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Though modern age banking in India has its roots in the British legacy, its journey so far has been charted by sheer Indian prudence. Post independence, India saw new age nationalized banks emerging with an aim to reach out to the largely un-banked population. Though slow and steady, the Indian banking industry did emerge from the doldrums of debt and instability to drive the countrys financial revolution.

With the IT revolution, the Indian banking and financial sector became the undisputed leader in adopting cutting edge technologies. And so began another phase of Indias banking journey. The 90s saw the banking industry embrace technology massively, led in particular by the private and multi-national banks. Among all technology innovations, Internet banking for retail customers was a concept that changed the way banking had been perceived over the past decades. Not only did it generate a great deal of interest within the industry, it was adopted at a time when the Internet as a medium was slow to take-off.

Slow and Steady
So, while technology uptake was gradually taking place, the Internet also came to be used by banks. After private and foreign banks had adopted this technology, the public sector banks also began to latch on to the bandwagon. With the core banking system (CBS) being adopted by all nationalized banks over the last 4 years, the transition to alternative banking channels such as the Internet, and now mobile has proved to be rather convenient and cost effective. Most nationalized banks are going a step further, using the Internet to increase its customers convenience, and at the same time extend it as a medium by which the government can create financial inclusion.

A couple of years ago, almost 12% of 38.5 mn Internet users in India were banking online and the figure is estimated to rise to 16 mn by 2008-end, according to a survey by IAMAI. Already, an estimated 4.6 mn users transfer funds online, including mobile banking figures, according to IAMAI. This clearly indicates the rise in the number of Internet banking users and the growing popularity of the medium.

Nevertheless, we still have a long way to go, especially with the Internet penetration in the country being just over 2%, and limited to the metros and large cities. This, in comparison to Singapore and Korea, which have more than 14% of the population banking over the Internet, shows where we stand compared to our Asian counterparts. Though today, more and more users are adapting to the online mode for the sheer comfort of the service. Banks are also enjoying this transition, as they believe that in the long term it will prove to be a huge cost saver, and also help realize the objective of de-paperized banking.

The Bigger Picture
India has had a rather slow Internet banking growth. ICICI Bank was the first to introduce online banking in 1996, and a host of other banks soon followed suit. For the Internet on the whole, 1996 to 1998 marked the adoption phase, while usage increased only in 1999, mainly due to factors like lower ISP online charges, increased PC penetration, and a tech-friendly atmosphere. With ICICI online iBanking service, customers could transfer funds to ICICI and non-ICICI bank accounts with a click of their mouse. The application covered savings accounts, demat accounts, credit cards, and loan accounts. Soon, customers could also pay all their utility bills through this facility. This contributed greatly to set the trend for online banking.

Soon after ICICI, Citibank, IndusInd and HDFC followed suit. Talking about HDFCs Internet banking journey, Anil Jaggia, CIO, HDFC, says, Late last decade, PC and Internet penetration in India were at an inflection point. Looking at worldwide trends, we realized that Internet as a channel would have explosive growth in the years ahead. Banking customers, especially the newer ones, were becoming very mobile and were looking for true anytime, anywhere banking. These customer enablement and convenience benefits, combined with our expectations on the low-cost for servicing this channel, led us to offer this service early on. Net banking was launched in 2001 as a product offering for our end-customers, and since then it has been evolving continuously, and maturing to include customer and market demands, and address their specific needs. Today, our user-base has increased by over 60% on a y-o-y basis, while transactions have increased 70%.

Another notable point is that the channel (Internet banking) was initially used for basic functions such as checking balances and was considered a frill service but now has graduated to the next level, where customers consider Internet banking a necessity. VK Ramani of Axis Bank says, Initially, this channel was used only for viewing account balances, but with the advent of new facilities, it is extensively used for other e-commerce puposes like ticket booking, etc. Due to the low percentage of Internet penetration, education level, and security concerns, Internet banking took longer to become popular. With new means of business like shopping malls and e-government initiatives, the penetration will increase. New technologies like 2-Factor Authentication, Biometric, etc have made Internet-based transactions more secure. There is a 100% increase in the number of users y-o-y.

Looking at the success of alternate banking channels, especially the mobile, most banks are replicating their online platforms. After the success of its online medium, ICICI Bank has gone a step ahead and replicated its Internet banking platform for the mobile. The service called iMobile provides all the features available in the online version. Similarly, Axis Bank and HDFC have also followed suit by mirroring their online banking medium onto the mobile. An exception worth mention is Barclays Bank that recently launched its Hello Money mobile transaction service. Being a late entrant in the market, the bank chose to enter the nascent mobile space first and then tap the online space.

Sridhar Guru, head, IT, Barclays Bank, says, We are working toward a unified channel experience for our users. We are in the final stages of building our online transaction gateway, which will be seamlessly integrated with our mobile banking platform. They wont have the exact same features, but we will take some features from our mobile banking platform for online banking. This will be our strategy, so that we can leverage on the benefits of other platforms and make it all-pervasive. We are trying to make all the platforms scalable.

While MNC banks such as Citibank and HSBC were always ahead in terms of technology, an added advantage for them was the fact that their customer base was more technologically savvy. They faced very little hurdles in terms of convincing customers to use new services. For the Indian private sector banks and nationalized banks, however, the journey has been relatively slow, mainly because, it warranted a complete transition to CBS, achieve seamless connectivity between branches, and, finally, wait for its customer base to gradually become technology savvy. But the situation has changed over the past couple of years. Nationalized banks are working closely with RBI and SEBI to streamline financial processesCBS is in the final stages of implementation, and has been able to leapfrog in terms of technology.

PSUs Chasing Up
The PSU banks, usually termed as laggard, are not far behind. Having crossed the initial regulatory hurdles and technology transitions, they have caught up in terms of using cutting edge technology and providing new services to its customers.

However, there is a certain imbalance in terms of technology adoption as there are only a few banks providing robust Internet banking facilities to its retail customers. Bank of India, State Bank of India, Bank of Baroda, Allahabad Bank, and Syndicate Bank are some of the prominent banks providing online banking facilities today. Even Central Bank introduced Internet banking a year ago. But considering they are all tapping areas where private banks cannot enter, these banks have been able to achieve greater penetration.

Talking about SBIs online banking initiatives, SK Sehgal, general manager, IT, SBI, says, Today we are providing online banking services at more than 4,000 branches. Our Internet banking site, www.onlinesbi.com enables bill payments, remittances, and fund transfer from one account to another, and also takes offline requests such as orders for chequebooks. Today, we have more than 124 mn accounts, which is the largest in this part of the world. We also handle about 16-17 mn transactions a day. In our scheme of events, as part of financial inclusion, we have about 125 mn accounts as of now and target 500 mn accounts in the next five years. We have been working closely with the government in terms of extending the online medium for financial inclusion. Certain government departments, especially the income tax department has made it mandatory that all payment of taxes should be done electronically. And SBI is being used as the platform for all tax payments and returns.

Apart from serving as a gateway for all tax payments, SBI has actively partnered with various universities and educational bodies, enabling students to make payment of fees electronically, at no additional cost. The bank has also been roping large number of local billers and registering them on the website, thus enabling customers to make all kinds of utility payments.

Similarly, Bank of India also has witnessed a good response through its online banking medium. The pioneers in technology for being the first PSU bank to have a fully-computerized branch in 1988, Bank of India, is working closely with the government to make sure that alternate banking channels reach out to the un-banked sectors.

PA Kalyansunder, general manager, IT, Bank of India, says, Online banking has been picking up since we implemented it 3-4 years ago. Bank of Indias online service allows customers to make utility payments, transfer funds, buy tickets online, and even apply for DGFT licenses. Initially the response was lukewarm but as the number of people using the Internet to make tax payments will increase, Internet banking also became popular. Booking of tickets, payments, purchases are other areas that are coming up. I really appreciate the efforts of the government on this front because it is forcing more and more people to take the e-banking route, and this will gradually lead to financial inclusion.

Initially, PSU banks refrained from adopting new technologies as typically most PSU banks have a majority of their customer base in smaller cities or towns and even in remote villages. In bigger cities, a large proportion of their customers are senior citizens who have a natural aversion toward adopting new technology. Where as, this is not the case with private or MNC banks, where the clientele is mostly urban-based falling in the 20-40 age group and have a higher exposure to technology.

But the trend has definitely changed, where these banks in tandem with the RBI are introducing the Internet in rural areas through crucial e-governance projects. In order to reach out to the rural masses further, the nationalized banks such as SBI and BOI, and private banks such as Axis Bank are localizing their services into regional languages. At present, SBI and Axis Bank have an option to choose Hindi as a medium to read instructions, and plan to introduce a few more languages.

The Cost Advantage
Banks have also realised the cost advantages of Internet banking. Comparing the transaction costs between manual and electronic transactions, Kalyansunder says, Manual transaction involving cash withdrawal at a branch costs about Rs 50. The same cash withdrawal transaction done at an ATM will cost about Rs 14-15. On the other hand, Internet transactions cost less than a rupee. Seconding this view, Sehgal says, Only the cost of infrastructure and maintenance is high. But the cost per transaction comes down to a few rupees compared to the Rs 50 for a manual transaction. These benefits can be extended to the customers. Today, retail customers can make large value transactions upto Rs 50,000 electronically without paying any additional cost to the bank. Earlier, a demand draft of Rs 100 made at a branch used to cost customers a minimum of Rs 15-20.

Apart from cost advantages to the retail customer, HDFCs Jaggia says that the convenience factor is equally important. He says, For the customer it not only results in saving of time but also ensures that all his needs are quickly catered to. For corporate customers, Internet banking offers integration between their internal ERP systems and HDFC Banks system, removing inefficiencies in managing vendors and dealers.

Security concerns
Security was always a concern for online banking systems. But RBIs stringent security standards for banks have resolved a majority of the issues. Banks such as SBI have robust security practices. SBI was the first bank to have a documented security policy. Apart from this, SBI also takes consultation from external bodies, expert panels, and conducts regular security audits.

Another bank leading in security practices is HDFC. The bank has taken proactive steps and has implemented solutions and monitoring tools with RSA for catering to negative IP and related risky access. The bank is also in the process of implementing a solution for financial transactions in net banking, where based on the risk scoring and rule engine, transactions would be assigned weightages, and a subsequent workflow for second level authentication would be triggered. This is expected to go live in the next 3 months.

Axis Bank, too, has been actively ramping up security standards across its entire network in India. The bank deals with phishing attacks, through customer awareness campaigns, where it actively reaches out to customers and educates them on the security measures for online banking. Axis Bank is also implementing the 2-Factor Authentication solution, which will add another security layer to the existing online banking function. This month, the RBI will also come up with a regulatory report where it may stipulate security audit guidelines for net banking services. This, according to the banking industry, will further streamline the regulatory process and deal with all pre-existing loopholes, if any.

Future Scope
Internet banking usage and transactions is set to grow, and there is a combination of reasons for this. Some of them being increased transaction sets for end users; optimum channel availability; higher broadband penetration; decreasing prices of PC; and heightened awareness from an end customers viewpoint. Internet banking will soon become one of the key fulcrums in ensuring that a customer is engaged with the bank and in touch with the changing environment. From the banks point of view, Internet banking will become important since it is a window to reach out to customers, irrespective of their geographical location.

VK Ramani foresees immense growth in the number of Internet banking services and the number of customers migrating toward it. We expect the number of transactions to increase by 15%, while the number of registered users would increase by 25% for the industry. The use of net banking for tax payments will increase, particularly for corporate clients, says Ramani.

Sehgal also believes that going forward, online banking will grow manifold. I think banks should be able to convert more than 50% of their transactions through such low-cost alternate channels, he explains. In addition, banks foresee Internet banking forming a symbiotic relation with other channels such as telebanking, ATM and mobile banking to provide a unified channel experience and create a single-point access code for customers.

Priya Kekre
priyak@cybermedia.co.in

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