28

CHAPTER-2

INDIAN BANKING SECTOR:

Brief History and Information Technology Trends There In

India is very different from the India of 1991. It is now a vibrant economy and has also

emerged as productive and profitable destination. Banks were bound to have an important role in

this mammoth change taking place. Further, the period also saw a massive shift in customer

expectations and demand for services. The high net worth technology savvy customers expected

standards of service and distribution channels which they were getting overseas or from foreign

banks operating in India (Joshi and Joshi, 1998). The Far Eastern Economic Review, in its

February 6th

1997 issue, had commented on the sad state of work systems in Indian banking. The

authors had stated ―that most Indian banks were state-owned dinosaurs that treat customers as

supplicants and also kept them waiting for long hours on end while lethargic clerks consulted

dusty ledgers and scribbled in transactions‖. At present, the things have changed drastically and

the Indian banking sector is rolling interesting times.

Technological developments, particularly in the area of telecommunications and

information technology, have revolutionized the Indian banking sector. To a large extent,

current developments reflects the banks‘ responses to changing customer expectations.

Customers want value-added services and innovations. Banks trying newer product design and

convenience in product delivery and access. Customers are keen on having self-serving

capability. These developments have prompted new delivery channels and banking systems

including Automatic Teller Machine (ATM), Telephone banking, Mobile banking, Internet

banking etc. Internet banking has become one of the most rapidly diffused banking technologies.

From a bank‘s perspective, Internet banking can reduce costs, increase the speed of service,

expand the market, and improve overall customer service. From the consumers‘ perspectives,

Internet banking can lower services fees, and allow customers to manage their finances more

conveniently, anytime and anywhere. ATMs now days are considered as mini banks catering to

different needs and wants of the consumers-be it withdrawal or deposit of cash or cheques,

opening of a fixed deposit (FDR), payment of utility bills and the list goes on and on.

29

The very rules of the game are changing. Neither geography nor time is a hindrance any

more. It‘s immaterial whether a person is in United States of America or a remote town of India,

as long as the person have a mobile phone, and a network to boot, he can transfer money and do

other transactions. Hence mobile banking is rightly called as ―bank in your pocket‖ and is now

being considered as an emerging banking channel. As rightly said by Sullivan (2000),

“technology will bring fundamental shift in the functioning of the 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”.

2.1 Brief History of Indian Banking Sector

The Indian banking system underwent four distinct phases of evolution (Joshi, 2006). The

phases are briefly discussed as under:

i. The Foundation Phase-Pre Nationalization period prior to 1969

When India achieved independence in 1947, its banking system was already fairly well

developed. The Reserve Bank of India (RBI) had been established in 1935 following the passing

of the Reserve Bank of India Act in 1934. At the end of 1947, over 600 commercial banks were

operating in India. (Cygnus: Economic & Business Research (2004), p. 5; ICRA (2004), p.

4;Reddy (2002), p 337.) During this phase, the government focused on creating a country-wide

sound system for banking. This phase saw the establishment of the necessary legislative

framework for the consolidation and re-organization of the Indian banking system, thus

delivering what is required for the Indian economy. This phase also marked two of the biggest

changes in the banking industry- reorganization of the Imperial Bank as the State Bank of India

(1955), followed by the nationalization of major private banks in 1969.

ii. The Expansion Phase- Nationalization of banks 1969

This phase began in the mid 1960s but only gained impetus in 1969, after the

nationalization of 14 major banks and resulted in a shift from class banking to mass banking.

This phase continued till 1984. The most notable factor of this phase was the determination to

30

make banking facilities available to the Indian masses. The branch networks were widened

rapidly, which was achieved in spite of many hindrances like poor infrastructure, inaccessibility

and harsh living conditions. Doing so, inversely affected the banks in terms of asset quality,

yielded negative profits and decreased the competitive efficiency of the system. The next wave

of reforms saw the nationalization of 6 more commercial banks in 1980.

iii. The Consolidation Phase-Slow down of branch expansion 1985

The RBI undertook several policy initiatives which resulted in a slow-down of branch

expansion from 1985. The banks laid more emphasis on improving the customer service,

housekeeping, staff productivity, credit management and profitability of the banks.

iv. The Reform Phase- Liberalization of the banking system of India 1991

Before 1991 banking sector in India was facing several problems such as:

a. Eroding productivity and inefficiency of public sector banks which led to continuous losses,

b. Poor customer service and obsolete work technology,

c. Increasing NPAs, deteriorated portfolio quality and inability to face competition effectively.

In order to remove the above-mentioned deficiencies, Narasimham committee was

appointed in 1991 which acted towards the liberalization of the banking system of India. The

committee submitted its report within three months in November 1991 with measures to improve

the productivity and efficiency of the banking sector (Uppal and Kaur, 2007).The aim was to

improve efficiency, productivity and profitability of the Indian financial sector. The

recommendations among other things laid emphasis on revitalizing overall monetary policy

framework, strengthening financial institutions and integrating the financial system with the

global economy to attract capital and modern technology (Rajneesh De and Padmanabhan,

2002).

This phase faced a major challenge in replacing the development initiatives through

administratively management of planned actions with elements of market incentives. Corporate

governance in banks was established (especially the PSBs), leading to changes in the regulatory

31

environment, monetary policies and structural transformation. During this phase, the policies

fuelled competition and enabled greater opportunities for practicing genuine corporate element in

banks. Competition increased with the introduction of private sector banks in the system, new

foreign sector banks and also liberalizing norms for the existing ones. Thus, the financial sector

reforms of 1991 brought about deregulation of interest rates, technological advancements,

increased competition, and autonomy packages, prudent guidelines for income recognition and

asset classification and enhancement of micro-credit category.

2.1.1 Evolution of the Indian Banking Sector

In the evolution of this strategic industry spanning over two centuries, immense

developments have been made in terms of the regulations governing it, the ownership structure,

products and services offered and the technology deployed. The entire evolution can be classified

into four distinct phases.

Phase I- Pre-Nationalization Phase (prior to 1969)

Phase II- Era of Nationalization and Consolidation (1969-1990)

Phase III- Introduction of Indian Financial & Banking Sector Reforms and Partial

Liberalization (1990-1991)

Phase IV- Period of Increased Liberalization (2004 onwards)

32

Figure 2.1: Phases of Evolution of the Indian Banking Sector.

33

2.1.2 Current Structure of Indian Banking System

Financial requirements in a modern economy are of diverse nature, distinctive variety and

large magnitude. Hence, different types of banks have been instituted to cater to the varying

needs of the community (Tiwari, 2011). The present structure of the Indian banking industry has

been analyzed on the basis of its organized status, business as well as product segmentation.

Figure 2.2: Structure of the Organized Banking Industry.

Banks in the organized sector may, however, be classified in to the following major forms:

1. Central Bank

2. Commercial Banks

34

3. Specialized Banks

1 Central Bank: - A central bank is the apex financial institution in the banking and financial

system of a country. It is regarded as the highest monetary authority in the country. It supervises

control and regulates the activities of the commercial banks. The central bank of the country is

the Reserve Bank of India (RBI). It was established in April 1935(with the passing of the RBI

Act. 1934) with a share capital of Rs. 5 crores on the basis of the recommendations of the Hilton

Young Commission (Tiwari, 2011).

2 Commercial Banks: - India‘s commercial banking system consists of ―scheduled banks‖ and

―non scheduled banks‖. Scheduled Banks in India are included in the second schedule of RBI

Act, 1934, consist of scheduled commercial banks and scheduled cooperative banks. The former

are further divided into four categories:

Public Sector Banks (includes Nationalized Banks and State Bank of India (SBI) and its

subsidiaries),

Private Sector Banks (includes Old Private Sector Banks and New ones that emerged after

1991),

Foreign Banks in India,

Regional Rural Banks (operate exclusively in rural areas). Scheduled Cooperative Banks are

further divided into Scheduled Urban Cooperative Banks and Scheduled State Cooperative

Banks.

3 Specialized Banks: - These banks cater to special needs and include:

Foreign Exchange Banks,

Industrial Banks,

Development Banks,

Land Development Banks,

Ex-im Bank

35

2.1.3 Narasimham Committee Report and Banking Sector Reforms

Several changes have taken place following the recommendations made by the

Narasimham committee, some of which are as follows:

• Free entry of new private sector/foreign banks

• Introduction of prudential accounting norms

• Prescription of capital adequacy requirements

• Increasing trend towards deregulation of interest rates

• Diversification of activities

• Emphasis on fee-based services

• Increasing competition

• Increasing customer expectations

• Rapid introduction of computerization and technology

These rapid developments have become new challenges for the banks. And in the post

liberalization era the banking sector has truly become one in which the survival of the fittest has

become the norm (Ramakrishnan, 1999). V. Leeladhar (2006), the then Deputy Governor of

Reserve Bank of India (RBI) had identified a few broad challenges faced by the Indian banks.

They are enhancement of customer service; application of technology; implementation of Basel

II; improvement of risk management systems; implementation of new accounting standards;

enhancement of transparency and disclosures; and compliance with Know Your Customer

(KYC) aspects. The Indian Financial Network (INFINET) was inaugurated in June 1999. It is

based on satellite communication using VSAT technology and would enable faster connectivity

within the banking sector (Nanda, 2010). The Reserve Bank constituted a National Payments

Council (Chairman: Shri S.P.Talwar) in 1999-2000 to focus on the policy parameters for

developing an IPSS with a real time gross settlement (RTGS) system as the core.

2.1.4 Profile of Banks Considered for the Study

The research work undertaken, comprises six banks from each group i.e. public sector

banks, private sector banks and foreign banks. They are:

36

1) State Bank of India(SBI Bank)

2) Industrial Development Bank of India (IDBI Bank)

3) Axis Bank Limited

4) Housing Development Bank of India ( HDFC Bank)

5) Standard Chartered Bank ,India

6) The Hongkong and Shanghai Banking Corporation Limited, India (HSBC Bank)

THE BANKER TO EVERY INDIAN

The State Bank of India was constituted on 1 July 1955.It is the country‘s oldest Bank

and a premier in terms of balance sheet size, number of branches, market capitalization and

profits is today going through a momentous phase of Change and Transformation – the two

hundred year old Public sector behemoth is today stirring out of its Public Sector legacy and

moving with an ability to give the Private and Foreign Banks a run for their money. The bank is

entering into many new businesses with strategic tie ups – Pension Funds, General Insurance,

Custodial Services, Private Equity, Mobile Banking, Point of Sale Merchant Acquisition,

Advisory Services, structured products etc – each one of these initiatives having a huge potential

for growth. The Bank is forging ahead with cutting edge technology and innovative new banking

models, to expand its Rural Banking base, looking at the vast untapped potential in the hinterland

and proposes to cover 100,000 villages in the next two years. The Bank is changing outdated

front and back end processes to modern customer friendly processes to help improve the total

customer experience. With about 8500 of its own 10000 branches and another 5100 branches of

its Associate Banks already networked, today it offers the largest banking network to the Indian

customer. The Bank is also in the process of providing complete payment solution to its clientele

with its over 21000 ATMs, and other electronic channels such as Internet banking, debit cards,

37

mobile banking, etc. Mr.Pratip Chaudhuri is the new chairman of country largest banking

institution State Bank of India.

Table 2.1.a :Vital Statistics :Manpower Planning, SBI.

Staff Strength as on Total

31.03.2011 222933

31.03.2012 215481

Source: SBI Annual Results FY 2011-12

Table 2.1.b: Branch Expansion, SBI.

As on Metro Urban Semi-Urban Rural Total

31.03.2011 2079 2416 3909 5138 13452

31.03.2012 2218 2502 3995 5382 14097

No. of e-SBIN

branches merged

during 2010-2011

121 85 144 120 470

Source: SBI, Annual Results, F.Y.- 2011-12

Table 2.1.c: Network in Uttar Pradesh, SBI.

Branches ATMs

1,215 1,280

Source: Business Standard, March 21st,

2012

Manpower Planning

Branch Expansion

Network in Uttar Pradesh

38

Table 2.1.d : Expanding Footprint, SBI.

Source: SBI, Annual Results, F.Y.- 2011-12

Expanding Footprint

Branches

No. of Group Branches 18266 19193 927

No. of SBI Domestic Branches 13542 14097 555

No. of Overseas Branches 156 173 17

ATMs

No. of ATMs for the Group 25005 27286 2281

No. of ATMs for SBI 20084 22141 2057

Hits per day 285 285 ----

Internet Banking

No. of customers (in lacs) 62.57 83.63 27.06

No. of transactions (in lacs) 457.74 796.30 338.56

Mobile Banking Registered mobile users (in lacs) 10.13 36.45 26.32

No. of financial transaction (lacs) 49.30 190.65 141.35

Debit Cards

Alternate Channels

No. of Debit Cards (in lacs) 728 910 182

% of total transactions 27.66 36.32 866 bps

on alternate channels

MAR ’ 11 MAR ’12 1212

YOY Incr.

39

SBI 'banking' on alternative channels

State Bank of India (SBI), which has the largest banking network in Uttar Pradesh of over

1,200 branches, is expanding the alternative channels of banking. These channels are being

strengthened to provide anytime and secure banking services to its clients using IT platform such

as ATM, mobile banking and internet banking. Currently, SBI has almost 4, 00,000 and 2,

00,000 customers on its internet and mobile banking platforms respectively in the Lucknow

Circle of UP spanning 57 districts. According to SBI chief general manager K. Ramachandran

SBI has 1,280 ATMs in the circle and are planning to add 1,400 more ATMs in the next two

years. He underlined that alternate banking would only grow stronger and SBI with its robust

technology platform would continue to lead its peers. To leverage technology, SBI had recently

introduced ‗Mobicash‘, which is akin to prepaid wallet for online payments, fund transfer and

merchant payments. To provide ease of transferring money from accounts by using ATM card,

the Bank had introduced ‗SBI trans-cash‘.

SBI had launched Green Channel Counters, wherein customers can withdraw and transfer

funds up to Rs 40,000 by swiping ATM card without filling any paper forms. This is aimed at

saving paper and help conserve environment. The bank has rolled out this facility in 400

branches and plans to add 200 more machines (presently 730 machines) in 100 more branches in

coming months. Besides, the Bank plans to add 35 more branches to its Lucknow Circle tally of

1,215. The Bank is giving priority to the agriculture and the MSME sectors, which together form

the backbone of India‘s second largest economy of UP. State Bank of India also became the first

bank to install an ATM at Drass in Jammu & Kashmir Kargil region, to serve locals as well as

soldiers guarding the frontiers in the country‘s coldest inhabited place. This is the banks

27,032nd ATM and is located adjacent to the Kargil Vijay Dwar, a memorial to the soldiers who

made the ultimate sacrifice in ensuring our armed forces re-occupied Tiger Hill (Pt 5353) in the

1998 war with Pakistan.

40

BANKING FOR ALL- IDBI BANK

“A new generation Government owned Bank”

Industrial Development Bank of India Ltd, (since renamed as IDBI Bank Ltd.), was

incorporated under Companies Act 1956, as a Limited Company, registered with the Registrar of

Companies, Maharashtra, Mumbai vide Certificate of incorporation dated 27th September, 2004.

In terms of the Articles of Association of the IDBI Bank Ltd., the Central Government being a

shareholder of the company shall, at all times, maintain not less than 51% of the Issued Capital

of the company. Reserve Bank of India has, vide its letter no DBOD. BP. 1630/21.04.152/2004-

05 dated April 15, 2005 confirmed that IDBI Ltd. (since renamed as IDBI Bank Ltd.) may be

considered as Government-owned bank. IDBI Bank Ltd. is a Universal Bank with its operations

driven by a cutting edge core Banking IT platform. The Bank offers personalized banking and

financial solutions to its clients in the retail and corporate banking arena through its large

network of Branches and ATMs, spread across length and breadth of India.

Headquartered in Mumbai, IDBI Bank today rides on the back of a robust business

strategy, a highly competent and dedicated workforce and a state-of-the-art information

technology platform, to structure and deliver personalised and innovative Banking services and

customised financial solutions to its clients across various delivery channels. As on March 31,

2012, IDBI Bank has a balance sheet of Rs.2.91 lakh crore and business size (deposits plus

advances) of Rs.3.92 lakh crore. As an Universal Bank, IDBI Bank, besides its core banking and

project finance domain, has an established presence in associated financial sector businesses like

Capital Market, Investment Banking and Mutual Fund Business. Going forward, IDBI Bank is

strongly committed to work towards emerging as the 'Bank of choice' and 'the most valued

financial conglomerate', besides generating wealth and value to all its stakeholders. As on March

31, 2012, the Bank had a network of 973 Branches and 1542 ATMs. The Bank's total business,

during F.Y. 2011-12, reached Rs. 3,91,651 Crore, Balance sheet reached Rs. 2,90,837 Crore

while it earned a net profit of Rs. 2032 Crore (up by 23.15 %). The Bank‘s vision is “TO BE

41

THE MOST PREFERRED AND TRUSTED BANK ENHANCING VALUE FOR ALL

STAKEHOLDERS”. Shri R.M.Malla is the Chairman and Managing Director of IDBI Bank.

Table 2.1.e : Network in Uttar Pradesh, IDBI Bank.

Source: As per Newsletter, IDBI Bank, (2012)

Table 2.1.f : Expanding Footprint, IDBI Bank.

Source: IDBI Bank Ltd., Annual Report, 2011-12

Branches ATMs

53 143

Network in Uttar Pradesh

Expanding Footprint

Branches

MAR ’ 11 MAR ’12 11

YOY Incr.

ATM’s

Manpower

No. of Branches 815 973 158

No. of ATMs 1370 1542 172

on alternate channels

No. of Employees 13598 15172 1574

42

BADHTI KA NAAM ZINDAGI….

Axis Bank was the first of the new private banks to have begun operations in 1994, after

the Government of India allowed new private banks to be established. The Bank was promoted

jointly by the Administrator of the specified undertaking of the Unit Trust of India (UTI - I), Life

Insurance Corporation of India (LIC) and General Insurance Corporation of India (GIC) and

other four PSU insurance companies, i.e. National Insurance Company Ltd., The New India

Assurance Company Ltd., The Oriental Insurance Company Ltd. and United India Insurance

Company Ltd. The Bank has strengths in both retail and corporate banking and is committed to

adopting the best industry practices internationally in order to achieve excellence.

The Bank's Registered Office is at Ahmedabad and its Central Office is located at

Mumbai. Ms. Shikha Sharma is the Managing Director and CEO of the bank. The Bank has

strengths in both retail and corporate banking and is committed to adopting the best industry

practices internationally in order to achieve excellence.

The Bank‘s Vision 2015 is “TO BE THE PREFERRED FINANCIAL SOLUTIONS

PROVIDER EXCELLING IN CUSTOMER DELIVERY THROUGH INSIGHT, EMPOWERED

EMPLOYEES AND SMART USE OF TECHNOLOGY.”

The Core Values of the Bank are:

-Customer Centricity

-Ethics

-Transparency

-Teamwork

-Ownership

43

The Bank has a very wide network of more than 1600 branches (including 169 Service

Branches/CPCs as on 30th June, 2012). The Bank has a network of over 10000 ATMs (as on

30th June, 2012) providing 24 hrs a day banking convenience to its customers. This is one of the

largest ATM networks in the country. It has a total of 111 branches and 733 ATMs in Uttar

Pradesh (Source: Hindustan Times, Thursday, July 26th

2012).

Table 2.1.g : Network in Uttar Pradesh, Axis Bank.

Branches ATMs

111 733

Source: Hindustan Times, Thursday, July 26th

2012

Table 2.1.h : Expanding Footprint, Axis Bank.

Source: Axis Bank Ltd., Annual Report, 2011-12

Network in Uttar Pradesh

Expanding Footprint

Branches

ATM’s

Manpower

MAR ’12 11

YOY Incr. MAR ’ 11

No. of Branches 1,390 1,622 232

No. of ATMs 6,270 9,924 3,654

on alternate channels No. of Employees 26,435 31,738 5,303

44

WE UNDERSTAND YOUR WORLD

The Housing Development Finance Corporation Limited (HDFC) was amongst the first

to receive an 'in principle' approval from the Reserve Bank of India (RBI) to set up a bank in the

private sector, as part of the RBI's liberalization of the Indian Banking Industry in 1994. The

bank was incorporated in August 1994 in the name of 'HDFC Bank Limited', with its registered

office in Mumbai, India. HDFC Bank commenced operations as a Scheduled Commercial Bank

in January 1995. Mr. C.M. Vasudev has been appointed as the Chairman of the Bank with effect

from 6th July 2010. Mr. Vasudev has been a Director of the Bank since October 2006 and

Mr.Aditya Puri is the Managing Director. The Bank is headquartered in Mumbai. The Bank at

present has an enviable network of 2,544 branches spread in 1,399 cities across India. All

branches are linked on an online real-time basis. Customers in over 500 locations are also

serviced through Telephone Banking.

The Bank's expansion plans take into account the need to have a presence in all major

industrial and commercial centers‘ where its corporate customers are located as well as the need

to build a strong retail customer base for both deposits and loan products. Being a

clearing/settlement bank to various leading stock exchanges, the Bank has branches in the

centre‘s where the NSE/BSE have a strong and active member base. The Bank also has 9,709

networked ATMs across these cities. Moreover, HDFC Bank's ATM network can be accessed by

all domestic and international Visa/MasterCard, Visa Electron/Maestro, Plus/Cirrus and

American Express Credit/Charge cardholders. HDFC Bank operates in a highly automated

environment in terms of information technology and communication systems. All the bank's

branches have online connectivity, which enables the bank to offer speedy funds transfer

facilities to its customers. Multi-branch access is also provided to retail customers through the

branch network and Automated Teller Machines (ATMs).

The Bank has made substantial efforts and investments in acquiring the best technology

available internationally, to build the infrastructure for a world class bank. The Bank has

prioritized its engagement in technology and the internet as one of its key goals and has already

45

made significant progress in web-enabling its core businesses. In each of its businesses, the Bank

has succeeded in leveraging its market position, expertise and technology to create a competitive

advantage and build market share.

Table 2.1.i : Network in Uttar Pradesh, HDFC Bank.

Source: Welcome Letter, HDFC Bank Ltd., 2012

Table 2.1.j : Expanding Footprint, HDFC Bank.

Source: HDFC Bank Ltd., Annual Report, 2011-12

Branches ATMs

212 1062

Network in Uttar Pradesh

Expanding Footprint

MAR ’ 11 MAR ’12 11

YOY Incr.

Branches

ATM’s

Manpower

No. of Branches 1,986 2,544 558

No. of ATMs 5,471 8,913 3,442

on alternate channels

No. of Employees 55,752 66,076 10,324

46

Figure 2.3: Showing Trend, Growth and % Customer Initiated Transactions by Channel,

HDFC Bank.

Source: HDFC Bank, Investor Presentation, 2011-12

Greater Choice and Convenience for Our Retail Customers

Multiple Delivery Channels

Regionalized Processing Units

Electronic Straight Through

Processing

Provide New or Superior Products

Improve Sales & Credit Efficiencies,

Cross-sell

Leveraging Technology

ATMs30%Branches18%Phone

Banking12%Internet

Reduce Transaction Costs and Error

Rates

Derive Economies of Scale

Data Warehousing, CRM,

Analytics

Innovative Technology Application

Leveraging Technology

47

YOUR RIGHT PARTNER

The Chartered Bank opened its first overseas branch in India, at Kolkata, on 12 April

1858. When The Chartered Bank first established itself in India, Kolkata was the most important

commercial city, and was the centre of the jute and indigo trades. With the growth of the cotton

trade and the opening of the Suez Canal in 1869, Bombay took over from Kolkata as India's

main trade centre. Today the Bank's branches and sub-branches in India are directed and

administered from Mumbai (Bombay) with Kolkata remaining an important trading and banking

centre.

Table 2.1.k : Network in Uttar Pradesh, Standard Chartered Bank.

Table 2.1.l Expanding Footprint, Standard Chartered Bank.

Source: Standard Chartered Bank, Annual Report, 2011-12

Branches ATMs

6 13

Network in Uttar Pradesh

Expanding Footprint

MAR ’ 11 MAR ’12 11

YOY Incr.

Branches

ATM’s

No. of Branches 94 94 -----

No. of ATMs 307 319 12

on alternate channels

48

THE WORLD’S LOCAL BANK

The antecedents of the HSBC Group in India can be traced back to October 1853 when

the Mercantile Bank of India, London and China was founded in Bombay (now Mumbai).

Starting with an authorized capital of Rs 5 million, the Mercantile Bank soon opened offices in

London, Madras(Chennai), Colombo and Kandy, followed by Calcutta(Kolkata), Singapore,

Hong Kong, Canton(Guangchow) and Shanghai by 1855. The following hundred years were in

many ways propitious for the Mercantile Bank. In 1950 it moved into its new head office

building in Mumbai at Flora Fountain. After the Mercantile Bank was acquired by The

Hongkong and Shanghai Banking Corporation, the Flora Fountain building became and remains

to this day, the Head Office of the HSBC Group in India. Through the 1990s, HSBC has

vigorously developed its role as one of the leading banking and financial services organizations

in the world. Its strategy of 'managing for value' emphasizes the Group's unique balance of

business and earnings between older, mature economies and faster-growing emerging markets.

HSBC in India is proud to have retained the Group's pioneering streak by being an active

partner in the development of the Indian banking industry - even giving India its first ATM way

back in 1987. The organization‘s adaptability, resilience and commitment to its customers have

further enabled it to survive through turbulent times and prosper through good times over the

past 150 years. In India, the Bank offers a comprehensive suite of world-class products and

services to its corporate and commercial banking clients as also to a fast growing personal

banking customer base. Mr. Stuart Milne has been appointed as chief executive officer for its

India business and Ms. Naina Lal Kidwai, a director at HSBC in Asia-Pacific, is currently the

country head of the bank in India. Currently, the bank has a nationwide network of 50 branches

and has the second largest branch network among foreign banks in the country. The total number

of ATMs of the bank is 150.

49

Table 2.1.m : Network in Uttar Pradesh, HSBC Bank.

Table 2.1.n : Expanding Footprint, HSBC Bank.

Source: HSBC Bank, Annual Report, 2011-12

Branches ATMs

2 2

Network in Uttar Pradesh

Expanding Footprint

MAR ’ 11 MAR ’12 11

YOY Incr.

Branches

ATM’s

No. of Branches 47 50 3

No. of ATMs 148 151 3

on alternate channels

50

2.2 Information Technology in Indian Banking Sector

“If you don‟t see the Internet as an opportunity, it will be a threat.” (Tony Blair, Former UK

Prime Minister)

The Information Technology (I.T.) saga in Indian Banking commenced from the mid

eighties of the twentieth century when the Reserve Bank took upon itself the task of promoting

automation in banking to improve customer service, book keeping, MIS and productivity. This

role played by the Reserve Bank has continued over the years (Department of Information

Technology-Financial Sector Technology Vision Document, 2005). Indian banking today is

witnessing drastic changes. Technology has made tremendous impact on banking. ―Anywhere

banking‖ and ―Anytime banking‖ i.e. (24*7 banking) has become a reality. 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 (Tiwari, 2010).

The new generation banks brought the necessary competition into the industry and

spearhead changes towards higher utilization of technology, improved customer service and

innovative products. However the public sector and the old private sector banks, which were

following the traditional method of banking till a few years ago, also realized the benefits that

could be reaped through the introduction of technology in their day-to-day operations. So they

are also of late increasingly pursuing a technology-centric strategy in banking operations and

services delivery as manifested by their adoption of core banking solutions and the introduction

of technology-enabled banking solutions (Sambrani and Suryanarayana, 2007).

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

delivery channels for the banking industry. 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 (Nanda, 2010). Information

Technology and the Communication Networking Systems have revolutionized the functioning of

banks and other financial institutions all over the world. The Reserve Bank of India (RBI) took

several initiatives and assigned top priority to the up gradation of technological infrastructure in

the Indian financial system. The RBI‘s role in the implementation of I.T. deployment in banking

51

has been commendable. In fact, RBI had appointed various committees to work on the

implementation of information technology in banking sector. The reports of various committees

are briefly summarized below:

1) Dr. C. Rangarajan Committee [1983]

Dr. Rangarajan committee had drawn up in 1983-84 the first blue print for

computerization and mechanization in banking industry and looked into modalities of drawing

up a phased plan for mechanization for the banking industry covering period 1985-89.The

committee in its report in 1984 recommended introduction of computerization and

mechanization at branch, regional office / zonal office and head office levels of banks. In 1988

another committee was constituted under the chairmanship of Dr. Rangarajan for making plans

for computerization for the next five years from 1990-94 for the banking industry. It identified

the purpose of computerization as improvement in customer service, decision making,

housekeeping and profitability. The committee observed that banking is a service industry and

improved efficiency will lead to a faster rate of growth in output and help to expand employment

all around. The work force in the banking industry must, therefore, look upon computerization as

a means to improve customer service and must welcome it in that spirit.

2) W.S. Saraf Committee [1994]

In 1994, the Governor, Reserve bank of India had appointed a committee on technology

issues under the chairmanship of W. S. Saraf. The committee looked into technological issues

related to the payment system and to make recommendations for widening the use of modern

technology in the banking industry. The Saraf committee recommended setting up institutions

for electronic funds transfer system in India. The committee also reviewed the

telecommunication system like use of BANKNET and optimum utilization of SWIFT by the

banks in India.

52

3) Shere Committee [1995]

In 1995, RBI formed a committee under the chairmanship of K. S. Shere, to study all

aspects relating to electronic funds transfer and propose appropriate legislation. The Shere

committee had recommended framing of RBI (EFT system) regulations under section 58 of the

Reserve bank of India Act 1934 (RBI Act.), amendments to the RBI act and to the bankers book

evidence act, 1891 as short term measures and enacting of a few new acts such as EFT act, the

computer misuse and data protection act etc. as long term measures.

4) Narasimham Committee [1998]

In order to examine the various issues related to the technology up gradation in the

banking sector, the Reserve Bank of India appointed Narasimham committee in September 1998.

The committee consists of representatives from the Government, Reserve Bank of India, banks

and academic institutions associated with the information technology. The committee dealt with

the issues on technology up gradation and observed that the most of the technology that could be

considered suitable for India in some form or the other has been introduced in some diluted form

or as a pilot project, but the desired success has not been achieved because of the reasons inter-

alia lack of clarity and certainty on legal issues. The committee also suggested implementation of

the necessary legislative changes, keeping in the view the recommendations of Shere committee.

The need for addressing the following issues was also emphasized:-

• Encryption on Public Switching Telephone Network (PSTN) lines

• Admission of electronic files as evidence

• Treating Electronic Funds Transfers on par with crossed cheques / drafts for purposes of

Income Tax etc

• Electronic Record keeping

• Provide data protection

53

• Implementation of digital signatures

• Clarification on payment finality in case of EFT

Taking into consideration the recommendations by various committees appointed by RBI and

guidelines of RBI, banks have started using IT to automate banking transactions and processes.

V.Leeladhar (2006), Deputy Governor, RBI described technology as a key driver in the

banking industry, the infusion of which has led to new business models and processes. This has

revolutionized the provisioning of banking services through introduction of new distribution

channels. Banks which have not made enough investments in technology are at peril as they will

soon find their customer base eroding. Those banks which have invested in technology have

gained great mileage through improved competitive advantage and are potentially poised to

attract increased market share. Technology adoption has also improved the quality of risk

management systems in banks. On February 28, 2011 RBI released its IT Vision Document for

2011-17. Main recommendations in the IT Vision document 2011-17 are as under:

The Vision Document sets priorities for commercial banks to move forward from their

core banking solutions to enhanced use of IT in areas like MIS, regulatory reporting,

overall risk management, financial inclusion and customer relationship management.

It also dwells on possible operational risks arising out of adopting technology in the

banking sector which could affect financial stability and emphasizes the need for internal

controls, risk mitigation systems, fraud detection / prevention and business continuity

plans.

Although banks have deployed technology for transaction processing, analytical

processing by banks is still in a nascent stage.

The Report urges banks to work towards reaping benefits of technology in terms of cost

reduction of small value transactions, improved customer services and effective flow of

information within the banks and to the regulator.

54

2.3 Electronic Banking (E-Banking) or Information Technology-Enabled Banking Services

(ITEBS) or Technology-Enabled Banking Services (TEBS)

In the present study the terms „Electronic Banking‟ and „Information Technology-

Enabled Banking Services‟ and „Technology-Enabled Banking Services‟ have been used

interchangeably. The term "banking technology" refers to the „use of sophisticated information

and communication technologies together with computer science to enable banks to offer

better services to its customers in a secure, reliable, and affordable manner, and sustain

competitive advantage over other banks‟.

Banking technology also subsumes the activity of using advanced computer algorithms in

unraveling the patterns of customer behavior by sifting through customer details such as

demographic, psychographic, and transactional data. This activity, also known as data mining,

helps banks achieve their business objectives by solving various marketing problems such as

customer segmentation, customer scoring, target marketing, market-basket analysis, cross-sell,

up-sell, customer retention, and so forth. Successful use of data mining helps banks achieve

significant increase in profits and thereby retain sustainable advantage over their competitors.

From a theoretical perspective, banking technology is not a single, stand-alone discipline, but a

confluence of several disparate fields such as finance (subsuming risk management), information

technology, communication technology, computer science, and marketing science (Vadlamani,

2008).

2.3.1 E-Banking Defined

Bank branches alone are no longer enough to offer services to meet the needs of today‘s

high demanding and challenging customers (Bradley, L et al, 2003). The most recent deliverance

channel to be introduced is electronic banking (Daniel, E. 1999). Electronic banking is the latest

delivery channel to be presented by the retail banks and there is large customer acceptance rate

which means delivery of banking services to customers using electronic technology either at

their office or home. The e-banking offers enormous opportunities in every sphere of business as

the competitive advantage, member/client retention, increased revenues and reduced costs

(Esser, 1999). Several definitions of electronic banking exist in the literature. Often E-banking is

defined as web based banking (Hertzum et al., 2004).

55

According to Nanda (2010), ―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, atms and the internet‖.

Sharma (2007), gave a rather interesting definition of electronic banking when he

equated it as ―providing banking service to customer at his/her office/home or at any other place

or time wherever the person is- be it traveling, shopping or even in a stadium through the usage

of electronic technology‖.

Uppal (2007), takes a broader definition to include all the services provided by banks

through all types of electronic delivery channels such as telephone, internet, cell phone and so

on. Hence as per this definition banking services such as internet banking, telephone banking,

mobile banking and services provided through ATMs are all brought under its purview.

Engler & Essinger (2000), gave a broader definition, ―Electronic banking is a generic

term encompassing internet banking, telephone banking, mobile banking and automated teller

machines. In other words, it is a process of delivery of banking services and products through

electronic channels such as telephone, internet, atms etc‖.

According to Daniel (1999), e-banking means, ―the provisioning of information and

services by a bank to its customers via computer, telephone or television‖. According to her, it

also means ―the access to the banking services via kiosks or ATMs located in work places or at

public locations such as an airport or a railway station‖.

Joshi (2004), ―E-banking is defined as the automated delivery of new and traditional

banking products and services directly to customers through electronic and interactive

communication channels.‖

Bajaj & Kaur (2004), ―Banking done electronically is electronic banking or delivery of

bank‘s service to a customer at his office or home by using E-technology can be termed as E-

banking.‖

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Shah& Clarke (2009), ―In its very basic form, e-banking can mean the provision of

information about a bank and its services via a home page on the World Wide Web

(WWW).More sophisticated e-banking services provide customer access to accounts, the ability

to move their money between different accounts, and making payments or applying for loans via

e-Channels.‖

Burr (1996), ―E-banking is described as an electronic connection between bank and

customers in order to manage and control financial transactions.‖

Mols, Sathye and Daniel (1999), defined e-banking ― as type of products and services

through which bank customers request information and carryout most of their retail banking

activities through computer, television or mobile phone.‖

2.3.2 E-Banking and Technology

Information and communication technologies are playing a very important role in the

advancements in banking. In fact information and communication technologies (ICT) are

enabling banks to make radical changes to the way they operate. E-banking relies heavily on

information and communication technologies (ICT) to achieve its promise of 24 hours

availability, low error rates, and quicker delivery of financial services (Oliga & Narter,2001).

When considering e-banking, bank websites usually come to mind first, but e-banking requires

much more than just a good website. It needs back end applications such as account systems,

support applications such as Customer Relationship Management (CRM systems),

communication technologies to link e-banking to the payment systems such as LINK, and

middleware to integrate all these often different type of systems.

2.3.3 Evolution of Delivery Channels

Financial sector reforms set in motion in 1991 have greatly changed the face of Indian

banking. The pace of transformation has been more significant in recent times with technology

acting as a catalyst. Traditionally, when a bank wanted to expand it had to open new branches,

thereby incurring high start up and maintenance costs. This was a high cost strategy considering

the high real estate and bank operating expenses. This forced the banks to develop strategies that

57

could help them reach out to end customers in cost-effective ways. In the recent years, the Indian

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

innovative strategies. All these bankers are generally slim in structure but heavily using the

technology and multi-channel facilities to reach out a large section of the customers. Technology

products, ―delivery channels‖, such as Automated Teller Machines (ATMs), Mobile banking,

Internet banking, etc improved customer convenience by providing anywhere any time banking

services. They turned out to be the growth drivers for private banks in India (Srikanth and

Padmanabhan, 2002). Technology is no longer being used simply as a means for automating

processes. Instead it is being used as a revolutionary means of delivering services to customers.

The adoption of technology has led to the following benefits: greater productivity, profitability,

and efficiency; faster service and customer satisfaction; convenience and flexibility; 24x7

operations; and space and cost savings (Sivakumaran, 2005).

2.3.4 New Technologies in Banking and Customer Services in Banks

Rising to the demands of the rising competition across the Globe, the Indian banks are

investing huge amounts on technology. It is estimated that Indian banks have collectively spent

around Rs. 10,000 crores on the road to Core Banking Solution (CBS) (Chawla, 2012).Besides

computerization of front-office operations, the banks have move towards back-office

centralization. ―Core Banking‖ or ―Centralized Banking‖ has also been implemented by the

banks, which provides connectivity between all of its branches and offer a large number of

value-added products, benefiting a large number of its customers.

Core Banking Solution (CBS) is networking of branches, which enables customers to

operate their accounts, and avail banking services from any branch of the bank on CBS network,

regardless of where he maintains his account. The customer is no more the customer of a branch.

He becomes the bank‘s customer. Thus, CBS is a step towards enhancing customer convenience

through anywhere and anytime banking. Technology is no longer a matter of choice for the

banking industry. With CBS forming the technological spinal cord of most banks, the focus

today is on technologies that aid in customer retention and result in tangible benefits in an era of

stiff competition. What we are seeing is the entry of business analytics and other integrated

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systems into the banking arena. Since some of these technologies require sophisticated

environments to operate in, they are forcing banks to modernize their CBS.

RBI Annual Report for the fiscal 2010-11 stated that the use of Automated Teller

Machines (ATMs) has been growing rapidly and this has helped in optimizing the investments

made by banks in infrastructure. The payment and settlement system is also modernized. With

the starting of operations of the Real Time Gross Settlement (RTGS) system effective from

March 26, 2004, India crossed a major milestone in the development of systemically important

payment systems abided by the core principles framed by the Bank for International Settlements.

RTGS provides for transfer of fund relating to inter bank settlements as also for customer related

fund transfers. It is a fully secure system and the reach and utilization of the system is

consistently increasing. Tele banking refers to banking on phone services. It is extensively user

friendly and effective in nature. Mobile banking is a new revolution in the realm of e-banking. It

provides a new way to pick up information and interact with the banks to carry out the relevant

banking business. The potential of mobile banking is limitless and is expected to be a big

business.

Electronic Funds Transfer (EFT) automatically transfers money from one account to

another. This system facilitates speedier transfer of funds electronically from any branch to any

other branch. The scheme has been in operation since February 7, 1996, in India. Internet

banking, involves the use of internet for delivery of banking products and services. Mechanized

cheque clearance has been used which uses Magnetic Ink Character Recognition (MICR)

technology. Cheque Truncation (E-Cheque) is another important element in e-banking in which

‗the image or relevant data of a cheque is electronically captured and transmitted to enable

payment of that cheque to the payee‘s account and simultaneously debiting the account of the

drawer without the physical movement of the cheque itself‘. The new delivery channels such as

ATMs, Mobile Banking, Telephone Banking and Internet Banking along with better access to

customer information have reformed the relationship between banks and customers. Banks have

the opportunity to market their products and services online and additional financial services like

banc assurance can be targeted at the existing customers and prospects, thus facilitating

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customization to suit the needs of individual customers (Godse, 2005). There is a phenomenal

change and paradigm shift towards customer focus over the past five decades (Tripathy, 2007).

Table 2.3.1: Customer Focus Over The Decades.

Decade Focus on Customer

1950-1960 Serving the customer

1960-1980 Satisfying the customer

1980-1990 Pleasing the customer

1990-2000 Delighting the customer

2000 and beyond Retaining the customer

Source: Tripathy, 2007

Table2.3.2: Paradigm Shift Scenario in India.

Before 1991 After 1991

Seller‟s market Buyer‟s market

Protected market Open market

Not many global brands Increase in number of global brands

Friendly competition Cut-throat competition

Patient customers Demanding customers

Non-awareness customers Awareness among customers

Limited choice for customers Multiple choice for customers

Limited media promotion Extensive media promotion

Limited customer services Increase customer services

I.T.-competitive advantage I.T.-enabler

Focus on new customer Focus on new customer as well as retaining

existing customers

Transactional banking Relationship banking

Little customer commitment High customer commitment

High customer contact due to traditional

banking

Moderate customer contact due to e-banking

Source: Tripathy, 2007

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2.4 E-Banking Channels

Electronic delivery of banking products and services can take a number of different forms

(Seitz & Stickel, 1998).

2.4.1 Automated Teller Machines (ATMs): “The one stop shop”

The first form of electronic banking was the ATM (Kass, 1994).ATMs are the cash

dispensing machines that can be seen at banks (on-site) and other locations (off-site) where

crowd proximity is more. ATMs started as a substitute to a bank to allow its customers to

withdraw cash at anytime and to provide services where it would not be viable to open another

physical branch. The ATM is the most visited delivery channel in retail banking, with more than

40 billion transactions annually worldwide. In fact, the delivery channel revolution is said to

have begun with the ATM. It was indeed a pleasant change for customers to be in charge of their

transaction, as no longer would they need to depend on an indifferent bank employee.

ATMs have made banks realize that they could divert the huge branch traffic to the ATM.

The benefits hence were mutual. Once banks realized the convenience of ATMs, new services

started to be added.ATM card holder‘s can perform routine cash transactions without interacting

with a human teller (Sivakumaran, 2005). “A machine that spat money! Automated teller

machines (ATMs) were a thing of wonder in the 1990s. But that was then” (Cairns, 2006).The

ATM is no longer just a machine to withdraw and deposit cash. It is a mini bank branch where

customers can do a host of financial activities as per their own conveniences. ATM is the most

popular way of banking that serves the customers for 24 hours a day, 7 days in a week. It is

convenient and cheaper technology and made the customer visits to a branch less necessary

(Hanson and Kalyanam, 2007).

Hongkong and Shanghai Banking Corporation (HSBC) was the first bank to introduce the

ATM concept in India way back in 1987. Now every commercial bank gives ATM facilities to

its customers. New private sector banks have taken the lead in introducing ATMs initially in a

big way to supplement their branch network and to compete with large public sector banks

having many branches. ICICI bank was the first bank to cross the 1000 mark in installing ATMs

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in India (Joshua, 2009). But in current scenario, public sector banks are also aggressively taking

up the installation of ATMs seriously for Indian market.

In a recent move, public sector banks have geared up to establish 60,000 more ATMs

across the country over the next two years. According to data from National Payments

Corporation of India, the number of ATMs in the country-of public, private, foreign and

cooperative banks, part of National Financial Switch connecting all ATMs- had reached 98,025

by the end of April 2012 (Business Standard, Friday, May 11-2012).

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Figure 2.4: Use Case Diagram for an ATM.

The above exhibit show the use case diagram for an Automated Teller Machine (ATM),

where customers can perform transaction by inserting their ATM card and carry out the

Approval Process by entering PIN Number. Security is provided in form of entering a Personal

Identification Number (PIN) by the customer (Ghose, 1987).After the approval, customer is

requested type of transaction (deposit of money, withdrawal of money etc.), and the transaction

Transaction Completed

Remove Card

Insert ATM Card

Enter Pin Code

Fund Transfer

Balance Inquiry

Bill Payment

Cash Withdrawals

Mini Statement

ATM Transaction

Process

Approval Process

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is carried out accordingly. At the completion of the transaction, the customer exit application and

remove his/her card.

2.4.1. A ATM Scenario In India

Table 2.4.1.a: ATM Strength of Scheduled Commercial Banks (As at end-March 2011).

Serial

Number

Bank Group On-Site

ATMs

Off-Site

ATMs

Total

Number of

ATMs

Off-Site

ATMs as

Percentage

of Total

ATMs

1 2 3 4 5 6

(1) Public sector

banks

29,795 19,692 49,487 39.8

(1.1) Nationalized

banks*

15,691 9,145 24,836 36.8

(1.2)

SBI group 14,104 10,547 24,651 42.8

(2) Private sector

banks

10,648 13,003 23,651 55.0

(2.1) Old private sector

banks

2,641 1,485 4,126 36.0

(2.2) New private sector

banks

8,007 11,518 19525 59.0

(3) Foreign banks 286 1,081 1,367 79.1

(4) Total 40,729 33,776 74,505 45.3

(*Include IDBI Bank Ltd.)

Source: RBI website

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Table 2.4.1.b: ATM Strength of Scheduled Commercial Banks (As at end-March 2012).

Serial

Number

Bank Group On-Site

ATMs

Off-Site

ATMs

Total

Number of

ATMs

Off-Site

ATMs as

Percentage

of Total

ATMs

1 2 3 4 5 6

(1) Public sector

banks

34,012 24,181 58,193 41.5

(1.1) Nationalized

banks*

18,277 12,773 31,050 41.1

(1.2)

SBI group 15,735 11,408 27,143 42.0

(2) Private sector

banks

13,247 22,830 36,077 63.3

(2.1) Old private sector

banks

3,340 2,429 5,769 42.1

(2.2) New private sector

banks

9,907 20,401 30,308 67.3

(3) Foreign banks 286 1,130 1,416 79.8

(4) Total 47,545 48,141 95,686 50.3

(*Include IDBI Bank Ltd.)

Source: RBI website

It is very much clear from table that the total number of ATMs installed the banks was

74,505 as on 31st March 2011 whereas by the same period in 2012 it was 95,686, registering a

growth rate of 28.42 over the previous year 2011. Nationalized banks constituted the largest

share of installed ATMs, followed by the new private sector banks, SBI group, old private sector

banks and foreign banks. While new private sector banks and foreign banks had more off-site

ATMs, nationalized banks, SBI group banks and old private sector banks had more on-site

ATMs. Understandably foreign banks and new private sector banks depend on off-site ATMs to

overcome the limitation of having less number of branches. With the installation base of more

than 95,000 ATMs (as on 31st March,2012) all over the country, ATMs are going to play greater

role in day-to-day banking transactions.

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Future ATMs will be more than just cash dispensing machines; they will be providing

additional value added services including several non-banking and non-cash ones (Mohanty,

2007). The common nonbanking services provided by most banks via ATMs are payment of

electricity, telephone, cellular and credit card bills, payment of insurance premiums, and

refilling/recharging pre-paid mobile phone connections. Bankers also testify that ATMs are now

an integral part of the bank‘s service delivery network. Says Shalini Mehta, executive vice-

president, Kotak Mahindra Bank: ―Subsequent to the Reserve Bank of India's (RBI) free price

regime, ATMs have become more powerful than before in terms of evolving as one of the

preferred medium of customers for their banking needs.‖ She adds that, at Kotak, close to 32 per

cent of the total bank transactions are conducted through the ATM channel. Says Mehta: ―Banks

are consciously driving the usage of these services on ATMs with customers so that it reduces

their time in visiting bank branches or service provider outlets‖. Today, a visit to the nearest

ATM can help you accomplish a myriad of tasks, such as utility payments, open an FD, pre-paid

mobile recharge, credit card payments, tax payments and others like donate funds to charity or

temple trusts, whilst acting as a cash point too. There has been a mushroom growth of ATMs in

metro and urban areas as banks have been given the freedom by the Reserve Bank of India to set

them up at any location of their choice.

According to Mr.Navroze Dastur, Senior General Manager (South Asia channel partners

and strategic alliance), NCR Corporation, ―Bank ATMs are growing at a phenomenal rate in

India. In the past five years, this segment witnessed a growth of over 30 percent. According to

data, ATM terminals in India are expected to grow at a compounded average growth rate

(CAGR) of 25 percent between 2011 and 2015. However, there is a lot of room for growth. At

present we have 75-80 ATMs per one million people and when we compare this figure with

China, we would find that there are 200 plus ATMs per million people. However, Indian banking

is also witnessing a steady growth and there are a number of reasons driving this growth. One

obvious reason is that banks themselves are opening a large number of new branches.

There is now a major focus on financial inclusion which means ATMs now have a wider

reach in rural and remote corners of the country. There is also a huge demand from the urban

population who are looking for instant services alongside seeking to avail of more value-based

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features.‖ Off late, the Reserve Bank of India reviewed the policy on ATMs and it has been

decided to permit non-banks to set up, own and operate ATMs to accelerate the growth and

penetration of ATMs in the country. Such ATMs will be in the nature of white label ATMs

(WLA) and would provide services to customers of all banks. While such WLAs will be owned

and operated by non-bank entities, cash management and customer grievance redressal will be in

the domain of the sponsor banks. The draft guidelines on WLAs were placed on the Reserve

Bank‘s website for public comments in February 2012. Roles and responsibilities of the

stakeholders (WLA operators, sponsor banks and ATM network operators) were indicated in the

draft circular keeping in view various aspects, including cash management, ATM network

membership and customer grievance redressal. The final guidelines will be issued, after taking

into account the views of public and stakeholders. (Business Standard, August 2012).

2.4.1.B ATM Security and Privacy Issues

Do‟s:

1) Do keep your PIN (Personal Identification Number ) secure .

2) Please memorize your PIN And destroy the printed PIN mailer.

3) Change your PIN immediately after receiving the PIN mailer and Card.

4) Always remember to take your Card after the transactions at the ATM.

5) Report loss of Card immediately .

6) Register for SMS banking with your branch to get ATM transaction SMS alerts.

7) Protect the Magnetic Stripe from damage. Never keep the Card near strong Magnetic source

like speakers, television set and other electronic equipments.

8) If you receive the PIN mailer in a tampered state please do not accept the same. Ask for a

fresh PIN.

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9) Verify account statements regularly and monitor your accounts. Notify the branch in case of

any doubtful transactions.

10) Ask for printed receipt , only if necessary. The balance details are shown on the screen after

transactions.

Don‟ts :

1) Do not keep the Card and PIN together.

2) Do not set PIN, which can be guessed easily.

3) Do not reveal your PIN to anyone or through Email/Internet . Banks do not ask for such

details.

4) Do not allow anyone else to withdraw for you.

5) Do not use helmets, cap etc while entering the ATM room.

2.4.1.C Biometric ATMs for Rural India

“ATMs with biometric devices are the latest solution in the ongoing effort to offer

banking services to the rural masses”.

To reach the rural masses, banks are going all out in providing a user-friendly banking

experience by deploying biometric solutions with ATMs. In recent years the importance of

biometrics has grown tremendously with an increasing demand of security in accordance of

unique identification of individuals. Its use for identification in applications other than policing is

on the rise. In view of the rapidly increasing applications, the scope of biometrics is also

increasing, be it identification via face, voice, retina or iris.

Fingerprinting, however, has the advantage of being a familiar concept worldwide. In the

retail payments arena, developments in biometric technology have made their presence felt in the

pervasiveness of self service devices including Automated Teller Machines (ATMs) and Point of

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Service (POS) machines. ATM enhancements with biometric support envisaged by vendors

eliminate the need for PIN entry, and authenticate customer transactions by thumb-impressions.

A simplified menu on ATMs coupled with possible audio guidance in local language

enable easy use for rural masses. So far bank ATMs are dependent on PIN verification. The

fingerprint authentication method is non-PIN based, and this requires enhancements to the

standard Switch environment.

2.4.1.D Securing Transactions with Fingerprints

With the development of biometric solutions for the ATMs there is no need to remember

PIN numbers. Software vendors have come up with finger print solutions for the rural masses.

Elaborating on the working of the biometric solutions, G. P. Shekar, Head - Consulting Practice,

Financial Software and Systems (P) Ltd. opined that, ―Customers opting for biometric

authentication can visit a nearby kiosk or ATMs or bank, where their finger-print data would be

scanned into a special PC with a finger-print scanner and the scanned fingerprint is then stored in

an encrypted form in a central server. When a customer inserts (or swipes) his card in a biometric

enabled ATM, he is prompted to set his finger in the fingerprint scanner. The transaction along

with customer‘s biometric information is passed on to the switch. The switch verifies the

fingerprint with the server, and if successful, requests the banking application to authorize the

transaction.‖ Based on the result, the Switch instructs the ATM to complete the transaction. FSS‘

BAIS solution meets this requirement, by performing requisite message translations as well as

confirming authorization.

2.4.1.E Bank ATMs Stop Sucking-in Cash After RBI Direction-“An initiative by RBI to

Enhance Customer Satisfaction and to Boost the Usage of ATMs.”

RBI has asked all banks to disable cash retraction facility at all their ATMs, however

customers will have to be extra careful in collecting money dispensed by the ATM, as they

cannot later claim it from the bank. Most of the banks, including HDFC Bank, Axis Bank and

IDBI Bank, have already removed the cash retraction facility from all their ATMs, while the

withdrawal process for this facility is underway for few remaining ATMs .As per RBI directions,

the banks are communicating to their customers about the withdrawal of this facility, under

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which the cash goes back into the ATM machine if not collected within a stipulated time, which

is generally 10-15 seconds, but varies from bank to bank. The facility was initially implemented

to avoid the cases of someone else getting the money, if the actual cardholder forgets to collect

the withdrawn cash before leaving the ATM.

However, RBI in the past one year has come across banks reporting several instances of

frauds pertaining to mis-use of cash retraction facility at the ATMs. The typical modus operandi

has been to hold on to a few pieces of notes in ATM machines that have cash retraction system,

while allowing one or two pieces of notes to be retracted and then claiming non-receipt of cash.

Since retracted transactions are credited back to the customer's account, the balance in the

fraudster's account remains unaffected even after collecting bulk of the delivered cash.

The ATMs do not have the capability to count the pieces of retracted notes, thus leaving a

loophole for committing such frauds. RBI discussed the matter at a special meeting of the

National Financial Switch Steering Committee, where disabling of ATM cash retraction facility

was suggested as one of the possible solutions. RBI accepted the suggestion and after a

successful pilot project decided to ask the banks to disable cash retraction facility at all their

ATMs. The Reserve Bank also asked the banks to educate the customer on the consequences of

cash retraction and the reasons for disabling this facility, display information regarding disabling

cash transaction at each and every ATM location and ensure wide propagation.

In its notice to customers, HDFC Bank said: "The Cash Retraction Facility on ATMs has

been disabled as per an RBI mandate. The cash will remain in the ATM dispenser tray till the

time it is not collected and will not get retracted into the ATM‖. "The bank has also asked its

customers to ensure that they collect the entire cash withdrawn through the ATM before leaving

the ATM and ―the bank would not be liable for any financial loss on account of failure to collect

the cash from the ATM dispenser tray‖.

In a similar message, IDBI Bank has informed its cardholders that the retraction of cash

by ATM has been disabled as per RBI directives and they should ensure collecting cash before

leaving the ATM room.

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Axis Bank said that as per the RBI guidelines, it is mandatory to remove 'cash retract'

feature from the ATMs. ―In line with the RBI directive, we at Axis Bank have taken out the

'Cash Retraction' facility from our ATM machines. Do not forget to collect your cash as the cash

will not be retracted in the ATM machine and will remain in the mouth of the ATM till the time

the cash is not collected,‖ the bank said. Similar communications are being made by various

other banks to their customers.

2.4.1.H Summing Up

In many parts of the world the majority of bank customers regularly use Automatic Teller

Machines (ATMs) and today‘s Western youth have not known a world without them (Angeli,

Athavankar, Joshi, Coventry and Johnson). Automatic Teller Machines (ATMs) allow

customers to deposit money, withdraw cash, request a balance and pay bills at any time. ATM

services not only provide convenience for customers, but also decrease operating costs for the

bank (Rose and Hudgins, 2008) .

Automatic Teller Machines have become a mature technology which provides financial

services to an increasing segment of the population in many countries (Das and Debbarma,

2011). Financial institutions have played a major, sometime coercive, role in encouraging ATM

adoption. Research has monitored this period revealing major drivers and deterrents of adoption

and basic usability issues (Stevens et al., 1986; Hatta and Iiyama, 1991; Pepermans et al., 1996;

Mead and Fisk, 1998; Little et al., 2003).

The ATM flourishes within societies where time is precious and money readily available.

This culture is composed of individuals, who have personal bank accounts and access to a wide

range of technology. For these people, ATMs are convenient and reliable everyday artifacts:

push a few buttons and get your money (Angeli & Johnson, 2009).

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2.4.2 Mobile Banking (m-banking): “Banking on the Move and Fingertips”

Mobile Banking (m-banking) is fast catching up as an alternative channel for banking

services. Mobile phone as a channel provides enormous potential in banking. ‗It is the hottest

area of development in the banking sector and has the potential to be used as a means to bring

into the banking fold the unbanked and under banked segment of the population (Nanda, 2010)‘.

Mobile banking is regarded in the industry as "the delivery channel of the future" for various

reasons. First and foremost is the convenience and portability afforded. It is just like having a

bank in the pocket. Other key reasons include the higher level of security in comparison to the

Internet and relatively low costs involved. The possibility that customers will adopt mobile

banking is high, considering the exponential growth of mobile phone users worldwide.

Mobile banking typically provides services such as the latest information on account

balances, previous transactions, bank account debits and credits, and credit card balance and

payment status (Vadlamani, 2008). ―As customers become comfortable with the mobile banking

channel, we expect its volumes to overtake those of Net banking. Roughly , for every user surfing

the Net , there are eight mobile phone users‖ (Rajiv Sabharwal, Executive Director, ICICI

Bank). According to a report by KPMG International (2009), the ability to identify customer‘s

most pressing need at a given moment of time is one of the promising propositions of mobile

banking and the challenge now is to deliver services according to consumers‘ perception of value

and trust.

2.4.2.1 Mobile Banking Defined

Mobile banking (m-banking) involves the use of a mobile phone or another mobile

device to undertake financial transactions linked to a client‘s account. M-banking is one of the

newest approaches to the provision of financial services through information communication

technology (ICT), made possible by the widespread adoption of mobile phones even in low

income countries(Anderson,2010).

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Mobile banking is an extension to application such as phone banking and online banking

(Pousttchi K. and Schurig M., 2004). It can be defined as a channel whereby customers interact

with a bank through a mobile device e.g. cell phone (Scornavacca E. and Barnes S.J., 2004).

Mobile banking (also known as m-banking, SMS banking etc.) is a term used for

performing balance checks, account transactions, payment, etc via mobile device such as mobile

phones. Mobile banking today is most often perform via SMS or mobile Internet, but can also be

used by special programs called clients downloaded to the mobile device (Anyasi and

Otubu,2009).

Mobile banking is an element of electronic banking that uses mobile phone technology

(or other wireless devices) to deliver electronic financial services to consumers. It has been

taunted as a powerful new marketing and CRM tool for financial services companies (Sangle

and Awasthi, 2011).

Mobile banking helps the customers to perform a lot of wide range of transactions on

cellular phones. Also, mobile devices improve the quality of the service because clients can

perform transactions at their convenience wherever and whenever they want it (Laukkanen,

2007) provided there is a connection. Thus, a mobile bank service can foster stronger

relationships to the existing ones between financial institutions and clients. Several factors are

found to moderate attitude towards intention to adopt mobile banking namely age, computer

skills, mobile technology readiness, and social influence (Kleijnen et al., 2004).

The scope of offered services may include facilities to conduct bank and stock market

transactions, to administer accounts and to access customized information (Srivastava, Gupta

and Dubey 2012). It provides 24 hours banking facility to the customers with no time and

location constraints at banking environment.

2.4.2.2 Mobile Banking Services

Banks offering mobile access are mostly supporting some or all of the following services:

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Figure 2.5: Mobile Banking “Your One Stop Shop.”

Source: Outlook Money, August 8th

, 2012

Mobile

Banking: “Bank

In Your Palm”

BANK ACCOUNT

Instant fund transfer & Bill payment.

Balance Inquiry/ last transaction details.

Cheque book request.

Cheque status inquiry/ stop cheque

payment.

Open a Fixed Deposit / Recurring

Deposit.

LOAN

Loan request.

Loan outstanding details.

EMI payment.

Loan rate.

CREDIT CARD

FACILITY

Payment of dues.

Balance details.

Last payment details.

Unbilled transaction

details.

Latest statement.

MOBILE SHOPPING

Prepaid mobile recharge.

Movie tickets.

Air tickets.

DTH recharge.

Railway tickets.

DEMAT ACCOUNT

Holding enquiry.

Transaction status.

Bill inquiry.

Stock market scrip

rates.

Total holding details.

OTHER SERVICES

Locate a branch.

Locate an ATM.

Track service request.

Donations to charity/ trust.

Insurance premium

payments.

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2.4.2.3 Mobile Banking in India: History & Current Trend

The pioneering bank to offer mobile banking services in India was ICICI bank in the year

1999, followed by HDFC bank and IDBI bank (Aithal , 2008) . Among the 11 prominent private

sector banks, seven are providing mobile banking facility to their customers. State Bank of India,

Bank of Baroda and Corporation Bank are some of the public sector banks which have started

offering this service to their customers (Joshua, 2009).Mobile banking in India is set to explode.

According to official data of RBI, the number of mobile phone subscribers in India increased to

811.59 million in March 2011 month-on-month with the addition of 20.21 million connections.

In a month only, 0.68 million transactions worth INR 610 million are being made through

mobiles, RBI said. To boost mobile banking in the country, in May, RBI enhanced the limit of

virtual money a user can load on a cell phone to INR50,000 from INR5,000 to relax the norms

for making payments through mobile banking. Agreed that mobile banking in India is still at its

nascent stage but the future prospect and growth looks brighter than anything else. Transactions

in mobile banking are also on an upsurge as more than 2,800,000 transactions (worth about Rs

196.12 crore [US$ 38.37 million]) were conducted during February 2012. According to the

country's central bank, the Reserve Bank of India (RBI), there are already 47 banks in the

country that actively provide mobile banking services. While some leading private sector players

have been experimenting with mobile banking over the past decade, it took a nudge from the

banking industry regulator for most other Indian banks to wake up to the vast potential of mobile

banking. The country‘s largest state-backed lender, State Bank of India (SBI), for instance,

launched mobile banking in December 2008, only after the RBI published mobile banking

guidelines. Shyamala Gopinath , deputy governor of the Reserve Bank of India, says: ―The RBI

recognised the potential and growing importance of mobile phones as a medium for providing

banking services and, in October 2008, issued formal guidelines for mobile banking, covering

regulatory and supervisory issues, technology and security standards, interoperability, transaction

limits, and customer service and so on‖.

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Figure 2.6 : The History Of Mobile Banking In India.

Source: Outlook Money, 08 August 2012

77

2.4.2.4 Vital Statistics On Mobile Banking

Mobile Banking Usage

Mobile Banking has really caught up in India. According to recently conducted survey by

ACI Worldwide, 76% of Indian mobile respondents used their mobiles for banking in last 6

months. This percentage is highest across the world. Comparatively, only 38% respondents from

US, and 31% from UK used mobile banking in last 6 months (Q1 2012). China came in after

India with 70% users using mobile banking followed by South Africa-61%. The global average

for Mobile Banking adoption rate stands at 35%.

Figure 2.7: Mobile Banking Usage.

0%

10%

20%

30%

40%

50%

60%

70%

80%

Mobile Banking Usage

Source: AITE Group; ACI Worldwide study of 4,200 consumers in 14 countries, Q1 2012

Most Popular Mobile Banking Services

It is very much evident from the graph below, that urban Indian customers‘ use mobile

banking services for checking account balances most frequently(15.9%) followed by viewing last

three transactions(11.8%).

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Figure 2.8 : Most Popular Mobile Banking Services.

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

18.0

Request A Cheque Book

(7.5%)

Checking Account Balances (15.9%)

Status of Cheque/ Demand Draft

(8.7%)

View Last Three Transactions

(11.8%)

Payment Reminders (7.3%)

Most Popular Mobile Banking Services

Source: Banknet India

Value of Mobile Transactions

It is very much clear from the table below (Source, RBI) that mobile banking is gaining traction,

whether it‘s in Public sector banks, Private sector banks or Foreign banks.

Table 2.4.2.a: Mobile Banking-Strong Reception.

BANKS* VALUE OF MOBILE TRANSACTIOS (In Rs. Crore)

GROWTH

(*Top seven banks on May 2012)

May 2011 May 2102 (In percentage)

State Bank of India 52.38 111.11 112

ICICI Bank 27.80 107.70 287

Citi Bank 3.84 33.61 774

Axis Bank 0.44 12.50 2,683

Union Bank of India 1.03 3.09 198

Bank of Baroda 0.06 2.94 4,400

HDFC Bank 1.29 2.82 118

All Banks 91.22 286.54 214

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Over the last 10 years, mobile adoption has moved up from approximately 10% to over

80%, and mobiles phones are becoming main stream for data access. This has made banking on

mobile natural and integral to most customers. Thus it is important for banks to refresh their

channel strategy and include mobile as a standalone core distribution channel.RBI reports that

while the government typically incurs a transaction cost of 12%-13%, mobile banking brings the

cost down to a mere 2%.

According to Dr. K. C. Chakrabarty, Deputy Governor, Reserve Bank of India,

“Mobile banking is the cheapest way to reach rural customers”. Mr.Joydeep Sengupta, head

of McKinsey‟s financial services practice in India, is bullish about mobile banking in

India: “There are lots of players driving mobile payments, the penetration of mobile is very

good, customers use the mobile for a lot of purposes and the RBI has very proactively and

favourably come up with good regulations. Additionally, there is ongoing migration from

rural to urban towns and cities, which will drive the need for remittances. The environment is

ripe for mobile banking.”

In the next seven to 10 years, he predicts, mobile banking is going to be a $350m to

$500m opportunity, with mobile payments playing a key role, and between $100m and $150m

coming through financial inclusion. Technology, in the guise of mobile and smart-card banking,

is bringing the remote sectors of India's population within reach of the country's banks.

2.4.2.5 Mobile Banking Security and Privacy Issues

By 2015, Berg Insight forecasts that 894 million people worldwide will use mobile

banking or related services. That is up 1,525 percent from the 55 million mobile banking users in

2009. As mobile banking continues to grow in popularity, consumers need to take steps to

protect themselves while accessing important information on their phone (Giselle Tsirulnik,

senior editor, mobile commerce daily and mobile marketer, 2009).

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Do‟s:

1. Use caution while installing a bank‘s software for mobile banking to ensure it is authentic and

reach out to the bank for confirmation.

2.Password-protect the mobile phone and choose a complex password with a minimum of 8

characters using letters, numbers and special symbols.

3. Review account statements frequently to check for fraudulent transactions.

4.Report a lost or stolen phone immediately to the bank and arrange to deactivate the mobile

banking service.

Don‟ts:

1.Don‘t store sensitive information such as credit cards details, mobile banking password and

user ID details in a separate folder on your phone.

2. Don‘t multi-task when you are transacting using mobile banking software installed on your

phone.

3.Don‘t forget to advise your bank of changes in your mobile number to ensure that SMS

notifications are sent to someone else.

4. Don‘t forget to intimate your bank in case your mobile is lost or stolen, so as to discontinue

the mobile banking services.

2.4.2.6 Benefits Mobile Banking Services (Uppal, R.K.)

(A)To Customers

Customers need not stand in the bank counters/front offices for various enquiries about

his account.

Customer can save his valuable time in banking transactions and save in travel cost

reaching the bank branch etc.

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It is a mobile banking to have information of all the 365 days at anytime anywhere about

his account.

Customer can pay his utility bills in time and save paying penalties, since alerts are

received from the bank.

Cheque book requests can be made sitting in his work place.

(B)To Bankers

M-banking helps banks in saving crore of rupees by way of reduced transaction costs.

Govt. incurs a cost of Rs. 12-13 for every Rs.100. Mobile banking helps it reduce the cost

to a mere Rs.2.

Banks can utilize the time saved for expansion of business, marketing and sales activities

by channel migration of customers to mobile banking.

Banks providing mobile banking service can have competitive advantage on those banks,

which are not providing this service.

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2.4.3 Internet Banking or On-Line Banking

In the present study the terms ‗Internet Banking‘ and ‗On-Line Banking‘ have been used

interchangeably. Internet banking often referred to as ‗online banking‘ can be defined as

performing financial transactions over the internet through a bank‘s website (Shao,

2007).Internet banking is quickly becoming an essential service for any size bank and is

increasingly becoming popular because of convenience and flexibility (Singhal and

Padmanabhan, 2008). It is an emerging technology that permits conduct of banking transactions

through the Internet. It represents an electronic marketplace whereby consumers may conduct

their financial transactions on a virtual level (Reiser, 1997; Daniel, 1999).

―Internet banking‖ refers to systems that enable bank customers to access accounts and

general information on bank products and services through a personal computer. Internet

banking products and services can include wholesale products for corporate customers as well as

retail products for consumers. Soon, the products and services obtained through Internet banking

may mirror products and services offered by other bank delivery channels such as traditional

branch banking, automated teller machines, phone banking, and call centers (Gartner, 2003).

Banks with a physical brick-and-mortar presence or virtual banks can offer Internet banking

(Gopalakrishnan, 2003). With the widespread growth of the Internet, customers can use this

technology anywhere in the world to access to a bank's network.

The Internet, as an enabling technology, has made banking products and services

available to more customers and eliminated geographic and proprietary systems barriers

(Malhotra and Singh, 2005). With an expanded market, banks also may have opportunities to

expand or change their product and service offerings. According to an International Data

Corporation (IDC) report (2012), ―reflecting the growing popularity of Internet banking, the total

number of user registrations for Internet banking in India at present stands at over 2 million‖.

These findings need to be adjusted for dormant users and multiple accounts (a user having

accounts with more than one bank). As per IDC estimates, India has a little less than a million

active Internet banking users that might be just 0.096 per cent of the total population, but

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represent 15 per cent of the Internet user population in India. In its latest report (2012), on the

status of e-Banking in India, IDC feels that though the banks have taken the first step, they have

got a long way to go before Internet banking becomes a way of life.

Internet banking services vary, but basic access to account information is the core

functionality. Customers today demand Internet banking facilities when they open new accounts

and the situation is particularly true in developed economies. Internet banking allows customers

of banks to:

Do balance enquiry, for example, online enquiries of current checking or savings account

balances.

Transfer funds electronically, for example, transfer funds between one's own accounts or

external accounts.

Pay bills, for example, utility bills or insurance premiums, or buy railway and air tickets,

and so forth.

Make loan applications, for example, applications for car loans, housing loans, personal

loans, and so forth.

Make investments, for example, create fixed deposits and so forth.

Trade in shares and securities.

Make stop payment for cheques etc.

Besides the above mentioned advantages the Internet banking offers to the customers, it

provides certain benefits to the bankers as well such as reducing operating costs, wide customer

reach, promote business diversification, savings on manpower, increased productivity,

opportunity to target new customer segments and retain market share (Carlson, 2001, Centeno,

2003).Nair, (2005) opined that ‗the prime driver for offering services online is to offer 24x7

availability and convenience to its customers, beyond that, cost reduction is another major

reason. It is estimated that the cost to the bank per transaction done over the Internet is nearly

one eighth of that done through branch banking. So the challenge to all banks will be to expand

the Internet banking user base and slowly increase the range of services customers use‘. How the

banks fare in designing, improving, marketing and rolling out services will greatly impact the

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adoption trends. The Internet banking is now being considered as a strategic weapon and will

revolutionize the way banks operate, deliver, and compete against one another, especially when

competitive advantages of traditional branch networks are eroding rapidly (Nehmzow & Seitz,

1998).

Furst, Lang, & Nolle, (2000) suggested different types or levels of Internet banking. The

basic level of Internet banking is primarily informational. The bank's Web site has marketing

information about the bank's products and services. The second level is communicative where

the Web site allows interaction between the bank's system and the customer such as account

inquiry, loan applications, or static file updates (name and address changes). At the third level

bank customers have more power to operate their accounts. This is the transactional level where

customers have the ability to execute transactions like paying bills, transferring funds, making

fixed deposits, and so forth. Most banks offer balance enquiry and funds transfer capabilities

through the Internet today. It is expected that more banks will develop the facilities for bill

payment, credit applications, new account setup, cash management, and fiduciary and insurance services

through Internet banking (Dinz, 1998).

As per the RBI‘s classification in their Report of Internet banking (2001), the levels of

banking services offered through internet can be categorized into three types:

i. The basic level service is the banks‘ websites which disseminate information on different

products and services offered to customers and members of public in general. It may receive and

reply to customers‘ queries through e-mail.

ii. In the next level are simple transactional websites which allow customers to submit their

instructions, applications for different services, queries on their account balances etc; but do not

permit any fund-based transactions on their accounts.

iii. The third level of internet banking services are offered by fully transactional websites which

allow the customers to operate on their accounts for transfer of funds, payment of different bills,

subscribing to other products of the bank and to transact purchase and sale of securities etc.

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The above forms of internet banking services are offered by traditional banks, as an

additional method of serving the customer or by new banks, who deliver banking services

primarily through internet or other electronic delivery channels as value added services.

2.4.3.1 Features of On-line Banking-Some of the distinctive features of on-line banking are:

1. It removes the traditional geographical barriers as it could reach out to customers of different

countries.

2. It has added a new dimension to different kinds of risks traditionally associated with banking,

heightening some of them and throwing new risk control challenges.

3. Security of banking transactions, validity of electronic contract, customers‘ privacy, etc.,

which have all along been concerns of both bankers and supervisors have assumed different

dimensions given that Internet is a public domain, not subject to control by any single authority

or group of users.

4. It poses a strategic risk of loss of business to those banks, who does not respond in time, to

this new technology, being the efficient and cost effective delivery mechanism of banking

services.

The emergence of Internet banking has prompted many banks to rethink their IT

strategies in order to stay competitive. Customers today are demanding much more from banking

services. They want new levels of convenience and flexibility (Birch & Young, 1997).

2.4.3.2 Internet Banking Scenario in India

The race for market supremacy has compelled banks in India to adopt the latest

technology on the Internet in a bid to capture new markets and customers. ICICI bank was the

first one to offer online banking way back in 1996 with the launch of ‗infinity‘ and other banks

especially those belonging to new private sector and foreign banks followed suit (Geetika,

Nandan and Upadhyay, 2008). The period from 1996 to 1998 marked the adoption phase even

for the internet as a whole. The usage increased only by 1999 as a result of lower online charges

and increased PC penetration combined with a tech- friendly atmosphere.

After ICICI Bank, Citibank, IndusInd Bank, HDFC Bank and Times Bank (now part of

HDFC Bank), were the early ones to introduce online banking (Rajneesh De and Padmanabhan,

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2002). At first the online banking facility was used as a vehicle for meeting the information

requirements of the customers and gradually transaction facilities like fund transfer and third

party transfers were introduced. Banks like Axis Bank Ltd., HDFC Bank Ltd. etc. are thus

looking to position themselves as one stop financial shops. These banks have tied up with

Internet Services Providers and portals for expanding their Net banking services, and widening

their customer base.

2.4.3.3 Internet Banking Security and Privacy Issues (E-threats)

“Security issues are important because fraudsters can make life unsafe and miserable”.

Acceptance of Internet banking is directly influenced by the confidence of customers

with regard to the security of the computer, network and most importantly the infrastructure of

the bank they wish to access. The main issues in internet banking relate to security,

authentication, access control, data confidentiality, data integrity, non-repudiation, security audit

trail, business continuity planning, and customer awareness. These issues are not only important

for the banks but also they are essential to build customer confidence and satisfaction (Kumar et

al., 2007).

Security: The providers of Internet banking services must be more responsive towards

security requirements (Fatima,2011).Security in Internet banking comprises both the computer

and communication security. The aim of computer security is to preserve computing resources

against abuse and unauthorized use, and to protect data from accidental and deliberate damage,

disclosure and modification. The communication security aims to protect data during the

transmission in computer network and distributed system.

Authentication: There has to be a process of verifying claimed identity of an individual

user, machine, software component or any other entity so that unauthorized persons cannot gain

access.

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Access Control: It is a mechanism to control the access to the system and its facilities by

a given user up to the extent necessary to perform his job function. It provides for the protection

of the system resources against unauthorized access. It goes hand in hand with authentication.

Data Confidentiality: The concept of providing for protection of data from unauthorized

disclosure is called data confidentiality. Due to the open nature of Internet, unless otherwise

protected, all data transfer can be monitored or read by others.

Data Integrity: To ensure that information cannot be modified in unexpected way.

Failure to protect the correctness of data may render data useless, or worse, dangerous.

Non-Repudiation: To verify whether the transactions have been effected through proper

encryption measures and digital signature.

Security Audit Trail: A security audit refers to an independent review and examination of

system's records and activities, in order to test for adequacy of system controls.

Business Continuity planning: To ensure transaction despite any interruptions.

Customer security awareness creation: Educating customers about preventive measures.

These measures are essential as there is increased threat of phishing or online identity

theft according to a study by Gartner, as cited by Balaraju and Balakrishnan (2008). They also

found that most of the senior bankers surveyed by them (97%) felt that phishing is a threat to

their online banking services and they also felt that most of the customers have low knowledge

levels about it.

Stronger authentication such as two factor authentication, usage of biometrics, quantum

cryptology along with proper customer sensitization are required to increase security and reduce

stealing of customer data (Fatima, 2011).

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2.4.3.4 What is Phishing?

Phishing is a technique employed by scamsters to illegally procure personal information

like account numbers, Internet banking user ids and passwords, etc. The most frequently used

method is to send a spam email to a large database of email ids say, all gmail ids or all yahoo ids.

The spam email is designed in such a way as to look exactly like an email sent by the targeted

company / bank. The email simply asks the recipient to click on a link and enter their user id and

password. Different techniques are used to lure the recipient to click on the link: validation of

account information, threat of account suspension, etc.

Stay Safe While Banking Online

Here's a list of Must Do's to keep your online banking a safe and secure experience.

Precautions while logging in

Avoid using Internet Banking on shared computers and public places like Cafés,

Libraries.

Always remember to Log off on Internet Banking and close your browser when you have

finished your online banking.

Disable the 'AutoComplete' function within your browser

Your account information safety

Change your Internet Banking password regularly and never disclose it to anyone.

Always use alphanumeric passwords and for multiple accounts, use different passwords .

Ensure that your system anti-virus is updated regularly.

Do not give your account information to telemarketers or to callers claiming to confirm

or verify your account information.

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2.4.4 Tele-Banking or Telephone Banking

Banks offers one more value added service, i.e. Tele Banking also known as telephone

banking services (another form of technology-enabled banking providing various banking

services in the self-service mode through the telephones) to its customers for handling banking

related services from the comfort of their home, office or on the move, that too all in their

preferred language . By dialing the number allotted by the bank, customers can transact most of

the banking transactions. Presently Tele-banking facility is available throughout the day( i.e.

24*7). This facility is available only for the account holders in Core Banking branches. Tele-

banking is offered by the banks (Kunjukunju, 2008) through a technology known as Interactive

Voice Response System (IVRS).The customers can dial toll free number within India to get the

following services from the Bank.

Figure 2.9: Services Available Through Telephone Banking.

Balance inquiry in respect of all the accounts of the customer.

Details of last 5 transactions of the account.

Cheque Status Inquiry. Request for Account statement through Fax,

email or post.

Stop Payment Instructions. Loan details of the customer.

Bank product information. Funds Transfer Facility.

Reporting of ATM/Debit/Credit card lost. Facility to change password.

Demat Account details. Facility to talk to Phone banker/Relationship

Manager/Call Centre

(Al-Ashban & Burney, 2001), ―With the obvious exception of cash withdrawals and

deposits, telephone banking offers all the virtual features that are accessed with the use of an

ATM such as balance inquiry, check latest transactions, bill payments, order statements, check

foreign exchange rate, activate cards, change passwords and funds transfer between customer

accounts‖.

In this study, both the IVRS and Phone Banking (option of interacting with the phone

banking officer) facility availed by bank customers have been included.

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2.4.4.1 New Terms in Tele-Banking

Customer Identification Number (CIN) – Unique digit numbers allotted by banks.

Telephone Identification Number (TPIN) – Password for query purpose.

Financial Telephone Personal Identification Number (FTPIN) – Password for transaction

purpose.

Phone Banking services are a combination of IVR and Agent offering, depending on the

type of transaction. For all transactions that cannot be completed on the IVR, phone banker

assisted services are available. Hence another variant of tele-banking is sometimes called the

phone banking in which a customer talks to a phone banking officer for transacting a banking

business.

2.4.4.2 What is Vishing?

Vishing is a combination of the words voice and phishing. Vishing is very similar to

phishing - the only difference is the technology. Phishing involves the use of emails to trick you

into providing your personal details whereas vishing involves voice or telephone services. If you

use a Voice over Internet Protocol (VoIP) phone service, you are particularly vulnerable to a

vishing scam. A typical vishing call involves a scammer, posing as an employee from your bank

or another organization, claiming to need your personal details. Scammers are very creative and

they could tell you many different reasons why they need this information from you. Do not

assume you won't be a target of a vishing scam. Regardless of the story you are told, the

scammer will be aiming to convince you to divulge confidential personal and banking

information, such as your PIN or password. Even if you use your telephone keypad or keyboard

to type in your details, if you are on the line to a scammer, the scammer can record them.

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2.4.4.3 Tele-Banking Security and Privacy Issues

The Telephone Personal Identification Number (TPIN) of the tele-banking service is for

the purpose of the user‘s personal use, strictly confidential and non transferable. TPIN shall not

be disclosed to any third party under any circumstances or by any means whether voluntarily or

otherwise as the TPIN restricts the usage of the tele-banking facility only to the authorized user.

The user shall not keep any written record of TPIN in any place or manner, which may enable a

third party to use the tele Banking. TPIN shall not be used for any purpose other than for

transaction designated by the bank. The user shall self generate the TPIN on accessing the tele

Banking Service for the first time and change the same as frequently thereafter as possible as a

safety measure. The user shall take all necessary precautions to prevent illegal use of the service

by any third party. For the purpose of using the tele-banking service, the User shall provide the

TPIN in the manner directed by the Bank. By use of the TPIN, the user shall be deemed to

represent that he is the legal and beneficial owner of or, authorized to deal with the funds and

property in the accounts each time the User uses the tele-Banking service and seeks information

in respect thereof. All transactions conducted with use of this TPIN will be the responsibility of

the account holder(s) and the account holder(s) will abide by the record of the transaction as

generated/maintained by the Bank (Xlander & Tui, 2008).

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2.4.5 Electronic Statement or E-Statement (Account Statement on Your Emails)

“Save paper. Save trees. Switch to e-statements…..A key green banking initiative”

(The present study includes both savings/current bank account statement and credit card

statement sent on registered email ids of the bank customers).

Paper statements are a standard feature of most banks in India. But times are changing,

the banking industry is moving quickly away from plain old paper to electronic statements. to

save money, streamline processes, and to better serve customers and members online.

E-statement save trees and help eliminate manual workflow.

(Higdon,2008), ―E-statement is a periodic account statement delivered via email to bank

account holders‖. (Stanford,2007), ―E-statements are secure electronic documents in the form of

account statements that are delivered directly to customer inboxes‖. E-statement adoption

continues to grow, with younger generation consumers particularly likely to say ―no‖ to paper

statement because of environmental considerations. (Phil,2007), ―E-Statements are electronic

versions of paper statements that state that the customer's regular statements are online and

available for viewing at any time‖.

With the advent of this new and emerging delivery channel, the bank customers can get

their savings account statement, current account statement and credit card statement on their

mails and even have the option to generate an account statement for a date range for any of their

accounts. Banks like HSBC sends a secure mail to its customers, informing them when their E-

Statement is ready. SBI gives the option of generating the statement on-line and Standard

Chartered bank delivers the same on mail box of the customers. Thus, the option of getting the

statements (savings/current and credit card) by emails and also to generate the same online has

been included in this research work undertaken.

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2.4.5.1 Picture Not Too Good in India

According to N Chandrasekaran, Chairman, CII Banking Tech Submit, 2012 ―Today,

more than ever before, people are using the Internet to pay their bills and conduct other financial-

related business at their convenience. However, the vast majority of bank and insurance

customers still aren‘t opting for entirely paperless communications from their financial

institutions, preferring instead to receive their statements and other correspondence by mail. This

is clearly bad news for banks, insurers and capital markets firms that could be reaping the

benefits of electronic communications with their customers. For instance, electronic statement

delivery can substantially cut costs and increase profitability, because these communications are

much less expensive to send. And e-statements bring customers the convenient on-demand

access to their account information they demand, increasing satisfaction with their financial

institution‖.

2.4.5.2 Barriers to E-Statement Adoption

In general, the public is hesitant to take advantage of electronic correspondence delivery,

and with good reason. All too often, customers hear horror stories of phishing or fraud incidents

that make them doubt the security of the online channel—and their personal financial

information being transmitted over it. Accessing electronic statements typically is an arduous

process, requiring users to click multiple links to be authenticated and to get to the appropriate

document.

According to John Hunter, senior product marketing manager, Adobe Systems Inc., very

few banks reach the 20 percent adoption rate for e-statements and e delivery, with most banks in

the 10 percent to 15 percent adoption range. Customer hesitance to utilize the online channel for

correspondence is proving to be very costly for banks. ―The cost to print and mail paper

statements can be upwards of $1.20 per statement,‖ notes Hunter. ―Multiply that by literally

millions of statements that financial institutions must print on a monthly basis, and the costs are

enormous—and the potential for cost savings becomes considerable.‖

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2.4.5.3 The Industry Needs A Better Way

Thus it is very much essential that banks and other financial institutions find a better way

to deliver electronic communications to customers in order to gain their acceptance of the online

channel and entice them to take advantage of electronic delivery of their statements and other

communications. Financial considerations alone are substantial, but there are also benefits as

well. ―E-Statements take all the benefits of paper statements from financial institutions today,

transform them into electronic mode and make them highly interactive,‖ Hunter points out.

2.4.5.4 Special Features of E-Statement

With the advent of the e-banking, many core solution banks have stopped mailing regular

statements to their customers. Instead, banks now prefer to send electronic statements or e-

statements. E-statements offer myriad functional benefits to customers: -

Significant savings - Significant reduction in postage, paper, printing and distribution

costs.

Reliability – customers don't have to worry about your bank statement getting lost in

mail.

Convenient – customers can access your bank statement at your fingertips and that too

24*7.

Secure - no need to worry about someone else opening your bank statement as it is

password enabled.

Faster- prompt delivery, instant availability and person specific delivery.

Record- no hassle of physical record maintenance.

Storage- e-statements can be stored virtually anywhere i.e. desktop, hard drive, in a

private e-vault etc.

Charges- there is no charge for this convenient, time-saving service. It‘s free of cost.

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2.4.5.5 Electronic Statement Security and Privacy Issues

1) User‘s availing this facility must not share their email pass word with third person.

2) Customer‘s should never share their customer id (cust id) generated by bank with others.

3) User‘s must save their downloaded statement in some safe place in your system and

ensure it is password protected.

2.5 Potential Benefits of E-Banking

Many banks and other organizations have already implemented or are planning to

implement e-banking because of the numerous potential benefits associated with it. Some of

these major benefits are briefly described below.

(a) Choice and convenience for customers

A ‗customer first‘ approach is critical for success in e-banking. Customers hold the key to

success and companies must find out what different customers want and provide it using the best

available technology, ensuring that they are acting on the latest, most up-to-date information. In

modern business environments, customers want greater choice. They want the traditional range

of banking services, augmented by the convenience of online capabilities and a stronger focus by

banks on developing personal relationships with customers. Offering extra service delivery

channels means wider choice and convenience for customers, which itself is an improvement in

customer service. E-banking can be made available 24 hours a day throughout the year, and a

widespread availability of the Internet, even on mobile phones, means that customers can

conduct many of their financial tasks virtually anywhere and anytime. This is especially true of

developed countries, but increasingly in developing countries, the spread of wireless

communications means that services such as e-banking are becoming accessible.

(b) Attracting high value customers

E-banking often attracts high profit customers with higher than average income and

education levels, which helps to increase the size of revenue streams. For a retail bank, e-banking

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customers are therefore of particular interest, and such customers are likely to have a higher

demand for banking products. Most of them are using online channels regularly for a variety of

purposes, and for some there is no need for regular personal contacts with the bank‘s branch

network, which is an expensive channel for banks to run (Berger & Gensler, 2007).

(c) Enhanced image

E-banking helps to enhance the image of the organization as a customer focused

innovative organization. This was especially true in early days when only the most innovative

organizations were implementing this channel. Despite its common availability today, an

attractive banking website with a large portfolio of innovative products still enhances a bank‘s

image. This image also helps in becoming effective at e-marketing and attracting

young/professional customer base.

(d) Increased revenues/incomes

Increased revenues as a result of offering e-channels are often reported, because of

possible increases in the number of customers, retention of existing customers, and cross selling

opportunities. It has also allowed banks to diversify their value creation activities.

(e) Easier expansion

Traditionally, when a bank wanted to expand geographically it had to open new branches,

thereby incurring high start up and maintenance costs. E-channels, such as the Internet, have

made this unnecessary in many circumstances. Now banks with a traditional customer base in

one part of the country or world can attract customers from other parts, as most of the financial

transaction do not require a physical presence near customers living/working place

(f)Load Reduction on branches

E-Channels are largely automatic, and most of the routine activity such as account

checking or bill payment may be carried out using these channels. This usually results in load

reduction on other delivery channels, such as branches or call centers.

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(g) Cost Reduction

The main economic argument of e-banking so far has been reduction of overhead costs of

other channels such as branches, which require expensive buildings and a staff presence. It also

seems that the cost per transaction of e-banking often falls more rapidly than that of traditional

banks once a critical mass of customers is achieved.

(h) Organizational Efficiency

To implement e-banking, organizations often have to re-engineer their business

processes, integrate systems and promote agile working practices. These steps, which are often

pushed to the top of the agenda by the desire to achieve e-banking, often result in greater

efficiency and agility in organizations.

2.6 Reasons for Implementing E-Banking

This section summarizes some of the reasons often cited by banks to be their primary

motive for implementing e-banking.

(a) Customers Demands

With the emergence of the digital economy the balance of power seems to be shifting to

customers. Customers are increasingly demanding more value, 24 hours availability, with goods

customized to their exact needs, at less cost, and as quickly as possible. To meet these demands,

banks need to develop innovative ways of creating value, and e-banking is seen as one of those

innovative ways to meet customers‘ expectations.

(b) Changes in the Environment

There have been some significant shifts in the importance of different sectors of the

economy. In most western countries, primary (such as mining, agricultural) and secondary

(manufacturing) have been steadily declining, whilst the service (e.g. financial services) sector is

growing in importance. This has increased the prominence of service sector organizations,

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resulting in more pressure on them to diversify their offerings and look beyond their immediate

markets to create value. They see new technologies such as the Internet and mobile

telecommunications as a key enabler in accessing new markets and the creation of value. Social

changes are also forcing banks to change the way they interact with their customers. Customers

are increasingly mobile (they move or travel more often), and this, coupled with the rise of single

person households, means that demand for flexible services is rising at rapid pace.

(c) To meet out competition

Some banks are offering e-banking because their competitors have done it, and not doing

so will mean losing an important customer segment to traditional competitors as well as new

entrants to the financial sector. If this is their sole reason for doing so, they often drag behind

their competitors and lack of enthusiasm prevents them from using e-banking to boost other

sources of innovation, which are often enabled by the new technologies.

(d) Achieving competitive advantage

Most organizations aspire to achieve competitive advantage, but few attain truly succeed,

and even if attained, few are able to sustain this. As Internet banking has spread widely, it is no

longer a source of competitive advantage on its own, at least in developed world. E-banking with

the help of other technologies such as data mining can however help in other sources of

competitive advantage such as faster product development, superior customers service and cross

selling. To gain competitive advantage, banks must continually develop new and innovative

services to differentiate themselves from the competition, as having a large branch network or

even e-banking is no longer seen as a main source of competitive advantage.

(e) To achieve efficiencies

Some banks look at e-banking from a cost savings point of view, as it is widely reported

in e-commerce literature (Shah et al., 2007) that cost per transaction is much lower than for other

service delivery channels. Banks may fail if they are thinking only of providing low cost

transactions, as these costs only become lower once a bank exceeds a critical mass of online

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customers, owing to the large upfront costs of implementing e-banking. Conducting cost/benefit

analysis on a regular basis often gives a clearer picture in this regard, enabling the analysis of

feasible alternatives in terms of the major costs involved together with the major benefits that are

expected to accrue. E-banking can also help lower operational costs since, to offer e-banking,

banks have to fine tune their business processes, systems and the ways in which employees

communicate with one another. This may be seen as an unnecessary and costly exercise initially,

but in the long run can prove immensely valuable, and may even enable a bank to survive the

economic pressures and down-turns.

2.7 Barriers to E-Banking

The following factors demonstrate why e-banking may be difficult to implement, or why

a bank may not realize the full benefits from it.

(a) Internet access

Although the growth of the Internet has been very fast, there is still a large population not

connected to the Internet. Lack of computer literacy, high cost of hardware and call charges and

various other social and economic factors are some of the reasons cited for this (Walczuch et al.,

2000). This is changing fast as more and more people connect to the Internet, and numbers are

expected to grow even faster with the maturity of mobile communications (Samuals, 2002).

However, this is still more of a problem in some developing countries, where the

telecommunications infrastructure is less developed.

(b) Consumer behaviour

A large number of consumers of financial services are still reluctant to conduct their

financial management online. A study of consumer habits in 10 countries found that two-thirds

of consumers do not consider online services important and that almost 30 percent do not know

whether their bank offers Web-base services (Regan & Macaluso, 2000). Changing consumer

behaviour takes many years, as was the case with the 10-year adoption cycle of the ATM. This

process can be accelerated with aggressive marketing and high value-added features, two things

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that are lacking in today‘s online banking market (Franco & Klein, 1999). This can also be true

for some businesses, which may be even slower than consumers in adopting new technologies.

Factors such as security, perceived difficulties of use, perceived usefulness, functionality and

lack of promotion (such as availability of cheaper products on new channels) are most commonly

cited factors which are hindering the widespread adoption of new technologies (Cheng et al.,

2006).

(c) Language and culture issues

These play a major role in global e-commerce. Although English is accepted as the

primary language of the Internet worldwide, in some cases a website has to be designed

specifically to suit the market that it is trying to reach. The main problems associated with this

are speed and cost. It takes a human translator up to a week to translate a small website into just

one language (Turban et al., 2000). Financial services related websites are usually very large and

consume large resources in the translation process. The problem does not end with the translation

of a website, it also need be adapted to the local culture to attract visitors. Banks around the

world would do well to learn from Swiss banks, which successfully offer their services in several

different languages.

(d)Adverse industry trends

The financial services industry worldwide is in the middle of dealing with a number of

significant developments, which usually means that e-banking is low on their priority list. These

developments include the recent ‗credit crunch‘, conversion to the Euro, and various mergers.

These require sizeable resources to deal with resulting costs and to upgrade and integrate various

systems, distracting the attention from e-banking development and advancements.

(e) Increase in cost

Some banks have been hesitant to promote e-banking systems, fearing that their costs will

become too high and that it will be difficult for them to match the prices of competing Internet

only banks. These fears have proven to be significant in most developed markets. Mols (1998)

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also stresses this point but suggests that not offering e-Services is not an option, instead

companies should focus on other means such as product differentiation to protect themselves

from excessive competition. Traditional banks could also use their well established brand names

and product development expertise to manage competition from new entrants.

(f) Security issues

Internet security is still one of the major issues hindering the growth of Internet related

trade. Since the Internet is an open network, high security risks are involved with financial

transactions (Han & Noh, 1999-2000). Internet fraud is common, and related stories get

immediate media attention, making people hesitant to bank online. Different security methods

(including hardware and software) are being tested and employed currently but there is still some

way to go to win the trust of a large majority of customers (Mols, 1999).

(g) Availability of resources

For some banks, lack of financial and human resources will be a problem because

offering the sophisticated Internet based services is an expensive project requiring major changes

in IT infrastructure (Mols, 1998). Similarly, Walczuch et. al. (2000) reported that the primary

deterrents for businesses establishing a Web presence is start up costs and the costs associated

with major organizational changes required for such moves. Mols (1998) suggests strategic

partnerships between banks to share such costs. These partnerships could combine to develop e-

banking related systems. However, finding suitable partners in very competitive environments

may prove difficult.

(h) Return on investment

E-banking should be considered more as a business project rather than a technological

initiative. In this context, cost benefit analysis may be very useful. Offering e-banking is

expensive because of initial technological, human and marketing costs. A detailed investment

appraisal may save a company from costly mistakes. Internet banking should be considered in

terms of how it can achieve business objectives.

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2.8 Importance of Security in Electronic Banking

Security has been widely recognized as one of the main obstacles to the adoption of

Electronic banking channels and particularly the Internet banking or the on-line banking. Many

studies suggest that banks must first convince their customers that Internet banking and

transactions are secure before customers show willing to use Internet banking. Security is a very

important aspect in the debate over the challenges facing electronic banking. Further, it has been

stated in numerous studies that the greatest challenge to the electronic banking sector will be

winning the trust of consumer in issues of security and confidentiality (Runge and Zimmermann

1997; Furnell and Karweni 1999; Bestavros 2000).

Adam et al. (1999) claim that ensuring security and confidentiality are fundamental

prerequisites before any commercial activities involving sensitive information can take place.

They add that security is the leading barrier to widespread electronic business on the Internet.

The rapid developments in technology have made significant contributions to securing the

Internet for electronic business. However, the challenges remain in this area, and security

remains a substantial issue for the development of electronic businesses, especially electronic

banking. Security is of paramount importance to Internet users Gervey and Lin (2000).

According to Furnell and Karweni (1999) consumers with a greater awareness of security

will be more likely to use Internet-based services such as shopping and banking. Their results

imply that awareness is the key in increasing consumer confidence. The need for security has

already been recognized within the Internet / electronic banking community and a number of

technologies have been developed to secure electronic transactions. The most common approach

used to secure current online transactions is the Secure Socket Layer (SSL) protocol developed

by Netscape (Frier et al. 1996), which is a general cryptographic protocol used at the transport of

the TCP/IP suite for securing bi-directional communication channels.

To conclude the discussion concerning security concerns, electronic banking via the

Internet will be the most secure financial system in the banking business (Nehmzow 1997;

Furnell and Karweni 1999). For example in Finland, one of the leading countries in the field of

Internet banking, security problems have never arisen in Internet banking. In fact, banking via

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the Internet is considered more secure than banking via ATMs. It is also clear that Internet

banking will always have its opponents, and one frequently used way to denigrate Internet

banking is to criticize its security (Karjaluoto and Mattila 2001).

2.9 Customer, Service and Customer Satisfaction in Banking Sector

Banks are competing in a highly competitive environment to offer quality oriented

services according to customers‘ expectations (Devlin, 1995). Indian banks face stiff competition

from their peers and conventional banks prevailing in the economy. Different aspects of banks

are studied by researchers e.g. operations, service quality, employee satisfaction, customer

satisfaction, financing products, bank efficiency, financial performance etc. as the key segments

for research. Many studies tried to assess the quality of services/products offered by the banks.

Customers became a center for all banking activities due to increased competition for greater

market share .

Banks also focus on demographic characteristics of customers to assess their needs.

Every bank is trying to enhance its performance by improving its service quality according to

customers' expectations. The efficiency of a banking sector depends upon how best it can deliver

services to its target customers. It is seen that 5% increase in customer retention can increase

profitability by 35% in banking business, 50% in insurance and brokerage, and 125% in the

consumer credit card market. Therefore, banks are now stressing on retaining customers and

increasing market share (Chothani et al. 2004).

2.9.1 Services

Service is defined as a set of benefits delivered from a service provider to the service

consumer. The service firm provides benefits (due to competency, skills, knowledge and

experience etc.) to the customers for the sake of reward (fee, salary, wages, etc.). Services may

be coaching, teaching, consultancy and other modes to facilitate the customers. Banks provide

financial inter-mediation, consultancy and agency services that are diversified with the passage

of time. Services are different from goods because they are intangible as they cannot be seen,

touched or felt; perishable as we are unable to store them; inseparable because they are attached

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with a service provider, and insubstantial due to heterogeneity (Parasuraman et.al.,1985;

Hoffman and Bateson, 2002).

Thakur (2007) suggested that superior service quality shows the organization's ability to

meet customers' desires and needs. So organization must improve their services to meet the

customers' wants and requirements. It is found that customers' perception of service quality is

very important for managers to compete in the market (Hoffman and Bateson,2002). Quality is

an ability of any product to meet customers' expectations and requirements. It is a set of features,

characteristics or attributes that are required or expected by the customers. There are several

studies that found a relationship between the service quality offered by banks and its

consequences as satisfaction level among customers. It is reported that quality is observed as a

major factor in reference to customer acquisition and retention (Galloway and Ho, 1996). Service

quality and customer satisfaction became core issues for the successful survival of any service

organization.

Service quality is considered very important indicator towards customer satisfaction

(Spreng and Machoy, 1996). Service quality got popularity among professionals and academia

due to increased competition. It contributes a lot to gain competitive advantage to maintain long-

term relationship with customers (Zeithmal et.al., 2000).

2.9.2 Technology-Enabled Service in Banks

The ‗bank‘ is generally understood as ―an institution that holds a banking license granted

by financial supervision authorities. Under the authorities, the bank conducts the most

fundamental banking services like accepting deposits and loans, and other financial services‖

(Wang and Wang, 2007). The banking industry is one of the earliest adopters of service

automation as providers recognized that technological innovations in banking services

represented an opportunity to differentiate themselves from competitors in what was otherwise a

mature market (Devlin, 1995 cited in Proenca and Rodrigeus, 2011).

Customers have altered the ways in which they access many services because of the

growth of technology-based self-service designs in recent years, including banking services

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(Bobbitt and Dabholkar, 2001 cited in Proenca and Rodrigeus, 2011). In banking services, most

of the studies have scrutinized the service quality linked to the specific technologies like internet

banking, ATM banking and phone banking (Al-Hawari et al., 2005; Curran and Meuter, 2005

cited in Ganguli and Roy, 2011).

Definition :

(a) Customer

A customer can be defined as a user or potential user of banking services. A customer

would include an account holder, or his representative, or a person carrying out casual business

transactions with a bank, or a person who, on his own initiative, may come within the banking

fold (Talwar Committee Report 1976).

(b) Satisfaction

Satisfaction means a feeling of pleasure because one has something or has achieved

something. It is an action of fulfilling a need, desire, demand or expectation. Every rationale

customer compares the cost (price) and benefit (utility) of any product or services. Customers

compare their expectations about a specific product/services and its actual benefits. This

comparison results into three types of customers: dissatisfied customers (expectations are more

than actual performance of the service); satisfied customers (actual benefits realized from

services are equal to or more than expectations); indifferent customers (actual performance and

expectation are exactly equal).

Westbrook (1981) reported that overall satisfaction is the outcome of customer's

evaluation of a set of experiences that are linked with the specific service provider. It is observed

that organization's concentration on customer expectations resulted into greater satisfaction

(Peters and Waterman, 1982).

Kotler (2000) defined satisfaction as a person's feelings of pleasure or disappointment

resulting from the comparison of product's perceived performance in reference to expectations.

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Customers' feelings and beliefs also affect their satisfaction level. It is said that satisfaction is a

function of customer's belief about fair treatment (Hunt, 1991).

2.9.3 Customer Satisfaction- “Is a function of expectation………..!”

Satisfaction is an emotional or feeling reaction (Westbrook, Newman, Taylor, 1978). It is

the result of a complex process that requires understanding the psychology of customers.

Satisfaction is influenced, in by expectations and the gap between perceived quality and expected

quality, called ―expectancy disconfirmation‖ (Zahorick,1996).

Customer satisfaction is an important driver for better organizational performance

especially in the banking sector due to increased competition and innovation. Several studies

measured the relationship between customer satisfaction and performance of the firm (e.g.

Anderson et.al., 1994; Al-Hawari and Ward, 2006 cited in Ahmed, 2011).

Mishra and Jain (2006-07) opined that satisfaction of the customers is an invaluable asset

for the modern organizations and by improving product and service quality attributes, customer

satisfaction increases. This increase in customer satisfaction, lead to greater customer retention

and loyalty and this in turn will lead to greater profitability. Satisfied customers are also likely to

tell others of their favorable experiences and thus engage in positive word of mouth advertising

(File and Prince, 1992; Richens, 1983).

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Figure 2.10: Chain Reaction of Customer Satisfaction.

Source: Piti Tantakasem and Sang M. Lee, (2002)

Satisfaction has a significant impact on customer loyalty (Sharma and Patterson, 2000)

and, as a direct antecedent, leads to commitment in business relationships (Burnham et al.,

2003), thus greatly influencing customer repurchase intention (Morgan and Hunt, 1994).

Satisfied customer is the real asset for any organization that ensures long-term profitability even

in the era of great competition.

It is found that satisfied customer repeat his/her experience to buy the products and also

creates new customers by communication of positive message about it to others (Dispensa,

1997). On the other hand, dissatisfied customer may switch to alternative products/services and

communicate negative message to others. So, organizations must ensure the customer

satisfaction regarding their goods/services (Gulledge, 1996). Today, a successful digital offering

in banking implies the provision of high quality online and mobile banking access.

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Figure 2.11: Adopting a Customer-Centric Approach to Build Profitable Relationships.

CUSTOMER’S.....

.....Expect More:

Expectations are being shaped by experiences outside of the banking industry where content, interactions and features are richer, delivering a more engaging and rewarding experience for the consumer.

…..Trust Their Peers:

The role of banks as the financial expert has been replaced by ‘word of mouth’ peer conversations, or independent influencers. The rapid emergence of social media in parallel with the rise of mobility has seen customers increasingly turn to their peers for information and advice, rather than to financial experts in banks.

…..Are Informed:

Financial consumers are more savvy today, due to the easy access to research, data and ‘expert’ views. As more financial services customers become ‘self-directed’, they are coming to rely less upon traditional sources of financial advice.

…..Have Choices:

Comparison and purchase of alternative financial products and services online is now straightforward and widespread. It has opened up a wide range of choices for consumers, some outside the boundaries of traditional banking services, such as peer-to-peer lending.

…..Have A Voice:

The rise of social media platforms has allowed a single consumer voice to be amplified to a tremendous degree, and consumers have not been shy about raising it. Stories of bad customer experiences rapidly spread through these media and often cause irreparable damage to associated brands.

Source: www.pwc.com/india

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In line with changing customer behaviour, following are among the key areas that need

focus to provide an enhanced experience to customers:

Transforming customer experience through seamless delivery across channels.

Providing flexibility through 24/7 cross-channel capability.

Deepening customer engagement by building additional applications around the customer

lifecycle.

Technology investments help organizations achieve greater customer-centric capabilities

at a competitive cost. Seamless delivery across all channels (atm, branch, internet, mobile,

phone, etc.) means that customers can shift easily between different channels, and complete an

activity in a channel different from where it was initiated.

Successful multi-channel banks extend full-time support (e.g. 24/7 support on phone or

the internet) to enable customers to access their channel of choice anytime anywhere. By

building multichannel capabilities, banks can enhance customer experience and also achieve cost

savings in the medium- to long-term. This will lead to overall customer satisfaction.

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Figure 2.12: E- Banking, Customer Adoption & Customer Satisfaction “A Conceptual

Framework.”

Source: A Conceptual Framework-Compiled From Self Study

E –Banking Channels:

ATM Internet Banking E-Statement Mobile Banking Tele Banking

Customer Adoption:

Awareness Interest Evaluation Usage

Customer Satisfaction:

Service Quality Security Cost of Channels Availability of

Channels (24*7)

Advantage Banks:

Commitment Loyalty Retention Recommendation

of Services Tele Banking

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The conceptual framework examines the factors influencing bank customers‘ acceptance

and satisfaction of E-Banking services. It further highlights the advantages the banks‘ derive on

the adoption of such services by their customers. Keltner (2000) opined that the relevant factors

determining the adoption of electronic banking among consumers include the level of awareness

or attention, the accessibility to computers and the Internet, convenience, privacy, costs, and the

availability of knowledge and support concerning electronic banking.

The introduction of electronic banking services is facilitated by the bank‘s reputation in

terms of size, awareness and trust awareness of service and its benefits in form of the amount of

information a customer has about electronic banking and its benefit may have a critical impact

on the adoption of electronic banking (Jaruwachirathanakul and Fink, 2005; Al-Somali et al.,

2008).

Kent, Program Manager, Citi Bank electronic banking product, opined that ―there is a

direct relationship between customer use of the Internet and the Internet knowledge o f our work-

force.‖ He continues that banks first need to change the behavior and attitudes of the sales

representatives themselves. Internal education in banks is one of the key forces driving customer

migration. Furthermore, the Vice President of Bank One, Dean Kontul, continued that ―nothing

could be worse than having customers inquire about the services available on our Internet site

and to have the sales representative unable to answer intelligently‖. Gan et al. (2006) indicate

that when consumers are aware of the availability of electronic banking, they will use and adopt,

though some may not.

Lichtenstein and Williamson (2006) noted that several converging reference domains and

theories suggest numerous potential influences on consumer adoption of internet banking

including theories of consumer behavior in mass media choice and use, gratification theories,

innovation diffusion, technology acceptance, online consumer behavior, online service adoption,

service switching costs and the adoption of internet banking. Davis (2003) proposed that

customers‘ intentions to use internet banking can be affected by customers‘ attitudes toward

using internet banking. When customers have positive attitudes, they are more likely to adopt

internet banking and vice versa (Lichtenstein and Williamson, 2006). Eriksson et al. (2005)

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found that customers‘ attitude are significant factor affecting customer behaviors in accepting or

rejecting technology. It was found that the relationship between attitude towards using and usage

was significant.

Customers' attitudes are a significant factor affecting customer behaviors in accepting or

rejecting technology (Davis et al., 1989). Further, Clarke et.al., (2006) clarified that ―banks

providing electronic banking services to its customers must ensure the safety and security of the

channels, level of services being offered i.e. the quality , cost of availing the delivery channels

and lastly its availability i.e. services should be provided uninterruptedly round the clock (24*7).

This will lead to customer delight and satisfaction which in turn will benefit the bank(s) in form

of customer commitment, loyalty, retention and referrals/recommendation of services (Uppal,

2007). Power and Associates (2009) defines customer loyalty as a deeply held commitment to

frequently rebuy or repatronize the same product or service, and though multidimensional in

nature, it includes rebuy, repurchasing and resistance towards price increase (Wangenheim and

Bayon, 2004).

Levesque and McDougall (1996) suggest that, ―in retail banking, increasing customer

satisfaction and loyalty will result in reducing banks‘ servicing cost and gaining knowledge of

the financial relationship and customers‘ needs, thereby allowing banks to effectively and

efficiently cross-sell existing and new products or services to their customers‖. Hansemark

&Albinsson ( 2004) suggest that ―satisfied customers tend to be less price sensitive, more

willing to buy additional products, and less influenced by competitors and in turn will

recommend such services to others thus increasing the organization‘s customer base‖.

2.9.4 Customer Satisfaction in Banking Sector

Customer satisfaction appears as the cumulative result of customer‘s internal feelings

about their experiences related to products/services. Molina, Marty and Esteban (2007)

investigated the customer satisfaction in retail banking by an empirical analysis of 204 bank

customers. They found a direct relationship between confidence benefits and customer

satisfaction. In the year 2000, the Cruickshank Report was unveiled (Cruikshank, 2000). The

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Report categorically acknowledged that service quality was low in retail banking in the UK,

implying low customer satisfaction.

Metawa and Almossawi (1998) investigated the banking behavior of Islamic banking

customers in Oman by collecting data from 300 customers. They aimed to find out the awareness

and satisfaction level among customers of Islamic banks by considering their demographic data.

The findings showed that the most of the customers are highly satisfied with products and

services of Islamic banks. They suggested that bankers should develop professionalism and

competency to maintain profitable relations with customers. Factors related to service offerings

are furthermore related to customer satisfaction (Levesque and McDougall, 1996).

As said by Levesque and McDougall (1996), convenience and competitiveness of the

bank are two main factors which are likely to influence the overall satisfaction levels of a

customer. Reidenbach (1995) argued that customer value is a more viable factor than customer

satisfaction because it includes not only the usual benefits that most banks focus on but also a

consideration of the price that the customer pays. Customer value is a dynamic that must be

managed. The survey by Leeds (1992), who documented that approximately 40 percent of

clients, switched banks because of what they measured to be poor service. Earlier research by

Brownlie, (1989) has recommended that some consumers have positive attitudes towards ATMs

based on dominant perceptions of convenience/accessibility/ease of use.

Anderson et al. (1976) and Laroche (1988), researchers of customer satisfaction opined

that convenience and accessibility which are enabling factors that make it easy for the customers

to do business with the bank. The bank‘s ability to deliver these benefits on a continuing basis to

its existing customers will probably have a high and positive impact on customer satisfaction.

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2.9.5 Reserve Bank of India and Customer Satisfaction in the Indian Banking Sector

“Customer first, RBI tells banks”

There have been remarkable improvements in banking services since the early 1990s, the

way customers conduct banking transactions, be it online payments, swiping cards at shopping

outlets or withdrawing cash from ATMs. The RBI regulations aimed at strengthening the safety

infrastructure and banks encouraging the use of alternative channels like ATMs, Internet

banking, Cards, etc has meant that the routine transactions have become more user friendly and

secure, providing optimum satisfaction to the user‘s of such services.

A committee set up by the Reserve Bank of India (RBI), under the chairmanship of

former SEBI chief M.Damodaran, has made some path breaking suggestions on customer service

in banks.

Internet banking: To make Internet banking safer, the committee suggested that there be

a secure total protection policy/zero liability against loss for any customer-induced

transaction utilizing the technology through ATMs/POS/online banking, etc. Banks may

introduce mechanisms whereby a customer has a choice of restricting account-to-account

transfers to be done only from particular IP addresses or a choice of addresses.

Plastic money: The committee has suggested that POS (point of sale) transactions should

necessarily be PIN-based and that all plastic cards carry the cardholder‘s photograph and

scanned signature. In case of lost cards, it's been suggested that hot listing be allowed

online; and the transaction is automatically reversed and the amount credited back into

the account. Banks should send alerts for each transaction to a customer on his mobile. If

the customer finds any misuse of his card, he should be able to block the card through an

SMS reply. Further, the customer‘s loss due to card misuse should be the minimum,

Banks can ensure that by prescribing rules that will allow a temporary credit which

refunds the full amount, pending a detailed probe.

Service charge: While the core banking system is in place for some time now, banks

continue to charge customers for non-home branch transactions. The committee has

suggested that customers shouldn‘t be charged for third-party, non-home branch trans-

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actions in case of self or local cheques; and in case of inter-city transactions, the charge

should not exceed the intercity collection charge. Also, you may no longer have to pay

penal charges if a cheque presented by you is returned.

Banks to make good your loss: You can get protection against non-authorized

transactions. The onus will be on a bank to prove a customer's mistake in any monetary

dispute arising out of any ATM/Internet banking.

Single access window: RBI has now asked banks to initiate the process of providing a

single view of all bank accounts of a customer, including deposits and loans, with the

help of technology like core banking solution (CBS). It has mandated that banks

complete the process within a year. Some banks are providing consolidated one window

access to their customers, but the RBI mandate will make it a uniform practice across all

banks in India.

Alerts for all transactions: Another customer-friendly measure that has been introduced

from 1 July is one that could minimize the damage caused by misuse of lost or stolen

cards. Banks have been asked to send SMS alerts to their customers for all card

transactions, be it online, at merchant establishments or ATMs. Prior to this, banks sent

alerts only if the value of transactions exceeded a certain limit, usually Rs 5,000. With

this facility being extended to all transactions, you will be in a better position to take

immediate remedial measures, such as blocking the lost or stolen card in case a

fraudulent transaction is conducted without your knowledge or consent.

2.9.6 New Rules Govern the ATM Usage

In an attempt to reduce the number of customers who visit branch offices, banks have

introduced several services that can be availed of at ATM kiosks and, of course, through the

bank Websites. Banks too are keen that ATMs are seen as more than just cash dispensing

machines, resulting in their increased usage. "After the changes in the regulation on ATM usage,

we have seen a four-fold increase in non-Standard Chartered customers accessing our ATMs,"

says Rajashree Nambiar, general manager, distribution, Standard Chartered Bank. Many banks

offer services that not only save time but also effort. These include paying utility bills and taxes,

fund transfers, donations to charities, etc, through their ATMs. "Our account holders can perform

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multiple transactions, which include prepaid mobile top-ups, fund transfer to any Stan-Chart

account, request for cheque book or account statement, cash or cheque deposit (at select ATMs),

and online/mobile banking registration," says Nambiar.

RBI issued the following guidelines to banks:

Failed ATM Transaction: The Reserve Bank of India (RBI) issued a circular on 27 May

2011 mandating banks to refund the money debited in a failed ATM transaction within

seven working days of receiving the customer‘s complaint. If the bank fails to do so, it

will have to pay `100 in compensation for each day of delay. To be eligible for this

compensation, however, the customer has to lodge the complaint within 30 days of the

date of the failed transaction.

PIN for all ATM transactions: Since January 2011, the RBI has mandated that account

holders will have to enter their PIN for every individual transaction at the ATM. Earlier,

you could carry out several transactions by entering the PIN just once. This effectively

rules out the possibility of anyone withdrawing cash from your account in case you forget

your debit card in the ATM slot.

Limited free transactions: The most recent stricture from the banking regulator concerns

third-party ATM transactions. Beginning July 1st 2011, the five free transactions allowed

at third-party ATMs include non-financial transactions as well. So, while earlier there

was no limit on nonfinancial transactions like balance enquiry and taking a mini-

statement, now these will be charged.

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Figure 2.13: Rules for ATM at a Glance.

Source: (The Economic Times, August 8th

, 2011)

2.10 The Information Technology- Enabled Banking Services (ITEBS) Scenario in India

“Traditional banking is facing its steepest challenge in over a generation. We believe

that a new tipping point has been reached, with digital at its fulcrum”(Pricewaterhouse

Coopers).

2.10.1 Bank Branches go High-Tech

Till a few years back, Indian bank branches wore a melancholy facade and had an

impatient air. Long queues decorated their periphery. Customers waited for tellers who would do

everything behind a counter. That‘s not the case anymore. Today‘s highly evolved branches look

like modern retail stores, all thanks to the widespread use of information technology and the

Indian banking industry‘s yearning to change. Today, financial service companies bank on the

latest technologies to meet a slew of needs from taming the competition to retaining their

customer base. With the arrival of foreign banks and private banks stepping up their efforts in the

past decade, competition in India‘s banking sector has increased manifold. Spoiled for choice

when it comes to picking a financial services provider, consumer expectations have risen. This,

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along with growing competition, has led to an increased awareness among banks on the role and

importance of technology in branch level banking. These revolutionary changes at the branch

level delivery channel began with Automated Teller Machine (ATM) technology. Innovations in

IT storage, wireless technologies, new applications etc. are equipping bank branches to take the

next big leap.

2.10.2 Digital Channels Enter Banking Mainstream

“Banks are beginning to treat digital channels as mainstream options rather than

alternative mechanisms for customer service. IT heads at banks are focusing on strengthening

these channels to sell financial products and acquire customers (Jhingan, 2012)”.

For banks in India, expansion no longer means adding branches. Welcome to the digital

era where banks are investing in technologies to reach out to customers through a variety of

digital channels including ATMs, kiosks, online portals and mobile apps and sites. Digital

platforms are critical for banks as a staggering volume and frequency of daily transactions are

executed electronically. As per a BCG study, ‗by 2015, $350 billion in payment and banking

transactions in India could flow through mobile phones, compared with about $235 billion of

total credit-and debit-card transactions today‘. Services like distance banking, branch free

banking, client-empowered demat accounts, virtual banking, etc. have started to come into play.

According to Gowri Mukherjee, Group Head - Digital Marketing, Standard Chartered

Bank, “ internet banking, given that it has been there for over 12 years now, is by far the most

mature among the new channels and is already an important channel for customer service with

over 50% of all of SCB‘s transactions being conducted though online channels.

Kartik Jain, Executive Vice President, Head - Marketing, HDFC Bank, said that the

focus had clearly shifted to ―offering the maximum width of transactions and ensuring complete

ease-of-use on the online channel‖. Mobile usage has also boomed in the last few years and the

bank expected that the penetration of data plans would drive usage further that allows customers

to access a wide range of banking transactions while on-the-move.

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Mukherjee of Standard Chartered reasoned that, ―The core banking system is the same

and all these channels at the end of the day have to connect into our core banking system in the

most seamless, state free way. What will differentiate each of these channels is how well they

individually improve the quality of consumer engagement without losing out on consistency.‖

2.10.3 Implementation of Strategic ITEBS- „Banking on Technology‟

Technology has taken the centre-stage and is transforming every industry. In the Banking

industry, it is fast changing the way products are conceived, designed and delivered across

channels and market segments. Strategic I.T. initiatives have long term impact on the entire

business and are focused on enhancing Banks' value propositions. Most Banks are planning for

I.T. initiatives that contribute significantly to strategic positioning of services and cost reduction.

As part of implementation of strategic I.T. initiatives, Banks are deploying I.T. solutions to

facilitate automation in transaction management, reporting and risk management.

Figure 2.14: Implementation Status of ITEBS in Banks.

TYPE OF

BANK

SEGMENTS COVERED UNDER I.T. INITIATIVE

Core Banking

CRM IAM Business Intelligence

GRC Self Service Kiosk

Internet Banking

Mobile Banking

Financial Inclusion

Public Banks H L L L M L H H H

Private Banks H H H M H H H H H

MNC/Foreign Banks

H H H H H H H H L

H:Implemented/In Progress M: Immediate Future L: Near Future/Not Planned

Source: The Economic Times Banking Technology Conclave, September 3rd 2010, Mumbai, KPMG

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Most banks across segments have already implemented core banking systems and general

ledger automation systems. Initiatives such as internet based transaction banking, self service

kiosks, mobile banking are either underway or are planned in near term. Initiatives in the area of

financial inclusion are already underway in Public and Private Banks. However, MNC Banks

have planned them in a two to three year window.

While initiatives in the areas of Governance-Risk-Compliance (GRC) and Identity and

Access Management (IAM) solutions are already underway or implemented in MNC and Private

Banks, Public Banks have planned to implement them at least after one year. Business

Intelligence and analytics initiatives are planned in the near term by Public Banks and in a two to

three year window by Private Banks. The deployment of new technologies is gaining

momentum, which has the potential to bring far reaching impact in the Banking industry as a

whole.

In order to derive a competitive advantage, banks must effectively leverage technology to

deliver on fast-changing customer expectations, align with regulatory controls and compliances,

and attract the tech-savvy Generation Y. It is therefore critical for banks to increase their IT

investments to align with new innovations in technology to meet their objectives. In this context,

technology initiatives in the banking industry coupled with continued innovations by technology

vendors will define a new growth path for the industry (Chandrasekaran, Chairman, CII Banking

Tech Submit, 2012).

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Figure 2.15: Various Technology-Based Initiatives Undertaken by Indian Banks.

Source: Technology Enabled Transformation in Banking - KPMG 2011

Operational Efficiency

-Straight-through-processing

-Transformation of Service Channels

-Collaborative Channel Management Strategy

-Branchless banking for Financial Inclusion

New Solutions

-Mobile phone based banking application

-Social media support

Customer Centricity

-Customer analytics

-Efficient customer data management

Governance & Risk Management

-Enterprise risk management

-Real-time executive dashboards

-Real time Security management

-Risk based Authentication

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Figure 2.16: Channel Interaction Mix Across Customer Segment.

TARGET

SEGMENT

RETAIL

BANKING

CUSTOMER DELIVERY STRATEGY-CHANNELS

BRANCH BANKING/ R.M./STAFF

INTERNET BANKING

MOBILE BANKING

ATM/KIOSK TELE-BANKING/

IVR

E-STATEMENT

URBAN CUSTOMERS

L H H H M H

NON-URBAN

CUSTOMERS

H L M M L L

H: High M: Medium L: Low

Source: Technology Enabled Transformation in Banking - KPMG 2011

2.10.4 Transforming the Service Channels

A number of banking institutions in India continue to hold on to the belief that physical

branches remain at the core of the customer delivery strategy. Many banks, today, have not

adapted easily to the customer of tomorrow who rarely visits the branch or the customer who

sees no need for an over-the-counter transaction. Customers should have the freedom to choose

channels and interactions that get them to their desired solution in the quickest and most efficient

manner. Each of these channels has a different role to play for both the consumer and the bank.

The banks therefore have to be careful while planning their strategies for each of these channels.

Online access almost eliminates the need for a customer to physically walk into a branch

giving him the convenience of doing all of his banking from his desk. For the bank, this

translates into cost savings as also the opportunity to engage the customer at a time when he is

more amenable to receiving messages from the bank.

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A mobile phone , on the other hand, puts the bank in the customers' pocket allowing him

to transact on-the-go and bringing the bank closer to its consumers.

ATMs have established themselves in India in the past decade. They are no longer

considered just a machine to withdraw cash. In fact, it has turned out to be a mini bank branch

where customers can do a host of financial activities and, that too, at their own convenience and

24*7.

2.10.5 Cost Benefits of E-Banking to Banks

Digitization will lead to an overall reduction of operational costs and transactional

overheads. Front-end transformation solutions ranging from customer interaction management

right up to channel innovation, put the customer in the driver‘s seat, enabling the bank to grow

its customer base and offer an enhanced portfolio of tailored services. Technology results in

sustainability and continuity in the progressive amelioration of service quality, anytime and

anywhere banking, focused product delivery, cross-selling and multi-channel touch

points.Organizations experience efficiency gains through lower costs in the first phase of

technological application. There are significant performance improvements in deploying Internet

banking over alternative delivery mechanisms. Baras (1986), has found that the Internet

significantly lowers the cost of distribution of banking products and services. In India the

banking industry estimates branch banking costs Re.1.25/-, teller cost at Re.1/- per

transaction, ATM costs Re. 0.45/-, phone banking Re.0.35/-, and Internet banking Re.

0.10/-per transaction (Indian Express, 2004).

The cost-conscious banks in the country have therefore actively considered use of the

Internet as a channel for providing services. Fully computerized banks, with better management

of their customer base are in a stronger position to cross-sell their products through this channel.

For banks, introducing Internet banking as a new delivery channel is a cost-effective and

revenue-generating venture. The capital investment to deploy Internet banking is relatively low

compared to opening a new branch or even installing an ATM. In spite of the low costs, all banks

do not adopt Internet banking speedily. This is primarily due to environmental factors (the level

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of penetration of the Internet), the industry-level factors (basic computerization of banks), and

firm-level factors (individual bank strategies to introduce Internet banking).

Figure 2.17: Transaction Costs by E-Delivery Channels.

Source: The Indian Express, 2004

With the changing trends, banks prefer servicing their customers at their doorsteps and at

their convenience. This not only gives them an opportunity to service larger customer base but

also reduce their transaction costs.

2.10.6 Tomorrow‟s Branches

A bank branch as a front-end will diminish. Given the pace with banks are deploying

cutting-edge technology, branches of the future will embrace digital signs, self-service kiosks

and other visually interactive technologies to improve the banking experience and communicate

more effectively with customers. The revolution in mobile technology will do a lot for banks. It

enables customers to carry out transactions via cell phones or tablets.

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The Reserve Bank of India is revising a few norms around mobile banking, and this is

expected to give a fillip to the category. Banks and telecom service providers will join hands to

deliver next generation solutions. Mobile networking is going to pioneer new business delivery

mechanisms for banks, which will in the future do away with the branch concept in totality.

2.10.7 Future Perfect With New Channels

Sophisticated and high technology banking is important to improve customer service,

productivity, and operational efficiency of banks. As a part of their action plans, banks in India

have introduced many new techniques and a considerable degree of mechanization and

computerization in their operations. Banks are developing and standardizing suitable computer

software‘s in a big way. Modern bank branches are employing more automation and self-service

technologies to offload work from the staff. New channels have carved out a niche for

themselves and are here to stay. Banks will have to keep abreast with technological

advancements coming in these areas.

2.10.8 Still Miles To Go…….!

―Digital channels such as the Internet and mobile offer significant potential to improve a

financial institution‘s overall performance provided they can ensure an integrated customer

experience and engagement‖ (Accenture,2102 „weaving digital strategy into the DNA of

financial institutions in India‟). According to a survey conducted by Accenture, only 40 percent

of Indian banking customers use at least one new digital channel to interact with their primary

bank. This is on a very lower side when compared to other developed countries

(Phalgunan,2011).Over half of India‘s 1.2 billion population is yet to be covered under the

formal banking system. There are at least 120 million Indians connected to the Internet and 898

million mobile subscribers in India, 292 million of whom live in rural areas, indicating a strong

adoption of the mobile phone as a channel for communication. However, there are only 240

million bank accounts and 88,000 bank branches resulting in more than half of Indian

households, 110 million altogether, not having access to banks as they do not have a bank

account.

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According to D. Subbarao, Governor, Reserve Bank of India, ―Although there has been a

steady year-on-year 25 per cent growth in the number of ATMs in the country, their penetration

as measured by the number of ATMs per million population is still very low when compared to

other emerging markets," (keynote address at the IDRBT Banking Technology Awards

Function). In proportional terms, India has one of the lowest numbers of ATMs and PoS (Point

of Sales) terminals - 63 ATMs and 497 PoS per million population. Speaking on mobile banking

penetration, D.Subbarao, Governor, Reserve Bank of India, said ―as of June, 2012, as many as 50

banks were providing mobile banking services with an aggregate customer base of 14.75

million‖. Both the volume and value of mobile banking transactions are witnessing a remarkable

growth.

As of June 2012, a year-on-year growth in terms of volume was 143 per cent while that in

terms of value was 213 per cent, as per data released by Reserve Bank of India. Further it was

stated in press release that when compared with other emerging markets like Brazil, Mexico and

Russia, ― the value of banknotes and coins in circulation in India, at 12 per cent of GDP, is high‖.

The number of ― non-cash transactions per person in India stands at just 6 per year‖, which again

is very low in comparison with other emerging economies. Clearly the penetration of banking

services is much lesser than that of technology channels such as mobile and online. Instead of

setting up brick and mortar branches this presents an ideal opportunity to use these alternative

technology channels as a means to deliver banking services both cost-effectively and

immediately. As banks are integrating channels in order to ensure the accuracy and integrity of

transaction data, there is a growing demand for technology to support these channels.

Ernst & Young Global Consumer Banking Survey (2011) : “Customers E-Banking

Channel Experience”

A survey was conducted by Ernst & Young in which the Indian customers shared their E-

banking Channel Experience. Upon the completion of the survey, it was found that customers in

India are very satisfied with branches, internet banking and ATMs followed by mobile banking

and tele/phone banking.84% are satisfied with the branch experience, 81% are satisfied with

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ATMs and 79% are satisfied with internet banking. 59% are satisfied with mobile banking and

52% are satisfied with tele/phone banking.

Figure 2.18: Customer Satisfaction Level in % For Different Delivery Channels.

84%81% 79%

59%

52%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

Branches ATMs Internet Banking

Mobile Banking

Tele/ Phone Banking

Delivery Channels

Customer Satisfaction Level for Delivery Channels

Branches

ATMs

Internet Banking

Mobile Banking

Tele/ Phone Banking

Source: Ernst & Young Global Consumer Banking Survey (2011)

2.11 Global E-Banking Trends- „International Experience: Country Wise & E-Banking

Channel Wise‟

Many banks globally have started to take initiatives to set in place more cost-effective

alternative service delivery systems in the form of internet and mobile banking. It has been

estimated that the average cost of service delivery at a typical bank ranges from 285 to 350 basis

points per dollar of deposits which is far higher than that for non-bank competitors (Barrett,

1997). For example, considering the cost per transaction of a customer to check account balance

costs $10.00 using a branch, $3.00 using a telephone and a live representative, $0.40 using an

automated telephone system and just a few cents using the internet (Barrett, 1997).

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Finnish banking system in Finland (a Nordic country) was the pioneer and perhaps the

world leader in the development, adoption and integration of electronic banking in the world

(Karjaluoto, 2002). The first Internet based banking service (online banking) was launched in the

year 1996 and according to the Finnish Banking Association‘s survey, the penetration rate is

over 70 percent (Pikkarainen et al., 2006). E-banking is still growing in Finland and has the

highest percentage of penetration (Yenenchua, 2006). In April 2005, 2.6 million consumers or

half the total Finnish population used IB on a regular basis (The Finnish Bankers‘ Association,

2005). Of roughly 700 million credit transfers made during the year 2005, 284 million were

made using the Internet (The Finnish Bankers‘ Association, 2006). According to Internet Usage

Stats and Telecom Reports (ITU), there are 4,661,265 Internet users as on December 2011,

representing 88.6% of the population with usage of internet banking services at 76%.

E-banking is widely used in Denmark. According to a report Focus Denmark released by

Ministry of Foreign Affairs (2010), ―The number of people in Denmark with access to their bank

accounts via the internet continues to increase. New figures show that more than 3 million out of

the 5.5 million populations have now made an internet banking agreement with their bank‖.

Bank customers with an internet banking agreement increased by almost 100,000 in the first six

months of 2010 and the figures reached to 250,000 by the end of year 2010. The number of

companies that conduct their banking transactions via the internet also continues to increase.

There are now more than a quarter of a million companies using internet banking. Nordic banks

lead the way in terms of numbers of internet banking customers.

In the mid 1990s, Lan & Spar Bank was the first bank in Denmark to offer a basic

internet banking solution. Later, the major banks followed with more advanced solutions, and

since then the range of internet banking facilities has grown tremendously. Even the smallest co-

operative bank in Denmark offers internet banking to its customers. This is possible because all

the small banks, savings banks and co-operative banks collaborate on the operation of EDP

centrals, making them large enough to develop the advanced systems that run the internet

banking facilities.

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Survey on Internet banking by U.K. Payments Administration during 2010-11 showed

that the ―number of internet users now banking online exceeds 50% for the first time ever‖.

According to the report , ―it is just 12 years since internet banking began, but its popularity has

grown so much that, in the first half of 2010, 23 million adults used internet banking on their

main current account. This means that for the first time ever more than 50 per cent of regular

internet users (41.4 million) are banking online‖.

According to information from the American Bankers Association (ABA) ,2011, ―62

percent of U.S. adults now view online banking as their preferred banking method, compared to

just 36 percent in 2010‖. The survey shows that older American's--those over the age of 55--are

helping drive the online banking trend. Results of the survey, which was conducted by Ipsos

Public Affairs, show that 57 percent of these adults prefer online banking, a 35 percent increase

over 2010 numbers. In second place behind online banking were bank branches, with 20 percent

of participants identifying them as their preferred method. ATMs were a far third choice and

were selected by 8 percent of participants. According to ABA Senior Council Nessa Feddis

‗customers of all age groups prefer the speed and convenience of conducting their banking

transactions on the internet‘. Feddis said that banks "are still committed to providing multiple

choices to serve the needs of all customers. Bank customers will continue to have the choice to

use branches, ATMs, telephone, mobile devices or the Internet to conduct their transactions."

As per Annual report on China's Online Banking Market, ―Online banking has achieved

rapid growth in recent years. In 2008, number of online banking subscribers increases by 54.7%,

and trade volume increases by 100.8%‖. Chinese domestic banks have recently been actively

engaged in e-banking initiatives (Kurnia, Peng and Liu). The first generation of electronic

banking was introduced by the China Merchant bank in 1997, in the form of internet payment

system (Laforet and Thong et.al. 2005).

Clair Gowenlock (2011) opined on Net Banking in Australia that the internet has become

more of a necessity, with the convenience of online banking, shopping and communication.

Nearly half of Australians own a mobile phone with internet capability. Michelle Hammond

(2011) stated in his report on trends in Australian Banking Sector that ―more Australians do their

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banking online rather than visiting a branch, although industry experts say face-to-face service

still resonates with small business customers‖.

According to Hammond‘s report, ―Over the past 12 years, internet banking use has risen

from 1% to 45%. As of December 2011, 45% of Australian consumers had used online banking

services in the previous four weeks, narrowly beating the 44% of consumers who visited a

branch over the same period. According to the study, ATMs have remained the most used

banking channel, with 77% of Australian consumers having used an ATM in the previous four

weeks. Meanwhile, internet banking is displacing phone banking, which has fallen consistently

since a peak usage of 28% in January 2003 to 18% in December 2011‖.

Suela Qemal, finance industry director at Roy Morgan, says the popularity and

convenience of the internet continues to drive customers towards internet banking. ―There is a

shift-away from traditional staff-based services of phone banking and the standard walk-in

branch visit,‖ Qemal says.

According to Japan Information Network (JIN), ―full Internet banking has arrived in

Japan and lower costs to operate Net banking may attract customers from all walks of life. The

emergence of Net banking in Japan may signal the start of a new trend in the banking industry‖.

Japan Net Bank, the first in Japan to operate entirely on the Internet, opened for business on

October 12, 2000. Currently, banks in Japan are increasingly focusing on e-banking transactions

with customers. Internet banking is an important part of their strategy. While some banks provide

services such as inquiry, settlement, purchase of financial products and loan application, others

are looking at setting up finance portals with non-finance business corporations. Most banks use

outside vendors in addition to in-house services.

A study on Internet Banking in New Zealand by Chung and Paynter (2002) revealed that

―banks in New Zealand enhance their retail banking services through the Internet‖. New Zealand

banks perform extremely well in providing up-to-date information. This had led to rapid growth

of customers registering for I-Banking and more than 50 percent of the populations have Internet

access and 34 percent use it on a regular basis (Groenfeldt, 2000). It is further predicted that the

usage of internet banking in New Zealand will continue to grow in the near future, as customer

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support for internet banking is mounting. According to New Zealand Herald ―there are more than

2 million Internet banking users performing 66% of the banking transactions‖.

According to Reuters (Press Release, 2011), ―The Singaporean online banking market is

among the most advanced in the world with a high proportion of the population using the online

channel. The number of online banking customers in Singapore will grow to almost four million

by 2013‖. According to an AC Nielson Survey, Singapore ranks third in the world in terms of

increased usage of electronic banking. Almost 80 percent of the banking population uses

electronic banking to communicate and transact, both domestically and internationally.

ComScore, Inc. (NASDAQ: SCOR), leader in measuring the digital world, (2011),

―Online Banking on the rise in Hong Kong. As per the report, there was an upward trend in

number of consumers opting for online banking throughout 2010. According to Joe Nguyen,

ComScore Vice President, ―Although online banking in Hong Kong does not exhibit as high a

level of penetration as markets in North America or Europe, it is growing rapidly as more

consumers respond to the convenience of the online channel for conducting banking activities

and transactions. As the Internet takes a more central role in how consumers interact with their

banks, it will be important to continue to enhance and develop site features and improve the

overall customer experience to continue to appeal to current and prospective customers‖. By the

end of the year 2010, Hong Kong‘s online banking audience grew 18 percent to 1.5 million

visitors, representing 35.5 percent of the total online population and ranking as the most highly

penetrated online banking market in the region.

ComScore, Inc. (NASDAQ: SCOR), leader in measuring the digital world, (2011),

―Across markets in Southeast Asia, visitation to online banking sites increased strongly in the

past year, growing by double-digits percentages‖. Malaysia, home to the largest total number of

online banking users in the study, climbed 16 percent to 2.7 million visitors in January 2011.

Indonesia posted the largest percentage increase, growing 72 percent to 749,000 unique visitors

followed by Philippines growing 39 percent to 525,000 unique visitors followed by Vietnam

growing 35 percent to 949,000 unique visitors for the same year i.e. January 2011.

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Accenture - Global Consumer Banking Survey (2012)

“A new era of customer expectation”

Globally, retail banks are entering new era and for banks to compete, differentiate and

grow in this new customer era, they must swiftly accelerate their innovation around banking

products and service offerings. Those that do so will enrich their brands and protect and increase

market share at a time when customer loyalty is no longer guaranteed. The banking industry in

mature markets has witnessed a wholesale and ongoing shift in confidence, and never before has

loyalty management and personal customer attention been such an issue for the sector. Despite

service quality being a key attrition lever, efforts by banks to improve the quality of service they

deliver have not yet resulted in improved customer perceptions. Most customers continue to feel

that they are not getting the level of personalized service they would like.

43% of customers say they get no, or only occasional, personal attention from

their main bank.

The personal attention received in emerging markets seems to be significantly

better, with 81% of Indian respondents saying they receive good or very good

personalized service.

Customers are open to greater communication, provided it is relevant and pertinent to

their personal circumstances. When it comes to channels, customers are responding positively to

the convenience, accessibility and reliability provided by digital channels, and particularly the

internet and ATMs.

Internet banking (83%), ATMs (79%) and Branches (79%), are the channels with

the highest levels of customer satisfaction.

Globally, 42% of customers never use mobile banking and only 44% are satisfied

with this emerging channel in banking.

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Call centers are not popular, with only 50% of customers satisfied with their

services and 30% never using them.

E-Statement(s) latest in offerings, enjoy 65% satisfaction among bank customers.

Figure 2.19: Level of Customer Satisfaction in % For Different Delivery Channels.

Internet Banking, 83%

ATMs, 79%

Branches, 79%

Mobile Banking, 44%

Tele/Phone Banking, 50%

E-Statement / Mails, 65%

Level of Customer Satisfaction for Delivery Channels

Internet Banking

ATMs

Branches

Mobile Banking

Tele/Phone Banking

E-Statement / Mails

Source: Accenture - Global Consumer Banking Survey

Thus it may be stated that, banks need to reconnect with their customer base by

improving the customer experience. There is a clear demand for greater personal attention among

the respondents, and it is also evident that banks need to invest in channels and become more

customer-centric across their operations. There is considerable room for improvement in the

levels of channel efficiency, personalization and integration that banks offer their customers.