Electronic Banking

1. Electronic Banking • The rapid development of electronic technology has a profound effect on the financial sector, especially in the provision of retail and wholesale financial services. Electronic banking services are offered by banks to personal and business customers.

2. Automated Teller Machine (ATM) • An automated teller machine is a data terminal connected to a host computer through a private network and the host computer is connected to a bank’s computer. It offers round-the-clock banking services including enquiry of account balances, deposit and withdrawal of cash, transfer of funds between accounts, etc.

3. Automated Teller Machine (ATM) • Like any other data terminal, the ATM connects to, and communicates through, a host processor. The host processor is analogous to an Internet service provider in that it is the gateway through which all the various ATM networks become available to the debit-card holders.

4. Automated Teller Machine (ATM)

5. Automated Teller Machine (ATM) • Most host processors can support either leased-line or dial-up machines. Leased-line machines connect directly to the host processor through a four-wire, point-to-point, dedicated telephone line. Dial-up ATMs connect to the host processor through a normal phone line using a modem and a toll-free number, or through an Internet service provider using a local access number via a modem.

6. Automated Teller Machine (ATM) • Leased-line ATMs are preferred for very high-volume locations because of their throughput capability, and dial-up ATMs are preferred for retail merchant locations where cost is a greater factor than throughput. The initial cost for a dial-up machine is less than half that for a leased-line machine. The monthly operating costs for dial-up are only a fraction of the costs for leased line.

7. Automated Teller Machine (ATM) • The host processor may be owned by a bank or financial institution, or it may be owned by an independent service provider. Bank-owned processors normally support only bank-owned machines, whereas the independent processors support merchant-owned machines.

8. Electronic Fund Transfer (EFT) • Electronic funds transfer enables an individual to access the payment system by means of a debit card. In Hong Kong, the electronic funds transfer at point of sale service is offered by means of the EPS. Easy Pay System (EPS) is operated by the Electronic Payment Services Company (Hong Kong) Limited which is a consortium of banks in Hong Kong, including the major note-issuing banks. They issue EPS debit cards to consumers which allows consumers to deduct purchases from their bank accounts at most retail stores in Hong Kong.

9. Telephone Banking • Telephone banking is developed from computer telephone integration. It is very popular nowadays and is based on either human interaction or automated voice recognition systems. It is also possible to automatically present the operator with a customer’s information before the telephone is answered. A lot of banking services can be done through telephone banking which include enquiry of account balances, interest rates, exchange rates, transfer of funds between accounts, request for cheque books, change of maturity instructions for time deposit, etc.

10. Cash Management Services • Cash management services is global electronic banking which provides timely and accurate portfolio information. Through the highly secured system, corporate customers have access to the end-of-day balance position, including ledger balance, available balance, credit facilities, funds held and clearing items. Balances can be examined and reported in different ways : by account, by bank, by currency and by location.

11. Cash Management Services • The customers can also reconcile and monitor their accounts by instant screen access to the credit and debit transaction details as far as 30 days. Funds can be transferred to third parties or moved between accounts. Payment and transfer can be made individually or in bulk, and repetitive instructions can be stored within the system and called back as required.

12. Electronic Data Interchange (EDI) Services • EDI enables all paper-based trade documentations to be sent, received and acknowledged by all parties electronically, including purchase orders, documentary credits and shipping documents. This helps importers and exporters to reduce errors, save time and resources.

13. Electronic Data Interchange (EDI) Services

14. Electronic Money • The shift from paper currency to electronic cash creates the potential for private money to compete with bank notes. Electronic payments system reduces transaction costs and helps retailers to expand markets.

15. Smart Card • Smart card is a plastic card embedded with a micro-chip which stores money in digital form. It looks and feels like a credit card but acts like a computer. It can be used to verify a user’s identity to log on to a computer network, enable a doctor to scan a patient’s medical records, and, in theory, replace many of the ever-growing assortment of identification, travel, credit, and access cards.

16. Smart Card • A smart card is programmable, so applications and data can be downloaded onto it for an infinite number of uses. It has storage and processing capability, so it can add or subtract value. The capability to act as a computer also brings security features not found in ordinary credit cards. And, unlike credit cards with their magnetic stripes, smart cards have a built-in processor that allows data can be written onto it with an infinite number of times.

17. Smart Card • In the banking industry, smart card technology is applied to the multi-purpose stored value card. It can replace cash and cheques for low value purchases and customers no longer need to wait for the changes. Moreover, the value transfer between two chips enables users to complete the transaction faster than credit card and EPS payment. Smart card helps merchants to reduce their costs for handling cash and changes, and increase the efficiency by faster queues.

18. Smart Card • There have been four smart cards issued in Hong Kong. The first one is Compass Visa launched in 1995 by Hutchison Whampoa and OTB Card Co. Ltd. This is not a stored value card but offers a cash rebate from 30 merchants including Park’N Shop, Watson’s, etc.

19. Smart Card • The second one is VisaCash launched in 1996 by Bank of China, Standard Chartered Bank and Visa International. Visacash stores HK$200 and consumers can use it in some fast food shops, convenient stores and car parks. • The third one is Mondex which was launched in 1996 but was withdrawn in 2001 by the HSBC Group. It was a reloadable stored value card with an initial cash value of HK$3,000.

20. Smart Card • The last one is Octupus. This smart card can be used across six transport operators which have joined together in a joint venture called Creative Star Limited. The joint venture includes the MTR Corporation, the Kowloon-Canton Railway Corporation (KCRC) – light and heavy rail, the Kowloon Motor Bus Co. (1933) Ltd (KMB), Citybus Ltd and Hongkong & Yaumati Ferry. This contactless smart card system was launched in 1997 and up to 2001 over four million octopus cards have been issued. The system is able to handle up to 10 million transactions daily across all modes of public transport.

21. Smart Card • Octopus has not only gained momentum among the passenger transportation industry but is also expanding into other retail channels such as fast food outlets and automatic vending machines. The popularity of this e-payment system is due to the convenience to consumers and the low cost to the merchants. The merchants are charged a commission of 0.5% of the transaction value.

22. Virtual Banking • Virtual banking means banking conducted through the internet. There are three stages of development. In the first stage, the world-wide web and email enables customers to access to information of banking services. Browsing the websites of banks is like reading a packet of brochures. Application forms for banking services can be download. In the second stage, the e-payment service involves online payment of bills with a credit card. Then in the third stage, e-cheque and e-cash have been developed to make full use of the internet for commercial purposes.

23. Virtual Banking • Most banks in Hong Kong have launched websites on the internet to provide information of their banking services. Chekiang First Bank was the first local bank to open a website for online transactions in 1998. The following banking services are provided by the Chekiang First Web Banking Service :

24. Virtual Banking • Bank information • Account transfer between customers’ registered accounts • Hong Kong dollar account transfer to third party account with the bank • Enquiry of account statement and balances • Buying and selling foreign currencies during office hours • Time deposit instructions. Customers can place new time deposit or change maturity instructions of time deposit during office hours.

25. Virtual Banking • Enquiry of mortgage repayment calculation • Enquiry of outstanding items like inward and outward bills, letters of credit, trust receipts, etc. • Enquiry of local or foreign currency deposit interest rates • Enquiry of foreign exchange rates • Requesting cheque books • Changing password

26. Virtual Banking • Meanwhile most of the above banking services are provided by other banks through telephone banking. The internet banking services offered by the Wing Lung Bank in 1999 added new features like property valuations and management tools for portfolio monitoring.

27. Shortcomings of virtual banking • In the case of Internet banking, the fact that financial transactions can be conducted through the cyber space without any human interactions changes the nature of the business risks involved. A major concern over the internet is its open nature. Financial transactions transported on closed networks can ensure a degree of security. Virtual banking, however, is conducted through open networks. The risk of being intruded during the course of a banking transaction is thus significantly increased.

28. Shortcomings of virtual banking The intrusions related to virtual banking can be sorted into three categories: • Application-based intrusion. E.g. attacks on encrypted networks • Host-based intrusion. E.g. unauthorized use of Trojan horses • Network-based intrusion. E.g. denial-of-service attacks

29. Shortcomings of virtual banking Few weeks ago, there was a worldwide example of the denial-of-service attack. On Saturday, 25 January 2003, a computer worm W32/SQLSlammer.worm was discovered to appear on the Internet.  This worm affected Microsoft SQL Server 2000 series by generating a huge amount of network traffics and spread them amongst SQL servers through the Internet (known as denial-of-service attack). Once the worm got control on the target computer, it loaded WS2_32.DLL and started to continually send itself to port 1434/udp of randomly selected IP targets in an infinite loop. This propagation strategy consumed a lot of network bandwidth and eventually caused immediate crashes of SQL servers all over the world.

30. Shortcomings of virtual banking This incident also affected the daily operations of the worldwide banking industry. In America and Europe, because of the crashes of network servers, almost all Internet banking and ATM services were down for half a day on that Saturday. In South Korea, half of the normal daily transactions of national stock trading were unable to complete causing a loss of around HK$6.7 million. In Hong Kong, certain academic institutions including HKU, HKUST and City U found their computer network traffics were jammed for the whole day.

31. Solutions to Virtual Banking Problems Security measures have been developed by the new technologies like Secure Sockets Layer (SSL) and Secure Electronic Transaction (SET). They enable all information sent between a customer computer and a bank server to be encrypted by the sending software and decrypted by the receiving software, thus providing a high degree of confidentiality to protect both the bank and the customers. The authentication of the customer’s identity can also be done through a combination of user password and digital certificates. Detailed descriptions of these new technologies are as follows:

32. SSL Developed by Netscape, SSL is the de facto standard protocol used to provide a secure network communication channel. It is another layer in the network protocol stack that rides on top of the TCP/IP stack. It provides secure encrypted communications, authentication of the server, and data integrity of the message. Because SSL resides on top of the TCP/IP layers, it can potentially secure the communications of any number of application-level protocols that communicate over the Internet. SSL secures the channel by providing end-to-end encryption of the data that is sent between a Web client and a Web server. Although a sniffer might be able to steal the data in transmission, the encryption will effectively scramble the data so that it cannot be intelligently interpreted.

33. SET Secure Electronic Transaction makes use of “hash” algorithms to prove the integrity of computer data or messages. “Hash” algorithm is also called message-digest algorithm. It can take any computer data as inputs and generate a fixed-length number as outputs. The output is the same size, regardless of the size of the input data. If a bank wants to prove to the client that its computer message was not altered during transmission, it can take a “hash” of the message before sending it to the intended recipient. When the bank sends the message, it includes the output of the hash function. When the recipient receives the message, she can compute a hash of the message and compare it to the hash received with the message. If they match, it means that the message was not altered during transmission.

34. Digital Certificates A digital certificate is the electronic equivalent of an identification card, such as a HKID care or a driver’s license. It is a digitally signed statement from a trusted third party that verifies the identity and public-key of an individual or computer. A digital certificate can be obtained either from a public Certificate Authority (e.g. HK Post) or from a private authority running its own certificate server. It can be used to strongly authenticate a user to a system and to encrypt email messages and other types of communications.

35. Conclusions Technology can improve the services that banks offer to their customers. Information can be produced accurately and quickly to enables banks to cut costs. But bankers have to make their decisions as to whether they should follow every new idea in technological advances.

36. Conclusions Information can be extremely powerful. Through the information systems, banks have perfect knowledge of the financial dealings of almost every economically active person and organization in the society. They could identify spending patterns, predict spending requirements and savings requirements. Besides the provision of banking services to customers, technology developments should also enable banks to establish their operational networks with their business associates and the regulatory authorities. Clearing functions, reporting systems and even trading can all be handled electronically. The Hong Kong Monetary Authority has started to obtain reports from banks through electronic channels since 1996/97.