Virtual Banking in India’s Banking Scenario-Pros and Cons

Banking in India has undergone a significant transformation in the nineties. While banks have been 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.

So let us understand the concept  -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. This is the latest and foremost form of present day banking where most of the services are delivered “Virtually” which  means,  the services are delivered through Web and there is almost 1 to 2% eventuality that customers require their physical presence at their Bank Branch.. These include Automated Teller Machines (ATMs), 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 different channels are utilised as an interface with a Host CBS – (core banking solution) through a custom built middle-ware. It provides customers of the bank, real-time access to their relationships in the bank such as account inquiries, fund transfers, credit cards, payments and remittances, where one can make payments to individuals or institutions,  online.

While virtual banking was once a novel idea, today you might be hard-pressed to tell whether a bank is virtual or traditional simply by viewing its website or mobile app. Many traditional banks now offer a full range of online products and services that match those offered by virtual banks. A virtual bank doesn’t have to pay for physical branches nor the employees to staff those branches. This is a tremendous cost saving and the savings are usually passed along to customers in the form of higher interest rates on their deposits, lower interest rates on loans and lower banking fees. In other respects, virtual banks and traditional banks with an online interface offer many of the same features, including FDIC insurance, account management, electronic transfers and payments, and even remote check deposit capabilities. In some cases, virtual banks offer additional online tools for financial planning, budgeting, investment analysis and even tax preparation but there is no reason a traditional bank can’t offer those services online and some have already been doing.

Virtual Banking dates back to 1980s’. Wells Fargo launched its personal computer banking service in 1989 and was the first bank in the world to offer internet banking services. ICICI was the first bank to initiate the internet banking revolution in India as early as 1997 under the brand name ‘infinity’.

The Government of India enacted the IT Act, 2000 with effect from October 17, 2000 which provided legal recognition to electronic transactions and other means of electronic commerce. The Reserve Bank is monitoring and reviewing the legal and other requirements of e-banking on a continuous basis to ensure that it would develop on sound lines and the e-banking related challenges would not pose a threat to financial stability. According to RBI Nov.2018 report  there are 203806 ATMs and 351859 point of sale devices operating in India. Today, Virtual Banking is being used for deposit and withdrawal of cash, online shopping, bills/Cr. Card payments, hotel/cab/movie ticket booking, payment of loan EMIs, insurance premia and a host of other usages. To sustain in the growing competition, commercial banks in India have adopted several initiatives to improve banking services and to gain competitive advantage. A number of Indian banks have implemented Online Tax Accounting System (OLTAS) for collection of taxes on behalf of Central Board of Direct Taxes, GOI. A few banks have also introduced E-Locker facility for their customers. These days, the banks are making their presence even on social media platforms like Facebook, Youtube and Twitter for targeting huge customer base as well as potential customers; you can find round-the-clock tweets and comments on the banks’ products and services.

Although,  on an average the branch usage has dropped by 27% and the usage of the Internet and Mobile Banking have increased by 28% and 83%, respectively, across Asia between 2007 and 2011, the big picture shows that the percentage of bank customers, who use net or mobile money wallets in our country, is still abysmally low. The Global Findex survey released by World Bank in April, 2018, shows that 29% Indians are making digital payments whereas in Kenya 97% and in South Africa, 60% are making digital payments. In 2017, only 5% of indians , when compared to 21% in Sub-Saharan Africa, accessed  Bank A/c from their phone or internet and only 2% of population owned a Mobile Money A/c. Thus, Virtual Banking is as yet at a nascent stage in our country. Rough estimates suppose that the teller cost is at Re.1 per transaction, ATM transaction cost at 45 paisa, the phone banking at 35 paisa and debit card at 20 paisa but the Internet banking comes to 10 paisa per transaction. The cost-conscious banks in the country have therefore started actively measuring the use of internet as a channel for providing services. Fully computerized banks, with superior management of their customer base are in a stronger position to cross-sell their products through this channel. Banks in India are at different stages of the web-enabled banking cycle yet numerous scheduled commercial banks are in the first stage of internet banking in operations. Undoubtedly, the race for market supremacy has started compelling banks in India to adopt the latest technology on the internet, in a bid to capture new markets and customers.

The major advantage of Virtual Banking is the lower cost of handling a transaction via the virtual resource compared to the cost of handling the transaction via the branch. The increased speed of response to customer requirements under virtual banking vis-a-vis branch banking can 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 for the bank without the concomitant costs of physically opening branches. The lower cost of operating branch network along with reduced staff costs leads to cost efficiency under virtual banking. It allows banks to expand in new markets, reduce operational issues and take banking services to the doorsteps of its existing & potential customers. With the process of dematerialization of shares having gained considerable ground in recent years, banks have assumed the role of depository participants. In addition to customers’ deposit accounts, they also maintain D-mat accounts of their clients. Online trading in equities is being allowed by SEBI, this is another area which banks are keen to get into. In addition, virtual banking allows the possibility of improved quality and an enlarged range of services being available to the customer more rapidly, accurately and at his convenience. WAP (Wireless Application Protocol) telephony is the merger of mobile telephony with the Internet. It offers two-way connectivity, unlike Mobile Banking where the customer communicates to a mailbox-answering machine. Users may surf their accounts, download items and transact a wider range of options through the cell phone-screen. WAP may provide the infrastructure for P2P (person to person) or P2M (person to merchant) payments. It would be ideal for transactions that do not need any cash backup, such as online 55 investments. Use of this cutting edge technology could wel- determine which bank obtains the largest market share in electronic banking.

If we look at the other side of coin, in a developing economy like India, where even after the passage of 71 yrs. of independence, the state of financial inclusion, general literacy and financial literacy is in a bad shape, large number of customers like to have face-time with a banker. The customer can go to local branch when he needs answers to a complex problem or when he has a complicated request. To be sure, virtual banks can have outstanding customer support over the phone or via an online chat, but one might prefer talking face-to-face with a banker who is familiar with his customer’s personal circumstances and understands his unique needs. A traditional bank often has services and staff available to help us with specialized needs, like drawing up trusts, exchanging currencies, obtaining a safe deposit box and other services that virtual banks typically do not offer. Moreover, virtual banks won’t interest those consumers who don’t like or don’t trust online banking or who are reassured by the presence of a physical bank when depositing their savings. Next issue is, India has one of the lowest broadband connectivity penetration rates in Asia as compared to Japan, Taiwan, Korea and Singapore. While the bigger cities such as Mumbai, Delhi, Chennai, and Bangalore have relatively better broadband penetration rates, PC users in smaller cities and towns still use dial-up options to connect to the Internet. Slow connectivity speeds often dampen the online banking experience for many customers eager to use such services. Banks’ ambivalent commitment levels and their reluctance to allocate huge budgets for net banking branding initiatives have resulted in poor acceptance levels of Internet banking by customers. Fear of Online Threats about hacking, identity theft, stolen passwords, viruses, worms and spyware tend to make customers wary as well as fearful of losing their hard-earned savings in online scams. Further, navigating through the website of a bank may be difficult for a first time user. Opening an account could also take time as some sites ask for numerous personal details including a photo identification which is enough to perplex many potential customers from rural or semi-urban parts of India. Moreover, the global approach to banking that internet banking permits, makes it extremely difficult for regulatory authorities to enforce finance laws.  Every bank does not have access to the hardware and software necessary to make internet banking possible leading to digital divide among banks. For online banking to reach a critical mass, there has to be sufficient number of users and the desired infrastructure in place. The ‘Infinity’ product of ICICI Bank Ltd. gets only about 50,000 hits per month. Though various security options like line encryption, branch connection encryption, firewalls, digital certificates, automatic signoffs, random pop-ups and disaster recovery sites are in place or are being looked at, there is as yet no Certification Authority in India offering Public Key Infrastructure which is absolutely necessary for online banking. The customer can be assured of a secured conduit for its online activities if an authority certifying digital signatures is in place. Banks offering online facilities also need to calculate their downtime losses because even a few minutes of downtime in a week could mean substantial losses. Some banks even today do not have uninterrupted power supply units or systems to take care of prolonged power breakdown. Proper encryption of data and effective use of passwords are also the matters that leave a lot to be desired. The top challenges of Virtual Banking are reflected as under:

Yes, the non-resident Indians for whom it is expensive and time consuming to access their bank accounts maintained in India, find net banking very convenient and useful.

So, what is the way out?  Despite the fact that internet banking functions are a few clicks away, in the present age fraught with risks like phishing, vishing and smishing etc, the first and foremost measure of meeting the challenges is ensuring the safety and security of financial transactions. This can be achieved through the concerted and continuous efforts on the part of both the bankers and customers like not sharing the password with anybody, even the family members, changing it at regular intervals, ensuring to have a password as a combination of upper case and lower case letters, numbers and special characters. Next is, avoiding the usage of public computers from cyber cafes or libraries. If unavoidable, it would always be better to make sure to clear the cache and browsing history and delete all the temporary files from the computer. Allowing the browser to remember the password increases the manifold chances of hacking your account. It would also be advisable to be vigilant of apparent phone calls from bank or an email requesting such details; not to give out login information. It would be ideal to use licensed anti-virus software, not get tempted by the pirated ones as they might not protect your computer from new viruses prevalent in the online world. Many users just browse and leave the work in between and do not disconnect the internet connection. Do they not invite the malicious hackers to access their computer via an internet connection and steal their confidential banking information. Safer would be to type your bank URL in the address bar of the browser than clicking on links given in an email. There are instances of fraudsters sending emails with fraudulent website links that are designed exactly like the bank’s original website. Once you enter your login details on such a website, they may be used to access your account and steal your money. While logging on, check for ‘https:// in the URL and ensure that it is your bank’s authentic website

Way Forward:

Any new concept, new practice comes with its own set of challenges but there is absolutely no doubt about the fact that no challenge, no problem is bigger than human brain. During the last few years, various government institutions like RBI, NABARD, SEBI, IRDA, TV business channels and other market players have taken a number of initiatives for increasing financial literacy in India as a result of which the Indian banking industry has become a poster child having taken rapid strides over the past decade or so. Once playing catch-up with leading global practices, the industry cut in half the number of unbanked individuals in India between 2011-2018. India has over a billion mobile phone connections and the smartphone user base is expected to grow to 520 million users by 2020, according to a report on Digital Payments by BCG and Google. Add to that the proliferation of bank accounts, higher spending power and favourable demographics, where over half the population is under the age of 30 and is technologically savvy and willing to experiment with new products & services that offer them more. We are not far off from the day when a digital bank would not only offer payments through cryptocurrencies but also offer a range of cross-platform services to every single customer. Unlike traditional banks, digital banks are free from the legacies of the past and can design their operations, processes and strategies keeping the customer at the center.

To conclude, does the adoption of e-banking not provide banks a competitive edge over other players? Reduction in costs, improvement in customer relations, Broader geographical reach like benefits have enabled the banks in managing their business in a better way. Thus, there is a paradigm shift from the seller’s market to buyer’s market in the industry and finally it has been rapidly changing the bankers’ approach from ‘conventional banking’ to ‘convenience banking’. The shift has also increased the degree of accessibility of a common man to bank for his variety of needs and requirements. In years to come, e-banking will not only be acceptable mode of banking but will be preferred mode of banking.

Authored By:

Manjula Wadhwa
Asstt. General Manager
NABARD, Haryana Regional Office
Chandigarh