Risk management and regulation in electronic banking
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Banking on the Internet (e-banking) is in many countries for a decade already an everyday tool for millions of persons. Operating direct on the stock exchanges is no more limited to experts. Even wallets are turning out to be used more electronically.
Getting your account balance via alerts, making micro-payments in shops or to friends, creating savings for the unbanked customers, … A lot is moving fast for financial (e.g. banks) and nonfinancial agents (e.g. telecoms) in these new channels.
 
This can generate a lot of questions:
- What are the risks of these new developments and how to tackle them?
- What type of new legislation do regulators create? - Who are these online banking clients? – What are the commercial and technical challenges for the future? - What about the security of e-banking?

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Risk management and regulation in electronic banking Presentation Transcript

  • 1. Risk management and regulation in electronic banking. April 2014 H. Van de Vyver
  • 2. Objective (e-banking) is in many countries for a decade already an everyday tool for millions of persons. Operating direct on the is no more limited to experts. Even are turning out to be used more electronically. Getting your account balance via alerts, making in shops or to friends, creating savings for the unbanked customers, … A lot is moving fast for financial (e.g. banks) and (e.g. telecoms) in these new channels. This can generate a lot of : - What are the risks of these new developments and how to tackle them? - What type of new legislation do regulators create? - Who are these online banking clients? – What are the commercial and technical challenges for the future? - What about the security of e-banking? 7 - 9 April 2014 2
  • 3. Your trainer  Trainings all over the world  Long tracking record  marketing department of the BNP Paribas Group in Luxemburg since 1999  Private Banking department of the Kredietbank Group in Luxemburg. Mr. Hubert VAN DE VYVER 7 - 9 April 2014 3  Electronic banking expert for the ATTF- Luxemburg, the Belgian Bank Academy and Radcliffe Training in London  International Trainer and Consultant (seminars on e-banking, electronic finance and multichannel banking) .
  • 4. Summary Seminar 7 - 9 April 2014 4 • Risk management • Fourteen principles for a sound risk management • Cross border issues • Risk policy • Laws and legislation, a way to tackle risks? • Compliance Compliance and risk management in e- banking • New model of competition • New clients convert members into clients • New promotion/communication The client and the marketplace • Saving accounts with higher rates of return • Online banking package • Buying all types of insurances on Internet • New ways to sell products New products, where do they differ from tradional ones
  • 5. 5 Identification of risks Cross Border issues 14 Basic principles E-banking standards (Technology/ Security) Risk Management 7 - 9 April 2014 5
  • 6. 6 Risk Management 7 - 9 April 2014
  • 7. 7 Risk Management Technology and infrastructure Security Data integrity System reliability Internal controls-audits Outsourcing Types of risk (1) 7 - 9 April 2014
  • 8. 8 Risk Management 7 - 9 April 2014 Types of risk (2)  Reputational risk  Legal risk  Other traditional risks Credit Liquidity Market Foreign exchange
  • 9. 9 Risk Management Credit Liquidity 7 - 9 April 2014 9
  • 10. 10 Risk Management Tools Support and oversight by the board of directors Supervisory staff technological knowledge  appropriate technological skills Technical training of staff Recruit outside expertise 7 - 9 April 2014 http://www.isaca.org/Journal/Past-Issues/2001/Volume-6/Pages/Risk- Management-for-Internet-Banking.aspx
  • 11. 11 Fourteen principles A) Board and management oversight Effective oversight of e-banking activities Establishment of a comprehensive control process Comprehensive due diligence and management oversight process for outsourcing relationships and other third party dependencies 7 - 9 April 2014
  • 12. 12 Fourteen principles 7 - 9 April 2014 B) Security controls Autentication of e-banking customers Non-repudiation and accountability for e-banking transactions Appropriate measures to ensure segregation of duties Proper autorisation controls within e-banking systems, databases and applications Data integrity of e-banking transactions records and information Establishment of clear audit trails for e-banking transactions Confidentiality of key bank information
  • 13. 13 C) Legal and Reputational risk management Appropriate disclosures for e-banking services Privacy of customer information Capacity, business continuity and contingency planning to ensure availability of e-banking systems and services Incident response planning Fourteen principles 7 - 9 April 2014
  • 14. 14 Cross border issues Technology expanding the virtual geographical reach of banks and customers No need of physical expansion Interconnected networks -> countries not licensed or supervised Banking and non-banking activities 7 - 9 April 2014
  • 15. 15 Cross border issues 7 - 9 April 2014 Existing regulation, laws, controls etc apply to e-banking Different jurisdictions Bank mostly refrain from cross border activities in e-banking -> Addition of e-banking to existing Brick and Mortar
  • 16. 16 Types of bank/customer E-Banking Relationships Licensed Home Abroad Type of bank Onshore Offshore Onshore Offshore Brick and Click A B C D Virtual E F G H Cross border issues Source: Bank for International Settlements 7 - 9 April 2014 16
  • 17. Cross border issues 7 - 9 April 2014 17
  • 18. 18 Cross border issues Three challenges 1. E-banking span geographic borders -> call into question regulations and juridical requirements 2. Foreign competitors conduct nearly identical activities : restrictive approach 3. Uncertainty during the period of construction of legal infrastructure 7 - 9 April 2014
  • 19. 19 Cross border issues The in-out scenario (bank in country– customers outside country) Home country responsible for laws on consolidated basis Same regulations and controls within home country Host approaches home country supervisor 7 - 9 April 2014
  • 20. 20 Cross border issues 7 - 9 April 2014 The out – in scenario (outside country bank – in country clients) Physically foreign bank, access to payment in local market Host supervisor checks if he needs some additional license Danger of lack of jurisdiction in host country
  • 21. 21 Cross border issues Positive notes Cheaper and less risky operations Resources in home country (easily switch from one foreign market to another) Objective of reaping economies of scale 7 - 9 April 2014
  • 22. 22 Cross border issues 7 - 9 April 2014 Critical notes Hard to build trust Less familiar with market conditions
  • 23. 23 Risk Policy 7 - 9 April 2014 Source: Deloitte.com
  • 24. 24 Risk Policy Assess risks Control risks Monitor risks Integrate in overall risk management 7 - 9 April 2014 Supervisory staff Technical training Outside expertise
  • 25. 25 International standards (1) Basel committee on banking supervision www.bis.org www.iosco.org / www.ias.org Cobit 4.0 www.isaca.org ISO 17799 www.iso.org OCTAVE www.cert.org Risk Policy 7 - 9 April 2014 25
  • 26. 26 International standards (2) COSO – Enterprise Risk Management www.coso.org PCI Data Security Standard www.mastercard.com Financial Action Task Force www.fatf-gafi.org Corporate governance codes www.ecgi.org Risk Policy 7 - 9 April 2014 26
  • 27. 27 Risk Policy Balance between risk and user-friendliness  Acceptable risk  Legal protection improves  Not 100% risk free  Risks in e-bkg reduces, risk in m-bkg to be reduced  Part of the risk identification process  Sometimes according to governance- defined goals 7 - 9 April 2014 27
  • 28. Risk management 287 - 9 April 2014
  • 29. 29 Legislation Introduction Privacy Intellectual property Electronic signatures and electronic records 7 - 9 April 2014
  • 30. 30 Legislation Europe Directive on prospectuses Date: May 2001 Objectives: create a single passport for issuers offering securities to the public available on the website or in electronic format 7 - 9 April 2014
  • 31. 31 Legislation 7 - 9 April 2014 Europe Personal Data protection Bill Directive 95-46-EC Objectives: Free movement of personal data Rules for the state, companies and individuals Appropriate level of protection
  • 32. 32 Legislation Europe Directive on e-money institutions Directive 2000-46-EC; 18th September 2000 Objectives: Promote consumer confidence in the use of e- money Establish regulatory framework for electronic money institutions 7 - 9 April 2014
  • 33. 33 Legislation 7 - 9 April 2014 Europe e-security proposal Date: 6th June 2001 Objective: ensure confidentiality and accessibility of networks and information
  • 34. 34 Legislation Europe Electronic signature act Directive 1999-93-EC Objective: Legal framework and technical conditions for electronic signature 7 - 9 April 2014
  • 35. 35 Legislation 7 - 9 April 2014 Europe Directive on traffic data retention Date: 27th June of 2000 Objectives: Revision of Directive 97- 66-EC Allow traffic data retention for limited time (billing purposes)
  • 36. 36 Legislation Europe Distance selling of financial services Mutual recognition of the banking licence/prudential supervision 27 april 2005, presentation to the European Parliament/Council 7 - 9 April 2014
  • 37. 37 Legislation 7 - 9 April 2014 Others Electronic banking and financial transactions (Lebanon) Circular n° 1810, 30th march 2000 Objective: modernize, regulate and organize electronic banking sector
  • 38. 38 Legislation USA E-sign act Date: 1999 Issuer: SEC (Securities exchange commission) Objectives: Retaining electronic records required by regulation, statute or law Rules of autentication, filing and timing terms 7 - 9 April 2014
  • 39. 39 Legislation 7 - 9 April 2014 International Convention on cybercrime Date: 23th November of 2001 Objective: International response and coordination to challenge cybercrime and cyberterrorism
  • 40. Legislation 40 © hdpaperwall.com 7 - 9 April 2014
  • 41. Compliance 7 - 9 April 2014 41 • Major Compliance Issues • Anti-money laundering • Know your customer (KYC) • Suspicious activities • Privacy of customer information • Information disclosures • Customer education Compliance in e-banking
  • 42. Compliance  Major Compliance Issues  International directives (Basel)  Organisation  Internal  External  Day to day implication in decisions  Strategical  Tactical 7 - 9 April 2014 42
  • 43. Compliance  Suspicious activities  Anti-money laundering  Fraud  Terrorism  Black/Gray/white 7 - 9 April 2014 43
  • 44. Compliance  Know your customer (KYC)  Legal obligation  Operational impacts  Benefits  Costs  Organisation  Internal  external 7 - 9 April 2014 44
  • 45. Compliance  Privacy of customer information  Legislation  Use of info (marketing)  Request permission  Storage and security  National and international differences  World wide web vs banking regulation 7 - 9 April 2014 45
  • 46. Compliance  Information disclosures  Global rule  Exceptions  Fraud  Tax authorities  International conventions  Levels of disclosures  Person related  Transaction related 7 - 9 April 2014 46
  • 47. Compliance  Customer education  General conditions  Training  Explain  Feedback  Improve  Weak link in the chain 7 - 9 April 2014 47
  • 48. Compliance 487 - 9 April 2014
  • 49. Summary Seminar 7 - 9 April 2014 49 • Risk management • Fourteen principles for a sound risk management • Cross border issues • Risk policy • Laws and legislation, a way to tackle risks? • Compliance Compliance and risk management in e- banking • New model of competition • New clients convert members into clients • New promotion/communication The client and the marketplace • Saving accounts with higher rates of return • Online banking package • Buying all types of insurances on Internet • New ways to sell products New products, where do they differ from tradional ones
  • 50. 50 New model of competition  Collaborate vs Compete e.g. mutual funds ebanking Aggregators: horizontally consolidated info about accounts e.g. Yahoo – Microsoft Vertical portals: one stop shopping Smart agents: compare financial offers New competitors: non-banking offers Confidence Valid contact address and real-world address Talk with living representative Watchdogs (e.g. BBBOnline, TRUSTe) Precise terms of purchase 7 - 9 April 2014
  • 51. 51 New model of competition 7 - 9 April 2014
  • 52. 52 New model of competition 7 - 9 April 2014
  • 53. 53 Convert members into clients Visitors -> members -> clients Online customer conversion rate Average customer acquisition cost 20.45 Eur / client 7 - 9 April 2014
  • 54. New promotion and communication  Promotion  Online  Websites  Social media  Mobile  Offline  Sync with online  Communication  Feedback clients  The conversation company 7 - 9 April 2014 54
  • 55. Summary Seminar Day 2 7 - 9 April 2014 55 • Risk management • Fourteen principles for a sound risk management • Cross border issues • Risk policy • Laws and legislation, a way to tackle risks? • Compliance Compliance and risk management in e- banking • New model of competition • New clients convert members into clients • New promotion/communication The client and the marketplace • Saving accounts with higher rates of return • Online banking package • Buying all types of insurances on Internet • New ways to sell products • PFM New products, where do they differ from tradional ones
  • 56. New products, where do they differ from traditional ones New ways to sell products  banking products  non banking products  products of other banks  brokerage products  insurance products (info) 7 - 9 April 2014 56 https://www.perficient.com/Thought-Leadership/Perficient-Perspectives/2013/Product-Strategy
  • 57. New products, where do they differ from traditional ones  Saving accounts with higher rates of return  types of saving accounts  motivation (banking stratefgy)  examples 7 - 9 April 2014 57 http://www.money-rates.com/research-center/americas-best-rates/2013-Q1.htm
  • 58. New products, where do they differ from traditional ones 7 - 9 April 2014 58 http://www.forbes.com/sites/moneybuilder/2013/01/11/online-banks-offer-best- savings-account-rates-for-2013/
  • 59. New products, where do they differ from traditional ones  Online banking package  online current account, savings account  overview of future payments  access to different accounts (private, business) 7 - 9 April 2014 59 http://www.nbc.ca/bnc/cda/productfamily/0,2664,divId-2_langId- 1_navCode-16134,00.html
  • 60. New products, where do they differ from traditional ones 7 - 9 April 2014 60
  • 61. New products, where do they differ from traditional ones  Buying all types of insurances on Internet  basic insurances  life insurances 7 - 9 April 2014 61 https://www.moneyadviceservice.org.uk/en/articles/how-to-buy- insurance-using-comparison-sites
  • 62. New products, where do they differ from traditional ones 7 - 9 April 2014 62 http://www.deloitte.com/assets/Dcom- UnitedStates/Local%20Assets/Documents/ US_FSI_Small_Business_Infographic_imag e_060713.pdf
  • 63. New products, where do they differ from traditional ones 7 - 9 April 2014 63
  • 64. New products, where do they differ from traditional ones 7 - 9 April 2014 64 https://www.kpmg.com/Global/en/IssuesAndInsig hts/ArticlesPublications/perspectives/Pages/opp ortunity-awaits-banks.aspx Opportunity awaits banks who claim PFM turf By Mike Davidsen, Financial Services Advisory, KPMG in the US. To most companies in the financial services sector, Personal Financial Management (‘PFM’) is just another buzzword that offers little opportunity for profits. But pioneering banks who explore the frontiers of PFM may find potential they could tap, if they adopt the right app. It’s understandable that banks have not raced to launch PFM tools, since it’s a completely foreign concept to the majority of consumers. However, many consumers perform basic PFM tasks on a regular basis, from tracking discretionary spending to paying bills. And with the proliferation of digital, PFM now encompasses everything from categorizing card transactions to receiving low-balance alerts to prevent overdraft.
  • 65. My budget My expenses My operations New products, where do they differ from traditional ones 7 - 9 April 2014 65
  • 66. Optimisation Opti-list New products, where do they differ from traditional ones 667 - 9 April 2014
  • 67. 67 New products, where do they differ from traditional ones The paper way Opening an account (bank; copy of ID) Bank statements (client) Receipt of transactions (POS) Information (client) The electronic way Opening an account (first steps) Bank statements (pdf; storage Epsilon;) Receipt of transactions (e-purse) Information (web site) Interesting debate: should-we-switch-from-paper-to-electronic-bank-and- other-statements debate Paper focus 7 - 9 April 2014
  • 68. New products 687 - 9 April 2014
  • 69. 69 More and questions Website: http://ebanking.homestead.com YouTube Channel http//youtube.com/ebanking E-mail address : info@Celufo.biz 7 - 9 April 2014