CHAPTER – FOUR

ELECTRONIC BANKING
CONCEPT
 What is Electronic banking?
According MR. Ellen H. lipis:
• “Electronic banking systems are electronic systems
that transfer money and record data relating to these
transfers, electronic banking services are developing
tools in the overall banking services delivery system.
• Here e-banking is viewed as the means of providing
traditional services in a modern or newer way.
• It is a technology based banking
system where transactions between the banker and
customer are done without any use of paper documents
• It is hoped that in the near future, this technology based
banking system will bring a radical change in the
concepts of economic and political sovereignty.
• So at last we say that Electronic banking is
modern technology
or satellite based computerized system of banking by wh
ich banks become able to provide quicker, more
accurate and convenient banking services to the
customers and maintain inter-relation among them.
 BANK COMPUTERIZATION
 At the time of manual transactions, an account
holder had to wait for hours at the bank counters for
getting a draft or for withdrawing his own money.
 Now, for banking transactions customers are no
longer prepared to wait for information or services.
 Financial Institutions and Banks are continuously
searching for new ways to use technology to deliver
increasing number of products and services to their
customers on one hand, on the other putting
technology in use for problem solving and decision
support.
 NEED FOR COMPUTERIZATION

• The four major objective of computerization in

banking are to improve
 Types of Bank computerization
1. Back Office Application
• The first step towards bank computerization, was
implementation of the Back office application in the
banking sector.
• The Back office application uses computers only for data
entry operations and a few calculative operations
• It also stores customer’s data and uses dos base FoxPro
to calculate interest and develop the pay roll system to
calculate the employees’ salary.
• This application was not beneficial to the banks
customers because it was not providing them any kind of
service.
 Types of Bank computerization
2. Total Branch Automation
 These branches should have a single customer ID
concept using which all the accounts of the
customer can be retrieved.
 In case of TBA bank can also provide ATM facility,
but that ATM facility is restricted to that branch
only which is provide ATM centers.
 Types of Bank computerization
3. Core banking Solution
 Core banking applications (CBS) in Banks provide the complete
front-end and backend automation of banks.
 These applications also help the banks to achieve centralized
processing of each and every service of the customer.
 Core banking is a newly developed concept adopted by banks.
 Core banking is a centralized system that provides accounting,
customer information management and transaction processing
functions.
 ELECTRONIC DATA
INTERCHANGE (EDI)
 EDI is the electronic exchange of business
documents in a standard, computer process able,
universally accepted format between trading
partners.
 It is a standard for the electronic exchange of
business documents, such as invoices and purchase
orders.
 These electronic documents enables in one
company to talk to computers in another company
without producing paper documents.
 BENEFITS OF EDI
 Lower Processing cost
 Improves the overall quality of data
 Helps to manage information system effectively and
efficiently
 Helps to reduce inventory level
 Transfer of information from computer to computer
is automatic and data is entered only at the source
 Customer relations can be improved
 Business relations with trading partners can be
improved
 ATMs: Automated Teller Machines
 An automated teller machine (ATM) is a
computerized telecommunications device that
provides the customers of a financial institution or
bank with access to financial transactions in a public
space without the need for a human clerk or bank
teller 24 hours a day.
 ATMs plays a vital role in facilitating the banking
services to banks as well as customers.
 HISTORY OF ATM
The first Automated Teller Machine (ATM) was
introduced in the year 1967 by Barclays Bank in
Enfield Town in North London. At that time a few
would have anticipated excess in ATMs.
The main objective of introducing the ATM was
reducing customer’s time, lesser bank distribution
cost and enhancing the efficiency of banking
institutes.
 LOCATION OF ATM
• ATMs are placed not only near or inside the
premises of banks, but also in locations such as
shopping centers/malls, airports, grocery stores,
petrol/gas stations, restaurants, or any place large
numbers of people may gather.
 USES OF ATM MACHINES

Making withdrawals.
Checking balances and updating Account
information.
Making deposits.
Making funds Transfer.
Making payments.
 PARTS OF ATM

 Card Reader
 Keypad
 Speaker
 Display Screen
 Receipt Printer
 Cash Dispenser
 CARD READER
The card reader
captures the account
information stored on
the magnetic stripe on
the back of an
ATM/debit or
credit card. The host
processor uses this
information to route
the transaction to the
cardholder's bank.
 KEYPAD
The keypad lets the
cardholder tell the bank
what kind of transaction is
required (cash withdrawal,
balance inquiry, etc.) and
for what amount. Also, the
bank requires the
cardholder's personal
identification number
(PIN) for verification.
Federal law requires that
the PIN block be sent to
the host processor in
encrypted form.
 DISPLAY SCREEN
The display screen
prompts the
cardholder through
each step of the
transaction process.
Leased-line machines
commonly use a
monochrome or color
CRT (cathode ray tube)
display. Dial-up
machines commonly
use a monochrome or
color LCD.
 RECEIPT PRINTER
The receipt printer
provides the cardholder
with a paper receipt of
the transaction
 Cash dispenser
The heart of an ATM is
the safe and cash-
dispensing mechanism.
The entire bottom
portion of most small
ATMs is a safe that
contains the cash.
 SECURITY
• Don't write down your PIN. If you must write it
down, do not store it in your wallet or purse.
• Make your PIN a series of letters or numbers that
you can easily remember, but that cannot easily be
associated with you personally.
• Avoid using birth dates, initials, house numbers or
your phone number.
 PROBLEMS WITH ATMS
Problem faced by Customers:
 Wrong insert the ATM card. This problem is more common with new ATM users
who are not familiar with ATM machine.
 They didn’t receive slip of account balance.
Money transfer problem:
 Some time money stuck in machine at the time of transaction.
 Some time machine didn’t accept ATM cards.
 Time out problem when the customer late for any step of processing.
 Customer face the problem when the process of bank is change.
 When cash not available.

Problem faced by Banks :

 Theft money from ATMs.
 Burglary of ATMs (including theft of entire ATMs).
 System problem (including server down).
 System failure (system crash or the software not work properly).
 FACTORS FOR GROWTH OF ATM
 Make transaction any time and more than one time
in a day.
 Take less time to make a transaction than a teller in
banks.
 Easy to use for people.
 Much reliable i.e. no body can access your account
without your permission.
 It reduce the bank ‘s work load.
 Accurate transaction.
 Can make payment for purchase anything.
 ELECTRONIC MAGNETIC CARDS
1. Credit cards
A credit card is a payment card issued to users as a
system of payment. It allows the cardholder to pay for
goods and services based on the holder's promise to
pay for them. Also called charge cards & plastic
money, it is a means of deferred payment.
 ELIGIBILITY FOR GETTING THE CARD
• Person should have current account in the bank.
• His assets and liabilities on a particular date are
reported to bank.
• A statement of annual or monthly income.
• He / she is considered credit worthy up to certain
limit depending upon his income, assets and
expenditure.
 Working Mechanism

 Three Parties :
1. Issuing organization or bank-agreements with
merchant establishments, makes payments after
deducting commission.
2. Card Holders: Buys goods/services from
establishments without immediate cash payment.
3. Member Establishment: Sends bills to issuing
organization/bank.
PARTICULARS DISPLAYED ON CREDIT CARDS

• Name of the customer

• 16-digit card number
• Validity date
• The VISA hologram and the VISA logo
• Name of the issuing bank
• Magnetic strip
What does 16 digit means
MECHANICS OF CREDIT CARD OPERATION
Contract for credit card (1)

Issue of credit card (2)

Card User /
Card Issuing Bank
Customer
Payment of credit card( 8)

Clearing and settlements (7)

Charging of credit card Purchase of

and raising bills (4) goods and
services (3)

Submission of bill Merchant

Marchant’s bank
for collection (5) establishment

Payment for bills (6)

For card holders :
For issuing bank :

 Source of income

 New customers attracted

 Reduces number of cheque transactions

 Relationship with member establishments

For member establishments :

 Payments guaranteed, when charge slip

sent to member establishment.

 Speedy settlement of bills by banks

 Burden of credit facility taken by bank.

 Increase in volume of business transactions.

 Disadvantages
To cardholders :
• Loss or stealing of card

To Merchants/ Shopkeepers :
• Retailers are required to pay a certain fee and service
charges at an agreed percentage of their credit card
sales.

To credit card companies :

• Risk of bad debt
• Risk of fraud
• OVERUSE--Revolving credit makes it easy to spend beyond Your means.
• PAPERWORK--You'll need to save your receipts and check them against
your statement each month.
• HIGH-COST FEES
• UNEXPECTED FEES--Typically, you'll pay between 2 and 4 percent
just to get the cash advance; also cash advances usually carry high interest
rates.
• NO FREE LUNCH--The high interest rates and annual fees associated
with credit cards often outweigh the benefits received.
• DEEPENING YOUR DEBT--Consumers are using credit more than ever
before. If you charge freely, you may quickly find yourself in over your
head--as your balance increases, so do your monthly minimum payments.
• HOMEWORK--It's up to you to make sure you receive proper credit for
incorrect or fraudulent charges.
• TEASER RATES--Low introductory rates may be an attractive option,
but they last only for a limited time.
• When the teaser rate expires, the interest rate charged on your balance can
jump dramatically.
 Safety Tips
 Do not leave cards lying around
 Close unused accounts in writing and by phone, then cut up the card
 Keep a list of all cards, account numbers, and phone numbers separate
from cards
 Report lost or stolen cards promptly
 ELECTRONIC MAGNETIC CARDS
2. Debit Card
 A debit card (also known as a bank card or check
card) is a plastic card that provides the cardholder
electronic access to his or her bank account/s at a
financial institution.
 Allow for instant withdrawal of cash, acting as the
ATM card for withdrawing cash and as a cheque
guarantee card.
 The card can be used as an alternative payment
method to cash when making purchases.
 DEBIT CARD.....Contd
 It is a popular method of making payment.
 Banks issue debit cards to their customers who have maintained
an account in the balance with sufficient credit balance.
 Each time the customer makes a purchase, an equal amount of
the purchase is debited in his account.
 Transaction works much like a credit card transaction.
 The merchant read the card through a transaction terminal and
the customer enters his personal identification number.
 Then the terminal route the transaction through the ATM
networks back to the customer’s bank for authorization against
customer’s deposit account.
 The funds, are approved, are transferred from the customer’s
bank to the sellers bank.
Debit Card Numbering
Debit Card Numbering
 How Debit Cards work

1. Collecting payment data

2. Authentication
3. Authorisation
4. Settlement of funds
 Types of debit card
• There are two types of debit cards
1. “ON-LINE” DEBIT CARDS: These cards usually
are enhanced ATM cards which work the same as
they would in an ATM transaction. It is an
immediate electronic transfer of money from your
bank account to the merchant’s bank account.
• To access your account at a store terminal, you
must punch in your personal identification
number (PIN), as you would at an ATM.
• OFF-LINE” DEBIT CARDS: these cards usually
look like a credit card and resemble a credit
card transaction.
• The merchant’s terminal reads your card,
identifies it as a debit rather than a credit card
and creates a debit against your bank account.
However, instead of debiting your account
immediately, it stores the debit for processing
later—usually within 2-3 days.
 How are they different

Credit Card Debit Card

• Borrowing money from a • Funds taken from the
bank or financial institution. money that you have in
(Spending "other's" money) your bank account.
• Need not be connected to (Spending your "own"
any bank account money)
• Pay additional interest • Needs checking
drawn on the amount Account/Savings Account
borrowed • No interest to be paid
• Limit: Credit line • Limit: Equals your account
limit
 ELECTRONIC BANKING

 In the context of e-banking, electronic delivery of

services means a customer conducting transactions
using online electronic channels such as the
Internet.
 “Electronic Banking is the use of a computer to
retrieve and process banking data and to initiate
transactions directly with a bank via a
telecommunications network” Lipis et al,1986.
 E-banking can mean the provision of information
about a bank and its services via a home page on
the World Wide Web (WWW).
 Why Is e-Banking Important?
 Choice and Convenience for Customers
 Attracting High Value Customers
 Enhanced Image
 Increased Revenues
 Easier Expansion
 Load Reduction on Other Channels
 Cost Reduction
 VARIOUS FORMS OF E-BANKING
1. INTERNET BANKING
 Internet Banking lets you handle many banking
transactions via your personal computer.
 Internet banking system and method in which a
personal computer is connected by a network
service provider directly to a host computer system
of a bank such that customer service requests can
be processed automatically without need for
intervention by customer service representatives.
 VARIOUS FORMS OF E-BANKING
2. Tele-banking
 It means banking over phone.
 Mainly used for marketing banking services.
 A customer can do entire Non-Cash related banking
over phone anywhere at anytime.
 With fall in mobile phone rates mobile banking will
emerge as one of the most cost effective delivery
channel.
 BENEFITS/CONCERNS OF E-BANKING
For Banks
 Price
 Customer Base
 Efficiency
 Customer Service and Satisfaction
 Image
 BENEFITS/CONCERNS OF E-BANKING
For Customers
 Bill Pay
 Other Important Facilities
 Buy and Sell Securities,
 Check Stock Market Information,
 Check Currency Rates,
 Check Balances,
 Checks are cleared,
 Transfer Money, and
 View Transaction History
 LIMITATIONS OF E-BANKING
 Start-up cost.
 Training & maintenance.
 Security.
 Legal issues.
 NOTE COUNTING MACHINE
• A Note-counting machine is a machine that counts
money—either stacks of banknotes or loose collections
of notes.

• Note-counting machine not only counts, they also

function as a high speed counterfeit banknote detector.
With the advanced printing, copying and electronic
scanning technologies available today.

• The need to validate currency authenticity has increased

dramatically, increasing the demand for continuous
improvement of counterfeit detection technologies.
 INVENTION
• The first ever recorded currency-counting
machine was invented in 1958 in China,
created by a small time banker Zhi Tian Sie,
who entered it in a contest.
 TYPES OF MACHINES

Loose note Counting Bundle note Desktop Model

Machine Counting
Machine
 LOSE NOTE COUNTING MACHINE
 LNCM (UV) is very user friendly and economic loose
notes counter for worldwide banknotes and all
types of currencies.
 Counting less amount of cash and any type
currencies in just 4 seconds.
 The best in terms of prices and user friendly with
excellent feature of UV detection.
 BUNDLE NOTE COUNTING MACHINE
 These type of machines also called as High Speed
counting machines
 HIGH SPEED machine (2/3/4 second) Counts 100
notes in 2 sec, 3 sec & 4 seconds
 Accurate counting
 8-12 hours working for HEAVCASH/CURRENCY
COUNTING
 Automatic Start/Stop function
 Alarm for aborted count
 DESKTOP MODEL
 Desktop model is compact model.
 Easy to carry any where.
 Lose note counting machine as well as bundled note
counting machine also have desktop versions.
 KEY FEATURES AND ADVANTAGES
 Accepts bank notes of ETB.1,5,10,50,100 and other
worldwide currencies as USD,Rs, Euro, etc.
 Best of all Fake note detection with separation
feature of Silver and Green Thread notes for Indian
currencies in Banks required.
 Function of fake note detection by UV inspection for
checking Paper quality of Xerox currencies.
 Detection and separation of Silver/Green Thread
notes.
 Automatic Audible alarm when fake note is
detected.
 DISADVANTAGES
 Continuous Power supply needed.
 Human interpretation is necessary.
 Always not accurate.
 Expensive
 Training Required.
 APPLICATIONS
 Bank & financial Institution
 Hospitals
 Schools & colleges
 Hotels & restaurants
 Shopping malls
 Railway
 Airport authority
 Other transport services
 Retail outlets & showrooms.
 ELECTRONIC CHECK
 It’s simply an electronic version of a paper check
 An e-Cheque is an electronic document which
substitutes the paper check for online transactions.
 Digital signatures (based on public key
cryptography) replace handwritten signatures.
 HOW ELECTRONIC CHECKS WORK

 First, you run a customer’s paper check through an

electronic scanner system supplied by your
merchant service provider.
 This virtual terminal captures the customer's
banking information and the payment amount.
 The information is then transferred electronically
over the Federal Reserve Bank's ACH Network,
which takes the funds from your customer's
account and deposits them into yours.
 BENEFITS OF E-CHEQUE
 TO CUSTOMERS;
 No physical movement of cheques so no fear of
loss of cheque in transit.
 Quicker clearance; within 3-4 working days.
 Its more secured than physical cheques.
 Decrease errors and fraud. eCheques reduce the
potential for errors and fraud because fewer
people handle them.
 They can serve corporate markets. Firms can use
them in more cost-effective manner
 BENEFITS TO BANK
 Reduce the risk associated with paper clearing
 Superior verification and reconciliation
process
 No geographical restrictions
 No physical movement of cheques- it saves
cost and time for banks.
 No chance of cheque dishonor- The risk is
taken care of by the accounting server, which
will guarantee that the cheque would be
honoured.
 DRAW BACKS
 Customer education
 Chances of misuse, hacking etc
 Need a different infrastructure
 Unauthorized transactions becomes challenge for
banks
 Problem could be when there is more than one
signer or endorser.
 Transactions based on internet- network failure may
lead to delay in payment.
 Both payer and payee should have e-cheque facility.
ELECTRONIC FUND TRANSFERS

 Electronic Funds Transfer (EFT) is a system of

transferring money from one bank account directly to
another without any paper money changing hands.
 EFT is safe, secure, efficient, and less expensive than
paper check payments and collections.
 EFT offers several services that consumers may find
practical to be as a means of payment.
 An electronic funds transfer (EFT) is a transaction
that takes place over a computerized network, either
among accounts at the same bank or to different
accounts at separate financial institutions.
 CONT……..
 Cardholder-initiated transactions, where a
cardholder makes use of a payment card
 Direct deposit payroll payments for a business to its
employees
 Direct debit payments, sometimes called electronic
checks, for which a business debits the consumer's
bank accounts for payment for goods or services
 Electronic bill payment in online banking
 HOW IT WORKS
• For example, when you use your debit card to make
a purchase at a store or online, the transaction is
processed using an EFT system.
• The transaction is very similar to an ATM
withdrawal, with near-instantaneous payment to
the merchant and deduction from your checking
account.
 ADVANTAGES OF EFT…..
• Increase efficiency and productivity.
• Manage cash flow easily.
• Improve safety and control.
• Saves money.
• Less paper works.
• Eliminate the risks associated with lost, stolen, or
misdirected cheques
 DISADVANTAGES
 One of the major disadvantages of EFT is RISK OF SECURITY ISSUE.
 Electronic banking largest adversary is the hackers who try to steal
the customer’s money and their information. When the account
has been compromised, money can be stolen. Hacker’s can also
use the information obtained to steal one’s identity. This could
mean a lots of trouble for the customer that can take years to fix.
Ones credit accounts are opened in his or her name it can be
many years before the debts are taken care and removed off of
their credit report.
 If you entered the target account number incorrectly, there is no
way to reverse the transaction since the bank would process the
transaction under the belief that the information you provided is
accurate
 Once an amount is transferred, the bank cannot reverse a