Chapter 13: e-Banking: Online Services and Digital Banking
Every business, however small, must receive money from customers and pay money to suppliers, employees and service providers. For a long time this meant cash at the counter, a cheque written by hand, or a visit to a bank branch during banking hours. Each of those methods costs time, carries the risk of loss or theft, and leaves the business dependent on when the branch happens to be open. Banking through electronic systems changed that. A trader can now be paid at the moment a customer taps a phone against a terminal, can settle a supplier’s bill late at night, and can retrieve a full record of every transaction without asking anyone for a statement. The bank branch has not disappeared, but most routine banking has moved on to networks, cards and applications. This chapter deals with that shift. It explains what e-banking is, examines the main systems used to transfer funds in India, and looks at digital banking, online payments, mobile banking, cards, ATMs and the demand draft, along with the advantages and the risks each carries for a business.
Figure
Fig. 13.0-1 — Making A Payment At A Retail Counter Photograph of a customer tapping a card or phone on a point-of-sale terminal at a small shop counter while the shopkeeper waits.
13.1 e-Banking: Meaning And Features
Banking exists to hold money safely and to move it from one person to another. For most of its history that movement required physical presence — the depositor came to the counter, signed a slip or a cheque, and waited for a clerk to complete the entry. A business that had to collect from customers in one city and pay suppliers in another lost both time and working hours to this process, and could do nothing at all once the branch had closed for the day.
Electronic systems removed the requirement of physical presence. Once a bank’s records are held on a computer network, a customer instruction can reach the bank through a card, a terminal or an application instead of through a counter clerk. The service the bank provides is unchanged; only the channel through which the customer reaches it has changed. Banking conducted through such channels is called e-banking.
Channels Of e-Banking
e-Banking is not a single facility but a group of channels, each suited to a different situation. Internet banking is operated through a bank’s website on a computer, mobile banking through an application on a smartphone, while cards and machines serve the customer at a shop counter or a cash point. The channels are set out in FC 13.1.
Flowchart
FC 13.1 — Channels Of e-Banking e-Banking → Internet Banking, Mobile Banking, Cards, Self-Service Machines, Alert Services; Cards → Debit Card, Credit Card; Self-Service Machines → ATM, Point-Of-Sale Terminal
Through these channels a customer can check a balance, view transaction history, download a statement, transfer money to another account, pay an electricity or telephone bill, recharge a mobile connection or open a fixed deposit. Cash withdrawal and balance enquiry are handled at an ATM, and payments at shops and on websites are settled by card or by an application.
Features Of e-Banking
The features below explain why e-banking has displaced counter banking for most routine work.
- Round-the-clock availability — services are provided by a network rather than by staff, so transactions can be carried out at night, on holidays and outside branch hours.
- Anywhere access — because the customer reaches the bank through a device and not through a building, banking becomes possible while travelling and in rural areas distant from a branch.
- Multiple channels — the same account can be operated through internet banking, a mobile application, a card or a machine, so the customer can choose the channel that suits the transaction.
- Speed of settlement — instructions are transmitted and processed electronically, which removes the delay caused by handling paper and allows funds to reach the payee quickly.
- Wide range of services — apart from transfers and payments, customers can apply for loans, invest in deposits and request services online, because the application process itself has been converted into an electronic form.
- Layered security — since the customer is not physically identified at a counter, banks authenticate the instruction instead, using passwords, personal identification numbers, one-time passwords, biometric verification and encryption.
- Automatic record-keeping — every instruction is recorded as it is processed, so the customer receives a permanent digital record without asking for one, and a business can use it directly in its accounts.
- Reduced paperwork — forms, slips and printed statements are replaced by electronic entries, which lowers the administrative cost of banking for both sides.
- Cost saving — banks need fewer counters and less staff time for routine work, and customers save the travel, waiting and handling costs of a branch visit.
Cautions In Using e-Banking
Convenience carries a matching risk. Because the customer is identified only by credentials, anyone who obtains a password, a personal identification number or a one-time password can operate the account. Fraud in e-banking therefore usually works by persuading the customer to part with these details through a fake message, a fake website or a false telephone call, rather than by breaking into the bank’s system. Service also depends on a working device and a network connection, so a technical failure at either end interrupts banking altogether.
13.2 Real-Time Gross Settlement (RTGS)
Not every payment a business makes carries the same urgency. A monthly telephone bill can wait a few hours; a payment that must reach a supplier before goods are released cannot. Where a large sum has to move between two banks and the payer needs certainty that it has arrived, the transfer system used must settle the instruction immediately and settle it beyond recall. Real Time Gross Settlement (RTGS) is the system designed for exactly this requirement.
The name states how the system works. ‘Real time’ means the instruction is acted upon at the moment it is received rather than being held for a later processing run. ‘Gross’ means each instruction is settled separately, on its own, and is not combined with other instructions of the same bank. The two together give the payee’s bank the funds immediately and give the payer a completed transaction that cannot be undone.
RTGS in India is operated by the Reserve Bank of India, which maintains the accounts of the participating banks and passes the debit and credit entries between them. Because the central bank itself is the settlement agent, the payee’s bank receives the funds with certainty and can credit the beneficiary’s account without waiting for confirmation from anyone else.
Features Of RTGS
- Immediate settlement — the instruction is processed as soon as it is authenticated and approved, so the waiting period built into batch-based systems does not arise.
- Individual processing — each transaction stands alone, which means the failure or delay of one instruction does not hold up any other.
- Finality and irrevocability — once settled, the transfer cannot be reversed, which is what gives the payee the certainty needed to release goods or discharge an obligation.
- Reduced settlement risk — because banks do not accumulate mutual obligations for later adjustment, neither bank is exposed to the other’s failure in the interval.
- Designed for high-value transfers — the Reserve Bank prescribes a minimum amount of ₹2,00,000 for an RTGS transfer and no upper limit, though a bank may fix its own limit for its customers.
- Continuous availability — the system operates through the day rather than in fixed sessions, so an urgent payment need not wait for the next settlement cycle.
The trade-off is that RTGS is not meant for routine, small payments. Settling every instruction separately consumes system capacity, which is why a minimum amount is prescribed and why smaller transfers are directed to the batch-based system explained in the next section.
13.3 National Electronic Funds Transfer (NEFT)
Most payments a household or a business makes are neither very large nor urgent — a fee, a rent, a supplier’s routine bill, a salary. Settling each of these separately and instantly, as RTGS does, would occupy the settlement system for no real gain. It is more economical to collect the instructions received over a short period, work out what each bank owes every other bank, and settle the resulting net amounts together. National Electronic Funds Transfer (NEFT) works on this principle.
Under NEFT the customer’s instruction is converted into an electronic message and passed to the beneficiary’s bank through the clearing arrangement operated by the Reserve Bank of India. Instructions are not settled one by one as they arrive; they are grouped into batches and settled at intervals through the day, after which the beneficiary’s bank credits the account. The credit therefore reaches the payee a short while after the instruction is given rather than at the same instant.
Features Of NEFT
- Countrywide reach — funds can be sent from any NEFT-enabled branch to any other such branch in the country, so the payer and the payee need not bank with the same institution.
- Batch settlement — instructions are accumulated and settled at intervals, which keeps the system economical and makes it suitable for routine payments where a few minutes make no difference.
- No minimum amount — because the system is built for ordinary payments, even a very small sum can be transferred, unlike RTGS.
- No registration formality — the remitter simply supplies the beneficiary’s details; a separate enrolment for the service is not required.
- Details required — the beneficiary’s account number, the beneficiary bank’s IFSC code, the beneficiary’s name and the amount must be entered correctly, since the credit is applied by the system to the account number given.
- Suitable for credit-based payments — as settlement is deferred, NEFT fits payments arising out of an existing obligation, such as fees, rent, salaries and supplier bills, rather than payments made against immediate release of goods.
A cash-based remittance made by a person who does not hold an account with the bank is permitted only up to a prescribed limit per transaction, since such a remitter cannot be identified through account records.
NEFT Compared With RTGS
Both systems transfer funds electronically between banks, and both are operated through the Reserve Bank of India, but they answer different needs. The differences are set out in Table 13.1.
The choice between the two therefore turns on amount and urgency. A business paying a supplier who is holding back a consignment needs RTGS; the same business paying its monthly electricity bill needs nothing more than NEFT.
13.4 Immediate Payment Service (IMPS)
RTGS settles instantly but is meant for large amounts; NEFT accepts small amounts but settles in batches. Between the two lies the most common payment situation of all — a small sum that must reach the other person at once, often late at night or on a holiday. Immediate Payment Service (IMPS) was introduced to fill this gap.
IMPS is operated by the National Payments Corporation of India, the organisation that runs the country’s retail payment systems. It allows a customer of one bank to send money to a customer of another bank instantly, at any hour, using a mobile phone, an internet banking facility or an ATM. The instruction is authenticated, the sending account is debited and the receiving account is credited within moments, and both parties are informed.
Features Of IMPS
- Real-time settlement — every instruction is processed as it is received, so the beneficiary can use the money at once rather than after a batch cycle.
- Round-the-clock service — the system runs on weekends and holidays as well, because it is operated by a network and not by branch staff.
- Retail orientation — it is built for small and moderate person-to-person payments, which is why no minimum amount is prescribed.
- Multiple access points — the same transfer can be initiated from a mobile application, an internet banking page or an ATM, so a customer without a smartphone is not excluded.
- Secure and encrypted — transaction messages are encrypted and the instruction is authenticated before it is executed, since the transfer is immediate and cannot be recalled afterwards.
- Interbank coverage — the participating banks are linked through a common network, so the sender and the receiver need not hold accounts with the same bank.
Because IMPS moves money immediately and irreversibly, an error in the beneficiary’s details cannot be corrected by simply cancelling the instruction. The remitter must therefore verify the account number or mobile number before confirming the transfer.
13.5 Digital Banking
The systems described so far — RTGS, NEFT and IMPS — each perform one task: moving money between accounts. A customer, however, does more with a bank than transfer funds. Accounts are opened, deposits are created, statements are drawn, cards are blocked, complaints are lodged. When a bank converts these activities as a whole into services delivered over digital platforms, the result is described as digital banking.
Digital banking therefore refers to the delivery of banking and financial services through electronic and digital platforms — mobile applications, internet banking sites, cards, ATMs, payment interfaces and automated systems — so that a customer can operate the relationship with the bank without a physical visit to a branch. The shift is one from branch-based banking, where the branch is the point of service, to network-based banking, where the network is.
Features Of Digital Banking
- Delivery through digital platforms — services reach the customer through mobile applications, internet banking sites, payment interfaces, cards and machines rather than through a counter.
- Availability beyond banking hours — because the platform and not the branch provides the service, banking continues after the branch has closed and on days when it does not open.
- Speed and convenience — instructions are executed by the system as they are received, so what once required a queue and a signature is completed in a few steps on a device.
- Reduced paperwork — applications, statements and requests are handled as electronic records, which lowers the cost of processing for the bank and the effort of documentation for the customer.
- Wider coverage of services — not only payments but account opening, deposits, loan applications, card management and grievance redressal are made available digitally, which is what distinguishes digital banking from a single electronic facility.
- Automated processing — routine work is handled by the system without staff intervention, which improves consistency and allows staff to be used for work that genuinely needs judgement.
Figure
Fig. 13.5-1 — A Self-Service Banking Kiosk Photograph of a bank lobby with a self-service kiosk and cash deposit machine in use, with the teller counters visible behind.
What Digital Banking Demands Of The Customer
The gains come with two conditions. The customer must have a working device and a reliable connection, which is not uniformly available in every part of the country, and must be able to use the platform confidently. Where either condition fails — an elderly customer unfamiliar with applications, a village with weak network coverage — digital banking is of little help, and the branch remains necessary. This is why banks continue to operate branches and simpler channels such as ATMs and alert services alongside their digital platforms.
13.6 Unified Payments Interface (UPI)
Transferring money through NEFT or IMPS requires the payer to know the beneficiary’s account number and the IFSC code of the beneficiary’s branch, and to add the beneficiary to a list before paying. That is workable for a supplier who is paid every month; it is impractical for a customer paying a shopkeeper at a counter or a friend splitting a bill. What such payments need is a single identifier that works across all banks, no different from a phone number.
Unified Payments Interface (UPI) provides it. Operated by the National Payments Corporation of India, UPI is an instant payment system built over the country’s immediate settlement infrastructure. A customer creates a Virtual Payment Address — an identifier of the form name@bank — and links it to the bank account. Money can then be sent to that address, or to a QR code that represents it, without either party disclosing an account number. The debit and credit take place in real time between the two banks.
The sequence of a UPI payment is summarised in FC 13.2.
Flowchart
FC 13.2 — Steps In A UPI Payment Payer opens the UPI application → enters the payee’s Virtual Payment Address or scans the payee’s QR code → enters the amount → authorises the payment with the UPI PIN → payer’s bank debits the account → payee’s bank credits the account → both parties receive confirmation
Features Of UPI
- Instant settlement — the transfer is completed between the two accounts at the moment it is authorised, so the payee need not wait for a batch or a clearing cycle.
- A single identifier — a Virtual Payment Address or QR code replaces the account number and IFSC code, which removes the main source of error and delay in ordinary transfers.
- Interoperability across banks — the interface sits above the individual banks, so a payment can be made from an account in one bank to an account in another through any participating application.
- Both retail and merchant payments — the same facility handles person-to-person transfers and payments to shops and service providers, which is why it is used equally at a counter and between individuals.
- Common technical standards — participating banks and applications connect through a standard set of interfaces, which is what allows a single application to operate accounts held with several banks.
- Authentication by the payer — every payment must be approved with a personal UPI PIN known only to the account holder, since the transfer once made is immediate and final.
The convenience of a single identifier also creates the main risk. A fraudster may send a request for money that resembles a payment being received, or may persuade a user to approve a collect request. Since the UPI PIN is required only to send money and never to receive it, a demand to enter the PIN in order to receive a payment is always a sign of fraud.
13.7 E-Wallet And Mobile Wallet
A bank account is designed to hold a customer’s deposits and to be operated with the care that deposits deserve. Small, frequent online payments — a cab fare, a recharge, a food order — do not need that machinery, and entering card or account details afresh for each of them is slow and exposes those details repeatedly. The solution adopted was to let a customer set aside a small sum in advance in an instrument meant only for such payments. That instrument is the e-wallet, also called a mobile wallet.
An e-wallet is a prepaid account. The user loads money into it from a bank account, a debit card or a credit card, and then spends from the balance so loaded. It is operated through an application on a smartphone or through a computer, is protected by a password or personal identification number, and is used to pay for groceries, online purchases, tickets and similar everyday items. In utility it resembles a card, but the money in it has already left the bank account before any purchase is made.
Components Of An E-Wallet
An e-wallet has two parts. The software component stores the user’s information and provides the security and encryption that protect it. The information component is the database of details the user has supplied — name, address, payment method, card details and the amount to be paid. The two together allow a payment to be completed without the user re-entering details at each purchase.
How An E-Wallet Works
- Loading of value — money is transferred into the wallet from a linked bank account or card, so the wallet always spends value that has already been paid in.
- Payment from stored balance — at the time of purchase the amount is deducted from the wallet balance rather than from the bank account, which is why a payment fails if the wallet has not been loaded.
- Transfers within the same service — a user can send money to another user of the same wallet service, since both balances are held by the same provider.
- Beneficiary details — to transfer funds the user opens the application, adds the recipient’s credentials such as a mobile number, and enters the amount.
- Immediate credit — once the remitter authenticates the transaction, the amount is credited to the beneficiary’s wallet in real time.
- Prescribed ceilings — the balance that may be held in a wallet and the amount that may be transferred from it are subject to limits laid down by the Reserve Bank, because the instrument is meant for small-value use.
Two limitations follow from the design. Money loaded into a wallet is idle until it is spent, and a wallet’s transfers usually work only between users of the same service, so its usefulness depends on how widely that service is accepted.
13.8 Digital Rupee (e₹)
Every payment system described so far moves deposits. When a customer pays through UPI, an e-wallet or a card, what changes is the record of how much each bank owes its customers; the money itself remains a claim on a bank. Cash is different. A currency note is not a claim on a commercial bank but money issued by the central bank, and it passes from hand to hand without any intermediary. The Digital Rupee (e₹) was introduced to give this quality of cash a digital form.
The Digital Rupee is the official digital form of India’s currency, issued by the Reserve Bank of India. It is a Central Bank Digital Currency (CBDC), which means it is money backed by the central bank in the same way as paper notes and coins, and not a deposit with a commercial bank. In its retail form the e₹ is issued as a digital token representing legal tender, available in the same denominations as physical currency. It is held in a digital rupee wallet provided through participating banks and can be used to pay individuals or shops directly. The Reserve Bank has introduced it through pilot projects rather than as an immediate countrywide replacement for cash.
Features Of The Digital Rupee
- Legal tender — it is issued by the Reserve Bank and carries the same legal status as a currency note, so a payee cannot refuse it as a means of settlement in the way a private instrument may be refused.
- Digital form of cash — it is designed to behave like cash rather than like a bank balance, which is why it is issued in fixed denominations and held in a wallet as tokens.
- Direct transfer — payment passes from the payer’s wallet to the payee’s wallet, so settlement is direct and does not depend on clearing between two banks.
- Use for person-to-person and merchant payments — the same tokens can be sent to another individual or used to pay a shopkeeper, exactly as a note can.
- Instant settlement — because the token itself moves, the payee holds the money at the moment of payment and there is no further settlement to await.
- Issued in a controlled manner — the Reserve Bank controls issue and has extended the facility through pilot projects with participating banks, so that its effects on banking and payments can be observed before wider use.
13.9 Online Payments
Cash and cheques settled trade for a very long time, but both require the payer and the payee to be in the same place or to wait for a document to travel and clear. As trade moved on to the internet, that requirement became impossible to meet: a buyer ordering from a seller several states away cannot hand over notes, and a seller cannot despatch goods against a cheque that may take days to clear. Online payment developed as the settlement method that matches this way of trading.
13.9.1 Meaning And Features Of Online Payments
Online payment is the electronic exchange of funds between buyers and sellers over the internet using digital platforms. Payment for goods and services is made without any physical exchange of cash or paper instruments such as cheques and demand drafts. The funds move directly from the payer’s bank account or payment instrument to the payee’s account through authorised banking networks or payment service providers.
Such payments are made from computers, smartphones and tablets, and are used for purchases from e-commerce sites, utility bills, fees, fund transfers and business-to-business dealings. The methods commonly used are UPI, debit cards, credit cards, net banking, mobile wallets and QR code-based systems, each of which carries the instruction to the payer’s bank in its own way while producing the same result.
Features Of Online Payments
- Wholly electronic settlement — the entire process from instruction to credit is carried out by systems, so no paper instrument is created and none has to be presented or cleared.
- Choice of payment methods — cards, net banking, UPI and wallets can all be offered on the same page, which allows a seller to accept payment from a buyer whatever instrument that buyer holds.
- Speed of processing — instructions are authenticated and executed in moments, which is what makes payment against an internet order practicable at all.
- Access through digital channels — payment can be made through a mobile application, a website or a payment gateway built into an e-commerce platform, so the buyer pays where the purchase is made.
- Paperless records — receipts, confirmations and statements are generated and stored electronically, which reduces documentation cost and makes retrieval simple.
- Security through authentication — passwords, personal identification numbers, one-time passwords, biometric verification and encryption are used, since the payer is not physically present to be identified.
- Reach beyond location — a seller can be paid by a buyer anywhere the network extends, which frees trade from the requirement that the two parties meet.
Online Payments And e-Banking Compared
The two terms overlap and are often used loosely. Table 13.2 sets out how they differ.
13.9.2 Advantages And Limitations Of Online Payments
Advantages
- Convenience and accessibility — the need to visit a bank or a payment counter disappears, which saves both the time of the payer and the working hours of a business.
- Support for a cashless economy — payments made through the banking system leave a record, which reduces the circulation of unaccounted money and improves tax compliance.
- Reliable record-keeping — every payment generates a confirmation and a statement entry, which a business can carry directly into its accounts and use at the time of audit.
- Wide acceptance — retail trade, education, health services, transport and government departments all accept online payment, so a single method serves most of a person’s obligations.
- Reduced risk of handling cash — theft, loss, miscounting and counterfeit notes cease to be concerns once money is not physically held or moved.
- Better financial control — because settlement is prompt and visible, a business can monitor its cash flows and pay suppliers on time rather than after a delay caused by clearing.
Limitations
- Security risk — online payments remain exposed to hacking, phishing and identity theft, because the instruction travels over a public network and the payer is identified only by credentials.
- Fraud and false portals — fake payment pages and fraudulent websites imitate genuine ones, and a payer who cannot tell them apart may hand over money and details together.
- Dependence on connectivity — a stable internet connection is essential, so in areas of weak coverage a payment may fail at the moment it is needed.
- Technical failure — system downtime, transaction failure or a payment gateway error can interrupt the process, leaving the payer uncertain whether the money has left the account.
- Limited digital literacy — elderly users, rural populations and economically weaker sections may lack either the devices or the confidence to use these systems, which keeps them dependent on cash.
- Loss of personal contact — with fewer visits to a branch, a customer who faces a complicated problem has no one at a counter to explain it to, and must rely on remote channels for redressal.
13.10 Mobile Banking
Internet banking freed the customer from the branch, but it still required a computer and, in practice, a place to sit down. The device most people actually carry is a telephone. Once banks built applications and message-based services for that device, banking could be conducted while standing at a counter, waiting at a site or travelling between two customers — which is where a great deal of small business is actually done.
13.10.1 Meaning And Features Of Mobile Banking
Mobile banking is the use of mobile devices such as smartphones and tablets to access and manage banking services, carry out transactions and conduct financial activities. Banks offer it through authorised mobile applications, mobile-optimised websites or message-based systems, so that account holders can operate their accounts from any place and at any hour. It is a part of e-banking, distinguished by the fact that the mobile device is the channel.
The concept rests on joining banking operations to mobile communication. The customer’s instruction travels from the handset to the bank over a digital network, is processed by the bank’s central system, and is reflected in the account at once. Its purpose is to widen access to banking, encourage payment without cash, and reduce the volume of routine work that must be done at a branch.
Features Of Mobile Banking
- Payment services — utility bills, credit card dues and other recurring payments can be settled directly from the bank account, so a separate visit or instrument is not needed for each.
- Fund transfer facility — money can be sent to another account within the same bank or to a different bank, in real time, from wherever the customer happens to be.
- Account management — balances, transaction records and statements are available on the device, and several accounts can be managed from one application.
- Alerts and notifications — the customer is informed of transactions and account events as they occur, which allows an unauthorised entry to be noticed early.
- Card management — cards can be activated, blocked or have their limits changed through the application, which matters most when a card is lost and time is short.
- Deposit and investment services — fixed deposits and similar instruments can be opened or managed electronically, because the application forms themselves have been converted into digital form.
- Security mechanisms — fingerprint recognition, facial recognition, personal identification numbers and multi-factor authentication are used, since the device is portable and may fall into other hands.
- Supporting facilities — features such as an ATM locator and access to grievance redressal are included so that the application can serve as the customer’s single point of contact with the bank.
Limitations Of Mobile Banking
- Technical difficulty — an application crash, a slow connection or an incompatible handset can interrupt a transaction at the moment it is needed.
- Security exposure — the channel remains open to hacking, malware and phishing, because the instruction is authenticated by credentials rather than in person.
- Dependence on the device — if the handset is lost, stolen or damaged, the customer loses access to banking and may be exposed to misuse of the stored credentials.
- Absence of personal assistance — a complicated problem cannot be explained to a person at a counter, which makes some grievances harder to resolve.
- Limited digital ability — customers with little exposure to technology may be unable to use the service effectively, so the branch remains necessary for them.
13.10.2 SMS Alerts
Mobile banking assumes that the customer will open an application to find out what has happened in the account. An alert service reverses that: the bank informs the customer as soon as something happens, without being asked. This is the purpose of SMS alerts.
The bank records the customer’s mobile number against the account in its system. Whenever a transaction is put through, whether a debit or a credit, a message is sent automatically to that number stating the nature and amount of the transaction, its date and the balance in the account on that date. The customer therefore learns of every entry without visiting a branch or opening an application.
Features And Value Of SMS Alerts
- Transaction notification — a message follows each successful transaction, allowing the customer to track payments and transfers as they happen.
- Security warning — alerts about unusual activity, such as a login attempt from an unrecognised device, act as an early warning of fraud and allow the customer to act before more is lost.
- Balance and cheque information — alerts cover balances, minimum balance requirements, and the clearance or dishonour of cheques, so the customer is not taken by surprise.
- Card and ATM activity — withdrawals and card usage are notified, which is the quickest way for a customer to detect a card being used without authority.
- Works without the internet — an alert reaches a basic handset over the mobile network, which makes it the one e-banking facility available to customers who have no data connection.
- Low cost to the bank — a message costs far less than a printed statement or a counter enquiry, which is why banks offer the facility widely.
The limitations are equally plain. A message is short and may not carry every detail of a transaction, so the customer often has to log in for more. The alert depends on network coverage, and one missed in a weak-signal area defeats its purpose. Banks may charge a nominal fee for the service, frequent messages can become a nuisance, and a lost handset places all this information in someone else’s hands.
13.10.3 Transfer Of Funds Via Mobile Banking
Transfer of funds means moving money from one person or organisation to another, either within the same bank or between different banks. It is the banking service on which trade depends: payments are made, liabilities discharged and accounts settled through it, and timely transfer is what keeps confidence and continuity in commercial dealings.
Through mobile banking the customer initiates such a transfer from the handset itself. The facility supports person-to-person transfers as well as transfers between banks, and can be used through a banking application, a message-based service or a payment platform built into the application. Domestic transfers, remittances abroad and payments to merchants are all handled in this way.
Features And Advantages
- Initiation from anywhere — no visit to a branch or an ATM is required, so a payment can be made at the moment the obligation arises.
- Speed of payment — processing is near-instantaneous, which shortens the interval between deciding to pay and the payee having the money.
- Record and proof — every transfer creates an electronic confirmation, which serves as evidence for accounting, verification and later reference.
- Simpler beneficiary details — contact-based and UPI-based transfers spare the customer from remembering account numbers and IFSC codes, which is where errors usually occur.
- Lower cost — transfers within the same bank, and those made through retail payment systems, generally attract lower charges than traditional methods.
- Support for business activity — suppliers, employees and service providers can be paid promptly, which keeps supply and work moving.
Limitations
- Transaction limits — a bank may cap the amount transferable in a single transaction or in a day, which can be insufficient for a high-value business payment.
- Security risk — mobile transfers remain open to cyber crime and to persuasion-based frauds in which the customer is induced to authorise the payment himself.
- Technical and network failure — glitches, connectivity problems and application malfunction can delay or fail a transfer.
- Risk of error — an incorrect account number or IFSC code may send the money to the wrong party, and because settlement is immediate it cannot simply be recalled.
- Service charges — banks may levy charges on certain transfer methods, particularly for high-value or urgent transfers.
13.10.4 Making Payments Via Mobile Banking
Mobile banking is used not only to send money to a known person but to pay for goods and services — purchases from e-commerce sites, utility bills, fees, subscriptions and payments at a shop counter. The customer completes the payment by scanning a QR code, tapping the handset on a terminal, or entering payment details in an application.
Features
- QR code scanning — the customer scans the merchant’s code, which links the payment directly to the customer’s bank account and removes the need for any card infrastructure at the shop.
- Near field communication payment — a handset supporting this technology is tapped against a compatible point-of-sale terminal, so a contactless payment can be made without handing over a card.
- Recurring payments — instructions can be set up for bills and subscriptions, which prevents the default that follows from simply forgetting a due date.
- Speed of payment — transactions are processed quickly, allowing bills and dues to be settled at the moment they fall due.
- Reduced reliance on cash — payment at a counter no longer requires notes or change, which lowers the risk of loss, theft and misplacement for both parties.
- Record of transactions — an electronic confirmation is generated for each payment and serves as proof in accounting and verification.
Limitations
- Uneven merchant acceptance — not every shop or service provider accepts mobile payment, so the customer cannot rely on it alone.
- Risk of device theft or loss — a lost handset without adequate password or biometric protection exposes the user to fraud.
- Technical downtime — a service outage prevents payment at the counter, where an alternative may not be at hand.
- Transaction limits and charges — banks may impose limits and levy charges, which can restrict large purchases.
- Incorrect payment — an error in the details entered may send the payment to the wrong account, and recovery then depends on the goodwill of the recipient.
13.11 Forms Of Electronic Banking
The systems described so far settle payments between banks. What a customer actually handles, however, is an instrument or a machine — a card at a counter, a terminal in a shop, a cash point on a street. These are the forms in which electronic banking reaches the ordinary user, and they are set out in FC 13.3.
Flowchart
FC 13.3 — Forms Of Electronic Banking Forms Of Electronic Banking → Electronic Funds Transfer System, Payment Cards, Automated Teller Machines; Electronic Funds Transfer System → Direct Credits, Direct Debits; Payment Cards → Debit Card, Credit Card; Automated Teller Machines → ATM, Micro ATM
13.11.1 Electronic Funds Transfer System
An employer paying a hundred employees, or a company paying dividend to thousands of shareholders, cannot sensibly issue that many cheques or count out that much cash. The electronic funds transfer system was developed for repeated payments of this kind. Under it a bank transfers wages and salaries directly from the company’s account to the accounts of its employees on the due date, sparing both employer and employees the inconvenience and risk of handling large amounts of cash.
Payments under the system take two forms.
- Direct credits — salary, pension, dividend on shares, interest on debentures, commission and royalty are credited directly to the account of the person entitled to them, so the payee receives the money without presenting any instrument.
- Direct debits — loan instalments, school fees, insurance premiums, telephone, electricity and water bills, club membership fees and credit card dues are debited directly from the account holder’s account under a standing authority, so a recurring obligation is met without a fresh instruction each time.
The advantages follow from these two arrangements. Payment is made on the due date, so a default caused by oversight does not arise. Nothing is lost in transit, because no instrument travels. No expense is incurred on correspondence, cash is not mishandled, and the transaction requires almost no effort from either side once the arrangement is in place.
13.11.2 Debit Cards
A debit card is a plastic card issued by a bank to a customer who holds a deposit with it. It gives the holder electronic access to that deposit. At a shop, a point-of-sale terminal connected to the bank’s computer reads the card, and on the holder’s authorisation the terminal transfers money from the holder’s account to the seller’s account. The same card is used at an ATM to withdraw cash, check a balance or carry out other basic services.
Features Of Debit Cards
- Linked to the account — the transaction is settled by withdrawing from the available balance, so the card spends the holder’s own money and offers no credit facility.
- Immediate deduction — the account is debited at the time of the transaction, which keeps the holder’s record of the balance current.
- Spending confined to the balance — a payment cannot exceed what is in the account, so debt cannot accumulate through the card.
- No interest charge — since the holder is using his own funds and not borrowing, no interest arises at any stage.
- Authentication by PIN — a personal identification number is required for transactions, because the card alone would otherwise be enough for anyone holding it.
- Access to ATM services — cash withdrawal, balance enquiry and other services are available at machines, which is what makes the card useful beyond shop counters.
13.11.3 Credit Cards
A credit card is also a plastic card issued by a bank, but it does something different: it provides the holder a line of credit. The card carries the holder’s name and signature, the name of the issuing bank and the date of validity. The holder buys goods and services at specified outlets by presenting the card without paying cash, and settles with the bank afterwards. In effect the bank pays the seller now and the holder pays the bank later, which makes the card a form of short-term borrowing.
Features Of Credit Cards
- Pre-approved credit limit — the bank fixes the maximum amount the holder may borrow on the card, since it is lending without security on each transaction.
- Grace period — purchases usually attract no interest for a stated period, provided the balance is paid in full by the due date.
- Interest on unpaid balance — if the balance is not cleared by the due date, the outstanding amount attracts interest, which can become substantial.
- Revolving credit — the holder may carry an outstanding balance forward subject to a minimum payment, which is convenient but is also how card debt builds up.
- Rewards and benefits — cashback, loyalty points and discounts are offered by issuers as an inducement to use the card.
- Use in emergencies — funds are available even when the bank account is empty, which is the card’s principal value to a household facing an unexpected expense.
- Effect on credit standing — repayment behaviour is recorded, so regular repayment builds the holder’s credit history while default damages it.
Debit Card And Credit Card Compared
The two cards look alike and are used at the same terminals, but they draw on different sources of money. The differences are set out in Table 13.3.
13.11.4 Automated Teller Machines
A teller is the bank employee at the counter who receives cash, verifies the signature and the balance, and makes payment. An Automated Teller Machine (ATM) performs that work electronically. The card issued by the bank carries the verified details of the holder; when it is inserted, the machine verifies the holder’s personal data, seeks the correct response from him, and then pays out the cash.
Uses And Features Of ATMs
- Money at any time and place — a teller works only during banking hours, while the machine works through the day and night on all days of the week.
- Saving of time — the customer does not stand in a queue for cash, and the bank’s staff are freed from routine payment work.
- Reduced workload for the bank — with withdrawals handled by machines, staff can attend to work that genuinely needs their judgement.
- Range of services — besides withdrawal, the machine handles balance enquiry, fund transfer, deposit of cash or cheques and payment of certain bills.
- Connection to the bank’s network — the machine is linked to the bank’s systems, so a customer can operate the account from any machine of the network at any time.
- Convenience of use — multi-language interfaces are provided so that customers of different regions can use the same machine.
Micro ATM
A micro ATM is a smaller version of the machine. It resembles a modified point-of-sale terminal and connects to the banking network over a mobile connection to carry out transactions. It contains a card swipe facility and a fingerprint scanner, and is carried by a bank representative to remote locations. The device holds no cash of its own; the representative carries the cash, and is also responsible for collecting cash and depositing it in the user’s account. In this way banking services reach places where a branch or a full ATM would not be viable.
Figure
Fig. 13.11-1 — An ATM In Use Photograph of a customer at an automated teller machine in a bank’s ATM cabin, with the card slot and keypad visible.
13.12 Demand Draft (Bank Draft)
A cheque is only a promise by its drawer that the account will honour it. The payee cannot know whether the funds are actually there, which is why a seller dealing with an unknown buyer, a university collecting fees, or a government office receiving a tender deposit will not accept one. What such a payee needs is an instrument on which the bank, and not the customer, is the party liable. The demand draft answers this need.
13.12.1 Meaning And Features Of A Demand Draft
A demand draft, also called a bank draft, is a prepaid negotiable instrument issued by a bank, drawn on its own branch or on another bank, and payable to the person named in it or to his order. The customer pays the bank in advance, and the bank then guarantees payment to the payee. Because the draft is drawn on the bank’s own funds rather than on the customer’s balance, it is a more secure form of payment than a personal cheque.
A draft is used mainly where the payee requires certainty — payments of government fees and college fees, tender deposits, and large payments that need verification before goods or services are released. The person wanting a draft fills in the prescribed form at the counter, pays the amount together with a nominal commission, and receives the instrument; the issuing bank sends a credit advice to the branch on which the draft is drawn.
Features Of A Demand Draft
- Paid for in advance — the value is collected from the purchaser before the instrument is issued, which is what allows the bank to guarantee it.
- Drawn by a bank — the instrument is drawn by a bank upon itself or upon another bank, so the party liable to pay is a bank and not an individual customer.
- Payable on demand — it is payable when presented, without days of grace, so the payee need not wait for a maturity date.
- Payable to a named payee — a draft cannot be made payable to bearer; it is paid to the person named in it or to his order, which protects it if it is lost.
- No risk of dishonour for want of funds — since the amount has already been received by the bank, the draft does not bounce as a cheque may for insufficiency of balance.
- Not easily stopped — payment cannot be countermanded as readily as in the case of a cheque, which is precisely why a payee is willing to rely on it.
- Useful as a mode of remittance — it enables money to be sent safely from one place to another, and is accepted both by private parties and by government departments.
- Commission payable in advance — the bank charges a nominal commission for the service, paid by the sender at the time of issue.
A related instrument is the banker’s cheque, also called a pay order, which a bank draws on itself and which is payable locally. A demand draft, by contrast, is ordinarily used to make payment at another centre.
Cheque And Demand Draft Compared
Table 13.4 sets out the differences that matter to a payee deciding which to accept.
13.12.2 Online Issue Of A Demand Draft
The security of a draft came historically at the cost of a branch visit, a printed form and a queue. Banks now allow a draft to be applied for and obtained electronically through their digital banking platforms, without the customer attending a branch at all. Once the application is completed and the amount paid, the draft is either mailed physically to the applicant or sent electronically to the payee.
- Completed from anywhere — the whole process is carried out on the bank’s platform, which saves the customer the time and effort of a branch visit.
- Quicker than the counter method — the instruction is processed as it is received rather than after the paperwork at a counter, so the draft is issued sooner.
- Better tracking — the applicant can follow the status of the draft through issue, delivery and clearing, which is not possible with an instrument collected by hand.
- Fewer errors in details — the payee’s name and the amount are taken from what the applicant enters on the platform, so a misread handwritten form does not cause a wrong issue.
13.13 Summary
- e-Banking is a system in which a bank delivers its services through electronic devices and digital networks, so that accounts can be operated without a branch visit. It works through internet banking, mobile banking, cards, self-service machines and alert services.
- The main features of e-banking are round-the-clock availability, anywhere access, multiple channels, speed of settlement, a wide range of services, layered security, automatic record-keeping, reduced paperwork and cost saving for both bank and customer. Its principal risks are fraud based on stolen credentials and dependence on devices and networks.
- Real Time Gross Settlement settles each interbank instruction individually and continuously as it is received, with immediate finality. It is meant for high-value urgent transfers and carries a prescribed minimum amount.
- National Electronic Funds Transfer settles instructions in batches on a deferred net settlement basis, has no minimum amount, and suits routine payments such as fees, rent, salaries and supplier bills. The choice between NEFT and RTGS turns on the amount involved and the urgency of the payment.
- Immediate Payment Service, operated by the National Payments Corporation of India, transfers funds between banks instantly at all hours through mobile phones, the internet and ATMs, and is built for small and moderate retail payments.
- Digital banking is the delivery of banking and financial services as a whole through digital platforms and automated systems, marking a shift from branch-based to network-based banking. It depends on the customer having both a working connection and the confidence to use the platform.
- Unified Payments Interface is an instant payment system that uses a single identifier, such as a Virtual Payment Address or a QR code, in place of an account number and IFSC code, and supports both person-to-person and person-to-merchant payments across banks.
- An e-wallet is a prepaid instrument in which value is loaded in advance and spent on small online and everyday purchases. It has a software component that secures the data and an information component that stores the user’s details, and it operates within limits prescribed by the Reserve Bank.
- The Digital Rupee is the digital form of India’s currency issued by the Reserve Bank as a Central Bank Digital Currency. It is legal tender, is issued in the same denominations as physical currency, is held in a digital rupee wallet, and passes directly between payer and payee like cash.
- Online payment is the electronic exchange of funds between buyer and seller over the internet, made through UPI, cards, net banking or wallets. Its advantages are convenience, support for a cashless economy, reliable records, wide acceptance, reduced cash-handling risk and better financial control; its limitations are security risk, fraud, dependence on connectivity, technical failure, limited digital literacy and loss of personal contact.
- Mobile banking uses a mobile device as the banking channel and covers payments, transfers, account management, alerts, card management and deposit services, subject to technical, security and device-related limitations. Within it:
- SMS alerts inform the customer automatically of transactions, balances, card activity and security events, and reach even a basic handset without an internet connection.
- Transfer of funds through a mobile device can be initiated from anywhere, settles quickly, creates a record, and is limited by transaction caps, security risk and the difficulty of recalling a wrong transfer.
- Payments through a mobile device are made by QR code, near field communication or stored details, and support recurring payments while depending on merchant acceptance.
- The forms in which electronic banking reaches the customer are:
- The electronic funds transfer system, which makes direct credits such as salary, pension and dividend and direct debits such as instalments, bills and card dues.
- The debit card, which draws on the holder’s own deposit, deducts immediately, permits no borrowing and attracts no interest.
- The credit card, which provides a line of credit up to a fixed limit, allows a grace period, charges interest on the unpaid balance and affects the holder’s credit record.
- The automated teller machine, which performs a teller’s routine work electronically at all hours, and the micro ATM, a portable version carried by a bank representative to remote locations.
- A demand draft is a prepaid negotiable instrument issued by a bank and payable on demand to a named payee. Because the bank collects the amount in advance and is itself the party liable, the draft does not bounce for want of funds and is required where a payee needs certainty of payment. Banks now permit drafts to be applied for and issued online.
13.14 Key Terms
- Automated Teller Machine (ATM) An electronic banking machine that performs a teller’s routine work, allowing a card holder to withdraw cash and carry out other transactions without a branch or bank staff.
- Central Bank Digital Currency (CBDC) Currency issued in digital form by a country’s central bank, carrying the same status as its physical notes and coins.
- Credit Card A payment card that provides the holder a line of credit from a financial institution, allowing purchases and cash withdrawals up to a specified limit, repayable later.
- Debit Card A payment card that draws money directly from the holder’s own bank account when used, for payments at merchant terminals and withdrawals at ATMs.
- Demand Draft A prepaid negotiable instrument issued by a bank on its own branch or another bank, payable on demand to a named payee out of the bank’s own funds.
- Digital Banking The delivery of banking and financial services through digital platforms and automated systems, so that customers can operate accounts without visiting a branch.
- Digital Rupee (e₹) The digital form of India’s currency issued by the Reserve Bank of India as a Central Bank Digital Currency, held in a digital rupee wallet and used like cash.
- e-Banking A system in which a bank delivers its services through electronic devices and digital networks, allowing account operations without a branch visit.
- Electronic Funds Transfer System A system under which a bank makes payments directly between accounts as direct credits and direct debits, without any instrument being issued.
- E-Wallet A prepaid electronic payment instrument in which a user stores money in advance and from which online and everyday payments are made.
- Immediate Payment Service (IMPS) An interbank funds transfer system that sends and receives funds instantly, on all days and at all hours, through mobile phones, the internet and ATMs.
- Internet Banking The e-banking channel through which a customer operates an account on a bank’s website using a computer.
- Micro ATM A portable, cash-free version of an ATM carried by a bank representative to remote locations, which connects to the banking network to complete transactions.
- Mobile Banking The use of a mobile device to access banking services, transfer funds, make payments and manage accounts through a bank’s application, mobile site or message service.
- National Electronic Funds Transfer (NEFT) A countrywide funds transfer system in which instructions are settled in batches on a deferred net settlement basis between NEFT-enabled bank branches.
- Online Payment The electronic exchange of funds between a buyer and a seller over the internet, without any physical exchange of money or paper instruments.
- Real Time Gross Settlement (RTGS) A funds transfer system in which interbank instructions are settled individually and continuously as received, with immediate finality.
- SMS Alert A text message notification sent automatically by a bank to a customer’s registered mobile number about transactions and other specified account events.
- Unified Payments Interface (UPI) An instant real-time payment system that transfers funds between accounts in different banks using a single identifier such as a Virtual Payment Address.
- Virtual Payment Address A unique identifier linked to a bank account, used to send and receive money through UPI in place of an account number and IFSC code.
13.15 Points To Ponder
- RTGS gives a payee certainty because a settled transfer cannot be reversed. That same finality means a payer who sends money to the wrong account has no way to recall it. Is irrevocability a strength of a payment system or a risk that a business must plan around?
- A bank saves the cost of counters and staff when customers move to digital channels, while the customer takes on the cost of a device, a connection and the effort of learning the platform. Who gains more from the shift to digital banking, and should the gain be shared differently?
- A demand draft survives in an age of instant transfers because a payee wants certainty before parting with goods or a seat. What does the continued use of the draft suggest about what payment systems must supply besides speed?
- A credit card offers a grace period, rewards and access to funds in an emergency, and also makes it easy to spend money the holder does not have. Should a card that builds a credit record also be treated as a source of borrowing for ordinary household expenses?
- Most e-banking fraud succeeds by persuading a customer to reveal credentials rather than by defeating a bank’s security. Where should the responsibility for such a loss lie — with the customer who parted with the details, or with the bank whose system executed the instruction?
- Digital payment reaches a customer only where devices, networks and confidence exist together. As branches and cash counters reduce in number, what obligation does a bank owe to customers for whom one of these three is missing?
13.16 Objective Questions
- A trader must pay ₹8,00,000 to a supplier who will release the consignment only after the money reaches his account. Which system should the trader use? [1]
- NEFT
- RTGS
- Demand draft
- E-wallet
- Read the following statements and choose the correct alternative. [1] Assertion (A): A demand draft is not dishonoured for insufficiency of funds. Reason (R): The bank collects the amount of the draft from the purchaser before issuing it.
- Both (A) and (R) are true and (R) is the correct explanation of (A)
- Both (A) and (R) are true but (R) is not the correct explanation of (A)
- is true but (R) is false
- is false but (R) is true
- Match the items in Column A with those in Column B. [1] Column A
- Direct debit
- Virtual Payment Address
- Micro ATM
- Digital Rupee Column B
- Identifier used to send money through UPI
- Currency issued in digital form by the central bank
- Electricity bill debited from the account under a standing authority
- Portable device carried by a bank representative to remote areas
- (i)–(C), (ii)–(A), (iii)–(D), (iv)–(B)
- (i)–(A), (ii)–(C), (iii)–(D), (iv)–(B)
- (i)–(C), (ii)–(D), (iii)–(A), (iv)–(B)
- (i)–(B), (ii)–(A), (iii)–(D), (iv)–(C)
- Fill in the blank: Under NEFT, instructions are settled in _______ rather than one by one as they are received. [1]
- State whether the following statement is true or false: A debit card holder can spend more than the balance available in the bank account. [1]
13.17 Check Your Concepts
- Define e-banking and name any two channels through which it reaches the customer. [2]
- State any three features of the Digital Rupee. [3]
- Why is a minimum amount prescribed for RTGS but not for NEFT? [3]
- Distinguish between a debit card and a credit card on any four bases. [4]
- ‘Online payment has made trade faster but has also created new risks for the payer.’ Explain this statement with three advantages and three limitations of online payment. [6]
13.18 Case-Based Questions
- Nandini runs a garment shop that until recently accepted only cash. She has now displayed a QR code at the billing counter, pays her fabric supplier in another state on the same day the invoice arrives, and receives a message from her bank each time an amount is credited to or debited from her account. Last month, a customer’s payment was debited from his account but did not appear in Nandini’s, and the amount was returned to him two days later.
- Identify the facility that informs Nandini of every credit and debit, and state two ways in which it helps her run the shop. [2]
- Name one limitation of online payment illustrated by the returned transaction and explain why such a situation can arise. [2]