B ANKING I NFORMATION S YSTEMS

1. BANKING INFORMATION SYSTEMS LECTURE 2

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.

3. What is E- banking? •  It is broader than online banking. •  E- banking is defined as the automated delivery of new and traditional banking products and services directly to customersthrough electronic, interactive communication channels.

4. 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.

5. 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 financial institutions: -  A primary concern for informational websites could be liabilityfor inaccurate information. -  A primary concern for transactional websites could be Identitytheft.

6. 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.

7. Risk Associated with InformationalWebsites 1. Potential liability and consumer violations for inaccurate or incomplete information about products, services, and pricing presented on the website. 2. Potential access to confidential financial institution or customer information if the website is not properly isolated from the financial institution’s internal network.

8. Risk Associated with InformationalWebsites 3. Potential liability for spreading viruses and other malicious code to computers communicating with the institution’s website. 4. Negative public perception if the institution’s on-line services are disrupted or if its website is defaced or otherwise presents inappropriate or offensive material.

9. 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.

10. Risk Associated with TransactionalWebsites 1. Liability for unauthorized transactions. 2. Losses from fraud if the institution fails to verify the identity of individuals or businesses applying for new accounts or credit on‐line. 3. Possible violations of laws or regulations pertaining to consumer privacy, anti‐money laundering, anti-­‐terrorism, or the content, timing,or delivery of required consumer disclosures. 4. Negative public perception, customer dissatisfaction, and potential liability resulting from failure to process third‐party payments as directed or within specified time frames, lack of availability of on-­‐lineservices, or unauthorized access to confidential customer informationduring transmission or storage.

11. E-banking Design Factors •  E-banking systems can vary significantly in their configuration depending on a number of factors. Financial institutions should choose 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.

12. 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.

13. Service Provider Options 1. One or more technology service providers can host the e‐banking application and numerous network components. •  In this configuration, the institution’s service provider hosts the institution’s website, Internet banking server, firewall, and intrusion detection system. •  While the institution 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.

15. Service Provider Options 2. The institution can host all or a large portionof its e‐banking systems internally. A typicalconfiguration for in‐house hosted. •  In this case, a provider is not between the Internet access and the financial institution’score processing system. Thus, the institutionhas day-to‐day responsibility for systemadministration.

17. Market Status •  Mid 1980s online banking debuted. •  However the services failed to get widespread acceptance due to high call costs,and unfriendly system interface. •  Providers discontinued the services.

18. 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.

19. Market Status •  Banks approach the market because theircompetitors have done it. •  Some banks prefer to “wait and see” beforeventuring in.

20. 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 combine online premium banking and share dealing. Within a few months, several other banks had followed 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 addsanother 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.

21. 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 means that e‐banking is only available in large cities. •  Banks would find it difficult to properly implement e-­ankingwithout 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, thepath is likely to open for economic benefits to accrue both within each country andglobally.

22. Market Challenges 1. Banks must satisfy complex and ever changing customer requirements. 2. Deal with increased competition from old as well as new entrants coming into the market. 3. Must address the pressures on the supply chain to deliver their services quickly. 4. They must continually develop new and innovative services to differentiate themselves from the competition.