Luận văn a study on electronic banking the case of bank for investment and development of vietnam

Lit Fhe Histors of Hectronie Banking, eee - M 12', Electronic Banking using a telephone connection 7 10 Phane banking Mobile banking :Jectronic Banking using personal computers.... In

VIETNAM NATIONAL UNIVERSITY, HANOI

SCHOOL OF BUSINESS

Nguyen Thi Tuyet Le

A STUDY ON ELECTRONIC BANKING

THE CASE OF BANK FOR INVESTMENT AND

DEVELOPMENT OF VIETNAM

Major: Business Administration

Code: 60 34 05

A -L0/ gỡ

MASTER OF BUSINESS ADMINISTRATION THESIS

Supervisors: Dr.Nguyen Viel Anh

Hanoi — 2010

Lit Fhe Histors of Hectronie Banking, eee - M

12', Electronic Banking using a telephone connection 7 10

Phane banking Mobile banking :Jectronic Banking using personal computers

[23 Others: Means of payment and self-service zones „

[LBL Paymenteard Trereree cece UT 1.2.3.2 EETPOS (Electronic fund transter at point of sale) 18

1.2.3.3, ATMS(Autemated Teller Machine) sete se TÑ

1,4 ELECTRONIC BANKING RISKS

Lat, Transaction/operations risk

LS ELECTRONIC BANKING STRATEGIC OPTIONS FOR BANKS

CHAPTER

2.1 BEECTRONIC BANKING IN VIETNAM

2.141 The development of Electronic Banking ín Vicutiam

2.1.2 Electronic Banking services in Victim occ seccesssnesscenn cesses

‘Trend in economic globalization

Compelilion pressure from banks

Income fiom E-Banking increases banks” cevenu TH: STATUS QUOS OF ELECTRONIC BANKING IN BIDV

LJectroni¢ Banking using ä telephone coniiection

Banking Short Message Service Llectronic Banking using personal computers

Home banking

Internet banking; Direet Ranking

Others: Meuns of payment and self-service zones

3.1.2, Legal basison completion

3.1.3 Highly potential market with over 85 mitlion people and higher level of people`s knowledge, strony development of internet Services io sense « eons weanenenennane ve BT

3.2 ORIENTATION AND STRATEGIC OPTIONS FOR DEVELOPING

33 SOLUTIONS TO DEVELOP AND IMPROVE ELECTRONIC BANKING

334 Complete the information technology and build an internal information system,

promoting the development of e-Banking 9

3.3.3 Frequent assessment and study of customer segmentation and vị

service quality product & service diversification for e-banking customers 1 95

of inforntation and instruction in e-banking use ta convince customers to stick at service

quality ¬— - ¬—-.- — - seca OO

3.3.6, Improvement of the bank's financial power cueeeeeeeasromsersersr TUỔ

3.3.7 Exploitation of retail services via the inlernet the use ef curd services, electranic

1a TÌM

payment provided by commercial hanks

102 Los

3.3.8 Promotion of produet marketinp eeu «eeeeeososree

3.3.9 Other selutivns

3.4 RECOMMENDATIONS

3l Recommendation far the GoXEDANIHẨ cc ecsecseserssseas anatase

3.4.2, Recommendations for The State Banh of Viettamm., à co eiieerree

3.4.3 Recommendations for Vietnam Bank Association (VBAL

106

= 106

107 l09

M

LIST OF TABLES

lable 2.1: BID V's business performance in the period 2005-2008

Vable 2.2: BSMS's business performance 2007-2008

Tuble 3,3: Home bankingˆs business performance nf BIDV 2007-2008 S

Vable 2.4: Card service's business performance of BIDV 2007-2008

Vable 3.1: Estimation of personal computer users in Vietnam

: Cards’ market share of banks

+ ATM's market shares of banks

LIST OF FIGURES

~

Basie diagram of E-banking

General trend ín I:-banking evolution —

Strategic options for vnferineg c-banking

Redefining the Primary Role of Banh Branches Thun coe

Interface ol Directbanking service

ATM network in Vietnam

Process of intemational economic integration in Vietnam

Vhe growth of numbers of card holders in Vietnam

: Number of bank accounts by percentage of population and number of

E-banking objeetives öŸ BIDV cac ÑỮ

BIDV’s Strategic options [or enlcring c-banking 90

xi

imponance is stil] continuing to increase Branches, which have had tradi

af conducting business and interaction between parties have also been influen

the Internet and gone through many changes One of these traditional branches

banking industry which during the middie of the 1990s started offering banking

services over the Internet The changes lead to that the physical interaction in the bank

office environment between the banks and their customers has diminished and been

replaced hy customers conducting their errands from their homes and businesses The joss of interaction between the banks and their customers has evoked my interest in the subject of developing e-banking services

Electronic banking (e-banking) is the newest delivery channel for banking,

services, The definition of e-banking varies among researches partially because

electronic banking refers to several types of servives through which bank customers

can request information and carry out most retail banking services via computer

television ar mobile phone

In recent years Vietnam’s commercial bank system has had strong changes in bank's scale as well ay service quality Especially, some banks bravely experiment and provide e-banking services for customers bringing much convenience and

efftclix eness [or customers hanks and the economy However, most customers still

reserve und use restric! because the concept of e-banking is quile new and strange Dut

to many reasons (finanec, technology, human resources ) some banks have no c- banking services and/or e-banking is leaved open Understanding the impertanee and

necessary of des elopment of e-banking services, BIDV quickly deployed these in past

years Although, some results have been gained BIDV is getting stuck of finding ways

develop and improve its e-banking services professionally

The thesis “A stady on electronic banking - The Case of Rank for Investment and Development of Vieinam (BIDV)" aimed to study electronic banking and propose

solutions for improving and developing lurther e-banking services in BIDV,

The objectives of this thesis are to (a) review basic concept of electronic

banking, (b) Provide an ov ervicw of the potentials and future perspectives af e-banking

development in Vietnam, and the adoption of e-banking in BIDV and analyze its

current e-banking services fo Hind out the problems of BEDY in adopting e-banking (c)

propose solutions to improve and develop e-banking service in BIDV

lòng is as follows:

‘The complete list of research ques

© What are definition, forms, benefits and risks of c-hanking?

® What are the potentials and future perspectives of e-banking development in

VieInam?

© What has 13112V's e-banking done se far and what are achieved results?

© What are problems of e-banking development in BIDV?

© What are solutions to improve and develop ¢-banking services in BIDV?

For the theoretical faundation this thesis will study ¢-hanking thearies in the

world.

For the case study this thesis will study the aduption and development of e-

banking in BIDV HIDY currently applies e-banking in the first step

lar the theoretical part data sources are textbooks articles trom internet since

2004 As for the ease study data is obtained trom interview with BIDV team and

Vietnam in next two or three years many banks can iniplement the hoowledge studied

in this thesis for their business activities

imitation of this thesis is due to the freshness of intemet services

The biggest

industry in Vietnam in general, and ¢-hanking in particular, therefore few acudemicals

reviews have been applied and proved In case of the BID, it has just run for several

The other limit is from case study method This methad cannot cover all the

theoretical issues of c-hanking Thus, later this case this thesis only studies several

areas in e-banking and applies some related key performance indieators to analyze

performanyy for BIDV,

9, Expected results

The thesis expects w give the systematical theory in electronic banking find out

BIIDV"s e-hanking performance restrictions and proposes solutions to improve it

Excluding introduction, cunelusion and reference part this thesis includes three parts as follow s:

Chapter 1: Theoretical Foundation

Chapter 2: The Case of BIDV

Chapter 3: Sotutions to improve and develop e-banking services in BIDV.

describes the process of buying and selling or exchanging of product:

information via computer networks including the Intemet It is the use of the Imemet

ad the Web to fransuet business Vhis means that ecommerce not unly consists of

selling and purchasing of goods and services over the Intemet it alsa consists of

marketing distributing and servicing preduets and services over the Internet |

E-commerce may also reler to electronic data interchange (EDI), in which one

[E-commerce affects a great part of the world and has a huge impact on people

and business but also various professions.” it is a growing industry: however il took

almost 40 years until it was adopted by the market By the end of 1990°s e-commerce

was something that every company wanted to be a part of E-commerce was a success

for every busi that joined the online family but with the su came also failure

Many vompani¢s that were dedicated to the online business began to fail in the end of

1999 and this period was called the dotcom crash Ioday there is a discussion about why some companies Jailed in the end of 1999 and most scientists agree that the reason

for the dotcom crash was because many companies were not ready lor online business

Many businesses went online because of the great tales of fame and fortune that

eculated about e-commerce Furthermore the technology was not ready yet for

handling the rapid expansion of e-commerce Organizations that joined e-commerce with specilic realistic and measurable goals and objectives avoided this failure online? Uhy future of e-commerce looks promising and profituble: almost every company around the world, weather small, medium or big cither has its own webpage or does business online, Not only companies are frequent users of ecommerce bul private customers are also starting to use the Intemet more and more to make their purchases

online

1.1.1.2 Electronic Finance

E-finance can be defined as all which relates to the linking of business, finance,

and banking via electronic means, encompassing information gathering processing,

Tetrieval and transinission of dala as well as the Iransmission purchase and selling of

goods and servives

Turban, F, 2003: Preface

“Trepper, ©2900: Introduction

But the definition broadens when we look at the new possibilities ol

ed by

iechneluogy Computers and the use of one time data entry and relational databases

mvan that online real-time data about a company’s business and accounts can be generated enabling managers lo manage their companies in new and more proactive

wars +

L113 Electronic Banking

What is electronic banking?

E-Commerce Sondustng business ar3.¢9 baciranie reas

Proud ng fran gervces Stored aun phiparở trough ekeronee channels, paymert mechansmt!

E-Banking Other finanelal

Proving baneng prodactsand = Services and

eo hiougfi tron products 2elwe chư Ersrsno, snc

brokering, a

—

¬_

ở Stare betason money tới hương

Other tlecteomme sett wth e-mcare balances at hot Ki

‘etary chants foal anos nade

Figure 1.1: Basic diagram of e-banking

“Electronic banking is an umbrella tenn for the process by which a customer

mas perlorm banking uansactions electronically without vi:

iting a brick-and-mortar

“Andrew Fight, A083 E Finaree

institution The following terms alf refer to one form or another of electronic banking: personal computer (PC) banking Internet banking virtual banking online banking,

home banking, remote electronic banking und phone banking PC banking and Internet

or omling banking is the most frequents used designations [t should be noted

however that the terms used to describe the various types of electronic banking are often used interchangeably.”

Electronic banking is the wave of the future It provides enormous benefits to

sonsumers iu tems of the case and cost of transactions But it alsa poses new

challenges for country authorities in regulating and supervising the financial system

and in designing and implementing macroeconomic policy

t:lectronic banking has been around for some time in the form of automatic teller machines and telephone transactions More recently, it has been transformed by

s that benefits both customers

the Intemet a new delivery channel for banking servic

and banks Access is fast, convenient and available around the clock whatever the customer's fucation Plus, banks can provide services more efficiently and at substantially lower casts

Electronic banking alsa makes it easier for customers to cormpare bunks! services

and products can increase competition among banks and allows banks te penetrate

new markets and thus expand their geographical reach, Some even see electronic

banking as an apportunity far countries with underdeveloped financial systems to

louptrog developmental stages Customers in such countries can access servives more

easily from banks abroad and through wireless communication systems which are

developing more rapidly than traditional "wired" communication networks

The Hip side of this technological boom is that electronic banking is not only

susceptible to but may exacerbate, same af the sume risks particularly governance

legal, operational and reputational -inherent in traditional banking In addition it

8

poses new challenges In response many national regulaters have already modified their regulations to achieve their main objectives: ensuring the safety and soundness of the domestic banking system, promoting market discipline and protecting customer

rights and the public trust in the banking system Policymakers are also becoming increasingly aware of the greater potential impact of macroeconomic policy on capital

movements

tery of Electronic Banking

Llectronic innovation in banking can be traced back to the 1970s when the computerization of financial institutinns gained mamentum (Pang 1995), However a visible presence of this was evident to the customers since 1981 with the introduction

of the @utomatic teller machine (ATM) \nnovative banking has grown since then,

aided by technological developments in the telecommunications and Information

‘Technology industry The early decade of the 1990s saw the emergence af automated

voice response (AVR} technology By using the AVR technology banks could offer

telephone banking facilities for financiat services With further advancements in

Internet banking one after another such as Citibank and Bank of America

` Sai: and Shanmugham, 2002

ụ

Making payments for goods and services in cash ur non-cash forms as well as

depositing money in financial institutions and managing these resources are an inherent

constituent of economic life Hanks serve as important intermediates In recent years

with the dev clapment of technolagies and techniques, options for communication with

hanks are expanding for clients New services are originating such as hame banking

phone banking internet banking and others

Clients use modern communication media for remote communication with the bank: a modem, telephone computer or payment card A characteristic feature of these

serviees is the client's uninterrupted round-the lock account access, Le., independent

of banking business hours and the ability to execute lacal and international payments

directly fem the comfort of the home or office This reduces cash handling and

speed and enhances the comfort of making payments Electronic communication means

are particularly coming to the forefront These are more convenient faster and ofien

cheaper for clients Banking experience shows it is suitable to use combinations of

operations products and situations, Electronic banking is a service that specifically

uses elecironic communication forms, Electronic banking can be divided on the basis

of the instruments used? telephone connection, personal computers, means of

payment [bank cards} and self-service zones

Banking using a telephone connection Telephone banking anu the first banking services using classic telephone lines

for communication date back to the turn of the sixties and seventies of the last century

These services grew very rapidly and at the close of the 20th century mohile phones

10

alsa started te be used in banking with the development of information and

communication technologies In this period banks quickly responded to the dawning of

anew era in using mobile telephones world-wide and began communicating with their

clients by SMS messages with GSM banking later becoming a natural component of

electronic banking Each financial institution offers Uiis under a different name but the

essential product remains the same A mobile phone can be used to communicate with

sl as well as a tixed

a so-called telephone banker or an automated tetephone system j

ling However opportunities for mobile phone usage in communication with a bank are

much greater Mobile phone use represents a direct communication channel that spread

un a massive scale through which clients have immediate access to typing a bank operation ordering services or working with accounts Electronic banking using a

telephone connection can be divided inte phone banking (ATS client advisor) and

wobile banking (SMS banking, GSM SIM Toolkit and WAP)

1.2.1.1 Phone banking

Phone banking is the provision of banking services using a classic telephone

line A hank client can obtain the nec information on dialing a (eluphone number

specified in advance, Helore the requested banking service information is provided the

client's identity is determined using contractually agreed terms Using this banking

in information conceming active and pas

service enables bank clients La abt

banking products but a client can also actively use the bank payment system and

request tur example a payment order or a collection order open or cancel a term deposit or a current account [n this case a fax connected to the telephone serves as an

output communication channel The client advisor or so-called telephone banker is a

bank employee capable of providing any infarmation about products and services and

follow ing verification that he is speuking wilh an authorized person can also pertorm

any passive or uative operation He van provide advice to the client and offer further

banking products,

One advantage of this service is that it requires no additional technical equipment apart from a telephone As a rule bank telephone center (call center)

operators work 24 hours a day nonstop and it is thus possible to use their services fram

ly place at any time, A client advisor is a bank employee: the bank pays his salary

service Banks therefore sometimes establish

thus mereasing ils costs and fees for this

aufomated telephone systems,

Automated Telephone System

The technical means necessary to use this system are the same as for

communication with a client adviser A telephone is required, which must have tone

dialingL or be equipped with an accessory adaptor (tone dialer) An automated

telephone system works on the basis ofa menu through which clients can move araund

using buttons on the telephone The service menu tree is usually designed to be simple

so that a choice does not take too long, More extensive information is sent to the client

by fax either to a telephone number agreed in advance of to a number requested by the

client Cost efficiency is the advantage Some hanks offer this service to clients free-of}

charve because costs are negligible and cumfor is significant One disadvantage is that

problems can sometimes arise when the client cannot choose a menu item that corresponds with his wishes ar the computer responds to an instruction in a way that

utomated

differs from what the client wanted It is then apprupriale to connect to an

telephone system with a telephane banker who can resolve the problem.

perlurmed ur on request: a client sends the bank a correctly formatted message which

processes it and answers the client's request hy SMS

Information sent on request mostly concerns current interest rates or currency exchange rates, Providing these is simple for the bank because this is publicly

accessible information that needs no protection A client however can request

information abuut the balance in his account, which is not public information and must

be protected when il is provided Passwords are used for this purpose or lechnologies

based on the principle of an electronic key, A client however is required to know the

code of every transaction including constant and variable symbals The whole message

contuining data separated by # symbols sometimes has up to fifty characters Users can

vasily make mistakes This is frequently a limiting factor for clients, reducing the

comfort factor in this service

GSM SIM Toolkit

The GSM SIM TYootkit service can only be used from a mebile phone

supparting this technology GSM SIM Toolkit is a software interface that enables

arbitrary changes to the mobile phone menu Operators supporting this technology can

use it to personalize mobile phone menus This means that only functions activated and

paid Tor will appear on the user menu This technology dates back ta 1998 Among the

standard were RadioMobil and Expandia Bank in the Czech Repubtic Most mobile phones new on the market support for the GSM SIM Toolkit ‘To use this service the client needs to be using services of an operator supporting this standard in its network,

be a client of a bank that offers handling of accounts through the GSM SIM Toolkit

have a mobile phone supporting GSM SIM Toolkit technology and use a special SIM

card lor banking services

After buying a special SIM card and activating it at the pertinent bank branch

the client can begin using this service The mobile phone menu will be widened to

include the Banking Services item through which it is possible 1a carry out active or

structure differs from ene financial institution

vecessary to know BPUK (PUK for banking applications) and BPIN BPUK is

assigned to a client by the bank when the application is activated and recorded on the mobile phone's SIM card BPIN is used for every access to protected items in the

banking application When a client makes three unsuccessful attempts lo type the

Ty to

RPIN, avcess to the banking application and its items is blocked, iis ne

know the BPUK to unblock it, When the client fails ten times to type the right BPLIK the SIM card can no longer be used for banking services The main advantage of this

service is its simplicity, A client just follows instructions on the mobile phone display WAP (Wireless Application Protocol)

WAP is often compared to web pages although this is a simplification Unlike

pages appearing on a camputer monitor, WAP presents its output on a small mobile

phone display therelore concentraling on text information [t is a form of gateway lo

rm One condition

various services prepared by a mobile network operator or another

for using the service is that the client must have a mabile phone supporting WAP

technology, Security is again provided by an electronic key WAT banking has not

14

caught on very well so far some banks however continue to offer it despite the

relatively low number of users

Along with significant growth in the usage of mobile phones in banking

personal computers have also come to the fore, which to an even greuter

vien facilitate and mademize banking service provision In an information seciety

this communication instrument plays an irreplaceable role and is indispensable for the

presen! day banking sphere The area of electronic banking realized through personal computers can be divided into home banking, intemet banking and mail-banking,

1.2.2.1 Home banking

Home banking is a service thal enables a bank client lo handle his accounts from

a computer from a place selected in advance, at home or in the office The main features of home banking systems are the high level of security comfart simplicity of

use, Openness 0Ÿ the system, wide communication passibililies, networking, definition

of users and their rights automated data transmission and the option to define &

combined signature specimen

A home banking system usually consists of two parts: a hank computer program

and a program in the client's computer The bank program works as a communication

server 11 receives calls fram clients verifies their identity, receives data from them,

authenticates digital signatures, generates digital receipts and sends data to clients A

home hunking computer system is a multi user application meaning, thal several of the

client's employees can work with it, in particular:

a) Administrator can define new employees change rights

by Sender ensures communication with the bank and transmission of prepared dat

<) Avcountant can type payment orders and orders for collection

Navigator) A client cannot avoid visiting the bank though beeause he must first ask

lor an identification code After opening the bank's web site the client simply selects

internet banking and, further 10 proper identification, can perform passive or active

operations Good internet banking should provide a maximum of services No less

important are the graphic interface clarity simplicity and unambiguily of usage The

intelligibility of texts determines simplicity and speed of understanding of the meaning

of menu items, data fields, and general lext information displayed to the client

Safety for concrete applications is assured by client authentication verification

of data and data pretection by eneryption Client identification ts done using passwords

or codes The client chooses some of these and the bank assigns others Tt is

sword made up of various

recommended to choose a pas ypes of characters which can

be a combination of numbers, lower case and capilal letters, and special symbol

Banks usually proteet large volume transactions with additional security means,

such as an encryption (authentication) calculator, or a token, which generates

nonrecurring rindam passwords which a client types on confinming an order Thế

token itself is protected by certain security features Work with it is only enabled after

the client types a four-digit PIN code whereby the user can change the PIN at any

ume In the event of three failed attempts to type the correct PIN the token blocks

16.

Hf off and once

itself Afier 60 seconds of inactivity a token automatically: s

switched back on it again requests the PIN

When a client generates several authentication codes in succession and types none of them into the cent system the key becomes desynchronized this protection serves to prevent use of the key for other purposes A cheaper and based on ils

dimensions, more practical alternative to u token is a vrid card This is a card with a

mesh drawn on it with fields with random generated characters ‘Phe user authorizes an active operation by typing the right code from the field of the card the operator requests from him

12

Mail banking

Mail banking is another electronic banking service thal makes it possible to

communicate with the bank by electronic mail or e-mail ‘The most trequendy used

service is sending account statements at agreed periadicity to the client's mailhox

quail fs wot used for more complex operations

Apart from those already mentioned there are other more or less widely known forms of electronic banking including a payment card, an clectranic wallet and a self:

1.2.3.2 EFTPOS (Electronic fund transfer at point of sale)

FFTPOS (Flectronic Funds Transler at Point of Sale) is an Australian and New

Zealand electronic processing sy slem for eredit cards, dehit cards and charge cards °

EF IPOS also allows users of the system to withdraw cash at the time of purchasing a

preduct or service through the merchant's 1:11 POS terminal This functionality is

called debit card cash back in uther countries

1.2.3.3, ATMs (Automated Teller Machine}

ATM {An automated teller machine) is a computerized telecommunications

lo financial

device that provides the customers of a financial institution with acces

transactions ina public space without the need for a human clerk or bank teller On most modern ATMs, the customer is identified by inserting a plastic ATM card with a

magnetic stripe ora plastic smarteard with a chip that contains a unique card number

n-the-wall, cashpeint Bancomat {in various countries in Europe and Russia)

VEPOS Merchant bunking services

Multibance (atter a registered trade mark in Portugal) and Any ‘Time Money (in

word is used to access a self

service zone A payment card in combination with a pas

service zane It is also possible to use other authentication devices, such as an electronic key, but also a fingerprint SelF-service zanes are available 24 hours a day 7

days a week

In expert circles it js sometimes possible to encounter another form of electronic

banking: fax-hanking A fax is however mostly used ay an addition to other forms, such

as telephone banking, when a client agrees with the bank that all ontpul woulid be sent

to him by fax,

13.1,

1.3.1.1

ELECTRONIC BANKING

The Benefits of Electronic Banking

Benefits to banking indusiry

Banking industry has also received numerous benefits due to growth of E-Banking

infrastructure, There are highlighted below;

1.3.1.2

The growth of E-banking has greatly helped the banks in controlling their over

heads und operating cost

Many repetitive and tedious tasks have now heen fully automated resulting in

ureater efficiency, better time usage and enhanced control

The rise of E-banking has made banks more competitive It has also ted to

expansion of the banking industry opening of new avenues for banking operations Electronic banking has greatly helped the banking industry to reduce paper work, thus helping them ta move the paper less environment

Electronic banking has also helped bank in proper documentation of their records

and transactions

‘The reach and delivery capabilities of computer networks, such as the Internet, arc

far better than any branch network)

Benefits to customers The main benefit from the bank customers’ point of view is significant saving of time by the automation of banking services proce:

Reduced cosi

in accessing and using the banking services

Increased comfort and timesaving transactions can be made 24 hours a day

without requiring the physical interaction with the bank

- Quick and cantinuous access to information, Corporations will have easier

uccess Lo information as, they can check on mulliple accounts at the click of a

button,

- Better cash management l:-banking facilities speed up cash cycle and increases

efficiency of business processes as large variety of cash management instruments are available on Internet sites of Estonian banks For example it is

possible 10 manage company’s short-term cash via Internet banks in Estonia

(investments in over-night short- and long term deposits, in commercial papers

in bonds and equities, in money market funds)

Private customers seck sightly different kind of benefits from e-banking In the

(2001) has found, that providing faster,

study on online banking drivers Aladwal

easier and more reliable services to customers were amongst the tap drivers of e-

banking development The main benefits from e-banking for private customers are as

fotlows: *

~ Reduced costs This is in terms of the cost of availing and using the various

banking products and services

- Convenience, All the banking transactions can be performed from the comfort

of the hame ar office or from the place a customer wants to

- Speed Thự response of the medium is very fast: therefore customers: can

actually wait ti] the last minule before concluding a fund transfer

“Wank Assay! 2001

- bunds management Customers can download their history of different accounts

and do a “what-if” analysis on their own PC before affecting any transaction on

the web This will lead to better funds management

1.3.1.3 Economic benefits

Lkctronic Banking as already stated has greatly serviced both the general public and

the banking industry This has resulted in creation of a better enabling environment that

supports growth productivity and prosperity Besides many tanuible benefit in form of

reduction if cost reduced delivery time increased efficiency reduced wastage e-banking electronically contratled and thoroughly monitured environment discourage many illegal and

creation which results in better economic condition, Besides all this E-banking has also helped

in documentatian of the economic activily of the masses,

1.3.2 The Advantages of Electronic Banking

make an online payment Your bank will automatically send the p

behalf in the amounts and on the dates you specify

a

Second, it is fast: Iransaction speed: Online bank sites generally execute and

Therd_ it is elicieney: You can ae

ineluding IRAs CDs, even securities, ram one secure site

Isactions ator qui

and manage all af your bank accounts,

Final, it ix effectiveness Many banks now offer sophisticated toals including

ACCOUNT aggregation, stock quotes, rate alerts and portfolio managing programs to help

you manage all of your assets more effectively Most are also compatible with money

managing programs such as Quicken and Microsoft Money

The_muin_issue_for_most people, is that of trust They may wonder if their

wansaction went through successfully or if they clicked on the correct button The best

Start-up may take time: In order to register for your bank's online program, you

form at 4 bank branch, [f you and your

will probably have la provide [D and sige

spouse wish to view and manage your assets together online, one of you may have to sign a durble pawer of attomey before the bank will display all of your holdings

Bunk site changes: Even the largest banks periodically upgrade their online

‘ams, adding new features in unfamiliar plac s In some cases you may have to re-

Clearly, e-banking has both advantages und disudvantages I simplil

some people and for them itis frankly a beller way to bank For others il may be a Hitle mare complex and downright intimidating In light of these two perceptions, mere and

more hanks are offering online banking as a viable option for their customers

TransactionQperations risk arises from fraud, processing errors system

stitution’s ínab: to

disruptions or other unanticipated events resulting in the

deliv er products or services, This risk exists in each product and service offered, The level af transaction risk is affected by the structure of the institution’s processing

crvironment including the types of services offered and the complexity of the

pracesses and supporting technology

In most instances, e-banking activities will increase the complexity of the

institution’s activities and the quantily of its transaction/operations risk, especially if

the institution is offering innovative services thal have not been standardized Since customers expect ¢-banking services to be available 24 hours a day 7 days a week financial instiuutions should ensure their e-banking infrastructures contain sufficient capacity and redundancy to ensure reliable service availability Even institutions that

de not consider e-banking a critical financial service due to the availability of allernate

ta]

processing channels, should carefully consider customer expectations and the put

impucl of service disruptions on customer salisfaction and loyalty

The key ta controlling transaction risk lies in adapting effective policies

procedures and cantrals to meet the new risk exposures intraduced by e-banking

Basie intemal controls including segregation pf duties dual controls, and

reconcilements remain important Information sceurily controls in particular become

more significant requiring additional processes tools expertise and testing

ised on their

Institutions should determine the appropriate level of security controls

assessment of the sensitivity of the informatian to the customer and to the institution and on the institution's established risk tolerance level Security controls are discussed

in this booklet’s “Risk Management ol’ K-Banking Activities” section under the

heading “Information Security Program.”

1.4.2 Credit risk

Generally a financial institution’s credit risk is nol increased by the mere fact

that a loan is originated through an u-banking channel ]fowever management should

consider additional precautions when originating and approving loans electronically

including assuring management information systems effectively track the performance

of portfolios origimated through e-banking channels The following aspects of on-line

toan origination and approval tend ta make risk management of the lending, proces

- Monitoring and controlling the growth pricing undersriting standards, and

ongoing credit quality af loans originated through e-banking channels:

- Monitoring and oversight of third-parties doing business as agents or on behalf’

of the financial instituien (for mple, an Internet loan origination site or

vlectronic payments processor):

Valuing collateral and perfecting liens over a potentially wider geographic area:

ting loans from individuals over a potentially wider

- Monitoring any increased volume of and possible concentration in, out-of-area lending

Funding and investment-related risks could increase with an institution's e-

banking initiatives depending on the volatility and pricing of the acquired deposits The

Intemmet provides institutions with the ability to market their products and services

globally Intemet-based advertising programs can effectively match yield-focused

investors with potentially high-vielding deposits But Internet-originated deposits have

the polential to attract customers who lacus exclusively on rales and may provide a

contract and aecounl opening practices, which might involve Face-lo-face meglings or

the exchange of paper correspondence The institution should modify its policies as

necessary [0 address the Following e-banking funding issues:

Potential increase in dependence on brokered /unds or other highly rate sensitive

deposits:

- Potential sequisition of funds from markets where the institution is not Heensed

to en page in banking particularly if the institution does not establish, disclose, and enforce geographic restrictions:

- Potential impact of loan or deposit growth from an expanded Internet market,

including the impact of such growth on capital ratios: and

delivery channel where the laws and rules governing the electronic delivery of certain

financial and institution products or services may be ambiguous or still evolving

Specific regulatory and legal challenges include

> Uneertainty over legal jurisdictions and which state's ar country's laws povern a

specific e-banking transaction,

= Delivery of credit and deposit-related disvlosures‘notices as required by law or

Establishment of legally binding electronic agreements,

Laws and regulations governing consumer transactions require specific pes of

disclosures notices, or record keeping requirements These requirements also apply to

c-banking and federal hanking agencies continue to update consumer laws and

regulations to refleet the impact of e-banking and on-line customer relationships

Institutions that offer e-banking services both informational and transactional ume a higher level ef compliance risk because of the changing nature of the

3?

technology the speed al which errors can be replicated and the frequency of regulatory

changes to address e-banking issues The potential for violations is further heightened

by the need to ensure consistency between paper and electronic advertisements

disclosures and notices Additional information on compliance requirements for c-

banking can be found on the agencies” websiles and in references

14.5, Strategic risk

A financial institution's board and management should understand the risks

associated with e-banking services and evaluate the resulting risk management costs

banking planning and investment decisions can increase a financial institution's

strategic risk, Early adopters of new e-banking services can establish themselves as

ors who anticipate the needs of their customers, but may do so by incurring

stratepic tisk associated with e-banking services, financial institutions should develop

clearly defined e-banking objcclives by which the institution can evaluate the success

of iis e-banking strategy In particular, financial institutions should pay attention to the

following:

+ Adequaey of management information systems (MIS) to track e-banking

+ Usage und profitability:

- Costs involved in| monitoring e-banking activilies or costs involved in

overseeing e-banking venders and technology service providers

Design delivery and pricing of services adequate to generate sufficient

customer demand:

Retention of eletrenic loan agreements and other electronic contracts in a

format that will be admissible and enforceable in litigation:

Costs and availability: of staff (o provide technical support far interchanges invalving multiple operating systems web browsers, and communication

devices:

Competition from other e-banking providers: and

Adequacy of technical operational compliance, or marketing support for c- banking products and services

An institution's decision ta offer e-banking: services, especially the more

complex transactional services, significantly increases its level of reputation risk Some

of the ways in which e-banking can influence an ins

itution’s reputation include

Loss of trust due to unauthorized activity on customer accounts,

Disclosure or theft of confidential customer information to unauthorized parties: tv.g hackers)

Failure to deliver on marketing claims,

Failure to provide reliable service due to the trequency or duration of service disruptions

Customer complaints about the difficully in using e-banking services and the

inability of the institution's help desk to reselve problems and

Contusion between services provided by the financial institution and services

provided by other businesses linked from the website (e-banking booklet)

»

1.5 ELECTRONIC BANKING STRATEGIC OPTIONS FOR

BANKS

In terms e-banking services sophistication the above e-banking sen ices can be

defined from one way informarian-push services where customers receive information

about the bank its products and services to dafermation-download where customers

căn download (or ask in case of telephone-banking) account information and forms to

full-transaction services where customers can perferm most banking transactions

(such as transfer between accounts bill payment, third party payment card and loan apptication, ete) electronically Some hanks do also provide new banking product (such

as e-saving) that are only accessible electronically Figure 1.2 shows the general trend

in the evolution of e-banking along the dimensions of electronic channels and banking

applications

tall transaction

channel channel channel

Electronics channel

Figure 1.2: General trend in e-banking evolution

Some of the key drivers aff offering c-hanking services include reducing

transaction costs increasing cousenience availability andl timeliness of transaction

and improving accessibility for better fund administration " Achieving these objectives

tend to contribute strategic benefits in terms uf better customer relationship

management increased customer hase and improved market image

A bank may therefore need to decide on what e-banking services (o provide to

witch customers and when and how (channel choice) to provide Ihose services The

seeming dominant strategy is the “click and mortal” model in which the bank combines:

or adds an online presence to its physical presence A number of factors related ta a

bank’s motivation, its resources and capabilities and strategic orientation and

positioning can affect the specific path a bank takes in terms of e-banking In addition

other factors related to customers awareness customer readiness, the specific nature af IC/ diffusion in the wider market, and experience wilh electronic based transactions

can also influence this path

in addition, issues related to customers development choices and potential

channel conflict need special attention A critical assessment of these issues can enable

a bank to formulate the objectives of entering e-banking services make strategic decisions an the services to be provided and the appropriate delivery channels to

deploy and manage these services efficiently The strategie choiees are deciding

between information-oriented services over a lim

ed mumber of delivery channels and

gradually advance through organizational learning to providing full transactional services across manageable number of multiple delivery channels Making the right strategic choieg with respect to the bank's resources and capabilities is essential 10

[Brown and Malls, 207131

avhieving success in providing services in creating a unique value proposition to

cusomers

Froms the above discussion, it can be realized that a number of factors influenced

the evolution and future intention of e-banking In adopting e-banking services hanks

are need with strategie aptians between the chaice of delivery channels and the level

of suphistication of servives provided by these delivery channels (see Figure 1.3}

Considering electronic channels banks have the options of ATMs Personal Computer- banking 1clephone-banking Internet-banking ‘'V-banking and Mobile-banking ete

However the choice of a delivery channel or combination of channels depends on the

level of sophistication af e-banking services the Bank intends to deliver E-banking

services cam begin al the basic level ranging from informalion-push services to

iuformation-download to an advanced level of tull-transactional services By asses: Ẻ

their capabilities and the constraints of their context banks can make the strategic

E-banking Channels: ATM, PC Telephone TY, Internet, Mobile

Figure 1.3: Strategic Options for Entering E-hanking