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Money and Banking

Risks of E-Banking

Electronic banking offers a lot of benefits to individual customers, businesses, and banks. However, one should not ignore the risks associated with virtual banking either. In this article, we will list the risks of e-banking and look at how RBI recommends mitigating these risks.

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Risks of E-Banking

Here are the risks of e-banking in detail:

Operational Risk

Operation risk or transactional risk is the most common type of risk of e-banking. It includes:

  • Incorrect transaction processing
  • Compromises in the integrity of data, data privacy, and confidentiality
  • Unauthorized access to the bank’s systems
  • Non-enforceability of contracts, etc.

risks of e-banking

Apart from technological errors, human factors like negligence (customers or employees), employee frauds, hackers, etc. are a potential sourceĀ of operational risk of e-banking.

Security Risk

When we talk about banking transactions, security of the transaction is of paramount importance. All customers want their transactions to be confidential.

However, since all information is online, there is always a chance that someone might retrieve the information and misuse it. The security risk of e-banking also arises from hacking threats and unauthorized access to the bank’s systems.

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System Architecture and Design

In order to manage various operational and security risks of e-banking, it is important that the bank has appropriate system architecture and controls in place. Banks always carry the risk of choosing the wring system design or technology or have inadequate control processes.

If the bank has an outdated system which is not upgradable, then it can turn into an investment loss for the bank along with inefficient service.

Banks need to keep updating their systems to keep up with the rapidly changing technology to avoid any holes in its security system. Further, the bank’s staff requires regular training to keep up with the new technologies too.

Reputational Risk

For any business, its reputation is of critical importance. When it comes to electronic banking, if a bank fails to perform critical functions or not work according to the expectations of its customers, then it faces a risk of loss of reputation. This eventually leads to a loss of funding or customers.

Some reasons for this risk are a system or product not functioning as expected, significant deficiencies in the system, security breaches (external or internal), misinforming customers about the processes and policies of using e-banking, certain communication issues that hinder the customer from accessing his account, etc.

Legal Risk

Whenever there is a violation of laws, regulations, or prescribed practices, or when the legal rights and obligations of any of the parties to a transaction are not established, then there is a legal risk involved.

E-Banking is relatively new to the industry and there is a lot of uncertainty and ambiguity about certain laws and rules. This increases the legal risk.

Money Laundering Risk

All transactions through the e-banking channel are done remotely. Therefore, it is difficult for banks to use traditional methods to detect and prevent criminal activities.

While there are certain money laundering rules in place, for electronic payments, their feasibility is questionable. Therefore, banks carry the risk of money laundering.

Cross-border Risks

The core idea of electronic banking is to extend the geographical reach of both banks as well as customers. This means that the expansion can go beyond national borders. This leads to several cross-border risks:

  • Legal and Regulatory risks – There is a possibility about uncertainties regarding the legal requirements in certain countries and jurisdiction ambiguities of different national authorities.
  • Operational risk – If the bank uses a service provider located in a different country, then it is difficult to monitor it causing operational risk.
  • Credit risk – Cross-border transactions can increase credit risk. This is because it is difficult to appraise an application for a loan from a customer in a different country.

Strategic Risk

This risk is associated with issues pertaining to:

  • The development of a business plan
  • Having sufficient resources available to support the business plan
  • In theĀ case of outsourced activities, the credibility of the vendor
  • For employees, any change in the work environment
  • Level of technology used in comparison with the available technology, etc.

Other Risks

The other risks of e-banking are the same as those of traditional banking like credit risk, liquidity risk, interest rate risk, market risk, etc. However, in e-banking, these risks are magnified due to the use of electronic channels and the absence of geographical boundaries.

All the risks mentioned above can arise due to some flaws in design, insufficient technology, negligent employees, and unauthorized system access (intentional or not). Therefore, it is important that banks adopt the right technology and systems and have proper access control for a secure transacting environment.

RBI’s recommendation on E-Banking

The Reserve Bank of India (RBI) has a working group which examines various issues of e-banking and suggests different ways to solve them. Some of these recommendations are:

  • Keeping security concerns in mind, all banks in India must follow a standard. Also, the Indian Banks Association should design this standard.
  • All banks must adopt adequate security measures to maintain the secrecy and confidentiality of data. Further, they must use logical access control to implement it.
  • In order to mitigate the money laundering risk, banks must develop an anti-money laundering (ALM) technology for reporting and querying.
  • Banks must have an internal grievance redressal system to adopt a fraud-free culture of banking.
  • All banks must have an explicit security plan along with documentation. Further, banks must strictly ensure physical access control.
  • Banks must adopt an extensive e-banking network so that the rural and remote areas of the country can also benefit.

Solved Question

Q1. List the risks of e-banking.

Answer: The risks of e-banking are:

  • Operational Risk
  • Security Risk
  • Risks due to system architecture and design
  • Reputational Risk
  • Legal Risk
  • Money Laundering Risk
  • Cross-border Risks
  • Strategic Risks
  • Traditional Banking Risks
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what are 5 websites of internet banking and e baking ?

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Does e-banking stop inflation?

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