.25, no.1 (2001b), pp.60-75.

65 S.M. Jasimuddin. Saudi Arabian banks on the web. Journal of Internet Banking and Commerce. pp.4. Available online: www.arraydev.com/commerce/jibc/0103_02.html.

66 E. Diniz (1998). Web banking in U.S.A. Journal of Internet Banking and Commerce.

lxvi

Suganthi et al.,67 in their article review Malaysian banking sites. It revealed

that all domestic banks were having a web presence. There are various psychological

and behavioural issues as trust, security of Internet transactions, reluctance to change

and preference for human interface which appear to impede the growth of Internet

banking

Furst et al.,68 in their comparative study of Internet and non-Internet banks in

U.S. and found that institutions with Internet banking out performed than non-

Internet banks in profitability.

Koedrabruen and Raviwongse69 in their study investigated, designed and

developed an Internet based retail banking prototype that meets the requirements of

the Thai customers. The survey from the executives of four Thai banks revealed that

there was a potential growth for retail Internet banking in Thailand.

Corrocher70 investigated that the determinants of the adoption of Internet

technology for the provision of banking services in the Italy. The results of the

empirical analysis, banks seem to perceive Internet banking as a substitute for the

existing branching structure.

Hasan71 in his working paper states that Do Internet activities add value.

the Italian bank experience found that online home banking has emerged as a

significant strategy for banks to attract customers.

67 Suganthi et al. Internet banking patronage: An empirical investigation of Malaysia. Journal of

Internet Banking and Commerce, vol.6, no.1 (2001), pp.8. 68 K. Furst et al. Internet banking: Developments and prospects. Working Paper. US: Center for

Information Policy Research, Harvard University (April 2002). 69 P. Koedrabruen and R. Raviwongse. A prototype of a retail Internet banking for Thai customers.

International Journal of Retail and Distribution Management, vol.31, no.4 (2002), pp.190-202. 70 N. Corrocher. Does Internet banking substitute traditional banking? Empirical evidence from

Italy. Working Paper, CESPRI, no.134 (November. 2002), pp.32. 71 I. Hassan (2002). Do Internet activities add value? The Italian bank experience. Working Paper.

New York University: Federal Reserve Bank of Atlanta. Berkley Research Centre, pp.25.

lxvii

Janice et al.,72 conducted a case study in Hong Kong banks view the Internet

as being a supplementary distribution channel for their products and services in

addition to other forms of distribution channels. Basic transactions and securities

trading are the most popular types of operations that customers carry out in Internet

banking.

Awamleh et al.,73 found that banks in Jordan are not fully utilizing concepts

and applications of web banking. The study revealed that Jordanian banks have been

successful in the introductory phase of web banking. However Jordanian banks are

required to move towards web banking usage with a view to conducting real

financial transactions and improving electronic customer relations.

Jarrah74 in his paper presented that the descriptive statistics provides a good

overview of Internet usage in the Arab world. It is estimated that the total number of

users in thirteen Arab countries was close to one million in April 1999. The papers

observe that Internet banking has revolutionized the banking industry and is under

pressure to offer new products and services. However, to succeed in to-day

electronic markets a strategic and focused approach is required.

Rao and Prathima75 in their article provided a theoretical analysis of Internet

banking in India and found that as compared to banks abroad, Indian banks offering

online services still have a long way to go. For online banking to reach a critical

mass, there has to be sufficient number of users and the sufficient infrastructure in

place.

72 D. Janice et al. (2002). Click and mortar of retail banking: A case study in Hong Kong.

Nanyang Business School, Singapore: Nanyang Technological University.

73 R. Awamleh et al. Internet banking in emergency markets the case of Jordon A note. Journal of Internet Banking and Commerce, vol.8, no.1 (2003), pp.1-34 www.arraydev.com/ commers/jibc/articles.htm (Accessed on February 24, 2004).

74 F. Jarrah (1999). Internet shoppers in the Arab world spend US$ 95 million.

75 G.R. Rao and K. Prathima. Internet banking in India. Journal of Mondaq Business Briefing, (April 11, 2003).

lxviii

Mookerji76 in his article found that Internet banking is fast becoming popular

in India. The purpose of this paper is to describe the current state of Internet banking

in India and identify key differences between Internet banks and non-Internet banks

with special reference to commercial banks operating in India.

Ravi Nath et al.,77 in his study examines bankers' views on providing banking

services to customers using the web. Data collected from 75 banks show that most

banks do not yet offer full-fledged Internet banking. However, most have plans to do

so. Furthermore, bankers see Internet banking as a strategic opportunity that can

reduce transaction costs, enhance customer service, increase the customer base and

improve cross-selling opportunities.

Singh and Pooja Malhotra78 in their article fill the significant gaps in

knowledge about the Internet banking landscape in India. The paper presents data,

drawn from a survey of commercial banks websites, on the number of commercial

banks that offer Internet banking and on the products and services they offer. It

investigates the profile of commercial banks that offer Internet banking, using

univariate statistical analysis with respect to profitability, cost efficiency, and other

characteristics. It was found that the profitability and offering of Internet banking

does not have any significant correlation.

Shrivastva et al.79 in their article explains the concept of marketing has not

changed in essence as a result of using the Internet as a new marketing channel but

Internet offers an unlimited opportunity for business.

76 N. Mookerji (1998). Internet banking still in evolutionary stage. 77 Ravi Nath. Bankers perspective on internet banking. E-Service Journal, vol.1, no.1 (2001),

pp.21-36. 78 Singh, B. and Pooja Malhotra. Adoption of Internet Banking an empirical investigation of

Indian banking. Journal of Internet Banking and Commerce, vol.9, no.2 (2004). pp.1-7. 79 D. Shrivastva et al., Problems and prospects of internet marketing. Journal of Internet Banking

and Commerce, vol.9, no.1 (2004). Available online: www.arraydev.com/commerce/jibc/ 0402. 02/htm.ic_code:1888

lxix

Perumal and Bala Shanmugam80 in their article state that there is little doubt

that the Internet has revolutionized the entire communication system. Having

observed the astronomical growth rate and acknowledging the potential banks often

adapt the Internet to suit their functions and roles. As any new venture there are set

backs in terms of issue of security and associated costs. As a consequence banks are

working towards remedying these shortcomings so as to take full advantage of the

digital revolution.

Sakkthivel81 in his study made an attempt to identify the significance of

demographics variables in influencing the consumption of different categories of

services over internet. The study revealed age and occupation have significant

impact on consuming different categories of services online. It has shown the

significance of demographic influence online consumption of services in the growing

Indian market. The corporate world may take care from the study for devising better

strategies to face their face.

Jeevan82 observes that the Internet enables banks to offer low cost, high value

added financial services. US web-corporation argues that finally banks are finding

that a comprehensive online banking strategy is essential for success in the

increasingly competitive financial services market.

1.11.3. Mobile banking

Mattila83 in his research paper focuses on defining the factors influencing

mobile banking adoption and aims at forming a model describing consumer

behaviour patterns. Thus it also evaluates the applicability to Rogers (1995) model

80 V. Perumal and Bala Shanmugam. Internet banking: Boon or Bane. Journal of Internet Banking

and Commerce, vol.9, no.3 (2004). Available online: www.arraydev.com/comm/jibc/2004-12/ perumal.htm.IDCode1887.

81 A.M. Sakkthivel. Impact of demographics on the consumption of different services online in India. Journal of Internet Banking and Commerce, vol.11, no.3 (2006), pp.1-7. .

82 M.T. Jeevan (2000). Only banks No bricks, voice and data. http://www.voicedata. com/content/ convergence/trends/100111102.asp (accessed on November 11, 2000).

83 M. Mattila. Factors affecting the adoption of mobile banking services. Journal of Internet Banking and Commerce. vol.8, no.1 (2004) pp.12. .

lxx in this context. In consequence, we are able to state that what are the drivers and

inhibitors of using banking services via wireless delivery channel. A quantitative

survey sheds more light on this researched issue. The data was collected in Finland

during May-July 2002 and includes 1253 survey responses.

Laforet and Li84 in their article state that the aim of this study is to investigate

the market status for online/mobile banking in China. The demographic, attitudinal

and behavioural characteristics of online and mobile bank users were examined.

Respondents from six major Chinese cities participated in the consumer survey. The

results showed Chinese online and mobile bank users were predominantly males, not

necessarily young and highly educated, in contrast with the electronic bank users in

the West. The issue of security was found to be the most important factor that

motivated Chinese consumer adoption of online banking. Main barriers to online

banking were the perception of risks, computer and technological skills and Chinese

traditional cash-carry banking culture.

1.11.4. Credit card

Teopaco85 in his Ph.D thesis on four case studies of companies in four

consumer services industries, fast foods, credit cards, health care and full service

hotels. The finding supports the relevance of the dominant market function as an

organizational dimension, but does not support the customer relationship hypothesis.

The research result also show that equally important to organizational design are

non-structural elements such as corporate culture, rewards, training and service

quality measurement system, emplo