Financial Institution

Econ 310

Group 7

Can traditional bank be replaced?

BackgroundBackground

Hong Kong : International financial center

Banking Industry : a significant position

Local banking community

Foreign banking community over 300 banks from 40 countries

Background

Foreign bank provides competition new ideas distinctive banking products

Advanced technology in 21st century electronic money products electronic delivery channels

Background

Electronic money consumers pay conventional funds store the value on a computer device purchase goods

E.g. Octopus

Background

E.g. Visa Cash

Mondex

Background

This project :

Internet Banking

Future development

Traditional Bank- Credit Rating

C redit RiskA sset quality RiskM anagement RiskE arnings RiskL iquidity Risk

Internet Bank- Special Risk

L iquidity riskO peration riskC redit riskA reputation riskL egal risk

Which risk can be controlled?

Liquidity risk

not able to meet its obligations to settle full value when they come due result in opportunity costs, defaults on obligations or costs associated with obtaining the funds

from other source lead to operational failure

Which risk can be controlled?

Credit risk risk of a borrower or counterparty failing to meet its obligations increased by a loan through an internet banking channel approving loans electronically

Basel II - Operations Risk

Operation Inadequacies or failings in the processes or systems Lack of control to detect damage from hacker, fraud,

Trojan Horse Arises from fraud, processing errors, system

disruptions or other unanticipated

Basel II - Legal Risk

differences between electronic and paper-based processes

uncertainty over laws govern a specific internet banking transaction

legally binding electronic agreements overseas?

Legal actions or uncertainty in the applicability or interpretation of contracts

Basel II - A Reputation Risk

Unauthorized activity on customer accounts

Disclosure or theft of confidential customer information

Failure to deliver on marketing claims Loss of trust

A Reputation Risk

Basel II - A Reputation Risk

Year Number of fraudulent website, emails or telephone system

06 22

05 26

04 32

A Reputation Risk - clipping

Security of Internet Banking

The liability for loss of customers

In accordance with the Code of Banking Practice, “unless a customer acts fraudulently or with gross negligence such as failing to properly safeguard his device(s) or secret code(s) for accessing the e-banking service, he should not be responsible for any direct loss suffered by him as a result of unauthorized transactions conducted through his account”.

Security of Internet Banking How customers safeguard their data security

Do not use your Online Banking Customer ID and Password for any other internet banking accounts, on-line memberships or internet services.

Do not share your online banking customer ID or Password with anyone.

Do not make up Your Password with easily recognizable combinations, such as your birthday, phone number or vehicle license plate number.

Do not use the same password for different online services, and change your password regularly.

Security of Internet Banking From June 2005, individual banks offered different two-factor

authentication methods to customers. The Two-factor authentication is a security measure recognized by the information security industry to combat Internet banking frauds.

Three common methods:• Digital certificate• Security token-based one-time password

• SMS-based one-time password

Development of Internet Banking in Hong Kong

Hong Kong i-banking Practices

Services provided by the Hong Kong i-banking: account management fund transfer investment management E-IPO services insurances services loads services MPF account management

Hong Kong i-banking Practices

Three management arrangements should be considered: Internal communication management Web development management Customer relation management

Internal communication

The senior management has kept clear communication with the technical and operational staff on the system

design the policies and procedures of i-banking

operations

Internal communication

On-site examination programme by HKMA focus on authorized institutions’ e-banking activiti

es, technology risk management and business continuity planning

update with the skills and knowledge related to e-banking

→Improvement on the security and services quality of i-banking in Hong Kong

Web development

Characteristic of Hong Kong i-banking sites: easy to use sufficient assistance and guidelines. convenient

The security systems of most of the bank advance information protection system personal identification system.

Customer relation

a critical factor affecting the success of any business

i-banking shifts the relation of contactcustomers and bank tellers

↓

customers and network linked with banks

Customer relation

Traditional banking: budget a large portion of money train up their staffs to be polite and patient and be

able to work efficiently i-banking

upgrade their i-banking system new services are always introduced I-banking hotlines to eliminate confusing or for

assistance

A case study of HSBC I-banking

A case study of HSBC I-banking

HSBC I-banking is called online@hsbc 8 main functions:

Money transfer Time deposit management View & pay bills Investment management Credit cards services MPF Accounts Insurance services Personal loans approval

Money transfer

Transfer money regardless of the regions Transfer in 45 days advance can be set Reference number is given after each

transaction. If problem arose from the money transaction,

reference number can be used to ask for assistance from HSBC

Time deposit management

2 types of time deposit: HK dollars Foreign currency

Current interest rate and details of time deposit can be check anytime

View & pay bills

Over 100 bills types available 45 days advance bills payment operations

can be set Auto pay function for the bills can also be set

Investment management

Different local securities, bonds and unit trust can be bought and sold online.

Update quotes and market information is available

Subscription for IPOS is available with a lower handling fee

Credit cards services

HSBC credit cards and Octopus Automatic Add-Value Serviceonline can be applied freely online

Application forms are pre-filled with customers’ information

Credit cards limits, balance, bonus points left and statement can be viewed online

Personal data can be updated and request to increase their credit cards limit

MPF Accounts

Balance and contributions can be viewed and switched

Fund performance can be checked Claim can be made by just doing some simpl

e clicks in online@hsbc Real time process is used Update information on banking services and

on many financial activities is provided

Insurance services

Insurance services of HSBC in online@hsbc including: Travel Home Accident insurances

Details of the insurance can be obtained Claim can also be made

Personal loans approval

Interest rates of personal loans package can be checked

Personal loans can be applied online Mortgage calculate is provided for customers

to easily calculate their mortgage rates

Security system of online@hsbc

128-bit Secure Sockets Laver (SSL) encryption technology is installed

Firewalls is set up within online@hsbc Correct combination of i-banking ID and password is

needed for accession Online access will be disabled if 3 consecutive incor

rect passwords have been attempted Inactive accounts will be logged off automatically Advices are given to the users

Future Development of Banking

Internet Banking However, Problems arisen on

Deposit of Money

Multi-purpose Card

Concept of Electronic money consumers pay conventional funds to an issuer of

electronic money in return for storing the value of those funds on an

computer device (chips) held by the consumer. Use the electronic value to purchase

Multi-purpose Card

Concept of Electronic money Issuer of the electronic money can earn interest o

n the investment of the funds received Issuer incurs a liability to make good claims on it

by holders of electronic value such as merchants

Multi-purpose Card

Issuer of a multi-purpose Card is taking money from the public investing it, in return for providing a means of payment

in electronic form.

Electronic Purse

Function

Multi-purpose Card

Future Development

Sources of Fund ( Input )

At the last Stage

Traditional bank can be replaced!

Q & A