Web Banking or Internet Banking is a term used to describe banking

transactions that are performed via a secured Internet application. Web

Banking transactions include such things as paying bills, transferring
funds, viewing account statements and paying down loans and
mortgages.
Although Web Banking has been popular among young Internet-savvy
people for many years, its popularity is expected to grow rapidly as
Internet usage grows internationally and people discover the many
advantages that it provides.
Web-Banking.org provides an overview of Internet Banking. It discusses
conventional and virtual banks, e-banking services, Internet security and
the cost/benefit considerations. Whether you are a complete novice to ebanking or an experienced web banking user wising to expand your
knowledge, this site will provide new insights.
INTRODUCTION
E Banking is the modern topic in the era of Science & Technology.
Though e banking started in 80s but the revolution has taken place in
20th century. Since then E banking concept is flourished with populous
model, theory and practical concept (like innovation technology
acceptance, affluence in internet business). So, before going to discuss
any core content of E banking, it is good to memorize the fundamental
concept of Ebanking which helps to realize basic concepts of E banking.
And this chapter is going to discuss these fundamental topics of E
banking.
3.2

E BANKING

Electronic banking is an umbrella term for the process by which a

customer may perform banking transactions electronically without visiting
a brick-and-mortar institution. Therefore transactions related to bank
activities via Electronic Mean and medium is called electronic Banking.
3.3

E BANKING CLASSIFICATION

In the viewpoint of use and access media, E-Banking can be classified into
three narrow (sometimes broad) sections:
Telephone Banking (The Oldest & Poorest one)
Internet Banking (or Online Banking)
Mobile Banking (Including SMS Banking)

3.3.1

TELEPHONE BANKING

Telephone banking is a service provided by a financial institution, that

enables customers of the financial institution to perform financial
transactionsover the telephone, without the need to visit a bank branch
or automated teller machine. Telephone banking times can be longer than
branch opening times, and some financial institutions offer the service on
a 24 hour basis. From the banks point of view, telephone banking reduces
the cost of handling transactions by reducing the need for customers to
visit a bank branch for non-cash withdrawal and deposit transactions.

Condition & Regulation: To use or take the benefits of telephone

banking the common condition & Regulation are:
Customer must first register with the institution for the service
Set up some password for customer verification.

Process of Servicing: To access telephone banking,

The customer would call the special phone number set up by the financial
institution
Enter on the keypad the customer number and password.
There could be more steps for security and or automated systems to
secure customer accounts or specific question to answer pre-determined
by customer.

3.3.2

INTERNET BANKING

Online banking (or Internet banking) allows customers of a financial

institution to conduct financial transactions on a secure website operated
by the institution, which can be a retail or virtual bank, credit union or
society. It may include of any transactions related to online usage
Brief Timeline of Establishment & Development
Time

Description

80s

Start of The precursor for modern home online banking services

80s_Late

online became popular

1981

Online services started in New York; Citibank, Chase

Manhattan,Chemical and Manufacturers Hanover offered home
banking services using the VIDEOTEX system.;
Commercial failure of VIDEOTEX, make e-banking unpopular
UK started the use of the Prestel system for online system

1983

Bank of Scotland started online services for customers of

theNottingham Building Society (NBS)

1992-93

First ATM point set up by Grind lays bank in Bangladesh.

1994

Stanford Federal Credit Union was the first financial institution to

offer online internet banking services to all of its members
First Online Bank in Bangladesh

1995

First Pure online banking started by Standard Chartered Bank in

Bangladesh.
HSBC, Citi Crop, Credit Agricole and Hanvit Bank Limited are pioneer
of online bank in Bangladesh
Now more than 40 banks out of 53 banks in Bangladesh are under
Electronic Banking.

Condition & Regulation: To access a financial institutions online banking

facility:
Personal Computer or Online Banking Services Compatible Handset
Personal Internet access
Registration with the institution for the service,
Set up some password for customer verification.
Process: To access online banking,
Enter financial institutions website,
Enter the online banking facility using the customer number and
password.
There may be additional security steps for access

3.3.3

MOBILE BANKING

Mobile banking (also known as M-Banking, mbanking) is a term used for

performing balance checks, account transactions, payments, credit
applications and other banking transactions through a mobile device such
as amobile phone or Personal Digital Assistant (PDA).
Establishment & Development
Introduction of GPRS technology and Personal Office Mobile Services in
late 1999 and in 2000

Introduction of mobile money (2000) and Third Generation Mobile(late

2001)
The earliest m-banking services were offered
over SMS (called SMSBanking).
Innovation of Apples iPhone and Googles Android Operating System
based Smartphone with mobile apps for banking services brought
revolution.
With advancements in JavaScript have seen more banks launching mobile
web based services to compliment native applications.
A recent study (May 2012) by Mapa Research suggests that over a third of
banks have mobile device detection upon visiting the banks main
website.
In Bangladesh, Trust Bank is first bank who started to provide mobile
banking services in August, 2010. In May, 2011 DBBL started mobile
banking services at mass level. With most renewed BRACK BIKASH there
are 9 banks who provides mobile banking services. Eastern Bank and
other 6 banks are permitted to conduct International Remittances.
Total Registered Customer of Mobile Banking is 442, 289 and International
Remittances Service is 887. When Agents of Banks are 9,093 and 3,670
respectively. Total Value of Transactions is 2070 million Taka. Through over
3000 ATMs banks are providing its services.[1]

SMS banking is a type of mobile banking, a technology-enabled service

offering from banks to its customers, permitting them to operate selected
banking services over their mobile phones using SMS messaging.
4.1

INTRODUCTION

This paper is conducted to search the relative advantages of E-banking

over Traditional Banking in Bangladesh, South-Asia and Developed
Countries Perspective. Now, Advantage means getting better one than
previous one. So, the advantages of E-banking can be measured after
seeing the services that are providing by BD provider through mobile,
telephone and Online. Then we can compare what are the advantages we
are getting in Bangladesh by using E-banking.

4.2

E-BANKING SERVICES IN BANGLADESH

E-Banking satisfied customer demand in banking activities electronically

throughout the world. At present, several private commercial banks (PCBs)
and foreign commercial banks (FCBs) in Bangladesh offered limited

services of Tele-banking, internet banking, and online banking facilities

working within the branches of individual bank in a closed network
environment.

Online banking: International standard online banking facilities were

expanding in Bangladesh. At present, 29[2] scheduled banks offered
facilities like transaction through any branch under the respective bank
online network;
Payment against paid order or pay order encashment,
Demand draft encashment,
Opening or redemption of FDR from any branch of the same bank;
Remote fund transfer,
Cash withdrawal,
Cash deposit,
Account statement,
Clearing and balance enquiry within branches of the same bank; and
L/C opening, loan repayment facility to and from any branch of respective
bank under its own online network.

Internet banking: Internet banking in true sense was still absent in

Bangladesh. some banking services via internet that included
Account balance enquiry,
Fund transfer among accounts of the same customer,
Opening or modified term deposit account,
Cheque book or pay order request,
Exchange rate or interest rate enquiry,
Bills payment,
Account summary, Account details, account activity, standing instructions,
Loan repayment, loan information, statement request,
Cheque status enquiry, stop payment cheque,
Refill prepaid card, password change,

L/C application, Bank guarantee application,

Lost card (debit/credit) reporting, Pay credit card dues, view credit card
statement, or check balance.

Mobile banking: The standard package of activated that mobile

banking covers are:
Mini-statements and checking of account history;
Alerts on account activity or passing of set thresholds;
Monitoring of term deposits; access to loan statements; access to card
statements;
Mutual funds/equity statements;
Insurance policy management; pension plan management;
Status on cheque, stop payment on cheque; ordering check books;
Balance checking in the account; recent transactions;
Due date of payment;
PIN provision, change of PIN and reminder over the internet;
Blocking of (lost/stolen) cards;
Domestic and international fund transfers;
Micro-payment handling; mobile recharging;
Commercial payment processing;
Bill payment processing;
Peer to peer payments;
Withdrawal at banking agent; and deposit at banking agent.
Despite huge prospects, only 10 banks adopted mobile banking in
Bangladesh during the last year.[3]

Tele-banking: Tele banking services widened not enough in daily

banking activities in Bangladesh. Only 4 banks (October, 2010) so far
provided a few options of Tele-banking services such as
Detail account information, Balance inquiry,
Information about products or services,

ATM card activation,

Cheque book related service,
Bills payment,
Credit card service and so on.
Funds transfer between current, savings and credit card account, stock
exchange transactions etc. were still inaccessible through Tele-banking in
Bangladesh.

4.2.1

DESCRIPTION OF SERVICES

Here the description of some basic services provided by Bangladesh

Electronic Banking services Provider.
SMS Banking: Short Message Service (SMS) is the formal name for text
messaging. SMS banking allows customers to make simple transactions to
their bank accounts by sending and receiving text messages.
Electronic Funds Transfer: Electronic Funds Transfer (EFT) is a system of
transferring money from one bank account to another without any direct
paper money transaction.
Any Branch Banking: Any branch banking is the service where an account
is accessible from any branch of a particular bank. In Bangladesh the term
is widely popularized as online banking.
Automated Teller Machine (ATM): ATM means computerized machine that
permits bank customers to gain access to their accounts and permit them
to conduct some limited scale banking transactions with a magnetically
encoded plastic card and a code number.
Point of Sale (POS): Point of Sale (POS) service is an innovative electronic
money transferring system that allows the customers of banks to pay for
their purchases through their ATM and credit card at any POS enabled
retailer.
Debit Cards: Debit cards are linked directly to the bank account of its
holder. The holder of debit card can use it to buy goods or withdraw cash
and the amount is taken from the bank account right away.
Credit Cards: A credit card is a form of borrowing. Credit cards allow its
holder to buy goods now and pay later called buying on credit. They
arent linked to the bank account of the customers.
Banking KIOSK: KIOSK Banking offers customers the flexibility to conduct
their banking transactions via the KIOSK machine. The customer must
have a Debit Card and a PIN. When one inserts the debit Card into the

Kiosk, he/she will be prompted to enter the PIN. He/she can then begin
using KIOSK Banking.
SWIFT: The Society for Worldwide Interbank Financial Telecommunication
(SWIFT) operates a worldwide financial messaging network which
exchanges messages between banks and other financial institutions.

Figure 4.1: Percentage of Banks Providing Different E Banking Services

MICR: Magnetic Ink Character Recognition is a character recognition
technology adopted mainly by the banking industry to facilitate the
processing of cheque.
Open online Letter of Credit: It means that for opening letter of credit the
customers need not to go to the bank physically. They can open the letter
of credit with the help of online banking.
Home Banking: At first, banks introduced Telephone Bill Payment (TBP)
system so that customers could be able to their banking activities from
their home. The next version of home banking was video home banking
(VHB). The interest is expected to be a major factor in home banking.
Retail Automated Clearing House Service: The Automated Clearing House
(ACH) is an electronic network for financial transactions. ACH processes
large volumes of both credit and debit transactions which are originated in
batches. ACH credit transfers include direct-deposit payroll payments and
payments to contractors and vendors. ACH debit transfers include
consumer payments on insurance premiums, mortgages loans and other
kinds of bills. Businesses are also increasingly using ACH to collect from
customer online, rather than accepting credit or debit cards.
Corporate Automated Clearing House: The Automated Clearing House
(ACH) is an electronic network for financial transactions. ACH processes
large volumes of both credit and debit transactions which are orginated in
batches. Other retail and fiduciary products and services may include
balance inquiry, Funds transfer, downloading transaction information, Bill
presentment and payment, Loan Application, Investment activity and
other value-added services.

4.3

DESCRIPTION OF SOME REPUTED BANKS

CitiDirect: The facilities of CitiDirect were online direct debit

transaction process; information reporting; real-time information reporting
for more effective cash management; delivered with the highest level of
security; easy-to-use application; world link through CitiDirect;
comprehensive payment transaction solution; flexible, streamlined
functionality; reliability, speed and information; payments through
CitiDirect; a comprehensive payments solution globally and locally;
simplified, secure transaction management; timely, accurate information;
email and wireless banking alerts by CitiDirect.

Standard chartered grindlays bank Ltd: Standard chartered offered

the client a comprehensive range of Cash Management services. It
provided the secure, reliable and effective link between the client and
clients accounts anywhere across the Standard Chartered network.

HSBC: Business banking account enabled a person to receive credit

of all the cash or cheque deposits along with inward remittance and made
all local payments and provided access to the wide range of services for
the business requirements. A person may deposit upto BDT50, 000 cash
per transaction and any BDT amount in cheque 24 h a day, 7 days a week
through the ATM Machines, conveniently located Sales and Service
Centers. EasyPay Machines were also available for deposit of BDT 50,000
cash per transaction and any BDT amount in cheque to the business
banking account. With easy-pay machines, both HSBC and Non-HSBC
customers made deposits and pay their utility bills, credit card payments
and etc.

Eastern bank limited: Eastern bank limited Internet banking

application addressed the needs of small, individual and corporate account
holders of the bank. This application provided a comprehensive range of
banking services that enabled the customer to meet most of their banking
requirements over the net. The transactions that were supported by the
internet banking provided by Eastern Bank Limited were account
operations and inquiries, fund transfers and payments, utility bill
payments, deposits, loans, session summary etc.

BIKASH Mobile Banking services: BIKASH Limited is a joint venture

between BRAC Bank Ltd., Bangladesh, and Money in Motion LLC, USA.
Ensuring access to a broader range of financial services for the people of
Bangladesh is the ultimate objective of bKash. It has a special focus to
serve the low income people of the country and promote sustainable
micro-savings to achieve broader financial inclusion by providing financial
services that are convenient, affordable and reliable. BIKASH is dedicated
to provide financial services through an extensive network of communitybased agents and existing technology, including mobile phones. The
overall value proposition is simple: a safe, fast & convenient way to send

and receive money, make payments anytime anywhere and store or

safekeeping of your hard earned money.

Bank Asia: Bank Asia centralized Database with online ATM, SMS and
Internet query service. The significant delivery channel of Bank Asia was
the shared ATM Network. Bank Asia had 21 ATMs as a member of ETN
along with eleven other banks. Bank Asia was maintaining its
competitiveness by leveraging on its Online Banking Software and modern
IT infrastructure. It was the pioneer amongst the local banks in introducing
innovative products like SMS banking, and under the ATM Network the
Stellar Online Banking software enables direct linking of a clients account.

BRAC bank: BRAC bank used the most advanced commercially

available Secure Socket Layer (SSL) encryption technology to ensure that
the information exchange between the customers Computer
and BRACBank.comover the internet was secure and cannot be accessed
by any third party.

Arab Bangladesh bank Ltd: Arab Bangladesh bank Ltd was the first
private bank of Bangladesh with a long standing experience in domestic
and international banking. Its 153 branches in all the major commercial
centers of the country and 152 correspondents worldwide provided
proficient banking services to its customers.

DBBL Mobile Banking: Customer Registration, o Cash-r (cash deposit)

, o Cash-out (cash withdrawal), Foreign Remittance, Salary debasement,
Person to Person Transfer (P2P), Air time top up, Balance Inquiry etc.

4.4

ADVANTAGES OF E-BANKING IN BANGLADESH

After getting the number of services provided by the BD Banks through Ebanking it is easy to what advantages we are getting by establishing and
using e-banking. The Advantages or benefits can be classified in three
categories, these are:
National Point of View
Banks Point of View
Customers Point of View

To see the benefits based on time these benefits can be classified into two
categories:
Short term benefits: Reduce extra time; Increase productivity and
efficiency; Eliminate duplication and wastage; Cut down maintenance, and
shortage cost; Curtail security cost.

Long-term benefits: Create new opportunities of jobs for jobless;

participate in the countrys economic health; proper planning and
monitoring; Proper use resources.

A few examples:

For Firms E Commerce brings:

Different and arguably lower barriers to entry;
Opportunities for significant cost reduction;
the capacity to rapidly re-engineer business processes;
Greater opportunities to sell cross border.
Each and all of these potential benefits provides for increased competition
and the ability to wrest market leadership from established players.
For consumers the potential benefits are:
More choice;
Greater competition and better value for money;
More information;
Better tools to manage and compare information;
Faster service.

And there are potential benefits even for regulators:

Better, more flexible, user friendly information for consumers and others
on our own web-site;
Better, almost indestructible audit trails;
Potential to monitor advertising and advice activity more easily;
More cost effective and efficient use of regulatory tools (for example the
use of our extra net over the Y2K period).

4.4.1

National Point of View

Though in these days banks transaction and activities has brought

negative impact on the economy of our country, the investment in e-

banking by banks can make some long-term benefits for our country. The
advantages that our country is getting from e-banking action are:

Job creation: According to Bangladesh Bureau of Statistics, the

number of unemployed people in Bangladesh in 1990 2001 was 1.0
million. Among them 0.2 million are male and 0.8 million female, at the
rate of unemployment was 1.1 which was extended 1.9.[4] The issue of
computers eliminating jobs of people was quite emotional and painfully
real. But it has two sides that automation will eliminate certain types of job
like record keeper and also created jobs like administrator, system analyst,
programmer, operator etc. and helped to reduce unemployment problem.

Contribution to GDP: Banks with a national economy, work towards

building national capital, increasing national savings and mobilizing
investments in trade and industry.

Economic benefits: E-banking served so many benefits not only to

the bank itself, but also to the society as a whole.
E-banking made finance economically possible: (i) Lower operational costs
of banks (ii) Automated process (iii) Accelerated credit decisions (iv)
Lowered minimum loan size to be profitable.
Potentially lower margins: (i) Lower cost of entry (ii) Expanded financing
reach (iii) Increased transparency.
Expand reached through self-service: (i) Lower transaction cost (ii) Make
some corporate services economically feasible for society (iii) Make
anytime access to accounts and loan information possible.

4.4.2

Banks point of view

From the banks view point, banks are getting some specific benefits or
advantages after starting the e-banking services. These advantages are:

Branding: Banks offering e-banking services was better branding and

better responsiveness to the market. DBBL and BRAC are two market
leader at present in mobile banking services in Bangladesh, is the result of
positive branding of the banks.

Profit Maximization: The main goal of every company was to

maximize profits for its owners and banks were not any exception. Banks
are increasing its profit by reducing the cost of paper, time etc. by using ebanking. Thus, automated e-banking services offered a perfect opportunity
for maximizing profits.

Increased Services Quality: Features of E-banking services include

less time, complete transaction, no human conflict and presence etc. thus
the quality of services of bank is increasing day by day.


Increased Customer Rate: It is the most noticeable change in bank
after starting e-banking services. Customer are accepting this medium
beside a traditional account. Ultimately, the profit of bank is increasing

4.4.3

Customers point of view

The main benefit from the bank customers point of view was significant
saving of time by the automation of banking services processing and
introduction of an easy maintenance tools for managing customers
money. The main benefits of e-banking were as follows:
Increased comfort and timesaving-transactions made 24h a day,
without requiring the physical interaction with the bank. Quick and
continuous access to information.
Corporations had easier access to information as, they checked on
multiple accounts at the click of a button.
Better cash management. E-banking facilities speed up cash cycle and
increases efficiency of business processes as large variety of cash
management instruments is available on Internet sites of banks.
Private customers looked for slightly different kind of benefits from ebanking.
Reduced costs: This was in terms of the cost of availing and using the
various banking products and services.
Convenience: All the banking transactions performed from the comfort
of the home or office or from the place a customer wants to.
Speed: The response of the medium was very fast; therefore customers
actually waited till the last minute before concluding a fund transfer.
Funds management: Customers downloaded their history of different
accounts and do a what-if analysis on their own PC before affecting any
transaction on the web.

4.5

CONCLUSION

After all, Banking Sector is giving all the services through Electronic
Banking which is available in the world. But the services can be varied in
case of Geographic cause, networking problem and much more. If these
problems are removed then it is expected that the whole country will be
under banking services through Electronic Banking Methods.

[1] Nabi M. G. et al (2012) Mobile Financial Services in Bangladesh: An

Overview of Market Development. Dhaka: Bangladesh Bank. p. 10
[2] Hasan, S., Azizul, B., Abdulbasah, K., & Parveen, S. (2010). Adoption of
e-banking in Bangladesh: An exploratory study. African Journal of Business
Management, 4(13), 2718-2727. Retrieved
fromhttp://www.academicjournals.org/AJBM
[3] See Nabi, G. M. (2012). Mobile Financial Services in Bangladesh: An
Overview of Market Development1
[4] See Hasan, S., Azizul, B., Abdulbasah, K., & Parveen, S. (2010).
Adoption of e-banking in Bangladesh: An exploratory study.
7.0

CONCLUSION

Electronic banking is the future of conventional banking today. Day by day,

the Electronic Banking has been flourishing with numerous technology.
Every technology comes and make the Electronic Banking more cost
saving and time saving way of banking. It is increasing its safety as much
as traditional banking gives or more than traditional banking in some
countries. People use Electronic Banking at home with highest comfort.
So, the relative advantage of Electronic Banking is higher than
conventional banking.
Now Bangladesh is in the beginning of Electronic Banking systems, though
the start of Telephone banking was in the 90s but the process is in dead
position. Online Banking started its different services but speed of
internet, user of internet is the main barriers for its prospects. But Mobile
Banking in Bangladesh has started its services from 2011 and now the
most promising banking systems in Bangladesh. Because people is getting
relatively better advantage than traditional banking.
Our survey have found the numerical position of different advantage
criteria. These Security, Easy to use, cost, time saving and Reliability on
services. But the point for Security and Cost saving is very disappointed
which is 3.18 and 2.8 (out of 5) respectively. But the other three criteria
has got good marks from our respondents. So, in conclusion we have some
suggestion to our banking systems regarding survey result. The
recommendations are
Increase the use of up to date technology for security
Increase the security process of Mobile Banking
Create better restore point in case of Mobile or SIM loss
Increase the quality of services or quantity relatively to cost of
transactions, so that customer think it is not costly.

Increase awareness among people for the acquiring more customers.

Bank should consider the networking systems of Mobile operator and also
the failure of Electricity in case of ATM transaction.
To solve ATM related transaction problems bank can rely on renewable
energy like Solar Panel.
Make customers acknowledged about banks services and offers.
The prospects of Electronic Banks in Bangladesh is very potential. So, bank
should consider the customer feedback on different criteria and services.
They should apply and re-structured the services as customer said at
considerable position.

The Internet Banking Concept: There are two concepts of Internet banking: First, "A bank that
only exists on the internet and has no offices." In this case the operations are conducted
exclusively over the Internet. Second, a bank whose offices are physically and have a
distribution channel for products and services operating on the internet. This case is currently
the most common. "
The Definition of Internet Banking: "You can set Internet banking as a set of technological
tools that offers a financial institution for its customers to make banking transactions via the
computer using your Internet connection." The Internet banking service is based on a web
interface or connection that integrates the functionalities of a bank branch. The term Web
comes from the English and their translation is red. In addition to defining the overall structure
of the network, this word refers to each of the parts of Internet web pages.
The website is the distribution channel of Internet banking service. A website is a document
whose content is developed in a special programming language called HTML that enables the
distribution and exchange of information in different formats like text, video or sound through
the Internet. The interface used is connected to the same applications used by bank
branches, where the bank has physical offices and ATMs, by allowing the user to perform
online transactions over the Internet.

A quarterly magazine of the IMF

September 2002, Volume 39, Number 3

Challenges of the "E-Banking Revolution"

Saleh M. Nsouli and Andrea Schaechter
Electronic banking is the wave of the future. It provides enormous

benefits to consumers in terms of the ease and cost of transactions.

But it also poses new challenges for country authorities in regulating
and supervising the financial system and in designing and
implementing macroeconomic policy.

Electronic banking has been around for some time in the form of
automatic teller machines and telephone transactions. More recently,
it has been transformed by the Internet, a new delivery channel for
banking services that benefits both customers and banks. Access is
fast, convenient, and available around the clock, whatever the
customer's location (see illustration above). Plus, banks can provide
services more efficiently and at substantially lower costs. For
example, a typical customer transaction costing about $1 in a
traditional "brick and mortar" bank branch or $0.60 through a phone
call costs only about $0.02 online.
Electronic banking also makes it easier for customers to compare
banks' services and products, can increase competition among banks,
and allows banks to penetrate new markets and thus expand their
geographical reach. Some even see electronic banking as an
opportunity for countries with underdeveloped financial systems to
leapfrog developmental stages. Customers in such countries can
access services more easily from banks abroad and through wireless

communication systems, which are developing more rapidly than

traditional "wired" communication networks.
The flip side of this technological boom is that electronic banking is
not only susceptible to, but may exacerbate, some of the same risks
particularly governance, legal, operational, and reputational
inherent in traditional banking. In addition, it poses new challenges.
In response, many national regulators have already modified their
regulations to achieve their main objectives: ensuring the safety and
soundness of the domestic banking system, promoting market
discipline, and protecting customer rights and the public trust in the
banking system. Policymakers are also becoming increasingly aware
of the greater potential impact of macroeconomic policy on capital
movements.
Trends in electronic banking
Internet banking is gaining ground. Banks increasingly operate
websites through which customers are able not only to inquire about
account balances and interest and exchange rates but also to conduct a
range of transactions. Unfortunately, data on Internet banking are
scarce, and differences in definitions make cross-country comparisons
difficult. Even so, one finds that Internet banking is particularly
widespread in Austria, Korea, the Scandinavian countries, Singapore,
Spain, and Switzerland, where more than 75 percent of all banks offer
such services (see chart). The Scandinavian countries have the largest
number of Internet users, with up to one-third of bank customers in
Finland and Sweden taking advantage of e-banking.

In the United States, Internet banking is still concentrated in the

largest banks. In mid-2001, 44 percent of national banks maintained
transactional websites, almost double the number in the third quarter
of 1999. These banks account for over 90 percent of national banking
system assets. The larger banks tend to offer a wider array of
electronic banking services, including loan applications and
brokerage services. While most U.S. consumers have accounts with
banks that offer Internet services, only about 6 percent of them use
these services.
To date, most banks have combined the new electronic delivery
channels with traditional brick and mortar branches ("brick and click"
banks), but a small number have emerged that offer their products and
services predominantly, or only, through electronic distribution
channels. These "virtual" or Internet-only banks do not have a branch
network but might have a physical presence, for example, an
administrative office or nonbranch facilities like kiosks or automatic
teller machines. The United States has about 30 virtual banks; Asia
has 2, launched in 2000 and 2001; and the European Union has
severaleither as separately licensed entities or as subsidiaries or
branches of brick and mortar banks.
New challenges for regulators
This changing financial landscape brings with it new challenges for
bank management and regulatory and supervisory authorities. The
major ones stem from increased cross-border transactions resulting
from drastically lower transaction costs and the greater ease of
banking activities, and from the reliance on technology to provide
banking services with the necessary security.
Regulatory risk. Because the Internet allows services to be provided
from anywhere in the world, there is a danger that banks will try to
avoid regulation and supervision. What can regulators do? They can
require even banks that provide their services from a remote location
through the Internet to be licensed. Licensing would be particularly
appropriate where supervision is weak and cooperation between a
virtual bank and the home supervisor is not adequate. Licensing is the
norm, for example, in the United States and most of the countries of
the European Union. A virtual bank licensed outside these
jurisdictions that wishes to offer electronic banking services and take
deposits in these countries must first establish a licensed branch.
Determining when a bank's electronic services trigger the need for a
license can be difficult, but indicators showing where banking
services originate and where they are provided can help. For example,
a virtual bank licensed in country X is not seen as taking deposits in
country Y if customers make their deposits by posting checks to an
address in country X. If a customer makes a deposit at an automatic

teller machine in country Y, however, that transaction would most

likely be considered deposit taking in country Y. Regulators need to
establish guidelines to clarify the gray areas between these two cases.
Legal risk. Electronic banking carries heightened legal risks for
banks. Banks can potentially expand the geographical scope of their
services faster through electronic banking than through traditional
banks. In some cases, however, they might not be fully versed in a
jurisdiction's local laws and regulations before they begin to offer
services there, either with a license or without a license if one is not
required. When a license is not required, a virtual banklacking
contact with its host country supervisormay find it even more
difficult to stay abreast of regulatory changes. As a consequence,
virtual banks could unknowingly violate customer protection laws,
including on data collection and privacy, and regulations on soliciting.
In doing so, they expose themselves to losses through lawsuits or
crimes that are not prosecuted because of jurisdictional disputes.
Money laundering is an age-old criminal activity that has been greatly
facilitated by electronic banking because of the anonymity it affords.
Once a customer opens an account, it is impossible for banks to
identify whether the nominal account holder is conducting a
transaction or even where the transaction is taking place. To combat
money laundering, many countries have issued specific guidelines on
identifying customers. They typically comprise recommendations for
verifying an individual's identity and address before a customer
account is opened and for monitoring online transactions, which
requires great vigilance.
In a report issued in 2000, the Organization for Economic
Cooperation and Development's Financial Action Task Force raised
another concern. With electronic banking crossing national
boundaries, whose regulatory authorities will investigate and pursue
money laundering violations? The answer, according to the task force,
lies in coordinating legislation and regulation internationally to avoid
the creation of safe havens for criminal activities.
Operational risk. The reliance on new technology to provide services
makes security and system availability the central operational risk of
electronic banking. Security threats can come from inside or outside
the system, so banking regulators and supervisors must ensure that
banks have appropriate practices in place to guarantee the
confidentiality of data, as well as the integrity of the system and the
data. Banks' security practices should be regularly tested and
reviewed by outside experts to analyze network vulnerabilities and
recovery preparedness. Capacity planning to address increasing
transaction volumes and new technological developments should take
account of the budgetary impact of new investments, the ability to
attract staff with the necessary expertise, and potential dependence on

external service providers. Managing heightened operational risks

needs to become an integral part of banks' overall management of
risk, and supervisors need to include operational risks in their safety
and soundness evaluations.
Reputational risk. Breaches of security and disruptions to the system's
availability can damage a bank's reputation. The more a bank relies
on electronic delivery channels, the greater the potential for
reputational risks. If one electronic bank encounters problems that
cause customers to lose confidence in electronic delivery channels as
a whole or to view bank failures as systemwide supervisory
deficiencies, these problems can potentially affect other providers of
electronic banking services. In many countries where electronic
banking is becoming the trend, bank supervisors have put in place
internal guidance notes for examiners, and many have released riskmanagement guidelines for banks.
Reputational risks also stem from customer misuse of security
precautions or ignorance about the need for such precautions.
Security risks can be amplified and may result in a loss of confidence
in electronic delivery channels. The solution is consumer education
a process in which regulators and supervisors can assist. For example,
some bank supervisors provide links on their websites allowing
customers to identify online banks with legitimate charters and
deposit insurance. They also issue tips on Internet banking, offer
consumer help lines, and issue warnings about specific entities that
may be conducting unauthorized banking operations in the country.
Regulatory tools
There are four key tools that regulators need to focus on to address
the new challenges posed by the arrival of e-banking.
Adaptation. In light of how rapidly technology is changing and what
the changes mean for banking activities, keeping regulations up to
date has been, and continues to be, a far-reaching, time-consuming,
and complex task. In May 2001, the Bank for International
Settlements issued its "Risk Management Principles for Electronic
Banking," which discusses how to extend, adapt, and tailor the
existing risk-management framework to the electronic banking
setting. For example, it recommends that a bank's board of directors
and senior management review and approve the key aspects of the
security control process, which should include measures to
authenticate the identity and authorization of customers, promote
nonrepudiation of transactions, protect data integrity, and ensure
segregation of duties within e-banking systems, databases, and
applications. Regulators and supervisors must also ensure that their
staffs have the relevant technological expertise to assess potential
changes in risks, which may require significant investment in training

and in hardware and software.

Legalization. New methods for conducting transactions, new
instruments, and new service providers will require legal definition,
recognition, and permission. For example, it will be essential to
define an electronic signature and give it the same legal status as the
handwritten signature. Existing legal definitions and permissions
such as the legal definition of a bank and the concept of a national
borderwill also need to be rethought.
Harmonization. International harmonization of electronic banking
regulation must be a top priority. This means intensifying crossborder cooperation between supervisors and coordinating laws and
regulatory practices internationally and domestically across different
regulatory agencies. The problem of jurisdiction that arises from
"borderless" transactions is, as of this writing, in limbo. For now, each
country must decide who has jurisdiction over electronic banking
involving its citizens. The task of international harmonization and
cooperation can be viewed as the most daunting in addressing the
challenges of electronic banking.
Integration. This is the process of including information technology
issues and their accompanying operational risks in bank supervisors'
safety and soundness evaluations. In addition to the issues of privacy
and security, for example, bank examiners will want to know how
well the bank's management has elaborated its business plan for
electronic banking. A special challenge for regulators will be
supervising the functions that are outsourced to third-party vendors.
The macroeconomic challenges
But the challenges are not limited to regulators. As the advent of ebanking quickly changes the financial landscape and increases the
potential for quick cross-border capital movements, macroeconomic
policymakers face several difficult questions.

If electronic banking does make national boundaries irrelevant

by facilitating capital movements, what does this imply for
macroeconomic management?

How is monetary policy affected when, for example, the use

of electronic means makes it easier for banks to avoid reserve
requirements, or when business can be conducted in foreign
currencies as easily as in domestic currency?

When offshore banking and capital flight are potentially only

a few mouse clicks away, does a government have any leeway for
independent monetary or fiscal policy?

How will the choice of the exchange rate regime be affected,

and how will e-banking influence the targeted level of international
reserves of a central bank?

Can a government afford to make any mistakes? Will the

spread of electronic banking impose harsh market discipline on
governments as well as on businesses?
The answers to these questions fall into two emerging strands of
thought. First, the technological revolutionparticularly the
expansion of electronic money but also, more broadly, electronic
advances in banking practicescould result in a decoupling of
households' and firms' decisions from the purely financial operations
of the central bank. Thus, the ability of monetary policy to influence
inflation and economic activity would be threatened.
Second, as electronic banking expands, financial transaction costs can
decline significantly. The result would be tantamount to a reduction in
the "sand in the wheels" of the financial sector machinery, making
capital flows even easier to effect, with a potential erosion of the
effectiveness of domestic monetary policy. In this regard, proponents
of the Tobin taxwhich would tax short-term capital flows to
increase their cost and, thereby, the sand in the wheelswould feel
that electronic banking makes an even more compelling case for
introducing such a tax.
Conclusion
While electronic banking can provide a number of benefits for
customers and new business opportunities for banks, it exacerbates
traditional banking risks. Even though considerable work has been
done in some countries in adapting banking and supervision
regulations, continuous vigilance and revisions will be essential as the
scope of e-banking increases. In particular, there is still a need to
establish greater harmonization and coordination at the international
level. Moreover, the ease with which capital can potentially be moved
between banks and across borders in an electronic environment
creates a greater sensitivity to economic policy management. To
understand the impact of e-banking on the conduct of economic
policy, policymakers need a solid analytical foundation. Without one,
the markets will provide the answer, possibly at a high economic cost.
Further research on policy-related issues in the period ahead is
therefore critical.
References:
Bank for International Settlements, Basel Committee on Banking
Supervision, 2000, "Electronic Banking Group Initiatives and White
Papers," October (Basel); http://www.bis.org/publ/bcbs76.htm
Stijn Claessens, Thomas Glaessner, and Daniela Klingebiel, 2002a,

"Electronic Finance: Reshaping the Financial Landscape Around the

World," Journal of Financial Services Research, Vol. 22, pp. 29-61.
, 2002b, "Electronic Finance. A New Approach to Financial
Sector Development?" World Bank Discussion Paper No. 431
(Washington).
Benjamin M. Friedman, 2000, "Decoupling at the Margin: The
Threat to Monetary Policy from the Electronic Revolution in
Banking," International Finance, Vol. 3, pp. 261-72.
Saleh M. Nsouli and Connel Fullenkamp, 2001, "The Regulatory
Framework for E-Banking," keynote address at "e-Lebanon:
Banking, Payments, and ICT" conference, Beirut, Lebanon, June 6-8.
Andrea Schaechter, 2002, "Issues in Electronic Banking: An
Overview," IMF Policy Discussion Paper, No. 02/6 (Washington:
International Monetary Fund).