CIOL:Online banking Advantage nimble players

Online banking: Advantage nimble players

When was the last time you visited your bank to check your account or to see whether your salary has been credited? Now, all that pain of visiting the bank or the ATM is gradually being relegated into history

Monday, August 21, 2006

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R Jai Krishna

The convenience of the Internet gives the complete experience of what the customers need to know and do about their bank accounts, anywhere, anytime.

The Web has emerged as a major factor in retail banking industry, as it optimally uses the Internet for the delivery of banking and services.

Internet Banking: Why and When

Internet banking took off after the liberalization phase of the Indian Government in the early 1990’s and it was after the Narasimham Committee Report on Banking Reforms that technology actually took up in the banking sector. The boom in affordable PCs, and the fear of being taken over by competition, also spurred the growth of Internet banking.

Why Banking Online?

With the Internet providing a level-playing platform for smaller banks besides technology integration that offers open access to customers through a cost-effective delivery channel, banks were compelled to go online.

On the customer front, Internet banking is viewed as an effort to improve customer access, facilitate the offering of more services, increase customer loyalty, reduce customer attrition and attract new customers, apart from providing services offered by the competitors.

This convergence of technologies has resulted in giving a major boost to retail banking too.

Online banking sites are categorized under four levels, from minimum functionality sites that offer basic services like access to account details to that of highly sophisticated sites offering integrated sales of additional products and other financial services, such an investment and insurance.

The Indian saga

The Indian banks’ record in Internet banking is nothing much to write about. The ICICI Bank kicked off online banking in 1996, followed by a host of other banks. But even for the Internet as a whole, 1996 to 1998 marked the adoption phase, while usage increased only in 1999, owing to lower ISP online charges, increased PC penetration and a tech-friendly atmosphere.

On the other hand, the Public Sector Banks (PSUs) lagged in the race for adopting Internet banking practices. While, among the PSUs, the State Bank of India took the lead, others are yet to catch up on Internet banking services.

Some banks blame it on the lack of regulations and procedures to go online. But, not many are willing to buy the argument. More than a lack of regulatory framework, it is a lack of zeal and a mindset attuned towards resisting any new technology that is holding back the nationalized banks.

The main reason being the typical PSU mindset, worsened by highly politicized unions, as they feel Internet banking would expose the low productive levels of the workforce.

Current scenario

IDC estimates that there are over two million registered users for Internet banking in India. This forms just 0.096 per cent of the total population, but represents 15 per cent of India’s Internet user population. Though India is slow to recognize Internet banking, it is catching up with those nations, which had joined the Internet banking bandwagon much earlier.

According to the latestIAMAI Report on the Online Banking trends in India, the Internet population in India is 38.5 million and is set to grow to 100 million by 2007-`08. The number of customers who bank online is expected to grow over 16 million (inclusive of Internet and Mobile Banking) by 2007-`08. Today, their population stands at an estimated 4.6 million (not a complete representation).

The report identifies two trends among Indians for getting hooked onto Internet banking: For information transactions such as checking account balances, cheque clearance, and for high-end transactions like transfer of funds.

Interestingly, online banking in tier-two cities and towns – with tremendous growth potential -- is reported to be at 26 per cent.

This growing number of Internet users and increase in financial activities online provide an opportunity for the banking industry to get a better understanding of this dynamic channel as an additional and mandatory touch point to serve their customers.

Technologies and partners

Most banks use separate software for corporate and retail banking, as there is no single package that meets all their business requirements. To reduce migration issues, the banks usually procure them from the same vendors. The vendors have programs that enable the migration or upgrades. These software have in-built security systems.

Banks that provide online facilities address the security issue within their limitations. Some banks, for instance, the HDFC, hire a third party to look into the logs, make the required changes, as there are patches and upgrades being constantly released and is imperative to incorporate it at the shortest time possible.

Role of RBI, DoIT

Internet banking is an extension of traditional banking services. However, there are several instances, which contradict the legal framework for internet banking in India: Banking Regulations Act, 1949, the Reserve Bank of India Act, 1934 and the Foreign Exchange Management Act, 1999.

The Information Technology Act 2000 attempted to address a number of e-commerce regulatory issues. Many feel that grey areas still exist, which have neither been spelt out properly nor any workable modes of implementation suggested by Constitutional institutions.

The IT Act of 2000 did address the need for banks to go online and have laid out security measures to be adopted. However, one cannot say the aspirations of the industry have been satisfactorily looked into.

The Reserve Bank of India has taken several initiatives in setting guidelines for internet banking, and reviews them at periodic intervals. Most important, RBI approval was made mandatory for all banks before offering any transactional services over the Internet. This was shelved last year, giving banks more autonomy on the online space, though ensuring at the same time, that it would be strictly under the provisions of the RBI.

Earlier, the RBI had adopted the recommendations of the ‘Working Group on Internet Banking,’ which examined three thrust areas such as Technology and security issues, legal issues and regulatory and supervisory issue.

RBI’s policy states that all banks going online, should take into account Operational Risk, and the financial institutions are asked to follow “Know Your Customer” requirements, thus broadly meeting the parameters of the RBI.

The RBI had then also set up a knowledge-sharing platform for this purpose.

The future

In a competitive market where services command market share, banks are constantly vying for customers. Banking has become a process of choice and convenience; better the service, customers tend to bank, and vice-versa, and Internet Banking is vital for both the industry and the customer.

The future of banking would be in terms of integration, as people will have less time for banking. This is already becoming a reality with new-age banks such as YES Bank, and others too adopting a single-PIN, where the customer needs to use a single PIN number for transacting both online, and as well as offline – namely ATMs.

People will want to process more transactions on the Internet. There will be more activity in terms of applications and services on the mobile. Geography will not be an inhibitor any more as everything is executable on the net.

Challenges

In the Internet banking system, information is considered as an asset and so worthy of protection. However, the present system of authentication does not address the security aspect in full. This calls for an urgent need to acclimatize the whole system.

According to Online Banking Association, member institutions rated security as the most important issue of online banking. There is a dual requirement to protect customers' privacy and protection against fraud.

Another major issue is that of Data Protection and the need for a legal and regulatory framework.

Currently, India has no law on data protection. Information security in e-banking presents two main areas of risk: preventing unauthorized transactions and maintaining integrity of customers’ transactions. Data protection falls in the latter. Data protection laws primarily aim to safeguard the interest of the individual whose data is handled and processed by others. ‘Interests’ are usually expressed in terms of privacy, autonomy and/or integrity.

The IT Act does not address this issue. India should take cue from nations, which have favored ad hoc enactment of sectoral laws over omnibus legislation.

Phishing is another issue that needs attention. Experts suggest that simple rules such as not sharing login IDs and passwords with anyone, would keep customers safe.

Future technology

One of the future technologies, which Internet Banking could witness, is of Biometrics approach as against the password authentication system of individual’s claimed identity.

Meanwhile, it needs to be recognized that such high cost technological initiatives need to be undertaken only after the viability and feasibility of the technology and its associated applications have been thoroughly examined.

The Internet and its underlying technologies will change and transform not just banking, but also all aspects of finance and commerce. It represents much more than a new distribution opportunity. It will enable nimble players to leverage their brick and mortar presence to improve customer satisfaction and gain share. It will force lethargic players who are struck with legacy cost basis, out of business since they are unable to bring to play in the new context.

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