The Use of Electronic Banking - Case Study Example

Student’s Name: Instructor’s Name: Course Code & Name: Date of Submission: Introduction Electronic banking has gained popularity in the financial industry in different countries around the world. The increase in preference comes from the fact that e-banking increases convenience in money transfer between individuals in different regions due to its features. The legal framework regulating is not clear, less developed and slightly different from the traditional system. The financial industry, legal and information technology dynamic must match to reduce the challenges facing electronic banking. The features and challenges facing electronic banking are developed below; Essential features of electronic banking The use of electronic banking has brought inefficiency in the financial industry that is directly or indirectly associated with the use of the technology. These features include; First, the electronic banking gives the individual ability to use smart cards and digital cards to transact in their daily business. This feature has reduced theft and inconveniences that result from carrying huge amount of cash (Bakare, 2015). For example, when an individual is transacting million dollar business, he or she can comfortably use visa or any other digital cash to make a payment that is easy than paying for the product in cash. The ability to transact with smart cards and digital cash is enabled by sells person installing point of sales system in their premises. Also, smart cards and digital cash secure than carrying cash due to the presence of digital signatures and well-protected system. For example, before making payment one is required to provide a password, fingerprint or eye scan. This makes it hard for unauthorized individuals to make payments without consent of the owner. Secondly, electronic banking allows the use of magnetic ink character recognition (MICR) which makes clearance of cheques and other documents between two or more financial institutions easy and fast. The efficiency in the cheques clearance provides a competitive advantage to the financial institution using the technology since they can achieve high consumer satisfaction (Bakare, 2015). Also, electronic banking provides a good procedure for truncation. For example, when making payment the electronic system will efficiently execute required checks before authorization money transfer. The execution carried out includes checking similarity of the digital signature, cash available in comparison with the current needs and counter checking of recipient information. The electronic banking reduces the issue of dishonored cheques and waste of time cheques clearance in the traditional system. Thirdly, electronic banking allows ‘real time’ payment and receipt of cash regardless of the geographical distance between two or more individuals. The real-time feature has increased the volume of domestic and international trade since one can easily make payment of goods or services. It eliminates the need to take money or pay receipt physically to allow dispatch of the product or service purchased (Bakare, 2015). For example, Alibaba.com uses electronic banking where individuals can make payment of goods purchased via the website by the use of visa and other electronic means of remitting money. Also, the real-time feature reduces opportunity cost due to shortages and lack of satisfaction due to delays in payment for the products required. A point of sale system provides a good example of real-time feature, for example when consumer purchases goods, the bank balance adjusts immediately and automatically. Fourthly, electronic banking does not involve the exact exchange of money between banks of the recipient and payer (Bakare, 2015). The banks always exchange liabilities where one bank assists another bank in paying its liabilities in the country or region of payment. The method is suitable in international trade where the exchange of physical money is not possible. Fifthly, the electronic transaction is supported and moderated by policies on Secure Electronic Transaction (SET). The specification ensures that the transactions are secured as much as possible for example, issuing electronic certificates, information is strictly accessed by intended parties, electronic signatures to enable the recipient to discern between fake and genuine transaction. Also, SET minimize risk due to a high number of parties engaged in transaction i.e. merchant, customer, and telecommunication provider through the provision of public key cryptography. It enables parties to have a private key to relevant information and another public key that circulate within parties to a given transaction. The feature ensures that transaction data is secure and cannot be manipulated by an unauthorized party. Lastly, electronic banking involves many participants that include bank(s), customer, and merchant and telecommunication provider. Therefore, making it easy to identify parties in a given transaction, unlike the traditional banking that only involved two parties at a given time i.e. customer and bank (Bakare, 2015). The feature minimizes errors during payments and ease auditing process. These features make banks efficient due to the elimination of unnecessary procedures and automation of account adjustment during payment and receipt of money. Consequently, efficient results to increase in penetration of banking industry in the economy thus increase in velocity of money. Legal problems to electronic banking The use electronic banking technology is still young in the financial industry. Therefore, the legal procedures and decided cases regulating the system are still few. It poses a great challenge in dealing with cases associated with electronic banking that includes; First, electronic banking widens geographical reach than traditional banking since an individual can use the service from any point of the globe. It brings a great challenge in harmonizing the local law and international law on the prosecution of a given offense. Also, the individual is under different jurisdiction making prosecution lengthy thus delaying justice. Consequently, lack of good relationship between the countries inhibits prosecution of electronic offenses since it is not possible to summon citizen of another country without seeking permission from relevant authorities. Secondly, electronic banking is not negotiable instrument thus does not fall within the legal framework that regulates negotiable instruments such as a bill of exchange (Bakare, 2015). However, it carries negotiable instrument characteristics since the transaction is not considered complete until the instrument is delivered to the payee. The time is of important in electronic banking than the real payment in the transaction. Therefore, one can contest not liable for nonpayment since it does not amount or equivalent to payment. The lack of valid contractual agreement between payer and payee conflicts with the sale of good act 1923 making it difficult to prosecute. Thirdly, electronic banks increase banks exposure to legal risk. The most common risk includes interception of communication in the network by the third party, either due to negligence or unavoidable circumstances by banks or telecommunication provider (Bakare, 2015). It is the obligation of the banks to ensure that customer data is stored and transferred in a secure network. Therefore, access of confidential information by the third party gives customer sufficient grounds to sue the bank for breaching terms of the contract. The risk may occur from client fault but due to the inadequate stipulation of the responsibilities in customer terms of the agreement. The loopholes in the terms of agreement increase the burden of liability to the financial institution in case the error is because of customer fault. Fourthly, lack or distortion of evidence by the third party is prevalent in electronic banking than traditional banking (Bakare, 2015). This give creates a hurdle to legal approach in solving e-banking disputes due to lack of evidence. Consequently, interceptors can hide their path making it difficult to trace the offender or getting a wrong individual due to impersonation. Therefore, prosecution of these offenses is impossible. Lastly, electronic banking exposes financial institutions to illegal malpractices such has money laundry. The use of electronic banking enables individual to send money from one part of the country to another to distort the source of the money easily than traditional banking (Bakare, 2015). It promotes money laundry mostly from developing nation due to corruption and lack of an adequate financial framework to minimize malpractice in the financial sector. The practice causes a financial institution to receive injunction by domestic and international agencies in regulating the financial and legal sector. The challenges above is clear evidence that despite numerous benefits derived from electronic banking, there are a lot of legal challenges that needs to be addressed to reduce the loss of funds, confidential data and malpractices in the financial sector. The soundness of the electronic banking will require efforts of all stakeholders such as regulators, financial institutions, legal system, merchants and customers. Conclusion and recommendation In conclusion, it is evident that electronic banking features are more beneficial than its shortcomings. These shortcomings can be eliminated by ensuring that there are adequate procedures and regulatory bodies to deal with issues arising from the use of e-banking. The following recommendation can be adopted in reducing the prevalence of illegal activities and fostering growth in electronic banking; Harmonization of domestic and foreign laws on financial industry- The laws should ease on the process required to prosecute individuals with different jurisdictions and reduce conflicting clauses to avoid loopholes that perpetrators can use to avoid legal liability. Development and growth of international financial regulations and laws that evolves with dynamics technology in the financial sector. The ability of growth of these regulations and laws ensures immediate remedy to emerging challenges in electronic banking. Financial institutions should ensure that it stipulates roles and responsibilities of each party clearly to reduce the effect of bearing obligation as a result of the negligence of another party. Integration of relevant laws affecting electronic banking, for example, recognition of electronic payment certificate as a legal instrument of trade. These will reduce losses incurred due to lack of good grounds to prosecute under sales of good act 1923 and other relevant acts. Also, it can be integrated to communication act on confidentiality of information and other relevant acts. Financial institutions and merchants should ensure that customers are well informed on how to use electronic banking platforms to reduce instances of losing information to the third party or making wrong payments. Consequently, the financial institution should ensure toll-free line with 24 hours support to respond to emergencies raised by the customers. The financial institution should ensure that it carries out enough testing and approval by relevant agencies before procuring and using software required in electronic banking. It reduces software bugs that make the bank’s system susceptible to hacking. Lastly, financial institutions must set limits of the transaction on volume made by the individual. The strategy will reduce issues of money laundering that puts the institution under legal battle in aiding money launders or financial malpractice. The adherence to the above recommendation will eliminate the shortcomings of the rapidly growing electronic banking system. The merits of electronic banking are immeasurable both in the growth of banking sector and globalization of trade. Therefore, calls for attention from all stakeholders in enhancing confidentiality and growth in the banking sector. Reference: Bakare, S. (2015). Varying Impacts of Electronic Banking on the Banking Industry. J Internet Bank Commer, 20(2). Read More