Online Banking in Bangladesh

Research Design

Objectives of the Study

• To explore the present scenario of online banking in Bangladesh.
• To exhibit the online banking system of Dhaka Bank Limited.
• To identify major challenges of online banking.
• To make the necessary recommendations to solve the problems of online banking.

Research Methodology

This report is mainly prepared by the secondary sources of information and some few primary sources of information like. The research was an exploratory approach and data collection and analysis are qualitative in nature. For this purpose, different recognized census, government rules, regulations, policies, and laws, news papers, national and international journals, periodicals have been consulted. Besides this, Internet has been widely used since the report focuses on Online and Electronic Banking system.

Data collection and analysis were made during the Internship period at Dhaka Bank Limited. The website of Dhaka Bank Limited was an important source of secondary data.

Primary Sources: Though the report is based on secondary data, some primary data have also been used. Primary data have been collected from different sources and methods which include direct observation in the bank branch during the internship period, discussion with professionals and experts and questioning concerned persons. The observation method helped find factual data and real-time analysis. Expertise in online banking fields gave their valuable feedback which has been an important source of primary data.

Secondary Sources: Numerous secondary sources were used for preparing this report. The secondary sources include Dhaka Bank’s Annual Report 2009, Internet, different journals about e-banking and online banking, books, newspapers and other publications. Internet has been used as the major source of secondary data because of its relevance with the topic. Bangladesh Bank’s publications helped find recent data.

Limitations of the Study

• The report has limited focus on Computer and Internet security issues associated with Online Banking
• The report being exploratory and qualitative in nature has fewer quantitative data
• Largely dependent on secondary data
• Inconsistency in the findings because of varying opinions and researches on the same fields of information

Literature Review

With the extensive technology innovation and telecommunication, we have seen new financial distribution channels increasing rapidly both in the numbers and form, from ATMs, telephone banking, PC banking to internet banking. (Earring Wood and Story, 1996). Developing alternative distribution channels is not only important in terms of reducing costs and improving competitiveness, but also in terms of financial institution’s ability to retain the existing customer case.

Kimball and Gregor, 1995) as well as to attract new customers. Sathye (1999) proposed a model for Internet Banking in Australia is significantly influenced by variables of system insecurity, case of use awareness of service and its benefits, reasonable price, availability of infrastructure and resistance to change. The transformation from traditional brick-and-mortar banking to E-Banking has been Automatic Teller Machine (ATM) and thus the retail banking industry witnessed significant and extensive change.

Formally, E-banking comprises various formats or technologies, including telephone (both land line and cell phone banking, direct bill payment (EFT), and PC or internet banking (Power, 2000). Weitzman, (2000), Lassar, Manolits and Lassar, (2005), Ehou and Chou (2000) identified five basic services associated with online banking: view account balances, and transaction histories, paying bills, transferring funds between accounts, requesting credit card advance, and ordering checks.

Majority of banks of banks is planning to introduce ICT for integration of banking service and new finance service, which will play a vital role in bringing efficiency in financial sector (Raihan, 2001). The most commonly factors are ease of use, transaction security, convenience and speediness (Wan, Luk and Chow, 2005). A Survey of Electronic Banking, Electronic Cash and Internet Gaming (2003), has defined electronic banking as “an umbrella term for the process by which a customer may perform banking transactions electronically without visiting a brick and mortar institution”.

The following terms all refer to one form or another of electronic banking: personal banking,(pc) virtual banking, on line banking, home Banking, remote electronic banking, and phone banking are the most frequently used designations, (Joris, Claessens, Valentine Dem et. al,2001),on line electronic banking system give everybody the opportunity for easy access to their banking activities. These banking activities may include; retrieving an account balance, money transfers (Between a user’s accounts, from user’s account to someone else’s account) retrieving an accounting history.

Banking in Bangladesh

An Exploratory Study on Dhaka Bank Limited E-banking is a form of banking where funds are transferred through an exchange of electronic signals between financial institution, rather than exchange of cash, checks or other negotiable instruments common wealth bank of Australia, (2006) defined E- banking as “a range of banking services that utilizes electronic equipment”. Electronic equipments are ATM machine card (plastic), PIN, password, code or net code etc.

With the extensive technology innovation and telecommunication we have seen new financial distribution channels increasing rapidly both in the numbers and form, from ATM’s, telephone banking, PC banking to internet banking. A broad range of financial distribution channels must be available to deliver varying services needs of customers segments (Earring wood and story, 1996).

Developing alternative distribution channels is not only important in terms of reducing costs and improving competitiveness but also in terms of a financial institution’s ability to retain the existing customer case Kimball and Gregor, 1995) as well as to future attract new customers.

Sathye (1999) proposed a model for Internet Banking Adoption, which argued that the Intention of Internet Banking in Australia is significantly influenced by variables of system insecurity, case of use awareness of service and its benefits, reasonable price, availability of infrastructure and resistance to charge. The Willis Report (1997 in Sathye, 1999) stated that the technology must be reasonably priced relative to alternatives for customers to adopt.

Otherwise the acceptance of the new technology may not be viable from customer’s stand point. Customers today are more conscious of the expenses associated with the banking as they are generally better informed about alternative option. The total costs incurred in using Internet Banking must be minimal or competitive (Joyawardhena and foley, 2000). The transformation from traditional brick-and-mortar banking to E-banking has been automatic teller machine (ATM) has the retail banking industry witnessed such significant and extensive change.

Formally, E-banking comprises varies formats or technologies, including telephone (both landline and cell phone banking, direct bill payment (EFT), and PC or internet banking (Power, 2000); Weitzman, 2000; Lassar, Manolits and Lassar, (2005), Ehou and Chou (2000) identified five basic services associated with online banking: view account balances, and transaction histories; paying bills, transferring funds between accounts; requesting credit card advanced; and ordering checks.

Conceptual Framework of Online Banking

Electronic Banking

Electronic Banking or e-banking refers to the banking environment in which banking information as well as transactions moves and conducted through electronic medium. It includes any technology that that enables a bank to do business electronically. E-banking has different aspects like Internet banking, Online Banking and e-payments. E-banking may be understood as term that covers all these ways of banking business electronically.

The following illustration depicts the different form of e-banking services: Internet Banking Telephone Banking Any Branch Banking EFT (Electronic Fund Transfer) EPS (Electronic Payment System) Online Banking SWIFT, ELDORADO E-Banking POS, ATM booths Plastic/E-Money Debit/Credit/ATM Cards Mobile Banking SMS Banking.

Types of E-banking

PC Banking: The increasing awareness of the importance of literacy of computer has resulted in increasing use of personal computers through the entire world. Furthermore, incredible plummet of cost of microprocessor has accelerated the use of computer. The term ‘PC banking’ is used for banking business transacted from a customer’s PC. Using the PC banking or home banking now customers can use their personal computers at home or at their office to access their accounts for transactions by subscribing to and dialing into the banks’ Intranet proprietary software system using password.

Banking in Bangladesh: An Exploratory Study on Dhaka Bank Limited Internet Banking: Customers need an Internet access service to handle this ype of banking. As an Internet Banking customer, he/she will be given a specific user ID and a confidential/secret or secured password so that they can access to their own account. Here customer can able to see the ledger balances, transfer his money, request something towards bank, etc. Virtual Banking: Virtual banks are banks without bricks; from the customer perspective, they exist entirely on the Internet, where they offer the same range of services and adhere to same rules and regulations of central banks.

Telephone Banking: Telephone banking refers to the services provided through phone that requires the customers to dial a particular telephone number to have access to an account which provides several options of services. Despite huge potential, telephone banking services have not been widened enough in daily banking activities in Bangladesh. Only four banks so far provide a few options of telephone banking services such as detail account information, balance inquiry, information about products or services, ATM card activation, cheque book related service, bills payment, credit card service and so on.

Funds transfer between current, savings and credit card account, stock exchange transactions etc are still inaccessible through telephone banking in Bangladesh. Mobile banking: Mobile banking (also known as M-banking or SMS banking) is a term used for performing balance checks, account transactions, payments etc. via a mobile device such as a mobile phone. Mobile banking is most often performed via SMS or the Mobile Internet but can also use special programs called clients downloaded to the mobile device.

The standard package of activities that mobile banking covers are:

• mini-statements and checking of account history;
• alerts on account activity or passing of set thresholds; monitoring of term deposits; access to loan statements; access to card statements;
• mutual funds/equity statements; insurance policy management; pension plan management; status on cheque, stop payment on cheque;
• ordering check books; balance checking in the account; recent transactions; due date of payment (functionality for stop, change and deleting of payments);
• PIN provision, change of PIN and reminder over the internet; blocking of (lost/stolen) cards; domestic and international fund transfers;
• micro-payment handling; mobile recharging; commercial payment processing; bill payment processing; peer to peer payments; withdrawal at banking agent;
• 3 and deposit at banking agent.

Despite huge prospects, only a few banks adopted mobile banking in Bangladesh during the last year.

Common Online Banking Services: Banking transactions can range from something as basic as a retail account balance inquiry to a large business-to-business funds transfer. On line banking services, like those delivered through other delivery channels, are typically classified based on the type of customer they support.

The following table lists some of the common retail on line banking services offered by banks are as follows: • • • • • • Account management Bill payment and presentment New account opening Investment/Brokerage services Loan application and approval Business-to-business payments.

Electronic Funds Transfer (EFT) and direct deposit are all examples of electronic money. Also, it is a collective term for financial cryptography and technologies enabling it. Plastic Money: Plastic money is a plastic card issued by banks or financial institutions with a magnetic stripe or chip that holds machine readable identification code (account number, customer’s personal identification number, and other such information readable by ATMs). Bank cards are used for electronic commerce (with magnetic stripe readers or via Internet) and for banking transactions through Automated Teller Machines (ATMs). Types of plastic money include: Page 10 of 35

Online Banking in Bangladesh: An Exploratory Study on Dhaka Bank Limited Credit Cards: Credit Card can be called as an equivalent of a loan sanctioned by the bank to its customers. Credit card facilitates and makes it possible to “Use First and Pay Later” the specified amount of credit as per the agreed terms of sanction. This card facilitates the cardholder to purchase goods and services from the merchant establishments and shops through the collaborating credit card companies like VISA, MasterCard, Maestro, and Cirrus. Debit Cards: A Debit Card provides for online electronic payment like Credit Card but from savings or current accounts of the cardholder for purchases.

This card is a deposit access product where cardholder uses his own money in his bank account through the debit card on the principle of “Pay First and Use Later”. Debit card contains the symbol or hologram of collaborating company such as VISA, MasterCard, Maestro and Cirrus etc. ATM Cards: ATM Card can be used to withdraw money, deposit money, balance enquires, deposit bills in the account. The cardholder must maintain a savings bank account or current account with the bank. On issuance of card, the cardholder is intimated a four digit secret Personal Identification Number (PIN). The cardholder is always required to maintain safely the PIN to prevent fraudulent activity.

ATM Card-cum-Debit Card: ATM Card-cum-Debit Card can be used both as an ATM card and Debit card as a method of payment when purchasing goods and services in Bangladesh and Overseas. The cardholder is responsible for all transaction made by the use of the card. In Bangladesh most of the debit cards issued by banks are also ATM cards. For example, Dhaka Bank Limited, DBBL, SCB, HSBC, BRAC Bank and other banks operating in Bangladesh provides ATM Card-cum-Debit Card. Smart Card: The smart card is an amazing piece of technology. It is the size of a regular ATM card but is capable of storing over a 1000 times more data. The data can be encrypted and hence the card is completely temper-proof.

People can deposit their money in a bank account and they have entitled withdraw their money through ATM card, which is applicable for 24 hours a day and 365 days in a year. It has different name such as ATM, 24 hours banking card, money link card, e-cash, ready cash etc. In Bangladesh, some multinationals incepted the ATM booth in Dhaka since 1992-93. The Grind lays Bank was the pioneer in Bangladesh then after Standard Chartered Bank, American express Bank, HSBC, Bank Asia, Dutch Bangla Bank, Dhaka Bank and other local private banks are the followers. Point of Sales: Point of sale (POS) or checkout is the location where a transaction occurs.

A “checkout” refers to a POS terminal or more generally to the hardware and software used for checkouts, the equivalent of an electronic cash register. A POS terminal manages the selling process by a salesperson accessible interface. The same system allows the creation and printing of the voucher. Electronic Funds Transfer: Electronic funds transfer or EFT refers to the computer-based systems used to perform financial transactions electronically. An EFT is the electronic exchange or transfer of money from one account to another, either within the same financial institution or across multiple institutions. Electronic Payment System: Electronic payment is an integral part of electronic commerce.

Broadly de-fined, electronic payment is a financial exchange that takes place online between buyers and sellers. The content of this exchange is usually some form of digital financial instrument (such as encrypted credit card numbers, electronic checks, or digital cash) that is backed by a bank or an intermediary, or by legal tender.

Present Scenario of Online Banking in Bangladesh

The commercial banking system dominates Bangladesh’s financial sector. Bangladesh Bank is the Central Bank of Bangladesh and the chief regulatory authority in the sector. The banking sector of Bangladesh comprises four categories of scheduled banks.

These are four state-owned commercial banks (SCBs), five state-owned development finance institutions (DFIs), thirty private commercial banks (PCBs) and nine foreign commercial banks (FCBs). The number of banks remained unchanged at 48 in 2008. These banks had a total number of 6886 branches as of December 2008.

The number of bank branches increased from 6717 to 6886 owing mainly to opening of new branches by the PCBs during the year. Online Banking in Bangladesh is yet to develop according to international standard. At present, several private commercial banks (PCBs) and foreign commercial banks (FCBs) offer limited services of telephone banking, internet banking, and online banking facilities working within the branches of individual bank in a closed network environment.

As a part of stepping towards e-banking, the FCBs have played the pioneering role with adoption of modern technology in retail banking during the early 1990s whereas the state-owned commercial banks (SCBs) and PCBs came forward with such services in a limited scale during the late 1990s.

Moreover, the banking industry as a whole, except for the four specialized banks (SBs), rushed to offer technology based banking services during the middle of the current decade. The existing form of e-banking that satisfies customer demand in banking activities electronically throughout the world are PC banking or PC home banking that include online banking, internet banking, mobile banking, and telephone banking. Before depicting the entire scenario of Online Banking in Bangladesh a brief introduction of the overall banking sector of the country is necessary.

Supported Infrastructure

All types of Electronic Banking operations require a well-established ICT infrastructure throughout the country. Online Banking largely depends on the country’s overall ICT infrastructure, legal environment and skilled human resources. At present the infrastructure for Online Banking is not satisfactory because of high cost and low penetration rate. This is one of the reasons for which the entire banking sector is still out of online system.

An Exploratory Study on Dhaka Bank Limited

There is also lack of technically skilled human resources. Computer and Internet is still out of reach of general people of the country. The following statistics will provide a detailed synopsis of the overall situation of the supported infrastructure for implementing Online Banking. The infrastructure of a country is very important for implementing online banking.

For online banking major cost is to setup backbone network. Fortunately Bangladesh Railway has a high-speed optical fiber network parallel to the railway path owned by Bangladesh Railway. Its total capacity is about 2. 5 gigabits per second. This fiber optic network covers almost every important parts of the country. 1 Bangladesh has been connected with the information superhighway on the 20th May, 2006.

It is a landmark of ICT sector of Bangladesh. The cable network covering some 786 miles across the country from the Bay of Bengal will provide a fiber-optic link with a data transfer capacity of 10 gigabits per second compared to the 150 megabits per second bandwidth now used by the state owned BTTB and dozens of private Internet Providers. The following figure shows the growth of Internet users of our country.

Present Status of Online Banking in Bangladesh

Last couple of years shows dramatic improvement in the awareness situation in the banking community regarding the comprehensive application of ICT. Majority of banks is planning to introduce ICT for integration of banking services and new e-finance services, which will play a vital role in bringing efficiency in the financial sector. Foreign banks are the pioneers in adopting electronic finance in Bangladesh. Most of the foreign banks are using the computerized transaction system and taking advantage of the superior technology by attracting customers and providing inter-branch and interbank linkage.

Foreign banks through successful use of a global network, has increased the timeliness and accuracy of information, benefiting its customers, its employees and also its management. One FCB introduced ATM and POS services for the first time in Bangladesh in 1992 and 1997 respectively. By the end of 1998, the bank has set up five ATM booths and 20 POS terminals in different locations of Dhaka city. Other categories of banks, such as PCBs, NCBs, and one SB gradually adopted both the services as a part of market competition in offering better customer services. Figure 2 shows that growth rate in adoption of POS terminals was higher compared with ATM booths during the 1998-2006 period.

By the end of 2006, the number of ATM booths and POS terminals stood at 478 and 4,647 respectively covering important merchant outlets in six divisional cities and some other important district towns in Bangladesh. Mohammad Mizanur Rahman, Innovative Technology and Bank Profitability: The Bangladesh Experience, Working Paper Series: WP 0803, Bangladesh Bank, December 2007.

Present status of Electronic Payment System in Bangladesh

At present several utility service providers along with many banks have started using electronic payment system in Bangladesh. But the system has still not reached the mass majority of people in the country. Bangladesh Bank has osted an “ICT Guideline” in their web site for the banks and financial institutes to create their own ICT Policy for the security of the online transactions. Nationalized banks like Sonali, Janata, Agrani and private banks like DBBL, Eastern Bank, Standard Chartered, and HSBC etc are using ATMs and POS for payment of utility bills electronically.

It is seen that Ready Cash card, Q-Cash card ATMs and POS are the mostly used options for the electronic payment. One of the problems for this is that these services are mostly available in big cities and towns. The people living in remote villages still have no idea that such a service is available. Also the card holder has to be a client of service providing bank to use the ATMs.

Other options available also include Online Banking which is done by some banks through which the utility bill can be paid over Internet. But this service is yet to be started by other banks. Bangladesh Bank has already started a project on Automatic Clearing House under which the online banking will be implemented in the future. The utility service providers have also taken several steps so that they can work along with the banks to provide the service of electronic payment. PDB, DESA, WASA, BTTB, Titas Gas, DESCO, Grameenphone etc have all made several contracts with different banks to pay their bills electronically using ATMs and other channels. Several Works are still getting carried away by these organizations to introduce new options of electronic payment. Other government and nongovernment organizations are also making changes in their infrastructure to make them capable of handling electronic payments.

Recommendations for Overcoming the Challenges

Developing and implementing online banking system in a country like Bangladesh is much challenging. To overcome these challenges the following courses of actions should be taken:

• Strategy development
• Channel integration
• Change management
• Promote innovation culture
• Leverage existing brand to deliver new services
• Reinforce “Trust Relationships”
• Universal product offering
• Highly secure, robust environment
• Manage resistance to change
• Manage technological issues with care 11. E-channels specific marketing
• Human resource development

Digital Bangladesh may be activated by 2021 to develop the economy of Bangladesh. Successful team building with a coherent manner for developing human ware, hardware, software and web ware are required to increase e-business process in a systematic way. Moreover, greater emphasis should be given on security system and to prevent fraud so that any sort of financial transactions including on line bank.