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Department of Economics Electronic Commerce: Electronic Banking and Cyberbanks How To PAY FOR E-COMMERCE Presentation Overview Background on FDIC E-banking trends, risks, and issues What are the emerging technologies? How are they being used by banks?

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Department of Economics

Electronic Commerce: Electronic Banking and Cyberbanks


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Presentation Overview

  • Background on FDIC

  • E-banking trends, risks, and issues

    • What are the emerging technologies?

    • How are they being used by banks?

    • What are the risks and regulatory issues?

  • “Cyberbanks”

    • Who are they & how are they unique?

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FDIC - General Information

  • Federal Agency, created in 1933

  • Insurer of banking and thrift institutions

  • Supervisor of state-chartered, non-member banks

    • 6,000 FDIC supervised institutions

    • 2,200 examiners in eight regions

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The Four Forces of Change in the Financial Services Industry



Financial Service




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Technology: The Internet Changes Everything

  • The networked environment provides instant, global access to information, products, and services

  • The Internet becomes a mass market (275 million users)

  • “Information” industries (financial services) are reinvented

  • Computing technology has become a core competency for financial services

  • Affordable, outsourced solutions are readily available

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CEO’s View of the Internet’s Impact on Business



















Source: Survey of 1,020 CEOs by PriceWaterhouseCoopers 1/2000

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Internet Banking Forecasts

“86% of financial institutions will offer online banking by 2003” -- IDC Research, 5/99

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Growth Trends in Bank/Thrift Web Sites

40% of all banks & thrifts have a web site

12% of all banks & thrifts have a transactional web site

Source: Call Report data and informal off-site monitoring

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Transactional Web Sites by Bank Asset Size

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Internet Banking Innovations

  • “Portal” sites

  • Financial services aggregation

  • Bill presentment and payment

  • Customer relationship management

  • Electronic commerce services

  • Wireless technology

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Traditional Risks








Risks of Electronic Delivery

Unique Risks

  • Speed of transactions

  • Global reach

  • No direct control over end users

  • Anonymity of users

  • Strong reliance on vendors to develop and maintain system(s)

  • Dynamics of technology

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Examples of Known Incidents and Potential Threats

  • Theft of confidential/proprietary information

    • Identity theft, Internet-related credit card fraud

  • Web site modification

  • Web site impersonation (“spoofing”)

  • Denial of service attacks

  • Possible extortion attempts

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Example of a Hacked Bank Web Site



“What happened???”

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Experience to Date Attempt”Common Problems

  • Lack of planning and updates to policies, audit programs, etc.

  • Inadequate control over sensitive information

  • Privacy statements are lacking

  • Weaknesses in customer authentication

  • Over-reliance on vendors

  • Uncertainty of applicable laws and regulations

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Planning and Policies Attempt”

  • Feasibility studies/strategic plans are often absent

  • Budgets should address system maintenance, upgrades, and training

  • Audit procedures should be updated

  • Policies should be updated to cover new activities

    • Example of “out-of-area” loan applications



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Control Over Sensitive Information Attempt”

  • Access and authentication controls (e.g., PINs, passwords) must be properly administered

  • Sensitive information should be encrypted

    • Distinguish between secure and unsecure transmissions (e.g., e-mail)

  • Security techniques and practices should be disclosed

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Web Site Privacy Statements Attempt”

Results from Interagency Web Site Survey:

  • 364 bank/thrift web sites surveyed

  • 64% collected personal information

  • 48% of all sites had a privacy disclosure

  • 52% of sites that collected info. had disclosures

  • 96% of “top 50” sites had privacy disclosures

  • Only 21% of sites with disclosures addressed all five fair information collectionpractice principles

See FIL 86-98 for info on what should be in a Privacy Statement

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New Customer Authentication Attempt”

  • Existing customers are generally authenticated by PINs

  • New technologies are being explored for private banking and commercial customers

    • E.g: digital certificates, smart cards, biometrics

  • Current industry practices include customer call-backs, fraud screens, etc.

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Dependence on Vendors Attempt”

  • Most banks outsource some or all of their e-banking activities

  • Increasing tendency of banks to “abandon responsibility” for outsourced systems

  • Due diligence, comprehensive contracts, and vendor oversight are essential

  • Ownership and control over customer data should be clarified

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Applicable Laws & Regulations Attempt”

  • Importance of ongoing web site review by compliance/legal staff

  • Existing laws and regulations generally apply

  • Difficulty in translating geography-based, paper-based, and signature-based requirements

  • Interagency statement: “Electronic Financial Services & Consumer Compliance” (7/98)

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Cyberbanks Attempt”

  • There is no singular definition of a “cyberbank”

  • My unofficial criteria:

    • Must have a legal bank charter

    • Strategy emphasizes the Internet

    • Electronic channels are primary method of delivery

  • Common strategies: niche focus, low-cost provider, high-rate payer, rapid growth

  • The “dot com” mentality

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Cyberbank Examples Attempt”

Since 1995, eleven “branchless” banks have emerged:

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1st National Bank = Attempt”

Internet Branches/Divisions

  • Approximately 14 institutions maintain web sites under “trade names”

  • Business strategy: target different customer groups

  • Potential for consumer confusion and uninsured deposits

  • Interagency guidance on the use of “trade names” (dated May 1, 1998)

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FDIC’s Supervisory Initiatives Attempt”

  • Examination procedures for bank examiners

  • Technical training for IS specialists

  • Industry guidance

  • Interagency & international workgroups

  • Monitoring programs and resources

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Industry Guidance Attempt”

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Summing it Up... Attempt”

  • Technology is revolutionizing the banking industry and becoming a critical competency

  • The challenge for the banking industry and financial services regulators is to keep pace with technological change

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Time for questions, comments, and discussion... Attempt”


For further information about Inetrnet banking and related matters please contact:Cynthia A. Bonnette, Examination Specialist550 17th Street, NW, Room F-6008Washington, DC

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Reference URLs Attempt”