The concept of internet bank was introduced in 1980's soon after the development of World Wide Web. Citi bank was the 1st bank who has started the 'home bank' services to its customers in 1981 in New York by using videotex. In United Kingdom 1st internet banking service was started in 1983 by Nottingham building society. The first fully functional online banking service was introduced in 1994 by Stanford Federal Credit Union, a US financial service institution.
What is Internet Banking?
"Internet banking refers to systems that enable bank customers to access accounts and general information on bank products and services through a personal computer (PC) or other intelligent device."
Types of Internet banking:
Internet banking can be classified into three types:
Informational
Communicative
Transactional
Informative:
This is the basic level of internet banking and in this kind of banking; banks normally provide general information about their products and services to its customers.
Communicative:
This type of internet banking system allows some interaction between customers and bank. Interaction or communication can be in the form of electronic mail, inquiry, live chat etc.
Transactional:
In this type of internet banking customers can execute transaction by citing at home using internet. They can transfer money, apply for loan credit card and can use all kind of banking service authorized by bank
Internet banking Risks:
Financial institutions have been providing internet banking service to their customers and business remotely for years. Internet fund transfer, making payments, corporate cash management system and Automatic Cash Machines ATM's, are global fixtures. The public acceptance of internet banking by the public is not only useful by the customers but also it has opened the new delivery channel for the banking products and services.
Despite, the considerable benefits of the technological innovation, the rapid development of internet banking carried risks as well. And it is very important that these risks must be recognized by the financial institutions in prudent manners. These developments led the Basel Committee on Banking Supervision to carry out a research on preliminary study of risk management of internet banking and e-money in 1998. This study demonstrate a more study on risk management of electronic banking which lead to the establishment of Electronic Banking Committee EBC, was founded in November 1999, comprise of banking supervisors and central banks.
The report of ECB's on the risks and supervisory issues arising from electronic banking was released by Basel Committee in October 2000. This report showed the major risks associated with the internet banking namely as strategy risk, reputational risk, operational risk (including security and legal risks) and credit, market and liquidity risks. The ECB further explained in the report, those electronic banking activities does not raise any risk which is not already identified by Basel Committee. But some risks like; strategic risk, reputational risk and operational risk has seen rapid rise with the development and use of the technology in banking industry.
Types of risks Associated with internet banking:
Credit Risk:
"Credit risk is the risk related to the earning of banks, it arise when customers fail to meet their obligation towards the bank." Electronic banking allows to banks to do business globally. In dealing with the customers over the internet, it is the challenging for the banks to verify personal details of the customers, which is vital for the banks to make strong credit decisions.
Effective management of credit risk is the job of the board and management of the bank. They must design the effective, useful and advance policies, practices in order to control risk associated with the loans generated by bank.
Liquidity Risk:
"Liquidity risk is the risk, when bank fail to meet its obligation towards customers at the time of demand." It is generated in the balance sheet of a bank by the mismatch of the asset and liabilities. Internet bank increases the deposit instability from customers who maintain accounts only on the basis of rate of term. Asset and liability management system of banks should be appropriate to the products and services offered through internet banking.
Foreign Exchange Risk:
Foreign risk relates to the money denominated in the currency of another country or group of countries or when loan portfolios of banks are funded by another country. Some banks provided their customer multi currency transactions, customers can choose which currency they want to use for payment or deposits. In this case banks can suffer from the risks, because any fluctuations in currency in international market can cause bank a serious loss , if foreign exchange risk in not seriously managed by the bank's management.
Transactional Risk:
It is risk to the earning of the bank and it occurs in the form of fraud, error, the inability to deliver products. Transactional risk is present in each product, service, development and delivery, system development, transactional process.
In internet banking transactional risk is very high specially when the products and transactional process are not effectively planned and monitored. Software used in internet banking, attacks on banking system during transactions and hacking are the major concerns for banks dealing with online business. Therefore contingency and effective business control is essential to make sure than banks can deliver product and services in adverse circumstances
Strategic Risk:
Strategic is also a major risks faced by banks. Poor business decision, wrong implementation of the strategies, slow reaction in fast industrial changing environment, all these are the main causes of strategic risk. The bank can face this risk, if the bank's goals, the strategies to achieve the required goals and the resources deployed against these goals are not effectively designed and implemented according to the current market environment. The resources can be tangible or intangible for instance, telecommunication, operating systems, delivery networks, and managerial capacities and capabilities. Therefore bank's management must understand and take into consideration this risk seriously before making any planning and strategy.
Reputational Risk:
Reputational risk arises from the negative public opinion and affects the earning or the capital portfolio of the bank. The bank can face serious setback if its reputational graph goes down in market. A bank's reputation can be damaged in internet banking service if it not user friendly or poorly executed. Therefore banks should made their services and web user friendly and all the third party links provided on the bank's web site must take into serious consideration. Because poor product and service of third party, who's link are shared on bank's web, can also affect the banks reputation.
Compliance Risk:
Compliance risks arise from the laws, banking regulations, rules, or ethical standard. Compliance risk may expose the bank fine, damages, penalty, and the voiding of the contract. This risk also has strong effect on banks earning and reputation. Federal consumer laws regulations, including fair lending are applicable to all the financial institutions dealing with the internet banking. Therefore bank's management has to manage this risk effectively otherwise it can cause ban a serious damage.
Research Question:
To find out if there are ways to minimize internet banking risks, in order to maximize share holders wealth?
Research Objectives:
According to McDaniel and Gates (2006), "the research objective is a clear, targeted statement that delineates the exact information needed to solve a research problem." Therefore it is very important to define the objectives of the research clearly before conducting it.
Following are the main objectives of the research paper
The main objective of this study is to have a broader picture, how ING bank is managing its internet banking risks including security and privacy issues. And also to highlight the key factors that contribute in success of this risk management.
The objective of this study is to explore the common techniques used by financial institution in order to manage the internet banking risks. And also I will illustrate the relationship between the concepts, theories and models of different internet risk and their management and explain which model is followed by ING bank.
The purpose of this research is to evaluate the measure taken by ING bank to make internet banking safe and secure for its customers, and how bank is preventing customers from online transactional frauds.
Research Plan:
Research Purpose:
"Research can be classified in term of their purpose. Accordingly these are usually classified as descriptive research and exploratory research." (Saunders et al, 2003)
Exploratory Research: A research that conducted because the problem has not been clearly defined.
Descriptive or Statistical Research: describes the data and the characteristic about the population or phenomenon being studied. In statistical research we try to answer who, what, when, where, how etc.
My research purpose will be the descriptive because it is based on the data and information which will be collected from the libraries and from detailed interviews.
Research Approach:
According to Yin (1994) "the best approach use for study depends on the purpose of the study and associated with the research questions."
There are two main approaches for research
Quantitative
Qualitative
Quantitative approach simply refers to the count and number and measurement of things.
The research approach based on my proposed study and related question will be qualitative. Qualitative approach is basically related to the collection, analyzing and interpreting of the data by observing what peoples say and do. This approach is more subjective and it refers to the meaning, concept, theories, symbols, definitions and narrative of things.
It will be qualitative because the interviews which I will take from the management of ING bank about their risk management policies will be very important. As a result I am taking this approach to conduct practical answers from minor investigation questions.
Research Methodology for Project:
First Stage: I will investigate the different kind of risk associated with internet banking including security and privacy issues and also the current improvement in the management of these risks.
Second Stage: I will analyze the existing practicing with the help of case study of ING bank. And analyze the banks risk management approach with the help of theories and models and will check that how strongly and effectively bank is managing its risks.
Third Stage: In this stage I will try to suggest some use full measures, tools and risk management frame work which will help ING direct bank to manage its internet banking risks more effectively in long run.
Primary And Secondary Data: How It Will Be Collected?
There are two types of data in the market:
Primary Data:
Primary data is collected from: observations, interviews and questionnaires (Hair et. al., 2003).
For the collection of the primary data, I will contact the management of ING direct bank via internet to get the related information by emails. And I will also get some data from the speeches and interviews given by senior management of the bank about their risk management policies and strategies.
Secondary Data:
Secondary data normally collected from secondary sources such as government publications, company reports, articles and journals, books, personal records, census (Kumar, 1996).
The secondary data of my proposed study will be based upon the existing literature which is already available in the libraries, on internet in the form of journals, articles, financial statements, data monitor reports etc.
Validity and Reliability:
Following steps and measure will be taken to make sure that my research will be reliable and valid.
Data will be collected from only realisable sources and authentic authors and all interviews will be taken from the professionals.
All of interview questions will be based on the literature review and research problems.
Questions will be pre-tested before interviews and I will discuss these questions with my supervisor and other class fellows as well.
Limitation of the Research:
One of the major limitations of this research will be that, it is based on the risk management of only one financial institution ING direct bank, it means the number of security issues and risk facing by other bank in internet banking cannot be discussed here.
