E-Banking on the Banking Industry Term Paper

Excerpt from Term Paper :

The growth of Internet has led to a desire to understand the characteristics of the users, their reasons for using the service and what the users do when connected. A huge and expanding 'Internet watching' industry has progressed to provide such data. Some statistics can be collected directly from the Internet about traffic volumes and the geographical segmentation of its users and these provide a reasonably accurate picture of what is happening. The number of host computers which are linked to the Internet continues to expand every year by over 60 per cent and their geographic distribution is concentrated within a very few countries. U.S. dominate the amount of computing power present on the Internet, and accounts for over 60 per cent of all of the host machines. There are some differences in the ways that different countries have responded to this technology. Japan and France have a relatively lower use while Scandinavia and particularly Finland has a very high numbers of computers connected to the Internet.

To a certain extent, the development of Internet banking is affected by the development and usage of Internet within the country. Let us now look at Internet Banking in critical terms. The term Internet banking refers to banking services when the Internet is used as a remote delivery channel for banking services. Services are inclusive of the regular services that were being provided by banks earlier like opening an account or transferring funds to different accounts, and new banking services, which are called electronic online payments. These permit customers to receive and pay bills on a bank's web site. In some cases these were earlier permitted at the branch of the bank. A situation has come where more and more banks are changing their businesses with the use of Internet technology to develop or increase links with their customers. The extent to which the Internet is used in a bank is controlled only by the relative maturity of the bank in relation to Internet technology.

Banks generally offer Internet banking in two significant manners. An existing bank having physical offices, which is now termed a brick-and-mortar bank, can create a web site and then provide Internet banking to its customers as an add on to the traditional channels that it had earlier. An alternative bank is either a virtual, branchless or Internet services only bank. The computer server or bank database that lies within the heart of the virtual bank is generally housed in an office that serves as the legal address of such a bank. These virtual banks interact with customers for making deposits and withdrawals through automated teller machines -- ATMs or via other channels which are owned by other institutions. Benefits of Internet banking are the change linked to technological and customer service innovation, the global character of the Internet, integrating of Internet banking applications along with computer systems and the enhancing dependence of banks on other parties to provide the required information technology.

Thus there are three levels of service provided by an Internet-based bank. The lowest level is called Informational and this is the basic level of Internet banking. Here the bank has required information about the bank's services and products on a stand-alone server. Risks that are associated with these types of operations are quiet low, as informational systems generally have no road between the server which deals with customers and the bank's internal network. This level of Internet banking can be directly provided by the bank or outsourced. Though the risk to the bank is relatively low, the data present on the server or within the web site may be altered. There is requirement of controls to prevent unauthorized alterations of the data on the bank's server or web site.

The second type of service is called Communicative and in this type of Internet banking system there are some interaction between the bank's computer systems and the customer's. The interactions may be limited to only handling of electronic mail, account inquiries, loan applications or regular file updates in the form of name and address changes. Here the servers have a direct link to the bank's internal networks, and the operational risk is greater with this configuration than with earlier mentioned informational systems. This means that there must be controls to avoid, assess and alert management when any unauthorized attempt to access the bank's internal networks and computer systems take place. Virus detection and stoppage are also significant in this operational system.

The highest level of service is called Transactional. In this level of service customers are allowed to directly execute transactions which have financial results. There are two levels of transactional Internet banking. The basic transactional site only permits a transfer of funds between the accounts of the customer and the bank. The advanced transactional site provides methods for making payments directly to third parties outside of the bank. This takes the form of bill payments through a bank official check or electronic funds transfer or automated clearing house entries. Many banks are also permitting payments from consumer to consumer using similar payment methods. It is clear that the changes in Internet banking has progressed from one step to another, and banks are taking additional risks to satisfy their customers.

Present status and profile of e-banking offered by banks

The banking industry promotes an interesting and significant study of changes in technology and regulation impacting competitive structure, business strategy and evolution of social support systems. When one takes a narrow view of traditional bank products and performance measures, and compares it to the increased pace of technological change coming through Internet banking would lead one to decide that traditional banking is now a declining industry. In fact, according to some experts, the commercial bank which is an organization for conducting the activities of accepting deposits payable on demand and originating loans is no longer accepted by users of the service. This view does not take into account many of the true innovations that have taken place in the industry of lately. These activities are those targeted at off-balance-sheet and information-based activities.

A more balanced judgment would say that banks are evolving in ways that are enabling them to provide the same basic functions as before, but in new, more effective methods. This can be said in simpler language as that most banks earlier thought of themselves as promoting a set of particular, unrelated products to various sets of customers. Now, due to the technological changes and competitive pressures, many banks are following techniques that aim to promote their capability to perform several functions. Some of these involve financial planning for retail clients and raising capital for middle-market companies, and these were not part of old product lines. As a result of changes in outlook, many banks are promoting a more diversified level of products and services than ever before.

Much of this has been possible by the latest advances being made in technology, and these are what is called the electronic banking revolution and speeded by the rapid development and application of the Internet. Thus the changes are like the changes in all other aspects of the software industry - fast to a point where one does not know what will happen next. The most important of the service changes that have taken place in United States, during the current year also have been discussed and one should remember that this is not the last change.

There is quite a large difference among American banks which offer Internet banking. All the 120 largest American banks have collectively 75% of the country's banking assets and they provide services to their customers who will enable them to check account balances, to transfer money among accounts and also to make bill payments online. Regarding the concerned services, in the U.S., one-third of Internet banks creates and maintains their own websites which offer interactive banking services. The other two-thirds of Internet banks have outsourced their requirements, and these needs vary from webpage design to customer services and data management. The cost of bringing in online banking is at an average of $50,000, and the annual average maintenance cost of over $22,000. Another estimate is that the initial cost of implementing an Internet banking system for community banks varies from $100,000 to $200,000, and has a monthly upkeep cost of about $4 per account.

This means a yearly maintenance cost of the operations of the website of $2.5 to $5 million for community banks with 50,000 to 100,000 accounts. This helps the banks to link their customers to the bank's partners for satisfying the requirements of the customers in brokerage, mortgage, real estate and insurance. The banks can join local securities, mortgage and insurance companies to provide portals on their web pages. The securities, mortgage and insurance companies also may reciprocate by means of portals on their own web pages for the banks. This may help small and medium-size community banks to…

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