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Abridged Note on “principal of Banking for DB&F/JAIIB Examination

Module-C:- Banking Technology:-

Essentials of Bank Computerizations:- UNIT: 12

1. Introduction of compute & communication network in banks started in the 1980s
with the agreement of bank computerization with the unions in the year 1983.
2. First Rangarajan Committee recommendations on bank computerization set up in
1983 and submitted its report in 1984 paved the way of computerization in banks.
The committee studied the possibilities and stages involved in bank
mechanization and was advised to frame guidelines for the same.
3. In 1988, another committee was set up under same Rangarajan to set up a
prospective plan on computerization of banks for a five year period 1990-1994.
4. The major objectives of bank computerization are to improve : I) customer service
II decision making III productivity & profitability
5. The main recommendations of Rangarjan Committee were- banks should draw up
plans to :- a) relevance of computer & technology in banks b) recognize for
greater technology adoption c) requirements of branch, regional and head office
levels d) developing in-house reliance e) to manage relations with staff.
6. The main objectives of computerization:- at the branch level:- to improve
customer service,, house keeping quality and generation of data for better
management control.- at the regional & head office levels- to store, analyze and
retrieve data received from branches for internal control & policy formulation.
7. Stand-alone Computer system:- an initial measure in banks:-a single user
computer system is used by only one person at a time. It is best suited for decision
making. It can not be used in multi-user environment but can be easily connected
to existing multi-user system for accessing to database. Normally it is called as
workstation or nod. At present, this system is also capable of handling
multimedia, graphics, fax message etc.
8. ALPMs:- it is a stand alone computer known as Advanced Ledger Posting
Machine. These are PCs with Winchester disk for storage facility.
9. Advantages of single-user system:- a) low equipment cost b) no complicated
software c) easy to operate d) better security.
10. Limitations:- a) slow speed b) low storage capacity.
11. Multi-user System:- several people can work at a time, examples: Mini
Computers, Main frame computer, Super computers and Micro computers.
12. Networking of Multi-user system:- a concept of centralized processing-
information is stored and processed in central machines to which many terminals
are attached.
13. Main Advantages:- a) huge data storage capacity b) speedy processing c) large
numbers of users connected. Users work with terminals. Unix, Linux etc are the
multi-user system used for DBMS or RDBMS.
14. In most of the computerized information system the data is processed at EDP
department.
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15. Advantages of centralized data processing as done in multi-user system are:-

a) availability of information in one location b) minimized cost c) high volume of
data can be processed using full capacity of computing resources d) costly
resources like leased lines etc can be shared to make cost effective.
16. Branch level Computerization:- main reasons:- a) computer interface is
maximum at branch level b) reduction in waiting time, accuracy in reporting
system etc to improve customer services c) online processing of data once
captured further processing becomes easier. It I) provides better & speedy
customer service ii) improve house keeping iii) Analyze data for decision making
iv) generates various reports. The provision of features like disk monitoring, disk
duplexing, , transaction tracking systems, regular backups etc. ensures security.
17. Total Branch Automation(TBA):- TBA is a real tome online banking. It
provides „Single Window‟ transaction concept. EFT can be used for automatic
transmission and processing of message and funds. Off-site ATMs can also be
linked to the branch system to enable the customer to bank anytime / anywhere.
18. Computerization at Regional / Zonal offices:- The most common job
performed by regional offices / zonal offices are:- a) branch profile b) inter-
branch reconciliation c) credit monitoring d) personal data management etc.
Branch Profiles:- it has two components I) fixed particulars which includes a)
branch location details b) the type of premises c) the area details etc., ii) variable
particulars which includes a) budgeted business volumes b) actual performance
c) income & expenditure data d) various statistical reports etc. Most of the Ros
/ZOs of the banks are equipped with minicomputers & unix operating system
with Informix, oracle etc as database back-ends and applications are either
software using COBOL, C, BASIC, etc.languages.
19. Computerization at H.O. level:- The head-office activities are divided into
different functional areas: a) operation b) planning c) personnel d) international
business e) services etc. The areas of applications of computerization are I)
personnel management & administrative support ii) funds management iii)
investment portfolio management iv) branch profiles etc. The information sent
from branches to head office include I) Standing Data File(SDF form), ii)
Performance Report File(PRF).
20. LAN & WAN:- The computer network that links computers and peripherals
within a localized area say within a building is known as Local Area
etwork(LAN). Generally LAN will not extend beyond 100 meters. However it
can be upto a maximum spread of 1 km and the number of devices
supported may also vary from 2 to as many as 1000. The way the server in a
LAN environment handles the services differ depending upon Topology &
Protocol A LAN distinguishably uses network adapters. Sharing common
cabling and pooling resources within a work group are they key elements of
LAN operation.
21. Topology (Layout) used in LAN:- I) Star Topology II) Ring Topology III) Bus
Topology. The way the devices are interconnected is known as Topology. There
are two basic forms of Local Area Network design used in information
transmission: a) Centralized Control and b) Distributed Control. The
popular Centralized Control networks are I) Star ii) Tree and iii) Loop
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Topologies while that of Distributed Controls are I) Ring and II) Bus
Topologies.
22. Packet Switching:- The method of operation for the transfer of data over
network is known as Packet Switching..
23. Bus Topology:- Here all devices on the network are connected to a single
continuous cable. Transmission from any station travels the length of the Bus, in
booth directions and can be received by all other stations.
24. Advantage of Bus Topology:- I) It is quite easy to set up. ii) if one station of
the LAN fails, it will not affect the rest of the network.
25. Disadvantages of Bus Topology:- a) it limits the geographic spread and b) it
has limited flexibility for change.
26. Ring Topology:- Devices are connected in a close loop abnd information is
passed from one node to other in series. Data is transmitted in one direction
only. As the packet circulates, the destination recognizes its address and
copies the packet contents onto itself. The main disadvantage is that the
break down of any one one station on the ring can disable the entire LAN.
27. Star Topology:- The central node is often the master. Each of the other nodes
are joined to the master by separate links.
28. Advantage of Star Topology:- a) It has maximum ability to change b) If one
nod fails, it will not affect the network.
29. Disadvantage of Star Topology:- It can not handle large traffic as every
transaction has to pass through the cental nod.
30. Protocols:- The Protocols are the rules for communication between similar
modules of process, usually in different nodes. The network potocol depends on
the adaptars. Some of the commonly used adapters are Ethernet & Token-
Ring. In Ethernet system listen-before-transmit media sharing system called
Carrier-Sense Multiple Access with Collusion Detection(CSMA/DA) is used.
Token-Ring system uses what is termed as Deterministic Media-Access
Control system. In the „token-ring‟ the token circulates when all stations are idle.
A station wants to transmit must wait until it detects a token passing by. It then
Seizes the token and transforms it to a start-of-packet sequence for its data packet.
31. A device called “Multiplexer‟ is used to receive signal from several
communication line and pass on to one communication line and vice-versa. A
Multiplexer takes multiple low speed lines and combines their individual data
transmission capacity needs so that a specific grouping of them can be transmitted
on a single high speed line.
32. The function of network software is to set up some computers as host or servers
and some as clients. Generally the network operating system fall into two
categories:- I) uses DOS as the file system and ii) UNIX as the file system.
33. Advantages of LAN:- I) Resources such as hardware & software can be shared by
several users. Ii) Stored information is available to all users. Therefore no need
for duplication of databases. iii) Since all the terminals are intelligent terminals,
the processing load is shared between the various machines, which avoids
overloading on any single machine.
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34. Shortcomings of LAN:- I) Complicated Software ii) Security risks are higher,
since each user access the host computer independently, iii) Maintenance cost is
high.
35. WAN(Wide Area Network) :- A large- scale computer network spread over a
span of sizeable geographic area, normally utilizing the telecommunication
network.
36. In WAN transmission speed and capacity are limited and data transfer
speed is low compared to that of LAN.
37. How a WAN works? Separate data line dedicated between two computers
can be used, and such network is called Leased Lines Network.
38. Computers can be linked by using ordinary telephone lines which is called Dial-
up Network.
39. The connectivity can also be established by using satellite links or microwave
links. This could be combination of al these methods also in single network.
40. Satellite Communication Network is an alternative to Wire
Telecommunication. Text, data ,voice and video information are converted to
radio waves at earth stations and are beamed up over a broad band
transmission channel to a satellite.
41. Logically any two computers connected through a telephone line needs
Modem at each end. Modem converts the digital signal into analogue signal
at the transmitting and and reconverts the analogue signal into digital signal
at the receiving end.
42. A Distributed system is an approach to Data Processing(DDP) in which
processing and data storage tend to be located at or near the points where the data
occurs.
43. Rangarajan Committee Report on Computerization(1989) favoured the DDP
Approach for better response time and more security.
44. Use of LAN, client server computing, RDBMS Packages like Oracle Sybase etc
are front end tools like Power builder, Developer 2000, etc.
45. UPS(Uninterruptible Power System):- UPS provides clean, reliable AC power to
computer system protecting them from power blackouts, brownouts, swells, sags,
surges and interface.
46. The general feature of UPS is an inverter and battery charger with automatic
change over of power supply from battery or load.
47. UPS are of two types: I) Online UPS:- the main 230V input current is
converted into 48 V DC and from battery charger cum rectifier it is again
converted to a 230 V AC, even in case of main supply available and the
power is supplied to the computer systems. In case of power failure the 48 V
DC is supplied by the batteries. It comes back automatically to the normal status
when the main supply is recovered. In bank computerization online UPS is used.,
II) Offline UPS: Here battery charger and inverter performs separately and
independently. When the power is available through the main, the charger charges
the battery and inverter is on stand-by. But, in case power off, the batteries are
connected to the inverter through a relay changeover and current is supplied to the
computer system. It supply raw power without regulating the input frequency.
Here the backup time is very low.
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48. Core Banking:- A centralized branch computerization model with a central

host(server) to which branches are attached. It incorporates branch automation
modules and and online multiple delivery channels like ATM, ABB(Any Branch
Banking), Debit Card, Tele Banking, Internet Banking etc. There is a central
database for the bank. Besides multiple business modules it can interface with the
systems like NDS, SFMS, RTGS, CFMS etc. without any extra cost. There are
manifold advantages including to facilitate BPR(Business Process Reengineering)
to streamline the existing process. NDS: National Data Services, SFMS:
Structured Financial Messaging System, CFMS: Code Forwarding Management
System
49. Essential Requirements for Core Banking:- a) Proper site for the Central
Server, a) central data is to be used for all customer centric delivery channel
services and other corporate business requirements integrated with the CBS c) to
be manned round the clock to offer 24*7 service
50. Disaster Recovery Site(DRS):- I.T.Act proposes to set up DRS site at Bangalore
or Hyderabad considering the main factor of non-proximity to seismic zones.
51. BPR:- a) to help the bank in realigning existing business process in tune with the
benefits derived from new technology platform, (b) taking advantage of the
business practices available in the technology platform for efficient services. (c)
capability to deliver enhance value to the customer and to gain from the process.
52. (UNIT: 14) Component of Component of Data Communication NetWork)
Modem: is a conversion device, which modulates (convert) digital signals
received from computer into analog signals and transmits it through telephone
line to other end modem, which demodulates analog signals into digital
signal(original data).
53. Twisted-wire pair: It consists of two insulated copper wires. These are useful for
connecting terminals to computers up to a distance of 100 meters.
54. Coaxial cable: The coaxial cables consist of an inner copper conductor held in
position by circular spacers. The inner wire is surrounded by insulation and
covered by a protective sheath. Data can be transmitted in digital form at a higher
rate of 500 mbps.
55. Optical fibre: It is made of thin glass or plastic fibres . It supports data rate of 2
gbps and provide high quality transmission (low error rate) at very high speeds.
56. Microwave systems: These use very high frequency radio signals used in
telephone systems and television transmissions. Antenna are mounted on towers
to send the microwave beams from one antenna to another.
57. Communication satellite: It is used to send signals to a wide geographical areas.
The satellite is fitted with transmitters and receiving antennas called
transponders.
58. Satellite based communication services is provided in India by NIC and VSNL
59. Message switcher: It is sued for Store and Forward data to large number of
terminals over a single communication channel.
60. Multiplexer: This device enables more than one signal to be sent simultaneously
over one physical channel.
61. Front end processor: It is used in Host Computer(server) to handle
communication activities.
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62. Simplex: Simplex transmission is capable of transmitting data in only one

direction. The sender cannot receive and receiver cannot send. Ex: Radio & TV
transmission.
63. Half-duplex: It allows data transmission in both the direction, but in only one
direction at a time. Ex: Modem
64. Full duplex: It allows two way data transmission simultaneously. The
transmission rate is faster than other medium. Ex: 4 wire full duplex modems used
in telephone line.
65. COMET: It is a software used in Banking Network(BANKNET) setup by RBI.
66. INET: was setup by the Department of Telephones in the year 1991. It allows
both way connectivity to: (1) Remote Area Business Message Network(RABMN)
(2) High Speed VSAT Network. (3) Gateway Packet Switching System(GPSS) of
VSNL at Mumbai.
67. Application of INET: Electronic Mail Services, Corporate communications,
Information Retrieval, Database Services, Remote Login, Credit Card
Verification, EFT.
68. NICNET: This is the largest Wide Area Network of Govt of India setup by
National Informatics Centres (NIC) to fulfill the needs of Central/State Govts. But
Banks in India are allowed connectivity for e-mail services and other services.
69. INDONET: The first countrywide network setup by CMC in 1980. It is build
around X.25 protocol and can be accessed via dial up/ dedicated VHF radio links
and a gateway to INET having connectivity to international network like
TELNET, Tymnet of USA, Telepack of Sinagapore and Datex of Germany. Its
fault tolerance mainframe offer high uptime greater processing facilities.
70. VSAT Network: As per Saraf committee, RBI setup this network being
christened as the INFINET(Indian Financial Network) at Hyderabad, which is a
satellite communication with VSAT as earth stations.This network provides very
high up time of about 99.7%.. It is a single closed user group network owned by
RBI and member banks . The INFINET has started functioning w.e.f. 19/06/1999.
It comprises: (a) an outdoor unit with small dish antenna with an interface to the
satellite and (b) an interface to user‟s computer system. This network is hybrid
system of Star and Mesh technology. Messages travels from a sending VSAT to
the hub via satellite and from hub to receiving VSAT again via satellite. It is
useful for more of data transmission and less of voice grade communications.
71. Internet: A global network of networks. The first type was ARPANET developed
by USA deptt of defence in 1960 and in 1989 it was replaced by NSFNET
(National Science Foundation Network).
72. SLIP & PPP: Serial Line Internet Protocol & Point to Point Protocol. These are
the software used to connect to the Host Computer.
73. Procedure to connect: The connection with service provider is established with
the help of Modem:
74. VSNL’s GIAS network in India: VSNL has main internet access node at
Mumbai, which is connected to that of USA via Satellite as well as to Europe via
submarine cable. It is also connected to VSNL‟s Gateway Packet Switched
Service(GPSS). GPSS is connected to DOT‟s Remote Area Business Message
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Network(RABMN), Domestic Packet Switched Network known as I-NET and

high speed VSAT Network HVNET.
75. Cyber Banking: It refers to the payment through cards engineered by purchasers
of product/services over internet.
76. Services of Internet: 1. E-Mail: Messaging system with out any extra charge.
77. Usenet: Messaging system on varied subjects on to an electronic bulletin board
for any one to refer to.
78. Gopher: Allows access and retrieval of information like reference materials,
magazines, government documents, speech etc.
79. FTP: File Transfer Protocol allows transfer of files from one system to another.
80. Internet Relay Charts(IRC): Access to forum of users for online discussion.
81. WWW: World Wide Web organizes internet related resources to make the access
easy . Creating web page with www anyone can put information on the internet.
82. Internet Security: Password is the only security. Risk of viruses attached to free
wire software traveling into the user‟s system at the time downloading . Another
risk area is offensive web site.
83. EFT System: of MICR technology for processing cheques was the first step for
mechanization of cheque clearing system. American Bankers Association first
introduced the concept of MICR in 1954 and in India it was introduced in terms
of Rangarajan Committee. In 1968, the Special Committee On Paperless Entries
(SCOPE) set up in USA to examine the concept of Automated Clearing House
(ACH) and in 1972 ACH started functioning.. POS system also came in 1970s.
During this period another development was introduction of SWIFT. The final
development in the EFT system has been the private card system like Visa
Card.The definition of EFT has been given in Section 105(5) of Article 4A of the
Uniform Commercial Code (UCC) of the USA. Fund transfer system means a
wire transfer network / ACH/ or other communication system of clearing houses
etc through which payment order by a bank may be transmitted to the addressee
bank. EFT takes two forms viz. a) Credit Transfer or b) Debit Transfer. EFT is a
means of real- time funds transfer mechanism. Wire transfer/ ATM/POS/Cards
have become the largest facilitators of EFT. RTGS & Cheque Truncation is the
landmark in the field of EFT. .
84. TELEX communication for message transfer: The telex systems derive
advantage of the storage and processing capabilities of computers for preparation
and handling of telex messages. TELEX is still in use as in singular mode as well
as the interface with other communication channels like SWIFT. In India, most of
the banks are using telex interface for transmitting their upcountry messages to
SWIFT through their main servers located at Mumbai.
85. Structured Message Transfer System using SWIFT: SWIFT was founded in
1973 by 239 banks with an objective of creating a unified international transaction
processing and transmission system. It is a co-operative non-profit making
organization established under Belgian law with its headquarters at Brussels. It is
basically a message transmission system where all the transactions are processed
without exchange of paper or notes or DDs and, as such true epitome of paperless
banking All nationalized banks are member of SWIFT. Regional processor of
SWIFT is located at Mumbai..
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86. Main features of SWIFT: it is operational throughout the year 24 hours a day.
At present 400 different standard formats are used .Transmission of the messages
to any part of the world is almost immediate. All message formats for transaction
are standardized. All messages are acknowledged. Information is confidential and
is protected against unauthorized disclosure and tampering. Method of
transmission is cost-effective. Free format messages are also permitted.
87. Security in SWIFT: SWIFT does not assume any responsibility of the messages
between the Regional Processor and the banks. Key authentication mechanism:
The SWIFT authentication mechanism is an improved and automated version of
the telegraphic test keys. Encryption: Encryption is a security control to ensure
data confidentially. Checksum: It is a security control to prevent automatic
changes during transmission. It uses as a part of mechanism both the text and the
receiver‟s address. Encryption:- is a security control to ensure data confidentiality
88. Developments in SWIFT: Now SWIFT allows its facilities to non-banking
financial institutions also.
89. Automated Clearing Systems: CHIP(Clearing House Inter-bank Payment
System:: This system is started operational in 1970 by New York Clearing House.
The financial transactions such as Foreign and Domestic trade services,
international loans, syndicate loans, Eurodollar placement, sale of short-term
funds are done through CHIPS.
90. CHIPS(Clearing House Inter-Bank Payment System):- started operation in
1970, run by NY Clearing House. Operational time is claimed to be 99.9 to 100%
It has direct interface with SWIFT system. Domestic EFT payments are also made
on CHIPS. CHIP has dual computers at two different sites with high-speed line
link. To protect forgery full payment-message authentication system has been
implemented.

91. CHAPS(Clearing House Automated Payment Systems: This system was setup
in the UK to provide almost same service for settlement of payments which are
guaranteed on receipt and can not be recalled. Major clearing branches are
equipped with CHAPS terminals. Its format has been deviced from SWIFT and it
allows direct transmission from SWIFT system. Participating banks‟ main system
is connected to the CHAPS, which uses Packet Switched Stream (PSS) for
communication network. It protects the high value payments and the messaging
phasing over it through encryption/authentication techniques.
92. CHATS(Clearing House Automated Transfer Systems: This system provides
inter-bank funds transfer facilities in Hong Kong, which has long been regarded
as the hub of financial activities world over. All the inter-bank entries are
validated at the point of entry before transmission to CHATS central system for
settlement. All POS transacvtions are also settled through this system.
93. Two Level Fund Transfer System:- I) Fedwire & II) Bankwire.
94. Fedwire ( The Federal Reserve Wire System):- It is in operation since 1956
used by the member banks of EFT and is the main fund transfer system in USA.
About 800 banks are linked together. It is primarily used for transferring reserve
account balance of depository institutions and Govt. securities, high value
domestic payments etc. USA has been divided into 12 districts/regions to carry
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out the function, each served by a Federal Reserve Bank and 25 branches. All the
12 banks put together constitute the Federal Reserve System in USA. Fedware
access is made through three modes:- I) Direct computer-to-computer
connectivity ii) Direct terminal access through leased line for online transaction
iii) Dial-up terminal facility for transmission. The Fedwire is an X.25 protocol
based packet switched network and has large number of alternative routes for
transmission. Fedwire makes use of CHIPS also.
95. Bankwire:- It supports standard message format through telex network and also
allows connectivity to its network to the non-members bank. Both funds &
administrative messages are transferred It has started providing a „Clearing‟
facility known as “CASHWIRE” that also undertakes settlement facility. It is the
pioneer private sector electronic telecommunication network owned by an
association of bank in USA
96. Point Of Sale System(POS):- It allows payments to be made at the point of sales
by way of EFT>It is the EFTPOS system. In POS the retailers‟ terminal is directly
connected to the bank‟s network and transactions can be communicated online.
Where both the retailer & the customer have the account in the same bank, first,
the PIN stored on the magnetic field of the card is verified and passed to the bank
computer which verifies the account balance and transaction is processed.. Where
different financial institutions share POS network, the transaction first travels to a
switching center, which directs it to appropriate bank and the information is
processed. This EFTPOS system is cost-effective to the retailers and instant credit
to their accounts.
97. ECS(Electronic Clearing System) in India:- ECS is the special variant of EFT,
it combines (1) Electronic credit clearing and (2) Electronic debit clearing
98. Electronic Credit Clearing: Launched in 1995 by RBI, it facilitates the
transaction having single debit multiple credits. The outer limit for individual
credit is fixed at Rs.5.00 lakhs .
99. Electronic Debit clearing: Here the principle is multiple debit single credit. In
February 1997 RBI introduced ECS-RAPID(Receipt and payment of document in
Mumbai) for payment of service charges to the service provider from the
consumers.
100. Floppy input clearing: Another mode of electronic clearing introduced by RBI
in 1995. The clearing participating banks submit their Inter Bank claim statements
in floppy. In clearing house data are consolidated and settlement statement
generated. This is more accurate and fast settlement process.
101. EFT System in India: EFT involves inter bank fund settlement at the national
level. It has been introduced in terms of Saraf Committee set up in 1994. Saraf
Committee has suggested a hybrid system comprising paper and electronic media
for message transmission. It recommended for high value institutional fund
transfer should be batched every hour, which has been implemented in 1996. RBI
acts as service provider and system regulator.
102. System of Message transmission under EFT: Messages are converted into
electronic format and are transmitted over network or to the NCC by cut off time
in encrypted form with check sum generation. The messages are classified and
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consolidated according to bank wise destination and NCC send the report to the
deposits accounts department(DAD) of RBI.
103. RTGS: Real Time Gross Settlement System: It is an electronic payment
environment where payment instructions are processed on continuous or real time
basis and settled on gross or individual basis without netting the debit against
credit for final and irrevocable settlement in the books of RBI. RTGS uses
INFINET and SFMS. Each bank will have a single gateway interface known as
PI(Participant Interface). Where from the message originates and passed on to
IFTP(Inter bank Fund Transfer Processor) which acts as a broker communication
between PI and RTGS through IFTP but not directly. IFTP stores the message and
incase of payment message construct settlement message and it is routed through
the RTGS and RBI. RBI checks the coverage fund of sending bank in its account
and inform the IFTP the status of transfer. IFTP enriches the message by adding
details and send the settlement advice both to the originating and beneficiary
participants or failure advice to the originating participant in case of failed
settlement. Thus neither sending or receiving bank is settlement agent but only
RBI acts as settlement agent.
104. RTGS Business Day: Divided into 4 phases: (1) RTGS open Phase- all normal
transactions are accepted and processed. (2) IDL Shut Phase: Transactions
processed in open phase but no new IDL to be requested. (3) IDL close Phase:
Restriction on fresh IDL continues and no transaction which debits a member
with an outstanding IDL will be settled.. (4) RTGS Close Phase: Transactions
reversing outstanding IDL will only be permitted. Outstanding Multilateral Net
Settlement Batch(MNSB) transaction for settlement, provided member is
designated as clearing entity, and MNSB return transactions are also permitted.
However the existing clearing system will also continue. The phase change
notification will be sent by RBI to the members having participant interface (PI)
along with changes in time, if any.
105. Digital Signature: The Information Technology Act 2000 has brought the
concept of digital signature required in electronic message and payment system
and also for e-commerce. Digital signature is not the replica of manual
signature, but it is the key and must be applied to satisfy the following features of
digitally signed message.
(a) authenticity of source (b) integrity of message (c) none repudiation by bank.
Digital signature is unique to each message and any change to message changes
digital signature. Manner of signing electronically is done with the help of Public
Key cryptography . Cryptography is based on the use of algorithmic function two
different but mathematically related keys using series of mathematical formula
applied to prime numbers. Two parts of keys (1) Public key and (2) Private Key .
Both are issued to the user by designated authority by the government. Before
signing digitally , sender must get Public-Private key pair . Private key is kept
confidential and used only by signer to create the digital signature. Relying party
to verify the digital signature uses the public key. One such key is used for
creating a digital signature or transmitting a data into a unintelligible form and the
other one for verifying the digital signature or converting the message to as
original form. Encryption does not necessarily implied to make any information
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confidential; the encrypted digital signature may be merely attended to a non-

encrypted message.

Module C:Unit-13:
Payment System & Electronic Banking:-
ATM:-
1. Automatic Teller Machine may be located on or off the bank premises. Besides cash
dispensing deposit of cash/cheque, balance statement of few transactions,cheque book
request, payment of card bills and transfer of funds are possible through ATM.
2. Access to ATM is made by using ATM card & Personal Identification Number(PIN)
3. ATM is broadly of two types, (a) Exterior or Off-site ATM and (b) Interior or On-site
ATM. ATM which is directly interactive with the Bank‟s Computer is known as Online
ATM and the other is known as offline ATM. Online ATM requires the support of
effective telecommunication facility.
4. Security aspect of ATM pertains to Access Lock to cover key pads/monitors etc.which
can only be opened with the ATM card. There are video surveillance and recording
system in ATM device.
5. Advantages:-24 hours/ 7days per week & 365 days in a year banking facility,
cardholders can get cash & service at any location, anywhere banking facility,
flexibility in withdrawals, fund transfer etc
6. Installation:- Secured leased line or satellite channel, Hardware like ATM
machine,Switch,Host Computers, Modems & Encryptor, related software like SWITCH
& HOST Software and Netware Management Software, interface with credit cards,
electronic fund transfer arrangement etc are needed.
HWAK( The Intelligent Auto Teller and Netware Management System:-
1. Intelligent Auto Teller System is an advanced device over ATM. HWAK provides
unsurpassed service even without benefit of a reliable communication network.
2. Special Advantages: Online & Off line auto recovery, anytime full banking facility,
enhanced security. As a whole HWAK is„One Stop‟ auto banking.
Personal Identification Number(PIN)
1. A PIN is similar to the password, but in ATM or POS terminals the PIN is a
combination of few numerical digits only without any alphabets as it uses limited
number of keys to operate. The PIN is randomly generated sequence of digits printed
on paper and automatically folded and sealed. None but the card holder opens the seal
Electro Magnetic Cards:-
1. Credit Cards:- A credit card is a small plastic card around 8.5cm by 5.5 cm. The limit
given in a card is called the card- limit. There are different types of cards viz. i) Charge
Card ii) Debit Card iii) Credit Card iv) Smart Card or Chip Card v) Restricted Card or
Member Card.

Charge Debit Card Credit Card Smart Card Restricted /

Card Member
Card
Transactions Account of Same as charge It lookes like any other plastic Used
are the card card where card or ATM card with an exclusively
accumulated holder is transactions are integrated circuit(IC Chip) by members
 12

over a period debited as charged to the which contains memory and of a club or
of time and soon as the account may contains a processor. a chain of
total amount transaction generally once The size, position and utility of hotels.
debited to the is notified to in a month. The the cards are specified by Example,
account. 25 the issuer. If main difference ISO7816 for interacting with Taj Card
to 50 days balance is with charge variety equipments. issued by
credit time is insufficient card is that, in Two main types:- i) Intelligent the
given in case to cover the case of charge Memory Chip and ii) Micro- management
the account is debit, the card the entire processor cards. of Taj
with difference is amount Memory Smart Card is used in Group of
insufficient immediately becomes pay phone, identification, Hotels,
balance. payable or payable access control, voting and Leela Card
Accumulated else a whereas in case other applications. by Leela
transactions service fee credit card there Processor Smart Card is group of
are charged is levied. In is an option to advanced device and most hotels etc,
but not debit card, pay a certain suited to banking applications the first card
debited as such, percentage and where reuse of the card is in the world,
immediately does not the rest in allowed. Dinners
to the have any monthly In this card intelligence is Card was
account. card-limit installment later built-in and protective against issued by
along with fraudulent operations. Dinners
service charge. Protection is based on Data Club
Max. 50 days Encryption Standard (DES)
credit period is which is accepted by the ISO.
generally For Smart Card, while
available but it ISO7816 defines the physical
mainly depends features & the
on the billing communication protocols,
cycle of a ISO 10202 defines the
particular card security features.
issuer. Requirements:-Terminal must
have reader as per ISO
specification to read and write
the card, secure pin, pin pad to
store the secret keys and
confidential memory zone
holding secret information.
First in 1983 NATWEST
Bank launched Mondex
system based Smart Card.
VISA & Master card have
joined with European largest
ATM network Europay to set
standard for smart card based
EFT system
 13

2.In manual modes of acceptance, interchange fee is generally 1.67% of volume of

transactions which go to card issuing bank. Manual modes is recommended for MEs
with low ticket size(average value of transaction).

3.In Electronic Mode of Acceptance, card is accepted through EDC( Electronic Data
Capture) machine. Validity and credit limit is verified online. Interchange fee is
generally 1.10%. MEs should have telephone line.

Multiple Pins:- A smart card may have unique multiple PINs. Apart from this there are
other security features in a smart card viz.i) Dynamic Signature Verification:- the
dynamic signature tablet automatically verifies the genuinity of signature, ii) Fingerprint
Verification:- to identify the user is genuine or not by electronically scanning fingerprint
ridges, iii) Voice Recording System:- recognizes voices with the help of computer and
compares with that of recorded original, iv) Hand Geometry:- to measures the finger
lengths/skin web opacity and curvature of finger prints through scanning , v) Retinal
Pattern Verification:- the retina is scanned using low intensity infrared beam to see
pattern of blood vessels and thereby ascertain the identity, vi) Vein Recognition:- this
method uses the vein structure known as „vein check‟ system which uses a simple
infrared scanning and encoding technique to locate the number, position and size of
subcutaneous vessels, vii) Visual Recognition:- A process of digitizing picture of a
person and stored in smart card memory.

Electronic Purse:- A variety of smart card which has space for several „electronic
purses‟ each for the storage of a specific amount. These can be used for different types of
accounts of the user. In addition, there is space for user data and even last 30 to 50
transactions.
1. Advantage to bank:-It enables bank to enter into a transaction market complementary
to debit/credit card transaction market. Electronic Purse presents no risk of bad payment.
Revenue is guaranteed from existence of float account
2.Advantages to the Purse Holder:- Cash in an Electronic Purse can not be spent if the
purse is reported stolen or lost. A new purse is can be issued restoring the original
balance.

Bank Card:- European International is Bank Card Service Provider which is having
European Payment System Network-EPS known as ‘Europay’ is a private network
which carries transaction information on personal payment card such as EuroCard and
MasterCard. It has a full range of services viz. Travelers‟ cheques, cheque guarantee,
ATM, Electronic Point-of-Sale, credit card and charge card.

Electronic Cheque:- The smart card can be used during EFTPOS(Electronic Fund
Transfer at the Point-of-Sale. The card is placed on the reader-automatically goes
through authentication sequences-to authorize payment customer types in the PIN and the
cardholder‟s bank account is debited & retailer‟s account is credited and a record of the
transaction is stored in the card.
 14

Electronic Cash:- Fund is loaded into a card for use as cash and used for purchase after
authorizing PIN; the retailer presents this information to the bank to get his account
credited.

Electronic Token:- A prepaid area is set aside to store electronic units of time or
electronic tickets, etc., for a specific service or item. Examples: Magnetic stripe card is
used with public telephone/parking meters and vending machines.

Corporate Cash Management Service:- Banks provide cash management service to

corporate where smart card can act as source key to the account holders to access bank‟s
computer to view their account and transfer money automatically between accounts.

ELECTRONIC BANKING:- Computers & ATM in banks have brought electronic

banking. Customers need not necessarily visit the bank. Due to facilities of tele-
banking/remote banking/online banking.

Any time Banking:- ATMs in banks has surpassed the limited time banking. Banking
through ATMs is secured too since guards are provided in the ATM location. Moreover,
access is controlled through ATM card & Pin. Hongkong bank has introduced the concept
of remote banking by providing a service called Hexagon which allows the customer from
a PC that is located at his office or home i.e. desktop banking

Anywhere Banking:- ATMs and tele-banking allow the customers to make transaction
from remote locations and basic transactions can be effected outside the bank. Sharing of
ATMs , off-site ATMs as per Rangarajan committee recommendations and facilities of
using credit card in ATMs have made virtually banking in the shape of „Anywhere
Banking‟.

Home Banking(Corporate & Personal):- i) Corporate Banking:- Remote banking has

become very popular among corporate customers especially to the big business/industrial
houses. By virtue of SWIFT (Society for Worldwide Inter-Bank Financial
Telecommunications) and its authentication facility in arrangement with their bankers,
customers will be able to directly prepare message in the SWIFT format by sitting in their
office or home and transfer the particulars in respective templates to their bankers who ,in
turn, directly authenticate the transactions. ii) By using tele-banking facility customers can
access to his account through dialing his identification number. Customers who have
modem, PC and telephone line can directly access to bank‟s computer and can avail
different services.

Tele-Banking:- Tele-Banking facility is based on the voice processing facility available

with the bank‟s computers. In this system computers at the bank end is connected to a
telephone link with modem. The voice processing facility provided in the software
identifies the caller and services are available. Some banks use Telephone Answering
Machine in which case the service is not really „tele-banking‟ per se, but simply a
telephone answering system. Besides tele-banking, voice mail facility is also available. In
this facility each service representative has his or her „Voice-Mail‟ postbag in which
 15

messages are stored and retrieved upon return to the desk‟s person. With the help of
telephone answering system the enquiries are most common in computerized reservation
system in railway.

Up-date Facility:- Up-dating transactions generated in a bank has two approaches viz. i)
Online Updates & ii) Batch Updates.
Online Updates:- Direct linking of an operation or equipment to a computer system so that
any stimulus provided by that operation or equipment is immediately accepted by the
computer system. The first application of online updation in banks is in front-office
mechanization. Online updation is required mainly in a) foreign exchange transaction b)
ATMs.
Batch Updates:- At the end of banking hours, the transactions of the whole day, it is
processed by the computer. This is known as local processing with batch updates.

Internet Banking:- The launch of Security First Network Bank(SFNB) on 18 October,

1995 in the USA as the first fully virtual bank marks a turning point in the development
of internet banking. Customers are able to make banking. Fully virtual bank exists only on
the internet, but has the same protection and regulatory approvals like a brick-and-mortar
bank.

Mobile Banking:- Mobile Banking comes with the features like 128 bit encryption, open
internet technology i.e. it is not dependent on any specific service provider and the hand set
company. The mobile banking service is free of charge.

Electronic Commerce (E-Commerce):- E-commerce is digital parlance. It is limited to

niche segment of B2B(Business –to- Business) transactions. Advantage of E-commerce are
higher degree of personalization, round the clock advantage, first and flexible execution,
immediate customer, relation and reduction in operating cost. GOI plan to provide
exclusive optical fiber links to all State capital and 12 major cities.

Signature Storage and retrieval System Scanner is used to store paper signature to a
digital form in the computer hard disk. Which can be magnified and retrieved in case of
need.

Cheque Truncation: Information of the cheque is converted to a medium for electronic

processing . The cheque itself is then stored and truncated, but processing is made not
from the paper cheque, but from the electronic information. Truncation can occur at
collective branch and electronic data send to clearing house or directly to the paying
branch. Truncation can also be done by EFT service. Ways for truncation are (1) Using
MICR data :-The entire MICR line is captured electronically and exchanged with other
for clearing(Inter Bank Data Exchange, IBDE). Cheques do not move. (2) Image
processing : It is a latest document handling system of storing the image of cheque
digitally in the hardware for use of further processing.

UNIT: 15:
 16

1. Data Warehousing: It is a database where data from heterogeneous sources is

stored to generate critical information for decision support system: Characteristic:
1. Subject oriented 2. Integrated 3. Non-volatile 4. Time variant(say 5-10 Years).
Basudevan Committee recommended for establishing data warehouse on Banking
and Finance by RBI
2. Data Mining: Data mining is a technique to reveal the strategic information
hidden in Data Warehouses. Storage of data in Data Warehouses and their
extraction through Data Mining techniques can be applied in: 1. Loan risk
analysis to analyse the performance of a set of loans. 2. Credit risk analysis by
the issuer of credit cards using database mining. 3. Stock portfolio creation and
analysis to analyse the performance of a set of securities. 4. Data analysis of the
demographic information about customers, to help banks focus on particular
segments. 5. Risk analysis by insurance companies and banks.
3. Electronic Data Interchange(EDI): is the inter-organisation exchange of
business documentation which can be processed by computer. Banks have been
using EDI in the form of SWIFT messages. In India, VSNL provides GEDIS(the
Gateway for Electronic Data Interchange Services worldwide. EDI is usually
refers to as EFT. Credit clearing , Debit clearing are different forms of EDI.
Electronic Data Interchange for Administration of Commerce and
Transport(EDIFACT) is the universal set of standards and guidelines for
communication by EDI.
4. EDI Formatting Standards Provide Guidelines Covering: 1. The documents
that can be communicated electronically. 2. The information to be included in
each electronic document. 3. The meaning of individual pieces of information.
5. Communication Standards: 1. The type of electronic envelope to be used. 2.
The transmission speed and the products on which the messages are to be sent. 3.
The time slots during the day which are acceptable for sending and receiving the
messages.
6. Electronic Mail: This an is instant messaging system used in communicating
between different users, thereby promoting paperless communication. In banks e-
mail used for correspondence between departments and offices. E-mail is
basically used for transmitting unstructured message.

Compartmentalisation: Rigid and well-defined boundaries between different

organs-offices of banks providing hindrance to information flow amongst themselves.
Fault tolerant computer systems: The availability of a system to continue
operations following failure in one or more components. A fault tolerant computer
usually comprises fully redundant systems for mutual backups in real time mode.
GUI: Visual representation that allows running of programs, execution of
commands and interaction with the computer by using a pointing like a mouse.
Static data: A data that usually does not change with passage of time. Example:
Customer Name.
Technological prowess: The extent of technology implemented successfully.
Turnover: Switch over of jobs by the employees, particularly professional.
Web site: Computer storage area that contains a collection of related documents, and
associated files, linked together that can be accessed in Internet.
 17

1. Computer based information system offer data redundancy:

2. Decision Support System uses: Query language, adhoc report generator,
statistical analyzer and graphics.
3. Information technology has resulted in improved efficiency, innovative
products, effective delivery system, enhance productivity.

Data: Information which is processed or stored by a computer.

Access Control System: Equipment or software designed to restrict access to the
system.
Algorithm: This is a set of mathematical operation to transform data in cipher form.
Algorithm and key word is used for encryption.