1 E-FINANCE CHAPTER 4 PARTICIPANTS of INTERNET BANKING Internet Banking and Its potential in TRNC, Zakaria Jado Zakario, Assoc. Prof. Dr. Hatice Jenkins V.C joshi (2004), E-finance Log into the future, 2nd Edition, Thousand Oakes, London

2 PARTICIPANTS of INTERNET BANKING  Internet Banking has a collective participation of four parties. 1.Consumers 2.Banks 3.Internet Service Providers 4.Regulatory Authorities

3 PARTICIPANTS of INTERNET BANKING 1.CONSUMERS  Consumers are the main users of Internet banking services.  They can be companies, organizations or individuals.  Each has certain needs to be fulfilled.  Banking institution responsibility is to explore these needs and design financial products and services that best fulfill those needs.  Most people in the world refuse to go their banks and prefer internet banking as it is available.

4 PARTICIPANTS of INTERNET BANKING 1.CONSUMERS (CONT.)  Internet services will best fit business needs to the extent that it will allow for time and money savings.  When consumers do not know much about it and demand is relatively low, they do not play a significant role in developing the internet banking phenomena.  Research: Daily and more frequents users are more pleased with the ease of use and tend to use internet banking more for fund transfer and foreign exchange transactions than less frequent users.

5 PARTICIPANTS of INTERNET BANKING 2. BANKS  Banks are the providers of internet banking services.  They play a major role in developing internet banking industry.  One of the important issues to consider is demand.  Banks are interested in products that will be demanded. Demand should be investigated and assured.

6 PARTICIPANTS of INTERNET BANKING  This should be done by testing the following 3 areas: A. Consumer’s Demographic Characteristics:  Some customers rely on traditional branches to conduct their banking business.  Others are early adopters of new technologies that arrive in the market place.  Potential customer base that might be turned into an actual customer once internet banking service is provided.  It was found that the demand for internet banking services depends on consumers demographic characteristics.

7 PARTICIPANTS of INTERNET BANKING A. Consumer’s Demographic Characteristics: (Cont)  The demographics of banking customers will continue to change. The challenge to national banks is to understand their customer base and find the right mix of delivery channels to deliver products and services profitably to their various market segments.

8 PARTICIPANTS of INTERNET BANKING B. Consumer’s Financial Characteristics:  Banks have to make sure that those customers can obtain whatever is necessary to use internet banking services.  In this field, disposable income should be enough to cover costs of obtaining a PC and internet connection.

9 PARTICIPANTS of INTERNET BANKING C. Infrastructure and Internet Availability:  It is usually the duty of the government to provide telecommunication infrastructure.  Low quality connections resulting from bad telecommunication infrastructure may prevent users from surfing internet smoothly.  Any shortfall would cause demand to breakdown.

10 PARTICIPANTS of INTERNET BANKING 3. INTERNET SERVICE PROVIDERS  For users to gain an access to their bank’s server they should first have internet connection.  Internet services within the country are provided by a group of companies called ISPs, or internet services providers.

11 PARTICIPANTS of INTERNET BANKING  The importance of ISPs to the development of Internet banking services rises from the following points: A.Internet Service Availability  The only mean for customers to contact their internet bank is through an internet connection, limited number of internet connections means limited number of internet banking users, decision makers have to be sure that internet connection is available for all its potential customers.

12 PARTICIPANTS of INTERNET BANKING B. Internet Service Quality  Slow internet connections can have bad results on Internet banking services. C. Internet Service Price  Price of the internet services offered is very important.  Expensive internet services will make internet banking customers think many times before being internet banking users.

13 PARTICIPANTS of INTERNET BANKING 4. REGULATORY AUTHORITIES  Central Bank is the authority that supervises its country’s banking system and controls the national monetary system. Thus, it is the central bank role to establish the rules of internet banking. A.Customer Protection  If the internet is used to move or hold money, then consumers expect their money to be delivered to the destinations wanted without errors and this should be guaranteed by delivering accepted levels of accuracy, safety and secrecy.

14 PARTICIPANTS of INTERNET BANKING B. Financial System Stability  Monetary authority should take into account all kinds of risk that may emerge with the introduction of internet banking as well as making sure that banks who adopt this approach have the ability to absorb all kinds of risk.  The risks that may have negative effect on bank’s earning or capital are, credit, interest rate, liquidity, price, foreign exchange, transaction, strategic and reputation risks.  These risks are not mutually exclusive and all of them are associated with Internet Banking.

15 Services and Products offered by E-finance  The developments in technology and the growing importance of internet in commercial transactions have led to a reduction in the commissions charged.  At the same time, customer pressure for speedier means to execute transactions was growing. Financial institutions had to respond this by offering services on the internet.

16 Services and Products offered by E-finance E-Money  There is a new internet currency that can be collected on line and spent at various merchant sites on the web.  Cyber Gold, E-charge, Ipin and Millicent are the companies offering new generation of on-line payment systems.  Smart cards and e-purses are also exciting new options.

17 Services and Products offered by E-finance Financial Services  The major users of the internet are the corporate customers.  Companies increasingly use internet based systems to cover their entire range of financial needs, from managing bank accounts and bill payments to asset management and even to insurance products.  Housing finance is one area where functions ranging from loan application apprising, valuation of houses to completion of loan documents are all carried out over the internet.

18 Services and Products offered by E-finance Factoring and Leasing  E-finance helps in lowering the costs and increases the availability and ease of transferring the information.  This development has increased lender and client opportunities for factoring, which is the sale of accounts receivables and  Leasing which are loans collateralized by assets.  Electronic transmission allows for real time information exchange between parties, increased security, immediate credit decisions and lower transaction costs.  Letters of credit, bills of lading and other documents associated with trade funds are also gradually being taken over under the E- finance umbrella.

19 Services and Products offered by E-finance E-Trading  E-trading systems provide electronic order routing, automated trade execution and post trade information services. E-trading in Foreign Exchange  E-trading is being applied first to transactions in liquid and homogeneous transactions than to larger transactions.

20 Services and Products offered by E-finance E-trading in Equity Markets  The trading models in equity markets can be divided into two categories. 1.Order driven systems combine all bid and ask orders into one central order book and automatically match the orders without intermediaries. 2.Direct access trading, where the investor places an order on-line and the brokerage firm routes it directly to a market maker and obtains a commission from him/her for what is known as payment for order flows.

21 Services and Products offered by E-finance E-trading in Fixed Income Securities  On-line trading in the fixed income securities market is of recent origin- barely five years old. Trade-web was the first online bond market.  Margin Trading: Investors have to guard against brokers who gave them too much credit, since margin trading is permitted. Margin lending simply lets you borrow a certain amount against the value of your stocks and trade with that money. Another factor called marginability must also be taken into account.

22 MARGIN TRADING (EX.) X Corp$70 50%Initial Margin 40%Maintenance Margin 1000Shares Purchased Initial Balance Sheet Position: Stock $70,000 Borrowed $35,000 Equity 35,000

23 MARGIN TRADING Stock price falls to $60 per share New Balance Sheet Position: Stock $60,000 Borrowed $35,000 Equity 25,000 Margin% = $25,000/$60,000 = 41.67% Maintenance margin: minimum amount equity in trading can be before additional funds must be put into the account