Internet Risk Management in the Banking Sector

Introduction to Internet Banking and Its Risks

Technological advancement in the banking industry, as in other economic sectors, has continued to accelerate. Banking organizations have made a wide array of products and services accessible 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 bank's 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 significant technology risks.

Nzevela describes risks as events, expected or unexpected, that adversely affect a bank's 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 and must employ a regulatory framework that allows them to manage those risks effectively. 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 banking is the lowest level — the 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 altered or corrupted. Communicative, or interactive, internet banking allows some degree of interaction between a bank's system and its customers.

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

Categories of Internet Banking Risks

The digitization of banking carries several risks. Internet banking risks can be categorized as operational/transactional, credit, interest rate, liquidity, foreign exchange, compliance, strategic, reputational, and security risk (Solanki 166). All these risks can arise from flaws in system design, unauthorized system access, and insufficient technology controls.

Transactional or operational risk is the most common and involves incorrect transaction processing, unauthorized access to the bank's system, and compromises in data privacy and integrity. Human causes such as negligence, fraud, hacking, and the inability to deliver products or services and retain a competitive position can also be sources of this risk (Virlanuta et al. 3). It is evident across each product and service and may arise with internet banking products, especially those that are not efficiently planned, implemented, and monitored.

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

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

The security and confidentiality of customer transactions are critically important. Because all information is online, there is always a probability that someone might access it and misuse it. Security risk also arises from hacking threats, which continue to evolve as technology advances.

This is the risk arising 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 bank products or services are vague or ambiguous. Internet banking customers will continue using other service delivery channels, so banks must disclose information on internet banking channels such as websites and synchronize them with those other channels.

Foreign exchange risk occurs when a foreign currency dominates a loan or a portfolio of loans. Sometimes banks will enter into multi-currency credit commitments that allow borrowers to choose the currency they prefer to use. They may be exposed to foreign exchange risk if they allow deposits or account creation in foreign currencies through internet banking.

Internet banking can accelerate deposit liquidity for customers who maintain accounts fully on a rate or terms basis. Liquidity risk arises when banks cannot meet their due obligations without incurring undesirable losses or managing unplanned changes in funding sources. Enhanced liquidity monitoring and changes in deposit tracking may be necessary depending on the nature and volume of internet account activities.

With internet banking, banks have the opportunity to expand their geographical reach, meaning customers can access a particular institution from anywhere in the world (Mircea n.p.). Dealing with such customers online without any personal contact can be challenging with respect to credential verification — a significant element in sound credit decision-making. Unless properly managed, internet banking could therefore lead to an increase in out-of-area credit exposure.

Conclusion

The banking sector is the lifeblood of many industries and is necessary for their survival. It performs a crucial function in accelerating the economic growth rate in each economy. Like other sectors, technology is an emerging trend in the banking industry, and new issues have arisen and will continue to do so (John et al. n.p.). Internet banking is a major boost to the sector, but it also has its drawbacks and risks. Banks need to develop strategies to mitigate those risks and continue offering the best possible customer service. New risks will always emerge, but when banks are prepared to manage them, they will be able to enjoy the benefits of e-banking more fully.

Works Cited

Alhawari, Samer, et al. "Knowledge-based risk management framework for information technology project." International Journal of Information Management 32.1 (2012): 50–65.

Atkins, Derek, et al. Reputational Risk: A Question of Trust. Global Professional Publishing, 2006.

Bodla, B. S., and Richa Verma. "Credit risk management framework at banks in India." The IUP Journal of Bank Management 8.1 (2009): 47–72.

Carlson, John, et al. "Internet banking: market developments and regulatory issues." Manuscript, the Society of Government Economists, Washington DC (2001).

Dorfman, Mark S. Introduction to Risk Management and Insurance. 9th ed. Prentice-Hall, 1998.

Florina, Virlanuta, Moga Liliana, and Ioan Viorica. "Risk management of e-banking activities." Annals of the University of Oradea, Economic Science Series 17.3 (2008).

Georgescu, Mircea. "Some issues about risk management for e-banking, accepted paper series Social Science Research Network." (2006).

Hosein, Nasim Z. "Internet banking: Understanding consumer adoption rates among community banks." Shantou University, Shantou, China (2010).

Kumar, Muneesh, Mamta Sareen, and Eric Barquissau. "Relationship between types of trust and level of adoption of internet banking." Problems and Perspectives in Management 10.1 (2012): 82–92.

Nzevela, Anne K. The Effect of Internet Banking Risk Management Strategies on Financial Performance of Commercial Banks in Kenya. Diss. University of Nairobi, 2015.

Ramakrishnan, Ganesh. "Risk management for internet banking." Information Systems Control Journal 6 (2001): 48–51.

Safeena, Rahmath, and Hema Date. "Customer perspectives on e-business value: a case study on internet banking." Journal of Internet Banking and Commerce 15.1 (2010): 1.

Sergeant, Carol. "E-Banking: Risks and Responses." U.K. Financial Services Authority, 2000.

Sokolov, Dmitri. "E-banking: risk management practices of the Estonian banks." Institute of Economics at Tallinn University of Technology 101 (2007).

Solanki, Virender Singh. "Risks in e-banking and their management." International Journal of Marketing, Financial Services & Management Research 1.9 (2012): 164–178.

Tarantino, Anthony. Essentials of Risk Management in Finance. Vol. 53. John Wiley & Sons, 2010.

Uppal, R. K. "Strategies to mitigate risk in internet banking." International Journal of Management (2011).

Zarei, Shapoor. "Risk management of internet banking." International Conference on Artificial Intelligence, Knowledge Engineering, and Data Bases. Cambridge, UK, 2011.