E-FINANCE

CHAPTER 6
RISK AND CHALLENGES
Risk and Challenges, V.C joshi (2004), E-finance Log into the future,
2nd Edition, Thousand Oakes, London,
E-finance: Status, Innovations, Resources and Future Challenges,
Manuchehr Shahrokhi, California - Managerial Finance 2008 Vol.
34, Issue , Pages 365-398

Discussion points in E-finance sector:

Functionality: This involves the decision of what products and
services to include in the internet banking services and what to
exclude. This should be considered at the first time and an ongoing
progress.
Web Design: This involves looking at what makes a good quality
internet banking web site. Issues to consider are related to the web
site appearance, content, speed and other issues that are important
to gain customer satisfaction.
Hosting: Banks engaging in internet banking should decide whether
to develop their internet banking system in house or outsource their
operations.

Analysis of Risk
Risk is the probability or likelihood of injury, damage or loss in
some specific environment and over some stated period of time.
It involves two elements: Probability and loss amount
The risks arise on account of a number of factors:
The policies pursued by the government,
Increased competition,
Reduced spreads and
Large number of sophisticated clients.
We will focus on additional risks faced by banks and financial
institutions using online channels.
Banks, brokers and financial institutions need to additionally deal
with risks specific to the internet
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Traditional risk management programmers must be adopted to

address new aspects of an electronic environment, including
transaction speed, geographic reach and user anonymity.
One of the major problems is to integrate the newer techniques with
legacy systems.
It must also be stressed that risk management is an ongoing process
of identifying, measuring, monitoring and managing all significant
operational, legal and reputation risks.
These areas can be divided into the following broad areas:
General Areas: Planning, policies and procedures. Distribution of
duties, accountability and delegation of authorities, regulatory
compliance and audits.
Transaction processing: User authentication. Information integrity
and non-repudiation of transactions and data confidentiality.
System Administration: Resource requirements, system security,
contingency planning, outstanding policies.
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RISKS and CHALLENGES

1-Regulatory issues
The deregulation of the London stock market in 1986,
The passage of the Riegle-Neal Act in 1994,
The deregulation of the Tokyo stock market in the 1990s
The crumbling of the Glass-Steagall Act in the late 1990s
Competition in e-finance is expected to accelerate over the
coming years as deregulation continues to make its way around the
world and new entrants enter particular areas of the market, develop
new niches/product expertise, or expand into new countries.

2- High Barriers to entry:

The finance industry has historically been both protected and
plagued by high barriers to entry.
New entrants to the financial markets have to have;
Strong human resource management,
A deep knowledge of risk,
Adequate financial resources,
Responsive customer service,
A robust technology infrastructure and
A well-established brand name/franchise.

3-Value Proposition
A successful e-commerce strategy in the financial services
industry involves rethinking and challenging value propositions.
The financial services industry had to rethink its e-commerce
business strategy and that involves reinventing products and
services, redefining the value proposition and perhaps creating new
business models.
4-Revenue and Cost Dimensions
The e-commerce revenue structure is quite complex, as the web has
altered the established concepts of pricing.
The web allows for free products and services, differential prices for
the same product and customer profiling.

5-Technology Architecture
The nature of the business model dictates the selection of the most
appropriate technical platform for the e-finance model.
6-Security
The online environment leaves all the operations of a financial
services firm susceptible to external and internal threats.
7- Adapting Global Technology to Local Requirements
While Internet technologies are global and standardized, their
applications can and must be adapted to local circumstances.

Risks can emerge from different sources within a banking

institution. Given below are details regarding factors causing such
risks.
Exceeding minimum capital requirements
Maintaining credit ratings
Maximizing shareholder value
Improving risk adjusted returns on equity, capital and assets.
So the relation between key business risks and activities undertaken
are:
Poor loan quality
Credit risk
High funding costs
Interest risk
Asset/Liability mismatches
Cash flow risk
Poor controls
Operations risk
Frauds
Reputation risk
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