The dawn of Chinese
e-banking By Frederick W
Stakelbeck Jr
China is in the midst of a
sustained banking revolution. Driving this
revolution are changes in customer expectations,
rapid technological advances, foreign equity
participation, and intense industry competition
that have placed extraordinary pressure on the
banking sector to modernize and reform.
Indeed, the time has arrived for China's
much maligned brick and mortar banking system to
adopt a new "business of banking" strategy. An
integral part of any new banking strategy should
include electronic or e-banking.
Simply
defined, e-banking is "an electronic channel used
to provide retail and commercial banking products
and services to
customers". E-banking
delivery channels can be divided into three
distinct categories: informational, electronic
transfer and electronic payment.
Using an
information channel, a bank provides general
purpose information, usually via a proprietary
website, to existing or prospective customers. An
electronic transfer channel allows a customer to
electronically submit loan or deposit applications
online, while an electronic payment channel
facilitates traditional payment entry, settlement
and distribution options. Some products and
services offered by e-banking channels include:
balance inquiries, transaction information, funds
transfer, bill payment and presentation, cash
management and loan applications.
In
October, World Bank president Paul Wolfowitz
visited Beijing for the first time since assuming
his new post as head of the global institution.
During his stay, Wolfowitz called China "a major
global force". He also acknowledged China's
increasing importance to the global economy
stating, "China, as we all know, has been the
fastest growing economy in Asia for the past 20
years. It has redefined the competitiveness of
virtually every other country."
In order
to maintain this competitive edge and meet the
banking needs of a growing middle class, China
will need to implement a financial modernization
program that addresses both the vast opportunities
and inherent risks associated with an e-banking
system.
Recent developments The
Industrial and Commercial Bank of China (ICBC),
the country's largest state-owned commercial bank,
has seen extensive growth in its e-banking program
recently, with 176,000 corporate clients and 12
million customers registered in several large
cities.
In September, ICBC noted that its
e-banking transactions totaled 170 billion yuan
(US$21 billion) in the first five months of 2005,
up 27% from the same period in 2004. This marked a
dramatic increase from only five years ago, when
e-banking transactions totaled only 15.4 billion
yuan.
In early October, ICBC reported
e-banking transactions volume for customers hit
80.2 billion yuan for the month of September,
breaking the 80 billion yuan monthly mark for the
first time. "The era of [really] tough competition
between foreign and local banks is yet to come for
Internet banking in China," said Zhou Yonglin,
marketing director of ICBC.
"We aim to
increase our individual clients to 20 million by
the end of next year, when online banking will
play a bigger role in the bank's development," he
said. A recent independent survey of 20,000 China
Internet users showed that 95.8% were aware of
ICBC's online brand. This supports future efforts
by ICBC to expand its e-banking initiatives.
In July 2004, China Construction Bank
(CCB), the largest Internet bank in Hong Kong
serving over 60% of the online bankers in the
city, reported its e-banking business was
developing rapidly. In October, CCB noted that
over 10 million new online banking accounts were
opened in 2004, while transaction volumes grew by
40% over 2003 figures. The bank recently described
its e-banking service as "a core strength and
fundamental to its business." To achieve its goal
of becoming a leader in e-banking, CCB has
strengthened its online management team,
encouraged employee training, improved marketing
strategies and enhanced customer outreach
programs.
The Chinese government has also
recognized the importance of e-banking to the
country's continued economic growth. The People's
Bank of China (PBoC), the country's central bank,
announced in September that it would oversee all
electronic payment businesses and grant licenses
for Internet service providers. In July, the
PBoC's Department of Payment and Clearing
published a draft "Management Regulation on
Payment Organizations" for public comment
addressing key payment system issues. The China
State Council solicited opinions in January on
accelerating the development of e-commerce related
to payment and settlement services, while the
Standing Committee of the 10th National People's
Congress passed the Law on Electronic Signatures
in August 2004.
Data integrity,
'phishing' seen as risks As with any new
technology, e-banking presents certain risks for
banks. Inadequate planning, faulty deployment,
insufficient internal controls, legal and
regulatory ambiguity and weak outsourcing
standards all pose significant risks to an
e-banking system. Data integrity, confidentiality,
authentication and authorization issues will also
place certain stresses on an immature e-banking
system.
To address these concerns, banks
will need to implement risk management practices
that effectively identify, measure, monitor and
manage risk. "Banks must put in place concrete
development plans and a system of controls and
security that boosts competitiveness and sustains
further progress," said Liu Mingking, chairman of
the China Banking Regulatory Commission (CBRC).
China's four large state-owned banks and
the CBRC will need to demonstrate flexibility,
leadership and strength to address the inevitable
challenges associated with an e-banking
transformation. Banks must review particular
e-banking products, services and activities,
resisting calls for premature implementation that
could harm the integrity of the entire Chinese
banking system.
Phishing (sending emails
faked to look like they came from a particular
bank in a bid to obtain passwords from that bank's
customers), money-laundering schemes, phony
Internet banks and the unauthorized use of
personal information to conduct e-banking
activities are an increasing concern for
e-banking.
China ranks second in the world
for hosting phishing attacks, accounting for 13%
of the world's total phishing websites. In 2004,
police pursued 1,350 online fraud and spam cases.
In the first quarter of 2005, 543 phishing
incidents were linked to 1,361 illegal websites
closed by Chinese authorities. Recent high-profile
Internet security breaches involving large
financial institutions such as the Bank of America
and JP Morgan Chase, as well as attacks against
third party processors, have raised questions
concerning the risks of conducting e-banking in an
immature Chinese banking market.
Consequently, Chinese banks that offer
e-banking solutions will need to implement
effective fraud prevention methods. Any risk
assessment should include the type of customer
(retail or commercial), customer transactional
capabilities, the sensitivity of customer
information being transmitted and the volume of
customer transactions. Reliable customer
authentication using passwords, digital
certificates, tokens and biometric identifiers
will help e-banking take root and flourish.
The future of e-banking The
success of the recent manned Shenzhou VI space
mission shows the extent to which China has become
a technologically driven society. As a country,
China understands the importance of technology in
today's world. It is only natural, then, for banks
and their customers to pursue e-banking.
A
properly configured e-banking infrastructure will
ensure orderly growth and sustainable economic
progress for China. Consumers will evaluate
e-banking products and services based on trust,
confidence, user privacy, transaction legitimacy,
security, system dependability and merchant
acceptance and conveyance. To ensure success, the
Bank of China must take a leadership role by
providing a blueprint for banks, customers and
third-party vendors to follow. Without such
guidance, China may find itself with several
conflicting e-banking standards which will
ultimately inhibit the development and growth of
the country's financial system.
Technology
has become the great enabler for the global
banking industry, helping today's banks meet the
changing needs of their customers, while at the
same time optimizing cost savings and improving
operating efficiencies. Moving forward, a careful
balance of regulatory reform that includes an
industry-wide architecture and affiliated
governance structure, coupled with well-managed
bank initiatives, will be needed. Moreover,
increased financial transparency, clearer banking
standards, predictable regulatory enforcement and
curtailing financial corruption will be of
enormous help.
Frederick Stakelbeck
Jr is an expert on China. His writings
concentrate primarily on the Chinese economy and
the implications of emerging bilateral and
trilateral Chinese relationships on US foreign
policy. His professional background includes 10
years of experience with the US judiciary and
seven years in the financial services industry. He
can be reached at
Frederick.stakelbeck@verizon.net.
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