E-FINANCE CHAPTER 6 RISK AND CHALLENGES Risk and Challenges, V.C joshi (2004), E-finance Log into the future, 2nd Edition, Thousand Oakes, London, E-finance: Status, Innovations, Resources and Future Challenges, Manuchehr Shahrokhi, California - Managerial Finance 2008 Vol. 34, Issue, Pages

2 Discussion points in E-finance sector: Functionality: This involves the decision of what products and services to include in the internet banking services and what to exclude. This should be considered at the first time and an ongoing progress. Web Design: This involves looking at what makes a good quality internet banking web site. Issues to consider are related to the web site appearance, content, speed and other issues that are important to gain customer satisfaction. Hosting: Banks engaging in internet banking should decide whether to develop their internet banking system in house or outsource their operations.

3 Analysis of Risk  Risk is the probability or likelihood of injury, damage or loss in some specific environment and over some stated period of time.  It involves two elements: Probability and loss amount  The risks arise on account of a number of factors:  The policies pursued by the government,  Increased competition,  Reduced spreads and  Large number of sophisticated clients.  We will focus on additional risks faced by banks and financial institutions using online channels.  Banks, brokers and financial institutions need to additionally deal with risks specific to the internet

4  Traditional risk management programmers’ must be adopted to address new aspects of an electronic environment, including transaction speed, geographic reach and user anonymity.  One of the major problems is to integrate the newer techniques with legacy systems.  It must also be stressed that risk management is an ongoing process of identifying, measuring, monitoring and managing all significant operational, legal and reputation risks. These areas can be divided into the following broad areas: General Areas: Planning, policies and procedures. Distribution of duties, accountability and delegation of authorities, regulatory compliance and audits. Transaction processing: User authentication. Information integrity and non-repudiation of transactions and data confidentiality. System Administration: Resource requirements, system security, contingency planning, outstanding policies.

5 RISKS and CHALLENGES 1-Regulatory issues  The deregulation of the London stock market in 1986,  The passage of the Riegle-Neal Act in 1994,  The deregulation of the Tokyo stock market in the 1990s  The crumbling of the Glass-Steagall Act in the late 1990s  Competition in e-finance is expected to accelerate over the coming years as deregulation continues to make its way around the world and new entrants enter particular areas of the market, develop new niches/product expertise, or expand into new countries.

6 2- High Barriers to entry:  The finance industry has historically been both protected and plagued by high barriers to entry.  New entrants to the financial markets have to have;  Strong human resource management,  A deep knowledge of risk,  Adequate financial resources,  Responsive customer service,  A robust technology infrastructure and  A well-established brand name/franchise.

7 3-Value Proposition  A successful e-commerce strategy in the financial services industry involves rethinking and challenging value propositions.  The financial services industry had to rethink its e-commerce business strategy and that involves reinventing products and services, redefining the value proposition and perhaps creating new business models. 4-Revenue and Cost Dimensions The e-commerce revenue structure is quite complex, as the web has altered the established concepts of pricing. The web allows for free products and services, differential prices for the same product and customer profiling.

8 5-Technology Architecture The nature of the business model dictates the selection of the most appropriate technical platform for the e-finance model. 6-Security The online environment leaves all the operations of a financial services firm susceptible to external and internal threats. 7- Adapting Global Technology to Local Requirements While Internet technologies are global and standardized, their applications can and must be adapted to local circumstances.

9 Risks can emerge from different sources within a banking institution. Given below are details regarding factors causing such risks. Exceeding minimum capital requirements Maintaining credit ratings Maximizing shareholder value Improving risk adjusted returns on equity, capital and assets. So the relation between key business risks and activities undertaken are: Poor loan quality Credit risk High funding costs Interest risk Asset/Liability mismatches Cash flow risk Poor controls Operations risk Frauds Reputation risk