Internet opens new vistas for Indian banks

Internet banking has gained wide acceptance internationally and seems to be fast catching up in India with more and more banks entering the fray. Rajneesh De & Chitra Padmanabhan investigate the pros and cons of this system

Anup Bagchi says that ICICI Bank’s Internet banking users are over 65 percent of all Internet banking customers in India

Indian banks have a chequered history. The British legacy left behind a host of large and small privately-held banks. The late 60s saw the nationalisation of banks, leading to the emergence of the public sector banks. The 90s saw the banking industry embracing technology in a massive way, led in particular by the new private banks and MNC banks. Among these series of technology innovations, Internet banking for the retail segment is a recent phenomenon that has generated a lot of interest in the Indian banking industry. Private and foreign banks have been the early adopters while the PSU banks are also beginning to latch on to the bandwagon.

As per IDC estimates, the total number of registered users for Internet banking in India is over two million. But this figure needs to be adjusted for dormant users and multiple accounts (a user having accounts with more than one bank). India has a little less than a million active Internet banking users. And though this is just 0.096 percent of the total population, it represents 15 percent of the India’s Internet user population. Thus indicating that the concept of Internet banking is surely catching on.

Impressive as these figures might be, the truth is that India lags behind other countries in Internet banking. In the US, the number of commercial banks with transactional websites is 1,275 or 12 percent of the total number of banks. Of these, seven could be called ‘virtual banks.’ Ten traditional banks have established Internet branches or divisions that operate under a unique brand name. At present, in the US approximately 78 percent of all commercial banks with assets more than $5 billion, 43 percent of banks with $500 million to $5 billion in assets, and 10 percent of banks under $500 million in assets have transactional websites.

From the Asian market experience, it is clear that Internet banking is here to stay and will be a major channel to acquire and service customers. Markets like Korea and Singapore have nearly 10 percent of their population banking over the Internet. Though, these markets are way ahead of India both in terms of Internet penetration and online banking penetration, India is a big potential market and is fast catching up with its Asian counterparts.

The Indian saga
In contrast, Indian banks have an insignificant Internet banking record. ICICI Bank kicked off online banking way back in 1996 and a host of other banks soon followed suit. But even for the Internet as a whole, 1996 to 1998 marked the adoption phase, while usage increased only in 1999—due to lower ISP online charges, increased PC penetration and a tech-friendly atmosphere. Reveals Anup Bagchi, head, Internet Banking, ICICI Bank, “We had launched the Internet banking service even before the RBI had formulated its guidelines. Fortunately, as it was a comparatively new concept, the regulating authorities were extremely co-operative with us.”

After ICICI, Citibank, IndusInd Bank and HDFC Bank and Timesbank (now part of HDFC Bank), were the early ones to bite the technology bullet in 1999. Says C N Ram, head, information technology, HDFC Bank, “Our vision was very clear, we were not enamoured by the concept of Internet banking but looked at it more as an add-on service which our customers should gradually adopt.” In line with this strategy, initially the Net banking facility was provided in order to meet the information requirements of the customers and gradually it ventured into fund transfers and third party transfers.

Though adoption of Internet banking by Indian banks and their customers would not set the Arabian Sea on fire, no one can deny the obvious benefits that this service offers. Costs of banking service through the Internet amount to a fraction of the costs through conventional methods. Industry estimates assume teller cost at Re 1 per transaction, ATM transaction costs at Re 0.45, phone banking at Re 0.35, debit cards at Re 0.20 and Internet banking at Re 0.10 per transaction. Says V K Ramani, president, information technology, UTI Bank, another of the early adopters, “No wonder, the cost-conscious banks in the country are now actively considering using the Internet as a channel for providing services. People were sceptical about even ATM at the beginning, but look how it has picked up today.” However, he warns that banks cannot expect instant returns, unless the Internet population itself does not reach a critical mass. Besides, he also feels that fully computerised banks, with better management of their customer base are in a stronger position to cross-sell their products through this channel.

Nitin Chopra, head, consumer banking, ABN-AMRO Bank, feels that the prohibitive costs of real estate would always make Internet banking a much more viable option in the long run than physical banks. In today’s environment besides their physical branches, banks need to grow non-branch delivery networks as a part of their growth strategy. ATMs are currently the hot favourite for most banks, but Internet banking definitely has the potential to leave the rest behind. Therefore, on the whole, Internet banking increases operational efficiencies and reduces costs, besides giving a platform for offering value added services to the customer, thereby fulfilling all the essential prerequisites for a flourishing banking industry.

The PSU lethargy
As in all forms of technology innovations, PSU banks have remained laggards in the race for adopting Internet banking practices. There are very few nationalised banks like State Bank of India, Bank of Baroda, Allahabad Bank, Syndicate Bank and Bank of India, that offer Internet banking services. Some others like Union Bank of India, Canara Bank and Punjab National Bank are on the verge of doing so. SBI’s Internet banking initiative, launched in July 2001, is in fact doing quite well and has over 18,000 registered customers across 150 branches. The enthusiastic response has encouraged the SBI management to extend the service to an additional 500 branches. But despite positive news like this, PSU banks still have a lot of catching up to do on the Internet banking services front.

C N Ram says that HDFC was not enamoured by the concept of Internet banking but looked at it more as an add-on service which its customers could adopt

DD Krishnamoorthy, deputy general manager, information technology, Bank of India says that the primary reason preventing PSU banks from introducing online banking services, has been the absence of a legal framework to back up, and regulate Internet banking operations in the country. Though the Information Technology Act 2000 attempted to address a number of e-commerce regulatory issues, he feels that there still are several grey areas which have neither been spelt out properly, nor have the courts suggested workable modes of implementation. Though Internet banking is only an extension of traditional banking services, there are several instances which contradict the legal framework for this banking in India provided by a set of enactments like the Banking Regulations Act, 1949, the Reserve Bank of India Act, 1934 and the Foreign Exchange Management Act, 1999.

However, not many are willing to buy the argument that it’s the lack of regulations that is preventing the PSU banks from taking the Internet plunge. Says an industry analyst, “More than a lack of regulatory framework, it is lack of zeal and a mindset attuned towards resisting any new technology that is holding back the nationalised banks. On top of this, the highly politicised unions are also an impediment as they feel that Internet banking would expose the low productive levels of the workforce.”

The average customer profile of PSU banks is also comfortable with the traditional banking system and is not too keen on adopting an online model. Typically, most PSU banks have the majority of their customer base in the smaller cities or towns and even in remote villages. Even in bigger cities, a large proportion of their customers are either senior citizens or at least 50+ who have a natural aversion towards adopting new technology. This not the case with private or MNC banks, where the clientele is mostly urban-based falling in the 20-40 age group and who have a higher exposure to technology.

Even the IDC survey seems to confirm this premise. Among the elite Internet banking users, that is, those customers who belong to Socio-Economic Class A1 (SEC A1) in the top five cities, it has been found that people access their account through the Internet once every week. Similarly users visit their ATM centre on an average of two times per week. The workplace happens to be the most favoured place to access Internet for banking purposes. The home comes a close second while cybercafes take the third place. ATM in the close vicinity to the office is the most preferred place among users for banking. The users (24 percent) who access the ATM near their office mostly go during the first half of the day, between 9 AM to 12 PM, but most preferred time by all users (41 percent) is between 6-9 PM.

Bouquet strategy
This probably explains why more and more banks are looking at Internet banking as another attractive addition to their bouquet of delivery channels. At least in urban areas, ATMs are already fast becoming the most popular mode of banking, while phone banking and mobile banking are also on the upswing as the user base grows. Internet banking now seems to be the perfect model to complement the whole system. Says Ram, “In fact, currently telephone banking is much more popular than Internet banking. But we at HDFC Bank are working on a strategy to integrate various channels like the telephone, ATM, Internet, mobile, branches, etc. Customers have real-time access in all wherein any action in any of the above mentioned channels would be immediately reflected in the account of the account holder.”

All these initiatives taken by banks are part of their channel diversification strategy, where they intend to put the strategy matrix in place. This will be done through sprucing up the channel strategy in depth and width in which width would mean the various varieties of channel and depth would mean the value added services in each channel. Adds Ramani, “We can divide the user group into 50 percent that would not prefer transacting through the Internet, 25 percent that are open to the idea, and the other 25 percent that are the ones who can be given credit to popularise the use of Internet for transaction purposes.”

What is ultimately emerging is that though there is certainly a high level of importance attached to Internet banking, it is at present not necessarily a priority for all banks. As far as banks are concerned, migrating customers to any self-directed channel is the main goal. However, the future of banking will be one in which customers can address most of their needs through self-directed means and the key differentiator will be how effective a bank is in getting its customers online and deriving measurable value from this presence. One can sum up the whole Internet banking scenario with the adage, “For while winners may not see massive gains, the losers will fade from view as their ability to compete is eroded with every mouse click.”

India’s Net banking almanac