Electronic Banking

Electronic Banking in Pakistan

1. PROBLEM AND ITS BACKGROUND

1.1. INTRTODUCTION

As the world has entered the twenty first century, one thing has become all too apparent, any organization that wishes to succeed in today's cutthroat competition will have to embrace Information Technology (IT) with fervor.

In this age of Information Technology new inventions and innovations are affecting all the fields of life. Almost all kinds of organizations are stepping into the field of IT, in an effort to increase their productivity and expand their customer bank. The same goes for the Banking Sector. Today all the banks of the world are adopting the tool of Electronic Banking.

The need of Electronic Banking was felt in South Asia during the last 5 to 7 years. This concept emerged as an essential tool for successful bank management. Financial sector has been quick to recognize this fact, and in Pakistan, most of the banking industry has moved away from the old ledger based system to computers and automation in order to modernize their operations. Although foreign banks were pioneers of bringing this concept to South-Asia but they have yet to start latest Electronic Banking practices in Pakistan

Background - Electronic Banking

Electronic banking is an umbrella term for the process by which a customer may perform banking transactions electronically without visiting a brick-and-mortar institution.

It is a form of banking in which funds are transferred through an exchange of electronic signals between financial institutions, rather than an exchange of cash, checks or other negotiable instruments.

The growth in use of the Internet world-wide and the development of procedures enabling secure transactions on-line have created the new field of on-line banking, where customers deal with their banks chiefly or entirely through Internet connections. Opening hours or location of branches, unlike the traditional banks does not restrict such services. Both existing banks and new groups are already moving into this potentially very important area. Since on-line banking services can be accessed with equal ease almost anywhere in the developed world, this raises the possibility of banking networks operating without regard to national boundaries, with consequent regulatory problems.

Banking on line, commonly called PC banking, electronic banking or Internet banking, has been around in one form or another for a decade or more.

Forms of on-line Banking

Following can be the ways to bank on-line:

1) Internet Based access

to account information through banks' web site, via modem, using a standard web browser such as Microsoft Internet Explorer or Netscape Navigator.

2) Bank Software:

Bank provides customers with proprietary software to install in their computers. The software allows customers to connect to bank's computers over a secure network. The customer essentially dials directly into the bank instead of through the Internet.

3) Personal Finance Software:

Software such as Quicken or Microsoft Money allows customer to exchange financial information with the bank. The software connects to the banks' computers via an Internet based set up and downloads financial information from the client's account. Many banks affiliate leading software vendors such as Intuit or Microsoft to make their systems compatible.

4) Pay-by-Phone Systems /Tele banking:

Allows a customer to pay by telephone certain bills, or transfer funds between accounts, with instructions to the bank. One must have an agreement in advance with the institution to make such transfers.

5) Point-of-Sale Transfers:

Allows a customer to pay for retail purchases with an EFT (or "debit") card. In some instances, this card may also be an ATM card. This is similar to using a credit card, but with one important exception: the money for the purchase is transferred immediately — or very shortly — from customer's bank account to the store's account. An increasing number of merchants are accepting this type of payment.

On-line Banking: a Revolution

The thought of today is the reality of tomorrow but the thoughts of Banking on Your OWN TERMS AT YOUR OWN DOORSTEPS, which seemed to be reality of tomorrow, is no a more mystique.

What we can do NOW (?)

* It allows customers to do most of their financial transactions at home on a personal computer.

* Pay your bills on-line while you're watching TV.

* Check your account balances from your digital cell phone as you stand in line to board a flight.

* Consolidate all your financial accounts on-line in one convenient, secure location.

Have access to friendly, helpful customer service representatives

Why on-line Banking?

Unfortunately, banking is a "necessary evil" that can take a large chunk out of already busy schedules. Visiting a branch or ATM, paying bills by paper check (and mailing them) and balancing a chequebook all can be time consuming. Banking on-line, by its nature, can automate many of these processes, saving time and, in many cases, money. One can access his account and do banking when (and where) it is convenient for him.

Following can be online banking services offered by various banks

- Check account balances

- Make transfers between online accounts

- Check the status of loans

- Track investments

- Apply for loans online

- Pay bills electronically

- Download account information to a personal finance software program

On-Line Banking Advantages

*Internet banks are open 7 days a week 24 hours a day

* In general, you will find lower fees and higher interest rates for deposits due to the reduced cost of operating on-line and not needing numerous physical bank branches.

* Create a more in depth portfolio of each individual customer of what their needs and expectations are.

* Be able to provide services to each customer that are customized to their individual preferences

* You will have easy access to account information and transactions, because any Internet-enabled computer can become your "bank terminal."

* You will generally have up-to-the-minute current bank account information due to the automation of most systems.

* In many cases, on-line banks offer free bill pay, which can be a big saving in both money and time.

* You can transfer funds electronically between accounts.

Common E-Banking Services

Retail Services

Wholesale Services

Account management

Account management

Bill payment and presentment

Cash management

New account opening

Small business loan applications, approvals, or advances

Consumer wire transfers

Investment/Brokerage services

Commercial wire transfers

Loan application and approval

Business-to-business payments

Account aggregation

Employee benefits/pension administration

Current Scenario of Electronic Banking in Pakistan

Pakistan is widely considered to be in the Third Wave of developing economies that include countries in Asia, Latin America, the Pacific Islands and the Middle East. These countries started to adopt the Internet from around 1993. Almost all have a state monopoly over the telecommunications sector with low tele-densities per population and high telecom costs, which restrict Internet access to elitist groups in the population. Less than 2 per cent of the population is connected to the Internet. These countries have weak political and democratic institutions where the governments welcome new commercial opportunities.

The First Wave countries include USA, Canada, and some Nordic states where the Internet took hold in the 1980s, and became an established feature of social, political and economic life. On average, over 35 per cent of the population are connected to the net, with households always connected online to the net 24 hours in the day in many cases.

Both the First and Second wave of counties have much in common; with both involved in the early development of the Internet. The gap between the two is rapidly diminishing. Both have highly developed telecommunication infrastructures, with extensive networks of fiber optic, satellite and ISDN lines that can respond to exponential growth in demand for bandwidth. Knowledge of Internet applications is a mainstream activity, and a prerequisite for commercial credibility. They have highly developed information, dissemination technology and content industries, with a strong export focus. Both have strong government policies that aim to influence the shape of the future information society, with massive investments in research and development, education, training, IT and Internet developed research.

E-Banking in Pakistan:

Due to advancements in sciences and technology, many foreign banks started offering Electronic Banking services in Pakistan. Electronic Banking offers tremendous opportunities and saves cost and time for both banks and customers.

E-Banking in Pakistan is still a relatively new phenomena and is expected to grow now faster with future penetration of computers and internet services in the country, availability of a robust legal framework, removal of concerns about security of electronic transactions and enhanced reliability of communication

Unfortunately Electronic Banking in Pakistan is still in the introduction phase and the government with the private sector has to streamline many policies for its further development and success. Although foreign banks took the initiative but now there are private Pakistani banks that are making advancements in E-Banking. The rate of technology transfer from developed to developing countries has been very slow in this regard.

In Pakistan the available technology services are NIFT, ATM, ETPoS, Tele Banking and Central Depository Systems.

* NIFT was established in 1997,it is a technology that uses images with high-speed sorters to automate check clearing.

* ATMs are automated teller machines that provide facilities for instant deposits and cash withdrawals, and are presently available at around 200 locations in major cities only.

* ETPoS is a method of payment where goods and services are paid for at the point of sale, and is available in major cities in a few super markets only.

* Telebanking is telephone banking facility available only in a few banks, and again, in major cities only.

* The central depository system is a well- established system used in stock exchanges for recording and the transfer of securities.

Secure electronic transactions (SET): This protocol was developed jointly by Visa and Master Card and is now baked by American Express. Major players in e-commerce, networking, and computing like Microsoft, Netscape, IBM, etc, are behind specifications of this protocol, and are thus becoming an industry standard for secured payments on the internet. SET provides confidentiality through encryption; message integrity using digital signatures, and authentication of consumer and merchant identity Use of this, method is ideal due to the level of security that this method offers. However, establishment of this protocol will require Internet merchant accounts.

Smart cards:

It is a digital currency payment, which looks similar to credit cards, but contains a microprocessor and a storage unit. The cards hold prepaid account information. Merchants who accept these records are credited for the transaction amount by card issuers. The use of this technology is safe but expensive to acquire. Pakistan will require building a consensus among major stakeholders to invest in making this technology available in Pakistan.

Value-added networks:

Pakistan could establish value added networks (VAN) for financial transactions to expedite fast and efficient flow of remittances to all major cities and to enable exchange of electronic documents. These networks will provide shared connectivity, security assurance of data, and reliability of service. These networks will provide bank -to -bank transfer of funds for financial transactions, and will also enable the exchange of electronic documents to facilitate e-trade. These value added networks will also facilitate B2B transactions using EDI systems. The EDI Van's will execute authorized transactions between valid trading partners. These networks will reduce technical complexities and the cost of implementing dedicated connections with a multitude of trading partners. Another advantage out of these networks will be the provision of storing viable information on the networks, so that authorized partners can directly access them without contacting the other parties. This will help in increasing efficiencies of business transactions in terms of time and costs.

1.2. STATEMENT OF THE PROBLEM

E-banking has entered the Pakistan economy in a big way but, considering the state of development of banking industry in the country and the client-base, there are doubts about the utility and cost-effectiveness of this mode of banking. The research study will examine these points and give recommendations on the subject:

1. An evaluation, theoretically and practically, of the progress of banks which adopted electronic operations, and the prospective role for banks in the future.

2. Discussing problems facing banks in the scope of electronic banking operations.

3. Specifying the concept of electronic banks.

1.3. OBJECTIVES OF THE STUDY

Following objectives have been set forth in conduct of the research:

* To familiarise public with the subject of ELECTRONIC BANKING, enhance their keenness to remain abreast to the techniques, and modern trends of efficient banking.

* To induce healthy practices in banking business and profession and to advise suitable measures for their achievement.

* To encourage and provide Electronic Banking information and to offer education through research report contents to students and consequently to national financial institutions.

* To print and publish the report for provision to all who are interested in the issue of Electronic Banking.

* To study Electronic Banking practices of different banks in Pakistan.

1.4. SIGNIFICANCE OF THE STUDY

E-banking is playing an important role not only in the development of electronic services in the first world countries but also in the developing countries too. Due to advancements in sciences and technology, many foreign banks started offering Electronic Banking services in Pakistan. Electronic Banking offers tremendous opportunities and saves cost and time for both banks and customers.

This study will evaluate the electronic performance of banks. This report emphasizes the fact that on-line accessibility, awareness, attitude towards change, computer and Internet access costs, trust in one's bank, security concerns, ease of use and convenience are the major factors affecting the adoption of Internet bank services in Pakistan.

1.5. SCOPE AND LIMITATIONS OF THE STUDY

Scope of the study:

The research thesis covers the leading banks in Pakistan that have entered the e-banking era and examine its economics. The major limitation of the study is that the concerned banks are reluctant to disclose information with regard to costs incurred on E- banking.

Limitations of the study:

As the E-banking in Pakistan is at the introduction stage and its efficacy is yet to be tested, adequate literature on the subject is not available.

Moreover, the topic under study requires comprehensive research, which is possible if more time is allotted for the project.

Banks personnel are reluctant to give information about banks electronic process and problems faced by banks.

2. LITERATURE REVIEW

Literature survey is conducted in order to get more insight into the study. Literature survey consists of past studies related to this topic. Which will help and ensure that no important information related to the study is omitted. It includes mostly domestic studies conducted by our own scholars.

2.1. FOREIGN SCENARIO

Yoshio, (1999), states that Malaysian banking sector started in the 1970's. However, the first visible form of electronic innovation in the Malaysian banking industry was the introduction of Automated Teller Machines (ATMs) in 1981. The ATMs to a large extent released banks from the constraints of time and geographical location.

Then in the early 1990's, Tele-banking was introduced in Malaysia, which provided yet another delivery channel for branch financial services via telecommunications devices connected to an automated system of the bank by utilizing Automated Voice Response (AVR) Technology.

Utsuml, on June 1, (2000), said that the Malaysian Central Bank gave the green light for locally owned commercial banks to offer Internet banking services. On June 15, 2000, Maybank, the largest domestic bank in terms of assets as well as network distribution, http://www.arraydev.com/commerce/jibc/www.maybank2U.com became the first bank to offer Internet banking services in Malaysia. This service is currently provided to individual customers of the bank and the site boasts of the latest 128-bit encryption technology to allay fears of security among consumers. The services provided in this portal include banking enquiry functions, bill payment, credit card payment, funds transfer, and accounts summary as well as transaction history. Customer support service is provided via e-mails as well as via telephone lines and is available daily from 6 am to 12 mid-night.

JoseÉ, (2000), said that the Hong Leong Bank commenced its Internet banking operations known as 'e-Banking', which can be accessed via their web site at http://www.arraydev.com/commerce/jibc/www.hlbb.hongleong.com.my in December 2000. In addition to providing services that were previously included in their Phone banking service, they also offer options of assessing account transaction history in their 'e-banking'. They too provide support services via e-mails and telephones from 7 am to 11.00 pm, seven days a week.

Al-Jasser, (1999), states that both the competitive forces as well as the expected benefits are causing concentration and expansion of E-banking services in the country (Saudi Arabia). However, in the long run it would be the actual benefits which the banks would realize in terms of higher profits through reduction in intermediary costs and expanded consumer base due to improved services on a cost effective manner that would determine the role of E-banking in the country's banking sector. E banking is expected to play an important role in integrating the financial markets of Saudi Arabia globally and banks would ultimately capitalize on these developments.

Figures, (2000), states that E-banking Automate critical banking activities and interact electronically with bank with comprehensive tools that help reduce administrative costs, increase productivity, and improve cash management—in a security-enhanced environment.

2.2. LOCAL SCENARIO

Mashhood, (2000), states that the role of information technology in financial services is to support operational efficiencies, facilitate customer services, mange risk and support in decision-making. In the IT policy on financial services, the government of Pakistan has asked the State Bank of Pakistan to allow opening of internet merchant accounts to enable inter-bank electronic fund transfer, to re-engineer processes of foreign trade sections, to accept e-orders of value less than $500, to open an e-commerce wing in financial institutions, and to facilitate clearing and e-reporting in al banks. The e-commerce action plans for the financial sector have been established as per directions from the government. The plan is to connect branches of 25 local and foreign banks in 12 major cities. In phase I, branches in one city will be linked with their head office. In phase II, all these banks and other financial institutions will be connected together. In phase III, private and public sector stakeholders will be linked and ultimately e-commerce network will include financial, trade and customs networks along with their international links.

Ziauddin, (1998), states that In Pakistan, huge investments, recurring costs, and absence of economies of scale are some of the major bottlenecks to invest in online banking. One other problem is that only a few foreign banks are linked with their branches, otherwise all major financial institutions work in isolation.

AL-Bader, (1999), said that in the absence of a centralized database linked to branches, banks do not only need the communication software to facilitate communication, but also require modems, routers, controllers, etc. irrespective of the volume of transactions, be it small or massive, huge investments are required to facilitate online banking. Not only the capital investments debut also the recurring costs, such as lease payments to PTCL, ongoing maintenance costs, etc, are discouraging national banks to invest.

Giasuddin, (2003) said that there is a need to establish inter-branch and inter-bank networks so that all financial institutions may be linked together to facilitate electronic payment systems, which are among basic prerequisites for establishment of the financial infrastructure for e-commerce development. The next step that is still not clear in Pakistan is the type of electronic payment systems and digital currencies to be used in Pakistan. There are a lot of different methods of payment that are available globally. Pakistan has to carefully decide the most feasible payment systems that can easily fulfill financial requirements, as well as, provide enough confidence to the buyers and merchants for safety and security of such payments.

Kazmi, (2000), said that there is an urgent need in Pakistan for establishing value added networks for financial transactions. Without these networks, it will be difficult for business and financial institutions to provide EC solutions with high quality and low costs.

Zaidi, (2003), states that there is a need to establish inter-branch and inter-bank networks so that all financial institutions may be linked together to facilitate electronic payment systems, which are among basic prerequisites for establishment of the financial infrastructure for e-commerce development. The next step that is still not clear in Pakistan is the type of electronic payment systems and digital currencies to be used in Pakistan.

Shabbir, (2003), said that both the competitive forces as well as the expected benefits are causing concentration and expansion of E-banking services in the country. However, in the long run it would be the actual benefits which the banks would realize in terms of higher profits through reduction in intermediary costs and expanded consumer base due to improved services on a cost effective manner that would determine the role of E-banking in the country's banking sector. E-banking is expected to play and important role in integrating the financial markets of Pakistan globally and banks would ultimately capitalize on these developments.

Naveed, (2003) states that Credit cards are primarily used as convenient payment products and at times a credit facility for short term needs. The State Bank of Pakistan is playing a pro-active role in promoting adoption of technology-based solutions in the banking sector and supporting services based on E-Banking. E-Banking has already taken off in this country and the recent launch by Habib Bank- one of the largest banks in the country - has provided a major breakthrough. so the question is not when the facilities will be provided but how rapidly these facilities will expand. Efforts in this direction are focused upon following areas:

* Creation of a robust legal infrastructure catering to the needs of E-Banking and other payments systems involving electronic settlement of funds. Key step in this direction was the promulgation of Electronic Transactions Ordinance 2002, which provides legal recognition to digital signatures and documentation reducing the risks associated with the use of electronic medium of business. State bank is currently engaged in an exercise to further augment the legal framework for electronic settlement of transactions in the banking sector.

* Establishing of Payment Systems Development Committee in which commercial banks are members, to guide the development of payment systems in Pakistan.

* Creation of a dedicated Payment Systems Department in the State Bank dealing with all issues pertaining to payment systems including E-Banking.

* Creation of a Real Time Gross Settlement System (RTGS) providing an E-Banking solution to banks maintaining their accounts with standard operating procedure (SOP) whereby they will be able to operate these accounts from their own premises via an electronic connection with the State Banks own servers.

* Commercial banks have been allowed to open and operate Internet Merchant Accounts.

* Banks are being encouraged to expand the ATMs network through more participation and a wider network of machines all across the country. all banks have been asked to join a SWITCH and interconnection between the 2 existing SWITCHES is being encouraged for further development of the electronic infrastructure .

* State Bank has already acquired SWIFT connection and has also made it mandatory for banks to acquire SWIFT connectivity for settlement of all cross border financial transactions.

* Expansion of automated cheques clearing services to all major cities in the country is actively being pursued. The usage of plastic money such as Credit/Debit cards is making good progress

Ishrat, (2003), states that introduction of E-banking will improve banking services mainly in terms of the convenience of the customers including, place, time and price, the banks will be able to provide improved services and, consequently, the quality and skills of banking staff will also improve. Although many banking services will be available 24 hours, the need for over the counter services will remain and banks would continue to provide normal services during office banking hours in Pakistan also like in the developed countries where E -banking is prevalent, it has been observed that customers feel much confident in using e-banking services when they can associate it with brick and mortar branches. Purely online banking without physical branch network has not made much headway even in developed countries. In Pakistan, with low rates of literacy the majority of customers will continue to use the 9-5 bank branches.

Rizvi, (1999), states that the state bank of Pakistan has constituted various committees such as the Payment Systems Development Committee and the ECH task force for the development of technology based banking services in the country. Besides other matters, these committees also oversee the developments in the areas of E-banking. State Bank of Pakistan coordinates closely with other agencies such as the Ministry of Science & Technology (MoST), in initiatives relating to E-banking.

Shirazi, (2001), said that the future of e banking is very bright in Pakistan. Many banks in Pakistan have started providing e-banking facilities to their consumers. Over 300 ATMs are in operation in Pakistan the use of ATMs is rapidly increasing. More and more facilities are being provided by the banks electronically including e-statements, funds transfer, bill payment for utilities as well as other purchases. By 2002, almost 40% of the bank branches have been automated and it is expected that this proportion will reach 50% by 2004. The rate of increase is phenomenal i.e. about 318%. Similarly, the number of online branches has doubled during the last 2 years to 570 and by 2004 this number will jump to 1356, representing an increase of 376%. This expansion along with the growing penetration of internet will bring E-banking to more and more of their customers both in terms of numbers as well as geographical locations.

Mahmood, (2003), states in order to meet E-banking challenges that State Bank of Pakistan established the ECH Task Force under the leadership of Mr. Naveed A Khan

(Country Representative - ABN AMRO Bank) to facilitate the development and implementation of E-Banking sector to promote E-Commerce. This Task Force was constituted to facilitate in planning & introduction of enabling technologies in the financial sector of the economy having a direct bearing on E-commerce. The ECH Task Force is constituted of various dedicated professionals from the major financial institutions of the country who enrich the Task Force with their experience and expertise with a firm commitment to develop and promote E-Commerce in Pakistan.

Ahmed,(2001), states that Electronic Commerce (E-Commerce) is just another business tool, one that enhances business efficiency and effectiveness and allows cost reduction. It is a vehicle to carry out business-to-business (B2B) or business-to-consumer (B2C) transactions. For financial institutions and entrepreneurs, E-Commerce not just makes old processes work better; it also provides a means to break with tradition and create new ways of doing business. E-Commerce has a lot of potential in Pakistan where ideas are rich, resources and labor are cheap, workmanship is excellent, entrepreneurial skill in abundance, and there is a large presence of indigenous and globally appreciated artifacts other tradable goods. However, on a more realistic side, we have a lot of ground to cover before we can reap the benefits of E-Commerce and turn our economy around. These are technical as well as administrative challenges that have to be met and above all we need the basic infrastructure, which facilitates and promotes trading through electronic means.

3. RESEARCH METHDOLOGY

This chapter presents the basic methodology required in research. It includes the methods of search, type of study and the sources of data.

3.1. METHDOLOGY OF THE STUDY

The methodology of study includes the different methods that researcher has used to reach to the conclusion. But due to shortage of time the researcher has tried his best to make this report informative, useful and also beneficial for others. The researcher has also gathered a lot of information to cover all types of aspects related to automation and electronic data processing.

In this report the researcher has covered first of all the introduction of electronic banking, its background, what facilities and benefits it provide and what is its scope in Pakistan? Secondly the researcher has visited few of the banks offering electronic services. They were very knowledgeable to the researcher basically in explaining their scope in Pakistan.

3.2. TYPE OF THE STUDY

The study is descriptive because the intention is to explore the existing values given in problem statement. Descriptive process was believed to be more suited in this kind of investigation because it seeks direct response from respondents. This procedure has been used in many areas of investigations in many fields of academics and scientific discipline.

3.3. GOAL OF DESCRIPTIVE STUDY

The goal of the descriptive study, here is to offer a people or to describe relevant aspects of the phenomena of interest to the researcher from an individual, organizational, industry oriented, or other perspective (Sekran, 2000,p.225). Descriptive study is the process of research that presents the data in meaningful form, thus help to;

§ Think systematically about the aspects in a given situation

§ Offer ideas about future probe and research

§ Help make simple decisions.

3.4. DATA SOURCES

The secondary data has been mainly complied from various books, journals, articles, magazines and newspapers. Some secondary sources of data are statistical bulletins, government publications and information published or unpublished and available from previous research, case study and library records, on line data, Webster and internet search. (Sekran, 1996, pp.57). The literature survey has been documented from published and unpublished work. The analysis of secondary information is a useful strategy for learning the research process.

The researcher also visited the IT departments of banks under study for collection of related data.

4. ANALYSIS AND INTERPRETATION

4.1. ANALYSIS

Much has been written on the factors affecting adoption or usage of new products and services. Some of the major psychological and behavioral factors which affect the adoption of any new innovation such as E- banking includes, consumer awareness, ease of use, security, accessibility, techno- phobia, or simply reluctance to change, preference for personalized services and cost of adopting the innovation.

One of the more important characteristics for adoption or acceptance of any innovative service or product is the creation of awareness among the consumers of the product or service. Some economists asserted that consumers go through a series of process in knowledge, conviction, decision and confirmation before they are ready to adopt a product or service and the adoption or rejection of the innovation begins when the consumer becomes aware of the product.

Another important factor affecting the acceptance and adoption of innovation is the level of security or risk associated with it. Even in countries where E-banking has long been established, one of the most important factors slowing progress of this new innovation is the consumers concern for security of on-line financial transactions.

In addition, e - bank customers would also be curious to find out how the banks would generally deal with erroneous transactions occurring in online transactions. Will the burden of proof be on the customers or the banks would be willing to settle the issue up front and investigate the problem later. The element of trust in this context would determine the security of transacting for consumers generally and determine the acceptability rate of this alternative delivery channel in the long run.

Another factor that would stand in the way of consumer adoption of E-banking is the cost factor. In E-banking, two types of costs are involved. First, the normal costs associated with on-line access fees and connection charges and secondly the bank fees and charges. If consumers are to use new technologies, the technologies must be reasonably priced relative to alternatives. Otherwise, the acceptance of the new technology may not be viable from the standpoint of the consumer.

Reluctance to change is also another factor that affects adoption because the existing mode of service or product delivery fulfils the customer's needs adequately. In the context of E-banking, telephone banking and mortar branches are the existing alternative modes of transacting banking business. For customers to change their present ways of operating and to take up new technology, it must " fulfill a specific need". Unless such a need is fulfilled, consumers may not be prepared to change from the present ways of operating. Many ways can be introduced to overcome the reluctance to change. Provision of personalized customer service personnel to assist consumers in performing transactions via the Internet as well as providing specific value added service, which are currently not provided through traditional banking channels can also help to reduce the customers reluctance to change.

Some consumers have generally been afraid of new technology. These consumers may not have the knowledge or know-how in dealing with computers specifically and thus trust human beings more than computers and machines. Their fear for computers and technology generally grows and eventually develops into a phobia for technology. Thus, technology phobia can also be a factor affecting the customers' reluctance to opt for E- banking.

4.2. DIFFERENT FORMS OF E PAYMENT

MECHANISM

Different banks also offer services for their clients for transfer of funds electronically. These options however have one major flaw in them; “the security threat”. Many cases of cyber frauds and stolen credit numbers have lead to a fear in the consumers. But the advantages of E- Commerce are too many for the customer itself that they offset the threat of cyber fraud. However, this is an area of concern for both the consumer and the businesses so both are working in this regard to eliminate any form of security threat.

Generally, the E-Payment mechanisms can be divided into four broad categories according to research:

1) Credit/Debit Cards

2) Digital Money

3) Smart Cards

4) Arrangements by different Banks

1:Credit/Debit Cards

The use of credit cards and debit cards was stretched beyond the conventional shopping in this era of Information Technology. Today credit cards are also used for shopping online by the end-consumers. Normally, the different websites doing businesses accept the most commonly used Visa and MasterCard for shopping online. It may be worth mentioning here that this is a payment mechanism for B2C type transactions. This is the most widely used method of payment for B2C transactions. The seller website asks for the credit card number along with the expiry date of the credit card and thus the payment takes place.

According to the figure primarily three parties are involved in the credit/debit card payment method. Firstly, the customer visits the website and purchases the product. After the usage of credit/debit card the website sends the card number and verification to the merchant bank which after verification, transfers the specified amount of money to the account of the website in the mean time the website sends the sold product to the customer who gets the bill at the end of the month from the merchant bank.

This mode of payment mechanism is not very secured. There is always a threat of a leakage of credit/debit card number while the transaction is in progress. This has caused a lot of controversy, as many hackers and credit card operators have been known to use stolen credit card numbers to shop online. The only mode of security for this is the firewalls, which a skilled hacker can pass with some or maybe no difficulty. Till this date many online frauds have happened due to this payment mechanism in which the person with the stolen credit cards have done shopping online from some distant part of the world and the cost of reaching that person has known to be more than the price of the product itself. In this regard another way of security could be the tracking of IP addresses. IP addresses or Internet Protocol addresses are unique addresses for every Internet user all across the world. What the websites can do is they can track the IP address of the online shopper at the time of transaction and then if it is known to be a fraud afterwards they can track that person through this IP address. But for this to happen a very high level cooperation on the global scale is needed.

A lot of companies have been working to provide security for the online purchases through Credit/Debit cards. Cyber Cash is one of them.

2:Cyber Cash

Cyber Cash is a well-established mechanism for payment of goods and services on the Internet. Cyber Cash also supports small transaction sizes, allowing sites to adopt a micro electronic commerce model of payment for goods and services. Cyber Cash gives consumers added benefits - they can choose one of three payment mechanisms. Cyber Cash supports checks, electronic cash, or credit card transactions. Cyber Cash has a large existing customer base, and poses a significant threat to other electronic cash services that use the Internet for transactions.

To begin with, consumers will need to download free Cyber Cash software from the Cyber-Cash's Internet servers. This software establishes the electronic link between consumers, merchants and their banks as well as between individuals. Once price has been negotiated and the consumer is ready to purchase, the consumer simply clicks on the Cyber Cash “Pay” button displayed prominently on the merchant's storefront, which invokes the Cyber Cash software. The merchant sends the consumer an online invoice detailing the purchase information together with a statement confirming the total charges. When the statement appears on the screen, the consumer adds to it his or her credit card number, name as it appears on the card and an expiration date. The customer also has the option of using a debit service to make the purchase. In this case, the customer simply adds the personal identification number (PIN) to the merchant's online invoice.

This statement information is then encrypted and passed along with the invoice to the merchant, which adds identification and forwards all information to the Cyber Cash server. There the Cyber Cash server initiates a standard credit card or debit card authorization request to the merchant's bank or bank-designated processing center. When the authorization request has been processed, the Cyber Cash server forwards a response to the merchant. The merchant then completes the transaction. The Cyber Cash server also supports related operations such as charge, void or return. Cyber Cash will charge Banks/processors fees for consumer to merchant transactions, as well as transactions between individuals will be competitive with the cost of a postage stamp.

3:Digital Money

This is actually a piece of information with intrinsic value that is stored on an individual's personal computer's (PC) hard drive or in an electronic wallet and could be used to make on-line purchases. It can also be transferred from a PC to a smart card for use off-line. The information (digital money) is downloaded over telephone lines, PCs, or dedicated terminals to be traded on-line over computer networks like the Internet. Digital cash has no value outside of the accounts to which it was tied, making fraud quite difficult. Some forms of e-cash, like that from DigiCash, Inc., are anonymous; their Digital cash cannot be traced back to the user, an attribute of traditional currency. In addition to DigiCash, Cyber Cash, Visa, and MasterCard, had developed their own forms of digital money.

4:Smart Cards

A smart card is a piece of plastic, the same size as a credit or debit card, with a silicon chip embedded in it. The chip contains a microprocessor, a miniature computer that can perform calculations and store data in its memory.

The card is "smart" because it is "active", that is it can receive information, process it and then "make a decision". For example, when a smart card is inserted in a terminal, the terminal sends its "signature" to the microprocessor. If the "signature" agrees with the existing parameters in the microprocessor's memory, then the memory files are opened and the data made visible to the terminal. In the same way, the card sends its "signature" to the terminal and the terminal's microprocessor verifies it. This mutual verification is done "off-line": this means that the terminal is not connected to the system's central computer, known as the "host".

The verification process typically takes a fraction of a second. In addition to digital signatures, Personal Identification Numbers (PINs) and hand-written signatures can be used.

A) Smart Card Uses

a) Electronic Purse:

Usually issued by banks, these electronic payment cards allow cardholders to avoid the hassle of finding correct change by loading value from their bank accounts into an electronic purse ("e-purse") which can then be used to pay for small-value everyday purchases at shops, vending machines, transport ticket machines, parking meters, public payphones etc.

b) Secure Internet Payments:

Smart cards offer the secure means of payment over the Internet, which consumers are demanding as the e-commerce boom continues. The adoption of common standards by issuers will lead to international interoperability of cards, so that payments can be made across national borders.

c) Automatic Public Transport Fare Collection:

Contact less smart cards have been adopted by public transport operators in many large conurbations. The Proton smart card technology can be added to these cards to identify cardholders for discount fares, or to allow purchase of more electronic tickets with an e-purse.

B) Benefits of Smart Cards

a) For cardholders:

Smart cards are convenient and offer a range of added-value services, that can be tailored to individual needs and that can be used on the Internet.

b) For merchants:

Smart cards reduce the risk of fraud, the costs associated with cash handling and telephone costs linked to on-line authorization, as well as offering opportunities to add applications such as loyalty schemes and giving a futuristic image to their businesses.

c) For card issuers:

Smart cards greatly reduce costs associated with fraud, they enable extra added-value services to be offered to customers, creating revenue and closer customer relationships and their off-line transactions, free space on networks for other on-line activities.

Automated Teller Machine (ATM)

In the modern era we have observed that machines have replaced man in many fields. They are not only faster, but have also proved to be more reliable and propitious. It could perhaps been only a fictitious fantasy to be having a device which could draw and deposit cash by the stroke of a finger a couple of decades back. With the advancement of computer technology we have such machines, which offer us these services, known as ATM (automated teller machine).

These machines had made banking a lot easier and simpler for the customers as well as the banks. Customers can withdraw cash at any time from these machines by inserting a card and PIN Code. These machines can be stand-alone as well as part of a network, and such a network is known as an ATM network.

The ATM communicates through a host processor. The host processor can support either leased lines or dial-up ATMs. Leased line machines connect directly to the host processor (of the specific bank/service provider), through a four wire, point-to-point, dedicated telephone line. Dial-up ATMs connect to the host processor through a normal phone line using a modem (modulator-demodulator) and a toll-free number.

The ATM forwards the transaction information to the Host Processor, this information is then forwarded to the Bank that issued the card, if the card holder requests cash, the host processor initiates an electronic funds transfer to take place from the customers checking account to the host processor's account. The processor will then send an approval code to the ATM authorizing the machine to dispense the cash.

WORKING OF ATM DATA FLOW DIAGRAM

When the customer inserts his ATM card in the ATM machine he is asked to enter his pin number and the amount he requires along with the notes he wants. The customer draws the money and receives it along with a receipt. The customer's account is debited and the bank account is credited immediately. The information goes to the branch serve and is updated. The same information, at the same time, is updated in the head office server.

After closing the transactions are printed and reported time and date wise, amount wise and ATM wise. All these reports are given to the managers and copies are sent to relevant branches.

Working of ATM after closing

(Courtesy: Muslim Commercial Bank, Islamabad)

The main difference between working hours and after closing is that during the working hours the information is updated real time. After closing of the branch, if a transaction is made, the information is directly updated in the head office computer, which runs 24 hours a day. This information is stored till the next morning when the system of the branch is turned on and the information is updated in the branch server. This process is done in batch. The branch balances its accounts before starting its ATM systems again.

4.3. The details of banks: specific interpretation and analysis is given in the following paragraph:

Following are the four banks under study which will help to understand in depth about the Electronic Banking scenario in Pakistan and the services being offered by these banks electronically: -

1. Abn-Amro bank

2. askari commercial bank

3. muslim commercial bank

4. habib bank limited

4.3.1. Abn-Amro Bank

ABN AMRO Bank Pakistan was established in 1948 and was the first foreign bank to be granted a license by the Government of Pakistan. Over the last five years, ABN AMRO has significantly enhanced its profile in Pakistan, and is ranked amongst the top 3 foreign banks in the domestic market. The Bank has strategically located branches in three of the country's main business centers: Karachi, Lahore and Islamabad.

Abn-Amro Bank Station

The Electronic Banking System offers adequate security features in all aspects of system access, transactions' authorization, database security, transmission and communication as well as authenticating transactions and files. These capabilities are well manifested by employing different methods like using user I/D and Passwords, defining user's privilege, using inherent built-in security features from MS Access and Windows NT, randomly generated dynamic MAC and DES key as well as using Smart Card to further the security. From the validation and security perspective, it will ensure no repudiation of instructions at any one time. Lastly in terms of the communication standpoint, information pertaining to in country will not flow out of the country except for cross-border information.

With a system that offers such tight security, it will be obvious that customers should have full confidence in using the system for initiating transactions. This will benefit in fast turnaround time for transactions processing, more efficient in creating payments instruction and minimizing errors thus results in cost saving. Apart from just initiating payments, customers can have access to their global account information that helps to make fast and accurate business decisions.

By introducing and emphasizing state-of-the-art technology to the financial system, it will help to boost the people's confidence and at the same time attract more investors into the country. This would results in the contribution to the stabilization of the country's economy.

Businesses today depend greatly on ready access to vital financial information in order to stay ahead. ABN AMRO Electronic Banking System allows corporate customers to do their banking in the convenience of their own offices and communicate directly with the various branches of the bank. Many benefits can be derived in using Electronic Banking both for the customers and the bank.

A) Benefits to Customer

* Global account information is at the fingertips, so that customer's can make instant, accurate business decisions.

* Investment opportunities can be maximized by monitoring and moving funds into interest-bearing accounts, time deposits and overnight money market.

* Customization to own needs to meet business goals of improving efficiency and reducing costs.

* Easy integration with existing back-office applications and system.

* Turnaround processing time for transactions is much shorter.

* Through file integration or pre-defined input, it increases accuracy and minimizes errors.

* Transactions can be created much faster.

B) Benefits to Bank

* Increased efficiency by having more straight through processing to the back-office system.

* Increased cross-sell opportunities.

* Reduce workload in operations as the level of automation increases.

* Reduce cost.

4.3.2. Askari Commercial Bank, Ltd

Askari Commercial Bank Limited (ACBL) is a scheduled Bank operating under the license of State Bank of Pakistan (Central Bank of the Country). ACBL's main shareholders are Army Welfare Trust (AWT).

ACBL has been rated A1+ for the short term and AA for the long term by the Pakistan Credit Rating Agency (PACRA) an affiliate of IBCA Ltd., UK, and is only Pakistani Bank in the private sector to voluntarily obtain this rating.

ACBL has adopted the policy of automation and introduction of modern technology, the objectives of which are to maintain efficiency, to reduce operating cost and to facilitate development of contemporary products. ACBL offers innovative products and services to its customers like 24 hours Automated Teller Machines, Telephone Banking and Automated Signature Verification System. All the ATMs and branches in the major urban centers are linked through state-of-the-art Satellite based Communication System offering real time 24 hours service.

A) Automated Teller Machine

ACBL installed its first ATM in January 1996; it is also the first Pakistani bank to start ATM sharing. The arrangements with ABN AMRO Bank were made in 1999 and due to this ATM network sharing experience, Habib Bank Limited, also proposed to join this network, and now this network is operational between all three banks. Currently this network consists of 61 ATMs.

Almost 44,000 customers of the bank hold ATM cards. Total transactions carried out during the year 2000 were 713,263 out which 430,241 were made through ATMs.

Askari Bank's ATM service is known as the "ASKCASH". It major 24 hours services are:

* Cash Withdrawal

* Deposit

* Balance Inquiry

* Fund transfer

* Utility bill payment

* Accounts statement

* Change pin

B) Communications

Online Banking without communication is not possible. Communications includes the communications links between the Head Office and the branches, which in the case of Askari Bank is via a private satellite based network.

In the Head Office, there are two types of network communications available - Wide Area Network communications between the Head Office and the Branches and a Local Area Network for internal Head Office computer communications. This is both efficient as it allows the utilization of a limited number of computer resources by a large number of computers, and it is also convenient, as these very same computers can not only communicate amongst themselves, but can also be used as terminals for the banking servers.

The Askari Bank Branch Network has expanded to 28 branches. All the ATM and Inter-branch Transactions are being processed through the private wide area communications network. It is therefore essential that the network run around the clock. For this purpose, the bank's main banking server and a backup have been installed in the Communications and Control Room. They both work simultaneously, so, if any problem occurs in one of the systems then the other one will automatically take-over and the network continues to work without any interruption.

Internet Banking at ACBL

Following services are linked to internet banking provided by Askari Bank:-

* Account Information

* Balance Inquiry

* Transfer of funds within the same branch

askaribank.com.pk

A) Benefits to Bank

· Increases efficiency of bank by having more straight- forward transactions.

* Reduces work load

* Reduces over all costs associated to cater customer demands.

B) Benefits to Customers

· Consumers can use their computers and a telephone modem to dial in from home or any site where they have access to a computer.

* The services are available seven days a week, 24 hours a day.

* Transactions are executed and confirmed quickly, although not instantaneously. Processing time is comparable to that of an ATM transaction.

· And the range of transactions available is fairly broad.

4.3.3. Muslim Commercial bank, Ltd

MCB is in its over 50 years of operation has a network of over 1,200 branches all over the country with business establishments in Bangladesh, Sri Lanka and Bahrain. The branch break-up province wise is Punjab (57%), Sindh (21%), NWFP (19%) and Baluchistan (3%) respectively.

MCB focuses on three core businesses namely Corporate, Commercial and Consumer Banking. Corporate clientele includes public sector companies as well as large local and multi-national concerns. MCB is also catering to the growing middle class by providing new asset and liability products

Automated Teller Machine

The branch provides 24 hour banking convenience with the largest ATM network in Pakistan covering 9 cities with 80 ATM locations. The MCB automated teller machine launched in 1995 is a means of providing customers with 24 hour cash convenience.

With the MCB ATM 24 hour cash card MCB customer can:

* Access 80 ATM machines in 11 major cities in Pakistan

* Select between two languages Urdu/English for the one screen transaction

* Withdraw cash

* Contact 24 hour MCB ATM help line

These are Spanish made NCR ATMs, but now the Bank plans to replace these ATMs with new IBM ATMs, which have following enhanced features

* Multi Currency withdrawal

* Sound Oriented

* Touch Screen system

* Printer facility for Bank statement

The Bank is currently using PTCL leased lines for online Banking and ATMs.

MCB Call Center (Telephony Banking)

Customer has to dial MCB's Call Center from his/her home or office or wherever he/she happens to be. It offers basic banking services for customer's convenience, eliminating the need for a customer to make unwanted trips to your branch.

A) Services Available through MCB Call Center

ATM Services

* ATM Lost / Stolen Reporting

* ATM Transaction Details, History & Complaints

Other Services

* Product Information (receive details through fax, SMS or email -registered users)

* ATM Locator (receive details through fax, SMS or email -registered users)

* Branch Locator (receive details through fax, SMS or email -registered users)

· Tele-banking Services Management i.e. TPIN change, Block / Unblock service.

Intranet for Corporate Customers

Muslim Commercial Bank also offers Intranet facility for its corporate customers. To carry out transactions, the corporate customer connects to the official web site of bank. On the web site there is a link for Intranet customers. The customer logs on to Intranet by giving user name and password. Each customer is given a specific name and PIN or password that is always kept confidential. Corporate customers can check their balances any time, they can carry out transfers to other accounts and all sort of transactions without going to the bank. This facility gives corporate customers the advantage to check their balance at any time of the day. The corporate customers having offices where there is no M.C.B branch can effectively use this facility to carry out various transaction operations.

4.3.4. Habib Bank, Ltd

Today, HBL has more than 1,700 branches all over Pakistan and presence in 26 countries across five continents. HBL introduced products such as Credit Cards, ATMs, Travelers Cheques, etc., to the Pakistani market.

Electronic Banking Scenario at Habib Bank, Ltd

Although Habib Bank is offering ATM services but when it is compared with other foreign and private banks in terms of other technological services, it is found that Habib

Bank is lagging far behind. This can be due to its totally different clientele and also due to large operations and above all can be because it is a government owned bank.

Whatever the problems may be, it is understood that to survive in today's fierce competition of banking industry, one must come up with innovative products and offerings.

Finally Habib bank has come up with a E-Banking service which is described below:-

Habib Bank ON-LINE Easy Access

This method of On-Line banking has connected 65 branches nation wide. The services that are being offered by this are:

* Inter-branch transaction

* Cash transfer

* With-drawls

* Deposits

5.1. CONCLUSION

Electronic-Banking is essentially global in both concept and realization. Millions of individuals and companies, around the world, are already transacting by using advanced electronic banking technologies. E- Banking is not a futuristic dream. It is happening now and it is happening fast, with many well-established success stories and examples.

This report emphasizes the fact that on-line accessibility, awareness, attitude towards change, computer and Internet access costs, trust in one's bank, security concerns, ease of use and convenience are the major factors affecting the adoption of Internet bank services in Pakistan

The impact of E- banking will be pervasive, both on companies and on society as a whole. Banking that choose to regard it only as an "add on" to their existing ways of doing business will gain only limited benefit. For those banks that are willing to change their organizations and business processes to fully exploit its potential, e- banking offers the possibility of breakpoint changes. All the banks, including those that try to ignore the new technologies, will then be impacted by these changes in markets and customer expectations.

Banks, wishing to join the E-banking, could continually examine the risks and opportunities created by electronic banking. Their information technology divisions must prepare enabling capabilities and technologies.

Evidence also indicates that there are greater promotional efforts on the part of banks to create greater awareness of E-banking and its benefits is important for the success of Internet banking services patronage.

In Pakistan Electronic Banking is still in its early stage. From the research it is found that almost all the foreign and private banks possess the technology to offer new and innovative electronic banking services. But the problem is consumer adaptability to the technology. The task of foreign banks could be to create an awareness campaign regarding the benefits of E-banking to the general public. This can be done by offering more user-friendly electronic products and services.

As far as State Owned banks are concerned it can be concluded that finally these banks have entered the era of E-banking. Habib Bank, Ltd one of the national banks has started to offer E-banking facility named as Easy Access to its customers. It would have been more appropriate for Habib Bank if it had tapped corporate customers in the beginning by offering a unique product to that class of customers.

ABN-AMRO bank, Askari Commercial Bank Ltd and Muslim Commercial Bank Ltd are very successfully operating and offering e-banking services. State Owned banks could benchmark the E-banking activities of such banks before offering E-banking products and services.

5.2. RECOMENDATIONS

1. Role of Government

§ The government's role is to put in place a legal framework, which provides for certainty, predictability, and clarity of the rights and obligations of the transacting part