Fundamentals of IT Law

Legal Issues in Internet Banking

The banking industry is being reshaped by globalization, competition and innovation and customer needs. Due to the emergence of a knowledge-based economy and society as information and communication technology (ICT) advanced, banking services have undergone profound changes during the last period.

The last decade has witnessed a drastic change in the economic and banking environment all over the world. With the economic and financial sector reforms introduced in the country since 1990s, the operating environment for banks in India has also undergone a rapid change. The process of deregulation and reforms in the Indian banking system resulted in the creation of an efficient and competitive banking system. Deregulation has opened up new vistas for banks to increase their revenues by diversifying into universal banking, investment banking, bank assurance, mortgage financing, depository services, securitization, personal banking, etc. An inevitable result of globalization is that it increases the soundness of the financial system as a whole and facilitates global competition. At the same time, liberalization has opened the turf to new players and brought greater competition among banks. To survive in this competition, the information and communication technology significantly contributed to the exponential growth and profit of financial institutions worldwide.

The most important factor in the development of banking is Information and Communication Technology (ICT) which enables banks to create sophisticated products, to have a better market infrastructure and to reach geographically distant and diversified markets.[1] The customers today require more personalized banking products and services and they expect to access such product and services at any time and any place, as well as they, are looking for simplicity in their day-to-day banking.

Internet Banking also is known as E-Banking is defined as the automated delivery of new and traditional banking products and services through electronic, interactive communication channels. Through e-banking individuals and corporate customers can access accounts, transact business, transfer funds or obtain information on products and services through electronic media without any paper transactions.[2] For many customers e-banking means 24 hours access to cash through ATM or direct deposit of paycheques into a savings account but electronic banking involves different types of transactions. E-banking also means transferring funds electronically with the use of computers and other electronic modes. It allows customers to automate cash receipt payment.

1.1 Difference between Traditional Banking and Internet Banking

As internet commercialization emerged in early 1990s, conventional ‘bricks and mortar’ banks started to inquire ways to providing limited online facilities to decrease operating costs. The success of these early attempts led several banks to increase their internet availability with enhanced websites that featured the capability to download forms, open new accounts and process loan applications. The term online banking referred to the usage of a keyboard, terminal and computer monitor or television to access one’s bank account utilizing landline telephone. The difference between the traditional ‘brick and mortar’ banking and internet banking is provided as[3]

Traditional Banking Internet Banking
Manual record maintaining. Due to the emergence of the internet, the record maintaining was shifted to a mainframe, client/server for the IT infrastructure.
Traditional banking requires interaction with physical facilities, processes, and payments. The customers are also required to carry out transactions with having a physical presence in a particular geographical location. E-banking is a way of on-line transactions via the internet. It constructs an alternative channel by which customers can easily make a transaction anywhere-anytime and reduce the needs for financial intermediaries.
In brick and mortar banking, the services are more comfortable, the risk is less, and trust can be easily maintained because of personal contact. The services are more convenient, efficient and based on the market extension.
With relation to market scope, traditional banking is related to the physical transaction, customers centered and focused on the particular customers in a geographic boundary. On the other hand, e-banking is not confined to a particular area but the customers are connected with an internet connection with wide customers’ base and having the active participants.
From the cost point of view, traditional banking is having restricted networking, high transaction and operating cost. On the other hand, e-banking is having high technological cost, management cost, and high creational cost.
From the profit aspect, as the risk is low so profits are also low. In e-banking, profits are very high due to the variety of services offered but at the same time advertisement cost, commissions, service charges are very high. However, transaction costs and labor charges are quite low.
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