E- Banking

ASSIGNMENT On Central Banking And Monetary Policy Course Code: Fin-2132

Submitted To: Nargis Parvin Lecturer, Dept. of Business studies, Southeast University.

Submitted by: Name:

ID:

Md. Monwar azam Papia Sakawat

2007110000020 2007110000036

Batch - 16(A) Program - BBA

Southeast University

March 08, 2009 Nargis Parvin Lecturer, School of Business Studies Southeast University Subject: Submission of the Assignment Dear Madam, We would like to submit the assignment which is to done on the “Opportunity and Threats of E-Banking in Bangladesh”. The assignment making has given us the opportunity to know about the E-Banking situation in Bangladesh. Your valuable advice, suggestion and guidance have helped us to prepare the assignment with care. We will be very glad, if you kindly accept this assignment. Sincerely your’s Md. Monwar Azam

2007110000020

Papia Sakawat

2007110000036

Acknowledgement

Firstly I would like to give thanks Almighty Allah for successfully complete the assignment. Secondly thanks to our course instructor “Nargis Parvin”, who has provided us suggestions to pursue the assignment. I also give thanks to the librarian of Southeast University for his help. Finally, I would like to thank my friends and respected personnel for providing me banking information.

Introduction: The advent of E-Business accompanied with technological innovations and globalization is constantly propelling the businesses organization to redefine their business operations in terms of value chain reengineering and restructuring business models. Likely, the financial sector is metamorphosing under the impact of competitive, regulatory and technological forces. Financial institutions especially the banking sector is currently in a transition phase. The banks have put themselves in the World Wide Web to take advantage of the internet’s power and reach, to cope with the accelerating pace of change of business environment. The famous quote by Bill Gates that banking is vital to a healthy economy, but banks themselves are not highlights the crucial nature of the electronic forces that are affecting banks more than any other financial service provider group. This transition of business operations by banks have crated new mode of operation called E-Banking.

E-Banking: The term Internet Banking or E-Banking Internet both are used as supplement. E-Banking is the one of the major part of E-Financing. Hertzum et al. defined E-Banking as web-based Banking. In other words E-Banking refers to the banking operations, which is done over World Wide Web. However, more comprehensive and well-established definition is given by the United Nations Conference on Trade and Development (UNCTAD). This definition covers almost all area of E-Banking. Internet banking refers to the deployment over the Internet of retail and wholesale banking services. It involves individual and corporate clients, and includes bank transfers, payments and settlements, documentary collections and credits, corporate and household lending, card business and some others. E-Banking information architecture is modeled as client-server architecture. A client operating through a PC linked to Internet opens the special E-Banking site of his bank and then, using a set of special secure numbers, gets access to his bank accounts and has the opportunity to consult them, as well as to make all necessary payments and transfers form his personal accounts.

When the transaction number is exhausted the bank sends him a new set of numbers for his individual transfer sessions. In some cases the bank provides customized software. The bank software program can also be utilized offline, for example for preparing the payment orders offline and then making the actual order online. The client receives all numbers separately, mainly by mail. The bank also provide clients with similar facilities in its premises so that clients can use the bank equipment such as an ATM or a special facility linked to the main terminal facility called Multimat, permitting them to effect the same account examination, payment and transfer operations without consulting the bank staff.

Types of E-banking: The terms ‘PC banking’, ‘online banking’, ‘Internet banking’, ‘Telephone banking’ or ‘mobile banking’ refer to a number of ways in which customers can access their banks without having to be physically present at the bank branch. E-banking may be understood as term that covers all these ways of banking business electronically.

Tele-banking Tele-banking service is provided by phone. To access an account it is required to dial a particular telephone number and there are several options of services. Options included __Checking account balance __Funds transfer between current, savings and credit card accounts __Bill payments __Stock exchange transaction __Receive statement via fax __Loan payment information

PC Banking The increasing awareness of the importance of literacy of computer has resulted in increasing use of personal computers through the entire world. Furthermore, incredible plummet of cost of microprocessor has accelerated the use of computer.The term ‘PC banking’ is used for banking business transacted from a

customer’s PC. Using the PC banking or home banking now customers can use their personal computers at home or at their office to access their accounts for transactions by subscribing to and dialing into the banks’ Intranet proprietary software system using password.

Internet Banking Internet banking would free both bankers and customers of the need for proprietary software to carry on with their online banking transactions. Customer behavior is changing rapidly. Now the financial service is characterized by individuality, independence of time and place and flexibility. These facts represent huge challenges for the financial service providers. So the Internet is now considered to be a ‘strategic weapon’ for them to satisfy the ever-changing customers’ demand and innovative business needs.

Mobile Banking Actually mobile banking is a variation of Internet banking. Mobile banking is a good example of how the lines between the various forms of e-banking are becoming gradually blurred. Due to the new transmission technologies such as WAP (Wireless Application Protocol), portable terminal like mobile phones, personal digital assistant (PDA) or small hand-held PCs are providing bank customers with access to the Internet and thus paving the way to Internet banking. It assures immense flexibility and makes the financial services independent of time and place. However, the use of mobile banking is still in a nascent state. The slower transmission speed of the WAP standard and the limited amount of information available are just two of the factors inhibiting the use of those terminals.

Opportunity of E-Banking in Bangladesh: The infrastructure covers the major cost of any electronic banking system. But it’s a matter of huge investment for a country like Bangladesh. But fortunately Bangladesh Railway has a high-speed optical fiber network parallel to the railway path owned by Bangladesh Railway which has a total capacity of about 2.5 Gbps. This fiber optic network covers almost every important parts of the country. So, it is an opportunity to use it as the backbone network of electronic banking in Bangladesh. Some of the multinational companies like Grameen mobile phone company, Ranks ITT of Bangladesh have already started to use

this high-speed optical fiber network and they are providing their services even in rural area. So we can utilize this opportunity in case of E-banking in Bangladesh. In Bangladesh there is a large gap between the computerization of foreign banks and that of local commercial banks (the gap is particularly great in respect of local public commercial banks) and as regards the state of their intra- and interbranch online networks. However, 75 per cent of local banks are planning to introduce E-Banking, which implies very dynamic improvements in their ICT use indicators. Virtually all banks use banking software at their head offices and during the past few years around one third of local banks has become SWIFT members. Credit card and point of sale services (POS) are already provided by a quarter of local banks, while ATM and internet banking are expanding rapidly especially in major cities.

Proposed ICT infrastructure for E-banking in Bangladesh:

BO-2

BO-N

Port Authority Bank X BO 1

Central Bank HO

OTHERS

Head Office

Router/FW

Bank Y

Bank Z

Router/FW

Router/FW

Router/FW

Optical Fiber Nation-wide Banking Network Sub Marine Cable

Router/FW

Router/FW

Router/FW

Router/FW

Principle Branch

Bank Z

Bank Y

Bank X

Central Bank/ Sonali Bank

HO- Head Office BO- Branch Office

BO

BO N

Othe

Description of Proposed ICT infrastructure In the above configuration all bocks are symmetric except for the role of central bank differs slightly. ► In central zone (i.e. Dhaka) Bangladesh Bank (Head Office) is connected with every other Head Office and branch office is connected to its head office in the same region. Bangladesh Bank(Head office) is given the legal authority to get any sort of information regarding the transaction flow from any bank. ► In the regions other than Dhaka the role of Bangladesh Bank is handed over to ‘Sonali Bank’ Principal Branch if there exists no branch of the central bank. ► In both regions each bank forms a local network (might be wired or through radiolink) where the head office or principal branch play the central role. ► In some relatively remote area (Rangamatee) where total number of branches of all banks is very few (for instance a total of 5 branches are there) the above configuration is not a feasible one. In such cases, all branches, irrespective of banks, should form a local network. This is because establishment and maintenance cost will be much higher for a number of very small LAN instead of a single moderately sized one. Unlike other unit it has no governing entity. Here every branch communicates directly with its Head Office. Every Head Office is having its own VSAT to be connected with the Internet. One is shown in the diagram. Alternatively, Internet connection can be assured by direct connection with the sub-marine cable as a future solution. It is shown as the dashed box in the diagram. In the diagram of the proposed infrastructure the magnified box shows a special module entitled ‘others’ connected with the head office. It is used to represent to facilitate for the utility bill payments such as water, gas etc. As a result, customer will be able to pay their utility bills at any branch of any bank. It would obviously reduce the immense pressure on some specific branches as being followed now. Again, it presents some nonbanking financial service providers such as insurance company.

According to the “E-Commerce beyond 2000”, the banking and finance sector has been a rapid adopter of E-Commerce because its products could easily be virtualized and the product had priority over place banks can generate revenue

through increased account access fees, and benefit from promotional opportunity to cross-sell products such as credit cards and loans. The advances in Internet security and the advent of relevant protocols has put banks in perspective again as financial intermediaries and facilitators of complete commercial transactions via electronic networks and especially via the Internet. Consumers are increasingly looking for services they can access from a single entry point. Awareness of competition has motivated banks to move aggressively in seeking alliances and establishing joint ventures to maintain their claim to this part of the E-banking infrastructure. Like there are alliances in the ATM network, Group Network, Money Transfer Network etc. This is also creating segmentation of networks where the customers of this networks sometimes unable to access to others’ network. Consumer behavior in banking changed partly as a result of changes in the amount of spare time available to individuals. Mobility, independence of time and place, and flexibility has become key words in consumer banking. The Internet banks serve also as gateways offering identification and authorization services to a number of third party service providers. There are user-friendly opportunities for conducting business over the Internet with telephone companies, Energy Company, tax board and other institutions. Demand for those services influences also the usage rates of Internet banks.

Threates:

Operational risk Operational risks arises from the fact of some external events , processes, systems, people etc. in the execution phase error occurred due to internal failure of processes, systems etc. external event causes serious operational risk due to natural disaster. It sometimes arises from the part of customers such as misuse of system and inadequately designed and implemented electronic business system.

Security risks Operational risk arises with respect to the controls over access to a bank’s critical accounting and risk management systems, information that it communicates with other parties and, in the case of electronic money, measures the bank uses to deter and detect counterfeiting. Controlling access to bank systems has become increasingly complex due to expanded computer capabilities, geographical dispersal of access points, and the use of various communication paths, including public networks such as the Internet. It is worth noting that with electronic financial transaction, a breach of security could result in fraudulently created liabilities of the bank. For other forms of electronic banking, unauthorized access could lead to direct losses, added liabilities to customers or other problems. A variety of specific access and authentication problems could occur. For example, successful attack by hackers via Internet he/she can cause severe danger by accessing confidential customer information. Some of the threat may occur like Replay attack Besides the external attack, an e-banking site must be well equipped to deal with some internal bad practice like employee fraud: employees could surreptitiously acquire confidential information of the customer for some evil aspects. System design, implementation and maintenance A bank faces the risk that the systems it chooses are not well designed or implemented. For example, a bank is exposed to the risk of an interruption or slow-down of its existing systems if the electronic banking system it chooses is not compatible with user requirements. The rapid pace of change that characterizes information technology presents banks with the risk of systems obsolescence. Furthermore, rapid technological change can mean that staff may fail to utilize the power of newly adapted technology for e-banking. Customer misuse of products and services

As with traditional banking services, customer misuse, both intentional and inadvertent, is another source of operational risk. In the case of e-banking this sort of risk is predominating if a bank does not adequately educate its customers about security precautions such as authentication information, credit card number etc. Subsequently, the bank may incur financial losses because of transactions customers did not authorize. Strategic risk from management perspective Financial institution’s board and management should understand e-banking risks and evaluate the risk and cost to minimize associate risks prior to offer ebanking service. Strategic risks result from (bad) business decisions taken by management. Specifically, the danger of not being able to keep up with rival technologies is the source of the greatest strategic risk. Technology is so important for e-banking operations that there is a correspondingly great needs to invest in new technologies. Innovators assume most of the risk. It is often impossible to foresee whether a new product will survive on the market or whether a project can be successfully brought to conclusion. Failed IT projects can raise the amount of misallocated investment; thus, instead of reducing costs, e banking would have precisely the opposite effect. Therefore, some institutions are pursuing the strategy of imitation. Such banks not only save costs on IT development but also have the advantage of knowing that a technology has proved to be feasible and that the market has shown initial signs of acceptance. A major disadvantage of this strategy is that if circumstances cause the technology to be entered into production too late, the market segment could already be occupied. The rapid pace of innovation in e-business is requiring banks to make e-banking strategy decisions as quickly as possible, since technological innovation and customers’ tastes may radically change. Frequently there is no way to predict which technology and which terminals (e.g. mobile phones, television set, PDAs ) will prevail. Missteps in the planning and implementation of strategy engender considerable risks. The responsibility for these decision lies with the senior management of the bank. Reputational risk Banking business is especially sensitive to fluctuations in confidence.Therefore, reputational risk, particularly in a relatively new field of business, represents a special challenge for banks. Customers’ confidence in their bank can be shaken if the bank is not able to provide secure and trouble-free e-banking services. The same is true if services such as responding to inquiries or processing orders are not performed at the speed that customers have come to expect in the ‘electronic age’.

Other risks Traditional banking risks such as credit risk, liquidity risk and market risk are alsopresent in e-banking sectors. Credit risk It is the risk that counter-party will not settle an obligation for full value, either when due or at any time thereafter. Banks engaging in e-banking activities may extend credit via non-traditional channels, and expand their market beyond traditional geographic boundaries. Inadequate procedures could heighten credit risk for banks. Banks engaged in electronic bill payment programs may face credit risk if a third party intermediary fails to carry out its obligations with respect to payment. Liquidity risk It arises from a bank’s inability to meet its obligations when they come due, without incurring unacceptable losses, although the bank may ultimately be able to meet its obligations. Liquidity risk may be significant for banks that specialize in electronic money activities if they are unable to ensure that funds are adequate to cover redemption and settlement demands at any particular time. In addition, failure to meet redemption demands in a timely manner could result in legal action against the institution, and lead to reputational damage. Market risk Market risk is the bank of losses in on and off balance sheet positions arising from movements in market prices, including foreign exchange rates. Banks accepting foreign currencies in payment for electronic money are subject to this type of risk.

Conclusion: Web based banking service or E-Banking, the latest generation of electronic banking transactions, has opened up new window of opportunity to the existing banks and financial institutions. It permits business process re-engineering, serving borderless market, to achieve zero latency leading to improvements in customer service levels and better risk management because of real-time settlement. Since its evolution in 90th decade, it is having unprecedented growth. The growth rate is higher in Developed Countries, and comparatively lower in LDCs countries like Bangladesh. The E-Banking sector is highly prohibitive for the new entrants although the inception cost is lower with high growth rate. The brand preference of the customer, existing network, physical existence, security and safety, supplier bargaining power, substitute product of non-banking sectors have made the way thorny. However, new comer with innovative idea and strategy definitely can make position in this sector. The analysis of the evolution and present status of E-Banking make us some room to make commandments for the government, new entrants and existing e-banks for effective utilization of the opportunity to accelerate the economic growth.