The internet banking journey in india

Mohit Negi
A-38 MBA General
1
The Journey of Internet Banking in India
Abstract
This case Study deals with the internet banking sector and how it has evolved over the years.
Majority of the population these days has access to the internet and internet banking has
become a convenient tool for the masses. This study documents online banking trends,
behaviour and expectations of Indian consumers. It also gives an insight about the problems
which are faced by both consumers and banks while performing the online transaction as this is
a relatively new area and not many people are aware of its functioning. This case study also
fills significant gaps in the knowledge about the consumer's perspective on internet banking,
trace its present growth, and identifies the weaknesses and loopholes of the conventional
internet banking and also addresses the regularity and supervisory concerns of internet banking.
Keywords
Banking, Internet banking, Online transactions, Loopholes in Internet Banking.
Introduction
Online banking, also known as internet banking, e-banking is an electronic payment
system that enables customers of a bank or other financial institution to conduct a range
of financial transactions through the bank's website. The internet banking system will typically
connect to or be part of the core banking system operated by a bank and is in contrast to branch
banking which was the traditional way customers accessed banking services.
To access a financial institution's online banking facility, a customer with internet access would
need to register with the internet banking service provided by the bank, and set up a password
and other credentials for customer verification. The credentials for online banking is normally
not the same as for telephone or mobile banking. Banks now routinely allocate customers
identity numbers or login id, whether or not customers have indicated an intention to access
their online banking facility. Login Id are normally not the same as account numbers, because a
number of customer accounts can be linked to the one customer number. Technically, the
Login id can be linked to any account with the financial institution that the customer controls,
though the Bank may limit the range of accounts that may be accessed to, say, cheque, savings,
loan, credit card and similar accounts.
The customer visits the Bank's secure website, and enters the online banking facility using the
Login id and password set up. The types of financial transactions which a customer may
transact through online banking are determined by the Bank according to the usage of the
customer, but usually includes obtaining account balances, a list of the recent
transactions, electronic bill payments and funds transfers between a customer's or
another's accounts. Most banks also enable a customer to download copies of bank statements,
which can be printed at the customer's premises (some banks charge a fee for mailing hard
copies of bank statements). Some banks also enable customers to download transactions
directly into the customer's accounting software. The facility may also enable the customer to
order a cheque book, statements, report loss of credit cards, stop payment on a cheque, advise
change of address and other routine actions.

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The following are the features of the Internet banking:-
 Internet banking allows you to view your account balances.
 Internet banking allows you to view your recent transactions.
 Internet banking allows you to Download the bank statements
 Viewing images of paid cheques
 Ordering cheque books
 Internet banking allows you to download periodic account statements
 Internet banking allows you to transfer the funds between the customer's linked accounts.
 Paying third parties, including bill payments and third party fund transfers
 Investment purchase or sale
 Loan applications and transactions, such as repayments of enrollments
 Credit card applications
 Register utility billers and make bill payments
 Management of multiple users having varying levels of authority
 Transaction approval process
There are some advantages on using e-banking both for banks and customers:
 Permanent access to the bank
 Lower transaction costs / general cost reductions
 Access anywhere
 Less time consuming
 Very safe and secure method
The Internet Banking Boom
In 2001, a Reserve Bank of India survey revealed that of 46 major banks operating in India,
around 50% were either offering Internet banking services at various levels or planned to in the
near future. According to a research report, while in 2001, India's Internet user base was an
estimated 9 lakh; it was expected to reach 90 lakh by 2003. Also, while only 1% of these
Internet users utilized the Internet banking services in 1998, the Internet banking user base
increased to 16.7% by mid- 2000.
Many of the major banks like ICICI, HDFC, IndusInd, IDBI, Citibank, Bank of Punjab and
UTI were offering Internet banking services. Based on the statistics India had a high growth
potential for Internet banking, the players focused on increasing and improving their Internet
bankingservices.
As a part of this, the banks began to collaborate with various utility companies to enable the
customers to perform various functions online. ICICI's 'Infinity,' which was already a leader in
the Indian Internet banking arena, began to allow its customers to pay their online real time

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shopping bills. HDFC, through its 'payment gateway' feature, allowed its Internet banking
customers to make online and real time payments for their purchases.
HDFC Bank tied up with various portals to provide these business-to-customer (B2C) e-
commerce transactions. Centurion bank acquired an equity stake in the teauction.com portal to
bring together buyers, sellers, suppliers, registered brokers and associations in the tea market
and eliminate the need for their physical presence at various auctions. As more banks entered
Internet banking arena, the competition between the banks also increased. This compelled the
banks to focus on capturing new markets and customers and adopting advanced technology on
the Internet. It was beginning to be seen as a replacement of traditional banking system with
internet banking system.
About Internet Banking
Globally, the banking business has always been in the forefront of utilising technology to
improve its services and efficiency. Banks have been quick to adopt rapidly evolving electronic
and telecommunication technologies to deliver an extensive line of value added products and
services to their customers. By the early 1990s, direct dial-up connections, personal computers,
tele banking and automated teller machines (ATMs) became common in most developed
nations. Internet banking evolved in the mid-1990s when Internet and the World Wide Web
began to catch on. Soon, many major banks in the US and Europe began to use the Internet to
provide banking services.
Exhibit 1: Mobile Banking in India
Source: http://www.livemint.com/
Internet banking is a web-based service that enables the bank's authorized customers to access
their account information. It allows the customers to log on to the bank's website with the help
of a bank-issued identification and a personal identification number (PIN). The banking system
verifies the user and provides access to the requested services. The range of products and
services offered by each bank on the Internet differs widely in their content. Most banks offer
Internet banking as a value-added service. Internet banking has also led to the emergence of
new banks, which operate only through the Internet and do not exist physically. Such banks are
called 'Virtual' banks or 'Internet only' banks.

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The products and services offered by the banks on the Internet can be divided into three types:
• Information Kiosks: It includes providing information regarding various products and
services offered by the bank to its customers and others in general. The bank's site receives and
answers queries of customers through e-mails.
• Basic Internet Banking: It includes enabling customers to open new accounts, check
account balance and pay utility bills.
• E-commerce Banking: Banks function as electronic market places (e-market place)
enabling customers to use their accounts for money transfers, bills payment, purchase and sale
of securities and online real time purchases and payments.
In a typical Internet banking transaction, customers' requests for online banking information
are passed on from Web server to the bank's Internet banking server through the WWW
interface. These requests pass through a firewall before they reach the Internet banking server.
Due to the use of SSL technology, only authenticated requests reach the Internet banking
server. The customer information database is stored on a bank's server, which is protected by
the use of various security tools in addition to the firewall technology.
Exhibit 2: Internet banking transaction mechanism
Source: http://klient-banking.ru/en/view/normal/13929
The WWW interface is the only media of communication with the Internet banking server and
Internet banking server is the only media of communication with the customer database, thus
ensuring the safety of operation and customer data. When the customer requests reach the
Internet banking server it passes the requests to the bank server hoarding customer database.
The database provides the required information to the Internet banking server, which is in turn
passed on to the web server, through the firewall, from where the customer is able to access it.
A security analyzer constantly monitors login attempts and recognizes failures that could
indicate a possible unauthorized attempt to log into an account. When such trends are observed,
steps are automatically taken to prevent that account from being used. The most significant
benefit of Internet banking is the ready accessibility of bank accounts at all times. The
inconvenience of visiting and waiting at the banks is also eliminated.
This result in, enhanced customer satisfaction, reduced customer attrition and increased
customer base. Internet banking considerably reduces transaction costs for the banks. The
Internet banking helped banks reduce the branch load and attract future customers. In India, the

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cost of one banking transaction through the Internet amounted to 10 paise to the bank, as
compared to Re.1 through a branch, 45 paise through an ATM, 35 paise through phone banking
and 20 paise through debit cards.
The low transaction costs and the promising picture painted by analysts induced many banks in
India to introduce Internet banking services during the late 1990s. However, only few of them
succeeded in moving beyond the launch of the website. ICICI's Internet banking service 'Infinity'
became the most popular service in the country, providing a wide range of products and services.
ICICI – Internet Banking Initiatives
ICICI bank was incorporated as a commercial banking company, by the Industrial Credit and
Investment Corporation of India (ICICI), in May 1994. The first ICICI branch was started in
June 1994 at Chennai. The bank provides an array of domestic and international banking
services to enable national and international trade and business, investment and foreign
exchange and treasury services. Right from its inception the bank focused more on incorporating
advanced technology. The bank operated the largest chain of ATMs in the country, which
amounted to more than 450 in 2000. All the bank's branches were fully computerized and
networked through V-SAT technology. By 1999, the number of branches increased to 65 and the
bank plans to have over 200 branches by the end of 2002.
In April 2000, ICICI became the first Indian bank to be listed on the New York Stock Exchange.
ICICI was always regarded as one of the best private banks to foster advanced technologies in
the banking sector. As part of its technology drive, in 1997, ICICI launched 'Infinity,' the first
Indian Internet banking service. The service was launched to reduce transaction cost and offer
convenient banking to customers. This meant enabling the customers to access their bank
account and make transactions at any time. ICICI realized that to make Infinity a success, it
would have to invest heavily in sound Internet banking e-commerce technology. During 1995-
99, ICICI invested Rs 50 million in online banking technology solutions. In 1997, ICICI bought
the 'BankAway' software from Infosys. BankAway was an e-commerce solution that provided
the bank a platform to offer an integrated financial services portal to the customers.
It offered access to account information, bill payment, cash management, trade finance and
online shopping. Infinity' was initially targeted at the non-resident Indians (NRIs) to enable them
to manage their bank accounts in India through the Internet. According to the bank's sources,
Infinity helped to increase the business generated from NRI customers from Rs 300 million in
1997 to Rs 1.4 billion in 1998.
The service was also aimed at individuals in the age group of 30 to 50 years working in the
corporate sector and proficient in using technology. However, over the next few years, the bank
enhanced its services to attract other customers as well. On account of the growing competition
in the Internet banking sector, ICICI focused on enhancing and extending its business-to-
business (B2B) and B2C services through tie-ups and acquisitions. The bank entered into a 50-
50 joint venture with Satyam Infoway in December 1999 to offer retail banking products and
services on the Internet.

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Exhibit 3: ICICI Internet Banking Login page
Source: https://infinity.icicibank.com
The alliance is going to give a big fillip to B2B." Infinity's services included account
information, funds transfer, bill payments, online Real-Time e-shopping payments;
communication with bank manager, various customized services. The products were targeted at
two different customers: individuals and small businesses, and corporate having an annual
turnover of over Rs 500 million. In the first half of 2000, ICICI introduced new Internet banking
products for school and college students. Kid-e-bank was introduced to help children between 5-
12 years to open an account and check the account balance on the Internet.
Bank@campus was a service for students to enable services like ATMs, Smart Card, educational
loans etc. It was launched across the country in many campuses. As part of its B2C programs,
ICICI tied up with 10 shopping malls all over India. This allowed customers to shop and pay
bills online from their accounts. It also tied up with 24 billing companies across 11 cities,
including Bharat Sanchar Nigam Ltd. (BSNL) for bill payment. The bank also offered mutual
funds related services to its customers. It also tied up with automobile major Ford, for local
delivery of its car 'Ikon' against orders placed on the Internet. By 2001, ICICI bank had emerged
as one of the leading providers of Internet banking services in India. The bank was reportedly
moving towards becoming a full-fledged e-commerce company in a couple of years. Nachiket
Mor, Head of ICICI Treasury said, "The Seven-Eleven supermarket chain in Japan has recently
applied for a banking license. This is the way world is moving. If supermarkets get into banking,
then it is also time for banks to get into the selling of consumer durables."
Problems faced by Internet Banking
Online Banking offers a higher level of convenience for managing one's finances even from
one's bedroom. However, it continues to present challenges to the financial security and personal
privacy. Many people have had their account details compromised, as a result of online banking.
Thus, if one is going to use it for financial transactions, he should be aware of the risks involved.

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Awareness of the risks and problems, enables him to take precautions for a more secured online
banking experience. Following are some of the online banking problems which the bankers
generally
Security Issues
While making online payments or transferring money from one account to another, the online
bankers are always concerned about the hackers and anti-social elements. Hacking enables the
unethical hackers to penetrate the accounts of online bankers, and spend their money.
Necessity of the Internet
For availing the benefits of online banking, one should have access to the Internet. For this
purpose, one should own a desktop, laptop or PDA device, and an Internet connection. This
reason limits the usage of online banking, as sometimes it's almost impossible to have an internet
connection to serve the purpose. So without internet connection there will be no transaction.
Customer Care Service
While carrying out online transactions there are many instances when the banker might need
help of a representative, from the bank. The brick and mortar banks have customer care
representatives who are easier to talk to, but in case of online banking, in which the banks
provide customer care numbers, the bankers find it difficult to get their problems solved.
Sometimes there is a congestion in the network and they have to wait for some time, in order to
talk to the bank's representative at the other end. Once the line is put through, one may either get
somebody helpful and knowledgeable or may not, leaving him in a confused situation.
Although online banking involves risk and imposes certain problems, there are many facilities
provided by it. To avail these benefits, it is important for one to educate himself about the risks,
and the steps he can take to protect his financial information. It is also necessary to understand
the rights and responsibilities as a customer, in order to make a difference to one's own financial
well-being.
The Future
Despite the rosy predictions and increased corporate activity, the Indian Internet banking system
is facing many hurdles. The problems include operational risks, security risks, system
architecture risks, reputational risks and legal risks . Apart from the security issues, there are a
host of other problems like:
• PC user base in India is extremely low compared to global standards.
• The Internet user base is limited.
• Lack of infrastructure to advanced technology based banking services.
• The absence of a regulatory framework for Internet banking transactions in India.

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• The mindset of the Indian consumer, who prefers personal interactions and is not very
comfortable, doing transactions through the Internet.
• Limited awareness about the potential of Internet banking on the part of banks.
The issue of banks not being ready to realize the full benefits of Internet banking was aptly
summed up by a critic, "Much of what is now on display at bank websites is an embarrassment,
to put it politely. The average site has information about certain products, e-mail contacts of
bank department, perhaps the Chairman's annual general meeting speech as well. A mere
information booth. This is definitely not Internet banking." However, banks are working towards
addressing these problems. The security issues can be tackled by having the bank's systems
technologically equipped to evade operational and security risks. Reputational risks can be
prevented by testing of the system before implementation, developing contingency plans (to
handle system disruptions, system hackers, security lapses and virus attacks) and creating back-
up facilities.
Legal and cross-border risks can be avoided through proper customer identification devices,
information screening techniques, periodic reviews on compliance with various laws, and
gaining knowledge of various national laws (applicable) and guide the customers through their
cross-border dealings. Apart from ensuring the security of the Internet-based transactions, ICICI
is taking steps to overcome the other hurdles. The bank is tying up with computer manufacturers
to make PCs available to customers at low prices. The bank also plans to tie-up with Sify to
place its ATMs in Sify cybercafes
In 2000, ICICI opened Internet kiosks (cabins) at its ATMs to enable easy Internet access to its
customers for banking. Many other banks are also adopting such practices. Analysts claim that
Internet banking holds lots of potential with the emergence of growing Internet awareness
among customers, integration of banking services with e-commerce service, the increasing reach
of the Internet and the entry of global players in the banking sector. Even the Reserve Bank of
India has come out with Internet banking related guidelines with ICICI already having decided
to make the Internet an integral part of its future business plans and other banks reportedly
following suit, Internet banking seems poised to become an important part of the Indian banking
sector in the years to come.
Questions:
1. Analyze the major changes that took place in the Indian banking sector with the origin of
Internet banking and discuss its advantages and disadvantages.
2. Discuss the future of Internet banking in India, keeping in view its moderate growth since its
inception.
3. From the above case what are the expectation of the customer from the internet banking?
4. Explain how a typical Internet banking transaction is conducted and discuss the need for
secure system architecture, in the light of various risks associated with Internet banking?

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5. What are the factors affecting client trust in Internet Banking?
References
1. Information related to Internet Banking. Retrieved from:
http://www.investopedia.com/terms/o/onlinebanking.asp
2. ICICI Bank Website, 'ICICI bank launches ‘Pocket by ICICI bank', Retrieved from:
http://www.icicibank.com/aboutus/article/icicibank-launches-pockets-by-icicibank.html
3. Internet Banking: Challenges and Opportunities in Indian Context, Prakash A and Malik G
“Empirical study of internet banking in India”, CURIE, BITS Pilani, Vol. 1, No. 3, (2008): pp.
83-92. Retrieved from:
http://www.apeejay.edu/aitsm/journal/docs/issue-june-2015/ajmst020305.pdf
4. Business Standard (2011, July 20), “7% Account Holders in India Use Net Banking: Study”,
Retrieved from:
http://www.business-standard.com/article/finance/7-account-holders-in-india-use-net-banking-
study-111072000193_1.html.
5. Internet banking services. Retrieved from:
http://www.computerweekly.com/feature/Case-Study-Internet-banking-services
6. Mobile banking sees dramatic surge in India. Retrieved from:
http://www.livemint.com/Industry/lSkb5rEURwIPpFfpmNQuKM/Mobilebanking-sees-
dramatic-surge-in-India.html
7. RBI Report (2001), Report on Internet Banking. Retrieved from:
http://rbidocs.rbi.org.in/rdocs/PublicationReport/Pdfs/21595.pdf
8. ICICI Bank switches on its Internet Service. Retrieved from:
http://www.business-standard.com/article/specials/icici-bank-switches-on-its-net-service-
197101101042_1.html

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