In todays world, technology is becoming more important and developing amongst the financial industries and specially banks. The problems in transferring money and growing international trading made researches to develop new systems to reduce those problems. E-banking is a service which is provided by most of the banks to their customers to make money transaction easy and to do other banking related transaction such as bill payment, Mortgages and many more. Internet Banking also provides services to create new relationship trading nationally and internationally. With the significant challenge e-banking provides policy makers and regulatory authorities.
Introduction to Internet Banking
Internet banking which is also known as e-banking is a service given by the banks and financial institutions to their customers to perform the bank related transactions such as balance inquiry, record of recent transaction, making payments, transferring money and many more activities through the use of the internet. Furthermore, using this service means that customers do not need to visit the bank to check their balance as they can check whatever the transaction happened from the place where they are seated using some form of computer to connect to the internet facility. The adoption of Internet banking by banks has grown very rapidly, and many banks, have made the development of services over the internet as a part of their business and marketing strategy.
History
Internet banking was first started in New York, America in 1983 under the name 'Home Banking' (Cronin, 1997). Home Banking was based on utilizing numeric keypads to send messages and tones that had instructions to the banks through phone lines (Cronin, 1997). However, this service never became prevalent and consequently diminished. In 1983, UK's first internet banking service was introduced by Nottingham Building Society.
Internet banking has many different names, which are listed below:
Net Banking
E-Banking
Virtual Banking
Remote Electronic Banking
There are numerous advantages in using this internet banking facility, which includes the following:
Very convenient
Very fast and effective
Can handle different bank accounts from one site
Cost-effective
Easy to transfer and receive money
Can apply for loans online with an existing online banking account
Can set up direct debits and standing orders
Can update personal contact details online
Can apply for an overdraft and request for an increase
Can open new online bank accounts
Can pay bills and mortgages
Can view bank statements and balances without waiting for hard copy to arrive in the post
Uses password and PINS entry to access the internet banking which enhances safety and protects customer identity
Even though there are many advantages of using internet banking there are disadvantages as well and these are provided below:,
Forgery
Fraud or Proxy website
Time consuming
Hard to understand how it works
Unapproachable and multifaceted
Not user friendly for those who do not understand how a computer or internet works
Levels of Internet Banking
Internet banking can be divided into three levels:
Informational
Transactional
Communicative
Informational
This provides general information about the various products and services that the bank offers to their customers. This is the basic level of the internet banking. Using this information, customers can understand what services are available to them, how to open an account and how to do the transactions. In the informational level of internet banking, the risk involved is very low because there is no path between the server and the bank's internal network. The bank or outsource can provide this level of the internet banking. Although this level of internet banking has low risk, there are controls put in place by the banks to avoid illegal alterations.
Transactional
This level allows the customers to complete their transaction such as accessing accounts, paying bills and transferring fund. In this level of internet banking the risk is high because the path exists between server and bank. To stop or reduce the risk, the bank must have stronger controls.
Communicative
The third level is communicative banking system and this allows some communication between the bank's systems and that of the customer. The communication may be restricted to e- mail, account inquiry, and loan applications. Since these servers may have a connection to the bank's internal networks, the risk is higher with this configuration than with informational systems. Banks endeavour to install suitable controls to prevent, monitor and alert management of any illegal attempt to access the bank's internal network and system. Since the network has the pathway to the bank's system, antivirus software should also be installed to prevent virus attacks to the bank's system.
Risk Involved in Internet Banking
A common knowledge shared amongst people who use internet banking is the many risks that are involved when using internet banking. For example, there are risks when customers use internet banking to make payments to their bills, when transferring funds and also when applying for loans online. The risks involved are listed below and described in detail,
The risks are as follows:
Credit Risk
Interest rate Risk
Liquidity Risk
Price Risk
Foreign Exchange Risk
Information Security Risk
Reputation Risk
Compliance Risk
Transaction Risk
Strategic Risk
Credit Risk
Credit risk is earnings from a customer's failure to meet his financial requirements. This allows customers to apply for credit from anywhere in the world. Banks will find it very difficult to verify the identity of the customer, if they mean to offer immediate credit through the Internet. Another risk in this is verifying and perfecting security agreements. When a transaction is made there will be another problem of which country's influence applies to the transaction.
Interest rate Risk
Interest rate risk is capital arising from movements in interest rates. Interest rate will not be the same between assets and liabilities and it shows how these are impacted by interest rate changes. Many customers will be attracted to the loans and deposits advertised in internet banking. In internet banking, it is more convenient to compare the interest rates amongst the different competing banks in the market. Additionally, pressure on the interest rates is higher, which highlights the need for banks to respond faster to changes to the interest rates in the market conditions.
Liquidity Risk
Liquidity risk is an income or capital arising from a bank's inability to meet its requirements. For the customers who are using internet banking and maintaining accounts properly their deposits and assets unpredictability increases and they get better rates. These customers change the bank if another bank provides them with better rates. Liquidity risk includes the inability to manage unexpected changes in funding sources.
Price Risk
Price risk is an income which starts when value of traded portfolio changes. This risk may be perceived in banks, if they create or expand their deposit brokering and if they loan sales programs as a result on this banking service.
Foreign Exchange Risk
Foreign exchange risk occurs when the assets are in one currency are funded in another currency. Banks advise their customers when they are doing the transaction to do it on their country currency where they live. Foreign exchange risk will increase when the transaction is done in nondomestic currency.
Information Security Risk
Information security risk is the most critical risk which occurs during the internet banking. The risks that can be held in internet banking are lack of information security, virus attack, hackers, data theft and fraud. This risk can become very critical because internet banking service is worldwide.
Reputation Risk
Reputation risk can occur if the internet banking gets the negative thoughts from the customers such as lack of information, too complicated, very slow, and bad response. If a bank does not secure their website and if customers' personal information has been taken by other companies when using the e-banking, the bank's reputation will be criticised and diminished amongst the bank's customers.
Compliance Risk
Compliance risk occurs if any issues related to ethical and law has been violated in internet banking. Bank and their branches need to understand the law which exists when they are providing the e-banking service to their customers. In many countries, when the transaction is carried out between the bank and their customers the compliance risk can increase. The compliance risk can occur if the bank does not keep their customers' information private and if the bank fails to check with the customer before providing their information to a third party. This risk can be reduced by making customer transaction fast and perfect. Further, this problem can be better managed by ensuring that customer's consent and permission are always obtained before passing their information onto third parties.
Transaction Risk
Transaction risk occurs when the bank does not maintain a proper security service to the customers when their transactions are made using e-banking. If the bank fails to maintain proper security, the bank will have to face high level of risks such as fraud, theft, hacking, and information error. This risk will increase if the bank does not have any control on third party involvement.
Strategic Risk
Strategic risk occurs if the bank fails to make proper implementation decision to the business and instead makes unpleasant decision with regards to the business. This strategic risk could be caused by many of the senior managers' not pertaining appropriate knowledge and understanding about the strategic and technical aspects of e-banking. Further, if the bank expands the internet banking service without comprehensively analysing the costs and the benefits of the service it provides, this can also lead to higher strategic risk.
Legal issues in Internet Banking
Even though most of the people like to use e-banking all over the world, there are advantages and disadvantages of using e-banking. One of the disadvantages of using e-banking relates to the legal issues. E-banking can save customers time, money and make their life easy. However at the same time it is important to protect people's personal information as this needs to be kept safe. Unfortunately due to the error in the internet banking system, the danger in protecting people's personal information when they use internet banking service is very real and inevitable.
When it comes to legal issues, there are certain aspects that a bank should consider and these are listed below and explained in depth as well:
Entering into agreements
Giving proper evidence
Bearing the liability
Ensuring Security
Maintaining Privacy
Secrecy of the bank
Entering into agreements
E-banking should provide details about the transactions which are due to take place by place by providing detailed information about the customer's request and the agreement going to take place between the two parties. This agreement must be in simple terms and discuss the liabilities towards the agreement. When the customer comes to open an account the bank should give the customer an agreement to be signed to have a mutual understanding between the customer and the bank.
Giving proper evidence
When the customer opens an account he/she should give proper evidence such as pay slips, bills which has proof of address, driving licence or passports which contains person's name and telephone bill which has contact numbers. Evidence such as these will enable the bank to identify the customer and to keep a record of their personal information. In case of any urgent situation they can contact the customer with the information he/she has given to the bank. Additionally, it will also be helpful to the bank to find out whether the customer's information is genuine or fraudulent.
Bearing the liability
The liability borne by the bank in e-banking is adverse than a normal transaction. Due to advancement in the information technology sector, banks in the recent days have a very secure transaction network such as the exchange networks, customer transactions, forex trading, swift code for interbank transaction and many others. Banks have to bear liabilities arising of fraudulent transaction done by people across the globe and the risk of being open to many international hackers. E-banking must therefore have many checks to verify and distinguish between their bank customers and the people attempting to commit fraudulent activities.
Ensuring Security
This is among the most important aspect for any banks to be able to provide an e-banking network. The bank customer must always feel safe about their transaction. This can be provided by enabling strict verification methods such as password changers, PINS entry devise and other online security software which are enabled by the internet banking sites. It is essential that banks enforce special teams to manage any difficulties that are being faced by the customers who are using the e-banking service and to deal with any problems which occur to their official web site.
Maintaining Privacy
Banks must keep their customers' information secure and confidential. The information of their customers must only be provided to the individual government of the country where the bank is established for important investigations surrounding fraudulent activities. This aspect of being able to maintain privacy is usually listed in the agreement while opening an account with the bank. The amount of privacy that can be maintained by the banks must be detailed in this initial agreement with the terms and conditions of the agreement.
Secrecy of the bank
Bank secrecy mainly consists of maintaining privacy about their customers. Under this legal issue, the banks agree with the customer that they will ensure that the highest level of privacy will be maintained and therefore they will not provide any internal customer information to the outside authorities, which includes the public. This information can only be disclosed if it is requested in special situations by other authorities in power, such as the court, the police and the government. For example, requests are often made during any fraudulent cases.
Overall, by considering these legal issues and by proving many services, e-banking now a days has become significantly popular and is vastly being used due to its high level of security, speed and accessibility when making transactions.
Ethical issues in Internet banking
Another important element of internet banking service is the ethical issues that are involved when people use internet banking. Ethical issues often relates to the vulnerability in collecting information about customers that are stored electronically and are frequently transferred through computer based networks (Harris & Spence, 2002). This vulnerability expands to wide range of ethical issues, which are listed below:
Privacy of information about individuals
Accuracy of information
Ownership of information
Accessibility of information held
All of the above focus greatly on the customers and fails to consider other broader important elements of the ethical issues involved in internet banking. These are listed below:
Freedom of choice
Transparency
Facilitating fraud (this relates to the illegal and ethical activities of other people)
Conclusion
To be concluded that banks have given their valuable customers a service called internet banking using the internet from any part of the world to make their transaction easy other than going to the bank straight and standing in the queue. Now the bank transaction carries out by a touch of a finger in your phone or personal computer. In this report I have mentioned in what are the ways internet banking can be called, the advantages and disadvantages using internet banking. At the same time what are the levels of internet banking such as informational, transactional and communicational. The risks that are involved in banking such as Credit Risk, Interest rate Risk, Liquidity Risk, Price Risk, Foreign Exchange Risk, Information Security Risk, Reputation Risk, Compliance Risk, Transaction Risk, Strategic Risk. Legal issues in e-banking such as Entering into agreements, Giving proper evidence, Bearing the liability, Ensuring Security, Maintaining Privacy, Secrecy of the bank and ethical issues involved in e-banking.
