BA4003 - BANKING AND FINANCIAL SERVICES

UNIT III

DEVELOPMENT IN BANKING TECHNOLOGY

Payment system in India - paper based - e payment - electronic banking - plastic money -
emoney - forecasting of cash demand at ATM’s - The Information Technology Act, 2000 in India - RBI’s
Financial Sector Technology vision document - security threats in e-banking & RBI’s Initiative.

1. PAYMENT SYSTEM IN INDIA

Paper based payment

 Cheque
 Demand Drafts
 Payment orders or Bankers Cheque

E Payment and Remittances

 Electronic Banking / Internet Banking
 Electronic Clearing services
 Electronic funds transfer
 Real time Gross settlement
 National Electronic funds transfer

Plastic money / Card based payments

 Credit Card
 Debit Card

1.1 Paper based payments

This type of payment system involves the use of physical documents, such as cheques or
demand drafts, to transfer funds between accounts.

 Cheque
 Demand Drafts
 Payment orders or Bankers Cheque

1.1.1 Advantage of paper based payment

 They are safer than cash, for example a crossed cheque can only be deposited into the payees
account
 They are preferred for large amounts and a large number of payment to avoid carrying large
sums of cash
 Payments can be made at payers convenience and posted to the payee

1.1.2 Disadvantage of paper based payment

 It can take up to 3 to 4 working da before funds are available to use

BA4003-NOTES Dr.B.Velmurugan, HoD/MBA NPRCET, Dindigul

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 There are extra costs if the payee wants an immediate clearance of funds
 Paper based instruments have other administrative costs associated with it

2.1. E-payment / electronic payments

Electronic payments allow customers to pay for goods and services electronically. This is without
the use of checks or cash. Normally e-payment is done via debit cards, credit cards or direct bank
deposits.

2.1.1 Advantage of E-Payment System

1. Speed of transactions
2. Convenience
3. Reaching global audience
4. Low transaction costs
5. Quick and easy setup
6. Variety of payment choices
7. Availability of more distribution channels
8. Easy management
9. Better customer experience
10. Recurring payment capabilities

2.1.2 Disadvantage of E-Payment System

1. Technical problems
2. Password threats
3. Cost of fraud
4. Security Concerns
5. Technological illiteracy
6. Limitations on amount and time
7. Service fees and other additional cost
8. Loss of smart cards

3. Types of E-Payment in India

1. Electronic Clearing Service (ECS)

2. Electronic Funds Transfer (EFT)
3. Real Time Gross Settlement (RTGS)
4. National Electronic Funds Transfer (NEFT)
5. Electronic Banking

3.1. Electronic Clearing Service (ECS)

The Electronic Clearing Service (ECS) is an electronic mode of payment and settlement in India
that facilitates the bulk transfer of funds and the collection of payments electronically. It streamlines the

BA4003-NOTES Dr.B.Velmurugan, HoD/MBA NPRCET, Dindigul

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process of transactions, making it more efficient and less dependent on physical instruments. Here are
key aspects of the Electronic Clearing Service:

Types of ECS:

ECS Credit (ECS Credit Clearing): This is used for bulk transactions where a large number of payments,
such as salary disbursement, dividend payments, or interest payments, need to be credited to multiple
accounts. It allows for the electronic credit of funds to the accounts of the recipients.

ECS Debit (ECS Debit Clearing): This is employed for bulk debit transactions, such as utility bill payments.
It enables electronic debiting of funds from the accounts of the payer.

Operational Mechanism:

ECS operates on a batch processing system where multiple transactions are grouped together
and processed simultaneously. This batch processing system enhances efficiency in handling large
volumes of transactions.

Participants:

The primary participants in the ECS system include banks and financial institutions. They act as
intermediaries to facilitate the electronic transfer of funds between the payer and the payee.

Authorization:

For ECS Debit, the payer needs to authorize the debiting of funds from their account. This
authorization is often in the form of a mandate given to the biller (e.g., utility company) to initiate the
debit on specified dates.

Applicability:

ECS is commonly used for repetitive and periodic transactions, such as salary payments,
dividend distributions, and bill payments.

Security and Timeliness:

ECS transactions are secure and efficient. They reduce the reliance on physical instruments like
cheques, minimizing the risk of loss or fraud. The system also ensures timely processing of transactions.

Regulation:

The Reserve Bank of India (RBI) regulates and oversees the functioning of ECS in India. The rules
and guidelines set by the RBI aim to ensure the smooth operation and security of electronic clearing
transactions.

BA4003-NOTES Dr.B.Velmurugan, HoD/MBA NPRCET, Dindigul

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3.2 Electronic Funds Transfer (EFT)

Electronic Funds Transfer (EFT) is a broad term that encompasses a range of electronic-based
financial transactions, allowing the transfer of money from one bank account to another without the
need for paper documentation. EFT is a secure and efficient method of transferring funds and is widely
used for various purposes. Here are key aspects of Electronic Funds Transfer:

Types of Electronic Funds Transfer:

 Bank-to-Bank Transfers: EFT enables individuals and businesses to transfer funds electronically
between different banks.
 Wire Transfers: A type of EFT that involves the electronic transfer of funds from one financial
institution to another, often used for large and time-sensitive transactions.
 Automated Clearing House (ACH) Transfers: ACH is a network for processing electronic
transactions, including direct deposits, payroll payments, and bill payments.

Key Features:

 Speed and Efficiency: EFT transactions are typically faster than traditional paper-based methods
like checks. Wire transfers, in particular, can provide real-time or same-day transfer of funds.
 Security: EFT transactions are secure, with multiple layers of authentication and encryption to
protect sensitive financial information.
 Convenience: EFT allows for the convenient transfer of funds without the need for physical
presence at a bank. Online banking and mobile apps have further facilitated this process.

Applications of EFT:

 Direct Deposit: Employers use EFT to deposit employees' salaries directly into their bank
accounts.
 Bill Payments: Consumers use EFT to pay bills electronically, either through online banking, ACH,
or other electronic payment systems.
 Business Transactions: Businesses use EFT for various financial transactions, including vendor
payments and receivables.

3.3 Real Time Gross Settlement (RTGS)

Real Time Gross Settlement (RTGS) is a specialized electronic funds transfer system that
facilitates the instantaneous and real-time settlement of high-value financial transactions. It is
commonly used for large-value interbank transfers, where the funds are transferred from one bank to
another in real-time and on a gross basis.

Here are key features and aspects of Real Time Gross Settlement (RTGS):

 Real-Time Processing: RTGS operates on a real-time basis, meaning that transactions are
processed and settled instantly as they are initiated. This ensures immediate and final transfer
of funds.

BA4003-NOTES Dr.B.Velmurugan, HoD/MBA NPRCET, Dindigul

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 High-Value Transactions: RTGS is typically used for high-value transactions. There is usually a
minimum transaction amount stipulated by the central bank or the entity overseeing the RTGS
system.
 Gross Settlement: The term "gross settlement" means that each transaction is settled
individually without offsetting against other transactions. Unlike net settlement systems, where
transactions are batched and settled at specific intervals, RTGS settles each transaction on its
own merits.
 Central Bank Oversight: RTGS systems are often operated and overseen by the central bank of a
country. The central bank establishes and manages the rules, regulations, and infrastructure for
RTGS to ensure the stability and efficiency of the financial system.
 Participant Banks: Banks that participate in the RTGS system must meet certain criteria and
adhere to established guidelines. These banks use RTGS to settle large financial transactions on
behalf of themselves or their customers.
 Minimum and Maximum Transaction Limits: RTGS systems typically have both minimum and
maximum transaction limits. The minimum limit helps in avoiding the operational overhead of
processing very small transactions, while the maximum limit is set to accommodate large-value
transactions.
 Security and Authentication: RTGS systems incorporate robust security measures to ensure the
integrity and confidentiality of the transactions. Authentication mechanisms, encryption, and
secure communication channels are utilized to protect sensitive financial information.
 Availability and Operating Hours: RTGS systems are usually available during specific operating
hours on business days. The operating hours are determined by the central bank or the entity
managing the RTGS system.
 International RTGS: Some countries have established links between their domestic RTGS
systems, allowing for cross-border real-time settlement of funds. This enhances the efficiency of
international financial transactions.
 Settlement Finality: RTGS ensures settlement finality, meaning that once a transaction is
processed, it is considered irrevocable and cannot be unwound. This provides a high level of
certainty and reduces counterparty risk.

3.4 National Electronic Funds Transfer (NEFT)

National Electronic Funds Transfer (NEFT) is an electronic funds transfer system in India that
allows individuals and businesses to transfer funds from one bank account to another. NEFT operates on
a deferred net settlement (DNS) basis, which means that transactions are settled in batches at specific
intervals rather than in real-time. It is a widely used and popular method for electronic fund transfers in
the country.

Here are key features and aspects of the National Electronic Funds Transfer (NEFT) system in
India:

 Participant Banks: NEFT involves participating banks that are part of the NEFT network. Most
major banks in India, including public sector banks, private sector banks, and foreign banks, are
participants in the NEFT system.

BA4003-NOTES Dr.B.Velmurugan, HoD/MBA NPRCET, Dindigul

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 Transaction Process: NEFT transactions are processed in batches, typically on an hourly basis
during the working hours of the banks. The transactions initiated during a specific batch are
settled at the end of that batch.
 Transaction Types: NEFT is used for various types of transactions, including person-to-person
transfers, salary credits, payment of bills, and other types of payments.
 Online and Offline Initiation: Customers can initiate NEFT transactions through various
channels, including online banking, mobile banking, and in-person at bank branches. Online
initiation has become more prevalent with the increasing use of digital banking platforms.
 Transaction Limits: NEFT transactions are subject to certain limits, including minimum and
maximum transaction amounts. These limits are set by the Reserve Bank of India (RBI) and may
vary based on the type of account and customer category.
 Processing Charges: Banks may levy charges for NEFT transactions, which can vary among
banks. However, the RBI has mandated that there should not be any charges for inward NEFT
transactions (i.e., credits to the beneficiary account).
 Availability: NEFT transactions are available on all working days of banks, excluding weekends
and public holidays. The availability of NEFT services may be subject to the operating hours of
the bank.
 Settlement Timings: While NEFT operates on a deferred net settlement basis, the RBI has
introduced additional settlement cycles to enhance the efficiency and speed of the system. In
recent years, NEFT has moved towards 24x7 availability, allowing customers to make
transactions at any time.
 Transaction Tracking: Customers can track the status of their NEFT transactions using
transaction reference numbers provided by the bank. This enables transparency and allows
users to verify the completion of their transactions.
 Security Measures: NEFT transactions are secured through encryption and authentication
measures to ensure the confidentiality and integrity of financial information.

3.5 Electronic Banking

Electronic banking uses an electronic medium to help users get access to their funds. It
eliminates the need for the bank's customers to visit the bank to do financial transactions.

Services Under E-Banking:

Mobile Banking: Mobile banking (otherwise called M-banking) is a name utilised for performing account
exchanges or transactions, bill payments, credit applications, balance checks, and other financial
exchanges through a mobile phone like a Personal Digital Assistant (PDA) or cell phone.

Electronic Clearing System (ECS): The Electronic Clearing System is a creative provision for occupied
individuals. With this provision, an individual’s credit card bill is consequently charged from the same
individual’s savings bank account, so one doesn’t have to stress over missed or late payments.

Smart Cards: A smart card is a card that stores data on a microchip or memory chip or a microprocessor
in lieu of the magnetic stripe found on debit cards and credit cards. Smart cards are not utilised for

BA4003-NOTES Dr.B.Velmurugan, HoD/MBA NPRCET, Dindigul

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transferring or moving monetary data alone, but also they can be utilised for an assortment of
identification grounds. Exchanges made with smart cards are scrambled or encrypted to shield the
exchange of data from one party to another.

Electronic Fund Transfers (ETFs): Electronic fund transfer (EFT) is the electronic exchange of cash
starting with an individual account in the bank to another individual account of the same bank, or within
or with other financial institutions or with multiple institutions, by means of personal computers based
frameworks, without the immediate intercession of bank staff.

Telephone Banking: Telephone banking is an assistance given by a bank or other monetary foundation
or other financial institutions, that empower clients to perform via telephone a scope of monetary
exchanges which don’t include cash or financial instruments, without the need to visit an ATM or a bank
branch.

Internet banking: Web-based banking is an assistance presented by banks that permits account holders
to get their record information by means of the web or the internet. Web-based banking or Internet
banking is otherwise called “Web banking” or “Online banking.”

4. The Information Technology Act, 2000 in India

The Information Technology Act, 2000 also aims to provide the legal framework under which
legal sanctity is accorded to all electronic records and other activities carried out by electronic
Information Systems Control and Audit means.

The IT Act, 2000 has two schedules:

 First Schedule: Deals with documents to which the Act shall not apply.
 Second Schedule: Deals with electronic signature or electronic authentication method.

Salient Features of the Information Technology Act, 2000

 Digital signature has been replaced with electronic signature to make it a more technology
neutral act.
 It elaborates on offenses, penalties, and breaches.
 It outlines the Justice Dispensation Systems for cyber-crimes.
 The Information Technology Act defines in a new section that cyber café is any facility from
where the access to the internet is offered by any person in the ordinary course of business to
the members of the public.
 It provides for the constitution of the Cyber Regulations Advisory Committee.
 The Information Technology Act is based on The Indian Penal Code, 1860, The Indian Evidence
Act, 1872, The Bankers’ Books Evidence Act, 1891, The Reserve Bank of India Act, 1934, etc.
 It adds a provision to Section 81, which states that the provisions of the Act shall have overriding
effect. The provision states that nothing contained in the Act shall
 restrict any person from exercising any right conferred under the Copyright Act, 1957

BA4003-NOTES Dr.B.Velmurugan, HoD/MBA NPRCET, Dindigul

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The offences and the punishments in IT Act 2000 :

 Tampering with the computer source documents.

 Directions of Controller to a subscriber to extend facilities to decrypt information.
 Publishing of information which is obscene in electronic form.
 Penalty for breach of confidentiality and privacy.
 Hacking for malicious purposes.
 Penalty for publishing Digital Signature Certificate false in certain particulars.
 Penalty for misrepresentation.
 Confiscation.
 Power to investigate offences.
 Protected System.
 Penalties for confiscation not to interfere with other punishments.
 Act to apply for offence or contravention committed outside India.
 Publication for fraud purposes.
 Power of Controller to give directions.

5. RBI’s Financial Sector Technology vision document

The core theme of the 2025 Payments Vision document is '4Es' – 'E-payments for Everyone,
Everywhere, Every time'. The goals and vision of the RBI, are categorised in the Payments Vision 2025
documents into five anchor goalposts – Integrity, Inclusion, Innovation, Institutionalisation and
Internationalisation.

Financial Sector Technology Vision Document included:

1. Digital Payments and Inclusion: Promoting the use of digital payments and ensuring financial
inclusion by leveraging technology to reach underserved and unserved areas.
2. Cybersecurity and Resilience: Emphasizing the importance of robust cybersecurity measures to
safeguard the financial system against cyber threats and enhance overall resilience.
3. Data Management and Analytics: Encouraging the effective use of data management and
analytics to derive insights, improve decision-making, and enhance risk management practices
within the financial sector.
4. Innovation and FinTech Collaboration: Fostering an environment that encourages innovation in
financial services and promoting collaboration with FinTech companies to drive technological
advancements.
5. Regulatory Technology (RegTech): Exploring the use of regulatory technology to streamline
regulatory compliance processes, automate reporting, and enhance supervision within the
financial sector.
6. Customer Education and Awareness: Promoting customer education and awareness regarding
digital financial services, cybersecurity best practices, and the benefits of technology adoption in
the financial sector.

BA4003-NOTES Dr.B.Velmurugan, HoD/MBA NPRCET, Dindigul

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7. Interoperability and Standardization: Working towards greater interoperability and

standardization of technology across different financial service providers to create a seamless
and efficient ecosystem.
8. Financial Inclusion through Technology: Leveraging technology to enhance financial inclusion by
reaching out to the unbanked and underbanked populations, potentially through innovative
solutions like mobile banking and digital wallets.
9. Blockchain and Distributed Ledger Technology: Exploring the potential applications of
blockchain and distributed ledger technology in the financial sector, including areas like trade
finance, supply chain financing, and digital identity verification.
10. Open Banking: Encouraging the adoption of open banking principles to enhance competition,
innovation, and customer choice in the financial services landscape.

6. Security threats in e-banking & RBI’s Initiative

6.1. Security threats in e-banking

 Phishing: Hoax e-mail claiming to be from financial institutions

 Spyware and Adware: Spyware is a type of software that secretively collects user information
while on the internet
 Viruses: A computer virus is software that affixes itself to another program like a spreadsheet or
word document
 Trojans: A Trojan anti-virus software program that poses a harmless application
 Unlike viruses, Trojan do no replicate themselves and do not need a host program to attach to
 Key loggers: If fraudster installs a software called ―key logger‖ on the computer or the device
on which the customer in accessing online banking, the software copies to a file, every keystock
typed on that PC.

6.2 RBI’s Initiative

The initiatives taken by RBI are follows:

 Customer induced options may be provided for fixing a cap on the value and mode of
transactions/beneficiaries. Additional authorization may be instead when the customer wants to
exceed the cap
o Limiting the number of beneficiaries to be added per day to be considered
o System alert to be introduced for beneficiary addition
o Number of transactions per day/per beneficiary may be monitored for suspicious
transaction
 Introduction of additional factor of authentication for unusual transaction to be authenticated
on special request
 Bank may consider implementation of digital signature for large value payments for all
customers, to start with for RTGS transactions
 IP address capture for transaction may be consider

BA4003-NOTES Dr.B.Velmurugan, HoD/MBA NPRCET, Dindigul