E-BANKING
1. Definition, History, Importance, Risks and
Challenges of E-banking
2. Types of E-banking
3. E-banking channels
4. E-banking services
5. The Philippine E-banking system
5.1. Guidelines on e-banking activities and
services
E-BANKING
(INTERNET BANKING, WEB BANKING,
VIRTUAL BANKING, OR ONLINE BANKING)
• All forms of banking services and transactions
performed through electronic means.
• E-banking includes the systems that enable
financial institution customers,
individuals or businesses, to access accounts,
transact business, or obtain information on
financial products and services through a
public or private network, including the internet.
E-BANKING
• Electronic banking is a form of banking in
which funds are transferred through an
exchange of electronic signals rather than
through an exchange of cash, checks, or
other types of paper documents.
• Transfers of funds occur between financial
institutions such as banks and credit unions.
E-BANKING
• They also occur between financial institutions
and commercial institutions such as stores.
Whenever someone withdraws cash from
an automated teller machine (ATM) or pays
for groceries using a debit card (which draws
the amount owed to the store from a savings
or checking account), the funds are
transferred via electronic banking.
E-BANKING
• Electronic banking relies on intricate computer
systems that communicate using telephone lines.
• These computer systems record transfers and
ownership of funds, and they control the methods
customers and commercial institutions use to
access funds.
• A common method of access (or identification) is
by access code, such as a personal identification
number (PIN) that one might use to withdraw cash
from an ATM.
WHEN DID IT BEGIN
• In the 1950s the Bank of America was one of the first
institutions to develop the idea that electronic computers
could take over the banking tasks of handling checks and
balancing accounts, which was, at that time, extremely
labor-intensive.
• Other institutions gradually joined the effort and progressed
away from using paper checks and toward all-electronic
banking.
WHEN DID IT BEGIN
• Data-processing machines, robotic document sorting, and
the invention of optical character recognition (a computer
application that translates handwritten or typewritten words
into text that can be machine-edited) were a few of the
developments which allowed this evolution.
• The first electronic banking machines were able to keep
records of deposits and withdrawals from each client, make
account balance information available instantaneously,
monitor overdrafts, stop payments, and hold funds.
WHEN DID IT BEGIN
• Electronic banking laid the groundwork for speed
and convenience in individual and commercial
(business) banking.
• The spread of personal computer use has added
another layer of convenience and speed to the
process.
HOW IT WORKS
• When funds are transferred between accounts by
electronic means, it is called an electronic funds
transfer (EFT).
• The Electronic Fund Transfer Act, passed by
the federal government in 1978, established that an
electronic funds transfer is any financial transaction
that originates from a telephone, electronic
terminal, computer, or magnetic tape (storage tape
of the sort used in video or audio cassettes).
HOW IT WORKS
• Electronic bill payment and presentment (EBPP) is a process
that companies use to collect payments electronically
through systems like the Internet, direct-dial access, and
Automated Teller Machines (ATMs).
• It has become a core component of online banking at
many financial institutions today. Other industries—including
insurance providers, telecommunications companies, and
utilities—depend on EBPP services as well.
IMPORTANCE OF E-BANKING
Banks
• Lesser transaction costs – electronic transactions are the cheapest modes of
transaction
• A reduced margin for human error – since the information is relayed
electronically, there is no room for human error
• Lesser paperwork – digital records reduce paperwork and make the process
easier to handle. Also, it is environment-friendly.
• Reduced fixed costs – A lesser need for branches which translates into a
lower fixed cost.
• More loyal customers – since e-banking services are customer-friendly, banks
experience higher loyalty from its customers.
IMPORTANCE OF E-BANKING
Customers
• Convenience – a customer can access his account and
transact from anywhere 24x7x365.
• Lower cost per transaction – since the customer does not
have to visit the branch for every transaction, it saves him
both time and money.
• No geographical barriers – In traditional banking systems,
geographical distances could hamper certain banking
transactions. However, with e-banking, geographical
barriers are reduced.
IMPORTANCE OF E-BANKING
Businesses
• Account reviews – Business owners and designated staff
members can access the accounts quickly using an online
banking interface. This allows them to review the account
activity and also ensure the smooth functioning of the
account.
• Better productivity – Electronic banking improves
productivity. It allows the automation of regular monthly
payments and a host of other features to enhance the
productivity of the business.
IMPORTANCE OF E-BANKING
Businesses
• Lower costs – Usually, costs in banking relationships are
based on the resources utilized. If a certain business requires
more assistance with wire transfers, deposits, etc., then the
bank charges it higher fees. With online banking, these
expenses are minimized.
IMPORTANCE OF E-BANKING
Businesses
• Lesser errors – Electronic banking helps reduce errors in regular
banking transactions. Bad handwriting, mistaken information,
etc. can cause errors which can prove costly. Also, easy review
of the account activity enhances the accuracy of financial
transactions.
• Reduced fraud – Electronic banking provides a digital footprint
for all employees who have the right to modify banking
activities. Therefore, the business has better visibility into its
transactions making it difficult for any fraudsters to play mischief.
ADVANTAGES OF ONLINE
BANKING
• Convenience is a major advantage of online
banking.
• Basic banking transactions such as paying bills
and transferring funds between accounts can
easily be done 24 hours a day, seven days a
week, wherever a consumer wishes.
ADVANTAGES OF ONLINE
BANKING
• Online banking is fast and efficient.
• Funds can be transferred between accounts almost
instantly, especially if the two accounts are held at
the same institution. Consumers can open and
close a number of different accounts online, from
fixed deposits to recurring deposit accounts that
typically offer higher rates of interest.
ADVANTAGES OF ONLINE
BANKING
• Consumers can also monitor their accounts
regularly closely, allowing them to keep their
accounts safe. Around-the-clock access to
banking information provides early detection
of fraudulent activity, thereby acting as a
guardrail against financial damage or loss.
DISADVANTAGES OF ONLINE
BANKING
• For a novice online banking customer, using systems for
the first time may present challenges that prevent
transactions from being processed, which is why some
consumers prefer face-to-face transactions with a teller.
• Online banking doesn't help if a customer needs access
to large amounts of cash. While he may be able to take
a certain amount at the ATM—most cards come with a
limit—he will still have to visit a branch to get the rest.
DISADVANTAGES OF ONLINE
BANKING
• Although online banking security is continually
improving, such accounts are still vulnerable when it
comes to hacking. Consumers are advised to use
their own data plans, rather than public Wi-Fi
networks when using online banking, to prevent
unauthorized access.
DISADVANTAGES OF ONLINE
BANKING
• Additionally, online banking is dependent on a
reliable Internet connection. Connectivity
issues from time to time may make it difficult to
determine if banking transactions have been
successfully processed.
RISKS OF E-BANKING
Operational Risk
Operation risk or transactional risk is the most common
type of risk of e-banking. It includes:
• Incorrect transaction processing
• Compromises in the integrity of data, data privacy, and
confidentiality
• Unauthorized access to the bank’s systems
• Non-enforceability of contracts, etc.
RISKS OF E-BANKING
Security Risk
• When we talk about banking transactions, security of the
transaction is of paramount importance. All customers want
their transactions to be confidential.
• However, since all information is online, there is always a
chance that someone might retrieve the information and
misuse it. The security risk of e-banking also arises from
hacking threats and unauthorized access to the bank’s
systems.
RISKS OF E-BANKING
Reputational Risk
• For any business, its reputation is of critical importance. When it
comes to electronic banking, if a bank fails to perform critical
functions or not work according to the expectations of its
customers, then it faces a risk of loss of reputation. This eventually
leads to a loss of funding or customers.
• Some reasons for this risk are a system or product not functioning
as expected, significant deficiencies in the system, security
breaches (external or internal), misinforming customers about
the processes and policies of using e-banking, certain
communication issues that hinder the customer from accessing
his account, etc.
RISKS OF E-BANKING
Legal Risk
• Whenever there is a violation of laws, regulations, or
prescribed practices, or when the legal rights and
obligations of any of the parties to a transaction are not
established, then there is a legal risk involved.
• E-Banking is relatively new to the industry and there is a lot
of uncertainty and ambiguity about certain laws and rules.
This increases the legal risk.
RISKS OF E-BANKING
Money Laundering Risk
• All transactions through the e-banking channel are done
remotely. Therefore, it is difficult for banks to use traditional
methods to detect and prevent criminal activities.
• While there are certain money laundering rules in place, for
electronic payments, their feasibility is questionable.
Therefore, banks carry the risk of money laundering.
RISKS OF E-BANKING
Cross-border Risks
The core idea of electronic banking is to extend the geographical
reach of both banks as well as customers. This means that the expansion can
go beyond national borders. This leads to several cross-border risks:
• Legal and Regulatory risks – There is a possibility about uncertainties
regarding the legal requirements in certain countries and jurisdiction
ambiguities of different national authorities.
• Operational risk – If the bank uses a service provider located in a different
country, then it is difficult to monitor it causing operational risk.
• Credit risk – Cross-border transactions can increase credit risk. This is because
it is difficult to appraise an application for a loan from a customer in a
different country.
RISKS OF E-BANKING
Strategic Risk
This risk is associated with issues pertaining to:
• The development of a business plan
• Having sufficient resources available to support the business plan
• In the case of outsourced activities, the credibility of the vendor
• For employees, any change in the work environment
• Level of technology used in comparison with the available
technology, etc.
RISKS OF E-BANKING
Other Risks
• The other risks of e-banking are the same as those of traditional
banking like credit risk, liquidity risk, interest rate risk, market risk,
etc. However, in e-banking, these risks are magnified due to the
use of electronic channels and the absence of geographical
boundaries.
• All the risks mentioned above can arise due to some flaws in
design, insufficient technology, negligent employees, and
unauthorized system access (intentional or not). Therefore, it is
important that banks adopt the right technology and systems
and have proper access control for a secure transacting
environment.
TYPES OF E BANKING
• Level 1 – This is the basic level of service that
banks offer through their websites. Through this
service, the bank offers information about
its products and services to customers. Further,
some banks may receive and reply to queries
through e-mail too.
TYPES OF E BANKING
• Level 2 – In this level, banks allow their
customers to submit instructions or applications
for different services, check their account
balance, etc. However, banks do not permit
their customers to do any fund-based
transactions on their accounts.
TYPES OF E BANKING
• Level 3 – In the third level, banks allow their
customers to operate their accounts for funds
transfer, bill payments, and purchase and
redeem securities, etc.
TWO TYPES OF BANKING WEBSITES
1. Informational Websites – These websites offer general
information about the bank and its products and
services to customers.
2. Transactional Websites – These websites allow
customers to conduct transactions on the bank’s
website. Further, these transactions can range from a
simple retail account balance inquiry to a large
business-to-business funds transfer. The following table
lists some common retail and wholesale e-banking
services offered by banks and financial institutions:
COMMON E-BANKING SERVICES
RETAIL SERVICES WHOLESALE SERVICES
*Account Management *Account Management
*Bill Payment *Cash Management
*New Account Opening *Small Business Loan Application,
*Consumer Wire Transfers Approvals, or Advances
*Investment / Brokerage Services *Commercial Wire Transfers
*Loan Application & Approval *B2B Payments
*Account Aggregation *Employee Benefits / Pension
Administration
THE PHILIPPINE E-BANKING SYSTEM
The Philippine
E-banking system
E-MONEY
E-money shall mean monetary value as
represented by a claim on its issuer, that is –
a. electronically stored in an instrument or
device;
b. issued against receipt of funds of an
amount not lesser in value than the monetary
value issued;
E-MONEY
c. accepted as a means of payment by
persons or entities other than the issuer;
d. withdrawable in cash or cash equivalent;
and
e. issued in accordance with the Section in
MORB.
ELECTRONIC MONEY ISSUER (EMI)
Electronic money issuer (EMI) shall be
classified as follows:
a. Banks (hereinafter called EMI-Bank);
b. NBFI supervised by the Bangko Sentral
(hereinafter called EMI-NBFI); and
c. Non-bank institutions registered with the
Bangko Sentral as a monetary transfer agent
under Sec. 4511N of the MORNBFI (hereinafter
called EMI-Others).
ELECTRONIC INSTRUMENTS OR
DEVICES
Electronic instruments or devices shall
mean cash cards, e-wallets accessible via
mobile phones or other access device, stored
value cards, and other similar products.
E-money issued by banks shall not be
considered as deposits.
Electronic Banking
Services and
Operations
ELECTRONIC BANKING
APPLICATION
Banks wishing to provide and/or enhance
existing electronic banking services shall submit to the
BSP an application describing the services to be
offered/enhanced and how it fits the bank’s overall
strategy.
This shall be accompanied by a certification
signed by its president or any officer of equivalent
rank and function to the effect that the bank has
complied with the following minimum pre-conditions:
ELECTRONIC BANKING
APPLICATION
a. An adequate risk management process
is in place to assess, control, monitor and
respond to potential risks arising from the
proposed electronic banking activities;
ELECTRONIC BANKING
APPLICATION
b. A manual on corporate security policy
and procedures exists that shall address all
security issues affecting its electronic banking
system, particularly the following:
(b.1) Authentication - establishes the
identity of both the sender and the receiver;
uses trusted third parties that verify identities in
cyberspace;
ELECTRONIC BANKING
APPLICATION
(b.2) Non-repudiation - ensures that
transactions can not be repudiated or presents
undeniable proof of participation by both the
sender and the receiver in a transaction;
(b.3) Authorization - establishes and enforces
the access rights of entities (both persons and/or
devices) to specified computing resources and
application functions; also locks out unauthorized
entities from physical and logical access to the
secured systems;
ELECTRONIC BANKING
APPLICATION
(b.4) Integrity - assures that data have not
been altered; and
(b.5) Confidentiality - assures that no one
except the sender and the receiver of the data
can actually understand the data.
ELECTRONIC BANKING
APPLICATION
c. The system had been tested prior to its
implementation and that the test results are
satisfactory. As a minimum standard, appropriate
systems testing and user acceptance testing should
have been conducted; and
d. A business continuity planning process and
manuals have been adopted which should include
a section on electronic banking channels and
systems.
PRE-SCREENING OF APPLICANTS
a. The BSP, thru the Technical Working
Group on Electronic Banking, shall pre-screen
the overall financial condition as well as the
applicant-bank’s compliance with BSP rules
and regulations based on the latest available
Bank Performance Rating (BPR) and Report of
Examination (ROE) including CAMELS Rating.
PRE-SCREENING OF APPLICANTS
b. The Working Group shall ensure that the
applicant bank’s overall financial condition
can adequately support its electronic banking
activities and that it shall have complied with
certain comprehensive prudential requirements
such as, but not limited to, the following:
PRE-SCREENING OF APPLICANTS
(b.1) Minimum capital requirement and net
worth to risk assets ratio;
(b.2) Satisfactory solvency, liquidity and
profitability positions;
PRE-SCREENING OF APPLICANTS
(b.3) CAMELS composite rating of at least 3,
(this number, however can be flexible depending
on other circumstances prevailing), and with at
least a moderate risk assessment system (RAS)
based on the latest regular examination.
(B.4) There are no uncorrected major
findings/exceptions noted in the latest BSP
examination.
