Compliance or Legal Risk in E-Banking

This is the risk to earnings or capital arising from violations of, or nonconformance with, laws, regulations and ethical standards. Compliance risk may lead to diminished reputation, actual monetary losses and reduced business opportunities. Banks need to carefully understand and interpret existing laws as they apply to Internet banking and ensure consistency with other channels such as branch banking. This risk is amplified when the customer, the bank and the transaction are in more than one country. Conflicting laws, tax procedures and reporting requirements across different jurisdictions add to the risk. The need to keep customer data private and seek customers’ consent before sharing the data also adds to compliance risk. Customers are very concerned about the privacy of their data and banks need to be seen as reliable guardians of such data. Finally, the need to consummate transactions immediately (straight-through processing) may lead to banks relaxing traditional controls, which aim to reduce compliance risk.

Compliance and legal issues arise out of the rapid growth in usage of e-banking and the differences between electronic and paper-based processes

Specific regulatory and legal challenges include the following:

  • Uncertainty over legal jurisdictions and which state’s or country’s laws govern a specific e-banking transaction. (international hacker v/s local hacker)
  • Delivery of credit and deposit-related disclosures/notices as required by law or regulation.
  • Retention of required compliance documentation for on-line advertising, applications, statements, disclosures and notices.
  • Establishment of legally binding electronic agreements

Institutions that offer e-banking services, both informational and transactional, assume a higher level of compliance risk because of the changing nature of the technology, the speed at which errors can be replicated, and the frequency of regulatory changes to address e-banking issues. The potential for violations is further heightened by the need to ensure consistency between paper and electronic advertisements, disclosures, and notices