High-Tech Banking

Unit V
Introduction
 Technology has not only assumed the role of a facilitator
but also a source of competitive advantage
 During the last decade, technology has been used only as
mean for efficiency and cost cutting
 Now banks have started to invest in technology as it does
not only help them improve revenue enhancement and
cost effectiveness but also improve the ROE & ROA
 The business of banking especially retail banking is
undergoing sea changes as business increasingly shifts
towards online environment
 Increasingly a large number of customer will be moving
towards online where customer shifts from market place to
market space.
CATEGORINZING FINANCIAL TRASACTION THROUGH TECHNOLOGY

E-commerce

E-Finance E-money

E-Banking –
Other financial
providing products
services/products
and services through
such as insurance, Prepaid payment mechanism
e-channels such as
mutual funds,
internet and mobile
brokering ect
banking
Benefits of Electronic Banking
For Banks
 Price
 Customer Base
 Efficiency
 Customer service and Satisfaction
 Image
For Customers
 Systematically Important Payment Systems
 High Value Clearing
 Real Time Gross Settlement
 Financial market clearing & other important retail payment facilities
 Financial market clearing is intended primarily for government securities and
foreign exchange market
 Retail payment system such as e-banking gives control over nearly every aspect
of managing his bank account
E-Payment
The importance of Payment & Settlement System
 An important ingredient of an efficient & deep financial system is the
ability of intermediaries to effect smooth and secure transfer of
money and exchange financial claim embedded in financial
instrument
 The security of payment & settlement is crucial in sustaining public
trust in the financial intermediaries
 Central banks as supervisors & regulators of payment and settlement
system through financial intermediaries, have to ensure development
of efficient and secure system to match the explosion in needs and
sophistication of the financial sector
 Technology has been a primary contributor to new & innovative
products and methods of payments and settlement in various
countries across the world
International Standards & Codes for Payment & Settlement
System
 The committee on payment & settlement system(CPSS) was set up by
the Bank for International settlement as a standing committee with
the objective of strengthening financial market infrastructure through
promoting sound and efficient payment and settlement system
 CPSS was set up by the G10 central banks in 2001 with the specific
objective of formulating broad supervisory standards & guidelines for
payment and settlement system
 It serves as the forum for the central banks to monitor and analyse
development in domestic payment, clearing and settlement system
as well as in cross-border & multi currency settlement system
 The membership of CPSS has widened beyond G10 to include 25
central banks in 2009
 The committee has forged relationship with non-CPSS central banks
in order to help strengthen payment system globally
International Standards & Codes for Payment & Settlement
System
 CPSS publishes reference works on payment system in select
countries called as the Red book
 After finalizing the core principles of systematically important
payment system in 2001, CPSS published in 2002 along with IOSCO its
recommendation for securities settlement system
 CPSS-IOSCO in 2004 gave its recommendation on Central Counter
Parties
Payment & Settlement System in India
 RBI has spearheaded a vast change in the use of technology for
making banking in India safer, more secure, smoother & more
efficient
 RBI was empowered in 2007 through the enactment of the payment
and settlement act 2007 to regulate and supervise payment and
settlement system in India, formulate relevant policies and provide
legal basis for multilateral netting and settlement finality
 To operationalize the act,RBI framed the board for regulation and
supervision of payment and settlement system regulation 2008 &
payment and settlement system regulation 2008
 Payment system can be bifurcated into
 Paper based
 Electronic Payment system
Payment Payment
System System
Large Value – RTGS, High
Paper Based –High Value Value clearing, CCIL
clearing, cheques

Retail Payment – MICR/non-

Electronic –RTGS, ECS,NEFT MICR cheque clearing, NEFT,
ECS, cards, Internet/mobile
based
RETAIL PAYMENT SYSTEM
 Retail payment are required for the purpose such as payments for
goods and services, bill payments, cash payments and so on

Instrument Purpose

Purchase of goods and

services; bill payments;
Cheques, debit & credit card;
trading/investment in
mobile/internet banking
financial instruments-
recurring/non recurring

ATM, pin-based debit cards, P2P Payments, cash

credit cards, POS cash back withdrawal, advances
The paper based payment and settlement mechanism in India are as
follows
 MICR & Non-MICR Cheques
 High Value Clearing
 Speed cheque clearing drawn on outstation CBS branches of drawee
bank processed in local clearing
 Cheque truncation
The Electronic clearing and settlement system being operated are as
follows
 ECS, NECS
 EFT
 NEFT
Paper-Based Instrument in Retail Payment System
 Cheques
 MICR
 Speed Clearing
 High Value Clearing
 Cheque Truncation
Electronic Retail Payment System
1) Electronic Clearing Service
 Bulk and repetitive payment like interest & dividends are mostly
paper based involved printing of warrants, dispatching them by
posts and reconciliation thereof after payment by the agency banks
 ECS is a retail payment system that facilitates bulk payment and bulk
receipts
 These two aspects are handled by two components of the system
1) ECS(Credit)
2) ECS (Debit)
3) ECS(Centralized)
The ECS systems works in the following steps
Step 1: Corporate institution(user) prepares the payment data and
submits the same to their banker(Sponsor bank)
Step 2: Sponsor bank would present the payment data to the local
bankers clearing house authorizing them to debit the sponsor bank
account and credit the account of the bank(destination bank) where
the beneficiary of the transaction maintain their account
Step 3: On receiving this authorization, the clearing house will process
the data and work out on a interbank fund settlement
Step 4: the clearing house will furnish to the service branches of the
destination banks branch wise credit report indicating the beneficiary
detail such as the names, account number, name of the branches
where the accounts are maintained
Step 5: The service branches will in turn pass on the advices to the
concerned branches of their bank, which will credit the beneficiary
accounts on the appointed date
Benefits to an Organization
 Savings
 Prevents loss of instrument
 Reconciliation of transaction is made automatic
 Cash management becomes easier
 Better customer/investor service
Benefits to customer
 Payment on the due date
 Effortless receipt
 No loss of instrument / fraudulent encashment not possible
Electronic Fund Transfer & National Electronic Fund Transfer
 EFT was introduced by the RBI in 1997 as an inter-city ,intra city and inter-
bank and intra-bank fund transfer mechanism by which funds can be
transferred from any branch of a bank to any bank anywhere in India
 EFT process Pre-authorised debit or credits from one bank to another
within a 48 hour period
 Customer have to sign a form the authorizes the bank to deduct their
payment on a certain date
 Details such as payee name, beneficiary account and date are programmed
into the account
 EFT system was replaced in November 2005 by the NEFT, an electronic
message based payment system using Public Key Infrastructure Technology
to ensure end to end security
 NEFT uses INFINET to connect bank branches for electronic transfer of funds
Plastic Money & E-Money
 Plastic money refers to substitution of currency at the time when the
payment is taking place by using a card normally made of plastic
Types of Plastic Money are
 Credit Cards
 Debit Cards
 Other Payment Channels
Credit Card
 They can be broadly classified into three types
1) Bank Cards
2) Travel and Entertainment Cards
3) Company or Retail Store Cards
The Parties to Credit Card Transaction
 Card Issuer
 Card Holder/user
 Member Establishment
 Clearing Agencies
 Credit Card Affiliates
How Does Credit Card Make money
 Fees paid my Member Establishment
 Interest paid by the user
 Other fees like late payment fees, Annual Fee, Over the limit transaction
charges, fees for cash advances
Benefits for Credit Card User
 Deferred payment of bills
 Revolving Credit
 Rewards from card issuer
Benefits for Credit Card Merchant
 Immediate Payment > Increased consumer spending
 Assured Payment
 Debit Cards
Benefits to Customer
 Payment convenience and Safety
 Wide Acceptance
 Easier qualification
Benefits to Merchants
 Fast Approval
 Fraud Prevention
 Increased sales
 Minimum investment and charges
 Security
 Cash Management
Credit and Debit Cards in India
Other Payment Channels/Products
 ATM
 Mobile Banking
 Prepaid Payment Instrument
Security Issues in E-Banking
 The safety of banks, integrity of the country's payment and
settlement systems and the trust that customer impose in the safety
of the system are all intertwined to ultimately contribute to financial
stability
 The challenge for the future will be to identify and address risk to
banking safety and security without hampering technological
innovation in banking
The most prevalent types of internet frauds are discussed below
 Identity theft
 Carding/Skimming
 Phishing
 E-mail phishing > Vishing
 Pharming > Man in the middle attack
 Spear Phishing > Man in the browser attack
 Phlash Phishing
 Mules
 RBI Initiative
Securing Card Payment Transactions
• All new debit and credit cards to be issued only for domestic usage unless
international use is specifically sought by the customer. Such cards enabling
international usage will have to be essentially EMV Chip and Pin enabled.
(By June 30, 2013)
• Issuing banks should convert all existing MagStripe cards to EMV Chip card
for all customers who have used their cards internationally at least once
(for/through e- commerce/ATM/POS) (By June 30, 2013)
• All the active Magstripe international cards issued by banks should have
threshold limit for international usage. The threshold should be determined
by the banks based on the risk profile of the customer and accepted by the
customer (By June 30, 2013). Till such time this process is completed an
omnibus threshold limit (say, not exceeding USD 500) as determined by
each bank may be put in place for all debit cards and all credit cards that
have not been used for international transactions in the past.
• Banks should ensure that the terminals installed at the merchants for
capturing card payments (including the double swipe terminals used)
should be certified for PCI-DSS (Payment Card Industry- Data Security
Standards) and PA-DSS (Payment Applications -Data Security Standards) (By
June 30, 2013).
 RBI Initiative
Securing Card Payment Transactions
• Bank should frame rules based on the transaction pattern of the
usage of cards by the customers in coordination with the authorized
card payment networks for arresting fraud. This would act as a fraud
prevention measure (By June 30, 2013).
• Banks should ensure that all acquiring infrastructure that is currently
operational on IP (Internet Protocol) based solutions are mandatorily
made to go through PCI-DSS and PA-DSS certification. This should
include acquirers, processors / aggregators and large merchants (By
June 30, 2013).
• Banks should move towards real time fraud monitoring system at the
earliest.
• Banks should provide easier methods (like SMS) for the customer to
block his card and get a confirmation to that effect after blocking the
card.
 RBI Initiative
Securing Card Payment Transactions
• Banks should move towards a system that facilitates implementation
of additional factor of authentication for cards issued in India and
used internationally (transactions acquired by banks located abroad).
 RBI Initiative
Securing Electronic Payment Transactions
• Customer induced options may be provided for fixing a cap on the
value / mode of transactions/beneficiaries. In the event of customer
wanting to exceed the cap, an additional authorization may be
insisted upon.
• Limit on the number of beneficiaries that may be added in a day per
account could be considered.
• A system of alert may be introduced when a beneficiary is added.
• Banks may put in place mechanism for velocity check on the number
of transactions effected per day/ per beneficiary and any suspicious
operations should be subjected to alert within the bank and to the
customer.
• Introduction of additional factor of authentication (preferably
dynamic in nature) for such payment transactions should be
considered.
 RBI Initiative
Securing Electronic Payment Transactions
• The banks may consider implementation of digital signature for large
value payments for all customers, to start with for RTGS transactions.
• Capturing of Internet Protocol (IP) address as an additional validation
check should be considered.
• Sub-membership of banks to the centralised payment systems has
made it possible for the customers of such sub-members to reap the
benefits of the same. Banks accepting sub-members should ensure
that the security measures put in place by the sub members are on
par with the standards followed by them so as to ensure the safety
and mitigate the reputation risk.
• Banks may explore the feasibility of implementing new technologies
like adaptive authentication, etc. for fraud detection.