1

Madras Law Journal - Civil (Journal Article)/2002/Volume 3/Internet Banking In India

Madras Law Journal

Internet Banking In India

Vinod K.Shah
Advocate, Mumbai, Former Law Officer, I.B.A.
© LexisNexis Butterworths Wadhwa Nagpur

Internet Banking started in India. Banks in India follow technology to improve their products, services and
efficiency. As a result, we have several Branches of Banks 'fully computerized'. Banks use delivery channels
like dial-up connections, public and private networks, PC and ATM. Similarly Internet (World Wide Web WEB
is used for banking purposes. In India all banks are not of the same size, strength and have variety of
geographical location and also differ from management point of view. Therefore, all banks offer Internet
Banking, there is difference. R.B.I, in its implementation of Generic architecture suggested "tree topology for
older banks (as the Bank of Maharashtra) which have branches reporting to controlling offices and then to
H.O. For newer Banks which have direct connectivity between branches and H.O. the "star topology". The
economics of Internet Banking may favour large banks because of economies of scale and scope and need
to be profitable and successful. By using the Internet, as compared to previously available "proprietory" or
"dial-up", PC Banking, banks have the potential to reach a large number of customers at a low incremental
cost High Network Individuals having multiple bank accounts. "Costs of banking service through the Internet
form a fraction of costs through conventional methods. Rough estimates assume teller cost at Rs.1 per
transaction, ATM transaction cost at 45 paise, phone banking at 35 paise, debit cards at 20 paise and
Internet banking at 10 paise per transaction. The cost-conscious banks in the country have therefore actively
considered use of the Internet as a channel for providing services. Fully computerized banks, with better
management of their customer base are in a stronger position to cross-sell their products through this
channel." (Report of Internet Banking of R.B.I. para 4.1.3 Source: India Research May 29, 2000, Kotak
Securities). According to the R.B.I. Report on Internet Banking total internet users are estimated to be 9 lakhs
and to growth to 90 lakhs by 2003. Only about 1% of Internet users did banking online in 1998 and increased
to 16.7% in the year 2000.
Present Services:- Some banks (ICICI Bank Ltd., HDFC Bank Ltd., UTI Bank Ltd., Citibank, Global Trust
Bank and Bank of Punjab Ltd.) offer facility of receipt, review and payments of bills on line. Electronic Bill
payment allows a customer to instruct bank to make payment electronically. The Bank then sends payment
to the Clearing House or a paper cheque. The customer's account is debited for the amount of the payment.
Another bank allows online real time shopping mail. A few are trying to develop one stop financial shops.
Most common Internet services offered are balance enquiry, transactions and statement of account, request
for cheque books, DD or Telegraphic transfers, Pay orders, change of address and opening and renewal of
deposits, transfer of funds between accounts at the same branch of the bank. It is believed that electronic
banking will grow rapidly, more or less in tandem with proliferating e-commerce. But Indian Banks offering
online services still have a long way to go. For that there is need for large number of users and sufficient
infrastructure.
The Scope of Internet Banking:- Internet banking refers to the use of the Internet as a remote delivery
channel for banking services. Banks maintaining expensive branch network might
(2002) 3 MLJ 21 at 22
have the greatest incentive to adopt to Internet banking, it might allow banks to reduce expenditures on
"brick and mortar". It includes traditional ones like opening deposit account or transferring funds among
different accounts, and new banking services, such as electronic bill payment and presentment, allowing
customers to receive and pay bills via. bank's Web sites. Existing banks to open Web site and offer Internet
Banking. Alternatively to establish 'Virtual or branchless banking'. For such operation computer server is the
central activity point. It may offer deposits and withdrawal by ATM or other remote delivery channel. Banks
can put the entire loan process -whether for a new or old car or housing loan online. Offer an online payment
 3

calculator and provide hyperlinks to real estate agents or builders and developers. Basis idea is to approach
the customer with an integrated solution. It can offer online cash management. "Cash management is a key
business oriented service and Internet would seem to offer significant opportunities for banks to create value
by improving cash management systems" (Who offers Internet Banking[#283] - Karen Frust, William W Lang
and Daniel E Nolle / Special Studies on Technology and Banking - Quarterly Journal Vol. 19, No.2, June
2000).
Cash Management: In US and EU most large bank provides of cash management have introduced Internet-
based cash management products and use Web based system. The largest advantage of Web-based
system is all software is centrally located. Web-based software is very user-friendly. Security is of utmost
importance since involves funds. Major browsers have built-in encryption called "Secured Socket Layer"
(SSL) technology. It also used digital signatures, which as the advantage of third party (Certifying Authority-
CA) guarantee of authenticity.
The demand for Internet banking is a open question. There are some doubt, about spread and demand of
customers and value of incurring expenditure connected with additional delivery channel. Internet banks
would have to reply heavily on non-internet income and less on core deposit. There is greater scope to
benefit from others. The key characteristics explaining which banks have chosen to offer Internet banking are
physical location of the bank in an urban area, relatively higher premises and other fixed expenses to net
operating revenue and higher non-interest income. Traditionally, banks have used branch networks and
distributed PC software as their delivery channels to reach business customers. However, in the recent past,
a combination of distinctive factors require that banks rethink their strategy. Internet has done what was
thought recent past impossible. It was thought that no banking business be conducted without speaking
directly to a bank employee or physically visiting a branch. It must be remembered that systems developed in
the past were not built to be accessed directly by customers anytime. These factors include demands on time
as a limited resource, rising real estate expense, changing human resource and information technology
infrastructure and, most of all, fierce competition. All of these factors are forcing banks to provide services to
their business customers anytime, anywhere, anyhow. Building an Internet bank delivery channel requires a
complete "end-to-end" solution that include High Availability and Redundancy, the highest level of Security;
Relationship Driven Account Access Capability; Total Customer Care Capability; Hierachy Reporting
Capability; as well as engaging a Solution Provider that can provide Internet Business Banking application
software, project management services, professional services for installation, deployment, training and
education, financial expertise, life cycle management, customer support and integration with existing core
processing applications. Conviction of the bank customer is desirable, because customers have not been
convinced that Internet Banking products and services provide value to warrant
(2002) 3 MLJ 21 at 23
change in their banking habits. Customers hesitate to deal with the Web because they are not sure of the
products and services they may receive.
Corporate Customers: Business customers demand that their requirements must be understood, that they
have immediate access to their corporate account information, and that these services are provided at
reasonable cost. Along with more convenient access to business customers, bankers are looking for ways to
reduce delivery cost of financial services. Customers need 24/7 access to all their accounts and ability to
manage their finances from home or office. Business consumers become more comfortable using out-of-the-
box technology, there is a migration from costly, face-to-face branch transactions to more cost-affective and
convenient delivery channels into both traditional office and virtual work places. With this lack of human
interaction, banks must deliver ever-increasing value-add services and information to retain their lucrative
and profitable business customers. Small businesses employing 10 or less employees are good target
because Internet banking can reduce the employees strength or the workload so that they can be used in
other work area. The challenge is to build a Virtual Corporate Channel to provide complete, robust and
secure cash management services to meet the demands of today's business environment.
The primary objective of business-to-business banking is to retain corporate customers and increase
customer accessibility through a more efficient, economical and effective delivery channel. By using the
Internet, bankers can easily provide access and availability to a client base. The ability to access information
anytime, anywhere to support both the traditional office as well as virtual office environments. With many
 4

bank corporate customers operating from a virtual office, controlled access of corporate information must be
provided to key executives and employees that spend most of their business day in the field.
Greater fee income opportunities by providing corporate clients with easier and more direct access to
services. Typical corporate clients require wire transfer services on a daily or weekly basis and are willing to
pay for this service. Also, they are seeking inexpensive electronic distribution channels to distribute payroll,
pay invoices and remit tax payments. Attracting new, as well as locking-in existing corporate customers by
providing an easy-to-use service with comprehensive access to corporate accounts and services controlled
at individual employee level. Reacting quickly and efficiently to corporate client requests by providing "on
demand" cash management services and faster, more efficient approvals and delivery of credit approvals to
corporate clients. Lowering the cost of delivery of service and sales transactions by leveraging the Web
infrastructure.
There is need for sufficient infrastructure to be in place for rapid growth. Various security options like line
encryption, branch connection encryption, firewalls, digital certificates, automatic sign off, random pop-ups
and disaster recovery sites are required to be in place. For on-line banking Public Key Infrastructure is
absolutely essential. Information Technology Act is already enacted but the Certification Authority and related
infrastructre should be visibly in existence. So far as customer is concerned he should feel secured about his
digital signature and assured of a secured conduit for its online activities. The communication bandwidth
available today is not enough to meet the needs of high priority services like on line banking and trading. The
band width capacity available in the country is only 3.2 gigabits per second which is around 60% of current
demand. Demand for bandwidth is growing by 350% a year in India (Report of R.B.I, on Internet Banking
-Para 4-3.10).
For customers to avail Internet Banking, a contractual agreement with the bank is first
(2002) 3 MLJ 21 at 24
requirement. The contract details are one-sided and the banks having absolute discretion to amend or
supplement any of the terms at any time. For customers other delivery channels like ATM, personal contacts
at the branch are less cumbersome Security of banking transaction is a matter of concern for customers,
banks and the regulator. Internet is a public network of computers which facilitates flow of data/ information
and to which there is unrestricted access. Robust customer identification and authentication procedure is
important especially in Internet banking since it is cross border. Upon opening of the Account, the customer is
given a tamper proof password for sign on and for the financial transactions. The customer is solely
responsible for maintaining secrecy of the Passwords and it is enjoined on him to ensure that that the same
are not disclosed to any person either voluntarily, accidentally or by mistake. It is also a condition that the
Bank shall not be responsible for any loss incurred arising out of misuse/unauthorised use of the Login name
and/ or passwords. It is a breach of term on the part of the customer if keeps password in a written form or
electronic form or disclosing or failing to take reasonable steps to prevent disclosure of the password to
anyone including the Bank Staff. Internet Bank account should have proper physical introduction and
verification. The Supreme Court of India has stated that as a general rule before accepting customer, the
bank must take reasonable care to satisfy himself that a person in question is in good reputation and if he
fails to do so, he will run the risk of forfeiting the protection under Sec. 131 of the Negotiable Instruments Act.
(, J.T. (1989)4 S.C. 334). It is obligation under the Negotiable Instruments Act and different case laws, not
only to establish the identity, but also to make enquiries about integrity and reputation of the prospective
customers. It is critical for banks to authenticate identity and authorization of an individual, agent or system
by means and as far as possible exclude unauthorised individuals or system. Internet transactions may
become untraceable and anonymous and may not leave a traditional audit trail. Money Laundering
transactions are cash transactions leaving no paper trail. It imposes an obligation on the bank to report. In
view of the Information Technology Act, Banks may rely on Certifying Authority and Digital Signatures. The
system may use PINs, passwords, Smartcards, biometrics and digital certificates. Multi-factor authentication
provides stronger security.
Confidentiality: Both Banks and customers stand to benefit substantially using the Internet to collect
information. Customers can benefit from allowing banks to collect and integrate large amounts of personal
information that help banks to tailor a wide range of products to individual demands. Information available to
banks arise from banker- customer relationship. The legal relationship between customer and bank has been
historically treated under law of contract. So the new rules will be required to be integrated with this law of
 5

contract. There is legal obligation on the bankers to maintain secrecy and confidentiality about customer's
account. Confidentiality extends beyond data transfer and include any connected data storage system
including network storage systems.