OPPORTUNITIES AND CHALLENGES OF ELECTRONIC BANKING
After attempting to define E-Banking and delve into basic history, this essay endeavors to
outline opportunities/challenges of specific modes of E-Banking (ATMs etc), before a
generic discussion of merits/trials of E-Banking initiatives.
DEFINITION
Electronic Banking is any method of banking activity or distribution of banking
services utilizing an electronic or digital mode of delivery/conveyance, and
includes Plastic Cards, ATMs, Dial-Up Corporate Banking, Internet Banking, EBilling, and even Branch Automation Systems (On-Line Banking, Phone Banking,
Call Centers) (Appendix 1). The spectrum of services comprises on-line credit
card transactions; e-cash; e-cheques; e-billing; electronic invoices; electronic
standing instructions and so forth.
HISTORY
The earliest user of electronic banking technology was the Fed Reserve
Communication System (Fed Wire) in USA, recording over 700,000 transfers in
1920. The growth of E-Banking was slow, and most information flowing
between corporate treasuries and banks was paper based even until 1970s.
Society For Worldwide Interbank Funds Transfer (SWIFT) began operations for
cross-border funds transfer in 1977, with 239 participating banks in 15 countries.
Midland Bank (UK) became the first bank to offer electronic banking to corporate
customers in 1982.
PLASTIC CARDS
Banks utilize plastic cards to diversify credit portfolio, standardize product
programs, cross-sell, reduce branch-costs of outdated cash-handling, and lower
risk through asset-backed securitization. The value-addition proposition for
customers means many downstream conveniences such as hassle-free shopping,
and upstream benefits such as utilization of “float” and availability of credit.
Through franchises like Visa, many banks now have EFTPOS/Shopping Cards
which virtually eliminate the need for cash. In Pakistan, Habib Bank’s “Value”
Card and its supporting marketing campaign (“It’s Current-It’s Currency”)
exemplify both the convenience to end-users of E-Banking solutions and the
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resource commitments required to launch, create awareness, induce switching,
and ensure smooth usage. Standard Chartered is particularly advanced in this
market, having launched a co-branded card with PIA.
Pundits foresee a time when EFTPOS cards shall be used in Pakistan in public
arenas such as buses and cinemas (“stored-value” cards). POS are deemed
especially attractive to merchants because they provide cash payments, reduce
paperwork, speed sales transactions, avoid credit-card fees, and reduce incidence
of bad cheques, although in economies like Pakistan negative inertia exists due to
necessary requirements of documentation. Sophisticated POS-users also realize
that POS cards eliminate the luxury of “float”, readily available with cheques
and credit cards.
Banks have introduced “E-Wallets” for micro-payments (magazines, fast-food
etc). These store monetary value and their usage debits the customers’ EAccount by the amount of purchase money. This points to the extremely varied
and growing number of channels of delivery, and the increased requirement for
banks’ front-office integration with back-office, support functions, and systems.
It was estimated in December 2003 that only about PKR 19.44 billion worth of
plastic money had been created in the domestic economy, which – if compared to
total money in circulation (M1) – demonstrates the available depth of
opportunities.
Sophisticated card delinquencies (cyber-crime and identity-theft), or simple lostand-stolen cards present major challenges, which are generally mitigated by the
banking system, contingent upon speedy and accurate reporting by the
customers, and by carrying general provisions to cover for future losses.
ATMs
The first ATMs were introduced in 1968-9 by Barclays Bank in UK. A major bank
to benefit from this technology was Bank of America, which eliminated 120 of its
1,071 branches during 1984. This illustrates that banks shall only benefit from EBanking initiatives if cost savings from premises and personnel redundancies can
be captured. However, in Pakistan, most large banks remain relatively
constrained in terms of free-hand to lay off staff or reduce branch network,
basically due to historically entrenched developmental and public-sector
outlooks, existence of strong unions in some cases, and lack of an adequate social
security infrastructure.
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Automatic Teller Machine services are being offered to customers as an “addon”, mostly without service fee. ATMs were introduced for the first time in
Pakistan in 1999 under the joint aegis of Askari and ABN-AMRO Banks. Most
banks today are members of unified 1-LINK and MNET networks (now
incorporated as Guarantee Company). Knowledge sharing has enabled all banks
to establish new ATMs in locations where there exists no other member banks’
machine, thus increasing banks’ penetration and customers’ convenience. This
example of enabling delivery of costly service at competitive pricing is indicative
of overall prospects in E-Banking through sharing information, infrastructure,
and experience.
However, there remain many teething technological and operational challenges
such as “down-time” due to back-office inefficiencies, and power cut-offs etc.
According to SBP’s “Pakistan Financial Sector Assessment-2004” Report,
amounts transacted through ATMs between 2004-2005 had declined abruptly by
PKR 44 billion. (In 2003-2004 ATM amounts touched record levels of PKR 120
billion). During the same period, number of installed ATMs had been enhanced
from 786 to 1,028 and number of on-line branches of banks had increased from
2,475 to 2,897. This points to customers’ ease of switching back to traditional
banking channels in case of poor service, despite banks’ voluminous investments
in equipment and marketing.
An innate challenge to this mode of electronic delivery is the perceived inability
of banks – as “pillars of the economy” – to offer this service to 60% of Pakistan’s
population, being rural-based and predominantly illiterate. However, banks
have recognized these rural pockets of wealth and some, including Union Bank,
have launched Agri-Cards, which function essentially as Credit Cards at
designated outlets. These services are being provided in Multan Division by
Union, with rollout planned for other areas.
Physical security is a key challenge mitigated by well-patrolled locales;
networked cameras; separate and discrete mailing of cards and PIN codes; and
encouragement of frequent PIN changes.
BRANCH AUTOMATION SYSTEMS And CALL CENTERS
A submission for credit, an application for fund-transfer, or a generation of
account statement in person does subject customers to certain degree of
discomfort, however small, and resultantly the more impersonal on-line form of
application is deemed far more appealing by many customers.
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Bankers in Pakistan state that Branch Automation is inversely proportional to
number of branches. Foreign Banks have achieved cross-country automation as
well as automation at Regional levels, whereas the large-network Pakistani
Banks have automation generally at the branch level and limited number of online branches. Allied Bank is the sole player with 100% on-line branches,
numbering 730+; and total on-line branches in Pakistan exceeded 1,500 by end
2003.
Banks in Pakistan are also progressing towards cross-linkage, allowing electronic
banking transactions between branches of different banks. Inter-bank fund
transfers through the network will open ancillary opportunities, such as
connectivity with international networks, allowing instant settlement of clearing
cheques as their images move on the network.
SBP has decided to automate inter-bank settlements through Real Time Gross
Settlement (RTGS), which shall complete automation of inter-bank chain, from
origination of transaction at a bank to clearing at NIFT and final settlement with
SBP.
Capitalizing on economic boom, consumerism, and increased spending power of
a progressively larger urban middle-class, prominent banks in Pakistan have
ventured into E-Banking delivery mode of 24x7 Call Centers. These provide
services, educate customers in new technology-driven initiatives, and also solicit
sales through cross-selling. Askari Bank, with its round-the-clock, fullyautomated, “voice response activated”, “Tele-Care Center” is the market leader.
In developed economies, a certain level of security has already been achieved,
wherein a client is provided a multi-level, customer-designed security product.
The user of branch-automation services sets the level for information such as
SMS alerts, e-mail notification, or may go as far as opting for telephonic
confirmations of transactions.
E-BILLING
E-Billing - the ability to receive and pay bills on-line - has become a significant
business in both the international and Pakistani financial markets, with banks
such as Askari and MCB taking the lead locally. UBL is in advanced stages of
offering utility payment services through 1-Link Switch.
The SBP established Payment Systems Department in 2002 and, on the Policy
Level, there exists a Payment System Policy Group headed by a Deputy
Governor, who is instituting IT-based Payment Systems.
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HOME BANKING (HB)
Advanced economies have been offering HBs, which comprise a home PC,
tailored banking software, and a modem. Customers utilizing this facility can
maintain records, sort and retrieve information, pay bills, transfer funds,
reconcile cheque books, issue orders to their bankers, and even register
complaints to the bank – all from the coziness of their homes. Advanced
versions of HBs can also accept and answer loan applications, trade securities
(AKD and others in Pakistan) and provide investment counseling. It is estimated
that 80% of US households utilize some level of HB and banks now even lease
HB equipment to maintain their market position!
INTERNET BANKING
An exponentially expanding Internet market has rendered it possible for the
banking industry to accept and deploy the Internet as a lucrative delivery
channel, and E-Banking has globally become a term synonymous with Internet
Banking. It is estimated that presently US households banking online are in
excess of 30 million.
The Internet has made it possible to launch a multitude of new financial services
and products such as “digital money” and “electronic checks” in a manner both
feasible to providers and easily assessable for end-users all over the world.
With the advent of “Merchant Accounts” in Pakistan, E-Banking would be
poised to exploit completely the benefits of E-Commerce. It would indeed not be
too far-sighted to imagine mass-scale Urdu web portals, such as ATM machines
presently offering both languages to patrons.
An Internet Banking platform provides opportunities to a bank in three basic
forms, depending on the complexity of deployment:
Information
At a reduced cost and readily available from anywhere, a website presents
information on-line (like a printed brochure), and may include unsecured email
contact. This format would require no customer identification, verification, or
authentication.
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Regulators, such as the SBP, have joined the bandwagon uploading their
information, circulars, and guidelines, which were previously deemed hard to
obtain but were always essential to develop seasoned/knowledgeable bankers.
Information Exchange
Basic customer information (name, address, account information) may be
collected and displayed, with possible secure email or data transfer requiring
verification of customer identification. As early as 2001, various Pakistani banks
had up-loaded their Account Opening Forms for comfort of savoir-faire patrons.
Transactional
Customers are enabled to conduct both simple and complex transactions, with
requirement for strong authentication.
SECURITY CHALLENGE
It presents a growing challenge to the banking industry to strategize, implement,
and operate an umbrella security program encompassing a risk-based protection
strategy and risk management plan; a security policy; an awareness program;
security controls; and testing. Banks desirous of forging ahead in E-Banking
shall require to structure programs based on passwords, firewalls, encryption,
and intrusion detection and management. Banks in Scandinavian countries,
Korea, Singapore, and other OECD nations have been carrying general
provisioning amounting to billions of dollars as pro-active shields against losses
due to hacking and insecure E-Banking. Additionally, marketing budgets
require to be committed to educate the customers regarding the security of their
funds and data, and induce a switch to E-modes.
Like conventional “brick-and-mortar” banks, electronic banks have to develop a
description of their MIS architecture, which would include – but not be limited to
– vendor and vendor contracts; E-Banking security policies; electronic operating
processes (vendor management, customer-vendor-employee authentication,
business resumption plans, internal controls, internal audit programs and so
forth). Some of the most prominent threats include inadequacy of physical and
logical protection against unauthorized external access like penetration attempts;
computer viruses; and denial of service.
The opportunity to “rope in” economies of scale and scope from E-Banking in
general and Internet Banking in particular generally only accrue if certain
specific security hurdles are overcome:6
Firewalls
Firewalls are used as security measures to protect internal systems. In layman’s
terms they can be described as gateways to guard against unauthorized
intrusions and access to the banks’ networks. Since Firewalls are penetrable,
they, per se, do not guarantee logical security, and work with multitude other
controls such as physical security, implying that access to physical systems
should be restricted to a “need-to-know” basis.
Intrusion Detection and Management
Intrusion to networks – a significant security challenge with dire ramifications may result in misuse of funds, destruction of customer and bank records, or
complete “black-out” and denial of service. Intrusion detection systems need to
be formulated as integral part of E-Strategy and, although not infallible, these
enable management to scan voluminous logs for pattern identification and
trends, as a supplement to manual reviews.
Encryption
The need for security of electronic messages and the increasing requirement to
authenticate them (for public confidence; confidentiality; determination of
identity) poses the banks with the challenge to incorporate encryption but only at
a sensitive level appropriate to the amount of risk present in systems.
Back-Up and Recovery
Banks need to determine and assess the degree of customer reliance on EBanking and the potential for loss of reputation if operations are not accessible or
functional. E-Banking requires corrective controls like fault-tolerant servers,
back-up battery power, and off-site vaulting (transmission/storage) of data.
“PURE ECONOMICS” OPPORTUNITIES & CHALLENGES
The generic E-Commerce model visualizes dramatically reduced costs of
delivery and of managing the business. Suppliers are enabled to lower prices,
which stimulates demand as existing consumers consume more and new
consumers switch from other higher priced alternatives. The activity jump is
more profound than the price reduction, resulting in rise in overall supplier
revenues. The cost base being durably reduced, profitability increases.
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However, economists and banking industry analysts quote empirical data to
substantiate that core-banking services are essentially utilitarian with low
demand elasticity. (For example, it cannot be reasonably perceived that lower
transactional costs will induce customers to make more frequent payments or
transfers. Similarly, even a difference of 1% in deposit rates does not represent a
sizeable amount for a general customer to switch banks.) Consequently, the
necessity of high marketing and promotional outlays to affect a change in
customer mindset cannot be emphasized enough.
Studies in developed economies have conclusively indicated that whatever cost
advantage newcomers may have achieved vide technology, it was heavily
undermined by the requirement for voluminous client acquisition spending.
Therefore, the real economic opportunity of E-Banking remains largely restricted
to the advantage of incumbents with a strong customer base (cross-selling etc).
Global banks realize that it is the customers’ base – and not technology – that
constitutes the major fixed-cost portion of the business. Such a base is integral
for economies of scale, which allow lowering of costs for existing services, and
for economies of scope, which facilitate service integration and cross marketing.
E-Banking, too, has its limitations – whilst it can reduce complex costs of
integrating various systems and data, it certainly has no power to eradicate them.
From economists’ point of view wages and overheads are “sticky”, and
technological initiatives shall only yield desired results if costs incurred would
allow for concurrent cost reductions in intermediation, delivery, and overheads.
Since many banks in developing economies like Pakistan operate many-a-time
for considerations other than purely commercial – rural outreach, providing
employment – the true essence of E-Banking may not be capitalized, resulting in
some duplication of costs or cannibalization of products/services.
MACRO/SOCIO ECONOMIC OPPORTUNITIES &
CHALLENGES
In Pakistan, a major opportunity is availability of relatively cheap and welltrained personnel to successfully devise and implement E-Banking strategies
extrapolating from successes and eliminating hiccups in similar efforts in
comparable economies – Mauritius being one. We have a head-start since we are
not required to re-invent the wheel. The present government has taken
pioneering steps in reducing band-width rates to levels lower than even India
and Dubai.
Opportunities can be adequately assessed from the example that largely because
of an agri-rural economy, the payment system in Pakistan remains cash-based,
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exerting immense pressure on paper currency, which costs sizeable amounts to
print. According to December 2003 estimates, the outward cash-dispensing
infrastructure in Pakistan comprised about 28.27 billion bank accounts; some 4.90
million post office savings accounts; and nearly 15 million personal accounts.
The outward remittance infrastructure catered to payment of salaries and
pensions to over 12.79 million personnel from military, government, and private
sectors. This burden on payment infrastructure causes inconvenience to
customers through time requirements, probability of error, and susceptibility to
disputes. The burdened payment infrastructure illustrates the vast opportunities
for investment in E-Billing and E-Banking in Pakistan and would serve the
present government’s stated objective of moving the economy towards improved
documentation, while ultimately benefiting the public in terms of convenience,
speed, and cost.
STRATEGIC OPPORTUNITIES & CHALLENGES
Global banks indicate a spectrum of reasons for forays into E-Banking, apart
from the purely commercial.
Enhancement of Reputation
Building a reputation for innovation makes it easier for a bank to introduce new
services in future as customers indicate greater readiness to accept new offers
from innovators and banks “ahead of the curve.”
Customer-Centric Initiatives
Customers’ base may be enhanced by attracting clients from new services
segment of marketplace or by winning share from competition. Once a customer
is “captive” opportunities abound through cross-marketing. Similarly, banks
find it increasingly incumbent to respond to customer requests for E-services,
due to widespread access, ease, and cost-efficiencies. It has been found that Ecustomers are generally younger, more business savvy, and, therefore, more
robust sources of future business for banks.
Preservation of “Fast-Follower” Status
Utilization of learning curves of competitors allows banks to introduce EBanking at lower costs without replication of others’ mistakes, and consequently
helps retain customers that may be contemplating a switch.
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MANAGEMENT OPPORTUNITIES & CHALLENGES
Customer Acceptance
An underlying challenge is in forecasting when and at what rate the usage level
by customers would induce break-even. Without a meaningful prediction of
future uptake, banks struggle globally to commit resources to the development
of E-services. Foreign Banks in Pakistan (ABN-AMRO, Deutsche, and Citibank)
have technological superiority and home-market-experience to initiate such
ventures on retail level but remain dormant citing lack of “critical-mass” in the
market: only 5% Pakistanis have access to Internet and less than 1% have PCs at
home
Potential Cost Savings
As mentioned, the lower transactional and intermediation costs associated with
E-Banking shall only translate into bank-wide cost savings if transactions can be
migrated from higher-cost channels to the on-line services in a manner that
allows the traditional channels to reduce their costs. (Cost per transaction
through the Internet is 27x less than through ATMs, 54x less than a Telephonic
transaction, and 107x less than a Branch-Banking transaction). Management is
faced with the multiple challenges of control over development, set-up, and
marketing costs of E-Initiatives so that these do not override the perceived
savings in intermediation cost.
Pricing Strategies
Customers with commercial acumen realize extraordinary cost-savings for banks
through E-Banking, and remain sensitive to pricing for such services.
Management must capture the opportunity to provide significant perceived
benefits for customers in terms of increased convenience and “one-window”
functionality before extracting fair fee-based income.
Control of Money Laundering
According to experts in the US Treasury Department, more than US$ 100 billion
a year in drug and terrorism-support money flows through US banks. With EBanking, the banking industry dances around the problem, not wanting to
invade customers’ privacy nor risk impeding legitimate commercial transactions.
By the time the trail of E-transactions is unearthed, originators generally have
parked these funds in exotic legal instruments. Since 9/11 a surge of banking
legislation has been witnessed in the area of money laundering not only due to
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rising fears of terrorism but also because emergent worldwide E-Banking makes
laundering easy.
Human Resource Imperatives
E-Banking necessitates redefinition of sales, operations, risk, technology, backoffice, legal and audit personnel – to name a few. Broadly speaking, staff
requires relevant technological expertise to match routine needs and stand up in
times of crisis-management; duties require to be documented and segregated
such as for database custodians and application users; adequate levels of
recognition of authentications require to be ensured; and legal staff need fair
understanding of prevalent local and home-country legislation.
REGULATORY CHALLENGES
E-Banking allows services to be provided from anywhere in the world, and
determining jurisdiction and sovereignty of prevailing law is increasingly
difficult. Banks providing such services in foreign countries may be in full
compliance of home-country legislation but may unknowingly violate some laws
of the domestic market and vice-versa, since emergent issues like hacking,
security, copyright, privacy, validity of contracts, jurisdiction, applicability of
relevant law are still not adequately covered by global banking laws, and
transactional formalities are still influenced by 19th century Civil Code. Apart
from seizing the opportunity to evolve new laws, banks have the opportunity
and challenge to educate personnel in at least the rudimentary laws that exist
(Basel-II; “Know Your Customer” – KYC).
LEGAL CHALLENGES
Virtual banks are susceptible to violation of customer protection laws, including
data collection and dissemination, privacy, and personally approaching
customers to offer services or solicit deposits based upon knowledge of
customers’ purchase behaviors. Government has somewhat mitigated this risk
in Pakistan through promulgation of Electronic Transaction Ordinance 2002,
which has provided enabling framework for E-transactions as acceptable
evidence in judicial system.
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OPERATIONAL CHALLENGES
Technological
Heavy reliance on novel technologies makes continuity - without break of
systems - the major operational risk of E-Banking.
While E-Banking offers a powerful standardization framework, the process is
arduous and time-consuming as various financial systems of even one bank
operate on incompatible formats and the E-Banker’s dilemma remains whether
to make E-Platform simple but not compelling or persuasive but not costefficient.
Capacity Planning
“Stock-out” – a term used by retailers – is apt for E-Bankers since a key challenge
is capacity planning for increased volume of business. Downtime, or system
failure in extreme cases, can cost not only in monetary terms but also escalate
intangible costs such as reputation-loss and compromise of goodwill.
THE “PERSONALIZED SERVICE PARADIGM” (PSP)
CHALLENGE
E-Banking skews many prospects in favor of banks, which are heavy users of
electronic/digital technologies and can enable themselves to adopt many new
initiatives entailing low marginal costs for standardized offerings. Growing
standardization presents vistas for banks to enlarge their packages of traditional
products through new delivery modes. But a challenge to standardized delivery
of mass-scale banking services to large and relatively homogenous client base is
that about 20% of customers’ base, approximately which in most cases account
for 80% of banks’ revenue streams, are increasingly willing to dole out premium
prices for personalized service.
Having already ridden one crash of the dot.com revolution and, in some cases,
suffered major operating losses, banks in many developed countries have once
again shifted to the “Personalized Service Paradigm” especially for the more
lucrative clients. Leading technology analysts believe that E-Commerce market
will be worth several trillion dollars over the next decade, however only a
quarter of existing E-based companies will survive. To mitigate, dedicated sales,
research, structuring, operational, and legal teams continuously remain in place
at prominent New York Money Center banks and other financial institutions, to
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cater some of the more demanding, elite, and sophisticated names from the
Fortune-500. Millions of dollars of marketing budgets are expended by banks
such as HSBC (“The World’s Local Bank”) to propound their emphasis on tailormade solutions for all categories of clients. These trends not only fly in the face
of “plain-vanilla”/standardized E-delivery, but also place a daunting task for the
entire banking industry to precariously balance E-Banking with the “humantouch”, as the realization dawns that at the end of the day banking is about
superior services and building, nurturing, and improving of personal
relationships (Appendix II).
SUMMARY
Soothsayers claim that E-Banking will be as critical to the financial services
industry as railways were to the Industrial Revolution. The emergence of ETechnology has allowed banks to redefine their traditional strategic business
model towards a lower-cost, higher-volume, swifter response-time global
industry, while increasingly savvy and demanding corporate and retail
customers place more stringent demands for speed, reliability, and security.
Though it is propounded that E-Banks will continue to experience sweeping
reductions in intermediation costs while continually evolving unique
methodologies to improve lasting customer relations, the inherent challenges of
advanced technology (Appendix III) compel that both the “brick” and the “click”
modes shall exist in tandem in future, and successful banking shall require
articulate amalgamation of the two into the product/services menu.
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