ebanking and its risk managment

8/19/2019 ebanking and its risk managment

1/40

E-banking: concepts & risk management NLDIMSR

Contents

1. INTRODUCTION:........................................................................................................... ...........1.1 Banking Overview:................................................................................................................

1.2 E-Banking basics....................................................................................................................

1.3 Edge over traditional banking................................................................................................

1.4Drivers for chnage...................................................................................................................

1.5 ndia banks on web................................................................................................................

1.! Evol"tion of E-banking..........................................................................................................

1.# $or%s of E-banking.............................................................................................................

2. E-BANKING COMPONENTS....................................................................................... ..

2.1 E-banking strateg&...............................................................................................................

2.1 $actors infl"encing e-banking s&ste%..................................................................................

2.2 'ost Entities.........................................................................................................................

2.3 (o%)onents and *rocesses..................................................................................................

3. E-BANKING SUPPORT SERVICES............................................................................. ..

3.1 +eblinking...........................................................................................................................

3.2 ,cco"nt ,ggregation............................................................................................................

3.3 Electronic ,"thentication.....................................................................................................

3.4 +ebsite 'osting...................................................................................................................

3.5 *a&%ents for E-(o%%erce..................................................................................................

3.5.1 *erson-to-*erson *a&%ents........................................................................................

3.! +ireless E-Banking..............................................................................................................

4. E-BANKING RISKS........................................................................................................ ..

4.1 ransactiono)erations risk..................................................................................................4.2 (redit risk.............................................................................................................................

4.3 /i0"idit& interest rate )rice%arket risks............................................................................

4.4 (o%)liancelegal risk..........................................................................................................

4.5 trategic risk........................................................................................................................

4.! e)"tation risk.....................................................................................................................

Page 1 of 40


2/40


5. Risk Management............................................................................................................. ...........

5.1Board anage%ent.........................................................................................................

5.2ec"rit&...............................................................................................................................

5.3eg"lator& and /egal fra%ework.......................................................................................

8. A!antages "# E-Banking:..............................................................................................................

$. C%a&&enges an '"a a%ea:...........................................................................................................

(). C"n*&+si"n........................................................................................................................................

!. Re#e'en*e .......................................................................................................................... .......

Page 2 of 40


3/40


INTRODUCTION

(.( Banking O!e'!ie, :

ince 16#7 banking and finance have "ndergone nothing less than a revol"tion. he

str"ct"re of the ind"str& in the %id-1667s bore little rese%blance to that established in the1637s in the after%ath of the bank fail"res of the 8reat De)ression. n the 16#7s and

1697s what had been a fract"red s&ste% b& design beca%e a single %arket do%esticall&

and internationall&. his is largel& attrib"ted to the ado)tion of new technolog& in

banking sector

ndian banking and financial sector has witnessed blaing s"ccess and created a h"ge

o))ort"nit& for the ndian ind"str& both in the international %arket and also

do%esticall&. +ith the financial services sector alread& acco"nting for %ore than 35

)ercent of the ndian software and services sector the seg%ent is well geared-") to offer

c"sto%ied financial )rod"cts and services as )er the ndian do%estic %arketsre0"ire%ents

Banks are de)lo&ing in the following areas :

;(ore Banking

;,"to%ation of Branches

;Deliver& (hannels

;arketing

Page 3 of 40


4/40


;ec"rit&

;(ash anage%ent and *a&%ent services

;Data wareho"sing and Data %ining

;+ork flow a"to%ation

; E and D

;aintenance

;,"dit and "rveillance

ost of the big software ho"ses do not enco"rage c"sto%iation. Banks need

c"sto%iation as each bank is "ni0"e has different b"siness goals and different b"siness

%iA so c"sto%iation enhances o)erating efficienc&. e-Engineering of banking

o)erations if )receded before c"sto%iation )rovides an ideal base for eAtre%el&s"ccessf"l i%)le%entation.

(. E-anking Basi*s:

E-banking is a )rocess b& which c"sto%er )erfor% banking transaction witho"t visiting a

brick-and-%ortar instit"tion and there is a"to%ated deliver& of new and traditional

banking )rod"cts and services directl& to c"sto%ers thro"gh electronic interactive

co%%"nication channels. E-banking incl"des the s&ste%s that enable financial instit"tion

c"sto%ers individ"als or b"sinesses to access acco"nts transact b"siness or obtain

infor%ation on financial )rod"cts and services thro"gh a )"blic or )rivate networkincl"ding the nternet thro"gh vario"s intelligent electronic devices s"ch as a )ersonal

co%)"ter )ersonal digital assistant a"to%ated teller %achine kiosk

or o"ch one tele)hone.

he ter% nternet Banking or E-Banking nternet both are "sed as s"))le%ent. E-

Banking is the one of the %aor )art of E-$inancing. E-Banking is web-based Banking. n

other words E-Banking refers to the banking o)erations which is done over +orld +ide

+eb.

he advent of E-B"siness acco%)anied with technological innovations and globaliation

is constantl& )ro)elling the b"sinesses organiation to redefine their b"siness o)erations

in ter%s of val"e chain reengineering and restr"ct"ring b"siness %odels. /ikel& the

financial sector is %eta%or)hosing "nder the i%)act of co%)etitive reg"lator& and

technological forces. he banks have )"t the%selves in the +orld +ide +eb to take

advantage of the internetCs )ower and reach to co)e with the accelerating )ace of change

of b"siness environ%ent.

Page 4 of 40


5/40


The famous quote b !i"" #ates that banking is $ita" to a hea"th econom% but banks

themse"$es are not high"ights of the crucia" nature of the e"ectronic forces that are

affecting banks more than an other financia" ser$ice pro$ier group.

he nternet banking is changing the banking ind"str& and is having the %aor effects on

banking relationshi)s. Even the organ tanle& Dean +itter nternet researche%)hasied that +eb is %ore i%)ortant for retail financial services than for %an& other

ind"stries. nternet banking involves "se of nternet for deliver& of banking )rod"cts

services. t falls into fo"r %ain categories fro% /evel 1 - %ini%"% f"nctionalit& sites

that offer onl& access to de)osit acco"nt data - to /evel 4 sites - highl& so)histicated

offerings enabling integrated sales of additional )rod"cts and access to other financial

services- s"ch as invest%ent and ins"rance.

E-Banking infor%ation architect"re is %odeled as client-server architect"re. , client

o)erating thro"gh a *( linked to nternet o)ens the s)ecial E-Banking site of his bank

and then "sing a set of s)ecial sec"re n"%bers gets access to his bank acco"nts and hasthe o))ort"nit& to cons"lt the% as well as to %ake all necessar& )a&%ents and transfers

for% his )ersonal acco"nts. +hen the transaction n"%ber is eAha"sted the bank sends

hi% a new set of n"%bers for his individ"al transfer sessions. n so%e cases the bank

)rovides c"sto%ied software. he bank software )rogra% can also be "tilied offline

for eAa%)le for )re)aring the )a&%ent orders offline and then %aking the act"al order

online. he client receives all n"%bers se)aratel& %ainl& b& %ail. he bank also )rovide

clients with si%ilar facilities in its )re%ises so that clients can "se the bank e0"i)%ent

s"ch as an , or a s)ecial facilit& linked to the %ain ter%inal facilit& called "lti%at

)er%itting the% to effect the sa%e acco"nt eAa%ination )a&%ent and transfer o)erations

witho"t cons"lting the bank staff.

(./An ege "!e' t'aiti"na& anking:

One has to a))roach the branch in )erson to withdraw cash or de)osit a che0"e or

re0"est a state%ent of acco"nts. n tr"e nternet banking an& in0"ir& or transaction is

)rocessed online witho"t an& reference to the branch at an& ti%e.

*roviding nternet banking is increasingl& beco%ing a need to have than a nice to

have service. he net banking th"s now is %ore of a nor% rather than an eAce)tion in

%an& develo)ed co"ntries d"e to the fact that it is the chea)est wa& of )roviding banking

services.

Banks have traditionall& been in the forefront of harnessing technolog& to i%)rove their

)rod"cts services and efficienc&. he& have over a long ti%e been "sing electronic and

teleco%%"nication networks for delivering a wide range of val"e added )rod"cts and

services. he deliver& channels incl"de direct dial ; ") connections )rivate networks

)"blic networks etc and the devices incl"de tele)hone *ersonal (o%)"ters incl"ding the

Page 5 of 40


6/40


,"to%ated eller achines etc. +ith the )o)"larit& of *(s eas& access to nternet and

+orld +ide +eb nternet is increasingl& "sed b& banks as a channel for

receiving instr"ctions and delivering their )rod"cts and services to their c"sto%ers. his

for% of banking is generall& referred to as nternet Banking altho"gh the range of

)rod"cts and services offered b& different banks var& widel& both in their content and

so)histication.

$ro% the )ers)ective of banking )rod"cts and services being offered thro"gh nternet

nternet banking is nothing %ore than traditional banking services delivered thro"gh an

electronic co%%"nication backbone vi nternet. B"t in the )rocess it has thrown o)en

iss"es which have ra%ifications be&ond what a new deliver& channel wo"ld nor%all&

envisage and hence has co%)elled reg"lators world over to take note of this e%erging

channel.

Page 6 of 40


7/40


(.0D'i!e's "# *%ange

nfor%ation technolog& is considered as the ke& driver for the changes taking )lace

aro"nd the world. he transfor%ation fro% the traditional banking to e-banking has been

a lea)C change. he evol"tion of e-banking started fro% the "se of ,"to%atic eller

achines and tele)hone banking direct bill )a&%ent electronicf"nd transfer and the revol"tionar& online banking. he f"t"re of electronic banking

wo"ld be %ore interactive i.e. F banking. $inland is the first co"ntr& in the world to

have taken a lead in e-banking. n ndia (( Bank initiated e-banking services d"ring

166# "nder the brand na%e nfinit&C. t has been forecasted that a%ong all categories

online banking is the f"t"re of electronic financial transactions. he rise in e-co%%erce

and internet in enhancing online sec"rit& transfor%ation and sensitive infor%ation has

been the core reason for the )enetration of online banking in ever&da& life. he shift

towards the involve%ent of the c"sto%ers in the financial service with the hel) of

technolog& es)eciall& internet has hel)ed in red"cing costs of financial instit"tions as

well as clientsc"sto%ers who "se the service at an&ti%e and fro% virt"all& an&where

with access to an internet connection.

,dvantages )revio"sl& held b& large financial instit"tions have shr"nk considerabl&. he

nternet has leveled the )la&ing field and afforded o)en access to c"sto%ers in the global

%arket)lace. nternet banking is a cost-effective deliver& channel for financial

instit"tions. (ons"%ers are e%bracing the %an& benefits of nternet banking. ,ccess to

oneGs acco"nts at an&ti%e and fro% an& location via the +orld +ide +eb is a

convenience "nknown a short ti%e ago. h"s a bankGs nternet )resence transfor%s fro%

Gbro"chrewareG stat"s to Gnternet bankingG stat"s once the bank goes thro"gh a technolog&

integration effort to enable the c"sto%er to access infor%ation abo"t his or her s)ecific

acco"nt relationshi). he siA )ri%ar& drivers of nternet banking incl"des in order of

)ri%ac& are:

H %)rove c"sto%er access

H $acilitate the offering of %ore services

H ncrease c"sto%er lo&alt&

H ,ttract new c"sto%ers

H *rovide services offered b& co%)etitors

H ed"ce c"sto%er attrition

(.1 Inian anks "n ,e

ndiaCs banking sector is growing at a fast )ace. ndia has beco%e one of the %ost

)referred banking destinations in the world. he Bank credit is growing at 37I )er

ann"% and there is an ever-eA)anding %iddle class of between 257 and 377 %illion

)eo)le


8/40


enables do"ble-digit ret"rns on %ost asset classes which is not so in a %aorit& of other

co"ntries. $oreign banks in ndia achieving a ret"rn on assets of 3I their keen

interest in eA)anding their b"sinesses is "nderstandable ; even %ore so when co%)ared

with the %easl& 1I average O, for the o) 1777 banks in the world. Banks o"tso"rce

over 95I of their infor%ation technolog& also the& are )ost)oning new technolog&

invest%ents b"t still investing in )roven technologies

he banking ind"str& in ndia is facing "n)recedented co%)etition fro% non-traditional

banking instit"tions which now offer banking and financial services over the nternet.

he dereg"lation of the banking ind"str& co")led with the e%ergence of new

technologies are enabling new co%)etitors to enter the financial services %arket 0"ickl&

and efficientl&.

ndian banks are going for the retail banking in a big wa&. 'owever %"ch is still to be

achieved. hro"gho"t the co"ntr& the nternet Banking is in the nascent stage of

develo)%ent .

n general these nternet sites offer onl& the %ost basic services. 55I are so called Gentr&

levelG sites offering little %ore than co%)an& infor%ation and basic %arketing %aterials.

Onl& 9I offer Gadvanced transactionsG s"ch as online f"nds transfer transactions cash

%anage%ent services. $oreign *rivate banks are %"ch advanced in ter%s of the

n"%ber of sites their level of develo)%ent.

(.2 E!"&+ti"n

ince the late 1667s E-Banking has develo)ed fro% virt"al insignificance to tens of

%illions of "sers worldwide 'owever E-Banking is the )rod"ct of different generations

of electronic transactions. he c"rrent web-based internet or E-Banking is the latest of

several generations of s&ste%s: ,"to%ated eller %achine *hone Banking *(

or 'o"se Banking. ,"to%ated teller %achines were the first well-known

%achines to )rovide electronic access to c"sto%ers where as in )hone banking "sers call

their bankCs co%)"ter s&ste% on their ordinar& )hone and "se the )hone ke&)ad to

)erfor% banking transactions.

*( banking s")erseded )hone banking and allowed "sers to interact with their bank b&

%eans of a co%)"ter with a dial-") %ode% connection to the )hone network. *hone and

*( banking entailed %aintenance costs associated with kee)ing ") to date with diverse

%ode%s and with avoiding )rohibitivel& co%)leA installation )roced"res. ,fter those

generations De"tsche Bank la"nched the ver& first nternet banking )roect in /atin

,%erica in 166! and (itibank has develo)ed a s)ecial Je-toolkitK across all its branches

worldwide. E-Banking "ses the web browser for the "ser interface and the nternet for

data transfer and download of software and so has a )otential for red"cing %aintenance

costs. $or "sers E-Banking )rovides c"rrent infor%ation 24-ho"rs-a-da& access to

Page 8 of 40


9/40


banking services. he )ri%ar& services )rovided b& e-banks are transferring %one&

a%ong oneCs own acco"nts )a&ing bills and checking acco"nt balances. /oans

brokering share trading service b"ndling and a host of other financial services are being

added to these )ri%ar& services E-Banking is widel& "sed in. Banks are gearing ") their

co%%"nications infrastr"ct"re to obtain a co%)etitive edge fro% E-Banking which is

fast beco%ing a realit& in ndia. E-Banking is fast beco%ing a strategic necessit& for %ost

co%%ercial banks as co%)etition increases fro% )rivate banks and ?B$s. he )rod"ct

had )riorit& over )lace banks can generate reven"e thro"gh increased acco"nt access

fees and benefit fro% )ro%otional o))ort"nit& to cross-sell )rod"cts s"ch as credit cards

and loans. D"e to the relative newness of this ra)idl& growing ind"str& banks as well as

cons"%ers had serio"s concerns abo"t the sec"rit& of nternet access to client acco"nts

which was the biggest challenge.

(ons"%ers are increasingl& looking for services the& can access fro% a single entr&

)oint. ,wareness of co%)etition has %otivated banks to %ove aggressivel& in seeking

alliances and establishing oint vent"res to %aintain their clai% to this )art of the

Eco%%erce infrastr"ct"re. /ike there are alliances in the , network 8ro") ?etwork

one& ransfer ?etwork etc. his is also creating seg%entation of networks where the

c"sto%ers of this networks so%eti%es "nable to access to othersC network. (ons"%er

behavior in banking changed )artl& as a res"lt of changes in the a%o"nt of s)are ti%e

available to individ"als. obilit& inde)endence of ti%e and )lace and fleAibilit& has

beco%e ke& words in cons"%er banking. he ke& feat"res of the nternet ; s"ch as 24

ho"r availabilit& al%ost i%%ediate access and the absence of )h&sical borders. ndeed

the nternet has been one of the ke& drivers in )ro%oting E-(o%%erce in the banking

sector. he o))ort"nities for banks in the nternet arena are varied des)ite this )lethora of o))ort"nities threats to the e-banks abo"nd. One %aor threat to banks is the Jnternet

onl&K virt"al banks. +ith @L 2 %illion one can set ") a f"ll&-f"nctional nternet Onl&

bank and )rovide )a&%ent services on the nternet.

he nternet banks serve also as gatewa&s offering identification and a"thoriation

services to a n"%ber of third )art& service )roviders. here are "ser-friendl&

o))ort"nities for cond"cting b"siness over the nternet with tele)hone co%)anies Energ&

(o%)an& taA board and other instit"tions. De%and for those services infl"ences also the

"sage rates of nternet banks. Banks for the cons"%ers and is a win-win sit"ation for the

banks and service )roviders.

t is evident that banks can obtain an advantage b& eA)loiting their eAisting E-

(o%%erce-read& infrastr"ct"re thro"gh leveraging it on the nternet b"t this o))ort"nit&

%"st be seen in the conteAt of a highl& co%)etitive ra)idl&-%oving %arket-)lace in

which new rivals are e%erging fro% %an& different directions.

Page 9 of 40


10/40


heoretical sec"rit& concerns the level of sec"rit& that is technicall& )ossibleM whereas

effective sec"rit& concerns the level of sec"rit& achieved in )ractice and is t&)icall&

lower than theoretical sec"rit&. @ser ado)tion of E-Banking is affected b& )erceived

sec"rit&. his s"))orts a view of sec"rit& as cr"cial to the overall "sabilit& of E-Banking

s&ste%s.

(.3 4"'ms "# E-anking

he following ter%s all refer to one for% or another of electronic banking: )ersonal

co%)"ter banking nternet banking virt"al banking online banking ho%e banking

re%ote electronic banking and )hone banking. *( banking and nternet or online

banking are the %ost fre0"entl& "sed designations. t sho"ld be noted however that the

ter%s "sed to describe the vario"s t&)es of electronic banking are often "sed

interchangeabl&.

C"'5"'ate e - Banking

cor)orate e-banking is a co%)rehensive cor)orate and s%all b"siness banking sol"tion

)roviding a single "nified view of cor)orate banking relationshi)s across asset and

liabilit& )rod"cts li%its trade finance and cash %anage%ent. t is designed to s"))ort

%"lti)le channels incl"ding the nternet and %obile and can be interfaced with dis)arate

host s&ste%s and third-)art& a))lications. his e%)owers banks to )rovide their

cor)orate c"sto%ers an&ti%e an&where access to real-ti%e consolidated infor%ation

he sol"tion is b"ilt on new-generation ind"str& standard technologies N2EE and .?E.

Ke6 #eat+'es:

• ,cco"nts and ransfers

• Electronic nvoice *resent%ent *a&%ent

• *a&%ents

• (ollections anage%ent

• /i0"idit& anage%ent

• econciliation e)orting

• rade $inance

C"ns+me' e-anking

(ons"%er e-banking sol"tion is a )roven nternet banking and %obile banking sol"tion

for retail banking c"sto%ers. B"ilt on new-generation technolog& it )rovides a single

"nified view of the c"sto%erGs %an& relationshi)s with the bank. he sol"tion )rovides

high fleAibilit& for c"sto%iation and rob"st sec"rit& feat"res.

Page 10 of 40


11/40


his sol"tion can be interfaced with an& core banking sol"tion directl& or thro"gh an

ind"str& standard %iddleware. t )rovides banking c"sto%ers real ti%e access to their

relationshi)s with the bank s"ch as acco"nt in0"iries f"nd transfers credit cards %"t"al

f"nds )a&%ents and re%ittances. t enables the% to %ake )a&%ents to individ"als or

instit"tions and other general )a&%ents online. (ons"%er nternet Banking with its

abilit& to reach each and ever& nook and crann& of the world holds great i%)ortance for a

nation like ndia where conventional Banking services are o"t of reach for a large

)ro)ortion of the %asses. B"t to %ake it a s"ccess it re0"ires %ore than "st an ade0"ate

internet enabling infrastr"ct"re

Ke6 #eat+'es:

• (ore od"le

• *a&%ents od"le

• (redit (ard and "t"al $"nd od"les

• Electronic Bill *a&%ent and *resent%ent od"le

• ,lerts od"le

• ec"rit& $eat"res

• obile Banking

o date %ore banks have established an advertising )resence on the nternet )ri%aril&

in the for% of infor%ational or interactive web sitesthan have created transactional web

sites. 'owever a n"%ber of Banks that do not &et offer transactional nternet banking

services have indicated on their web sites that the& will offer s"ch banking activities in

the f"t"re.

,ltho"gh nternet banks offer %an& of the sa%e services as do traditional brick-and-

%ortar Banks anal&sts view nternet banking as a %eans of retaining increasingl&

so)histicated c"sto%ers of develo)ing a new c"sto%er base and of ca)t"ring a greater

share of de)ositor assets. , t&)ical nternet bank site s)ecifies the t&)es of transactions

offered and )rovides infor%ation abo"t acco"nt sec"rit&.

Beca"se nternet banks generall& have lower o)erational and transactional costs than do

traditional brick-and-%ortar banks the& are often able to offer low-cost checking and

high-&ield (ertificates of de)osit. nternet banking is not li%ited to a )h&sical siteM so%e

nternet banks eAist witho"t )h&sical branches for eAa%)le elebank and Banknet . $"rther in so%e cases web banks are not restricted to

cond"cting transactions within national borders and have the abilit& to %ake transactions

involving large a%o"nts of assets instantaneo"sl&.

Page 11 of 40


12/40


E-Banking C"m5etiti!eness

E-Banking is develo)ing grad"all& and it is getting acce)tance globall&. B"t whether this

field is l"crative for entr& can be "dged b& ind"str& and co%)etitive anal&sis. /ike other

ind"str& *orterCs $ive $orces odel of (o%)etition can also be a))lied to "nderstand E-

Banking co%)etitiveness.

Rivalry among Competing Parties

,s there is no single internet onl& bank eAist in this world the c"rrent rivalr& a%ong the

co%)etitor or banks in the banking ind"str& sho"ld be considered. Banking instit"tions

are co"ntering their co%)etitors b& leveraging E-(o%%erce technologies and vario"s

service offerings online this is a %aor shift fro% the earl& da&s of Electronic $"nds

ransfer when large organiations introd"ced electronic banking to si%)lif& the

%anage%ent of their salar& and )a&roll )roble%s.

Banks are leveraging it as a distrib"tion channel to offer co%)leA )rod"cts at the sa%e

0"alit& the& can )rovide fro% their )h&sical branches at a lower cost to %ore )otential

c"sto%ers witho"t bo"ndaries. E-Banking is "sed to a"g%ent their c"rrent val"e chain

offering new )rod"ct and co%)ete for the c"sto%ers.

New Entrants

,t )resent the entr& barriers to nternet banking a))ear to be %"ch higher for new

entrants than was the case d"ring the earl& da&s of this t&)e of banking. he barriers ste%

fro% c"sto%er attit"des and the ver& nat"re of banking services and )rod"cts. he

traditional banks with a strong c"sto%er base have a co%)etitive advantage over newco%ers.

Buyers

he nternet has leveled the )la&ing field: the bargaining )ower of cons"%ers is

increasing switching costs are beco%ing lower


13/40


. E-BANKING COMPONENTS

.( E-Banking St'ateg6

everal %odel of E-B"siness were tried b& different banks all over the world to get the%

involved in the E-Banking vicinit&. he %ost "sed E-B"siness %odel were Internet 'n"% !rick-an-("ick or ("ick-an-Mortar) 'owever nternet Onl&C %odel failed to s"rvive.

ec"rit& $irst ?et Bank which was for%ed in 166! in the @ and clai%s to be

the first nternet-onl& bank in the world. B"t it was ac0"ired b& the o&al Bank of

(anada in 1669 s"ggesting that c"sto%ers %a& still want the co%fort of a )h&sical

)resence. he )resent trend is Brick and (lickC or (lick and ortarC where banks serve

their c"sto%ers thro"gh internet having )h&sical o)erations si%"ltaneo"sl&. *rogress in

infor%ation technolog& has red"ced trans)ortation costs transaction cost and th"s

s"ggests that the nternet enabled banks to offer low-cost high val"e-added financial

services. ,ltho"gh )rice incentives can )la& significant role in getting c"sto%ers online

the service needs to be based on 0"alit& rather than )rice onl&. Develo)ing technological

sol"tions sho"ld was not done with a )rod"ct or line of b"siness in foc"s b"t with a

c"sto%er relationshi) foc"s with integrated deliver& of )rod"cts and services. "ccess or

fail"re in nternet banking is greatl& deter%ined b& the integration of technolog&

infrastr"ct"re with the b"siness )rocesses.

E-Banking 7"'& 7ie

ince its ince)tion nternet banking has eA)erienced strong and s"stained growth. +orld

Bank re)ort on lea)frogging in e-finance )ointed o"t that the three co"ntries with

i%)ressive )rogress in infor%ation technolog& in this sense are Estonia e)"blic of =orea and Brail. (reation of the worldCs leading electronic banking s&ste%s has been

done at a re%arkabl& low cost co%)ared to other world-class internet banks

he share of @nited tates ho"seholds "sing nternet banking will increase to 55 billion

"sers b& 2717. 8rowth in this area has been driven b& traditional banks which have "sed

the online channel to generate c"sto%er lo&alt& and i%)rove their o)erating %argins.

,ll banks offering E-Banking also offer sec"rit& for transactions "sing firewalls vir"s

)rotection 129 bit encr&)tion verification b& %eans of digital certificate and

state li%its to c"sto%er liabilit& for "na"thoried "se of access codes. n ,sia one of the%ost i%)ressive records has been achieved b& the e)"blic of =orea. nternet banking in

that co"ntr& has increased at a ra)id )ace. he e)"blic of =orea is also leading in online

brokerage and in %obile banking. n o"th-East ,sia nternet banking is also develo)ing

ra)idl& in hailand ala&sia and inga)ore and to a lesser eAtent in the *hili))ines.

,)art fro% ?orth and o"th ,frica the "b aharan ,frica is the region that is serio"sl&

lagging behind in nternet banking altho"gh it is giving to the rest of the world the good

Page 13 of 40


14/40


eAa%)le of %icrofinance develo)%ents. Banking is likel& to be a significant co%)onent

of the )rod"ct deliver& and c"sto%er strateg& of the strategic %arketing )lans of c"tting-

edge $s in the f"t"re.

. 4a*t"'s in#&+en*ing e-anking s6stem

E-banking s&ste%s can var& significantl& in their config"ration de)ending on a n"%ber

of factors. $inancial instit"tions sho"ld choose their e-banking s&ste% config"ration

incl"ding o"tso"rcing relationshi)s based on fo"r factors:

• trategic obectives for e-bankingM

• co)e scale and co%)leAit& of e0"i)%ent s&ste%s and activities

• echnolog& eA)ertise

• ec"rit& and internal control re0"ire%ents.

./ "st Entities

$inancial instit"tions %a& choose to s"))ort their e-banking services internall&.

,lternativel& financial instit"tions can o"tso"rce an& as)ect of their e-banking s&ste%s to

third )arties. he following entities co"ld )rovide or host e-banking-related services for financial instit"tions:

• ,nother financial instit"tion

• nternet service )rovider

• nternet banking software vendor or )rocessor

• (ore banking vendor or )rocessor

•

anaged sec"rit& service )rovider

• Bill )a&%ent )rovider

• (redit b"rea"

• (redit scoring co%)an&.

Page 14 of 40


15/40


.0 C"m5"nents an P'"*esses

E-banking s&ste%s rel& on a n"%ber of co%%on co%)onents or )rocesses. he following

list incl"des %an& of the )otential co%)onents and )rocesses seen in a t&)ical instit"tion:

• +ebsite design and hosting

• $irewall config"ration and %anage%ent

• ntr"sion detection s&ste% or D

• ?etwork ad%inistration

• ec"rit& %anage%ent

•

nternet banking server

• E-co%%erce a))lications

• nternal network servers

• (ore )rocessing s&ste%

• *rogra%%ing s"))ort

• ,"to%ated decision s"))ort s&ste%s

hese co%)onents work together to deliver e-banking services. Each co%)onent

re)resents a control )oint to consider. hro"gh a co%bination of internal and o"tso"rced

sol"tions %anage%ent has %an& alternatives when deter%ining the overall s&ste%

config"ration for the vario"s co%)onents of an e-banking s&ste%. One or %ore

technolog& service )roviders can host the e-banking a))lication and n"%ero"s network

co%)onents as ill"strated in the following diagra%. n this config"ration the instit"tionCs

service )rovider hosts the instit"tionCs website nternet banking server firewall and

intr"sion detection s&ste%. +hile the instit"tion does not have to %anage the dail&

ad%inistration of these co%)onent s&ste%s its %anage%ent and board re%ain

res)onsible for the content )erfor%ance and sec"rit& of the e-banking s&ste%.

Page 15 of 40


16/40


PcloseQ

4ig+'e (: T%i'-Pa't6 P'"!ie' "ste E-Banking Diag'am

his diagra% ill"strates the transaction flow for one )ossible config"ration where the

bank relies on a technolog& service )rovider to host its nternet banking a))lication.

nternet banking c"sto%er sends an e-banking transaction thro"gh their nternet

ervice *rovider via a )hone wireless or broadband connection.

he c"sto%erCs * ro"tes the transaction thro"gh the nternet and sends it to the e-

banking service )roviderGs * which ro"tes it to the )rovider.

he transaction enters the )roviderGs network thro"gh a ro"ter which directs the e-

banking transaction thro"gh a firewall to the a))lication r"nning on the nternet banking

server.

he website server and nternet banking server %a& have host-based intr"sion

detection s&ste% software %onitoring the server and its files to )rovide alerts of

)otential "na"thoried %odifications.

?etwork D software %a& reside at different )oints within the network to anal&e

the %essage for )otential attack characteristics that s"ggest an intr"sion atte%)t.

Page 16 of 40


17/40


he nternet banking a))lication )rocesses the transaction against acco"nt balance

data thro"gh a real ti%e connection to the core banking s&ste% or a database of acco"nt

balance data which is ")dated )eriodicall& fro% the core banking s&ste%.

he nternet banking server has a firewall filtering nternet traffic fro% its internal

network.

/. E-BANKING SUPPORT SERVICES

n addition to traditional banking )rod"cts and services financial instit"tions can )rovide

a variet& of services that have been designed or ada)ted to s"))ort e-co%%erce.anage%ent sho"ld "nderstand these services and the risks the& )ose to the instit"tion.

C"mm"n E-Banking Se'!i*es

o%e of the co%%on retail and wholesale e-banking services offered b& financial

instit"tions are:

etail ervices

1. ,cco"nt %anage%ent

2. Bill )a&%ent and )resent%ent

3. ?ew acco"nt o)ening

4. (ons"%er wire transfers

5. nvest%entBrokerage services

Page 17 of 40


18/40


!. /oan a))lication and a))roval

+holesale ervices

1. ,cco"nt %anage%ent

2. (ash %anage%ent

3. %all b"siness loan a))lications a))rovals or advances

4. (o%%ercial wire transfers

5. B"siness-to-b"siness )a&%ents

E%)lo&ee benefits)ension ad%inistration

/.( 7e&inking

, large n"%ber of financial instit"tions %aintain sites on the +orld +ide +eb. o%e

websites are strictl& infor%ational while others also offer c"sto%ers the abilit& to

)erfor% financial transactions s"ch as )a&ing bills or transferring f"nds between

acco"nts.

Firt"all& ever& website contains Jweblinks.K , weblink is a word )hrase or i%age on a

web)age that contains coding that will trans)ort the viewer to a different )art of the

website or a co%)letel& different website b& "st clicking the %o"se. +hile weblinks are

a convenient and acce)ted tool in website design their "se can )resent certain risks.

8enerall& the )ri%ar& risk )osed b& weblinking is that viewers can beco%e conf"sedabo"t whose website the& are viewing and who is res)onsible for the infor%ation

)rod"cts and services available thro"gh that website. here are a variet& of risk

%anage%ent techni0"es instit"tions sho"ld consider "sing to %itigate these risks. hese

risk %anage%ent techni0"es are for those instit"tions that develo) and %aintain their own

websites as well as instit"tions that "se third-)art& service )roviders for this f"nction.

he agencies have iss"ed g"idance on weblinking that )rovides details on risks and risk

%anage%ent techni0"es financial instit"tions sho"ld consider.

/. A**"+nt Agg'egati"n

,cco"nt aggregation is a service that gathers infor%ation fro% %an& websites )resents

that infor%ation to the c"sto%er in a consolidated for%at and in so%e cases %a& allow

the c"sto%er to initiate activit& on the aggregated acco"nts. he infor%ation gathered or

aggregated can range fro% )"blicl& available infor%ation to )ersonal acco"nt

infor%ation . ,ggregation services can

i%)rove c"sto%er convenience b& avoiding %"lti)le log-ins and )roviding access to tools

Page 18 of 40


19/40


that hel) c"sto%ers anal&e and %anage their vario"s acco"nt )ortfolios. o%e

aggregators "se the c"sto%er-)rovided "ser Ds and )asswords to sign in as the c"sto%er.

Once the c"sto%erCs acco"nt is accessed the aggregator co)ies the )ersonal acco"nt

infor%ation fro% the website for re)resentation on the aggregatorCs site . Other aggregators "se direct data-feed arrange%ents with website o)erators or

other fir%s to obtain the c"sto%erCs infor%ation. 8enerall& direct data feeds are tho"ght

to )rovide greater legal )rotection to the aggregator than does screen scra)ing.

/./ E&e*t'"ni* A+t%enti*ati"n

eliable c"sto%er a"thentication is i%)erative for E-banking. Effective a"thentication

can hel) banks red"ce fra"d re)"tation risk disclos"re of c"sto%er infor%ation and

)ro%ote the legal enforceabilit& of their electronic agree%ents verif&ing the identities of

c"sto%ers and a"thoriing e-banking activities are integral )arts of e-banking financial

services. ince traditional )a)er-based and in-)erson identit& a"thentication %ethodsred"ce the s)eed and efficienc& of electronic transactions financial instit"tions have

ado)ted alternative a"thentication %ethods incl"ding:

ethods to a"thenticate c"sto%ers:

• *asswords *?

• Digital certificates *=

• *h&sical devices s"ch as tokens

• Bio%etric identifiers

he a"thentication %ethods listed above var& in the level of sec"rit& and reliabilit& the&

)rovide in the cost and co%)leAit& of their "nderl&ing infrastr"ct"res. ,s s"ch the choice

of which techni0"e to "se sho"ld be co%%ens"rate with the risks in the )rod"cts and

services for which the& control access. he Electronic ignat"res in 8lobal and ?ational

(o%%erce ,ct establishes so%e "nifor% federal r"les concerning the legal

stat"s of electronic signat"res and records in co%%ercial and cons"%er transactions so as

to )rovide %ore legal certaint& and )ro%ote the growth of electronic co%%erce. he

develo)%ent of sec"re digital signat"res contin"es to evolve with so%e financialinstit"tions either acting as the certification a"thorit& for digital signat"res or )roviding

re)ositor& services for digital certificates.

Page 19 of 40


20/40


4ig+'e : Sna5s%"t s%",ing &"gin 5age "# D4C ank9s e-anking ,esite

Page 20 of 40


21/40


4ig+'e /: D4C ank9s ,e5age s%",ing a**"+nt etai&s

/.0 7esite "sting

o%e financial instit"tions host websites for both the%selves as well as for other

b"sinesses. $inancial instit"tions that host a b"siness c"sto%erCs website "s"all& store or

arrange for the storage of the electronic files that %ake ") the website. hese files arestored on one or %ore servers that %a& be located on the hosting financial instit"tionCs

)re%ises. +ebsite hosting services re0"ire strong skills in networking sec"rit& and

)rogra%%ing. he technolog& and software change ra)idl&. nstit"tions develo)ing

websites sho"ld %onitor the need to ado)t new intero)erabilit& standards and )rotocols

s"ch as EAtensible ark-@) /ang"age to facilitate data eAchange a%ong the

diverse )o)"lation of nternet "sers.

Page 21 of 40


22/40


/.1 Pa6ments #"' E-C"mme'*e

an& b"sinesses acce)t vario"s for%s of electronic )a&%ents for their )rod"cts and

services. $inancial instit"tions )la& an i%)ortant role in electronic )a&%ent s&ste%s b&

creating and distrib"ting a variet& of electronic )a&%ent instr"%ents acce)ting a si%ilar

variet& of instr"%ents )rocessing those )a&%ents and )artici)ating in clearing and

settle%ent s&ste%s. 'owever increasingl& financial instit"tions are co%)eting with third

)arties to )rovide s"))ort services for e-co%%erce )a&%ent s&ste%s. ,%ong the

electronic )a&%ents %echanis%s that financial instit"tions )rovide for e-co%%erce are

a"to%ated clearing ho"se


23/40


1. $inancial instit"tions that do not )rovide bill )a&%ent services b"t %a& direct

c"sto%ers to select fro% several "naffiliated bill )a&%ent )roviders.

-(a"tion c"sto%ers regarding sec"rit& and )rivac& iss"es thro"gh the "se of on-line

disclos"res or %ore conservativel& e-banking agree%ents

2. $inancial instit"tions that rel& on a third-)art& bill )a&%ent )rovider incl"ding nternet

banking )roviders that s"bcontract to third )arties.

-et dollar and vol"%e thresholds and review bill )a&%ent transactions for s"s)icio"s

activit&

-8ain inde)endent a"dit ass"rance over the bill )a&%ent )roviderCs )rocessing controls.

-estrict e%)lo&eesC ad%inistrative access to ens"re that the internal controls li%iting

their ca)abilities to originate %odif& or delete bill )a&%ent transactions are at least asstrong as those a))licable to the "nderl&ing retail )a&%ent s&ste% "lti%atel& trans%itting

the transaction.

-estrict b& vendor contract and identif& the "se of an& s"bcontractors associated with

the bill )a&%ent a))lication to ens"re ade0"ate oversight of "nderl&ing bill )a&%ent

s&ste% )erfor%ance and availabilit&.

-Eval"ate the ade0"ac& of a"thentication %ethods given the higher risk associated with

f"nds transfer ca)abilities rather than with basic acco"nt access

3. $inancial instit"tions that "se third-)art& software to host a bill )a&%ent a))lication

internall&.

-Deter%ine the eAtent of an& inde)endent assess%ents or certification of the sec"rit& of

a))lication so"rce code.

-Ens"re software is ade0"atel& tested )rior to installation on the live s&ste%

-Ens"re vendor access for software %aintenance is controlled and %onitored.

4. $inancial instit"tions that develo) %aintain and host their own bill )a&%ent s&ste%

$inancial instit"tions can offer bill )a&%ent as a stand-alone service or in co%bination

with bill )resent%ent. Bill )resent%ent arrange%ents )er%it a b"siness to s"b%it a

c"sto%erCs bill in electronic for% to the c"sto%erCs financial instit"tion. ("sto%ers can

view their bills b& clicking on links on their acco"ntCs e-banking screen or %en". ,fter

Page 23 of 40


24/40


viewing a bill the c"sto%er can initiate bill )a&%ent instr"ctions or elect to )a& the bill

thro"gh a different )a&%ent channel.

n addition so%e b"sinesses have beg"n offering electronic bill )resent%ent directl&

fro% their own websites rather than thro"gh links on the e-banking screens of a financial

instit"tion. @nder s"ch arrange%ents c"sto%ers can log on to the b"sinessCs website to

view their )eriodic bills. hen if so desired the& can electronicall& a"thorie the

b"siness to JtakeK the )a&%ent fro% their acco"nt. he )a&%ent then occ"rs as an ,('

debit originated b& the b"sinessCs financial instit"tion as co%)ared to the ,(' credit

originated b& the c"sto%erCs financial instit"tion in the bill )a&%ent scenario described

above. nstit"tions sho"ld ens"re )ro)er a))roval of b"sinesses allowed to "se ,('

)a&%ent technolog& to initiate )a&%ents fro% c"sto%er acco"nts.

(ash %anage%ent a))lications wo"ld incl"de the sa%e control considerations described

above b"t the instit"tion sho"ld consider additional controls beca"se of the higher risk

associated with co%%ercial transactions. he ade0"ac& of a"thentication %ethods

beco%es a higher )riorit& and re0"ires greater ass"rance d"e to the larger average dollar

sie of transactions. nstit"tions sho"ld also establish additional controls to ens"re

binding agree%ents ; consistent with an& eAisting ,(' or wire transfer agree%ents ;

eAist with co%%ercial c"sto%ers. ,dditionall& cash %anage%ent s&ste%s sho"ld )rovide

ade0"ate sec"rit& ad%inistration ca)abilities to enable the b"siness owners to restrict

access rights and dollar li%its associated with %"lti)le-"ser access to their acco"nts.

/.1. Pe's"n-t"-Pe's"n Pa6ments

Electronic )erson-to-)erson )a&%ents also known as e-%ail %one& )er%it cons"%ers to

send J%one&K to an& )erson or b"siness with an e-%ail address. @nder this scenario a

cons"%er electronicall& instr"cts the )erson-to-)erson )a&%ent service to transfer f"nds

to another individ"al. he )a&%ent service then sends an e-%ail notif&ing the individ"al

that the f"nds are available and infor%s hi% or her of the %ethods available to access the

f"nds incl"ding re0"esting a check transferring the f"nds to an acco"nt at an ins"red

financial instit"tion or retrans%itting the f"nds to so%eone else. *erson-to-)erson

)a&%ents are t&)icall& f"nded b& credit card charges or b& an ,(' transfer fro% the

cons"%erCs acco"nt at a financial instit"tion. ince neither the )a&ee nor the )a&er in the

transaction has to have an acco"nt with the )a&%ent service s"ch services %a& beoffered b& an ins"red financial instit"tion b"t are fre0"entl& offered b& other b"sinesses

as well.

/.2 7i'e&ess E-Banking

Page 24 of 40


25/40


+ireless banking is a deliver& channel that can eAtend the reach and enhance the

convenience of nternet banking )rod"cts and services. +ireless banking occ"rs when

c"sto%ers access a financial instit"tionGs network "sing cell"lar )hones )agers and

)ersonal digital assistants thro"gh teleco%%"nication co%)aniesC

wireless networks. +ireless banking services in the @nited tates t&)icall& s"))le%ent a

financial instit"tionGs e-banking )rod"cts and services.

+ireless devices have li%itations that increase the sec"rit& risks of wireless-based

transactions and that %a& adversel& affect c"sto%er acce)tance rates. Device li%itations

incl"de red"ced )rocessing s)eeds li%ited batter& life s%aller screen sies different

data entr& for%ats and li%ited ca)abilities to transfer stored records. hese li%itations

co%bine to %ake the %ost recognied nternet lang"age '&)erteAt ark") /ang"age


26/40


)rocesses tools eA)ertise and testing. nstit"tions sho"ld deter%ine the a))ro)riate level

of sec"rit& controls based on their assess%ent of the sensitivit& of the infor%ation to the

c"sto%er and to the instit"tion and on the instit"tionCs established risk tolerance level.

0. CREDIT RISK

8enerall& a financial instit"tionCs credit risk is not increased b& the %ere fact that a loan

is originated thro"gh an e-banking channel. 'owever %anage%ent sho"ld consider

additional )reca"tions when originating and a))roving loans electronicall& incl"ding

ass"ring %anage%ent infor%ation s&ste%s effectivel& track the )erfor%ance of )ortfolios

originated thro"gh e-banking channels. he following as)ects of on-line loan origination

and a))roval tend to %ake risk %anage%ent of the lending )rocess %ore challenging. f

not )ro)erl& %anaged these as)ects can significantl& increase credit risk.

Ferif&ing the c"sto%erCs identit& for on-line credit a))lications and eAec"ting anenforceable contractM

onitoring and controlling the growth )ricing "nderwriting standards and ongoing

credit 0"alit& of loans originated thro"gh e-banking channelsM

onitoring and oversight of third-)arties doing b"siness as agents or on behalf of the

financial instit"tion M

Fal"ing collateral and )erfecting liens over a )otentiall& wider geogra)hic areaM

(ollecting loans fro% individ"als over a )otentiall& wider geogra)hic areaM and

onitoring an& increased vol"%e of and )ossible concentration in o"t-of-area

lending.

0./ ;I INTEREST RATE> PRICEMARKET RISKS

$"nding and invest%ent-related risks co"ld increase with an instit"tionCs e-banking

initiatives de)ending on the volatilit& and )ricing of the ac0"ired de)osits. he nternet

)rovides instit"tions with the abilit& to %arket their )rod"cts and services globall&.nternet-based advertising )rogra%s can effectivel& %atch &ield-foc"sed investors with

)otentiall& high-&ielding de)osits. B"t nternet-originated de)osits have the )otential to

attract c"sto%ers who foc"s eAcl"sivel& on rates and %a& )rovide a f"nding so"rce with

risk characteristics si%ilar to brokered de)osits. ,n instit"tion can control this )otential

volatilit& and eA)anded geogra)hic reach thro"gh its de)osit contract and acco"nt

o)ening )ractices which %ight involve face-to-face %eetings or the eAchange of )a)er

Page 26 of 40


27/40


corres)ondence. he instit"tion sho"ld %odif& its )olicies as necessar& to address the

following e-banking f"nding iss"es:

*otential increase in de)endence on brokered f"nds or other highl& rate-sensitive

de)osits

*otential ac0"isition of f"nds fro% %arkets where the instit"tion is not licensed to

engage in banking )artic"larl& if the instit"tion does not establish disclose and

enforce geogra)hic restrictionsM

*otential i%)act of loan or de)osit growth fro% an eA)anded nternet %arket

incl"ding the i%)act of s"ch growth on ca)ital ratiosM and

*otential increase in volatilit& of f"nds sho"ld e-banking sec"rit& )roble%s

negativel& i%)act c"sto%er confidence or the %arketCs )erce)tion of the instit"tion.

0.0 COMP;IANCE;EGA; RISK

(o%)liance and legal iss"es arise o"t of the ra)id growth in "sage of e-banking and the

differences between electronic and )a)er-based )rocesses. E-banking is a new deliver&

channel where the laws and r"les governing the electronic deliver& of certain financial

instit"tion )rod"cts or services %a& be a%big"o"s or still evolving. )ecific reg"lator&

and legal challenges incl"de:

@ncertaint& over legal "risdictions and which stateCs or co"ntr&Cs laws govern a

s)ecific e-banking transaction

Deliver& of credit and de)osit-related disclos"resnotices as re0"ired b& law or

reg"lation

etention of re0"ired co%)liance doc"%entation for on-line advertising

a))lications state%ents disclos"res and noticesM and

Establish%ent of legall& binding electronic agree%ents.

/aws and reg"lations governing cons"%er transactions re0"ire s)ecific t&)es of

disclos"res notices or record kee)ing re0"ire%ents. hese re0"ire%ents also a))l& to e-

banking and federal banking agencies contin"e to ")date cons"%er laws and reg"lations

to reflect the i%)act of e-banking and on-line c"sto%er relationshi)s. o%e of the legal

Page 27 of 40


28/40


re0"ire%ents and reg"lator& g"idance that fre0"entl& a))l& to e-banking )rod"cts and

services incl"de:

olicitation collection and re)orting of govern%ent %onitoring infor%ation on

a))lications and loans as re0"ired b& E0"al (redit O))ort"nit& ,ct

and $air (redit e)orting ,ct reg"lations.

nstit"tions that offer e-banking services both infor%ational and transactional ass"%e a

higher level of co%)liance risk beca"se of the changing nat"re of the technolog& the

s)eed at which errors can be re)licated and the fre0"enc& of reg"lator& changes to

address e-banking iss"es. he )otential for violations is f"rther heightened b& the need to

ens"re consistenc& between )a)er and electronic advertise%ents disclos"res and notices.

Page 28 of 40


29/40


0.1 STRATEGIC RISK

, financial instit"tionCs board and %anage%ent sho"ld "nderstand the risks associated

with e-banking services and eval"ate the res"lting risk %anage%ent costs against the

)otential ret"rn on invest%ent )rior to offering e-banking services. *oor e-banking

)lanning and invest%ent decisions can increase a financial instit"tionCs strategic risk.

Earl& ado)ters of new e-banking services can establish the%selves as innovators who

antici)ate the needs of their c"sto%ers b"t %a& do so b& inc"rring higher costs and

increased co%)leAit& in their o)erations. (onversel& late ado)ters %a& be able to avoid

the higher eA)ense and added co%)leAit& b"t do so at the risk of not %eeting c"sto%er

de%and for additional )rod"cts and services. n %anaging the strategic risk associated

with e-banking services financial instit"tions sho"ld develo) clearl& defined e-banking

obectives b& which the instit"tion can eval"ate the s"ccess of its e-banking strateg&. n

)artic"lar financial instit"tions sho"ld )a& attention to the following:

,de0"ac& of %anage%ent infor%ation s&ste%s to track e-banking "sage and

)rofitabilit&M

(osts involved in %onitoring e-banking activities or costs involved in overseeing e-

banking vendors and technolog& service )rovidersM

Design deliver& and )ricing of services ade0"ate to generate s"fficient c"sto%er

de%andM

etention of electronic loan agree%ents and other electronic contracts in a for%at

that will be ad%issible and enforceable in litigationM

(osts and availabilit& of staff to )rovide technical s"))ort for interchanges involving

%"lti)le o)erating s&ste%s web browsers and co%%"nication devicesM

(o%)etition fro% other e-banking )rovidersM and

,de0"ac& of technical o)erational co%)liance or %arketing s"))ort for e-banking

)rod"cts and services.

0.2 REPUTATION RISK

Page 29 of 40


30/40


,n instit"tionCs decision to offer e-banking services es)eciall& the %ore co%)leA

transactional services significantl& increases its level of re)"tation risk. o%e of the

wa&s in which e-banking can infl"ence an instit"tionCs re)"tation incl"de:

/oss of tr"st d"e to "na"thoried activit& on c"sto%er acco"nts

Disclos"re or theft of confidential c"sto%er infor%ation to "na"thoried )arties

$ail"re to deliver on %arketing clai%s

$ail"re to )rovide reliable service d"e to the fre0"enc& or d"ration of service

disr")tions

("sto%er co%)laints abo"t the diffic"lt& in "sing e-banking services and the

inabilit& of the instit"tionCs hel) desk to resolve )roble%s

(onf"sion between services )rovided b& the financial instit"tion and services

)rovided b& other b"sinesses linked fro% the website.

1. RISK MANAGEMENT

he Basel (o%%ittee on Banking ")ervision eA)ects s"ch risks to be recognied

addressed and %anaged b& banking instit"tions in a )r"dent %anner according to the

f"nda%ental characteristics and challenges of e-banking services. hese characteristics

incl"de the "n)recedented s)eed of change related to technological and c"sto%er service

innovation the "bi0"ito"s and global nat"re of o)en electronic networks the integration

of e-banking a))lications with legac& co%)"ter s&ste%s and the increasing de)endence

of banks on third )arties that )rovide the necessar& infor%ation technolog&. +hile not

creating inherentl& new risks the (o%%ittee noted that these characteristics increased

and %odified so%e of the traditional risks associated with banking activities in )artic"lar

strategic o)erational and legal and re)"tation risks thereb& infl"encing the overall risk

)rofile of banking.

Based on these concl"sions the (o%%ittee considers that while eAisting risk

%anage%ent )rinci)les re%ain a))licable to e-banking activities s"ch )rinci)les %"st be

tailored ada)ted and in so%e cases eA)anded to address the s)ecific risk %anage%ent

challenges created b& the characteristics of e-banking activities. etting detailed risk

Page 30 of 40


31/40


%anage%ent re0"ire%ents in the area of e-banking %ight be co"nter-)rod"ctive if onl&

beca"se these wo"ld be likel& to beco%e ra)idl& o"tdated beca"se of the s)eed of change

related to technological and c"sto%er service innovation. he (o%%ittee has therefore

)referred to eA)ress s")ervisor& eA)ectations and g"idance in the for% of isk

anage%ent *rinci)les in order to )ro%ote safet& and so"ndness for ebanking activities

while )reserving the necessar& fleAibilit& in i%)le%entation that derives in )art fro% the

s)eed of change in this area.

he isk anage%ent *rinci)les fall into three broad and often overla))ing categories

of iss"es that are gro")ed to )rovide clarit&: Board and anage%ent OversightM ec"rit&

(ontrolsM and /egal and e)"tation isk anage%ent

5.1Board and Management Oversight:

Prini!"es:

1. Effective %anage%ent oversight of e-banking activities: he Board of Directors and

senior %anage%ent sho"ld establish effective %anage%ent oversight over the risks

associated with e-banking activities incl"ding the establish%ent of s)ecific

acco"ntabilit& )olicies and controls to %anage these risks.

2. Establish%ent of a co%)rehensive sec"rit& control )rocess: he Board of Directors and

senior %anage%ent sho"ld review and a))rove the ke& as)ects of the bankGs sec"rit&

control )rocess.

3. (o%)rehensive d"e diligence and %anage%ent oversight )rocess for o"tso"rcing

relationshi)s and other third-)art& de)endencies: he Board of Directors and senior %anage%ent sho"ld establish a co%)rehensive and ongoing d"e diligence and oversight

)rocess for %anaging the bankGs o"tso"rcing relationshi)s and other third-)art&

de)endencies s"))orting ebanking.

Beca"se the Board of Directors and senior %anage%ent are res)onsible for develo)ingthe instit"tionCs b"siness strateg& and establishing an effective %anage%ent oversightover risks the& are eA)ected to take an eA)licit infor%ed and doc"%ented strategicdecision as to whether and how the bank is to )rovide ebanking services. he initialdecision sho"ld incl"de the s)ecific acco"ntabilities )olicies and controls to addressrisks incl"ding those arising in a cross-border conteAt. Effective %anage%ent oversight

is eA)ected to enco%)ass the review and a))roval of the ke& as)ects of the bankCssec"rit& control )rocess s"ch as the develo)%ent and %aintenance of a sec"rit& controlinfrastr"ct"re that )ro)erl& safeg"ards e-banking s&ste%s and data fro% both internal andeAternal threats. t also sho"ld incl"de a co%)rehensive )rocess for %anaging risksassociated with increased co%)leAit& of and increasing reliance on o"tso"rcingrelationshi)s and third-)art& de)endencies to )erfor% critical e-banking f"nctions

Page 31 of 40


32/40


1.SECURIT=

Ke6 E&ements "# Se*+'it6 P'"g'am

eviewing )h&sical and logical sec"rit&:

a. eview intr"sion detection and res)onse ca)abilities to ens"re that

intr"sions will be detected and controlled b. eek necessar& eA)ertise and training as needed to )rotect )h&sical

locations and networks fro% "na"thoried access

c. aintain knowledge of c"rrent threats facing the bank and the

v"lnerabilities to s&ste%s

d. ,ssess firewalls and intr"sion detection )rogra%s at both )ri%ar& and

back-") sites to %ake s"re the& are %aintained at c"rrent ind"str& best

)ractice levels.

e. Ferif& the identit& of new e%)lo&ees contractors or third )arties

accessing &o"r s&ste%s or facilities. f warranted )erfor% backgro"nd

checks. eview s"ccession )lans for ke& e%)lo&ees and delegations ofa"thorit& in the event of a crisis.

f. Eval"ate whether )h&sical access to all facilities is ade0"ate.

g. +ork with service )rovider and other relevant c"sto%ers to ens"re

effective logical and )h&sical sec"rit& controls.

ec"rit& ss"es in E-Banking

Page 32 of 40


33/40


$irewall )rotection

nternet banking and )a&%ent s&ste%s %a& allow for new wa&s to cond"ct illegal and

fra"d"lent activities ,ccording to 2771 $B( s"rve& #7I re)orted that the nternet is

the )oint of c&ber attacks. Banks are re0"ired to establish ad%inistrative technical

)h&sical safeg"ards to )rotect the )rivac& of c"sto%ersC non)"blic c"sto%er records and

infor%ation

he sec"rit& of an nternet banking %odel %"st be addressed at three levels. he first

concern is the sec"rit& of c"sto%er nfor%ation as it is sent fro% the c"sto%erGs *( to the

+eb server. he second area concerns the sec"rit& of the environ%ent in which the

nternet banking server and c"sto%er infor%ation database reside. $inall& sec"rit&

%eas"res %"st be in )lace to )revent "na"thoried "sers fro% atte%)ting to log into the

online banking section of the +eb site.

/aw cannot )ossibl& be eA)ected to kee) )ace with changes in technolog&. he recent

debacle of virt"al vo&e"ris% has bro"ght o"t a%ongst other things the inade0"ac& and

v"lnerabilit& of the laws governing "se of internet. $iAing liabilit& recording and

re)rod"cing evidence ascertaining "risdiction are )roble%s which show little sign of easing. (oncerns over sec"rit& and %is"se )ertaining to e-banking activit& have been

%o"nting as %ore banks in ndia fora& into electronic banking. E-banking activities

involve not "st banks and their c"sto%er b"t n"%ero"s third )arties too. nfor%ation

held b& banks abo"t their c"sto%ersC their transactions etc changes hands several ti%es.

t is i%)ossible for banks to retaining infor%ation solel& within their own co%)"ter

networks let alone a single "risdiction is i%)ossible. isks )ertaining leakage

Page 33 of 40


34/40


ta%)ering or blocking of data are s"fficientl& high to warrant ade0"ate legal and

technical )rotection. ndia has no law on data )rotection leave alone a law governing an

area as s)ecific as )rotection of data in electronic banking. nfor%ation sec"rit& in e-

banking )resents two %ain areas of risk: )reventing "na"thoried transactions and

%aintaining integrit& of c"sto%ers transactions. Data )rotection falls in the latter

categor&.

1./ REGU;ATOR= AND ;EGA; 4RAME7ORK:

+hile E-banking has i%)roved efficienc& and convenience it has also )osed several

challenges to the reg"lators and s")ervisors. everal initiatives taken b& the govern%ent

of ndia as well as the eserve Bank of ndia have facilitated the develo)%ent of

E-banking in ndia. he govern%ent of ndia enacted the ,ct 2777 which )rovides

legal recognition to electronic transactions and other %eans of electronic co%%erce. he

B has been )re)aring to ")grade itself as a reg"lator and s")ervisor of the

technologicall& do%inated financial s&ste%. t iss"ed g"idelines on risks and control in

co%)"ter and teleco%%"nication s&ste% to all banks advising the% to eval"ate the risks

inherent in the s&ste%s and )"t in )lace ade0"ate control %echanis%s to address these

risks. he eAisting reg"lator& fra%ework over banks has also been eAtended to E-

banking. t covers vario"s iss"es that fall within the fra%ework of technolog& sec"rit&

standards and legal and reg"lator& iss"es.

Data )rotection laws )ri%aril& ai% to safeg"ard the interest of the individ"al whose data

is handled and )rocessed b& others. nterestsC are "s"all& eA)ressed in ter%s of )rivac&

a"tono%& andor integrit&. Data )rotection laws are fra%ework lawsC )roviding rather

diff"sed general r"les for s"ch )rocessing and %aking allowances for develo)ing detailednor%s as and when the need arises. "ch legislation t&)icall& reg"lates all or %ost stages

of the data )rotection c&cle incl"ding registration storage retrieval and disse%ination of

)ersonal data.

he ndian nfor%ation echnolog& ,ct 2777 basicall& a fra%ework law %akes

hacking a )"nishable offence "nder ection !!. Breach of infor%ation sec"rit& is

i%)licitl& recognied as a )enal offence in the for% hacking. he a))ro)riate

govern%entC is e%)owered to declare an& co%)"terC co%)"ter s&ste%C

or co%)"ter networkC as a )rotected s&ste%. , ten &ear )rison ter% and a heft& fine

await an& )erson who sec"res access to the sec"red co%)"ter s&ste%C in contravention

of the )rovisions of the law.

8. ADVANTAGE O4 E-BANKING

Page 34 of 40


35/40


1. t re%oves the traditional geogra)hical barriers as it co"ld reach o"t to c"sto%ers of

different co"ntries legal "risdiction. his has raised the 0"estion of "risdiction of law

s")ervisor& s&ste% to which s"ch transactions sho"ld be s"bected t gives worldwide

connectivit&.

2. t has added a new di%ension to different kinds of risks traditionall& associated with

banking heightening so%e of the% and throwing new risk control challenges

3. /ower o)erating costs

4. , new for% of co%)etition has e%erged both fro% the eAisting )la&ers and new

)la&ers of the %arket who are not strictl& banks so there is %)roved or s"stained

co%)etitive )osition.

5. ncreased c"sto%er de%and for services

!. ?ew reven"e o))ort"nities

#. ,vailabilit& of in0"ir& and transaction services aro"nd the clockM

9. Eas& access to transaction data both recent and historicalM and Direct c"sto%er control

of international %ove%ent of f"nds witho"t inter%ediation of financial instit"tions inc"sto%erCs "risdiction.

$. CA;;ENGES AND ROAD AEAD

C%a&&enges:

nfor%ation technolog& anal&st fir% the eta 8ro") recentl& re)orted that financial

instit"tions who donGt offer ho%e banking b& the &ear 2777 will beco%e %arginalied.

B& the &ear of 2772 a large so)histicated and highl& co%)etitive nternet Banking

arket will develo) which will be driven b&

H De%and side )ress"re d"e to increasing access to low cost electronicservices.

H E%ergence of o)en standards for banking f"nctionalit&.

H 8rowing c"sto%er awareness and need of trans)arenc&.

Page 35 of 40


36/40


H 8lobal )la&ers in the fra&

H (lose integration of bank services with web based E-co%%erce or even

disinter%ediation of services thro"gh direct electronic )a&%ents .

H ore convenient international transactions d"e to the fact that the nternet

along with general dereg"lation trends eli%inates geogra)hic bo"ndaries.

H ove fro% one sto) sho))ing to GBanking *ortfolioG i.e. "nb"ndled

)rod"ct )"rchases.

(ertainl& so%e eAisting brick and %ortar banks will go o"t of b"siness. B"t thatGs beca"se

the& fail to res)ond to the challenge of the nternet. he nternet and itGs "nderl&ing

technologies will change and transfor% not "st banking b"t all as)ects of finance and

co%%erce. t re)resents %"ch %ore than a new distrib"tion o))ort"nit&. t will enable

ni%ble )la&ers to leverage their brick and %ortar )resence to i%)rove c"sto%er

satisfaction and gain share. t will force lethargic )la&ers who are str"ck with legac& cost

basis o"t of b"siness-since the& are "nable to bring to )la& in the new conteAt.

MAIN CONCERNS IN INTERNET BANKING

n a s"rve& cond"cted b& the Online Banking ,ssociation %e%ber instit"tions rated

sec"rit& as the %ost i%)ortant iss"e of online banking. here is a d"al re0"ire%ent to

)rotect c"sto%ersG )rivac& and )rotect against fra"d. Online Banking via the +orld +ide

+eb )rovides an overview of nternet co%%erce and how one co%)an& handles sec"re

banking for its financial instit"tion clients and their c"sto%ers. o%e basic infor%ation

on the trans%ission of confidential data is )resented in ec"rit& and Encr&)tion on the

+eb. *( againe Online also offers a )ri%er: 'ow Encr&)tion +orks. , %"lti-la&ered

sec"rit& architect"re co%)rising firewalls filtering ro"ters encr&)tion and digital

certification ens"res that &o"r acco"nt infor%ation is )rotected fro% "na"thoried access:

H $irewalls and filtering ro"ters ens"re that onl& the legiti%ate nternet "sers are allowed

to access the s&ste%.

Page 36 of 40


37/40


H Encr&)tion techni0"es "sed b& the bank wo"ld ens"re that )rivac& of data flowing between the browser and the

nfinit& s&ste% is )rotected.

H Digital certification )roced"res )rovide the ass"rance that the data &o" receive is fro%

the nfinit& s&ste%.

he %ain disadvantage of e-banking is the sec"rit& )roble%s that s"rro"nd it. tGs a fact

that %aking transactions online )oses a %"ch bigger risk co%)ared to %aking

transactions in a )h&sical branch. his is d"e to the hacking )roble%s and identit& theft.

,ddition to these risks technical diffic"lties co"ld also arise. o%eti%es the bankGs

website goes down and if this ha))ens it will be a hassle for the c"sto%er beca"se heshe

has to go to a branch or %ake )hone calls- which is "s"all& b"s& d"e to other c"sto%ers

also %aking a call. ,nother case that has ha))ened was an "n)redicted rise in c"sto%er

that the servers of the bank were not able to co)e with. , c"sto%er %a& also r"n into a

bad service. o%eti%es &o" %ight wait a while for &o"r checks to clear and &o" certainl&

canGt do an&thing abo"t it if it is online.

"r)risingl& technical iss"es do not a))ear to be the %aor constraint in the s"ccessf"l

ado)tion of electronic banking initiatives. Develo)ing and )ro%oting a val"e )ro)osition

to the c"sto%er that is high eno"gh to %atch the fleAibilit& and accessibilit& of cash. t

beco%es vital to design )rod"cts that offer a balance between co%)etitive )ricing

f"nctionalit& and s"fficient access )oints for basic transactions like de)osits andwithdrawals of cash.

(). CONC;USION AND RECOMMENDATIONS

+eb based banking service or E-Banking the latest generation of electronic

banking transactions has o)ened ") new window of o))ort"nit& to the eAisting

banks and financial instit"tions.. ince its evol"tion in 67 th decade it is having

"n)recedented growth. he E-Banking sector is highl& )rohibitive for the new

entrants altho"gh the ince)tion cost is lower with high growth rate. he brand

)reference of the c"sto%er eAisting network )h&sical eAistence sec"rit& andsafet& s"))lier bargaining )ower s"bstit"te )rod"ct of non-banking sectors have

%ade the wa& thorn&. 'owever new co%er with innovative idea and strateg&

definitel& can %ake )osition in this sector. he anal&sis of the evol"tion and

)resent stat"s of E-Banking %ake "s so%e roo% to %ake co%%and%ents for the

govern%ent new entrants and eAisting e-banks for effective "tiliation of the

o))ort"nit& to accelerate the econo%ic growth.

Page 37 of 40


38/40


nternet )enetration is a %aor factor for the growth of E-Banking. here is a

strong )ositive correlation between nternet "sage and E-Banking "sage.

'owever nternet )enetration alone does not g"arantee online banking

)enetration. n this sit"ation co%)anies can give incentives s"bsidiing the

s"rfing cost free training %"lti)le access facilit&

%otivation )rogra%s to the "ser and the )o)"lation as a whole.

Ttandard or (o%%on and at"re technolog& is alwa&s a )roble% in this 'i-ech

age. etting ") electronic banking re0"ires s"bstantial invest%ents and it is ver&

co%)licated to %ove fro% old technologies to new ones. h"s banks can

coo)erate closel& in the field of develo)ing standards to offer services to third

)arties.

TE-Banks %"st take aggressive %arketing effort. t has been seen that the

%arketing efforts %ade to )ro%ote Estonian nternet banking have been

contin"o"s and aggressive in different %edia channels and in bank branches.

nnovative )rod"cts which have been )ro%oted eAtensivel& have a higher chance

of s"ccess in the %arket than si%ilar )rod"cts witho"t the co%%"nications

s"))ort.

T,ll of the efforts to establish an internet onl&C %odel E-Banking of b"siness has

not been s"cceed &et. h"s there %"st be a )h&sical eAistence of the bank and E-

Banking co"ld be an eAtent to that o)eration. t will give the c"sto%ers an

i%)ression of sec"rit& and safet&. Besides anal&sis showed that the senior citiens

all over the world like to acco"nt with brick and %ortar banks. ,voiding the% the

e-banks wo"ld loose a large )ortion of their c"sto%ers.

TE-Banks %"st tr& to eA)and their network as soon as )ossible. ,s %ore and %ore

third )art& will involve in the network the& co"ld attack %ore c"sto%ers.

Page 38 of 40


39/40


8overn%entsC %ain role is enhancing the enabling environ%ent as it is known

that the direct intervention into financial %arkets %a& have )oor res"lts. n

general a laisse faire a))roach to the reg"lation and s")ervision of the econo%ic

)olic& will foster )ositive attit"des nationwide.

he e-banks %"st tr& to achieve critical %ass. ,chieving critical %ass is ke&

s"ccess factor in electronic banking develo)%ent. his can be achieved when

there is s"bstantial nternet )enetration and banks are able to )rovide services

which have ver& broad de%and. n this case the satisfied "sers will serve as

endorsers and %arketers of the service. he )ower of )erson-to-)erson

co%%"nication and word of %o"th can never be "nderesti%ated.

Re#e'en*es:

1. isk anage%ent in Electronic Banking: (once)ts and Best *ractices b& Na&ara%

=ondabagil

2.http://www.ffiec.gov/ffiecinfobase/booklets/e_banking/ebanking_00_intro_def.ht

ml

3.http://www.fdic.gov

4.http://www.banknetindia.com/banking/ibkgintro.htm

5.www.ncua.gov

Page 39 of 40

http://www.amazon.co.uk/exec/obidos/search-handle-url?_encoding=UTF8&search-type=ss&index=books-uk&field-author=Jayaram%20Kondabagilhttp://www.amazon.co.uk/exec/obidos/search-handle-url?_encoding=UTF8&search-type=ss&index=books-uk&field-author=Jayaram%20Kondabagilhttp://www.ffiec.gov/ffiecinfobase/booklets/e_banking/ebanking_00_intro_def.htmlhttp://www.ffiec.gov/ffiecinfobase/booklets/e_banking/ebanking_00_intro_def.htmlhttp://www.fdic.gov/http://www.ncua.gov/http://www.amazon.co.uk/exec/obidos/search-handle-url?_encoding=UTF8&search-type=ss&index=books-uk&field-author=Jayaram%20Kondabagilhttp://www.amazon.co.uk/exec/obidos/search-handle-url?_encoding=UTF8&search-type=ss&index=books-uk&field-author=Jayaram%20Kondabagilhttp://www.ffiec.gov/ffiecinfobase/booklets/e_banking/ebanking_00_intro_def.htmlhttp://www.ffiec.gov/ffiecinfobase/booklets/e_banking/ebanking_00_intro_def.htmlhttp://www.fdic.gov/http://www.ncua.gov/


40/40


6. A Survey of lectronic !ash" lectronic #anking and $nternet %aming & report

#y '$(!( )http://www.bankersonline.com/technology/gurus_tech0*+*0,d.html#

7. !onsumer protection in electronic banking )e-banking" e-commerce.

etrieved arch +0"1002 from http://3lplaw.com/blog/consumer-protection-

inelectronic-

e-banking-commerce/

*. -#anking - $mpact" isks" Security. etrieved arch +0"1002 from

http://steconomice.uoradea.ro/anale/volume/2008/v4-management-

marketing/280.pdf
http://www.bankersonline.com/technology/gurus_tech081803d.htmlhttp://jlplaw/http://www.bankersonline.com/technology/gurus_tech081803d.htmlhttp://jlplaw/

Documents

ebanking and its risk managment