Chapter 4: Banking: Latest Trends

A payment is complete only when money has actually reached the person entitled to it. For most of banking history that meant moving something physical — cash carried by hand, a cheque posted to another city and passed through a clearing house, a draft handed across a counter. Each of these took time, carried the risk of loss in transit, and tied both parties to the working hours of a branch. Electronic settlement removed the physical movement of the instrument. The payer instructs a bank to debit one account and credit another, and that instruction is carried through a settlement system operated for all banks together. The same shift has changed the way a customer reaches the bank: an internet connection, a card at a terminal or an application on a mobile phone now does what a visit to the branch once did. This chapter deals with those arrangements — the systems that settle funds between banks, the channels through which a customer operates an account, the instruments used to pay without carrying cash, and the meaning of the digital banking vocabulary now in everyday use.

Figure

Fig. 4.0-1 — Making A Payment Without Cash Photograph of a customer completing a payment on a smartphone at a small shop counter displaying a printed QR code.

4.1 Online Transfer of Funds: RTGS and NEFT

A payment between two customers of the same bank is a matter of book entries in one set of records. The moment the payer and the payee bank with different banks, the payment creates an obligation between the two banks themselves, and that obligation has to be settled before the money can be treated as delivered.

Every bank maintains an account with the Reserve Bank of India. A transfer between banks is settled by debiting the account of the sending bank and crediting the account of the receiving bank in those books. Real Time Gross Settlement (RTGS) and National Electronic Funds Transfer (NEFT) are the two systems through which such settlement is carried out for customer payments.

The person who sends the money is the remitter and the person who is to receive it is the beneficiary. Whichever system is used, the remitter must identify the beneficiary exactly — the account number and the code of the branch where that account is held — because the receiving bank makes the credit on the strength of these particulars. The sequence common to both systems is summarised in FC 4.1.

Flowchart

FC 4.1 — Steps In An Online Transfer Of Funds Remitter submits the transfer request with the beneficiary’s particulars → remitting bank verifies the request and debits the remitter’s account → transfer message sent to the settlement system operated by the Reserve Bank of India → settlement between the two banks in their accounts with the Reserve Bank → message passed on to the beneficiary bank → beneficiary’s account credited → confirmation sent to the remitter

A request may be made at a branch on a printed form, or online through internet banking or a mobile application. The particulars called for are the same in both cases, and are set out in Spec 4.1.

Specimen

Spec 4.1 — Contents Of A Funds Transfer Request Remitter’s name and account number · amount to be transferred · beneficiary’s name · beneficiary’s account number · name of the beneficiary’s bank and branch · IFSC code of the beneficiary branch · date of the request · signature or online authentication of the remitter

Business Example

One Operator, Two Systems RTGS and NEFT are both operated by the Reserve Bank of India, which also settles the resulting obligations between banks in the accounts those banks maintain with it. A branch can offer either service only after it has been enabled for that system.

4.1.1 Real Time Gross Settlement (RTGS)

RTGS is a funds transfer system in which every instruction is settled singly and at the moment it is processed. The name states both of these features. ‘Real time’ means that there is no waiting period, the transaction being settled as soon as it is taken up. ‘Gross’ means that the transaction is settled one to one, on its own, and is not bunched with other transactions so that only a net figure passes between the banks.

Settling each instruction separately in the books of the Reserve Bank makes the transfer final and irrevocable once it has gone through. The remitter cannot recall the money afterwards, which is why the beneficiary’s particulars have to be verified before the request is made and not after.

Definition

Real Time Gross Settlement RTGS is a funds transfer system under which the instruction relating to each transaction is settled individually and continuously, in real time, without being bunched with any other transaction.

Trade Term

Gross Settlement Settlement of each transaction on its own, one to one, instead of setting off a bank’s total receipts against its total payments and settling only the difference.

Features Of RTGS

Settlement one transaction at a time — each instruction is taken up and settled by itself, continuously through the day, so that no transaction has to wait for others to be gathered together.
Enabled branches only — the transfer can go through only if the sending branch and the receiving branch have both been enabled for RTGS.
A minimum amount — the smallest sum that may be remitted through RTGS is ₹2 lakh, since the system was designed for large-value payments.
No upper limit — there is no ceiling on the amount, which is what makes the system suitable for settling large business obligations.
Credit within a fixed time — the beneficiary bank must credit the beneficiary’s account within thirty minutes of receiving the transfer message, and in practice the credit is almost immediate.
Final and irrevocable — once the transaction has been settled it cannot be reversed by the remitter.
Round-the-clock availability — the service is available on all days of the year, at all hours.

4.1.2 National Electronic Funds Transfer (NEFT)

NEFT is a countrywide system by which an individual, a firm or a company can transfer funds electronically from any enabled bank branch to a beneficiary holding an account with any other enabled branch in the country. It differs from RTGS in one respect that governs everything else: instructions are not settled singly but are collected and settled together in batches at fixed intervals through the day.

Batch settlement is economical, because the cost of running one settlement is spread over all the transactions gathered into it. That economy is what allows NEFT to carry payments of every size, including very small ones, without prescribing any floor. What is given up in return is immediacy — a request made after one settlement has to wait for the next.

Features Of NEFT

Settlement in batches — transactions are gathered and settled together at fixed intervals through the day, so a request made after one settlement waits for the following one.
Enabled branches only — a branch must be NEFT enabled to be part of the network, whether it is sending or receiving the funds.
No minimum or maximum amount — an account holder may transfer any sum through NEFT, which makes the system usable for routine payments of every size.
Round-the-clock availability — like RTGS, the service is available on all days of the year.
Two ways of initiating a request — the remitter may use internet or mobile banking, or may hand in a written request at the branch.
Remittance without an account — a person who holds no bank account may still remit money by depositing cash at an enabled branch, though such cash remittances are restricted to ₹50,000 per transaction. The beneficiary, however, must hold an account to receive the funds.
Domestic transfers only — NEFT cannot be used to receive remittances from outside India.
Charges on the remitter alone — the remitting bank may recover a service charge, which varies from bank to bank, while the beneficiary pays nothing.

4.1.3 Distinction Between RTGS And NEFT

Both systems move money electronically between banks, both work on all days of the year, and both require the branches at either end to be enabled. The difference lies in how the settlement is organised, and every other difference follows from it, as Table 4.1 shows.

Table

Case Snippet

Case 4.1 — A Payment That Cannot Wait Meridian Castings must pay ₹9,60,000 to a supplier before the close of business today, failing which the consignment of raw material lying ready at the supplier’s works will be released to another buyer. The firm banks in Pune and the supplier banks in Coimbatore, and both branches are enabled for every electronic transfer service. Q. Name the transfer system Meridian Castings should use and state one feature of that system which makes it suitable in this situation.

4.2 Immediate Payment Service and Demand Drafts

Two situations remain unprovided for by the systems described in the previous section. The first is a small payment that must reach the beneficiary at once, at any hour, without waiting for a settlement batch and without meeting the floor prescribed for large-value transfers. The second is a payment to someone who does not know the payer and is unwilling to accept his personal instrument at all, because such an instrument may be returned unpaid.

The Immediate Payment Service answers the first. The bank draft, an instrument on which the bank itself is the paying party, answers the second.

4.2.1 Immediate Payment Service (IMPS)

Immediate Payment Service (IMPS) is an instant inter-bank money transfer service facilitated by the National Payments Corporation of India. Funds are sent and received in real time, on all days of the year, and the service can be reached through several channels rather than through a bank branch alone.

The remitter identifies the beneficiary either by the beneficiary’s account number together with the IFSC code of that branch, or by the beneficiary’s registered mobile number together with a Mobile Money Identifier, a short code generated by the beneficiary’s bank for use on mobile platforms. Because the credit is made instantly and cannot be recalled, the accuracy of these particulars matters as much here as in any other electronic transfer.

Features Of IMPS

Instant transfer — the money is credited to the beneficiary’s account in real time, and the sender and the receiver are both informed of the transaction.
Available at all times — the service works on all days of the year and at all hours, including bank holidays, so it is not tied to settlement timings.
Several channels — the service may be used through mobile banking, internet banking, an automated teller machine or a bank branch, which is what makes it reachable from almost anywhere.
Suited to small and medium payments — there is no large-value floor of the kind RTGS prescribes, so ordinary everyday payments can be made through it.
Wide range of uses — apart from person-to-person transfers, the service is used for merchant payments, online shopping, utility bills, insurance premium, school and college fees and travel bookings.
Inexpensive — the charge recovered by the remitting bank is small and varies from bank to bank, and many banks levy nothing on transfers made through their own applications.

4.2.2 Bank Draft

A bank draft is an order drawn by one branch of a bank on another of its branches, or on another bank, requiring the sum named in it to be paid to a particular person or to his order. It is always payable on demand, and is therefore also called a demand draft.

The whole value of the instrument lies in who is liable on it. A cheque is the drawer’s own order on his own bank, and may be returned unpaid if his account does not carry the funds. A draft is issued only after the bank has collected the amount from the purchaser, so the party promising payment is the bank itself and the question of insufficient funds does not arise. This is why a payee who has no dealings with the payer, and no reason to trust him, will accept a draft where he will not accept a cheque.

Definition

Demand Draft A bank draft is an order drawn by a bank on one of its own branches or on another bank, requiring payment of a specified sum, on demand, to the person named in it or to his order.

Trade Term

Drawee Branch The branch on which a bank draft is drawn, and at which the payee presents the draft to obtain payment.

The steps by which a draft is obtained and encashed are summarised in FC 4.2.

Flowchart

FC 4.2 — Obtaining And Encashing A Bank Draft Purchaser fills in the prescribed application form at the bank → pays the amount of the draft together with the bank’s commission → issuing branch prepares the draft and hands it to the purchaser → purchaser sends the draft to the payee → payee presents it at the drawee branch → drawee branch verifies the draft and makes payment or credits the payee’s account

Specimen

Spec 4.2 — Contents Of A Bank Draft Name and address of the issuing bank and branch · name of the drawee branch and its code number · serial number of the draft · date of issue · name of the payee · amount in words and in figures · words showing that it is payable on demand · signatures of the authorised officials of the issuing bank

Features Of A Bank Draft

Drawn by a bank — the drawer is a bank and not a customer, which is the source of the payee’s confidence in the instrument.
Amount collected in advance — the purchaser pays the value of the draft, together with commission, before the draft is issued.
No danger of dishonour — since the bank already holds the money, the draft cannot be returned for want of funds.
Payable on demand — the drawee branch pays as soon as the draft is duly presented by the person named in it or by his order.
A safe means of remittance — money can be sent from one place to another without carrying cash, and a lost draft can be dealt with by the issuing bank without the amount passing to a stranger.
Available to non-customers — a person who holds no account may obtain a draft by paying the amount in cash, subject to the bank’s rules.

The differences between the two paper instruments a customer is most likely to confuse are set out in Table 4.2.

Table

Business Example

Where A Cheque Will Not Do Colleges, government departments and sellers of high-value goods commonly insist on payment by demand draft rather than by cheque. The bank has already collected the money before issuing the draft, so the receiver is not exposed to the risk of an instrument returned unpaid, and need make no enquiry into the payer’s balance.

4.2.3 Issue of Demand Drafts Online

A draft once required a visit to the branch, which took away part of the convenience of the instrument. A customer may now apply for a draft through internet or mobile banking by stating the amount, the name of the payee and the place at which the draft is to be payable.

The amount of the draft together with the bank’s commission is debited to the customer’s account, and the draft is then printed by the bank and delivered to the address given or made available for collection at a branch. The instrument itself is unchanged; only the manner of applying for it has moved online, so the payee continues to receive an order on which the bank, and not the purchaser, is the party bound to pay.

4.3 Electronic Banking

The systems described so far settle money between banks. They do not by themselves answer a different question: how the customer is to reach his own bank in order to set a payment in motion. So long as every instruction had to be signed on paper and handed in at a counter, the customer’s dealings with the bank were confined to one branch and to the hours that branch kept.

Electronic banking removes that confinement. The instruction travels over a telecommunication network instead of across a counter, so the customer’s location and the branch’s working hours cease to govern what he can do with his account.

4.3.1 Meaning and Features

Electronic banking, or e-banking, means the carrying on of banking transactions with the help of computer systems and telecommunication networks. A customer with a computer or a mobile device and a connection reaches the bank’s system directly, obtains information about the account and gives instructions upon it, without a bank employee attending to him in person.

Definition

Electronic Banking Electronic banking means the conduct of banking transactions with the help of computer systems and telecommunication networks, the customer operating the account through an electronic device instead of attending the branch in person.

Features Of Electronic Banking

No face-to-face contact — the customer deals with the bank’s system and not with a bank employee, so identification rests on passwords and other electronic means rather than on recognition at the counter.
Equipment is needed at both ends — the bank must maintain the system and the customer must have a computer or a mobile device with a connection.
The customer must opt for the facility — the account holder registers with the bank for electronic banking and is given the means of access.
Technical understanding is required — both the bank’s staff and the customer must be able to work the system, since there is no one at hand to correct a mistaken instruction.
Records are created automatically — every transaction is recorded by the system as it is carried out, and the record is available to the customer at once.

Figure

Fig. 4.3-1 — Operating An Account Without Visiting The Branch Photograph of a customer using a laptop at home with a bank’s internet banking page open on the screen.

4.3.2 Forms of Electronic Banking

Electronic banking is not a single facility but a group of them, each answering a different need — moving money, obtaining information, freeing the account from the branch, or warning the customer that something has happened to it. The forms are set out in FC 4.3. The automated teller machine and the payment cards are dealt with in section 4.4, and mobile banking in section 4.5, since each carries enough detail of its own.

Flowchart

FC 4.3 — Forms Of Electronic Banking Electronic banking → Electronic funds transfer, Automated teller machine, Debit and credit cards, Tele banking, Core banking solution, SMS alerts, Mobile banking; Electronic funds transfer → Direct credits, Direct debits

Electronic Funds Transfer

Electronic funds transfer is a system under which money is moved from one account to another by instruction rather than by an instrument. Its chief use is in payments that repeat month after month, where drawing and delivering a separate cheque each time is wasteful for the payer and inconvenient for the receiver. Such transfers take two forms.

Direct credits — amounts due to a person are credited straight to his account. Salary, pension, dividend on shares, interest on debentures, commission and royalty are commonly paid in this way.
Direct debits — amounts payable by a person are debited to his account on the due date under a standing arrangement. Loan instalments, insurance premium, school fees, electricity, water and telephone bills and credit card dues are commonly settled in this way.

Both forms owe their advantages to the removal of the paper instrument. Payment is made on the due date without anyone having to remember it, there is no loss in transit and no correspondence about a cheque that has not arrived, cash is not handled at any stage, and the effort of collecting or delivering the money disappears altogether.

Business Example

Salary Paid Without A Single Cheque An employer with several hundred employees once had to draw that many cheques every month, each of which the employee then had to deposit and wait for. Under electronic funds transfer the employer sends one instruction to its bank and every employee’s account is credited on the same day.

Tele Banking

Under tele banking the customer’s telephone is connected to the bank’s computer, and the customer obtains information about the balance in the account and the transactions recently carried out in it. The facility exists for enquiry rather than for payment, and it is available round the clock, so a customer need not wait for the branch to open merely to learn where his account stands.

Core Banking Solution

Before branches were linked to one another, an account belonged to the branch at which it was opened, and a customer away from that branch was a stranger. Core banking solution is the networking of all the branches of a bank to a common set of records, so that the customer becomes a customer of the bank rather than of a branch.

Trade Term

Core Banking Solution A network linking all branches of a bank to one set of records, so that a customer becomes a customer of the bank rather than of a branch and may operate the account at any branch.

The customer is given a unique identification, and on the strength of it the following facilities become available at every networked branch.

Instant transfer of funds between accounts held at core banking branches anywhere in the country.
Withdrawal of cash at any core banking branch and not merely at the branch of account.
Updating of the passbook at any core banking branch.
Operation of centralised limits sanctioned to a corporate customer, at all its branches together.

SMS Alerts

Under this service the customer registers his mobile number with the bank, and the bank sends a message whenever the account is debited or credited. The message states the nature and amount of the transaction, its date and the balance remaining. Its value is not convenience but control: a customer learns of a debit he did not authorise within moments of its being made, instead of at the end of the month.

4.3.3 Advantages of Electronic Banking

Benefits To Customers

Service at all hours — the account can be operated on all days of the year and at any time, since the system and not the counter clerk attends to the instruction.
Service at any place — transactions can be carried out from the residence, from the office or while travelling, so a journey to the branch is no longer part of banking.
Financial discipline — every transaction is recorded as it is made, and the record before the customer encourages him to watch what he spends.
Safety — payments are made without drawing and carrying currency, so the risk attached to handling cash is avoided.
Greater satisfaction — access to the account is not rationed by branch timings, and the customer is therefore less dependent on the bank’s convenience.

Benefits To Banks

Competitive advantage — a bank offering the fuller electronic service attracts customers from one that does not.
Reach beyond the branch network — the bank is no longer limited by the number of its branches, since the network links them into a single whole and serves customers wherever they are.
Lower load at the counter — a centralised database and the shifting of routine work to the customer reduce the volume of business handled at branches.

4.3.4 Limitations of Electronic Banking

Investment in technology — the bank must build and maintain the system and the customer must own a suitable device, so the facility is not free of cost to either.
Cash cannot be deposited — currency can be paid into an account only at a branch or a machine meant for the purpose, never through an online channel, so electronic banking cannot serve a business that collects its takings in cash.
Training is required — both the staff and the customer must be taught to use the system, and those unfamiliar with such technology are effectively shut out.
Failure of technology — a defect in the system, a breakdown of the network or a virus can leave the customer unable to transact at the very moment he needs to.
Errors are costly — there is no clerk to notice a mistake before it takes effect, so a wrong figure or a wrong account number entered by either side can send a large sum where it was never intended to go.

The contrast between the two ways of dealing with a bank is drawn together in Table 4.3.

Table

4.4 The ATM, Debit Cards and Credit Cards

Electronic banking as described in the previous section serves a customer who is sitting before a screen. It does not help him at the moment he actually needs money in his hand, or is standing before a seller who must be paid there and then. For that, the bank has to put something into the customer’s pocket that will work at a machine — a card, and machines that read it.

Two of these machines matter. The automated teller machine stands in for the cashier at the counter. The terminal kept by a seller stands in for the payment of cash across a shop counter. The card is the same object in both cases, but what it does with the money differs according to whether it is a debit card or a credit card.

4.4.1 Automated Teller Machine

An automated teller machine (ATM) is an electronic machine through which a customer withdraws or deposits money and obtains other banking services without the help of a bank employee. The customer inserts the card issued by the bank and enters a personal identification number, a secret code known to him alone, which takes the place of the signature the counter clerk would otherwise have verified.

The machine works at all hours, and it costs the bank far less than a human teller for the same volume of routine work. Its effect on the branch has been considerable: a customer who once had to reach the branch during working hours for every withdrawal now needs to visit it only for business that a machine cannot do.

Definition

Automated Teller Machine An automated teller machine is an electronic machine which enables a customer to withdraw or deposit money and obtain certain other banking services by using a card issued by the bank together with a personal identification number.

Banks have added other machines and devices alongside the teller machine, so that the group of them now performs much of the work of a small branch. Cash-depositing machines accept loose currency and credit it to the account at once, passbook printers bring the passbook up to date, and information kiosks answer routine enquiries. The teller machine itself commonly offers the following services.

Withdrawal of cash, up to a limit fixed by the bank for each day.
Enquiry about the balance standing in the account.
A short statement of the transactions recently carried out in the account.
Transfer of funds between accounts of the same customer.
Change of the personal identification number by the customer.

Figure

Fig. 4.4-1 — A Bank’s Teller Machine In Use Photograph of a customer using an automated teller machine at a bank’s cash point, card in the slot and keypad in view.

4.4.2 Debit Card

A debit card is a card issued to a customer against the money he has already deposited with the bank. When it is used, the price of the purchase is transferred from the buyer’s account to the seller’s account, and the transfer is made at once. The card therefore does no more than move the cardholder’s own money, and it can move only as much of it as the account holds.

Payment is made at a point of sale terminal kept by the seller. The card is read by the terminal, the cardholder authenticates the transaction, and the amount passes from one account to the other without any cash changing hands. The same card is used at an automated teller machine to draw currency when currency is what is wanted.

Trade Term

Point Of Sale Terminal A machine kept by a seller at which a customer’s card is read, so that the price of the purchase passes electronically from the buyer’s bank to the seller’s account.

Features Of A Debit Card

Money must be deposited first — the card is issued against a deposit with the bank, and it is that deposit which is spent.
Spending is limited by the balance — no payment can exceed the money standing in the account, so the cardholder cannot spend what he does not have.
No credit facility — the bank lends nothing, and the cardholder is at no stage a borrower.
Payment is made before or at the moment of use — the account is debited as the transaction is put through.
Particulars are carried on the card — the name of the cardholder and of the issuing bank appear on it, along with the card number and the period for which it is valid.
Shopping without cash — purchases can be made wherever the seller keeps a terminal, and cash need not be carried for the purpose.
A charge for the card — the bank recovers a charge for issuing and maintaining it.
Incentives — discounts and similar benefits are sometimes offered to cardholders by the bank in arrangement with sellers.

Figure

Fig. 4.4-2 — Paying At A Point Of Sale Terminal Photograph of a shop counter where a customer’s card is being read by a hand-held point of sale terminal.

4.4.3 Credit Card

A credit card is a card by which the holder buys goods and services on the bank’s money, and pays the bank afterwards. Money need not be lying in his account at all. What the bank looks to before issuing the card is the applicant’s reputation and capacity to repay, and what it grants him is a limit up to which he may spend — in substance an overdraft facility carried about in the pocket.

The order of events is the reverse of that under a debit card. The bank pays the seller first, the cardholder receives a statement of what has been spent, and he then settles it in accordance with his agreement with the bank. Between the purchase and the settlement he owes the bank the amount, and is to that extent its debtor.

Features Of A Credit Card

Reputation is the basis of issue — the card is granted on the applicant’s creditworthiness, and not against any deposit.
No advance deposit — the holder need not keep money with the issuer, though he may be required to open an account.
Credit is extended — the bank meets the seller’s bill and allows the holder time to repay, which is the essential feature of the card.
Payment after use — the holder pays the bank on receiving its statement, and not at the time of the purchase.
Particulars are carried on the card — the name of the holder, the name of the issuing bank and the period of validity are inscribed on it.
A charge is payable — the bank recovers a charge for the card, and further amounts fall due if payment is delayed beyond the period allowed.
Incentives — gifts, reward points and similar benefits are commonly offered to holders.

Business Example

Cash That Need Not Be Carried A traveller once had to carry enough currency for a whole journey, and bore the risk of losing all of it at once. Cards allow the same person to draw money from a machine as it is needed, or to pay the seller directly, so that very little is exposed at any one moment.

4.4.4 Distinction Between Debit Card and Credit Card

The two cards look alike, are used at the same terminals and are issued by the same banks. They differ in whose money is being spent, and every other difference follows from that single point, as Table 4.4 shows.

Table

Case Snippet

Case 4.2 — Two Cards, Two Results Ashwin Bhatia carries two cards issued by the same bank. When he paid for a refrigerator with the first of them, the amount was taken out of his savings account the same afternoon. When he paid for an air ticket with the second, nothing was taken from the account at the time, and a statement reached him three weeks later asking for the amount. Q. Name each of the two cards and state the position of the cardholder in relation to the bank in the second case.

4.5 Mobile Banking

Electronic banking through a computer still requires the customer to be at a place where a computer is kept. The mobile phone removes even that condition, and it does so for a far larger number of people, since a phone is owned by many who own no computer and reaches many who live nowhere near a branch.

For the bank the attraction is different. A transaction carried out on the customer’s own phone uses neither premises nor staff time, and therefore costs the bank a small fraction of what the same transaction costs at a counter.

4.5.1 Meaning and Modes

Mobile banking means the carrying on of banking transactions through a mobile phone. The customer obtains information about the account and gives instructions upon it from the phone, and the bank answers to the same phone.

Definition

Mobile Banking Mobile banking means the conduct of banking transactions through a mobile phone, the customer obtaining information about the account and giving instructions upon it from the handset itself.

Banking on a phone is carried on in three ways, which differ in what the handset must be capable of.

By message — the bank prescribes a code which the customer sends to a designated number, and the bank replies by message. Balance enquiry, stopping payment of a cheque and asking for a statement are commonly done in this way, and a simple handset suffices. The codes, however, are not the same from one bank to another, which makes the method awkward for a customer who deals with more than one bank.
By browsing — the bank’s website is opened on the phone using the customer’s identification and the password used for internet banking. The site seen on a phone is often laid out differently from the one seen on a computer, and a customer takes some time to find his way about it.
By application — the bank’s own application is downloaded to a smartphone and used for the whole range of services. This is the fullest of the three methods and the one banks now encourage, but it works only on an internet-enabled handset.

4.5.2 Services Available on Mobile Banking

The greater part of mobile banking is enquiry rather than payment. Customers use it chiefly to learn the balance in the account, to obtain a statement of recent transactions, to stop payment of a cheque and to ask for a new cheque book. Beyond these, three services matter.

SMS alerts — the bank sends a message on every debit and credit to the account, stating the nature and amount of the transaction and the balance left. The service tells the customer what has happened to his account without his having to ask, and an unauthorised debit therefore comes to notice within moments instead of at the end of the month.
Transfer of funds — money is remitted to another account from the handset, the transfer being put through one of the settlement systems already described. Urgent payments are commonly made in this manner.
Making payments — bills for the telephone, electricity and other utilities, credit card dues, insurance premium and similar recurring amounts are paid from the phone on or before the due date.

Figure

Fig. 4.5-1 — Paying A Bill From A Handset Photograph of a customer using a bank’s mobile application on a smartphone to make a utility bill payment.

Business Example

The Cheapest Counter A Bank Has Serving a customer through a mobile application costs a bank a small fraction of what the same transaction costs at a branch counter, since neither premises nor staff time are used. This is why banks steadily move routine work such as balance enquiries, statements and small transfers on to the customer’s own phone.

4.5.3 Advantages of Mobile Banking

Banking at any time and place — the account is operated from wherever the customer happens to be, on all days of the year, so neither branch timings nor distance stands in the way.
Wider reach than the branch network — a phone is owned by far more people than live within reach of a branch, so banking services extend to those the branch network does not conveniently serve.
Low cost to both sides — the customer spends nothing on travelling to the branch, and the bank is spared the cost of attending to him at a counter.
Immediate knowledge of the account — alerts reach the customer as each transaction takes place, which allows an unauthorised debit to be reported at once.
Suited to urgent payments — a bill falling due or a payment that cannot wait is settled from the handset in a few moments.

4.5.4 Limitations of Mobile Banking

Dependence on the handset — the fuller range of services works only on an internet-enabled smartphone. A basic phone gives access to a few message-based services and no more.
Technical knowledge is required — the customer must be able to work an application that changes from time to time, which is a real difficulty for elderly customers and for those unfamiliar with such devices.
Risk of fraud — careless practices expose the customer to phishing, in which a fraudulent message or site obtains his banking particulars and the money is drawn away before the loss is discovered.
No uniform procedure — the codes, the screens and the steps differ from bank to bank and from platform to platform, so what a customer learns for one account does not help him with another.
Dependence on the network — a weak signal, an exhausted battery or a lost handset leaves the customer cut off from the account at the moment he may most need it.

4.6 Online Payments

The arrangements described so far move money between two people who both hold bank accounts and who, between them, know how the money is to be sent. A different difficulty arises when the payment is made to a seller the buyer has never met, at the moment an order is placed, and the goods are to be despatched only when the price is secure.

Selling at a distance is impossible until that difficulty is met. Online payment meets it by carrying the money over the same network that carries the order, so that the seller is paid before the goods leave his premises and the buyer parts with nothing before the order is accepted.

4.6.1 Meaning

An online payment, also called a digital payment, is a payment made by transmitting money between the parties over the internet or another electronic network, instead of by the conventional means of cash or cheque. A computer, a mobile phone or any other device connected to the network is used to initiate and complete the payment.

Definition

Online Payment An online payment is a payment made by transmitting money between the parties over the internet or another electronic network, by means of electronic platforms, in place of cash or a cheque.

Where the payment is made on a seller’s website, the particulars given by the buyer do not pass to the seller himself. They are carried to the bank by a payment gateway, which brings back the bank’s approval or refusal, so that the seller learns whether he has been paid without ever holding the buyer’s card details.

Trade Term

Payment Gateway The service that carries a buyer’s card or bank particulars from a seller’s site to the bank in a secured form, and returns the bank’s approval or refusal of the payment.

Business Example

Payment Before Despatch A seller shipping goods to a buyer he has never met once had to choose between waiting for a cheque to clear and sending the consignment on trust. An online payment settles the price before the goods leave the premises, which is why selling at a distance grew as these payment systems grew.

4.6.2 Advantages of Online Payments

Payment from any place — a payment can be made from wherever the payer happens to be, provided there is a connection, so neither party need travel to conclude the transaction.
Payment at any time — the platforms work round the clock, and a payment is therefore not held up by the closing of a bank or a shop.
Speed — the money passes at once or within a short time, so the seller need not wait for an instrument to be cleared before acting on the order.
Lower cost — paper, printing, postage and the handling of instruments disappear, and the charge on the transaction is generally smaller than the cost of the older methods.
Security measures — encryption and authentication by more than one means are used to protect the particulars passing between the parties, which is what makes a stranger willing to pay before he receives the goods.
A record of every transaction — the platform maintains particulars of all payments made, which helps the payer to keep account of his spending and the seller to trace a disputed payment.
Payment across borders — a buyer in one country can pay a seller in another, so a business is not confined to customers who can reach it.

4.6.3 Limitations of Online Payments

Exposure to cyber threats — hacking, phishing and breaches of stored data can lay bare the personal and financial particulars of users, and the loss is discovered only after the money has moved.
Technical failure — an outage of the system or an error in processing interrupts a payment midway, leaving the payer uncertain whether the money has gone and the seller uncertain whether he has been paid.
Dependence on infrastructure — the payment rests on connectivity, on a working device and on power, and a failure of any of these stops it however sound the underlying account may be.
Fraud — weaknesses in a payment system are exploited for identity theft, unauthorised transactions and payment scams, and the user bears a financial risk that cash payment would not have carried.
Loss of privacy — every online transaction leaves a trace that can be followed back to the payer, so the anonymity of a cash payment is given up.
Limits and time conditions — banks fix daily ceilings on the number and value of transactions, and steps such as entering a one-time password must be completed within a short period, which some users find restrictive.
Risk attached to the linked instruments — payment accounts are commonly linked to cards, so the loss of a card puts the accounts connected with it at risk as well.

4.6.4 Types of Online Payments

Online payments take several forms, which differ in where the money is drawn from and in what the payer must hold before he can use them. The forms are set out in FC 4.4.

Flowchart

FC 4.4 — Types Of Online Payments Online payments → Card payments, Bank transfers, Unified Payments Interface, Digital wallets, Prepaid cards, In-app payments

Card payments — the buyer enters the particulars of a debit or credit card, and the payment is put through by a payment gateway. This is among the most widely used modes, and it requires the buyer to hold a card.
Bank transfers — money is moved from the buyer’s account to the seller’s account by electronic funds transfer, using internet banking, a mobile application or a payment platform. No card is needed, only an account.
Unified Payments Interface — payment is made directly from one bank account to another from a smartphone, without a card and without a wallet. Its meaning is taken up in section 4.7.
Digital wallets — money is first loaded into a wallet held on the phone and then spent from it. These too are taken up in section 4.7.
Prepaid cards — gift cards and reloadable cards are charged with a sum in advance and used until the balance is exhausted. They allow a person who holds no bank account, or who does not wish to expose one, to pay online.
In-app payments — the payment is made inside an application without leaving it, as in gaming applications, subscription services and shopping platforms where the buyer’s particulars are already stored.

Figure

Fig. 4.6-1 — Choosing A Mode Of Payment Photograph of a laptop screen showing an online store’s payment page with card, bank transfer and wallet options listed.

Case Snippet

Case 4.3 — Selling To Buyers She Has Never Met Tarangini Handlooms has begun selling through its own website to customers all over the country. The firm’s bank has offered a facility that will carry each buyer’s card particulars from the website to the bank in secured form and return the bank’s approval before the order is accepted. The proprietor is nevertheless concerned that many of her buyers hold no card at all. Q. Name the facility offered by the bank and state one other type of online payment the firm could offer to buyers who hold no card.

4.7 Digital Banking, UPI and E-Wallets

Three expressions are now in daily use for arrangements described in this chapter, and they are often confused with one another. The first is the name of the whole, the second is a system for moving money between bank accounts, and the third is a store of money held outside the bank account. Their meanings are given below.

4.7.1 Digital Banking

Digital banking means the delivery of banking services in electronic form, so that what was once obtained at the counter is obtained instead through digital channels. It is the widest of the three expressions, and it covers internet banking, mobile banking, payment cards, teller machines and the electronic transfer of funds together.

Definition

Digital Banking Digital banking means the delivery of banking services in electronic form through digital channels, so that the services once obtained at a branch counter are obtained without attending the branch.

4.7.2 Unified Payments Interface

The Unified Payments Interface, commonly called UPI, is a real-time payment system developed by the National Payments Corporation of India, through which money is transferred instantly from one bank account to another using a smartphone. The payment is initiated by a virtual payment address, a mobile number linked to an account or a code displayed by the receiver, and no wallet stands between the two accounts.

Definition

Unified Payments Interface The Unified Payments Interface is a real-time payment system developed by the National Payments Corporation of India, which enables instant transfer of funds directly between bank accounts through a smartphone.

4.7.3 E-Wallet

An e-wallet, also called a digital or mobile wallet, is an electronic store of money kept on a phone or computer, out of which payments are made. Money is loaded into it beforehand from a bank account or a card, and is then spent to another wallet or to a seller, so what is spent is the balance in the wallet and not the balance in the bank account.

Definition

E-Wallet An e-wallet is an electronic store of money held on a phone or computer, into which funds are loaded in advance from a bank account or card and out of which payments are afterwards made.

4.8 Summary

A payment between customers of different banks creates an obligation between the two banks, which is settled by debiting and crediting the accounts those banks maintain with the Reserve Bank of India.
Real Time Gross Settlement settles each instruction singly and continuously, in real time, without bunching it with any other transaction.
The chief features of RTGS follow from that manner of settlement:

The minimum amount that may be remitted is ₹2 lakh, there being no upper limit.
The beneficiary bank must credit the account within thirty minutes of receiving the message.
The transfer is final and irrevocable once settled, and the service is available on all days of the year.

National Electronic Funds Transfer gathers instructions and settles them together in batches at fixed intervals, which makes the system economical and allows it to carry payments of every size, with no minimum or maximum for an account holder.
A person holding no bank account may remit money through NEFT by depositing cash at an enabled branch, subject to a limit of ₹50,000 per transaction, but the beneficiary must hold an account to receive the funds.
RTGS and NEFT differ in the manner and timing of settlement, in the minimum amount, in the time taken to reach the beneficiary and therefore in the payments each is suited to.
The Immediate Payment Service, facilitated by the National Payments Corporation of India, transfers funds instantly at all hours through several channels, and is suited to small and medium payments.
A bank draft is an order drawn by a bank on its own branch or on another bank, payable on demand to the person named in it or to his order. Since the bank collects the amount before issuing the draft, it cannot be dishonoured for want of funds, and a payee who will not accept a cheque will accept a draft.
A draft may now be applied for through internet or mobile banking, the amount and the commission being debited to the customer’s account; only the manner of applying has changed, not the instrument.
Electronic banking is the conduct of banking transactions through computer systems and telecommunication networks, the customer operating the account without attending the branch.
The forms of electronic banking each answer a different need:

Electronic funds transfer moves money by instruction, through direct credits such as salary and dividend and direct debits such as instalments and bills.
Tele banking supplies information about the account over the telephone.
Core banking solution links all branches to one set of records, making the customer a customer of the bank rather than of a branch.
SMS alerts inform the customer of every debit and credit as it occurs.

Electronic banking gives the customer service at any time and place, records that impose discipline and freedom from handling cash, and gives the bank reach beyond its branches and a lighter load at the counter. Against this stand the cost of technology, the inability to deposit cash online, the need for training, the risk of technical failure and the cost of an uncorrected error.
An automated teller machine allows a customer to withdraw or deposit money and obtain other services by using a card with a personal identification number, at all hours and without a bank employee.
A debit card spends the cardholder’s own deposit and creates no debt, while a credit card spends the bank’s money up to a sanctioned limit and makes the holder a debtor until he settles the statement.
Mobile banking is carried on by message, by browsing the bank’s site or through its application, and supplies alerts, transfer of funds and payment of bills. It extends banking beyond the branch network at low cost, but depends on a suitable handset, on technical knowledge and on the network, and exposes careless users to fraud.
An online payment transmits money over the internet in place of cash or a cheque, a payment gateway carrying the buyer’s particulars to the bank in secured form. It allows selling at a distance, but carries risks of cyber fraud, technical failure and loss of privacy.
Digital banking is the delivery of banking services in electronic form; the Unified Payments Interface transfers money instantly between bank accounts through a smartphone; and an e-wallet holds money loaded in advance, out of which payments are afterwards made.

Flowchart

FC 4.5 — Ways Of Paying Without Cash Paying without cash → Transfers between banks, Instruments issued by a bank, Channels for reaching the bank, Payments to an online seller; Transfers between banks → RTGS, NEFT, IMPS; Instruments issued by a bank → Bank draft, Debit card, Credit card; Channels for reaching the bank → Internet banking, Tele banking, Mobile banking, Automated teller machine; Payments to an online seller → Card payment, Bank transfer, UPI, E-wallet, Prepaid card

4.9 Points to Ponder

RTGS could carry small sums as easily as large ones, yet a floor of ₹2 lakh is prescribed for it. Is it sound to reserve immediate one-to-one settlement for large payments, or should immediacy be available to a payment of any size, and what would each arrangement cost the system that provides it?
Electronic banking shifts work that a bank employee once did on to the customer, who now enters the particulars, checks them and bears the consequence of an error. Where do the savings from that shift finally settle — with the bank, with the customer, or with both?
A transfer once settled is final and cannot be recalled by the remitter, and finality is what makes the receiving party willing to act on the credit at once. Would a system that allowed a remitter to recall a mistaken payment be an improvement, or would it destroy the very quality that makes electronic settlement useful?
The bank draft exists because the bank, and not the purchaser, is the party bound to pay. Now that money can be moved between accounts in moments, does the draft still serve a purpose that an instant transfer cannot, or does it survive only out of habit?
Mobile banking is said to extend banking to people whom the branch network never reached, yet its fuller services work only on an internet-enabled handset and demand a degree of technical confidence. On balance, does the shift to the phone widen access to banking or narrow it for some existing customers?
Every online payment leaves a record that identifies the payer, the payee and the purpose, while a cash payment leaves none. What is gained by that record, what is given up, and who should decide how long such records are kept?

4.10 Objective Questions

The smallest amount that may be remitted through Real Time Gross Settlement is: [1]

₹50,000
₹1,00,000
₹2,00,000
There is no minimum amount

An order drawn by a bank on one of its own branches, requiring payment of a stated sum on demand to the person named in it, is called: [1]

A cheque
A demand draft
A letter of credit
A bill of exchange

Assertion (A): A credit cardholder is a debtor of the issuing bank. [1] Reason (R): The bank pays the seller out of its own funds and recovers the amount from the cardholder afterwards.

Both Assertion (A) and Reason (R) are true, and Reason (R) is the correct explanation of Assertion (A).
Both Assertion (A) and Reason (R) are true, but Reason (R) is not the correct explanation of Assertion (A).
Assertion (A) is true, but Reason (R) is false.
Assertion (A) is false, but Reason (R) is true.

Match the service in Column I with its description in Column II: [1]

Column I	Column II
a. Core banking solution	i. Informs the customer of every debit and credit to the account
b. SMS alert	ii. Links all branches of a bank to one set of records
c. Point of sale terminal	iii. Carries a buyer’s card particulars from a seller’s site to the bank in secured form
d. Payment gateway	iv. Reads a card at a seller’s counter so that the price passes to the seller’s account

State whether the following statement is true or false: NEFT transactions are settled individually and continuously, as each instruction is processed. [1]

4.11 Check Your Concepts

State any two features of the Immediate Payment Service. [2]
Explain why a bank draft cannot be dishonoured for want of funds, and state one situation in which a payee would insist on a draft rather than on a cheque. [3]
Distinguish between a debit card and a credit card on any three bases. [3]
What is meant by core banking solution? State any two facilities available to a customer under it, and explain why those facilities were not available before branches were networked. [4]
Explain the meaning of electronic banking. State any three advantages it offers to customers and any two of its limitations. [6]

4.12 Case-Based Questions

Havelock Interiors, a furnishing firm in Kochi, must pay ₹4,80,000 to a fabric supplier in Surat before the close of business today, failing which the consignment lying ready will be released to another buyer. The firm’s branch and the supplier’s branch are both enabled for every electronic transfer service. On the same day the proprietor has to send ₹19,000 to a college in Bengaluru towards his daughter’s admission fees. The college does not accept cheques from persons who do not hold an account with it, and requires an instrument on which payment is assured.

Name the funds transfer system the firm should use for the payment to the supplier, and state two features of that system which make it suitable in this situation. [2]
Name the instrument the proprietor should obtain for the payment to the college, and explain why the college prefers it to a cheque. [2]