View with images and charts The Impact of Electronic Banking over the Personal& Business Life Introduction The evolution of electronic banking (e-Banking) started with the use of automatic teller machines (ATMs) and has included telephone banking, direct bill payment, electronic fund transfer and online banking. According to some, the future direction of e-banking is the acceptance of mobile telephone (WAP-enabled) banking and interactive-TV banking. However, it has been forecast by many that online banking will continue to be the most popular method for future electronic financial transactions. Electronic funds transfer (EFT), refers to the computer-based systems used to perform financial transaction electronically. The term is used for a number of different concepts including electronic payments and cardholder-initiated transactions, where a cardholder makes use of a payment card such as a credit card or debit card. DEFINITION OF E-BANKING E-banking is defined as the automated delivery of new and traditional banking products and services directly to customers through electronic, interactive communication channels. E-banking includes the systems that enable financial institution customers, individuals or businesses, to access accounts, transact business, or obtain information on financial products and services through a public or private network, including the Internet. Customers access e-banking services using an intelligent electronic device, such as a personal computer (PC), personal digital assistant (PDA), automated teller machine (ATM), kiosk, or Touch Tone telephone. While the risks and controls are similar for the various e-banking access channels, this booklet focuses specifically on Internet-based services due to the Internet’s widely accessible public network. Accordingly, this booklet begins with a discussion of the two primary types of Internet websites: informational and transactional.
E-BANKING COMPONENTS E-banking systems can vary significantly in their configuration depending on a number of factors. Financial institutions should choose their e-banking system configuration, including outsourcing relationships, based on four factors: Strategic objectives for e-banking; Scope, scale, and complexity of equipment, systems, and activities; Technology expertise; and Security and internal control requirements. Financial institutions may choose to support their e-banking services internally. Alternatively, financial institutions can outsource any aspect of their e-banking systems to third parties. The following entities could provide or host (i.e., allow applications to reside on their servers) e-banking-related services for financial institutions: Another financial institution, Internet service provider,
Internet banking software vendor or processor, Core banking vendor or processor, Managed security service provider, Bill payment provider, Credit bureau, and Credit scoring company. E-banking systems rely on a number of common components or processes. The following list includes many of the potential components and processes seen in a typical institution: Website design and hosting, Firewall configuration and management, Intrusion detection system or IDS (network and host-based), Network administration, Security management, Internet banking server, E-commerce applications (e.g., bill payment, lending, brokerage), Internal network servers, Core processing system, Programming support, and Automated decision support systems. These components work together to deliver e-banking services. Each component represents a control point to consider How e-banking can ease life (Facilities of e-banking) Penalty due to non-payment of bill is not new to anyone of us. And quite obviously, who likes the long procedure of writing a cheque, standing in a long queue and then ensuring that the particular amount is available in your bank account? Similarly, Someone, who is on business tour for at least 25 days a month, finds it difficult to clear his dues on time because of his busy schedule. He, like many of us, was possibly not aware of the online services, banks are offering these days. With just a click, all his dues would have been cleared long back. However, it's never too late to mend. Banks are trying to make your life easier. Not just bill payment, you can make investments, shop or buy tickets and plan a holiday at your fingertips. In fact, sources from ICICI Bank tell us, "Our Internet banking base has been growing at an exponential
pace over the last few years. Currently around 78 per cent of the bank's customer base is registered for Internet banking." To get started, all you need is a computer with a modem or other dial-up device, a checking account with a bank that offers online service and the patience to complete about a one-page application--which can usually be done online. You can avail the following services. Bill payment service Each bank has tie-ups with various utility companies, service providers and insurance companies, across the country. You can facilitate payment of electricity and telephone bills, mobile phone, credit card and insurance premium bills. To pay your bills, all you need to do is complete a simple one-time registration for each biller. You can also set up standing instructions online to pay your recurring bills, automatically. One-time standing instruction will ensure that you don't miss out on your bill payments due to lack of time. Most interestingly, the bank does not charge customers for online bill payment. Fund transfer You can transfer any amount from one account to another of the same or any another bank. Customers can send money anywhere in India. Once you login to your account, you need to mention the payees's account number, his bank and the branch. The transfer will take place in a day or so, whereas in a traditional method, it takes about three working days. ICICI Bank says that online bill payment service and fund transfer facility have been their most popular online services. Credit card customers Credit card users have a lot in store. With Internet banking, customers can not only pay their credit card bills online but also get a loan on their cards. Not just this, they can also apply for an additional card, request a credit line increase and God forbid if you lose your credit card, you can report lost card online. Railway pass This is something that would interest all the aam janta. Railways has tied up with ICICI bank and you can now make your railway pass for local trains online. The pass will be delivered to you at your doorstep. But the facility is limited to Mumbai, Thane, Nashik, Surat and Pune. The bank would just charge Rs 10 + 12.24 per cent of service tax. Investing through Internet banking
Opening a fixed deposit account cannot get easier than this. You can now open an FD online through funds transfer. Online banking can also be a great friend for lazy investors. Now investors with interlinked demat account and bank account can easily trade in the stock market and the amount will be automatically debited from their respective bank accounts and the shares will be credited in their demat account. Moreover, some banks even give you the facility to purchase mutual funds directly from the online banking system. So you need not worry about filling those big forms for mutual funds, they will now be just a few clicks away. Nowadays, most leading banks offer both online banking and demat account. However if you have your demat account with independent share brokers, then you need to sign a special form, which will link your two accounts. Recharging your prepaid phone Now you no longer need to rush to the vendor to recharge your prepaid phone, every time your talk time runs out. Just top-up your prepaid mobile cards by logging in to Internet banking. By just selecting your operator's name, entering your mobile number and the amount for recharge, your phone is again back in action within few minutes. Shopping at your fingertips Leading banks have tie ups with various shopping websites. With a range of all kind of products, you can shop online and the payment is also made conveniently through your account. You can also buy railway and air tickets through Internet banking. Internet banking versus traditional method Inspite of so many facilities that Internet banking offers us, we still seem to trust our traditional method of banking and is reluctant to use online banking. But here are few cases where Internet banking will turn out to be a better option in terms of saving your money. 'Stop payment' done through Internet banking will not cost any extra fees but when done through the branch, the bank may charge you Rs 50 per cheque plus the service tax. Through Internet banking, you can check your transactions at any time of the day, and as many times as you want to. On the other hand, in a traditional method, you get quarterly statements from the bank and if you request for a statement at your required time, it may turn out to be an expensive affair. The branch may charge you Rs 25 per page, which includes only 30
transactions. Moreover, the bank branch would take eight days to deliver it at your doorstep. If the fund transfer has to be made outstation, where the bank does not have a branch, the bank would demand outstation charges. Whereas with the help of online banking, it will be absolutely free for you. As per the Internet and Mobile Association of India's report on online banking 2006, "There are many advantages of online banking. It is convenient, it isn't bound by operational timings, there are no geographical barriers and the services can be offered at a miniscule cost." Security Precautions Customers should never share personal information like PIN numbers, passwords etc with anyone, including employees of the bank. It is important that documents that contain confidential information are safeguarded. PIN or password mailers should not be stored, the PIN and/or passwords should be changed immediately and memorised before destroying the mailers. Customers are advised not to provide sensitive account-related information over unsecured e-mails or over the phone. Take simple precautions like changing the ATM PIN and online login and transaction passwords on a regular basis. Also ensure that the logged in session is properly signed out. E-BANKING SUPPORT SERVICES In addition to traditional banking products and services, financial institutions can provide a variety of services that have been designed or adapted to support e-commerce. Management should understand these services and the risks they pose to the institution. This section discusses some of the most common support services: weblinking, account aggregation, electronic authentication, website hosting, payments for e-commerce, and wireless banking activities. WEBLINKING A large number of financial institutions maintain sites on the World Wide Web. Some websites are strictly informational, while others also offer customers the ability to perform financial transactions, such as paying bills or transferring funds between accounts. Virtually every website contains “weblinks.� A weblink is a word, phrase, or image on a webpage that contains coding that will transport the viewer to a different part of the website or a completely different website by just clicking the mouse. While weblinks are a convenient and accepted tool in website design, their use can present certain risks. Generally, the primary risk posed by weblinking is that viewers can become confused
about whose website they are viewing and who is responsible for the information, products, and services available through that website. There are a variety of risk management techniques institutions should consider using to mitigate these risks. These risk management techniques are for those institutions that develop and maintain their own websites, as well as institutions that use third-party service providers for this function. The agencies have issued guidance on web linking that provides details on risks and risk management techniques financial institutions should consider. ACCOUNT AGGREGATION Account aggregation is a service that gathers information from many websites, presents that information to the customer in a consolidated format, and, in some cases, may allow the customer to initiate activity on the aggregated accounts. The information gathered or aggregated can range from publicly available information to personal account information (e.g., credit card, brokerage, and banking data). Aggregation services can improve customer convenience by avoiding multiple log-ins and providing access to tools that help customers analyze and manage their various account portfolios. Some aggregators use the customer-provided user IDs and passwords to sign in as the customer. Once the customer’s account is accessed, the aggregator copies the personal account information from the website for representation on the aggregator’s site (i.e., “screen scraping”). Other aggregators use direct data-feed arrangements with website operators or other firms to obtain the customer’s information. Generally, direct data feeds are thought to provide greater legal protection to the aggregator than does screen scraping. ELECTRONIC AUTHENTICATION Verifying the identities of customers and authorizing e-banking activities are integral parts of e-banking financial services. Since traditional paper-based and in-person identity authentication methods reduce the speed and efficiency of electronic transactions, financial institutions have adopted alternative authentication methods, including: Passwords and personal identification numbers (PINs), Digital certificates using a public key infrastructure (PKI), Microchip-based devices such as smart cards or other types of tokens, Database comparisons (e.g., fraud-screening applications), and Biometric identifiers. The authentication methods listed above vary in the level of security and reliability they provide and in the cost and complexity of their underlying infrastructures. As such, the choice of which technique(s) to use should be commensurate with the risks in the products and services for which they control access. Additional information on customer authentication techniques can be found in this booklet under the heading “Authenticating E-Banking Customers.” WEBSITE HOSTING
Some financial institutions host websites for both themselves as well as for other businesses. Financial institutions that host a business customer’s website usually store, or arrange for the storage of, the electronic files that make up the website. These files are stored on one or more servers that may be located on the hosting financial institution’s premises. Website hosting services require strong skills in networking, security, and programming. The technology and software change rapidly. Institutions developing websites should monitor the need to adopt new interoperability standards and protocols such as Extensible Mark-Up Language (XML) to facilitate data exchange among the diverse population of Internet users. Risk issues examiners should consider when reviewing website hosting services include damage to reputation, loss of customers, or potential liability resulting from: Downtime (i.e., times when website is not available) or inability to meet service levels specified in the contract, Inaccurate website content (e.g., products, pricing) resulting from actions of the institution’s staff or unauthorized changes by third parties (e.g., hackers), Unauthorized disclosure of confidential information stemming from security breaches, and Damage to computer systems of website visitors due to malicious code (e.g., virus, worm, active content) spread through institution-hosted sites. PAYMENTS FOR E-COMMERCE Many businesses accept various forms of electronic payments for their products and services. Financial institutions play an important role in electronic payment systems by creating and distributing a variety of electronic payment instruments, accepting a similar variety of instruments, processing those payments, and participating in clearing and settlement systems. However, increasingly, financial institutions are competing with third parties to provide support services for e-commerce payment systems. Among the electronic payments mechanisms that financial institutions provide for e-commerce are automated clearing house (ACH) debits and credits through the Internet, electronic bill payment and presentment, electronic checks, e-mail money, and electronic credit card payments. Additional information on payments systems can be found in other sections of the IT Handbook. Most financial institutions permit intrabank transfers between a customer’s accounts as part of their basic transactional e-banking services. However, third-party transfers – with their heightened risk for fraud – often require additional security safeguards in the form of additional authentication and payment confirmation. Person-to-Person Payments Electronic person-to-person payments, also known as e-mail money, permit consumers to send “money” to any person or business with an e-mail address. Under this scenario, a consumer electronically instructs the person-to-person payment service to transfer funds
to another individual. The payment service then sends an e-mail notifying the individual that the funds are available and informs him or her of the methods available to access the funds including requesting a check, transferring the funds to an account at an insured financial institution, or retransmitting the funds to someone else. Person-to-person payments are typically funded by credit card charges or by an ACH transfer from the consumer’s account at a financial institution. Since neither the payee nor the payer in the transaction has to have an account with the payment service, such services may be offered by an insured financial institution, but are frequently offered by other businesses as well. WIRELESS E-BANKING Wireless banking is a delivery channel that can extend the reach and enhance the convenience of Internet banking products and services. Wireless banking occurs when customers access a financial institution's network(s) using cellular phones, pagers, and personal digital assistants (or similar devices) through telecommunication companies’ wireless networks. Wireless banking services in the United States typically supplement a financial institution's e-banking products and services. Wireless devices have limitations that increase the security risks of wireless-based transactions and that may adversely affect customer acceptance rates. Device limitations include reduced processing speeds, limited battery life, smaller screen sizes, different data entry formats, and limited capabilities to transfer stored records. These limitations combine to make the most recognized Internet language, Hypertext Markup Language (HTML), ineffective for delivering content to wireless devices. Wireless Markup Language (WML) has emerged as one of a few common language standards for developing wireless device content. Wireless Application Protocol (WAP) has emerged as a data transmission standard to deliver WML content. Impact of e-banking on traditional services One of the issues currently being addressed is the impact of e-banking on traditional banking players. After all, if there are risks inherent in going into e-banking there are other risks in not doing so. It is too early tohave a firm view on this yet. Even to practitioners the future of e-banking and its implications are unclear.It might be convenient nevertheless to outline briefly two views that are prevalent in the market. The view that the Internet is a revolution that will sweep away the old order holds much sway. Arguments in favour are as follows: • E-banking transactions are much cheaper than branch or even phone transactions. This could turn yesterday’s competitive advantage - a large branch network, into a comparative disadvantage, allowing e-banks to undercut bricks-and-mortar banks. This is commonly known as the "beached dinosaur" theory.
• E-banks are easy to set up so lots of new entrants will arrive. ‘Old-world’ systems, cultures and structures will not encumber these new entrants. Instead, they will be adaptable and responsive. E-banking gives consumers much more choice. Consumers will be less inclined to remain loyal. • E-banking will lead to an erosion of the ‘endowment effect’ currently enjoyed by the major UK banks.Deposits will go elsewhere with the consequence that these banks will have to fight to regain and retain their customer base. This will increase their cost of funds, possibly making their business less viable. Lost revenue may even result in these banks taking more risks to breach the gap. Portal providers, are likely to attract the most significant share of banking profits. Indeed banks could become glorified marriage brokers. They would simply bring two parties together – eg buyer and seller,payer and payee. The products will be provided by monoclines, experts in their field. Traditional banks may simply be left with payment and settlement business – even this could be cast into doubt. Traditional banks will find it difficult to evolve. Not only will they be unable to make acquisitions for cash as opposed to being able to offer shares, they will be unable to obtain additional capital from the stock market. This is in contrast to the situation for Internet firms for whom it seems relatively easy to attract investment. There is of course another view which sees e-banking more as an evolution than a revolution. E-banking is just banking offered via a new delivery channel. It simply gives consumers another service (just as ATMs did). Like ATMs, e-banking will impact on the nature of branches but will not remove their value. Traditional banks are starting to fight back. The start-up costs of an e-bank are high. Establishing a trusted brand is very costly as it requires significant advertising expenditure in addition to the purchase of expensive technology (as security and privacy are key to gaining customer approval).E-banks have already found that retail banking only becomes profitable once a large critical mass is achieved. Consequently many e-banks are limiting themselves to providing a tailored service to the better off. Nobody really knows which of these versions will triumph. This is something that the market will determine. However, supervisors will need to pay close attention to the impact of e-banks on the traditional banks, for example by surveillance of: • strategy • customer levels • earnings and costs • advertising spending • margins • funding costs • merger opportunities
E-Banking Revolution Electronic banking is the wave of the future. It provides enormous benefits to consumers in terms of the ease and cost of transactions. But it also poses new challenges for country authorities in regulating and supervising the financial system and in designing and implementing macroeconomic policy. Eectronic banking has been around for some time in the form of automatic teller machines and telephone transactions. More recently, it has been transformed by the Internet, a new delivery channel for banking services that benefits both customers and banks. Access is fast, convenient, and available around the clock, whatever the customer's location (see illustration above). Plus, banks can provide services more efficiently and at substantially lower costs. For example, a typical customer transaction costing about $1 in a traditional "brick and mortar" bank branch or $0.60 through a phone call costs only about $0.02 online. Electronic banking also makes it easier for customers to compare banks' services and products, can increase competition among banks, and allows banks to penetrate new markets and thus expand their geographical reach. Some even see electronic banking as an opportunity for countries with underdeveloped financial systems to leapfrog developmental stages. Customers in such countries can access services more easily from banks abroad and through wireless communication systems, which are developing more rapidly than traditional "wired" communication networks. Trends in electronic banking Internet banking is gaining ground. Banks increasingly operate websites through which customers are able not only to inquire about account balances and interest and exchange rates but also to conduct a range of transactions. Unfortunately, data on Internet banking are scarce, and differences in definitions make cross-country comparisons difficult. Even so, one finds that Internet banking is particularly widespread in Austria, Korea, the Scandinavian countries, Singapore, Spain, and Switzerland, where more than 75 percent of all banks offer such services (see chart). The Scandinavian countries have the largest number of Internet users, with up to one-third of bank customers in Finland and Sweden taking advantage of e-banking.
In the United States, Internet banking is still concentrated in the largest banks. In mid2001, 44 percent of national banks maintained transactional websites, almost double the number in the third quarter of 1999. These banks account for over 90 percent of national banking system assets. The larger banks tend to offer a wider array of electronic banking services, including loan applications and brokerage services. While most U.S. consumers have accounts with banks that offer Internet services, only about 6 percent of them use these services. To date, most banks have combined the new electronic delivery channels with traditional brick and mortar branches ("brick and click" banks), but a small number have emerged that offer their products and services predominantly, or only, through electronic distribution channels. These "virtual" or Internet-only banks do not have a branch network but might have a physical presence, for example, an administrative office or nonbranch facilities like kiosks or automatic teller machines. The United States has about 30 virtual banks; Asia has 2, launched in 2000 and 2001; and the European Union has several—either as separately licensed entities or as subsidiaries or branches of brick and mortar banks. E-Banking Risks TRANSACTION/OPERATIONS RISK Transaction/Operations risk arises from fraud, processing errors, system disruptions, or other unanticipated events resulting in the institution’s inability to deliver products or services. This risk exists in each product and service offered. The level of transaction risk is affected by the structure of the institution’s processing environment, including the types of services offered and the complexity of the processes and supporting technology.
CREDIT RISK Generally, a financial institution’s credit risk is not increased by the mere fact that a loan is originated through an e-banking channel. However, management should consider additional precautions when originating and approving loans electronically, including assuring management information systems effectively track the performance of portfolios originated through e-banking channels. LIQUIDITY, INTEREST RATE, PRICE/MARKET RISKS Funding and investment-related risks could increase with an institution’s e-banking initiatives depending on the volatility and pricing of the acquired deposits. The Internet provides institutions with the ability to market their products and services globally. Internet-based advertising programs can effectively match yield-focused investors with potentially high-yielding deposits. But Internet-originated deposits have the potential to attract customers who focus exclusively on rates and may provide a funding source with risk characteristics similar to brokered deposits. An institution can control this potential volatility and expanded geographic reach through its deposit contract and account opening practices, which might involve face-to-face meetings or the exchange of paper correspondence COMPLIANCE/LEGAL RISK Compliance and legal issues arise out of the rapid growth in usage of e-banking and the differences between electronic and paper-based processes. E-banking is a new delivery channel where the laws and rules governing the electronic delivery of certain financial institution products or services may be ambiguous or still evolving. STRATEGIC RISK A financial institution’s board and management should understand the risks associated with e-banking services and evaluate the resulting risk management costs against the potential return on investment prior to offering e-banking services. Poor e-banking planning and investment decisions can increase a financial institution’s strategic risk. Early adopters of new e-banking services can establish themselves as innovators who anticipate the needs of their customers, but may do so by incurring higher costs and increased complexity in their operations. Conversely, late adopters may be able to avoid the higher expense and added complexity, but do so at the risk of not meeting customer demand for additional products and services. In managing the strategic risk associated with e-banking services, financial institutions should develop clearly defined e-banking objectives by which the institution can evaluate the success of its e-banking strategy REPUTATION RISK An institution’s decision to offer e-banking services, especially the more complex transactional services, significantly increases its level of reputation risk. Some of the ways in which e-banking can influence an institution’s reputation include:
Loss of trust due to unauthorized activity on customer accounts, Disclosure or theft of confidential customer information to unauthorized parties (e.g., hackers), Failure to deliver on marketing claims, Failure to provide reliable service due to the frequency or duration of service disruptions, Customer complaints about the difficulty in using e-banking services and the inability of the institution’s help desk to resolve problems, and Confusion between services provided by the financial institution and services provided by other businesses linked from the website. Conclusion Electronic banking can provide a number of benefits for customers and new business opportunities for banks, it exacerbates traditional banking risks. Even though considerable work has been done in some countries in adapting banking and supervision regulations, continuous vigilance and revisions will be essential as the scope of e-banking increases. In particular, there is still a need to establish greater harmonization and coordination at the international level. Moreover, the ease with which capital can potentially be moved between banks and across borders in an electronic environment creates a greater sensitivity to economic policy management. To understand the impact of e-banking on the conduct of economic policy, policymakers need a solid analytical foundation. Without one, the markets will provide the answer, possibly at a high economic cost. Further research on policy-related issues in the period ahead is therefore critical.