This document discusses various risks associated with online banking and technology-based banking products and services. It addresses operational risk, credit risk, and reputational risk. Operational risks include internal fraud, external fraud, business disruptions, system failures, and more. Credit risk relates to uncertainty in a counterparty's ability to meet obligations. Reputational risk could result from negative publicity, whether true or not, that leads to loss of customers, revenues, and increased costs. Effective risk management, including risk assessment and mitigation strategies, is important for banks offering online and technology-based services.

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Management issues in onlineManagement issues in online
BankingBanking

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An Introduction to Risk ManagementAn Introduction to Risk Management
Risk ManagementRisk Management is the process ofis the process of
measuring or assessing the actual ormeasuring or assessing the actual or
potential dangers of a particularpotential dangers of a particular
situation.situation.

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Growth in Number of National Banks thatGrowth in Number of National Banks that
Have Transactional WebsitesHave Transactional Websites

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Technology-based BankingTechnology-based Banking
Products & ServicesProducts & Services
 Balance inquiryBalance inquiry
 Transaction informationTransaction information
 Funds transferFunds transfer
 Cash ManagementCash Management
 Bill paymentBill payment
 Bill presentmentBill presentment
 Loan applicationsLoan applications
 Stored ValueStored Value

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Technology-based BankingTechnology-based Banking
Products & ServicesProducts & Services
 AggregationAggregation
 Electronic FinderElectronic Finder
 Automated clearinghouse (ACH) transactionsAutomated clearinghouse (ACH) transactions
 Internet PaymentsInternet Payments
 Wireless BankingWireless Banking
 Certification AuthorityCertification Authority
 Data StorageData Storage

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Risk Has Two ComponentsRisk Has Two Components
 Uncertainty.Uncertainty.
 Exposure.Exposure.

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Types of RiskTypes of Risk
 Operational.Operational.
 Credit.Credit.
 Reputational.Reputational.

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Operational RiskOperational Risk
The risk of loss resulting fromThe risk of loss resulting from
inadequate or failed internal processes,inadequate or failed internal processes,
people and systems, or from externalpeople and systems, or from external
events.events.

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Operational Risks IncludeOperational Risks Include
 Internal Fraud.Internal Fraud.
 External Fraud.External Fraud.
 Employment Practices and Workplace Safety.Employment Practices and Workplace Safety.
 Clients, Products and Business Practices.Clients, Products and Business Practices.
 Damage to Physical Assets.Damage to Physical Assets.
 Business Disruption and System Failures.Business Disruption and System Failures.
 Execution, Delivery and Process Management.Execution, Delivery and Process Management.

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Internal FraudInternal Fraud
 Unauthorized Activity.Unauthorized Activity.
 Transactions not reported.Transactions not reported.
 Transaction type unauthorized.Transaction type unauthorized.
 Mismarking of position.Mismarking of position.
 Theft and Fraud.Theft and Fraud.
 Fraud/credit fraud/worthless deposits.Fraud/credit fraud/worthless deposits.
 Theft/extortion/embezzlement/robbery.Theft/extortion/embezzlement/robbery.
 Misappropriation of assets.Misappropriation of assets.
 Forgery.Forgery.
 Account take-over/impersonation.Account take-over/impersonation.
 Bribes/kickbacks.Bribes/kickbacks.
 Insider trading.Insider trading.
 Money laundering.Money laundering.
 Willful blindness.Willful blindness.

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External FraudExternal Fraud
 Theft and Fraud.Theft and Fraud.
 Theft/robbery.Theft/robbery.
 Forgery.Forgery.
 Check kiting.Check kiting.
 Identity theft.Identity theft.
 Elder financial abuse.Elder financial abuse.
 Systems Security.Systems Security.
 Hacking damage.Hacking damage.
 Theft of information (with monetary loss).Theft of information (with monetary loss).

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Business Disruption and System FailuresBusiness Disruption and System Failures
 Systems.Systems.
 Hardware.Hardware.
 Software.Software.
 Telecommunications.Telecommunications.
 Utility outage/disruptions.Utility outage/disruptions.

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Credit RiskCredit Risk
Risk due to an uncertainty in aRisk due to an uncertainty in a
counterparty’s ability to meet itscounterparty’s ability to meet its
obligations in accordance with agreedobligations in accordance with agreed
upon terms.upon terms.

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Credit Risks Include:Credit Risks Include:
 Loans.Loans.
 Acceptances.Acceptances.
 Interbank transactions.Interbank transactions.
 Trade financing.Trade financing.
 FX transactions.FX transactions.
 Futures.Futures.
 Swaps.Swaps.
 Equities.Equities.
 Letters of credit.Letters of credit.
 Options.Options.

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Sound Practices for ManagingSound Practices for Managing
Credit RiskCredit Risk
 Establish an appropriate credit risk environment.Establish an appropriate credit risk environment.
 Operate under a sound credit-granting process.Operate under a sound credit-granting process.
 Maintain an appropriate credit administration,Maintain an appropriate credit administration,
measurement and monitoring process.measurement and monitoring process.
 Ensure adequate controls over credit risk.Ensure adequate controls over credit risk.

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Establish an Appropriate Credit RiskEstablish an Appropriate Credit Risk
EnvironmentEnvironment
 Board of Directors should review credit risk strategyBoard of Directors should review credit risk strategy
periodically.periodically.
 Senior management should implement credit riskSenior management should implement credit risk
strategy approved by the Board.strategy approved by the Board.

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Reputational RiskReputational Risk
Reputational risk is the potential thatReputational risk is the potential that
negative publicity, whether true or not, willnegative publicity, whether true or not, will
result in loss of customers, severing ofresult in loss of customers, severing of
corporate affiliations, decrease incorporate affiliations, decrease in
revenues and increase in costs.revenues and increase in costs.

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Reputational RiskReputational Risk
 This is the current and prospective risk to earnings
and capital arising from negative public opinion. A
bank's reputation can be damaged by Internet
banking services that are poorly executed (e.g.,
limited availability, buggy software, poor response).

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Benefits of Effective ReputationBenefits of Effective Reputation
ManagementManagement
 Improving relations with shareholders.Improving relations with shareholders.
 Creating a more favorable environment forCreating a more favorable environment for
investment.investment.
 Recruiting/retaining the best employees.Recruiting/retaining the best employees.
 Reducing barriers to development in new markets.Reducing barriers to development in new markets.
 Securing premium prices for products.Securing premium prices for products.
 Minimizing threats of litigation.Minimizing threats of litigation.

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Reputational Risk ChecklistReputational Risk Checklist
 Processes for crisis management are planned andProcesses for crisis management are planned and
documented.documented.
 External perceptions of the bank are regularly measured.External perceptions of the bank are regularly measured.
 Reputational threats are systematically tracked.Reputational threats are systematically tracked.
 Employees are trained to identify and manage reputationalEmployees are trained to identify and manage reputational
risks.risks.
 Standards on environmental, human rights and laborStandards on environmental, human rights and labor
practices are set publically.practices are set publically.
 Relationships and trust with pressure groups and otherRelationships and trust with pressure groups and other
potential critics are established.potential critics are established.

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QuestionsQuestions
Write a brief note on management issues on onlineWrite a brief note on management issues on online
banking??banking??