Financial Institution

1
Financial Institution

• Econ 310
• Group 7
• Can traditional bank be replaced?

2
Background

• Hong Kong International financial center
• Banking Industry a significant position
• Local banking community
• Foreign banking community
• over 300 banks from 40 countries

3
Background

• Foreign bank
• provides competition
• new ideas
• distinctive banking products
• Advanced technology in 21st century
• electronic money products
• electronic delivery channels

4
Background

• Electronic money
• consumers pay conventional funds
• store the value on a computer device
• purchase goods
• E.g. Octopus

5
Background

• E.g. Visa Cash
• Mondex

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Background

• This project
• Internet Banking
• Future development

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Traditional Bank- Credit Rating

• C redit Risk
• A sset quality Risk
• M anagement Risk
• E arnings Risk
• L iquidity Risk

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Internet Bank- Special Risk

• L iquidity risk
• O peration risk
• C redit risk
• A reputation risk
• L egal risk

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Which risk can be controlled?

• Liquidity risk

• not able to meet its obligations to settle full
  value when they come due
• result in opportunity costs, defaults on
  obligations or costs associated with obtaining
  the funds from other source
• lead to operational failure

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Which risk can be controlled?

• Credit risk

• risk of a borrower or counterparty failing to
  meet its obligations
• increased by a loan through an internet banking
  channel
• approving loans electronically

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Basel II - Operations Risk

• Operation

• Inadequacies or failings in the processes or
  systems
• Lack of control to detect damage from hacker,
  fraud, Trojan Horse
• Arises from fraud, processing errors, system
  disruptions or other unanticipated

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Basel II - Legal Risk

• Legal actions or uncertainty in the applicability
  or interpretation of contracts

• differences between electronic and paper-based
  processes
• uncertainty over laws govern a specific internet
  banking transaction
• legally binding electronic agreements overseas?

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Basel II - A Reputation Risk
A Reputation Risk

• Unauthorized activity on customer accounts
• Disclosure or theft of confidential customer
  information
• Failure to deliver on marketing claims
• Loss of trust

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Basel II - A Reputation Risk
Year Number of fraudulent website, emails or telephone system
06 22
05 26
04 32
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A Reputation Risk - clipping
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Security of Internet Banking

• The liability for loss of customers
• In accordance with the Code of Banking Practice,
  unless a customer acts fraudulently or with
  gross negligence such as failing to properly
  safeguard his device(s) or secret code(s) for
  accessing the e-banking service, he should not be
  responsible for any direct loss suffered by him
  as a result of unauthorized transactions
  conducted through his account.

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Security of Internet Banking

• How customers safeguard their data security
• Do not use your Online Banking Customer ID and
  Password for any other internet banking accounts,
  on-line memberships or internet services.
• Do not share your online banking customer ID or
  Password with anyone.
• Do not make up Your Password with easily
  recognizable combinations, such as your birthday,
  phone number or vehicle license plate number.
• Do not use the same password for different
  online services, and change your password
  regularly.

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Security of Internet Banking

• From June 2005, individual banks offered
  different two-factor authentication methods to
  customers. The Two-factor authentication is a
  security measure recognized by the information
  security industry to combat Internet banking
  frauds.
• Three common methods
• Digital certificate
• Security token-based one-time password
• SMS-based one-time password

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Development of Internet Banking in Hong Kong
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Hong Kong i-banking Practices

• Services provided by the Hong Kong i-banking
• account management
• fund transfer
• investment management
• E-IPO services
• insurances services
• loads services
• MPF account management

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Hong Kong i-banking Practices

• Three management arrangements should be
  considered
• Internal communication management
• Web development management
• Customer relation management

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Internal communication

• The senior management has kept clear
  communication with
• the technical and operational staff on the system
  design
• the policies and procedures of i-banking
  operations

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Internal communication

• On-site examination programme by HKMA
• focus on authorized institutions e-banking
  activities, technology risk management and
  business continuity planning
• update with the skills and knowledge related to
  e-banking
• ?Improvement on the security and services quality
  of i-banking in Hong Kong

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Web development

• Characteristic of Hong Kong i-banking sites
• easy to use
• sufficient assistance and guidelines.
• convenient
• The security systems of most of the bank
• advance information protection system
• personal identification system.

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Customer relation

• a critical factor affecting the success of any
  business
• i-banking shifts the relation of contact
• customers and bank tellers
• ?
• customers and network linked with banks

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Customer relation

• Traditional banking
• budget a large portion of money
• train up their staffs to be polite and patient
  and be able to work efficiently
• i-banking
• upgrade their i-banking system
• new services are always introduced
• I-banking hotlines to eliminate confusing or for
  assistance

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A case study of HSBC I-banking
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A case study of HSBC I-banking

• HSBC I-banking is called online_at_hsbc
• 8 main functions
• Money transfer
• Time deposit management
• View pay bills
• Investment management
• Credit cards services
• MPF Accounts
• Insurance services
• Personal loans approval

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Money transfer

• Transfer money regardless of the regions
• Transfer in 45 days advance can be set
• Reference number is given after each transaction.
  
• If problem arose from the money transaction,
  reference number can be used to ask for
  assistance from HSBC

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Time deposit management

• 2 types of time deposit
• HK dollars
• Foreign currency
• Current interest rate and details of time deposit
  can be check anytime

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View pay bills

• Over 100 bills types available
• 45 days advance bills payment operations can be
  set
• Auto pay function for the bills can also be set

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Investment management

• Different local securities, bonds and unit trust
  can be bought and sold online.
• Update quotes and market information is available
  
• Subscription for IPOS is available with a lower
  handling fee

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Credit cards services

• HSBC credit cards and Octopus Automatic Add-Value
  Serviceonline can be applied freely online
• Application forms are pre-filled with customers
  information
• Credit cards limits, balance, bonus points left
  and statement can be viewed online
• Personal data can be updated and request to
  increase their credit cards limit

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MPF Accounts

• Balance and contributions can be viewed and
  switched
• Fund performance can be checked
• Claim can be made by just doing some simple
  clicks in online_at_hsbc
• Real time process is used
• Update information on banking services and on
  many financial activities is provided

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Insurance services

• Insurance services of HSBC in online_at_hsbc
  including
• Travel
• Home
• Accident insurances
• Details of the insurance can be obtained
• Claim can also be made

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Personal loans approval

• Interest rates of personal loans package can be
  checked
• Personal loans can be applied online
• Mortgage calculate is provided for customers to
  easily calculate their mortgage rates

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Security system of online_at_hsbc

• 128-bit Secure Sockets Laver (SSL) encryption
  technology is installed
• Firewalls is set up within online_at_hsbc
• Correct combination of i-banking ID and password
  is needed for accession
• Online access will be disabled if 3 consecutive
  incorrect passwords have been attempted
• Inactive accounts will be logged off
  automatically
• Advices are given to the users

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Future Development of Banking

• Internet Banking
• However, Problems arisen on
• Deposit of Money

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Multi-purpose Card

• Concept of Electronic money
• consumers pay conventional funds to an issuer of
  electronic money
• in return for storing the value of those funds on
  an computer device (chips) held by the consumer.
• Use the electronic value to purchase

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Multi-purpose Card

• Concept of Electronic money
• Issuer of the electronic money can earn interest
  on the investment of the funds received
• Issuer incurs a liability to make good claims on
  it by holders of electronic value such as
  merchants

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Multi-purpose Card

• Issuer of a multi-purpose Card is
• taking money from the public
• investing it,
• in return for providing a means of payment in
  electronic form.
• Electronic Purse
• Function

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Multi-purpose Card
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Future Development
Sources of Fund ( Input )
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At the last Stage

• Traditional bank can be replaced!

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• Q A