Module No.
5: Technology in Banking
New technology in Banking – E-services – Core Banking- plastic cards. Internet
Banking, ATM based services, ECS, MICR, RTGS, NEFT, DEMAT, IMPS UPI ,
AADHAR enabled payment System, USSD, E-Wallet and application-based payment
systems, Role of artificial intelligence in banks, Block Chain – Meaning and features.
Introduction: The term "payments system" describes the system in place to facilitate
money transfers between individuals, businesses, and other institutions. Customers'
use of cash, cards, cheques, and electronic funds transfers as well as the behind-the-
scene arrangements that allow for the transfer of funds from one financial institution
to another are all part of this system.
Processing and execution of payment instructions are some of the statutory
obligations of the banks. Conventionally, paper-based instruments like cheques,
drafts, dividend and interest warrants, refund orders, gift cheques, traveller
cheques, etc., have been the modes of settling payment transactions. However,
computers and communications have changed the whole mechanism of funds
transfer and the settlement process into fast and automated EFT systems. An
electronic funds transfer differs from a conventional transfer in that the information
is processed and transmitted electronically. Interestingly many of these electronic
fund transfer systems are made available online for customers to transfer funds
from anywhere.
The banking sector has undergone a radical transformation, evolving from
traditional brick-and-mortar institutions to dynamic, technology-driven service
providers. This shift, often called "Digital Banking" or "FinTech," aims to enhance
customer convenience, improve operational efficiency, and ensure security. This
document provides a detailed explanation of the key technologies and services
shaping the modern banking landscape.
Core Banking
• Meaning: Core Banking is the backbone of a bank's operations. It is a
centralized system where a bank's branches are interconnected, allowing
customers to manage their accounts and conduct basic transactions from
any branch of the bank, not just the one where they opened their account.
• Details:
o It is a network of branches that enables Anywhere, Anytime
Banking.
o The central server hosts all customer information and transaction
records.
o Key functions include managing deposits, loans, credit processing,
and new account creation.
o Examples of transactions: Cash deposit, withdrawal, fund transfer,
and balance inquiry from any networked branch.
Plastic Cards
• Meaning: Plastic cards are payment cards issued by financial institutions
that allow cardholders to access funds, make purchases, or avail of services.
• Types and Details:
o Debit Cards: Linked directly to the customer's bank account.
Transactions result in an immediate deduction of funds.
o Credit Cards: Provide a pre-approved line of credit. Customers can
borrow money up to a certain limit to make purchases and pay it back
later, often with interest.
o Prepaid Cards: Loaded with a specific amount of money in advance.
They are not linked to a bank account (e.g., gift cards, travel cards).
Internet Banking
• Meaning: Also known as Online Banking, it is a facility provided by banks
that allows customers to conduct financial and non-financial transactions
via the bank's secure website.
• Services Offered:
o Fund transfers (NEFT, RTGS, IMPS).
o Bill payments (electricity, water, credit card).
o Account statement generation.
o Fixed Deposit (FD) and Recurring Deposit (RD) opening.
o Loan applications and credit card bill payments.
o Investment in mutual funds and insurance.
ATM Based Services
• Meaning: An Automated Teller Machine (ATM) is an electronic
telecommunications device that enables customers to perform basic financial
transactions without the aid of a bank teller.
• Services Offered:
o Cash withdrawal.
o Cash and cheque deposit.
o Fund transfers between linked accounts.
o Balance inquiry and mini-statement generation.
o PIN change.
ECS (Electronic Clearing Service)
• Meaning: ECS is an electronic mode of fund transfer used for bulk, repetitive
transactions. It is of two types:
o ECS Credit: Used for crediting a large number of beneficiaries (e.g.,
salary payments, dividend distributions).
o ECS Debit: Used for debiting accounts for recurring payments (e.g.,
utility bills, loan EMIs, insurance premiums).
MICR (Magnetic Ink Character Recognition)
• Meaning: MICR is a technology used to verify the legitimacy of paper-based
documents, primarily cheques. A special ink and unique font are used to
print characters at the bottom of a cheque.
• Details:
o The MICR code contains information like the cheque number, bank
code, and branch code.
o It enables high-speed, automated processing and clearing of cheques,
reducing errors and fraud.
RTGS (Real Time Gross Settlement)
• Meaning: RTGS is a funds transfer system where money is moved from one
bank to another in real-time and on a gross (individual) basis.
• Features:
o Real-Time: Transaction is processed as soon as it is initiated.
o Gross Settlement: Transactions are settled one-by-one, not bunched
with other transactions.
o Minimum Amount: Primarily for high-value transactions (typically ₹2
lakhs and above in India).
o Irrevocable: Once processed, the transaction cannot be reversed.
REAL TIME GROSS SETTLEMENT (RTGS)
Real Time Gross Settlement, means a system where money transfers are settled
continuously and in real-time, transaction by transaction (without netting).
"Real Time" means that instructions are processed as soon as they come in,
while "Gross Settlement" means that each funds transfer instruction is settled
on its own.
Banks and financial institutions use RTGS to transfer large amounts of money
quickly and securely. It is typically used for transactions of over Rs 2,00,000
and the funds are transferred in real-time, meaning the recipient can access
the funds immediately after the transaction is completed. RTGS is considered
a highly secure and reliable method of money transfer and is often used for
important transactions such as large business payments or government
transactions.
Though both NEFT and RTGS are funds transfer settlement systems, RTGS
offers a real-time settlement. At the same time, NEFT functions on a deferred
settlement mechanism. The speed of RTGS transactions can be gauged from
the fact that bank branches are expected to receive the funds in real-time and
the beneficiary bank is required to credit the beneficiary's account
instantaneously. For a funds transfer through RTGS, the sending bank branch
as well as the receiving bank branch need to be RTGS enabled. Currently, there
are more than 1,60,000 RTGS-enabled bank branches,
Since then, RBI has launched the Next Generation Real Time Gross Settlement
(NG-RTGS) system, which not only makes it easier for India to keep up with
the growing number of payments but also gives it a platform for advanced
liquidity management services and functionality for dates in the future. At the
beginning of 2011, it was decided that a new Application with better features
was needed. So, the Next Generation RTGS system (NG- RTGS) chose to use
the ISO 20022 messaging standard.
The NG-RTGS System has many advanced features, such as the ability to
manage liquidity, a messaging system based on extensible markup language
(XML) that complies with ISO 20022, and monitoring and control systems for
information and transactions that work in real-time.
Some of the features of RTGS are:
• The RTGS is a safe and secure way to send money.
• The system is available 24 hours a day, 7 days a week, 365 days a year.
• Funds are sent to the beneficiary account in real-time.
• A Unique Transaction Reference (UTR) number is a 22-character code
that identifies a transaction in the RTGS system in a way that no
other transaction can.
• NEFT is a way to send money electronically, and all transactions
received up to a certain time are processed at once. In RTGS, on the
other hand, transactions are processed continuously throughout the
day, one transaction at a time.
• As of December 14, 2020, RTGS is available 24 hours a day, seven
days a week, 365 days a year. The RTGS system is mostly used for
transactions with large amounts of money.
With RTGS, the least amount that can be sent is Rs. 2,00,000/-, and there
is no maximum amount that can be sent.
• To help banks make sense of the service fees they charge for transferring
money through the RTGS system, a broad framework of fees has been set
up.
a) Transactions going in are free and don't cost anything.
b) Transactions made outside the country: Rs. 2,00,000/- to Rs.
5,00,000/-: not more than 25/- (exclusive of tax, if any)
c) Over Rs. 5,000,000: not more than Rs. 50 (exclusive of tax, if any)
• Banks can choose to charge less than the rates set by RBI, but they can't
charge more.
• RTGS credit will only be given to the customer's account based on the
account number provided in the RTGS remittance instruction or message.
• RTGS system does not accept future value-dated transactions. Suppose
the failed payment isn't returned on time. In that case, the customer who
made the payment can get compensation equal to the current repo rate
plus 2%.
NEFT (National Electronic Funds Transfer)
• Meaning: NEFT is a nationwide system that facilitates one-to-one funds
transfer in a deferred net settlement basis.
• Features:
o Batch Processing: Transactions are processed in half-hourly batches.
o No Minimum Limit: Can be used for transferring any amount, even
₹1.
o Suitable for: Low and medium-value transactions.
o Settlement Cycle: Operates in multiple time slots on all working days.
NATIONAL ELECTRONIC FUNDS TRANSFER SYSTEM
The goal of the National Electronic Funds Transfer (NEFT) System is to set up a way
to transfer and clear money electronically so that the current paper- based system
doesn't have to work so hard. In November 2005, it went on sale. Reserve Bank of
India stated that the objective of the NEFT system is to create an Electronic Funds
Transfer system to facilitate an efficient, secure, economic, reliable and expeditious
system of funds transfer between banks in the banking sector using Structured
Financial Messaging Solutions (SFMS) backbone. Unlike Real-time gross settlement
(RTGS), fund transfers through the NEFT system do not occur in a real-time basis.
NEFT settles fund transfers in half-hourly batches, with 23 settlements occurring
between 8:00 AM and 7:30 PM on week days and the 1st, 3rd and 5th Saturday of
the calendar month. NEFT, launched in 2005 with 8 participating banks, has
currently more than 160 banks live on the system. As per the RBI, close to 130,000
bank branches are enabled for NEFT transactions.
NEFT facilitates one-to-one transfers between two banking accounts (like RTGS,
though settlement routines are different). It allows individuals, firms and corporates
to electronically transfer money from any bank branch to another individual, firm or
corporate having a banking account with any other NEFT-enabled bank branch in
India. NEFT has grown tremendously from its inception in 2005. The growing
popularity of NEFT is reflected in the value and volumes of business during the last
few years. In 2019, the value of NEFT transactions has reached nearly INR 2,50,000
Bn and the total number of transactions is 2319 Mn. The volumes and value of NEFT
transactions have grown at a CAGR of approximately 50% from 2011 to 2019.
The Reserve Bank of India (RBI) owns and runs the National Electronic Funds
Transfer (NEFT), a Central Payment System for the whole country. Individuals,
businesses, and corporations with accounts at any NEFT member bank can
send money electronically to any individual, business, or corporation with an
account at any other NEFT member bank in the country.
Benefits of NEFT
When sending or getting money, NEFT has the following benefits.
• Every day of the year, you can get help at any time.
• Funds are sent to the beneficiary account and settled safely in real-time.
• An extensive network of branches of all kinds of banks covers the
whole country of India.
• The person who gets the paper instruments doesn't have to go to a
bank branch to deposit them. If the sender's bank offers internet
banking, they can start the transfer from their home or place of work.
• Positive confirmation to the sender by SMS or e-mail when the
money has been deposited into the recipient's account.
• Interest charges for transactions that are late being credited or returned.
• RBI doesn't charge banks anything.
• Online NEFT transactions from a savings bank account do not cost
the customer anything.
• RBI has put a limit on transaction fees.
• The law supports the deal.
• Money can be sent from India to Nepal in only one direction.
• The NEFT system can be used for more than just sending money. For
example, it can be used to pay credit card dues to the banks that issued
the cards, pay loan EMIs, send foreign exchange to India, etc.
• When a customer wants to send money through NEFT, they start the
Process by sending an online funds transfer request through a bank
branch or the internet/mobile banking service. The person sending the
money must give the following information.
The maximum transaction charges that beneficiary banks can levy are :
up to `10,000 Not exceeding `2.50 (+ Applicable GST)
above `10,000 upto `1 lakh Not exceeding `5 (+ Applicable GST)
above `1 lakh and upto `2 Not exceeding `15 (+ Applicable GST)
lakh
above `2 lakh Not exceeding `25 (+ Applicable GST)
DEMAT Account
• Meaning: A DEMAT (Dematerialized) account is used to hold financial
securities (like shares, bonds, mutual funds) in electronic format, eliminating
the need for physical share certificates.
• Purpose: It makes trading and holding securities safe, convenient, and
efficient by preventing theft, loss, or damage of physical documents.
IMPS (Immediate Payment Service)
• Meaning: IMPS is an instant, 24x7, interbank electronic funds transfer
service in India. It is faster than NEFT as it works in real-time.
• Features:
o 24/7/365 Service: Available 24 hours, all year round.
o Instant Transfer: Money is credited to the beneficiary's account in
seconds.
o Uses MMID: Can be done using Mobile Money Identifier (MMID) and
mobile number, besides IFSC code and account number.
UPI (Unified Payments Interface)
• Meaning: UPI is a revolutionary real-time payment system developed by NPCI
that facilitates inter-bank transactions through a single mobile application.
• Features:
o Single Platform: Merges multiple bank accounts into one mobile app.
o Virtual Payment Address (VPA): Allows users to send/receive money
using a unique ID (e.g., name@paymentservice) instead of bank details.
o Instant Money Transfer: 24x7 real-time payments.
o QR Code Based Payments: Simplifies merchant payments.
AADHAR Enabled Payment System (AEPS)
• Meaning: AEPS is a bank-led model that allows online interoperable financial
transactions at PoS (MicroATM) through the Business Correspondent (Bank
Mitra) using the Aadhaar authentication.
• Services Offered:
o Cash Withdrawal
o Cash Deposit
o Balance Inquiry
o Aadhaar to Aadhaar Fund Transfer
o It enables financial inclusion by allowing people without smartphones
or debit cards to access banking services using only their Aadhaar
number and biometrics (fingerprint/iris).
USSD (Unstructured Supplementary Service Data)
• Meaning: USSD, or *99# service, is a mobile banking technology that allows
users without a smartphone or internet connection to perform banking
transactions by dialing a code on their basic feature phone.
• Features:
o No Internet Required: Works on all GSM mobile phones.
o Menu-Based Service: Users interact with a simple text menu.
o Services: Balance inquiry, mini-statement, fund transfer using MMID.
E-Wallet and Application-Based Payment Systems
• Meaning: These are digital platforms that store users' payment information
(like bank account, card details) securely and facilitate transactions for goods,
services, and transfers.
• Types:
o Closed Wallets: Specific to a merchant (e.g., Amazon Pay).
o Semi-Closed Wallets: Can be used at multiple listed merchants and
online platforms (e.g., Paytm, PhonePe).
o Open Wallets: Issued by banks, can be used for all transactions a
debit/credit card can, including ATM withdrawals (e.g., Vodafone M-
Pesa).
Role of Artificial Intelligence in Banks
AI is revolutionizing banking by automating processes, enhancing customer
experience, and improving security.
• Chatbots and Virtual Assistants: Provide 24/7 customer support and handle
routine queries.
• Fraud Detection: Analyzes transaction patterns in real-time to identify and
flag suspicious activities.
• Credit Scoring: Uses alternative data and machine learning to assess the
creditworthiness of customers more accurately.
• Personalized Banking: Offers tailored product recommendations and
financial advice.
• Process Automation (RPA): Automates back-office tasks like data entry and
compliance checks, reducing errors and costs.
Block Chain – Meaning and Features
• Meaning: Blockchain is a decentralized, distributed digital ledger that records
transactions across many computers in such a way that the registered
transactions cannot be altered retroactively.
• Key Features:
o Decentralization: No single central authority controls the data; it is
shared across a network.
o Immutability: Once a transaction is recorded, it is extremely difficult
to change or tamper with.
o Transparency: All participants in the network can view the
transactions, ensuring trust.
o Enhanced Security: Uses advanced cryptography to secure data.
• Application in Banking:
o Cross-Border Payments: Faster, cheaper, and more transparent
international transfers.
o Trade Finance: Streamlines and secures the complex documentation
process.
o KYC (Know Your Customer): Creates a single, secure, and verified
digital identity for customers that can be used by multiple banks.