Academic Open Internet

Journal www.acadjournal.com Volume 20, 2007

ISSN 1311-4360
 
 
The future of Internet Banking in India
 
L. Arunachalam Dr. M.Sivasubramanian
Professor 
Reader
Department of Management
Department of Management
Studies
Studies
Sathyabama Deemed University
Annamalai University
Old Mahabalipuram Road
 Chidambaram
Tamil Nadu, India 
 Tamil Nadu, India
e-mail:
 
arunachalam63@yahoo.com
 
 
INTRODUCTION
Banks and financial institutions in India are in the process of Web-enabling their
services in order to offer Internet banking services to its customers.
It's the new generation of banking in India. Most private and MNC banks have already
setup an elaborate Internet banking infrastructure. And this exercise has provided them
numerous benefits like:
 Greater reach to customers
 Quicker time to market
 Ability to introduce new products and services quickly and successfully
 Ability to understand its customers needs
 Customers are given access to information easily across any location
 Greater customer loyalty
The Internet banking is changing the banking industry and is having the major effects
on banking relationships. Even the Morgan Stanley Dean Witter Internet research
emphasized that Web is more important for retail financial services than for many other
industries. Internet banking involves use of Internet for delivery of banking products &
services. It falls into four main categories, from Level 1 - minimum functionality sites that
offer only access to deposit account data - to Level 4 sites - highly sophisticated offerings
enabling integrated sales of additional products and access to other financial services- such as
investment and insurance. In other words a successful Internet banking solution offers
· Exceptional rates on Savings, CDs, and IRAs
· Checking with no monthly fee, free bill payment and rebates on ATM
    surcharges
· Credit cards with low rates
· Easy online applications for all accounts, including personal loans and
  mortgages
· 24 hour account access
· Quality customer service with personal attention
Internet banking is changing the banking industry and is having the major effects on
banking relationships. Banking is now no longer confined to the branches were one has to
approach the branch in person, to withdraw cash or deposit a cheque or request a Statement
of accounts.
In true Internet banking, any inquiry or transaction is processed online without any
reference to the branch (anywhere banking) at any time. Providing Internet banking is
increasingly becoming a "need to have" than a "nice to have" service.
 The net banking, thus, now is more of a norm rather than an exception in many
developed countries due to the fact that it is the cheapest way of providing banking services.
Internet banking refers to the use of the Internet as a remote delivery channel for
banking services. Such services include traditional ones, such as opening a deposit account or
transferring funds among different accounts, and new banking services, such as electronic bill
presentment and payment (allowing customers to receive and pay bills on a bank’s Web site).
Banks offer Internet banking in two main ways. An existing bank with physical offices can
establish a Web site and offer Internet banking to its customers as an addition to its
traditional delivery channels. A second alternative is to establish a “virtual,” “branchless,” or
“Internet-only” bank. The computer server that lies at the heart of a virtual bank may be
housed in an office that serves as the legal address of such a bank, or at some other location.
Virtual banks may offer their customers the ability to make deposits and withdraw funds via
ATMs or other remote delivery channels owned by other institutions.
The impact of E-transaction and authentication issues in banking
It's hardly great news that there has been tremendous growth in the use of the
Internet and other   electronic   facilities   to process financial transactions. According    to   
the    Federal Deposit Insurance Corp., transactional Web sites have more than doubled
each year for the past six years, growing from one in 1995 to nearly 2,500 in 2000.
This growth is a reflection of the fact that over the past few years, financial leaders
have been considering various ways in which to allow their customers to transact business
using the Internet. This objective is now reaching beyond the financial services industry
into non-electronic business segments, such as the building supply industry. Furthermore, this
growth is likely to continue to climb as the number of Internet users, Internet connection
speed, and the number of transactional Web sites continues to increase. The number of adults
using PC banking is also growing. With this growth, there is an increased awareness of the
benefits of using online transaction processing, thereby fueling the thought that all business
should be electronically facilitated.
Gartner predicts that worldwide business-to-business (B2B) e-commerce will total $3.6
trillion by 2003 and $8.5 trillion in 2005. Online financial activity had a slower start, but has
had steady growth, from 6 million users in 1998 to 27.5 million users in 2000. During 2000,
only 30 percent of the Internet-capable households were using some form of Internet banking,
indicating that there is tremendous room for increased use. 
The e-Commerce Value Chain
Consider that the consumer and the merchant are on either ends of the electronic
commerce value chain, with the authentication network and transaction processor (bank) in the
middle. Banks have traditionally been the trusted agents, have the largest customer base,
and have received the initial benefits from electronic commerce. Value has begun a steady
migration to the ends of the value chain. Customers can receive and pay bills from one point
using products from multiple issuers. Merchants can influence and enhance the consumer
experience by providing innovative and time-saving means of doing business. Merchants can
add value to the payment process, for example, by offering discounted prices for electronic
payment.
Merchants can also reduce their costs by receiving electronic payments, which results
in reducing and sometimes eliminating the need for data entry, as well as reducing the error
rate and the time to investigate and correct the data. By increasing and effectively managing
cash flow, merchants may also be able to reduce costs associated with lines of credit.
Trends in the Use of Electronic Transactions
Financial institutions are developing new means of processing their current
transaction base. Two traditional areas of service have been check processing and lockbox
services. These areas are also undergoing transformation to electronic processing
functionality.
Cheque Truncation
Almost every individual and business has used, and possibly still uses, checks to
initiate payment for goods or services. A trend currently in development is called check
truncation. In this payment processing method, a payment starts as a check and ends up as an
electronic payment transaction. These transaction services operate as follows:
•             At the point of sale (POS), the merchant's clerk rings the sale and swipes the
customer's check in a magnetic ink code reader (MICR).
•             The MICR information and the related transaction (sale) information are
transmitted to a site where the MICR information is converted into electronic
transaction format.
•             A request is sent to the paying bank for verification, and an approval transaction is
returned from the bank to the store POS system.
•      The customer signs the authorization document, and the clerk voids and
returns the customer’s check.
 
Lockbox Truncation
Many businesses contract with banks and other financial institutions to provide
lockbox services. These services provide a central collection point and faster processing for
payments. Lockbox truncation works as follows:
•           The billing merchant or service provider notifies the customer of the truncation
service and obtains authorization for use.
•           The customer mails the check payment to the vendor.
•           The vendor captures  the cheque and other information from the MICR line
on the   cheque               
•           Vendor truncates the check (using the service described with POS systems) and
transmits payment as an automated clearinghouse (ACH) debit transaction.
•           The entry flows through the ACH network and is posted to the customer
account.
These types of services enable the financial institutions to electronically process
traditionally generated transactions, thus speeding up payment.
Certifications
 Financial institutions may wish to provide some increased level of assurance that the
information contained on their Web sites is protected from unauthorized use or loss due to
unforeseen circumstances. An independent review of management's assertions related to
these areas may provide customers with that desired level of assurance. Many organizations
are obtaining these reviews from certified public accountants and other consulting
organizations. The resulting certification is often evidenced by a seal that is placed on the
financial institution or merchant Web site which, when accessed, indicates the assertions
made, the process followed for the certification, and qualification information about the
certification issuing firm.
e-Transaction Authentication Issues
Transaction authentication has been a topic of discussion since early in the evolution
of e-commerce. Use of digital signatures is becoming widely accepted and has attracted the
attention of legislators.
 
Digital Signatures
On October 1, 2000, the Electronic Signatures in National and Global Commerce Act
was signed. This act states that an agreement, contract, or transaction signed electronically
is enforceable in a court of law. Accordingly, financial services institutions can now legally
transact business using electronic signatures, allowing transactions such as mortgages, funds
transfers, opening and closing of accounts, benefits enrollment, and beneficiary
designations to occur in an electronic environment.
The law defines an electronic signature as "an electronic sound, symbol, or process
attached to or logically associated with a contract or other record and executed or adopted by
a person with the intent to sign the record." Fortunately, the legislation does not attempt to
define acceptable technologies except to indicate that the technologies must be mutually
acceptable to the transacting parties. Since a valid signature can be as simple as a digital
image of a signature (enabled through an electronic pen and pad) or as complex as today's
public key infrastructure (PKI) and associated encryption methods, the technology decision
maker must define relevant business objectives and understand the risks, such as cost and
unauthorized use associated with alternative implementations.
There are possible additional benefits to the implementing organization. These
include reduced transaction timelines, reduction in paper processing costs, facilitation of cus-
tomer migration to the Internet as a business channel, and increased online transaction
security.
When compared to physical signatures, e-signature technologies are, in general, a more
secure authentication method. Many financial institutions are studying the possible
implementation of a public key infrastructure (PKI) system that will allow them to exchange
electronic information securely with unknown parties.
PKI is the delivery channel for public key cryptography, a method that allows the
parties to a transaction to keep a communication private through the use of a two-part key
made up of public and private components. To encrypt messages, the published public keys
of the recipients are used. To decrypt the messages, the recipients use their unpublished
private keys, known only to them. Quite simply, if the signer's private key is not compro -
mised, which can happen by releasing the password or allowing access to the device
containing the private key, a document cannot be digitally signed
Definition of Broadband
There is no universal definition of broadband. For the purpose of monitoring the
growth of broadband uptake, as well as in the interest of consumers, each country needs to
specify minimum characteristics of a broadband connection. Normally, broadband means a
high speed, reliable, on-demand internet connectivity. Various organizations like the ITU,
OECD and international regulators specify the minimum download speed of a broadband
connection ranging from 256 Kbps to 2 Mbps or higher.
 
Most of the stakeholders, in response to the Authority’s consultation process, have
suggested that a broadband connection should be a fast enough, always on connection
capable of quick data download along with video conferencing. The Authority also
recognizes that while a definition for broadband speeds may be fixed today, it may change
over time as applications and bandwidth needs change, meaning that broadband today could
be narrowband tomorrow.
 
Goals for Broadband and Internet Penetration
 
For the widespread availability of broadband and internet access, the consultation
process solicited responses from stakeholders in respect to targets to be set for the next 5
years. Suggestions were made that at least 25% of existing copper local loops (10+ million)
should be converted to broadband connections. The ISPAI suggested an ambitious target for
internet and broadband subscribers, basing their estimate on the proliferation of access
technologies, new avenues to provide services, and significant decreases in the cost of
providing these services and of access devices. On the other hand, the incumbent operators
suggested a conservative target.
 

In this regard, the CII study’s

targets are in Table below.
CII Broadband Subscriber Targets
 

Internet and Broadband access are widely recognized as catalysts for economic and
social development of a country. Availability of broadband services at affordable price levels
will contribute to higher GDP growth rates, provide for a larger and more qualified labor
force, and make that labor pool more efficient. Additionally, by promoting establishment of
such infrastructure, social initiatives benefit because of the significantly reduced cost related
to building access to citizen services, and the cost saved in training and educating users.
While other countries, like the US, are speaking of delivering “universal, affordable access to
broadband” for all of their citizens, India needs to quickly create the environment for
stimulating explosive initial growth. Without the right interventions, the current market
offerings – dial-up connectivity. It is universally accepted that widespread broadband
adoption accelerates GDP growth...   An analysis by the Confederation of Indian Industry
National Broad band Economy Committee shows that the total present value (2004) of
benefit to the Indian economy due to growth from broadband is expected to be US$90 billion
for the years 2010 – 2020, with an 11% additional growth in labor productivity. This activity
is expected to launch new business lines and increased efficiency in existing businesses,
leading to direct employment of 1.8 million and total employment of 62 million by 2020.
These estimates are based on CII’s goals of achieving at least 10 million subscribers
by 2010 and 32 – 39 million by 2020. 3 The Authority is proposing higher goals in this
recommendation.  In India’s quest to become a leading knowledge-based society, widespread
adoption of ICT services, especially broadband will play a key role. Many countries
worldwide have had success in driving growth in this area, as discussed in the Authority’s
consultation paper. Key comparative indicators show that India still has significant scope to
grow. Please refer to Table below.
Parameters Korea Malaysia China India
No. of PCs per 100 78.6 15 2.8 0.8
No. of cable TVs per 100 persons 43 0 9 6

No. of fixed telephone/100 persons 51 18.5 18.0 3.9

 
No. of mobile phones Access & 75 43.9 18.3 2.6
Infrastructure per 100 persons

GDP (US$ Per capita) 10,000 4,000 965 465

No. of internet connections per 100 26 12 2.5 0.4
Persons
no. of users per 100 persons 65.5 34 6.2 1

No. of broadband /100 persons 255 0.4 1.4 0.02

 
Charges for broadband 30 29 16 20
per month (US$)
Charges per 100 kbps Broadband per 0.25 7.61 3.07 15.63
month (US$)
Import duty on the Local ---- Local 38 %
 
 
South Korea (henceforth Korea) continues to present a shining example of the results
possible when the appropriate steps are taken to create an environment for growth, and the
government and corporate sector work in partnership to deliver that growth. As recently as
1996, Korea had internet subscriber penetration under 2%, and broadband reached close to
1% penetration only in 1999. In the five years since, though, broadband has become a way of
life for Koreans, and permeates everything they do. Today, almost 1.8.This success can also
be replicated in India. The CII has estimated that investments of at least US$2.6 billion by
2010 and US$5.35 billion by 2020 will be needed to achieve the goals they have set for
broadband services. 8 This includes investment in urban networks, domestic and international
backhaul, content delivery mechanisms, content and application development, and rural
build-out. The content and applications would include a full gamut of services including
education, health, governance, local language web content, and new broadband-based
entertainment like games and videos. At today’s levels, though, Indians are expected to pay
60 times more than subscribers in Korea for the same throughput, which translates to 1,200
times more when considering affordability measures based on GDP per capita comparison.
For this magnitude of investment to occur, the appropriate regulatory environment and
policies need to be established so that the discrepancy in pricing between India and Korea
can be eliminated. Once this happens,
only then will there be successful growth and business models in internet and
broadband services.
 An Open Sky policy should be adopted for VSAT operators, similar to what is
available to ISP’s and broadcasters. VSAT service providers should be allowed to work
directly with any international satellite.
The regulation for a minimum size for a VSAT dish should be removed to allow
operators further cost savings and increased operational efficiencies by taking advantage of
available technologies. Additionally, throughput restrictions on VSAT services, for both up-
link to the satellite and downlink to remote-stations, should be completely removed. SACFA
clearance should ensure that the interference levels are within acceptable limits.
 
DTH Services
Deployment of DTH for showing TV channels has lately gained considerable
urgency. DTH can also be utilized as the medium for last mile access for internet and
broadband connections, though this is not permitted today. The uplink (connectivity to the
ISP node) in this type of service would be an independent connection most likely through
dial- up services utilizing a separate modem or a modem built into the satellite device.
Therefore, the connection to the internet would have to pass through an already monitored
international gateway before going abroad. Thus, security concerns can be easily taken care
of on the outgoing side.
In the downlink from the satellite to the customer, there may be some concern for
security if the hub station is located outside India. For addressing this concern, one
In the downlink from the satellite to the customer, there may be some concern for
security if the hub station is located outside India. For addressing this concern, one
monitoring location in India could be insisted upon for all ISP licensees offering internet
services through a DTH or receive-only VSAT. Since the downlink signal format for internet
service is the same as that for DTH, this is feasible, and therefore the requirement for
monitoring the downlink signal can be fulfilled with one monitoring location.
Figure shows a schematic of the communication chain in providing broadband
services through this platform. Furthermore, since the DTH terminals would not be
transmitting, there may not be a need for the NOCC fee, which is paid for uplink monitoring.
Likewise, a receive-only VSAT can also be used for internet services.
 
Receive only internet service via satellite
 
 
Net work illustration for Internet & broadband traffic flow

As part of the demand estimation exercise, CII conducted both qualitative and
quantitative studies across the top 35 cities to arrive at their conclusions. Focus group
discussions were used to understand the mindset of consumers and what are the drivers and
inhibitors for broadband penetration. Market research was also conducted in 10 cities, and
then extrapolated to represent the country as a whole. The market was segmented into
households, SME’s, SOHO’s, corporate and cyber cafes, while also incorporating an
aggregate projection n for rural connectivity. Performance of other similar products and
estimates of the result of network effects in increasing familiarization of broadband services
was then used to estimate long term saturation rates. Analysis was also performed to
determine the demand of each individual application at different price levels. For the
corporate sector, inputs were also taken from companies on their own predictions of the need
for broadband connectivity and application usage. This process combined led to CII’s goal of
achieving at least 10 million broadband subscribers by 2010.
Confederation of Indian industries Broadband subscriber target

Banking in the next century:

More and more non banking institutions are going to provide the banking functions
than the designated banks in the coming century .Banks are going to be vanished from its
existing strong positions. Financial liberalization, internationalization and technological
advancement are going to further pressurize the banks to make their struggle for existence. If
a bank overcome all these pressures survival of the fittest comes again because of the
technological innovation and the type of competition in the banking industry.
Banks also need to revitalize their fee income flows to supplement and supplant if
necessary their net interest margin for which they are required to reemphasis risk
management on a daily basis .Banks are forced to give up isolated approaches to the
challenges of competition profitably and risk management .Strategic panning has superseded
the isolated approaches. The need for sound conceptual and technical skills has been seared
into every bankers mind. For banks to survive profitable they have to improve the operational
methods with latest hi-tech financial modeling content
Banks to focus on latest trends:
In the developing countries like India, Banks should have a long foresighted vision on   
developments of banking operations. It has to observe what is happening in the developed
countries and what is going to happen in India in near future with the following four trends
1. Financial Liberalisation
2. Disinternmediation
3. Globalisation
4. Technological innovation
Financial liberalization
 
             Financial liberalization leads to the rise of non banks like finance companies, mutual
funds, investment banks, insurance companies and even non-financial firms as purveyors of
liquidity and risk management services.
  Disintermediation erodes banks' share and role because banks evolved within a
culture of very cautions credit risk-taking. This culture has been encouraged or even
demanded by regulators for which banks have erected expensive credit, audit and risk
management departments. The rise of secondary markets for bank loans not only helps satisfy
the liquidity needs of non-traditional investors but also conscripts banks' role.
 Globalisation is a result of liberalization and disintermediation. It encourages
consolidation and concentration within the industry. Mergers and acquisitions will be
anointed on the industry and a large number of small banks disappear into a small number of
large banks.
Technological innovation has rendered "information" as a serious input in the
financial services industry. Home banking, banking by e-mail, the rise of electronic money,
the increased use of electronic highway, etc., though remain unmatched by non bank
competition, and have to become banks' forte for survival.
             In the late 1990s, the plastic cards market in India, comprising credit cards, smart
cards, debit cards, charge cards, stored value cards and others picked up momentum like
never before, growing at an annual rate of 25%.
            Though initially, there were only two players, (HDFC and Citibank), the debit  card
market base grew considerably through 1999 and reached the 3 million mark in March 2000).
The usage figures indicated a very healthy growth of  the market in future, as seven out of 10
cardholders were reportedly using their card regularly. The annual spending through debit
cards in  India reached over Rs.5 billion. The growth of debit cards was all the more
impressive considering the fact that credit cards, introduced in the country in the early 1980s,
had managed to reach the 100 million-user base level only in 2000. Thus, the debit card user
base had reached one-third of the credit card user base in just around one - tenth of the time.
                        The global card market is dominated by two US-based players, Visa and
Master Card. Visa introduced its first credit card, Bank of America card in 1958, which went
on to become a great success, acquiring universal merchant acceptance. Visa's card base
increased significantly through the decades and reached the one billion mark in 2000.
MasterCard International was established in the 1970s. The first MasterCard was issued in
1988, in Soviet Union. By 2000, MasterCard was issued in 1988, in Soviet Union. By 2000,
Master Card had over 30 offices around the world in various countries like India, Thailand,
Chile, US, China, Europe, South Korea, Taiwan and others.
            In the 1990s, having covered a majority of US and European markets, Master Card
and Visa shifted their focus to the East, especially the Asia Pacific region. By 2000,
MasterCard and Visa had established their debit cards as well in the Asia Pacific region. In
2000, Visa debit cards reached the 48 million mark in the Asia Pacific region, while the
MasterCard debit card base touched the 37 million mark. MasterCard's credit card base
touched 80 million during the period.
            Credit cards are electronic cards that enable the holders to pay for their purchases
without physically carrying cash. The issuer of the cards gives a short-term loan to the
cardholders, enabling them to make purchases and pay for them later, by giving them an
interest free credit period of 30 to 50 days. Credit cards bear many numbers that stand for
different features. Usually, the first digit in the credit card number denotes the card system it
uses, for example, the digit 3 stands for travel / entertainment cards, 4 for Visa cards and 5
for Master Card. The structure of the card number differs with the card system. For example
Diners Club card numbers start with 38 and American Express card numbers with 37. For
American Express, digits three and four signify card type and currency, five to eleven, the
account number, twelve to fourteen, the card number in the account and fifteen, the check
digit. Similarly for Visa, digits two to six denote the bank code, seven to twelve, the account
number and thirteen to sixteen, a check digit.
            The reverse side of the credit card carries the magnetic stripe, also known as a
magnetic stripe. The magnetic stripe is built from minute iron-based magnetic particles
embedded in a plastic like film. Each particle is a bar magnet, about 20 millionths of an inch
in size. The tiny bar magnets can be magnetized in both the north and south directions, which
enables writing of the stripe. The stripe contains three tracks, each track one-tenth of an inch
wide. The ISO / IEC standard 7811 is the typical magnetic stripe technology used by the
banks. Generally, credit cards only use tracks one and two. The third track is a read / write
track that includes the encrypted Personal Identification Number (PIN), currency units,
country code and the amount authorized. This third track is used less as its usage is not
standardized among banks.
            A credit card transaction requires five players to execute the transaction - a
cardholder, a merchant or sale outlet, the merchant acquirer (an acquirer is the firm that
segregates credit authentication requests and guarantees payment to the merchants), the card
issuer (bank or other organization that issued the card to the holder) and the card scheme
network. A typical transaction involving a credit card takes place is in the following manner:
      When a purchase is paid for by a credit card, the merchant sends details of the transaction
to the merchant acquirer.
      The acquirer controls all card transactions of the merchant, regardless of which
organization issued the card.
      The acquirer credits the merchant's account with the amount of the purchase or
transaction along with a nominal service fee.
      Details of the transaction are transferred to the organization that issued the card, at times
through the card scheme networks.
Authentication is a key step in the processing of a credit card transaction. The process
of authentication includes verifying the identity of the holder, ascertaining whether the
cardholder is within the stipulated credit limit and checking other related information. The
process includes the following steps:
      When the credit card is swiped through the card reader, the Electronic Data Capture
(EDC) software on the point-of-sale (POS) terminal dials a stored telephone number
through a modem to call the acquirer. On obtaining the credit-card authentication request,
the acquirer company checks the transaction, with help of the data on the magnetic stripe,
for the merchant identification, valid card number, credit-card limit, balance on the card
and its expiration date. Single dial-up (telephone) transactions are processed at a speed of
1,200 to 2,400 bps and the direct Internet attachment uses even higher speeds.
      For authentication the cardholder is required to enter his / her personal identification
number (PIN) using the keypad. The PIN is present in an encrypted form either in the
bank's database or on the card itself. The conversion system used in this type of
cryptography is known as one-way, which means, it is easy to decrypt the PIN when the
bank code and the cardholders PIN are given, but technically impossible to decrypt it
when only the bank code is given. The one-way technology ensures the safety of the
bank's computer files. The communication between the bank's central computer and the
ATM3 is also encrypted.
      Once the transaction is authenticated, the Electronic Funds Transfer at the Point of Sale
machine records the authentication on the sales voucher.
 
Debit Cards
            Debit Cards, also called `check cards', appear similar to an ATM or a credit card.
Though debit card serves the same purpose as a credit card, unlike a credit card, it does not
offer any credit facility, but entails a debit to the holder's bank account every time it is used.
In other words, the debit card works like a cheque book, giving the holder access to his bank
account at all hours. It makes sure the holder spends only the balance available in his account
and also keeps track of his purchases.
            There are two types of debit cards - direct debit cards (on-line debit cards) and
deferred debit cards (off-line debit cards). In the case of direct debit cards, the money is
electronically transferred from the cardholder's account to the merchant's account, on entry to
the holder's PIN in the store's terminal. In the case of deferred debit cards, the transaction
gets recorded in the merchant's terminal and is executed in two-three days following the
actual transaction. Currently, only direct debit cards are in use in India.
            The debit card design is similar to that of any credit card or an ATM card and follows
the same process of authentication. A typical debit card transaction includes the following
steps.
      When the card is presented for payment at the payment counter, it is swiped through the
reader.
      The card gets connected to the cardholder's bank account and the holder is required to
enter his ATM PIN to forward the transaction.
      The bank debits the cardholder's account with the value of the goods or services
purchased, fee, charges cash and other payments made by the cardholder through the
card.
      The transactions appear in the account statement of the accounts related to the card.
Citibank and HSBC were the pioneers in the Indian credit card market in the 1980s.
Over the next two decades, the number of players increased to more than ten in 2000. The
credit card market registered a healthy annual growth rate of over 25% during 1987 - 2001.
Besides Citibank and HSBC, the other leading players in the market were SBI, ICICI, Bank
of India and Standard Chartered Bank. A wide variety of cards were introduced in the market
during this period ranging from gold, silver and smart to global, affinity to secure cards.
The credit card issuers principally targeted the uppers and middle classes. However,
while the middle class population was around 300 million in 2001, the total credit card users
amounted to only over 10 million. Identifying the vast potential for growth in the middle
class segment, many players entered the fray. This intensified the competition, and forced the
players to enhance their product and service offerings (through co-branded cards), enhance
their card technologies, expand their reach through increased number of card operating
outlets and extend the card facilities to smaller cities, apart from the metros and tourist
centers.
Measures for Plastic Card Protection
      The card should be signed as soon as it is received.
      The PIN should be entered in such a way that no one will be able to easily memorize the
number typed.
      The receipt should not be left behind at the ATM.
      The PIN and account number from a discarded receipt could make the cardholder
susceptible to credit-card fraud. The credit-card statement, receipts or carbons should not
be thrown without first being shredded.
      Giving the card number over the telephone has to be avoided, unless the call has been
initiated by the cardholder. Giving the card number over a cordless phone, even when the
call is initiated by the cardholder is not recommended.
      Credit card offers that require the holders to spend money up-front or which fail to
disclose the identity of the card issuer should be ignored.
      The card should be taken back after the transaction is completed. The cardholder should
take care of cancelled sales slips by personally tearing them.
      A record of all credit cards, credit-card numbers and toll-free numbers has to be
maintained.
      Monthly statements should be thoroughly checked, to make certain the holder himself
made all the transactions. He should immediately inform the card issuer in case of errors
of unauthorized charges.
                     Aversion to debt: The average Indian consumer was found to be averse to the
concept of utilizing debt to meet his needs. As the credit card business offered short-
term loans, Indian customers were slow to respond to the concept.
                     High Interest Rates:  The short-term credit offered to the holders was to be repaid
within a stipulated time-period, failing which the cardholder had to pay a high
interest over the amount not repaid. Carry forward of payments past the scheduled
limit at times resulted in a debt trap for the cardholder. The interest reached 36% -
40% per annum in some cases.
                     Limited number of card operating outlets and their location: Until the late 1990s, the
credit card market in India was largely confined to the metros and other major cities.
The number of outlets offering the service was also limited.
Smart cards
Smart cards were first introduced in France in 1984. A Smart card is a credit card
sized plastic card containing an integrated circuit chip, with memory capacity and high
computing ability. In a smart card permanent data is stored in non-volatile memory and to an
extent into volatile memory. Smart card's self-containment enables it to work independent of
other external resources, thus offering high security protection and authentication. The smart
card serves many purposes - it can serve as an identity card for a cardholder, a medical card
that contains the medical history of the holder and as a credit card / debit card, facilitating
off-line transactions. In future single card, with the help of a multi-functional smart card, is
expected to replace the conventional magnetic strip card. The single card is referred to as an
electronic purse or a wallet.
The smart card principally contains a plastic card that has an integrated circuit and a
printed circuit. The principal ability of the smart card lies in its circuit chip (made of silicon),
which includes a microprocessor, non static random access memory (RAM) and read only
memory (ROM) and electrically erasable programmable read only memory (EEPROM). The
EEPROM works even in the absence of power. The smart card is programmed to ask for user
authentication before it provides access to the data.
The working of the smart card involves many aspects of encryption, along with the
authentication process similar to the credit cards. The microprocessor embedded in the card
and the encryption technology help in the functioning of the card. The transaction in which a
smart card is used involves the following steps:
         The cardholder has to establish his identify every time a transaction is made.
         For identity verification, the card and the card reader exchange a sequence of
encrypted signs / countersigns to confirm the identity.
         After the identity has been verified, the transaction is executed in encrypted form
to prevent discrepancies or fraud.  Major advantages provided by the smart card
technology as compared to magnetic-stripe technology include :
          Enhanced security that makes it impossible to tamper with the data on the card,
and the capability of the card to verify the authenticity of the cardholders.
         Higher storage capacity than cards using traditional magnetic - stripe technology.
         Ability to the card to divide storage area and apply separate security to each area.
         Services as a multiple purpose card and connect the cardholder with various
service-providers.
 
Smart Cards – Future plastic money
            While companies were putting in place various measures to address security issues,
the debit card market was having a smooth run in India. After being introduced in the mid
1990s, debit cards acquired popularity and user acceptance at a rapid pace. A major reason
for the quick popularity gained by debit cards was the absence of the credit component that
resulted in elimination of interest charges or monthly card bills.
            By 2001, many banks had replaced their standard ATM cards with new ones that also
included the debit card features. However, industry analysts believed that the Indian plastic
money market would pick up real momentum once smart cards became popular and widely
available. The memory and processing capacity of a smart card is around 10-times greater
than that of conventional magnetic-stripe cards. A smart card is capable of performing
various applications that eliminates the need to carry different cards for different purposes.
            Though growth in the market for smart cards was very slow, most analysts agreed that
with their advanced technologies and the corresponding benefits, it would not be long before
smart cards established themselves in India. In late 200i, most of the companies had
announced plans to convert their credit / debit cards to smart cards by replacing the magnetic
stripes in them with computer chips and incorporating latest encryption technologies.
            Important structural changes and major policy initiatives over the last few years have
resulted in a new financial architecture that consists of two well-developed wholesale and
retail markets. The new financial landscape has presented customers with greater
opportunities and bargaining power - redefining how banks and non-banks approach the
marketplace and each other.
            Today, customers obtain customized solutions, choose modes of access and define the
way they want to conduct business - often getting banks and non-banks to collaborate and
form new value networks to service them. They actively seek new opportunities arising out
of market developments and reforms. More recently, they have attempted to use capital
account liberalization to explore new possibilities - be it deposits, investments in capital and
money markets, or capital transfer in local and global markets.
            At the turn of the century, there were over a hundred scheduled commercial banks,
several hundred more cooperative banks, Non-Banking Financial Companies (NBFCs), and
other financial institutions in India. Most of these organisations were seen to be offering
vanilla banking services with minimal differentiation. A few years ago, the banking industry
could be classified into specific categories like public sector, private sector, foreign banks,
etc. Barely half a decade later the scenario could not be more different. Far from the earlier
days, where too many banks attempted to operate in both markets, only a few large players
have been able to sustain servicing a broad range of customers, providing the entire range of
service across both wholesale and retail markets.
            Other players have limited their activities to one-market alone or focused on specific
opportunities across both markets, due to a combination of market and regulatory pressures.
Marginal players have been forced to reduce their range of activities, sell branches and assets,
and in some cases, transform themselves to become service providers to banks. Some players,
existing and new, have opted to become financial consolidators, offering a single window
access to multiple financial products, managing customer relationships and experience. As a
result, the banking industry today can easily be divided among a few large full-service banks,
which are competing for market dominance, and the rest, which include some niche players
specializing in product categories and customer segments, and a group of survivors who
manage customer access and / or service other financial intermediaries.
Financial Sector Reform
            The central regulator took a series of steps over the last few years, including adopting
international accounting standards, strengthening the financial system and improving
supervision and governance. In a bid to promote India as a regional financial centre, `special
licenses’ or `restricted licenses' were permitted. These licenses attempted to move away from
the one-size-fits-all banking license towards offering licenses to carry out specific activities
such as investment banking, debt restructuring, offshore banking and credit card issuance.
This enabled banks and non-banks to build a portfolio of activities around their competence
and choice rather than attempt broad market participation, as was the case before.
 
Raising the Sustenance Barrier
            Strong prudential and supervisory norms along with new Basel Committee guidelines
required many Indian Banks to bring in additional capital, and conform to rising regulatory
standards. Through a series of market driven actions and regulator interventions, the banks
had to merge, reduce scope and scale of operations or transform themselves to adopt new
roles.
Government Divestment
            The government's decision to divest its stake in most public sector banks (PSBS),
either through the capital markets or through strategic sales, forced most public sector banks
to develop a business case for their existence. Some PSBs had foreseen the impending
changes and had taken initiatives to build upon their core strengths of reach and a large
customer base. They invested in technology and changed the way they were doing business
to emerge stronger and more efficient. A few PSBs that had not reacted quickly to these
changes, found business unsustainable and had to divest operations i.e., branches and
portfolios selectively, or in some cases, merged their operations with stronger banks.
Globalisation
            Implementation of the WTO accord and the subsequent liberalization of rules for
foreign banks have had a significant impact on the banking sector. Although not too many
new banks entered the market, the existing foreign banks grew bigger by purchasing market
share wherever they perceived value. The new banks were mostly specialists, which focused
on particular segments using special licenses as their entry vehicles. Some foreign banks
exited India as part of their global rationalization and decision to concentrate on their core
competence or local markets.
Co-operative Ban Reform
            A series of scams and the subsequent erosion of public confidence, a few years ago,
affected the co-operative banking sector. Relief came when the government enacted the
`Demutualization of Cooperatives Act'. Financial incentives were given to banks that
converted their ownership structure into a limited company structure. Some cooperative
banks were forced to close down while others were taken over by more efficient banks.
            The new financial landscape has been a key impetus for banks to start looking at new
business models to survive. Over the last few years, the increasing need to enhance fee-based
income, improve quality of service and reduce cost of operations has forced most banks to
rethink their business models. They have had to focus on core competence, collaborate with
other players to offer products and services to customers and partner with a new breed of
service providers to perform non-core activities ranging from processing to technology
management.
            Some banks have adopted the model of being specialist service providers to other
banks in India and abroad. The range of these services is seen to include regular transaction
processing, trade finance, credit documentation, etc. In addition to the above, a few non-
banks have also entered the domain of providing wither services like provision of
infrastructure e.g., shared ATM networks POS terminals, cheque processing centres and print
shops.
Conclusion
            The banking scenario in 2007 could be similar to the one presented above, which
requires banks to be proactive and adopt a range of measures to shape their future:
         Anticipate and prepare for regulatory change
         Focus on identifying core competence and migrate to a business model of choice.
         Build an optimal operating model by understanding which activities to retain collaborate
and outsource.
         Go beyond compliance to use risk management as a critical decision support tool.
         Create and sustain customer, investor and regulator confidence by adopting international
accounting standards and improving corporate governance.
         The no of internet users and the developing technology paved the super highway to
internet banking.
         The comfort and the security play a vital role in switching from the traditional banking
system to modern 24/7 net banking.
         Increasing usage of mobile phones is going to revolutionize the banking culture in near
future.
         Carrying money in the form of plastic cards which is widely accepted every where to
buy any thing is quite safe and give peace of mind to users is widely accepted.
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Nicholas brealy Pub., London 1997, pp26-29
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Subramanyam ,Ganti , “Banking in India makes a comeback “ Vinimaya
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