This research paper reviews the concept of internet banking as a major constituent of modern day banking. The internet and integrated information systems based on vast computer networks have been adopted by businesses. Today, such vast networks make up the core of operations for most businesses. This research paper illustrates how internet banking has grown to become a major component in modern banking. The paper will further explain the advantages of internet banking to both the financial institution and the customer. Either, the research paper will review risks associated with internet banking as well as a case that subjected internet banking customers to great risk. The research will finally review government regulation regarding internet banking.
Introduction
The twenty-first century has seen immense changes in the society. Globalization has become the leading factor in commerce and international relations. Governments, businesses and non-governmental organizations have cross-border operations and influences. The result is a global community where different parts of world have become highly interdependent. Nothing illustrates this better that the recent financial crisis that plunged the entire globe into a recession. While, the crisis may have been a result of a failed United States financial system, its impacts reverberated through entire globe. Such extensive globalization has been possible due to innovations and improvements in information communication technology and in particular the extensive use of computers and the internet. Governments such as the United States government hold sensitive information about its citizens in such computer networks. In the same regard, modern day banking has introduced internet-based banking services. Banks appreciate the fact that customers have limited time to go to the banking halls and therefore internet banking creates convenience of unparalleled proportion. Customers are able to pay for their shopping, bills, loans, mortgages and other key functionalities at the comfort of their offices, homes, phones or while away on business. Banks are also able to reach all customers through mails and online banking portals thereby reducing turnaround time and saving on postal costs. However, the internet presents one of the most insecure structures for conducting business. Online banking is susceptible to cyber attacks and for this reason some customers have avoided online banking altogether.
Online Banking
As earlier stated, the use of the internet and computers has allowed businesses to perform transactions and manage money electronically. Online banking is a service that allows a customer to perform three basic functions:
Viewing and evaluating individual account information
Making use of bills payment services and
Meeting obligation with other financial institutions such as loans, credit cards and mortgages
The concept of online banking is rather simple. A financial institution create an online portal through which customers are able to log into the secure bank network. Once the portal has been created, banks invite customers to apply for the chance to access their accounts and other banking services at their convenience. Customers are meant to create an authentication procedure based on the requirements set by financial institutions. The most common mode of authentication applied is a password combination. The password that is to be used is usually the security benchmark. Financial institutions set such security benchmarks and no customers will be able to make use of the portal if such security benchmarks have not been met. Once customers can remotely access their account, they can perform banking services at their own convenience.
Growth in Internet Banking
Over the past decade, internet banking has registered immense growth. Several surveys have been carried out and have since affirmed this assertion. In the year 2004, comScore Networks, a leader market research in the field of consumer behavior conducted a survey of online in the United States. The report indicated quite a commendable growth in use of online banking. The survey established that by the first quarter of the year 2000, about 22 million customers of the top ten banks in the US actively made use of online banking services available to them . By the year 2003 this figure had increased to about 30 million a 29% increase. The report also started that by 2004 about 37% of all bills were paid using online banking services. According to comScore Networks, online banking is the fastest growing products in modern banking.
A similar survey was undertaken by Pew Internet and American Life Project. The survey was conducted in the year 2005 and the result was similarly impressive. According to the survey, about 53 million Americans made active use of online banking services . The report argued that the figure represented 44% percent of all internet users in the United States. Further, Pew Internet asserted that the 53 million was a 47% increase in online banking users as compared to the figure of 2002 . As of 2005, Pew Internet argues about 13 million American used online banking on a daily basis. This growth was attributed to saturated growth and innovation in high speed internet.
The 2012 Ernst and Young report on global banking survey indicates online banking as the new frontier for personal banking. The young between the ages of 25 and 34 make up 62% of all internet banking users and this proportion is expected to increase. Similarly, middle age customers from the age of 34 to 54 are actively absorbing internet banking.
Factors for immense growth
All the surveys that were performed on online banking agreed on several reasons for such immense growth. The use of online banking has been attributed to the fact that it is a low cost channel for banking on both the financial institution and the customer . Online banking takes away the burden from the bank in terms of having to serve huge numbers of customers on the banking lobby. Banks are thus able to deliver the same banking services with fewer tellers and less time. Either, banks do not have to post bank statements thereby reducing the paper work and other involvements on the side of the bank.
Customers too get to benefit from the online banking channel. Costs normally appended to over-the-counter banking transactions are eliminated. Perhaps the most fundamental advantage of online banking is the convenience that comes with the banking channel. Customers are able to perform their banking activities at the comfort of their offices or their homes. The time in which a customer can perform a transaction is not limited. This convenience is the biggest incentive for customers to prefer online banking over conventional over-the-counter banking system.
Risks
The concept of online banking is based on the internet. While this banking paradigm may be a low cost and convenient means of performing financial transactions, it is susceptible to the risk and dangers associated with the internet. Cyber security is one the greatest challenges of the twenty first century. Hackers and malicious characters are ever looking for new innovative ways of accessing data on secure networks. Several cases such as T.J Maxx and the Mafia Boy incident indicate the extent to which online banking is altogether a risky affair . Either, customers are not certain that financial institutions are doing enough to secure the online banking channel.
This distrust among consumers has been brought to the fold. In the year 2003 a research by Informa Research established that customer confidence in online banking is waning . A similar research by Gartner indicates similar distrust among customers. In particular, the customers are concerned with media reports that indicate security breaches in banking institutions. Security breaches that compromise customer personal information, disclosure of sensitive information and a rise in phishing attacks have negatively impacted customer confidence .
Phishing
Internet banking is an online system that relies on consumer willingness to declare sensitive information on the internet. The leading concern that customers have expressed with regard to online banking is the potential risks presented by phishing. Nearly all organizations and businesses with online access portals have expressed loss of business due to phishing. Customers, who would otherwise engage in the online business, shy away from such businesses due to the perception that the business is illegitimate thus a phishing entity.
Phishing is a recent online scum that is perpetrated by malicious characters. Phishing is the process of deceptively obtaining personal information from non-suspecting online customers. The process begins by the fraudsters setting up illegitimate online trading portals that mimic legitimate financial institutions, trading companies and government agencies. The customer is requested to declare personal data such as bank account information, credit card information, s, password and other important personal data. Once the customer declares such information, fraudsters proceed to access the customer’s bank accounts and performed unauthorized transactions at the expense of the customer.
There are numerous ways to implement phishing. Some of ways include misleading emails, overriding content of a webpage, screen and key log grabbers, URL obfuscation, web Trojans, man-in-the-middle code intrusion, malware phishing, manipulation of IP addresses and reconfiguration of network settings. Therefore, customers who are not conversant with intricate internet technology might not be able to discern legitimate websites from the fraudsters. For this reasons, individual customers prefer to avoid the entire online banking scheme as whole in order safe guard personal financial information.
Hacking
One of the most potent risks that are associated with internet businesses is hacking or data breaches. Financial institutions and large retailers have become the pristine target for data breaches. Even government agencies, despite federal resources at their disposal, still experience incidences of data breach. Hackers have been able to developed networking and programming paradigms with supreme sophistication and have managed to access integrated information systems of several big organizations.
An incident that depicts the nature in data breaches affects internet banking is the T.J. Maxx incident. T.J Maxx is a retail chain store with several hundreds of stores in the United States. The company also has operations in other countries such as Ireland, United Kingdom Germany, and Poland (FitzGerald & Dennis, 2008). T.J Maxx’s operations in the USA are a huge business with a capitalization of about $13 billion (Ballad, Ballad, & Banks, 2008).
In early 2007 the T.J Maxx announced that hackers had managed to gain entry into the company integrated information system and that customer personal information had been compromised. Hackers had managed to access credit and debit card information regarding millions of customers. Transaction data, going back several years, had been held in the integrated information system and therefore the hackers had credit and debit card information . Online banking customers who electronically paid for shopping had their information accessed.
The results of the said intrusion were indeed frightening. The hackers managed to gain access to financial information of over 45 million American customers. Either, other vital information such as driver license numbers and social security numbers of about 451,000 customers had been downloaded by the hackers (FitzGerald & Dennis, 2008). The public was perplexed by the simple manner in which the hackers gained access. T.J Maxx used a very weak low cost web security mechanism referred to as Wired Equivalent Privacy (WEP) protocol. Outdated and easy to be break, hackers simply used a Wi-Fi system across the street and accessed the data for months.
Intruders of T.J Maxx took full advantage of the intrusion and used the information to make money. Customer financial information was used in performing transactions in several states within the US. Incidents of unauthorized uses of the said credit and debit cards were reported in other countries such as Mexico, Italy, China and Japan. One particular incident stands out where a single transaction worth $8 million was reported in the state of Florida. In the end, millions of dollars ended in the hand of hackers. Indeed, online banking customers lost their money and any confidence in the entire online banking system.
Regulation
Any electronic banking system such as online banking is regulated by the Federal Reserve Board based on the provisions of the Electronic Fund Transfer Act (EFTA) of 1978. While online banking was not present during EFTA legislation, amendments have been made to include online banking. Under Reg 59033 of the EFTA, a 2010 amendment, all disclosures with regard to overdraft and confidentially has been extended to include online banking . Commonly referred to as regulation E, EFTA has a wide scope that regulates the manner in which financial institutions will relate to customers with regard to electronic money. Identification, authorization and confirmation of electronic cash transfers have also been covered under regulation E.
With regard to cyber security, the Federal Reserve has a much lesser role to play in terms of regulation. The United States government has always maintained that intervention by the authorities would deter investment .This is due to the fact that investing in cyber security is both a complex and expensive venture. Either, the field of cyber security is under constant changes and new technologies emerge every other time . Thus, subsequent governments have left the issue of cyber security to be an initiative of the private sector and the industry to a level which private organizations perceive to be necessary to safeguard their business and by extension information regarding the American customer.
However, the Obama Administration has adopted a Cyberspace Policy where the federal government and private sector have a coordinated approach towards cyber security. The policy attempts to provide security benchmarks for institutions in order to safeguard private information.
Conclusion
Modern banking is experiencing a shift from conventional banking to web based banking services. Following in this trend is a huge middle aged and youth demographic that prefers convenient and lost cost banking services. Online banking is now a norm and it would be detrimental for a financial institution to overlook online banking. However, while the online system provides a convenient low cost banking channel, it is a very insecure banking system that can be hacked and the information disclosed to malicious persons. Therefore, investing in cyber security should be a priority if online banking services are to become a success.
References
Ballad, B., Ballad, T., & Banks, E. (2008). Access Control, Authentication, and Public Key Infrastructure. Boston: Jones & Bartlett Publishers.
Ernst & Young. (2012). The customertakes control: Global Consumer Banking Survey 2012. Retrieved Nov 9, 2012, from www.ey.com: http://www.ey.com/Publication/vwLUAssets/Global_Consumer_Banking_Survey_2012_The_customer_takes_control/$FILE/Global_Consumer_Banking_Survey_2012.pdf
Federal Reserve. (2011). Regulation E; Electronic Fund Transfers. Retrieved Nov 9, 2012, from www.federalreserve.gov: http://www.federalreserve.gov/boarddocs/supmanual/cch/efta.pdf
FitzGerald, J., & Dennis, A. (2008). Business Data Communications and Networking. New York: John Wiley and Sons.
Greenemeier, L. (2009, March 29). T.J. Maxx Parent Company Data Theft Is The Worst Ever. Retrieved Nov 9, 2012, from informationweek.com: http://www.informationweek.com/news/198701100?pgno=1
Heffernan, S. (2005). Modern Banking. Sussex: John Wiley & Sons.
Williamson, G. D. (2006 ). Enhanced Authentication In Online Banking. Journal of Economic Crime Management, Fall 206, Volume 4, Issue 2 , 1-42.
