• FEBRUARY 17, 2001

E-banking: Will it replace brick & mortar?

As per the international report the banking transactions on a brick and mortar banking costs around $ 1.1. While through ATM it costs around $ 0.27 and just 1 percent of over the counter banking in case of Internet banking. Statistics such as these have woken the Indian Banking Industry. Thus, the Indian banking system is seeing a fabulous change in the quality of service provided by them. Technology is the root of this change, which is implemented by the banks’ to win more business from customers.

Almost all the private sector banks are moving towards e-enabling their existing products. HDFC Bank and ICICI Bank have taken a lead in introducing e-banking in India.

Internet banking starts from migrating existing products to the net. This started initially with simple functions such as getting information about interest rates, checking account balances and computing loan eligibility. Then the services were extended to online bill payment, transfer of funds between accounts and cash management services for corporates. Recently, banks started setting up payment gateways for B2B and B2C transactions. This is to facilitate payment for e-commerce transactions by directly debiting bank accounts or through credit cards. Banks can earn a commission based income, on the transaction or sale value resulting in higher other income. This could be more than the revenues they can generate from credit card transactions.

Private sector banks have leveraged the Internet effectively in taking away the customers from public sector banks and significantly increased their revenue potential. Internet banking is just one manifestation of these banks’ technological capabilities. They have a complete automation, an electronic customer database, real time transaction processing capabilities and the latest technological platforms. Management of these banks is very focused in using technology as a key competitive tool. The capability of the management is also visible in terms of their profitability. Among the private sector banks HDFC Bank and ICICI Bank have excellent returns on equity compared to their peers in the industry. These banks commenced operations few years and have negligible excess in terms of branches and employees. Therefore unlike most other banks around the world, e-banking is not an added cost for them. In fact it is expected to contribute significantly to their revenues and profits in years to come.

Valuations show the difference
Particulars * HDFC
SBI Corporation
Price/Book value (x) 6.9 2.9 0.9 1.1
P/E (x) 30.3 24.6 6.0 5.5
Revenues/employee (Rs m) 6.1 9.0 1.1 1.8
Profits/employee (Rs m) 2.5 2.5 0.1 0.3
* Based on March 2001 projections

The distribution of banking business in India is highly skewed both geographically and in terms of customer segment. Geographically the top 100 centres account for around 70 percent of the loans disbursed. This are expected to account for mostly early Internet users. In terms of customer segment, key focus on the asset side is the corporate sector. This segment accounts for a high share of profits of banks and is likely to be an early adapter to the Internet. On the liability side Internet banking is expected to boost customer acquisition and profitability significantly in the top corporate segment and in the urban high/middle income retail segments.

Apart from e-banking, future prospects of e-commerce is also strong as it is set for explosive growth rates. According to the NASSCOM’s survey, e-business transactions in India are expected to reach to Rs 12 billion by 2000-01 from Rs 4.5 billion in the previous year. For e-commerce to take off there is a need for real time financial intermediation and there are very few banks offering this in India. The right combination of customer relationship and technological competency is required to dominate the financial intermediation of e-commerce. Who else than private sector banks can provide such services? They are all set to lead the segment with a marginal competition from foreign banks. Going forward, as the share of e-commerce in the economy increases, these banks should be able to move up their market share apart from generating higher fee based income.

Long way to grow
Particulars FY98 FY02E
Internet users (m) 0.5 4.5
E-commerce revenues ($ m) 3.5 600

But one does wonder what difference e-banking make with only 22 percent of the Internet uses globally utilizing e-banking services. In India also the penetration is less than 1 percent. It is not all win-win case for Internet banking in India. A number of uncertainties surround e-banking and e-commerce ventures. Among the others, hurdles like low Internet penetration, security issues, tax considerations and credit issues continue to depress the growth of the segment. Even if the government has passed the cyber laws, still there is a lack of clarity about legislative aspects governing the sector and the effectiveness of the administration to track & punish cyber crimes. It all depends on the ability of banks to enter these businesses successfully.

Those banks which have already started e-banking will have to continuously update their services to retain the potential customers since any customer is just a click away from a competitor elsewhere. Also, one cannot afford to depend only on Internet banking; brick and mortar will continue to play an important role. For those, which are yet to begin, are ignoring the potential customers by remaining away from the latest technology.

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