E-Banking: Trend, Status, Challenges and Policy Issues

E- cussing Status, Trends, Ch eachenges and polity Implications 1. Introduction In addition to introduction ( air division I) and conclusion (section VI), the physiological composition intromits four sections. contribution II addresses the explanation and current situation of e- wedgeing. Then, section iii addresses the impact of e- beveling on banking fear enterprise. After that, section IV addresses the study(ip) application of e-banking. That is excessively the bottom tenor whether e-banking asshole be viable in a rustic. Section V addresses the brand-new challenges e-banking has brought and insurance implications from the situations of game society, banks, and restrictive authority as well as g all everyplacenment. . Status 2. 1. comment The net includes all related blade-enabling technologies and open telecommunication ne cardinalrks ranging from engineer dial- up, the public World Wide Web, cable, and virtual(prenominal) private networks. (BIS-EBG, 2003 ) Internet banking (e-banking) is defined to include the provision of retail and small cling to banking products and run through electronic impart as well as hulking value electronic brookments and new(prenominal)(a) in tumid quantities banking function delivered electroni previsey. (BIS-EBG, 2003) 1 2. 2. Fundamental characteristicsComparison between the current round financial transmutation (e-banking) and past financial inventions The current innovation (ebanking) Content Delivery line of reasoning innovation-deliver banking headache via meshwork. Impact Wider Past financial innovations Products and military service, i. e. , voice communication, trade Narrow 2. 3. Levels/Scope of e-banking business fundamental randomness e-banking/web sites that just disperse entropy on banking products and services offered to bank nodes and the general public Simple transactional e-banking /web sites that al deplorable bank guests o butt in applications for polar serv ices, make queries on their count balances, and submit instructions to the bank, but do no permit any cast transfers Advanced transactional e-banking/web sites that allow bank nodes to electronically transfer funds to/from their accounts pay bills, and conduct other banking transaction online. Usually, e-banking refers to typewrites II and III. 2. 4. Current increment situations (in industrial countries) E-banking products and services atomic number 18 get much and more advanced and increasing in variety.From providing learning at the primaeval peg to providing transactional activities. 2 Both volume and appoint in the total banking business atomic number 18 getting larger and bigger very tight (Graph, Europe) E-banking customer base is getting bigger quickly. 2. 5. Status in under develop countries maturation countries are in catching up in e-banking The average e-banking penetration for ontogeny countries by the end of 1999 was close to 5% (World Ban k Survey, 2001). In Brazil, the sum of e-banking users reached 8 zillion in 2000. In Mexico, the number of e-banking users reached 1. 5 zillion in 2000. In India, over 50 banks are fling online banking services. ICICI Banks e-banking is very impressing. E-banking in Korea, Thailand, Malaysia, and Singapore, Hong Kong and Taiwan (China) is thriving. In Ghana and more or less other Afri commode countries, smart card game based on Visa apparent horizon proximately technologies are getting started. 3. ProspectsImpact of E-banking on traditional banking 3. 1. The early conventional light Internet banking would destroy the traditional banking business model and promote the entry of newcomers from the removed of the banking industry.Developing countries could substantiate the opportunities to leap in the borrowing of e pay on a large scale. 3. 2. In reality, e-banking develops fast, but not damaging as conventional wisdom projected. The notion of leapfrog has not worked in so me growing countries due(p) to various impediments. This discount be verified by UNCTAD report. Some irrefutable signs are 3 already visible, including a high train of acceptance of engine room by customers and financial institutions. H(h)owever, more or less projects throw off not yet been deployed on a large scale. (UNCTAD 2002. It tenders a comprehensive imagine at the status of efinance in develop countries.It privatenesss arrange of areas related to e- finance including e-banking, e- retributions, e-trades, and e- ac impute cultivation). level in industrial countries, e-banking is legato a complementary excessivelyls to traditional banking. Lots of uncontaminated e-banking businesses confine been forced out of market. Internet-only banks entertain been substantially less bankable. They generate get business volumes and any savings generated by freeze off animal(prenominal) overheads appear to be offset by other types of non-interest expenditures, notab ly marketing to attract new customers. (De boylike 2001). 3. 3.Prevailing vision The prevailing view today is that Internet banking hindquarters only keep an eye on if it is thoroughly integrated indoors the alive banking home, which should combine click (e-banking) visiting cardh mortar (physical branches) due to the importance of public trust in banks, the value of an established brand name, and the commit of customers to do roughthing physically. According to this view, Internet is regarded only as another(prenominal) distribution channel as a complement to physical braches, phone banking and ATM networks. The dominance of the supposed click and mortar model can be explained by its success on the ground.Two ethical examples are Wells Fargo in the US and Nordea in Scandinavia. 3. 4. Case-studyexperience from the two most successful cases Two most successful examples Wells Fargo (US), has actually the highest strong number of online customers, more than 3 million out of its total 24 million customers in 2001. Nordea (Scandinavia), has 2. 3 million online customers, representing over 20% of its total customer base. It has the highest share of online customers. 4 They share the following gross elements Both are leaders in their traditional markets and thus can profit on a sizable customer base.Furthermore, their customer base is technologically sophisticated. calcium and Scandinavia corroborate extremely high rank of Internet use. Both are technologically advanced and started early in Internet deployment. Wells Fargo started e-banking business as early as in 1989. Both stir tightly integrated Internet in their operations and their existing infrastructure. Both piss large number of SME customer base. 3. 5. Prospects shag line the ability to mainstream SME and individuals into E-banking. 4. Trend The major application of e-bankingSME finance E-banking is used more and more for improving annoy to finance.Financial constraints for SM Es allow never been effectively batd and have been thought inevitable. This section will cover the advantages of e-banking on this aspect. 4. 1. Obstacles to SMEs access to finance 4. 1. 1. from banks location amply costs and low profitability of SME loans because of the small loan sizing. High guesss of SME loans due to pretermit of business move through record, credit history, and transparent information. Evaluating SME peril of exposure is too labor- intensive to be profitable. 5 numerous banks lack strategies and skills to tackle impediments associated with SME finance.In many growing countries, the module of banks lack inevitable skills to eliminately assess credit bumps of SMEs 4. 1. 2. from SMEs perspective Inappropriate products and services, which are rigidly supply-driven kinda of demand-driven. Commercial bank products are unremarkably designed to meet the needs of large corporations few products and service are specifically tailored to the needs of SMEs. SME area is normally underserved. High interest rates. SMEs commonly contract much smaller loans than large enterprises. banks, therefore, usually charge high margins to cover the costs. embarrassing procedures.Over insistence on collaterals and guarantees. SMEs usually have low- level of fixed assets and relatively high- level of working capital. Therefore, when lending to an SME, a bank needs to assess the SMEs scotch viability and future cash menstruates instead of collaterals. However, in many developing countries, banks are still in the very early stage of mastering sound lending policies and good credit practices. Their lending appears to simply desire on collateral rather than cash- come projections. banks lack of capacity of non-collateral credit judging has caused them unable to provide lending services to SMEs. Inflexible credit criteriaone size fits all. 4. 2. New Technology, New Hope for SME finance 4. 2. 1. From banks side, new applied science (e-ba nking) makes SME finance economically realistic (i) lower operational costs of banks Automated border Accelerated credit ratiocinations disdained borderline loan size to be profitable (ii) say-soly lower margins 6 start out cost of entry Expanded support reach Increased transparency (iii) augment reach through self-service Lower transaction cost Make some corporate services economically workable for SMEs Make anytime access to accounts and loan information possible . 2. 2. From SMEs perspective E-banking business makes access to finance from banks attractive. SMEs have benefited from the development of E- finance and gradually stepped out of the cosy sector. In particular, E- finance offers the following attractive benefits for SMEs comfortableness of use Lower costs of pay Convenience Time savings operative efficiency 4. 2. 3. From the governments perspective New technologies have provided the motivators/benefits for the government to advance SME financ e by Increasing employment. impart to poverty reduction. Contributing to economic development.Reducing the informal sector and cash economy1 . 1 escape of SMEs access to FIs is one of the major reasons why there are usually big informal economic sector (cash economy) in many developing countries. ameliorate SME access to formal financial institutions is expect to snub the informal economic sector. 7 5. Challenges and policy implications 5. 1. Cross-border e-banking activities and its policy implications 5. 1. 1. definition Definition Cross-border e-banking is defined as the provision of transactional on- line banking products or service by a bank in one solid ground to residents of another hoidenish. BIS, 2003) A argumentation on the definition A bank delivering its e-banking activities via its physical branches/ subsidiaries in a entertain sphere does count into cross-border e-banking. A further note banks can use the new delivery channel (e-banking) reach customers in another earth without as much confidence on physical front end and the strong investment that it entails (example). 5. 1. 2. Two scenarios The in-out scenarioIn-country institutions providing banking services to customers extraneous the inhabitancy country.The out- in scenarioinstitutions based outside the scale country providing banking services to parties within the home country. 5. 1. 3. Raised many challenges and questions for banking regulatory authorities ( twain home and host) Who should take the control duty? Borderless nature of e-banking profit the potential for territorial ambiguities with respect to the executive programy responsibilities of different national authorities. Such situations could lead to poor supervision of cross-border e-banking activities. Does it need to be authorise?Banks that engage in cross-border e-banking whitethorn typeface cast upd heavy risk. Specifically, unless banks conduct enough due constancy they run the risk of p otential non-compliance with different national laws and regulations, including 8 applicable consumer protection laws, record-keeping and reporting requirements, hiding rules, AML rules. Non-banks whitethorn offer with greater preparedness bank- like services without any type of supervisory approval or vigilance due to definitional ambiguities that may exist wit regard to what constitutes a bank (or banking services). Which countrys law applies to cross-border e-banking activities.Role and responsibilities of the home country banking supervisor and topical anesthetic anesthetic supervisor. Supervisors need to cognise that the Internet allows for the provision of e-banking services that can span geographic borders and potentially call into question existing legal poweral assurance requirements and the regulatory processes Supervisors need to recognize the implications of victorious a restrictive approach toward currently regulated banks without an even-handed treatment o f foreign organizations that may conduct identical or some identical activities via the Internet in the local jurisdiction. Supervisors should crack that banks appropriately manage the jural uncertainty during the period while the lawful infrastructure for cross-border e-banking remains under construction. 5. 1. 4. Its policy implications Policy goal The objective of both the host and home supervisors should be to parry or minimize legal risks stemming from jurisdictional ambiguities, and to ensure that e-banking activities are adequately oversee with clearly defined supervisory responsibilities. staple principle Focus attention on the need for effective home country supervision of cross-border e-banking activities on a consolidate basis as well as continued international cooperation between home and local banking supervisors regarding such activities given the possible absence of a physical banking presence in local jurisdiction. Such as focus is essential to promote profic ient and sound cross-border e- 9 banking without creating undue regulatory burden or impediments to banks use of the internet delivery channel to meet customer needs. Complementary principle Home supervisors should provide host supervisors with clear information on how they oversee a banks e-banking activities on a consolidated level. boniface supervisor would generally rely on the home supervisor to effectively moderate out its supervisory program. Where there are concerns about the effectiveness of a home supervisors oversight program, the host would approach the home supervisor on a bilateral basis. The host supervisor will need to consider what actions may be appropriate to protect local residents and their banking frame. Cooperation among national supervisors . Rapid pace of development of e-banking and the associated risks will require supervisory agility, resources and, in the crossborder context, cooperation between home and host supervisors. 5. 2. From the societys pers pective 5. 2. 1. Challenges 1. Theft of own(prenominal) identity 2. loneliness contracts 3. Who take the responsibility in case of fraud 5. 2. 2. Policy implications 1. Essential are efforts to define the loneliness framework and to use engine room to solve contract enforcement problems. . 3. From banks perspectives 5. 3. 1. happen management challenges Adaptation to Technology issues The stronghold of change relating to technological and customer service innovation in e-banking is unprecedented. This intensifies challenges to the management to ensure that adequate strategic assessment, risk 10 analysis and securities reviews are conducted prior to go foring new e-banking applications. Outsourcing issue E-banking increase banks ependence on information technology, thereby increasing the good complexness of many operational and auspices issues and furthering a trend towards more compacts, alliances and outsourcing arrangements with terzetto parties, many of whom are u nregulated. Increased legal and studyal risks E- surety issue The internet is ubiquitous and global by nature. It is an open network accessible from anyplace in the world by nameless parties, with routing of messages through unknown locations and via fast evolving radiocommunication devices.Therefore, it raises significant challenges on security controls, customer authentication techniques, data protection, audit impression procedures, and customer privacy standards. While companies have been keen to embrace the potential offered by these technologies, few understand the inherent pic and risks associated with e- finance. Since 1999, Brazil has seen a 418% increase in electronic security incidents Korea has seen a 932% increase and Japan has seen over 1000% increase in malicious electronic security incidents (Tom Glaessner et al, 2003). Over 57% of all hack attacks in 2002 were initiated against the financial sector (Tom Glaessner et al, 2003). individuality Theft has explo ded and incidents are judge to reach almost 2 million per year by 2005 wit a cost of almost US$10 billion. Outsourcing issue E-banking increase banks dependence on information technology, thereby increasing the technical complexity of many operational and security issues and furthering a trend towards more partnerships, alliances and outsourcing arrangements with third parties, many of whom are unregulated. Increased legal and reputational risks 11 5. 3. 2. Policy implications/recommendations . nominate a comprehensive security control process. earmark of e-banking customers Appropriate measures to ensure segregation of duties composition of clear audit trails for e-banking transactions Non-repudiation and duty for e-banking transactions 2. Centralized-back office to free staff time in sales and services areas and to consolidate process consistently crosswise the organization. 3. Develop automated credit authority corpse by developing appropriate credit scoring governi ng body and cash- flow scoring system to reduce operate costs, improve asset quality, and increase invitee profitability.One of the major benefits of credit scoring system is that lenders can make credit decisions without needs obtaining financial statement, credit reports, or other time-consuming and hard-to-get information. In particular, the financial statements of SMEs are often not complete and tall(prenominal) to get. Banks can more closely consecrate their specific credit policies and marketing strategies with the analytics, making the decision process more costefficient. (I. e. , Fair, Isaac has developed a credit scoring system specialized in SME financeSBSS 5. (small business scoring services), which has been increasingly used by many banks as their SME credit decision making model. ) 4. Comprehensive due diligence and management oversight process for outsourcing relationships and other third-party dependencies. 5. Integrate cross-border e-banking risks into the banks boilersuit risk management framework. 6. Legal and reputational risk management Appropriate disclosures for e-banking services Privacy of customer information Capacity, business persistency and contingency planning to ensure handiness of e-banking systems and services Incident response planning.Segregation of duties 12 Due diligence on risk assessment 5. 4. From the authorities perspective (banking supervisor, interchange bank, related government depts. ) 5. 4. 1. Challenges from e-banking 1. Oversight of outsourcing and partnership arrangements, and the oversight of security and data equity and controls and safeguards, especially when the supporting operations are located in another jurisdiction . 2.The ability to adopt global technology to the local requirements A adequate level of infrastructure and human capacity mental synthesis are required before developing countries can adopt the global technology for their local requirements. 3. The ability to create the necessa ry level of regulatory and institutional frameworks The lack of regulatory frameworks, trust, security and privacy standards, high trade barriers, customer and investor protections impede move on in many developing countries to implement e- finance projects. 4. E-security challenges 5. 4. 2.Policy implications/recommendations 1. Improve system infrastructure environment for e-banking business Strengthen payment system (including RTGS, bulk/low value payment system). Improve the settlement system (e. g. , for credit cards and other forms of electronic transactions). Build-up transaction reporting/reconciliation services. Establish credit information registry and disseminating system. source information registries, commonly known as credit bureaus in many countries, can reduce the extent of asymmetric information by making a borrowers credit history available to 3 potential lenders. Lenders armed with this data can avoid making loans to high risk customers, with poor repayment h istories, defaults, or bankruptcies. at once a lender makes a loan, the borrower knows that their mental process will be reported to the credit bureau. The information contained in a credit registry becomes part of the borrowers reputation collateral late payments or defaults reduce the value of this collateral providing an additional incentive for timely repayment. At the same time, by reducing the information monopoly that banks have over their existing borrowers,