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Monday, Feb 23, 2004

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Internet Banking

B. S. Raghavan

ALL bankers, including those, if any, in the Reserve Bank of India, engaged in futuristic research on e-money and e-banking, must go through the very comprehensive working paper brought out by the IMF in the current month under the heading "Six Puzzles in Electronic Money and Banking". They must do so not only to understand the issues and implications touching on an emerging phenomenon that will stand the entire concept of money and banking on its head, but also to take a hand in giving it a proactive push without allowing events to overtake them.

The working paper sets out to unravel six puzzles: The elusive nature of the definition and scope of e-money and e-banking; the exact points of difference between the existing and emerging financial architecture based on e-banking; to what extent the economies of countries will be affected by bricks changing into clicks; the degree to which conventional monetary transactions will be supplanted by electronic ones; monetary policy formulation in the era without tactile currency and physical reserves, when the control of the central banks over money supply becomes a thing of the past; and the nature of the firewall(s) to be put in place to afford maximum protection and privacy capable of coping with the volume, velocity, variety and versatility of transactions.

Electronic money and banking are not to be confused with the modes of exchanges of commodities and services for plastic money that take place via the various portals such as PayPal and eBay in the US and their analogues elsewhere. The idea goes farther than facilities that are already in vogue in the form of telephone banking, use of MICR technology for payment clearing and settling, automatic teller machines and the like. Money management by electronic methods will encompass delivery of the whole range of traditional banking services using payment media not restricted to what are now familiar.

Several complex financial riddles will confront the world community when Internet banking system is in full swing. Foremost among them will be the loss of the national governments' hold over the creation and circulation of money, and the increasing dominance of private e-money generated by individuals or non-bank firms. The situation will also make nonsense of tax regimes. International control and monitoring mechanisms like the IMF may find their roles called into question, unless they undergo a total transmogrification to suit the new conditions. On other hand, banking will become infinitely simpler and less costly. Altogether a fascinating new world unfolding before our very eyes and within our own lifetime.

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