E-banking channels and customer service in commercial banks

¶ … E-Banking on the Banking Industry

To understand the relationship that can develop between the Internet and banks, one has to first understand the nature of both these items. The first to be understood is the banks. So far as banks are concerned, at the beginning of the twenty-first century, central banking which is the source of all banking activity would appear to be at a crossroads in their future. Earlier it was the lender of last resort, active participant in stabilizing economic fluctuations, and now the present main function is being the guardian of price stability. As it is still the monetary authority, much is expected from them. At one stage, fiscal policy was considered to be the main instrument of economic policy, the situation changed to an ascendancy of monetary policy and that was noted by the late 1980s in most parts of the industrialized world. This had a lot of implications for the role of the central bank.

However, change does not stop, and today, financial innovations threaten the position of central banks as they are the major influencing force responsible for bringing about financial stability as well as that of economic outcomes. This is due to changes in feelings and over the past several decades, central banking has been at the mercy of whims or at the influence of fashion. "At a time when the price level is rising and employment is relatively full, price stability takes precedence over full employment as a policy objective. At a time when prices are stable and unemployment is rising, on the other hand, employment becomes the prime objective." There are also questions as to the necessity of central banks, but since this study is not on central banks, this question will not be dealt with.

Let us now get down to the question of individual commercial banks and how they service their customers. The quality of banking services that a customer gets and how the services are provided to the customer will depend, to a great amount, on how the banking is done. There are three main channels for banking today, through branches, through the internet and on telephone. At the same time, they are not mutually exclusive. Some users need one, others use all three. The traditional way of banking was to process all transactions through the local branch. This service was available at all high-street banks and also in some smaller banks which had arrangements with a high street bank to use their counter. This is most suited for customers who need to visit the bank every day to pay in cash or to make withdrawals, as it is the most convenient.

Online bank accounts are now becoming increasingly popular as those banks are improving their service and availability. All the high street banks now certainly offer this service, as well as some of the former building societies and smaller banks. The advantages of Internet banking are obvious. With internet banking the customer can access the account, check the balance and make transactions 24 hours a day, or throughout entire weeks. This is all done from the comfort of their own home or office. What is needed is a reasonable internet connection to take advantage of the service. There is often a set up fee or monthly charge for having an internet account. It is best to ask for a trial period to determine that the Internet account works efficiently. It is important to find out whether there is a technical support line and the data security measures that are in place.

Chapter I

How internet banking has grown in the last decades, especially regarding new product being offered

Information technology has now changed the old definition of the banking industry worldwide, along with markets and customer bases. Internet banking has had a great effect on reduction of barriers to enter the industry, and simplify the entire process of financial disintermediation. Competitive influences of e-- banking are seen more clearly in the U.S., as in this country non-bank financial service providers have cut into banks traditional operating area and taken shares for themselves. Yet, U.S. banks are not taking any offensive action, and have themselves embraced online banking as their defensive strategy. In other countries, the situation is not the same and online banking in Japan is basically directed to the domestic customer base. European banks are using Internet banking for cross-border expansion as there are many countries within Europe, as also for their consolidation and countering competition. However, e-banking in the European Union with the present single currency is important from the regulatory and technical issues.

About around 10% of the world's population being online, and more are attaining access every day, the Internet tries to become the most powerful vehicle for exchange of information. But this great progress is being stopped by the authoritarian governments that are aggressively trying to block and censor the Internet. In those countries individuals face torture and imprisonment for trying to access such subversive material as news from that of the CNN, BBC, Washington Post, and the Voice of America. It is seen that non-democratic regimes throughout the world are denying to their citizens unrestricted accessibility to the Internet. Cuba, Laos, North Korea, the People's Republic of China, Saudi Arabia, Syria, Tunisia, and Vietnam are considered to be the most notorious as the violators of Internet freedom. It is in these countries that Internet banking will not develop.

Some banks have collected more than one million customers during 2004 -05. One of these banks is the U.S. Bank Internet Banking at usbank.com in the last year. U.S. Bank says that the success is due to the popularity of its free Internet bill payment service, as also growth in customer confidence in Internet banking and recent enhancements in service at usbank.com. The total number of customers with service facilities in Internet banking at U.S. Bank now is over three million. This makes it clear that the growth is more than 30% in a year. The reasons for this growth given by Steve SaLoutos, senior vice president of consumer products and services at U.S. Bank is that "The growth that we are experiencing in Internet banking at U.S. Bank illustrates a trend that we have seen for some time. Consumers want to stay close to their accounts and to access their bank through multiple channels. They see the value in services like Internet banking and bill pay because of the peace of mind that comes with our risk free Internet banking guarantee." In addition to all this, U.S. Bank Internet Banking provides a risk free guarantee protects users from unauthorized transactions made during a secure Internet banking session at usbank.com. This probably leads to greater confidence in Internet banking, the company also credits free bill pay for the spurt in online banking.

The main success of U.S. Bank was when it made its Internet bill pay service free in December 2003 and from then onwards the amount of active bill pay customers enhanced by more than 250%. There are further enhancements that have been made could continue to increase Internet banking volume. In April of this year, U.S. Bank introduced a new feature that permitted customers to directly log onto Internet banking from the home page at usbank.com. U.S. Bank also changed its home page so that it opens to the page that the customer chooses, and this may be for personal banking, small business, commercial and government or the Spanish language page. The internet services of U.S. Bank have been credited for being one of the most convenient Internet banking sites and which can be used easily. Improvements were made available in the year 2004 to enable the customers to easily view images of canceled checks, deposit slips and statements online and get customized alerts that notified customers of important transactions on their account, and increased transfer capabilities on the account which permitted customers to bring about a transfer in the future.

U.S. Bank also made it easy to apply for an account online in English or Spanish as per the desire of the user. U.S. Bank is a subsidiary of the U.S. Bancorp and it has $195 billion in assets, and that makes U.S. Bancorp the 6th largest financial holding company in the country. The company has 2,370 banking offices and 4,620 ATMs in 24 states, and provides customers with a complete line of banking, brokerage, insurance, investment, mortgage, trust and payment services products. Thus there are some services that help the growth of Internet banking and these can be listed as being credit free bill payment, confident checking of operations that have been made on their account, and move around their money easily. There is also the question of language that becomes important in certain areas. At the same time, there are risks in the business and one has to be careful on that account.

Evolution of Internet banking

To a large extent, the growth of internet banking can be related to the growth of the Internet. The growth of Internet has led to a desire to understand the characteristics of the users, their reasons for using the service and what the users do when connected. A huge and expanding 'Internet watching' industry has progressed to provide such data. Some statistics can be collected directly from the Internet about traffic volumes and the geographical segmentation of its users and these provide a reasonably accurate picture of what is happening. The number of host computers which are linked to the Internet continues to expand every year by over 60 per cent and their geographic distribution is concentrated within a very few countries. U.S. dominate the amount of computing power present on the Internet, and accounts for over 60 per cent of all of the host machines. There are some differences in the ways that different countries have responded to this technology. Japan and France have a relatively lower use while Scandinavia and particularly Finland has a very high numbers of computers connected to the Internet.

To a certain extent, the development of Internet banking is affected by the development and usage of Internet within the country. Let us now look at Internet Banking in critical terms. The term Internet banking refers to banking services when the Internet is used as a remote delivery channel for banking services. Services are inclusive of the regular services that were being provided by banks earlier like opening an account or transferring funds to different accounts, and new banking services, which are called electronic online payments. These permit customers to receive and pay bills on a bank's web site. In some cases these were earlier permitted at the branch of the bank. A situation has come where more and more banks are changing their businesses with the use of Internet technology to develop or increase links with their customers. The extent to which the Internet is used in a bank is controlled only by the relative maturity of the bank in relation to Internet technology.

Banks generally offer Internet banking in two significant manners. An existing bank having physical offices, which is now termed a brick-and-mortar bank, can create a web site and then provide Internet banking to its customers as an add on to the traditional channels that it had earlier. An alternative bank is either a virtual, branchless or Internet services only bank. The computer server or bank database that lies within the heart of the virtual bank is generally housed in an office that serves as the legal address of such a bank. These virtual banks interact with customers for making deposits and withdrawals through automated teller machines -- ATMs or via other channels which are owned by other institutions. Benefits of Internet banking are the change linked to technological and customer service innovation, the global character of the Internet, integrating of Internet banking applications along with computer systems and the enhancing dependence of banks on other parties to provide the required information technology.

Thus there are three levels of service provided by an Internet-based bank. The lowest level is called Informational and this is the basic level of Internet banking. Here the bank has required information about the bank's services and products on a stand-alone server. Risks that are associated with these types of operations are quiet low, as informational systems generally have no road between the server which deals with customers and the bank's internal network. This level of Internet banking can be directly provided by the bank or outsourced. Though the risk to the bank is relatively low, the data present on the server or within the web site may be altered. There is requirement of controls to prevent unauthorized alterations of the data on the bank's server or web site.

The second type of service is called Communicative and in this type of Internet banking system there are some interaction between the bank's computer systems and the customer's. The interactions may be limited to only handling of electronic mail, account inquiries, loan applications or regular file updates in the form of name and address changes. Here the servers have a direct link to the bank's internal networks, and the operational risk is greater with this configuration than with earlier mentioned informational systems. This means that there must be controls to avoid, assess and alert management when any unauthorized attempt to access the bank's internal networks and computer systems take place. Virus detection and stoppage are also significant in this operational system.

The highest level of service is called Transactional. In this level of service customers are allowed to directly execute transactions which have financial results. There are two levels of transactional Internet banking. The basic transactional site only permits a transfer of funds between the accounts of the customer and the bank. The advanced transactional site provides methods for making payments directly to third parties outside of the bank. This takes the form of bill payments through a bank official check or electronic funds transfer or automated clearing house entries. Many banks are also permitting payments from consumer to consumer using similar payment methods. It is clear that the changes in Internet banking has progressed from one step to another, and banks are taking additional risks to satisfy their customers.

Present status and profile of e-banking offered by banks

The banking industry promotes an interesting and significant study of changes in technology and regulation impacting competitive structure, business strategy and evolution of social support systems. When one takes a narrow view of traditional bank products and performance measures, and compares it to the increased pace of technological change coming through Internet banking would lead one to decide that traditional banking is now a declining industry. In fact, according to some experts, the commercial bank which is an organization for conducting the activities of accepting deposits payable on demand and originating loans is no longer accepted by users of the service. This view does not take into account many of the true innovations that have taken place in the industry of lately. These activities are those targeted at off-balance-sheet and information-based activities.

A more balanced judgment would say that banks are evolving in ways that are enabling them to provide the same basic functions as before, but in new, more effective methods. This can be said in simpler language as that most banks earlier thought of themselves as promoting a set of particular, unrelated products to various sets of customers. Now, due to the technological changes and competitive pressures, many banks are following techniques that aim to promote their capability to perform several functions. Some of these involve financial planning for retail clients and raising capital for middle-market companies, and these were not part of old product lines. As a result of changes in outlook, many banks are promoting a more diversified level of products and services than ever before.

Much of this has been possible by the latest advances being made in technology, and these are what is called the electronic banking revolution and speeded by the rapid development and application of the Internet. Thus the changes are like the changes in all other aspects of the software industry - fast to a point where one does not know what will happen next. The most important of the service changes that have taken place in United States, during the current year also have been discussed and one should remember that this is not the last change.

There is quite a large difference among American banks which offer Internet banking. All the 120 largest American banks have collectively 75% of the country's banking assets and they provide services to their customers who will enable them to check account balances, to transfer money among accounts and also to make bill payments online. Regarding the concerned services, in the U.S., one-third of Internet banks creates and maintains their own websites which offer interactive banking services. The other two-thirds of Internet banks have outsourced their requirements, and these needs vary from webpage design to customer services and data management. The cost of bringing in online banking is at an average of $50,000, and the annual average maintenance cost of over $22,000. Another estimate is that the initial cost of implementing an Internet banking system for community banks varies from $100,000 to $200,000, and has a monthly upkeep cost of about $4 per account.

This means a yearly maintenance cost of the operations of the website of $2.5 to $5 million for community banks with 50,000 to 100,000 accounts. This helps the banks to link their customers to the bank's partners for satisfying the requirements of the customers in brokerage, mortgage, real estate and insurance. The banks can join local securities, mortgage and insurance companies to provide portals on their web pages. The securities, mortgage and insurance companies also may reciprocate by means of portals on their own web pages for the banks. This may help small and medium-size community banks to compete with big banks and large brokerage firms, which have already created inroads into the franchise of the community banks. At the same time, one has to be careful about getting into such banking as the risks are much higher and even the auditors have been warned in the matter.

Nature of product offered

There are differences in the product that is offered by different banks and no general rule will be applicable to all. What is now being tried is to provide some facilities which a person intending to open an account for e-banking may look for. It is possible to find out the answers regarding availability on the Internet. In these accounts, customers have a facility to deposit products online of different types like checking savings, Money Market and Certificates of Deposits, but they have to be suitably prepared for this purpose; the customers can check the information regarding the balance in the account; the customer can receive in the account the benefits that he is entitled due to co-promotions by different authorities that he has participated in; the customer can receive and pay bills online; the information that is to be downloaded can be downloaded directly into the desired software that the customer uses like Quicken or MS Money; within the system itself, there is likely to be available software for financial planning which will enable the customer to calculate loan payments or tax due; within the facilities of the bank itself the customer can see time trends of different financial indicators and that includes interest rates; when the client has more than one account within the same bank, he is generally permitted to shift money between accounts; within the bank itself, there may be different types of accounts and the bank generally provides interactive tools to help the customer decide what account will be the best for him; the customer may log in once and that will be enough to access the different accounts that the client may have in the bank; the client can internally transfer funds from deposit accounts to loan accounts as also for payment of credit card balances; a regular client will have the facility for online mortgages and the customer can even check on the account balances and transfer money through Web-enabled phones or other similar instruments.

Even in countries which are not as advanced as United States, the direct actions that are permitted are to see up-to-date account information; check on the transaction details that have gone on for the last month or so; the account statement that is available on Internet is generally for the lost twelve months as on any date; some provide banker's checks to the customer free of charge in different location and this is more important for banks which do not have so many branches; when the customer wants, he may ask for a check book to be sent to him, or ask for a deposit slip to enable him to deposit money; the customer may pay utility bills through the bank; and the bank will attend to all e-mail queries from customers.

Businesses throughout the world are being reinvented and reengineered with the use of the World Wide Web. And in particular, Internet technology is totally altering global banking industry. This is happening as the traditional lines that separate product, market and customer base. Today, the click of the mouse gives the power to the consumers with previously unexpected freedom in selecting vendors for their financial requirements. One of the main sources of this is Internet banking and that is growing In United States and abroad.

Chapter II

The operations of banks in different areas: What is the Contribution?

Banks have a critical role in financial intermediation, and the benefits come to society as banks shoulder all risk in the process of earning money from using their liabilities and customer deposits to earn more money. Change has come through the revolution in information processing as that has lowered entry cost, and thus increased competition among banks, as also competition between banks and other financial institutions, like security brokers. The less efficient operators have thus been forced to merge and consolidate. In short, technology has the rules of creation, delivery, reception, and utilization of financial products, and advances in computing and telecommunication have eroded economic and regulatory barriers to competition, de facto.

At the same time, let us not assume that all the process of creation of benefits for the society by banks was a straightforward game. One of the major players was Bruce Rappaport and he was not even known till the Pertamina scandal. His activities crippled Indonesia's economy and that attracted a great deal of attention. This made it clear that the Geneva banker was a significant influence in the underworld of financial crime. The methods of his formation of Inter-Maritime Bank in 1965 showed the particular social world of banking in which he flourished.

This bank was used to cause all types of troubles to Indonesia. Thus there are many reasons for formation of banks. The other question was why the bank failed? There are three major reasons as to why individual banks fail. These reasons can be named as credit risk, interest rate risk, and foreign exchange risk. Two other important causes of failure for banks are bank runs and fraud. Bank runs occur when depositors or other creditors fear that their funds in the bank are not safe and try to withdraw them. This happens in most cases with uninsured deposits. During the time of the financial debacle in Russia in August 1998, it was shown on CNN and other television stations that long lines of Russians were trying to withdraw their funds from local banks. Most banks do not keep sufficient funds on hand to meet unanticipated large-scale withdrawals. Under such situations, it is clear that banks cannot pay off all depositors immediately.

'silent run' is the name of the action of large creditors withdrawing their funds. This occurred in Continental Illinois bank in the year 1974. International banks had tens and hundreds of millions of dollars as uninsured deposits in the Continental Illinois bank. When the run is on an illiquid but solvent institution, which might be in a position to borrow from the lender of the last resort. And insolvent institutions are likely to fail. The depositor's lack of confidence in the bank comes from their belief that the bank has had large losses due to credit risk, interest rate risk, or foreign exchange risk and this has resulted in their deposits being at risk. The concept of fraud is legal, and what defines fraud in one country may be standard business practice in another country. What was considered to be known as crony capitalism in Indonesia is also known as fraud in the United States.

However, within United States, banks are limited in their operational activity by rules that exist in every state. Within this article it is not possible to discuss the scope of activities permitted in every state, but let us take the situation within the state of Wyoming. The restriction on activities starts with restrictions on operations. State banking commissioners have the option of asking all active officers and employees of banks to provide a fidelity bond in duplicate of an amount that will also be fixed by the state banking commissioners and this has to be issued by a surety company which is authorized to do business in the state. One copy of this bond shall be filed with the state banking commissioners. No bank is permitted to give any loan from its funds to executive officers, directors or to any person owning or controlling ten percent or more than that of the banks or the bank holding company's voting ownership interests.

The same restriction also applies to persons in which any of the executive officers, directors or owners or controllers are interested other than in those cases where there is a written application of the person. Even then before sanctioning of the loan, there has to be a prior approval of a majority of the board of directors. This approval has to be made a part of the records of the directors meeting. A bank shall not help any depositor or creditor through pledging the assets of the bank as security except in cases where the bank will be able to qualify as depository for United States deposits, postal savings funds or other public funds through the deposit of the securities and that is required by law.

There are a lot of restrictions on banks for investing in real estate. No bank is permitted to purchase, hold, convey or lease real estate other than for the purposes of Real estate and buildings that are needed for transaction of the business of the bank meaning its banking offices with other premises in the same buildings to give on rent so as to provide a source of income. The value of the property on the books of the bank as an asset shall not be for an amount more than one hundred percent of the bank's capital and surplus. This may be increased with the prior approval of the state banking commissioner, to include undivided profits and reserve accounts. When any bank stops using the real estate and improvements, the property shall be sold within five years from the date of vacation of the premises.

Secondly, no bank is permitted to purchase, hold, convey or lease real estate other than for the purposes of "Real estate which is purchased by or conveyed to the bank in satisfaction of or on account of debts previously contracted by a party in the course of its business." Finally, no bank is permitted to purchase, hold, convey or lease real estate other than for the purposes of "Real estate which is purchased at execution sale or acquired by decree under securities held by it." Even when real estate is acquired under the second and the last clause as mentioned above, the value of the real estate on the books of the bank shall not be more than the acquisition cost, or appraised fair market value, and whichever is less. This will again be appraised at least every one year, and has to be sold within ten years after title to the property is acquired. Any real estate which has been acquired before July 1, 1992 shall be carried on the bank's books at the lower of the bank's book value for that property as of July 1, 1992 or appraised value. The penalties are also severe for not selling real estate in time and when any real estate is not sold within the time required, it shall not be permitted to be carried as an asset of the bank.

Banks are also not permitted to invest any of its assets in the capital stock of any other corporation except (I) in the capital stock of that of a federal reserve bank; (II) in the stock which had to be acquired to save a loss on a preexisting debt and that also has to be sold within one year from the date acquired other than a longer period of time is being provided by the state banking commissioner; (III) in the stock of a small business investment company as being defined by the federal Small Business Investment Act of 1958 as being amended; (IV) in relation to the stock of the federal national mortgage association; (V) in relation to the stock of a corporation which is created primarily for the purpose of creating agricultural loans and borrowing or discounting loans from banks and associations of the farm credit system as being authorized in the Farm Credit Act of 1971, and which is being subject to such situations and limitations as the state banking commissioner might prescribe; (VI) in relation to the stock of a bank service corporation; (VII) in relation to mutual fund shares whose underlying securities consist solely of obligations of the United States treasury or other federal agency obligations that are guaranteed by the United States government without any conditions; (VIII) in relation to the stock of a federal home loan bank which is created under the Federal Home Loan Bank Act; (IX) in relation to the stock of an operating subsidiary or (X) in relation to the stock of a bank which is engaged for offering services to "state or national banks or their subsidiary corporations, bank holding companies or their subsidiary corporations, or other financial institutions." Thus it is clear that operations of banks are limited through state laws and the positions are tightly controlled. The same rules are also applicable to Internet banks as the laws are specified for banks and not dependant on the nature of their operations. The safety of the individuals who invest their money depends on the rules which the banks have to follow and not on the methods through which they operate. The only extra hazards, if any, may be due to the nature of the medium and not due to the mode.

It has already been seen that banks can establish only limited numbers of subsidiaries and even they can operate in limited areas. Thus for the capital market, the services of banks are in providing the needed back up banking services that are required and advising their clients about the new issues that are coming out on the market. Regarding foreign exchange, their main roles are in money changing or transferring currency of one country to the currency of another country. The only advantage is that they have large amounts of money available with them, or in transit. This enables them to take the best advantages of shifts within the currency market from time to time. They cannot take up the role of speculators as that is not the role of banks.

At the same time they have taken an important advantage from Contributions. Regarding contribution, one has to talk about defined contribution plans or retirement plans. They are the opposite of defined benefit plans where the result is being known but the amount that needs to be contributed is not. There are three types of IRA accounts - Deductible IRA, Non-Deductible IRA, and Roth IRA. IRA means Individual Retirement Arrangement and does not signify Individual Retirement Account. IRA is permitted by a provision of the tax code and that is Section 408 of the Internal Revenue Code. This permits individuals to arrange for there retirement. IRA is not a separate class of investment, but simply investments that the tax code will treat differently from other investments.

For banks it gives them an opportunity to sell certificates of deposit under IRA. That means a CD can be with or without an IRA. Is the CD in an IRA distinct from a CD not within an IRA? NO. The tax treatment is different, but the CD is considered to be the same. When a tax payer decides to open an IRA at a bank, he will get a CD. This is not understood by many as banks have done a good marketing job, and many people consider that IRAs are investment products and banks are the only place to have them. It may be simpler to think of an IRA as a bucket. The IRS says that if you put $3,000 and that was the annual maximum which was permitted by law and that increases to an amount of $4,000 in the year 2005, and those 50 and older can provide an extra $500 into the IRA, that money can be used to buy and sell investments as the investor wishes.

The restriction is that the money will remain inside the IRA account for the required amount of time. The period of time changes with each IRA. The taxpayer will not have to pay taxes that year on the profits earned from the IRA. It is important to understand that almost any investment can be bought with that $3,000. That money "can buy CDs, savings accounts, money markets, Treasury bills, stocks and bonds, U.S. Government Securities, mutual funds, variable annuities, fixed annuities, limited partnerships, gold, international securities, foreign currencies, real estate and almost anything." Thus it is clear that this has given an opportunity to banks to sell CDs, but that is marketing and the confidence of people in banks. Banks do not have any special legal advantage.

Effects of e-banking on banking operations: What is the contribution of internet banking toward the business?

The consumer has accepted the Internet and e-commerce with high intensity and speed. Electricity was invented in 1873, and it took another 46 years for adoption of this technology for general use around the world. Similarly, it took 35 years for telephones, 22 years for that of the radio and 16 years for the computers. For the Internet, it has taken only 6 years for the technology to spread. By January 1998, there were only 770 banks in the U.S. which offered online services and this was seven percent of all banks. After one year the estimated number were that 4,990 banks were offering or planning to offer full service Internet banking. The change was also among small banks and over 65% of small- and medium- size community banks planned to introduce electronic banking to their customers. Now, considering the total picture, online customers account for more than 20% of the total customers, and growth is increasing all over the U.S. In 1999, Internet banking sites totaled 1,845 in Germany, Belgium, Holland, Spain, United Kingdom, Italy and Ireland. Germany had the largest number of banks while France had the fastest growth in the market. During this same period the U. S had only about one third as many banks as that of these eight countries, even while considering the fact that though the U.S. had an internet using population which was double than that of all internet users in all of Europe.

The influence of electronic and Internet banking is observed more in the U.S., as in this country nationwide branch banking is prohibited, especially in comparison to Japan and the European Union, where branches are generally allowed. The effects of online banking in the U.S. have been to dismantle the geographic barriers that banks have traditionally enjoyed with their local customers. ATMs and the virtual branches have resulted in increase in the competitiveness of consumer banking in many areas, and this has resulted in fewer banks actually competing in greater numbers of geographical markets. This means that competition within the banking industry has become tougher in comparison to the pre-Internet era in the U.S. The ability to increase profits is no longer guaranteed by the presence of few competitors.

The accounting firm Booz, Allen and Hamilton has estimated that the costs are roughly from $25 to $30 million to create a traditional brick-and-mortar bank but only $6 million to create an Internet bank in the U.S. Again, as e-commerce is now rapidly spreading among businesses and consumers, bank customers now expect technical innovation and convenience in the services which are provided by their banks. Third, as yet Internet banking operations are not profitable to most banks, but the cost of attracting and maintaining customers with online banking is very less and that makes investments in electronic and Internet banking an area which is irresistible to banks and non-bank financial institutions. This is reflected in a survey by Booz, Allen and Hamilton. That shows the estimated cost of offering routine business at a full service branch which is about $1.07 per transaction, and comparatively is 54 cents in telephone banking, 27 cents in ATM banking and an only one and one-half cents in Internet banking.

So far as contributions are concerned, it does not really matter what type of banking is being used - traditional or Internet. It is a question of making investments in a permitted area and keeping the funds locked up there. The quality of investment will depend on the capacity of the individual concerned and that has little to do with the manner in which he makes the investment. The other matters of capital market service and foreign exchange, it is certainly easier for an Internet bank to handle it. They can send messages to their customers at very little cost, or even put up an advertisement in their site so that the customer cannot possibly miss the advertisement. The costs will certainly be lowered, but the efficiency of the bank itself depends on the individuals involved and not on the media in which they work.

Looking directly at the system of banking through the Internet or on the Personal computer has certain advantages over traditional banking. The first advantage is that it permits persons to attend to their banking functions whenever they want to - day or night. It is decided by the customer only and not the bank. The work involved can be paying of bills, revising standing orders that have been given to the bank and transferring funds and this can be done as desired. Apart from the convenience in terms of time, the customer can do the work directly and does not have to wait in the bank for the convenience of other people. This makes the job much faster.

The entire system is easier and quicker as the money is managed in an easier manner; one can earn more through the transfer of excess funds into high interest savings accounts and also transfer money from savings account and current accounts so that interest charges can be avoided. Another problem that many customers face is determining whether their checks have been cleared or not, and this is very easy to do with an Internet bank account. In many accounts there are also packages that can forecast the financial position of people and this helps an individual to plan ahead and make better management of money.

Another method is called PC banking and that is done from the PC used by the customer through and modem and special software that are provided by the bank. The difference with Internet Banking can be done is that it can be done from any personal computer with an access to the Internet and the password that is provided by the bank. The banks offer facilities for both types of operation - PC banking and Internet banking, whereas others permit the use of one of the two. The services available through Internet banking can be some of these facilities or all these facilities like paying of bills, transferring of money between accounts, looking at the statements that are generally provided by banks, adjusting standing orders that are given to the bank for executions on a regular basis, ordering for check books and other facilities from the bank that are given to the customers, applying for loans from the bank, applying for credit cards that are issued by the bank, opening fresh savings accounts at the bank, arranging for insurance or any other services that are provided by the bank and getting information about accounts, banking services and current rates of interest.

This has also been discussed earlier. In short, the customer can get the same facilities from the bank through the Internet that he would have had to go to the bank to otherwise get. This speeds up service from the bank and allows the bank to provide services to a greater number of customers as the bank has a number of rules, which if followed, the work to be done remains only clerical, which can be done even by the computer. It is likely that the operation of the computer will be faster as it has more of memory and faster checking up of records, and is not likely to follow procedures that are not permitted.

The next question is of the speed of Internet banking and this can be seen clearly from some examples. In the case of payment of a bill, the collecting organization is likely to receive the payment within three to five working days. The delay is not due to the operational delay, but due to the checks and procedures that have to be carried out and the other matters that are concerned with making the payment. This is true for all types of payments and thus the receiving organization must be aware of the delays that are likely to take place for the customer is likely to suffer otherwise. Concerning the starting of Internet banking by a customer, there are certain procedures that have to be followed. The methods are different for different banks and most of the instructions for starting on Internet banking for a bank are available on the bank site itself. The bank sites also offer a list of banks which offer Internet banking services.

Chapter III

Performance Measurement

The land within which Internet resides is called cyberspace and these are virtual lands having virtual lives and virtual societies. These lives and societies do not possess the same amount of physical reality that 'real' societies do consisting of men that we meet every day. Today cyberspace has become a big world, and the virtual is now counter posed to the real. The physical prevails in cyberspace but is reinvented when it enters cyberspace. Virtual is the general term for this reinvention of similar physical space found in cyberspace. On the other hand, the tradition has been that power is what structures culture, politics and economics. Power can be seen in many forms and there are several theories of power is built, but all these theories draw their relevance from the idea that power names the things that decide as to how life is to be lived. It is that cyberspace now touches all lives.

For some it has become as essential as the telephone or the letter. For others it is still only a whisper of technological promise. Sometimes we are shocked by the possibilities that cyberspace has provided and this is realized when a friend sends letters instantly across the world by means of the telephone. Now cables and phone lines have been joined to computers, and this parallel world of cyberspace has been created. It is often called a virtual world because one cannot see it in tangible, physical reality but only feel it in the light and electronics of communications technology. In the virtual world people also live their virtual lives, and this goes on with their real lives. Even individuals not interested in the virtual world are affected, often without their knowing.

An automated bank teller gives money as communications in cyberspace has authorized it to. After we have given our password and told the ATM what we want, it then makes use of a phone line to contact a computer that decides whether our request should be complied with or not. In this action, humans do not have a role and only machines decide. In a way, machines rule humans in these cases. It is also clear that some of these machines can operate much better than humans - they can work for all twenty four hours, do not get tired due to repeated queries, their speed in operation is much faster than human beings, etc. The question is then as to how does one evaluate the performance of these machines and with what sort of yardsticks should they be compared?

One of the methods of measuring is with our dreams and that puts Internet banking in a difficult position. In spite of all expectations and support from different quarters, electronic bill presentment and payment has not reached to the levels that it was expected to reach. There are certainly cost savings and ease in operating online, but people have not changed their habits. Among American consumers, the value of bills paid online was just 1% of the total bills last year as per the reports given by Gartner, a firm of consultants. Even for businesses, of the total 9 billion payments that were made, 82% were made through the new method as per the consultant, Celent Communications. The reasons for using the mail to send checks through the mail are viewed to be many.

It is clear that most individuals do not like to send their private financial information over Internet where they feel other people have a chance of getting to that information, and it may take a long time for attitudes to change. Even companies apparently find no reason why they should change their traditional systems, and are willing to let people handle bills in the usual way. The reasons for this are difficult to find out as most business organizations are aware of the advantages of electronic payment systems like automated clearinghouse and wire transfers. Even most treasurers know the benefits that they can get through operations on the Internet. According to a Gartner analyst, a company is likely to save $7.15 per invoice when it treats the invoice over the Internet and not present it on paper. In general large companies handle some 800,000 invoices in a year, and the savings of the company in operating through the Internet could be over $5 million and that is a substantial sum. The total investment required for switching to Internet for the company would be only around $500,000 and that means that the company needs to process only 10% of its invoices online to break even for the switch to the new system.

Thus the performance management for Internet banking by the banks themselves is easy to reach. The efforts are also spreading to other areas. USERS Incorporated is a unit of Fiserv Inc. And has signed an agreement with SensCom -- www.senscom.comthat made its PCU Internet Banking capabilities which can be accessed through wireless devices, inclusive of Internet-enabled cell phones and personal digital assistants. The move brought the convenience of secure wireless access to the fast-expanding base of credit unions which are employing USERS PCU solution. Thus it is clear that the usage of modern technology for the spread of banking services is increasing.

There are always risks that are associated with e-bank services and it is up to the management to take decisions regarding about the levels that it should be implemented at. The choice of the level of e-banking services provided to various customer segments should be based on customer requirements and the institution's risk assessment considerations by the management of financial institutions. Reaching this decision by the institution should be by means of a board-approved, e-banking strategy that considers all important factors such as competition, maintenance costs, expertise, implementation expense, customer demand, and capital support. Some institutions may even choose not to offer e-banking services or to put a limit on e-banking services only to an informational website. This decision should be periodically re-assessed by the financial institutions to make sure that the strategy chosen is suitable for the institution's total business strategy. The definition of success for institutions may be in several ways - increase in market share, enhancing customer relations, reducing expenses, or generation of new revenue. Only when the financial institution determines that a transactional website is required, then the next decision it has to take is about the range of products and services that it wants to electronically make accessibility to its customers.

To ensure delivery of these products and services, the financial institution may have more than one website or several pages in a website for several business lines. Finally, the decision has to be taken independently by the financial institution. When we look at e-banking we have to realize that it has particular features that may enhance an institution's overall risk profile as also the level of risks which are linked with traditional financial services, especially strategic, operational, legal, and reputation risks. The unique characteristics of e-banking include effects of speed of technological changes, effects of varying customer expectations, enhanced visibility of publicly accessible networks -- "for example, the Internet, less of face-to-face interaction with the customers of financial institutions, need to integrate e-banking with that of the institution's previous computer systems, depending on third parties for the required technical expertise, and increased proliferation of threats and vulnerabilities that are associated with publicly accessible networks.

Chapter IV

Reality of system risks and control

This is one of the factors that worries individuals involved with e-banking, and the other factor is that economy is not very strong and corporate profits are doubtful and this has made the shift into e-banking even more doubtful. Apart from the economic conditions, there is also the problem of inertia in the corporate world. There are five major institutions in Canada who dominate the industry and they have now fixed up standards for presentation and payment of electronic bills. This has helped the growth of the industry there. In United States the approaches to problems by banks have been individual and the entire issue of e-banking is viewed by them as a threat to their relationships with customers. Thus there are not many agreements between the bankers so that common standards and policies are adopted.

An alliance was made by 6 of the top bankers in United States called Spectrum, but this organization has not been able to progress much. In certain sections of the market, the banks want to dispose of their role as middlemen and would like to help clients make the required shifts This is viewed as being useful to maintain their roles in the future. The help that customers want from banks is to help them reach the direct and through processing from invoice payment to general ledger. This is not a direct function of e-banking, but is originating from e-banking. The bankers are stepping in for sales of vendor software and are themselves taking up the role as the integrator between customer, supplier systems and back office enterprise resource planning systems.

In this regard, Citibank has made a deal with Bottomline Technologies to enable corporate clients to implement EIPP. In spite of this, the growth of EIPP has to date been slow, but Norberto Spangaro, the Americas regions head for Citibank E-Business, is of the opinion that the growth will speed up during the next few years. Spangaro states that it is just a matter of people varying their processes, and any significant variation in business processes is difficult to achieve. Further companies have been very slow with regard to adopting EIPP, but those that have are also fascinated by it. Some banks are taking up opportunities to be outsourcing partners. In 2000, Hoolehan hired LaSalle Bank in this regard. That is a division of Dutch banking giant ABN Amro and the job was to manage a complete receivables program for Blistex. This included an EIPP application from BillingZone LLC. Earlier the accounts receivable department was spending too much of time while trying to chase money that it should have been gathered months earlier, and on top of that, staff turnover was high as the job was monotonous.

The general agreement among observers is that as electronic banking becomes more widespread and difficult, there is a necessity for banks to evaluate and handle operational risks and that will become more crucial. When security failures take place at an institution it could lead to major losses for that institution, and also result in a general lack of confidence in electronic banking innovations. This will slow down development. Apart from this, unlike other remote banking channels like telephone banking, security risks prevailing around the Internet are difficult to address, since the Internet is a network designed to lead to open access. The warnings have come from regulators that financial institutions risk breaches in security and chances of intrusions is enhancing as the number of remote access devices is continuously increasing.

Risks and threats in the digital world seem to be like those in the physical world -- threats to bank information systems may be internal in origin due to disgruntled, dishonest, or poorly trained workers or from outside through hackers or defalcators using sophisticated and available tools and tactics. In spite of this, few banks have had serious breaches in their security system, but a major breach could cause the consumer or market to loose confidence in the bank's ability to manage Internet-based transactions. Poor security may also result in risks to reputation or legal liabilities. This may be viewed as banks providing less protection for customer's personal data. These securities related risks could be worse if processes to authenticate customers online are not strict enough. These are risks that will increase as financial institutions search for new and more convenient methods of using technology to open Internet banking accounts online. It is important for the banks to concentrate on methods to reduce fraud and security vulnerabilities.

One of the results of Internet banking is that it has made banks increasingly reliant on third party service providers. The uses of these providers result in significant economic advantages. Banks are able to separate banking and payment services. This helps many small and medium size banks that would find it impossible to independently provide many bank technology "inputs" like the creation of an Internet banking Web site. Even larger banks often rely on third parties to provide products and services outside their core competencies. At the same time, the banks' reliance on outsourcing leaves them more dependent for the safety and soundness of individual banks, and the banking system, on third party service providers, many of whom are not part of a regulated industry. This compels policy makers to meet the challenge of access and oversight through non-bank technology companies on one side, and being able to meet the excessive expansion of bank regulations while supervising such firms on the other side.

There is also a new broad policy under consideration and that is in balancing establishing of rules vs. allowing financial institutions to develop their own non-regulatory approaches to manage new risks. There have been rapid changes in technology and those make it difficult to design hard and fast regulatory rules and supervisory policies. Regulation efforts may result in obsolete policies. It is also possible that in certain cases, seemingly well-designed regulatory and supervisory policies could end up retarding or distorting market development. This makes it clear that certain risks are involved in Internet banking and it is extremely difficult to control the banks' operation in the Internet.

Security worries have also stopped many banking customers from taking to internet banking but, online banking is very safe. There have been various scares which were greatly embarrassing for the banks, yet not a single customer has lost a penny because of the flaws. This experience tells us that it is quite likely that no one ever will lose money. Even if customers were to be the victims of online fraud, the bank would no doubt try their best to reimburse them. The same thing happens with credit cards, where fraud is a reality and the frauds are increasing.

Thus even if frauds do take place, it is not likely to hurt customers. Even the latest positions, as of July 2005 show that Internet banking is quite safe. It is clear that banks are trying to remove their customer's apprehensions regarding online banking and continuously reminding them that the service exists. Websites of all the significant banks and that includes Bank of America and Citibank, invite customers to have their accounts registered online. For the guidance of prospective customers, they provide screens that lay out the security characteristics of their sites. According to Michael L. Jackson, associate director in the division of supervision and consumer protection in the Federal Deposit Insurance Corp., online banking is usually safe. He has recommended that potential customers search for a secure Internet page, and that is indicated by a padlock which is located at the bottom, which is towards the right hand corner of the computer screen.

In addition, the customer should install an up-to-date virus protection program; and refuse to reply to suspicious e-mails that on the first glance seem to be from the financial institution without calling the institution to confirm that the message has been sent by them. The FDIC warns consumers to search for "phishing" schemes, and these are fake e-mails sent by identity thieves. The mail is intended to be like solicitations from a bank or that of a government agency that requests personal or financial information like the consumer's Social Security number. The e-mails generally send the consumer to a fraudulent Website so that their identity can be stolen. At the same time, a recent study commissioned by the Better Business Bureau and conducted by Javelin Strategy & Research this year; found that fears of identity theft are more worries than fact. Family members, friends, and neighbors constitute half of all identity thieves.

Identity theft happens more from lost wallets, checkbooks, and stolen mail than hackers and spy ware. Identity theft is even now considered to be an off-line crime, according to Jordana Beebe who is a communications director for the Privacy Rights Clearinghouse which is a nonprofit consumer advocacy group based in San Diego. It could be said that online banking is considered to be bit safer as there is not a paper trail. Majority of the identity theft is caused due to stolen mail, and online banking enables to lessen the possibility that one's personal information relating to finances can be taken away in that manner. Online bankers also would tend more frequently to check their accounts, so that any unauthorized action could be caught earlier. There are thefts even from ordinary accounts and those are being checked by the customers only when their monthly statements finally arrive.

Now let us look at some facts which have been reflected in the states and as an example, the report for the period ending June 2004 for Texas has been taken. This report clearly states that "Corporate customers of Bank of America Corp's Global Treasury Services unit can now accept payments online or over the phone with a single system." This method of remote payments online has been tested by them on a pilot level for several months and is now being used by some 70 companies. The payments can be made recurring, or at one time through a credit card or through an automated clearing house. Even when customers are making a purchase on the phone, they can be connected to the banks which have voice response systems. The results of this are also obvious and The Federal Reserve System announced that it is closing nine check-processing facilities and as a result removing from service 6% of the centers staffs through 2005 and 2006.

This is happening due to the growth in electronic payments which is reducing numbers of checks. As a result the System will cut down 260 jobs at the centers. At the end of 2004, there will be 32 check-processing operations, and this is down from 45 two years ago. Sometime in 2006, there will 23 check processing operations. In 2003, Reserve Banks volume of checks had reduced by 7%. Since then, the rate of decline has only increased. On the other hand, banks in Texas and at least 3 neighborhood states are reporting an increase of thefts in which customers make deposits into fake boxes which are placed over night deposit boxes. Thieves have used the fake boxes in order to steal cash and the checks that customers were depositing into the banks' boxes. Thus it is clear that there have not been complaints against Internet banking and that has only become popular.

Conclusion

The main point that has to be understood is that e-banking is not a different form of banking, but only a method of extending banking services to customers in line with new technology that has become common usage among customers of today. The rules for e-banking are not any different from the rules of banking in branches. Even earlier selling through credit cards was different from collecting payment in cash before providing service or gods. In a way the changes are like the changes in behavior of men regarding money which took place when coins and notes were replaced by paper money and checks. It is not new. The effects of e-banking are slowly beginning to affect the services that are being provided by men now and individuals will soon be replaced by computers. This is only a technical change. The apparent feelings among customers about safety of Internet banking are also not really valid and are not borne out by experiences. Even if any untoward incidents do take place, it is likely that the loss will be borne by banks and not customers. When behaviors of society change, the changes will affect all parts of the society. Yet, no change is welcomed by all parts of the society.