Economics · Governance · Law · Public Policy

Mechanism of Electronic Fund Transfer: Analysis and Challenges

In modern times, banking business is being conducted through a personal computer via internet and it is called e-banking. Bank Customers can transact banking tasks, through online banking including Electronic Funds transfer between customer’s linked accounts; Loan applications and transactions such as repayment of enrollments; payment of bills etc. Electronic Funds Transfer is a system of transferring money from one bank account directly to another without any banknotes/coins changing hands. It refers to the computer based systems used to perform financial transactions electronically initiated through the exchange or transfer of money either within the same financial institution or across multiple institutions using an electronic terminal, the telephone or the computer.[i]

The use of EFT results in the quick transfer of money from one place to another. It allows an individual to exchange the funds through electronic channels via internet, computers and such electronic devices. The term is also referred to as wire transfer.[ii] The objective of NEFT is to establish an EFT system to facilitate an efficient, secure, economical, reliable and expeditious system of funds transfer between banks in the banking sector. The RBI is hopeful that the NEFT initiative, “as a part of payment system reforms” aimed at reducing “risks, especially settlement and systemic risks, in payment systems” will become `the major clearing system for all retail payments’.[iii]

Electronic Funds Transfer (EFT) is a system of transferring money from one bank account directly to another without any paper money changing hands. At present, in India, different payment systems are functioning which includes paper based systems as well as Electronic Funds transfer systems which are secure and settle payment systems on a gross and real time basis.[iv]

PROCESS

Step-1: The remitter fills in the EFT application form giving the particulars of the beneficiary (city, bank, branch, beneficiary’s name, account type and account number) and authorizes the branch to remit a specified amount to the beneficiary by raising a debit account.

Step-2: The remitting branch prepares a schedule and sends the duplicate of the EFT application form to its Service branch for EFT data preparation. If the branch is equipped with a computer system, data preparation can be done at the branch level in the specified format.

Step-3: The Service branch prepares the EFT data file by using a software package supplied by RBI and transmits the same to the local RBI (National Clearing Cell) to be included for the settlement at 12 noon, 2 p.m.

Step-4: The RBI at the remitting centre consolidates the files received from all banks, sorts the transactions city-wise and prepares vouchers for debiting the remitting banks on Day itself. City-wise files are transmitted to the RBI offices at the respective destination

Step-5: RBI at the destination centre receives the files from the originating centers, consolidates them and sorts them bank transmitted to banks on Day 1 itself. Bank receiving banks’ accounts the same day or next day.

Step-6: On day 1/2 in  morning the receiving banks at the destination centers process the  remittance files transmitted by RBI and forward credit reports to the destination branches for crediting the beneficiaries account[v]

At present most banks such as ICICI Bank, HDFC, CitiBank, PNB etc offers internet banking services. In September 2008, RBI introduced National Electronic Clearing Services, at National Clearing Cell, Reserve Bank of India, Nariman Point, Mumbai which has been designated as the NEFT Clearing Centre (NCC) for purposes of the NEFT System.

Benefits of EFT[vi]

a) The remitter need not send the physical cheque or Demand Draft to the beneficiary.

b) The beneficiary need not visit his bank for depositing the paper instruments.

c) The beneficiary need not be apprehensive of loss or theft of physical instruments or the likelihood of fraudulent encashment thereof.

d) Credit confirmation of the remittances sent by SMS or email

e) Remitter can initiate the remittances from his home or place of work using the internet banking also.

MAJOR ISSUES: SECURITY AND PRIVACY [vii]

There are a plethora of risks and issues which are associated with EFT which in other words have proved to be disadvantages of electronic banking. Security refers to the protection of the integrity of EFT systems and their information from illegal or unauthorized access and use. Security risk arises on account of unauthorized access to a bank’s critical information stores like accounting system, risk management system, portfolio management system, etc. For instance, hackers operating through internet can access, retrieve and use confidential customer information and can also implant virus. As the use of EFT systems becomes widespread and common among banks, the growing connectivity between information systems, the Internet and other infrastructure create opportunities for attacks on such systems. Funds can be removed in currency instantly without review of individual transactions by officials. Proper identification and authentication procedures should be established and followed to establish accountability and to prevent unauthorized persons from gaining access to the systems.

To ensure security in EFT, establishment of trust among parties is essential. This can be established through a trusted third party designated as a Certification Authority. Digital certificates may play an important role in authenticating parties and therefore, establishing trust in EFT systems. The protection of data finds its roots in the individual’s right to privacy doctrine. The right to privacy is explicitly contained in or has been inferentially found to exist in the constitutions of most developed nations and the jurisprudential parameters of privacy rights explored in various forums. Privacy is regarded as an attribute of individuals and the focus is on those activities through which they are able to control and restrict access to personal information

Thus, the customers need to know what information is recorded about them and how they can correct inaccuracies. In many ways EFT can enhance the privacy of financial transactions. An ATM transaction is clearly more impersonal and anonymous than one conducted through a human teller. The coding of information as electronic signals minimizes the possibility of casual or accidental perusal of information.

All banks which are using EFT systems and those which are moving towards high level of computerization must formulate a security policy stating the objectives and system controls which could be devised and implemented to protect the integrity of the important information and data. These controls have to be backed by regular monitoring, surveillance and auditing in order to maintain high level of security. The banks should keep upgrading the systems to latest versions which would ensure better security and control. Risk Management Cells should be established in the banks, particularly those which are resorting to EFT systems for making and receiving payments. There are various types of risks associated with E-Banking.

[i]  http://financialliteracy.bankofguyana.org.gy/about-us?id=136

[ii] Wall Street Words: An A to Z Guide to Investment Terms for Today’s Investor by David L. Scott. Copyright © 2003 by Houghton Mifflin Company. Published by Houghton Mifflin Company.

[iii] http://www.thehindubusinessline.com/todays-paper/tp-opinion/is-there-a-law-governing-electronic-fund-transfers/article2196143.ece

[iv]  Law of Banking : Dr. S.R. Myneni pg. 106(8)

[v]  RBI – FAQ-http://www.rbi.org.in/scripts/FAQView.aspx?Id=57 – 22k , accessed on 21st January 2015, 6.34 pm.

[vi] http://education-portal.com/academy/lesson/what-is-an-electronic-funds-transfer-definition-process-benefits.html

[vii]  electronic funds transfer : A critical study in Indian Context with special reference to security and privacy

About the Author

Bhagyashree SonwaneBhagyashree Sonwane is a 4th year student from Vaishnav Law College, Indore. Her areas of interests are Legal Compliances and Corporate Laws. She’s pursuing Company Secretary Course and is associated with the Model Governance Foundation and Global Justice Academy as Research Intern. She’s a learner and a determined student. Her hobbies include reading, travelling as well as cooking.

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