The adoption of technology has brought a sea change to the Indian banking sector, especially in the post-reforms period.
Introduction
The adoption of technology has brought a sea change to the Indian banking sector, especially in the post-reforms period. Technology has helped the banking companies towards reaching the doorsteps of the customers by scaling geographical barriers of branch banking and easing the time, resource and volume constraints. The growth and development of information technology in the 80s and the advancement in computer networking has helped the banks to automate the transactions.[1] With the development of the internet and subsequent introduction of e-commerce and Automated Teller Machines (ATMs), the industry has witnessed structural and functional changes. In addition to scaling borders, technology has enabled the banks to change strategic behavior, improve their efficiency and cut down on transaction costs. Beginning its journey in Indian banking as an enabler, technology over a period of time has transformed into a business driver, and is fast becoming an inseparable part of the banking process. It has become essential that banks adopt innovative methods of computerization and communication so as to afford a well-designed, strong and transparent financial infrastructure, backed by efficient payment and settlement systems.
Electronic fund transfer (EFT) system owes its origin to the introduction of the first automated teller machine (ATM) in the mid-1960s. The ATM was able to handle account transfers, accept deposits, and dispense cash using a standard magnetic stripe card and personal identification number (PIN).[2]The term EFT refers to the application of computer and telecommunication technology in making or processing payments. It is a descriptor that defines payment vehicles which use electronic networks instead of cash or cheques to conduct a transaction. EFT networks are divided into two main types: wholesale and consumer. Wholesale networks are generally used by banks and financial institutions for large-dollar electronic transfers. Consumer networks provide for a variety of electronic payment services used by consumers and generally move small-dollar amounts.
In India, the push towards electronic banking was initiated by the Reserve Bank of India with the help of various recommendations made by the Committees constituted from time to time for development of information technology infrastructure. In 1984, the banks started executing advanced technology in their internal system to improve the working and communication between the branch offices.[3] In 1988, the exhaustive plan for computerization of the banking sector was declared.[4] The major recommendations included operationalization of Magnetic Ink Character Recognition (MICR) technology in four metropolitan cities, framing of uniform regulations for clearing houses,[5] introduction of credit cards and ATMs. In 1994, the main objective was to furnish recommendations on technology issues regarding payment systems made by Rangarajan Committee Reports on Computerization of Banks. Some of the recommendations made by the Committee included the establishment of an EFT system, introduction of MICR clearing in more than 100 banks and promotion of card culture. In the same year, legislation on EFT and other electronic payment modes were proposed. A set of EFT Regulations were recommended by the Reserve Bank under the Reserve Bank of India Act, 1934 and amendment to the Bankers’ Books Evidence Act, 1891. Subsequently, the EFT was launched by the Reserve Bank in 1995 with a view to modernizing funds transfer in the country and speed up the transfer of funds between and among the banks.
Further, the Narasimham Committee Report (1998) focused on issues like strengthening of the banking system, upgrading of technology and human resource development.[6] The Committee laid emphasis on the need for clarification of various issues regarding authentication of EFT. Another committee, under the chairmanship of Dr. A. Vasudevan further recommended upgradation of technology in the banking sector which included legal framework of electronic banking, technology plans for banks, outsourcing of technology and services and computerization of Government transactions.[7] The Indian Financial Network (INFINET), inaugurated in 1999, serves as a communication backbone of the Integrated Payment and Settlement System (IPSS). The RBI set up a ‘Working Group’ on Internet Banking[8] to examine different aspects of Internet Banking. The focus of the group was on three major areas of banking: technology and security issues, legal issues and regulatory and supervisory issues.
Considering and recognizing the importance of the above issues, the Government of India enacted Information Technology Act, 2000 (IT Act, 2000) to provide legal recognition to electronic transactions. An amendment to the RBI Act was also made which empowers the
Reserve Bank to regulate electronic fund transfer among banks and financial institutions. Further legal issues and developments which have taken place pertaining to EFTs will be dealt in the third and the fourth chapters but prior to that, brightness needs to be lent to this paper for which it is important to study the types of electronic banking and payment systems in India.
FORMS OF ELECTRONIC BANKING IN INDIA
The concept and scope of E-Banking is still evolving. E-Banking is expected to result in high productivity and efficiency gain for the bank. Several initiatives taken by the Government of India as well as the Reserve Bank have facilitated the development of E-Banking in India. The Reserve Bank has made considerable progress in consolidating the existing payment and settlement systems and in upgrading technology with a view to establishing an efficient, integrated and secure system, which has further helped in developing E-Banking in India.[9]
(1) INTERNET BANKING:-
Banking transaction which takes place in a virtual ambience on the website of a banking company or a financial institution is termed as Internet banking.[10] The essence of internet banking likes in online access of banking and financial services by customers. The basic difference between internet banking and traditional banking is that in traditional banking, the customer is required to personally visit the branch for making transactions, be it cash deposit or withdrawal, or transfer of funds, or statement of accounts, while in internet banking, these operations can be carried out through computers without physically visiting the bank branch. It is a win-win situation for both the customer and the bank. The customer is relieved from the influence of travelling and the time saved can be effectively utilized in other productive ways. The greatest advantage of internet banking is that it enables a customer to perform basic banking transactions through PC or Laptop in any part of the world. Through the internet, customers access the bank’s website for checking and viewing their account details and performing the basic banking transactions. It was ICICI Bank which initiated the electronic banking revolution in India when they introduced internet banking in 1997 under the brand name ‘Infinity’. Through Internet banking, customers can not only get account balance and see statements of accounts online but they can also transfer funds, order demand drafts and pay utility bills.[11]
(2) MOBILE BANKING:-
With mobile banking facilities, one can bank from anywhere, at any time and in any condition. The biggest limitation of internet banking is the requirement of a computer or laptop with internet connection. This is not a big obstacle in the US and European countries but it is a big barrier in countries like China and India. Mobile banking addresses this fundamental limitation of internet banking by reducing the customer requirement to just a mobile phone. The kind of banking and financial service that gives real-time mobile access to customers on the move is called ‘mobile banking’. Mobile banking refers to banking activity carried out on a mobile phone. Mobile banking facility is an extension of internet banking. Banking is enabled even when a person is on the move.
It is generally required that a customer who registers for internet banking should also register for mobile banking for which a common application form is filled and duly submitted to the bank. Mobile banking is deployed using mobile applications developed on the following three channels:
a) Interactive Voice Response (IVR)
b) Short Messaging Services (SMS)
c) Wireless Access Protocol (WAP)
(3) TELEPHONE BANKING:-
Telephone banking refers to dialing a telephone number using a telephone to access the account, transfer funds, request statements or cheque book simply by following recorded messages and pressing the corresponding keys on the phone.[12] It allows customers to check accounts at convenient times and get simple things done without visiting bank premises.[13] Telephone banking service makes use of an automated voice response system. It aims at providing 24 hour service that is quick, convenient and secured for all customers. Telephone banking, therefore, can be defined as a secure, fast and convenient way to obtain a range of services by using a telephone without visiting the branch, e.g. account information, conduct of transactions, report loss of ATM card, order a cheque book, etc. There are several benefits of telephone banking. A stunning benefit of telephone banking is that it is increasingly accepted as a modern banking and financial service. Telephone banking provides a mass-market delivery mechanism for financial services. The customer can access account information and perform transactions without personally visiting the branch even when he is out of station. This facility, therefore, carries with itself the advantage of convenience, economies of scale, efficiency and time management.
Types of Telephone Banking Systems:-
(1) Automated Voice Response (AVR)
(2) Human Operators
(3) Personal Computer
An important adjunct for the working of telephone banking is the existence of call centers. Call centers are workstations which act as nucleus of the functioning of the telephone banking system. The telephone system is linked to the work stations. Call centers play a significant role in offering the best possible and efficient telephone banking service. Call centers maintain a comprehensive database of the bank’s customers. In order to render effective telephone banking service, it is imperative that call centers are organized and maintained in an automated manner. The human operator at the call center is provided with screen-based software, so as to enable access to a wide range of information about the customer.
(4) AUTOMATED TELLER MACHINE (ATM):-
ATM is an electronic machine operated by the customer himself to make deposits, withdrawals and other financial transactions. It is a step towards improvement in customer service. ATM facility is available to customers 24 hours a day. ATMs have given an edge to banks and financial institutions in efficiently carrying out their operations.
The customer is issued an ATM card which is a plastic card with magnetic strip, containing the name of the customer, card number, information about the bank, validity period and signature panel. Each card holder is provided with a secret personal identification number (PIN).
[1] R. K. Mittal and Sanjay Dhingra, “Technology in Banking Sector: Issues and Challenges” Vinimaya, Vol. 27, 14 (2006-07).
[2] Stan Sienkiewicz, “The Evolution of EFT Networks from ATMs to New On-Line Debit Payment Products”
Discussion Paper, Federal Reserve Bank of Phila Payment Cards Center (April 2002), p. 2 available at:Source link.
[3] Sonia Chawla and Ritu Singhal, “India and the World: The Changing Paradigms in the Banking Sector due to Technological Advancements” Prajnan, Vol. 39, 130 (2010-11).
[4] Ibid
[5] Ibid
[6] Ibid
[7] Ibid
[8] Working Group on Internet Banking, 2001 under the Chairmanship of S. R. Mittal.
[9] R. K. Uppal, “Banking Sector Reforms and E-Banking in India” published in E-banking in India- Challenges and Opportunities (New Century Publications, New Delhi, 1st edition, 2007) at 17.
[10] Dr. Gurusamy, Banking Theory- Law and Practice (Tata Mcgraw Hill Education Pvt. Ltd., New Delhi, 2nd edition, 2009) at 91.
[11] Deepak Kumar, Shashi Kapoor et. al. “Internet Banking: A New Paradigm” published in E-banking in India- Challenges and Opportunities, 125 (New Century Publications, New Delhi, 1st edition, 2007).
[12] Seema Kapoor and Deepak Dhingra, “Application of Information Technology in Banking” published in Ebanking in India- Challenges and Opportunities, 106 (New Century Publications, New Delhi, 1st edition, 2007).
[13] Ibid.
