EFINANCE CHAPTER 5 ADVANTAGES AND DISADVANTAGES Internet Banking

E-FINANCE CHAPTER 5 ADVANTAGES AND DISADVANTAGES Internet Banking and Its potential in TRNC, Zakaria Jado Zakario, Assoc. Prof. Dr. Hatice Jenkins 1

ADVANTAGES & DISADVANTAGES of E-FINANCE Ø Finance on internet-mostly internet banking- benefits consumer in terms of convenience and the provider in terms of cost reduction and greater reach. Ø As mentioned earlier, there are four groups that participate in the development of e-finance. Ø Their role of developing E-finance will depend on the benefits and risks they may realize from the presence of E-finance. Ø Advantages and disadvantages of E-finance will be discussed in terms of Internet Banking which is the most popular and used E-finance transaction. 2

1 -BANKS PERSPECTIVE ADVANTAGES: A. ADDITIONAL REVENUES Ø Internet banks were allowed to generate additional revenues from being allowed to offer new fee based services and magnify the usage of existing products and services offered. Ø Additional revenues can be classified into two groups: 1. Home Banking Offerings 2. Cash Management Offerings 3

1. Home Banking Offerings, include the basic internet banking services such as bill payment and presentment, shopping online, viewing balances etc. 2. Cash management offerings exceeds home banking by allowing commercial users to manage their businesses as well as their personal finances such as handling many account at once, transfer funds between accounts, handling foreign exchanges between different currencies, viewing monthly account billing statement and scheduling different payments. 4

B. OPERATING COST REDUCTION Ø Internet based banks were allowed to reduce costs of their operations. Cost saving can be realized through less reliance on manual operations and calling centers. Ø Internet banking allows banks reduce costs and provide the following scenarios: Ø Internet banking will allow banks to reduce customer service staff, Ø Electronic payment will replace checks and costs of processing these checks will decrease. Ø E-mails will replace mails, and electronic applications will replace paper ones. Ø Consumers can open new account online, in addition they can apply for financial services from their homes and the result will be less data entry by the bank’s personnel. 5

C. EXPANSION COST REDUCTION Ø In addition to the reduced costs of operations, banks seeking expansion will fill expanding through the internet extremely cheaper than building a new physical branch. D. CUSTOMER RETENTION Ø Customer retention is a prime advantage of internet banking under the condition of offering a wide range of services on a bank’s web site, existing customers will be more likely to stay and new customers can be attracted to join when they are informed. 6

DISADVANTAGES: Transaction Risk: Ø Transaction risk is the current and prospective risk to earnings and capital arising from fraud, error, and the inability to deliver products or services, maintain a competitive position, and manage information. Ø A high level of transaction risk may exist with Internet banking products, particularly if those lines of business are not adequately planned, implemented, and monitored. 7

Reputation Risk: Ø Reputation risk is the current and prospective impact on earnings and capital arising from negative public opinion. Ø A bank’s reputation can be damaged by Internet banking services that are poorly executed or otherwise alienate customers and the public. Ø Well designed marketing, including disclosures, is one way to educate potential customers and help limit reputation risk. 8

Strategic Risk: Ø Strategic risk is the current and prospective impact on earnings or capital arising from adverse business decisions, improper implementation of decisions, or lack of responsiveness to industry changes. Ø Management must understand the risks associated with Internet banking before they make a decision to develop a particular class of business. 9

Credit Risk: Ø Credit risk is the risk to earnings or capital arising from an obligor’s failure to meet the terms of any contract with the bank. Ø Internet Banking provides the opportunity for banks to expand their geographic range. Ø In dealing with customers over the internet, it is difficult to understand the willingness of the customer to pay the debt when there is an absent of any personal contact. 10

Liquidity Risk: Ø Liquidity risk is the risk to earnings or capital arising from a bank’s inability to meet its obligations when they come due, without incurring unacceptable losses. Ø Liquidity risk includes the inability to manage unplanned changes in funding sources. Ø Internet banking can increase deposit volatility from customers. Ø Increased monitoring of liquidity and changes in deposits and loans may be warranted depending on the volume of Internet account activities. 11

Foreign Exchange Risk: Ø Foreign exchange risk is present when a loan or portfolio of loans is denominated in a foreign currency or is funded by borrowings in another currency. Ø Banks may be exposed to foreign exchange risk if they accept deposits from non-U. S. residents or create accounts denominated in currencies other than U. S. dollars. Ø Appropriate systems should be developed if banks engage in these activities 12

Price Risk: Ø Price risk is the risk to earnings or capital arising from changes in the value of traded portfolios of financial instruments. Ø 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. Ø Appropriate management systems should be maintained to monitor, measure, and manage price risk if assets are actively traded. 13

Interest Rate Risk: Ø It is the risk to earnings and capital arised from the fluctuating interest rates. Ø Internet banking can attract deposits, loans and other relationships from a larger pool of customers. Ø Greater access to customers forces managers to maintain appropriate asset liability management systems, including the ability to react quickly to changing market conditions. 14

2 - CONSUMER PERSPECTIVE ADVANTAGES: A. BANKING ANY TIME Ø Banks who offers internet banking services open 24 hours a day, no weekends and no vacations. For that, clients can access, modify and conduct their banking activities any time they want with no delays. B-BANKING FROM ANYWHERE Ø The presence of large number of PCs connected to the internet has allowed customers to conduct their banking activities from their home, office or even public places. 15

C. BETTER PRICES and INTEREST RATES Ø On average it was found that internet banking transactions costs are much lower than conducting the same transaction traditionally. D. SAVING TRANSACTIONAL COST Ø Internet banking allows users to conduct their banking activities almost from any place where a computer is available; therefore users are allowed to save their travelling costs. In addition they can save money by cutting down postage and government charges. E. DIRECT AND CONTINUOUS CONTROL TO ACCOUNTS Ø In traditional banking activities, the procedure is to ask the bank to conduct transactions and then the bank will act on behalf of the customer. 16

F. CUSTOMIZATION Ø Customers are able to customize their banking site in the format they want. If available, they can customize their site to provide the information they want, they control how those information are shown, display particular product of their interest. G. FASTER SERVICE and NO WAITING in LINE Ø As they learn how to bank online, consumers can conduct their banking activities in a relatively shorter time compared to that needed to visit their physical branch. 17

H. EXTRAORDINARY BENEFITS Ø Consumers can benefit from the other services offered that are not provided by banking off-line such as: Ø Bill presentment and bill payment service by which they can receive their bills via the bank e-mail and schedule future payment automatically. Ø Funds management services by which they can download their history of different accounts and conduct a sensitivity analysis before even starting to make any transaction. Ø Financial tools can be used by corporate users such as financial calculators, loan calculators and other tools that help users to make their financial decision. 18

DISADVANTAGES: A. EXTRA REQUIREMENTS Ø Although it might seem like that in some countries where the majority of households and businesses have PCs that are connected to internet, it is hardly believed that it is so in other countries where computer and internet penetration are relatively low or moderate. B. KNOW-HOW IS REQUIRED Ø Clients should know how to use computer and they should be familiar with using different internet applications. They should also be updated with instructions by their banking service providers and regulatory authority to know how to protect their accounts. 19

C. NO FACE to FACE CONTACT: Ø There is no opportunity for direct interaction between customers and their bank. Face to face contact is essential for dealing with complex products such as pensions and certain types of investment that require careful explanation and discussion. D. SECURITY CONCERNS Ø Transacting funds via the internet means that confidential data might be viewed and further used without the permission of the original owners. While security is provided mainly by bank, users should be kept to update knowledge and latest updates of antivirus programs and protection tools. 20

E. BANK’S SYSTEM and BANK RELIABILITY Ø Conducting internet banking services is based on a large number of computer networks that starts with user’s PC and ends with the bank’s server. Thus, any mistake between the two extremes may prevent users from conducting their banking activities; if one is down users can not access their accounts. 21

3 - REGULATORY AUTHORITY Ø Internet itself is not a secure medium, and thus, it poses a number of concerns to regulators and supervisors of banks and financial institutions. These concerns are: A. CROSS BORDER ISSUES Ø The emerging of internet banking has removed geographical barriers and has allowed banks and customers to meet although they operate in different countries. 22

B. CUSTOMER PROTECTION AND CONFIDENTIAL ISSUES Ø Security of internet banking is one of the most important areas of concern to regulatory authority, transacting business across the internet exposes data transmitted to be viewed by unauthorized agents who may then use it without the user approval. C. COMPETITIVENESS AND PROFITABILITY ISSUES Ø For the benefits delivered by internet to banks, many will rush to adopt and for banks that lack enough funds, they will abandon or at least delay in their adoption. 23

4. INTERNET SERVICE PROVIDERS Ø As customers realize the importance of internet banking services, with each new internet banking customer, internet service providers (ISPs) will gain a new customer. On the other hand, it is expected for internet usability to increase in term of time spent surfing the internet, and this will increase ISPs revenues. Ø ISPs will have to provide higher quantity and quality of internet services and this will require additional investments in hardware, software and marketing. 24