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).
References
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:
http://en.wikipedia.org/wiki/Online_banking
Last accessed 18 October 2007
