The use of the internet in the distribution of financial services, particularly in e-banking and e-payments, is the decade’s most important innovation in information and communication technologies (ICTs), according to a recent report from the United Nations.
The Information Economy Report 2007-2008 states that over the past 10 years the use of ICTs have been detrimental in “driving major innovations in business processes, and financial intermediation”.
It also says ICTs have further enhanced globalisation, liberalisation and technological change and cites ICTs as a major force in the future.
In the past decade the share of payments by paper-based cheques and credit transfer orders have decreased from 60 per cent in 1989 to 20 per cent in 2005. E-banking has also decreased the tendency of economic agents to keep cash and increased the importance of commercial bank money. The value of deposits kept by non-banks in commercial banks in G10 countries increased from 30 to 50 per cent of GDP, while the share of currency remained stable at seven per cent.
E-banking – referred to as internet or online banking – has proved to be less costly for the commercial banks and convenient for businesses, governments and individuals.
Transaction costs are much lower and consumers can keep control of their finances at the touch of a button.
The significance of online transactions can be mainly traced in remittances which are increasingly relying on online money transfer systems. And in a country like the UAE where outward remittances by expatriate workers continue to weigh heavily on its balance of payments, this is a major issue.
Remittances by expatriates in the UAE are slated to have reached Dh59 billion, about 17 per cent of the country’s gross domestic product, figures from Abu Dhabi Chamber of Commerce and Industry show.
Worldwide, remittances sent by migrants to developing countries reached $206bn in 2006, but it is estimated that the real level of current remittances could be 50 per cent higher owing to the major role of various informal remittances networks.
In other words, the overall volume of all remittances might come close to that of the foreign direct investment (FDI).
The United Nations Conference on Trade and Development (Unctad) estimates FDI flows to developing economies totalled $379bn in the same period.
In the traditional transfer process, the fees collected by major formal money transfer service providers were quite high, considerably exceeding the level of interchange fees paid by merchants for credit processing.
With the advent of the internet and other electronic means of payment, some money transfer service providers started to carve large chunks of payments out of the cash-based systems.
Another result of e-banking and e-payment was substantially lowering the costs related to initiation and handling of paper orders.
Not surprisingly, many attempts were further made to replace cash with various types of e-money. The Bank for International Settlements describes e-money as a “stored value or pre-paid product in which a record of the funds or value available to the consumer is stored on an electronic device in the consumer’s possession”.
In other words, it is a transfer of value originated either from cash or from bank accounts into an electric device embedded in a card or software linked to a PC. Having been transferred, it becomes e-money making further payments possible. So far, the expectation that e-money would spell the end of notes and coins was premature, says the study by Unctad.
“The expectation that payment cards would all be more important by now has also proved to be exaggerated,” it said.
But while the use of e-finance diminishes the role of cash, it has created another set of security challenges in the form of cyber crime in many parts of the world.
The United States predicts the number of e-bankers will rise from 56 per cent of households in 2006 to 76 per cent in 2011, other sources are noting a tendency for some groups of customers to reduce or even cease their e-banking and e-payment activities because of security concerns.
The US Online Banking Five Year Forecast said that 73 per cent of users in the 18-50 age group are concerned about identity theft.
“Security is all important with online banking and it might determine its success or failure,” the United Nations’ report says.
“In fact, some consumers stop paying bills and conducting other operations online as the risk increases.”
RAKBank has been reluctant to immediately jump into the interactive online banking wagon, and decided to launch e-banking only in the second quarter of this year.
“We didn’t go way ahead earlier as we had concerns regarding security,” said Graham Honeybill of RAKBank. “We wanted to make sure we had our security sorted out first and as a result we have changed two different systems and now we’re on the way to complete implementation.”
The natural progression is for banks to start outsourcing IT-related operations to other firms. In this case, there is also an increased risk the latter may not be sufficiently regulated and the transfer of information to them, and between them and the banks, may increase the security risk.
Consequently, there is a need to develop approaches to make sure a combination of enough technical expertise, security support and oversight is in place when engaging in outsourcing and offshoring in e-finance. Dubai Outsource Zone, an initiative of Dubai Technology, E-Commerce and Media Free Zone is confident that security is at the top of the agenda.
“With the advancement of technology and with companies going through trial and error lessons, companies have moved faster in regards to managing and securing data,” Ismail Al Naqi, Director of Dubai Outsource Zone, told Emirates Business.
However, the security problem should not be overestimated, Unctad says. Many schemes have been developed to solve the problems, with more, including biometrics in the pipeline.
Furthermore, some information technology authors claim the slower growth of internet banking in the United States is not linked to security concerns but to the macro-economy and market saturation.
A study by Siriluck and Speece says Asian cultures attach greater importance to interpersonal contacts and relations than those in the West, and as a result internet banking faces an extra hurdle.
Major providers of payments such as the Society for Worldwide Interbank Financial Telecommunication (Swift), payment card providers such as Visa and MasterCard or peer-to-peer payment schemes such as Paypal are also taking major steps to introduce better-performing security systems so as to protect their clients.
Visa and MasterCard have improved security on the web with systems such as Verified by Visa and Mastercard Secure Code, while Paypal has made its security procedures more stringent.
Risks involved in e-banking, however, do not end with security concerns. E-banking combines informational and transactional facilities. While the risks related to informational websites are limited to incorrect information or negative perceptions of the host bank, the risks with transactional facilities are more considerable.
In a wider perspective, e-banking risks include transaction and operations risk, credit risk, funding and investment-related risks, legal and compliance risks and strategic risk. Thus, the use of e-banking poses additional operational and hence reputation risk for existing banks.
Banks that start e-banking may also face initially high costs and technical problems, but those that wait, may lose customers to those who market the market first.
E-banking and e-payment are further scrutinised by regulators that are trying to ensure financial stability.
Regulation is especially important now since e-banking may be subject to security breaches that can undermine confidence and thus the stability of the banking sector.
The central banks of the world’s major developed economies are co-ordinating their efforts in this field with support of Bank of International Settlement through the Basel Committee on Banking Supervision and the Committee on Payment and Settlement Systems. But the general consensus here is not binding to developing and transition countries’ central banks.
There are several tools that regulators can use, including existing regulations and laws adapted to the requirements of the mentioned committees and making sure that banks have adequate facilities for training staff in new technologies.
Once laws are in place, efficient implementation is still needed. In South Africa, banks have been accused of unjustifiably requesting online customers in cases of identity theft to sign away their rights to money that might eventually be returned.
Another regulation-related issue is the need for a comprehensive system. In India the data protection law emphasises that hackers should be punished. But firms are under no obligation to prevent them from being able to hack into the systems in the first place. Thus the law does not really serve the consumers’ interest.
Dubai, which recorded more than Dh55 million ($15m) worth of transactions online last year, claims the existence of a virtual police in the emirate’s e-crime division.
“I’m sure they do it with the collaboration of the Interpol and other agencies in the world,” said Salem Al Shair, eServices Director, Dubai eGovernment.
Only 18 of the top 100 banks in the Arab world currently offer e-banking services, but not for long, says a new study by Ireland-based Research and Markets.
E-banking registration rates among banks’ retail clientele suggest demand is growing along with internet penetration in the Middle East.
About 14 per cent of internet users in the eight Arab countries can now use online banking. The equivalent number in the United States today is 17 per cent. Analysis of online service offerings among the top 100 Arab banks shows 82 banks do not offer online transactions.
As most Arab countries prepare to enter the World Trade Organisation, they face deregulation in the financial services sector and the prospect of competition with multinational banks. Concern about loss of market share is leading many experts in the region to advocate the unrolling of online banking services, the report said.
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