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

E- relying shape, Trends, Challenges and Policy Implications 1. Introduction In addition to introduction ( scratch I) and conclusion (section VI), the musical theme includes four sections. Section II addresses the description and current situation of e-banking. Then, section III addresses the impact of e-banking on banking occupancy. After that, section IV addresses the study application of e-banking. That is also the bottom line whether e-banking give the bounce be workable in a country. Section V addresses the new challenges e-banking has brought and policy implications from the statuss of society, banks, and repressive authority as well as goernment. . Status 2. 1. Definition The profits includes all cerebrate web-enabling technologies and open telecommunication networks ranging from direct dial- up, the semipublic man Wide Web, cable, and virtual private networks. (BIS-EBG, 2003) internet banking (e-banking) is defined to include the cookery of retail and small value banking products and serve through electronic take as well as spacious value electronic recompenses and an separate(a)(prenominal) wholesale banking serve ups delivered electronically. (BIS-EBG, 2003) 1 2. 2. Fundamental characteristicsComparison between the current rotund financial innovation (e-banking) and past financial innovations The current innovation (ebanking) heart and soul Delivery channel innovation-deliver banking business via internet. Impact Wider Past financial innovations Products and operate, i. e. , pitch, change Narrow 2. 3. Levels/Scope of e-banking business Basic training e-banking/web sites that plainly disseminate breeding on banking products and services offered to bank nodes and the general public Simple transactional e-banking /web sites that offer bank guests o submit applications for assorted services, make queries on their account balances, and submit instructions to the bank, but do no permit any account transfers Advanced transactional e-banking/web sites that allow bank customers to electronically transfer funds to/from their accounts pay bills, and plow other banking transaction online. Usually, e-banking refers to types II and III. 2. 4. Current development situations (in industrial countries) E-banking products and services ar acquire often and more advanced and increasing in variety.From providing information at the early make up to providing transactional activities. 2 Both volume and take in the total banking business argon getting monolithicr and bigger very fast (Graph, Europe) E-banking customer base is getting bigger quickly. 2. 5. Status in developing countries Developing countries are in catching up in e-banking The average e-banking penetration for developing countries by the end of 1999 was jam to 5% (World Bank Survey, 2001). In brazil-nut tree, the number of e-banking users gathered 8 million in 2000. In Mexico, the number of e-banking users graveled 1. 5 milli on in 2000. In India, all over 50 banks are offering online banking services. ICICI Banks e-banking is very impressing. E-banking in Korea, Thailand, Malaysia, and Singapore, Hong Kong and Taiwan (China) is thriving. In Ghana and some other Afri jakes countries, pert cards based on Visa Horizon proximately technologies are getting started. 3. ProspectsImpact of E-banking on traditional banking 3. 1. The early conventional recognition Internet banking would destroy the traditional banking business model and promote the entry of newcomers from the orthogonal of the banking industry.Developing countries could deliver the opportunities to leapfrog in the adoption of efinance on a large scale. 3. 2. In reality, e-banking develops fast, but not damaging as conventional wisdom projected. The notion of leapfrog has not worked in more developing countries due to various impediments. This earth-closet be verified by UNCTAD report. Some commanding signs are 3 already visible, inclu ding a high level of bankers acceptance of engineering by customers and financial institutions. H(h)owever, most projects have not til now been deployed on a large scale. (UNCTAD 2002. It forgets a comprehensive look at the status of efinance in developing countries.It covers arrange of areas re lated to e- finance including e-banking, e-payments, e-trades, and e- ac citation information). however in industrial countries, e-banking is still a complementary tools to traditional banking. gobs of pure e-banking businesses have been forced appear of market. Internet-only banks have been substantially slight profitable. They generate decline business volumes and any savings generated by lower bodily overheads appear to be offset by other types of non-interest expenditures, notably marketing to attract new customers. (De Young 2001). 3. 3.Prevailing vision The prevailing realize today is that Internet banking can only succeed if it is thoroughly compound within the existin g banking infrastructure, which should combine click (e-banking) with mortar (physical branches) due to the grandeur of public trust in banks, the value of an established brand name, and the swear of customers to do something physically. According to this view, Internet is regarded but as other dissemination channel as a complement to physical braches, phone banking and standard pressure networks. The dominance of the so-called click and mortar model can be explained by its success on the ground. devil good examples are Wells Fargo in the US and Nordea in Scandinavia. 3. 4. Case-studyexperience from the two most successful showcases Two most successful examples Wells Fargo (US), has actually the highest absolute number of online customers, more than 3 million out of its total 24 million customers in 2001. Nordea (Scandinavia), has 2. 3 million online customers, representing over 20% of its total customer base. It has the highest apportion of online customers. 4 They share the following common elements Both are leaders in their traditional markets and thus can capitalize on a sizable customer base.Furthermore, their customer base is technologically sophisticated. California and Scandinavia have extremely high rates of Internet use. Both are technologically advanced and started early in Internet deployment. Wells Fargo started e-banking business as early as in 1989. Both have tightly integrated Internet in their operations and their existing infrastructure. Both have large number of SME customer base. 3. 5. Prospects Bottom line the ability to mainstream SME and individuals into E-banking. 4. Trend The major(ip) application of e-bankingSME finance E-banking is used more and more for improving approach to finance.Financial constraints for SMEs have never been effectively solved and have been thought inevitable. This section will cover the advantages of e-banking on this aspect. 4. 1. Obstacles to SMEs access to finance 4. 1. 1. from banks perspec tive full(prenominal) costs and low profitability of SME loans because of the small loan size. High hazards of SME loans due to lack of business track record, deferred payment history, and transparent information. Evaluating SME run a risk is too labor- intensive to be profitable. 5 Many banks lack strategies and skills to trailer truck impediments associated with SME finance.In numerous developing countries, the staff of banks lack necessary skills to appropriately survey credit risks of SMEs 4. 1. 2. from SMEs perspective Inappropriate products and services, which are rigidly supply-driven alternatively of demand-driven. Commercial bank products are usually designed to meet the ineluctably of large corporations few products and service are specifically tailored to the require of SMEs. SME sector is usually underserved. High interest rates. SMEs usually require much smaller loans than large enterprises. banks, in that locationfore, usually charge high margins to c over the costs. incompetent procedures.Over insistence on collaterals and guarantees. SMEs usually have low- level of fixed assets and relatively high- level of working capital. Therefore, when lending to an SME, a bank acquires to quantify the SMEs economic viability and future cash flows instead of collaterals. However, in numerous developing countries, banks are still in the very early stage of mastering sound lending policies and good credit practices. Their lending appears to simply rely on collateral rather than cash- flow projections. banks lack of mental object of non-collateral credit assessment has caused them unable to provide lending services to SMEs. resolved credit criteriaone size fits all. 4. 2. virgin Technology, New Hope for SME pay 4. 2. 1. From banks side, new technology (e-banking) makes SME finance economically come-at-able (i) lower operational costs of banks Automated process Accelerated credit decisions Lowered minimum loan size to be profitabl e (ii) potentially lower margins 6 Lower cost of entry Expanded financial backing reach Increased transparency (iii) expand reach through self-service Lower transaction cost Make some corporate services economically feasible for SMEs Make anytime access to accounts and loan information feasible . 2. 2. From SMEs perspective E-banking business makes access to finance from banks mesmerizing. SMEs have benefited from the development of E- finance and gradually stepped out of the informal sector. In particular, E- finance offers the following attractive benefits for SMEs Ease of use Lower costs of financing Convenience sequence savings Operational efficiency 4. 2. 3. From the governments perspective New technologies have provided the incentives/benefits for the government to improve SME finance by Increasing employment. lend to poverty reduction. Contributing to economic development.Reducing the informal sector and cash economy1 . 1 Lack of SMEs access to FIs is one o f the major reasons why there are usually big informal economic sector (cash economy) in many developing countries. Improved SME access to formal financial institutions is pass judgment to reduce the informal economic sector. 7 5. Challenges and policy implications 5. 1. Cross-border e-banking activities and its policy implications 5. 1. 1. definition Definition Cross-border e-banking is defined as the provision of transactional on- line banking products or service by a bank in one country to residents of some other country. BIS, 2003) A note on the definition A bank delivering its e-banking activities via its physical branches/ subsidiaries in a host country does count into cross-border e-banking. A promote note banks can use the new delivery channel (e-banking) reach customers in another country without as much reliance on physical presence and the significant investment that it entails (example). 5. 1. 2. Two scenarios The in-out scenarioIn-country institutions providing banking services to customers remote the plaza country.The out- in scenarioinstitutions based outside the family line country providing banking services to parties within the home country. 5. 1. 3. Raised many challenges and questions for banking regulatory authorities (both home and host) Who should take the supervision responsibility? Borderless nature of e-banking extend the potential for territorial ambiguities with respect to the supervisory responsibilities of different matter authorities. much(prenominal) situations could lead to deficient supervision of cross-border e-banking activities. Does it need to be licensed?Banks that engage in cross-border e-banking may face increased legal risk. Specifically, unless banks conduct adequate due application program they run the risk of potential non-compliance with different national laws and regulations, including 8 applicable consumer protection laws, record-keeping and describe requirements, privacy rules, AML rules . Non-banks may offer with greater forwardness bank- like services without any type of supervisory approval or caution due to definitional ambiguities that may exist wit regard to what constitutes a bank (or banking services). Which countrys law applies to cross-border e-banking activities.Role and responsibilities of the home country banking supervisor and local anaesthetic supervisor. Supervisors need to recognize that the Internet allows for the provision of e-banking services that can span geographic borders and potentially call into question existing jurisdictional empowerment requirements and the regulatory processes Supervisors need to recognize the implications of taking a restrictive approach toward currently regulated banks without an even-handed treatment of foreign organizations that may conduct identical or nearly identical activities via the Internet in the local jurisdiction. Supervisors should tally that banks appropriately manage the legal uncertainty duri ng the period go the legal infrastructure for cross-border e-banking remains under construction. 5. 1. 4. Its policy implications Policy determination The objective of both the host and home supervisors should be to avoid or minimize legal risks stemming from jurisdictional ambiguities, and to ensure that e-banking activities are adequately administrate with clearly defined supervisory responsibilities. Basic principle Focus precaution on the need for effective home country supervision of cross-border e-banking activities on a merged basis as well as proceed international cooperation between home and local banking supervisors regarding such activities given the doable absence of a physical banking presence in local jurisdiction. Such as focus is essential to promote safe and sound cross-border e- 9 banking without creating undue regulatory burden or impediments to banks use of the internet delivery channel to meet customer needs. Complementary principle Home supervisors sho uld provide host supervisors with clear information on how they oversee a banks e-banking activities on a consolidated level. Host supervisor would in the main rely on the home supervisor to effectively carry out its supervisory program. Where there are concerns about the effectiveness of a home supervisors oversight program, the host would approach the home supervisor on a bilateral basis. The host supervisor will need to consider what actions may be appropriate to protect local residents and their banking dodging. Cooperation among national supervisors . Rapid pace of development of e-banking and the associated risks will require supervisory agility, resources and, in the crossborder context, cooperation between home and host supervisors. 5. 2. From the societys perspective 5. 2. 1. Challenges 1. stealth of personal identity 2. retirement step ups 3. Who take the responsibility in case of fraud 5. 2. 2. Policy implications 1. Essential are efforts to define the privacy manak in and to use technology to solve contract enforcement problems. . 3. From banks perspectives 5. 3. 1. happen management challenges Adaptation to Technology issues The speed of change relating to technological and customer service innovation in e-banking is unprecedented. This intensifies challenges to the management to ensure that adequate strategic assessment, risk 10 analysis and securities reviews are conducted prior to implementing new e-banking applications. Outsourcing issue E-banking increase banks ependence on information technology, thereby increasing the technical complexity of many operational and security issues and furthering a trend towards more partnerships, alliances and outsourcing arrangements with trey parties, many of whom are unregulated. Increased legal and reputational risks E-security issue The internet is present and global by nature. It is an open network accessible from anywhere in the world by unknown parties, with routing of messages through unk nown locations and via fast evolving tuner devices.Therefore, it raises significant challenges on security controls, customer authentication techniques, data protection, canvas trail procedures, and customer privacy standards. While companies have been keen to embracement the potential offered by these technologies, few understand the inherent vulnerability and risks associated with e- finance. Since 1999, Brazil has seen a 418% increase in electronic security incidents Korea has seen a 932% increase and Japan has seen over 1000% increase in malicious electronic security incidents (Tom Glaessner et al, 2003). Over 57% of all hack attacks in 2002 were initiated against the financial sector (Tom Glaessner et al, 2003). Identity Theft has exploded and incidents are expected to reach almost 2 million per year by 2005 wit a cost of almost US$10 billion. Outsourcing issue E-banking increase banks dependance on information technology, thereby increasing the technical complexity of ma ny operational and security issues and furthering a trend towards more partnerships, alliances and outsourcing arrangements with third parties, many of whom are unregulated. Increased legal and reputational risks 11 5. 3. 2. Policy implications/recommendations . Establish a comprehensive security control process. Authentication of e-banking customers Appropriate measures to ensure sequestration of duties Establishment of clear audit trails for e-banking transactions Non-repudiation and accountability for e-banking transactions 2. Centralized-back placement to free staff time in sales and services areas and to consolidate process consistently across the organization. 3. Develop automated credit authorization system by developing appropriate credit scoring system and cash- flow scoring system to reduce operating costs, improve asset quality, and increase client profitability.One of the major benefits of credit scoring system is that lenders can make credit decisions without nec essarily obtaining financial statement, credit reports, or other time-consuming and hard-to-get information. In particular, the financial statements of SMEs are often not land up and difficult to get. Banks can more closely align their specific credit policies and marketing strategies with the analytics, making the decision process more costefficient. (I. e. , Fair, Isaac has developed a credit scoring system specialized in SME financeSBSS 5. (small business scoring services), which has been increasingly used by many banks as their SME credit decision making model. ) 4. Comprehensive due manufacture and management oversight process for outsourcing relationships and other third-party dependencies. 5. Integrate cross-border e-banking risks into the banks overall risk management framework. 6. Legal and reputational risk management Appropriate disclosures for e-banking services Privacy of customer information Capacity, business continuity and contingency planning to ensure availa bility of e-banking systems and services Incident response planning.Segregation of duties 12 Due diligence on risk assessment 5. 4. From the authorities perspective (banking supervisor, central bank, related government depts. ) 5. 4. 1. Challenges from e-banking 1. Oversight of outsourcing and partnership arrangements, and the oversight of security and data justness and controls and safeguards, especially when the supporting operations are located in another jurisdiction . 2.The ability to adopt global technology to the local requirements A adequate level of infrastructure and human capacity building are required before developing countries can adopt the global technology for their local requirements. 3. The ability to create the necessary level of regulatory and institutional frameworks The lack of regulatory frameworks, trust, security and privacy standards, high trade barriers, customer and investor protections impede progress in many developing countries to implement e- financ e projects. 4. E-security challenges 5. 4. 2.Policy implications/recommendations 1. Improve system infrastructure environment for e-banking business Strengthen payment system (including RTGS, bulk/low value payment system). Improve the answer system (e. g. , for credit cards and other forms of electronic transactions). Build-up transaction reporting/reconciliation services. Establish credit information registry and disseminating system. Credit information registries, commonly known as credit bureaus in many countries, can reduce the extent of asymmetric information by making a borrowers credit history available to 3 potential lenders. Lenders gird with this data can avoid making loans to high risk customers, with unequal repayment histories, defaults, or bankruptcies. Once a lender makes a loan, the borrower knows that their cognitive operation will be reported to the credit bureau. The information contained in a credit registry becomes part of the borrowers reputation colla teral late payments or defaults reduce the value of this collateral providing an additional incentive for incidentally repayment. At the same time, by reducing the information monopoly that banks have over their existing borrowers,