Trends in Banking

Product Innovation Investment products Gold / silver coins Marketing of insurance product Credit cards and debit cards Innovative services Automatic Teller Machines Facilitate issue of capital market products

Internet Banking Web site information of banks. Bank products and services. Web transactions. Submission of applications, instructions, account balance queries etc. Website enabling complete transactions. Account operations such as transfer of funds, payment of bills, payment for other bank products.

Virtual Banks Do not have a physical presence in a country however offer their services to customers. Electronic delivery channels provide banking services. Internet services of banking products. Termed as ‘i-banking’.

Features of Internet Banking Performance beyond physical borders. Security of banking transactions. Changing / updating technology frequently. Additional risk to the banking system. Changes in risk control measures to cope with technology risk. Strategic business models to cope with the new entrants.

Regulation of Internet Banking Legal issues Jurisdiction of services offered Security issues Money transfer Technology issues Loopholes in technology and change in technology Operational issues Control and supervision of banking operations

Benefits from Internet Banking Less cost of services when compared to traditional banking practices. Helps banks to offer several products desired by customers. Banks can offer their services efficiently. Large base of customers have shifted to internet usage and hence banks benefit through access of such customer base.

Comparative Cost Structure Data Source: India research, May 29, 2000, Kotak Securities

Illustrative Banks offering Internet based Services in India ICICI bank HDFC bank Axis bank City bank Bank of Punjab Bank of Madura Federal bank Allahabad bank State bank of India

Electronic Fund Transfer Facilitates one-to-one fund transfer Customers through the accounts are provided services to transfer funds across banks and branches Transfer of funds across individual, firm or corporate level account holdings

National Electronic Funds Transfer (NEFT) Bank branches are NEFT enabled Reserve Bank of India associates itself with the NEFT enabling of banks Customers with accounts in the bank branches are allowed to transfer funds through NEFT Cash restriction on fund transfers is Rs.50,000 per transaction NEFT also enables fund transfer without bank account after required details are furnished by the customers

Operating Details of NEFT Settlement of funds between receiving and paying banks takes place centrally from Mumbai. Bank branches participating with NEFT can be located anywhere in the country. Customer through an application form provides details of the required transfer. Customer operating through a net banking facility can also initiate the fund transfer through their bank. Through the Indian Financial System Code (IFSC) the bank branch participant is identified and is used in the transfer of funds.

Benefits of using NEFT No physical transfer of cheque or demand draft Possibility of loss of funds in transfer is not there Transaction cost is less when compared with other payment methods Service is enabled through internet banking / / mobile and thus minimizes the effort of the transfer Real time transfer of funds

Risks Associated with Innovative Banking Services Operational risk Transactional risk associated with processing of transactions, data integration, data confidentiality. Security risk Financial transaction movement through unauthorized access. Technology risk Inappropriate choice of technology, such as file transfer protocol, hyper text transfer protocol, telnet use.

Risks Associated with Innovative Banking Services Reputation risk Customer confidence and bank customer relationship management. Legal risk Compliance of legal rules and regulations imposed by the country in which the bank is operating. Fraud Criminal and fraudulent activities that are encountered in a banking transaction. International Transaction risk Banker’s inability to track foreign customers resulting in credit risk for the banks.