This article deals with the practical use of the Internet in the financial system: Internet Banking, as a new form of communication between the bank and its clients, where anyone with a computer in front has a virtual branch of their bank in the moment you need it.
Although the number of users using online banking services has been growing, it is still minimal compared to the population, and despite the existence of a wide range of products and services, users prefer to use only the simplest. The cases of Mexico and Peru are considered as examples.
On the other hand, reference is made to the significant investment in technologies made by banks to improve their processes and services, the results of which cannot be seen in the short term. Likewise, the issue of the risks of using this service is touched upon, and finally the security measures that are being applied, in order to reduce customer distrust and encourage their migration from traditional banking to electronic banking via the Internet.
Key Words: Internet Banking, Online Banking, Electronic Media, Current Situation, Projections, Risks, Security Controls.
- Introduction
In a globalized world where the Internet has transformed the way of doing business, the financial system could not be left behind. New information technologies are incorporated in banking services, which are altering the traditional definitions of product, market and customer, and which have changed global banking, developing Internet banking, as a means of communication between banks and their customers. They are natural or legal persons, to carry out online transactions at a lower time and cost for their users, optimizing their resources better. Internet banking has significantly reduced barriers to entry, speeding up bank disintermediation. Actually,Studies show that the sector that is using the information technologies the most in the world is the financial sector.
Initially, when banks opened their web pages, in order to align themselves with the new technologies that had already been accepted by their clients through e-commerce, they were not convinced of the profitability or potential of this business. Thus, the first pages had a complicated design, which prevented quick navigation and only repeated the same advertising messages from the branches. Subsequently, the banks made large investments in technologies and marketing, which allow them today to offer a high range of free online services, from inquiries of savings account balances, transfers between accounts, payment of services such as electricity, water, telephone, cable, investments in mutual funds, payment of taxes, information on products and services for personal and business banking, among others,which can be accessed from the comfort of home, business or anywhere. Furthermore, banks have already developed sophisticated structures that guarantee the privacy of operations and offer maximum security in identifying their clients through Internet access.
On the other hand, although at the beginning of Internet banking, customers did not have confidence in this new medium; the ease of use, the speed of the online service and the reduction in costs of not having to go to the bank offices or make long queues, are its most significant advantages, and the factors that explain its significant growth.
Banks are making efforts to encourage the migration of their current customers to electronic media, as they are cheaper than the branch; as well as to attract new virtual customers to Internet banking. Although the statistics show that the number of clients that carry out operations through the Internet does not stop growing; Online banking does not have short-term returns, but rather long-term returns, since it is a new product in maturity, and it is necessary to establish a culture of use of this technology, so it is not possible to know how long it will take to investment recovery (high start-up and advertising costs).
This paper aims to analyze the current situation, projections, risks and security measures of Internet banking services, referring to the Peruvian and Mexican case.
- Current situation
For several years, banks began to offer their clients the possibility of making transactions through electronic means, and have been promoting the migration of their clients to these means, because they are cheaper than the branch and improve efficiency.. For example, banks in Peru charge a commission to pay for services (telephone, cable, water, electricity) in their offices, while if payments are made through ATMs or the Internet, they do not charge any commission. However, one question remains in the minds of consumers, if the service is the same as traditional banking, why does it cost less or is it simply free? Some people consider that it is an uncreative solution, adopting this policy for payments via the Internet,in order to publicize the medium and attract new customers.
On the other hand, it reduces clients' costs, since they do not spend on transportation to go to the bank's offices, they save time, they have better availability of their schedule and they reduce the risk of robberies, as they do not have to transport large amounts of money.
However, the transition from traditional banking to Internet banking is slow, due in part to customer resistance to using the Internet to conduct banking. Although the Association of Bankers of Mexico (ABM) affirms that the number of Internet banking users grew from 700,000 in 2000 to 2.4 million in 2001 and it is expected that by 2005 it will reach 4.5 million, which shows a greater consumer confidence in the security of this type of banking services, the number of users is still minimal, as it corresponds to less than 3% of the Mexican population.
A study carried out by the Consultant Select indicates that the geographic regions of Mexico, where the largest number of users of Internet Banking services are found, are Central, Pacific and Valley, as can be seen in figure 1.
Figure 1
Internet banking users by geographical region
On the other hand, it is appreciated that the main services used by users are the simplest. According to the ABM, of the 280 million banking operations carried out on the Internet in 2001, the first place corresponded to the consultation of balances (78% of the total transactions via the Internet) because it implies the minimum risk from the point of view of the user. Second was the payment of services (10%) and finally other transactions (12%) such as transfers between accounts, payment of credit cards and taxes, since they are repetitive financial transactions and of little complexity. In this regard, we must bear in mind that mistrust in users prevents the wide variety of services offered by Internet banking from being used, as well as ignorance of their characteristics,and not considering themselves among advanced users in the use of the Internet. Accordingly, banks should strive to build sufficient confidence in the management of these new systems to increase their use and achieve greater customer loyalty. This does not mean that branches should disappear, but rather that they should focus more on services such as credit granting.
- Projections
Considering that Internet banking is in a maturing process, you cannot ask for profitability in the short term, but rather in a realistic time scenario such as the medium or long term, which is explained by the following factors:
- The potential market is unclear. Although the use of the Internet has seen significant growth among consumers, thanks to the increase in the use of personal computers and the lowering of connection costs, it cannot be considered as a synonym for a greater number of Internet banking users.. A Gallup / American Banker survey in the US found that 63% of families have personal computers, but only 12% use them for banking transactions. Likewise, it is not possible to identify how many of the Internet banking users have replaced traditional banking, generating a substitution effect but not a net increase in consumers. There is no differentiation of the product and / or service by brand.The new information technologies grant enormous power to the consumer since the services offered on the Internet can be easily compared via prices, as well as financial services via fees, which reduces the impact of brands as a differentiating factor. Significant sunk costs. Although Internet banking has low operating costs compared to traditional banking, it also represents significant sunk costs due to high start-up and marketing costs, as well as a high acquisition rate. Rapid change in technology affects maintaining a competitive advantage. Since the change and diffusion of new ideas is much faster on the Internet than on traditional channels, new products are quickly replicated,which affects maintaining differentiated competitive advantages over time. The determination of profitability is not clear. This is because the transactions are not carried out completely through the Internet. At certain times executives can intervene by phone or you will have to go to a branch, so income must be shared with other departments such as telephone banking or even with the traditional branch.
According to the aforementioned, it is important that realistic time horizons are given to pretend to obtain benefits from Internet banking. A small bank could perhaps stay with traditional banking, but a large bank with globalization aspirations must offer online services, in order to maintain its position in the market, and be competitive, despite the fact that the level of profitability is not clear. of Internet banking. Otherwise, you risk losing significant customer volumes, with your more aggressive rivals.
Regarding the experience in Mexico, we can mention that the offering of Internet banking services began in 1997 with Vital, followed in 1998 by Banamex and Bancomer, and that the number of operations carried out between 2001 and 2002 in the portals of Banking Internet tripled, going from just under 11 million to just over 20 million in 2002. While in Peru it started in 2000, with the opening of the viaBCP portal of Banco de Crédito del Perú, Peru's main bank, which offers a wide range of banking services, which have been expanding in recent years. It should be noted that since the launch of the portal in May 2000, the number of operations carried out over the Internet has quadrupled, reaching 9% of total transactions of 14.5 million monthly on average in 2002.
Considering the growth of Internet banking in Mexico and Peru, it can be inferred that its growth projections are favorable, as it should be in other parts of the world, for which the following aspects should be taken into account:
- Orientation towards innovation. Innovation is very important in this type of services, since, as noted above, when services are found on the Internet, they can be easily copied by their competitors, so investment in information technologies is crucial to differentiate their products and / or services. It should be added that being on the Internet becomes a competitive advantage in itself, and that banks should not only focus on attracting new customers, but also on retaining them. Banks must know how to correctly segment their target markets. Banks must offer attractive rates online. In turn, if they wish to finance the costs of traditional branches, they cannot offer the same rates to these customers as those granted through online channels.This does not necessarily mean prohibiting access to either channel, but rather offering correct incentive structures through adequate pricing. The use of Internet banking has limitations that may affect its possibility of overcrowding, such as its inability to take deposits and provide cash at physical distribution points, although one possibility is to use it as a complement to ATM networks and rechargeable smart cards through the computer. Many users do not like to fill out the forms for the use of Internet banking, so Some banks have been using telephone banking executives to help users complete the process. Alliances are a key element for the success of Internet banking,Any time establishing an Internet point of sale can be expensive and the returns on investment unclear at first. For example, banks of various sizes have established associations to install themselves on the network.
- Risks of Internet banking.
The incorporation of new technologies has meant great transformations for financial and banking activity, which highly benefit customers, but which mean changes for banks. Internet banking does not create new risks, but rather emphasizes those that already exist in a bank. It should be noted that there are different types of risks in addition to information security that must be taken into account by banks, but which in most cases are not highly considered.
The risks to which financial institutions are exposed are classified into three profiles depending on the type of Internet banking services they offer:
- Low Risk - Informative: Corresponds to financial institutions that offer information about the bank's products and services (“brochureware”). Moderate Risk - Communicative: Refers to financial institutions that offer information related to savings accounts, and update of data such as address, telephone, among others. As in this case the user is entering the main systems of the bank, the risk is material. Higher Risk - Transactional: Corresponds to financial institutions that allow their clients to carry out financial transactions for which they involve a higher risk.
The main risks to which financial institutions are exposed for offering Internet banking services include the following:
- Strategic Risk: It originates from adverse business decisions or inadequate implementation of business decisions when the technical and strategic aspects of Internet banking are not fully understood, and due to pressure from the competition, they can introduce these services without prior cost-benefit analysis.; Furthermore, the company structure may not be prepared to provide this type of services. Transaction Risk: It arises from fraud, error, negligence and inability to maintain expected levels of service. There may be a high level of transactional risk with Internet banking products due to the need for sophisticated internal controls and their constant use,since Internet banking platforms are mostly based on new platforms that use complex interfaces to link with previous systems, which increases the risk of errors in transactions. Likewise, the integrity of the data and the non-repudiation of transactions must be ensured. Compliance Risk: This is due to violations of laws, regulations and ethical standards; and it could affect reputation, real monetary losses and reduced business opportunities. Banks need to carefully understand and interpret the existing laws in their countries that apply to Internet banking and ensure consistency with traditional branch banking. About,Clients are highly concerned about the privacy of their data and banks need to be viewed as reliable custodians of such data. Reputational Risk: Arises from negative public opinion. A bank's reputation can be damaged by Internet banking services that do not live up to customer expectations, which will generate distrust in the bank. For example: limited availability or problem software. It should be noted that clients have higher expectations regarding the performance of the Internet channel.Information Security Risk: It originates from weak information security processes, which expose the institution to malicious internal attacks or hackers, viruses, information theft, among others.The speed of change of technology and the fact that the Internet channel is universally accessible makes this risk quite critical. Credit Risk: As Internet banking allows customers to apply from anywhere in the world, it is difficult to verify the identity of the client when offering instant credits through the network. Interest Rate Risk: It arises from movements in interest rates. Furthermore, since rates are published on the Internet, it is much easier to compare one bank with another, adding pressure on interest rates, accentuating the need to react quickly to changes in the market. Liquidity Risk: It arises from the inability of a bank to meet its obligations. Internet banking can increase the volatility of deposits and assets,in the case of clients who maintain their accounts only because they are obtaining a better rate, and who can withdraw if they obtain a better one, due to the fact that it is easier to compare banks across the network. Price Risk: It arises from the change in the value of the financial instruments traded. Foreign Currency Exchange Risk: When assets in one currency are based on liabilities in another currency. Internet banking could encourage speculation, due to the ease and low cost of transactions.Foreign Currency Risk: When assets in one currency are founded on liabilities in another currency. Internet banking could encourage speculation, due to the ease and low cost of transactions.Foreign Currency Risk: When assets in one currency are founded on liabilities in another currency. Internet banking could encourage speculation, due to the ease and low cost of transactions.
In this context, the senior management of banks should be concerned with managing these risks and establish effective control over the risks associated with e-banking activities, and therefore not leave it for the management of Information Technology to manage. Likewise, they must be aware of the role of Internet banking to achieve the entity's strategic goals, and that before implementing these services they must carry out a cost-benefit analysis, be aware of the importance of technical supervision and administration of risks.
- Security controls
Security controls in Internet banking are of utmost importance because you are on the open network.
Internet Banking Security Controls
Figure 1 shows a type of software used in e-banking for encrypting (transforming the information to be transmitted as a key) of data in file transfers.
The main steps for security controls are as follows:
- Authentication: It means ensuring that customers and their identities are verified before making transactions over the Internet. At this stage the most used authentication methods are passwords, biometric methods, and challenge-response systems. In the viaBCP portal of Banco de Crédito del Perú, apart from having a 6-digit numerical password to enter our savings accounts, there is a calculator where the password is marked, in which the position of the numbers varies each time. that you enter the system; and when transfers are required, the access code must be confirmed, and the third error blocks the entry. Non-rejection: It consists of the bank having to cover the client's rejection of the transaction,claiming that it has not been done by accepting digital certificates (PKI technique); however its applicability in many countries is still doubtful. For example: on the viaBCP portal when it is required to withdraw or subscribe to mutual funds, the system asks us to accept a digital contract about the mutual fund service, before the transaction is completed. Task segregation: It is vital to prevent fraud.
In addition, banks must keep an audit trail of e-banking transactions, and preserve the confidentiality of customer data through available methods such as firewalls and physical and logical access controls.
It is worth mentioning that the security controls in electronic banking appear in the Risk Management Principles of the report of the Basel Committee, in which mention is made of what was previously discussed.
Risks arising from Internet banking are not restricted to the areas of information security, so risk management must be directed by senior management, and control procedures need to be aligned with rapidly changing technology..
- Conclusions
- Advances in technology are found in all economic sectors, with the financial sector being the one that uses information technology the most in the world, an example of this is Internet banking. Through this medium, a significant amount is offered of banking products and / or services to clients, whether natural or legal persons, eliminating the inconvenience of distances and queues that are generated in branches, due to their limited physical space, although banks encourage the migration of their clients From traditional banking to Internet banking, because it implies lower costs than keeping a large number of branches and administrative staff active, they must keep in mind the significant investment that must be made to maintain it with a high quality standard,In addition to the security measures that it requires when making transactions through the network. Although the growth in the number of Internet banking users is increasing, it is a recent business and it cannot be asked to be profitable in the short term. The use of information technology to offer online services for large banks is very important to maintain their competitive advantages; however small banks should perhaps stick with traditional banking in view of the high sunk costs it represents, and the uncertainty of profitability they will generate in the medium and long term. It is important for banks to take into account that being on the Internet, customers can easily make comparisons of the rates they offer,therefore, there is a potential risk of rapid inflow and outflow of capital. There are also a number of risks associated with this service and which are sometimes not adequately considered by banks, such as reputational risk, if the bank has with limited software, which can affect the image of the financial institution; the risk of compliance with the legal regulations of a country; Among others, it is vitally important that the bank's senior management is involved in the risk management processes of Internet banking, since it is not just about technical problems that Information Technology management can solve.Banks must be able to adopt the security measures that are required in order to maintain the confidentiality of their clients' data and ensure that their transactions are carried out appropriately via the Internet. Internet banking has a great opportunity for growth as even its market is maturing. It is the job of banks to carry out an aggressive customer acquisition policy, clearly highlighting the benefits of using virtual banking, as well as its limitations, and to provide the control and security necessary to instill trust among users.clearly highlighting the benefits of using virtual banking, as well as its limitations, and providing the necessary control and security to instill confidence among users.clearly highlighting the benefits of using virtual banking, as well as its limitations, and providing the necessary control and security to instill confidence among users.
- References
- Ortiz, Fernanda. "The Click Age: Internet Banking". Economic News. Magazine No. 270. Volume XVI. November, 2002. Accessed October 12, 2003. http://www.actualidad.co.cr/270/30-tecnologia.html. "Internet banking". Financial Synergy. Vol. 6. August, 2003. Accessed October 12, 2003. http://www.condorbs.com/sinergia/Vol6_agosto_2003/banca_por_Internet.asp. "Use in electronic media banking grows" Reforma. Mexico City, pg. 1. March 11, 2002. Galán, Verónica.. Accessed, October 14, 2003. Ahumada, Sergio. "The importance of Internet Banking grows." Technology and Business Newsletter. No. 90. March 21, 2003. Accessed November 9, 2003. http://www.select.com.mx. Larraín Christian. "Perspectives of Internet Banking". The Economic Kybalion. January, 2000. Accessed October 14, 2003. http://www.elkybalion.cl/columnas/larra5-1-00.htm.Ramakrishnan Ganesh. "Risk Management of Internet Banking". Without date. Accessed October 12, 2003.
INTERNET BANKING: A NEW WAY OF DOING BUSINESS
Contributed by: Betty Infante - [email protected]
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