E-Banking on the Banking Industry

¶ … 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

General benefits of banks from e-business and other communication

It is not that individuals do not realize the benefits of dealing through Internet. As per the 2001 Survey of Consumer Finances, around nine out of ten households in United States have a bank account, but full utilization is not being made of the benefits. Within that groups, over 90% of the households have a feature to use electronic fund transfer. This can be in the form of direct deposits, ATM or debit cards or computer banking that are connected to that banking account. Direct deposit is the most popular and two thirds of all employees in United States have their payments deposited into their bank accounts as also the social security benefits in four fifths of the cases. Part of the reason for this is the keen interest that was shown by the United States Department of Treasury in 1999 to have federal payments made electronically.

This led to developments that permitted Electronic Transfer Accounts and that is a consumer bank account that permits federal benefit recipients to collect their money through ATMs and at point-of-sale terminals. This type of accounts has become quite useful and more than 74,000 such accounts were opened by October 2003. ATM Cards were introduced much earlier, in the 1960s to enable customers to draw cash easily from their bank accounts. The numbers have grown and in 2003, there were 902 million ATM transactions being processed every month, and this is an increase over 2002. Now, the advances are enabling customers not to use their ATM cards only at their banks, but at other banks and even abroad. ATM cards are no longer contained only at the bank premises, as more than 64% of the teller machines are located off-site.

Another variety of similar cards are Debit cards and these can also be used at ATMs wherever they may be. The growth of Debit card transactions between 1995 and 2002 has been by 42%. The scheme is becoming popular now and the growth in 2003 over 2002 was 21%. Another system is called preauthorized debits and through this the customers paid automatically from their accounts on specific dates. These are generally repayments for which the clients have taken up liabilities to repay. The funds are automatically transferred from the client's account to the creditor. This action is however a standard action by the customer and does not require any authorization from the customer.

For the provision of better banking services, more attention has to be paid to customer. This was not happening. There were many bank mergers, many of which combined two banks from various geographic markets and this reduced the total amount of banks by about one-third during the 1990s. Yet, though there are fewer banks, the U.S. now has more banking points of sale than it had ten years ago. The number of branch locations that are in service has enhanced from about 60,000 ten years ago to about 70,000, now. Apart from this, the number of ATMs has also increased significantly. All banking organizations now have a wider geographic reach, and cover the markets serviced by them with a wider network of branches and ATMs. In recent times, banks have supported their distribution networks with that of the transactional websites or Internet contact points. These allow customers to open accounts, apply for loans, check the balances, transfer funds, and make and receive payments over the Internet. The number of banks which have transactional websites is expanding greatly, from zero which was just a few years ago, to around 2,000 plus by the end of the year 2001.

The Internet is also improving traditional bank distribution channels. This has also been done in the service of the ABMs. Among the recently increased ATMs there was the introduction of automated banking machines -- ABMs. These were often deployed at banking kiosks. The ABMs combined at a single location an ATM for taking cash and depositing checks, an Internet link to the bank's website for other services, and also a telephone for getting access to customer service. Even the increase in bank branches over the past decade included the introduction of mini-branches. In these places Internet kiosks are placed along with the teller windows.

Ultimately, so far as the customer is concerned, it is essential to interact with the bank. The places where they interact were earlier only branches and now the same process also takes place in the Internet.

It is not only USA where the system is becoming popular, but the same situation exists even in small states like Singapore. During the period from March to May 2001, banking sites with e-commerce facilities has seen a gradual enhancement from 25.4% to 28.1% across March and May 2001, respectively in terms of reach. In May 2001, the number of people visiting e-banking sites was a total of 235,860. This shows clearly that compared to December 2000, visitors to bank sites have risen by 36%. This is thus one of the fastest growing sectors in Internet.

There are many online banks coming up, but they are not being able to make profits. Last year was a very bad year in terms of profits for online banks in UK. Barclays Bank has 1.25 million internet customers and they got a studded shock when a security failure allowed customers to spy on the intimate financial details of fellow customers. But, Barclays is not the only bank which is in trouble. Abbey National has a net banking operation, called Cahoot and the peculiar name was given as it is not customary for web banks, like cars or pedigree dogs, to be given sensible names. This bank crashed soon after its launch. Intelligent Finance -- IF was the Halifax's long-awaited dedicated online bank and it felt that its chances have improved since Cahoot failed. Then this bank was forced to abandon its own launch, due to technical difficulties. Cynics who are resident in that area now translate its acronym as Intermittent Fault. Even Egg, the oldest online banks in the area, has reported larger-than-expected losses.

So the question comes whether online banking has a future? The answer is that most customers should set up an Internet account. And individuals who do not have an account should open an account immediately as the banks will ensure that it is in their customer's financial interest to have an account. While most bricks-and-mortar bank customers give interest of only 0.1 per cent on their current account, an online account with Nationwide or Abbey National, the returns are 70 times greater, and are at 7 per cent. Even other internet banks are paying interests of the same order. Compare this to the interest charged on credit cards of almost 20 per cent by brick and mortar banks. When the existing balance is transferred to Egg, the rate will be cut to just 2.5 per cent for the first six months.

The reason for the difference is that the banks want customers to move over to the web, and are willing to provide a generous profit to them to feel encouraged. It is becoming increasingly apparent; the big banks are not too keen to have more branches. They have in fact axed 4,000 branches in the past ten years in England. Branches are costly, what with the rent and overheads, even without considering costs of staff to run them. Such moves are not popular, especially if the removal of the branch makes communities loose their last remaining bank. This is a new era of transparency and account portability and that just means that banks of every type will have to work ever harder to keep their customers happy. Thus it can be seen that in many cases, it is not the bank that makes an extra profit from Internet banking, but the banks are interested in developing Internet banking.

The progress of Internet banking has also been made possible by alliances and one such alliance was between nFront, Inc. which is a prominent outsource provider of Internet banking services, and CheckFree. They entered into an agreement to enable electronic bills to be presented to an increasing amount of Internet banking users. Of the two companies, CheckFree is a pioneer in electronic billing and payment -- EBP and had launched the country's first fully integrated market-proven EBP payment solution in the year 1997. They have more than half of the country's top 100 billing organizations as their clients. And further CheckFree has remained the prominent provider of the technology. The other organization, nFront provides its customers of banks the enabling technology and market support for complete Internet banking services. nFront has enabled its bank customers to present electronic bills prepared by billing organizations from CheckFree and those clients include leading telephone companies, utilities, mortgage companies and cable operators and even bills to Internet banking users!

There are also organizations like Magnet Communications, Inc. Their developments are being supported by the Internet Business Banking Authority which offers web-based cash management, business banking, and e-commerce services to financial institutions. They ensured that Atlanta-based SunTrust Banks, Inc. will have to implement Magnet's Internet Banking Suite for commercial cash management operations so that its customer services to its commercial clients are improved. SunTrust is the country's 9th largest commercial banking organization. Thus it is clear that most organizations are interested in the development on Internet banking.

One of the advantages of the introduction of the Internet banking channel parallels with the introduction of ATMs several years back. ATMs did not introduce any new element of financial service, but they gave customers more easy accessibility to some of the then existing financial services. These services included mainly the safekeeping of deposits, liquidity services, and information on that of the account balances. In short, an ATM served some of the functions of the bank branch for the customers. Like ATMs, Internet banking also provides the convenience of accessing an even increased array of prevailing banking services to the customers. The range of services have increased due to developments like credit scoring technology, check imaging, and check truncation that have come up now. Apart from this, some of the financial services that banks offer over the Internet are new.

Some banks use the Internet to provide account aggregation to customers, and this organizes in one place the entire data from a customer's multiple links with banks, insurance companies, and brokerage firms. This is due to the other modern technology that is used in Internet banking - the computer. The real life situation has also changed as prior to financial deregulation, customers to have relations with less financial institutions, and that made account aggregation less important for customers. The process involves the logistics of collecting data and mailing it to customers, and without the facility of the Internet this becomes a very expensive service.

Another example of effective use of the Internet is in the business-to-business marketplace. In that service, banks use the Internet to bring around prospective buyers and sellers of standardized business inputs like chemicals or paper products or food items. Even when these markets are constructed efficiently, buyers and sellers benefit from better prices and more timely delivery, and banks can benefit by providing financing for the deals that result from the service. Thus it can be seen that in a way an Internet service provides extra number of branches to banks at lower costs, provides services to customers that the customer was not getting earlier and in the end earning money for the bank as the money stays within the bank and can thus be used by the bank for earning more money.

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.