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Electronic Commerce: Electronic Banking and Cyberbanks

Department of Economics Electronic Commerce: Electronic Banking and Cyberbanks How To PAY FOR E-COMMERCE Presentation Overview Background on FDIC E-banking trends, risks, and issues What are the emerging technologies? How are they being used by banks?

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Electronic Commerce: Electronic Banking and Cyberbanks

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  1. Department of Economics Electronic Commerce: Electronic Banking and Cyberbanks How To PAY FOR E-COMMERCE

  2. Presentation Overview • Background on FDIC • E-banking trends, risks, and issues • What are the emerging technologies? • How are they being used by banks? • What are the risks and regulatory issues? • “Cyberbanks” • Who are they & how are they unique?

  3. FDIC - General Information • Federal Agency, created in 1933 • Insurer of banking and thrift institutions • Supervisor of state-chartered, non-member banks • 6,000 FDIC supervised institutions • 2,200 examiners in eight regions

  4. The Four Forces of Change in the Financial Services Industry Globalization Convergence Financial Service Providers Consolidation Technology

  5. Technology: The Internet Changes Everything • The networked environment provides instant, global access to information, products, and services • The Internet becomes a mass market (275 million users) • “Information” industries (financial services) are reinvented • Computing technology has become a core competency for financial services • Affordable, outsourced solutions are readily available

  6. CEO’s View of the Internet’s Impact on Business 10 69 19 7 63 28 32 52 14 39 51 6 44 46 7 26 60 14 Source: Survey of 1,020 CEOs by PriceWaterhouseCoopers 1/2000

  7. Internet Banking Forecasts “86% of financial institutions will offer online banking by 2003” -- IDC Research, 5/99

  8. Growth Trends in Bank/Thrift Web Sites 40% of all banks & thrifts have a web site 12% of all banks & thrifts have a transactional web site Source: Call Report data and informal off-site monitoring

  9. Transactional Web Sites by Bank Asset Size

  10. Internet Banking Innovations • “Portal” sites • Financial services aggregation • Bill presentment and payment • Customer relationship management • Electronic commerce services • Wireless technology

  11. CompuBank’s Portal Site

  12. OnMoney’s F/S Aggregation Site

  13. First Union’s EBPP Offering

  14. Fleet’s “My Page”

  15. Citi’s “Small Business Resource Center”

  16. Traditional Risks Strategic Operational Credit Liquidity Compliance Reputation Systemic Risks of Electronic Delivery Unique Risks • Speed of transactions • Global reach • No direct control over end users • Anonymity of users • Strong reliance on vendors to develop and maintain system(s) • Dynamics of technology

  17. Examples of Known Incidents and Potential Threats • Theft of confidential/proprietary information • Identity theft, Internet-related credit card fraud • Web site modification • Web site impersonation (“spoofing”) • Denial of service attacks • Possible extortion attempts

  18. Example of a Hacked Bank Web Site Before After “What happened???”

  19. “A Tale of a Web Site, a Hacker, and an Extortion Attempt”

  20. Experience to DateCommon Problems • Lack of planning and updates to policies, audit programs, etc. • Inadequate control over sensitive information • Privacy statements are lacking • Weaknesses in customer authentication • Over-reliance on vendors • Uncertainty of applicable laws and regulations

  21. Planning and Policies • Feasibility studies/strategic plans are often absent • Budgets should address system maintenance, upgrades, and training • Audit procedures should be updated • Policies should be updated to cover new activities • Example of “out-of-area” loan applications LOAN POLICY

  22. Control Over Sensitive Information • Access and authentication controls (e.g., PINs, passwords) must be properly administered • Sensitive information should be encrypted • Distinguish between secure and unsecure transmissions (e.g., e-mail) • Security techniques and practices should be disclosed

  23. Web Site Privacy Statements Results from Interagency Web Site Survey: • 364 bank/thrift web sites surveyed • 64% collected personal information • 48% of all sites had a privacy disclosure • 52% of sites that collected info. had disclosures • 96% of “top 50” sites had privacy disclosures • Only 21% of sites with disclosures addressed all five fair information collectionpractice principles See FIL 86-98 for info on what should be in a Privacy Statement

  24. New Customer Authentication • Existing customers are generally authenticated by PINs • New technologies are being explored for private banking and commercial customers • E.g: digital certificates, smart cards, biometrics • Current industry practices include customer call-backs, fraud screens, etc.

  25. Dependence on Vendors • Most banks outsource some or all of their e-banking activities • Increasing tendency of banks to “abandon responsibility” for outsourced systems • Due diligence, comprehensive contracts, and vendor oversight are essential • Ownership and control over customer data should be clarified

  26. Applicable Laws & Regulations • Importance of ongoing web site review by compliance/legal staff • Existing laws and regulations generally apply • Difficulty in translating geography-based, paper-based, and signature-based requirements • Interagency statement: “Electronic Financial Services & Consumer Compliance” (7/98)

  27. Cyberbanks • There is no singular definition of a “cyberbank” • My unofficial criteria: • Must have a legal bank charter • Strategy emphasizes the Internet • Electronic channels are primary method of delivery • Common strategies: niche focus, low-cost provider, high-rate payer, rapid growth • The “dot com” mentality

  28. Cyberbank Examples Since 1995, eleven “branchless” banks have emerged:

  29. 1st National Bank = dotcombank.com Internet Branches/Divisions • Approximately 14 institutions maintain web sites under “trade names” • Business strategy: target different customer groups • Potential for consumer confusion and uninsured deposits • Interagency guidance on the use of “trade names” (dated May 1, 1998)

  30. What is “X.com”?

  31. FDIC’s Supervisory Initiatives • Examination procedures for bank examiners • Technical training for IS specialists • Industry guidance • Interagency & international workgroups • Monitoring programs and resources

  32. Industry Guidance

  33. Summing it Up... • Technology is revolutionizing the banking industry and becoming a critical competency • The challenge for the banking industry and financial services regulators is to keep pace with technological change

  34. Time for questions, comments, and discussion... ?? For further information about Inetrnet banking and related matters please contact:Cynthia A. Bonnette, Examination Specialist550 17th Street, NW, Room F-6008Washington, DC 20429202-898-6583cybonnette@fdic.gov

  35. Reference URLs • http://www.ecommcenter.com • http://www.onmoney.com • http://www.firstunion.com/online_access • http://www.fleet.com • http://www.bizzed.com • http://www.x.com • http://www.fdic.gov

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