MODULE - 4

BANKING INNOVATIONS
Contents of the Module
• Banking Innovations: meaning and need;
• Core banking,
• E-Banking:
• Mobile banking, Electronic Clearing System, Smart Cards, EFTs, Telephone Banking,
Internet banking, Home banking,
• Internet Banking,
• Electronic Funds Transfer: NEFT, RTGS, IMPS, UPI,
• ATM, Debit Card, Credit Card,
• Truncated Cheques, MICR Cheques, Cryptocurrency, Central Bank Digital
Currency, SWIFT.
Meaning
Innovations in the banking industry refer to the introduction of new
ideas and technologies that aim to improve the efficiency and
effectiveness of banking services. This can include a wide range of
activities, such as the development of new financial products and
services, the use of emerging technologies like artificial intelligence and
blockchain, and the implementation of new business models and
operating processes. The goal of banking innovations is typically to
increase customer satisfaction, reduce costs, and improve the overall
competitiveness of the bank.
Banking Innovations
Banking Innovations
Four Innovation types:
• Incremental—this is the most common type of innovation and uses technology to increase a
customer’s value (i.e. features, design changes, and more) within an existing business model. Example:
Instead of customers waiting in line to talk with human tellers at bank branches, Chase Bank installed
self-serve teller kiosks in many branches, allowing customers to quickly help themselves.
• Disruptive—involves applying the latest technologies and processes to a bank within an existing
business model. Example: Apple Pay via Apple Watch allows customers to pay for goods and services
—mobile banking creates frictionless com
• Architectural—is used to apply learned lessons, skills, and processes to a different business model by
combining technological and business model disruptions. Example: With the Habito app customers
can apply for a mortgage and receive a decision within minutes instead of days or weeks, and then visit
the physical branch to sign legal documents.
• Radical—the most disruptive type, radical innovation creates trends via revolutionary technology.
Example: Blockchain technology replaces and improves current financial fraud prevention methods.
Need for Banking Innovations
• Given the scale and pace of change in the world, banks understood that they could no
longer evolve in timid steps. They needed to deliver bold innovations, often within
months or even weeks. The pace of innovation we saw is a clear indication of the
transformation that lies ahead.
• To stay relevant and connected with customer needs, banks must constantly evolve
through innovation. Customers expect highly personalized experiences and real-time
transactions across multiple interactive devices.
• This need for on-demand and bespoke service drives banks to adapt new business
models and invest in the latest technology to stay engaged with customer needs.
• Since the start of the COVID crisis, banks have recognized the need to be more purpose-
driven than ever as they innovated.
• There are many types of banking facilities that the banks have started in recent years.
Core Banking
• Core banking is a back-end system that connects multiple branches of the
same bank together to deliver operations like loan management, interest
calculation, passbook maintenance, withdrawals, deposits and payments in
real-time.
• The term CORE stands for Centralized Online Real-time Environment, which
implies that the customer can experience the bank as a single entity,
regardless of their location – with the aim to provide more independence for
the customers in terms of using their accounts and conducting transactions
from any location in the world.
• The key core banking services include new accounts creation and customer
relationship management, interest calculations, deposits and withdrawals
processing, loans issuing and servicing etc.
Core Banking contd.
• When a customer withdraws money from a branch or an ATM, the application
sends a request to the centralized data center, which then processes the
request and authenticates the operation.
• The data center contains the database, an application server, a web server,
and a firewall to protect the system from malware attacks. Banks can host
their data center locally or on the cloud.
Core Banking Advantages
• With a better understanding of the working principle and features of the core banking platforms,
let’s explore their key benefits:
• Enhanced productivity: Core banking platforms increase operational efficiency by reducing the time it takes
to connect with multiple branches. As a result, banks can process transactions faster, regardless of the client’s
physical location.
• Improved security: Core banking systems use advanced encryption modules to protect the infrastructure
from hackers and malware. On the client’s side, bio-verification and two-factor authentication also provide
additional layers of security to the platform. These features help banks maintain KYC standards and comply
with other banking regulations.
• 24/7 access to banking services: In this era of contactless payments, access to round-the-clock bank
services is vital. Users can conduct financial operations anywhere and anytime since the core banking
platform never goes offline. Clients can also contact customer support for assistance at any time.
• Lower operational costs: Banks can rely on their core platforms to reduce operational costs since these
systems require fewer human resources to function. Besides, the AI-powered infrastructure increases the
completion rate of operations and reduces the chances of errors in documentation.
• Multiple currencies: Users can trade in multiple currencies instantly without needing to change large
amounts at a currency exchange.
Core Banking Limitations
• Technical downtimes can disrupt regular banking operations,
thereby frustrating clients.
• Using a core banking system can introduce a single point of failure
that affects all branches simultaneously in the case of a
cyberattack.
• Modern core banking systems can be expensive to buy and
maintain, especially for small and medium-sized banks.
E-Banking
• Electronic banking has many names like web-based banking, e-banking, virtual banking, or web
banking, and online banking. It is just the utilization of telecommunications networks and
electronic networks for conveying different financial services and products. Through e-banking,
a client can acquire his record and manage numerous exchanges utilizing his cell phone or
personal computer.
• Classification of E-Banking: Banks offer different kinds of services through electronic
financial stages. These are of three sorts:
• Type 1: This is the essential degree of administrations or services that banks offer through their sites.
Through this assistance, the bank offers data, information regarding its services and products to clients.
Further, a few banks might respond to an inquiry through email as well.
• Type 2: In this category, banks permit their clients to submit directions or applications for various
administrations, check their record balance, and so on. Be that as it may, banks don’t allow their clients to
do any fund-based exchanges with respect to their records or accounts.
• Type 3: In the third category, banks permit their clients to work or operate their records or accounts for
bill payments, purchase and redeem securities and fund transfers, and so on.
E-Banking
• Informational Websites – These websites offer general information about the bank and its
products and services to customers.
• Transactional Websites – These websites allow customers to conduct transactions on the
bank’s website. Further, these transactions can range from a simple retail account balance
inquiry to a large business-to-business funds transfer. The following table lists some common
retail and wholesale e-banking services offered by banks and financial institutions:
Retail Services Wholesale Services
Account Management Account Management
Bill Payment Cash Management
New account opening Small Business loan application, approvals or
advances
Consumer wire transfers Commercial wire transfers
Investment services Business to Business payments
Loan application and approval
Account aggregation
Services under E-Banking
• Mobile Banking: Mobile banking (otherwise called M-banking) is a name
utilized 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.
• 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.
Services under E-Banking contd.
• 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.”
• Internet banking through customary banks empowers clients to play out
every standard exchange, for example, bill payments, balance requests, stop-
payment requests, and balance inquiries. Some banks even proposition
online credit card and loan applications.
• Account data can be acquired day or night, and should be possible from any
place.
Debit Card
• A debit card, also known as a check card or bank card is a payment card that can be used in place of cash to make
purchases. The term plastic card includes the above and as an identity document.
• In many countries, the use of debit cards has become so widespread they have overtaken cheques in volume, or have
entirely replaced them; in some instances, debit cards have also largely replaced cash transactions.
• There are five debit card innovations that promise to make payment easier and more secure for their users:
• A Universal Card: The idea of a universal card isn’t necessarily new. Several companies have already tried to create their
own version. Take Coin, for example. A few years ago, this tech startup launched a universal card that combined all credit
cards, debit cards, and even loyalty cards.
• Coin was the size of a normal debit card. But its interface let users cycle through their stored cards so they could choose
which one they wanted to use at a given time. With this secure smart payment device, people didn’t have to walk around
with a full wallet. They could take one card with them and have access to all their accounts.
• Unfortunately, Coin didn’t succeed. But that doesn’t mean it wasn’t on the right track.
• Universal cards are likely to make a comeback because of the ease of use and freedom they offer. Whether cardholders
are traveling across town or around the world, these cards make it easier by keeping all their payment options available
in one place.
Credit Card
• A credit card is a payment card issued by a bank or financial services company that allows
cardholders to borrow funds with which to pay for goods and services with merchants that
accept cards for payment.
• Credit cards impose the condition that cardholders pay back the borrowed money, plus any
applicable interest, as well as any additional agreed-upon charges, either in full by the
billing date or over time.
• In addition to the standard credit line, the credit card issuer may also grant a separate cash
line of credit (LOC) to cardholders, enabling them to borrow money in the form of cash
advances that can be accessed through bank tellers, ATMs, or credit card convenience
checks.
• Such cash advances typically have different terms, such as no grace period and
higher interest rates, compared with those transactions that access the main credit
line. Issuers customarily preset borrowing limits based on an individual’s credit rating.
ATM
• ATMs were introduced to the Indian banking industry in the early 1990s initiated by foreign
banks.
• Most foreign banks and some private sector players suffered from a serious handicap at that time-
lack of a strong branch network.
• ATM technology was used as a means to partially overcome this handicap by reaching out to the
customers at a lower initial and transaction costs and offering hassle free services. Since then,
innovations in ATM technology have come a long way and customer receptiveness has also
increased manifold.
• Public sector banks have also now entered the race for expansion of ATM networks.
• Development of ATM networks is not only leveraged for lowering the transaction costs, but also as
an effective marketing channel resource.
Innovations in ATM
• Biometric ATMs: Banks across the country have started the process of setting up ATMs enabled with biometric technology
to tap the potential of rural markets. Development of biometric technology has made the use of self-service channels like
ATMs viable with respect to the illiterate population. Though expensive to install, the scope of biometrics is expanding
rapidly. It provides for better security system, by linking credentials verification to recognition of the face, fingerprints, eyes
or voice. Some large banks of the country have taken their first steps towards large scale introduction of biometric ATMs,
especially for rural banking.
• Multilingual ATMs: Installation of multilingual ATMs has also entered pilot implementation stage for many large banks in
the country. This technological innovation is also aimed at the rural banking business believed to have large untapped
potential. The language diversity of India has proved to be a major impediment to the active adoption of new technology,
restrained by the lack of knowledge of English. Multifunctional ATMs are yet to be introduced by most banks in India, but
have already been recognized as a very effective means to access other banking services.
• Multifunctional ATMs are equipped to perform other functions, besides dispensing cash and providing account
information. Mobile recharges, ticketing, bill payment, and advertising are relatively new areas that are being explored via
multifunctional ATMs, which have the potential to become revenue generators for the banks by effecting sales, besides
acting as delivery channels.
Internet Banking
• Internet banking in India began taking roots only from the early 2000s.
• Internet banking allows a user to conduct financial transactions through the Internet. Internet
banking is also known as online banking or web banking.
• Internet banking services are offered in three levels.
• The first level is of a bank‘s informational website, wherein only queries are handled;
• The second level includes Simple Transactional Websites, which enables customers to give
instructions, online applications and balance enquiries. Under Simple Transactional Websites, no
fund based transactions are allowed to be conducted.
• Internet banking in India has reached level three, offering Fully Transactional Websites, which
allow for fund transfers and various value added services.
• Internet banking poses high operational, security & legal risks. This has restrained the development of
internet banking in India. The guidelines governing internet banking operations covers a number of
technological, security related & legal issues to be addressed in relation to internet banking.
Internet Banking
Features of Internet banking
• Check Account Balances & Statements: Customer can log into the internet banking account to check account
balance, check for recent transactions or download statements from years ago at anytime.
• 24x7 Fund Transfer: Customer can transfer money within the same or different banks through internet banking
via facilities like RTGS, IMPS, NEFT, and UPI.
• Bill Payments & Recharge: Customer can pay various utility bills like electricity, landline, gas, property tax, EMI,
etc., and set standing instructions for automatic payments.
• Apply for Loans: Customer can apply for personal loans, home loans, and auto loans through the net banking
portal.
• Make Investments: Customer can access information about investment in mutual funds, bonds, shares, or other
market products. Customer can also link bank account to investment accounts for instant credit and debit of
funds.
• Security: Banks take various measures to ensure customer enjoy a secure internet banking experience. Security
features of internet banking systems include multi-factor authentication, virtual keyboard, spending limits and
session timeouts.
Mobile banking
• Mobile banking refers to the use of a mobile device to carry out financial
transactions. This service is provided by the financial institutions, especially banks.
• Before the introduction and enablement of mobile web services in 1999, mobile
banking was completed primarily through text or SMS; it was known as SMS
banking. European banks were on the frontier of mobile banking service offering,
using the mobile web via WAP support.
• SMS banking and mobile web were the most popular mobile banking products
before 2010. With the development of smartphones with iOS or Android operating
systems, mobile banking applications (apps) began to evolve. Clients were able to
download the banking apps onto their smartphones with more sophisticated
interfaces and improved transactional abilities.
Mobile banking contd.
Services provided by Mobile Banking
• Account information access: Account information access allows clients to view their account balances and
statements by requesting a mini account statement, review transactional and account history, keep track of their
term deposits, review and view loan or card statements, access investment statements (equity or mutual funds), and
for some institutions, management of insurance policies.
• Transactions: Transactional services enable clients to transfer funds to accounts at the same institution or other
institutions, perform self-account transfers, pay third parties (such as bill payments), and make purchases in
collaboration with other applications or prepaid service providers.
• Investments: Investment management services enable clients to manage their portfolios or get a real-time view of
their investment portfolios (term-deposits, etc.)
• Support services: Support services enable clients to check on the status of their requests for loan or credit
facilities, follow up on their card requests, and locate ATMs.
• Content and news: Content services provide news related to finance and the latest offers by the bank or institution.
Mobile banking contd.
• Some of the challenges associated with mobile banking include
(but are not limited to):
• Accessibility based on the type of handset being used
• Security concerns
• Reliability and scalability
• Personalization ability
• Application distribution
• Upgrade synchronization abilities
 Difference between Mobile Banking and Internet
Banking
Basis Mobile Banking Internet Banking
Device used Smartphone and tablet Laptop and desktop
Services offered Limited All banking services
Access Customer should download the Customer require login
banking application on the device credentials to access the
services
Push notifications available Not available
Electronic Fund Transfer
• The Electronic Fund Transfer (EFT) definition is the movement of money from one bank
account to another through electronic means. This can be done within the same bank or
across multiple banks.
• EFT payment meaning is when transfers occur on a computer-based system and do not need
the direct involvement of any banking staff. A bank customer wishing to utilize an ETF can do
so through a computer, phone call, or mobile application.
• ETFs are used to streamline money transfers without having to involve banking staff. This
has become widely popular in the past several decades and is the primary method of
transferring money among individual bank customers.
• The EFT covers all electronic credit and debit money transactions including ATM
transactions, online bill payment, wire transfer, and automatic deductions from the account
of the customers to make regular payments.
Electronic Fund Transfer contd.
• Types of EFT:
• National Electronic Fund Transfer (NEFT)
• Real Time Gross Settlement (RTGS)
• Immediate Payment Service (IMPS)
• Unified Payment Interface (UPI)
• National Electronic Fund Transfer: It is one of the most prominent electronic funds transfer
system of India started in November 2005. NEFT is a facility provided to customers to enable
them to transfer funds easily and securely on a one-to-one basis. Any sum of money can be
transferred using the NEFT system. Funds transfer through NEFT requires a transferring bank
and a destination bank. Before transferring funds via NEFT you register the beneficiary,
receiving funds. For this you must possess information such as name of the recipient,
recipient’s bank name, a valid account number belonging to the recipient and his respective
bank’s IFSC code. NEFT facilities are available in most of the banks all over the country and
work on a half hourly batch mode.
Electronic Fund Transfer contd.
• Real Time Gross Settlement: As the name suggests, RTGS is a real time funds
transfer system which facilitates the account holder to transfer funds from one
bank to another in real time. The transaction isn't put on a waiting list and
cleared out instantly. RTGS payment gateway, maintained by the Reserve Bank of
India makes transactions between banks electronically.
• The transaction amount is instantly deducted from the account of one bank and
credited to other bank’s account.
• The remitting customer needs to add the beneficiary and his bank account
details prior to transacting funds via RTGS. The details required while
transferring funds would be the beneficiary’s name , his/her account number,
receiver’s bank address and the IFSC code of the respective bank.
• The minimum value that can be transferred using RTGS is Rs.2 Lakhs and above
Electronic Fund Transfer contd.
• Immediate Payment Service (IMPS):
• It is an instant real time inter-bank electronic funds transfer system in India. IMPS
offers inter-bank electronic fund transfer service through mobile phones.
• Unlike NEFT and RTGS, the service is available 24x7 throughout the year including
bank holidays.
• IMPS was publicly launched on November 22, 2010.
• It is managed by the National Payment Corporation of India.
• To be able to transfer money via IMPS route, the account holder must first register
for the IMPS with the bank (Mobile Money Identifier).
Electronic Fund Transfer contd.
• Unified Payment Interface:
• UPI is a system that powers multiple bank accounts into a single mobile
application (of any participating bank), merging several banking features,
seamless fund routing & merchant payments into one hood.
• UPI is developed by NPCI - National Payments Corporation of India by
partnering with the Reserve Bank of India and Indian Banks Association
(IBA).
• UPI enables immediate money transfer through mobile device round the
clock 24*7 and 365 days by a single mobile application for accessing different
bank accounts.
Truncated Cheques
• Cheque Truncation System (CTS) is a cheque clearing system undertaken by the Reserve
Bank of India (RBI) for quicker cheque clearance. As the term proposes, truncation is the
course of discontinuing the flow of the physical cheque in its way of clearing. Instead of this
an electronic image of the cheque is transferred with vital essential data.
• It is also called image based clearing system
• Cheques Truncation System was introduced in India on February 1, 2008 and commenced in
2010. Initially introduced in Delhi, Chennai and Mumbai.
• Recently, it was made mandatory for all banks to implement Cheque Truncation System
(CTS) in all their branches across the country by September 30, 2021.
• Cheque Truncation System brings elegance to the whole activity of cheque processing &
clearing and offers numerous benefits to banks like time and cost savings, cost effectiveness,
including human resource rationalization, business process re-engineering and enhanced
customer service.
Truncated Cheques
• Highlights of Cheque Truncation System Cheques
• All CTS cheques hold a watermark, with ‘CTS-INDIA’, which is visible when
held against any light source.
• Pantograph (wavelike design) with hidden / embedded word ‘VOID’
become clearly visible in photocopies of a cheque.
MICR Cheque
• Magnetic ink character recognition code, known in short as MICR code, is a character
recognition technology used mainly by the banking industry to streamline the processing
and clearance of cheques and other documents.
• MICR encoding, called the MICR line, is at the bottom of cheques and other vouchers and
typically includes the document-type indicator, bank code, bank account number, cheque
number, cheque amount (usually added after a cheque is presented for payment) and a
control indicator.
• The format for the bank code and bank account number is country-specific.
• The technology allows MICR readers to scan and read the information directly into a data-
collection device.
• Unlike barcode and similar technologies, MICR characters can be read easily by humans.
MICR encoded documents can be processed much faster and more accurately than
conventional OCR encoded documents.
• “Magnetic Ink Character Recognition” (MICR) is a technology that uses a 9-digit code
printed at the bottom of a cheque to quickly and accurately identify and process it. In addition
to speeding up the processing of cheques, MICR has other features such as:
• MICR is located at the bottom of the cheque
• It includes bank-specific information such as the bank code, account details, cheque number,
and amount
• MICR codes are composed of various characters
• Unlike IFSC codes, MICR codes are widely accepted for cross-border fund transfers
• MICR codes cannot be easily copied due to their unique font and use of magnetic ink
• Indian banks each have their own MICR codes
• The first three digits of the MICR code represent the city code.
• The middle three digits represent the bank code.
• The final three digits represent the branch code
Central Bank Digital Currency
• The Reserve Bank of India (RBI) has defined Central Bank Digital Currency
(CBDC) as the legal tender issued by a central bank in a digital form. It is
the same as a fiat currency and is exchangeable one-to-one with the fiat currency.
• A CBDC is a digital form of the fiat currency issued by the central bank of a
country and is in lieu of the paper/metal currency issued which is the
direct liability of the central bank – that is, it is denominated in the national unit
of account. A CBDC acts as a safe, government-backed, and ultimate medium
of settlement by eliminating all claims that occur during a transaction.
• Types of CBCDs:
• Retail: Retail CBCDs are meant for use by individuals, households, and corporations.
• Wholesale: Wholesale CBCDs are meant for use by financial institutions.
Cryptocurrency
• A cryptocurrency, crypto-currency, or crypto is a digital currency designed to work as a medium of
exchange through a computer network that is not reliant on any central authority, such as a government or bank, to
uphold or maintain it.
• A cryptocurrency follows decentralized network which is based on Blockchain concept (Distributed Ledger). It uses
SHA-256 hashing algorithm.
• The exchange of cryptocurrency occurs between consent parties without any involvement of brokers or regulating
agencies.
• Individual coin ownership records are stored in a digital ledger, which is a computerized database using strong
cryptography to secure transaction records, control the creation of additional coins, and verify the transfer of coin
ownership.
• Despite their name, cryptocurrencies are not considered to be currencies in the traditional sense, and while varying
treatments have been applied to them, including classification as commodities, securities, and currencies,
cryptocurrencies are generally viewed as a distinct asset class in practice.
• The first decentralized cryptocurrency was Bitcoin, which was first released as open-source software in 2009. As of
March 2022, there were more than 9,000 other cryptocurrencies in the marketplace, of which more than 70 had
a market capitalization exceeding $1 billion.
Major Cryptocurrencies
SWIFT
• The Society for Worldwide Interbank Financial Telecommunication (SWIFT) is the global
messaging software and is headquartered in Brussels, Belgium. It is a global member-owned
cooperative.
• Its principal function is to serve as the main messaging network through which international
payments are initiated.
• It allows financial entities to send and receive messages about financial transactions in a secure,
standardized and reliable environment.
• It was founded in 1973 to develop a secure electronic messaging service and common
standards to facilitate cross-border payments.
• The messages are encrypted to protect confidentiality.
• However, the organization does not manage accounts on behalf of individuals or financial
institutions, and it does not hold funds from third parties. It also does not
perform clearing or settlement functions.
End of the Module