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A STUDY OF E-BANKING SERVICES AND ITS POTENTIAL RISKS IN FOREIGN BANKS
Peeush Ranjan Agrawal
1, Sakshi Misra Shukla
21 Veer Bahadur Singh Purvanchal University, Jaunpur, Uttar Pradesh,India
2Department of MBA, S.P. Memorial Institute of Technology, Allahabad, India
ABSTRACT
Technology has narrowed down span of financial settlement in a bank with regard to time frame and distance mode to ‘0’. Indian market has opened new vistas to the foreign banks to expand base among populous market with product and services blended with value and infused technology. Issues, involved in the paper are basic concerns of the customer, if addressed fruitfully, has the potential to offer a new way of life. E banking includes the systems that enable bank’s customers, individuals or businesses to access accounts transact business, obtain information on financial products and services through a public or private network, including the Internet.
Banks may choose to support their e-banking services internally. Banks may outsource any aspect of their e- banking systems to third parties. Verifying the identities of customers and authorizing e-banking activities are integral parts of e-banking financial services. There are two primary types of Internet websites available:
informational and transactional. The Bank’s informational websites provide customers access to general information about its products and services whereas the transactional one enables customers to transact through the bank’s website or purchase products and services. The paper not only explains the e- banking services but also addresses the potential risks involved. The survey was conducted in the twin cities of Hyderabad & Secunderabad and the National Capital Region with the sample size of few selected foreign banks. The research methodology of the paper includes literature review, extraction of variables, questionnaire formulation, pilot testing, data collection from primary as well as secondary resources and application of statistical tools with the help of SPSS software. The major findings relate to the e-banking services as well as their potential risks which are clearly on a rise since the technological shift has taken place in the banking industry. The paper also recommends banks as well as the customers to avail the e-banking services while segregating the inherent risks involved in it.
Keywords: E-banking, E-banking Risks, E-banking Services, Foreign Banking, Online Banking
I. INTRODUCTION
E-banking is a process of an automated delivery of new and traditional banking products & services to customers through electronic, interactive communication channels. E banking includes the systems that enable bank’s customers, individuals or businesses to access accounts transact business, obtain information on financial products and services through a public or private network. Customer’s access e-banking services, using electronic device, such as personal computer (PC), Smart phones & tablets, personal digital assistant (PDA), a hand-held device that combines computing, telephone/fax, internet and networking features. It can function as a cellular phone, fax sender, web browser and personal organizer, automated teller machine (ATM), touch-tone
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telephone and kiosk, which is a touch-screen and computer placed in a secure enclosure in a public place to enable consumers to have instant electronic access to information, products and services.
1.1 E-Banking Services
Few of the common banking services provided under e-banking modes are enlisted in table 1.1 Retail and Wholesale e-banking services offered;
TABLE 1: E-BANKING SERVICES
Retail Services Wholesale Services
Account Management
Balance enquiry, e-statement, and record of transactions.
Account Management Fund transfers between own accounts or to third party.
Bill Payment and Presentment Receive, view, and pay bills online, setting alerts
for due dates and upcoming payments.
Cash Management
Online account receivables, payments, funds transfer, e-invoicing and liquidity management New Account Opening
Opening new accounts online.
Small Business Loan Application, Approvals, or Advances
Online application and approval of professional, small business loans and advances for business.
Consumer Wire Transfers
Transfer of funds electronically between bank accounts as offered by western union.
Investment/Brokerage Services
Online trading and investment in mutual funds and money market.
Commercial Wire Transfers Transfer of funds electronically between bank accounts for business payments or commercial
purposes.
Loan Application and Approval Online application and approval of personal loans.
Business-to-Business Payments
Online financing, payment, invoicing, reconciliation, authentication, and security.
Account Aggregation
Collects information of all online accounts onto one Web page. One can view online accounts from a central location - branded Web site. Also includes
funds transfer, new account openings, card based bill pay.
Employee Benefits/Pension Administration Online pension fund management and administration,
pension schemes and payment of benefits to scheme members
Source: E-banking, August 2003, Report of Federal Financial Institutions Examination Council, FFIEC, pp 1-40 and, www.fdic.gov, 26th December 2006. [1]
E-Banking systems rely on a number of components or processes that work together to deliver e-banking services. Through a combination of internal and outsourced solutions, management holds several alternatives while determining the overall system-configuration, for the various components of an e-banking system. There can be two basic variations. First, one or more technology service providers can host the e-banking application and numerous network components. In this configuration, the bank’s service provider hosts the bank’s website,
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Internet banking server, firewall, and intrusion detection system monitoring the server and its files to provide alerts of potential unauthorized modifications. While the bank does not have to manage the daily administration of these component systems, its management and board remain responsible for the content, performance, and security of the e-banking system.
Second, the bank can host all or a large portion of its e-banking systems internally. In this case, a provider is not between the internet access and its core-processing system. The bank has day-by-day responsibility for system administration. Banks may choose to support their e-banking services internally. Alternatively, banks may outsource any aspect of their e-banking systems to third parties. Following entities could provide or host, i.e.
allow applications to reside on their e-banking-related services for i. Another financial institution
ii. Internet service provider,
iii. Internet banking software vender or processor, iv. Core banking vender or processor,
v. Managed security service provider, vi. Bill payment provider,
vii. Credit bureau, and viii. Credit scoring company.
1.1.1 Support Services
In addition to traditional banking products and services, banks provide services, which are designed or adapted to support e-commerce.
1.1.1.1 Web Linking
A large number of banks maintain sites on the World Wide Web. Some websites are strictly informational, while others offer customers the ability to perform financial transactions, such as paying bills or transferring funds between accounts. Every website contains ‘weblinks’. A weblink is a word, phrase, or image on a webpage that contains coding that will transport the viewer to a different part of the website or a completely different website by just clicking the mouse. Weblinks are a convenient and accepted tool in website design;
their use can present certain risks. The primary risk posed by web-linking is that viewers can become confused about whose website they are viewing and who is responsible for the information, products, and services available through that website.
1.1.1.2 Account Aggregation
Account aggregation is a service that gathers information from many websites presents that information to the customer in a consolidated format and, in some cases, may allow the customer to initiate activity on the aggregated accounts. The information gathered or aggregated can range from publicly available information to personal account information e.g., credit card, brokerage, and banking data. Aggregation services can improve customer convenience by avoiding multiple log-INS and providing access to tools that help customers analyze and manage their various account portfolios.
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1.1.1.3 Electronic Authentication
Verifying the identities of customers and authorizing e-banking activities are integral parts of e-banking financial services. Since, traditional paper-based and in-person identity authentication methods reduce the speed and efficiency of electronic transactions, banks have adopted alternative authentication methods, including i. Passwords and personal identification numbers (PINs),
ii. Digital certificates using a public key infrastructure (PKI),
iii. Microchip-based devices such as smart cards or other types of tokens, iv. Database comparisons e.g., fraud-screening applications, and
v. Biometric identifiers.
1.1.1.4 BILL PAYMENT
Bill payment services permit customers to electronically instruct their banks to transfer funds to a business’s account at some future specified date. Customers can make payments on a one-time or recurring basis, with fees typically assessed as a ‘per item’ or monthly charge. In response to the customer’s electronic payment instructions, the bank or its bill payment provider generates an electronic transaction- usually an automated clearing-house (ACH, a computer based clearing and settlement facility for interchange of electronic debits and credits among banks) credit – or mails a paper check to the business on the customer’s behalf. To allow for the possibility of a paper-based transfer, banks advise customers to make payments effective, 3-7 days before the bill’s due date. Internet-based cash management is the commercial version of retail bill payment. Business customers use the system to initiate third-party payments or to transfer money between company accounts. Cash management services include minimum balance maintenance, recurring transfers between accounts and on line account reconciliation. Businesses require stronger controls, including the ability to administer security and transaction controls among several users within the business.
DAY 1
DAY 1
DAY 1
DAY 1
Fig 1: BILL PAYMENTS/ TRANSACTIONS
Source: How bill payment works, http://www.synergyonthenet.com/synergy_bank/site/ faq-diagram- billpay.html, 21st February 2007. [2]
Payment is made at the Website
Payment is processed
Money is Moved from Account
Electronic Payments Paper Checks
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1.1.1.5 Person-To-Person Payment
Electronic person-to-person payments, known as e-money, permit consumers to send ‘money’ to any person or business with an e-mail address. Under this, a consumer electronically instructs the person-to-person payment service to transfer funds to another individual. The payment service then sends an e-mail notifying the individual that the funds are available and informs him or her of the methods available to access the funds including requesting a check, transferring the funds to an account at an insured financial institution, or retransmitting the funds to someone else. Person-to person payments are funded by credit card charges or by an automated clearing house (ACH) transfer from the consumer’s account at a bank. Since, neither the payee nor the payer in the transaction has to have an account with the payment services, such services may be offered by an insured financial institution.
1.1.1.6 Wireless E-Banking
Wireless banking is a delivery channel that can extend the reach and enhance the convenience of Internet banking products and services. Wireless banking occurs when customers access a bank’s network(s) using cellular phones, pagers, and personal digital assistants or similar devices through telecommunication companies’
wireless networks. Wireless banking services in the United States supplement a bank’s e-banking products and services. Wireless devices have limitations that increase the security risks of wireless- based transactions and that may adversely affect customer acceptance rates. Devices limitations include reduced processing speeds, limited battery life, smaller screen sizes, different data entry formats and limited capabilities to transfer stored records. [3]
1.2 Potential Risks In E-Banking
There are two primary types of Internet websites available: information and transaction. Bank’s informational websites provide customers, access to general information about its products and services. Bankers should consider following risk issues, reviewing the informational websites:
i. Potential liability towards violations of consumer’s rights like, inaccurate or Incomplete information about products, services and pricing presented on the Website
ii. Prohibiting potential access to confidential financial information of the customers that is also separated from information of the banks.
Transactional websites provide customers with the ability to conduct transactions through the bank’s website by initiating banking transactions or buying products and services. Banking transactions can range from a retail account balance inquiry to business-to-business funds transfer. The website enables the electronic exchange of confidential customer information and the transfer of funds. Wholesale e-banking systems expose to the highest risk per transaction, since commercial transactions involve larger amount. In addition to the risk associated with informational websites, bankers reviewing transactional e-banking services should consider the following issues: -
i. Security controls for safeguarding customer information
ii. Authentication processes, necessary to verify the identity of new customers and also of the existing customers, who have access to e-banking services
iii. Liability for unauthorized transactions
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iv. Losses from fraud if the bank fails to verify the identity of individuals or businesses applying for new accounts or credits on-line;
v. Possible violations of laws or regulations pertaining to consumer privacy, anti-money laundering, anti- terrorism, or the content, timing or delivery of required consumers related disclosures, and
vi. Avoidance of negative public perception, customer dissatisfaction or any potential liability, resulting out of failure in the process towards third-party payments, as directed, or delays in time frame, or lack of availability of on-line services, unauthorized access to the confidential customer information during transaction or storage. In may 2003 email targeted users of Citibank money transfer service, asking them to submit personal information via a form within the email. [4]
1.2.1 Risks Relating To E-Banking May Also Be Categorized As Under 1.2.1.1transaction And Operation Risk
Transaction and operation risks arise out of frauds, processing errors, system disruptions, or other unanticipated events resulting in the banks inability to deliver desired product and services. These risks exist in each of the products and services offered. The level of transaction risk is affected by the structure of the processing environment, types of services offered and the complexity of the processes and supporting technology. E- banking increases the complexity of the activities and volume of risks, especially if innovative services are being offered and that have not been standardized. Customers expect e-banking service to be available 24 hours a day, 7 days a week. Banks should ensure their e-banking infrastructure contain sufficient capacity and redundancy to ensure reliable services to be available. Basic internal controls include segregation of duties, dual controls and reconciliation. Information security controls require additional processes, tools, expertise and testing. Banks should determine the level of security controls based upon its assessment of the sensitivity of the information to the customer, to the banks and its established risk tolerance level.
1.2.1.2 Credit Risk
A banker’s credit risk is not increased by the mere fact that loan is originated through an e-banking channel.
Management should consider additional precautions when originating and approving loans electronically, including assuring management information systems effectively track the performance of portfolios origination through e banking channels. Online Loan Origination and Approval tend to make Risk Management of the Lending Process Challenging: -
i. Verifying the customers identity for on-line credit application and executing an enforceable contract ii. Monitoring and controlling the growth, pricing, underwriting standards, and ongoing credit quality of loans
originated through e-banking channels
iii. Monitoring and oversight of the third parties doing business as agents or on behalf of the banks, for example, an internet loan origination site or electronic payments processor
iv. Valuing collateral and perfecting liens over a potentially wider geographic area v. Collecting loans from individuals over a potentially wider geographic area, and vi. Monitoring any increased volume of and possible concentration in, out of-area lending.
1.2.1.3 Liquidity And Market Risks
Funding and investment-related risks could increase with banks e-banking initiatives depending on the volatility and pricing of the acquired deposits. The Internet provides banks with the ability to market its products and
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services globally. Internet-based advertising programs can match yield-focused investors with potentially high- yielding deposits. But internet-originated deposits have the potential to attract customers who focus on rates and may provide a funding source with risk characteristic similar to brokered deposit. A bank can control this potential volatility and expanded geographic reach through its deposit contract and account openings, which involves face-to-face meeting and the exchange of papers.
1.2.1.4 Legal Risks
Legal issues arise out of the growth in usage of e-banking and the difference between electronic and paper-based processes. E-banking is a delivery channel where the laws and rules governing the electronic delivery of financial products or services may be ambiguous and still evolving. These challenges include:
i. Uncertainty over legal jurisdiction and which state / country’s laws govern a specific transaction ii. Delivery of credit and deposit-related disclosures as required by law or regulation
iii. Retention of required compliance documentation for on-line advertising, application; statement, disclosure and notice, and
iv. Establishment of electronic agreements.
1.2.1.4 Strategic Risks
A bank’s management should evaluate the resulting risk management cost against the potential return on investment, prior to offering e-banking services. Poor e-banking planning and investment decisions can increase strategic risks. Early adopters of e-banking services can establish themselves as innovators who anticipate the needs of their customers, but may incur cost and complexity in their operations. Late adopters may avoid the expense and complexity and do so at the risk of not meeting customer demand for additional products and services.
1.2.1.5 Reputation Risks
A decision to offer e–banking services of complex transactional nature increases its level of reputation risk.
Such Risk Include:
i. Loss of trust due to unauthorized activity on customer accounts
ii. Theft of confidential customer information to unauthorized parties e.g. hackers iii. Failure to deliver on bank’s claims
iv. Failure to provide reliable service due to disruptions
v. Complaints about the difficulty in using e-banking services and the inability of the institution’s help desk to resolve problems, and
vi. Confusion between banks and services provided by other businesses linked from the website.
1.2.1.6 Privacy Risks
Unauthorized disclosure of confidential data may expose a bank to customer litigation or action by law agencies.
To meet the obligations regarding the privacy of customer information, banks should ensure that their standards comply with applicable privacy laws and regulations. [5]
II. RESEARCH METHODOLOGY 2.1 OBJECTIVES
a. Analyzing the financial products & services offered by the Foreign Banks in India
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b. Evaluating the needs of the Indian customers in the changing market conditions c. Assessing the level of potential risks involved in the e-banking services 2.2 Primary Tools
i. Collection of literature from Foreign Banks, educational institutions and libraries.
ii. Conducting Survey using a structured Questionnaire on Foreign Bank customers in two cities of NCR and twin cities of Hyderabad & Secunderabad.
2.3 SECONDARY TOOLS
i. Study of financial reports ii. Journals and periodicals 2.4 Sampling Plan
The Universe included customers of the foreign banks operating in two regions. Convenience sampling was adopted, so the customers who were present at the foreign banks’ branches in two cities at the time of Survey were pursued personally to fill the questionnaires. Customers were surveyed in two metro cities of NCR/New Delhi and Hyderabad/Secunderabad. In convenience sampling, samples obtained out of selecting such units in a vast Universe that may be conveniently shortlisted and contacted at a point of time or period on locations specified.
2.5 Hypothesis Formulated
H1: There will be a significant difference between number of users and non-users of ATM/Credit/Debit Card among different age groups.
H2: There will be significant difference in number of customers who avail and who do not avail credit facility from Foreign Banks.
H3: There will be a significant difference between number of customers availing Business Loan and those who do not avail Business Loan among different age groups.
III. DATA ANALYSIS AND INTERPRETATION
Data was analyzed with the help of SPSS software and statistical tool like chi square.
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TABLE 2Customers of Different Age Groups Availing ATM/Debit/Credit Cards.
Age of the customer Total
Up to 20 21-30 31-40 41-50 51-60
No Count 0 2 4 0 0 6
% within B1atmcrdr .0% 33.3% 66.7% .0% .0% 100.0%
% within age of the
customer .0% 1.5% 3.6% .0% .0% 1.7%
Yes Count 44 133 108 39 20 344
% within B1atmcrdr 12.8% 38.7% 31.4% 11.3% 5.8% 100.0%
% within age of the
customer 100.0% 98.5% 96.4% 100.0% 100.0% 98.3%
Total Count 44 135 112 39 20 350
% within B1atmcrdr 12.6% 38.6% 32.0% 11.1% 5.7% 100.0%
% within age of the
customer 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Interpretation: 98.3% of customers of all the age groups availed ATM/Credit/Debit Cards from foreign bank.
H1: There will be a significant difference between number of users and non-users of ATM/Credit/Debit Card among different age groups.
(χ2 = 4.13, DF = 4,p<. 39). There is no significant difference between frequency of customers availing ATM/Credit/Debit Card and those who do not avail among different age groups. Hence, hypothesis H1 is rejected.
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TABLE 3Customers of Different Age Groups Availing E-Banking.
Age of the customer Total
Up to 20 21-30 31-40 41-50 51-60
No Count 26 68 77 27 13 211
% within
B1ebanking 12.3% 32.2% 36.5% 12.8% 6.2% 100.0%
% within age of the
customer 59.1% 50.4% 68.8% 69.2% 65.0% 60.3%
Yes Count 18 67 35 12 7 139
% within
B1ebanking 12.9% 48.2% 25.2% 8.6% 5.0% 100.0%
% within age of the
customer 40.9% 49.6% 31.3% 30.8% 35.0% 39.7%
Total Count 44 135 112 39 20 350
% within
B1ebanking 12.6% 38.6% 32.0% 11.1% 5.7% 100.0%
% within age of the
customer 100.0% 100.0
% 100.0% 100.0% 100.0
% 100.0%
Interpretation: Out of the customers surveyed (39.7%) availed e-banking, whereas (60.3%) did not availed e- banking from foreign bank.
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TABLE 4Customers of Different Age Groups Availing Credit Facility.
Age of the customer Total
Up to 20 21-30 31-40 41-50 51-60
No Count 29 87 51 29 10 206
% within credit
facility 14.1% 42.2% 24.8% 14.1% 4.9% 100.0%
% within age of the
customer 65.9% 64.4% 45.5% 74.4% 50.0% 58.9%
Yes Count 15 48 61 10 10 144
% within credit
facility 10.4% 33.3% 42.4% 6.9% 6.9% 100.0%
% within age of the
customer 34.1% 35.6% 54.5% 25.6% 50.0% 41.1%
Total Count 44 135 112 39 20 350
% within credit
facility 12.6% 38.6% 32.0% 11.1% 5.7% 100.0%
% within age of the
customer 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Interpretation: Only 41.1% of total customers availed credit facility from Foreign Banks.
H2: There will be significant difference in number of customers who avail and who do not avail credit facility from Foreign Banks.
Since the obtained Chi Square (χ2 =11.2, df=1, p<.01) is significant, Hence hypothesis H2 is accepted.
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TABLE 5Customers of Different Age Groups Availing Business Loan.
Age of the customer Total
Up to 20 21-30 31-40 41-50 51-60
No Count 39 100 77 31 8 255
% within business loan 15.3% 39.2% 30.2% 12.2% 3.1% 100.0%
% within age of the
customer 88.6% 74.1% 68.8% 79.5% 40.0% 72.9%
Yes Count 5 35 35 8 12 95
% within business loan 5.3% 36.8% 36.8% 8.4% 12.6% 100.0%
% within age of the
customer 11.4% 25.9% 31.3% 20.5% 60.0% 27.1%
Total Count 44 135 112 39 20 350
% within business loan 12.6% 38.6% 32.0% 11.1% 5.7% 100.0%
% within age of the
customer 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Interpretation: 72.9% Customers did not availed Business Loan from Foreign Banks and 27.1% availed.
H3: There will be a significant difference between number of customers availing Business Loan and those who do not avail Business Loan among different age groups.
Since the obtained Chi Square (χ2=18.38,df=4,p<.001) is significant, we can say that frequency of customers availing business loan and those who do not avail business loan differ significantly among different age groups.
Hence, hypothesis H3 is accepted.
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IV. FINDINGS OF THE STUDY1.3 ATM/Credit/Debit card users are in majority with an aggregate of 70.6% within the age group of 21-40 years, followed by young users up to age of 20, 12.6%.
1.4 Withdrawals from ATM are common to all the age groups i.e. 21-30 years (52.6%), 31-40 years (43.8%) and 41-50 years (48.7%). Surprisingly the eldest customers use ATMs for withdrawals to an extent of 35%
whereas customers of age group up to 20 years use it to 20.5% only. This young age group up to 20 years uses ATMs for deposits to the highest 29.5%.
1.5 The users prefer a fixed location of the ATM largely in different age groups 21-30 years 72.6% followed by 51-60 years, 65%.
1.6 Female customers are not lagging behind the male customers in regard to the availing of ATM/Credit/Debit Cards within the respective categories; all 100% female customers use the facilities whereas male customers use the same almost fully, 97.2%.
1.7 As far as satisfaction level of varied age groups is concerned in terms of security, the ratio comes out to be 50:50 between the adult as well as the young customers.
1.8 Hyderabad/Secunderabad is more confident of the security set up of a foreign bank, 94% than NCR/New Delhi, and 73.5% in terms of combating potential risks.
V. RECOMMENDATIONS
1.9 Services offered by the foreign banks in NCR/New Delhi are faster than twin cities, especially in case of immediate clearing of the cheques.
1.10 Personal contact and mouth-to-mouth publicity is largely preferred over advertisements for attracting customers. Innovative methods to educate the customers and publicize its products and services should be adopted by the foreign banks, as these banks are facing more competition from Indian banks rather than overseas banks.
1.11 Due to demonetization crisis ATMs have exhausted, gone dry in last 2 months, even then many ATMs are maintained and refilled by outsourced agencies. Half of the problems in ATMs are found to be its non- operation and fraud.
VI. CONCLUSION
Foreign banks branches in the country could strive to reach urban populace but the major dominating factors which they thought of infusing deeply in Indian market, first, technological innovations and second, International networking, which could not move fast as existing banks in India hired / purchased the technology and to provide overseas services networked with the International majors visa, Master card, American express, and diner’s club.
The recent challenge before them is to be fully functional and efficient in the battle of demonetization which has for the time being lowered down investments and rate of capital formation in India. [6] [7]
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REFERENCES[1] E-banking, August 2003, Report of Federal Financial Institutions Examination Council, FFIEC, pp 1-40 and, www.fdic.gov, updated on 26th December 2016.
[2] How bill payment works, http://www.synergyonthenet.com/synergy_bank/site/ faq-diagram-billpay.html, 21st February 2007.
[3] Agrawala N.K., Lal A, Electronic Payment System, Business on the net Macmillan India Limited New Delhi, 2000, P-47.
[4] Bandopadhyay Tapati, Electronic Payments, Fundamentals of E-Commerce Galgotia Publications Private Limited New Delhi, 2003, pp 109-139.
[5] Bennett Roger, International Technology Transfer, International Business, Pearson Education, New Delhi, 2003, pp 201-204.
[6] http://www.insightsonindia.com/2016/11/16/big-picture-impact-demonetization/, 10th December 2016.
[7] Peeush Ranjan Agrawal and Sakshi Misra, Role of Foreign Banks in Indian Market : A Technological Shift in Offering Value Added Services, Ph.d Thesis, School of Management Studies, Motilal Nehru National Institute of Technology, Allahabad, 2008.
