Understand Electronic Banking
E-banking is defined as the automated delivery of new and traditional banking products and services directly to customers through electronic, interactive communication channels (Federal Financial Institutions Examination Council, 2003).
The "E" can mean anything electronic like the Internet, telephone, television and things that can perform a function electronically, at such customer have access to their account, transfer fund, make payment, make enquiries and so many more just by the connection through an E-channel.
The Evolution of Electronic Banking
E-banking had developed significantly in since the late 1990s with an estimation of 32 million clients in 2001 (OECD, 2001).However, Electronic Banking is the delivery of different types of electronic transactions.
Mainframes were the earliest applications of computer within the banking sector which are mainly use for calculations, and later minicomputers as a result of advancement to process bank inventories, customer accounts, personnel records and accounting which later became the spreadsheets.
In the late 1970s electronic Funds Transfer (EFT) and Electronic Data Interchange (EDI) were used to send commercial documents such as purchase orders or invoices electronically. The use of all these technology was to help bankers deliver their work faster, more conveniently and with less error so as to deliver good customer services which brought competition and pressure on banks as different banks need to deliver the best service to maintain a competitive hedge. The primary services provided by e-banks are transferring money from an account to the other, paying bills, and checking account balances and viewing bank statements. Loans, brokering, share trading, service bundling, and a host of other financial services are being added to these primary services (Dewan & Seidmann, 2001).
TowerGroup USA estimates shows that some of the top banks customers that are using online banking is 60%. Even the non-performing among the large banks were able to penetrate to a rate of 25%, this estimates are millions of people per bank . (see figure)
The advancement in E-banking brought about the evolution of various E-banking elements mainly to cut down the cost of transaction and to speed up payments. The well-known Elements to provide electronic access to customers where Automated Teller machine (ATM), Electronic Point of Sales (EPOS), Mobile/Telephone banking, PC banking, E-banking Kiosk
Automated Teller Machines (ATMs):
In 1980's, The use of Automated Teller Machines (ATM) coupled with Credit/debit cards became well known, ATMs being the earliest well-known machines to give electronic access to customers In remote areas without the assistance of human, it is available 24-hour which give consumers the opportunity to access his/her bank account almost any time, from being mere currency dispensers they now have multifunctional attributes which enables customer perform a wide range of transactions like account management, fund transfer, bill payments which brings about the development of Electronic cards such as : Credit/Debit cards
They are virtual money usually made of plastics with a magnetic stripe or chip where value of money and customer information are stored, they have specific amount of credit embedded electronically in the card, these cards can be used to make payments, Transfer money and pay for bills, as a result they make the transaction fast, easy and convenient.
Electronic Point Of sales (EPOS):
The next step in providing direct customer service came with the extended use of credit and debit cards in merchants' shops through EPOS (electronic point of sale) to make payments mainly to cut down the cost of transaction and to speed up payments. This led to the development of specialized products like corporate cash management systems.
PC banking superseded the ATMs in the sense that it allowed users to interact with their bank by means of a computer, Instead of having to locate the ATM or EPOS this time, Consumers can view their account balances, request transfers between accounts, request bank statement, View banking information and pay bills electronically from home with the use of their account information and some details provided on their Electronic cards, This has to do with connection through the Internet using the dial-up or broadband internet technology to access the bank information systems.
This evolution eliminates the need to deposit Checks into bank account personally by customers, with the development of the banking kiosk which can perform the duty of a bank worker by accepting checks deposit, kiosk can also perform personal enquiries by allowing you to check your account balance, print a mini statement and make checks book requests, connects to the internet and carry out transactions through e-banking.
Telephone banking used to be a situation where users call their bank's information systems with the use of landline telephones and by using the phone keypad to perform transactions and make enquiries by following programmed instructions and answering some questions, This is also time consuming and more expensive, the advances in telecommunication technology have helped in this area of electronic banking known as mobile banking, customers can access their account through Wireless Application protocol (WAP) and SMS, Wireless is estimated to be growing at more than three times the rate of landlines globally. Mobile banking will experience strong growth in the coming years. In the case of USA, it was estimated that by 2012 close to 41 million individuals will be using mobile banking services (TowerGroup, 2007) (see fig)
Some banks are making significant investments in mobile systems to deliver business activities so as to increase efficiency and reduce cost, to improve operational effectiveness and customer services; the usage of mobile banking will increase in the total bank's transaction volume (TowerGroup)
Hoang: Online banking open up new market for banks. Banking products are becoming commodities as consumers gain access to more powerful search and comparison tools on the Internet. The ubiquity of the Internet opens up new horizons for banks to move from local to perhaps even global frontiers. For example, a homeowner searching for the lowest mortgage rate needs only log on to the Internet and be almost instantaneously granted several competing offers. The entire mortgage approval transaction can be conducted from start to finish without any face-to-face contact, and indeed, many homeowners have done exactly this. To this end, the Internet levels the playing field between local and national banks and, to some extent, services do become commodities. (Pennathur, 2001)
Factors driving E-banking
Competition is the most significant driving force behind increasing, innovative development and use of E-banking technology, Banking institutions are countering their competitors by leveraging E-Commerce technologies and various service offerings online (Morath, 2000),Banks use E-banking channels operation and services to give value added services so as to keep existing customers and attract new ones.
Banks via the Internet transaction can make costs far lower than traditional brick-and-mortar branches. The actual costs to execute a transaction varies depending on the delivery channel used, The traditional banking requires a lot to of money to set it up.
E-banking enables banks to expand customer contact through high geographical reach at lower cost, some banks are even doing business exclusively via the E-channels alone; they do not have traditional brick-and-mortar branches and only reach their customers online.
Relationship building and management is a priority for many banks, E-banking technology can provide channel for banks to develop and manage ongoing relationships by offering easy access to a wide range of products and services.
Some customers place a premium on person-to-person contact, at such they rely on traditional branches to conduct their transactions and enquiries and some are adopters of new technologies. Understanding customer base and finding the right delivery channels to deliver products and services profitably to customers is one of the major concerns of the banks.
Types of Internet Banking
Understanding different types of E-banking products will help to assess the risks involved and how to tackle them, Currently we have three that are generally use
This is the basic idea of E-banking, marketing information about the bank's products and services are made available to be accessed by customer on a stand-alone server. The risk at this level is low, as the bank information systems have no path between the server and the bank's internal network. This level can be outsourced, the server or Web site may be vulnerable to violation by users or intruders. Appropriate measures therefore must be kept in place to prevent unauthorized access to the bank's server.
This system allows some interaction between the customer and bank's systems which may be limited to account inquiry, E-mail, loan applications, or account update. In this case bank's server may have a linkage to the internal networks; with this configuration the risk is higher than with informational systems. Control measures need to be in place to monitor, prevent, and alert management of any intrusion, Virus controls also is also more critical in this environment.
Customers are able to execute transactions in this level which involve the highest risk and must have the strongest controls since a path typically exists between the server and the bank's internal network. Customer transactions include transferring money and paying bills.
Hoang: a transactional Web site is an Internet Web site of a bank that allows customer to initiate interaccount transfers.
An Internet bank is a bank that offers a transactional Web site.
An Internet bank is different from an Internet-only bank which is distinguished by a lack of physical branches.
Internet-only strategy will not be profitable (DeYoung 2001a): pure-play bank is not a financially viable business model. But interent is a strategic choice for banks.
Electronic Banking Components
There are various components that contributes to the functionality of the various Electronic banking elements mentioned above which are: ICT Infrastructures, Applications, Operational aspects, Service provider
The ICT infrastructure consisting of a network architecture and application platform. are used to manage data entry, administrative, and management tasks of the E-banking elements, some of which are Email and internal networks communication systems, ATM, servers for net-banking, Storage area networks(SAN) and Item processing equipment such as Magnetic Ink Character recognition(MICR) coders ATM.
They are software or rule-based(Artificial intelligence) applications that serve as interface that enables various ICT infrastructures perform their operations as planned, some of which are, Core banking processing system, Operating systems, E-banking applications such as bill pay, system performance monitoring, automated decision support systems, and intrusion detection systems.
This is the managerial aspect of the Electronic banking where all measures to protect the banking information systems are configured and managed, The Programming support, security management, Network administration, firewall configuration and management and Configuration management are some of the examples.
They provide subscription or internet-based service to the banks, Banks can either choose to set this up or outsource it, if outsourced, The providing company will be responsible for the management and update of the information systems , Example are disaster recovery services and Website design and hosting.
Impacts of e-Banking
Experience in Scandinavia (arguably the most advanced e-banking area in the world) appears to confirm that the future is 'clicks and mortar' banking. Customers want full service banking via a number of delivery channels. The future is therefore 'Martini Banking' (Carol Sergeant, 2000). Banks were known to be branch-banking model with two basic competitive advantages; namely, brand name and customer relationship. The advancement in information technology has turned around the banking system and will continue to influence future banking trends.
Competition in the banking sector is determining the success of a bank by ability to deliver innovative products and services in a technologically advanced way that meets the changing needs of the customer. This have some Positive and negative impacts on the normal traditional banking.
Changing customer profile:
Initially customers only change bank account at extreme cases but now it can be done at the click of a mouse, by surfing the internet for information provided by the banks. The cost of changing bank account is very low in the case of electronic banking which reduces customer loyalty and on the other side there is overload of information, at such they get confused of the financial organization they are dealing with and on what grand which leaves them open to scam and fraud
Market Transparency: Due to the easy availability of information, banks can get information about new innovative products offered by competitors, accelerating product standardization and commoditization
Cross-Selling: banks can generate revenue through increased account access fees, and benefit from promotional opportunity to cross-sell products such as credit cards and loans (Yerkes, 1998), with the availability of customer banking trends and preferences, banks have the potential to cross-sell other financial products and services once they are able to identify the customers want by the information available on the internet.
Choice and convenience for customers: As customers want better and comfortable choices, providing standard services is something that will retain customers, Consumers are increasingly looking for services they can access from a single entry point. As Denny (2000) observes, banks need to develop personal relationships with customer because there are some services that are needed by customers that cannot be automated. Data mining technology can help in identifying customer needs.
Attracting High value customer: With good customer services provided by banks through E-channels, high profit customers are attracted which brings more income for the banks because most of these customers are using online channels for different kind of transactions and businesses
Enhanced Image: One of the many advantages that the internet banking has over the traditional banking is that it is effective; dealing with thousands of customers within a short period of time is no problem. Because E-banking is a customer focused organization but banks are also worried about dealing with thousand of fraud and scam, an attractive banking website with wide range of innovative products will enhance bank image which also help in effective e-marketing and attracting customers.
Increased Revenue: The cost of running the bank in terms of expenditure is lower which has influenced higher profit margin for the banks, cost of running E-banking channels becomes cheaper than the normal traditional banking and it also brings about possible increase in number of customers, customer retention and cross-selling opportunities.
Easier Expansion: Timmers (2000) supports this view, highlighting the key features of the Internet - such as 24 hour availability, almost immediate access, and the absence of physical borders. Customers now enjoy the benefit of bank accessibility round the clock, regardless of their location, receive and send money through their account within seconds, apply for a loan, buy or sell stocks and can even open new accounts because there is no little or no geographical boundaries, There is no need to build branches with is usually expensive to start up and maintain, e-channels can be offered in another area where the bank is not located.
Concern of E-banking
(Yerkes, 1998) argues that, due to the relative newness of this rapidly growing industry, banks as well as consumers had serious concerns about the security of Internet access to client accounts, which was the biggest challenge (Denny 2000).
E-Banking provides many capabilities, it also has so many potential problems; users somehow find it difficult to use the system because of the fear of security. Online banking security issues have become one of the most important concerns of the banks affecting areas like: government, businesses, banks, individuals and technology.
Government: In many countries regulatory barriers are on the wane. As the Internet gains momentum of expanding further, the pressure to reduce the barriers to competitive activity in the financial sector still further is on the governments and regulators to allow existing banks to remain competitive with their newer rivals (Carew, 1998), E-Banking also brings about concerns in requirements of the bank reserve, deposit insurance and the consumer protection laws attached with e-transfer of money,
Businesses: Businesses also have some concerns about this media of interaction. There is always huge transfer of money which is most done by businesses, they become seriously concern about the safeness of their money and at the same time the media have the potential to save time and financial charges(physical deposit usually attracts bank charges)associated with it because if workers are employed to attend to customers they need to get paid. Another businesses concern related to the customer is that there are some customers that will not transact businesses because it does not offer some payment methods e.g. e-transfer and debit cards which usually result to loss of customer, On the other side, if this system is widely spread and used, it pushes more buying power to the consumer which makes businesses see the reason to allow wide range of e-transfer system.
Banks: As competition rises banks are pressured from other financial institutions to deliver a value added financial services to their customers. By handling financial transactions, profits are made by banks, charging customers for some transactions and by investing the money held from customers deposit in other areas which is known as "spread", the security of the bank's system is a big concern to them as most of the e-transactions are being processed by their central computer systems
Individuals: User adoption of E-Banking is affected by perceived security (Jih et al., 2005), security of the system is most time the concern of individual, mainly with the unwarranted and unauthenticated access to their accounts, customers are also concerned about the confidentiality of their personal information. Banks have to make sure that the customers receive assistance quickly if they need help. Major problem or disastrous without quick reactions by the bank can destroy the image of the bank easily. Customer should be made to trust online banking ensuring reliability of E-banking. Some privacy technologies related to the electronic banking industry are electronic cash and electronic checks which will be discussed in the software solution section.
Technology: To enable secure and effective banking transactions, there are three major technology issues that needs to be resolved which are
- Security: Security of the transactions is the primary concern of the Internet-based industries. The lack of security will leave the banking system open to serious damages, more on security issues will be discussed in the next chapter, E-banking system are usually open to potential hazards during transferring funds, on-line transactions, and minting electric currency, etc.
- Anonymity/Privacy: Customers and other banking partners are seriously concerned about sending confidential and personal information through the e-channels; so much focus on strengthening the area of privacy technology will ensure the secrecy and security of the transactions, private information such as the date and time of the transaction, the amount of the transaction, and the name of the merchant or customer where the transaction is taking place are related to the banking industry and needs to be taken care of.