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. METHODOLOGY 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 peo