Project on Project on Internet Banking - Report of RBI Working Group
Internet Banking - a New Medium

Internet – its basic structure and topology

Internet is a vast network of individual computers and computer networks connected to and communicate with each other using the same communication protocol – TCP/IP (Transmission Control Protocol / Internet Protocol). When two or more computers are connected a network is created; connecting two or more networks create ‘inter-network’ or Internet. The Internet, as commonly understood, is the largest example of such a system. Internet is often and aptly described as ‘Information Superhighway’, a means to reach innumerable potential destinations. The destination can be any one of the connected networks and host computers.

Internet has evolved to its present state out of a US Department of Defence project ARPANet (Advanced Research Project Administration Network), developed in the late 1960s and early 1970s as an experiment in wide area networking. A major perceived advantage of ARPANet was that the network would continue to operate even if a segment of it is lost or destroyed since its operation did not depend on operation of any single computer. Though originally designed as a defence network, over the years it was used predominantly in areas of scientific research and communication. By the 1980s, it moved out of Pentagon’s control and more independent networks from US and outside got connected to it. In 1986, the US National Science Foundation (NSF) established a national network based on ARPA protocol using commercial telephone lines for connectivity. The NSFNet was accessible by a much larger scientific community, commercial networks and general users and the number of host computers grew rapidly. Eventually, NSFNet became the framework of today’s Internet. ARPANet was officially decommissioned in 1990.

It has become possible for innumerable computers operating on different platforms to communicate with each other over Internet because they adopt the same communication protocol, viz, TCP/IP. The latter, which stands for ‘Transmission Control Protocol / Internet Protocol’, is a set of rules which define how computers communicate with each other. In order to access Internet one must have an account in a host computer, set up by any one of the ISPs (Internet Service Providers). The accounts can be SLIP (Serial Line Internet Protocol) or PPP (Point to Point Protocol) account. These accounts allow creating temporary TCP/IP sessions with the host, thereby allowing the computer to join the Internet and directly establish communication with any other computer in the Internet. Through this type of connection, the client computer does not merely act as a remote terminal of the host, but can run whatever programs are available on the web. It can also run several programs simultaneously, subject to limitations of speed and memory of the client computer and modem. TCP/IP protocol uses a unique addressing scheme through which each computer on the network is identified.

TCP / IP protocol is insecure because data packets flowing through TCP / IP networks are not normally encrypted. Thus, any one who interrupts communication between two machines will have a clear view of the data, passwords and the like. This has been addressed through Secured Socket Layer(SSL), a Transport Layer Security (TLS) system which involves an encrypted session between the client browser and the web server.

FTP or File Transfer Protocol is a mechanism for transferring files between computers on the Internet. It is possible to transfer a file to and from a computer (ftp site) without having an account in that machine. Any organization intending to make available to public its documents would normally set up a ftp site from which any one can access the documents for download. Certain ftp sites are available to validated users with an account ID and password.

e-mail: The most common and basic use of Internet is the exchange of e-mail (electronic mail). It is an extremely powerful and revolutionary result of Internet, which has facilitated almost instantaneous communication with people in any part of the globe. With enhancements like attachment of documents, audio, video and voice mail, this segment of Internet is fast expanding as the most used communication medium for the whole world. Many websites offer e-mail as a free facility to individuals. Many corporates have interfaced their private networks with Internet in order to make their e-mail accessible from outside their corporate network.

Internet encompasses any electronic communication between computers using TCP/IP protocol, such as e-mail, file transfers etc. WWW is a segment of Internet, which uses Hyper Text Markup Language (HTML) to link together files containing text, rich text, sound, graphics, video etc. and offers a very convenient means of navigating through the net. It uses hypertext transfer protocol (HTTP) for communication between computers. Web documents, which are referred to as pages, can contain links to other related documents and so on, in a tree like structure. The person browsing one document can access any other linked page. The web documents and the web browsers which are the application programs to access them, are designed to be platform independent. Thus any web document can be accessed irrespective of the platform of the computer accessing the document and that of the host computer. The programming capabilities and platform independence of Java and Java applets have further enriched the web. The ‘point and click’ method of browsing is extremely simple for any lay user of the net. In fact, the introduction of web since early 1990 has made Internet an extremely popular medium and its use in business has been enhanced dramatically.

The next in the HTML genre is the Extensible Markup Language (XML), which allows automated two-way information flow between data stores and browser screens. XML documents provide both the raw content of data and the data structure and is projected by its proponents as taking the web technology beyond the limits of HTML

WAP is the latest industry standard which provides wireless access to Internet through handheld devices like a cellular telephone. This is an open standard promoted by WAP forum and has been adopted by world’s all major handset manufacturers. WAP is supplemented by Wireless Application Environment (WAE), which provides industry wise standard for developing applications and services for wireless communication networks. This is based on WWW technology and provides for application for small screens, with interactive capabilities and adequate security. Wireless Transaction Protocol (WTP), which is the equivalent of TCP, sets the communication rules and Wireless Transport Layer Security (WTLS) provides the required security by encrypting all the session data. WAP is set to revolutionize the commercial use of net.

One of the biggest attractions of Internet as an electronic medium is its openness and freedom. It is a public domain and there is no restriction on who can use it as long as one adheres to its technical parameters. This has also given rise to concerns over the security of data and information transfer and privacy. These concerns are common to any network including closed user group networks. But over the Internet, the dimensions of risk are larger while the control measures are relatively fewer. These issues are discussed in detail in Chapter–5 and Chapter–6 of the report. It will be sufficient to say here that the key components of such concern are, (i) authentication, viz., assurance of identity of the person in a deal, (ii) authorization, viz., a party doing a transaction is authorized to do so, (iii) the privacy or confidentiality of data, information relating to any deal, (iv) data integrity, viz., assurance that the data has not been altered and (v) non repudiation, viz., a party to the deal can not deny that it originated the communication or data.

Even though started as network primarily for use by researchers in defence and scientific community, with the introduction of WWW in early 1990s, use of Internet for commerce has grown tremendously. E-commerce involves individuals and business organizations exchanging business information and instructions over electronic media using computers, telephones and other telecommunication equipments. Such form of doing business has been in existence ever since electronic mode of data / information exchange was developed, but its scope was limited only as a medium of exchange of information between entities with a pre-established contractual relationship. However, Internet has changed the approach to e-commerce; it is no longer the same business with an additional channel for information exchange, but one with new strategy and models.

A business model generally focuses on -

1. where the business operates, that is, the market, the competitors and the customers

2. what it sells, that is, its products and services

3. the channels of distribution, that is, the medium for sale and distribution of its products an

4. the sources of revenue and expenditure and how these are affected.

Internet has influenced all the four components of business model and thus has come to influence the business strategy in a profound way. The size of the market has grown enormously as technically, one can access the products and services from any part of the world. So does the potential competition. The methods of reaching out to customers, receiving the response and offering services have a new, simpler and efficient alternative, now, that is, Internet. The cost of advertisement, offer and delivery of services through Internet has reduced considerably, forcing most companies to rework their strategies to remain in competition.

A research note by Paul Timmers of European commission had identified eleven business models, which have been commercially implemented. These are e-shop, e-procurement, e-auction, e-mall, Third-party market place, Virtual communities, Value chain service providers, Value chain integrators, Collaboration platforms and Information brokers. He classified business models along two dimensions, i.e, degree of innovation and extent of integration of functions. The innovation ranged from the electronic version of a traditional way of doing business (e-shop) to more innovative ways by offering functions that did not exist before. The second dimension, i.e, extent of integration ranges from a single function business model (like e-shop) to fully integrated functionality (value chain integrator). In the top end of the graph are models, which cannot be implemented in a traditional way and are critically dependent upon information technology and creating value from information flow. Business models, in between these two limits are a combination of both dimensions in different degrees and have some degree of analogy in traditional firms.

There are two types of e-commerce ventures in operation: the old brick and mortar companies, who have adopted electronic medium, particularly Internet, to enhance their existing products and services, and / or to offer new products and services and the pure e-ventures who have no visible physical presence. This difference has wider ramifications than mere visibility when it comes to issues like customer’s trust, brand equity, ability to service the customers, adopting new business culture and cost. These aspects of e-commerce will be touched upon in the following discussions.

Another way of classifying the e-commerce is by the targeted counterpart of a business, viz, whether the counterpart is a final consumer or another business in the distribution chain. Accordingly, the two broad categories are: Business-to-Consumer (B2C) and Business-to-Business (B2B).

In the B2C category are included single e-shops, shopping malls, e-broking, e-auction, e-banking, service providers like travel related services, financial services etc., education, entertainment and any other form of business targeted at the final consumer. Some of the features, opportunities and concerns common to this category of business irrespective of the business segment, are the following.

Internet provides an ever-growing market both in terms of number of potential customers and geographical reach. Technological development has made access to Internet both cheaper and faster. More and more people across the globe are accessing the net either through PCs or other devices. The purchasing power and need for quality service of this segment of consumers are considerable. Anybody accessing Internet is a potential customer irrespective of his or her location. Thus, any business targeting final consumers cannot ignore the business potential of Internet.

Internet offers a unique opportunity to register business presence in a global market. Its effectiveness in disseminating information about one’s business at a relatively cost effective manner is tremendous. Time sensitive information can be updated faster than any other media. A properly designed website can convey a more accurate and focussed image of a product or service than any other media. Use of multimedia capabilities, i.e., sound, picture, movies etc., has made Internet as an ideal medium for information dissemination. However, help of other media is necessary to draw the potential customers to the web site.

The quality of service is a key feature of any e-commerce venture. The ability to sell one’s product at anytime and anywhere to the satisfaction of customers is essential for e-business to succeed. Internet offers such opportunity, since the business presence is not restricted by time zone and geographical limitations. Replying to customers’ queries through e-mail, setting up (Frequently Asked Questions) FAQ pages for anticipated queries, offering interactive help line, accepting customers’ complaints online 24 hours a day and attending to the same, etc. are some of the features of e-business which enhance the quality of service to the customers. It is of crucial importance for an e-venture to realize that just as it is easier to approach a customer through Internet, it is equally easy to lose him. The customer has the same facility to move over to another site.

Cost is an important issue in an e-venture. It is generally accepted that the cost of overhead, servicing and distribution, etc. through Internet is less compared to the traditional way of doing business. Although the magnitude of difference varies depending on the type of business and the estimates made, but there is unanimity that Internet provides a substantial cost advantage and this, in fact, is one of the major driving forces for more number of traditional business adopting to e-commerce and pure e-commerce firms to sprout.

Cost of communication through WWW is the least compared to any other medium. Many a time one’s presence in the web may bring in international enquiries, which the business might not have targeted. The business should have proper plans to address such opportunities

There are a number of obstacles, which an e-commerce venture needs to overcome. Trust of customers in a web venture is an important concern. Many customers hesitate to deal with a web venture as they are not sure of the type of products and services they will receive. This is particularly true in a B2C venture like e-shop, e-mall or e-auction site. Traditional business with well established brands and goodwill and having a physical presence face less resistance from customers in this regard than a pure e-venture.

Many B2C ventures have ultimately to deliver a product or service in physical form to the customer for a deal contracted through Internet. This needs proper logistics, an efficient distribution network, and control over quality of product or service delivered. These issues are not technology related and any let off in this area can drive the customer away to the competitor or from e-commerce.

The privacy of information on the customer’s preferences, credit card and bank account details etc. and customers’ faith in a system where such privacy is stated to be ensured are important issues to be addressed. These are mainly technological issues, but human factor is important both at the business and at the customers’ end and also in building the trust in the system.

Security of a transaction, authenticity of a deal, identification of a customer etc. are important technological and systems issues, which are major sources of concern to e-commerce. Equally important are questions of repudiation of a deal, applicability of law, jurisdiction of tax laws etc. These are important to all forms of e-commerce, whether B2C or B2B and all segments of business, i.e, manufacturing, services and finance and are addressed in different chapters of this report.

Accessibility to Internet by the consumers is an important issue in B2C domain. This is particularly so in countries like India where penetration of PCs and other devices to households for access to Internet is minimal. Also important are availability of bandwidth and other infrastructure for faster and easier access. Considering that e-commerce aims at global market, deficiencies of these kinds in the developing world are no longer concerns confined to these areas, but are global e-commerce concerns.