Darul Ihsan University

Institute of Business Studies

Assignment
On
“Opportunity and Threats of E- Banking in Bangladesh”.

Course Code: CSC-120

Course Title: Application of computer in Business

Submitted To:
Helaluddin Ahmed
Lecturer, Dept. of Business studies,
Darul Ihsan University

Submitted by:
Md. Abu Taher ID: 32035
Batch - 31st(A)
Program - BBA.
 Date of Submission: 8th January,2011

January 08, 2011

Helaluddin Ahmed
Lecturer, Institute of Business Studies
Darul Ihsan University

Subject: Submission of the Assignment

Dear Sir,
I would like to submit the assignment which is to done on the “Opportunity and Threats of E-
Banking in Bangladesh”. The assignment making has given us the opportunity to know about
the E-Banking situation in Bangladesh.

Your valuable advice, suggestion and guidance have helped us to prepare the assignment
with care. I will be very glad, if you kindly accept this assignment.

Sincerely your’s
Md.Abu Taher
BBA,31st (A)
ID:32035

Acknowledgement
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Firstly I would like to give thanks Almighty Allah for successfully complete the assignment.
Secondly thanks to our course teacher “Helaluddin Ahmed”, who has provided us
suggestions to pursue the assignment. I also give thanks to the librarian of Darul Ihsan
University for his help.

Finally, I would like to thank my friends and respected personnel for providing me banking
information.

TABLE OF CONTENT
Sl. no Particulars Page no.

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 0.1 Introduction: E-Banking 05
0.2 Types of E-banking: 06-07
0.3 Opportunity of E-
Banking in Bangladesh
0.4 Proposed ICT 08
infrastructure for E-
banking in Bangladesh
0.5 Description of Proposed 09-10
ICT infrastructure
0.6 Threat’s 10-13
Conclusion 13

Introduction:

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The advent of E-Business accompanied with technological innovations and globalization is
constantly propelling the businesses organization to redefine their business operations in
terms of value chain reengineering and restructuring business models. Likely, the financial
sector is metamorphosing under the impact of competitive, regulatory and technological
forces. Financial institutions especially the banking sector is currently in a transition phase.

The banks have put themselves in the World Wide Web to take advantage of the internet’s
power and reach, to cope with the accelerating pace of change of business environment. The
famous quote by Bill Gates that banking is vital to a healthy economy, but banks themselves
are not highlights the crucial nature of the electronic forces that are affecting banks more
than any other financial service provider group. This transition of business operations by
banks have crated new mode of operation called E-Banking.

E-Banking:
The term Internet Banking or E-Banking Internet both are used as supplement. E-Banking is
the one of the major part of E-Financing. Hertzum et al. defined E-Banking as web-based
Banking. In other words E-Banking refers to the banking operations, which is done over
World Wide Web. However, more comprehensive and well-established definition is given by
the United Nations Conference on Trade and Development (UNCTAD). This definition
covers almost all area of E-Banking.

Internet banking refers to the deployment over the Internet of retail and wholesale banking
services. It involves individual and corporate clients, and includes bank transfers, payments
and settlements, documentary collections and credits, corporate and household lending, card
business and some others.

E-Banking information architecture is modeled as client-server architecture. A client

operating through a PC linked to Internet opens the special E-Banking site of his bank and
then, using a set of special secure numbers, gets access to his bank accounts and has the
opportunity to consult them, as well as to make all necessary payments and transfers form his
personal accounts.
When the transaction number is exhausted the bank sends him a new set of numbers for his
individual transfer sessions. In some cases the bank provides customized software.

The bank software program can also be utilized offline, for example for preparing the
payment orders offline and then making the actual order online. The client receives all
numbers separately, mainly by mail. The bank also provide clients with similar facilities in
its premises so that clients can use the bank equipment such as an ATM or a special facility
linked to the main terminal facility called Multimat, permitting them to effect the same
account examination, payment and transfer operations without consulting the bank staff.

Types of E-banking:

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The terms ‘PC banking’, ‘online banking’, ‘Internet banking’, ‘Telephone banking’ or
‘mobile banking’ refer to a number of ways in which customers can access their banks
without having to be physically present at the bank branch. E-banking may be understood as
term that covers all these ways of banking business electronically.

Tele-banking
Tele-banking service is provided by phone. To access an account it is required to dial a
particular telephone number and there are several options of services. Options included
__Checking account balance
__Funds transfer between current, savings and credit card accounts
__Bill payments
__Stock exchange transaction
__Receive statement via fax
__Loan payment information

PC Banking
The increasing awareness of the importance of literacy of computer has resulted in increasing
use of personal computers through the entire world. Furthermore, incredible plummet of cost
of microprocessor has accelerated the use of computer. The term ‘PC banking’ is used for
banking business transacted from a customer’s PC. Using the PC banking or home banking
now customers can use their personal computers at home or at their office to access their
accounts for transactions by subscribing to and dialing into the banks’ Intranet proprietary
software system using password.

Internet Banking
Internet banking would free both bankers and customers of the need for proprietary software
to carry on with their online banking transactions. Customer behavior is changing rapidly.
Now the financial service is characterized by individuality, independence of time and place
and flexibility. These facts represent huge challenges for the financial service providers. So
the Internet is now considered to be a ‘strategic weapon’ for them to satisfy the ever-
changing customers’ demand and innovative business needs.

Mobile Banking

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Actually mobile banking is a variation of Internet banking. Mobile banking is a good
example of how the lines between the various forms of e-banking are becoming gradually
blurred. Due to the new transmission technologies such as WAP (Wireless Application
Protocol), portable terminal like mobile phones, personal digital assistant (PDA) or small
hand-held PCs are providing bank customers with access to the Internet and thus paving the
way to Internet banking.

It assures immense flexibility and makes the financial services independent of time and
place. However, the use of mobile banking is still in a nascent state. The slower transmission
speed of the WAP standard and the limited amount of information available are just two of
the factors inhibiting the use of those terminals.

Opportunity of E-Banking in Bangladesh:

The infrastructure covers the major cost of any electronic banking system. But it’s a matter of
huge investment for a country like Bangladesh. But fortunately Bangladesh Railway has a
high-speed optical fiber network parallel to the railway path owned by Bangladesh Railway
which has a total capacity of about 2.5 Gbps. This fiber optic network covers almost every
important parts of the country.

So, it is an opportunity to use it as the backbone network of electronic banking in

Bangladesh. Some of the multinational companies like Grameen mobile phone company,
Ranks ITT of Bangladesh have already started to use this high-speed optical fiber network
and they are providing their services even in rural area. So we can utilize this opportunity in
case of E-banking in Bangladesh.

In Bangladesh there is a large gap between the computerization of foreign banks and that of
local commercial banks (the gap is particularly great in respect of local public commercial
banks) and as regards the state of their intra- and inter-branch online networks. However, 75
per cent of local banks are planning to introduce E-Banking, which implies very dynamic
improvements in their ICT use indicators.

Virtually all banks use banking software at their head offices and during the past few years
around one third of local banks has become SWIFT members. Credit card and point of sale
services (POS) are already provided by a quarter of local banks, while ATM and internet
banking are expanding rapidly especially in major cities

Proposed ICT infrastructure for E-banking in Bangladesh:

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 BO-2 BO-N

Port Authority
Bank X
BO 1
Central Bank HO
OTHERS

Head
Office
Bank Y Bank Z

Router/FW Router/FW Router/FW Router/FW

Optical Fiber Nation-wide Banking Network

Sub Marine Cable

Router/FW Router/FW Router/FW Router/FW

Principle Branch

Bank Z Bank Y Bank X

Central Bank/
Sonali Bank
BO Othe
BO N
1 r
HO- Head Office
BO- Branch Office

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Description of Proposed ICT infrastructure
In the above configuration all bocks are symmetric except for the role of central bank differs
slightly.
► In central zone (i.e. Dhaka) Bangladesh Bank (Head Office) is connected with every other
Head Office and branch office is connected to its head office in the same region. Bangladesh
Bank(Head office) is given the legal authority to get any sort of information regarding the
transaction flow from any bank.

► In the regions other than Dhaka the role of Bangladesh Bank is handed over to ‘Sonali
Bank’ Principal Branch if there exists no branch of the central bank.

► In both regions each bank forms a local network (might be wired or through radio link)
where the head office or principal branch play the central role.

► In some relatively remote area (Rangamatee) where total number of branches of all banks
is very few (for instance a total of 5 branches are there) the above configuration is not a
feasible one. In such cases, all branches, irrespective of banks, should form a local network.
This is because establishment and maintenance cost will be much higher for a number of
very small LAN instead of a single moderately sized one. Unlike other unit it has no
governing entity. Here every branch communicates directly with its Head Office.

Every Head Office is having its own VSAT to be connected with the Internet. One is shown
in the diagram. Alternatively, Internet connection can be assured by direct connection with
the sub-marine cable as a future solution. It is shown as the dashed box in the diagram. In the
diagram of the proposed infrastructure the magnified box shows a special module entitled
‘others’ connected with the head office.

It is used to represent to facilitate for the utility bill payments such as water, gas etc. As a
result, customer will be able to pay their utility bills at any branch of any bank. It would
obviously reduce the immense pressure on some specific branches as being followed now.
Again, it presents some non-banking financial service providers such as insurance company.

According to the “E-Commerce beyond 2000”, the banking and finance sector has been a
rapid adopter of E-Commerce because its products could easily be virtualized and the
product had priority over place banks can generate revenue
through increased account access fees, and benefit from promotional opportunity to cross-sell
products such as credit cards and loans.

The advances in Internet security and the advent of relevant protocols has put banks in
perspective again as financial intermediaries and facilitators of complete commercial
transactions via electronic networks and especially via the Internet.

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Consumers are increasingly looking for services they can access from a single entry point.
Awareness of competition has motivated banks to move aggressively in seeking alliances and
establishing joint ventures to maintain their claim to this part of the E-banking infrastructure.
Like there are alliances in the ATM network, Group Network, Money Transfer Network etc.
This is also creating segmentation of networks where the customers of this networks
sometimes unable to access to others’ network. Consumer behavior in banking changed
partly as a result of changes in the amount of spare time available to individuals. Mobility,
independence of time and place, and flexibility has become key words in consumer banking.

The Internet banks serve also as gateways offering identification and authorization services
to a number of third party service providers. There are user-friendly opportunities for
conducting business over the Internet with telephone companies, Energy Company, tax board
and other institutions. Demand for those services influences also the usage rates of Internet
banks.

Threates:
Operational risk

Operational risks arises from the fact of some external events , processes, systems, people
etc. in the execution phase error occurred due to internal failure of processes, systems etc.
external event causes serious operational risk due to natural disaster. It sometimes arises from
the part of customers such as misuse of system and inadequately designed and implemented
electronic business system.

Security risks
Operational risk arises with respect to the controls over access to a bank’s critical accounting
and risk management systems, information that it communicates with other parties and, in the
case of electronic money, measures the bank uses to deter and detect counterfeiting.
Controlling access to bank systems has become increasingly complex due to expanded
computer capabilities, geographical dispersal of access points, and the use of various
communication paths, including public networks such as the Internet.

It is worth noting that with electronic financial transaction, a breach of security could result
in fraudulently created liabilities of the bank. For other forms of electronic banking,
unauthorized access could lead to direct losses, added liabilities to customers or other
problems. A variety of specific access and authentication problems could occur. For
example, successful attack by hackers via Internet he/she can cause severe danger by
accessing confidential customer information.

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Some of the threat may occur like Replay attack Besides the external attack, an e-banking
site must be well equipped to deal with some internal bad practice like employee fraud:
employees could surreptitiously acquire confidential information of the customer for some
evil aspects.

System design, implementation and maintenance

A bank faces the risk that the systems it chooses are not well designed or implemented. For
example, a bank is exposed to the risk of an interruption or slow-down of its existing systems
if the electronic banking system it chooses is not compatible with user requirements. The
rapid pace of change that characterizes information technology presents banks with the risk
of systems obsolescence. Furthermore, rapid technological change can mean that staff may
fail to utilize the power of newly adapted technology for e-banking.

Customer misuse of products and services

As with traditional banking services, customer misuse, both intentional and inadvertent, is
another source of operational risk. In the case of e-banking this sort of risk is predominating
if a bank does not adequately educate its customers about security precautions such as
authentication information, credit card number etc. Subsequently, the bank may incur
financial losses because of transactions customers did not authorize.

Strategic risk from management perspective

Financial institution’s board and management should understand e-banking risks and
evaluate the risk and cost to minimize associate risks prior to offer e-banking service.
Strategic risks result from (bad) business decisions taken by management. Specifically, the
danger of not being able to keep up with rival technologies is the source of the greatest
strategic risk. Technology is so important for e-banking operations that there is a
correspondingly great needs to invest in new technologies. Innovators assume most of the
risk. It is often impossible to foresee whether a new product will survive on the market or
whether a project can be successfully brought to conclusion. Failed IT projects can raise the
amount of misallocated investment; thus, instead of reducing costs, e banking would have
precisely the opposite effect. Therefore, some institutions are pursuing the strategy of
imitation. Such banks not only save costs on IT development but also have the advantage of
knowing that a technology has proved to be feasible and that the market has shown initial
signs of acceptance.

A major disadvantage of this strategy is that if circumstances cause the technology to be

entered into production too late, the market segment could already be occupied. The rapid
pace of innovation in e-business is requiring banks to make e-banking strategy decisions as
quickly as possible, since technological innovation and customers’ tastes may radically
change. Frequently there is no way to predict which technology and which terminals (e.g.
mobile phones, television set, PDAs ) will prevail.

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Missteps in the planning and implementation of strategy engender considerable risks. The
responsibility for these decision lies with the senior management of the bank.

Reputational risk

Banking business is especially sensitive to fluctuations in confidence. There fore,

reputational risk, particularly in a relatively new field of business, represents a special
challenge for banks. Customers’ confidence in their bank can be shaken if the bank is not
able to provide secure and trouble-free e-banking services. The same is true if services such
as responding to inquiries or processing orders are not performed at the speed that customers
have come to expect in the ‘electronic age’.

Other risks
Traditional banking risks such as credit risk, liquidity risk and market risk are also present in
e-banking sectors.

Credit risk
It is the risk that counter-party will not settle an obligation for full value, either when due or
at any time thereafter. Banks engaging in e-banking activities may extend credit via non-
traditional channels, and expand their market beyond traditional geographic boundaries.
Inadequate procedures could heighten credit risk for banks. Banks engaged in electronic bill
payment programs may face credit risk if a third party intermediary fails to carry out its
obligations with respect to payment.

Liquidity risk
It arises from a bank’s inability to meet its obligations when they come due, without
incurring unacceptable losses, although the bank may ultimately be able to meet its
obligations. Liquidity risk may be significant for banks that specialize in electronic money
activities if they are unable to ensure that funds are adequate to cover redemption and
settlement demands at any particular time. In addition, failure to meet redemption demands
in a timely manner could result in legal action against the institution, and lead to reputational
damage.

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Market risk
Market risk is the bank of losses in on and off balance sheet positions arising from
movements in market prices, including foreign exchange rates. Banks accepting foreign
currencies in payment for electronic money are subject to this type of risk.

Conclusion:
Web based banking service or E-Banking, the latest generation of electronic banking
transactions, has opened up new window of opportunity to the existing banks and financial
institutions. It permits business process re-engineering, serving borderless market, to achieve
zero latency leading to improvements in customer service levels and better risk management
because of real-time settlement. Since its evolution in 90th decade, it is having unprecedented
growth. The growth rate is higher in Developed Countries, and comparatively lower in LDCs
countries like Bangladesh. The E-Banking sector is highly prohibitive for the new entrants
although the inception cost is lower with high growth rate.

The brand preference of the customer, existing network, physical existence, security and
safety, supplier bargaining power, substitute product of non-banking sectors have made the
way thorny. However, new comer with innovative idea and strategy definitely can make
position in this sector. The analysis of the evolution and present status of E-Banking make us
some room to make commandments for the government, new entrants and existing e-banks
for effective utilization of the opportunity to accelerate the economic growth.

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