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MODULE C – BANKING TECHNOLOGY

JAIIB/DBF Paper 1

Index
No. of Unit Unit Name

Unit 1 Essentials of Bank Computerization

Unit 2 Payment System and Electronic Banking

Unit 3 Data Communications Networks and EFT

Systems

Unit 4 Role of Money Markets, Debt Markets &

Forex Market

Unit 5 Security Considerations

Unit 1- Essentials of Bank Computerization

Bank Computerization
The Concept of Bank Computerisation Practically stated after 1980-81 and more
precisely gained pace in the year 1983-84, after setting up a committee in the year 1983
under the chairmanship of the then Deputy Governor of RBI, Dr. C. Rangarajan. This
Committee was set up to study the possibilities and stages involved in bank
computerisation and to prepare guidelines for the same. The report submitted by the
committee in the year 1984 was know as First Rangarajan Committee Report on bank
mechanization.
Another Committee was constituted in 1988 was know as first Rangarajan Committee
Report on bank mechanization.

Need for Computerisation

The four Major objectives of computerization in banking are to improve

• Customer Service

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• Housekeeping
• Decision- making
• Productivity and profitability

Stand- Alone Computer System

Using the stand- Alone computer system is normally the initial stage of computerization at
a bank. The single user- computer system is a small system, which as its name implies, is
used by only one person at a time.

Multi- user System

The Multi-user systems, as their names signify, are computers to which several people can
access at the same time. Mini computers, Main Frame Computers, Micro- Computers and
the more powerful Super Computers all fall under this category.

Network
LAN (Local Area Network)

A Local Area Network (LAN) is a group of computer and peripheral devices which are
connected in a limited area such as school, laboratory, home, and office building. It is a
widely useful network for sharing resources like files, printers, games, and other
application. The simplest type of LAN network is to connect computers and a printer in
someone's home or office. In general, LAN will be used as one type of transmission
medium.

It is a network which consists of less than 5000 interconnected devices across several
buildings.

Characteristics of LAN

Here are important characteristics of a LAN network:

• It is a private network, so an outside regulatory body never controls it.

• LAN operates at a relatively higher speed compared to other WAN systems.
• There are various kinds of media access control methods like token ring and
ethernet.

Advantages of LAN

Here are pros/benefits of using LAN:

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• Computer resources like hard-disks, DVD-ROM, and printers can share local area
networks. This significantly reduces the cost of hardware purchases.
• You can use the same software over the network instead of purchasing the licensed
software for each client in the network.
• Data of all network users can be stored on a single hard disk of the server computer.
• You can easily transfer data and messages over networked computers.
• It will be easy to manage data at only one place, which makes data more secure.
• Local Area Network offers the facility to share a single internet connection among
all the LAN users.

Disadvantages of LAN

Here are the important cons/ drawbacks of LAN:

• LAN will indeed save cost because of shared computer resources, but the initial cost
of installing Local Area Networks is quite high.
• The LAN admin can check personal data files of every LAN user, so it does not offer
good privacy.
• Unauthorized users can access critical data of an organization in case LAN admin is
not able to secure centralized data repository.
• Local Area Network requires a constant LAN administration as there are issues
related to software setup and hardware failures

Network Device
There are various network Devices used in a LAN, The basic network devices used in a LAN
are
• NICs (Network Interface Cards)
• Hubs
• Switches
• Bridges
• Routers
• Gateways
• Firewalls
• WAPs
• Modems etc.

WAN (Wide Area Network):

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WAN (Wide Area Network) is another important computer network that which is spread
across a large geographical area. WAN network system could be a connection of a LAN
which connects with other LAN's using telephone lines and radio waves. It is mostly limited
to an enterprise or an organization.

Characteristics of LAN:

• The software files will be shared among all the users; therefore, all can access to the
latest files.
• Any organization can form its global integrated network using WAN.

Advantages of WAN

Here are the benefits/ pros of using WAN:

• WAN helps you to cover a larger geographical area. Therefore business offices
situated at longer distances can easily communicate.
• Contains devices like mobile phones, laptop, tablet, computers, gaming consoles, etc.
• WLAN connections work using radio transmitters and receivers built into client
devices.

Disadvantage of WAN

• The initial setup cost of investment is very high.

• It is difficult to maintain the WAN network. You need skilled technicians and
network administrators.
• There are more errors and issues because of the wide coverage and the use of
different technologies.
• It requires more time to resolve issues because of the involvement of multiple wired
and wireless technologies.
• Offers lower security compared to other types of networks.

Uninterruptible power supply (UPS)

An uninterruptible power supply (UPS) is a device that allows a computer to keep running
for at least a short time when the primary power source is lost. UPS devices also provide
protection from power surges.
A UPS contains a battery that "kicks in" when the device senses a loss of power from the
primary source. If an end user is working on the computer when the UPS notifies of the
power loss, they have time to save any data they are working on and exit before the
secondary power source (the battery) runs out. When all power runs out, any data in your
computer's random access memory (RAM) is erased. When power surges occur, a UPS
intercepts the surge so that it does not damage the computer.

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Core Banking Solution

What is the Core Banking System?

Core Banking solutions are vital to the day-to-day functioning of any bank. It is an
integral part of the banking technology which aims to serve their clients and customer
with the best services. In simple words, core banking solutions are account-management
back-end and front-end processes.
Core is short for “Centralized Online Real-time Exchange.” As the name suggests, it is a
centralized system or a network created by a bank and its branches. This allows the
customers of the bank to access, manage and perform basic transactions from any branch
of the bank they hold an account in. Thus, core banking software allows the banks to create
a centralized data center.

Core banking solutions offer the following advantages to the bank:

• Improved operations which address customer demands and industry consolidation

• Errors due to multiple entries eradicated
• Easy ability to introduce new financial products and manage changes in existing
products
• Seamless merging of back office data and self-service operations.

Features of Core Banking Solution:

• Customer-On Boarding.
• Managing deposits and withdrawals.
• Transactions management
• Interest. Calculation and management.
• Payments processing (cash, cheques /checks, mandates, NEFT, RTGS etc.).
• Customer relationship management (CRM) activities.
• Designing new banking products.
• Loans disbursal and management.
• Accounts management
• Establishing criteria for minimum balances, interest rates, number of withdrawals
allowed and so on.

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Unit 2- Payment System and Electronic Banking

Electronic Payment system
E-payment system is a way of making transactions or paying for goods and services
through an electronic medium without the use of check or cash.

Automated Teller Machines (ATM)

The Automated Teller Machine, or ATM, enables people to withdraw and deposit money
from their bank accounts using machines.
The Committee headed by Dr. C. Rangarajan recommended the setting up of ATM in
India.
ATM Models in India:
• Online
• Offline
• Stand-alone
• Networked

HWAK (The Intelligent Auto- teller and Netware Management System)

Intelligent auto-teller systems are a special breed of auto-teller machines capable of

thinking for themselves, that means they are fast, impose less demands on your banking
systems and serve the customers more like a personal banker than less sophisticated auto
teller systems.
HWAK provides unsurpassed service even without benefit of a reliable communication
network.
Benefits of HWAK are:
• Customer satisfaction.
• High availability
• Online and offline auto-recovery
• Anytime full banking service
• Low cost, shorter queues and less number of tellers with ease of use
• Quick and early implementation

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• Enhanced security and audit control

• Network management
• Predictable cost of ownership
• Comprehensive ‘One Stop’ autobanking.

White Label ATMs (WLA)

Automated Teller Machines (ATMs) set up, owned and operated by non-bank entities are
called “White Label ATMs” (WLAs). They provide the banking services to the customers of
banks in India, based on the cards (debit/credit/prepaid) issued by banks.

Key facts related:

• Non-bank entities shall commence setting up and operating WLAs only after it has
been authorised to do so by the RBI under the Payment and Settlement Systems
Act, 2007.
• Taking over of ATMs operated by banks would not be permitted. Entities may
ensure to draw a strategic plan for installation of such WLAs based on the criteria
set during authorization. White Label ATM Operators (WLAO) may also indicate the
value added services it proposes to offer at the WLA while seeking authorisation.

• WLAO is permitted to have more than one Sponsor Bank. All the transactions of
WLAs serviced by this Sponsor Bank would be settled through it.
• Cash Management at the WLAs will be the responsibility of the Sponsor Bank, who
may if required, make necessary arrangements with other banks for servicing cash
requirements at various places.

• WLAO may establish connectivity with any of the authorised ATM Network
Operators/ Card Payment Network Operators and ensure that the settlement of all
the transactions at the WLAs shall be done only in the books of the Sponsor Bank
through the ATM Network Operators/ Card Payment Network Operators with
whom the WLAO has established connectivity.
• Maintenance and servicing of the WLAs shall be the sole responsibility of the WLAO.

As per the new guidelines, it has been decided to allow:

• The WLA Operators to buy wholesale cash, above a threshold of 1 lakh pieces (and
in multiples thereof) of any denomination, directly from the Reserve Bank (Issue
Offices) and Currency Chests against full payment.
• The operators to source cash from any scheduled bank, including Cooperative Banks
and Regional Rural Banks.
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• The operators to offer bill payment and Interoperable Cash Deposit services, subject
to technical feasibility and certification by National Payments Corporation of India
(NPCI).

• The display advertisements pertaining to non-financial products / services

anywhere within the WLA premises, including the WLA screen, except the main
signboard. However, it shall be ensured that the advertisements running on the
screen disappear once the customer commences a transaction.
• Banks to issue co-branded ATM cards in partnership with the authorised WLA
Operators and may extend the benefit of ‘on-us’ transactions to their WLAs as well.
• All guidelines, safeguards, standards and control measures applicable to banks
relating to currency handling, and cyber-security framework for ATMs, shall also be
applicable to the WLA Operators.

National Payment Corporation of India (NPCI)

National Payments Corporation of India (NPCI), an initiative of the Reserve Bank of India
(RBI) and Indian Banks’ Association (IBA), is an umbrella organisation for operating retail
payments and settlement systems in India.
NPCI has ten core promoter banks—State Bank of India, Punjab National Bank, Bank of
Baroda, Canara Bank, Bank of India, HDFC Bank, Citibank, HSBC, and ICICI Bank.
The organisation functions under the provisions of the Payment and Settlement Systems
Act, 2007 in order to create robust payments and settlement infrastructure for India.
It is a non-profit organisation set up under the provisions of Section 25 of Companies
Act, 1956 (now, Section 8 of Companies Act, 2013). NPCI aims to provide infrastructure
to the whole banking industry, both physical and electronic payment and settlements
system.

Rupay Card

RuPay was introduced in 2012 by NPCI and functions within the domestic
boundaries. RuPay cardholders can use the service for ATM withdrawals, online
transactions, and card payments. RuPay card has a comparatively lower processing cost
and processing time in comparison to Visa and MasterCard. RuPay cards are available all
over the country including urban and rural areas.

Benefits of RuPay Card

A brainchild of RBI, RuPay is exclusively crafted to meet the needs and requirements of
Indian customers. Here are some of the benefits that RuPay customers stand to get.

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• Security of Information Related to Indians: Customer data and transaction

details pertaining to RuPay card transactions will not be passed outside India.
• Safe Transactions: With SMS alerts and notifications that are sent to the customer’s
phone number after every transaction, RuPay cardholders can be ensured of a
secure transaction.
• Designed for India: RuPay cards have been customized keeping in mind the
product and service requirements of Indians.
• Greater Reach in Rural Areas: When it comes to the RuPay cards transactions, all
the processing happens within the country. This results in lower cost of settlement
and clearing for the transactions made using RuPay debit card. Banks will profit
immensely from this as costs for transaction processing becomes affordable.
• Greater Reach in Rural Areas: Consumers in rural areas can easily apply and get a
RuPay card.
• Payment Solutions across Platforms: RuPay debit card is designed to provide
complete interoperability between payment channels including mobile technology,
ATMs, cheques etc.

Plastic Cards
Types of Plastic Cards

Debit Card
Debit card is linked to the account of the cardholder i.e one who owns the cards. They are
usually issued by Banks and financial institutions. When ones use a debit card the money is
immediately deducted directly from one’s account associated with the card. One can buy
things as long as there is money in account. A debit card is a way to “pay now” Say you have
Rs 10,000 in your account. The amount you can spend, or withdraw, through your card
cannot exceed this limit.
Credit Card
Credit Card is a small plastic card that is issued by financial institutions such as banks. As
the name Credit when one buys using credit card, one is buying by taking loan. One needs
to pay back later(there are no free lunches in life!). There is a limit to which one can buy on
a credit card. So, even if you have only Rs 10,000 in your account but your credit limit is Rs
50,000, you are free to spend up to Rs 50,000. You could also have Rs 1,00,000 in your
account, but your credit limit is only Rs 50,000. You need to repay the amount bought on
credit by a due date.
Charge card

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Charge card carries all the features of credit cards. However, after using a charge card you
will have to pay off the entire amount billed, by the due date. If you fail to do so, you are
likely to be considered a defaulter and will usually have to pay up a steep late payment
charge. In case of credit card, one can pay late payment fee if one misses the due date.
Popular charge cards are American Express cards also called as Amex cards
Smart Card
It contains an electronic chip that is used to store cash. There is no requirement of any
signature, identification and payment authorization. The exact amount is deducted from
the smart card during payment and is collected by the smart card reader machines.
Member Card
A small card issued to and held by a member of a club, society or other organisation,
verifying the member's membership for a given period.
Membership cards and discount offers are important elements of marketing programs
designed to build customer loyalty. Consumers and business customers can apply for
membership cards offered by companies that sell products or services that they buy
frequently.

Electronic Banking
Electronic banking has many names like e banking, virtual banking, online banking, or
internet banking. It is simply the use of electronic and telecommunications network for
delivering various banking products and services. Through e-banking, a customer can
access his account and conduct many transactions using his computer or mobile phone.

Anytime Banking

ATMs have eliminated the time limitations of customer service and offer a host of banking
services, including deposit, withdrawals, requisitions, instructions and transfers.

Anywhere Banking

With the introduction of ATMs and tele-banking, financial details can be accessed from
remote locations and basic transactions can be effected even outside the bank.

Home Banking (Corporate and Personal)

Home Banking Versus Online Banking Online banking is generally available for both
individuals and small businesses. Additional services, such as certificates of deposit (CDs),
and business, personal and mortgage loans, often still occur at physical branch locations.

Corporate Banking

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Remote Banking has become very popular among corporate customers especially big
business/ industrial house which are already automated. More and More banks are
providing customer terminals right in the customer’s office, which facilitates the customers
to operate the account without physically coming to the bank.
At present, by utilizing remote banking facility, corporate customers will be able to get
the following services:
Getting their current balance or getting their statement of accounts for any pre-defined
period

• Ordering cheque banks

• Ordering/ Transferring intra-bank and inter-bank fund transfers
• Instructing stop payments of cheques
• International remittances
• Opening letter of credits

Personal Banking

Personal banking is a type of banking service and product line offered by banks to retail
customers, that is consumers rather than businesses, intermediaries and institutions.
Banks worldwide offer personal banking products that typically include savings and
transaction facilities such as a bank transaction account, debit cards/EFT, an interest
bearing floating account (savings account) and a fixed interest deposit account for a
specific agreed period (certificates of deposit / term deposit) which can vary according to
the bank. In addition it also includes debt facilities such as loans, mortgages and credit
cards.
Example:
The customers of personal banking services and products are commonly the general public
that includes adult individuals, retirees, students, children who may be citizens, residents
and non-residents depending on the requirements of the country or bank. While affluent
individuals may also use personal banking services, they may also be offered private
banking services by banks which can include more sophisticated services and investments.

Internet banking:

Most online payments are done via internet banking option. It has become one of the most
convenient payment methods for transferring money. Most banks have created their own
apps that can be downloaded on the phone and used any time. Through mobile devices,
users can make transactions through mobile apps, net banking facilities, or internet fund

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transfer services such as IMPS (Immediate Payment Services), NEFT (National Electronic
Fund Transfer), and RTGS (Real-time Gross Settlement).

Mobile Banking

Mobile banking has simplified the lives of many people and given them the option to send
money, receive money, check account balance, pay bills, etc. using their mobile phones. And
the best part is that banks offer mobile banking services for free.

Electronic Commerce (E-Commerce)

E-Commerce or Electronic Commerce means buying and selling of goods, products, or

services over the internet. E-commerce is also known as electronic commerce or internet
commerce. These services provided online over the internet network. Transaction of
money, funds, and data are also considered as E-commerce. These business transactions
can be done in four ways: Business to Business (B2B), Business to Customer (B2C),
Customer to Customer (C2C), Customer to Business (C2B). The standard definition of
E-commerce is a commercial transaction which is happened over the internet. Online
stores like Amazon, Flipkart, Shopify, Myntra, Ebay, Quikr, Olx are examples of E-
commerce websites. By 2020, global retail e-commerce can reach up to $27 Trillion.

Cheque Truncation
Section 6 of the Negotiable Instruments Act, defined cheque as “a bill of exchange
drawn on a specified banker and not expressed to be payable otherwise than on
demand”. This section has been amended in September 2002 to include truncations and
cheques within the definition of cheque.

What is Cheque Truncation System?

Cheque Truncation System (CTS) is a cheque clearing system undertaken by the Reserve
Bank of India (RBI) for quicker cheque clearance. As the term proposes, truncation is the
course of discontinuing the flow of the physical cheque in its way of clearing. Instead of this
an electronic image of the cheque is transferred with vital essential data. Cheque
Truncation System brings elegance to the whole activity of cheque processing & clearing
and offers numerous benefits to banks like time and cost savings, cost effectiveness,
including human resource rationalization, business process re-engineering and enhanced
customer service.

Benefits of Cheque Truncation System

• Time, money and manpower expended on physical transfer of cheques

from banks to clearing house are eliminated

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• Clearing related frauds become less plausible

• Probability of cheques misplaced in transit is eliminated
• CTS is more advanced and more secure.
• It provides quicker clearance of cheques
• Reduces operational risk and risks related to paper clearing
• There are no extra charges levied for the collection of cheques drawn
on a bank located within the grid, further providing no geographical
restrictions.

Unit 3- Data Communications Networks and EFT

Systems
Data Communication Networks

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Data communications helps in drastically cutting and the time involved in transferring data
from the point of origin to the computer and information from the computer to the point of
use.

Components of Data Communications Networks

Data communications typically consists of various data communication components. When

the components operate together for the sharing of resources, they are said to form a
network. It has three basic components.
Transmission Devices and Interface Equipment
The data is transmitted along the communication path between computer devices using
electrical signals and bit sequences to represent number and characters.
Modem: A modem is a device or program that enables a computer to transmit data over,
for example, telephone or cable lines. Computer information is stored digitally, whereas
information transmitted over telephone lines is transmitted in the form of analog waves. A
modem converts between these two forms.
Transmission Medium
For Communications between computers, the data has travel through some medium during
its transmission. The prevalent technologies for data communications media are terrestrial,
microwave and satellites.
(a)Terrestrial Cables (Three types)
• Twisted Pair
• Coaxial Cable
• Optical fibre
(b)Microwave systems: A microwave system is a system of gear used for microwave data
transmission. The typical microwave system includes radios located high atop microwave
towers, which are used for the transmission of microwave communications using line of
sight microwave radio technology.
(c) Communication satellite: A satellite is a body that moves around another body in a
mathematically predictable path called an Orbit. A communication satellite is nothing but a
microwave repeater station in space that is helpful in telecommunications, radio, and
television along with internet applications.
A repeater is a circuit which increases the strength of the signal it receives and retransmits
it. But here this repeater works as a transponder, which changes the frequency band of the
transmitted signal, from the received one.

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The frequency with which the signal is sent into the space is called Uplink frequency, while
the frequency with which it is sent by the transponder is Downlink frequency.
Transmission Processors
The Purpose of communication processors is to enhance is to data communication between
two points. Communications processors can be broadly categorized as:
• Message Switches
• Multiplexers
• Front end processors

Modes of transmission

• Simplex
• Half- Duplex
• Full Duplex

Network Scenario in India: Major Networks

The Committees on communication networks for banks, set up in 1987 under the
chairmanship of “T.N Anantharam Lyer” executive director, RBI, had strongly
recommended for the establishment of a cooperative communication network especially
for the banking industry.
INET
INET was set up by the department of telephones in the year 1991. It is a fast, reliable,
flexible and quite cost effective data communication network.
NICNET
NICNET has been set up by the National Informatics Centre (NIC), a Government of India
organization. It is India’s largest Wide Area Network (WAN). The Master Earth station is
installed in New Delhi, to provide access to satellites and operates from around 2000 VSAT
terminals.
INDONET
It was set up by CMC Ltd. In the 1980 and was among the first countrywide networks in
India.
RBINet
After recognising the pressing need to harness information technology for intra-bank and
inter-bank communications in the 1980s, RBI commissioned the BANKNET in 1991.

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RBI Net is also being used by several departments of banks for various applications
such as:

• Transmission of section 42(2) o the RBI Act, 1934, data by

commercial banks to regional offices of department of banking
operations and development (DBOD) and furnishing of consolidated
data by the regional offices of DBOD to central DBOD.
• Press relations division daily news summary of important financial
matters.
• Department of economic analysis and policy macroeconomic indicators
on a weekly basis.

Emerging Trends in Communications Networks for Banking

RBI’s VSAT Network

The Indian Financial Network (INFINET) is a Closed User Group (CUG) Network for the
exclusive use of Member Banks and Financial Institutions. It was set up by the Reserve
Bank in 1999 through the Institute for Development and Research in Banking and
Technology (IDRBT) Hyderabad. The Institute explored capability, methods, procedure to
expand the network using a blend of communication technologies such as VSATs and
Terrestrial Leased Lines. In order to have a careful combination of technologies in the
INFINET, a Leased Line Network (LLN), connecting 21 major cities has been seamlessly
integrated with it. The LLN is a mix of 2 Mbps and 64 Kbps lines. The LLN provides
gateways to banks from each of these 21 cities. The Network Management System (NMS) of
the LLN is located at the INFINET Hub at Hyderabad. The Backup NMS is located in the
Main Office of RBI in Mumbai
Among various inter-bank and intra-bank applications ranging from simple messaging,
MIS, EFT (Retail), Electronic Clearing Service (ECS) for both Credits and Debits, online
dealing and trading in Government securities, Centralized Funds Management
System(CFMS) for Banks and Financial Institutions, Anywhere banking/Anytime Banking
(ATM), Inter-Branch Reconciliation, Structured Financial Messaging System (SFMS) and
Electronic Funds transfer (RTGS/NEFT) System, transmission of Inter-city Cheque
Realisation advices, government securities trading, and currency chest accounting are
done through this service. VSAT technology service can also be used for one-way and/or
interactive communications via satellite. Presently, the network consists of over 950 VSATs
located in 127 cities of the country. All Banks and financial institutions in the country are
eligible to become members of the INFINET.

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Internet

The Internet is a global network of networks. It is a system of computers which allows user
computers exchange data, message, files etc.

• The Internet is a global network of networks. It is a system of

computers which allows user computers exchange data, message, files
etc.
• Serial Line Protocol (SLIP)
• Point to Point Protocol (PPP)

Internet Access Service

• E-mail
• Usenet
• Gopher
• File Transfer Protocol (FTP)
• World Wide Web (WWW)

SWIFT (Society for Worldwide Interbank Financial

Telecommunication)
SWIFT message types are the format or schema used to send messages to financial
institutions on the SWIFT (Society for Worldwide Interbank Financial
Telecommunication) network. The original message types were developed by SWIFT
and retrospectively made into an ISO standard, ISO 15022. In many instances, SWIFT
message types between custodians follow the ISO standard. This was later
supplemented by a XML based version under ISO 20022.
SWIFT India Domestic Services Pvt Ltd (“SWIFT India” or “the Company”), founded on
similar principles, is a financial messaging services provider formed by SWIFT SCRL and
Indian banks, for the domestic Indian financial community and by the community.
Through shared resources and capital, SWIFT India functions with the objective of enabling
harmonised exchange of structured financial information between domestic participants in
the domestic Indian community, thereby
(a) Reducing costs and risks,

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(b) Expanding the reach of automated, standardised and secure exchange of information
across the industry,
(c) Enabling new instruments, opportunities and markets for the industry.

Message types:

• Real-time and bulk messages

• File transfer of structured and unstructured information

Security:

• Role-based access control

• Maker-checker controls
• 3 layers of asymmetric encryption to ensure integrity, authenticity and
confidentiality
• Hardware security modules
• Support for local Controller of Certifiying Authorities (CCA) licensed public
key infrastructure (PKI)

International and domestic standards:

• Support for international ISO 15022 (MT) and ISO 20022 (MX) message
formats, including domestic to international message transformation
• Support for local market practices and flows
• Support for local addressing schemes such as the Indian Financial System
Codes (IFSC)

Value added message features:

• Guaranteed delivery
• Delivery confirmation and non-delivery warning
• Broadcast messages
• Syntax and rule-book message validation
• Non-repudiation proof of messsage transmission in case of dispute
• Message retrieval for 124 days in case of messages lost or corrupted by
either sender or receiver
• Store-and-forward for when counterparties are not online

Back-office integration for straight-through-processing

• Message transformation
• Multiple protocols (incluing SOAP, MQ, file transfer, etc)
• Custom workflows

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Unit 4- Role Of Technology Upgradation and Its

Impact on Banks
Trades in Technology Development
The Advancements in software tools, computer hardware and telecommunications have
shifted the focus of the banks towards computerization from data processing to
information services.

• Data Warehousing
• Data Mining

Data Warehousing

What is Data Warehousing?

Data warehousing is the process of constructing and using a data warehouse. A data
warehouse is constructed by integrating data from multiple heterogeneous sources that
support analytical reporting, structured and/or ad hoc queries, and decision making. Data
warehousing involves data cleaning, data integration, and data consolidations.

Using Data Warehouse Information

There are decision support technologies that help utilize the data available in a data
warehouse. These technologies help executives to use the warehouse quickly and
effectively. They can gather data, analyze it, and take decisions based on the information
present in the warehouse. The information gathered in a warehouse can be used in any of
the following domains −
• Tuning Production Strategies − The product strategies can be well tuned by
repositioning the products and managing the product portfolios by comparing the
sales quarterly or yearly.
• Customer Analysis − Customer analysis is done by analyzing the customer's
buying preferences, buying time, budget cycles, etc.

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• Operations Analysis − Data warehousing also helps in customer relationship

management, and making environmental corrections. The information also allows
us to analyze business operations.

Integrating Heterogeneous Databases

To integrate heterogeneous databases, we have two approaches −

• Query-driven Approach
• Update-driven Approach

Query-Driven Approach

This is the traditional approach to integrate heterogeneous databases. This approach was
used to build wrappers and integrators on top of multiple heterogeneous databases. These
integrators are also known as mediators.

Process of Query-Driven Approach

• When a query is issued to a client side, a metadata dictionary translates the query
into an appropriate form for individual heterogeneous sites involved.
• Now these queries are mapped and sent to the local query processor.
• The results from heterogeneous sites are integrated into a global answer set.

Disadvantages

• Query-driven approach needs complex integration and filtering processes.

• This approach is very inefficient.
• It is very expensive for frequent queries.
• This approach is also very expensive for queries that require aggregations.

Update-Driven Approach

This is an alternative to the traditional approach. Today's data warehouse systems follow
update-driven approach rather than the traditional approach discussed earlier. In update-
driven approach, the information from multiple heterogeneous sources are integrated in
advance and are stored in a warehouse. This information is available for direct querying
and analysis.

Advantages

This approach has the following advantages −

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• This approach provide high performance.

• The data is copied, processed, integrated, annotated, summarized and restructured
in semantic data store in advance.
• Query processing does not require an interface to process data at local sources.

Functions of Data Warehouse Tools and Utilities

The following are the functions of data warehouse tools and utilities −
• Data Extraction − Involves gathering data from multiple heterogeneous sources.
• Data Cleaning − Involves finding and correcting the errors in data.
• Data Transformation − Involves converting the data from legacy format to
warehouse format.
• Data Loading − Involves sorting, summarizing, consolidating, checking integrity,
and building indices and partitions.
• Refreshing − Involves updating from data sources to warehouse.

Data Mining

What is Data Mining?

Data mining is looking for hidden, valid, and potentially useful patterns in huge data sets.
Data Mining is all about discovering unsuspected/ previously unknown relationships
amongst the data.
It is a multi-disciplinary skill that uses machine learning, statistics, AI and database
technology.
The insights derived via Data Mining can be used for marketing, fraud detection, and
scientific discovery, etc
Data mining is also called as Knowledge discovery, Knowledge extraction, data/pattern
analysis, information harvesting, etc.

Business understanding:

In this phase, business and data-mining goals are established.

• First, you need to understand business and client objectives. You need to define
what your client wants (which many times even they do not know themselves)
• Take stock of the current data mining scenario. Factor in resources, assumption,
constraints, and other significant factors into your assessment.

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• Using business objectives and current scenario, define your data mining goals.
• A good data mining plan is very detailed and should be developed to accomplish
both business and data mining goals.

Data understanding:

In this phase, sanity check on data is performed to check whether its appropriate for the
data mining goals.

• First, data is collected from multiple data sources available in the organization.
• These data sources may include multiple databases, flat filer or data cubes. There
are issues like object matching and schema integration which can arise during Data
Integration process. It is a quite complex and tricky process as data from various
sources unlikely to match easily. For example, table A contains an entity named
cust_no whereas another table B contains an entity named cust-id.
• Therefore, it is quite difficult to ensure that both of these given objects refer to the
same value or not. Here, Metadata should be used to reduce errors in the data
integration process.
• Next, the step is to search for properties of acquired data. A good way to explore the
data is to answer the data mining questions (decided in business phase) using the
query, reporting, and visualization tools.
• Based on the results of query, the data quality should be ascertained. Missing data if
any should be acquired.

Benefits of Data Mining:

• Data mining technique helps companies to get knowledge-based information.

• Data mining helps organizations to make the profitable adjustments in operation
and production.
• The data mining is a cost-effective and efficient solution compared to other
statistical data applications.
• Data mining helps with the decision-making process.
• Facilitates automated prediction of trends and behaviors as well as automated
discovery of hidden patterns.
• It can be implemented in new systems as well as existing platforms
• It is the speedy process which makes it easy for the users to analyze huge amount of
data in less time.

Disadvantages of Data Mining

• There are chances of companies may sell useful information of their customers to
other companies for money. For example, American Express has sold credit card
purchases of their customers to the other companies.

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• Many data mining analytics software is difficult to operate and requires advance
training to work on.
• Different data mining tools work in different manners due to different algorithms
employed in their design. Therefore, the selection of correct data mining tool is a
very difficult task.
• The data mining techniques are not accurate, and so it can cause serious
consequences in certain conditions.

Role and Uses of Technology Upgradation

Technology has allowed banks to offer much more to their customers like the facilities of
card and telephone access, anytime and anywhere banking through 24hrs ATMs, credit
card, debit card and POS (Point of sale) access. The technology has made it possible for the
customers to have fingertip access to their accounts worldwide.
Data and Message Transferring

• Electronic Data Interchange (EDI): Banks have been using EDI in the
form of SWIFT messages.
• Electronic Mail

Corporate Websites

• Dissemination of information
• Financial Advice
• To highlight non-banking activities
• A node for commerce
• Selling financial products
• Gateway to the Internet
• Account services

Management Information System (MIS):

A management information system is an information system used for decision-making, and
for the coordination, control, analysis, and visualization of information in an organization.
The study of the management information systems testing people, processes and
technology in an organizational context.

• Computer- based Information systems

• Decision Support Systems (DSS)

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Impact of ‘IT’ on Banks

• Changes in Organisational Structure and Orientation

• Impact on Service Quality (Changes In Customer Aspirations)
• Impact on Human Resources (Role Transition, Training Needs)
• Impact on Privacy and Confidentiality of Data

Unit 5- Security Considerations

Risk Concern Areas
The Customer Demands have triggered a fierce competition among banks and financial
companies for the application of information technology in their operations to help them
offer innovative products and services at reduced costs. This also helps those entering new
geographical areas.
• Data and software: Data is critical resource, necessary for an organisation’s
continuing operations. Incorrect data can have serious implications in decision
making, as well. The increasing availability and use of expert system and the
potential impact erroneous data can result in playing havoc with an organisation’s
business.
• Infrastructure: Banks have to invest heavily for implementing technology- based
tools and solutions. In addition to software and data, same hardware components
are required for operations of the computer and communication systems.
• Peopleware: Peopleware refers to the group of persons directly or indirectly
involved in managing and running the computerized systems.

Different types of Threats

The threats to computerized system manifests in the form of business interruptions as
under:
• Errors and omissions in data and software
• Unauthorised disclosure of confidential information
• Computer abuse and mis-utilisation of banks assets
• Computer/cyber frauds

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Accidental Damages: Computers and communications systems have found their

applications to be quite extensive in banking and other financial organisations. However, at
the same time, these systems are vulnerable to damages caused accidentally, both due
human failures and natural calamities.
• Environmental Hazards
• Human Error and Omissions
• Unreliable systems

Malicious Damages: Risk of malicious damages to computerized systems can be from

disgruntled employees who wish to disrupt the services or from individuals with malafide
intentions, using the technology for perpetrating fraud for financial gains.

• Interruptions in Services
• Frauds

Control Mechanism
Implementation of effective control mechanism is required management of risks associated
with the use of IT tools.
Physical Control
Internal Control

1. Accounting Control
2. Administrative Control

Operational Control

1. Audit Trails (i)Accounting Audit Trail (ii) Operations Audit Trail

2. Checksum
3. Data Encryption

Computer Audit
Banks can achieve effective, secure and reliable computer systems only through the use of
appropriate control techniques discussed above. The control techniques selected, varies

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from bank to bank, reflecting the particular risks within each bank and the costs of related
security and control procedures.
A regular programme of independent tests of security and control procedures by auditors
help in in identifying lapses before the banking operations land into serious risk. The
generic organizational function aimed at evaluation of the asset safeguarding, data
integrity, system effectiveness, and system efficiency in computerized systems is termed as
“Computer Audit”.

Information System Audit (IS Audit)

An information system (IS) audit or information technology(IT) audit is an examination of
the controls within an entity's Information technology infrastructure. These reviews may
be performed in conjunction with a financial statement audit, internal audit, or other form
of attestation engagement. It is the process of collecting and evaluating evidence of an
organization's information systems, practices, and operations. Obtained evidence
evaluation can ensure whether the organization's information systems safeguard assets,
maintains data integrity, and are operating effectively and efficiently to achieve the
organization's goals or objectives.

Information Systems Audit Methodology

PHASE 1: Audit Planning

PHASE 2 – Risk Assessment and Business Process Analysis
PHASE 3 – Performance of Audit Work
PHASE 4: Reporting

Benefit of IS Audit

It would identify the risks of exposure to an existing computerized environment. On

Identification of the risks, remedial measure can be taken to protect the interests of an
organisation.
It would deter people/employees/ users from indulging in corruption/ manipulation of
data, frauds etc. An undesired activity will be detected through implementation of IS audit.

Information System Security (IS Security)

Information systems security, also known as INFOSEC, is a broad subject within the field of
information technology (IT) that focuses on protecting computers, networks, and their
users. Almost all modern companies, as well as many families and individuals, have
justified concerns about digital risks to their well-being.

Need for IS Security

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• To Comply with law of the land and regulator’s guidelines.

• To comply with business policy.
• To comply with business partner’s requirements.

IS Security in Banking

Banks must meet their customers requirement for security aspects in special way on many
levels, whether it is with their saving, taking advantage of over-the counter services at a
branch office, withdrawing money from the teller machines, making deposits via the cash
recycling system, online banking etc.

Threats to IS Security

• E-mail Viruses
• Phishing Attacks
• Hackers Attack
• Vishing
• Smishing

Evaluation Requirements
The IT resources continuously undergo changes in the form of development of new
applications, acquisition of new hardware, turnover of trained employees etc.

• Computer Hardware
• Computer Software
• Data
• Communication channels
• Disaster Recovery Management
• System Development Process

Legal Framework For Electronic Transactions

At present, many legal provisions recognize the paper-based records and documents that
should bear signature. Since, electronic commerce eliminates the need for paper-based
transactions. Therefore to facilitate e-commerce, there was a need for
enactment/amendment of necessary Law.

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Indian Parliament enacted a comprehensive information Technology Bill, which received

the Present’s assent on 9 June 2000.
Consequent upon the recognition given to the electronic records, electronic documents
and electronic signatures, incidental amendments have also been made in the
following Acts:

• The Indian Penal Code, 1860

• The Indian Evidence Act, 1872
• The Banker’s Bank Evidence Act, 1891
• The Reserve Bank of India Act, 1934

The Act purports to include the work “electronic record” along with the word
“record”/”document” appearing generally in various sections of these act.
The amendment to Indian Penal Code, 1860, also states that for the purpose of the Section
466 (dealing with forgery of records) a “register” shall include any list, data or record of
any entires maintained in the electronic form as defined in the IT Act 2000.
Bankers Books Evidence Act, 1891 redefines banker’s books as ledgers, daybooks, cash
books and account Books used in the ordinary business of the Bank.
The RBI act, 1934 has been amended by the IT act, 2000, empowering the central board to
make regulations for fund transfers through electronic means between the banks or
between the banks and other financial institutions.

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