role of ebanking

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Chapter-1- Introduction

1.1 Background

1.1.1Banks have traditionally been in the forefront of harnessing

technology to improve their

products, services and efficiency. They have, over a long time,

been using electronic

and telecommunication networks for delivering a wide range of

value added products

and services. The delivery channels include direct dial - up

connections, private

networks, public networks etc and the devices include

telephone, Personal Computers

including the utomated Teller !achines, etc. "ith the

popularity of PCs, easy access

to #nternet and "orld "ide "eb $"""%, #nternet is

increasingly used by banks as a

channel for receiving instructions and delivering their products

and services to their

customers. This form of banking is generally referred to as

#nternet Banking, although

the range of products and services offered by different banks

vary widely both in their

content and sophistication.

1.1.2 Broadly, the levels of banking services offered through

#&T'(&'T can be categori)ed

in to three types* $i% The Basic +evel ervice is the banks

websites which disseminate information on different products

and services offered to customers and members of

public in general. #t may receive and reply to customers ueries

through e-mail, $ii% #n

the ne/t level are imple Transactional "ebsites which allow

customers to submit their

instructions, applications for different services, ueries on their


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account balances, etc,

but do not permit any fund-based transactions on their accounts,

$iii% The third level of

#nternet banking services are offered by 0ully Transactional

"ebsites which allow the

customers to operate on their accounts for transfer of funds,

payment of different bills,

subscribing to other products of the bank and to transact

purchase and sale of

securities, etc. The above forms of #nternet banking services are

offered by traditional

banks, as an additional method of serving the customer or bynew banks, who deliver

banking services primarily through #nternet or other electronic

delivery channels as the

value added services. ome of these banks are known as

virtual banks or #nternet-

only banks and may not have any physical presence in a

country despite offering

different banking services.

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1.1.3 0rom the perspective of banking products and

services being offered through #nternet,

#nternet banking is nothing more than traditional

banking services delivered through an

electronic communication backbone, vi), #nternet.

But, in the process it has thrown

open issues which have ramifications beyond

what a new delivery channel would

normally envisage and, hence, has compelled

regulators world over to take note of this

emerging channel. ome of the distinctive features

of i-banking are*

1. #t removes the traditional geographical barriers

as it could reach out to customers

of different countries 2 legal 3urisdiction. Thishas raised the uestion of 3urisdiction

of law 2 supervisory system to which such

transactions should be sub3ected,

4. #t has added a new dimension to different kinds

of risks traditionally associated with

banking, heightening some of them and

throwing new risk control challenges,

5. ecurity of banking transactions, validity of

electronic contract, customers privacy,

etc., which have all along been concerns of

both bankers and supervisors have

assumed different dimensions given that

#nternet is a public domain, not sub3ect to


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control by any single authority or group of

users,

6. new form of competition has emerged both from the e/isting

players and new

players of the market who are not strictly banks.

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.

1.1.4 The (egulatory and upervisory concerns in

i-banking arise mainly out of the

distinctive features outlined above. These

concerns can be broadly addressed under

three broad categories, vi), $i% +egal and regulatory

issues, $ii% ecurity and technology

issues and $iii% upervisory and operational issues.

+egal issues cover those relating to

the 3urisdiction of law, validity of electronic

contract including the uestion of

repudiation, gaps in the legal 2 regulatory

environment for electronic commerce. 7n the

uestion of 3urisdiction the issue is whether to

apply the law of the area where access to

#nternet has been made or where the transaction has

finally taken place. llied to this is

the uestion where the income has been generated

and who should ta/ such income.

There are still no definite answers to these issues.

1.1.5 ecurity of i-banking transactions is one of the

most important areas of concerns to the

regulators. ecurity issues include uestions of

adopting internationally accepted state-

of-the art minimum technology standards for

access control, encryption 2 decryption $

minimum key length etc%, firewalls, verification

of digital signature, Public 8ey

#nfrastructure $P8#% etc. The regulator is eually

concerned about the security policy

for the banking industry, security awareness and

education.


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1.1.6 The supervisory and operational issues include

risk control measures, advance warning

system, #nformation technology audit and re-

engineering of operational procedures.

The regulator would also be concerned with

whether the nature of products and

services offered are within the regulatory

framework and whether the transactions do

not camouflage money-laundering operations.

1.1.7 The Central Bank may have its concern about

the impact of #nternet banking on its

monetary and credit policies. s long as #nternet is

used only as a medium for delivery of

banking services and facilitator of normal payment

transactions, perhaps, it may not

impact monetary policy. 9owever, when it

assumes a stage where private sector

initiative produces electronic substitution of money

like e-cheue, account based cards

and digital coins, its likely impact on monetary

system can not be overlooked. 'ven

countries where i-banking has been uite

developed, its impact on monetary policy has

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1.1.8 The world over, central bankers and regulators

have been addressing themselves to

meet the new challenges thrown open by this form

of banking. everal studies have

pointed to the fact that the cost of delivery of

banking service through #nternet is

several times less than the traditional delivery

methods. This alone is enough reason for

banks to flock to #nternet and to deliver more

and more of their services through

#nternet and as soon as possible. &ot adopting this

new technology in time has the risk

of banks getting edged out of competition. #n such

a scenario, the thrust of regulatory

thinking has been to ensure that while the banks

remain efficient and cost effective, they

must be aware of the risks involved and have

proper built-in safeguards, machinery and

systems to manage the emerging risks. #t is not

enough for banks to have systems in

place, but the systems must be constantly

upgraded to changing and well-testedtechnologies, which is a much bigger

challenge. The other aspect is to provide

conducive regulatory environment for orderly

growth of such form of banking. Central

Banks of many countries have put in place broad

regulatory framework for i-banking.

1.1.9 #n #ndia, too i-banking has taken roots.

number of banks have set up banking


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portals allowing their customers to access facilities

like obtaining information, uerying

on their accounts, etc. oon, still higher level of

online services will be made available.

7ther banks will sooner than later, take to

#nternet banking. The #ndian scenario is

discussed in detail in Chapter-6 of this report.

1.2 Constitution of the Working Group

1.2.1 #n the above background (eserve Bank of

#ndia constituted a "orking :roup to

e/amine different issues relating to i-banking and

recommend technology, security,

legal standards and operational standards

keeping in view the international best

practices. The :roup is headed by the Chief

:eneral !anager-in-Charge of the

;epartment of #nformation Technology and

comprised e/perts from the fields of

banking regulation and supervision, commercial

banking, law and technology. The

Bank also constituted an 7perational :roup under

its '/ecutive ;irector comprising

officers from different disciplines in the bank, who

would guide implementation of the

recommendations.

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1.2.2 Terms of reference

The "orking :roup, as its terms of reference,

was to e/amine different aspects of

#nternet banking from regulatory and

supervisory perspective and recommend

appropriate standards for adoption in #ndia,

particularly with reference to the

following*

1. (isks to the organi)ation and banking system,

associated with #nternet banking and

methods of adopting #nternational best practices

for managing such risks.

4. #dentifying gaps in supervisory and legal

framework with reference to the e/isting

banking and financial regulations, #T

regulations, ta/ laws, depositor protection,

consumer protection, criminal laws, money

laundering and other cross border issues

and suggesting improvements in them.

5. #dentifying international best practices on

operational and internal control issues, and

suggesting suitable ways for adopting the same

in #ndia.

6. (ecommending minimum technology and

security standards, in conformity with

international standards and addressing issues

like system vulnerability, digital

signature ,information system audit etc.


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. ny other matter, which the "orking :roup

may think as of relevance to #nternet

banking in #ndia.

1.3. Approch of the Group*

1.3.1 The first meeting of the "orking :roup was

held on ?uly 1@, 4AAA. #t was decided

that members of both "orking :roup and

7perational :roup would participate in all

meetings and deliberations. The :roup, in its

first meeting identified the broad

parameters within which it would focus its

deliberations.

1.3.2 The :roup agreed that #nternet banking is a

part of the electronic banking $e-

banking%, the main difference being that in i-

banking the delivery channel was

#nternet, a public domain.lthough the concerns

of e-banking and i-banking have

many things in common, the fact that #nternet is a

public domain called for additional

security measures. #t was agreed that the :roup

would primarily focus its attention

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on # - banking and to the e/tent there were

commonality between i-banking and e-

banking, its recommendation would also apply to

e-banking.

1.3.3 The :roup further held that i-banking did not

mean any basic change in the nature of

banking and the associated risks and returns. ll

the same, being a public domain and

a highly cost effective delivery channel, it

does impact both the dimension and

magnitude of traditional banking risks. #n fact, it

adds new kinds of risk to banking.

ome of the concerns of the (egulatory

uthority in i-banking relate to technology

standards including the level of security and

uncertainties of legal 3urisdiction etc. #ts

cost effective character provides opportunities

for efficient delivery of banking

services and higher profitability and a threat to

those who fail to harness it.

1.3.4 The :roup decided to focus on above three

ma3or areas, where supervisory attention

was needed. ccordingly, three sub-groups

were formed for looking into three

specific areas* $i% technology and security

aspects, $ii% legal aspects and $iii%

regulatory and supervisory issues. The sub-

groups could seek help of e/ternal e/perts

in the relevant fields, if needed.


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1.4 !"out of the #eport$

1.4.1. The views of the :roup were crystalli)ed

after several rounds of deliberations of

members of both the "orking :roup and the

7perational :roup. The reports

prepared by the three sub-groups were

discussed and assimilated in to this report.

The report is presented in nine chapters.

Chapter-1, the introductory chapter, gives

the background leading to the formation of the

:roup, its composition, terms of

reference and the approach adopted by the :roup

in finali)ing its recommendations.

1.4.2. The basic structure of #nternet and its

characteristics are described in Chapter-4 in

order to e/plain the nature of concerns

addressed in the chapters to follow. lso

e/plained in the chapter is the growth of #nternet

banking and different products and

different e-commerce concepts.

1.4.3. Chapter-5 describes #nternational e/perience in

i-banking, particularly with reference

to , nited 8ingdom and other

candinavian countries, who are pioneers in this

form of banking. Chapter- 6 looks at the #ndian

scenario as it prevails now.

1.4.4. Chapter-< discusses different types of risks

associated with banking in general and i-

banking in particular. 'mphasis is given on

normal risks associated with banking


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which gets accentuated when the services are

delivered through #nternet. (isks relating to

money laundering and other cross border

transactions are discussed.

1.4.5. Technology and security standards are core

concerns for (egulatory uthorities in

relation to #nternet banking. separate sub-

group looked in to these issues, which

are discussed in detail in Chapter->. 'mphasis is

given on technology and security

standards and policy issues rather than on

products and technical tools.

1.4.6 nother important regulatory concern is the

legal environment in which i-banking

transactions are carried out. #t is of

importance to identify gaps in the e/isting

framework and to suggest changes reuired. The

legal sub-group had made a detailed

analysis of legal uestions involved, which are

discussed in Chapter - .

1.4.7 Chapter-D deals with various control measures

reuired to be adopted by banks to

manage risks discussed in earlier chapters.

7perational aspects like internal control,

early detection system, #T audit, technical

manpower, etc are also discussed. The

impact of i-banking on clearing and settlement

arrangements has also been addressed.

The sub-group on (egulatory and upervisory


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issues had addressed the above

uestions.

1.4.8 Chapter-@ contains recommendations of the

"orking :roup. hri . 9. Bho3ani had

disagreement with some of the observations 2

recommendations by the :roup and a

note of dissent is appended as nne/ure-1.

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Chpter%2% &nternet 'nking % ne( me)ium

2.1 &nternet % its *sic structure n) topo+og"

2.1.1 #nternet is a vast network of individual computers

and computer networks connected to

and communicate with each other using the same

communication protocol - TCP2#P

$Transmission Control Protocol 2 #nternet

Protocol%. "hen two or more computers are

connected a network is created= connecting two

or more networks create inter-

network or #nternet. The #nternet, as commonly

understood, is the largest e/ample of

such a system. #nternet is often and aptly

described as #nformation uperhighway, a

means to reach innumerable potential destinations.

The destination can be any one of

the connected networks and host computers.

2.1.2 #nternet has evolved to its present state out of a

;epartment of ;efence pro3ect

(P&et $dvanced (esearch Pro3ect

dministration &etwork%, developed in the late

1@>As and early 1@As as an e/periment in wide

area networking. ma3or perceived

advantage of (P&et was that the network

would continue to operate even if a

segment of it is lost or destroyed since its operation

did not depend on operation of any


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single computer. Though originally designed as a

defence network, over the years it

was used predominantly in areas of scientific

research and communication. By the

1@DAs, it moved out of Pentagons control and

more independent networks from

and outside got connected to it. #n 1@D>, the

&ational cience 0oundation $&0%

established a national network based on (P

protocol using commercial telephone

lines for connectivity. The &0&et was

accessible by a much larger scientific

community, commercial networks and general

users and the number of host computers

grew rapidly. 'ventually, &0&et became the

framework of todays #nternet.

(P&et was officially decommissioned in 1@@A.

2.1.3 #t has become possible for innumerable

computers operating on different platforms to

communicate with each other over #nternet

because they adopt the same

communication protocol, vi), TCP2#P. The latter,

which stands for Transmission

Control Protocol 2 #nternet Protocol, is a set of

rules which define how computers

communicate with each other. #n order to access

#nternet one must have an account in

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a host computer, set up by any one of the #Ps

$#nternet ervice Providers%. The

accounts can be +#P $erial +ine #nternet

Protocol% or PPP $Point to Point Protocol%

account. These accounts allow creating

temporary TCP2#P sessions with the host,

thereby allowing the computer to 3oin the #nternet

and directly establish communication

with any other computer in the #nternet. Through

this type of connection, the client

computer does not merely act as a remote terminal

of the host, but can run whatever

programs are available on the web. #t can also run

several programs simultaneously,

sub3ect to limitations of speed and memory of the

client computer and modem. TCP2#P

protocol uses a uniue addressing scheme

through which each computer on the

network is identified.

2.1.4 TCP 2 #P protocol is insecure because data

packets flowing through TCP 2 #P networks

are not normally encrypted. Thus, any one who

interrupts communication between two

machines will have a clear view of the data,

passwords and the like. This has been

addressed through ecured ocket +ayer$+%, a

Transport +ayer ecurity $T+%

system which involves an encrypted session


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between the client browser and the web

server.

2.1.5 0TP or 0ile Transfer Protocol is a mechanism for

transferring files between computers

on the #nternet. #t is possible to transfer a file to

and from a computer $ftp site% without

having an account in that machine. ny

organi)ation intending to make available to

public its documents would normally set up a ftp

site from which any one can access

the documents for download. Certain ftp sites are

available to validated users with an

account #; and password.

2.1.6 e-mail:The most common and basic use of

#nternet is the e/change of e-mail

$electronic mail%. #t is an e/tremely powerful and

revolutionary result of #nternet, which

has facilitated almost instantaneous

communication with people in any part of the

globe. "ith enhancements like attachment of

documents, audio, video and voice mail,

this segment of #nternet is fast e/panding as the

most used communication medium for

the whole world. !any websites offer e-mail as a

free facility to individuals. !any

corporates have interfaced their private networks

with #nternet in order to make their e-

mail accessible from outside their corporate

network.

2.1.7 World Wide Web (WWW)

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2.1.7.1 #nternet encompasses any electronic

communication between computers using

TCP2#P protocol, such as e-mail, file transfers etc.

""" is a segment of #nternet,

which uses 9yper Te/t !arkup +anguage

$9T!+% to link together files containing

te/t, rich te/t, sound, graphics, video etc. and

offers a very convenient means of

navigating through the net. #t uses hyperte/t

transfer protocol $9TTP% for

communication between computers. "eb

documents, which are referred to as pages,

can contain links to other related documents and

so on, in a tree like structure. The

person browsing one document can access any

other linked page. The web documents

and the web browsers which are the application

programs to access them, are designed

to be platform independent. Thus any web

document can be accessed irrespective of the

platform of the computer accessing the document

and that of the host computer. The

programming capabilities and platform

independence of ?ava and ?ava applets have

further enriched the web. The point and click

method of browsing is e/tremely simple

for any lay user of the net. #n fact, the introduction

of web since early 1@@A has made

#nternet an e/tremely popular medium and its


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use in business has been enhanced

dramatically.

2.1.7.2The ne/t in the 9T!+ genre is the '/tensible

!arkup +anguage $E!+%, which

allows automated two-way information flow

between data stores and browser screens.

E!+ documents provide both the raw content of

data and the data structure and is

pro3ected by its proponents as taking the web

technology beyond the limits of 9T!+.

2.1.8 Wireless Application Protocol (WAP):

"P is the latest industry standard which provides

wireless access to #nternet through

handheld devices like a cellular telephone. This is

an open standard promoted by "P

forum and has been adopted by worlds all ma3or

handset manufacturers. "P is

supplemented by "ireless pplication

'nvironment $"'%, which provides industry

wise standard for developing applications and

services for wireless communication

networks. This is based on """ technology and

provides for application for small

screens, with interactive capabilities and

adeuate security. "ireless Transaction

Protocol $"TP%, which is the euivalent of TCP,

sets the communication rules and

"ireless Transport +ayer ecurity $"T+%

provides the reuired security by

encrypting all the session data. "P is set to

revolutioni)e the commercial use of net.

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2.1.9 Security:

7ne of the biggest attractions of #nternet as an

electronic medium is its openness and

freedom. #t is a public domain and there is no

restriction on who can use it as long as

one adheres to its technical parameters. This has

also given rise to concerns over the

security of data and information transfer and

privacy. These concerns are common to

any network including closed user group

networks. But over the #nternet, the

dimensions of risk are larger while the control

measures are relatively fewer. These

issues are discussed in detail in Chapter-< and

Chapter-> of the report. #t will be

sufficient to say here that the key components of

such concern are, $i% authentication,

vi)., assurance of identity of the person in a deal,

$ii% authori)ation, vi)., a party doing a

transaction is authori)ed to do so, $iii% the

privacy or confidentiality of data,

information relating to any deal, $iv% data integrity,

vi)., assurance that the data has not

been altered and $v% non repudiation, vi)., a

party to the deal can not deny that it

originated the communication or data.

2.2 ,%Commerce$

2.2.1 'ven though started as network primarily for

use by researchers in defence and


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scientific community, with the introduction of

""" in early 1@@As, use of #nternet for

commerce has grown tremendously. '-commerce

involves individuals and business

organi)ations e/changing business information and

instructions over electronic media

using computers, telephones and other

telecommunication euipments. uch form of

doing business has been in e/istence ever since

electronic mode of data 2 information

e/change was developed, but its scope was

limited only as a medium of e/change of

information between entities with a pre-established

contractual relationship. 9owever,

#nternet has changed the approach to e-commerce=

it is no longer the same business

with an additional channel for information

e/change, but one with new strategy and

models.

2.2.2 business model generally focuses on $i% where

the business operates, that is, the

market, the competitors and the customers, $ii%

what it sells, that is, its products and

services $iii% the channels of distribution, that is,

the medium for sale and distribution of

its products and $iv% the sources of revenue and

e/penditure and how these are

affected. #nternet has influenced all the four

components of business model and thus has

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come to influence the business strategy in a

profound way. The si)e of the market has grown

enormously as technically, one can access the

products and services from any part of the world.

o does the potential competition. The methods

of reaching out to customers, receiving the

response and offering services have a new,

simpler and efficient alternative, now, that is,

#nternet. The cost of advertisement, offer and

delivery of services through #nternet has reduced

considerably, forcing most companies to rework

their strategies to remain in competition.

2.2.3 research note by Paul Timmers of 'uropean

commission had identified eleven

business models, which have been commercially

implemented. These are e-shop, e-

procurement, e-auction, e-mall, Third-party market

place, Firtual communities, Falue

chain service providers, Falue chain

integrators, Collaboration platforms and

#nformation brokers. 9e classified business models

along two dimensions, i.e, degree of

innovation and e/tent of integration of functions.

The innovation ranged from the

electronic version of a traditional way of doing

business $e-shop% to more innovative

ways by offering functions that did not e/ist

before. The second dimension, i.e, e/tent

of integration ranges from a single function


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business model $like e-shop% to fully

integrated functionality $value chain integrator%. #n

the top end of the graph are models,

which cannot be implemented in a traditional way

and are critically dependent upon

information technology and creating value from

information flow. Business models, in

between these two limits are a combination of both

dimensions in different degrees and

have some degree of analogy in traditional firms.

2.2.4There are two types of e-commerce ventures in

operation* the old brick and mortar

companies, who have adopted electronic

medium, particularly #nternet, to enhance

their e/isting products and services, and 2 or to

offer new products and services and

the pure e-ventures who have no visible physical

presence. This difference has wider

ramifications than mere visibility when it comes

to issues like customers trust, brand

euity, ability to service the customers,

adopting new business culture and cost.

These aspects of e-commerce will be touched

upon in the following discussions.

2.2.5nother wayof classifying the e-commerce is by

the targeted counterpart of a business,

vi), whether the counterpart is a final consumer or

another business in the distribution

chain. ccordingly, the two broad categories are*

Business-to-Consumer $B4C% and

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Business-to-Business $B4B%.

2.2.6Business-to-Consumers (B2C):

2.2.6.1 #n the B4C category are included single e-

shops, shopping malls, e-broking, e-

auction, e-banking, service providers like travel

related services, financial services etc.,

education, entertainment and any other form of

business targeted at the final consumer.

ome of the features, opportunities and concerns

common to this category of business

irrespective of the business segment, are the

following.

2.2.6.2 Opportunities:

2.2.6.2.1 #nternet provides an ever-growing market

both in terms of number of potential

customers and geographical reach. Technological

development has made access to

#nternet both cheaper and faster. !ore and more

people across the globe are accessing

the net either through PCs or other devices. The

purchasing power and need for uality

service of this segment of consumers are

considerable. nybody accessing #nternet is a

potential customer irrespective of his or her

location. Thus, any business targeting final

consumers cannot ignore the business potential of

#nternet.

2.2.6.2.2 #nternet offers a uniue opportunity to

register business presence in a global market.


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#ts effectiveness in disseminating information

about ones business at a relatively cost

effective manner is tremendous. Time sensitive

information can be updated faster than

any other media. properly designed website can

convey a more accurate and focussed

image of a product or service than any other media.

se of multimedia capabilities, i.e.,

sound, picture, movies etc., has made #nternet as

an ideal medium for information

dissemination. 9owever, help of other media is

necessary to draw the potential

customers to the web site.

2.2.6.2.3 The uality of service is a key feature of any

e-commerce venture. The ability to sell

ones product at anytime and anywhere to the

satisfaction of customers is essential for

e-business to succeed. #nternet offers such

opportunity, since the business presence is

not restricted by time )one and geographical

limitations. (eplying to customers

ueries through e-mail, setting up $0reuently

sked Guestions% 0G pages for

anticipated ueries, offering interactive help line,

accepting customers complaints

online 46 hours a day and attending to the same,

etc. are some of the features of e-

business which enhance the uality of service to

the customers. #t is of crucial

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importance for an e-venture to reali)e that 3ust as

it is easier to approach a customer through

#nternet, it is eually easy to lose him. The

customer has the same facility to move over to

another site.

2.2.6.2.4 Cost is an important issue in an e-venture. #t

is generally accepted that the cost of

overhead, servicing and distribution, etc.

through #nternet is less compared to the

traditional way of doing business. lthough

the magnitude of difference varies

depending on the type of business and the

estimates made, but there is unanimity that

#nternet provides a substantial cost advantage

and this, in fact, is one of the ma3or

driving forces for more number of traditional

business adopting to e-commerce and

pure e-commerce firms to sprout.

2.2.6.2.5 Cost of communication through """ is the

least compared to any other medium.

!any a time ones presence in the web may bring

in international enuiries, which the

business might not have targeted. The business

should have proper plans to address

such opportunities.

2.2.6.3 Concerns:

2.2.6.3.1 There are a number of obstacles, which an e-

commerce venture needs to overcome.

Trust of customers in a web venture is an


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important concern. !any customers hesitate

to deal with a web venture as they are not sure of

the type of products and services

they will receive. This is particularly true in a

B4C venture like e-shop, e-mall or e-

auction site. Traditional business with well

established brands and goodwill and having

a physical presence face less resistance from

customers in this regard than a pure e-

venture.

2.2.6.3.2 !any B4C ventures have ultimately to

deliver a product or service in physical form

to the customer for a deal contracted through

#nternet. This needs proper logistics, an

efficient distribution network, and control over

uality of product or service delivered.

These issues are not technology related and any

let off in this area can drive the

customer away to the competitor or from e-

commerce.

2.2.6.3.3 The privacy of information on the

customers preferences, credit card and bank

account details etc. and customers faith in a

system where such privacy is stated to be

ensured are important issues to be addressed. These

are mainly technological issues, but

human factor is important both at the business and

at the customers end and also in

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building the trust in the system.

2.2.6.3.4 ecurity of a transaction, authenticity of a

deal, identification of a customer etc. are

important technological and systems issues, which

are ma3or sources of concern to e-

commerce. 'ually important are uestions of

repudiation of a deal, applicability of

law, 3urisdiction of ta/ laws etc. These are

important to all forms of e-commerce,

whether B4C or B4B and all segments of

business, i.e, manufacturing, services and

finance and are addressed in different chapters of

this report.

2.2.6.3.5 ccessibility to #nternet by the consumers is

an important issue in B4C domain.

This is particularly so in countries like #ndia

where penetration of PCs and other

devices to households for access to #nternet is

minimal. lso important are availability

of bandwidth and other infrastructure for faster

and easier access. Considering that e-

commerce aims at global market, deficiencies of

these kinds in the developing world are

no longer concerns confined to these areas, but are

global e-commerce concerns.

2.2.7 Business to Business (B2B)

2.2.7.1 s opposed to B4C e-commerce, in B4B

domain, the parties to a deal are at different

points of the product supply chain. Typically, in a


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B4B type domain, a company, its

suppliers, dealers and bankers to all the parties are

networked to finali)e and settle all

aspects of a deal, online. Perhaps, only the goods

in different stages of processing

physically move from the supplier to the dealer.

This scenario can be e/tended to

include the shipper, providers of different ancillary

services, #T service provider and the

payment system gateway, etc., depending on

the degree of sophistication of the

available systems.

2.2.7.2 nother important feature of a B4B domain, as

distinct from B4C, is that business

information 2 data is integrated to the back office

systems of parties to a deal and the

state of straight through processing $TP% or

near TP is achieved. This is a very

significant aspect of B4B model of e-commerce,

which results in improved profits

through lowering cost and reducing inventories.

2.2.7.3 0or e/ample, in a B4B environment, typically,

the back office system of a company

controls inventory reuirement with reference to

the order book position updated

regularly on the basis of orders received from

dealers through #nternet. t the optimum

level of inventory it raises a purchase order with

the supplier, whose system in turn,

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processes the order and confirms supply.

Buyer companys system issues debit

instructions on its bank account for payment to the

supplier. The buyers bank credits

sellers bank with the cost of sale though a payment

gateway or through (T: system.

imilar series of transaction processes are also

initiated between the company and its

dealers and their respective banks. 7nce e-

commerce relationship is established

between the firms, the transactions of the type

shown above can be processed with

minimal human intervention and on 46 hours a day and day aweek basis.

2.2.7.4&ew business models are emerging in B4Bdomain. There are portals which offer a

meeting ground to buyers and sellers of different

products in supply chain, more like a

buyer-seller meet in international business.

This has enabled relatively smaller

companies to enter the global market. Banks in

the portal offer financial services fordeals settled through the portal.

2.2.7.5 Technology and networking are important

constituents of a B4B type of business

domain. 'arlier, only large firms could have

access to such technology and they used

private networks with interface to each other for

information flow and transaction


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processing. ma3or concern used to be

compatibility of ';# platforms across different

B4B partners. #nternet with """ and other

standard technology have offered

opportunity to relatively smaller and medium si)ed

firms to integrate their operations in

B4B model and take advantage of the

benefits it offers. #t has also led to

standardi)ation of software platforms.

2.2.7.6 7ther new forms of business models in

B4B domain are pplication ervice

Providers $P% and ervice #ntegrators. Ps

offer application software online to e-

commerce companies who pay for the same

according to the use without owning it.

7ften entire back office processing is taken

care of by Ps and other service

integrators. 9owever, the utility of such service

providers will to a large e/tent depend

on the business strategy of the e-venture.

2.2.7.7 The concerns of B4B e-commerce are similar to

those of B4C, discussed earlier. The

security issues are more pronounced because of

high value transfers taking place

through the net. o also are the issues relating to

privacy of information, law, ta/

repudiation etc. The other issues of importance

to a B4B firm are the choice of

appropriate technology, the issue of build or

outsource, maintenance and training of

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personnel, etc., since they involve large investments and arecritical to success.

2.2.7.8 everal studies have attempted to assess the

relative importance of B4B and B4C

business domains. There is wide difference in

estimates of volume of business

transacted over #nternet and its components

under B4C and B4B. 9owever, moststudies agree that volume of transactions in B4B

domain far e/ceeds that in B4C. This

is e/pected result. There is also a growing opinion

that the future of e-business lies in

B4B domain, as compared to B4C. This has

several reasons some of which are

already discussed earlier, like low penetration ofPCs to households, low bandwidth

availability etc., in a large part of the world. The

success of B4C ventures depends to

a large e/tent on the shopping habits of people

in different parts of the world.

survey sponsored 3ointly by Confederation of

#ndian #ndustries and #nfrastructure+easing and 0inancial ervices on e-commerce

in #ndia in 1@@@ made the following

observations. >4H of PC owners and


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varying between (s. 4


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online transactions are put through. These aspects

have been dealt with in brief in the

introductory chapter and again detailed products

and services are discussed in chapters

5 and 6. 9ence, in the following paragraphs #-

banking concerns in B4B domain are

discussed.

2.3.2 Considering the volume of business e-commerce,

particularly in B4B domain, has been

generating, it is natural that banking would

position itself in an intermediary role in

settling the transactions and offering other trade

related services. This is true both in

respect of B4C and B4B domains. Besides, the

traditional role of financial intermediary

and settlement agents, banks have also e/ploited

new opportunities offered by #nternet

in the fields of integrated service providers,

payment gateway services, etc. 9owever,

the process is still evolving and banks are

repositioning themselves based on new

emerging e-commerce business models.

2.3.3 #n B4B scenario, a new form of e-commerce

market place is emerging where various

players in the production and distribution chain

are positioning themselves and are

achieving a kind of integration in business

information flow and processing $TP or

near TP% leading to efficiencies in the entire


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supply chain and across industries. Banks

are positioning themselves in such a market in

order to be a part of the financial

settlements arising out of transactions of this

market and providing wholesale financial

services. This needs integration of business

information flow not only across the players

in the supply chain, but with the banks as well.

2.3.4 "ith the integration of business information flow

and higher degree of transparency, the

banks and other financial services institutions

have lost some of the information

advantage they used to en3oy and factor in to

pricing of their products. 9owever, such

institutions have the advantage of long standing

relationships, goodwill and brand,

which are important sources of assurance in a

virtual market. Banks are in fact,

converting this goodwill into a business

component in e-commerce scenario in

providing settlement and other financial services.

ome banks have also moved to

providing digital certificates for transactions

through e-markets.

2.3.5 Banks strategies in B4B market are responses to

different business models emerging in

e-commerce. recent study by rthur ndersen

shows that banks and financial service

institutions generally adopt one of three business

models to respond to e-business

18


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challenges. #n the first place, they treat it as an

e/tension of e/isting business without

any significant changes other than procedural

and what technology demands. The

second strategy takes the same approach as the

first but introduces structural changes

to the underlying business. #n the third approach

banks launch e-business platform as a

different business from the e/isting core business

and as a different brand of product.

There is no definite answer as to which approach is

appropriate. Perhaps it depends on

the type of market the bank is operating, its

e/isting competencies and the legal and

regulatory environment. #t is, however, sure that

e-banking is evolving beyond the

traditional limits of banking and many new

products 2 services are likely to emerge as e-

commerce matures.


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Chpter%3 % &nterntion+ e-perience

3.1 #nternet banking has presented regulators and

supervisors worldwide with new

challenges. The #nternet, by its very nature,

reaches across borders and is, for this

reason, engaging the attention of regulatory and

supervisory authorities all over the

world. The e/perience of various countries, as far

as #nternet banking is concerned, is

outlined in this chapter.

3.2 ./.A.

3.2.1 #n the , the number of thrift institutions and commercial

banks with transactionalweb-sites is 14< or 14H of all banks and thrifts. ppro/imately

DH of all

commercial banks with more than I< billion in

assets, 65H of banks with I


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Presentment and Payment $'BPP%, handheld

access devices such as Personal ;igital

ssistants $P;s%, #nternet Telephone and

"ireless Communication channels and

phones are emerging in the market. few

banks have become #nternet ervice

Providers $#Ps%, and banks may become

#nternet portal sites and online service

providers in the near future. (eliance on third

party vendors is a common feature of

electronic banking ventures of all si)es and

degrees of sophistication in the .

Currently, payments made over the #nternet are

almost e/clusively conducted through

e/isting payment instruments and networks. 0or

retail e-commerce in the , most

payments made over the #nternet are currently

completed with credit cards and are

cleared and settled through e/isting credit card

clearing and settlement systems.

'fforts are under way to make it easier to use debit

cards, cheues and the utomated

Clearing 9ouse $C9% to make payments over

the #nternet. Fersions of e-money,

smart cards, e-cheues and other innovations are

being e/perimented with to support

retail payments over the #nternet.

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3.2.2 There is a matri/ of legislation and regulations

within the that specificallycodifies

the use of and rights associated with the #nternet

and e-commerce in general, and

electronic banking and #nternet banking activities

in particular. 0ederal and state laws,

regulations, and court decisions, and self-

regulation among industries groups provide

the legal and operational framework for #nternet

commerce and banking in the .

The international model laws promulgated by the

nited &ations Commission on

#nternational Trade +aw $&C#T(+% provide the

guidance to the member nations on

the necessity for revising e/isting legal

structures to accommodate electronic

transactions. ome important laws of general

application to commercial activity over

the #nternet within the are the

niformCommercial Code $CC%, the niform

'lectronic Transaction ct $'T% $which

provides that electronic documents and

contracts should not be disualified as legal

documents particularly because of their

electronic form%, various state laws and

regulations on digital signatures and national

encryption standards and e/port regulations. !any

states already have digital signature

and other legislation to enable e-commerce. tate


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laws in this area differ but the trend

is towards creating legislation, which is technology

neutral. The '-sign ct, a new

law that took effect on 7ctober 1, 4AAA, validates

contracts concluded by electronic

signatures and euates them to those signed

with ink on paper. nder the ct,

electronic signatures using touch-tones $on a

telephone%, retinal scans and voice

recognition are also acceptable ways of entering

into agreements. The '-sign ct takes

a technological neutral approach and does not

favor the use of any particular

technology to validate an electronic document.

The ct however does not address

issues relating to which states laws would

govern an online transaction and which

states code would have 3urisdiction over a dispute.

3.2.3 The :ramm - +each - Bliley $:+B% ct has substantially easedrestrictions on the

ability of banks to provide other financial services.

#t has established new rules for the

protection of consumer financial information.

The #nter-agency tatement on

'lectronic 0inancial ervices and ConsumerCompliance $?uly 1@@D% addresses

consumer protection laws and describe how they

can be met in the conte/t of electronic

delivery. #n addition, the 0ederal (eserve Board

has issued a reuest for comment on

revised proposals that would permit electronic

delivery of federally mandated


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22


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disclosures under the five consumer protection

regulations of the 0(B $(egulations B, ;;, ', !

J K%.

3.2.4 The #nterpretive (uling of the 7ffice of the

Comptroller of Currency $7CC% authori)es

a national bank to perform, provide or deliver

through electronic means and facilities

any activity, functions, product or service that it is

otherwise authori)ed to perform,

provide or deliver. The concerns of the 0ederal

(eserve are limited to ensuring that

#nternet banking and other electronic banking

services are implemented with proper

attention to security, the safety and soundness of

the bank, and the protection of the

banks customers. Currently, all banks, whether

they are #nternet only or traditional

banks must apply for a charter according to

e/isting guidelines. The five federal

agencies - 0ederal ;eposit #nsurance Corporation

$0;#C%, 0ederal (eserve ystem

$0(%, 7ffice of the Comptroller of Currency

$7CC%, 7ffice of Thrift upervision

$7T% and the &ational Credit nion ssociation

$&C% supervise more than 4A,AAA

institutions. #n addition, each state has a

supervisory agency for the banks that it

charters. !ost financial institutions in the

face no prereuisite conditions or


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notification reuirements for an e/isting banking

institution to begin electronic banking

activities. 0or these banks, supervisors gather

information on electronic banking during

routine annual e/amination. &ewly chartered

#nternet banks are sub3ect to the standard

chartering procedures. 0or thrift institutions,

however, 7T has instituted a 5A-day

advance notification reuirement for thrift

institutions that plan to establish a

transactional web site. few tate banking

departments have instituted a similar

notification reuirement for transactional #nternet

banking web sites.

3.2.5 upervisory policy, licensing, legal reuirements

and consumer protection are generally

similar for electronic banking and traditional

banking activities. #nternet banks are also

sub3ect to the same rules, regulations and

policy statement as traditional banks.

9owever, in response to the risks posed by

electronic banking, federal banking agencies

have begun to issue supervisory guidelines and

e/amination procedures for e/aminers

who review and inspect electronic banking

applications. lthough speciali)ed banking

procedures are used in some areas of #nternet

banking activities, the e/isting

information technology e/amination framework

that addresses access controls,

information security, business recovery and other

risk areas generally continues to be


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23


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applicable. To assist supervisors in monitoring the

e/pansion of #nternet banking, state

chartered and national banks have been

reuired since ?une 1@@@ to report their

websites niform (esource +ocators $(+% in

the Guarterly (eports of 0inancial

Condition that are submitted to supervisors. #n

addition, e/aminers review the potential

for reputational risk associated with web-site

information or activities, the potential

impact of various #nternet strategies on an

institutions financial condition, and the need

to monitor and manage outsourcing relationships.

To address these risks, the 7CC is

developing specific guidance for establishing

#nternet only banks within the . The

Banking #ndustry Technology ecretariat

recently announced the formation of a

security lab to test and validate the security of

software and hardware used by banking

organi)ations. #f a bank is relying on a third party

provider, it is accepted that it should

be able to understand the provided information

security programme to effectively

evaluate the security systems ability to protect

bank and customer data. '/amination

of service providers operations, where necessary,

is conducted by one or more 0ederal

banking agencies pursuant to the Bank ervices


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Company ct, solely to support

supervision of banking organi)ations.

3.2.6 The 0ederal 0inancial #nstitutions '/amination Council

$00#'C% introduced the

#nformation ystems $#% rating system to be used

by federal and state regulators to

assess uniformly financial and service provider

risks introduced by information

technology and to identify those institutions and

service providers reuiring special

supervisor attention. The 00#'C has recently

renamed the system as niform (ating ystem for

#T $(#T%, which has enhanced the audit

function. The importance of risk management

procedure has been reinforced under the revised

system.

3.2.7 ome characteristics of e-money products such

as their relative lack of physical bulk,

their potential anonymity and the possibility of

effecting fast and remote transfers make

them more susceptible than traditional systems to

money laundering activities. The

7CC guidelines lay down an effective know your

customer policy. 0ederal financial

institutions, regulators, ociety for "orldwide

#nterbank 0inancial Telecommunications

$"#0T% and Clearing 9ouse #nterbank

Payment ystem $C9#P% have issued

statements encouraging participants to include

information on originators and

beneficiaries.


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24


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3.3 .0.

3.3.1 !ost banks in .8. are offering transactional

services through a wider range of

channels including "ireless pplication Protocol

$"P%, mobile phone and T.F.

number of non-banks have approached the

0inancial ervices uthority $0% about

charters for virtual banks or clicks and mortar

operations. There is a move towards

banks establishing portals.

3.3.2 The 0inancial ervices uthority $0% is

neutral on regulations of electronic banks.

The current legislation, vi). the Banking ct

1@D and the Building ocieties ct,

provides it with the necessary powers and the

current range of supervisory tools.

new legislation, the 0inancial ervices and !arket

Bill, offers a significant addition in

the form of an ob3ective reuiring the 0 to

promote public understanding of the

financial system. There is, therefore, no special

regime for electronic banks. draft

'lectronic Banking :uidance for supervisors has,

however, been developed. guide

to Bank Policy has also been published by the

0 which is technology neutral, but

specifically covers outsourcing and fraud. The 0

also maintains bilateral discussions


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with other national supervisors and monitors

developments in the 'uropean nion

$'% including discussions by the Banking

dvisory Committee and :roup de Contract.

&ew legislation on money laundering has been

proposed and both the British Bankers ssociation

and the 0 have issued guidance papers in this

regard.

3.3.3The 0 is actively involved in the Basle

Committee e-banking group which has

identified authori)ation, prudential standards,

transparency, privacy, money laundering

and cross border provision as issues where there is

need for further work. The 0 has

also been supporting the efforts of the : 0inancial

tability 0orum, which is e/ploring

common standards for financial market, which is

particularly relevant to the #nternet,

which reaches across all borders.

3.3.4 The 0inancial ervices and !arkets Bill will

replace current powers under the 1@D

Banking ct giving the 0 statutory authority for

consumer protection and promotion

of consumer awareness. Consumer compliance is

reuired to be ensured via desk based

and on site supervision. The 0 has an

uthori)ation and 'nforcement ;ivision,

which sees if web sites referred to them are in

violation of .8. laws.

3.3.5 The 0 has issued guidelines on advertising in .8. bybanks for deposits,

25


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investments and other securities, which apply to

#nternet banking also. The guidelines

include an ppendi/ on #nternet banking. The

0s supervisory policy and powers in

relation to breaches in the advertising code $vi).

invitation by any authori)ed person to

take a deposit within .8., fraudulent

inducements to make a deposit, illegal use of

banking names and descriptions, etc.% are the same

for #nternet banking as they are for

conventional banking. The 0 does not regard a

bank authori)ed overseas, which is

targeting potential depositors in its home market or

in third countries as falling within

.8. regulatory reuirements solely by reason of

its web site being accessible to

#nternet users within the .8., as the

advertisements are not aimed at potential .8.

depositors.

3.4 /cn)ini

3.4.1 wedish and 0innish markets lead the world in

terms of #nternet penetration and the

range and uality of their online services.

!erita&ordbanken $!(B% $now &ordic

Bank 9olding, a merger between 0inlands !erita

and &ordbanker of weden% leads in

Llog-ins per monthM with 1.4 million #nternet

customers, and its penetration rate in

0inland $around 6


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the world for a bank of brick and

mortar origin. tandinaviska'askildaBanken

$'B% was wedens first #nternet

bank, having gone on-line in ;ecember 1@@>. #t

has 1,AAA corporate clients for its

Trading tation - an #nternet based trading

mechanism for fore/ dealing, stock-inde/

futures and wedish treasury bills and government

bonds. wedbank, is another large-

si)ed #nternet bank. lmost all of the

appro/imately 1


55/82

gives each transaction a uniue code, and has so far

proved safe. ome banks use even more

sophisticated versions of the same techniue. #t is

not a common practice to use third party vendors

for services.

3.4.3 #n weden, no formal guidance has been given to

e/aminers by the verigesbank on e-

banking. :eneral guidelines apply eually to

#nternet banking activities. Contractual

regulari)ation between customers and the bank is a

concern for regulators and is being

looked into by the authorities.

3.4.4 The role of the Bank of 0inland $uomenParkki%

has been, as part of general oversight

of financial markets in 0inland, mainly to monitor

the ongoing development of #nternet

banking without active participation. &umerous

issues concerning #nternet banking

have, however, been e/amined by the Bank of

0inland.

3.4.5ll #nternet banking operating from a &orwegian

platform are sub3ect to all regular

banking regulations, 3ust as any other bank. s

part of the standard regulation, there is

also a specific regulation on the banks use of #T.

This regulation dates from 1@@4

when #nternet banking was not the main issue, but

it covers all #T systems, including

#nternet banking. The regulation secures that


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banks purchase, development, use and

phase out of #T systems is conducted in a safe and

controlled manner. n ct relating

to Payment systems defines payment systems as

those which are based on standardi)ed

terms for transfer of funds from or between

customer accounts in banks2financial

undertakings when the transfer is based on use of

payment cards, numeric codes or any

other form of independent user identification.

#nternet banking is covered by this

regulation. The Banking, #nsurance and

ecurities Commission may order for

implementation of measures to remedy the situation

if there is a violation of provisions.

3.4.6#n addition to their national laws, countries in

'urope are also e/pected to implement

'uropean nion $'% directives. #n 1@@


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3.5 ther Countries

3.5.1Australia:

3.5.1.1 #nternet Banking in ustralia is offered in two

forms* web-based and through the

provision of proprietary software. #nitial web-

based products have focused on personal

banking whereas the provision of proprietary

software has been targeted at the

business2corporate sector. !ost ustralian-owned

banks and some foreign subsidiaries

of banks have transactional or interactive web-

sites. 7nline banking services range

from 0#s websites providing information on

financial products to enabling account

management and financial transactions.

Customer services offered online include

account monitoring $electronic statements, real-

time account balances%, account

management $bill payments, funds transfers,

applying for products on-line% and financial

transactions $securities trading, foreign currency

transactions%. 'lectronic Bill

Presentment and Payment $'BPP% is at an early

stage. 0eatures offered in proprietary

software products $enabling business and

corporation customers to connect to the

financial institutions $via dial-up2leased

line2e/tranet% include account reporting,

improved reconciliation, direct payments,


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payroll functionality and funds transfer

between accounts held at their own or other

banks. part from closed payment

systems $involving a single payment-provider%,

#nternet banking and e-commerce

transactions in ustralia are conducted using long-

standing payment instruments and

are cleared and settled through e/isting clearing

and settlement system. Banks rely on

third party vendors or are involved with outside

providers for a range of products and

services including e-banking. :enerally, there are

no virtual banks licensed to operate

in ustralia.

3.5.1.2 The 'lectronic Transactions ct, 1@@@

provides certainty about the legal status of

electronic transactions and allows for

ustralians to use the #nternet to provide

Commonwealth ;epartments and agencies with

documents which have the same legal

status as traditional paperwork. The

ustralian ecurities and #nvestments

Commission $#C% is the ustralian regulator with

responsibility for consumer aspects

of banking, insurance and superannuation and as

such, it is responsible for developing

policy on consumer protection issues relating to

the #nternet and e-commerce. #C

currently has a draft proposal to e/pand the

e/isting 'lectronic 0unds Transfer Code of

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Conduct $a voluntary code that deals with

transactions initiated using a card and a P#&% to

cover all forms of consumer technologies,

including stored value cards and other new

electronic payment products. ustralias anti-

money laundering regulator is the ustralian

Transaction (eports and nalysis Centre

$T(C%.

3.5.1.3 (esponsibility for prudential supervisory

matters lies with the ustralian Prudential

(egulation uthority $P(%. P( does not

have any #nternet specific legislation,

regulations or policy, and banks are e/pected to

comply with the established legislation

and prudential standards. P(s approach to

the supervision of e-commerce

activities, like the products and services

themselves, is at an early stage and is still

evolving. P(s approach is to visit institutions

to discuss their #nternet banking

initiatives. 9owever, P( is undertaking a

survey of e-commerce activities of all

regulated financial institutions. The growing

reliance on third party or outside providers

of e-banking is an area on which P( is

increasingly focusing.

3.5.2 &e! 'ealand:


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3.5.2.1 !a3or banks offer #nternet banking service to

customers, operate as a division of the

bank rather than as a separate legal entity.

3.5.2.2 (eserve Bank of &ew Kealand applies the

same approach to the regulation of both

#nternet banking activities and traditional

banking activities. There are however,

banking supervision regulations that apply only to

#nternet banking. upervision is

based on public disclosure of information rather

than application of detailed prudential

rules. These disclosure rules apply to #nternet

banking activity also.

3.5.3Sin%apore:

3.5.3.1 The !onetary uthority of ingapore $!%

has reviewed its current framework for

licensing, and for prudential regulation and

supervision of banks, to ensure its relevance

in the light of developments in #nternet banking,

either as an additional channel or in the

form of a speciali)ed division, or as stand-alone

entities $#nternet 7nly Banks%, owned

either by e/isting banks or by new players entering

the banking industry. The e/isting

policy of ! already allows all banks licensed

in ingapore to use the #nternet to

provide banking services. ! is sub3ecting

#nternet banking, including #7Bs, to the

same prudential standards as traditional banking.

#t will be granting new licences to

banking groups incorporated in ingapore to set

up bank subsidiaries if they wish to


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29


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pursue new business models and give them

fle/ibility to decide whether to engage in #nternet

banking through a subsidiary or within the bank

$where no additional licence is reuired%. ! also

will be admitting branches of foreign incorporated

#7Bs within the e/isting framework of admission

of foreign banks.

3.5.3.2 s certain types of risk are accentuated in

#nternet banking, a risk - based supervisory

approach, tailored to individual banks

circumstances and strategies, is considered more

appropriate by ! than Lone-si)e-fits-allM

regulation. ! reuires public

disclosures of such undertakings, as part of its

reuirement for all banks and enhance

disclosure of their risk management systems. #t is

issuing a consultative document on

#nternet banking security and technology risk

management. #n their risk management

initiatives for #nternet banking relating to security

and technology related risks, banks

should $a% implement appropriate workflow,

authenticated process and control

procedures surrounding physical and system

access $b% develop, test, implement and

maintain disaster recovery and business

contingency plans $c% appoint an independent

third party specialist to assess its security and

operations $d% clearly communicate to


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customers their policies with reference to rights

and responsibilities of the bank and

customer, particularly issues arising from

errors in security systems and related

procedures. 0or liuidity risk, banks, especially

#7Bs, should establish robust liuidity

contingency plans and appropriate sset-+iability

!anagement systems. s regards

operational risk, banks should carefully manage

outsourcing of operations, and maintain

comprehensive audit trails of all such operations.

s far as business risk is concerned,

#7Bs should maintain and continually update a

detailed system of performance

measurement.

3.5.3.3 ! encourages financial institutions and

industry associations such as the

ssociations of Banks in ingapore $B% to

play a proactive role in educating

consumers on benefits and risks on new financial

products and services offered by

banks, including #nternet banking services.

3.5.4on% on%:

3.5.4.1 There has been a spate of activity in #nternet

banking in 9ong 8ong. Two virtual

banks are being planned. #t is estimated that

almost 1


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services. Banks are participating in strategic

alliances for e-commerce ventures and are forming

alliances for #nternet banking services delivered

through ?etco$a bank consortium operating an

T! network in 9ong 8ong%. few banks have

launched transactional mobile phone banking

earlier for retail customers.

3.5.4.2 The 9ong 8ong !onetary uthority $98!%

reuires that banks must discuss their

business plans and risk management measures

before launching a transactional website.

98! has the right to carry out inspections of

security controls and obtain reports

from the home supervisor, e/ternal auditors or

e/perts commissioned to produce

reports. 98! is developing specific guidance

on information security with the

guiding principle that security should be Lfit for

purposeM. 98! reuires that risks in

#nternet banking system should be properly

controlled. The onus of maintaining

adeuate systems of control including those in

respect of #nternet banking ultimately

lies with the institution itself. nder the eventh

chedule to the Banking ordinance,

one of the authori)ation criteria is the reuirement

to maintain adeuate accounting

system and adeuate systems control. Banks

should continue to acuire state-of-the art


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technologies and to keep pace with developments

in security measures. The 98!s

supervisory approach is to hold discussions with

individual institutions who wish to

embark on #nternet banking to allow them to

demonstrate how they have properly

addressed the security systems before starting to

provide such services, particularly in

respect of the following - $i% encryption by

industry proven techniues of data

accessible by outsiders, $ii% preventive measures

for unauthori)ed access to the banks

internal computer systems, $iii% set of

comprehensive security policies and procedures,

$iv% reporting to 98! all security incidents and

adeuacy of security measures on a timely basis.

t present, it has not been considered necessary

to codify security ob3ectives and reuirements

into a guideline. The general security ob3ectives

for institutions intending to offer #nternet banking

services should have been considered and

addressed by such institutions.

3.5.4.3 98! has issued guidelines on

uthori)ation of Firtual Banks under ection

1>$1A% of the Banking 7rdinance under which $i%

the 98! will not ob3ect to the

establishment of virtual banks in 9ong 8ong

provided they can satisfy the same

prudential criteria that apply to conventional

banks, $ii% a virtual bank which wishes to

31


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DIGITAL MONEY

The massive adoption of plastic money and internet have

been driving the Digital Payment Industry for last few years. In 2014,however, India is going to take down a barrier ofdigital payment

industrys growthrate of 40% and the industry will touch a mark of INR

120,120 Crore( US$ 20.02 billion). Last year the industry outgrew to INR

85,800 Crore (US$ 14.3 billion), according to the latest IAMAI report

titledINR 85,800 Crore Digital Money.

The internet in India has become a viable source to do many

things including transactions pertaining to payments. In todays fast moving

world, people tend to transact on internet than triggering the traditional

styled offline transaction. The explosive adoption of smartphone and mobile

internet in India has fuelled the growth of digital payment industry further.
http://iamai.in/PRelease_detail.aspx?nid=3348&NMonth=5&NYear=2014http://iamai.in/PRelease_detail.aspx?nid=3348&NMonth=5&NYear=2014


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In accordance to the report that is constructed by IMRB International,

Payment Council of India and Internet and Mobile Association of India

on Digital Payments of India, country has gained a Compound Annual

Growth Rate (CAGR) of 10 percent in digital payments since 2010 till2013 year-end.

Payments on electronic media have increased because of explosive

growth in Etailing sites, online Travel sites for tickets and

accommodation in hotels and resorts, financial services for paying

fees, rents and other needed transactions. These transactions are

now done through internet to reduce time wastage. The transitionmodes mainly are through card transactions, mobile wallet, cash/ cash

on delivery, transfers through net banking, but do not include

remittance.


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TRANSACTION

National Electronic fund Transfer (NEFT):

,T fci+ittes on+ine trnsfer of fun)s from one *nkccount to nother *nk ccount. The +imit of trnsferring fun) is2%. &n &n)i,T s"stem +ies (ith eect from 21 oem*er 25. ,T (ssent to coer ++ *nks(hich (ere prticipting in the speci+e+ectronic fun)s trnsfer ,T: c+ering. ,T (sm)e on thestructure) ;nnci+ messging so+ution /


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Volume of Electronic Transactions of Scheduled Commercial

Banks(Volume in Millions)

ertrnsction

,C/ cre)it ,C/ )e*it ,T

o+ume G# D!

role of ebanking

Documents