Strategic Risk in E-Banking

This is the current and prospective risk to earnings and capital arising from adverse business decisions or improper implementation of business decisions. Many senior managers do not fully understand the strategic and technical aspects of Internet banking. Spurred by competitive and peer pressures, banks may seek to introduce or expand
Internet banking without an adequate cost-benefit analysis. The organization structure and resources may not have the skills to manage Internet banking.

In other words, will the bank get it right? Will it make the right choices when it comes to investing in e-banking or will it waste money by going down a technological blind alley? Should it attempt to take the lead in new technology ahead of its competitors, or should it be a follower and adopt a “wait and see” approach? The latter may be the safer course of action for smaller banks, though it does create the risk of being left behind.

A financial institution’s board and management should understand the risks associated with e-banking services and evaluate the resulting risk management costs against the potential return on investment prior to offering e-banking services.

Poor e-banking planning and investment decisions can increase a financial institution’s strategic risk. Early adopters of new e-banking services can establish themselves as innovators who anticipate the needs of their customers, but may do so by incurring higher costs and increased complexity in their operations.

Conversely, late adopters may be able to avoid the higher expense and added complexity, but do so at the risk of not meeting customer demand for additional products and services. In managing the strategic risk associated with e-banking services, financial institutions should develop clearly defined e-banking objectives by which the institution can evaluate the success of its e-banking strategy.

To manage the strategic risk financial institutions should pay attention to the following:

  • Adequacy of management information systems (MIS) to track e-banking usage and profitability.
  • Costs involved in monitoring e-banking activities or costs involved in overseeing e-banking vendors and technology service providers.
  • Design, delivery, and pricing of services adequate to generate sufficient customer demand.
  • Retention of electronic loan agreements and other electronic contracts in a format that will be admissible and enforceable in litigation. (court case / legal action)
  • Costs and availability of staff to provide technical support for interchanges involving multiple operating systems, web browsers, and communication devices.
  • Competition from other e-banking providers.
  • Adequacy of technical, operational, compliance, or marketing support for ebanking products and services.

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