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

E- pious platitudeing aspect, Trends, Challenges and insurance policy Implications 1. Introduction In addition to knowledgepower ( constituent I) and conclusion (section VI), the paper includes four sections. Section II addresses the definition and menstruum situation of e- patoising. Then, section III addresses the impact of e-banking on banking military control. After that, section IV addresses the major(ip) application of e-banking. That is also the bottom zephyr whether e-banking laughingstock be viable in a calculationry. Section V addresses the fresh challenges e-banking has brought and policy implications from the perspectives of society, banks, and restrictive authority as vigorous as government. . Status 2. 1. Definition The earnings includes all related to web-enabling technologies and open telecommunication networks ranging from contain dial- up, the public World Wide Web, cable, and virtual private networks. (BIS-EBG, 2003) Internet banking (e-banking) is delimit to include the pro visual sense of retail and s loaner respect banking products and services carteh electronic channels as well as large value electronic move overments and new(prenominal) wholesale banking services delivered electronically. (BIS-EBG, 2003) 1 2. 2. Fundamental characteristicsComparison betwixt the menstruum round financial innovation (e-banking) and past financial innovations The current innovation (ebanking) Content Deli real channel innovation-deliver banking business via internet. Impact Wider ago financial innovations Products and services, i. e. , legal transfer, swap Narrow 2. 3. Levels/Scope of e-banking business Basic nurture e-banking/web sites that just disseminate selective study on banking products and services base on ballsed to bank customers and the general public Simple transactional e-banking /web sites that allow bank customers o submit applications for different services, make queries on their account balances, and subm it operating(a) instructions to the bank, but do no permit any account transfers right transactional e-banking/web sites that allow bank customers to electronically transfer funds to/from their accounts pay bills, and conduct other banking transaction online. Usually, e-banking refers to types II and III. 2. 4. Current development situations (in industrial countries) E-banking products and services ar acquiring some(prenominal) and more advanced and win over magnitude in variety.From providing information at the early stage to providing transactional activities. 2 two volume and sh atomic number 18 in the total banking business ar acquiring bigger and bigger very fast (Graph, Europe) E-banking customer base is getting bigger quickly. 2. 5. Status in growth countries Developing countries are in catching up in e-banking The average e-banking penetration for developing countries by the end of 1999 was close to 5% (World Bank Survey, 2001). In Brazil, the number of e-banking habitrs striveed 8 million in 2000. In Mexico, the number of e-banking users reached 1. 5 million in 2000. In India, over 50 banks are offering 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 some(a) other African countries, smart cards based on Visa sentiment proximately technologies are getting started. 3. ProspectsImpact of E-banking on traditional banking 3. 1. The early ceremonious wisdom Internet banking would destroy the traditional banking business modeling and progress the inlet of newcomers from the outside of the banking industry.Developing countries could stick the opportunities to leapfrog in the realizeion 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 some developing countries due to various impediments . This can be verified by UNCTAD report. Some positive signs are 3 already visible, including a ut nigh train of acceptance of technology by customers and financial institutions. H(h)owever, most projects ware not yet been deployed on a large scale. (UNCTAD 2002. It provides a all-around(prenominal) look at the status of efinance in developing countries.It covers arrange of areas related to e- finance including e-banking, e- allowances, e-trades, and e- belief information). Even in industrial countries, e-banking is still a antonymous tools to traditional banking. Lots of pure e-banking businesses squander been forced out of market. Internet-only banks gain been substantially less profitable. They generate lower business volumes and any nest egg generated by lower corporeal overheads appear to be offset by other types of non-interest expenditures, notably marketing to attract new customers. (De Young 2001). 3. 3.Prevailing vision The prevailing view today is that Inter net banking can only get through if it is thoroughly integrated within the existing banking infrastructure, which should combine click (e-banking) with mortar (physical branches) due to the importance of public trust in banks, the value of an completed brand name, and the desire of customers to do something physically. According to this view, Internet is regarded simply as another distribution channel as a complement to physical braches, ph bingle banking and ATM networks. The dominance of the so-called click and mortar model can be explained by its success on the ground. both good examples are surface 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 advancedest right-down 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 graduate(prenominal)est share of online customers. 4 They share the following common elements two are leaders in their traditional markets and thus can capitalize on a sizable customer base.Furthermore, their customer base is technologically sophisticated. California and Scandinavia begin extremely richly rates of Internet use. both(prenominal) are technologically advanced and started early in Internet deployment. Wells Fargo started e-banking business as early as in 1989. twain mystify tightly integrated Internet in their operations and their existing infrastructure. Both have large number of SME customer base. 3. 5. Prospects Bottom 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 overture to finance.Financial constraints for SMEs have never been effectively solved and have been thought inevitable. This section will cover th e advantages of e-banking on this aspect. 4. 1. Obstacles to SMEs access to finance 4. 1. 1. from banks perspective High costs and low profitability of SME lends because of the small loan size. High risks of SME loans due to lack of business track record, trust history, and transparent information. Evaluating SME risk is too labor- intensive to be profitable. 5 legion(predicate) banks lack strategies and skills to tackle impediments associated with SME finance.In galore(postnominal) developing countries, the staff of banks lack necessity skills to appropriately assess cite risks 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 normally intentional to meet the needs of large corporations few products and service are specifically tailored to the needs of SMEs. SME arena is usually underserved. High interest rates. SMEs usually bear much smaller loans than l arge enterprises. banks, therefore, usually charge high margins to cover the costs. Cumbersome procedures.Over insistence on collaterals and guarantees. SMEs usually have low- take aim of fixed assets and relatively high- level of working capital. Therefore, when alter to an SME, a bank needs to assess the SMEs frugal viability and future cash come downs instead of collaterals. However, in many developing countries, banks are still in the very early stage of mastering sound lending policies and good book of facts practices. Their lending appears to simply rely on collateral rather than cash- flow projections. banks lack of mental object of non-collateral credit assessment has caused them unable to provide lending services to SMEs. Inflexible credit criteriaone size fits all. 4. 2. naked as a jaybird Technology, New Hope for SME Finance 4. 2. 1. From banks side, new technology (e-banking) makes SME finance economically possible (i) lower operational costs of banks Automated answer Accelerated credit decisions Lowered minimum loan size to be profitable (ii) potentially lower margins 6 Lower cost of entry Expanded financing reach Increased transparency (iii) expand reach through self-service Lower transaction cost Make some corporate services economically feasible 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 in noble sector. In particular, E- finance offers the following attractive benefits for SMEs Ease of use Lower costs of financing Convenience Time savings Operational efficiency 4. 2. 3. From the governments perspective New technologies have provided the incentives/benefits for the government to improve SME finance by Increasing employment. Contributing to poverty reduction. Contributing to economic development.Reducing the inf ormal sector and cash economy1 . 1 Lack 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. Improved SME access to formal financial institutions is expected to reduce 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 positd as the supplying of transactional on- line banking products or service by a bank in one untaught to residents of another country. BIS, 2003) A note on the definition A bank delivering its e-banking activities via its physical branches/ subsidiaries in a host country does count into cross-border e-banking. A further note banks can use the new delivery channel (e-banking) reach customers in another country without as much reliance on physical presence and the significant investment that it entails (example). 5. 1. 2. Two sce narios The in-out scenarioIn-country institutions providing banking services to customers outside the dwelling house country.The out- in scenarioinstitutions based outside the stand country providing banking services to parties within the home country. 5. 1. 3. Raised many challenges and forelands for banking regulatory authorities (both home and host) Who should take the supervision duty? Borderless nature of e-banking cast up the potential for jurisdictional ambiguities with respect to the executive programy responsibilities of different field of study authorities. such(prenominal) situations could lead to insufficient supervision of cross-border e-banking activities. Does it need to be licensed?Banks that affiance in cross-border e-banking may face increased legal risk. Specifically, unless banks conduct adequate to(predicate) due pains they run the risk of potential non-compliance with different national laws and regulations, including 8 applicable consumer hold dearion laws, record-keeping and reporting requirements, privacy rules, AML rules. Non-banks may offer with greater facility bank- like services without any type of supervisory approval or oversight 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 local supervisor. Supervisors need to recognize that the Internet allows for the provision of e-banking services that can span geographic borders and potentially call into question existing jurisdictional authorization requirements and the regulatory processes Supervisors need to recognize the implications of victorious a restrictive burn down toward currently regulated banks without an even-handed treatment of distant organizations that may conduct identical or nearly identical activities via the Internet in the local jurisdiction. Supervisor s should reckon that banks appropriately manage the legal hesitation during the period while the legal 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 avoid or minimize legal risks stemming from jurisdictional ambiguities, and to ensure that e-banking activities are adequately supervised with clearly defined supervisory responsibilities. Basic ruler Focus attention on the need for effective home country supervision of cross-border e-banking activities on a consolidated 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 honest 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 article of belief Home supervisors should provide host supervisors with clear information on how they administer a banks e-banking activities on a consolidated level. entertain supervisor would generally rely on the home supervisor to effectively carry out its supervisory program. Where there are concerns about the effectualness 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 system. 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 perspective 5. 2. 1. Challenges 1. Theft of personal identity 2. Privacy reveals 3. Who take the responsibility in case of fraud 5. 2. 2. Policy implications 1. Essential are efforts to define the privacy framework and to use technology to solve contract enforcement problems. . 3. From banks perspectives 5. 3. 1. Risk management challenges Adaptation to Technology beds The speed 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 previous to implementing new e-banking applications. Outsourcing issue E-banking increase banks ependence on information technology, thereby increase the practiced complexity of many operational and certification issues and furthering a bm towards more partnerships, alliances and outsourcing arrangements with third parties, many of whom are unregulated. Increased legal and recordal risks E- warranter issue The internet is ubiquitous and global by nature. It is an open network tender from an ywhere in the world by unexplored parties, with routing of messages through unknown locations and via fast evolving wireless devices.Therefore, it raises significant challenges on security controls, customer documentation techniques, data protection, audit trail procedures, and customer privacy standards. While companies have been keen to embrace the potential offered by these technologies, few understand the intrinsical vulnerability 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 literary hack attacks in 2002 were initiated against the financial sector (Tom Glaessner et al, 2003). Identity Theft has exploded and incidents are expected to reach almost 2 million per year by 2005 wit a cost of almost US$10 billion. Outsourcing issue E-banking increase bank s 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 . Establish a comprehensive security control process. Authentication of e-banking customers withdraw measures to ensure segregation of duties Establishment of clear audit trails for e-banking transactions Non-repudiation and function for e-banking transactions 2. Centralized-back office to free staff time in gross sales and services areas and to consolidate process consistently across the organization. 3. Develop modify credit authorization system by developing appropriate credit hit system and cash- flow scoring system to reduce operating costs, improve asset quality, and increase client profitability.One of the major benefits o f credit scoring system is that lenders can make credit decisions without necessarily obtaining financial statement, credit reports, or other time-consuming and hard-to-get information. In particular, the financial statements of SMEs are practically not complete and difficult to get. Banks can more closely lay out 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 overall risk management framework. 6. Legal and reputational risk management beguile disclosures for e-banking services Privacy of customer in formation Capacity, business continuity and misadventure planning to ensure availability 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, central 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 integrity and controls and safeguards, especially when the supporting operations are situated in another jurisdiction . 2.The ability to adopt global technology to the local requirements A adequate level of infrastructure and human capacity building are required before developing countries can adopt the global technology for their local requirements. 3. The ability to create the necessary level of regulatory and institutional frameworks The lack of regulatory frameworks, trust, security and privacy standards, high trade barriers, customer and inv estor protections impede progress 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 cash register and disseminating system. Credit 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 histories, defaults, or bankruptcies. Once a lender makes a loan, the borrower knows that their performance will be reported to the credit bureau. The informat ion contained in a credit registry becomes part of the borrowers reputation collateral late payments or defaults reduce the value of this collateral providing an superfluous incentive for timely repayment. At the same time, by reducing the information monopoly that banks have over their existing borrowers,