Internet Risk Management in the Banking Sector

Executive Summary

Technological advancement in the banking industry, like in other economic sectors, has continued to increase. Banking organizations have allowed a wide array of products and services to become accessible and offered to customers via an electronic channel commonly known as e-banking or internet banking. According to Uppal, internet banking can be defined as a system that allows bank customers to access their accounts and available bank products and services information through a personal computer or other intelligent devices (39). E-banking offers numerous benefits to banks, businesses, and customers.

For instance, customers can access any service they want without visiting a banks branch office. The technology is also convenient, easy-to-operate, time-efficient, and always available (it is not time restrictive). For banks, it has contributed to increased efficiency and competitiveness and reduced customer service time. The creation of new services for customers and small businesses, such as operational accounting, taxation, online accounting, and profit forecasting, are among the reasons for banks involvement in internet banking. Even so, while it offers great benefits, internet banking carries with it technology risks.

Nzevela describes risks as events, expected or unexpected, which adversely affect a banks capital or income (24). Most banks are not new to internet risk management. One analysis found that 22% of banks worldwide have invested over 25% of their yearly budget in digital risk management. They are aware of the different types of risks in e-banking. Therefore, they must employ a regulatory framework that will allow them to manage the internet banking risk. They should have internet banking technology risk management guidelines and know the strategies to follow in managing the risks.

Types of Internet Banking

Three basic kinds of internet banking exist: communicative, transactional, and informational internet banking (Muneesh et al. 84). Informational is the lowest level or most basic form and involves the bank having marketing data about its services on a stand-alone server. Banks providing only this service may experience relatively low risk but may suffer reputational harm if the information on the website is mutilated. Communicative or interactive internet banking allows some degree of interaction between a banks system and the customers.

The interaction of communicative internet financial services can be limited to account opening or inquiry, electronic mail, loan applications, or updates (Nasim n.p). The risk level ranges from low to moderate based on whether the website links directly to the banks internal network. Finally, transactional internet banking is the top-most level of e-banking, and it allows customers to execute transactions such as accounts access, bills payment, and funds transfer. It poses the highest risk; thus, banks must impose the most stringent measures to curb them.

Categories of Internet Banking Risks

Digitization of banking has several risks. Internet banking risks can be categorized into; - operational/transactional, credit, interest rate, liquidity, foreign exchange, compliance, strategic, reputation, and security risk (Solanki 166). All these risks can occur because of some flaws in the design, unauthorized system access, and insufficient technology.

Figure 1: How Digital Transformation Exposes Any Organization to Risks

Operational risk

Transactional or Operational risk is the most common and involves incorrect transaction processing, unauthorized access to the banks system, and compromises in data privacy and integrity. Also, human causes such as negligence, frauds, hackers, and the inability to deliver products or services and retain a competitive position can be a source of this risk (Virlanuta et al. 3). It is clear from each product and service and may exist with internet banking products, especially if they are not efficiently planned, implemented, and monitored.

Reputation risk

It is another risk impacting a banks capital and earnings and arises from negative public opinion (Carol n.p). It affects a banks ability to form new relationships or continue servicing existing ones. The risk may expose the financial institution to litigation, reduction in customer base, and financial loss. The institution needs to exercise an abundance of caution in handling the customers and community. The reputation can suffer if it does not deliver on marketing claims or offer accurate, timely services. It can also happen if it fails to adequately meet customer credit requirements, provide unreliable delivery systems, or violate customer privacy.

Strategic risk

This risk results from inefficient business decisions, inappropriate implementation of the decisions, or lack of strategic goals and business strategies and resources to achieve them (Dmitri 101). The resources required to carry out the goals can be tangible and intangible, and they include; - operating systems, communication channels, delivery networks, and managerial capabilities.

Security risk

The security and confidentiality of customer transactions are very critical. But, since all information is online, there is always a probability that someone might access the information an misuse it. The security risk also arises from hacking threats.

Compliance/legal risk

This is the risk that arises from violations of or non-compliance with laws, regulations, and stipulated practices or ethical standards (Ganesh 48). It can also result from situations where laws or regulations governing some banks products or services may be vague. Internet banking customers will keep using other service delivery channels; so, banks will have to disclose on the internet banking channels like websites and synchronize them with such channels.

Foreign exchange risk

It occurs when a foreign currency dominates a...…proper boundaries and restrictions on internal and external user activities, and data integrity of records, transactions, and information. There should also be explicit audit trails for all e-banking transactions and measures to preserve the confidentiality of key e-banking information.

Legal and Reputational Risk Management

Internet banking services must be provided regularly and timely according to high customer expectations to protect banks against legal and reputation risk (Derek et al. n.p). An institution must deploy e-banking services to all end-users and maintain such availability in all circumstances. Banks must have effective capacity, business continuity, and contingency planning and develop appropriate incident response plans that control reputation risk and limit liability associated with disruptions in their internet banking services.

Figure 3: How Bank Reputations Fell in 2019

Customer Education

Banks need to also educate their customers on the security and dependability of e-banking and online transactions (Hema & Rahmath 1). Even if the management applies all the risk management principles, they might not eliminate all the risks. When banks introduce new operating features, especially those concerned with security, they should give enough instructions and information so that customers can properly use them. For instance, regarding PINs, banks can provide customers with advice on the minimum number of digits that a PIN should have, the common combinations to be avoided when setting up a PIN, and not using the same one for various applications or websites. Further, banks can encourage customers to adopt the following:

Regularly updating installed anti-virus and firewall software in their personal computers, especially when linked through broadband connections or modems.

Regularly backing up crucial data.

Logging off any online session or switching off their computer when not in use

Being careful not to install software or any program from an unknown source and not open e-mail attachments from unknown sources

Not using online banking or making transactions when using the public internet.

Being discreet not to disclose personal, financial, or credit card information to strangers or suspect websites

Conclusion

The banking sector is the lifeblood of many industries and is necessary for their survival. A performs a crucial function in accelerating the economic growth rate in each economy. And, like other sectors, technology is an emerging trend in the banking industry, and new issues have come up and will still crop up (John et al. n.p). Internet banking is one major boost to the sector, but it also has its drawbacks and risks. Banks need to come up with strategies to mitigate the risks and continue offering the best customer service. There will be new risks, but when banks are prepared to manage them, they…