BANKING INFORMATION SYSTEMSLECTURE 2

What is Online Banking?

•  Computerized service that allows a bank'scustomers to get online with the bank viatelephone lines to view the status of theiraccounts and transaction history. It alsoallows them to transfer funds, pay bills,request check books, request loans, etc.

What is E- banking?

•  It is broader than online banking.

•  E- banking is defined as the automateddelivery of new and traditional bankingproducts and services directly to customersthrough electronic, interactivecommunication channels.

Benefits of E-banking

1.  Choice and convenience for customers.2.  Attract more customers.

3.  Enhance bank image.4.  Increase revenue.5.  Easier expansion.

6.  Reduce load on other channels.7.  Cost reduction.8.  Organizational efficiency.

E-Banking Websites•  There are two primary types of E-Banking websites:-  Informational websites-  Transactional websites

•  Each of these presents a set of risk issues for financialinstitutions:

-  A primary concern for informational websites could be liabilityfor inaccurate information.

-  A primary concern for transactional websites could be Identitytheft.

Informational Websites

•  Informational websites provide customersaccess to general information about thefinancial institution and its products orservices.

•  Information may be provided in connectionwith one or two way communication.

Risk Associated with InformationalWebsites1.  Potential liability and consumer violations for

inaccurate or incomplete information aboutproducts, services, and pricing presented onthe website.

2.  Potential access to confidential financialinstitution or customer information if thewebsite is not properly isolated from thefinancial institution’s internal network.

Risk Associated with InformationalWebsites3.  Potential liability for spreading viruses and

other malicious code to computerscommunicating with the institution’s website.

4.  Negative public perception if the institution’son-line services are disrupted or if its website isdefaced or otherwise presents inappropriate oroffensive material.

Transactional Websites

•  Transactional websites provide customers withthe ability to conduct transactions through thefinancial institution’s website by initiatingbanking transactions or buying products andservices.

•  Banking transactions can range from somethingas basic as a retail account balance inquiry to alarge business to business funds transfer.‐ ‐

Risk Associated with TransactionalWebsites1.  Liability for unauthorized transactions.

2.  Losses from fraud if the institution fails to verify the identity ofindividuals or businesses applying for new accounts or credit on line.‐

3.  Possible violations of laws or regulations pertaining to consumerprivacy, anti money laundering, anti- terrorism, or the content, timing,‐ ‐or delivery of required consumer disclosures.

4.  Negative public perception, customer dissatisfaction, and potentialliability resulting from failure to process third party payments as‐directed or within specified time frames, lack of availability of on- line‐services, or unauthorized access to confidential customer informationduring transmission or storage.

E-banking Design Factors•  E-banking systems can vary significantly in their configuration

depending on a number of factors. Financial institutions shouldchoose their e banking system configuration, including‐outsourcing relationships, based on four factors:

-  Strategic objectives for e-banking.

-  Scope, scale, and complexity of equipment, systems, and activities.

-  Technology expertise.

-  Security and internal control requirements.

E banking Components‐1.  Website design and hosting.

2.  Firewall configuration and management.

3.  Intrusion detection system or IDS(network and host based).‐

4.  Network administration.

5.  Security management.

6.  Internet banking server.

7.  E- commerce applications (e.g., bill payment, lending, brokerage).‐

8.  Internal network servers.

9.  Core processing system.

10.  Programming support.

11.  Automated decision support systems.

Service Provider Options1. One or more technology service providers can host the e‐banking application and numerous network components.

•  In this configuration, the institution’s service providerhosts the institution’s website, Internet banking server,firewall, and intrusion detection system.

•  While the institution does not have to manage the dailyadministration of these component systems, itsmanagement and board remain responsible for thecontent, performance, and security of the e-bankingsystem.

Service Provider Options

2. The institution can host all or a large portionof its e banking systems internally. A typical‐configuration for in house hosted.‐

•  In this case, a provider is not between theInternet access and the financial institution’score processing system. Thus, the institutionhas day-to day responsibility for system‐administration.

Market Status

•  Mid 1980s online banking debuted.

•  However the services failed to getwidespread acceptance due to high call costs,and unfriendly system interface.

•  Providers discontinued the services.

Market Status

•  The arrival of the internet made banks renewtheir interest in online banking. They starteddeveloping web presence.

•  Due to the webs interactivity banks:-  Enhanced core services.

-  Enabled banks to communicate more effectivelyand expand customer relationships.-  Improved analytical capabilities of data mining.

Market Status

•  Banks approach the market because theircompetitors have done it.

•  Some banks prefer to “wait and see” beforeventuring in.

Market Analysis•  Many analysts predicted that e banks, having the advantage of a low cost base, would win‐

deposits and loans by offering superior rates and that many existing providers of those productswould be driven out of the market.

•  In 2000, HSBC and Merrill Lynch committed to spend $1bn on a joint venture that would combineonline premium banking and share dealing. Within a few months, several other banks hadfollowed suit but the response was generally disappointing because customers were reluctant togive up their bricks and mortar branches.

•  Low ROI from e banking initially meant that some traditional retail banks which used e banking‐ ‐as just another channel rather than replacing branches or call centers benefited most.

•  The early experience showed that even the most keen e banking customers also wanted the‐convenience of branches and phone banking. This led to an argument that e banking just adds‐another layer of complexity and unjustifiable costs.

The growth of phishing’, where fraudsters use spam e mails and bogus websites to encourage people to reveal ‐their account details, Together with other security concerns, were also used to argue against the very existence of e-banking.

Market Analysis•  In spite of some skepticism, e-banking continues to grow rapidly in most parts of the

developed world. In developing countries the picture has been less clear.

•  In China, lower use of credit cards and a less sophisticated financial infrastructure has

resulted in e-banking being adopted by only a small portion of the population.

•  In Pakistan most of rural bank branches still operate using paper filing system which meansthat e banking is only available in large cities.‐

•  Banks would find it difficult to properly implement e- anking without a strong ICT

infrastructure. In addition, economic, political and banking reform is vital.

•  Attention must also be directed towards bank management training in the areas of

electronic channels. If efficient e banking is generally adopted by emerging markets, the‐path is likely to open for economic benefits to accrue both within each country andglobally.

Market Challenges1.  Banks must satisfy complex and ever changing customer

requirements.

2.  Deal with increased competition from old as well as newentrants coming into the market.

3.  Must address the pressures on the supply chain todeliver their services quickly.

4.  They must continually develop new and innovativeservices to differentiate themselves from thecompetition.