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Online banking; the Future of Banking

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The internet has come a long way since Tim Berners Lee discovered it under two decades ago. There have been remarkable progress to create value added services from the internet, among them online banking. The capacity to use internet to deliver online banking services is yet to attract due attention from scholars on the impact of online banking on the efficient delivery of services by the bank (Harnando, Nietoa, 2006). The most obvious contribution online banking has brought to the banking industry is the reduction of overheads that would have otherwise been incurred particularly in relation to the staff and advertising and others services like information technology as no special software is needed (wikipedia 2007[online]). The reductions in costs in those areas have undoubtedly added positively to a bank bottom-line. The emerging consensus on the future role of online banking is that it can be used to add value to overall banking services as appertaining service delivery, but online banking has failed to marshal potent force to dislodge physical banks branches.


The reason why online banking is yet to dislodge the brick and mortar traditional branches is because risk management on online banking applications have not walked with tandem with other advances in information technology. The imperfections of technology sometimes mean that online banking may not be a perfect substitution for a bank branch, and some functions (such as depositing cash) might still require the need to have physical branches for some foreseeable future.


 There are three major ways in which financial institutions exploit the internet (Ramakhrishnan, 2001), or basically online banking means these three things. They can do it for information purposes whereby the bank can disseminate information about its products over the internet. Secondly, online banking can be about communication with a certain identifiable set of people (in this case a customer) about matters of interest to them such as account information. Thirdly and at the highest level, online banking can be transactional, whereby a customer may give the bank a certain mandate to operate the account in a certain way, like to make payments to a third party. This would happen without the customer stepping into the bank's hall.


Numerous risks abound in online banking, and it is impossible to discuss here them all (Comptroller, 1999). But the main ones are,


Credit risk

Interest rate risks

Foreign exchange risks,

Transaction risks,

Compliance risks,

Reputation risks.


Risks arise from events, foreseen and unforeseen, that may have an unfavourable effect on the banks earnings or capital. The risks are not particularly peculiar to online banking, but they become more potentially threatening in online banking.


Bank management for online banking system may be ill advised to leave these risks to the IT department to handle. Many of them require the management careful considered exercise of discretion. This may involve the establishment of effective management controls over the online banking risks, for instance accountability and appropriate policy directives for containment of these risks. New online banking projects that have a risk factor should be reviewed by the management and they should ensure that adequate technical expertise is available at all times.


For securities risk management strategy, the banks should have in place adequate identification (authentication) of online banking customers before a transaction is carried out. Measures should also be in place to ensure that such customer cannot deny he transacted over the internet.


Measures should also be in place before embarking on an online banking project to protect customer’s privacy and Know Your Customer rules for online banking customers should be stricter than usual (Basel, 2001).




1. HERNANDO, I, NIETOA, MJ (2006) “Is the Internet Delivery Channel Changing the Banks Performance?” Banco de Espana 0624.

2. COMPTROLLER OF CURRENCY, (1999) Internet Banking--Comptroller's Handbook, OCC, Washington.

3. BASEL COMMITTEE ON BANKING SUPERVISION (2001) Risk Management Principles for Electronic Banking, Bank of International Settlements, Basel, Switzerland.

4. RAMAKRISHNAN, G (2001). Risk Management for Internet Banking Information Systems Control Journal, Volume 6.

5. Wikipedia (2007). Online Banking. Available: Last accessed 18 October 2007

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