Technology In Banking

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.

1


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

2


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

2


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 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.

3


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.

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.

4


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 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.

5


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 6


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.

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 7


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 20022003: "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 branches situated at commercially important centres on a time-bound 8


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 9


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

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 10


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. Ebanking and Internet banking have opened new avenues in “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. 11


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.

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.

12


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 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.

13


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. 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.

14


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.

15

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.

16


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. 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 17


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.

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

18


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 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.

19

Role Of Technology In Banking 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 ( 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 20


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 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: 21


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. 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.

22


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."

Core matters And Core Banking:

23


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 nonstop 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.

24


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:

25


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 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.

26


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. 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.

27


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 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.

28


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.

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.

29


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

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

30

Role Of Technology In Banking •

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 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 31


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 wellknown 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, the source of the intrusion is unknown but it occurred during online banking, the report states.

32


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

•

An e-commerce payment system facilitates the acceptance of electronic payment for online transactions. Also known as Electronic Data Interchange (EDI), ecommerce payment systems have become increasingly popular due to the widespread use of the internet-based shopping and banking. In the early years of B2C 33


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.

34


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:

35

Role Of Technology In Banking 1.

Consolidation, where numerous bills for any one recipient are made available at one Web site, most commonly the recipient's bank. In some 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 36


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.

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.

37


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 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.

38

Role Of Technology In Banking 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 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

39


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 shortterm loans to be quickly made to 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 40


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 41


in the batch without prior authorizations; these are either transactions falling under the merchant's floor limit or ones where the 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

42


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).

3.5 Mobile Banking:

In one academic model, mobile banking is defined as: Mobile Banking refers to provision and availment of bankingand 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 43


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, 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 messageonly phones do not.

44


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-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-

45


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 NonbankLed. 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 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 46


arrangements or by creating a JV between Bank and Telco/nonbank. 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

7. Insurance policy management 8. Pension plan management 9. Status on cheque, stop payment on cheque 10. 10.

Orde Orderi ring ng cheq cheque ue book books s

11. 11.

Bala Balanc nce e chec checki king ng in the the acco accoun untt

12. 12.

Recen ecentt tran transa sact ctio ions ns

47


13.

Due date date of payment payment (functi (functiona onality lity for stop, stop, change change

and deleting of payments) 14.

PIN provisi provision, on, Change Change of PIN and reminde reminderr over over the

Internet 15. 15.

Bloc Blocki king ng of (los (lost, t, stol stolen en)) card cards s

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 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 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 48


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 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:

49

Role Of Technology In Banking 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 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 50


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. 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. 51

Role Of Technology In Banking 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 financial institution with access to financial transactions in a

52


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.

53


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

54


network. This is often performed through an ISO 8583 messaging system. 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 55


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 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 56


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. 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. 57


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 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 emoney 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.

58


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.

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 59


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

60


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. 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. 61


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.

Push and pull messages:

62


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 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 63


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 nonfinancial 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;

•

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; 64


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.

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 defacto 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 65


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.

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 66


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 selfservice 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.

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.

67

Role Of Technology In Banking 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. 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.

68

Role Of Technology In Banking 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.

Video Banking Services:

Depending on the type of video banking solution deployed there are numerous types of services that can be offered. In 69


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

3.13 Growth In Various Aspects Of International Banking Industry Due To Technological Advancements: 70


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

71


• 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).

72


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 73


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 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

74


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 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 75


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 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.

76


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: 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, 77


by detecting and reporting fraud before further damage can be done (Bank Systems & Technology, September 2003).

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 78


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 customercentric. 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 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

79


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 dayto-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, 80


with bright and colored touch-screens replacing monochrome displays and dirtied keypads. Research group International Data (Research Group International, 2004) predicts the 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.

81


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.

82


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 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 83


challenge for banks, but it could also be a major threat. Nonbanking institutions - i.e. those which do not have authorization to issue new money - already have the potential to create ecash 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 own highly reliable networks. Without wishing to do so, they are becoming quasitelecommunications 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. 84


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.

•

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.

85


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

•

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 86


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 greater importance. To this end, 87


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. 88


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.

•

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.

89


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. Technologyenabled 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 90


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. 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.

91

Technology In Banking

Recommend Documents