Internet Banking and The Many Aspects of It

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					                    Internet Banking and The Many Aspects of It

        Internet banking is the use of personal computers to connect to financial institutions to
transfer funds, make payments, obtain information, and perform other banking functions. There
are 3 types of Internet banking.

   1)       The pure information sites inform consumers about particular banking institutions and
            the products and services it offers.
    2)      The information exchange sites inform the customers of the banking institutions and
            allow you to electronically ask the financial institute questions.
    3)      The full transaction sites provide information on products and services, allow
            customers to ask questions electronically, and transfer funds, pay bills or other
            banking services.
Internet banking is currently centered around retail corporations. There are many services
offered via Internet. They include: checking accounts, savings accounts, Home Equity loans,
Mortgage loans, CD’s, money markets, reporting lost/stolen ATM cards, ordering checks, etc.
On-line checking accounts allow you to check balances, pay bills, and make transfers. The
largest benefit of on-line checking is the prices. As long as you have Internet access , it is free.
On-line savings accounts draw more interest than regular savings accounts. On-line auto loans
allow you to search and finance cars completely on-line. The on-line auto loan process allows for
faster approval.

One-third of all national banks offer some type of Internet Service. About 40% of commercial
banks assets and about 60% of national banks are accessible through the Internet. It is cheaper
for both the consumer and the financial institution to do Internet banking. The Internet also
allows for great business opportunities and a higher level of productivity. With more banks
offering on-line banking, competition is strong. One way to attract customers is to include
financial news on the banks website. This is one of the leading reasons people visit a banks
website. Consultants predict that small banks that can’t afford and other banks that don’t offer
Internet services will fold in the future.

                          Internet Banking and Small Businesses
Many small banks are loosing their small businesses to larger banks that offer Internet banking.
As of June 2000, about 15% of small banks did their banking on-line. That number has grown
significantly in the last 11/2 years. In order to be competitive, banks must offer small banks a
choice. Not all small business are egar to go to Internet banking. Accoring to Futurebanker,
magazine 39% of small businesses saw no advantage to internet banking. Small businesses tend
to do more branch using. They are big on customer service and customer satisfaction and are not
satisfied with intenet banking. Small businesses tend to confide in their face-to-face bankers.
Experts suggest using bank personnel to help switch small busissnes to on-line banking. If
bankers are able to sway small businesses to on-line banking, they will need to offer some type
of training on how to use intenet banks.
                       Internet Banks and the Risks They Face
Banks face when risks with Internet banking. Banks should have a risk management team to
limit their liability. Some of those risks are listed below.

   1) A security risk is the risk of potential unauthorized access to a depository institution’s
      networks, system, and databases. These could result in financial loss for both the
      consumer and the financial institution.
   2) Transactional risks cause financial loss due to problems with service or product delivery.
      These problems occur from deficiencies in computer system design, implementation, or
      maintenance problems.
   3) Strategic Risks are earnings and capital arising from adverse business decisions or
      adverse implementation of these decisions. Consumers face these risks when financial
      institutions introduce new products or services.
   4) Reputation Risks are caused by significant negative publicity. They cause a critical loss
      of funds or customers. These risks also cause major litigation problems.
   5) Compliance Risks occur when banks are non-compliant with business rules, regulations,
      required practices, or ethical standards.
   6) Overt Risks include theft of private information, fraudulent money transactions,
      vandalism, shutdown of website , and the creation of fraudulent banks. Encryption,
      firewalls, and intrusion detection will help reduce these risks.
   7) Common risks include bugs, mechanical failure, software bugs, human error, lack of
      trained personnel, computer viruses, low memory, power failure, fires, tornados, or
      hurricanes. These risks can be reduced or limited by following information, system
      guidelines, and proper management.

                               Internet Banking Insurance
The insurance package offered to Internet banking companies is known as The Internet Banking
Protection Package. It comprises an Internet banking liability policy and an enhanced version of
an existing financial institute bond. They cover losses from invasion of privacy, slander, and
defamation, loss/damage to electronic data of a customer, denial impairment and interruption of
service, unauthorized access to customer accounts, and in appropriation of ideas. The financial
institute bond covers theft of data or property, damage to data, computer viruses and crashes,
employee sabotage and fraud. The package also offers optional coverage that includes business
interruption and public relation expense.

Banks have been provided with guidelines on how to minimize risk of Internet banking. They
say banks should plan for, manage, and monitor risks with technology. There are 5 federal
regulators. They are the FDIC, FRS, NCUA, OCC, and OTS. They conduct reviews of on-line
banking systems for compliance with consumer protection and laws and regulations. They
requests banks to implement:

       1)        An active board of directors- They should be informed of all large investments
                 and other business opportunities. They must approve all business and
                   technology strageties. They will make sure there are strong risk management
                   polices are in place.
        2)         An effective internal controls team- They provide the board of directors with
                   information on a banking institution’s assests and if they are safe and guarded.
                   They also let them know if their systems and operations are reliable and
                   according to regulators guidance. This helps minimize risks. It also helps to
                   keep pace with technology developments.
        3)         An adequate internal audits team- They produce a review that should indentify
                   risks of on-line banking and find weaknesses in the risk management systems,
                   and as it pertains to on-line banking.

                                Internet Banks and It’s Myths
According to jkafahfka jladjfohn,dagf there are many myths with the Internet.

   1)        Security is the sole responsibility of the financial institution. Everyone including the
             customers have some responsibility in protecting their financial assests.
   2)        The second myth is that the internet is only for the young. The older and retired
             groups tend to have more money. They also have more time and experience for using
             the internet.
   3)        The third myth is that people are at a higher risk of loosing their money when internet
             banking. On-line banking companies are protected because they are regulated by
             regulation E.

                                  Is the Internet Profitable?
Although the idea of Internet banking has been around for awhile; it has just taken off.
According to the Business Source, Internet banking has gone from 1 million customers in 1996
to 16 million customers in 2001. Banks that offer full internet banking services should receive a
profit of 60%. Billpay is the largest and most profitable internet service. Experts say increasing
billpay by one-half can triple profits.

                    How do Consumers feel about Internet Banking?

Many consumers say that Internet banking is empowering them with more financial liberty.
Consumers that have not invested in Internet banking yet say it is due to security concerns.
About 90% of people that use the Internet for banking say it was a good idea. According to a
survey done by Indiana Banking Association, 77% of internet banker are “very satisfied” and
22% are “somewhat satisfied”.

                          Internet Banking in Foreign Countries
Internet banking in Asia.

Asian banks us a product known as UCPB to operate their on-line banking services. This service
allows Asians to make balance inquires, transfer funds, request statements and checks, report lost
or stolen cards, and pay bills on-line. This company has 60,000 people throughout the Asian
Pacific Region.

Arabs and Internet Banking
The Arab nation has made a very slow transition to Internet banking. Many Arabs were not
interested in it. They soon found that if they didn’t invest in Internet banking, they would loose
customers to companies that offered more technology. Arab bankers believed this would
decrease Arab funds. The flip side is that Arab bankers saw Internet banking as a way to expand.
NBK was the first bank to offer Internet services in Kuwait. They started operating in January
2000. Some of the problems Arab bankers faced were security, poor technical infrastructure, and
a high cost to access the Internet. They believe the biggest challenge belongs to the government.
They say the government should make good on the promise of democratic accountability and
economic prosperity. Arab bankers are now focuses on investment banking on the Internet.

Australia and Internet Banking

Australia operates it Internet Banking through a company know as eCOMM. They have more
than 1.2 million customers. Australia’s Internet banking population grew quicker than any other
nation. They began to expand to Asia. Many Australian bankers are not sure if the company is
making a profit from Internet banking.

Internet Banking in Europe

The use if the Internet in Europe is not consistent. Their largest users are in France, Germany,
Italy, and The U.K. Personal loans and mortgagees are the largest part of their Internet business.
Europe wants to offer its on-line customers account aggregation. This will allow them to access
accounts from various financial institutions with one password.

Internet Banks is Peoria.

South Side Trust and Savings Bank is the leading Internet provider in Peoria. In addition to
balance inquires, fund transfers, and bill payment; they will offer payroll and tax payments on-