Digital Banking Opportunities and Challenges in India

Introduction
Information Technology has become a necessary tool in today’s
organizations. Banks today operate in a highly globalized, liberalized,
privatized and a competitive environment. IT has introduced new
business paradigm. It is increasingly playing a significant role in
improving the services in the banking industry. Indian banking industry
has witnessed a tremendous developments due to sweeping changes that
are taking place in the information technology. Internet Banking refers
to a system allowing individual customers to perform banking activities
at off-bank sites such as home, office and other locations via internet
based secured networks. Internet or online banking through traditional
banks enable customers to perform all routine transactions, such as
account transfers, balance inquiries, bill payments and stop-payment
requests, and some even offer online loan and credit card applications.
Internet banking is a web-based service that enables the banks
authorized customers to access their account information. It permits the
customers to log on to the banks website with the help of bank’s issued
identification and personal identification number (PIN). The banking
system verifies the user and provides access to the requested services,
the range of products and service offered by each bank on the internet
differs widely in their content. The banking industry can kill two birds
with one stone that is with help of technology. Tremendous progress
took place in the field of technology which has reduced the world to a
global village and it has brought remarkable changes in the banking
industry.
1
“Life of an economy is banking” The banks have become an essential
component of most of the economies as banking services are described
as “Engines for economic growth” or act as a “conduits towards
promoting economic growth”. New business paradigm has been
introduced by IT. A revolution of IT i.e. “The birth of internet based
economy” help the banking sector to achieve its objectives. Information
about its products and services like accessing account, transferring funds
and buying financial products or services online available on the web
page of the bank. The product and services in the banking industry due
to rapid development of technology internet play a very crucial role in
banking industry. By such an IT revolution in the past 2-3decades
technologies have changed the way of banks dealing with their bank
customers. Online banking calculates the interest of loans and credit
card within the fraction of second at any time at any place. The future of
web based e-banking in development areas appears bright but customers
and merchants in developing countries face in numbers of barrier to
successful e-banking, less reliable telecommunication infrastructure and
power supplies, less access to online mechanism and relatively high cost
for personal computer and internet access. Nowadays, the concept of e-
banking is not a current concept but most of the citizens of our country
doesn’t use e-banking.
E-BANKING (meaning)
E-banking is the term that signifies and encompasses the entire sphere of
technology initiatives that have taken place in the banking industry. E-
banking is a generic term making use of electronic channels through
telephone, mobile phones, internet etc. for delivery of banking services
and products. The concept and scope of e-banking is still in the
transitional stage. E-banking has broken the barriers of branch banking.
2
 Online banking, also known as internet banking, is an electronic
payment system that enables customers of a bank or other financial
institution to conduct a range of financial transactions through the
financial institution's website. The online banking system will typically
connect to or be part of the core banking system operated by a bank and
is in contrast to branch banking which was the traditional way customers
accessed banking services.
Internet banking software provides personal and corporate banking
services offering features such as viewing account balances, obtaining
statements, checking recent transaction and making payments.

History of digital banking

1981: New York City Banks Test At-Home Banking

The early version of what was considered online banking began in 1981.
New York City was the first place in the U.S. to test out the innovative
way of doing business by providing remote services as four of its major
banks — Citibank, Chase Manhattan, Chemical Bank and Manufacturers
Hanover — made home-banking access available to their customers.

1983: Bank of Scotland Institutes First UK Internet

Banking Services
The Bank of Scotland offered customers the first UK internet banking
service called Homelink. People had to connect to the internet through
their TVs and telephones to pay bills and transfer money. What is now
known as online banking was formed during this time.

1994: Stanford Federal Credit Union Offers U.S. Internet

Banking

3
In October 1994, Stanford Federal Credit Union became the first
financial institution in the U.S. to offer internet banking to all of its
customers. A year later, Presidential Bank became the first bank in the
country to offer customers access to their accounts online. The
advantages of internet banking systems began to catch on as many other
banks soon followed Presidential Bank’s lead.

1996: NetBank Is Founded

The evolution of internet banking continued with one of the first truly
successful internet-only banks, NetBank — which was founded in 1996
and closed in 2007.

1999: Bank of Internet USA Is Founded

Bank of Internet USA was officially founded as part of the incorporation
of BofI Holding Inc. on July 6, 1999, making it America’s oldest
internet bank; it opened for business on July 4, 2000. The conveniences
and perks of internet banking became obvious to many
customers: higher interest rates online than with traditional banks,
greater access to accounts, and online banking transfers, to name a few.

2001: Bank of America Has 3 Million Online Customers

In 2001, Bank of America made history as the first financial institution
to gain more than 3 million online banking customers, about 20 percent
of its customer base at the time. More people were starting to realize the
advantages of online banking.

2006: 80% of US Banks Offer Internet Banking

As the evolution of online banking continued, it slowly gained
popularity in e-commerce. When big-name banks began to offer online
products and services, e-banking seemed to gain legitimacy for
consumers.
4
By 2006, online banking had become mainstream: An overwhelming 80
percent of banks in the U.S. were offering internet banking services.

2009: Ally Bank Is Launched

In 2009, Ally transformed GMAC Bank into what we know today
as Ally Bank, joining the ranks of internet-only banks. In recent years, it
has repeatedly been named the top online bank in GOBankingRates’
annual Best Banks rankings.

2010: Online Banking Is Growing Faster Than the Internet

In a 2010 survey on consumer billing and payment trends, Fiserv, a
financial services technology company, found that online and mobile
banking were growing at a faster pace than the internet. Online banking
has continued to evolve as more innovations and conveniences have
been offered.
Bank of Internet USA has introduced a number of new and
technologically advanced products and services since its inception,
including mobile internet banking apps for the most popular mobile
devices, mobile check deposit, Popmoney for money transfer via text or
email and EMV-chip debit cards.

2018: Online Banking Is Standard Practice

Online banking has become so widespread today that customers expect
accounts to include free online banking, and many banks only operate on
the internet, effectively decreasing overhead costs to offer more
competitive rates on savings accounts and enjoy higher profit margins.

5
CHALLENGES IN E-BANKING
Security Risk:
The problem related to the security has become one of the major
concerns for banks. A large group of customers refuses to opt for e-
banking facilities due to uncertainty and security concerns. According to
the IAMAI Report (2006), 43% of internet users are not using internet
banking in India because of security concerns. So it’s a big challenge for
marketers and makes consumers satisfied regarding their security
concerns, which may further increase the online banking use.
The Trust Factor:
Trust is the biggest hurdle to online banking for most of the customers.
Conventional banking is preferred by the customers because of lack of
trust on the online security. They have a perception that online
transaction is risky due to which frauds can take place. While using e-
banking facilities lot of questions arises in the mind of customers such
as: Did transaction go through? Did I push the transfer button once or
twice? Trust is among the significant factors which influence the
customers‟ willingness to engage in a transaction with web merchants.
Customer Awareness: Awareness among consumers about the e-
banking facilities and procedures is still at lower side in Indian scenario.
Banks are not able to disseminate proper information about the use,
benefits and facility of internet banking. Less awareness of new
technologies and their benefits is among one of the most ranked barrier
in the development of e-banking.
Privacy risk:
The risk of disclosing private information & fear of identity theft is one
of the major factors that inhibit the consumers while opting for internet
banking services. Most of the consumers believe that using online
banking services make them vulnerable to identity theft. According to
the study consumers‟ worry about their privacy and feel that bank may
invade their privacy by utilizing their information for marketing and
other secondary purposes without consent of consumers.
Strengthening the public support:
In developing countries, in the past, most e-finance initiatives have been
the result of joint efforts between the private and public sectors. If the
public sector does not have the necessary resources to implement the
projects it is important that joint efforts between public and private
sectors along with the multilateral agencies like the World Bank, be
developed to enable public support for e-finance related initiatives.
Availability of Personnel services:
In present times, banks are to provide several services like social
banking with financial possibilities, selective up gradation,
computerization and innovative mechanization, better customer services,
effective managerial culture, internal supervision and control, adequate
profitability, strong organization culture etc. Therefore, banks must be
able to provide complete personnel service to the customers who come
with expectations.
Implementation of global technology:
There is a need to have an adequate level of infrastructure and human
capacity building before the developing countries can adopt global
technology for their local requirements. In developing countries, many
consumers either do not trust or do not access to the necessary
infrastructure to be able to process e-payments.
Non- Performing Assets (NPA):
Nonperforming assets are another challenge to the banking sector.
Vehicle loans and unsecured loans increases N.P.A. which terms 50% of
banks retail portfolio was also hit due to upward movement in interest
rates, restrictions on collection practices and soaring real estate prices.
So that every bank have to take care about regular repayment of loans.
Competition:
The nationalized banks and commercial banks have the competition
from foreign and new private sector banks. Competition in banking
sector brings various challenges before the banks such as product
positioning, innovative ideas and channels, new market trends, cross
selling ad at managerial and organizational part this system needs to be
manage, assets and contain risk. Banks are restricting their
administrative folio by converting manpower into machine power i.e.
banks are decreasing manual powers and getting maximum work done
through machine power. Skilled and specialized man power is to be
utilized and result oriented targeted staff will be appointed.
Handling Technology:
Developing or acquiring the right technology, deploying it optimally
and then leveraging it to the maximum extent is essential to achieve and
maintain high service and efficiency standards while remaining cost
effective and delivering sustainable return to shareholders. Early
adopters of technology acquire significant competitive advances
Managing technology is therefore, a key challenge for the Indian
banking sector.
 Internal barriers
For banking to be fully digitized, it means that both the banking system
and employees will have to undergo a cultural shift. However, it is good
to know that unlike other businesses, banks have a unique way of
departmentalization, and this greatly influences the level of technology
to be used. While some department will benefit from a digital banking
system, some departments will have to lay off some employees. Also,
employee training may be required.

To buy or build the banking system

With the demand for digital banking on the high, some banks are
desperate to take the leap and adopt digital banking. However, most
banks are not quickly adopting digital banking because they don’t know
which kind of system will work correctly. Some prefer purchasing such
systems because they want to work with a system that has been tested.
Others prefer having a system built specifically for them. Don’t forget
that both kinds of system have their pros and cons.

OPPORTUNITIES IN E-BANKING
Untapped Rural Markets:
Contributing to 70% of the total population in India is a largely untapped
market for banking sector. In all urban areas banking services entered
but only few big villages have the banks entered. So that the banks must
reach in remaining all villages because majority of Indian still living in
rural areas.
Multiple Channels: Banks can offer so many channels to access their
banking and other services such as ATM, Local branches,
Telephone/mobile banking, video banking etc. to increase the banking
business.
Competitive Advantage: The benefit of adopting e-banking provides a
competitive advantage to the banks over other players. The
implementation of e-banking is beneficial for bank in many ways as it
reduces cost to banks, improves customer relation , increases the
geographical reach of the bank , etc. The benefits of e- banking have
become opportunities for the banks to manage their banking business in
a better way.
Increasing Internet Users & Computer Literacy: To use internet
banking it is very important or initial requirement that people should
have knowledge about internet technology so that they can easily adopt
the internet banking services. The fast increasing internet users in India
can be a very big opportunity and banking industry should encash this
opportunity to attract more internet users to adopt internet banking
services
Worthy Customer Service: Worthy customer services are the best
brand ambassador for any bank for growing its business. Every
engagement with customer is an opportunity to develop a customer faith
in the bank. While increasing competition customer services has become
the backbone for judging the performance of banks.
Internet Banking: It is clear that online finance will pickup and there
will be increasing convergence in terms of product offerings banking
services, share trading, insurance, loans, based on the data warehousing
and data mining technologies. Anytime anywhere banking will become
common and will have to upscale, such up scaling could include banks
launching separate internet banking services apart from traditional
banking services.
Retail Lending: Recently banks have adopted customer segmentation
which has helped in customizing their product folios well. Thus retail
lending has become a focus area particularly in respect of financing of
consumer durables, housing, automobiles etc., Retail lending has also
helped in risks dispersal and in enhancing the earnings of banks with
better recovery rates.
Better market predictions
Digital banking is backed up with an accurate data collection
mechanism. Data is i8mportant for any organization because it can be
used to predict the market and offer better services to the customers.
Today, the data available in banks have not been utilized as they are
supposed to be mainly because of the format in which they exist makes
them harder to access.
Digital banking is promising a better banking experience for both
customers and banks. However, it is without any doubt that the future
banker is a digital banker. Today the AI for banking is already being
implemented by other banks, and the results are impressive for some. In
the future, bank ques will be history, and that should be a heads up for
any bank or financial institution wanting to dominate the market in the
future.
Fastened services
Money needs to move around fast in any business setting. That is why
having to spend hours in long ques in the bank to transfer money is a
disadvantage to both customers and financial institution. Through digital
banking, one will not even have to leave their bed to transfer cash or
complete payments.