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Internet Banking in India-Part I

- Dr A. K. Mishra
[Dr Mishra is Professor at IIM Lucknow. In his Two part feature, Dr Mishra covers emerging challenges, main concerns in Internet banking and strategies that need to be adopted by Indian banks.]

INTRODUCTION The Internet banking is changing the banking industry and is having the major effects on banking relationships. Even the Morgan Stanley Dean Witter Internet research emphasised that Web is more important for retail financial services than for many other industries. Internet banking involves use of Internet for delivery of banking products & services. It falls into four main categories, from Level 1 - minimum functionality sites that offer only access to deposit account data - to Level 4 sites highly sophisticated offerings enabling integrated sales of additional products and access to other financial services- such

as investment and insurance. In other words a successful Internet banking solution offers Exceptional rates on Savings, CDs, and IRAs Checking with no monthly fee, free bill payment and rebates on ATM surcharges Credit cards with low rates Easy online applications for all accounts, including personal loans and mortgages 24 hour account access Quality customer service with personal attention DRIVERS OF CHANGE Advantages previously held by large financial institutions have shrunk considerably. The Internet has leveled the playing field and afforded open access to customers in the global marketplace. Internet banking is a cost-effective delivery channel for financial institutions. Consumers are embracing the many benefits of Internet banking. Access to one's accounts at anytime and from any location via the World Wide Web is a convenience unknown a short time ago. Thus, a bank's Internet presence transforms from 'brouchreware' status to 'Internet banking' status once the bank goes through a technology integration effort to enable the customer to access information about his or her specific account relationship. The six primary drivers of Internet banking includes, in order of primacy are: Improve customer access Facilitate the offering of more services Increase customer loyalty Attract new customers Provide services offered by competitors Reduce customer attrition

INDIAN BANKS ON WEB The banking industry in India is facing unprecedented competition from non-traditional banking institutions, which now offer banking and financial services over the Internet. The deregulation of the banking industry coupled with the emergence of new technologies, are enabling new competitors to enter the financial services market quickly and efficiently. Indian banks are going for the retail banking in a big way. However, much is still to be achieved. This study which was conducted by students of IIML shows some interesting facts: Throughout the country, the Internet Banking is in the nascent stage of development (only 50 banks are offering varied kind of Internet banking services). In general, these Internet sites offer only the most basic services. 55% are so called 'entry level' sites, offering little more than company information and basic marketing materials. Only 8% offer 'advanced transactions' such as online funds transfer, transactions & cash management services. Foreign & Private banks are much advanced in terms of the number of sites & their level of development. EMERGING CHALLENGES Information technology analyst firm, the Meta Group, recently reported that "financial institutions who don't offer home banking by the year 2000 will become marginalized." By the year of 2002, a large sophisticated and highly competitive Internet Banking Market will develop which will be driven by

 Demand side pressure due to increasing access to low cost electronic services. Emergence of open standards for banking functionality. Growing customer awareness and need of transparency. Global players in the fray Close integration of bank services with web based E-commerce or even disintermediation of services through direct electronic payments (E- Cash). More convenient international transactions due to the fact that the Internet along with general deregulation trends, eliminate geographic boundaries. Move from one stop shopping to 'Banking Portfolio' i.e. unbundled product purchases. Certainly some existing brick and mortar banks will go out of business. But that's because they fail to respond to the challenge of the Internet. The Internet and it's underlying technologies will change and transform not just banking, but all aspects of finance and commerce. It represents much more than a new distribution opportunity. It will enable nimble players to leverage their brick and mortar presence to improve customer satisfaction and gain share. It will force lethargic players who are struck with legacy cost basis, out of business-since they are unable to bring to play in the new context. MAIN CONCERNS IN INTERNET BANKING In a survey conducted by the Online Banking Association, member institutions rated security as the most important issue of online banking. There is a dual requirement to protect customers' privacy and protect against fraud. Banking Securely: Online Banking via the World Wide Web provides an overview of Internet commerce and how one company handles secure banking for its financial institution clients and their customers. Some basic information on the transmission of confidential data is presented in Security and Encryption on the Web. PC Magazine Online also offers a primer: How Encryption Works. A multilayered security architecture comprising firewalls, filtering routers, encryption and digital certification ensures that your account information is protected from unauthorised access: Firewalls and filtering routers ensure that only the legitimate Internet users are allowed to access the system. Encryption techniques used by the bank (including the sophisticated public key encryption) would ensure that privacy of data flowing between the browser and the Infinity system is protected. Digital certification procedures provide the assurance that the data you receive is from the Infinity system.

Concluding Part Claus Nehmzow, a Principal in the Information Technology Group in London at Booz Allen & Hamilton, writes of some compelling research findings and offers his projections for European banks in The Internet Will Shake Backing's Medieval Foundations. He believes the low transaction cost will make banking on the Net irresistible, but also that this will require institutions to carefully consider and plan customer relations programs. It is believed that everything will be determined by content and context, and where execution will be key. From a customer

and service provider perspective, this is where the world is moving-it is going to be real-time, on-line, personalisation for both marketing and the service experience. If existing banks don't want to disappear, it is this challenge of Integration that they need to embrace in order to win and survive. The more things change, the less they change. In the months and yearsahead are going to be how Service Providers integrate and market their offerings across different channels. The strategic and executional battles of the future are going to be fought for Channel Integration. What does Channel Integration means? It means that an institution presents an identical face to the customer-be it in the branch, on the web, at an ATM or for that matter, through a sales representative or a broker. An identical face, an identical message. Or better still, messages that reinforce each other. If a sales representative tries to sell you a housing loan, you get e-mail a day later reminding you about the loan. That's called Integrated Sales, which results in incremental economic activity and improved efficiencies of communications. Channel Integration across the phone web can clearly lead to a gain of several percentage points of GDP. The beauty of this approach is that one channel does not displace another. They feed on each other to create incremental value for the customer, as well as the institution. The incremental value comes from two distinct sources. Firstly, you reduce inefficiencies. You don't send people junk mail because you know that they are not likely to buy a particular product or service today. That results in net saving for the economy. Secondly, you persuade people at the right time (the right time from the customer's perspective, not from the service provider's perspective) to opt for a tailor made offering. This too increases value. Actually, this has to do with the Internet itself, and more to with the underlying technologies of the Internet which allow incremental efficiency, and empowers the customer to make more enlightened and timely choices. Lastly the product range is another issue which becomes important. It will take a technological revolution to make available advanced banking products on the net and given the rate at which the technology is developing we can expect this to happen in near future. STRATEGIES TO BE ADOPTED BY INDIAN BANKS Internet banking would drive us into an age of creative destruction due to non-physical exchange, complete transparency giving rise to perfectly electronic market place and customer supremacy. The question to be asked right now is "What the Indian Banks should do" Whatever is the strategy chosen and options adopted, certain key parameters would determine the bank's success on web: 1. For long term success, a bank may follow: Adopting a webs mindset Catching on the first mover's advantage Recognising the core competencies Ability to deal multiplicity with simplicity Senior Management initiative to transform the organisation from inward to outward looking Aligning roles and value propositions with the customer segments Redesigning optimal channel portfolio Acquiring new capabilities through strategic alliances. 2. The above can be implemented in four steps: Familiarising the customer to new environment by demo version

of software on bank's web site. This should contain tour through the features which are to be included. It will enable users to give suggestions for improvements, which can be incorporated in later versions wherever feasible. Second phase provides services such as account information and balances, statement of account, transaction tracking, mail box, check book issue, stop payment, financial and customised information. The third phase may include additional services such as fund transfers, DD issue, standing instructions, opening fixed deposits, intimation of loss of ATM cards. The last step should include advanced corporate banking services like third party payments, utility bill payments, establishment of L/Cs, Cash Management Services etc. Enhanced plan for the customers in future can include requests for demand drafts and pay orders and many more to bring in the ultimate in banking convenience. All the above strategies will help banks in translating their traditional business model into an Internet one, falling into three main categories One stop shop Virtual one-stop-shop Best of breed supplier.

1981-1985 1986-1990 1991-1995 1996-2000 2001-2005 2006-2010

Country name Country name Afghanistan Albania Algeria American Samoa Andorra

2006

2007

2008

2009

2010

2006 1.9 9.6 7.4

2007 1.8 15.0 9.5

2008 1.7 23.9 10.2

2009 3.2 41.2 11.2

2010 3.7 45.0 12.5

48.9

70.9

70.0

78.5

81.0

Country name Angola Antigua and Barbuda Argentina Armenia Aruba Australia Austria Azerbaijan Bahamas, The Bahrain Bangladesh Barbados Belarus Belgium Belize Benin Bermuda Bhutan Bolivia Bosnia and Herzegovina Botswana Brazil Brunei Darussalam Bulgaria Burkina Faso Burundi Cambodia Cameroon Canada Cape Verde

2006 1.9 62.6 20.9 5.6 28.0 66.1 63.5 12.3 26.0 28.2 1.0 63.0 16.3 63.7 9.9 1.5 70.5 4.5 6.2 25.1 4.3 28.2 42.2 27.1 0.6 0.7 0.5 2.0 72.4 6.8

2007 2.8 70.1 25.9 6.0 30.9 69.6 69.4 14.9 27.0 32.9 1.8 64.7 19.8 68.7 10.2 1.8 74.9 5.9 10.5 27.9 5.3 30.9 44.7 33.6 0.8 0.7 0.5 2.9 73.2 8.3

2008 3.1 75.0 28.1 6.2 34.2 71.7 72.9 17.4 31.5 52.0 2.5 66.5 23.2 70.5 10.5 1.9 82.9 6.6 10.8 34.7 6.3 33.8 46.0 39.5 0.9 0.8 0.5 3.4 76.7 20.0

2009 3.3 74.2 34.0 15.3 37.7 74.1 73.5 27.8 33.9 53.0 3.1 68.7 27.8 75.2 10.8 2.2 83.8 7.2 14.3 37.7 6.2 39.2 49.0 44.7 1.1 1.9 0.5 3.8 80.1 29.7

2010 3.9 80.0 36.0 37.0 42.0 75.8 72.8 36.5 43.0 55.0 3.7 70.2 32.1 78.0 12.7 3.1 84.7 13.6 20.0 52.0 6.0 40.7 50.0 45.9 1.4 2.1 1.3 4.0 81.4 30.0

Country name Cayman Islands Central African Republic Chad Chile China Colombia Comoros Congo, Dem. Rep. Congo, Rep. Costa Rica Cote d'Ivoire Croatia Cuba Curacao Cyprus Czech Republic Denmark Djibouti Dominica Dominican Republic Ecuador Egypt, Arab Rep. El Salvador Equatorial Guinea Eritrea Estonia Ethiopia Faeroe Islands Fiji Finland

2006 44.5 0.3 0.6 34.5 10.6 15.3 3.3 0.3 2.0 25.1 1.5 37.9 11.2

2007 52.0 0.4 0.8 35.9 16.0 21.8 3.4 0.4 2.8 28.4 1.8 41.3 11.7

2008 61.0 1.0 1.2 37.3 22.7 25.6 3.5 0.4 4.3 32.3 2.0 50.4 12.9

2009 64.5 1.8 1.5 38.8 29.0 30.0 3.6 0.6 6.7 34.3 2.3 56.0 14.3

2010 66.0 2.3 1.7 45.0 34.4 36.5 5.1 0.7 7.3 36.5 2.6 60.0 15.1

35.8 47.9 86.7 1.3 39.4 14.8 7.2 12.6 5.5 1.3 2.2 63.5 0.3 69.4 9.6 79.7

40.8 51.8 85.1 1.6 40.3 17.7 10.8 16.1 6.1 1.6 2.5 66.2 0.4 76.0 10.9 80.8

42.3 62.7 85.1 2.3 41.2 20.8 18.8 18.0 10.1 1.8 4.1 70.7 0.5 75.6 12.2 83.7

49.8 64.1 86.9 4.0 42.0 27.7 22.3 24.3 12.1 2.1

53.0 68.6 88.8 6.5 47.5 39.5 24.0 26.7 15.0 6.0 5.4

72.6 0.5 75.2 13.4 82.5

74.2 0.8 75.1 14.8 86.9

Country name France French Polynesia Gabon Gambia, The Georgia Germany Ghana Greece Greenland Grenada Guam Guatemala Guinea Guinea-Bissau Guyana Haiti Honduras Hong Kong SAR, China Hungary Iceland India Indonesia Iran, Islamic Rep. Iraq Ireland Isle of Man Israel Italy Jamaica Japan

2006 45.3 25.1 5.5 5.2 7.6 72.3 2.7 32.5 59.9 21.4 43.9 6.5 0.6 2.1

2007 63.9 28.6 5.8 6.2 8.3 75.4 3.9 36.1 61.9 22.3 46.2 7.3 0.8 2.2

2008 68.4 33.9 6.2 6.9 10.0 78.3 4.3 38.4 63.9 23.2 48.4 8.3 0.9 2.4 18.2

2009 69.3 44.6 6.7 7.6 19.9 79.7 5.4 42.6 63.9 24.1 50.6 9.3 0.9 2.3 23.9 8.1 9.8 69.2 61.7 92.1 5.4 8.7 11.1 1.0 66.7

2010 77.5 49.0 7.2 9.2 26.4 82.5 8.6 44.6 63.8 33.5

10.5 1.0 2.5 29.9 8.4 11.1 69.3 65.1 95.8 7.8 9.1 13.0 2.5 69.7

6.8 7.8 60.6 47.0 88.7 2.9 4.8 8.8 0.9 54.4

7.2 9.4 64.3 53.2 88.9 4.1 5.8 9.5 0.9 59.6

7.6 9.6 66.2 55.9 89.1 4.6 7.9 10.2 1.0 64.3

26.7 38.1 16.6 68.0

46.4 40.9 21.4 73.6

57.6 44.6 23.9 74.7

61.2 48.9 24.6 77.4

65.4 53.7 26.5 79.4

Country name Jordan Kazakhstan Kenya Kiribati Korea, Dem. Rep. Korea, Rep. Kosovo Kuwait Kyrgyz Republic Lao PDR Latvia Lebanon Lesotho Liberia Libya Liechtenstein Lithuania Luxembourg Macao SAR, China Macedonia, FYR Madagascar Malawi Malaysia Maldives Mali Malta Marshall Islands Mauritania Mauritius Mayotte

2006 13.8 3.3 7.5 4.5 0.0 76.4

2007 20.0 4.0 8.0 6.0 0.0 77.2

2008 23.2 11.0 8.7 7.0 0.0 79.5

2009 26.5 18.1 10.0 8.0 0.0 80.3

2010 38.9 33.4 25.9 9.0

82.5

28.8 12.1 1.2 53.8 15.0 3.0

31.6 13.8 1.6 59.3 18.7 3.4 0.6

34.3

36.9

38.3

3.6 63.6 22.5 3.6 0.5 5.1 70.0 55.2 81.9 49.2 46.0 1.7 0.7 55.8 23.2 1.6 50.3 3.6 1.9 22.1

6.0 67.0 23.7 3.7 0.5 5.5 75.0 59.8 87.3 54.0 51.8 1.6 1.1 55.9 24.8 1.9 59.1 3.5 2.3 22.8

7.0 68.7 31.0 3.9 0.1 5.7 80.0 62.2 90.9 56.8 51.9 1.7 2.3 55.3 28.3 2.7 63.5

4.3 64.2 43.9 71.4 46.4 28.6 0.6 0.4 51.6 11.0 0.7 40.9 3.8 1.0 16.9

4.7 65.1 50.0 78.2 47.3 36.3 0.7 1.0 55.7 16.3 0.8 47.3 3.7 1.4 20.5

2.9 25.2

Country name Mexico Micronesia, Fed. Sts. Moldova Monaco Mongolia Montenegro Morocco Mozambique Myanmar Namibia Nepal Netherlands New Caledonia New Zealand Nicaragua Niger Nigeria Northern Mariana Islands Norway Oman Pakistan Palau Panama Papua New Guinea Paraguay Peru Philippines Poland Portugal Puerto Rico

2006 19.5 12.8 20.3

2007 20.8 13.6 21.0

2008 21.7 14.5 23.8

2009 26.3 15.4 37.4

2010 31.0 20.0 40.1

12.0 32.2 19.8 0.8 0.2 4.4 1.1 83.9 33.0 69.0 2.8 0.3 5.5

12.3 37.0 21.5 0.9 0.2 4.8 1.4 86.1 34.5 69.8 3.9 0.4 6.8

12.5 41.0 33.1 1.6 0.2 5.3 1.7 87.7 34.0 72.2 5.3 0.7 15.9

12.6 44.9 41.3 2.7 0.2 5.9 2.0 89.8 33.5 79.8 7.3 0.8 28.4

12.9 52.0 49.0 4.2

6.5 6.8 90.7

83.0 10.0 0.8 28.4

82.7 8.3 7.1

87.2 16.7 10.1

90.8 20.0 15.8

92.2 51.5 16.6

93.4 62.6 16.8

17.3 1.8 8.0 20.7 5.7 44.6 38.0 24.4

22.3 1.8 11.2 25.2 6.0 48.7 42.1 26.6

33.8 1.2 14.3 30.6 6.2 53.3 44.2 36.1

39.1 1.6 17.4 31.4 9.0 59.1 48.4 39.3

42.8 1.3 23.6 34.3

62.5 51.3 42.7

Country name Qatar Romania Russian Federation Rwanda Samoa San Marino Sao Tome and Principe Saudi Arabia Senegal Serbia Seychelles Sierra Leone Singapore Sint Maarten (Dutch part) Slovak Republic Slovenia Solomon Islands Somalia South Africa South Sudan Spain Sri Lanka St. Kitts and Nevis St. Lucia St. Martin (French part) St. Vincent and the Grenadines Sudan Suriname Swaziland Sweden

2006 29.0 24.8 18.2

2007 37.0 28.4 24.9 2.1

2008 38.0 32.5 27.1 3.1 5.0 54.5 15.5 36.0 10.6 37.1 39.8 0.3 68.0

2009 43.0 36.7 29.2 4.5 6.0 54.2 16.4 38.0 14.5 39.9

2010 69.0 40.0 43.4 7.7 7.0

4.5 50.2 14.2 19.5 5.6 28.1 34.8 0.2 59.1

4.7 50.4 14.6 30.0 7.7 34.4 38.4 0.2 67.9

18.8 41.0 16.0 43.0

0.3 68.4 70.1

56.4 54.0 1.6 1.1 7.7

62.2 56.6 2.0 1.1 8.2

71.8 57.9 3.0 1.1 8.5

75.6 63.5 4.0 1.2 10.1

79.8 69.2 5.0

12.3

50.3 2.5 28.1 24.5

54.8 3.9 29.8 28.0

59.1 5.8 31.3 32.1

62.3 8.8 32.9 36.1

66.5 12.0

32.1 8.1 9.5 3.7 87.9

52.3 8.7 14.1 4.1 82.1

60.5 10.2 21.1 6.9 90.2

69.6

31.4 7.6 91.1

31.6 8.0 90.0

Country name Switzerland Syrian Arab Republic Tajikistan Tanzania Thailand Timor-Leste Togo Tonga Trinidad and Tobago Tunisia Turkey Turkmenistan Turks and Caicos Islands Tuvalu Uganda Ukraine United Arab Emirates United Kingdom United States Uruguay Uzbekistan Vanuatu Venezuela, RB Vietnam Virgin Islands (U.S.) West Bank and Gaza Yemen, Rep. Zambia Zimbabwe

2006 75.5 7.9 3.8 5.8 17.2 0.1 4.3 5.9 30.0 12.8 18.2 1.3

2007 76.9 16.7 7.2 7.2 20.0 0.1 4.5 7.2 32.3 16.9 28.6 1.4

2008 78.4 6.5 8.8 9.0 18.2 0.2 4.8 8.1 34.8 27.3 34.4 1.8

2009 80.0 13.8 10.1 10.0 20.1 0.2 5.1 10.0 44.3 33.8 36.4 2.0

2010 82.2 20.7 11.6 11.0 21.2 0.2 5.4 12.0 48.5 36.6 39.8 2.2

10.0 2.5 4.5 52.0 68.8 69.2 29.5 6.3 5.9 15.3 17.4 27.2 18.1 1.2 4.2 9.8 3.7 6.5 61.0 75.0 75.2 34.1 7.4 7.5 20.9 20.9 27.2 20.6 5.0 4.9 10.9

15.0 7.9 10.5 72.0 78.2 74.1 39.4 8.9 7.3 26.0 24.2 27.2 23.7 6.9 5.6 11.4

20.0 9.8 15.5 75.0 83.4 78.2 42.0 16.7 7.1 31.3 26.8 27.2 31.3 10.0 6.3 11.4

25.0 12.5 22.8 78.0 84.8 79.3 43.5 19.5 8.0 35.8 27.8

36.4 10.9 6.8 11.5

1 http://data.worldbank.org/indicator/IT.NET.USER.P2