BANKING LAW PROJECT

E-Banking: Features and Study of Legal

Environment

In partial fulfillment of BALLB five years course

Submitted by: Submitted to:

Ayushi Tyagi Ms. Upagya Sharma

Roll no: 1820 (Asst. Prof. of Banking Law)
 ACKNOWLEDGEMENT
Though my name appears on this project but the real credit for the project goes to my Banking
Law professor, Ms. Upagya Sharma, who has provided me with this opportunity to work on
this project.

It is an immense pleasure to have to work on this project and I would like to show my
gratitude towards all those who helped me to complete this project.

I am very grateful to Almighty God, my friends, my family and my classmates.

[2]
 INDEX

S. No. Topic Page

Number

1. Introduction 4

2. Current Scenario of Internet Banking/ E-Banking in India 5

3. Need and Benefits of E-banking 5

4. Initiatives Taken by Government for Developing Banking System in 8

India

5. Challenges in E-banking 9

6. Bibliography 13

[3]
 INTRODUCTION
Electronic banking is defined as “Delivery of bank’s services to a customer at his office or home by
using Electronic technology can be termed as Electronic Banking.” Finland was the first country in
the world who took a lead in E-banking. In India, ICICI bank was the first bank that initiated E-
banking as early as 1997 under the brand name “Infinity”. Online Banking or E-based banking is
also known as Cyber banking, home banking, and virtual banking and includes various banking
activities that can be conducted from anywhere.

E-banking allows customers to do financial transactions on a secured website operated by the

institution, which can be a retail bank, virtual bank, credit union, building society, it also includes
RTGS, NEFT, ECS, Credit cards and debit cards, Cheque truncation, ATM, Tele banking, Internet
banking and Mobile banking. According to Daniel electronic banking can be simply defined as the
delivery of bank's information and services by banks to customers via different delivery platforms
that can be used with different terminal devices such as a personal computer and a mobile phone
with browser or desktop software, telephone or digital television.

4
 CURRENT SCENARIO OF INTERNET BANKING / E-BANKING
IN INDIA
In entire Indian banking system, Electronic Banking has emerged as an important part. The concept
of e-banking is to some extent latest origin in India. Traditional model of banking i.e., branch-
based banking was widespread till 1990s, and after that non-branch banking services began. IT Act,
2000, was created by government of India with effect from the 17th October 2000. A Committee
was laid down to study various aspects of Internet banking. The committee had paid enough
consideration on three most important areas of Internet banking, Security issues, legal issues and
regulatory issues. Recommendations and guiding principles of Working committee was
acknowledged by Reserve Bank of India and accordingly plans were issued to banks to employ
internet banking in India.

NEED AND BENEFITS OF E-BANKING

Banking has witnessed many innovations in last 3 decade and one of the majors among it is e-
banking which was result of information and technological revolution. These IT revolutions
changed the entire working of banking sector as e- banking gave birth to new type of financial
services which was created by the intersection of tradition retail financial services with the internet.
E-banking provides provision of performing basic banking services or transaction through web.

These services include:

 Checking and savings accounts

 Consumer loans and mortgage financing

 Credit and debit cards

 Private banking services

Introduction of e- banking made banking very convenient and time saving. Main focus of e-
banking is to provide a customer with convenient and secure methods of doing online financial
transactions like automatic deposits, automatic bill payments from their bank account, getting
online loan and many more. The process used in e- banking is very simple and transparent as in this
customer’s contact their bank and then they input their user id and password at their bank’s Web
site to get full access to their account. They just need to have a secure Web browser. This way of
banking online requires the use of Internet browsers that support 128-bit encryption, which protects
consumers by scrambling all the personal information transmitted between a consumer’s computer
and the bank. This ultimately leads towards improved customer satisfaction.

Following is the list various innovation that took place in E-Banking:

1. Automated Teller Machines (ATM): ATM is known as an automated teller machine or

automatic teller machine. In simple sense it is an electronic computerized telecommunications
device that allows customers to complete financial transaction like cash withdrawals or cash
deposit by using their ATM cards and report of the account's balance can also be received that too
without the aid of any bank branch representative or teller. In simple words, it is simple to use self-
service solution.

2.Tele Banking: Telephone banking is second type of e- banking innovation as this service
facilitates the bank’s customer to perform a range of financial transactions over the telephone,
without visiting any bank branch or automated teller machine. Moreover, the timing of Telephone
banking is much longer than branch timing, and even some of the financial institutions offer 24-
hour service for their customers. The various types of financial transactions which customers may
transact through their telephone banking are:

 obtaining account balances

 list of latest transactions

 Electronic bill payments

 Funds transfers between a customer’s or even in another's accounts.

One of the major benefits of telephone banking is that it has minimised the transactions handling
cost by reducing the need for customers to visit a bank branch for non-cash withdrawal and deposit
transactions.

3. Smart Card: A smart card is also known chip card, or integrated circuit card (ICC) it is a
pocket-sized plastic card that has embedded in form of computer chip. The microprocessor is under
a contact pad on one side of the card. Think of the microprocessor as replacing the usual magnetic
stripe present on a credit card or debit card. The microprocessor on the smart card is there for
security. The host computer and card reader actually "talk" to the microprocessor. The
microprocessor enforces access to the data on the card. The chips in these cards are capable of
many kinds of transactions like cash withdrawal, deposit and balance inquire etc.

4. Debit Card: Debit cards are also known as a bank card or check cards. Debit cards look like
credit cards or ATM (automated teller machine) cards it is a plastic payment card that can be used
instead of cash when making purchases but operate like cash or a personal check. But still Debit
cards are different from credit cards as credit card is a way to "pay later," but debit card is a way to
"pay now." When any customer uses a debit card his/her money is quickly deducted from their
account. In simple words by use of debit card the money comes directly from the user's bank
account when a transaction is being performed.

5. E-Cheque: An e-Cheque is one of latest innovation done in field of e-banking; it is a new

payment method that facilitates those customers who do not possess credit or debit card as a back-
up payment method. In e- cheque method payment is made directly from customer's’ bank account.
A customer can only send an e-Cheque if their bank account is the only payment method attached
to your bank account. But if customer has a back-up payment method you will not be able to send
e-Cheques.

6. Direct Deposit: Direct deposit or direct credit refers to deposit of money by a payer directly into
a payee's bank account. Direct deposits are most use in the payment of salaries and wages and other
type bill payment directly in other’s accounts. Direct deposits are most commonly made by means
of electronic funds transfers effected using online, mobile, and telephone banking systems but can
also be affected by the physical deposit of money into the payee's bank account.

7. Electronic Bill Payment: Electronic bill is a type of e- banking innovation that allowing a
customer of a financial institution or bank to transfer money through financial transaction or credit
card account to the creditor or vendor such as a public utility, department store or an individual to
be credited against a specific account. These payments are done electronically in the form of direct
deposit through a national payment system, operated by the banks or in conjunction with the
government.

8. Electronic Check Conversion: Electronic check conversion is a process in which check is used
as a source of information, information like check number, account number, and the number that
identifies your financial institution. The information is then used to make a one-time electronic
payment from customer account--an electronic fund transfer.
9. Cash Value Stored: A stored-value card means refer to payments card which have a monetary
value stored on the card itself, not in an external account maintained by a financial institution.
Stored-value cards differ from debit cards as in credit cards the credit limit is set by the issuer but it
is not in cash value stored as in this money is on deposit with the issuer. Another difference
between stored-value cards and debit and credit cards is that debit and credit cards are usually
issued in the name of individual account holders but stored-value cards may be anonymous, as in
the case of gift cards. Stored-value cards are prepaid money cards and may be disposed when the
value is used, or the card value may be topped up.

INITIATIVES TAKEN BY THE GOVERNMENT OF INDIA FOR

DEVELOPING THE INTERNET BANKING
With the objective of promotion and encouragement of the applications of E-Banking, various
initiatives have been taken by RBI and Indian Government:

1. IT Act, 2000 was conceded by GOI w.e.f. October 17, 2000 which paid attention to give legal
recognition to electronic transactions and supplementary means of electronic commerce.

2. Constant analysis of E-Banking legal requirements by RBI, so as to further make certain that
financial solidity of Nation may not be influenced by E-Banking Challenges.

3. Vision Document 2011-171, was framed by Dr. K.C. Chakrabarty Committee including
members from IIM, IDRBT, IIT and Reserve, which presents an analytical road map i.e.,
strategy to enhance the relevance of IT in the banking sector.

4. Endeavours by RBI to make payment systems more safe and sound. Banks has been therefore
advised to make its safety feature stronger in e-banking. It was being admitted by RBI that
applying alternate channels of payments like Mobile Banking, ATMs involves an extra
responsibility of Banks to guarantee safe & secure transactions2.

5. RBI allowed National Payments Corporation of India (NPCI) to elevate the number of mobile
banking services and increase the IMPS (Immediate Payment Service) channels like ATMs,
internet, mobile etc. Besides this, efforts are being made by NPCI to take more mobile network

1
IT Vision of Reserve Bank of India 2011-2017
2
RBI Annual Report (2013)
 operators with the intention that mobile banking services can be made accessible through a
common platform.3

6. The Basel Committee on Banking Supervision’s (2001) has enlightened risk management
principles for electronic banking. They primarily spotlight the extension and tailoring the
existing risk-management plan to the electronic banking structure.

CHALLENGES IN INTERNET BANKING

The challenges associated to e-banking exist in Indian scenario are discussed below:

1. Security Risk:

Large proportion of customers resists adopting e-banking facilities considering safety and security
concerns. According to the IAMAI Report4, 43% of internet users are still not accepting the use of
internet banking in India because of security risks. Therefore, it is a primary challenge for banks to
convince the consumers on this aspect, which may further lift up the online banking usage.

2. Privacy/ Confidentiality risk:

Risk of revelation of not to be disclosed or confidential information & alarm of identity theft is one
of the major reasons that restrain the consumers while opting for electronic banking services. This
is being believed by large no. of consumers, that by adopting internet banking services, their
identity would be at threat. According to the research 5, consumers’ fret related to their privacy in
the way that bank may march into their confidentiality by using their information for marketing and
other consequential purposes without agreement of consumers.

3. The Trust Issue:

Trust is the major obstacle to electronic banking for most of the customers. Traditional banking is
often used by customers because of lack of conviction in the online bank transactions. They have a
mindset that there is a risk in online banking transaction leading to different frauds and scams.
While using online banking services by the consumers, there always remains a doubt or question in
their minds regarding the successful completion of that transaction till the time a confirmation
message is received.

3
Ibid.
4
2006
5
Andrews S and Shen A., 2000
4. Customer Understanding:

Knowledge or understanding regarding e-banking among consumers about is still at junior side in
Indian context. Banks are not able to advertise entire information about the use, benefits and
facility of online banking. Therefore, one of the most ranked hurdles in the expansion of electronic
banking is the less alertness of new technologies among customers.

5. Less Internet diffusion in India:

The online banking channel has altered over the years. E-Banking use in India has raised from 1%
in 2006 to 7% in 2011 while in North America in the year 2011, 60 percent of the times essential
transactions in banks were executed through online channels 6. So, it can be declared that
understanding and availability of internet is still a one of the critical confronts that exists in Indian
context. According to the report of IAMAI 2006, about 22% of internet users are not aware about
how to transfer funds online. Thus, the penetration of internet customer and knowledge related to
internet are the major challenges.

6. Poor Infrastructure:

Internet Banking needs consistent support of efficient infrastructure for effective implementation
and expanded geographical reach. E-Banking has been restrained to expand itself to semi urban and
rural areas due to poor Infrastructural facilities in terms of indecent set up, electric connection, poor
satellite, internet and broadband connectivity.

7. Operating Conditions:

India is a country of multiple cultures and multiple languages 7, but this makes operating
methodology for online banking a bit difficult as displaying Instructions or Guidelines in Different
languages is a cumbersome task. However, technology has found out a solution to this, but,
Illiterate people are still not covered under this solution and also ATMs can’t guarantee identical
operating levels from all people resulting in high wear & tear.

6
Infosys Report, 2012
7
National Conference Proceedings, 2014
8. Technological Illiteracy:

In case of Mobile Banking, the technical rules and regulations are not understandable by many of
the mobile users in lower class and resultantly, they find them difficult to operate. Consumers
generally purchase Handsets in consideration to their budget and those Handsets sometimes offer
the features which are unsupportive as far as Mobile Banking is concerned and this becomes a
limitation in the execution of e-banking.

9. Training the Employees:

Training imparted to bank employees is an easier task in case of private sector banks, as they have
young dynamic computer literate employees, while in case of public sector banks, training the
employees is a complex task as present staff is comparatively lesser computer literate. In spite of
this fact, they have been able to do influentially well after functioning on it for over a decade now.

10. Customer Education:

E-banking facilities were being made accessible to customers from early days in case of private
banks. However, in case of old public sector banks, it is quite difficult to persuade their customers
regarding the utility of this program. Imparting Education among customers formally with respect
to e-banking is a difficult task. Considering this, banks opted for providing monetary inducements
like a Free Debit card, Free Net Banking facilities, providing constant and timely information to
customers regarding Monthly Statement of their accounts on E- Mail, etc., to switch customers to
these rising services of banking.

11. Restricted Business:

Another challenge for e-banking is that all the banking transactions cannot be executed online or
through other electronic mediums; for few services like deposits and withdrawals, one has to
approach Banks physically. Although, it has been observed that some of the banks have automated
their method and their customers (front end) but still numerous follow traditional process (back
end). This in a way confines the customers due to limited awareness and technical hurdles.
12. Cost of Technology:

Initial Cost of investment is high in terms of cost of personal computers and other equipment
required to perform the electronic Banking transactions. The cost of maintenance of all these
devices like modems, routers, entire IT set up is also large.

BIBLIOGRAPHY
I have taken help of the following sources of information to research on the topic:
1. IT Vision of Reserve Bank of India 2011-2017
2. RBI Annual Report (2013)
3. IAMAI Report, 2006
4. Infosys Report, 2012
5. National Conference Proceedings, 2014
6. https://www.ijert.org/research/electronic-banking-in-india-innovations-challenges-and-
opportunities
7. https://www.researchgate.net/publication/325120601_E-
Banking_Security_risks_previsions_and_recommendations/link/5af9783caca2720af9ef279c/down
load
8. “Risks in E-banking and Their management” by Professor Virendra Singh Solanki
9. “E-BANKING IN INDIA AND ITS PRESENT SCENARIO AND FUTURE PROSPECTS” by
Basavarajappa M.T.