Virtual Banking in India

The practice of banking has undergone a significant transformation in the nineties. While banks are striving to strengthen customer relationship and move towards ‘relationship banking’, customers are increasingly moving away from the confines of traditional branch-banking and are seeking the convenience of remote electronic banking services. And even within the broad spectrum of electronic banking, the aspect of banking that has gained currency is virtual banking. Increase in the functional and geographical spread of banks has necessitated the switchover from hard cash to paper based instruments and now to electronic instruments. Broadly speaking, virtual banking denotes the provision of banking and related services through extensive use of information technology without direct recourse to the bank by the customer. The origin of virtual banking in the developed countries can be traced back to the seventies with the installation of Automated Teller Machines (ATMs). It is possible to delineate the principal types of virtual banking services. These include Shared ATM networks, Electronic Funds Transfer at Point of Sale (EFTPoS), Smart Cards, Stored-Value Cards, phone banking, and more recently, internet and intranet banking. The salient features of these services are the overwhelming reliance on information technology and the absence of physical bank branches to deliver these services to the customers.

The financial benefits of virtual banking services are manifold.

  • Lower cost of handling a transaction and of operating branch network along with reduced staff costs via the virtual resource compared to the cost of handling the transaction via the branch.
  • The increased speed of response to customer requirements; enhance customer satisfaction and, ceteris paribus, can lead to higher profits via handling a larger number of customer accounts.
  • It also implies the possibility of access to a greater number of potential customers
  • Manipulation of books by unscrupulous staff, frauds relating to local clearing operations will be prevented if computerisation in banks takes place.

On the flip side of the coin, however, it needs to be recognized that such high-cost technological initiatives need to be undertaken only after the viability and feasibility of the technology and its associated applications have been thoroughly examined.

Virtual banking has made some beginning in the Indian banking system. ATMs have been installed by almost all the major banks in major metropolitan cities, the Shared Payment Network System (SPNS) has already been installed in Mumbai and the Electronic Funds Transfer (EFT) mechanism by major banks has also been initiated. The operationalisation of the Very Small Aperture Terminal (VSAT) is expected to provide a significant thrust to the development of INdian FInancial NETwork (INFINET) which will further facilitate connectivity within the financial sector.

The popularity which virtual banking services have won among customers, owing to the speed, convenience and round-the clock access they offer, is likely to increase in the future. However, several issues of concern would need to be pro-actively attended. While most of electronic banking have built-in security features such as encryption. Prescriptions of maximum monetary limits and authorizations, the system operators have to be extremely vigilant and provide clear-cut guidelines for operations. On the large issue of electronically initiated funds transfer, issues like authentication of payments instructions, the responsibility of the customer for secrecy of the security procedure would also need to be addressed.

The INFINET is a Closed User Group (CUG) Network for the exclusive use of Member Banks and Financial Institutions. It uses a blend of communication technologies such as VSATs and Terrestrial Leased Lines. Presently, the network consists of over 689 VSATs located in 127 cities of the country and utilises one full transponder on INSAT 3B. Inaugurated on June 19, 1999, various inter-bank and intra-bank applications ranging from simple messaging, MIS, EFT (Retail, RTGS), ECS, Electronic Debit, online processing and trading in Government securities, dematerialisation, centralized funds querying for Banks and FIs, Anywhere/Anytime Banking, Inter-Branch Reconciliation are being implemented using the INFINET. The INFINET will be the communication backbone for the National Payments System, which will cater mainly to inter-bank applications like RTGS, Delivery Vs Payment (DVP), Government Transactions, Automatic Clearing House (ACH) etc.

Major issues plaguing the banking industry are the lack of standardisation of operating systems, systems software and application software throughout the banking industry. In a tight competitive environment where banks are making a thrust towards technology to provide superior services to its customers, customers stand to gain the most.

With increased competition, spreads in corporate lending have decreased significantly. Banks are thus moving into the retail mode to tide over the global slowdown and boost the bottomline.

The Customer is now in an enviable position where he can demand superior services at competitive prices.

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