A study on electronic banking the case of Bank for Investment and Development of Vietnam

Electronic banking e-banking is the newest delivery channel for banking services.. The definition o f e-banking varies among researches partially because electronic banking refers to sev

VIETNAM NATIONAL UNIVERSITY, HANOI

SCHOOL OF BUSINESS

Nguyen Thi Tuyet Le

A STUDY ON ELECTRONIC BANKING

THE CASE OF BANK FOR INVESTMENT ANI)

DEVELOPMENT OF VIETNAM.

Major: Business Administration

Code: 60 34 05

A ' L O / < s

MASTER OF BUSINESS ADMINISTRATION THESIS

Supervisors: D r.N guyen Viet Anh

Hanoi - 2010

TABLE OF CON TENTS

INTRODUCTION

1 The problem s

2 Objectives and A im s

3 Research questions

4 Scope o f w o rk

5 Data sources

6 M e t h o d s

7 Significance

8 Limitation

9 Expected results

10 Outline

CHAPTER 1

1.1 BASICS OF ELECTRONIC BANKING 1 1 1 D e f i n i t i o n

I I I I E l e c t r o n i c C o m m e r c e

I 1 1.2 E l e c t r o n i c F i n a n c e

1 .1.1.3 E l e c t r o n i c B a n k i n g

1 1

9

? 2

3 3 3 3 4 4 5 5 5 5

6

7

1.1.2 The History o f Klectronic B a n k in g 9

1.2 F O R M S O F K L E C T R O N I C B A N K I N G 10

1.2.1 Electronic Banking using a telephone c o n n e c tio n 10

12.1.1 Phone b a n k in g 11

12.1.2 M obile b a n k i n g n 1.22 Electronic Banking usinu personal com puters 15 P 2.1 H o m e b a n k i n g 15

1 2.2.2 Internet bankint» 16

12.2.3 Mail b a n k i n g 17

1.2 ' Others: M eans o f paym ent and self-service zones 17 12.3.1 Paym ent c a r d 17

12.3.2 El I POS (Electronic fund transfer at point o f s a le ) 18

12.3.3 A T M s (A utom ated Teller M a c h i n e ) 18

12.3.4 Electronic w a lle t 19

12.3.5 Self-service z o n e 19

3 A D V A N T A G E S A N D D I S A D V A N T A G E S O F 1E L E C T R O N I C B A N K I N G 2 0 1 1 T he B enefits o f Electronic B a n k i n g 70

1.3.1.1 B enefits to banking i n d u s t r y ?0

1.5.1.2 Benefits to c u s t o m e r s 20

1.3.1.3 Econo m ic b e n e fits 22

1 .2 T he A dvantages o f Electronic B a n k in g 22

I 3 T he D isadvantages o f Electronic b a n k i n g 23

4 E L E C T R O N I C B A N K I N G R I S K S 74

1.‘ 1 Transaction/operations r i s k 24

I.‘.2 C redit r i s k 25

1.^.3 l iquidity, interest rate, price/m arket r is k s 26

1 -.4 C o m p lia n c e legal r i s k 77

I/.5 Strategic r i s k 28

l.<6 Reputation ris k ?9

v i i i

1.5 II Ỉ Cl RON IC BANKING STRATEGIC OPTIONS FOR BANKS 30 CHAPTER 2 35 2.1 ELECTRONIC BANKING IN V IE TN A M 35

2 1 1 T h e d e v e l o p m e n t o f E l e c t r o n i c B a n k i n g in V i e t n a m 3 5

2 1 2 E l e c t r o n i c B a n k i n g s e r v i c e s in V i e t n a m 3 7

2 1 2 1 H o m e - b a n k i n g 3 7

2 1 2 2 P h o n e - b a n k i n g 3 9

2 1 2 3 M o b i l e - b a n k i n g 4 0

2 1 2 4 I n t e r n e t - b a n k i n g 4 0

2 1 2 5 B a n k k i o s k 41

2.2 OVERVIEW OF B ID V 41

2 2 1 I n t r o d u c t i o n o f B I D V 4 i

2 2 2 O r g a n i z a t i o n s t r u c t u r e 4 3

2 2 3 O v e r v i e w o f b u s i n e s s p e r f o r m a n c e in t h e p e r i o d 2 0 0 5 - 2 0 0 8 4 5

2 2 3 I B u s i n e s s P e r f o r m a n c e 4 5

2 2 3 2 S e r v i c e s 4 6

2.3 TTE NECESSARY OF DEVELOPING ELECTRONIC BANKING IN BIDV

48

2 3 1 T r e n d in e c o n o m i c g l o b a l i z a t i o n 4 8

2 3 2 C o m p e t i t i o n p r e s s u r e f r o m b a n k s 4 9

2 3 3 I n c o m e f r o m E - B a n k i n g i n c r e a s e s b a n k s ' r e v e n u e 5 0

2.4 I l l STATUS QUOS OF ELECTRONIC BANKING IN B ID V 51

2 4 1 E l e c t r o n i c B a n k i n g u s i n g a t e l e p h o n e c o n n e c t i o n 5 2 BSNvi; - B a n k i n g S h o r t M e s s a g e S e r v i c e 5 2

2 4 2 E l e c t r o n i c B a n k i n g u s i n g p e r s o n a l c o m p u t e r s 55

2 4 2 H o m e b a n k i n g 5 5

2 4 .21. I n t e r n e t b a n k i n g : D i r e c t B a n k i n g 5 8

2 4 3 O t h e r s : M e a n s o f p a y m e n t a n d s e l f - s e r v i c e z o n e s 61

2 4 3 P a \ m e n t c a r d 61

LIST OF TABLES

Table 2.2: BSMS's business performance 2007-2008 54

I able 2.3: Home banking's business performance o f BIDV 2007-2008 57

Table 2.4: Card service's business performance o f BIDV 2007-2008 63

Table 3.1: Estimation o f personal computer users in Vietnam 83

Table 2.1 : B ID V 's business perform ance in the period 20 05-2008 45

XI I

LIST OF FIGURES

f igure 1.2: General trend in E-banking evolution 30

f igure 1.3: Strategic options for entering e-banking 32

f igure 1.4: Redefining the Primary Role o f Bank Branches 34

Figure 2.1 : The organization structure o f BIDV's Head Office 44

Figure 2.2: Before-tax Profit o f BIDV from 2005 to 2008 46

Figure 2.3: Net Service Revenue in BIDV from 2005 to 2008 47

Figure 2.4: Interface o f Directbanking serv ice 59

Figure 2.5: Cards’ market share o f banks 63

f igure 2.6: ATM network in Vietnam 65

Figure 2.7: A I M 's market shares o f banks 65

Figure 2.8: POS's market share o f b a n k s 68

Figure 3.1: Process of international economic integration in Vietnam 78

Figure 3.2: 1 he growth of numbers of card holders in Vietnam 80

Figure 3.3: Number o f bank accounts by percentage o f population and number of Internet users in Vietnam by percentage o f population 84

f igure 3.4: E-banking objectives o f BIDV 87

Figure 3.5: BIDV's Strategic options for entering e-banking 90

Figure 3.6: Marketing strategy o f e-banking 102

Figure 1.1 : B asic diagram o f E-hanking 7

Electronic banking (e-banking) is the newest delivery channel for banking services The definition o f e-banking varies among researches partially because electronic banking refers to several types o f services through which bank customers can request information and carry out most retail banking services via computer, television or mobile phone.

In recent years Vietnam's commercial bank system has had strong changes in bank's scale as well as service quality Especially, some banks bravely experiment and provide e-banking services for customers, bringing much convenience and effectiveness for customers, banks and the economy However, most customers still reserv e and use restrict because the concept o f e-banking is quite new and strange Due

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

necessary of development of e-banking serv ices, 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 study on electronic banking - The Case of Bank for Investment and Dev elopment of Vietnam (BIDV)” aimed to study electronic banking and propose solutions for improving and developing further e-banking serv ices in BIDV

The objectives of this thesis are to (a) review basic concept of electronic banking, (b) Provide an overview of the potentials and future perspectives o f e-banking development in Vietnam, and the adoption o f e-banking in BIDV, and analyze its current e-banking serv ices to find out the problems of BIDV in adopting e-banking, (c) propose solutions to improve and develop e-banking service in BIDV

3 Research questions

I he complete list of research questions is as follows:

• What are definition, forms, benefits and risks o f e-banking?

• What are the potentials and future perspectives o f e-banking development in Vietnam?

• What has BIDV's e-banking done so far and what are achieved results?

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

• What are solutions to improv e and develop e-banking services in BIDV?

l o r the theoretical foundation, this thesis will study e-banking theories in the world

lor the ease study, this thesis will stud\ the adoption and development of e- banking in BIDV BIDV currently applies e-banking in the first step.

lo r the theoretical part, data sources are textbooks, articles from internet since

2004 As for the case stud\ data is obtained from interview with BIDV team and internal data

in this thesis for their business activities

I he biggest limitation of this thesis is due to the freshness of internet services industry in Vietnam in general, and e-banking in particular, therefore few academicals reviews have been applied and proved In case of the BIDV, it has just run for several years and in the simple way so it may be early to measure and judge exactly its performance

I lie other limit is from case study method This method cannot cover all the theoretical issues o f e-banking Thus, later this case, this thesis only studies several areas in e-banking and applies some related key performance indicators to analyze performance for BIDV

Chapter 1: Theoretical Foundation

Chapter 2: The Case of BIDV

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

4

Doing business online, typically via the Web it is also called "e-business," "e- tailing" and "1-commerce." Although in most cases e-commerce and e-business are synonymous, e-commerce implies that goods and services can be purchased online,

w hereas e-business might be used as more of an umbrella term for a total presence on the Web which would naturally include e-commerce (shopping) component

E-commerce may also refer to electronic data interchange (EDI), in which one company's computer queries and transmits purchase orders to another company's computer

1 I urban I., 2004 : Preface

I {-commerce affects a great part of the world and has a huge impact on people and business but also various professions.2 It is a growing industry: however, it took almost 40 years until it was adopted by the market By the end of 1990‘s e-commerce was something that even, company wanted to be a part of E-commerce was a success for every business that joined the online family, but w ith the success came also failure Mam companies that were dedicated to the online business began to fail in the end of

1999 and this period was called the dotcom crash Today there is a discussion about why some companies failed in the end of 1999 and most scientists agree that the reason for the dotcom crash was because many companies were not ready for online business Many businesses went online because of the great tales of fame and fortune that circulated about e-commerce Furthermore the technology was not ready yet for handling the rapid expansion of e-commerce Organizations that joined e-commerce with specific, realistic and measurable goals and objectives avoided this failure online.3

I he future of e-commerce looks promising and profitable; almost every company around (he world, weather small, medium or big either has its own webpage or does business online Not only companies are frequent users of ecommerce but private customers are also starting to use the Internet more and more to make their purchases online

1.1.1.2 Electronic Finance

and banking via electronic means, encompassing information gathering, processing, retriev al, and transmission of data as well as the transmission, purchase, and selling of goods and services

‘ Turban I , 2004 : Preface

' Trepper, C 2000 : Introduction

But the definition broadens when we look at the new possibilities offered by technology Computers and the use of one time data entry and relational databases mean that online real-time data about a company's business and accounts can be generated, enabling managers to manage their companies in new and more proactive

w ays.4

1.1.1.3 E lectronic Banking

What is electronic banking?

E-Commerce Conducting business through electronic networks

E-Finance Providing financial services through electronic ctonneis

E-Money Stored value Of prepaid payment mechanisms'

E-Banking Providing banking products and

services through electronic

delivery channels

Internet banking

other linancial services and products Insuronoe online brokering, etc

Telephone banking

Other electronic delivery cnanneis

The đtter-É-n:* b«f*een e mcm-v and * taring

15 Item Y.'rth i-momy bdlanws jrp not ten in accounts •irt'i banic*

Figure 1.1: Basie diagram of e-banking

may perform banking transactions electronically without visiting a brick-and-mortar

4 Andrew riuht 2002 : IM'inance

7

institution I he following terms all refer to one form or another of electronic banking: personal computer (PC) banking Internet banking, virtual banking, online banking, home banking, remote electronic banking, and phone banking PC banking and Internet

or online banking is the most frequently used designations It 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 consumers in terms of the ease and cost of transactions But it also poses new challenges for country’ authorities in regulating and supervising the financial system and in designing and implementing macroeconomic policy

Electronic banking has been around for some time in the form of automatic teller machines and telephone transactions More recently, it has been transformed by the Internet, a new delivery channel for banking services that benefits both customers and banks Access is fast, convenient, and available around the clock, whatever the customer's location Plus, banks can provide services more efficiently and at substantially lower costs

Electronic banking also makes it easier for customers to compare banks' services and products, can increase competition among banks, and allows banks to penetrate new markets and thus expand their geographical reach Some even see electronic banking as an opportunity for countries with underdeveloped financial systems to leapfrog developmental stages Customers in such countries can access services 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, some of the same risks—particularly governance, legal, operational, and reputational inherent in traditional banking In addition, it

poses new challenges In response, many national regulators 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.

1.1.2 T h e H is to r y o f Ele ctron ic B a n k in g

Electronic innovation in banking can be traced back to the 1970s when the computerization of financial institutions gained momentum (Pang, 1995) However, a

\isible presence of this was evident to the customers since 1981 with the introduction

of the automatic teller machine (ATM). Innovative 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 of automated voice response (A\'R) technology By using the AVR technology, banks could offer telephone banking facilities for financial services With further advancements in technology, banks were able to offer services through personal computers owned and operated by customers at their convenience, through the use of Intranet proprietary softw are The users of these services w ere, however, mainly corporate customers rather than retail ones.5 The Security First Network Bank was the first Internet banking in the world that was built in 1995 USA After that some famous banks introduced their Internet banking one after another, such as Citibank and Bank of America

Soiail and Shanmugham, 2003

9

1.2 FORM S OF E L E C T R O N I C BANKING

Making payments for goods and serv ices in cash or non-cash forms as well as depositing money in financial institutions and managing these resources are an inherent constituent of economic life Banks serve as important intermediates In recent years,

w ith the dev elopment of technologies and techniques, options for communication with banks are expanding for clients New services are originating such as home banking, phone banking, internet banking and others

Clients use modem communication media for remote communication with the bank: a modem, telephone, computer or payment card A characteristic feature of these services is the client's uninterrupted round-the clock account access, i.e independent

of banking business hours and the ability to execute local and international payments directly from the comfort of the home or office This reduces cash handling and transport costs, lowers the risk of theft or accepting counterfeit bank notes, increases speed and enhances the comfort of making payments Electronic communication means are particularly coming to the forefront These are more convenient, faster, and often cheaper for clients Banking experience shows it is suitable to use combinations of several communication means, depending on individual segments, clients, and types of operations, products and situations Electronic banking is a service that specifically uses electronic 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.

1.2.1 E le c t r o n ic B a n k i n g usin g a t e le p h o n e c o n n e c t io n

Telephone banking and the first banking services using classic telephone lines for communication date back to the turn of the sixties and sev enties of the last century These services grew very rapidly and at the close of the 20th century mobile phones

also started to be used in banking with the development of information and communication technologies In this period banks quickly responded to the dawning of

a new 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 this under a different name, but the essential product remains the same A mobile phone can be used to communicate with

a so-called telephone banker or an automated telephone system, just as well as a fixed line However, opportunities for mobile phone usage in communication with a bank are much greater Mobile phone use represents a direct communication channel that spread

on 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 into phone banking (ATS client advisor) and mobile 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 bank client can obtain the necessary information on dialing a telephone number specified in advance Before the requested banking service information is provided, the client's identity is determined using contractually agreed terms Using this banking service enables bank clients to obtain information concerning active and passive banking products, but a client can also actively use the bank payment system and request, for example, a payment order or a collection order, open or cancel a term deposit or a current account In 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 information about products and services and, follow ing verification that he is speaking with an authorized person, can also perform

any passive or active operation He can prov ide advice to the client and offer further hanking 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 from

am place at any time A client advisor is a bank employee; the bank pays his salary thus increasing its costs and fees for this serv ice Banks therefore sometimes establish automated telephone systems

Automated Telephone System

The technical means necessary to use this system are the same as for communication with a client advisor A telephone is required, which must have tone dialing 1 or be equipped with an accessory adaptor (tone dialer) An automated telephone system works on the basis of a menu through which clients can move around 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 or to a number requested by the client Cost efficiency is the advantage Some banks offer this service to clients free-of- charge because costs are negligible and comfort is significant One disadvantage is that problems can sometimes arise when the client cannot choose a menu item that corresponds with his wishes or the computer responds to an instruction in a way that differs from what the client wanted It is then appropriate to connect to an automated telephone system with a telephone banker who can resolve the problem

1 2 1 2 M obile banking

SMS Ranking

SMS hanking uses short text messages sent through the client's mobile phone SMS text messages can be used for both passive and active operations similarly as with classic telephone banking A client can automatically receive information about his account balance: an SMS is sent to the client immediately after a certain operation is performed, or on request: a client sends the bank a correctly formatted message which processes it and answers the client's request by 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 about the balance in his account, which is not public information and must

be protected when it is provided Passwords are used for this purpose or technologies based on the principle of an electronic key A client however is required to know the code of every transaction including constant and variable symbols The whole message containing data separated by # symbols sometimes has up to fifty characters Users can easily make mistakes This is frequently a limiting factor for clients, reducing the comfort factor in this service

GSM SIM Toolkit

The (iSM SIM Toolkit service can only be used from a mobile phone supporting (his technology GSM SIM Toolkit is a software interface that enables arbitrary changes to the mobile phone menu Operators supporting this technology can use it (o personalize mobile phone menus This means that only functions activated and paid for will appear on the user menu This technology dates back to 1998 Among the first companies to use it in banking applications based on the GSM SIM Toolkit

standard were RadioMobil and Hxpandia Bank in the Czech Republic Most mobile phones now on the market support for the (iSM 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 for 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 to carry out active or passive banking operations The precise structure differs from one financial institution

to another Security is what is important here To access banking services it is necessary 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 to type the BPIN access to the banking application and its items is blocked, it is necessary to know the BPUK to unblock it When the client fails ten times to type the right BPUK 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 computer monitor WAP presents its output on a small mobile phone display, therefore concentrating on text information It is a form of gateway to various services prepared by a mobile network operator or another firm One condition for using the service is that the client must have a mobile phone supporting WAP technology Security is again provided by an electronic key WAP banking has not

caught on verv well so far some hanks however continue to offer it despite the relativ ely low number of users.

1.2.2 E le c t r o n ic B a n k i n g usi n g personal c o m p u t e r s

Along with significant growth in the usage of mobile phones in banking practice, personal computers have also come to the fore, which to an even greater extent facilitate and modernize banking service provision In an information society this communication instrument plays an irreplaceable role and is indispensable for the present day banking sphere The area of electronic banking realized through personal computers can be div ided into home banking, internet banking and mail-banking

1.2.2.1 H om e banking

I lome banking is a serv ice that enables a bank client to 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, comfort, simplicity of use openness of the system, wide communication possibilities, networking, definition

of users and their rights, automated data transmission and the option to define a combined signature specimen

A home banking system usually consists of two parts: a bank computer program and a program in the client's computer The bank program works as a communication server It receives calls from clients, verifies their identity, receives data from them, authenticates digital signatures, generates digital receipts and sends data to clients A home banking computer system is a multi user application, meaning that several of the client's employees can work with it in particular:

a) Administrator - can define new employees, change rights

b) Sender ensures communication w ith the bank and transmission of prepared data

e) Accountant can type payment orders and orders lor collection,

b) Viewer - can browse through statements and announcements received

This system is open and can be expanded in the future without great cost

1 2 2 2 Internet banking

Internet banking can be used from the home or the office, as well as an internet café although the latter is not recommended for security reasons In order to handle his account a user just needs an internet browser (such as MS Explorer or Netscape Navigator) A client cannot avoid visiting the bank though, because he must first ask for an identification code After opening the bank's web site the client simply selects internet banking and further to 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 unambiguity of usage The intelligibility of texts determines simplicity and speed of understanding of the meaning

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

Safety for concrete applications is assured by client authentication, verification

of data and data protection by encryption Client identification is done using passwords

or codes The client chooses some of these and the bank assigns others It is recommended to choose a password made up of various types of characters, which can

be a combination of numbers, low er case and capital letters, and special symbols

Banks usually protect large volume transactions with additional security means, such as an encryption (authentication) calculator, or a token, which generates nonrecurring random passwords, which a client types on confirming an order The 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 time In the event of three failed attempts to type the correct PIN the token blocks

itself After 60 seconds of inactivity a token automatically switches itself off and once switched hack on it again requests the PIN.

When a client generates several authentication codes in succession and types none of them into the client system, the key becomes desynchronized This protection serves to prevent use of the key for other purposes A cheaper and based on its dimensions, more practical alternative to a token is a grid card This is a card with a mesh drawn on it with fields with random generated characters The user authorizes an activ e operation by typing the right code from the field of the card the operator requests from him

1 2 2 3 M ail banking

Mail banking is another electronic banking service that makes it possible to communicate with the bank by electronic mail or e-mail The most frequently used serv ice is sending account statements at agreed periodicity to the client's mailbox E- mail is not used for more complex operations

1.2.3 O the rs: M e a n s o f p a y m e n t an d se lf-se rv ic e zon es

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

1 2 3 2 EFTPO S (Electronic fu n d transfer at p o in t o f sale)

EFTPOS (Electronic Funds Transfer at Point of Sale) is an Australian and New Zealand electronic processing system for credit cards, debit cards and charge cards 6

IT I POS also allow s users of the system to w ithdraw cash at the time of purchasing a product or service through the merchant's EFTPOS terminal This functionality is called debit card cash back in other countries

European banks and card companies also sometimes reference "EFTPOS" as the system used for processing card transactions through terminals on points of sale, though the system is not the trademarked Australian/New Zealand variant, (wikipedia com vn)

1 2 3 3 A TMs (A utom ated Teller M achine)

ATM (An automated teller machine) is a computerized telecommunications dev ice that provides the customers of a financial institution with access to financial transactions in a 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 or a plastic smartcard with a chip that contains a unique card number and some security information, such as an expiration date or CVC (CVV) Security is provided by the customer entering a personal identification number (PIN)

Using an ATM, customers can access their bank accounts in order to make cash withdrawals (or credit card cash advances) and check their account balances as well as purchasing mobile cell phone prepaid credit AT Ms are known by various other names including automated banking machine, money machine, bank machine, cash machine, hole-in-the-wall, cashpoint Bancomat (in various countries in Europe and Russia),

“ E FTPO S Merchant banking serv ices.

IX

Multibanco (after a registered trade mark, in Portugal), and Any Time Money (in India) (wikipedia.com.vn)

In expert circles it is sometimes possible to encounter another form of electronic banking: fax-banking A fax is however mostly used as an addition to other forms, such

as telephone banking, when a client agrees with the bank that all output would be sent

to him by fax

19

1.3 A D V A N T A G E S A N D D I S A D V A N T A G E S OF

E L E C T R O N I C BA NKING

1.3.1 T h e Be ne fi ts o f Ele ctron ic B a n k in g

Banking industry has also received numerous benefits due to growth of E-Banking infrastructure There are highlighted below:

The growth of E-banking has greatly helped the banks in controlling their over heads and operating cost

Many repetitive and tedious tasks have now been fully automated resulting in greater efficiency, better time usage and enhanced control

The rise of E-banking has made banks more competitive It has also led 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 to 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, are far better than any branch network.)

The m a in b enefit from the b an k c u s to m e r s ' p o in t o f v ie w is sig nificant s a v in g o f tim e by the a u to m a tio n o f b a n k in g service s p ro c e s s in g and intro d u ctio n o f an easy

m a in te n a n c e to o ls for m a n a g in g c u s t o m e r 's m o n e y T h e m a in a d v a n ta g e s o f e -b a n k in g for corporate customers are as follow s:

BankA\va\ ! 2001 ; Gurau 2002

20

Reduced costs in accessing and using the banking services.

Increased comfort and timesaving — transactions can he made 24 hours a day without requiring the physical interaction w ith the bank

- Quick and continuous access to information Corporations will have easier access to information as they can check on multiple accounts at the click of a button

Better cash management E-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 to 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 seek slightly different kind of benefits from e-banking In the study on online banking drivers Aladwani (2001) has found, that providing faster, easier and more reliable services to customers were amongst the top drivers of e- banking development The main benefits from e-banking for private customers are as follows: x

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 home or office or from the place a customer wants to

Speed Fhe response of the medium is very fast: therefore customers can actually wait till the last minute before concluding a fund transfer

8 Bank Away! 2001

21

Funds 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 w ill lead to better funds management.

1.3.1.3 Econom ic benefits

Electronic 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 tangible benefit in form of reduction if cost, reduced delivery time, increased efficiency, reduced wastage, e-banking electronically controlled and thoroughly monitored environment discourage many illegal and illegitimate practices associated with banking industry like money laundering, frauds and embezzlements Further E-banking has helped banks in better monitoring of their customer base This it is a useful tool in the hand of the bank to device suitable commercial packages that are in conformity with customer needs As e banking provide opportunity to banking sector to enlarge their customer base, a consequence to increase the of volume of credit creation which results in better economic condition Besides all this E-banking has also helped

in documentation of the economic activity of the masses

1.3.2 T h e A d v a n t a g e s o f Electron ic B a n k i n g

First, electronic hanking is convenient: It allows you to perform transactions, pay bills and check balances 24 hours a day 7 days a week The bank virtually never closes because it is as accessible as your PC or laptop computer No matter where you are in the country or in the world, you can visit your e-banking and handle money matters You can even schedule to pay several payees ahead of time rather than keeping up with paper bills or trying to remember when to visit a payee's web site to make an online payment Your bank will automatically send the payments on your behalf in the amounts and on the dates you specify

Second, it is fast: Transaction speed: Online bank sites generally execute and confirm transactions at or quicker than ATM processing speeds.

Third, it is efficiency: You can access and manage all of your bank accounts, including IRAs CDs even securities, from one secure site

Final, it is effectiveness. Many banks now offer sophisticated tools, 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

1.3.3 T h e D i s a d v a n t a g e s o f Ele c t r o n ic b a n k in g

The main issue for most people is that o f trust. They may wonder if their transaction went through successfully or if they clicked on the correct button The best way to overcome this uneasiness is to make a habit of printing the transaction receipt Keep this receipt until your bank statement or online account view confirms that you have successfully executed the transaction

Start-up may take time: In order to register for your bank's online program, you will probably have to provide ID and sign a form at a bank branch If you and your spouse wish to view and manage your assets together online, one of you may have to sign a durable power of attorney before the bank will display all of your holdings together

Learning curve: Banking sites can be difficult to navigate at first Plan to invest some time and/or read the tutorials in order to become comfortable in your virtual lobby

23

Bank site changes', liven the largest hanks periodically upgrade their online programs, adding new features in unfamiliar places In some cases, you may have to re­enter account information.

Clearly, e-banking has both advantages and disadvantages It simplifies life for some people and for them it is frankly a better way to bank For others it may be a little more complex and downright intimidating In light of these two perceptions, more and more banks are offering online banking as a viable option for their customers

1.4 E L E C T R O N I C B A N K I N G RISKS

1.4.1 T r a n s a c t i o n / o p e r a t i o n s risk

Transaction/Operations risk arises from fraud, processing errors, system disruptions, or other unanticipated events resulting in the institution's inability to deliver products or services This risk exists in each product and service offered The level of transaction risk is affected by the structure of the institution's processing environment, including the types of services offered and the complexity of the processes and supporting technology

In most instances, e-banking activities will increase the complexity of the institution's activities and the quantity of its transaction/operations risk, especially if the institution is offering innovative services that have not been standardized Since customers expect e-banking services to be available 24 hours a day 7 days a week, financial institutions should ensure their e-banking infrastructures contain sufficient capacity and redundancy to ensure reliable service availability Even institutions that

do not consider e-banking a critical financial serv ice due to the availability of alternate processing channels, should carefully consider customer expectations and the potential impact of service disruptions on customer satisfaction and loyalty

I he key to controlling transaction risk lies in adapting effective policies, procedures, and controls to meet the new risk exposures introduced by e-banking Basic internal controls including segregation of duties, dual controls, and reconcilements remain important Information security controls, in particular, become more significant requiring additional processes, tools, expertise, and testing Institutions should determine the appropriate level of security controls based on their assessment of the sensitivity of the information 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 of E-Banking Activities" section under the heading "Information Security Program.”

1.4.2 C r e d i t ri sk

Generally, a financial institution's credit risk is not increased by the mere fact that a loan is originated through an e-banking channel However, management should consider additional precautions when originating and approving loans electronically, including assuring management information systems effectively track the performance

of portfolios originated through e-banking channels The following aspects of on-line loan origination and approval tend to make risk management of the lending process more challenging If not properly managed, these aspects can significantly increase credit risk

Verifying the customer's identity for on-line credit applications and executing

an enforceable contract:

Monitoring and controlling the growth, pricing, underwriting standards, and ongoing credit quality of loans originated through e-banking channels;

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

of the financial institution (for example, an Internet loan origination site or electronic payments processor);

Valuing collateral and perfecting liens over a potentially wider geographic area;Collecting loans from individuals over a potentially wider geographic area; andMonitoring any increased volume of and possible concentration in out-of-area lending

1.4.3 L i q u id it y , in te re st rate, p r i c e / m a r k e t risks

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 Internet provides institutions with the ability to market their products and services globally Internet-based advertising programs can effectively match yield-focused investors with potentially high-yielding deposits But Internet-originated deposits have the potential to attract customers who focus exclusively on rates and may provide a funding source with risk characteristics similar to brokered deposits An institution can control this potential volatility and expanded geographic reach through its deposit contract and account opening practices, which might involve face-to-face meetings or the exchange of paper correspondence The institution should modify its policies as necessary' to address the following e-banking funding issues:

Potential increase in dependence on brokered funds or other highly rate sensitive deposits;

Potential acquisition o f funds from markets where the institution is not licensed

to engage in banking, particularly if the institution does not establish, disclose, and enforce geographic restrictions;

26

Potential impact of loan or deposit growth from an expanded Internet market, including the impact of such growth on capital ratios: and

Potential increase in volatility of funds should e-banking security problems negatively impact customer confidence or the market's perception of the institution

1.4.4 C o m p l i a n c e / l e g a l risk

Compliance and legal issues arise out of the rapid growth in usage of e-banking and the differences between electronic and paper-based processes E-banking is a new 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

Uncertainty over legal jurisdictions and which state's or country's laws govern a specific e-banking transaction

Delivery of credit and deposit-related disclosures/notices as required by law or regulation

Retention of required compliance documentation for on-line advertising, applications, statements, disclosures and notices; and

Establishment of legally binding electronic agreements

Laws and regulations governing consumer transactions require specific types of disclosures, notices, or record keeping requirements These requirements also apply to e-banking, and federal banking agencies continue to update consumer laws and regulations to reflect the impact of e-banking and on-line customer relationships

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

technology, the speed at 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 e- banking can be found on the agencies' websites and in references

1.4.5 S t r a t e g ic risk

A financial institution's board and management should understand the risks associated with e-banking services and evaluate the resulting risk management costs against the potential return on investment prior to offering e-banking services Poor e- banking planning and investment decisions can increase a financial institution's strategic risk Early adopters of new e-banking services can establish themselves as innovators who anticipate the needs of their customers, but may do so by incurring higher costs and increased complexity in their operations Conversely, late adopters ma\ be able to avoid the higher expense and added complexity, but do so at the risk of not meeting customer demand for additional products and services In managing the strategic risk associated with e-banking services, financial institutions should develop clearly defined e-banking objectives by which the institution can evaluate the success

of its e-banking strategy In particular, financial institutions should pay attention to the following:

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

Usage and profitability;

Costs involved in monitoring e-banking activities or costs involved in overseeing e-banking vendors and technology serv ice providers;

Design, delivery, and pricing of services adequate to generate sufficient customer demand:

Retention of electronic loan agreements and other electronic contracts in a format that will he admissible and enforceable in litigation:

Costs and availability of staff to provide technical support for interchanges involving multiple operating systems, web browsers, and communicationdevices:

Competition from other e-banking providers; and

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

1.4.6 R e p u t a t io n risk

An institution's decision to 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 institution's reputation include

l oss of trust due to unauthorized activity on customer accounts

Disclosure or theft of confidential customer information to unauthorized parties (e.g hackers)

failure to deliver on marketing claims

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

Customer complaints about the difficulty in using e-banking services and the inability of the institution's help desk to resolve problems, and

Confusion between services prov ided by the financial institution and services provided by other businesses linked from the website, (e-banking booklet)

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1.5 E L E C T R O N I C B A N K IN G S T R A T E G IC OP TION S FOR

BANKS

In ternis e-hanking services sophistication, the above e-banking serv ices can be defined from one way information-push services where customers receive information about the bank, its products and services to information-download where customers can download (or ask in case of telephone-banking) account information and forms to

full-transaction services where customers can perform most banking transactions (such as transfer between accounts, bill payment, third party payment, card and loan application, etc) electronically Some banks 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

Electronics channel Figure 1.2: General trend in e-banking evolution

3 0

Some of the key drivers of offering e-banking services include reducing transaction costs, increasing convenience, availability and timeliness of transactions, and improv ing accessibility for better fund administration v Achiev ing these objectives tend to contribute strategic benefits in terms of better customer relationship management, increased customer base, and improved market image.

A bank may therefore need to decide on what e-banking serv ices to provide to

which customers and when and how (channel choice) to prov ide those 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 to 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 of

IC f diffusion in the wider market, and experience with 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 c-banking services, make strategic decisions on the services to be provided and the appropriate delivery channels to deploy and manage these services efficiently The strategic choices are deciding between information-oriented services over a limited number 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 choice with respect to the bank's resources and capabilities is essential to

(Brown and Molla 2005 )

achieving success in providing services in creating a unique value proposition to customers.

From the above discussion, it can be realized that a number of factors influenced the ev olution and future intention of e-banking In adopting e-banking serv ices, banks are faced with strategic options between the choice of deliver}' channels and the level

of sophistication of serv ices prov ided by these delivery channels (see Figure 1.3 ) Considering electronic channels, banks have the options of ATMs Personal Computer- banking telephone-banking Internet-banking TV-banking and Mobile-banking, etc However, the choice of a delivery channel or combination of channels depends on the level of sophistication of e-banking services the Bank intends to deliver E-banking services can begin at the basic level ranging from information-push services to information-download to an advanced level of full-transactional serv ices By assessing their capabilities and the constraints of their context, banks can make the strategic choice of which services to provide over a deliv ery channel they can effectively deploy and manage

Single dual channel -► Multi channel

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

Figure 1.3: Strategic Options for Entering E-banking