INTRODUCTION

E-banking is the wave of the future. It provides enormous benefits to consumers in

terms of ease and cost of transactions, either through Internet, telephone or other
electronic delivery. Electronic finance (E finance) has become one of the most essential
technological changes in the financial industry. E -finance as the provision of financial
services and markets using electronic communication and computation. In practice, e-
finance includes payment, e-trading, and e-banking According to the definitions from
the Bank for International Settlement (BIS-EBG, 2003b), e-payment creates
considerable efficiencies and is superior to traditional paper based solution. E-trading
is referred to as a wide variety of systems that provide electronic order routing,
automated trade execution, and electronic dissemination of pre-trade and post-trade
information. With the help of the e-trading systems, the transactions can be executed at
a remote server and information can be conveyed to a remote location. And e-banking
means the provision of retail and small value banking products and services through
electronic channels and large value electronic payments and other wholesale banking
services delivered electronically. Although clients have enjoyed great convenience of
e- banking and bankers have improved cost efficiency of banks (Lin and Lin, 2006,
2007), e-banking may lead to unstable financial environments. In other words, e-
banking could make the financial markets less manageable by the regulators.
Internet banking refers to the deployment over the Internet of retail and wholesale
banking services. It involves individual and corporate clients, and includes bank
transfers, payments and settlements, documentary collections and credits, corporate and
household lending, card business and some others. Since its inception Internet banking
has experienced strong and sustained growth. According to Jupiter Media, Internet
traffic for all United States banks which grew by 77.6 per cent between July 2000 and
July 2001, compared with overall World Wide Web traffic growth of 19.8 per cent
over the same period. Another source estimated that the share of United
States households using
Internet banking will increase from 20 per cent in 2001 to33 per cent in 2005, and that
by 2010 there might be 55 million users. Internet banking operations currently
represent between 5 per cent and 10 per cent of the total volume of retail banking
transactions both in the United States and in Europe. This is less than the share of
Internet securities trading estimated at between 20 and 25 per cent of the total,
but much more than overall business to-consumer (B2C) ecommerce, which
represent less total then 2 % of the retail trade

TYPES OF E-BANKING

The common assumption is that Internet banking is the only method of on-line
banking. However, this is not strictly the case, as several types of service are currently
available:
 PC Banking - The forerunner to Internet banking has been around since the late 1980's
and is still widely used today. Individual banks provide software which is
loaded on to an SME's office computer. The SME can then access their bank
account via a modem and telephone link to the bank. Access is not
necessarily via the Internet.
 Internet Banking - Using a Web browser, a user can access their account, once the bank's
application server has validated the user's identity.
 Digital TV Banking- Using the standard digital reception equipment (set top box and
remote control), users can access their bank account. Abbey National and
HSBC services are available via Digital TV providers. One of its main
selling points is that no account details are transmitted via the World Wide
Web;
 Text Phone Banking - HSBC have introduced this service to allowcustomers with text
phones to check their balance, pay bills andtransfer money.

Internet banking can be split into two distinct groups:

 Traditional banks and building societies use the Internet as an add-onservice

with which to give businesses access to their accounts.
 New Internet-only banks have no bricks and mortar presence on theHigh Street.
Therefore, they have lower overheads and can offer higher rates of interest and
lower charges
Internet is increasingly used by banks as a channel for receiving
instructions and delivering their products and services to their customers.
Different banks follow different levels for providing services on internet.
Compared to banks abroad, India banks offering online services still have
a long way to go in terms of number of users and sufficient infrastructure
in place.

Various security options are in place or are being looked at; however,
Certification Authority is still missing in India. Also there are various risks
associated with internet banking such as Operational Risk, Security Risk,
Cross Border Risks, Legal Risk, etc.

The Basel Committee’s Electronic Banking Group (EBG) in late 1999, tried
to develop risk management guidance for Internet banking that will guide
bankers and promote effective and consistent bank supervision around
the world.
The use of Information Technology in banking enables the banks to
provide Any Time Banking, Customer Service, Telebanking, Home
Banking, Plastic Card Services, etc., facilities. However, these facilities
along with certain advantages these have certain disadvantages too.

A successful internet banking solution offers:-

 Exceptional rates on saving, cash deposits, free bill payment &

rebates on ATM surcharges.

 Credit cards with low rates

 Easy online application for all accounts, including personal loans &
mortgages

 24 hours account access.

Concluding this, India is on threshold of a major banking revolution with

the invasion of net banking and with the concept of payment gateway
coming in; banks are vying with one another for the lion’s share in the
market. ATM, Any Time Banking, Electronic Funds Transfer, Telebanking
etc., banks controls, main issues concerning online banking & the scope
for online banking in the near future.
Features

Online banking solutions have many features and capabilities in common,

but traditionally also have some that are application specific.

The common features fall broadly into several categories

Transactional (e.g., performing a financial transaction such as an account

to account transfer, paying a bill, wire transfer... and applications... apply
for a loan, new account, etc.)

o Electronic bill presentment and payment - EBPP

o Funds transfer between a customer's own checking and
savings accounts, or to another customer's account
o Investment purchase or sale
o Loan applications and transactions, such as repayments

 Non-transactional (e.g., online statements, check links, co

browsing, chat)
o Bank statements
 Financial Institution Administration -
 Support of multiple users having varying levels of authority
 Transaction approval process
 Wire transfer

A feature commonly unique to Internet banking is Personal financial

management support, such as importing data into personal accounting
software. Some online banking platforms support account aggregation to
allow the customers to monitor all of their accounts in one place whether
they are with their main bank or with other institutions.

Role and Significance

Internet banking has transformed the financial industry. Banking

customers can perform most transactions by themselves on their own
computer at hours that work for them. No longer do customers have to
wait in lines at the bank or rush to get to their bank before it closes. They
can withdraw cash, perform transfers and make payments with the click
of a mouse.

Internet banking is convenient for those who are working from home,
have limited time or want to keep track of their finances 24 hours a day.
Internet banking allows account holders to transfer funds, pay bills, keep
a more accurate balance ledger, and report fraudulent transactions and
more. Anyone who has a laptop or desktop computer with Internet access
may do their banking from anywhere in the world.

There is a potential for identity theft or fraud when consumers use

Internet banking. Financial institutions have software programs in place
to deter criminal activity. Account holders can protect themselves by
using a firewall on their own computers. Financial institutions prefer
online banking because it reduces manpower, attracts consumers and
makes financial reporting easier. Consumers can enjoy the benefits of
banking at a time and place of their choosing. Internet banking is a fact of
life for many individuals today with a busy lifestyle. Some individuals will
have a brick and mortar bank that offers Internet banking in addition to
going to the brick and mortar location. Other banks exist only on the
Internet that does not have a physical location.

Computers were originally destined for a minor role in banks, primarily

intended to facilitate accounting transactions. Subsequently, once its
superiority was firmly established, it grew in status as a tool for
management information and a host of other inventions. Although the
accounting aspect is still quite important and relevant, IT has a far greater
role to play to day to day banking operations, especially in decision
making process. Further, facilities like ATM, Anywhere Banking, Internet
as well as Mobile Banking have been increasing their presence. It has, to
be conceded that ‘Information Technology’ is not the end in itself, but is
useful tool in the hands of the management to leverage business
prospects in its favour and enhance efficiency.
Banks now have come under great pressure to reduce operational costs
to safeguard their bottom lines. With banking tuning more and more
customer-centric with every passing day, technology as an enabler has
helped banks to launch a whole array of customer-centric products such
as ATMs, Debit Cards, 24 hour Anywhere Banking. Customer Relations
Management is now a very potential concept. Internet Banking also has a
role to play in ensuring a fair return to shareholders, by facilitating in
ensuring greater profits to the banking sector. The recent emerging trends
in self-service channels, namely ATM,s, Call-centers, Internet and Mobile
Banking would increase the use of E-banking as this offer the twin benefit
i.e. convenience to the customers and reduction and cost of operation to
the banks. The popularity of internet banking likely depends upon
inculcating in customers about their security and personal privacy of their
money and assets.

Internet Banking in India

The Indian Scenario

The Internet banking is changing the banking industry and is having

the major effects on banking relationships. Internet banking involves
use of Internet for delivery of banking products & services. It falls
into four main categories, from Level 1 - minimum functionality sites
that offer only access to deposit account data - to Level 4 sites -
highly sophisticated offerings enabling integrated sales of additional
products and access to other financial services- such as investment
and insurance. In other words a successful Internet banking solution
offers

· Exceptional rates on Savings, CDs, and IRAs

· Checking with no monthly fee, free bill payment and rebates on
ATM surcharges
· Credit cards with low rates
· Easy online applications for all accounts, including personal loans
and mortgages
· 24 hour account access
· Quality customer service with personal attention

Internet banking, both as a medium of delivery of banking services

and as a strategic tool for business development. At present, the total
internet users in the country are estimated at 9 lakh. However, this is
expected to grow exponentially to 90 lakh by 2003. Only about 1
percent of Internet users did banking online in 1998. This is increased
to 16.7 percent in March 2000.
- (India Research, May 29, 2000, Kotak Securities)

Cost of banking service through the Internet from a fraction of costs

through conventional methods. Rough estimates assume teller cost at
Re.1 per transaction, ATM transaction cost at 45 paisa, phone
banking at 35 paisa, debit cards at 20 paisa and Internet banking at
10 paisa per transaction. The banking industry in India is facing
unprecedented competition from non-traditional banking institutions,
which now offer banking and financial services over the Internet. The
deregulation of the banking industry coupled with the emergence of
new technologies, are enabling new competitors to enter the financial
services market quickly and efficiently.

Indian banks are going for the retail banking in a big way. However,
much is still to be achieved. This study which was conducted by
students of IIML shows some interesting facts:

· Throughout the country, the Internet Banking is in the nascent stage

of development (only 50 banks are offering varied kind of Internet
banking services).
· In general, these Internet sites offer only the most basic services.
55% are so called 'entry level' sites, offering little more than company
information and basic marketing materials. Only 8% offer 'advanced
transactions' such as online funds transfer, transactions & cash
management services.
· Foreign & Private Banks are much advanced in terms of the number
of sites & their level of development.

Products and Services offered

Meet customer demands for both convenience and financial

independence. Every online transaction drives more traffic to your
website. By integrating the website and online services, customers will
see important news and promotions they may have otherwise missed.
Internet Banking solutions include:
 o Internet Banking
Show customers you are there for them anytime, anyplace.
Make it easy to give customers 24/7 access to their accounts
and other valued information.
 Bill Payment
Give customers convenient, safe, and reliable, access to pay their
bills online – 24/7. Bill Payment can be integrated with Internet
Banking platform, providing a seamless single-sign-on user
experience, or it can be offered independent of any Internet
banking product or data host. Choose to offer customers good
funds or risk-based settlement from a variety of third-party
disbursement partners.
 Business Banking
Provide a wide range of online tools specifically designed for your
customers’ small business needs. Solutions include a variety of cash
management capabilities such as Business Bill Pay, ACH Origination
and Account to Account transfers and more. We deliver a complete
solution with exceptional reliability and high-level security to
increase operational efficiencies for business customers
 Lending
Offer customers the ability to apply for loans online. Make
immediate loan decisions and give an on-the-spot response. Our
interactive loan decisions are based on financial institution’s own
decision criteria and the applicant’s real-time credit bureau data at
all major credit bureaus.
 Imaging
Provide customers fast, easy and secure electronic access to their
check images and statements when it is convenient for them from
home or office.

Account Alerts
Give the financial institution the opportunity to notify customers with
real-time email account alerts. Customers define real-time, “tell me
when” alerts that notify them when a check clears an account; an account
balance threshold is met; and/or a specified transaction activity occurs.
This solution is the perfect add-on to Internet Banking solution, enabling
a financial institution to truly leverage 24/7 online banking channel.

Account to Account Transfers

Become the online hub for all your customers’ financial relationships.
With an Account to Account (A2A) Transfer solution, one can offer
account holders the ability to move money between any institution and
accounts at other financial institution. The result is that customers
leverage the online banking solution as the central, trusted service for
managing all their financial relationships.

Account Opening & Funding

Provide an automated online account opening and funding process for
new accounts. Automating real-time account opening and funding allows
you to lower account opening costs by minimizing costly manual
processes and making products and services available to consumers 24/7.
The net result to a financial institution is the reduction of weeks of
processing time down to minutes!

Marketing Campaign Manager

Create, control, and track targeted marketing campaigns within your
Internet Banking site. Display marketing ads and text messages that are
tightly integrated into your existing website design and/or Internet
Banking. Create them with easy-to-use administrative tools, control them
with intelligent targeting rule sets, and track the results with up-to-the-
minute reporting tools.

Secure Messaging
Communicate securely with your customers without fear of interception
by hackers or third-party e-mail services. Customers can send a secure SSL
-encrypted message that can be stored and answered in your Internet
Banking administrative site, enabling customers to send a financial
institution questions and other communications containing sensitive
data, such as account numbers and balances

Future Scenario
There is no doubt that potential for net banking in India is immense
considering the rising penetration levels of the World Wide Web in Indian
homes and offices. When one takes a look at what is available worldwide,
one sees that net banking is more of a norm rather than an exception in
many developed countries. The services offered enables one to check credit
card transactions, paying bills, transferring funds between accounts in two
different banks and scheduling future payments and transfers. The gradual
increase in net banking is logical as the need to minimize costs catches
attention. A North American Internet Banking Survey done by
management consultancy Booz Allen & Hamilton in 1996 revealed that the
cheapest way of banking is Internet banking. The survey estimated that a
brick and mortar network of a bank would cost US$1.07 per transaction
while it is only US$0.01 for internet banking. The same survey said that by
2000, 16 million US households would be banking through the net.

In India, however, there may arise problems with nationalized banks,

which have in the past opposed computerization. However, the fact
remains that given a choice, customers would like to bank via the net and
the next decade could well see virtual banking becoming a reality.

Compared to banks abroad, India banks offering online services still have
a long way to go. For online banking to reach a critical mass, there has to
be sufficient number of users and the sufficient infrastructure in place.

Various security options like Line Encryption, Branch Connection

Encryption, Firewalls, Digital Certificates, Automatic Sign-offs, Random
Pop-ups and Disaster Recovery Sites are in place or are being looked at;
there is as yet no Certification Authority in India offering Public Key
Infrastructure, which is absolutely necessary for online banking.

The communication bandwidth available today in India is also not enough

to meet the needs of high priority services like online banking and trading.
Banks offering online facilities also need to calculate their downtime
losses, because even a few minutes of downtime in a week could mean
substantial losses. Users of Internet Banking Services are required to fill
up the application forms online and send a copy of the same by mail or
fax to the bank.

A contractual agreement is entered into by the customer with the bank

for using the Internet banking services. Domestic customers, for whom
other access points such as ATMs, Telebanking, Personal Contact, etc. are
available, are often hesitant to use the Internet banking services offered
by Indian banks. Internet Banking, as an additional delivery channel, may,
therefore, be attractive/ appealing as a value added service to domestic
customers. Non-resident Indians, for whom, it is expensive and time
consuming to access their bank accounts maintained in India find net
banking very convenient and useful.

Cyber crimes are, therefore, difficult to be identified and controlled. In

order to promote Internet banking services, it is necessary that proper
legal infrastructure is in place. The Department of Telecommunications
(DoT) is moving fast to make available additional bandwidth, with the
result that internet access will become much faster in the future.

Reserve Bank of India has constituted a group to examine different issues

relating to I-banking and recommend technology, security legal standards
and operational standards keeping in view the international best
practices. In the following paragraphs a generic set of risks discussed as
the basis for formulating general risk control guidelines.

A healthy banking system is essential for any economy striving to achieve

good growth and yet remain stable in an increasingly global business
environment. The Indian banking system has witnessed a series of
reforms in the past, like deregulation of interest rates, dilution of
government stake in PSBs, and increased participation of private sector
banks. It has also undergone rapid changes, reflecting a number of
underlying developments. This trend has created new competitive threats
as well as new opportunities. This paper aims to foresee major future
banking trends, based on these past and current movements in the
market.

Given the competitive market, banking will (and to a great extent already
has) become a process of choice and convenience. The future of banking
would be in terms of integration. This is already becoming a reality with
new-age banks such as YES Bank, and others too adopting a single-PIN.
Geography will no longer be an inhibitor. Technology will prove to be the
differentiator in the short-term but the dynamic environment will soon
lead to its saturation and what will ultimately be the key to success will be
a better relationship management.

Risks Involved in Internet Banking

Internet banking does not open up new risk categories, but rather
accentuates the risks that any financial institution faces. The board and
senior management must be cognizant of these risks and deal with them
appropriately. These risks, which often overlap, are briefly described
below:

Strategic risk

This is the current and prospective risk to earnings and capital arising from
adverse business decisions or improper implementation of business
decisions. Many senior managers do not fully understand the strategic
and technical aspects of Internet banking. Spurred by competitive and
peer pressures, banks may seek to introduce or expand Internet banking
without an adequate cost-benefit analysis. The organization structure and
resources may not have the skills to manage Internet banking.

Transaction risk

This is the current and prospective risk to earnings and capital arising from
fraud, error, negligence and the inability to maintain expected service
levels. A high level of transaction risk may exist with Internet banking
products, because of the need to have sophisticated internal controls and
constant availability. Most Internet banking platforms are based on new
platforms which use complex interfaces to link with legacy systems,
thereby increasing risk of transaction errors. There is also a need to
ensure data integrity and no repudiation of transactions. Third-party
providers also increase transaction risks, since the organization does not
have full control over a third party. Without seamless process and system
connections between the bank and the third party, there is a higher risk
of transaction errors.

Compliance risk

This is the risk to earnings or capital arising from violations of, or non-
conformance with, laws, regulations and ethical standards. Compliance
risk may lead to diminished reputation, actual monetary losses and
reduced business opportunities. Banks need to carefully understand and
interpret existing laws as they apply to Internet banking and ensure
consistency with other channels such as branch banking. This risk is
amplified when the customer, the bank and the transaction are in more
than one country. Conflicting laws, tax procedures and reporting
requirements across different jurisdictions add to the risk. The need to
keep customer data private and seek customers' consent before sharing
the data also adds to compliance risk. Customers are very concerned
about the privacy of their data and banks need to be seen as reliable
guardians of such data. Finally, the need to consummate transactions
immediately (straight-through processing) may lead to banks relaxing
traditional controls, which aim to reduce compliance risk.

Reputation risk

This is the current and prospective risk to earnings and capital arising from
negative public opinion. A bank's reputation can be damaged by Internet
banking services that are poorly executed (e.g., limited availability, buggy
software, poor response). Customers are less forgiving of any problems
and thus there are more stringent performance expectations from the
Internet channel. Hypertext links could link a bank's site to other sites and
may reflect an implicit endorsement of the other sites.

Information security risk

This is the risk to earnings and capital arising out of lax information
security processes, thus exposing the institution to malicious hacker or
insider attacks, viruses, denial-of-service attacks, data theft, data
destruction and fraud. The speed of change of technology and the fact
that the Internet channel is accessible universally makes this risk
especially critical.

Security Risk arises on account of unauthorized access to a bank’s critical

information stores like accounting system, risk management system,
portfolio management system, etc. Other related risks are loss of
reputation, infringing customers’ privacy and its legal implications, etc.
Attackers could be hackers, unscrupulous vendors, disgruntled employee
or even pure thrill seekers.

In addition to external attacks banks are exposed to security risk from

internal sources e.g. employee fraud. Employee being familiar with
different systems and their weaknesses become potential security threats
in a loosely controlled environment. They can manage to acquire the
authentication data in order to access the customer accounts causing
losses to the bank. Unless specifically protected, all data/ information
transfer over the internet can be monitored or read by unauthorized
persons.

Credit risk

This is the risk to earnings or capital from a customer's failure to meet his
financial obligations. Internet banking enables customers to apply for
credit from anywhere in the world. Banks will find it extremely difficult to
verify the identity of the customer, if they intend to offer instant credit
through the Internet. Verifying collateral and perfecting security
agreements are also difficult. Finally, there could be questions of which
country's (or state's) jurisdiction applies to the transaction.

Interest rate risk

This is the risk to earnings or capital arising from movements in interest

rates (e.g., interest rate differentials between assets and liabilities and
how these are impacted by interest rate changes). Internet banking can
attract loans and deposits from a larger pool of customers. Also, given
that it is easy to compare rates across banks, pressure on interest rates is
higher, accentuating the need to react quickly to changing interest rates
in the market.

Liquidity risk

This is the risk to earnings or capital arising from a bank's inability to meet
its obligations. Internet banking can increase deposit and asset volatility,
especially from customers who maintain accounts solely because they are
getting a better rate. These customers tend to pull out of the relationship
if they get a slightly better rate elsewhere.

Price risk

This is the risk to earnings or capital arising from changes in the value of
traded portfolios or financial instruments. Banks may be exposed to price
risk, if they create or expand deposit brokering, loan sales or securitization
programs as a result of Internet banking activities.

Foreign exchange risk

This arises when assets in one currency are funded by liabilities in another.
Internet banking may encourage residents of other countries to transact
in their domestic currencies. Due to the ease and lower cost of
transacting, it may also lead customers to take speculative positions in
various currencies. Higher holdings and transactions in no domestic
currencies increase foreign exchange risk.

Cross Border Risk

Internet banking is based on technology that, by its very nature, is

designed to extend the geographic reach of banks and customers. Such
market expansion can extend beyond national borders. This causes
various risks.

Such considerations may expose banks to legal risks associated with non-
compliance of different national laws and regulations, including consumer
protection laws, record keeping and reporting requirements, privacy rules
and money laundering laws.

The foreign-based service provider or foreign participants in internet

banking are sources of country risk to the extent that foreign parties
become unable to fulfill their obligations due to economic, social or
political factors.

Operational Risk

‘Operational Risk’, also referred to as ‘Transactional Risk’ is the most

common form of risk associated with I-banking.

It takes them from of inaccurate processing of transactions, non-

enforceability of contracts, compromises in data integrity, data privacy
and confidentiality, unauthorized access / intrusion to bank’s systems and
transaction, etc.

Such risks can arise out of weaknesses in design, implementation and

monitoring of banks information system.

Besides inadequacies in technology, human factors like negligence by

customers and employees, fraudulent activity of employees and crackers/
hackers, etc. can become potential source of operational risk.

System Architecture & Design

Banks face the risk of wrong choice of technology, improper system

design and inadequate control processes. Numerous protocols are used
for communication across internet. Each protocol is designed for specific
types of data transfer.

A system allowing communications with all protocols, say HTTP (Hyper

Text Transfer Protocol), FTP (File Transfer Protocol), Telnet, etc. is more
prone to attack than one designed to permit say, only HTTP. Security
related operational risk include access control, use of firewalls,
cryptographic techniques, public key encryption, digital signature, etc.

Risk of Unfair Completion

Internet banking is going to intensify the competition among various

banks. The open nature of internet may induce a few banks to use unfair
practices to take advantage over rivals. Any leaks at network connection
or operating system, etc. may allow them to interfere in a rival bank’s
system.
Thus, one can find that along with the benefits internet banking carries
various risks for bank itself as well as banking system as a whole.

Pros and Cons of Internet Banking

Many people are turning to online banking to meet their banking needs.
Online banking is less expensive for the banks because of the lack of paper
and postage involved, so they encourage their customers to transition to
online banking. Many customers continue to resist this push, feeling
uncomfortable with handling their banking needs over a computer. Online
banking comes with both advantages and disadvantages, which are
outlined below.
Pros of Internet Banking

24/7 availability of banking services and flexibility are the acknowledged

advantages of online banking. Better interest rates on CDs and savings
accounts that are opened online, wider array of financial products and
services for customers are other attractive features of online banking. The
advantages of Internet banking are obvious. Business people can access
their personal and business account information while saving a trip to the
bank. You can check your balance whenever you need to, even if the bank
is closed. Not only that, but you can pay your bills online as well, which
saves both time and money on postage.

Another advantage of Internet banking is the ability to easily compare

services offered by different banks. You can buy financial products and
apply for loans online, and in doing so, you can compare your options to
ensure that you get the best possible services. You can even buy insurance
online through Internet banking services. Stocks and bonds and other
investments can be managed with online banking from your home or
office independent of a financial intermediary like a stockbroker.

Convenience

Internet banking's major benefit to account holders is convenience. It

allows an account holder to monitor usage of his account and perform
basic transactions online for his banking account. From the privacy of your
home, you can transfer funds, check your bank balance and pay your bills
at any time of the day or night.

Bonuses

There are some Internet banking companies such as ING Direct that will
allow a customer to receive a monetary bonus for opening an account
with them. The bonus varies based on the promotion the Internet banking
company is running at the time.

Expediency

Online banking is frequently faster than "snail mail." Many payments can
be made in 24 hours, which the U.S. Postal Service cannot match.

Scheduling Payments

You can schedule a transaction today but delay the processing until a later
date. This enables you to pay your bills in once without the money
immediately leaving your account.

Learning Curve

Many people feel uncomfortable with trying something new, and they
feel nervous about working through a learning curve when their money is
involved.

Paperless
Online banking is paperless. Paperless banking is environmentally
friendly, but many people feel more comfortable having a paper trail
when they pay their bills.

Cons of Internet Banking

Internet banking or electronic banking allows customers to access their

accounts at any time from any computer or smart phone. This banking style
has a lot of advantages, including 24-hour account monitoring, the ability
to bank from anywhere and fast transactions. However, this system has
some distinct disadvantages, too.

Limited Access

If an individual opens an account at an online-only bank such as ING

Direct, access is limited to their account. If the bank account owner can not
find a location with Internet access, she will be unable to perform
transactions on her banking account.

Difficulty in Resolving Disputes

When using an Internet banking account, the account owner may have no
face to face interaction with a bank employee if the bank does not have a
brick and mortar location. This can make resolving disputes more difficult
as the account holder will have to make a phone call and possibly wait on
hold, or be forced to send an email.

Security Concerns

Conducting your banking over the Internet can be you at a significant risk
of scams and fraud. Make sure when using your internet banking account
you are accessing it through a secured network, and never provide your
account password to anyone. With hacking and identity theft on the rise,
Internet banking customers have to place a certain amount of trust in the
bank that their account information and personal information are safe.
Many people worry about hackers accessing their bank accounts. Also,
family or friends could steal your password and access your account
information.

Identity Confirmation

Federal regulations require that financial institutions confirm each

customer's identity. This may present a logistical issue, as copying and
faxing documents is sometimes necessary.

Customer Service

If you bank at a traditional bank, you can go to the bank and speak to
someone face to face about your problem but, with an Internet bank, you
will likely spend a lot of time on the phone being passed around and
placed on hold.

Accessibility

If the Internet goes down in your area or the area of the banking office,
you will be unable to access your accounts. This includes being unable to
withdraw money from ATMs or to use your debit card.

Fees

Many Internet banks don't have ATMs, which means you will have to pay
ATM fees. This can cost you more money than paying the regular monthly
fees at a brick and mortar bank.

Other Threats

Despite robust security practices and secure transaction technologies

that all top-line banks offer on their Websites and personal PC protection
programs used by consumers themselves, the threat of identity theft is
constant and real. Other threats to online banking include hacking of
banking accounts, worms, spy ware attacks, and phishing.

Internet Banking: Challenges for Banks and Regulators

 Internet Banking in the United States

An average industry estimates indicates that about 13 million US

households banked online by the end of 2000 – twice as many as in the
previous years.

At the beginning of 2001, 37% of all US national banks, including nearly

all of the largest national banks, were offering full transactional
capabilities online – a near twofold increase in little over a year.

Banks offering Internet-based transaction service – and there are more of

them each day – should be well positioned to compete in the financial
markets of the future.

New Risks:

Internet banking poses risks that are different from those that bank
supervisors customarily dealt with in assessing credit, market, or interest
rate risk.

First, banks must manage the unprecedented speed of technological

change, and assess how it relates to their technology investments and
their ability to provide consistently high-quality customer service.

Second, bank is increasingly dependent on third parties to provide the

necessary Information Technology.

Security is another area of significant risk. So far, relatively few financial

institutions have reported being victimized by online security violations.