Role Of Technology In Banking

1. INTRODUCTION:

Technology has opened up new markets, new products, new services and

efficient delivery channels for the banking industry. Online electronics banking,

mobile banking and internet banking are just a few examples.

Information Technology has also provided banking industry with the

wherewithal to deal with the challenges the new economy poses. Information

technology has been the cornerstone of recent financial sector reforms aimed

at increasing the speed and reliability of financial operations and of initiatives

to strengthen the banking sector.

Indian banking today is witnessing drastic changes. The liberalization of the

financial sector and banking sector reforms have exposed the Indian banks to a

new economic environment that is characterized by increased competition and

new regulatory requirements. As a result, there is a transformation in every

sphere of activities of the banks in India, especially in Governance, nature of

business, style of functioning and delivery mechanisms.

The new generation banks brought the necessary competition into the industry

and spearheaded changes towards higher utilization of technology, improved

customer service and innovative products. In spite of their strong and larger

network, public sector banks proved to be surprisingly quick and flexible to

meet the emerging needs of customers. Change is the order of the day.

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Role Of Technology In Banking

1.1 Nature Of Changes And Trends In The Banking Industry:

The changes in the political, economic, social, cultural and environmental

perspective can be seen in business environment too. Above all, the business

scenario is highly influenced by the changes in the needs and aspirations of the

people. The human factors such as, the mindset of the people, ethics and

values, social system, lifestyle, work culture etc. are greatly induce the

different sections of the people for changing their day-to-day requirements.

But today, the degree of such changes is so fast and more frequently

experienced by them. Therefore, the consumer status is changed from;

isolated to connected, unaware to well-informed, passive to active.

Consumers now seek to exercise their influence in every walk of the business

system, interact with firms and co-create value. As the outreach is enlarged in

the industry with the increased number of banks and wider network, the

customer demands convenience, comfort, speed, cost- effective and quality

services in the banking operations. In the recent years the Indian banking

industry saw a host of new faces called new generation banks entering with

their innovative strategies. All these bankers are generally slim in structure but

heavily using the technology and multi-channel facilities to reach out to a large

section of the customers.

In this context, Information Technology and Enabled Services (ITES) have

emerged as the integrator; assisting banks in managing transformation that

takes place continuously. RBI has taken several initiatives with the broad

objective of providing systems which impact beneficially on efficient

housekeeping in banks, better customer service and overall systemic efficiency.

The Reserve Bank has assigned priority to the up gradation of technological

infrastructure in the Indian financial system. The RBI’s role in the

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Role Of Technology In Banking

transformational of IT deployment in banking has been commendable. RBI

established in 1996 with a vision and foresight, the Institute for Research and

Development in Banking Technology (IDRBT). In order to establish an efficient,

cost-effective and dependable communication backbone, the Indian Financial

Network (INFINET) has been set up. About 150 banks, primary dealers and

mutual funds have become members.

Technology has a definitive role in facilitating transactions in the banking

sector and the impact of technology implementation has resulted in the

introduction of new products and services by various banks in India. During the

last decade, payment services offered by banks to the common persons as well

as the corporate bodies have improved substantially. It is partly due to

increased use of technology in service delivery and partly due to procedural

changes necessitated in the wake of competition amongst the banks.

With the introduction of electronic banking, banks are moving their focus of

payments from the physical presence of money to the use of electronic money.

Electronic banking refers to the use of technology which allows customers to

access banking services electronically whether it is to pay bills, transfer funds,

view accounts or to obtain information and advices. It refers to the electronic

services that are made available to the customers through phone, personal

computer, television and the Internet. Customers can perform banking

transactions such as balance enquiries, bill payments, transaction histories,

and transfer of money between accounts, obtain quotes and submit equity

option and mutual fund offers without having to step into the office on the

branch.

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Role Of Technology In Banking

1.2 I.T. in Banking:

1). Technology has opened up new markets, new products, new services and

efficient delivery channels for the banking industry. Online electronics banking,

mobile banking and internet banking are just a few examples.

2). Information Technology has also provided banking industry with the

wherewithal to deal with the challenges the new economy poses. Information

technology has been the cornerstone of recent financial sector reforms aimed

at increasing the speed and reliability of financial operations and of initiatives

to strengthen the banking sector.

3). The IT revolution has set the stage for unprecedented increase in financial

activity across the globe. The progress of technology and the development of

world wide networks have significantly reduced the cost of global funds

transfer.

4). It is information technology which enables banks in meeting such high

expectations of the customers who are more demanding and are also more

techno-savvy compared to their counterparts of the yester years. They

demand instant, anytime and anywhere banking facilities.

5). IT has been providing solutions to banks to take care of their accounting

and back office requirements. This has, however, now given way to large scale

usage in services aimed at the customer of the banks. IT also facilitates the

introduction of new delivery channels--in the form of Automated Teller

Machines, Net Banking, Mobile Banking and the like. Further, IT deployment

has assumed such high levels that it is no longer possible for banks to manage

their IT implementations on a stand alone basis with IT revolution, banks are

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Role Of Technology In Banking

increasingly interconnecting their computer systems not only across branches

in a city but also to other geographic locations with high-speed network

infrastructure, and setting up local area and wide area networks and

connecting them to the Internet. As a result, information systems and

networks are now exposed to a growing number.

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Role Of Technology In Banking

1.3 History:

In the five decades since independence, banking in India has evolved through

four distinct phases. During Fourth phase, also called as Reform Phase,

Recommendations of the Narasimham Committee (1991) paved the way for

the reform phase in the banking. Important initiatives with regard to the

reform of the banking system were taken in this phase. Important among

these have been introduction of new accounting and prudential norms relating

to income recognition, provisioning and capital adequacy, deregulation of

interest rates & easing of norms for entry in the field of banking.

Entry of new banks resulted in a paradigm shift in the ways of banking in India.

The growing competition, growing expectations led to increased awareness

amongst banks on the role and importance of technology in banking. The

arrival of foreign and private banks with their superior state-of-the-art

technology-based services pushed Indian Banks also to follow suit by going in

for the latest technologies so as to meet the threat of competition and retain

their customer base.

Indian banking industry, today is in the midst of an IT revolution. A

combination of regulatory and competitive reasons, have led to increasing

importance of total banking automation in the Indian Banking Industry.

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Role Of Technology In Banking

1.4 Role Of Technology:

Information Technology has basically been used under two different avenues

in Banking. One is Communication and Connectivity and other is Business

Process Reengineering. Information technology enables sophisticated product

development, better market infrastructure, implementation of reliable

techniques for control of risks and helps the financial intermediaries to reach

geographically distant and diversified markets. In view of this, technology has

changed the contours of three major functions performed by banks, i.e., access

to liquidity, transformation of assets and monitoring of risks. Further,

Information technology and the communication networking systems have a

crucial bearing on the efficiency of money, capital and foreign exchange

markets.

Internet has significantly influenced delivery channels of the banks. Internet

has emerged as an important medium for delivery of banking products &

services. Detailed guidelines of RBI for Internet Banking has prepared the

necessary ground for growth of Internet Banking in India.

The Information Technology Act, 2000 has given legal recognition to creation,

transmission and retention of an electronic (or magnetic) data to be treated as

valid proof in a court of law, except in those areas, which continue to be

governed by the provisions of the Negotiable Instruments Act, 1881.

As stated in RBI's Annual Monetary and Credit Policy 2002-2003: "To reap the

full benefits of such electronic message transfers, it is necessary that banks

bestow sufficient attention on the computerisation and networking of the

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Role Of Technology In Banking

branches situated at commercially important centres on a time-bound basis.

Intra-city and intra-bank networking would facilitate in addressing the "last

mile" problem which would in turn result in quick and efficient funds transfers

across the country".

The precursor for the modern home online banking services were the distance

banking services over electronic media from the early 1980s. The term online

became popular in the late '80s and referred to the use of a terminal, keyboard

and TV (or monitor) to access the banking system using a phone line. ‘Home

banking’ can also refer to the use of a numeric keypad to send tones down a

phone line with instructions to the bank. Online services started in New York in

1981 when four of the city’s major banks (Citibank, Chase Manhattan,

Chemical and Manufacturers Hanover) offered home banking services using

the videotex system. Because of the commercial failure of videotex these

banking services never became popular except in France where the use of

videotex (Minitel) was subsidised by the telecom provider and the UK, where

the Prestel system was used.

The UK's first home online banking services was set up by Bank of Scotland for

customers of the Nottingham Building Society (NBS) in 1983. The system used

was based on the UK's Prestel system and used a computer, such as the BBC

Micro, or keyboard (Tandata Td1400) connected to the telephone system and

television set. The system (known as 'Homelink') allowed on-line viewing of

statements, bank transfers and bill payments. In order to make bank transfers

and bill payments, a written instruction giving details of the intended recipient

had to be sent to the NBS who set the details up on the Homelink system.

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Role Of Technology In Banking

2. OBJECTIVES:

The basic objective of this project is to trace the role of technology in the

banking industry in:

Identifying the opportunities it has provided to the industry in exploring

new opportunities,

how technology has enabled the banking industry to identify and

develop new products and services to meet these opportunities

the manner it has made banking a more pleasurable activity

how it has enabled the banking industry to use customer relationship

management to get closer to its clients

Technology will bring fundamental shift in the functioning of banks. It would

not only help them bring improvements in their internal functioning but also

enable them to provide better customer service. Technology will break all

boundaries and encourage cross border banking business. Banks would have to

undertake extensive Business Process Re-Engineering and tackle issues like a)

how best to deliver products and services to customers b) designing an

appropriate organizational model to fully capture the benefits of technology

and business process changes brought about. c) how to exploit technology for

deriving economies of scale and how to create cost efficiencies, and d) how to

create a customer - centric operation model.

Entry of ATMs has changed the profile of front offices in bank branches.

Customers no longer need to visit branches for their day to day banking

transactions like cash deposits, withdrawals, cheque collection, balance

enquiry etc. E-banking and Internet banking have opened new avenues in

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Role Of Technology In Banking

“convenience banking”. Internet banking has also led to reduction in

transaction costs for banks to about a tenth of branch banking.

Technology solutions would make flow of information much faster, more

accurate and enable quicker analysis of data received. This would make the

decision making process faster and more efficient. For the Banks, this would

also enable development of appraisal and monitoring tools which would make

credit management much more effective. The result would be a definite

reduction in transaction costs, the benefits of which would be shared between

banks and customers.

While application of technology would help banks reduce their operating costs

in the long run, the initial investments would be sizeable. IT spent by banking

and financial services industry in USA is approximately 7% of the revenue as

against around 1% by Indian Banks. With greater use of technology solutions,

we expect IT spending of Indian banking system to go up significantly.

One area where the banking system can reduce the investment costs in

technology applications is by sharing of facilities. We are already seeing banks

coming together to share ATM Networks. Similarly, in the coming years, we

expect to see banks and FIs coming together to share facilities in the area of

payment and settlement, back office processing, data warehousing, etc. While

dealing with technology, banks will have to deal with attendant operational

risks. This would be a critical area the Bank management will have to deal with

in future.

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Role Of Technology In Banking

2.1 Advantages Of Technology:

1. From both customer and banking perspectives it shows that the Internet is a

convenience tool available whenever and wherever customers need it. It is

also

found that the Internet has improved the factors in service quality like

responsiveness, communication and access. It is concluded that the Internet

has an important and positive effect on customer perceived banking services

and the service quality has been improved since the Internet has been used in

banking sector.

2. It's generally secure. But make sure that the website you're using has a valid

security certificate. This lets you know that the site is protected from cyber-

thieves looking to steal your personal and financial information.

3. It gives twenty-four-hour access. When the neighbourhood bank closes, you

can still access your account and make transactions online. It's a very

convenient alternative for those that can't get to the bank during normal hours

because of their work schedule, health or any other reason.

4. It allows us to access our account from virtually anywhere. If we're on a

business trip or vacationing away from home, we can still keep a watchful on

our money and financial transactions – regardless of our location.

5. Conducting business online is generally faster than going to the bank. Long

teller lines can be time-consuming, especially on a Pay Day. But online, there

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Role Of Technology In Banking

are no lines to contend with. You can access your account instantly and at your

leisure.

6. Many features and services are typically available online. For example, with

just a few clicks you can apply for loans, check the progress of your

investments, review interest rates and gather other important information that

may be spread out over several different brochures in the local bank.

7. Technology has opened up new markets, new products, new services and

efficient delivery channels for the banking industry. Online electronics banking,

mobile banking and internet banking are just a few examples.

8. Information Technology has also provided banking industry with the

wherewithal to deal with the challenges the new economy poses. Information

technology has been the cornerstone of recent financial sector reforms aimed

at increasing the speed and reliability of financial operations and of initiatives

to strengthen the banking sector.

9. The IT revolution has set the stage for unprecedented increase in financial

activity across the globe. The progress of technology and the development of

worldwide networks have significantly reduced the cost and time of global

funds transfer.

10. It is information technology which enables banks in meeting such high

expectations of the customers who are more demanding and are also more

techno savvy compared to their counterparts of the yester years. They demand

instant, anytime and anywhere banking facilities.

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Role Of Technology In Banking

11. IT has been providing solutions to banks to take care of their accounting

and back office requirements. This has, however, now given way to large scale

usage in services aimed at the customer of the banks.

12. IT also facilitates the introduction of new delivery channels--in the form of

Automated Teller Machines, Net Banking, Mobile Banking and the like.

13. Use of de-mat account and online trading enables a person to buy and sell

shares any time. The share trading companies and AMC’s can give improved

and faster service with help of technology.

14. There are many useful features and services available online besides for

the usual transactions. For example, you can apply for credit cards, manage

investments, and pay bills through your online account portal. You can also

perform more mundane tasks such as ordering new checks, requesting

additional deposit slips, or reporting a lost or stolen debit card. Certainly the

above mentioned advantages if technology have improved the quality of

service in a banking and financial sector.

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Role Of Technology In Banking

2.2 Disadvantages Of Technology:

1. Yes, online banking is generally secure, but it certainly isn't always secure.

Identity theft is running rampant, and banks are by no means immune. And

once your information is compromised, it can take months or even years to

correct the damage, not to mention possibly costing you thousands of dollars,

as well. This generally does not happen in case of traditional method of

banking.

2. Some online banks are more stable than others. Not all online setups are an

extension of a brick-and-mortar bank. Some operate completely in cyberspace,

without the benefit of a branch that you can actually visit if need be. With no

way to physically check out the operation, you must be sure to thoroughly do

your homework about the bank's background before giving them any of your

money.

3. Before using a banking site that you aren't familiar with, check to make sure

that their deposits are FDIC-insured. If not, you could possibly lose all of your

deposits if the bank goes under, or its major shareholders decide to take an

extended vacation in Switzerland.

4. Customer service can be below the quality that you're used to. Some people

simply take comfort in being able to talk to another human being face-to-face

if they experience a problem. Although most major banks employ a dedicated

customer service department specifically for online users, going through the

dreaded telephone menu can still be quite irritating to many. Again, some are

considerably better (or worse) than others.

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Role Of Technology In Banking

5. Not all online transactions are immediate. Online banking is subject to the

same business-day parameters as traditional banking. Therefore, printing out

and keeping receipts is still very important, even when banking online.

6. If your bank operates only online or simply does not have a branch office in

your local area, you will not be able to reach a representative in person for

discussion of account issues. Normally this is not a problem, but sometimes

customer service by telephone or email can be spotty and may prove to be

more of a hassle if you have a serious issue that is not easily resolved. Some

banks are better than others in this department, so you will need to do some

research if this is an important consideration for you.

7. Using online banking effectively requires some basic computer literacy and

familiarity with navigating the Internet. While this is not a problem for people

like me, those who are afflicted with technophobia or are simply inexperienced

with this particular genre may not be comfortable with this concept. There are

also a significant number of people who are suspicious of anything having to

do with the Internet because it is outside of their comfort zone. Others are

simply too stubborn to acquire the relevant knowledge and skills.

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Role Of Technology In Banking

2.3 The core issues faced by banks today are on the fronts of

customer's service expectations, cutting operational costs, and managing

competition. Technology can help banks in meeting these objectives.

IT is central to banking. It has moved from being just a business enabler to

being a business driver. In a manner the banking and financial services sector—

being the early adopters of any new technology—defines the roadmap for

future technology adoption.

As it is clear for the previous story, banks are focused on three areas: meet

customer's service expectations, cut costs, and manage competition. For this

banks are exploring new financial products and service options that would help

them grow without losing existing customers. And any new financial product or

service that a bank offers will be intrinsically related to technology.

Automation is key:

Automation is the basic thing that banks need to have in place. It involves a

combination of centralized networks, operations, and a core banking

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Role Of Technology In Banking

application. Automation enables banks to offer 24x7x365 service using lesser

manpower.

But to be really competitive, banks need to think beyond just basic

automation.

Says V Chandrasekhar, GM (Chief Technology Officer), and Bank of Baroda, "IT

has changed the way a bank reaches out to its customers. Gone are the days

where IT was deployed for automating accounting/back office functions to

remove drudgery of employees. It is now massively being deployed for

customer interfacing/interaction."

A better way to understand the technologies that would define the future of

banking would be to start in the past.

Evolution:

The Evolution of Banking and Financial Information Technology

1. The first applications of the computer age within banking were the use of

mainframes, and later minicomputers, to process data such as customer

accounts, bank inventories, personnel records, and accounting packages -

which ultimately evolved into spreadsheets. Although 70% of banking

applications expenditure in the US remain mainframe based, this reflects an

old embedded base. Client/server systems expenditure are the fastest growing

at 29% p.a.

2. The idea of direct customer services was less clear, but the first ATM

(Automatic Teller Machine) came into commercial use in 1968. By 1995 in

Europe over 100,000 were in use. In Hong Kong there are two networks, the

Hong Kong Bank system which had around 800 ATMs in September 1994

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Role Of Technology In Banking

(Business Asia Survey) and the Jetco network linking the other clearing banks

with about 1,150 ATMs.

These are ‘private’ or corporate wide-area networks run over leased circuits. If

we denote these networks as ‘C’ for corporate we can describe the ATM

system as:

C - C

that is transactions, such as EFT (Electronic Funds Transfer) or communications

take place just within the corporate WAN.

3. The next step in providing direct customer services came logically in the

extended use of debit and credit cards in the shops of merchants through EPOS

(Electronic Point of Sale) technology. In Hong Kong there are over 5,000

terminals, an increasing number of them handheld wireless applications. The

authentication and direct debit functions of EPOS use the PSTN (Public

Switched Telephone Network) to connect into the corporate networks of banks

and credit card companies. If we denote the PSTN as ‘P’ then we can describe

the interconnection of merchant system to the corporate system as:

C - P - C

4. The latest step is the introduction of smartcard technology. Here, for

example, money can be downloaded from the ATM into the card, and then

transferred by smartphone across the PSTN to another person’s smartcard and

finally transferred to a merchant or into another bank account. A description of

this process would be as follows:

C-P-P-C

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Role Of Technology In Banking

5. We do not have time here to develop this model further, although it would

interesting to see how it enters the general model of the circulation of

commodity money and capital. What we can point out is that the opportunities

for entry into this extended system of transactions opens up the logical

possibility of new financial service providers offering specialist services at

different points in the chain, especially where the chains cross (nodal points)

and the need for specialist carrier networks and for specialist network

management. We could begin to model this as follows:

C-C

C-P-P-C

C-P-P-C

C-C

The need for centralized infrastructure:

In the early days of banking technology, the network/backend infrastructure

used to be decentralized. This meant that each branch had its own server(s),

banking applications, database(s), and other such assorted hardware/software.

Decentralized networks had their own set of problems in terms of the cost and

management fronts. The decentralized model involves huge capital

expenditure and resources (trained manpower, hardware, etc). In the

decentralized model, there is no coordination or one central control point.

"We had problems with updating applications, troubleshooting, etc before we

opted for centralization. Technology representatives had to be present at each

branch to provide support," says P.K.Vohra, General Manager, ICICI Bank.

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Role Of Technology In Banking

This was an acceptable scenario till multi-channel came into the picture. With

these concepts came the need for a centralized database. The database had to

be updated instantaneously irrespective of the branch or channel the customer

used. The networks had to be run and managed with lesser costs.

Although data centres were being used by some of the banking majors, they

were never considered as being capable of being a central operations hub.

Things changed when banks realized the cost benefits of swapping the

decentralized model to centralized datacentre architecture.

"When one or two private sector banks showed that it can be done efficiently,

other banks began to show an interest—they also began consolidating their

databases into a single large database," says V.K. Ramani, President (IT), UTI

Bank.

Says P.K. Vohra, "Centralization using a data centre has helped a lot in

improving and simplifying the network from the operations, user, and

administration perspectives. From a cost perspective, centralization has been

very effective."

It is not just the datacenter which contributed to centralization. The network

has also evolved into a unified IP network. Says Naresh Wadhwa, Vice

President-West, Cisco Systems (India), "Older day banking networks used to be

a potpourri of several older protocols. There used to be one network for data

traffic, another for telephony, and so on. Today, irrespective of whether its

data, voice or videoconferencing, ATMs or mobile banking, just a single IP

based network is used."

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Role Of Technology In Banking

Core matters And Core Banking:

After the turn of consolidated databases and networks come core banking

applications. Core banking applications help provide complete front and

backend automation of banks.

These applications also help banks achieve centralized processing and provide

24-hour customer service. "Core banking applications provide anywhere,

anytime 24 by 7 non-stop services, which is not possible with traditional

localized branch automation systems that are available only between 10 am to

2 pm," says V. Chandrasekhar.

Core banking applications help integrate the enterprise to existing in-house

applications to offer a single customer view. These applications provide

automation across multiple delivery channels.

Adds Joseph John, Head, Banking Products Division, i-flex solutions: "Banks are

increasingly adopting core-banking solutions for retaining customers and

lowering service costs to the customer."

Banks are reinventing themselves as marketing agencies by selling products

like life insurance, RBI bonds, credit cards, etc. Core banking applications are

able to support this.

Risk management is another area where core banking applications can help.

These systems take care of the risk monitoring and reporting requirements.

Loyalty programs can also be monitored and managed using a core banking

application.

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Role Of Technology In Banking

Core Banking is normally defined as the business conducted by a banking

institution with its retail and small business customers. Many banks treat the

retail customers as their core banking customers, and have a separate line of

business to manage small businesses. Larger businesses are managed via the

Corporate Banking division of the institution. Core banking basically is

depositing and lending of money.

Nowadays, most banks use core banking applications to support their

operations where CORE stands for "Centralized Online Real-time Exchange".

This basically means that all the bank's branches access applications from

centralized datacenters. This means that the deposits made are reflected

immediately on the bank's servers and the customer can withdraw the

deposited money from any of the bank's branches throughout the world.

These applications now also have the capability to address the needs of

corporate customers, providing a comprehensive banking solution. A few

decades ago it used to take at least a day for a transaction to reflect in the

account because each branch had their local servers, and the data from the

server in each branch was sent in a batch to the servers in the datacenter only

at the end of the day (EoD).

Normal core banking functions will include deposit accounts, loans, mortgages

and payments. Banks make these services available across multiple channels

like ATMs, Internet banking, and branches.

Core Banking Solutions:

Core Banking solutions are banking applications on a platform enabling a

phased, strategic approach that lets people improve operations, reduce costs,

and prepare for growth. Implementing a modular, component-based

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Role Of Technology In Banking

enterprise solution ensures strong integration with your existing technologies.

An overall service-oriented-architecture (SOA) helps banks reduce the risk that

can result from multiple data entries and out-of-date information, increase

management approval, and avoid the potential disruption to business caused

by replacing entire systems.

Core Banking Solutions is new jargon frequently used in banking circles. The

advancement in technology, especially internet and information technology

has led to new ways of doing business in banking. These technologies have cut

down time, working simultaneously on different issues and increasing

efficiency. The platform where communication technology and information

technology are merged to suit core needs of banking is known as Core Banking

Solutions. Here, computer software is developed to perform core operations of

banking like recording of transactions, passbook maintenance, interest

calculations on loans and deposits, customer records, balance of payments and

withdrawal. This software is installed at different branches of bank and then

interconnected by means of communication lines like telephones, satellite,

internet etc. It allows the user (customers) to operate accounts from any

branch if it has installed core banking solutions. This new platform has changed

the way banks are working.

Gartner defines a core banking system as a back-end system that processes

daily banking transactions, and posts updates to accounts and other financial

records. Core banking systems typically include deposit, loan and credit-

processing capabilities, with interfaces to general ledger systems and reporting

tools. Strategic spending on these systems is based on a combination of

service-oriented architecture and supporting technologies that create

extensible, agile architectures.

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Role Of Technology In Banking

CRM Tools:

CRM tools can be broadly classified into two categories: Operational and

Analytical.

Operational CRM provides the software support for businesses that require

customer contact. These tools are largely workflow based to provide

information to employees and document customer interactions. This includes

collaborative CRM type of tools used to provide enterprise/customer

interaction across all contact channels such as face-to-face, telephonic,

electronic, and wireless. Operational CRM types are the major CRM tools being

used nowadays for customer support in India. For example, say a premium

customer dials your call center from his home. Operational CRM can alert the

call center executive of his account status and other details by his home

telephone. This will help the employee in extending him the kind of service

extended to a premium customer.

Analytical CRM helps you make sense of the information. It helps you target

customers and utilize their potential to the maximum. For example, say an

account holder withdraws Rs 10,000 every month from his account and

deposits it in another bank as EMI for a loan. Analytical CRM tools can help you

track this activity. Techniques such as data warehousing and data mining are

prominent tools used for this. Your bank could offer a loan to the customer at

a lower rate than what the other bank offers. This will keep the customer

happy since he knows that you are giving him better service. This translates to

gains for your bank as well.

Banks tend to forget one important aspect about CRM; it is more than just a

technology implementation, it has to be a clearly defined process with

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Role Of Technology In Banking

appropriate customer service levels. This is exactly the reason why CRM

implementations meet with limited success.

Adds K. N. C. Nair: "e-transformation should not be at the expense of the

personal touch in service. This will differentiate a bank from its competitors

when the technology is available to all sooner or later."

Mining for intelligence:

Another important issue banks face is in proper analysis of financial data to

identify business potential. This helps a bank identify cross- sell and up-sell

potentials. Technologies such as data warehousing/mining come into play

here.

Says Ramani, "If you have an operational CRM, it streamlines your delivery

channels. If you have CRM backed with your data warehouse solution, it not

only streamlines the channels, but also tells you where to move. It tells you

which customer to focus on."

A data warehouse can help the bank get a single view of its data across

disparate systems. This comes in handy since most banks have data spread

over several disparate, sometimes legacy systems. If the data is spread across

different systems, a transaction done on one system will not be reflected in the

other. This is not a very desirable situation when it comes to multi-channel

banking.

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3. FEATURES:

3.1 Online Banking:

Online banking (or Internet banking) allows customers to conduct financial

transactions on a secure website operated by their retail or virtual bank, credit

union or building society.

Online banking solutions have many features and capabilities in common, but

traditionally also have some that are application specific.

The common features fall broadly into several categories

Transactional (e.g., performing a financial transaction such as an account

to account transfer, paying a bill, wire transfer... and applications... apply

for a loan, new account, etc.)

o Electronic bill presentment and payment - EBPP

o Funds transfer between a customer's own checking and savings

accounts, or to another customer's account

o Investment purchase or sale

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Role Of Technology In Banking

o Loan applications and transactions, such as repayments of

enrollments

Non-transactional (e.g., online statements, check links, cobrowsing,

chat)

o Bank statements

Financial Institution Administration -

Support of multiple users having varying levels of authority

Transaction approval process

Wire transfer

Features commonly unique to Internet banking include

Personal financial management support, such as importing data into

personal accounting software. Some online banking platforms support

account aggregation to allow the customers to monitor all of their

accounts in one place whether they are with their main bank or with

other institutions

Security:

Protection through single password authentication, as is the case in most

secure Internet shopping sites, is not considered secure enough for personal

online banking applications in some countries. Basically there exist two

different security methods for online banking.

The PIN/TAN system where the PIN represents a password, used for the

login and TANs representing one-time passwords to authenticate

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transactions. TANs can be distributed in different ways; the most

popular one is to send a list of TANs to the online banking user by postal

letter. The most secure way of using TANs is to generate them by need

using a security token. These token generated TANs depend on the time

and a unique secret, stored in the security token (this is called two-

factor authentication or 2FA). Usually online banking with PIN/TAN is

done via a web browser using SSL secured connections, so that there is

no additional encryption needed.

Signature based online banking where all transactions are signed and

encrypted digitally. The Keys for the signature generation and encryption

can be stored on smartcards or any memory medium, depending on the

concrete implementation.

Attacks:

Most of the attacks on online banking used today are based on deceiving the

user to steal login data and valid TANs. Two well-known examples for those

attacks are phishing and pharming. Cross-site scripting and key logger/Trojan

horses can also be used to steal login information.

A method to attack signature based online banking methods is to manipulate

the used software in a way, that correct transactions are shown on the screen

and faked transactions are signed in the background.

A recent FDIC Technology Incident Report, compiled from suspicious activity

reports banks file quarterly, lists 536 cases of computer intrusion, with an

average loss per incident of $30,000. That adds up to a nearly $16-million loss

in the second quarter of 2007. Computer intrusions increased by 150 percent

between the first quarter of 2007 and the second. In 80 percent of the cases,

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the source of the intrusion is unknown but it occurred during online banking,

the report states.

3.2 Electronic funds transfer:

Electronic funds transfer or EFT refers to the computer-based systems used to

perform financial transactions electronically. An EFT is the electronic exchange

or transfer of money from one account to another, either within the same

financial institution or across multiple institutions

The term is used for a number of different concepts:

Cardholder-initiated transactions, where a cardholder makes use of a

payment card

Direct deposit payroll payments for a business to its employees, possibly

via a payroll service bureau

Direct debit payments, sometimes called electronic checks, for which a

business debits the consumer's bank accounts for payment for goods or

services

Electronic bill payment in online banking, which may be delivered by EFT

or paper check

Transactions involving stored value of electronic money, possibly in a

private currency

Wire transfer via an international banking network (generally carries a

higher fee)

Electronic Benefit Transfer

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An e-commerce payment system facilitates the acceptance of electronic

payment for online transactions. Also known as Electronic Data

Interchange (EDI), e-commerce payment systems have become

increasingly popular due to the widespread use of the internet-based

shopping and banking. In the early years of B2C transactions, many

consumers were apprehensive of using their credit and debit cards over

the internet because of the perceived increased risk of fraud. Recent

research shows that 30% of people in the United Kingdom still do not

shop online because they do not trust online payment systems.

However, 54% do believe that it is safe to shop online which is an

increase from 26% in 2006.

There are numerous different payments systems available for online

merchants. These include the traditional credit, debit and charge card

but also new technologies such as digital wallets, e-cash, mobile

payment and e-checks. Another form of payment system is allowing a

3rd party to complete the online transaction for you.

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3.3 Electronic Bill Presentment and Payment:

Electronic bill presentment and payment (EBPP) is a fairly new technique that

allows consumers to view and pay bills electronically. There are a significant

number of bills that consumers pay on a regular basis, which include: power

bills, water, oil, internet, phone service, mortgages, car payments etc. EBPP

systems send bills from service providers to individual consumers via the

internet. The systems also enable payments to be made by consumers, given

that the amount that appears on the e-bill is correct. Banks in Canada have

been offering these on-line payment services for some time now, and are

growing in popularity. Other service providers such as Rogers Communications

and Aliant accept major credit cards within the bill payment sections of their

websites. This service is in addition to the original EBPP method of a direct

withdrawal from a bank account through a bank such as Scotia bank.

The biggest difference between EBPP systems and the traditional method of

bill payment is that of technology. Rather than receiving a bill through the mail,

writing out and sending a check, consumers receive their bills in an email, or

are prompted to visit a website to view and pay their bills.

Three broad models of EBPP have emerged. These are:

1. Consolidation, where numerous bills for any one recipient are made

available at one Web site, most commonly the recipient's bank. In some

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countries, such as Australia, New Zealand and Canada, the postal service

also operates a consolidation service. The actual task of consolidation is

sometimes performed by a third party and fed to the Web sites where

consumers receive the bills. The principal attraction of consolidation is

that consumers can receive and pay numerous bills at the one location,

thus minimizing the number of login IDs and passwords they must

remember and maintain.

2. Biller Direct, where the bills produced by an organization are made

available through that organization’s Web site. This model works well if

the recipient has reasons to visit the biller's Web site other than to

receive their bills. In the freight industry, for example, customers will

visit a carrier's Web site to track items in transit, so it is reasonably

convenient to receive and pay freight bills at the same site.

3. Direct email delivery, where the bills are emailed to the customer's In

Box. This model most closely imitates the analog postal service. It is

convenient, because almost everyone has email and the customer has to

do nothing except use email in order to receive a bill. Email delivery is

proving especially popular in the B2B market in many countries.

Major providers of outsourced bill production services have developed

facilities to process bills through consolidation, biller direct and email delivery

services, thus enabling major billers to have all their bills, paper and electronic,

processed through the one service. Niche service providers in many countries

provide one or two of these models, but generally do not integrate with paper

bill production.

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3.4 Credit Cards:

A credit card is a small plastic card issued to users as a system of payment. It

allows its holder to buy goods and services based on the holder's promise to

pay for these goods and services.[1] The issuer of the card creates a revolving

account and grants a line of credit to the consumer (or the user) from which

the user can borrow money for payment to a merchant or as a cash advance to

the user.

A credit card is different from a charge card: a charge card requires the balance

to be paid in full each month. In contrast, credit cards allow the consumers a

continuing balance of debt, subject to interest being charged. Most credit

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cards are issued by banks or credit unions, and are the shape and size specified

by the ISO/IEC 7810 standard as ID-1.

Collectible credit cards:

A growing field of numismatics (study of money), or more specifically

exonumia (study of money-like objects), credit card collectors seek to collect

various embodiments of credit from the now familiar plastic cards to older

paper merchant cards, and even metal tokens that were accepted as merchant

credit cards. Early credit cards were made of celluloid plastic, then metal and

fiber, then paper, and are now mostly plastic.

Interest charges:

Credit card issuers usually waive interest charges if the balance is paid in full

each month, but typically will charge full interest on the entire outstanding

balance from the date of each purchase if the total balance is not paid.

For example, if a user had a $1,000 transaction and repaid it in full within this

grace period, there would be no interest charged. If, however, even $1.00 of

the total amount remained unpaid, interest would be charged on the $1,000

from the date of purchase until the payment is received. The precise manner in

which interest is charged is usually detailed in a cardholder agreement which

may be summarized on the back of the monthly statement. The general

calculation formula most financial institutions use to determine the amount of

interest to be charged is APR/100 x ADB/365 x number of days revolved. Take

the Annual percentage rate (APR) and divide by 100 then multiply to the

amount of the average daily balance (ADB) divided by 365 and then take this

total and multiply by the total number of days the amount revolved before

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payment was made on the account. Financial institutions refer to interest

charged back to the original time of the transaction and up to the time a

payment was made, if not in full, as RRFC or residual retail finance charge. Thus

after an amount has revolved and a payment has been made, the user of the

card will still receive interest charges on their statement after paying the next

statement in full (in fact the statement may only have a charge for interest that

collected up until the date the full balance was paid, i.e. when the balance

stopped revolving).

The credit card may simply serve as a form of revolving credit, or it may

become a complicated financial instrument with multiple balance segments

each at a different interest rate, possibly with a single umbrella credit limit, or

with separate credit limits applicable to the various balance segments. Usually

this compartmentalization is the result of special incentive offers from the

issuing bank, to encourage balance transfers from cards of other issuers. In the

event that several interest rates apply to various balance segments, payment

allocation is generally at the discretion of the issuing bank, and payments will

therefore usually be allocated towards the lowest rate balances until paid in

full before any money is paid towards higher rate balances. Interest rates can

vary considerably from card to card, and the interest rate on a particular card

may jump dramatically if the card user is late with a payment on that card or

any other credit instrument, or even if the issuing bank decides to raise its

revenue.

Benefits to customers:

The main benefit to each customer is convenience. Compared to debit cards

and cheques, a credit card allows small short-term loans to be quickly made to

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a customer who need not calculate a balance remaining before every

transaction, provided the total charges do not exceed the maximum credit line

for the card. Credit cards also provide more fraud protection than debit cards.

In the UK for example, the bank is jointly liable with the merchant for

purchases of defective products over £100.

Many credit cards offer rewards and benefits packages, such as offering

enhanced product warranties at no cost, free loss/damage coverage on new

purchases, and points which may be redeemed for cash, products, or airline

tickets. Additionally, carrying a credit card may be a convenience to some

customers as it eliminates the need to carry any cash for most purposes.

Transaction steps:

Authorization: The cardholder pays for the purchase and the merchant

submits the transaction to the acquirer (acquiring bank). The acquirer

verifies the credit card number, the transaction type and the amount

with the issuer (Card-issuing bank) and reserves that amount of the

cardholder's credit limit for the merchant. An authorization will generate

an approval code, which the merchant stores with the transaction.

Batching: Authorized transactions are stored in "batches", which are

sent to the acquirer. Batches are typically submitted once per day at the

end of the business day. If a transaction is not submitted in the batch,

the authorization will stay valid for a period determined by the issuer,

after which the held amount will be returned back to the cardholder's

available credit (see authorization hold). Some transactions may be

submitted in the batch without prior authorizations; these are either

transactions falling under the merchant's floor limit or ones where the

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authorization was unsuccessful but the merchant still attempts to force

the transaction through. (Such may be the case when the cardholder is

not present but owes the merchant additional money, such as extending

a hotel stay or car rental.)

Clearing and Settlement: The acquirer sends the batch transactions

through the credit card association, which debits the issuers for payment

and credits the acquirer. Essentially, the issuer pays the acquirer for the

transaction.

Funding: Once the acquirer has been paid, the acquirer pays the

merchant. The merchant receives the amount totaling the funds in the

batch minus either the "discount rate," "mid-qualified rate", or "non-

qualified rate" which are tiers of fees the merchant pays the acquirer for

processing the transactions.

Chargebacks: A chargeback is an event in which money in a merchant

account is held due to a dispute relating to the transaction. Chargebacks

are typically initiated by the cardholder. In the event of a chargeback,

the issuer returns the transaction to the acquirer for resolution. The

acquirer then forwards the chargeback to the merchant, who must

either accept the chargeback or contest it. A merchant is responsible for

the chargeback only if she has violated the card acceptance procedures

as per the merchant agreement with card acquirers.

Mobile banking (also known as M-Banking, mbanking, SMS Banking

etc.) is a term used for performing balance checks, account transactions,

payments, credit applications etc. via a mobile device such as a mobile

phone or Personal Digital Assistant (PDA).

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3.5 Mobile Banking:

In one academic model, 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."

According to this model Mobile Banking can be said to consist of three inter-

related concepts:

Mobile Accounting

Mobile Brokerage

Mobile Financial Information Services

Most services in the categories designated Accounting and Brokerage are

transaction-based. The non-transaction-based services of an informational

nature are however essential for conducting transactions - for instance,

balance inquiries might be needed before committing a money remittance. The

accounting and brokerage services are therefore offered invariably in

combination with information services. Information services, on the other

hand, may be offered as an independent module.

Mobile phone banking may also be used to help in business situations

Trends in mobile banking: The advent of the Internet has enabled new

ways to conduct banking business, resulting in the creation of new institutions,

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such as online banks, online brokers and wealth managers. Such institutions

still account for a tiny percentage of the industry.

Over the last few years, the mobile and wireless market has been one of the

fastest growing markets in the world and it is still growing at a rapid pace.

According to the GSM Association and Ovum, the number of mobile

subscribers exceeded 2 billion in September 2005, and now exceeds 2.5 billion

(of which more than 2 billion are GSM).

With mobile technology, banks can offer services to their customers such as

doing funds transfer while travelling, receiving online updates of stock price or

even performing stock trading while being stuck in traffic. Smartphones and 3G

connectivity provide some capabilities that older text message-only phones do

not.

Mobile banking business models:

A wide spectrum of Mobile/branchless banking models is evolving. However,

no matter what business model, if mobile banking is being used to attract low-

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income populations in often rural locations, the business model will depend on

banking agents, i.e., retail or postal outlets that process financial transactions

on behalf telcos or banks. The banking agent is an important part of the mobile

banking business model since customer care, service quality, and cash

management will depend on them. Many telcos will work through their local

airtime resellers. However, banks in Colombia, Brazil, Peru, and other markets

use pharmacies, bakeries, etc.

These models differ primarily on the question that who will establish the

relationship (account opening, deposit taking, lending etc.) to the end

customer, the Bank or the Non-Bank/Telecommunication Company (Telco).

Another difference lies in the nature of agency agreement between bank and

the Non-Bank. Models of branchless banking can be classified into three broad

categories - Bank Focused, Bank-Led and Nonbank-Led.

Bank-focused model:

The bank-focused model emerges when a traditional bank uses non-traditional

low-cost delivery channels to provide banking services to its existing

customers. Examples range from use of automatic teller machines (ATMs) to

internet banking or mobile phone banking to provide certain limited banking

services to banks’ customers. This model is additive in nature and may be seen

as a modest extension of conventional branch-based banking.

Bank-led model:

The bank-led model offers a distinct alternative to conventional branch-based

banking in that customer conducts financial transactions at a whole range of

retail agents (or through mobile phone) instead of at bank branches or through

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bank employees. This model promises the potential to substantially increase

the financial services outreach by using a different delivery channel (retailers/

mobile phones), a different trade partner (telco / chain store) having

experience and target market distinct from traditional banks, and may be

significantly cheaper than the bank-based alternatives. The bank-led model

may be implemented by either using correspondent arrangements or by

creating a JV between Bank and Telco/non-bank. In this model customer

account relationship rests with the bank

Non-bank-led model:

The non-bank-led model is where a bank has a limited role in the day-to-day

account management. Typically its role in this model is limited to safe-keeping

of funds. Account management functions are conducted by a non-bank (e.g.

telco) who has direct contact with individual customers.

Mobile Banking Services:

Mobile banking can offer services such as the following:

Account Information:

1. Mini-statements and checking of account history

2. Alerts on account activity or passing of set thresholds

3. Monitoring of term deposits

4. Access to loan statements

5. Access to card statements

6. Mutual funds / equity statements

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7. Insurance policy management

8. Pension plan management

9. Status on cheque, stop payment on cheque

10.Ordering cheque books

11.Balance checking in the account

12.Recent transactions

13.Due date of payment (functionality for stop, change and deleting of

payments)

14.PIN provision, Change of PIN and reminder over the Internet

15.Blocking of (lost, stolen) cards

Payments, Deposits, Withdrawals, and Transfers:

1. Domestic and international fund transfers

2. Micro-payment handling

3. Mobile recharging

4. Commercial payment processing

5. Bill payment processing

6. Peer to Peer payments

7. Withdrawal at banking agent

8. Deposit at banking agent

A specific sequence of SMS messages will enable the system to verify if the

client has sufficient funds in his or her wallet and authorize a deposit or

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withdrawal transaction at the agent. When depositing money, the merchant

receives cash and the system credits the client's bank account or mobile wallet.

In the same way the client can also withdraw money at the merchant: through

exchanging sms to provide authorization, the merchant hands the client cash

and debits the merchant's account.

Investments:

1. Portfolio management services

2. Real-time stock quotes

3. Personalized alerts and notifications on security prices

4. mobile banking

Support:

1. Status of requests for credit, including mortgage approval, and insurance

coverage

2. Check (cheque) book and card requests

3. Exchange of data messages and email, including complaint submission

and tracking

4. ATM Location

Content Services:

1. General information such as weather updates, news

2. Loyalty-related offers

3. Location-based services

Based on a survey conducted by Forrester, mobile banking will be attractive

mainly to the younger, more "tech-savvy" customer segment. A third of mobile

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phone users say that they may consider performing some kind of financial

transaction through their mobile phone. But most of the users are interested in

performing basic transactions such as querying for account balance and

making bill payment.

Challenges for a Mobile Banking Solution:

Key challenges in developing a sophisticated mobile banking application are:

Handset operability:

There are a large number of different mobile phone devices and it is a big

challenge for banks to offer mobile banking solution on any type of device.

Some of these devices support Java ME and others support SIM Application

Toolkit, a WAP browser, or only SMS.

Initial interoperability issues however have been localized, with countries like

India using portals like R-World to enable the limitations of low end java based

phones, while focus on areas such as South Africa have defaulted to the USSD

as a basis of communication achievable with any phone.

The desire for interoperability is largely dependent on the banks themselves,

where installed applications (Java based or native) provide better security, are

easier to use and allow development of more complex capabilities similar to

those of internet banking while SMS can provide the basics but becomes

difficult to operate with more complex transactions.

There is a myth that there is a challenge of interoperability between mobile

banking applications due to perceived lack of common technology standards

for mobile banking. In practice it is too early in the service lifecycle for

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interoperability to be addressed within an individual country, as very few

countries have more than one mobile banking service provider. In practice,

banking interfaces are well defined and money movements between banks

follow the IS0-8583 standard. As mobile banking matures, money movements

between service providers will naturally adopt the same standards as in the

banking world. On January of 2009, Mobile Marketing Association (MMA)

Banking Sub-Committee, chaired by CellTrust and VeriSign Inc., published the

Mobile Banking Overview for financial institutions in which it discussed the

advantages and disadvantages of Mobile Channel Platforms such as Short

Message Services (SMS), Mobile Web, Mobile Client Applications, SMS with

Mobile Web and Secure SMS.

Security:

Security of financial transactions, being executed from some remote location

and transmission of financial information over the air, are the most

complicated challenges that need to be addressed jointly by mobile application

developers, wireless network service providers and the banks' IT departments.

The following aspects need to be addressed to offer a secure infrastructure for

financial transaction over wireless network:

1. Physical part of the hand-held device. If the bank is offering smart-card

based security, the physical security of the device is more important.

2. Security of any thick-client application running on the device. In case the

device is stolen, the hacker should require at least an ID/Password to

access the application.

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3. Authentication of the device with service provider before initiating a

transaction. This would ensure that unauthorized devices are not

connected to perform financial transactions.

4. User ID / Password authentication of bank’s customer.

5. Encryption of the data being transmitted over the air.

6. Encryption of the data that will be stored in device for later / off-line

analysis by the customer.

One-time password (OTPs) are the latest tool used by financial and banking

service providers in the fight against cyber fraud [6]. Instead of relying on

traditional memorized passwords, OTPs are requested by consumers each time

they want to perform transactions using the online or mobile banking

interface. When the request is received the password is sent to the consumer’s

phone via SMS. The password is expired once it has been used or once its

scheduled life-cycle has expired.

Because of the concerns made explicit above, it is extremely important that

SMS gateway providers can provide a decent quality of service for banks and

financial institutions in regards to SMS services. Therefore, the provision of

service level agreements (SLAs) is a requirement for this industry; it is

necessary to give the bank customer delivery guarantees of all messages, as

well as measurements on the speed of delivery, throughput, etc. SLAs give the

service parameters in which a messaging solution is guaranteed to perform.

An automated teller machine (ATM), also known as an automated banking

machine (ABM) or Cash Machine and by several other names (see below), is a

computerized telecommunications device that provides the clients of a

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Role Of Technology In Banking

financial institution with access to financial transactions in a public space

without the need for a cashier, human clerk or bank teller.

On most modern ATMs, the customer is identified by inserting a plastic ATM

card with a magnetic stripe or a plastic smart card with a chip, that contains a

unique card number and some security information such as an expiration date

or CVVC (CVV). Authentication is provided by the customer entering a personal

identification number (PIN).

Using an ATM, customers can access their bank accounts in order to make cash

withdrawals, credit card cash advances, and check their account balances as

well as purchase prepaid cellphone credit.

3.6 ATM:

ATMs are known by various other names including automatic banking

machine (or automated banking machine particularly in the United States)

(ABM), automated transaction machine,[2] cashpoint (particularly in the United

Kingdom), money machine, bank machine, cash machine, hole-in-the-wall,

autoteller (after the Bank of Scotland's usage), cashline machine (after the

Royal Bank of Scotland's usage), MAC Machine (in the Philadelphia area),

Bankomat (in various countries particularly in Europe and including Russia),

Multibanco (after a registered trade mark, in Portugal), Minibank in Norway,

Geld Automat in Belgium and the Netherlands, and All Time Money in India.

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Financial networks:

An ATM in the Netherlands. The logos of a number of interbank networks this

ATM is connected to are shown.

Most ATMs are connected to interbank networks, enabling people to withdraw

and deposit money from machines not belonging to the bank where they have

their account or in the country where their accounts are held (enabling cash

withdrawals in local currency). Some examples of interbank networks include

PULSE, PLUS, Cirrus, Interac, Interswitch, STAR, and LINK.

ATMs rely on authorization of a financial transaction by the card issuer or other

authorizing institution via the communications network. This is often

performed through an ISO 8583 messaging system.

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Many banks charge ATM usage fees. In some cases, these fees are charged

solely to users who are not customers of the bank where the ATM is installed;

in other cases, they apply to all users.

In order to allow a more diverse range of devices to attach to their networks,

some interbank networks have passed rules expanding the definition of an

ATM to be a terminal that either has the vault within its footprint or utilizes

the vault or cash drawer within the merchant establishment, which allows for

the use of a scrip cash dispenser.

ATMs typically connect directly to their host or ATM Controller via either ADSL

or dial-up modem over a telephone line or directly via a leased line. Leased

lines are preferable to POTS lines because they require less time to establish a

connection. Leased lines may be comparatively expensive to operate versus a

POTS line, meaning less-trafficked machines will usually rely on a dial-up.

3.7 Electronic Money:

Electronic money (also known as e-currency, e-money, electronic cash,

electronic currency, digital money, digital cash or digital currency) refers to

money or scrip which is only exchanged electronically. Typically, this involves

the use of computer networks, the internet and digital stored value systems.

Electronic Funds Transfer (EFT) and direct deposit are all examples of

electronic money. Also, it is a collective term for financial cryptography and

technologies enabling it.

While electronic money has been an interesting problem for cryptography (see

for example the work of David Chaum and Markus Jakobsson), to date, the use

of e-money has been relatively low-scale. One rare success has been Hong

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Kong's Octopus card system, which started as a transit payment system and

has grown into a widely used electronic money system. London Transport's

Oyster card system remains essentially a contactless pre-paid travelcard. Two

other cities have implemented functioning electronic money systems. Very

similar to Hong Kong's Octopus card, Singapore has an electronic money

program for its public transportation system (commuter trains, bus, etc.),

based on the same type of (FeliCa) system. The Netherlands has also

implemented an electronic money system known as Chipknip, which is based

upon the same system in Hong Kong...

A number of electronic money systems use Contactless payment transfer in

order to facilitate easy payment and give the payee more confidence in not

letting go of their electronic wallet during the transaction.

Electronic money systems:

In technical terms, electronic money is an online representation, or a system of

debits and credits, used to exchange value within another system, or within

itself as a stand alone system. In principle this process could also be done

offline.

Occasionally, the term electronic money is also used to refer to the provider

itself. A private currency may use gold to provide extra security, such as digital

gold currency. Some private organizations, such as the United States armed

forces use independent currencies such as Eagle Cash.

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Centralized systems:

Many systems—such as Paypal, WebMoney, cashU, and Hub Culture's Ven—

will sell their electronic currency directly to the end user, but other systems

only sell through third party digital currency exchangers.

In the case of Octopus card in Hong Kong, electronic money deposits work

similarly to regular bank deposits. After Octopus Card Limited receives money

for deposit from users, the money is deposited into a bank. This is similar to

debit-card-issuing banks redepositing money at central banks.

Some community currencies, like some LETS systems, work with electronic

transactions.

Decentralized systems:

Decentralized electronic money systems include:

Ripple monetary system, a project to develop a distributed system of

electronic money independent of local currency.

Bitcoin, an existing peer-to-peer electronic money system with a

maximum inflation limit

Offline 'anonymous' systems:

In the use of offline electronic money, the merchant does not need to interact

with the bank before accepting money from the user. Instead merchants can

collect monies spent by users and deposit them later with the bank. In principle

this could be done offline, i.e. the merchant could go to the bank with his

storage media to exchange e-money for cash. Nevertheless the merchant is

guaranteed that the user's e-money will either be accepted by the bank, or the

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bank will be able to identify and punish the cheating user. In this way a user is

prevented from spending the same funds twice (double-spending). Offline e-

money schemes also need to protect against cheating merchants, i.e.

merchants that want to deposit money twice (and then blame the user).

Using cryptography, anonymous ecash was introduced by David Chaum. He

used blind signatures to achieve unlinkability between withdrawals and spend

transactions.[2] In cryptography, e-cash usually refers to anonymous e-cash.

Depending on the properties of the payment transactions, one distinguishes

between online and offline e-cash.

3.8 E-Payments:

Online Banking ePayments (OBeP) is a type of payments network, developed

by the banking industry in conjunction with technology providers, specifically

designed to address the unique requirements of payments made via the

Internet.

Key aspects of OBeP which distinguish it from other online payments systems

are:

1. The consumer is authenticated in real-time by the consumer financial

institution’s online banking infrastructure.

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2. The availability of funds is validated in real-time by the consumer’s

financial institution.

3. The consumer’s financial institution provides guarantee of payment to

the merchant.

4. Payment is made as a credit transfer (push payment) from the

consumer’s financial institution to the merchant, as opposed to a debit

transfer (pull payment).

5. Payment is made directly from the consumer’s account rather than

through a third-party account.

Other Benefits:

For Consumers:

use of cash-like payment encourages responsible consumerism

does not require set-up or registration with a third-party payments

entity

presents familiar interface to facilitate online payment

awareness of funds availability

For Merchants:

improved sales conversion / reduced abandoned carts

real time authorization of guaranteed ACH payment (good funds)

offering preferred payment methods may drive repeat transactions

For Financial Institutions:

recapture revenue being lost to alternative payment providers

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3.9 Online Savings Account:

An online savings account (OSA) is a savings account managed and funded

primarily on the Internet

OSAs are often characterized by a higher interest rate or lower fees, compared

with traditional savings accounts. Many of these high-yield accounts have no

minimum balance. Account holders may link their OSAs to their existing

external bank accounts for easy transfer of funds between multiple accounts.

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Some also offer ATM cards so customers can directly access the funds in their

OSAs.

Changes in banking and investing:

OSAs, combined with rising interest rates, have made cash an increasingly

attractive investment option. They provide a relatively low risk option for

investors looking for a place to park their money, especially in uncertain

economic times. Inflation, stagflation, recessionary fears and stock market

volatility are among the economic indicators that have encouraged more and

more investors to consider cash as a way to balance their portfolios. In fact,

more than 8.5 million customers signed up for OSAs with leading U.S. banks in

2005 alone and some industry experts estimate the Online Savings Account

market will triple in size, from $250 billion to $400 billion by 2010.

3.10 SMS Banking:

SMS banking is a technology-enabled service offering from banks to its

customers, permitting them to operate selected banking services over their

mobile phones using SMS messaging.

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Push and pull messages:

SMS banking services are operated using both push and pull messages. Push

messages are those that the bank chooses to send out to a customer's mobile

phone, without the customer initiating a request for the information. Typically

push messages could be either Mobile marketing messages or messages

alerting an event which happens in the customer's bank account, such as a

large withdrawal of funds from the ATM or a large payment using the

customer's credit card, etc. (see section below on Typical Push and Pull

messages).

Another type of push message is One-time password (OTPs). OTPs are the

latest tool used by financial and banking service providers in the fight against

cyber fraud. Instead of relying on traditional memorized passwords, OTPs are

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requested by consumers each time they want to perform transactions using

the online or mobile banking interface. When the request is received the

password is sent to the consumer’s phone via SMS. The password is expired

once it has been used or once its scheduled life-cycle has expired.

Pull messages are those that are initiated by the customer, using a mobile

phone, for obtaining information or performing a transaction in the bank

account. Examples of pull messages for information include an account balance

enquiry, or requests for current information like currency exchange rates and

deposit interest rates, as published and updated by the bank.

The bank’s customer is empowered with the capability to select the list of

activities (or alerts) that he/she needs to be informed. This functionality to

choose activities can be done either by integrating to the internet banking

channel or through the bank’s customer service call centre.

Typical push and pull services offered under SMS banking:

Depending on the selected extent of SMS banking transactions offered by the

bank, a customer can be authorized to carry out either non-financial

transactions, or both and financial and non-financial transactions. SMS banking

solutions offer customers a range of functionality, classified by push and pull

services as outlined below.

Typical push services would include:

Periodic account balance reporting (say at the end of month);

Reporting of salary and other credits to the bank account;

Successful or un-successful execution of a standing order;

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Successful payment of a cheque issued on the account;

Insufficient funds ;

Large value withdrawals on an account;

Large value withdrawals on the ATM or EFTPOS on a debit card;

Large value payment on a credit card or out of country activity on a

credit card.

One-time password and authentication

Typical pull services would include:

Account balance enquiry;

Mini statement request;

Electronic bill payment ;

Transfers between customer's own accounts, like moving money from a

savings account to a current account to fund a cheque;

Stop payment instruction on a cheque;

Requesting for an ATM card or credit card to be suspended;

De-activating a credit or debit card when it is lost or the PIN is known to

be compromised;

Foreign currency exchange rates enquiry;

Fixed deposit interest rates enquiry.

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Technologies employed for SMS banking:

Most SMS banking solutions are add-on products and work with the bank’s

existing host systems deployed in its computer and communications

environment. As most banks have multiple backend hosts, the more advanced

SMS banking systems are built to be able to work in a multi-host banking

environment; and to have open interfaces which allow for messaging between

existing banking host systems using industry or de-facto standards.

Well developed and mature SMS banking software solutions normally provide

a robust control environment and a flexible and scalable operating

environment. These solutions are able to connect seamlessly to multiple SMSC

operators in the country of operation. Depending on the volume of messages

that are require to be pushed, means to connect to the SMSC could be

different, such as using simple modems or connecting over leased line using

low level communication protocols (like SMPP, UCP etc.). Advanced SMS

banking solutions also cater to providing failover mechanisms and least-cost

routing options.

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3.11 Telephone Banking:

Telephone banking is a service provided by a financial institution, which allows

its customers to perform transactions over the telephone.

Most telephone banking services use an automated phone answering system

with phone keypad response or voice recognition capability. To guarantee

security, the customer must first authenticate through a numeric or verbal

password or through security questions asked by a live representative (see

below). With the obvious exception of cash withdrawals and deposits, it offers

virtually all the features of an automated teller machine: account balance

information and list of latest transactions, electronic bill payments, funds

transfers between a customer's accounts, etc.

Usually, customers can also speak to a live representative located in a call

centre or a branch, although this feature is not always guaranteed to be

offered 24/7. In addition to the self-service transactions listed earlier,

telephone banking representatives are usually trained to do what was

traditionally available only at the branch: loan applications, investment

purchases and redemptions, chequebook orders, debit card replacements,

change of address, etc.

Banks which operate mostly or exclusively by telephone are known as phone

banks. They also help modernize the user by using special technology.

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3.12 Video Banking:

Video banking is a term used for performing banking transactions or

professional banking consultations via a remote video connection. Video

banking can be performed via purpose built banking transaction machines

(similar to an Automated teller machine), or via a videoconference enabled

bank branch.

Types of Video Banking:

Today, video banking has many forms, each with its own benefits and

limitations.

In-branch:

Video banking can be conducted in a traditional banking branch. This form of

video banking replaces or partially displaces the traditional banking tellers to a

location outside of the main banking branch area. Via the video and audio link,

the tellers are able to service the banking customer. The customer in the

branch uses a purpose built machine to process viable medias such as checks,

cash, or coins.

Time Convenience:

Video banking can provide professional banking services to bank customers

during nontraditional banking hours at convenient times such as in after-hours

banking branch vestibules that could be open up to 24 hours a day. This gives

bank customers the benefit of personal teller service during hours when bank

branches are not typically open.

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Location Convenience:

Video banking can provide professional banking services in nontraditional

banking locations such as afterhours banking branch vestibules, grocery stores,

office buildings, factories, or educational campuses.

Technology Branches:

Video banking can enable banks to expand real-time availability of high-value

banking consultative services in branches that might not otherwise have access

to the banking expertise.

Technology of Video Banking:

Although video banking has many different forms, they all have similar basic

components.

Video Connection:

Although termed video banking, the video connection is always accompanied

by an audio link which ensures the customer and bank representative can

communicate clearly with one another. The communication link for that video

and audio typically requires a high-speed data connection for applications

where the tellers are not in the same physical location. Various technologies

are employed by the vendors of video banking, but recent advances in audio

and video compression make the use of these technologies much more

affordable. For an in depth discussion on videoconferencing technologies see

wiki videoconferencing article.

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Video Banking Services:

Depending on the type of video banking solution deployed there are numerous

types of services that can be offered. In conjunction with transaction hardware

video banking can include all of the following types of services.

Customer authentication

Cash Deposits

Check Deposits

Cash Withdrawal

Coin Withdrawals

Check Print

Account Transfers

Bill Payments

Account inquiries

Process New Accounts

With all types of video banking the following services are enabled:

Process New Loans

Consult with banking professionals

Process New Accounts

Inquire about banking services

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3.13 Growth In Various Aspects Of International Banking

Industry Due To Technological Advancements:

3.13.1 Growth in Online Banking with Technology:

The American Banking Association estimated in 1996 that online transaction

costs $.01, ATM transaction costs of $.27 telephone transaction costs $.54 and

a branch transaction costs $1.07. New online technology would yield market

control by:

• Enhancing customers’ satisfaction and improve customers retention;

• Gaining advantages through Intranets and Extranets

• Fundamental shift of power to consumers through information accessibility

• Traditional branch network can be reduced and smaller staff strength

expected.

SunTrust customers exert little effort choosing a checking account due to up-

front, detailed information. Currently, twenty-eight million households in the

United States bank online. Recent forecasts indicate that by 2010 over fifty

million U.S. homes will be banking online. Exponential growth of Internet users

since the middle of 1990s is an unequal business phenomenon not witnessed

Or encountered

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• USA has the highest user ratio of 32%, followed by 28% for Singapore, 23%

for Australia and 19% for Hong Kong

• The fastest growth of internet users are found in East Asia: with China at

51%, Hong Kong at 44% and Malaysia at 41%

• E-Banking has filtered fast in to commercial banks such as Wells Fargo Banks

in 1995,

• First Union Bank and Bank of America in 1996 and Citicorp and Banc One in

1997. Not until1998, major houses such as JP Morgan, Bankers Trust, Chase

and Fist Chicago are yet to move into this new medium of financial services

(VNU Business Publications 2004).

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3.13.2 Growth in Mortgage Banking/Loan and Technology:

Mortgage banking is one of the last areas of consumer credit to be affected by

the Internet. Electronic commerce has been slow to gain momentum in

mortgage banking, but this is changing rapidly.

Numerous barriers to true on-line mortgage lending remain, but they are

toppling, and online originations can be expected to grow to more than 10% of

the total market by 2005. Tower Group estimates that in 1998 consumers

completed nearly 65,000 mortgage loan applications on-line, which amounted

to US$8 billion in mortgages. While large, these numbers represent only about

0.55% of the estimated 12 million mortgage applications and US$1.45 trillion in

mortgages originated in 1998 (Tower Group 1999).

On-line lending has garnered considerable attention over the last few years.

Already, products such as credit cards and second mortgages are commonly

originated via on-line channels. On-line lending began in earnest in 1996, and

originally this channel was widely dismissed by the financial services

community. On-line lending has given rise, however, to both a new industry

and a new way of conducting business. Beginning in 1996, loan aggregators

and Web banks began to emerge. As traditional banks have seen margin erode

in their liability businesses (checking, savings, money market, etc.), they have

sought to expand their product offerings and customer base on the asset side

(Loan products, like credit cards, overdraft, mortgages, auto loans, etc.). Loan

aggregators and Web banks pose a potential threat to the asset product

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strategy of many financial services institutions. In addition, financial services

institutions have increased their reliance on re-marketed and co-branded

Products, like insurance and securities. Aggregators, portals, and Web banks

have been quick to expand into these markets as well, presenting a new and

real threat to the traditional way of banking and lending. We expect the

percentage of on-line mortgage originations to rise to just over 10% by

2005, and then to continue to rise slowly over the next decade (Bank

Technology News, Oct 2004).The number of loans originated on-line and the

number completed on-line are very small compared to the number of loans

passing through on-line automated underwriting (AU) systems. Almost 70% of

which passed through their online systems. With some of the changes

occurring in the industry, Tower Group expects the percentage of loans

underwritten by on-line systems to climb to over 90% within the next three

years (Tower Group 1999). The Internet is already having a profound impact on

housing finance and it is likely that we are just seeing the tip of the iceberg.

The most visible impact is on how products and services are being delivered to

the customer but perhaps the larger and more fundamental impact is on the

competitive structure of the housing finance industry.

The application of new Internet-based technologies is changing the mortgage

origination process. The Internet is a new distribution channel. As discussed in

the article by Richard Beidl of the (Tower Group, March 2000) issue of Housing

Finance International, Internet originations are still a small portion of the total

market (less than 1% in 1998) but are forecast to grow to 10% of the U.S.

market by 2005. Although established players like Countrywide Home Loans

and Cendant have a major Internet presence, new entrants like E-Loan and

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Mortgage.com are attracting media and investor attention, if not yet major

market share. Aggregator sites such as Quicken Mortgage and IOwn allow

consumers to compare price and terms of a large number of loan products

from a number of lenders.

Beidl predicts a growth in Internet origination as the number of households

connected to the Web increases, their connection speed improves, and

security concerns are alleviated. In the US, nearly 60% percent of loans are

originated through mortgage brokers and correspondents (Tower Group, June

1999).

The Internet is opening up new competition from unexpected sources. The

web gives companies with strong brands, loyal customers, or highly trafficked

websites a chance to earn fees for finding mortgage leads. Microsoft, Intuit,

Yahoo!, and priceline.com have all invested in mortgage lenders, built their

own mortgage referral models, or acquired mortgage companies. Online

brokers like E-Loan and IOwn have integrated backward into funding (i.e., they

have become mortgage bankers) in order to capture additional revenues. As

Internet companies move from marketing to fulfilment to funding, they

increase their share of total origination revenues, leaving less for traditional

lenders (HFI, June 1997).

Morgan Stanley Dean Witter, (The Internet Mortgage Report II: Focus on

Fulfilment, February 10, 2000) explained that the Internet rate will increase the

transparency of the market, which is likely to accelerate concentration among

originators. The Internet makes it relatively easy for consumers to shop for

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mortgages from hundreds of lenders, compare them on an apples-to-apples

basis, and choose the cheapest rate.

3.13.3 Effect of Technology on Bill Payment:

Free bill payment is a service that runs circles around the paper equivalent.

Users can save time, save money (postage, late fees, and check printing fees),

can improve bill tracking and budgeting, and make their financial life easier.

And, if the electronic payment doesn't post at the biller on time, the bank

and/or processor will go to bat for them to resolve the problem. Banks insist

on providing this beneficial and costly service free of charge because they are

doing it for the "relationship" value.

Customers love getting something for nothing. The technology makes it simple

to pay any bill to anyone from anywhere. It saves time, money, and it's safe.

That’s the main reason online bill payment is starting to take off. By 2005, an

estimated 40 million American households will pay bills online. Mailing a bill

out costs $2.00 for processing and postage, but a bill can be presented online

for 35 cents to 50 cents. Companies promoting bill payment are just as

interested as customers in sending bill online because they see substantial

costs savings.

Banking and paying bills over the Internet could help to prevent one million

cases of identity theft annually and reduce fraud by $4.8 billion, new research

has claimed. A report from market research firm Javelin Strategy & Research

challenges popular assumptions that Internet transactions are less safe than

paper-based ones. The company argued that using the Internet could protect

consumers and businesses from two common types of identity theft:

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fraudulent opening of new accounts, and unauthorized use of existing

accounts. Conducting banking electronically, consumers and businesses

eliminate common means of identity theft, such as stealing personal

information contained in bills, bank statements, and credit card statements

delivered by post, or in a signed, outgoing check used to pay a bill. In addition

consumers who view and pay their bills online are nearly four times more likely

to monitor their transactions on a regular basis than those who wait for paper

bills and monthly statements. This earlier detection was found to have the

potential to reduce identity theft by more than 18 per cent, by detecting and

reporting fraud before further damage can be done (Bank Systems &

Technology, September 2003).

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3.13.4 Growth in Customer Service with Technology:

As financial institutions expand the variety of services they offer, they rely on

technology to provide them a total and accurate customer view. Having

consolidated information can assist in such areas as product marketing, making

decisions on check acceptance or defining the more elite customers.

Improving customer service and retention by adding or upgrading customer

relationship type solutions is a typical activity found in banks. According to Roy,

a bank COO, technology can provide banks with the architecture for giving

better, more targeted and more effective customer service. Roy explained: 'A

uniform and integrated retail delivery strategy is the key to success, and offers

the maximum opportunity for differentiation, value addition, higher customer

loyalty and branding.

Banks have realized they are a fundamentally a retail outlet and are trying to

differentiate in terms of customer experience and that includes using

technology to become more customer-centric. Efficient use of technology

means banks can segment their branches by customer type, industry,

profitability and other demographics. And while the branch is an expensive

asset in terms of real estate and staff costs, it is essential to maximize

customer retention. In the 1960’'s, if you had a personal banker you were

probably working with JP Morgan and you had $10 million in the bank or more

because the cost of a personal banker could only be rationalized by someone

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who was doing that much business. As the years go on, the cost of a personal

banker will go down because the breadth of services that a banker can cover

and the number of people that banker can cover is increasing thanks to

technology (Bank Systems & Technology, September 2003).

Clearly banks want a complete view of their customers so that they can

identify new marketing opportunities and better serve their customers. To

achieve this, institutions need to be able to fully interface with the latest

customer management solutions and any relevant data available for each

unique customer. The reality is if you can use technology, you increase the

expanse that a person can cover intelligently and you're going to get a lot of

value. Technology doesn't directly replace labour in most customer-facing

situations. It enables labour to be more productive. By using communications

and information technologies, a bank can layer its customer-facing model so

product or service experts are on call to front line people when they are

needed. Expertise can then be better leveraged across multiple branches. Of

households with checking accounts that use a computer to "consume" financial

services has risen from 4 percent in 1995, to over 6 percent in 1998, and

almost 20 percent in 2001. At the same time, bank branch usage has declined

from 87 percent in 1995, to 80 percent in 1998, and 78 percent in

2001. Computers are taking over a greater percentage of day-to-day human

interactions as consumers bypass the cashier or ticket agent and pay directly at

a kiosk. These machines fitted with touch-screens are taking over at gas

pumps, airline ticket counters, subway and train stations, grocery stores, and in

the financial sector as ATMs as the public's faith in technology grows. The

machines are becoming much easier to use as well, with bright and colored

touch-screens replacing monochrome displays and dirtied keypads. Research

group International Data (Research Group International, 2004) predicts the

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number of retail self-checkout systems will double by the end of this year. The

machines, which at their core are customized PCs, herald the roboticization of

the service sector, say analysts (American Banker, Bank Technology News,

2003).

Besides speed and convenience, experts also point to a more worrying reason

for self-service consumers want to avoid human interactions with sometimes

disgruntled workers. The results could shield consumers from having to think

about how low-wage workers are getting by and allow isolationism, for

example. Another worry is that these machines are so flexible and cost-

effective that they are displacing a tremendous number of human workers in a

wide variety of industries. Although businesses that employ self-service

machines insist they are responding to customer demand to

Improve service, the clear financial benefits of a $10,000 kiosk over a $20,000

cashier are Unmistakable; experts also point out that self-service machines are

different from other mechanistic Assaults on human jobs because they are so

widely applicable and the first to be able to take over functions requiring

cognitive skills.

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3.14 Future Of Technology In The Banking Industry:

The Shape of Things To Come

1. Two diametrically opposed views have been put forward concerning the

future shape of the banking business. Everyone agrees that information

technology will change its shape. Deloitte Touché Tohmatsu International The

Future of Retail Banking argues that because branch banking is so expensive

and telephone banking so cheap by comparison - around 40% per customer

cheaper - retail banks will cut the number of branches by 50% by the year

2000. In contrast, Dominic Casserley, director, McKinsey & Co. (HK)has argued

that technology will be used to maximize revenues rather than to minimize

costs, and foresees direct banking services as complementary to rather than as

a substitutes for branches. Support for this view may come from past

experience. Technology freed up bank labour, but to extend personal customer

services - such as direct enquiries, processing loan requests, etc - rather than

cut staffing costs.

2, an alternative analysis is to consider the economics of the banking market.

The DTT study found that profitability of small and large banks in the UK was

similar. This was explained by the fact that while economies of scale exist in

some operations, a large branch network is very expensive to maintain. Some

activities, such as cheque clearing and credit card and debit card

authentication and settlements, are most efficiently handled in volume and at

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national level. Other activities, such as personal banking services and

correspondence, either require individual attention by a professional bank

manager or are labour intense and are better handled at the local branch level.

Electronic banking, such as telephone banking, is typically half the cost per

customer to the bank than branch service, and also has marketing advantages.

Hence it will proliferate. The shape of banking in the future will involve direct

banking in the form of telephone banking, personal and commercial banking

and financial management using home or office PC, kiosk banking where the

public can access a telephone line, a PC, a fax machine, a smartphone all in one

location to carry out their transactions.

3. Increasingly, electronic commerce will take over from cash transactions and

paper-based contract signing. This is a major challenge for banks, but it could

also be a major threat. Non-banking institutions - i.e. those which do not have

authorization to issue new money - already have the potential to create e-cash

or electronic money and create extended credit. For example, merchants issue

Loyalty Cards which provide credit to their customers. The rise of Internet

combined with the smartcard and an international telephone circuit offers the

scope for e-money and credit creation beyond the control of nation states, far

less within the control of banks.

4. To become competitive in the global market banks will have to develop

rapidly their capabilities in electronic money matters and electronic commerce.

But they have opportunities. The first is they have, or are building out, their

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own highly reliable networks. Without wishing to do so, they are becoming

quasi-telecommunications companies. The second is they can provide a high

level of professional support for customer services, which perhaps remains

their key advantage, but only if they develop it before new entrants attract

customers away.

Vision 2008-2010

The vision for the ensuing three year period commencing from 2008

holds great scope for innovation and differentiation for the financial

sector.

One of the basic premises for this period is that IT would continue to be

the predominant factor acting as the main catalyst in the forces of

change.

Network based computing would be in vogue and consequently,

centralisation of certain systems, databases etc., would be the order of

the day.

Core Banking Systems would have stabilised well and all banks would

have migrated to a large portion of their branch operations being

conducted using Core Banking Systems.

Sharing of costly resources would be the norm and this would work

positively for the benefit of the banking system as a whole

The Reserve Bank which has played a substantial developmental role in

ushering in Technology based Banking in the initial period and for large

scale computerisation thereafter, would gradually move away from its

Developmental role and take a participative role.

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Work would also be taken up for introduction of Extensible Markup

Language (XML) based reporting by banks to the Reserve Bank with

impetus being given to XBRL based transaction flows, for which a

Committee has been constituted under the Chairmanship of Shri V

Leeladhar, Deputy Governor.

As a move aimed at better Governance, one of the major changes

planned would be that the Reserve Bank would not perform the dual

role of a service provider and a regulator. This would be achieved by

hiving off of service delivery functions wherever feasible.

Based on the above, the following are some of the specific components

of the plans for 2008-2010:

Completion of the implementation of Core Banking Systems by banks

Integrating the Core Banking Systems with the common interbank

payment systems offered by the Reserve Bank - such as the NEFT, RTGS

etc., to facilitate ‘Straight Through Processing (STP) ’ modes

Approach towards centralisation so that banks and financial institutions

can benefit in terms of facilities such as Customer Relationship

Management (CRM), Customer Profiling and Differentiation and for

improved customer service

As measures aimed at enhancing the payment and settlement systems

of the country, the recommendations of the Working Group on

Electronification of Payments would be implemented on time bound

basis.

Need for effective and fail safe Business Continuity Plans by ensuring

adequate Disaster Recovery Systems and the regular, periodical testing

of critical systems

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With IT becoming deeply ingrained in the normal processing systems of

banks, IS Audit gains greater importance. IS Audit would be a regular

function of the internal processes of Inspection and Concurrent Audit in

banks as also of external / independent audit. To this end, tools and

technologies such as COBIT and conformity to internationally accepted

standards such as ISO 27001 would be made use of

The role of technology service providers and intermediaries would gain

greater significance in the context of increased outsourcing; for the

banks and financial institutions, the complexities in handling in vendor

management as part of outsourcing need to be addressed so as to

ensure the risks arising out outsourcing are minimised

A crucial activity which needs to be completed in a time bound manner

relates to the IT related aspects pertaining to conformity to the BASEL II

requirements by banks

The role of the IDRBT as a pure educational and research oriented entity

would get clearly defined and the service functions currently handled by

the Institute would be taken care of by the new entity which would have

to ensure that these service offerings are made available to users at

competitive rates and are managed in a professional manner.

For the corporate customer and financial institutions, SFMS would be

made available through the Internet as well so that this could be used as

a facility for the transmission of financial messages in a secure and safe

manner. Inter-linkage of SFMS and S.W.I.F.T. would be achieved so as to

provide for STP based message transfers between the SWIFT gateway

and the respective bank / branch in the country.

The use of mobile means of communications for banking related

transactions in general and payment services in particular would assume

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greater importance. To this end, efforts would be channelled to provide

for standards for such systems, best practices to be followed, and

suitable regulatory / oversight framework provided for.

The Reserve Bank would also be implementing its own Core Banking

System for the benefit of its customers. This would provide for

‘Anywhere Access’ for the constituents of the DAD, PAD and PDO. As far

as possible, electronic based transactions processing using an STP based

process would be provided for.

The Integrated Computerised Currency Operations and Management

System (ICCOMS), which is being rolled out to all locations would

become the means for effective information collation in respect of

currency notes movement in the country, which would ultimately result

in better currency management for the country as a whole.

The processing of Government related transactions is also envisaged to

undergo substantial changes after the acceptance of electronic modes of

data and / or funds movement is accepted by the Government. This,

coupled with the impending introduction of Cheque Truncation, would

result in changes in the processing systems and cycles which will be

facilitated by IT based systems, wherever feasible.

IT usage by banks would continue to exist in substantial scales. The

Reserve Bank would also be leveraging on the facilities available through

IT for improved functioning of the central bank, commercial banks and

the financial sector as a whole.

The broad outlines given in this Vision document would form the basis

for the initiatives to be taken by the Reserve Bank during the period of

this plan document.

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The Reserve Bank would also be providing detailed guidelines and

instructions, wherever necessary so as to ensure that the constituents in

the chain are fully aware of the expectations and can also plan their own

initiatives in a manner so as to match the overall road map laid down by

the Reserve Bank for the financial sector as a whole.

This document would be subject to regular, periodical reviews so that

changes in the environment and the IT industry could be recognised on

time and incorporated for appropriate action.

Although the indications made in this document apply for the medium

term, the broad approaches indicated shall be the basis for further

initiatives including those which would have a long term effect; it shall

be also ensured that the gradual transition from the medium term to a

longer period is achieved as time progresses.

All these would ultimately result in improved customer service, better

housekeeping and overall systemic efficiency.

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4. Conclusion:

Banking is in a period in which we are seeing a decrease in the number of

traditional competitors due to industry consolidation. At the same time, we are

seeing an increase in the number of competitors for each customer and

relationship. Technology-enabled improvements and a desire to improve

earnings stability have led many banks to enter new markets (global and

national) driving increased competition in local markets by the adoption of

new technology. Local competition includes remote banks and nonbank

competitors. This, combined with a growing appetite for customization and

personalization, is driving the need to constantly transform applications and

offerings to meet new competition and changing customer preferences,

expectations, and needs.

Banks have a growing understanding of the power of technology and have

begun leveraging advances in technology to improve operations and enhance

customer service. However, technology is always changing and improving, and

banks typically and desperately adapt in order to keep their customer base.

When there is a change in the solution within a bank policy, it affects the

interaction of other solutions being used within the same bank. Therefore, to

take full advantage of these ever changing solutions, the bank must act to

make sure it has full access to information between each solution. While ever-

changing technology can pose difficulties, it is still an essential tool to ensure

an institution’s standing in the highly competitive financial services market.

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The banking today is re-defined and re-engineered with the use of Information

Technology and it is sure that the future of banking will offer more

sophisticated services to the customers with the continuous product and

process innovations. Thus, there is a paradigm shift form the seller’s market to

buyer’s market in the industry and finally it effected at the bankers level to

change their approach from “conventional banking to convenience banking”

and “mass banking to class banking”. The shift has also increased the degree of

accessibility of a common man to bank for his variety of needs and

requirements.

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