financial risk

Topics: Two-factor authentication, Bank, Online banking Pages: 10 (2870 words) Published: February 14, 2014

Many organizations today have responded to the competitive business environment by implementing e-business as part of their business strategies. With the growth of the internet, it is inevitable for banks to move towards providing online banking for their customers. Although the current branch based retail banking remains the most common method for conducting banking transactions, internet technologies has changed the way personal financial services are designed and delivered to customers.

Shih and Fang (2004) describe internet banking as a new type of information system that uses the innovative resources of the internet and WWW (World Wide Web) to enable customers to effect financial activities in virtual space. For example, it allows customers to perform a wide range of banking transactions electronically via the bank’s web site. Early online banking web sites contained mainly product and service information for their customers. However, with the development of asynchronous and secured electronic transaction technologies, more banks are now using online banking both as a transactional as well as an informational medium.

As a result, registered internet banking users can now perform common banking transactions such as writing cheques, paying bills, transferring funds, printing statements, setting up fixed deposits, purchasing investment related funds and enquiring about account balances.

Internet banking has evolved into a “one stop service and information unit” that promises great benefits to both banks and consumers. Internet banking works the same way as the traditional banking services. The main difference is that customers are accessing their account and information, making payments and reconciling statements by using their computer rather than paper to complete the transactions. Internet banking services are crucial elements for the long-term survival of banks in the world of electronic commerce. The market for internet banking is forecasted to grow sharply in the next few years, affecting the competitive advantage enjoyed by traditional banks with physical branches.

In Malaysia, internet banking was officially allowed by the Malaysian Central Bank on June 1, 2000. Malayan Banking Berhad (Maybank) the largest bank in Malaysia was the first bank to offer internet banking in Malaysia. RISK OF INTERNET BANKING

1. Strategic risk
This is the current and prospective risk to earnings and capital arising from adverse business decisions or improper implementation of business decisions. Many senior managers do not fully understand the strategic and technical aspects of Internet banking. Spurred by competitive and peer pressures, banks may seek to introduce or expand Internet banking without an adequate cost-benefit analysis. The organization structure and resources may not have the skills to manage Internet banking. 2. Transaction risk

This is the current and prospective risk to earnings and capital arising from fraud, error, negligence and the inability to maintain expected service levels. A high level of transaction risk may exist with Internet banking products, because of the need to have sophisticated internal controls and constant availability. Most Internet banking platforms are based on new platforms which use complex interfaces to link with legacy systems, thereby increasing risk of transaction errors. There is also a need to ensure data integrity and no repudiation of transactions. Third-party providers also increase transaction risks, since the organization does not have full control over a third party. Without seamless process and system connections between the bank and the third party, there is a higher risk of transaction errors. 3. Compliance risk

This is the risk to earnings or capital arising from violations of, or nonconformance with, laws, regulations and ethical standards. Compliance risk may lead to diminished reputation, actual monetary losses and reduced business...

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