1.

Electronic banking

Electronic banking, or e-banking, is the term that describes all transactions that take place among
companies, organizations, and individuals and their banking institutions.

Electronic banking uses computer and electronic technology as a substitute for checks and other
paper transactions. E-banking are initiated through devices like cards or codes that let you, or
those you authorize, access your account. Many financial institutions use ATM or debit cards
and Personal Identification Numbers (PINs) for this purpose.

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 The difference between e-money and e-
banking is that, with e-money, balances are
not kept in financial accounts with banks.

( picture 1, forms of e-banking)

2. History of electronic banking

First conceptualized in the mid-1970s, some banks offered customers electronic banking in
1980s. Online banking was first introduced in the early 1980s when four New York banks--
Citibank, Chase Manhattan, Chemical and Manufacturers Hanover--offered home banking
services. The systems were quite difficult to use and did not prove to be very popular. In the
U.K., it was Nottingham Building Society that in 1983 offered the first electronic home banking
system.

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The lack of internet users, and costs associated with using online banking, stunted growth. The
internet explosion in the late-1990s made people more comfortable with making transactions
over the web. Despite the dot-com crash, e-banking grew alongside the internet.

While financial institutions took steps to implement

e-banking services in the mid-1990s, many
consumers were hesitant to conduct monetary
transactions over the web. It took widespread
adoption of electronic commerce, based on
trailblazing companies such as America Online,
Amazon.com and eBay, to make the idea of paying
for items online widespread. By 2000, 80 percent of
U.S. banks offered e-banking. Customer use grew
slowly. At bank of America, for example, it took 10
years to acquire 2 million e-banking customers. However, a significant cultural change took
place after the Y2K scare ended.

In 2001, Bank of America became the first bank to top 3 million online banking customers, more
than 20 percent of its customer base. In comparison, larger national institutions, such as
Citigroup claimed 2.2 million online relationships globally, while J.P. Morgan Chase estimated it
had more than 750,000 online banking customers. Wells Fargo had 2.5 million online banking
customers, including small businesses.

Online customers proved more loyal and profitable than regular customers. In October 2001,
Bank of America customers executed a record 3.1 million electronic bill payments, totaling more
than $1 billion. In 2009, a report by Gartner Group estimated that 47 percent of U.S. adults and
30 percent in the United Kingdom bank online.

3. Forms of electronic banking

Electronic banking can be divided on the basis of the instruments used: telephone connection,
personal computers, means of payment (bank cards) and self-service zones.

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 3.1 Electronic banking using a telephone connection:

Telephone banking and the first banking services using classic telephone lines for
communication date back to the turn of the sixties and seventies, of the last century. These
services grow very rapidly and at the close of the 20th century mobile phones also started to be
used in banking with the development of information and communication technologies. In this
period, banks started with to communicating with their clients by SMS messages, with GSM
banking later becoming a natural component of electronic banking.

A mobile phone can be used to communicate with a so-called telephone banker or an automated
telephone system, just as well as a fixed line. However, opportunities for mobile phone usage in
communication with a bank are much greater. Mobile phone use represents a direct
communication channel that spread on a massive scale trough which clients have immediate
access to typing a bank operation, ordering services or working with accounts. Electronic
banking using a telephone connection can be divided into phone banking (ATS, client advisor)
and mobile banking (SMS banking, GSM SIM Toolkit and WAP). Here is described some
electronic banking with a telephone connection:

3.2 Phone banking:

Phone banking is the provision of banking services using a classic telephone line. A bank client
can obtain the necessary information of dialing of telephone number specified in advance. Before
requested banking service information is provided the
client’s identity is determined using contractually agreed
terms. Using this banking services enables bank clients to
obtain concerning active and passive banking products,
but a client can also actively use the bank payment
system and request, for example, a payment order or a
collection order, open or cancel a term deposit or a
current account. In this case a fax connected to the
telephone serves as an output communication channel.

3.3 Automated Telephone Systems ( ATS ):

Automated telephone systems allow bank customers to access account information and services
24 hours a day, seven days a week. An automated
telephone system works on the basis of a menu trough
which clients can move around using buttons or
telephone. The service menu is usually designed to be

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simple so that a choice doesn’t take too long. Bank customers wishing to use the automated
telephone system need a touch-tone telephone line to communicate with the bank’s computer.
After entering bank account numbers and other information used to verify identity, bank
customers can check account balances, transfer funds, find service locations, and perform other
routine tasks.

Secure communication for this system can be arranged in two elementary ways:

1. END TO END security - the whole communication chain is secured by a verbal code.
This is very secure, but also expensive and only used in public administration and army.

2. Using so called access rights - at the start the client must document his authorization to
communicate with bank.

3.4 SMS banking:

SMS banking uses short text messages sent trough the client’s mobile phone. SMS text message
can be used for both passive and active operations similary as with classic telephone banking. A
client can be automatically recieve information about his account balance: an SMS is sent to the
client immediately after a certain operation is performed, or on request: a client sends the bank a
correctly formatted message which processes it and answers the client’s request by message.

3.4.1 GSM SMS Toolkit

The GSM SMS Toolkit service can only be used from a mobile phone supporting this
technology. GSM SIM Toolkit is a software interface that enables arbitrary changes to the
mobile phone menu. Operators supporting this technology can use it to personalize mobile phone
menus. This means that only functions activated and paid will appear on the user menu. This
technology dates back to 1998. Among the first companies to use it in banking applications
based on the GSM SMS Toolkit standard were RadioMobil and Expandia Bank in the Czech
Republic.

3.5 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
financial institution'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 typically supplement a financial institution's e-banking products and
services.

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Wireless devices have limitations that increase the security risks of wireless-based transactions
and that may adversely affect customer acceptance rates. Device limitations include reduced
processing speeds, limited battery life, smaller screen sizes, different data entry formats, and
limited capabilities to transfer stored records. These limitations combine to make the most
recognized Internet language, Hypertext Markup Language (HTML), ineffective for delivering
content to wireless devices. Wireless Markup Language (WML) has emerged as one of a few
common language standards for developing wireless device content. Wireless Application
Protocol (WAP) has emerged as a data transmission standard to deliver WML content.

3.6 Electronic banking using personal computer

Along with significant growth in the usage of mobile phones

in banking practice, personal computers have also come to the
fore, which to an even greater extent facilitate and modernize
banking service provision. In an information society this
communication instrument plays an irreplaceable role and is
indispensable for the present day banking sphere. The area of
electronic banking realized trough personal computers can be
divided into home banking, internet banking and mail
banking.

3.6.1 Home banking

Home banking is a service that enables a bank client to handle his accounts from computer from
a place selected in advance, at home or in the office. A home banking system is multi user
application, meaning that several of the client’s employees can work it, in particular:

a) administrator- can define new employees, change rights,

b) sender- ensures communication with the bank and transmission of prepared data,
c) accountant- can type payment orders and orders for collection
d) viewer- can browse through statements and announcements received.

3.6.2 Mail banking

Mail banking is electronic banking service that makes possible to communicate with the bank by
electronic mail or e-mail. The most frequently used service is sending account statements at
agreed periodicity to the client’s mailbox. E-mail is not used for more example operations.

3.6.3 Internet banking

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Internet banking allows customers to access their bank accounts from any computer with Internet
access. Customers wishing to use Internet banking must first apply at their local bank for access
to the encrypted network. In addition to allowing basic functions like account balance checking,
Internet banking usually allows customers to pay bills and make electronic fund transfers.

3.7 Payment instruments and self-service zones

Apart those already mentioned, there are other more or less widely known forms of electronic
banking including a payment card, an electronic wallet and a self-service zone.

3.7.1 Payment card

Is currently one of the most widely used payment instruments designated to authorized holders
trough which they can perform non-cash payments or cash withdrawals from an extensive
network of automated teller machine.

3.7.2 Electronic wallet

Represents a chip card similar to a payment card that contains a record of a financial sum that is
available to its owner.

3.7.3 Self-service zone

Is a fully automated alternative work place of a bank with terminals and devices that clients can
use to get various bank services. It enables active and passive operations offered by the bank be
made without the presence of a bank employee.

The bank of Japan and its

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Multi- 4)
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Governmen system Payment Re
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finansial institutions)
Processing (15) Confirmation of (12) Payment
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Amount of payment Data processing
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Internet ATM (automatic

banking Telephone Mobile teller machine)
banking banking

(picture 2, forms of e-banking)

4. Electronic banking components

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; and

Security and internal control requirements.

Financial institutions may choose to support their e-banking services internally. Alternatively,
financial institutions can outsource any aspect of their e-banking systems to third parties. The
following entities could provide or host (i.e., allow applications to reside on their servers) e-
banking-related services for financial institutions:

Another financial institution,

Internet service provider,

Internet banking software vendor or processor,

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 Core banking vendor or processor,

Managed security service provider,

Bill payment provider,

Credit bureau, and

Credit scoring company.

E-banking systems rely on a number of common components or processes. The following list
includes many of the potential components and processes seen in a typical institution:

Website design and hosting,

Firewall configuration and management,

Intrusion detection system or IDS (network and host-based),

Network administration,

Security management,

Internet banking server,

E-commerce applications (e.g., bill payment, lending, brokerage),

Internal network servers,

Core processing system,

Programming support, and

Automated decision support systems.

These components work together to deliver e-banking services. Each component represents a
control point to consider.

Through a combination of internal and outsourced solutions, management has many alternatives
when determining the overall system configuration for the various components of an e-banking
system. However, for the sake of simplicity, this booklet presents only two basic variations.
First, one or more technology service providers can host the e-banking application and numerous
network components as illustrated in the following diagram. 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

9
administration of these component systems, its management and board remain responsible for
the content, performance, and security of the e-banking system.

5. The advantage of electronic banking

5.1 Ease of use

Electronic banking allows you to conveniently conduct your banking activities online. You can
view you account balances and statuses from your home computer. In addition, you don't have to
deal with lines at the bank or have conversations with bankers in front of other people.

With e-banking all you need is an account number and a password. You don't need to know how
to operate any complicated software program or banking system. You don't need any paperwork.
Just sign in from any secure computer and a good e-banking site will clearly indicate how to
access your personal banking information. To prove your identity, you may need to answer
secret questions that you have chosen when you set up your account.

5.2 Convenience
With e-banking you can manage your accounts from the privacy of your own home. You don't
need to go to the bank and stand in line. You don't have to keep deposit or withdrawal slips
handy. You can save your financial activity online, so you can print bank statements if you need
them instead of handling paper copies. All you need is an Internet connection and your online
bank will do the rest.

5.3 Speed
If you bank online, you can transfer funds, withdraw money or make payments in seconds. You
can access your accounts and handle your financial affairs quickly. All banks have different
policies and the rules governing the availability of funds can vary by financial institution, but
completing transactions online is fast and easy.

5.4 Acces
Online banks are open 24 hours a day, seven days a week. You can sign in and access your
account long after your brick and mortar bank closes. You can access your online bank virtually
any time you need to, from anywhere in the world. Since most banks offer the option to bank
online, you'll never be far away from your bank, no matter where you are.

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 5.5 Options
Some e-banking sites allow you to purchase and manage other financial instruments such as
mortgages, personal loans and lines of credit. Some offer an automatic bill-paying system so you
can pay bills using your bank account. You can even direct your bank to pay bills on specified
dates each month, so you don't have to remember when they're due. If you use this option, you
won't have to write checks or buy stamps to mail bills.

6. The disadvantages of electronic banking

Nowadays, almost every banking transaction---that once had to be done in person---can be done
over the internet. Despite the advantages of online banking, such as saving trips to a local bank
and avoiding long lines, a considerable number of people still prefer the more traditional form of
banking in person. Often, the reasons stem from disadvantages that are incurred when banking
online. Here are the disadvantages of e-banking:

6.2 Internet connection

Not everyone enjoys the luxury of having a stable and fast Internet connection at home. Aside
from having a personal computer or laptop, having stable internet access at home is a basic
prerequisite to performing electronic banking. Of course, people can always use a public
computer with internet access; however, the security of public computers is always a concern.

6.3 Computer know-how

Conducting a successful electronic banking transaction, like paying bills online, requires basic
computer skills and knowing your way around the Internet. Being computer-literate is not
common to everyone---especially seniors who might not have grown up using computers---and
this is a major disadvantage to electronic banking.

6.4 Delayed statements

When performing online banking there is not a standard at which payments made will show up
on your online bank statements; they might show up two to three days later, depending upon the
bank. When banking in person, you can generally get the exact status of your bank account.

6.5 Security concerns

One of the biggest disadvantages of doing electronic banking is the question of security. With the
prevalence of keyloggers, phishing emails, trojans and other online threats, it is natural for
people to be concerned with the security of their identity, funds and electronic banking
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transactions. Using antivirus and similar programs is not full-proof. People worry that their bank
accounts can be hacked and accessed without their knowledge or that the funds they transfer may
not reach the intended recipients. Although it is rare nowadays with enhanced security measures,
these threats still exist.

6.6 Lose of human touch

Some people still value talking and interacting with bank tellers, managers and other bank
clients. Electronic banking takes the majority of these "human interactions" away, leaving the
banking experience as a very hands-off, impersonal process.

7. Features of electronic banking

Electronic banking exists in three main forms.Online banking was introduced in the mid-90s and
changed the way of banking. From mobile banking to ATM's, banking works on a customer's
schedule. There are three main kinds of electronic banking: automated, phone and online
banking. Each is different, but ultimately works the same way.

7.1 Alerts
Mobile and online banking offer security alerts so you know what activity is occurring on your
account. Alerts are sent directly to your cell phone or email when credit or debit transactions are
completed on the account. You can also receive daily alerts of your bank account balance.

7.2 Location
Electronic banking allows you to conduct most types of banking transactions without leaving
home. Even if you are on vacation halfway across the world you can conduct banking as long as
you have a computer and internet access. ATM's allow you to deposit or withdraw money
without stepping foot in a bank. When you are on vacation or out shopping, you can access your
money at ATMs as well.

7.3 Bills
You can pay most bills online by signing
up your different billing accounts so that
they are paid from your bank account.
This link is made through online banking
where you can then set up automatic
payments that debit the money directly
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(picture 3)
from your account. Over the phone, you can also use electronic checks or a debit card to arrange
payments or pay bills.

8. Benefits of electronic banking

Electronic banking or online banking is now the most popular form of e-commerce for people
around world. Most mainstream banks and even credit unions now offer a host of products and
services over the internet. Investment by banks in secure-transaction technologies and robust IT
practices has made electronic banking more reliable and popular.

8.1 Convenience
You can shop, pay bills, buy items at auction, and transfer money from anywhere at any time.

8.2 Features
Electronic banking can be carried out at any time of the day or night as long as one has access to
a PC (or other hand-held device) and Internet connectivity.

8.3 Attractive Rates and Incentives

Banks offer attractive interest rates for CDs that are opened online. Many others also offer
incentives, giveaways and special offers to customers for opening accounts online.

8.4 Consolidated Portfolio Interface:

Most banks offer a seamless and consolidated interface to customers for managing their debt and
credit accounts, mortgages, investment portfolio and other financial assets.

8.5 Time Savings:

Time saved from traveling to brick-and-mortar bank branches for conducting banking
transactions and other key banking activities can be used productively for other pursuits.

9. E - banking technologies

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Electronic banking encompasses a broad range of technologies. Some are “front end” products
and services that consumers open for (ATM cards and computer banking),others are “back end”
technologies used by financial institutions, merchants, and other service providers (electronic
check conversion).Some are related, and some are unrelated to a bank accounts instead store
monetary value in a database or directly on a card.

9.1 Products related to bank accounts

a) Direct deposit: A form of payment by which an organization (such as an employer or

government agency) pays funds (such as pay or benefits) via an electronic transfer. The funds
are transferred directly into a consumer’s bank account.

b) ATM cards or automated teller machines: An electronic terminal provided by financial

institutions and other firms that permits consumers to withdraw cash from their bank accounts,
make deposits, check balances, and transfer funds.

c) Debit cards: A card used at an ATM or a point-of-sale (POS) terminal that enables consumer
to have funds directly debited from his r her bank account (usually a checking account). Some
financial service providers (such as check cashers and currency exchanges) may market a so-
called debit card that is not tied to a deposit account but instead functions as a stored –value card.

d) Preauthorized debits: A form of payment that allows a consumer to authorize automatic

payment of regular, recurring bill from his or her account an a specific date, and usually for a
specific amount (for example, car payments, housing payments, and budget-plan utility
bills).The funds are electronically transferred from the consumer’s account to the creditor’s
account.

e) Computer banking: Banking services that consumers can access, by using an Internet
connection to a bank’s computer center, in order to perform banking tasks, receive and pay bills,
and so forth. Many other financial services can be accessed via the Internet (for example, paying
credit car bills on a credit card issuer’s web site), but those services may not be classified as
computer banking.

9.2 Products not related to bank accounts:

a) Payroll card: A type of stored-value card issued by an employer instead of a paycheck that
enables an employee to access his or her pay at ATMs or point-of-sale terminals. The employer
adds the value of the employee’s pay to the card electronically.

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b) Smart card: A type of stored-value card in which one or more chips or microprocessors are
embedded, making the card capable of storing data, performing calculations, or performing
special-purpose processing (to validate personal identification numbers, authorize purchases).

10. Use and users of e-banking

The look in depth at who is using e-banking products and services, this analysis focuses on the
use and users of three specific technologies – debit cards, preauthorized, debits, and computer
banking. The three were chosen to represent different types of e-banking technologies at
different stages in their development and are technologies that might attract different types of
users.

Debit cards: represent the next generation of an existing and familiar technology. They operate
as an extension of the widely used ATM card, by allowing consumers to pay for goods at a point
of sale by directly debiting a designated bank account (usually a checking account).

Preauthorized debits: represent a passive technology; once consumers sign up for automatic
payment of a particular bill, they need do little more than ensure that funds are in the account by
the debit date.

Computer banking: calls for perhaps the most consumer involvement, as it requires the user to
maintain and regular interact with additional technology (a computer and an internet
connection).

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 (picture 4)

10.1 Consumer perception and the use of e-banking

Data(1999-2003) from the Survey of Consumer Finances and the Surveys of Consumers show a
consistent increase over the past eight years in the proportion of consumers using a variety of
electronic banking technologies, from such long-available products and services at ATM cards
and direct deposit to such newer technologies as debit cards and computer banking. The use of
some products, particularly debit cards, has become more democratized over time, but it is still
the case that most e-banking products tend to be used by higher income, higher asset, younger,
and better educated households.

In light of the growth in the proportion of consumers using e-banking technologies, it may not be
surprising that the annual volume of checks for the first time in 2003.However, not all banking
services may be adaptable to electronic delivery. For a variety of reasons, some related to the

16
product and others to consumer preferences, delivery channels for some products will probably
remain more traditional.

For example, although the number of online mortgage applications has risen in recent years,
consumers may prefer personal contact with financial institution staff when engaging in complex
transactions such as mortgages.

E-banking technologies are continuing to evolve, and many new products and services are on the
horizon. The Department of the Treasury, for example, which is moving toward an all-electronic
Treasury, has several new programs in place or in planning stages. For example, it provides the
U.S. Debit Card, a mechanism for delivering nonrecurring payments to individuals and enabling
federal government employees to access cash as part of their official duties. The Treasury is also
replacing coin and currency in circulation on military bases, ships, and other locations worldwide
with stored-value cards. In addition, the Treasury is considering a plan to stop issuing paper
savings bond certificates and to instead issue electronic savings bonds. Consumers would
purchase the savings bonds online instead of at financial institutions, and the bonds would be
stored electronically, as Treasury bills, notes, and bonds are currently.

E-banking technologies hold the promise of helping families manage their money, pay their bills
on time, and avoid overextending themselves with credit. To take full advantage of these
technologies, consumers need to be very of the evolving array of e-banking technologies
available to them and to understand how different technologies fit with their financial
management needs .Financial planners and financial institutions, can help this promise become a
reality.

10.1.1 Survey of Consumer Finances:

The survey of Consumer Finances (SCF) is a triennial survey of U.S. families(defined as primary
economic units, as noted above) sponsored by the Federal Reserve, in cooperation with the
Internal Revenue Service, Statistics of Income Division, and conducted by NORC, a national
organization for research at the University of Chicago.

The survey provides detailed information on U.S. families’ balance sheets, use of financial
services, demographics, and labor force participation. The great majority of interviewers were
allowed to conduct telephone interviews if that was more convenient for the respondent.
Interviewers used a program running on laptop computers to administer the survey and collect
the data. Respondents were encouraged to consult their records as necessary during the
interviews.

To gather information that is both representative of the U.S. population and reliable for those
assets concentrated in affluent households, the SCF employs a dual-frame sample design
consisting of a standard, geographically based random sample and an oversample of affluent

17
households. Weights are used to combine data from the two samples so that the data from the
sample families represent the population of all families.

10.1.2 Surveys of Consumers:

The Surveys of Consumers, initiated in the late 1940s by the Survey Research Center at the
University of Michigan, measures changes in consumer attitudes and expectations with regard to
consumer finance decisions. Each monthly survey of about 500 households includes a set of core
questions. For the October and November 1999 and June and July 2003 surveys, the Federal
Reserve Board commissioned additional questions concerning households’ use and perceptions
of electronic banking technologies. Some of these additional questions were based on questions
in the Survey of Consumer Finance to allow for comparison of responses to the two surveys.

Interviews were conduct by telephone, with telephone numbers drawn from a cluster sample of
residential numbers. The sample was chosen to be broadly representative of the four main
regions of country-Northeast, Midwest, South, and West-in proportion to their populations.
Alaska and Hawaii were not included. For each telephone number drawn, an adult in the family
was randomly selected as the respondent.

11. Risk management for electronic banking

The Committee has identified fourteen Risk Management Principles for Electronic Banking to
help banking institutions expand their existing risk oversight policies and processes to cover their
e-banking activities.

These Risk Management Principles are not put forth as absolute requirements or even "best
practice." The Committee believes that setting detailed risk management requirements in the area
of e-banking might be counter-productive, if only because these would be likely to become
rapidly outdated because of the speed of change related to technological and customer service
innovation. The Committee has therefore preferred to express supervisory expectations and
guidance in the form of Risk Management Principles in order to promote safety and soundness
for e-banking activities, while preserving the necessary flexibility in implementation that derives
in part from the speed of change in this area. Further, the Committee recognizes that each bank's
risk profile is different and requires a tailored risk mitigation approach appropriate for the scale
of the e-banking operations, the materiality of the risks present, and the willingness and ability of
the institution to manage these risks. This implies that a "one size fits all" approach to e-banking
risk management issues may not be appropriate.

For a similar reason, the Risk Management Principles issued by the Committee do not attempt to
set specific technical solutions or standards relating to e-banking. Technical solutions are to be
addressed by institutions and standard setting bodies as technology evolves. However, this

18
Report contains appendices that list some examples current and widespread risk mitigation
practices in the e-banking area that are supportive of the Risk Management Principles.

Consequently, the Risk Management Principles and sound practices identified in this Report are
expected to be used as tools by national supervisors and implemented with adaptations to reflect
specific national requirements and individual risk profiles where necessary. In some areas, the
Principles have been expressed by the Committee or by national supervisors in previous bank
supervisory guidance. However, some issues, such as the management of outsourcing
relationships, security controls and legal and reputational risk management, warrant more
detailed principles than those expressed to date due to the unique characteristics and implications
of the Internet distribution channel.

The Risk Management Principles fall into three broad, and often overlapping, categories of
issues that are grouped to provide clarity: Board and Management Oversight; Security Controls;
and Legal and Reputational Risk Management.

12. Challenges of electronic banking

Electronic banking is the wave of the future. It provides enormous benefits to consumers in terms
of the ease and cost of transactions. But it also poses new challenges for country authorities in
regulating and supervising the financial system and in designing and implementing
macroeconomic policy.

Plus, banks can provide services more efficiently and at substantially lower costs.

Electronic banking has been around for some time in the form of automatic teller machines and
telephone transactions. More recently, it has been transformed by the Internet, a new delivery
channel for banking services that benefits both customers and banks. Access is fast, convenient,
and available around the clock, whatever the customer's location.

The flip side of this technological boom is that electronic banking is not only susceptible to, but
may exacerbate, some of the same risks—particularly governance, legal, operational, and
reputational—inherent in traditional banking. In addition, it poses new challenges.

12.1 Trends in e-banking:

Internet banking is gaining ground. Banks increasingly operate websites through which
customers are able not only to inquire about account balances and interest and exchange rates but
also to conduct a range of transactions. The Scandinavian countries have the largest number of

19
Internet users, with up to one-third of bank customers in Finland and Sweden taking advantage
of e-banking.

( picture 5 )

In the United States, Internet banking is still concentrated in the largest banks. In mid-2001, 44
percent of national banks maintained transactional web sites, almost double the number in the
third quarter of 1999.

To date, most banks have combined the new electronic delivery channels with traditional brick
and mortar branches ("brick and click" banks), but a small number have emerged that offer their
products and services predominantly, or only, through electronic distribution channels. These
"virtual" or Internet-only banks do not have a branch network but might have a physical
presence.

12.2 New challenges for regulatory:

This changing financial landscape brings with it new challenges for bank management and
regulatory and supervisory authorities. Regulatory risk: Because the Internet allows services to
be provided from anywhere in the world, there is a danger that banks will try to avoid regulation
and supervision. What can regulators do? They can require even banks that provide their services
from a remote location through the Internet to be licensed. Licensing would be particularly

20
appropriate where supervision is weak and cooperation between a virtual bank and the home
supervisor is not adequate.

Legal risk: Electronic banking carries heightened legal risks for banks. Banks can potentially
expand the geographical scope of their services faster through electronic banking than through
traditional banks. In some cases, however, they might not be fully versed in a jurisdiction's local
laws and regulations before they begin to offer services there, either with a license or without a
license if one is not required. When a license is not required, a virtual bank—lacking contact
with its host country supervisor—may find it even more difficult to stay abreast of regulatory
changes. As a consequence, virtual banks could unknowingly violate customer protection laws,
including on data collection and privacy, and regulations on soliciting. In doing so, they expose
themselves to losses through lawsuits or crimes that are not prosecuted because of jurisdictional
disputes.

Money laundering is an age-old criminal activity that has been greatly facilitated by electronic
banking because of the anonymity it affords. Once a customer opens an account, it is impossible
for banks to identify whether the nominal account holder is conducting a transaction or even
where the transaction is taking place.

Operational risk: The reliance on new technology to provide services makes security and system
availability the central operational risk of electronic banking. Security threats can come from
inside or outside the system,

Banks' security practices should be regularly tested and reviewed by outside experts to analyze
network vulnerabilities and recovery preparedness. Capacity planning to address increasing
transaction volumes and new technological developments should take account of the budgetary
impact of new investments, the ability to attract staff with the necessary expertise, and potential
dependence on external service providers.

Reputational risk: Breaches of security and disruptions to the system's availability can damage a
bank's reputation. The more a bank relies on electronic delivery channels, the greater the
potential for reputational risks. If one electronic bank encounters problems that cause customers
to lose confidence in electronic delivery channels as a whole or to view bank failures as system
wide supervisory deficiencies, these problems can potentially affect other providers of electronic
banking services.

Reputational risks also stem from customer misuse of security precautions or ignorance about the
need for such precautions. Security risks can be amplified and may result in a loss of confidence
in electronic delivery channels. The solution is consumer education—a process in which
regulators and supervisors can assist.

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 12.3 Regulatory tools

There are four key tools that regulators need to focus on to address the new challenges posed by
the arrival of e-banking.

Adaptation:

In light of how rapidly technology is changing and what the changes mean for banking activities,
keeping regulations up to date has been, and continues to be, a far-reaching, time-consuming,
and complex task. In May 2001, the Bank for International Settlements issued its "Risk
Management Principles for Electronic Banking," which discusses how to extend, adapt, and
tailor the existing risk-management framework to the electronic banking setting.

Legalization:

New methods for conducting transactions, new instruments, and new service providers will
require legal definition, recognition, and permission. Existing legal definitions and permissions
—such as the legal definition of a bank and the concept of a national border—will also need to
be rethought.

Harmonization:

International harmonization of electronic banking regulation must be a top priority. This means
intensifying cross-border cooperation between supervisors and coordinating laws and regulatory
practices internationally and domestically across different regulatory agencies. The problem of
jurisdiction that arises from "borderless" transactions is, as of this writing, in limbo.

Integration:

This is the process of including information technology issues and their accompanying
operational risks in bank supervisors' safety and soundness evaluations.

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13. Transactional websites

Transactional websites provide customers with the ability to conduct transactions through the
financial institution’s website by initiating banking transactions or buying products and services.
Banking transactions can range from something as basic as a retail account balance inquiry to a
large business-to-business funds transfer. E-banking services, like those delivered through other
delivery channels, are typically classified based on the type of customer they support. The
following table lists some of the common retail and wholesale e-banking services offered by
financial institutions.

Table 1: Common E-Banking Services

Retail Services Wholesale Services

Account management Account management

Bill payment and presentment Cash management

New account opening

Small business loan applications,
Consumer wire transfers approvals, or advances

Investment/Brokerage services Commercial wire transfers

Loan application and approval Business-to-business payments

Account aggregation Employee benefits/pension

administration

Since transactional websites typically enable the electronic exchange of confidential customer
information and the transfer of funds, services provided through these websites expose a
financial institution to higher risk than basic informational websites. Wholesale e-banking
systems typically expose financial institutions to the highest risk per transaction, since
commercial transactions usually involve larger dollar amounts. In addition to the risk issues
associated with informational websites, examiners reviewing transactional e-banking services
should consider the following issues:

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 Security controls for safeguarding customer information;

Authentication processes necessary to initially verify the identity of new customers and
authenticate existing customers who access e-banking services;

Liability for unauthorized transactions;

Losses from fraud if the institution fails to verify the identity of individuals or businesses
applying for new accounts or credit on-line;

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; and

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-line services, or unauthorized access to confidential customer information
during transmission or storage.

14. Examples for electronic banking

Electronic banking encompasses a broad range of established and emerging technologies. Some
are “front end” products and services that consumers opt for, such as ATM cards and computer
banking; others are “back end” technologies used by financial institutions, merchants, and other
service providers to process transactions, such as electronic check conversion.

Some are tied to a consumer bank account; others are unrelated to a bank account but instead
store monetary value in database or directly on a card.

For many people today, electronic banking provides the ultimate in convenience and control.
Whether using your home computer, a debit card or the telephone, managing your finances has
never been easier. Now, having control over your finances is as simple as clicking a mouse.

We found some information about banks around the world that uses electronic banking. Some of
these banks are “Raiffaisen bank”, “The bank of Georgia”, “The international bank of
Azerbaijan”, “Effinity bank, N.A.”, and a lot of others banks.

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“The Raiffaisen Bank”:
The Raiffaisen bank offer to a clients fast, efficient and reliable system of e-banking for
accessing to their accounts with their bank through the Internet as well as all services available.
This bank enables to its clients instantly conduct and review/financial transactions as well as to
check their statements in the modern way, 24 hours a day, 7 days a week. The system has been
designed in such a manner that they may choose the most convenient channel (web, off-line and
SMS) to obtain the desired information. The Raiffaisen bank offers its clients to conduct
payment transactions (local and in other main currencies), based on state-of-the-art technological
solutions.

“The Effinity Bank”, N.A.

This Internet-primary bank will deliver products and services to its retail customers through a
variety of electronic delivery channels including the Internet, automated teller machines and/or
remote service units. The bank may solicit "affinity" relationships with other groups and
commercial entities to establish a private-label clientele. The bank will offer its products and
services to customers or members of the affinity group under a private label. The bank will
establish individual divisions to provide products and services specific to the needs expressed by
affinity groups.

“The CIBC National Bank”

Canadian Imperial Bank of Commerce, Toronto, Ontario, Canada (CIBC), received approval to
establish a new full-service national bank in Maitland, Florida. The bank will not have any
traditional banking offices but will deliver products and services through a variety of electronic
delivery channels. Customers will conduct transactions through ATMs, Internet via a
transactional Web site, and via a toll free customer service line. These delivery channels are
available at kiosks located on the premises of retail stores for which the bank has a joint
marketing arrangement. The bank will operate under a brand name associated with the retail
store partner.

“The Compu Bank”

Approved in August 20, 1997, CompuBank, NA, Houston, TX, is the first national bank charter
approved to deliver products and services to customers primarily through electronic means and
designated a limited-purpose bank. It will not have any traditional banking offices. In addition to
using the mail, customers will conduct their banking transactions by personal computer or by
telephoning the automated voice response system or customer service line. It will focus
exclusively on checking and savings accounts and electronic bill payment services.

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“The International Bank of Azerbaijan (IBA) ”

(IBA) has signed an agreement with Connect telecommunications company to make payments
for the services via cards issued by the bank, IBA has said. The IBA spokesman Rauf Agayev
said that the bank continues to develop services and the infrastructure of electronic banking.

One of the most popular electronic banking services are payments for utilities and
telecommunication services, he said. Connect joined the number of companies whose customers
can carry out such payments, a few days ago. More than 10 companies, including Azercell,
Bakcell, Narmobile, Bakielektrikshebeke, Azeronline, Elcell, and International Insurance
Company use electronic banking services.

Agayev said that there is great demand for e-banking services. Roughly 243,800 transactions
amounting to 4.88 million manat were conducted this way in 2007. The number of all types of
transactions amounted to 366,300 (an increase of 33.4 percent) and their total sum to 7.97
million manat (an increase of 38.8 percent) in 2008. Positive dynamics were preserved in 2009
with roughly 498,700 transactions amounting to 13.6 million manat. The number of operations
exceeded 264,000 and the total sum was 8.3 million manat in the first and second quarters of
2010.

In the continue of the examples of the banks that uses electronic banking we represent to You the
top 10 banks in electronic banking.

Table 2 (top 10 e-banking):

Rank/site Score Transfer Receive Low- Receive Stop

funds to bills balance Web-only payment
other online e-mail statements on a
banks alert check
1. Wellsfargo.com 80 x x x x
2. Citibank.com 79 x x x x
3.Bankofamerica.co 77 x x x x
m
4. 74 x x x
Bankus.etrade.com
5. Huntington.com 69 x x
6. Firstnational.com 68 x x
7.Hsbc.com 68 x x x
8.Usbank.com 68 x x
9. Chase.com 67 x x
10. Wachovia.com 67 x x

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Watchfire GómezPro, an Internet research firm, ranked the top 10 online banks based on the
features that consumers find most important. Competition is stiff, and that's caused a rough
parity in services. All of the banks provide the key services that customers want most, including
guarantees against computer fraud and late bill payments, according to Watchfire. Among the
top five, in particular, the differences are minor.

Wells Fargo is ranked first, in part because of its Quicken-style tools for viewing your spending
habits. Then again, second-place Citibank is better than Wells or third-place Bank of America at
"money movement" -- the ability to funnel funds to another account, user or bank. Fourth-place
E*Trade Bank provides excellent alerts (such as letting you know when your balance is low), but
it doesn't allow you to stop payments on checks. Reverse that for fifth-place Huntington: no low-
balance alerts, but it will let you stop payments. E*Trade also does an excellent job integrating
its online banking and brokerage services.( Information as of July 2005. Source: Watchfire
GómezPro )

15. E-banking in payment system of Bosnia and Herzegovina

The Internet was introduced in BH in 1995 through the university line UTIC (University Tele-
Information Centre). Several months later, BH PTT

 offered the service for its users. All IPS (inches per second) The measurement of the speed of
tape passing by a read/write head or paper passing through a pen plotter.

(IPS) (intrusion preventions  are in the state-owned PTT monopoly. Today, in BH 41 licensed
Internet services providers exist (BH's Communication Regulatory Agency, 2005). The
development of e-banking in banks of BH is linked on introducing to credit and debit cards in
BH. 33 banks were operated in BH banking system on the end of 2004; from that number 32
commercial banks are included in payment system. Five years ago, the first ATM has been
installed in payment system of BH. Using of e-banking in payment system of BH started with
opening national banking system to foreign banks through process of privatization.

Using Internet made payment simple. Twenty one banks in BH operate with credit cards.
Between them 14 made card business operation with international cards. In comparison to 2003 a
same number of BH's banks works with international cards, but 4 more included in theirs
business domestic card.

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Some of the banks in Bosnia and Herzegovina which uses electronic banking are: “ The Bor
bank”, “NLB Tuzlans bank”, “The Postbank”, “The Procredit bank”, “ The Sparkasse bank”,
“The Volksvagen bank”, and the others.

16. Mani forward-Thinking Companies Offer Online Bill Paying

Students at hundreds of educational institutions across North America are already using online
bill paying to receive and pay their tuition bills—avoiding the hassle of receiving paper bills and
paying by mail, while also saving their schools hundreds of thousands of dollars a year in paper,
postage and administrative costs.

Forward-thinking companies already offering their customers similar online bill paying options
include Bank of America, BellSouth, Citibank, Qwest, South Carolina Electric & Gas, Southern
California Edison, T-Mobile, Verizon Wireless, Wells Fargo and Washington Mutual, among
many others.

BellSouth offers “e-bills” that you can print out any time but don’t have to. With the click of a
mouse you can view your bill, access details and billing history, and make secure payments. You
can pre-schedule so that each monthly bill gets paid on time, or set it up so that funds are
remitted only when you authorize it. Southern California Edison’s Online Billing and Payment
service involves the same routine, with no paper exchange needed between company and
consumer, and no need to print out your bills. Both companies send e-mail notices to let you
know each time a new bill has been tendered.

16.1 Why Is Electronic Banking More Convenient Than Checks?

The convenience of electronic banking has slowly phased many people off of writing traditional
checks. Although some people refuse to rely on electronic banking, there are a variety of benefits
to using electronic banking over traditional pen and paper.

Types:
Electronic banking includes ATMs, phone service and online banking. It includes credit, debit
and electronic checks.

Benefits:
Electronic banking allows you to bank on your time. This means you do not have to rush to the
bank to cash a check while the bank is open. When you use electronic banking, the money is
taken directly from your account.

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Use:
Debit cards can be used in lieu of a check with a PIN number. These cards can also be used as
credit with a signature. Cards can pay for services and goods both online and in person.

Time Frame:
Electronic banking is more convenient to business and customers. The money is automatically
transferred, which is much quicker than cashing a check.

Misconceptions:
Some people feel electronic banking is not safe. There are scams and hackers that cause
problems with online banking, but most ATM and online sites are secure. Never give your
information to anyone over the phone or email--a bank will never ask this of you.

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