Introduction

Technology in the banks is presently catching up with a high level of development around the world. The gaps between the Indian banks and their counterparts in the technologically advanced countries are gradually narrowing down. The world has witnessed an information and technological revolution of late. This revolution has touched every aspect of public life including banking (Siam, 2006). Since two decades, due to an increasingly competitive, saturated and dynamic business environment, retail banks in many countries have adopted customer-driven philosophies to address the rapid and changing needs of their customers (Walker et al., 2008). Technological advances have changed the world radically, altering the manner in which individuals conduct their personal and business affairs. Over the past two decades in particular, the banking industry has invested substantial resources in bringing ICT to customers.

The banking industry is undergoing through the significant technological changes; it has several impacts on customer satisfaction and loyalty. ―It has revolutionised every industry including banking in the world by rendering faster and cost effective delivery of products and services to the customers. According to Chakrabarty, (2007) core banking solution enables banks to extend the full benefits of ATM, tele-banking, mobile banking, internet banking, card banking and other multiple delivery channels to all customers allowing banks to offer a multitude of customer-centric services on a 24x7 basis from a single location, supporting retail as well as corporate banking activities.

Now, Indian banks are investing heavily in the technologies such as branch automation and computerization, core banking, tele-banking, mobile banking (M-banking), internet banking, automated teller machine (ATMs), data warehousing etc. ICT innovations in the previous few years have changed the landscape of banks in India (Mittal and Dhingra, 2007; Kour and Kour, 2011). Today public sector and private sector banks are offering online banking services. Various alternative channels to

provide easy and any where banking are properly thought of. The process of bank computerization was started since 1985 in public sector banks in India. However, some private sector banks have started computerization prior to the public sector banks in India. The banks in India are using ICT not only to improve their own internal processes but also to increase facilities and services to their customers.

A customer satisfaction is an ambiguous and abstract concept. Actual manifestation of the state of satisfaction will vary from person to person, product to product and service to service. The state of satisfaction depends on a number of factors which consolidate as psychological, economic and physical factors. The quality of service is one of the major determinants of the customer satisfaction, which can be enhanced by using ICT available to survive. The banks in India are using Information Technology (IT) not only to improve their own internal processes but also to increase facilities and services to their customers1. Particularly, in the banking sector ICT is one of the most important tools, because it provides many suitable alternative banking channels to the customers. It brings connivance, customer centricity, enhance service quality and cost effectiveness in the banking services. Even now, customers are evaluating their banks based on availability of high-tech services.

Therefore, implementation of ICT in the banking business continues to improve the banking service. Many researchers from USA, UK, Finland, Malaysia, Taiwan, etc. have proved that the use of technology positively affects the customer’s satisfaction in banking industry. But some researches evidenced that, technology based banking service can‘t satisfy the each and every need of the customer’s and each type of customers‘. There are may be some possibilities of gaps between customer’s expectations and actual service perception in ICT based banking service, which leads to customer dissatisfaction. Hence, there is a need to assess the impact of alternative banking services on customers‘ satisfaction in Indian context to study the level of satisfaction, problems and areas of further improvements.

INNOVATIONS IN BANKS:1) In late 1980‟s and early 1990‟s there was arrival of card-

based payments- debit card, credit cards2) In late 1990‟s Electronic Clearing Service (ECS) was

introduced.3) Electronic Fund Transfer/ Special EFT (EFT/SEFT) was

introduced in the early 2000‟s4) Introduction of Real Time Gross Settlement (RTGS) in

March 20045) Introduction of NEFT (National Electronic Funds

Transfer)as a replacement for EFT/SEFT in 2005/066) In 2007 plan for implementation of cheque truncation

system as a pilot program in New Delhi.7) Migration from cash and cheque based payment system; it

has become a necessity to electronic fund transfer system on account of the following reasons:

a) Large volumes of transactionb) High cost of physical handling and storage of paper

instruments.c) Delay in realization is a common feature.d) Finality of payment takes time because the physical

movement of instruments in large volumes from branches to and from clearing house, and sorting them according to each bank branch at the center creates problems.

ALTERNATIVE BANKING CHANNELS AND TYPES OF CHANNELS

Modern service provision to customers, such as banking or retailing, is now supported by a myriad of interactive technologies, such as the internet, mobile applications, or interactive kiosks, leading to the emergence of multichannel or multi-interface service systems (Patrício et al, 2009). Technological innovations in banking provide many efficient alternative delivery channels to customers (Frei et al, 1998). The advance of communication and computer technology have made it possible that one can do most banking transactions from a any

location even without stepping into a physical financial structure (Burns, 2002) through alternative banking channels. Alternative banking, as the name suggest, is the newer method of carrying on banking operations, is the newer method of carrying on banking operations. It includes all non-traditional means of banking (World Retail Banking Report-2008, pp-40; Shrotryiya, 2007; Ogilvie, 2008; Rakesh Mohan, 2002; Niels et al , 1999; Chris et al , 2005; Sathye, 1999) such as ATM, internet banking, bank automation, core banking, credit cards, debit cards, mobile banking, EFT etc. According to IBM Global Services alternative banking is set of alternative delivery channels1. Alternative distribution channels are not only important to reducing costs and improving competitiveness, but also ability to retain the existing customer case as well as to attract new customers (Kimball and Gregor, 1995). Daniel, (1999) mentioned that there are six different alternative delivery chandelles of banking i.e. PC banking, internet banking, managed network2, TV banking3, Telephone banking and Mobile phone banking. Association of Banks in Palestine (2009) defined as ―it is conducting financial transactions electronically, without physically interacting with the bank (i.e. using visa card, visa electron, internet banking, other). However TV banking facilities are not available in India till date.

Alternative banking is alternative options for process banking transactions other than traditional means. It is also known as e-banking, electronic banking, online banking, virtual banking, direct banking and high tech-banking. According to Howcroft (1993) alternative distribution channels provides convenient alternatives to branch banking. In the traditional banking system customers need to visit branch to make transaction and getting information about banking services, account information etc. But in the alternative banking there is no need to visit physical branch most of banking transactions are possible through alternative channels (Kumbhar 2009). It is also known as quasi-banking, alternative remittance systems, and parallel banking. According to Devlin, et al (2003) Direct banking is the generic term that has been adopted to encompass telephone and Internet banking, as well as interactive television

and most recently m-banking (banking using a mobile platform such as a hand phone or personal digital assistant). There is substantial evidence to suggest that e-banking is being embraced by financial institutions in developed and emerging markets. There are two different strategies has been adopted by banks for e-banking: First, an existing bank with physical offices can establish a web site and offer alternative banking to its customer as an additional delivery channel. A second alternative is to establish an Internet-only bank or additional e-channels or virtual bank, almost without physical offices (Miranda et al, 2006).

IT-based service channel may significantly lower costs of serving customers. The analysts forecast that 40% of adult UK consumers will be lured in by the conveniences of online banking bringing the number to 22 million users by 2012. Internet banking allows customers to perform many banking functions anytime and anywhere, while ATMs provide some services not possible by internet banking, such as withdrawing money around the clock (Banker et al 2009). The advent of Internet, electronic commerce, communication technology and users‘ response to this technology has opened opportunity for many businesses including the financial institution (Wang and Wang 2006).

Features of alternative banking

According to Kaleem Ahmad (2008) Electronic banking minimizes the cost of transactions, saves time, minimizes inconvenience, provides up-to-date information, increases operational efficiency, reduces HR requirements, facilitates quick responses, improves service quality and minimizes the risk of carrying cash. As per Report of European Central Bank (1999) technology has reduced the cost of operation and ways of the banking truncation. After reviewing the literature related to alternative banking, e-commerce, mobile commerce and ICT based financial services we have identified followings characteristics of alternative banking services are:

a) Technology dependency – Alternative banking services are highly depends on technology and high-tech communication system (Srotriya, 2007, Verner, et. al. 1989). For the pursuing the e-banking services banks are using Information and communication technology (Internet, mobile phone, telephone, other electronic devises) But e-banking services are totally technology based services.

b) Round the clock service- Alternative banking portal are provides 24 hours banking services. Customers can enjoy round the clock banking service through the self-service banking modes. They have freedom from tense about official time of bank.

c) Multi channel banking – Modern technology based banking provides many alternatives to transact banking business through the different channels e.g. ATM, core banking, Mobile banking, Internet banking, Phone banking, POS terminals, Credit and Debit cards etc.

d) Lack of Face2Face contact- in the e-banking transaction there is lacking face to face contact of customer and services provider (Jayawardhena & Foley, 2000; Durkin and O'donnell, 2005). Customers can use the banking services via virtual means of e-banking i.e. internet banking, mobile banking, ATM, credit card etc. While Lack of face-to-face contact is biggest obstacle to modern banking because right customer has been identified by ID and password than face to face identification.

e) Risk factors- Despite of certain benefits of alternative banking channels there are some certain risks e.g. Performance risk6, Strategic risk, financial risk7, Compliance and legal risk8, Reputational Risk9, Operational (Operational) Risk10 there has been fear of inadequate security is one of the electronic banking channels (Ezeoha, 2005; Schilder 2001; Sokolov Dmitri). There may be. So, it is clear that alterative banking channels is lacking actually the assurance provided in traditional banking (Lee et al., 2009). The Electronic Data storage and interchange system also consist Data Risk. Unauthorized access to the bank client‘s private information causes first of all operational risk, but indirectly also legal as well as reputational risk (BIS, 2009). Customer education on security risks and precautions can play an important role for consumer protection and for limiting reputational risk.

f) Inseparability- e-banking services can‘t be separate from e-service channels and even there is also inseparability in production and consumption of the e-banking services. These services are being produced at the same time that the customer is receiving it.

g) Homogeneity- Formal services have a heterogeneity concerns the potential for high variability in the performance of services is special characteristics of the services it make difficult to establish standard. However alternative banking services are homogenous of one specific bank due to same types of channel and service specifications, while their actual performance may be differ by place and speed of internet connectivity.

h) Cost effectiveness - Technology based banking services provide cost effectiveness to customers and bank both. Banks can deliver banking services through alternative channels at transaction costs far lower than traditional ways. It has been proved that online banking channels are cheaper delivery channel than traditional banking (Adesina, 2010).

i) Geographical reach- Alternative banking allows expanded customer contact through increased geographical reach and lower cost of delivery channels. Yibin (2003) argued that it provides borderless banking services throughout the world where the internet connectivity is available.

j) Virtual banking– Alternative banking channels have reduced branch networks and downsized the number of service staff. E-banking offer freedom from place constraint, and reduced stress of queuing in banking hall. Which has paved the way to self-service channels as quite many customers felt that branch banking took too much time and effort. Virtual banking offering any ware banking facilities.

According to Singhal and Padhmanabhan (2008), User of ICT based banking expect Convenience, Flexibility, Easy to use and user friendliness, Reliability, Fulfillment, Real time access, Cost effectiveness, Alternative Options, Security & Privacy, Speed & Continuity, Anytime and anywhere banking facilities. There is some risk factors include in e-banking like data loss, fraud, lack of adequate information, password theft

etc. Kaleem Ahmad (2008). Hence customers expect security and trust in e-banking services.

History of alternative banking in India

Information Technology (IT) has helped in increasing the speed and efficiency of banking operations by facilitating the emergence of innovative products and new delivery channels. The role of the Reserve Bank as the driver of technology initiatives in the banking sector assumes greater importance given the challenges posed by rapid advancements in technology. The Resave Bank of Indian has played important role in implementation of information. In order to this intension the RBI constituted several committees from time to time with different objectives, headed by experts in different fields or academicians, some of them during eighties and nineties. The Reserve Bank of India has appointed various committees to implement ICT in Indian banking (Table 4.2).

History of the bank automation traced with use of computer technology in India. The government of India has established the Electronics Corporation of India Ltd. in 1967 with the objective of research & development in the fields of Electronic Communication, Control, instrumentation, automation and Information Technology. The Computer Maintenance Corporation of India Ltd. was established in 1976 to look after maintenance operations of Main Frame Computers installed in several organizations in India.

Entry of technology in the Indian banking industry can be traced back to the Raganarajan Committee report, way back in the second half of the 1970s. In 1979, the RBI has appointed the Talwar Committee on Consumer Services in Banks’ and it recommended that, computerisation of some functions is required to avoid delays in customer service in Indian banks. While automation process has not tack off stage till 1993, because bank employees unions are not agree with bank automation process they have fever about job losses. However, in 1993, the Employees' Unions of Banks signed an agreement with Bank Managements under the auspices of Indian Banks' Association (IBA) after job assurance given by management. This agreement was a major breakthrough in the introduction of computerized applications and development of communication networks in Banks. In the first phase the Indian banks started computerizing the front-end operations through Advanced Ledger Posting Machines (ALPMs). Some banks concentrated on the back office automation and some are front-end operations. In the second phase banks started total branch automation with front-end and back-end operation within same branch. In the third phase, during the nineties the banking sector witnessed various foreign and new private sector banks are entre in the Indian banking industry with the latest technology.

Bank computerization in India

As per the recommendations of the various committees and working groups the RBI tied to enhance technology in Indian commercial banks. The first blue print for computerization of

banks in India was drown in 1983-84 as phased plan for mechanization of banking industry (1985-89)11. Although, the Reserve Bank of India (RBI) installed its first computer in 1968, and a larger one in 1979. But the United Commercial (UCO) Bank, the Standard Chartered Bank, Lloyds' Bank, Grindlays, and others had installed accounting and other machines before 1966. But in large scale computerisation of Indian public sector banks has been undertaken by the Phased plan of computerisation in 1985 which was constituted by Dr. C. Rangrajan Committee. Now most public sector banks are computerised fully or partially. In the first phase of computerisation spanning the five years ending 1989, banks in India had installed 4776 ALPMs at the branch level, 233 mini computers at the Regional/Controlling office levels and trained over 2000 programmers/systems personnel and over 12000 Data Entry Terminal Operators.

Core banking or centralized banking

Core banking is a term used to describe a service provided by a group of networked bank branches. Bank customers may access their funds from any of the member branch offices. Core banking consists of a networking process by which the servers of different branches of a bank are joined to a common server and henceforth an account holder may access, deposit, and withdraw money from his/her account from any of the branches of the bank. In 21st United States, core banking has become common place. HSBC is the first bank to opt for Core Banking Solution way back in 199914. Today around 67.7 % of public sector bank branches are all branches of private and foreign banks are under core banking solution in India.

ATM and POS terminals

The history of ATM is confusing due to the many claims about its invention and very short literature and their evidences. The history of ATM can be traced back to the 1960s, when the first ATM machine was invented by John Shepherd-Barron he was managing director of De La Rue Instruments. That machine used by Barclays Bank (Barclays Bank in Enfield

Town in North London, United Kingdom) in 27 June 1967 (Wikipedia E-encyclopaedia). Forth more, in 1965, Mr. Goodfellow designed a system which accepted a machine readable encrypted card, to which he added a numerical keypad, its called automatic cash dispenser machine. These Machines were marketed by Chubb LTD and installed nationwide in the UK during the late 60s and early 70s. According to Cornelis Robat (USA) the concept of the ATM first began in 1968, a working prototype came about in 1969 and Docutel was issued a patent in 1973. The first working ATM was installed in a New York based Chemical Bank. The machine was called a "Credit Card Automatic Currency Dispenser". Some eveidances cleiam that Westminister Bank installed first automated teller machine (ATM) at Victoria, London Branch in 1967. While, According to Banknet organization (India) the first Automated Teller Machine (ATM) was introduced in the year 1967 by Barclays Bank in Enfield Town in North London. In 1969 first use of ATM magstripe cards in Docutel installs its Docuteller machine at New York's Chemical Bank. Chemical Bank's ad campaign announces: "On Sept. 2, our bank will open at 9:00 and never close again!" ATM also popular in Germany 84% of all Germans are using ATMs.

The first bank to introduce the ATM concept in India was the Hong Kong and Shanghai Banking Corporation (HSBC) in the year 1987. As a Indian bank, Bank of India was first bank to introduced ATM in Bombay in 1988 followed by Vijaya Bank at Delhi in 1989 and then after almost of commercial banks have started their ATM facilities. AS on March 2009 there are 24,645 on-site and 19,006 off-site ATMs installed in India (total 43,651) (see Table No 4.4). Today, some Urban Cooperative Banks (UCBs) and District Central Cooperative Banks (DCCBs) also providing ATM service in India. However, SBI is following the concept of 'ATMs in Quantity‘ SBI group has installed highest ATMs in India. The Corporation Bank has the second largest network of ATMs amongst the Public Sector Banks in India. Today‘s all Public Sector Banks are taking the installation of ATMs seriously for Indian market. They are either setting up their own ATM centers or entering into tie-ups with other banks.

Since April 2009 access in any ATM machine is free of charge it is the great opportunity to any ware banking in India.

The number of ATMs under National Financial Switch (NFS) Network now stands at 61,702 and the number is growing at a rate of around 1000 ATMs a month. National Payments Corporation of India which provides the central infrastructure and routing service through the NFS can easily handle 300 million transactions a month. MITR is a Multi lateral ATM Network Sharing arrangement of 6 member Banks in India. It came into existence on 8 October 2003. CashTree is an interbank network in India that has been in operation since March 2004. Bank of India is the settlement bank for this network, which started with just 6 public sector banks but later expanded to admit private sector banks. BANCS is another TAM network run by Bank of India since 2004. Swadhan it most fevered network of this network. Other than these network there are some bilateral ATM network also working in Indian banking industry i.e. SBI groups ATM network and SVC Cache 24 Insta ATM sharing Arrangement of the Shamrao Vithal Co-operative Bank Ltd. SWADHAN also one of the ATM network of the public sector banks in India (Uppal and Jatana, 2007 pp. 103). The Indian Banks Association has introduced SWADHAN as shared payment network.

POS terminals in India

A Point of Sale (POS) terminal is an integrated PC-based device, with a monitor (CRT), POS keyboard, POS printer, Customer Display, Magnetic Swipe Reader and an electronic cash drawer all rolled into one16. More generally, the POS terminal refers to the hardware and software used for checkouts kept at the merchant's store. POS terminals are predominantly used for sale and purchase transactions. Therefore, to encourage ccustomers for used of POS the Reserve Bank of India (RBI) has allowed cash withdrawal from point of sale (POS) terminals across the country since 2009. According to the bankers this will also encourage the use of debit cards at PoS-enabled merchant establishments in India.

Electronic money or plastic money

The history of money is one of its progressive dematerialization from metal money to e-money. Recently paper money system has been replaced by e-money. According to the ―Report on electronic Money‖ published by the European Central Bank (1998) ―Electronic Money is an electronic store of monetary value on a technical device that may be widely used for making payments to undertaking other than the issuer without necessarily involving bank accounts in the transaction, but acting as a prepaid bearer instrument‖ (Desai, 2007 pp12-13) it is also known as Plastic Money, Cybercash, eCash and Digcash (Digital cash). Plastic card also known as plastic currency involving electronic device in their functioning is gaining popularly as a convenient mode of payment (Uppal and Jatana, 2007 pp. 112).

As per the history of the electronic money the most popular type of the e-money is debit card, since their launch in 1987 debit cards have established themselves as the most popular card payment with consumers. Initially developed as a convenient and cost-effective alternative to point-of-sale cheques, debit cards are increasingly being used as a substitute for cash. A debit card is a plastic card which provides an alternative payment method to cash when making purchases. Debit cards are accepted at many locations, including grocery stores, retail stores, gasoline stations, and restaurants. It‘s an alternative to carrying a cheque book or cash. There are currently two ways that debit card transactions are processed: online debit cards and offline debit cards. Online debit cards require electronic authorization of every transaction and the debits are reflected in the user‘s account immediately.

Credit cards Use of credit card is many countries of the world are quite old. But it has become popular in Indian past one decade only. The origins of the bank credit card have been traced to Johnc Biggins a customer credit specialist at the Flatbush National Bank of Brooklyn, New York. In 1946, Biggins launched as credit plan called ―Charge it‖. The programme

featured a form of script that was accepted by local merchants for small purchases. After the sale was completed the merchant deposited the scrip in the bank account and the bank billed the customer for the total scrip issued (Auriemma, 1999 pp 4-5).

In the 1951 the first modern was introduced in America in 1950 when a businessman Frank Menomara invited some of friends in hotel and suddenly at the time of payment he discovered that he forgot bring the purse. Then he decided to develop a fool proof system to avoid such conditions in future. The first of these was the Diners Club Card, initially accepted by 14 restaurants in New York City. American Express, then a leading issuer of traveler‘s cheques, launched a more widely accepted T&E card in 1958. Unlike some retail chains, Diners Club and American Express expected the consumer to pay his charge balance in full at the end of each month.

Franklin National Bank in New York in 1951, began issuing their own ―universal‖ credit cards combining widespread acceptance with the opportunity to defer repayment beyond the end of the month, then Bank of America, launched its BankAmericard in 1958 (Latzer, 2005).

A credit card system is a type of retail transaction settlement and credit system, named after the small plastic card issued to users of the system. In the case of credit cards, the issuer lends money to the consumer. Credit cards are the most frequently used electronic payment instrument in the United States. These cards combine a payment instrument with a credit arrangement. There were 39.5 billion credit card transactions processed during 2014, valued at USD 5.6 trillion. Bank credit cards are generally issued by a bank under a license from a national organisation, such as Visa and MasterCard, and typically involve a revolving credit agreement. There are Four major service providers who are providing technical services to banks to provide credit and debit card facilities worldwide i.e. Visa, MasterCard. American Express, and Discover.

Debit cards

A debit card is a plastic bank card used at an ATM or a point-of-sale (POS) terminal that enables a consumer to have funds directly debited from customers‘ bank account. Some financial service providers (such as check cashers and currency exchanges) may market a so-called debit card that is not tied to a deposit account but instead functions as a stored-value card (Anguelov et al , 2004). The debit cards most commonly used in the UK are Visa Debit, issued under the Visa card scheme, and Maestro Cards, previously known as Switch cards, have been rebranded Maestro to make them part of a worldwide scheme. There are two types of debit cards: Online and off-line debit card. Online debit card require the card to be present with the cardholder entering a PIN to complete the sale while offline debit card transactions may or may not be authorized against the cardholder. However, now most of banks are providing online debit cards. Use of card based payment system was introduced during 1960s in India. While as a branch of Diners Club Card in August 1980 credit card facility was provided by Central Bank of India as Master Card. Then Andhra Bank has issued a credit card in 1981 with linkage VISA and Japan Credit Bureau International (JCBI). In India card fashion increasing day by day due to its convenience and utility. Many banks have providing customised credit and debit cards to increase their business in India. Most of banks are using VISA, MasterCard technology to provide cars services.

Evolution of payment systems in India

Payment systems are the means by which funds are transferred between a payer and a beneficiary. It has importance for the functioning and integration of financial markets. It influences the speed, financial risk, reliability and cost of domestic and international transactions. The evolution of modern payment systems was characterized by computerization of clearing operations. The other significant milestones in the development of the payment systems were magnetic image character recognition (MICR) based mechanised cheque

processing technology in Mumbai (1986), Chennai, New Delhi (in 1987) and Calcutta (1989). To reduce the pressures on the cheque clearing and settlement process, and to improve customer service (especially for high volume, low value clearing,) the central bank introduced an electronic clearing service (ECS) credit scheme and the ECS debit scheme to facilitate payment of charges to utility services. The modernization of the payment system in line with the global standards was implemented as a part of the reforms of the financial system. It includes followings transactions:

The Inter-bank Clearing System;

The Securities Clearing and Settlement System;

The MICR Clearing System;

The Government Securities and Foreign Exchange Clearing Systems;

The Real Time Gross Settlement System. (The High Value Clearing System) -RTGS;

Retail Card Based Clearing System

An efficient and stable payment system is the backbone of any economy. Recognizing the importance of payment systems in the financial system, the Reserve Bank of India has taken a number of steps to strengthen the institutional framework for the payment and settlement systems in the country. The emergence of e-commerce has created new financial requirements that in many cases cannot be effectively fulfilled by the traditional payment systems. The efforts of the Reserve Bank have been to ensure full compliance to the core principles of BIS. The improvement in payment systems in India has facilitated the integration of financial markets. For recognizing these needs the RBI has implemented bank computerisation project in India and providing ICT based networking facilities to the banks and financial institutions in India. Since 1991 the RBI has started ‘BANKNET’ it is network for banking institutes other than

Banknet The 'INFINET' - Indian Financial Network is a satellite based wide area network using VSAT (Very Small Aperture Terminal) technology set up in June 1999. The Centralised Funds Management System (CFMS) facilitates centralised balance viewing of and funds transfer between own accounts of a member bank maintained with the Bank at different locations. In Indian banking system ATM also providing better alternative to traditional payment system it can be used for payment of utility bills, funds transfer between accounts, deposit of cheques and cash into accounts, balance enquiry and several other banking transactions. Apart from these facilities RBI has enhancing the payment system by introducing MICR technology, ECS, EFT, NEFT, Card Based Clearing and RTGS etc. According to the changing payment and settlement system in India the government of India has introduced ‗The Payment and Settlement Bill‘. The Payments and Settlements Bill, 2006 was introduced in the Lok Sabha on July 25, 2006. The Bill seeks to designate the Reserve Bank as the authority to regulate payment and settlement systems. The RBI has introduced ‗Payment Systems in India - Vision 2005-08‘. It is implemented to enhance payment system in India, the four broad tenets of the mission relate to the Safety, Security, Soundness and Efficiency. It is called the ‗Triple-S + E’ principle in short, each of the principles support to customer satisfaction and enhancement of payment system. In the Vision document 2009-2012 two more principles are added as accessibility and authorization in payment system.

In order to relieve the central bank from the ownership of the retail payment systems it envisaged that the creation of a separate legal entity entrusted with at the national level to be entrusted with the Indian retail clearing function. The advantage of setting up of the national entity on these lines for running all retail payment system activities will be that this entity will have uniformity in the structure, operations and procedures.

Electronic Funds Transfer (EFT)

Reserve Bank of India has introduced the Reserve Bank of India Electronic Funds Transfer System in 1997 which

may be referred to as 'RBI EFT System as per recommendations of the Share Committee (Committee for proposing Legislation on Electronic Funds Transfer and other Electronic Payments, 1995). This system utilizes the Service Branches of the member banks and the nodal offices of RBI and RBINET is the conduit for the flow of funds. The Reserve Bank of India acts as the service provider as well as regulator of EFT. The National Electronic Fund Transfer (NEFT) was introduced in 2003.

Real Time Gross Settlement System (RTGS)

RTGS stands for Real Time Gross Settlement. RTGS system is a funds transfer mechanism where transfer of money takes place from one bank to another on a ―real time‖ and on ―gross‖ basis. The RTGS system is primarily for large value transactions system established as per recommendations of the Dr. R. H. Patil committee – Committee on Payment System (2002). The minimum amount to be remitted through RTGS is ` 1 lakh. There is no upper ceiling for RTGS transactions. RTGS System has been implemented from March 26, 2004 placing India at par with the best practices in the world in terms of payment system. It is system for large value clearing operated by RBI. This system ensures settlement of payments with no credit risk involved. It is therefore, essentially a system for settlement of large value and time critical payments. The system facilitates Inter-bank as well a customer payments.

Inter-bank clearing is used by banks mainly for four types of transactions i.e. call money transactions, Rupee payment of foreign currency transactions, Bank to Bank transfers for funding upcountry requirements and Inward remittances. Inter-bank clearing was introduced in Chennai in April 1989, followed by Mumbai, Calcutta and New Delhi. In India all bank branches are not RTGS enabled because only core banking (CBS) enabled bank branches can extend this facility.

Other than electronic clearing service the RBI has implemented Cheque Truncation System’ to faster cheque clearing services. In the cheque truncation process the physical cheque will be converted in electronic image and image of cheque would be sent to the drawee branch along with the relevant information like the MICR fields, date of presentation, presenting banks to its clearance. This process works through the INFINET with proper authentication. The required time frame of cheque clearing via cheque truncation is T+0 (same day) for Local Clearing and T + 1 (within one day) for inter-city clearing.

Electronic Clearing Service (ECS)

To solve critical problem of hug clearing transaction in April 1968 the clearing banks set up the Inter-Bank Computer Bureau, latter to become a separate company known as ―Bankers Automated Clearing Service-BACS‖. Now, there is MICR, ECS debit and Credit clearing services and National Electronic Clearing services are now available to bankers and customers both as clearing mechanisms. ECS Scheme operated by the RBI since 1996-97, A new variant of ECS styled National Electronic Clearing Service (NECS) was introduced in September 2008.

ECS (Credit) facilitates the bulk payments whereby the account of the institution remitting the payment is debited and the payments remitted to beneficiaries' accounts. In India it is mostly known as pay unit system provided by banks to employers. This facility is now available at 86 major centres in the country. ECS (Debit) facilitates is the collection of payments by utility companies. In this system the account of the customers of the utility company, in different banks are debited and the amounts are transferred to the account of the company. ECS (Debit) is automated method of payment which provides an option to pay monthly/quarterly/half-yearly/yearly interest/dividend/salary/pension utility bills like telephone, electricity, loan installments, insurance premium etc directly through customers‘ bank account.

MICR cheque clearing service

MICR (Magnetic Ink Character Recognition) is the technology to reading and identification of paper documents by electronic machines. MICR is a character recognition technology used primarily by the banking industry to facilitate the processing of cheques. According to available information MICR technology was first demonstrated to the American Bankers Association in July 1956, and by 1963 it was almost universally employed in the U.S. (Mandell, Lewis 1977) On September 12, 1961, U.S. Patent Number 3,000,000 was awarded for the invention of MICR. MICR cheques are processed by the MICR Scanner, it the electronic devise for scanning MICR cheques and recording to city, name of bank, name of branch and other details of cheque. The MICR scanning machine can scan the MICR cheque and read their data and convert in digital form and send that information to service computer of the bank to further clearing operation. It make easy clearing and sorting of thousands of cheques.

In order to changing technology RBI has taken one more step in the cheque clearing system in 80s it is known as inception of Magnetic Ink Character Recognition (MICR) technology for cheque clearing. This technology was installed in Mumbai (1986) followed by Chennai, New Delhi, (1987) and Calcutta (1989), The MICR Clearing is now in operation in 64 centers including RBIs 16 MICR clearing centres in Hyderabad, Banglore, Ahmedabad, Kanpur, Jaipur, Nagpur, Baroda, Pune, Gauhati, Trivandrum etc. Now most of banks are issuing the MICR cheques to their customers. MICR cheque is paper instrument but it has MICR coding. The codes are arranged on cheque by order city, name of bank and name of the branch as given in the following figure.

First set of number is cheque number, second set of numbers related to city, bank and branch name it helps a bank to recognize the bank and branch that issued the cheque, city of the bank where bank office located. The third set of six digit numbers represents customers account number. In the case of Government Cheques issued by RBI alone, the account number is of seven digits and set of number consisting two digit is transaction code, in case of government cheque it have three digits.

Cheque Truncation System (CTS) in India

According to recommendations of Working Group on Cheque Truncation under the Chairmanship of R.B. Barman (2003), The Cheque Truncation System (CTS) was implemented in the National Capital Region in February 2008. Cheque Truncation System (CTS) will be rolled out at Chennai.22 However, In most of the developed countries cheque truncation system is in place since long. Countries like Denmark, Belgium has adopted this system since more than 2 decades. Singapore has adopted this system from the year 2002 (Ranjan Nayak, 2006). The present system of MICR cheque clearing system requires the cheques to be physically moved from place to place for their presentation. It is required as per the Negotiable

Instruments Act, 1881 under which the physical instrument had to be presented to the drawee branch for payment. Now the law was amended during the year 2002 according to IT Act, 2000 to paving the way for the presentment of electronic images instead of the physical instrument.

In this process electronic image of minimum standard prescribed by RBI (grey scale 100 DPI 8 bit (256 level) in JFIF format with JPEG compression, and front and back bi-tonal (black and white), 200 DPI TIFF image) of the cheque with corresponding data contained in MICR line has used to cheque presentation. As on Feb., 2010 the RBI has issued more specific norms for scanning and imaging cheques for truncation as "CTS-2010 Standard". This system beneficial because it provides:

Speeds in collection of cheques Enhances customer service (T+1), Reduces the scope for clearing related frauds, Minimizes cost of collection of cheques, Reduces reconciliation problems, Eliminates logistics problems etc.

Internet banking

Till 1993 internet was dose not used commercial purpose but after 1993 internet has used as tool of commerce

and trade. Internet banking began in 1993 the office of the Thrift Supervision Chartered Security First Network Bank (SFNB) in Atlanta (Georgia) and it opened for business in October 1995. In 1998 it was acquired by the Royal Bank Financial Group, Canada (Desai, 2007 pp 2-3). Internet banking not limited to the USA many banks in the developed and developing countries are using this technology.

In India, ICICI Bank Ltd. was started internet banking service in 1997 as brand name ―Infinity‖ followed by HDFC Bank Ltd in Sept 1999 (Uppal and Jatana, 2007 pp. 132). However, of late many public sector banks and scheduled commercial banks have taken a led in this area. Internet or web based banking is network of banks and financial institutes as well other sealers. It provides electronic payments and settlement services to customers. It implies the most pragmatic use of information technology as medium of universal communication. It has brought unprecedented changes in banking industry. There are high increase indicates in internet users in India.

Mobile banking

Mobile banking is simply application of mobile (Cell) phone dives as mean of banking via Wireless Application Protocol (WAP) technology and short message service (SMS) facilities. Mobile financial services is a term applied to a range of financial activities conducted using mobile devices, such as cellular phones or personal digital assistants (Cheney, 2008). According to Ogawara, Jason and Pete (2002) the concept of mobile payment originates in Finland. Sonera, a telecommunication company in Finland, released a mobile payment system named Sonera Mobile Pay (SMP) in 1999. In Germany a cellular payment service named PayBox started in 2000 to online shopping. In 2001 like SMP service Pro-tect has released the Mobile Money System (MMS) in Japan. In order to demand of mobile divides to use in m-banking almost of cellular device developer companies alike Ericsson, Motorola, Nokia, LG, Siemens, Samsung, Sony etc. are developing their mobile handset according to m-banking requirements. Most recent

handsets are enabled with CDMA, GSM, WAP, 3G, SMS, MMS, JAWA, GPRS, Bluetooth, Infrared, and windows also.

DISTRUPTIVE POTENTIAL OF DIGITAL BANKING

The digital revolution promises extraordinary gains in the productivity of the banking industry; dramatic improvements in the quality of customer experience; and a fundamental shift in the nature and intensity of competition. Supported by pro-development regulations and government action, it also promises a rapid and unprecedented advancement in the reach of banking.

Unprecedented Advancement in Reach

The digital revolution is upon us in its full glory. Technology is advancing by the day. Affordable smart phones and high bandwidth access will reach an unprecedented number of Indian consumers in the coming years. The Indian Government’s ambitious vision for a digital India emboldens us to predict that within the next five years we will see a new, digitally savvy Indian consumer emerging across urban as well as rural markets. As depicted in Exhibit 2.1, by 2020 we expect the number of smart phone users to equal the number of active bank accounts in the country, and cover 70-80 percent of the eligible population.

It is possible to envisage that almost all eligible customers will be on boarded onto the mobile phone-based digital payment and savings platform in next five years. A similar revolution is conceivable on the lending side. The phenomenal impact of the information bureau on the retail lending business in India is evident in the continuously declining NPA ratio of retail lending for banks. Extension of the information bureau to cover a larger population will lead to a majority of Indian people who are self employed, or employed in the unorganized sector, to have credit history and eligibility for credit from the banking sector. Incorporation of telecom and electricity bill payment records into the credit information bureau can unleash this enormous potential to extend the penetration of banking in India.

Dramatic Improvement in Customer Experience

Digital banking customers have been immersed into the digital experience by iconic technology companies like Google, Apple, and Amazon. These customers also have very advanced expectations from banks. Exhibit 2.2 highlights some

select expectations. They put heavy demands on operational excellence and technological prowess to provide dynamic customization and integrated interactive multichannel access. This requires significant technology and operations transformation in the banks. We see a possibility of dramatic change in the level of customer service offered to banking customers in a more digitally enabled banking context.

Extraordinary Gains in Productivity of Banks

The good news is that this investment in technology can lead to a much more profitable business model. Digital banks have a cost-to-income ratio advantage of 10-15 percent over conventional models. This is driven by the rate of customer acquisition that is more than twice as productive as conventional models, a 50-70 percent higher level of primary banking

relationships (where the customer uses the bank as her primary mode of payments), and a 30-50 percent higher level of cross-holding of products (i.e. higher cross-sell). These productivity gains come through reduction of wasteful costs in conventional operating models.

Fundamental Shift in Nature and Intensity of Competition: War for Transactions

Digital technology is leading to a proliferation of channels and massive increase in the number of transactions made by customers. Exhibit 2.4 shows the growth rate in transactions between FY 2013 and FY 2014.

Whereas traditional transactions show 3 percent growth, those supported by technology (ATMs / CDMs) show 30 percent growth per annum; purely digital transactions post over 60 percent growth. We expect transactions to be the primary battleground for market share between banks; the number of transactions facilitated by a bank will determine its market share in deposits.

This is already evident in the Indian market. There is a very clear correlation between the average savings balance per account in a bank and the average number of non branch transactions per savings account in that bank. We expect this trend to intensify over the next five years. The introduction of

payment banks will render this space highly competitive; we expect significant investment from the banking industry to make the payment process more convenient for the customers. Exhibit 2.6 depicts the four categories of potential payment banks that will contest for consumer transactions: telecom operators, retailers, stand-alone Pre Paid Instruments (PPI) players and traditional banks. We expect the new competition from non bank participants to dent low cost deposit franchises of traditional banks by stealing away transactions with better customer propositions.

More fundamentally, we expect that the process of switching accounts between banks will become far easier with digital technology. Starting a new banking relationship will be fast and convenient. This implies that banking relationships that were considered ‘sticky’ will be under threat and inefficient banks will see rapid loss of market share.

Massive Economic and Societal Benefits with Eradication of Paper

One of the most profound implications of digital banking is the possibility of eradicating paper in the banking system. This paper exists in the form of cash in circulation, cheques issued to make payments, and massive use in application forms, statements, credit memoranda etc. The benefits are obvious. Paper based processes are slow as physical movement takes time.

Digital processes eliminate such inefficiencies. The environmental benefit of eradicating paper cannot be over emphasised. Exhibit 2.7 depicts the levels of cash and cheque used by savings and current account customers. The level of cash is substantial at around 26 percent of the transactions. Over 45 percent of current account transactions are still cheque based. Over 40 percent of savings account transactions are through ATM cash withdrawal. There clearly is a massive opportunity for the Indian banking system to harness digital technology.

Eradication of cash has advantages that go beyond the obvious cost benefits. In case of benefit transfers, electronic transactions can be tracked to ensure right recipient and also right end use. Tax compliance will get a significant boost with movement of cash to electronic transactions.

This, however, requires collective action from the banks, and support from regulators and the government.

Call for Action from Banks

Incumbent banks will need to undergo a complex transformation process to harness digital technology fully. The

first step is a change in the paradigms adopted by the top management. These are depicted in Exhibit 2.9. Some of the long standing paradigms are to be replaced over time by emerging paradigms that will dictate the business model design. First is the idea that payment is a core product that is critical for deposits.Banks need to compete specifically to get the payments business of clients to defend their low cost deposits.

Digital channels are often called ‘alternate channels’ while the branch is referred to as the ‘core channel’. Digitally advanced banks will have digital channels as their core and the branch as an alternate specialized channel. This is based on the recognition that advancements in digital technology permit much richer interactions on digital channels as compared to the face-to face interactions that are highly valued in the branches.

In the digital paradigm, the banks do not merely facilitate a payment passively when the customer has decided what to buy; rather, they use analytics on customer data to ascertain what is best for the customer and try to facilitate customer choice. Digital banks influence the customer decision process and hence capture all the payments made. And finally, the loans process is not just about the customer application process followed by credit analysis; it involves proactive credit

preapprovals with no paperwork, fast decisions and immediate online disbursals. The biggest challenge for incumbent banks is to be able to change the framework of thinking in the top management. Exhibit 2.10 depicts the set of initiatives that incumbent banks need to undertake to harness digital technology fully. Digitization is relevant across all aspects of the organization. Digitization of the sales process can increase the sales productivity of the front staff by as much as 25 percent. Online channels can contribute to the tune of 20 percent of total new customer acquisitions.

In some advanced digital banks, this could be as high as 80 percent. If the customers are properly engaged with intuitive and useful digital payment interfaces, chances are that they will keep up to 20 percent higher balances. On the cost side, there is a possibility of 5-10 percent cost reduction in the back office with process digitization. Internal processes of the bank like the performance management system can be digitized to improve data transparency regarding performance and manpower resource allocation, thereby increasing productivity of resources within the organization. With analytics, it is possible to envisage early warning systems that could help reduce bad debt costs for the bank by improving collection efficiency.

Interventions Needed From RBI and Government

Among comparable emerging economies in Asia, a foreign entrant finds India to be the most conducive environment for digital banking. RBI has successively fine tuned the KYC process, business correspondent regulations, pre-paid instruments framework, mobile banking guidelines, and so on. It is a great starting point. A few more specific regulatory

interventions will hasten the digital transformation of the sector and the consequent benefits to banks and consumers.

1. Eradicating cash: Moving Point of Sale (POS) cash to Mobile-to-Mobile transfer (M2M).

Set up a mobile registry shared by all banks along the lines of the PayM system of the UK, which links mobile phone numbers with bank account numbers across the nation. This system can be used to facilitate highly convenient mobile P2P or P2M transfers with only knowledge of the mobile phone number of the payee or merchant.

Broaden the vision of the Giro Scheme to envision a one-time bill from any merchant to be raised to any customer on the latter’s mobile number, which can be accepted and paid online through the mobile phone. Effectively, a bill raised on the POS can be accepted on the mobile and paid through mobile transfer based on the scheme mentioned in the previous point.

2. Digital customer experience:

It is conceivable to offer an entirely digital consumer banking experience inIndia. At least a section of the customers should be able to open their accounts purely online by authenticating themselves biometrically or with OTP without the need for wet signatures on paper or human interaction. Few interventions in this context would be:

Expedite uniform KYC norms and inter-usable KYC records across the financial sector.

Clarify the legal necessity of wet signatures in case the customer is authenticated with OTP or biometrics.

Obviate the need for physical verification by a bank official for opening an account in case the customer is authenticated biometrically through Aadhar.

3. Disincentivize physical modes of payments:

Ironically, the pricing of payment instruments is often such that it promotes usage of physical instruments. For example, cheques are free whereas customer pays for RTGS or NEFT transactions.

Consider pricing cheque payments vis-à-vis electronic payments that achieve the same purpose.

4. Product development:

Certain products in digital form are not mature enough to fully capture the benefits of their physical counterparts. Two instances are evident—bank guarantees and cheques.

Expedite electronic bank guarantees.

Introduce an electronic payment product that replaces cheques. It should have an option to be post-dated, and intimation of issuance of the instrument should reach the payee instantly. The payee should have the same legal protection as with a paper cheque under the Negotiable Instruments Act.

5. Expand coverage of the information bureau:

Information bureau can be the most potent driver of inclusion on the credit side. Expansion of credit bureau should get top priority from the government and the RBI.

Expedite introduction of periodic utility bill payments (electricity, telecom) and periodic insurance premium payments information into information bureau records. This would increase the bureau coverage from current 20 percent to almost 70 percent and would be a major boost to

credit eligibility of low ticket borrowers who are largely self employed or in the unorganized sector.

Government should consider subsidizing entry of records of low ticket borrowers into the information bureaus. Often low ticket lending margins are not able to profitably support the fee of information bureau.

6. Urgent transformation measures in public sector especially the smaller banks.

It is evident in this report that the set of smaller public sector banks (PSU-M) is trailing the larger banks (PSU-L) on almost all dimensions. The gap will widen rapidly as digital environment reduces the stickiness of customers. Government must accelerate definition and implementation of the proposed “autonomy with accountability” package with particular consideration for the set of smaller public sector banks.

In the immediate term, facilitate higher management bandwidth to transform smaller size PSU banks.

Consolidation to create five-six large PSU banks with sufficient scale in technology, management bandwidth and the talent pipeline.