Project Report on Role of Information Technology in

banking sector”

Bachelor of Banking and Insurance

Semester VI
By
 Certificate
This is certify that MR KENDRICK JOEL FERNANDES Roll no.8250 of TY
BBI Sem 6 Has Successfully completed The Project on “ROLE OF
INFORMATION TECHNOLOGY IN BANKING SECTOR”

Principal and co-coordinator Internal Examiner

Project Head External Examiner

(College seal)

Place:-

Date:-
 DECLARATION BY LEARNER
I the undersigned MR. KENDRICK JOEL FERNANDES here by, Declare That the work
embodied in this project work title “ROLE OF INFORMATION TECHNOLOGY IN
BANKING SECTOR”, forms my own contribute to Research Work Carried out under the
guidance of Prof. is a Result of my Own research work and has not been previously
submitted to any other University for any other Degree/ Diploma to this or any other university.

Whenever reference has been made to previous works of others, it has been clearly indicate as
such as included in the bibliography. I, here by further Declare that all information of this
document has been obtained and Presented In accordance with academic rules and ethical
conduct.

KENDRICK JOEL FERNANDES

Name and signature of the learner

Certified by,

Signature of the guiding teacher

 Table of content
SR Particulars Pg no.
NO.

1 INTRODUCTION

2 RESEARCH METHODOLOGY

3 THEORETICAL BACKGROUND AND

LITERATURE
REVIEW

4 DATA ANALYSIS

5 CONCLUSION
6 BIBLIOGRAPHY
Chapter -1:
 Introduction
 Role of Information Technology in banking sector
The term “Information 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 behaviour by sifting through

customer details such as demographic, psychographic, and transactional data.

The banks in India are using Information Technology (IT) not only to improve their own

internal processes but also to increase facilities and services to their customers. Banks today

have become synonymous with technology and have leveraged IT in all areas of governance,

operations and control. Effectively use of Technology has facilitated accurate and timely

management of the increased volume of banks that comes with a larger customer base.

The banking sector is the most dominant sector of the financial system in India. Significant

progress has been made with respect to the banking sector in the post liberalization period. The

financial health of the commercial banks has improved manifolds with respect to capital

adequacy, profitability, and asset quality and risk management. Further, deregulation has
opened new opportunities for banks to increase revenue by diversifying into investment

banking, insurance, credit cards, depository services, mortgage, securitization, etc.

Liberalization has created a more competitive environment in the banking sector.

During the recent years, the pace and quality of banking was changed by the technological

advancements made in this area. Computerization as well as the adoption of core banking

solution was one of the major steps in improving the efficiency of banking services. The

process of computerization of the banking sector continued.

 Objectives can be attributed to it

1. The use of appropriate hardware for conducting business and servicing the customers

through various delivery channels and payment systems and the associated software

constitutes one dimension of banking technology. The use of computer networks,

security algorithms in its transactions, ATM and credit cards, Internet banking,

Telebanking, and mobile banking are all covered by this dimension. The advances made

in information and communication technologies take care of this dimension.

2. On the other hand, the use of advanced computer science algorithms to solve several

interesting marketing-related problems such as customer segmentation, customer

scoring, target marketing, market-basket analysis, cross-sell, up-sell, and customer

retention faced by the banks to reap profits and outperform their competitors constitutes

the second dimension of banking technology. This dimension covers the

implementation of a data warehouse for banks and conducting

3. Moreover, banks cannot ignore the risks that arise in conducting business with other

banks and servicing their customers, otherwise their very existence would be at stake.

Thus, the quantification, measurement, mitigation, and management of all the kinds of

risks that banks face constitute the third important dimension of banking technology.

This dimension covers the process of measuring and managing credit risk, market risk,

and operational risk. Thus, in a nutshell, in ‘banking technology’, ‘banking’ refers to

the economic, financial, commercial, and management aspects of banking, while

‘technology’ refers to the information and communication technologies, computer

science, and risk quantification and measurement aspects.

4. Over a decade Indian banking system witnessed metamorphosis. The main driver of

transformation has been the fast adoption of Information, Communication and

Technology (ICT) based system in the banks. The huge red ledgers, row of racks of

ledger holders, cash scrolls, registers, clearing cheque scrolls, totaling machines, long

rolls of paper ribbons often gazing the floor formed part of hardware in the branches.

5. It was also common to see staff hiding behind the tall branch counters, row of signature

cabinets standing between the counters and supervisory staff, customers eyeing

frantically on movement of ledgers and cheques until their transactions were done.

They are now no more relevant. The banking work space has changed for good. Bank

branches are now sporting a smart look with refurbished interior, radiating corporate
 color, well dressed bank logos, wide glass doors, and plush interiors and well-

developed customer lounges etc.

6. The onsite ATMs, teller counters, swipe machines / kiosks have speed up standard

transactions of every day need of consumers. With the onset of alternative delivery

channels, even the branch timings are not very significant. Phone and mobile banking,

smart cards, debit cards, rechargeable electronic purse are also some of the modern-day

banking facilities that allow round the clock access. With the profile and aptitude of

bank consumers fast changing toward the use of ICT facilities, the popularity of e-

channels of banking are set to assume more significance. Banks are fast gearing up to

introduce add-on services to attract young generation of customers.

7. The low height counters handled by trained employees wearing inviting look, customers

having one to one interface with departments, banking halls buzzing with clicks of

mouse, laptops, computers, currency notes zipping through the counting machines form

part of modernized attire of bank branches at least in metro cities. Banking and

technology go hand-in-hand these days.

 Evolution of Banking
Despite the enormous changes the banking industry has undergone through during the past20

years let alone since 1943one factor has remained the same: the fundamental nature of the need

customers has for banking services. However, the framework and paradigm within which these

services are delivered has changed out of recognition. It is clear that people’s needs have not

changed, and neither has the basic nature of banking services people require. But the way

banks meet those needs is completely different today. They are simply striving to provide a
service at a profit. Banking had to adjust to the changing needs of societies, where people not

only regard bank account as a right rather than a privilege, but also are aware that their business

is valuable to the bank, and if the bank does not look after them, they can take their business

elsewhere

(Engler & Eslinger, 2000).

Indeed, technological and regulatory changes have influenced the banking industry during the

past 20 years so much so that they are the most important changes to have occurred in the

banking industry, apart from the ones directly caused by the changing nature of the society

itself. In this book, technology is used interchangeably with information and communication

technologies together with computer science. The relationship between banking and technology

is such that nowadays it is almost impossible to think of the former without the latter.

Technology is as much part of the banking industry today as a ship’s engine is part of the ship.

Thus, like a engine, technology drives the whole thing forward (Engler &Eslinger, 2000).

Technology in banking ceased being simply a convenient tool for automating processes. Today

banks use technology as a revolutionary means of delivering services to customers by

designing new delivery channels and payment systems. For example, in the case of ATMs,

people realized that it was a wrong approach to provide the service as an additional

convenience for privileged and wealthy customers.

It should be offered to the people who find it difficult to visit the bank branch. Further, the cost

of delivering the services through these channels is also less. Banks then went on to create

collaborative ATM networks to cut the capital costs of establishing ATM networks, to offer

services to customers at convenient locations under a unified banner (Engler &Eslinger, 2000).
People interact with banks to obtain access to money and payment systems they need. Banks,

in fact, offer only what might be termed as a secondary level of utility to customers, meaning

that customers use the money access that banks provide as a means of buying the things they

really want from retailers who offer them a primary level of utility. Customers, therefore,

naturally want to get the interaction with their bank over as quickly as possible and then get on

with doing something they really want to do or with buying something they really want to buy.

That explains why new types of delivery channels that allow rapid, convenient, accurate

delivery of banking services to customers are so popular. Nowadays, customers enjoy the fact

that their banking chores are done quickly and easily (Engler &Eslinger, 2000). The kind of

enormous and far-reaching developments discussed above have taken place along with the

blurring of demarcations between different types of banking and financial industry Activities
1. Governments have implemented philosophies and policies based on an increase in

competition in order to maximize efficiency. This has resulted in the creation of large new

financial institutions that operate simultaneously in several financial sectors such as retail,

wholesale, insurance, and asset management.

2. New technology creates an infrastructure allowing a player to carry out a wide range of

banking and financial services, again simultaneously.

3. Banks had to respond to the increased prosperity of their customers and to customers ‘desire

to get the best deal possible. This has encouraged banks to extend their activities into other

areas.

4. Banks had to develop products and extend their services to accommodate the fact that their

customers are now far more mobile. Therefore, demarcations are breaking down.

5. Banks have every motivation to move into new sectors of activity in order to try to deal with

the problem that, if they only offer banking services, they are condemned banks realized the

convenience of ATMs, new services started to be added.

 Chapter 2:

Research Methodology
Data collection: primary Method

This study attempts to investigate the impact of electronic banking in the Idea. It explores

efficiency, profitability and barriers to the development of electronic banking in India. A

quantitative methodology and econometrics models will be employed to address the research

questions and the hypotheses. This study is based on secondary and primary data. The required

data have been collected from various sources i.e. the primary data were obtained through

questionnaires and were complemented with oral interviews of experts of IT section and

managers of banks involved in the study. Information and data relating to different banking

ratios, banking performance, volume and number of e-banking transactions and facilities, trend

and progress and different reports and guidelines have been collected from the various annual

reports of RBI, Indian bank’s association, annual reports of selected banks, reports of bank for

international settlement, reports of institute for development and research in banking

technology and IRB bulletins.

This includes 8 major commercial banks of India, State Bank of India (SBI), Bank of India

(BOI), Central Bank of India (CBI), Punjab National Bank (PNB), and Union Bank of India

(UBI), ICICI Bank, HDFC Bank and Axis Bank. The annual balance sheet and income
statement used were taken from different reports of Reserve Bank of India. Because of non-

availability of data for number of ATMs we analyzed data from 2003 to 2011.

In the literature in the field, there is no consensus regarding the inputs and outputs that

have to be used in the analysis of the efficiency of the activity of commercial banks (Berger

and Humphrey, 1997). In the studies in the field, five approaches for defining inputs and

outputs in the analysis of the efficiency of a bank were developed, namely: the intermediation

approach; the production approach; the asset approach; the user cost; the value added approach.

The first three approaches are developed according to the functions that banks do fulfill

(Favero and Papi, 1995). The production and the intermediation approaches are the best known

ones and the most used in the quantification of bank efficiency (Sealy and Lindley, 1997).

In the production-type approach, banks are considered as deposit and loan producers and

it is assumed that banks use inputs such as capital and labor to produce a number of deposits

and loans. According to the intermediation approach, banks are considered the intermediaries

that transfer the financial resources from surplus agents to the agents with deficit. In this

approach it is considered that the bank uses as inputs: deposits, other funds, equity and work,

which they transform into outputs such as: loans and financial investments. The opportunity for

using each method varies depending on circumstances (Tortosa- Ausina, 2002). The

intermediation approach is considered relevant for the banking sector, where the largest share

of activity consists of transforming the attracted funds into loans or financial investments

(Andrie and Cocris, 2010). In our analysis we will use the following set of inputs and outputs

to quantify the efficiency of banks in India:

 Outputs: Loans and investments

 Inputs: Fixed assets, deposits, number of employees, number of branches and number of

ATMs

This study uses the intermediation approach to define bank inputs and outputs. Under the

intermediation approach, banks are treated as financial intermediaries that combine deposits,

labour and capital to produce loans and investments. Under the intermediation approach, banks

are treated as financial intermediaries that combine deposits, labour and capital to produce

loans and investments. In order to measure efficiency of banks we employed DEAP Version

2.1 software.

For identification of obstacles and challenges of development of electronic banking we

employed a descriptive and survey research method and also a multistage sampling method is

used as sampling method. In this case we found out and accurately described the factors that

influence implementation and development of electronic banking.

In the first step of analyzing we used bivariate correlation analysis which describes the

strength, direction and assessing the significance level of the linear correlation between two

variables. These features will help us to test our hypotheses. There are numbers of different

statistics available from SPSS in order to test the hypotheses, but depending on the level of our

measurements all of which are in interval level we used Pearson Product-Moment Correlation

coefficient to test our hypotheses. In order to evaluate research questions independent sample t-

test, one way ANOVA test and post-hoc are used to evaluate research questions. In the table

provided by Pearson product-moment correlation coefficient there are a number of different

aspects of the output that should be considered. Herein, the first thing to consider is assessing

the significance level to test the hypotheses. If the Sig. value is less than 0.05, then with 95%

confidence there is a correlation between two variables and consequently Null hypotheses is
rejected and the alternative hypothesis is accepted. The value is less than 0.01, then with 99%

confidence there is a correlation between variables and again Null hypothesis is rejected.

Finally, if the Sig. Value is greater than 0.05, then we conclude that there is no relationship

between variables and accordingly the Null hypothesis is accepted. In order to determine the

direction of the relationships the negative or positive sign in front of r value will be considered.

A negative sign means there is a negative correlation between two variables (i.e. High scores

on one variable is associated with low scores on the other) and a positive sign means there is a

positive correlation between the two variables (i.e. High scores on one variable is associated

with high scores on the other).

Secondary Method

This study is based on secondary quantitative data and on panel dataset which covering 8 top

commercial banks of India over the period of 2003-04 to 2010-11. The banks are State bank of

India (SBI), Bank of India (BOI), Central bank of India (CBI), Punjab national bank (PNB),

and Union bank of India (UBI), ICICI Bank, HDFC bank, and Axis Bank. The data are from

banks tables published by RBI and selected banks.

Model Specification

The model which we used in this section is based on SCP theory is:

Where (t) is period of time from 2003 to 2010 and (i) is the number of banks and other

variables of study are:

Dependent variable:

1. ROA: The return on assets (ROA) percentage shows how profitable a company's assets are

in generating revenue. Independent variables:

1. Bank Index of Market Concentration: Proponents of banking sector concentration argue

that economies of scale drive bank mergers and acquisitions (increasing concentration). Thus,

increased concentration goes hand-in-hand with efficiency improvements. Market

concentration is one of the dimensions of the banking market. This arguably is the most

important structural variable in the equation of profitability. For measurement of concentration

in this study we employed Herfindahl–Hirschman Index. The Herfindahl index (also known as
Herfindahl–Hirschman Index or HHI) is a measure of the size of firms in relation to the

industry and indicator of the amount of competition among them.

2. Size (BSIZE): Size of bank is another important structural variable which affects

profitability of banks. It is believed that big banks due to having more opportunities as

compared to small banks are in a better position and their profitability is higher. This variable

in this study is defined as:

3. Number of ATMs: Number of ATMs is another independent variable in this study. Due to

lack of data for other e-banking services we use only numbers of ATMs as representative of e-

banking and period of study will be from 2003-04 to 2010-11.

4. Member to National Financial Switch: Membership to the country’s national financial

switching is a dummy variable in this model and is used to identify whether membership to

financial switching has any impact on profitability of banks. The Institute of Development and

Research in Banking Technology (IDRBT) in Hyderabad has been providing the ATM
switching service to banks in India through National Financial Switch since 2005.
 Chapter 3:

Literature Review

Information Technology (IT) is very powerful in today’s world, and financial institutions are

the backbone of the Indian economy. Indian Banking Industry today is in the midst of an IT

revolution. Nearly, all the nationalized banks in India are going for information technology-

based solutions. The application of IT in Banks has reduced the scope of traditional or

conventional banking with manual operations. Nowadays banks have moved from disbursed to
a centralized environment, which shows the impact of IT on banks. Banks are using new tools

and techniques to find out their customers need and offer them tailor made products and

services. The impact of automation in banking sector is difficult to measure.

A literature review is important due to the following reasons:

1) A literature review gives more knowledge about the area in which the research is conducted

2) It helps to refine the research topic by determining the research gap.

3) It helps to avoid errors of duplication

4) It helps to identify the contribution that one’s research will make and also provides a

justification for the study.

5) It will help in understanding how already existing research findings have been presented in

that particular area.

6)Application of IT in banking

7) IT framework for Indian banking

8) Technological developments in cooperative banks

9) Indian banking sector: challenges and opportunities

The review has been conducted in the following manner:

1) First, several literature sources in the area of behavioral finance were identified and studied.
2) The topic was then narrowed down upon as there were several discussions on the various

factors

3) Therefore, I decided to study all such factors and read more articles on this topic which

completed the literature review

 Technological development in the banking sector

The technological development in the banking sector began with the use of Advanced Ledger

Posting Machines (ALPM) in the 1980s and nowadays banks are using core banking solution

(CBS) for providing better services to their customers. Over the years several studies have been

conducted both at the industry and academic level to examine the impact of IT on banking

productivity and profitability.

Palani and Yasodha P. (Apr 2012)

The research paper is focused on customer’s perceptions on mobile banking offered by Indian

Overseas Bank and it also focuses on the various drivers that drive mobile banking consumers..

The results of this study showed that gender, education and income of the consumers play an

important role in usage of mobile banking. Most of the researches are focused on the

acceptance of the mobile banking technology due to which not much research has been

conducted on people. The research reveals that if skills can be upgraded among the consumers

there will be greater willingness on the part of consumers toward the use of Mobile banking.

Some the factors like security trust, gender, education, religion, and price can have minimal

effect on consumer mindset towards Mobile banking compared to the other factors.

Thakur, Rakhi; Srivastava, Mala. (2013)

The paper studies the factors influencing the adoption intention of mobile commerce. Perceived

usefulness, perceived ease of use and social influence are found to be significant dimensions of

technology adoption readiness to use mobile commerce while facilitating conditions were not

found to be significant. The results of the research study also indicate the perceived credibility

risk defined by security risk and privacy risk are significantly associated with behavioral

intention in negative relation, which indicates that security and privacy concerns are important

in deterring customers from using mobile commerce. This research study developed an

integrated model for behavioral intention towards financial innovations. Practical implications

of this study is one of the few empirical studies which have investigated the adoption of mobile

commerce in India, which is considered one of the fastest growing countries in terms of mobile

usage. The study relates to inclusion of both utilitarian and credibility aspect of adoption

intention. It gives an empirical basis on which mobile and banking companies can base their

mobile payments marketing strategy.

Kumar, Reji G; Rejikumar, G; Ravindran, D Sudharani.

This research paper examines the factors influencing the continuance decisions of the early

adopters of m-banking services in Kerala, India. The study used constructs adopted from

Technology Acceptance Model along with constructs of perceived service quality, perceived

credibility and perceived risk to empirically establish the influence on satisfaction and

continuance usage intentions. The study confirmed that after adoption of the technology, the

customer finds satisfaction in the quality parameters of the service. Perceptions about the risks

involved in m-banking had adverse impact on service quality and satisfaction.

Kalaiarasi, H &Srividya, V. 3 (Jul-Sep 2012)

Mobile banking as a new channel to the existing banking channels provides convenient and

cost efficient banking services anytime anywhere. It is observed that, though India has strong

potential for mobile banking only 5% of mobile subscribers are registered users of mobile

banking. Attracting the new customers may not be easy than retaining the existing mobile

banking customers 2009). Hence the current research focuses on the factors influencing actual

usage of mobile banking services. The results shows that, Indians mobile banking usage is

influenced by ease of mobile banking technology, its suitability to the user’s lifestyle and the

benefits like mobility and mobile transactions. However customer’s perception towards

security of mobile transactions and privacy fears demotivates actual usage.

Tenkasi Taluk & Devasena, S Valli, (Jan 2012)

Banking system is the backbone of the economy and Information Technology (IT) in turn has

become the backbone of banking activities. Technology, which was playing a supportive role

in banking, has come to the forefront with the ever-increasing challenges and requirements.

Technology to start with was a business enabler and now has become a business driver. The
Banks cannot think of introducing a financial product without IT support. Be it customer

service, transactions, remittances, audit, marketing, pricing or any other activity in the Banks,

IT plays an important role not to complete the activity with high efficiency but also has the

potential to innovate and meet the future requirements. The Banking Sector was early adopter

of technology and in that way set an example to the other industries the need to opt for

automation for taking full advantage in operational efficiency.

Laukkanen &Tommie (2007).

The aim of the paper is to explore and compare customer value perceptions in internet and

mobile banking. The results indicate that customer value perceptions in banking actions differ

between internet and mobile channels. The findings suggest that efficiency, convenience and

safety are salient in determining the differences in customer value perceptions between internet

and mobile banking. By understanding how and what kind of value different service channels

provide for customers service providers are better enabled to create actions to enhance internet

and mobile banking adoption. The contribution of the paper lies in achieving a more profound

understanding on consumer value perceptions to internet and mobile banking.

Goswami, Divakar; Raghavendran, Satish. (2009)

The research is conducted to determine the potential that mobile banking provides for both the

banks and the mobile carriers. After the secondary research the report gives an insight into the

best-practices based on a critical evaluation of partnership models. Banks and mobile carriers

have tested these waters timidly, and many of the resulting offerings were expensive to the

banks and mobile carriers and less than enticing to their customers. This report weeds out
ineffective partnering models that companies stumble into on their way to developing mobile-

banking and identifies the keys to successful partnerships.

Dr. Vinod Kumar Gupta RenuBagoria&NehaBagoria .

This research paper try s to identify and investigate the various factors which influence the

customer’s decision to use a specific form of mobile banking and specially focus on the

evaluation of SMS-based mobile banking in India. The study also plans to connect the gap of

research in the acceptance of mobile banking among the customers. The main challenges

involved in the adoption of mobile banking are related to the Positive and Negative factors

which influence the adoption of SMS-based mobile banking .Second challenge is Focused on

the adoption of mobile banking services by customers and usage of mobile banking in India.

Third is related to the different Technologies behind Mobile Banking. The study has its own

limitations but the implications and conclusion from the results can provide practical

recommendations to the banking areas and banking industries. It can also provide directions for

further work

Prerna Sharma Bamoriya (2011)

The study was conducted to identify certain issues relating to banks, mobile handsets and

telecom operators, mobile handset operability, security/privacy, standardization of services,

customization, Downloading & installing application software and Telecom services quality.

For this purpose a descriptive design was adopted to empirically explore the selected issues.

Study suggested that from consumers ‘perspective mobile handset operability security or

privacy and standardization of services are the critical issues. The objective of the research is to

study the selected issues in mobile banking form urban customers’ perspective and to explore

the perceived utility of mobile banking in comparison to retail banking and online banking
among the mobile banking users and non-users. The study is aimed to evaluate perceptions and

opinions of urban mobile banking users. For this purpose a cross sectional descriptive design

was adopted with ad-hoc quota sampling. Sample for the study comprised of 50 mobile

banking users and 50 non-users in Indore city, India.

Achana Sharma (2011)

This paper examines consumer adopting mobile banking as a new electronic payment service

.It also focuses on the various factors influencing the adoption of mobile banking in India.

When it comes to the research methodology used in the study, data collected has been grouped

into two main categories – primary and secondary data. The secondary data have been

collected from the newspapers, journals, magazines, internet and also various other research

papers..In case of questionnaires the has been targeted on user and non user of mobile banking

which included the Businessmen, servicemen, professionals, students etc. The primary data for

the study is extracted from a survey conducted in Ghaziabad in U.P, India. The research had a

total of 100 respondents participating in the data collection for understanding the use of Mobile

banking. From the data collected it was possible to make projections in the research.

Ashish Adholiya, Pankaj Dave, ShilpaAdholiya (2012)

This paper investigates the determinants influencing the customer satisfaction for mobile

banking users. Customer satisfaction is one of the fundamental marketing constrain in the last

three decades. This research is focused to those respondents who are using the mobile banking

services by their service provider. For the research100 respondents are identified. The

respondents belong from both private and public sector banks of Udaipur, Rajasthan. The

opinions of the respondents were collected using structured questionnaire. Data collected were

analyzed using tools like factor analysis, chi-square and correlation analysis. In factor analysis
varimax rotation is used and correlation matrix is used for identifying the relationship between

the service quality, perceived value , flexibility, technological innovation, brand perception,

strategic endorsement and functional performance of mobile banking service with customer

satisfaction.

Shastri R.V, (March, 2003)

“Recent trends in Banking Industry‖ IT emergence, Charted Financial Analyst, ( in this article

stated that liberalization policy and intense competition keeps every banker on his toes.

Implementation of Information Technology (IT) helps for maintaining proper accounts

especially in decision making process. He also stated that facilities like ATM, anywhere

banking, Internet and mobile banking have imported customer service which in turn helps for

better customer relations management. He also explained the challenges faced by banks

because of IT implementation like employment problem and security concerns. He suggested

that the customer delight is the primary goal of all future IT initiatives.

Prabhakar Rao Ch. (Jan, 2004).

Indian banking in 2010‖ IBA Bulletin Special Issues, in this study discussed about the

revolutionary changes that witnessed in the financial sector around the world. He stated that net

worked branches. ATMs, technology-based payment and settlement system, technology vision

of RBI, floating rate of interest have changed the Indian banking sector. He concluded that

brick and mortar bank branches will disappear and customers will be able to operation their

accounts through electronic devices.

Arora. K. (2003)
Highlighted the significance of bank transformation. Technology has a definitive role in

facilitating transactions in the banking sector and the impact of technology implementation has

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

Brett (I997)

Studied the changing in old money structure into E-Money. Now days the banks are providing

different cards (Smart Card, Credit & Debit Cards) to their customers.

Thomas et al.(2002)

Stated that although technology opens up new dimensions of scope and timing but it

creates the possibility for crimes to be committed very quickly. Technology provides

benefits for banks but it worsens traditional banking risks. As the amount of products and

services offered by technology grows rapidly, consumers are more and more concerned

about security and privacy issues. The banking industry has declared information privacy

and security to be major obstacles in the development of consumer electronic commerce.

Continuous vigilance and revisions will be essential as the scope of technology on

banking increases. However, the ease with which capital can potentially be moved

between banks and across borders in a technology environment pose a greater sensitivity to

economic policy management.

O’Leary et al.(1989)

Two issues come to mind when banks talk about security. They are privacy and security,

controlling who gets access to the bank’s computer system and its programs, and what time to

access it. Studies regarding technology on banking examined barriers such as,security,
privacy, and trust of Web system (Rotchanakitumnuai and Speece,2003).To be more precise,

lack of privacy andsecurity were found to be significant obstacles to the adoption of

technology on banking services(Sathye,1999). Challenges ontechnology is inevitable,

therefore care must be taking in since itsnegative effect can cause the bank billions of

money.Breaches of security and disruptions to the system's availability can damage a bank's

reputation;this can potentially affect other technologybanking services and its usage

(Schechter, 2002)
 Chapter 4:

Data Analysis
 TECHNOLOGICAL DEVELOPMENT IN

BANKING

Wave of technology in banking:

The technological development in banking can be traced as follows: -

1960 - Mechanized banking introduced.

1970 - Introduction of computer-based banking industry.

1980 - Introduction of computer-linked communication-based banking.

Advent of computer technology has created a major impact on working of banks. The

computerization and subsequent development in history of Indian banks can be traced back to

1966 when Indian Bankers Association (IBA) along with exchange banks Association signed

first wage settlement with the union, which accounted for the use of IBM or ICT accounting

machines for inter-branch reconciliation etc. As per the reports of RBI the first wave in

banking technology began with the use of Advanced Ledger Posting Machines (ALPM) in

the 1980s. The RBI advised all the banks to go in for huge computerization at the branch

level.
There were two options: Automate the front office or the back office. Many banks opted for

automating the front office. In the first phase, whereas banks like State Bank of India also

concentrated on the back-office automation at the branch level. The Second wave of

development was Total Branch Automation (TBA) which came in late 1980s. This automated

both

front-end and back-end operations within the same branch. TBA comprised of total

automation of a particular branch with its own database. In the third wave, the new private

sector banks entered into the field of automation. These banks opted for different models of

having a single centralized database instead of having multiple databases for all their

branches. This was possible due to the availability of good network102infrastructure. Earlier,

banks were not confident of running the whole operation through single data center.

However, when a couple of private sector banks showed that it could be done efficiently,

other banks began to show interest and they also began consolidating their databases into a

single database. The banks followed up on this move by choosing suitable application

software that would support centralized operations. The fourth wave started with the
evolution of the ATM delivery channel. This was the first stage of Empowerment of the

customer for his own transactions. The second stage was the Suvidha experiment in

Bangalore. This showed the power of technology and how the reach can be increased

amazingly at a great pace. Seeing these, all the banks started revamping their retail delivery

channels. Their core focus became increasing the number of customers they can service at a

lower cost. The main channels for these were internet banking and mobile banking.

After this, came the alliances for payment through various other gateways. The third

important development happening now is the real-time gross settlement system of the RBI.

Once this was in place, transactions between banks could be done through the settlement

system, online, electronically thereby, ensuring faster collection. The process of

computerization had started from back Office application, after that Total Branch Automation

and nowadays it is the period of implementation of Core Banking Solutions (CBS).

A key trend in the last couple of years has focused core banking systems. With the

implementation of core banking systems across the banks, the usage level of IT for customer

management has increased. Core banking systems have enabled banks to launch new

products and services targeting specific customer segments after understanding their banking

andinvestment requirements.ATM, internet banking and mobile banking have Improved

customer convenience by providing anywhere any time banking services. The utility bill

presenting and payment has help customers to pay their bills online at the click of a button.

Electronic clearing system and electronic funds transfer facilitate faster funds movement and

settlement for the customers of different banks and different centers. The electronic data

interchange and cash management service facilities have enabled better Funds management

for the customer. Very few banks offered customers the ability to access their accounts and

perform at least simple money transactions using internet banking. Advancements in

information technology had make possibility for the banks to use the internet as delivery

channel for banking services. Technological developments

has introduce tremendous changes in the ability of financial and non financial firms to

efficiently collect, store, use and sell information about their customers

Over a decade Indian banking system witnessed metamorphosis. The main driver of

transformation has been the fast adoption of Information, Communication and Technology

(ICT) based system in the banks. The huge red ledgers, row of racks of ledger holders, cash

scrolls, registers, clearing cheque scrolls, totaling machines, long rolls of paper ribbons often

gazing the floor formed part of hardware in the branches. It was also common to see staff

hiding behind the tall branch counters, row of signature cabinets standing between the

counters and supervisory staff, customers eyeing frantically on movement of ledgers and

cheques until their transactions were done. But in the post bank reform era, more particularly

after the ICT enablement there is semantic changes and innovation in the quality of customer

services. Moreover, the beeline of customers standing in queue in bank branches staring

anxiously at the staff, their eagerness to catch up bank timings to log in transactions,

searching for known employees to deposit/receive payments late at the counters, receiving

wads of currency notes in retail payments at the counters, waiting for updating pass books,

receiving drafts, grumbling over the bad hand writing of some of the employees were also the

common features of 104 manual banking. They are now no more relevant. The banking work

space has changed for good. Bank branches are now sporting a smart look with refurbished

interior, radiating corporate color, well dressed bank logos, wide glass doors, and plush

interiors and well developed customer lounges etc.

The well painted signage, clear guidance in the branch, customer information, display of

product information, enquiry kiosk, smiling relationship assistants in some banks adds to the

modern branch set up. The low height counters handled by trained employees wearing

inviting look, customers having one to one interface with departments, banking halls buzzing

with clicks of mouse, laptops, computers, currency notes zipping through the counting

machines form part of modernized attire of bank

branches at least in metro cities. The eerie silence of customers and staff, an assured quick

servicing system, provides an atmosphere for maintaining focused quality of service in the

branches. The onsite ATMs, teller counters, swipe machines / kiosks have speed up standard

transactions of every day need of consumers. With the onset of alternative delivery channels,

even the branch timings are not very significant. Phone and mobile banking, smart cards,

debit cards, rechargeable electronic purse are also some of the modern day banking facilities

that allow round the clock access. With the profile and aptitude of bank consumers fast

changing toward the use of ICT facilities, the popularity of e-channels of banking are set to

assume more significance. Banks are fast gearing up to introduce add-on services to attract

young generation of customers. This connectivity has removed even the limitations in the use

of debit/credit cards.

As per the Reports of RBI, the first wave in banking technology began with the use of

Advanced Ledger Posting Machines (ALPM) in the 1980s. The RBI advised all the banks to

go in for huge computerization at the branch level. There were two options: automate the

front office or the back office. Many banks opted for automating the front office in the first

phase. Whereas banks like State Bank of India also concentrated on the back-office

automation at the branch level. The Second wave of development was in Total Branch

Automation (TBA) which came in late 1980s. This automated both the front-end and back-

end operations within the same branch. TBA comprised of total automation of a particular
branch with its own database. In the third wave, the new private sector banks entered into the

field of automation. These banks opted for different models of having a single centralized

database instead of having multiple databases for all their branches. This was possible due to

the availability of good network infrastructure. Earlier, banks were not confident of running

the whole operation through a single data center. However, when a couple of private sector

banks showed that it can be done efficiently, other banks began to show interest and they also

began consolidating their databases into a single database. The banks followed up on this

move by choosing suitable application software that would support centralized operations.

The fourth wave started with the evolution of the ATM delivery channel. This was the first

stage of empowerment of the customer for his own transactions. The second stage was the

Suvidha experiment in Bangalore. This showed the power of technology and how the reach

can be increased amazingly at a great pace. Seeing these, all the banks started revamping

their retail delivery channels. Their core focus became increasing the number of customers

they can service at a lower cost. The main channels for these were internet banking and

mobile banking. After this, came the alliances for payment through various other gateways.

The third important development happening now is the real-time gross settlement system of

the RBI. Once this was in place, transactions between banks could 61 be done through the

settlement system, online, electronically thereby, ensuring faster collection. The process of

computerization had started from Back Office Application, after that Total Branch

Automation and nowadays it is the period of implementation of Core Banking Solutions

(CBS). A key trend in the last couple of years has been the focus on core banking systems.

With the implementation of core banking systems across the banks, the usage level of IT for

customer management has increased. Core banking systems have enabled banks to launch

new products and services targeting specific customer segments after understanding their

banking and investment requirements. ATM, internet banking and mobile banking have
improved customer convenience by providing anywhere any time banking services. The

utility bill presenting and payment has helped customers to pay their bills online at the click

of a button. Electronic clearing system and electronic funds transfer have facilitated faster

funds movement and settlement for the customers of different banks and different centers.

The electronic data interchange and cash management service facilities have enabled better

funds management for the customer. Very few banks offered customers the ability to access

their accounts and perform at least simple money transactions using internet banking.

Advancements in information technology have made it possible for the banks to use the

internet as a delivery channel for banking services. Technological developments have

introduced tremendous changes in the ability of financial and non-financial firms to

efficiently collect, store, use and sell information about their customers. Balasubramanya S.

(2002) in his study analyzed that the automation in the banking sector has come a long way

starting with the Rangarajan Committee report on the banking sector reforms during the

eighties, followed by reports of the Narasimhan Committee in the nineties. With over 65,000

branches of the banks (public, private and the cooperative sector) in the country, the author

found that the percentage of branches 62 covered by automation was very low. Though many

banks had claimed that more than 70% business has been automated due to the enforcement

of RBI guidelines, in reality it was much lower, as many functions in each branch were still

done manually or with partial automation. Hence, there was a significant amount of

automation work to be achieved in the banking sector.

Reserve bank of India and impact of liberalization on banking system

With liberalization in the telecom industry and its improved reliability at a reduced cost,

many banks and financial sectors at that time were going forward with large-scale networking
of their branches and implementing the centralized core banking solutions. As a result, banks

were able to provide their products and services to their customers anywhere, any time. With

these developments, bank customers could avail these services across different locations with

improved transaction realization and reduced cost. With increasing proliferation of ATMs,

telebanking, and availability of internet banking facilities, the customer contact points had

increased enormously, thereby resulting in increased services to customers. This has been

possible solely due to the implementation of technology.

RBI has set up Department of Information Technology (DIT) which works for:

• Computerization in RBI (Regional Offices and Central Office Departments)

• Design and development of projects for use of banks and financial institutions and

• Monitoring progress of technology in banks

Current Focus of DIT:

i) Computerization in RBI DIT has been concentrating on computerization of all activities

undertaken in the Banking Department (Deposit Accounts Department, Public Accounts

Department, Public Debt Office, Establishment Section and Central Accounts Section) and

the Issue Department (Currency Chest Management and Accounting) which impact on the

balance 63 sheet of the Reserve Bank. These departments also extend customer service.

Computerization of these departments, therefore, aims at ensuring better housekeeping and

efficient customer service.

ii) Design and Development of Projects for use of Banks and Financial Institutions The

projects developed so far and those listed for developments are as under: Projects already

developed:
• MICR cheque processing at four metros (Mumbai, New Delhi, Calcutta and Chennai) with

image technology (July - October 1999) • Electronic Clearing Services (debit and credit) at

15 centers where RBI has its offices and 30 centers managed by SBI.

• Electronic Funds Transfer at four metros and its extension to Hyderabad, Ahmedabad and

Bangalore

Projects in the Process of Development:

• Indian Financial Network (INFINET)

• Securities Settlement System (SSS) and Negotiated Dealing System (NDS)

• Centralized Funds Management System (CFMS) • Structured Financial Messaging Solution

(SFMS)

• Real Time Gross Settlement (RTGS)

(iii) Monitoring

• Progress in computerization and networking to achieve targets set by the Central Vigilance

Commission of coverage of 70% of their business by computerization.

• Setting up MICR Cheque Processing centers at non-metros • Adoption of standardization in

the area of hardware, operating system and communication platforms • Development of

generic architecture e (tree or star topology for domestic and cross border connectivity)

 IT Framework for Indian Banking sector

IT planning is an ongoing effort intended to match the bank’s technology capabilities

with its changing strategic objectives. It is necessary for a bank to identify technology

gaps and develop a plan that supports the bank’s long/medium term-strategic goals in
order to bridge the gaps. It is imperative for banks to have a clearly defined technology

planning process that is based on a well founded technology action plan for the

following reasons:

- Increasing competition, new products and changing distribution channels.

- Banks currently spend a huge amount of their budget annually on technology. Such

investments will only continue to escalate.

- Effective technology management requires an underlying technology plan. Without

it, scarce resources are likely to be wasted and opportunities missed.

Gulati et al. (2002) suggested IT policy framework for Indian banks as follows. IT

strategies need to be formulated by banks taking into consideration the critical aspects

of long/short-term planning to align technology systems with business objectives.

Conscious efforts must be made to place the entire organization’s proper perspective

and to have a holistic approach to planning. The following strategic evaluation needs to

be made:

 Current state (Where are we?): There should be a self-assessment process which

analyses the present/current technology in use. It also involves evaluation of

staffing, training, organizational processes and controls, communication and

management reporting. To successfully integrate new technologies, banks must

objectively confront internal operating issues and be willing to make changes

wherever necessary. Business process re-engineering should be accorded top

priority to successfully absorb new technology.

 Desired state (Where do we want to go?): Identification and prioritization of the

reasons behind technology adoption is vital. Technology goals should always be

firmly grounded in an understanding of the marketplace. Sizing up the

 competition and measuring up to its pace, based on a SWOT analysis, must be

the foundation of the decision on where to go.

 Destination (How do we get there?): This phase of the technology planning

process, involves making decisions about, how to implement the technology

action plan and the technology initiatives required to be pursued in the

short/mid/long-term.

As part of the planning of technology initiatives, a list of projects to be undertaken needs to

be made. For this, the element of time span should be considered relative to the bank’s

position and future needs (what initiatives are planned in short/mid/long term). A

technology plan is a document that lays down the steps necessary for each action item. It

serves as a road map for investment.

 Role of ICT in Banking

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). Harrison Jr., chairman and chief

executive officer of Chase Manhattan, which pioneered many innovative applications of ICT

in banking industry, observed that the Internet caused a technology revolution and it could

have greater impact on change than the industrial revolution (Engler&Essinger, 2000).

Technology has been used to offer banking services in the following ways (Sivakumaran,

2005):

ATM:
 ATMs are the cash dispensing machines that can be seen at banks and other locations

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

customers to withdraw cash at any time 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.
 The phenomenal success of ATMs had made the banking sector develop more

innovative delivery channels to build on cost and service efficiencies. As a

consequence, banks have introduced telebanking, call centers, Internet banking, and

mobile banking. Telebanking is a good medium for customers to make routine queries

and also an efficient tool for banks to cut down on their manpower resources. The call

center is another channel that captured the imagination of banks as well as customers.

At these centers, enormous amount of information is at the fingertips of trained

customer service representatives. A call center meets a bank’s infrastructural, as well

as customer service requirements. Not only does a call center cut down on costs, it

also results in customer satisfaction. Moreover, it facilitates 24x7 working and offers

the “human touch” that customers seek. The call center has large potential dividends

by way of improved customer relationship management (CRM) and return on

investment (ROI).

 With the Internet boom, banks realized that Internet banking would be a good way to

reach out to customers. Currently, some banks are attempting to harness the benefits

of Internet banking, while others have already made Internet banking an important

and popular payment system. Internet banking is on the rise, as is evident from the

statistics. Predictions of Internet banking To go the ATM way have not materialized

as much as anticipated; many reasons can be cited for this. During 2003, the usage of

the Internet as a banking channel accounted for8.5%. But this was due to the false,

unrealistic expectations tied to it. Some of the factors that were detrimental in

bringing down, or rather, not being supportive, are low Internet penetration, high

telecom tariffs, slow Internet speed and inadequate bandwidth availability, lack of

extended applications, and lack of a trusted environment.

 Before an ATM is placed in a public place, it typically has undergone extensive

testing with both test money and the backend computer systems that allow it to

perform transactions. Banking customers also have come to expect high reliability in

their ATMs, which provides incentives to ATM providers to minimize machine and

network failures. Financial consequences of incorrect machine operation also provide

high degrees of incentive to minimize malfunctions

 ATMs and the supporting electronic financial networks are generally very reliable,

with industry benchmarks typically producing 98.25% customer availability for

ATMsand up to 99.999% availability for host systems that manage the networks of

ATMs. If ATM networks do go out of service, customers could be left without the

ability to make transactions until the beginning of their bank's next time of opening

hours. To aid in reliability, some ATMs print each transaction to a roll-paper journal

that is stored inside the ATM, which allows its users and the related financial

institutions to settle things based on the records in the journal in case there is a

dispute.

 A payment terminal, also known as a Point of Sale (POS) terminal, credit card

terminal, EFTPOS terminal (or by the older term as PDQ terminal which stands for

"Process Data Quickly “or in common jargon as "Pretty Damn Quick" is a device

which interfaces with payment cards to make electronic fund transfer, The terminal

typically consists of a secure keypad (called a PIN pad) for entering PIN, a screen, a

means of capturing information from payments cards and a network connection to

access the payment network for authorization.

 A payment terminal allows a merchant to capture required credit and debit

card information and to transmit this data to the merchant services provider or bank

for authorization and finally, to transfer funds to the merchant. The terminal allows
 the merchant or their client to swipe, insert or hold a card near the device to capture

the information. Terminal is often connected to point of sale systems so that payment

amounts and confirmation of payment can be transferred automatically to the

merchant’s retail management system. Terminals can also be used in standalone

mode, where the merchant keys the amount into the terminal before the customer

present their card and personal identification number (PIN)

 Payment cards are part of payment system issued financial institutional, such as a

bank, to a customer that enables its owner (the cardholder) to access the funds in the

customer's designated bank accounts, or through a credit accounts and make payments

by electronic fund transfer and access automated teller machine (ATMs). Such cards

are known by a variety of names including bank cards, ATM cards, MAC (money

access cards), client cards, key cards or cash cards

Electronic fund transfer

.Electronic funds transfer (EFT) are electronic transfer of money from one bank account to

another, either within a single financial institution or across multiple institutions,

via computer-based systems, without the direct intervention of bank staff.

Electronic Funds Transfer (EFT) is a system of transferring money from one bank account

directly to another without any paper money changing hands. One of the most widely-used

EFT programs is Direct Deposit, in which payroll is deposited straight into an employee's

bank account, although EFT refers to any transfer of funds initiated through an electronic

terminal, including credit card, ATM, Fed wire and point-of-sale (POS) transactions. It is

used for both credit transfers, such as payroll payments, and for debit transfers, such as

mortgage payments.

Transactions are processed by the bank through the Automated Clearing House (ACH)

network, the secure transfer system that connects all U.S. financial institutions. For payments,

funds are transferred electronically from one bank account to the billing company's bank,

usually less than a day after the scheduled payment date

The Electronic Fund Transfer Act (EFTA) (15 USC 1693 et seq.) of 1978 is intended to

protect individual consumers engaging in electronic fund transfers (EFTs). EFT services

include transfers through automated teller machines, point-of-sale terminals, automated

clearinghouse systems, telephone bill-payment plans in which periodic or recurring transfers

are contemplated, and remote banking programs. The Federal Reserve Board (Board)

implements EFTA through Regulation E, which includes an official staff commentary. The

Electronic Signatures in Global and National Commerce Act (the E-Sign Act), 15 USC 7001

et seq., became effective October 1, 2000, and allows electronic documents and signatures to

have the same validity as paper documents and handwritten signatures. Disclosures in

consumer transactions provided in electronic form would satisfy Regulation E’s written

disclosure requirement only if the financial institution received proper consent under the E-

Sign Act. If a financial institution provides disclosures in both paper and electronic form, the

paper form can be used to meet the disclosure requirements, and E-Sign consent is not

required. The Board issued final rules for the electronic delivery of disclosures required under

Regulation E on December 10, 2007 (72 Fed. Reg. 63,452 (Nov. 9, 2007)).
National Electronic Funds Transfer

(NEFT) 

National Electronic Funds Transfer (NEFT) is an electronic funds transfer system maintained

by the Reserve Bank of India (RBI). Started in November 2005, the setup was established

and maintained by Institute for Development and Research in Banking Technology

(IDRBT). NEFT is a facility enabling bank customers in India to transfer funds between any

two NEFT-enabled bank accounts on a one-to-one basis. It is done via electronic messages.

Unlike Real-time gross settlement (RTGS), fund transfers through the NEFT system do not

occur in real-time basis. NEFT settles fund transfers in half-hourly batches with 23

settlements occurring between 8:00 AM and 7:00 PM on week days and the 1st, 3rd and 5th

Saturday of the calendar month. Transfers initiated outside this time period are settled at the

next available window. No settlements are made on the second and fourth Saturday of the

month, or on Sundays, or on public holidays.

NEFT facilities are available at 74,680 branches offices of 101 banks across the country (out

of around 82,400 bank branches) as of January 2011, and well as online through the website

of NEFT-enabled banks and work on a batch mode. NEFT has gained popularity due to its

saving on time and the ease with which the transactions can be concluded, This reflects from

the fact that 42% of all electronic transactions in the 2008 financial year were NEFT

transactions

Detailed process NEFT is as follows:

 Customer fills an application form providing details of the beneficiary (like name, bank,

branch name, IFSC, account type and account number) and the amount to be remitted.

The remitter authorizes his/her bank branch to debit his account and remit the specified

amount to the beneficiary. This facility is also available through online banking and some

banks offer the NEFT facility even through the ATMs.

1. The originating bank branch prepares a message and sends the message to its pooling

center (also called the NEFT Service Centre).

2. The pooling center forwards the message to the NEFT Clearing Centre (operated by

National Clearing Cell, Reserve Bank of India, Mumbai) to be included for the next

available batch.

3. The Clearing Centre sorts the funds transfer transactions destination bank-wise and

prepares accounting entries to receive funds from the originating banks (debit) and

give the funds to the destination banks(credit). Thereafter, bank-wise remittance

messages are forwarded to the destination banks through their pooling centre (NEFT

Service Centre).

4. The destination banks receive the inward remittance messages from the Clearing

Centre and pass on the credit to the beneficiary customers’ accounts.

Real-time gross settlement (RTGS)

Real-time gross settlement (RTGS) systems are specialist funds transfer systems where the

transfer of money or securities takes place from one bank to any other bank on a "real time"
and on a "gross" basis. Settlement in "real time" means a payment transaction is not subjected

to any waiting period, with transactions being settled as soon as they are processed. "Gross

settlement" means the transaction is settled on one-to-one basis without bundling

or netting with any other transaction. "Settlement" means that once processed, payments are

final and irrevocable.

RTGS systems are typically used for high-value transactions that require and receive

immediate clearing. In some countries the RTGS systems may be the only way to get same

day cleared funds and so may be used when payments need to be settled urgently. However,

most regular payments would not use a RTGS system, but instead would use a

national payment system or automated clearing house that allows participants to batch and

net payments. RTGS payments typically incur higher transaction costs and usually operated

by a country's central bank.

RTGS systems are usually operated by a country's central bank as it is seen as a critical

infrastructure for a country's economy. Economists believe that an efficient national payment

system reduces the cost of exchanging goods and services, and is indispensable to the

functioning of the interbank, money, and capital markets. A weak payment system may

severely drag on the stability and developmental capacity of a national economy; its failures

can result in inefficient use of financial resources, inequitable risk-sharing among agents,

actual losses for participants, and loss of confidence in the financial system and in the very

use of money.

RTGS system does not require any physical exchange of money; the central bank makes

adjustments in the electronic accounts of Bank A and Bank B, reducing the balance in Bank

A's account by the amount in question and increasing the balance of Bank B's account by the

same amount. The RTGS system is suited for low-volume, high-value transactions. It lowers

settlement risk, besides giving an accurate picture of an institution's account at any point of
time. The objective of RTGS systems by central banks throughout the world is to minimize

risk in high-value electronic payment settlement systems. In an RTGS system, transactions

are settled across accounts held at a central bank on a continuous gross basis. Settlement is

immediate, final and irrevocable. Credit risks due to settlement lags are eliminated. The best

RTGS national payment system cover up to 95% of high-value transactions within the

national monetary market.

RTGS systems are an alternative to systems of settling transactions at the end of the day, also

known as the net settlement system, such as the BACS system in the United Kingdom. In a

net settlement system, all the inter-institution transactions during the day are accumulated,

and at the end of the day, the central bank adjusts the accounts of the institutions by the net

amounts of these transactions.

The World Bank has been paying increasing attention to payment system development as a

key component of the financial infrastructure of a country, and has provided various forms of

assistance to over 100 countries. Most of the RTGS systems in place are secure and have

been designed around international standards and best practices. There are several reasons for

central banks to adopt RTGS. First, a decision to adopt is influenced by competitive pressure

from the global financial markets. Second, it is more beneficial to adopt an RTGS system for

central bank when this allows access to a broad system of other countries' RTGS systems.

Third, it is very likely that the knowledge acquired through experiences with RTGS systems

spills over to other central banks and helps them make their adoption decision. Fourth, central

banks do not necessarily have to install and develop RTGS themselves. The possibility of

sharing development with providers that have built RTGS systems in more than one country

(CGI of UK, CMA Small System of Sweden, JV Perabo of South Africa, SIA S.p.A. of Italy

and Moneran of USA) has presumably lowered the cost and hence made it feasible for many

countries to adopt.
Online banking

Online banking, also known as internet banking, is an electronic payment system that enables

customers of a bank or other financial institution to conduct a range of financial

transactions through the financial institution's website. The online banking system will

typically connect to or be part of the core banking system operated by a bank and is in

contrast to branch banking which was the traditional way customers accessed banking

services.

Some banks operate as a "direct bank" (or “virtual bank”), where they rely completely on

internet banking.

Internet banking software provides personal and corporate banking services offering features

such as viewing account balances, obtaining statements, checking recent transaction and

making payments. Access is usually through a secure web site using a username and

password, but security is a key consideration in internet banking and many banks also

offer two factor authentications using a (security token).

 Operations

To access a financial institution's online banking facility, a customer with internet access will

need to register with the institution for the service, and set up a password and

other credentials for customer verification. The credentials for online banking is normally not

the same as for telephone or mobile banking. Financial institutions now routinely allocate

customers numbers, whether or not customers have indicated an intention to access their

online banking facility. Customer numbers are normally not the same as account numbers,

because a number of customer accounts can be linked to the one customer number.

Technically, the customer number can be linked to any account with the financial institution

that the customer controls, though the financial institution may limit the range of accounts

that may be accessed to, say, cheque, savings, loan, credit card and similar accounts.

The customer visits the financial institution's secure website, and enters the online banking

facility using the customer number and credentials previously set up.

Each financial institution can determine the types of financial transactions which a customer

may transact through online banking, but usually includes obtaining account balances, a list

of recent transactions, electronic bill payments, financing loans and funds transfers between a

customer's or another's accounts. Most banks set limits on the amounts that may be

transacted, and other restrictions. Most banks also enable customers to download copies of

bank statements, which can be printed at the customer's premises (some banks charge a fee

for mailing hard copies of bank statements). Some banks also enable customers to download

transactions directly into the customer's accounting software. The facility may also enable the

customer to order a cheque book, statements, report loss of credit cards, stop payment on a

cheque, advice change of address and other routine actions.

 Features

Online banking facilities typically have many features and capabilities in common, but also

have some that are application specific. The common features fall broadly into several

categories:

 A bank customer can perform non-transactional tasks through online banking,

including:

 Viewing account balances

 Viewing recent transactions

 Downloading bank statements, for example in PDF format

 Viewing images of paid cheques

 Ordering cheque books

 Download periodic account statements

 Downloading applications for M-banking, E-banking etc.

 Bank customers can transact banking tasks through online banking, including:

 Funds transfers between the customer's linked accounts

 Paying third parties, including bill payments (see, e.g., BPAY) and third

party fund transfers (see, e.g., FAST)

 Investment purchase or sale

 Loan applications and transactions, such as repayments of enrollments

 Credit card applications

 Register utility billers and make bill payments

 Financial institution administration

 Management of multiple users having varying levels of authority

 Transaction approval process

 Security

Security of a customer's financial information is very important, without which online

banking could not operate. Similarly, the reputational risks to banks themselves are

important. Financial institutions have set up various security processes to reduce the risk of

unauthorized online access to a customer's records, but there is no consistency to the various

approaches adopted.

The use of a secure website has been almost universally embraced.

Though single password authentication is still in use, it by itself is not considered secure

enough for online banking in some countries. Basically, there are two different security

methods in use for online banking:

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

TANs representing one-time passwords to authenticate transactions. TANs can be

distributed in different ways; the most popular one is to send a list of TANs to the online

banking user by postal letter. Another way of using TANs is to generate them by need

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

secret, stored in the security token (two-factor authentication or 2FA).

 More advanced TAN generators (chip TAN) also include the transaction data into the

TAN generation process after displaying it on their own screen to allow the user to

discover man-in-the-middle attacks carried out by Trojans trying to secretly manipulate

the transaction data in the background of the PC.

 Another way to provide TANs to an online banking user is to send the TAN of the

current bank transaction to the user's (GSM) mobile phone via SMS. The SMS text

usually quotes the transaction amount and details; the TAN is only valid for a short

period of time. Especially in Germany, Austria and the Netherlands many banks have

adopted this "SMS TAN" service.

 Usually online banking with PIN/TAN is done via a web browser using SSL secured

connections, so that there is no additional encryption needed.

 Signature based online banking where all transactions are signed and encrypted

digitally. The Keys for the signature generation and encryption can be stored on

smartcards or any memory medium.[

 Attacks

Attacks on online banking used today are based on deceiving the user to steal login data and

valid TANs. Two well-known examples for those attacks are phishing and pharming. Cross-

site scripting and key logger/Trojan horses can also be used to steal login information.

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

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

are signed in the background.

A 2008 U.S. Federal Deposit Insurance Corporation Technology Incident Report, compiled

from suspicious activity reports banks file quarterly, lists 536 cases of computer intrusion,

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

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

quarter of 2007 and the second. In 80 percent of the cases, the source of the intrusion is

unknown but it occurred during online banking, the report states.

Another kind of attack is the so-called man-in-the-browser attack, a variation of the man-in-

the-middle attack where a Trojan horse permits a remote attacker to secretly modify the

destination account number and also the amount in the web browser.
As a reaction to advanced security processes allowing the user to cross-check the transaction

data on a secure device there are also combined attacks using malware and social

engineering to persuade the user himself to transfer money to the fraudsters on the ground of

false claims (like the claim the bank would require a "test transfer" or the claim a company

had falsely transferred money to the user's account and he should "send it back").Users

should therefore never perform bank transfers they have not initiated themselves.

 Countermeasure

There exist several countermeasures which try to avoid attacks. Digital certificates are used

against phishing and pharming, in signature based online banking variants (HBCI/FinTS) the

use of "Decoder" card readers is a measurement to uncover software side manipulations of

the transaction data.

In 2001, the U.S. Federal Financial Institutions Examination Council issued guidance

for multifactor authentication (MFA) and then required to be in place by the end of 2006.

In 2012, the European Union Agency for Network and Information Security advised all banks

to consider the PC systems of their users being infected by malware by default and therefore

use security processes where the user can cross-check the transaction data against

manipulations like for example (provided the security of the mobile phone holds up) SMS

TAN where the transaction data is sent along with the TAN number or standalone smartcard

readers with an own screen including the transaction data into the TAN generation process

while displaying it beforehand to the user (see chipTAN) to counter man-in-the-middle

attacks
 Mobile Banking

Mobile banking is a service provided by a bank or other financial institution that allows its

customers to conduct financial transactions remotely using a mobile device such as

a smartphone or tablet. Unlike the related internet banking it uses software, usually called

an app, provided by the financial institution for the purpose. Mobile banking is usually

available on a 24-hour basis. Some financial institutions have restrictions on which accounts

may be accessed through mobile banking, as well as a limit on the amount that can be

transacted. Mobile banking is dependent on the availability of an internet or data connection

to the mobile device.

Transactions through mobile banking depend on the features of the mobile banking app

provided and typically includes obtaining account balances and lists of latest

transactions, electronic bill payments, remote check deposits, P2P payments, and funds

transfers between a customer's or another's accounts Some apps also enable copies of

statements to be downloaded and sometimes printed at the customer's premises.

From the bank's point of view, mobile banking reduces the cost of handling transactions by

reducing the need for customers to visit a bank branch for non-cash withdrawal and deposit

transactions. Mobile banking does not handle transactions involving cash, and a customer

needs to visit an ATM or bank branch for cash withdrawals or deposits. Many apps now have

a remote deposit option; using the device's camera to digitally transmit cheques to their

financial institution.

Mobile banking differs from mobile payments, which involves the use of a mobile device to

pay for goods or services at the point of sale or remotely, analogously to the use of a debit or

credit card to affect an EFTPOSpayment.

Mobile Banking refers to provision and availment of banking- and financial services with the

help of mobile telecommunication devices. The scope of offered services may include

facilities to conduct bank and stock market transactions, to administer accounts and to access

customized information."

According to this model mobile banking can be said to consist of three inter-

related concepts:

 Mobile accounting

 Mobile brokerage

 Mobile financial information services

Most services in the categories designated accounting and brokerage are

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

nature are however essential for conducting transactions - for instance, balance

inquiries might be needed before committing a money remittance. The

accounting and brokerage services are therefore offered invariably in

combination with information services. Information services, on the other hand,

may be offered as an independent module.

Mobile banking may also be used to help in business situations as well as

financial

 Account Information

1. Mini-statements and checking of account history

2. Alerts on account activity or passing of set thresholds

3. Monitoring of term deposits

4. Access to loan statements

5. Access to card statements

6. Mutual funds / equity statements

7. Insurance policy management

 Transaction

1. Funds transfers between the customer's linked accounts

 2. Paying third parties, including bill payments and third party fund transfers (see,

e.g.,FAST)

3. Check Remote Deposit

 Investment

1. Portfolio management services

2. Real-time stock

 Support

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

2. Check (cheque) book and card requests

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

4. ATM Location

 Content Services

1. General information such as weather updates, news

2. Loyalty-related offers

3. Location-based services

A report by the US Federal Reserve (March 2012) found that 21 percent of mobile phone

owners had used mobile banking in the past 12 months. Based on a survey conducted by

Forrester, mobile banking will be attractive mainly to the younger, more "tech-savvy"

customer segment. A third of mobile phone users say that they may consider performing

some kind of financial transaction through their mobile phone. But most of the users are
interested in performing basic transactions such as querying for account balance and making

bill

 Challenges for a Mobile Banking Solution

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

to offer a mobile banking solution on any type of device. Some of these devices support Java

ME and others support SIM Application Toolkit, a WAP browser, or only SMS.

Initial interoperability issues however have been localized, with countries like India using

portals like "R-World" to enable the limitations of low-end java-based phones, while focus on

areas such as South Africa have defaulted to the USSD as a basis of communication

achievable with any phone.

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

applications (Java based or native) provide better security, are easier to use and allow

development of more complex capabilities similar to those of internet banking while SMS

can provide the basics but becomes difficult to operate with more complex transactions.

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

applications due to perceived lack of common technology standards for mobile banking. In

practice it is too early in the service lifecycle for interoperability to be addressed within an

individual country, as very few countries have more than one mobile banking service

provider. In practice, banking interfaces are well defined and money movements between

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

service providers will naturally adopt the same standards as in the banking world.

In January 2009, Mobile Marketing Association (MMA) Banking Sub-Committee, chaired by

Cell Trust and VeriSign Inc., published the Mobile Banking Overview for financial
institutions in which it discussed the advantages and disadvantages of Mobile Channel

Platforms such as Short Message Services (SMS), Mobile Web, Mobile Client Applications,

SMS with Mobile Web and Secure SMS

 CYBER SECURITY IN BANKING INDUSTRY

There is a noticeable shift in the banking industry in the way customers deal with their

transactions. There is a rapid increase in the usage of digital channels such as internet

banking, digital wallets, mobile banking, ATM. This leads to the increase in exposure and

thereby cyber attacks which further may lead to financial and reputational losses. Banks may

loose the customer confidence which can further increase the impact. The key influencers

who makes it imperative for the banks to invest in security are: Increase in financial data

losses including card data, personal identifiable information etc. Unauthorized access to

bank’s network and systems

With increasing risks of cyber threats, banks are facing an unprecedented challenge of data

breaches and are therefore strengthening their cyber security postures. The following are the

noticeable trends in banking industry from cyber security point of view: Financial sector
faced almost three times the cyber attacks as compared to that of the other industries Data

breaches (both internal through fraud and external through cyber criminals) leads to the

exponential rise in costs It has been estimated that cost of implementing and managing the

cyber security infrastructure will increase over 40% by 2025 There is an increase in

biometrics and. tokenization as banks have begun to recognize that in addition to being a

solution for payments these controls are also useful in security the sensitive data Customers

are using biometrics for banking. activities such as authentication for mobile banking,

transaction at ATMs and payments With digital channels becoming the preference. Choice of

customers for banking services, banks will also need to leverage advanced authentication and

access control processes, without any compromise to customer experience

With the increase in the development of technologies the banking industry is evolving at an

extraordinary rate. Unmanned aerial systems, the Internet of Things, Near Field of

Communication (NFCs), and nearable devices are some of the technological advancements

that banks will need to consider in the near future. Few of the top upcoming priorities for

banks could be cloud based platforms, robotic process automation and cognitive
technologies. Automation will drive new efficiencies across the security lifecycle, but require

the creation of control mechanisms and strong governance. The above trends however pose

their own set of challenges which are discussed in the next section.

Challenges:

The exponential growth of digital payments platform in India and the push towards a cashless

economy has renewed focus on the need to strengthen cybersecurity posture. Few of the

major challenges faced by banks include:

- Strict compliance regulations: Managing regulatory compliances has become

enormously challenging for the banks. Over the past few years the volume of

regulations has increased dramatically. Along with the larger banks, smaller ones too

are required to fulfill the regulatory obligations The struggle to secure.

- The struggle to secure customer data: There are number of ways in which violation of

privacy can take place in banking sector like stolen or loss card data, unauthorized

sharing of data with third parties and loss of client’s personal data due to improper

security measures

- Third party risk: Banks need to conduct due diligence on third parties they are

associated with. As per Payments card industry data security standard, third parties

need to report any critical issues associated the card data environment to the bank .

- Evolving cyber threat landscape: The development in technologies is leading to the

latest cyber threats like next generation ransomwares, web attacks etc
 - Transaction frauds: Fraud detection technologies should be in place with proper

consideration of risks based on the business factors.

- Secure SDLC: Banks need to incorporate SDLC security for banking products and

applications.

REGULATORY PERSPECTIVE:

To ensure security in banking industries, the Reserve Bank of India removed a Circular

DBS.CO.ITC.BC.No.6/31.02.008/ 2010-11 dated April 29 2011, where all banking

institutions have to comply for. Some of the key features of the regulations are

- Cyber Security Policy to be distinct from the broader IT policy / IS Security Policy of

a bank

- Arrangement for continuous surveillance

 - Comprehensive network and database security

- Protection of customer information

- Cyber security preparedness indicators

- Cyber Crisis Management Plan

- IT architecture should be conducive to security

- An immediate assessment of gaps in preparedness to be reported to RBI

- Cyber security awareness among stakeholders/ Top Management

SECURITY CONSIDERATIONS:

While each bank thinks distinctively on adopting various considerations it is imperative to

assume that the theme remains the same for various banking channels:

Banks must conduct regular drills, awareness programs and simulation exercises to keep their

infrastructure secured.

APPROACH TO SECURITY:
At BDO India, we Endeavour to provide expertise driven solutions to help and assist our

clients business needs are met, through a well defined risk based approach Approach to

adoption can have the following phases:

- Plan: Discussing the scope of work, making a roadmap for the approach, formalizing

leadership & project SPOC and to understand the policy and procedures all can be a

part of the planning phase.

- Build & Design: The build phase consists of requirements as a part of a systems

engineering process. The main milestone of design phase would be matching the

system specifications and the disposition of risk from the organization as shown in the

framework.

- Implementation: Gaps identified during the plan phase are implemented. Integration

elements should be carefully planned.

- Transition: A seamless transition and handover to the operations team should be taken

into consideration.

- Manage: This phase includes management, monitoring, and periodic reviews against

security threats and frauds.

CYBER SECURITY TRENDS:

- Blockchain is a technology that was initially developed for Bitcoin, the

cryptocurrency. Blockchain could reduce banks infrastructure costs by US$ 15-20

billion per annum by 2022. Blockchain have the potential to transform how the

business and the government work in vast variety of contexts.

- Banks will continue to leverage digital technologies to enhance customer experience.

- Ongoing threats related to IoT devices will force banks to tighten security layers,

including patchable firmware/software, secured authentication, and controlled

privilege access. Today, most IoT devices are considered throw away devices and

security patches are not issued. But, new regulations will be driven by large scale

attacks using IoT to amplify the attack.

Questionnaire & Survey:

1. Which category of the banks do you consider as most technologically

advanced?
 Ans. There are at most 52% in private sector banks, whereas, there

are 48% in Private sector banks

2. Which attribute of the bank do you value the most?

Ans. People always believe in trustworthy banks ,who always stay loyal

with their customers, whereas some peoples also go for quality of service

given by banking sector.

3. Which factor promotes you to use the new techniques in banking?

Ans.

People always used to go for easier way of transaction in banking sector,if

there is a technological development in market then it will promotes new

techniques in banking sector.

4. How familiar are you with computer usage level of your bank?
Ans.

There should be more awareness of using computer techniques in

banking sector, thus this helps to grow technological development in

banks

5. Customer level of usage of technology.

 Ans

The most used technology in Banking sector are ATM services, whereas

there is also an huge demand in E-payment where they can use easily

withdraw cash.

6. How frequently do you use the following banking services per month?
Ans.

As the technological development is increasing day by day there is a lesser

demand for Tele-phone banking, whereas ATM services are most used by

customers in Banking sectors

 Problems of Technology Usage

1. ATM Problems.
Ans.

2. Internet Banking Problems.

Ans.

3. Telephone Banking Problems.

Ans.

4. Mobile Banking Problems.

Ans.

 Satisfaction on Technology usage

1. ATM Services
Ans.

2. Internet banking Services

Ans.

3. Telephone Banking Services.

Ans.

4. Mobile Banking services

Ans.

Conclusion

Banking systems have been with us for as long as people have been using money. Banks and

other financial institutions provide security for individuals, businesses and governments,

alike. Let's recap what has been learned with this tutorial: 

In general, what banks do is pretty easy to figure out. For the average person banks accept

deposits, make loans, provide a safe place for money and valuables, and act as payment
agents between merchants and banks. Banks are quite important to the economy and are

involved in such economic activities as issuing money, settling payments, credit

intermediation, maturity transformation and money creation in the form of fractional reserve

banking.

To make money, banks use deposits and whole sale deposits, share equity and fees and

interest from debt, loans and consumer lending, such as credit cards and bank fees.In addition

to fees and loans, banks are also involved in various other types of lending and operations

including, buy/hold securities, non-interest income, insurance and leasing and payment

treasury services.

History has proven banks to be vulnerable to many risks, however, including credit, liquidity,

market, operating, interesting rate and legal risks. Many global crises have been the result of

such vulnerabilities and this has led to the strict regulation of state and national banks.

However, other financial institutions exist that are not restricted by such regulations. Such

institutions include: savings and loans, credit unions, investment and merchant banks, shadow

banks, Islamic banks and industrial bank

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