E-FINANCE

CHAPTER 5
ADVANTAGES AND DISADVANTAGES
Internet Banking and Its potential in TRNC,
Zakaria Jado Zakario, Assoc. Prof. Dr. Hatice Jenkins

ADVANTAGES & DISADVANTAGES of E-FINANCE

Finance on internet-mostly internet banking- benefits
consumer in terms of convenience and the provider in
terms of cost reduction and greater reach.
As mentioned earlier, there are four groups that
participate in the development of e-finance.
Their role of developing E-finance will depend on the
benefits and risks they may realize from the presence of
E-finance.
Advantages and disadvantages of E-finance will be
discussed in terms of Internet Banking which is the most
popular and used E-finance transaction.
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1-BANKS PERSPECTIVE
ADVANTAGES:
A. ADDITIONAL REVENUES
Internet banks were allowed to generate additional
revenues from being allowed to offer new fee based
services and magnify the usage of existing products
and services offered.
Additional revenues can be classified into two groups:
1. Home Banking Offerings
2. Cash Management Offerings

1. Home Banking Offerings, include the basic internet

banking services such as bill payment and
presentment, shopping online, viewing balances etc.
2. Cash management offerings exceeds home banking
by allowing commercial users to manage their
businesses as well as their personal finances such as
handling many account at once, transfer funds between
accounts, handling foreign exchanges between
different currencies, viewing monthly account billing
statement and scheduling different payments.

B. OPERATING COST REDUCTION

Internet based banks were allowed to reduce costs of their
operations. Cost saving can be realized through less reliance on
manual operations and calling centers.
Internet banking allows banks reduce costs and provide the
following scenarios:
Internet banking will allow banks to reduce customer service
staff,
Electronic payment will replace checks and costs of processing
these checks will decrease.
E-mails will replace mails, and electronic applications will
replace paper ones.
Consumers can open new account online, in addition they can
apply for financial services from their homes and the result will
be less data entry by the banks personnel.
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C. EXPANSION COST REDUCTION

In addition to the reduced costs of operations, banks
seeking expansion will fill expanding through the
internet extremely cheaper than building a new physical
branch.
D. CUSTOMER RETENTION
Customer retention is a prime advantage of internet
banking under the condition of offering a wide range of
services on a banks web site, existing customers will be
more likely to stay and new customers can be attracted
to join when they are informed.

DISADVANTAGES:
Transaction Risk:
Transaction risk is the current and prospective risk to
earnings and capital arising from fraud, error, and the
inability to deliver products or services, maintain a
competitive position, and manage information.
A high level of transaction risk may exist with Internet
banking products, particularly if those lines of business
are not adequately planned, implemented, and
monitored.

Reputation Risk:
Reputation risk is the current and prospective impact on
earnings and capital arising from negative public
opinion.
A banks reputation can be damaged by Internet banking
services that are poorly executed or otherwise alienate
customers and the public.
Well designed marketing, including disclosures, is one
way to educate potential customers and help limit
reputation risk.

Strategic Risk:
Strategic risk is the current and prospective impact on
earnings or capital arising from adverse business
decisions, improper implementation of decisions, or lack
of responsiveness to industry changes.
Management must understand the risks associated with
Internet banking before they make a decision to develop
a particular class of business.

Credit Risk:
Credit risk is the risk to earnings or capital arising from
an obligors failure to meet the terms of any contract
with the bank.
Internet Banking provides the opportunity for banks to
expand their geographic range.
In dealing with customers over the internet, it is difficult
to understand the willingness of the customer to pay the
debt when there is an absent of any personal contact.

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Liquidity Risk:
Liquidity risk is the risk to earnings or capital arising
from a banks inability to meet its obligations when they
come due, without incurring unacceptable losses.
Liquidity risk includes the inability to manage
unplanned changes in funding sources.
Internet banking can increase deposit volatility from
customers.
Increased monitoring of liquidity and changes in
deposits and loans may be warranted depending on the
volume of Internet account activities.
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Foreign Exchange Risk:

Foreign exchange risk is present when a loan or
portfolio of loans is denominated in a foreign currency
or is funded by borrowings in another currency.
Banks may be exposed to foreign exchange risk if they
accept deposits from non-U.S. residents or create
accounts denominated in currencies other than U.S.
dollars.
Appropriate systems should be developed if banks
engage in these activities

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Price Risk:
Price risk is the risk to earnings or capital arising from
changes in the value of traded portfolios of financial
instruments.
Banks may be exposed to price risk if they create or
expand deposit brokering, loan sales, or securitization
programs as a result of Internet banking activities.
Appropriate management systems should be maintained
to monitor, measure,and manage price risk if assets are
actively traded.

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Interest Rate Risk:

It is the risk to earnings and capital arised from the
fluctuating interest rates.
Internet banking can attract deposits, loans and other
relationships from a larger pool of customers.
Greater access to customers forces managers to maintain
appropriate asset liability management systems,
including the ability to react quickly to changing market
conditions.

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2- CONSUMER PERSPECTIVE
ADVANTAGES:
A. BANKING ANY TIME
Banks who offers internet banking services open 24
hours a day, no weekends and no vacations. For that,
clients can access, modify and conduct their banking
activities any time they want with no delays.
B-BANKING FROM ANYWHERE
The presence of large number of PCs connected to the
internet has allowed customers to conduct their banking
activities from their home, office or even public places.
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C. BETTER PRICES and INTEREST RATES

On average it was found that internet banking transactions costs
are much lower than conducting the same transaction
traditionally.

D. SAVING TRANSACTIONAL COST

Internet banking allows users to conduct their banking activities
almost from any place where a computer is available; therefore
users are allowed to save their travelling costs. In addition they
can save money by cutting down postage and government
charges.

E. DIRECT AND CONTINUOUS CONTROL TO ACCOUNTS

In traditional banking activities, the procedure is to ask
the bank to conduct transactions and then the bank will
act on behalf of the customer.
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F. CUSTOMIZATION
Customers are able to customize their banking site in the
format they want. If available, they can customize their
site to provide the information they want, they control
how those information are shown, display particular
product of their interest.
G. FASTER SERVICE and NO WAITING in LINE
As they learn how to bank online, consumers can
conduct their banking activities in a relatively shorter
time compared to that needed to visit their physical
branch.
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H. EXTRAORDINARY BENEFITS
Consumers can benefit from the other services offered
that are not provided by banking off-line such as:
Bill presentment and bill payment service by which they
can receive their bills via the bank e-mail and schedule
future payment automatically.
Funds management services by which they can
download their history of different accounts and conduct
a sensitivity analysis before even starting to make any
transaction.
Financial tools can be used by corporate users such as
financial calculators, loan calculators and other tools that
help users to make their financial decision.
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DISADVANTAGES:

A. EXTRA REQUIREMENTS
Although it might seem like that in some countries
where the majority of households and businesses have
PCs that are connected to internet, it is hardly believed
that it is so in other countries where computer and
internet penetration are relatively low or moderate.
B. KNOW-HOW IS REQUIRED
Clients should know how to use computer and they
should be familiar with using different internet
applications. They should also be updated with
instructions by their banking service providers and
regulatory authority to know how to protect their
accounts.
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C. NO FACE to FACE CONTACT:

There is no opportunity for direct interaction between
customers and their bank. Face to face contact is
essential for dealing with complex products such as
pensions and certain types of investment that require
careful explanation and discussion.
D. SECURITY CONCERNS
Transacting funds via the internet means that
confidential data might be viewed and further used
without the permission of the original owners. While
security is provided mainly by bank, users should be
kept to update knowledge and latest updates of antivirus
programs and protection tools.
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E. BANKS SYSTEM and BANK RELIABILITY

Conducting internet banking services is based on a large
number of computer networks that starts with users PC
and ends with the banks server. Thus, any mistake
between the two extremes may prevent users from
conducting their banking activities; if one is down users
can not access their accounts.

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3- REGULATORY AUTHORITY
Internet itself is not a secure medium, and thus, it poses
a number of concerns to regulators and supervisors of
banks and financial institutions. These concerns are:
A. CROSS BORDER ISSUES
The emerging of internet banking has removed
geographical barriers and has allowed banks and
customers to meet although they operate in different
countries.

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B. CUSTOMER PROTECTION AND CONFIDENTIAL ISSUES

Security of internet banking is one of the most important

areas of concern to regulatory authority, transacting
business across the internet exposes data transmitted to
be viewed by unauthorized agents who may then use it
without the user approval.
C. COMPETITIVENESS AND PROFITABILITY ISSUES

For the benefits delivered by internet to banks, many

will rush to adopt and for banks that lack enough funds,
they will abandon or at least delay in their adoption.

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4. INTERNET SERVICE PROVIDERS

As customers realize the importance of internet banking
services, with each new internet banking customer,
internet service providers (ISPs) will gain a new
customer. On the other hand, it is expected for internet
usability to increase in term of time spent surfing the
internet, and this will increase ISPs revenues.
ISPs will have to provide higher quantity and quality of
internet services and this will require additional
investments in hardware, software and marketing.

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