Only Banks, No Bricks

Banks, as we know them today, are on the way to obsolescence.

Remember the time you walked into the nearest branch of your bank, waited in the

long queue outside the teller’s counter, hassled by the limited banking hours.

Now, everything is only a mouse-click away from the privacy and comfort of your

home, irrespective of the time. Internet has changed the nature of banking as

never before.

Globally, the financial sector is metamorphosing under the

impact of competitive, regulatory and technological forces. There is an

increasing overlap between different financial services and there is competition

from non-traditional sources such as retailers, airline and telecom companies.

Technology, especially the Internet, is perhaps the biggest source of change.

The electronic revolution in banking basically centers on

changes in the distribution channels of financial institutions. The first giant

step in this electronic revolution was the computerisation of banks. Then, by

linking up technological developments in telecommunications and IT, real-time

online electronic funds transfer came into existence. Commercial banks today

have the privilege of various delivery channels for their products and services.

These include brick and mortar branch network, ATMs, telebanking using the

telecommunication channel and PC-banking. But nothing has ushered in a total

shift in retail banking like the way Internet has.

The Indian Scenario

With Internet emerging as a popular medium for transacting

financial products, e-banking is becoming a reality in India earlier than what

many people had envisaged. And the private sector banks were quick to latch onto

this new delivery channel, leaving behind their public sector counterparts.

Banks like ICICI, HDFC and UTI now offer a slew of products and services on the

Web.

India’s largest public sector bank, State Bank of India, is

catching up and has already made online banking available at select branches in

the metros. It is now planning to reinvent itself to gain competitive edge. Its

technology roadmap includes initiating virtual banking, which would mean

interconnectivity of 400 ATMs, specialized branches, introduction of remote and

home banking, smart cards, e-trading, e-commerce and even hi-tech, low-cost

solutions for rural branches.

ICICI Bank offers its products and services under the brand

name "Infinity". The services offered include account information,

funds transfer, bill payment and online real-time e-shopping payments.

Enhancements for further versions include request for demand drafts and pay

orders. The bank also offers many value-added services such as trade related

information to corporates and something as innovative as online pooja payment

service at Sidhivinayak Ganapati Temple in Mumbai.

HDFC Bank under its "NetBanking" service has a

couple of more offerings such as demand draft/banker’s draft request, FD

inquiry, new FD requests and TDS inquiry. Customer can also leave with the bank

any instruction not currently included in its NetBanking service that they would

like the bank to perform on their accounts. Another value-added service offered

by the bank includes online VSNL Internet subscriptions in Mumbai, Delhi,

Calcutta, Chennai, Pune, and Bangalore.

On the corporate front, HDFC Bank offers "Enet", an

online electronic delivery channel that provides its corporate clients

convenient and secure access to their banking data around the world. It has also

added new revenue streams by launching Application Service Provider (ASP)

services by joining forces with I-flex solutions, a banking solutions provider.

This joint venture offers I-flex’s flagship product FLEXCUBE on an ASP model

for the first time in India. HDFC Group and I-flex solutions have an equal stake

in the new company.

Both these private banks have launched their own private

gateways eyeing the e-commerce market. ICICI has already signed up with 15 web

merchants where all online transaction will take place in its gateway. In the

coming months, the gateway will be available on more than 50 sites. HDFC Bank

has tied up with 15 portals and is negotiating with several others to offer

secure business to consumer e-commerce transactions. Few of the portals that

HDFC bank has tied up with are: Satyam, IndiaInfo, Fabmart, Mantra Online,

CyberITMall, Cricketnext, Indiacar, IndBazaar, Travelanza, and VSNL.

Another area where both these banks have gained a foothold is

m-commerce. ICICI has a tie-up with Orange and offers services based on WAP. It

already provides a range of personal finance services including personal banking

services, online information tracking of utility bills, travel and ticketing

information, etc.

HDFC has launched its m-commerce services in Punjab in

association with Spice Telecom and with Fascel in Gujarat based on SMS

technology. HDFC Bank first introduced this facility in Mumbai followed by

launches in Delhi, Chennai, Calcutta, Maharashtra, Goa, Kerala, Tamil Nadu,

Karnataka, and Andhra Pradesh.

The Opportunities

Initially, banks saw Internet as just another delivery

channel bringing in greater flexibility. But, they have realized that it also

presents opportunities to substantially improve the economics of reaching a

diverse, profitable customer base because accessing customers through remote

channels breach the traditional link between growth in branches and balance

sheet growth. This bodes well for Indian banks grappling with branch

proliferation and over staffing. Another advantage would be marketing of

information like brochures and product details over e-mail to its customers.

However, the most important of it all is the significant

improvement in customer relationship. Customers, both corporate and retail, are

no longer willing to queue in banks, or wait on phones, for the most basic of

services. They demand and expect to be able to transact their financial dealings

where and when they wish. The emergence of Internet banking is prompting banks

to rethink their customer interface. The Internet enables banks to offer

low-cost, high value-added financial services. In addition, it provides

customers with better opportunities to compare services.

To remain competitive, banks will need to develop their

Web-based business models centered on customers by developing and personalising

innovative, easy-to-use offering that focus on customer’s lifestyle goals and

develop tailored customer solutions in real-time.

E-business Marketplaces

Various studies clearly suggest that banks in future will

become e-business marketplaces. In North America and Europe, banks have already

started investing in Internet commerce market, by discovering areas in which

they have a role to play and can reap the benefits first. Banks have discovered

that they can play a primary role as financial intermediatores and facilitators

of complete commercial transaction via electronic networks and especially the

Internet. Both ICICI and HDFC have made significant investments in their payment

gateways with this objective in mind. The challenge for banks is to offer a

payment backbone system that will be open enough to support multiple payment

instruments (credit cards, debit cards, direct debit to accounts, e-checks,

digital money, etc.) and scalable enough to allow for a stable service

regardless of the workload.

The Impediments

One of the major hurdles in the way of Internet banking in

India is the lack of a critical mass of Internet subscribers. PC penetration is

dismal and Internet growth is still slow. Add to this the state of poor IT

infrastructure in the country. Hence, banks are not in a position to achieve the

full potential of their electronic capabilities. However, the major hurdle in

the way of e-banking in India is that of security–a hitherto uncharted

territory both for banks and their customers. The ubiquitous nature of Internet

means there is a theoretical possibility of attack by anyone, anywhere. These

attacks can manifest themselves as traditional break-ins, fake web sites or by

"denial of service" attacks.

The web sites of ICICI Bank and HDFC Bank furnish elaborate

information on the security aspects of their banks. ICICI has multi-layered

security architecture comprising firewalls, filtering routers, 128-bit

encryption and digital certificates. HDFC Bank uses a technology called Secured

Socket Layer (SSL), which involves scrambling of the information between the

customer and the Bank.

However, despite cryptography, authenticated web sites and

firewalls, there remain serious legal challenges to be resolved. Business on the

Internet is without precedent and lacks a legal framework in most countries.

Banks and customers, therefore, need to define appropriate legal measures

covering, among other things: service levels, indemnities, limitations of

liability and acceptability of digital signature. In India, all of these are

conspicuous by absence and lack of a Public Key Infrastructure (PKI) could

hamper the growth of Internet banking.

Trends

Six years ago, Bill Gates said, "banking is necessary,

but banks are not." Virtual banks with no branches and attached costs are

gaining popularity in the West. But it doesn’t necessarily spell doom for

traditional banks. And it would seem almost inconceivable that the position of

big banks which process crores of rupees a day could be challenged by these

Internet entities, and especially in the Indian context, it is a far-fetched

idea. As has happened in the past, some of the biggest dotcom web sites of the

world have fallen prey to hacking that has stalled their systems for hours in a

day. Legacy systems on the other hand have been known to work. What the Internet

does offer established systems of the old types are opportunities for cutting

costs and marketing products more efficiently. With IT enabling a paradigm shift

in the banking sector, there is no way banks can turn a blind eye to new

technology and the willingness to adopt technology products.

MT Jeevan