Contents :

1. INTRODUCTION
IMPACT ON TRADING IN FINANCIAL MARKETS
2. IMPACT ON FINANCIAL INTERMEDIATION
NEW BUSINESS MODELS
E- BANKING
E-TRADING
3. OUTSOURCING
CYBER CRIMES
4. NETWORK SECURITY
5. RETAIL PAYMENT SYSTEM
6. CONCLUSION
7. REFERENCE
 INTRODUCTION
The internet and information technology (IT) have affected the
financial system greatly since the latter half on 1990s. There are some areas like
e-broking where the internet has been very successful and some other areas
where it is not doing so well (For example- e-money, e-insurance). The author
says that "Some Asian and European countries favor limiting e-finance to
regulated institutions while the United States tends to favor a more hands-off
approach".

Based on the World Bank and Central Banks data, in the year 1999, Internet
users as a % inhabitants was 27%, mobile phones per 100 inhabitants were 31,
6% of the bank customers were using online banking and 56% of the total
transactions were electronic brokerage transactions. Due to the stock- owning
culture in the United States, e- broking has become very popular, but online
banking hasn't become so popular due to the prevalence of small banks, the
greater use of non- financial institutions and the facilities for automated funds
transfer available before the internet.

IMPACT ON TRADING IN FINANCIAL MARKETS:

RETAIL TRADING: Retail broking market has been transformed as a result

of information technology. Costs have reduced and people can access lots of
information on the internet. The author says “Retail trading accounts for over
half of retail stock trades in the United States and a new category of investors
online day traders- has emerged.
WHOLESALE MARKETS: E- trading has transformed the structure of
wholesale financial markets, especially the foreign exchange and equity
markets. The BIS triennial survey shows that 20-30% of interbank trading in the
major countries was conducted using electronic brokers in 1995 and this rose to
about 50% in 1998 and it is now likely to exceed 90%. But the transactions
between banks and customers using electronic banking have not been so
successful.

IMPACT ON FINANCIAL INTERMEDIATION:

 The Nature Of E-banking: A comparison of internet- only banking
with traditional banking reveals that internet- only banking has been less
profitable. They generate low business volume and the cost that is saved in the
physical set-up is used in the extensive marketing employed to attract
customers. However, internet- banking can prove to be a viable business option
later on. De Young has observed that the increase in profits in case of internet-
banking is much more than the increase in profits of traditional banking.

There are no longer talks of closing the banking branches in the

United States. Comparisons of US banks with and without with internet
banking by Furst et al (2000) and Sullivan (2000) find that large banks offering
e-banking have the same costs and profitability as those banks who do not
offer these services. Among smaller established banks, those offering these
services had higher costs and lower profitability than those not offering it. Nor
is there any indication yet that the costs of banks with e-banking is falling. This
may be a temporary phenomenon.

NEW BUSINESS MODELS:

Banks currently have all the financial details of their customers. E-
banking has the potential to challenge this advantage of banks by introducing
new models

“Vertical portals” allow customers one-stop shopping for financial

and other products offered by a range of firms. They reduce search costs
dramatically and hence increase the competition among banks and
strengthen the position of the customers. But they also pose a threat to the
banks. They are able to build up a profile of financial and other interests
of the customers and are hence in a better position to attract the
customers than the banks.

“Smart agents” automate the comparison process offered by vertical

portals.

“Aggregators”- which may be operated by Yahoo or Microsoft- allow

individuals to obtain horizontally consolidated information of their
 financial and non-financial accounts across institutions. A customer who
uses aggregator’s services may no longer be able to see a bank’s
marketing messages unless the bank has tied up with the aggregator.
Banks also fear being help responsible for the misuse of confidential
customer data by the aggregators.

E- BANKING :
To begin with a definition
of e-banking is important as various authorities/users have different perceptions
about the definition of E-banking. E-banking is defined as the automated
delivery of new and traditional banking products and services directly to
customers through electronic and interactive communication channels. E-
banking includes the systems that enable financial institution customers,
individuals or businesses, to access accounts, transact business, or obtain
information on financial products and services through a public or private
network, including the internet. Customers access e-banking services using an
intelligent electronic device such as a personal computer (PC), personal digital
assistant (PDA), automated teller machine (ATM), kiosk or touch tone
telephone.
We would be using this definition in the text. However, it might be
useful to quote the OECD version too. ‘An electronic finance transaction is a
financial transaction that depends on the internet or a similar network to which
households or non-financial enterprises have access. The trade in electronic
finance is the part of an electronic finance transaction that relates to the
exchange of remunerated financial services’ (Christiansen 2001). Importantly,
this implies an element of service provisioning for it to constitute a trade in e-
finance service.

E- TRADING:
Procedures and practices adopted in the new distributive channel.
There was degree of novelty about the mechanism and the number of
transactions was not significant. However, the last three years witnessed a
tremendous upsurge particularly in the shares trading and introduction of
trading in Government of India (GoI) securities and currency trading. The
introduction of newer products could certainly be regarded as an additional
stimulus to the growth process. The current financial crisis has, however,
pushed the hands of the development clock several notches and a very
promising area of development(both for theoretical work and the resultant
applications) has received a considerable setback. The removal of capital
adequacy requirements and relaxations offered to the leading investment banks
by the SEC(securities and exchange commission) in the US resulted in their
ultimate downfall. The staggering losses recorded are a sad reflection on greed
and avarice leading to their demise. Some US entities have ceased to exists
investment banks.

OUTSOURCING:
Increasing competition and change in technology has led to
outsourcing of many jobs to developing countries. Outsourcing allows small
institutions to achieve economies of scale and gain expert advice. For larger
organizations, it is more about using the management time for core businesses.
However, some banks overestimate the cost reduction from outsourcing, have
unrealistic timetables had don’t give thought to the disruption that may result in
the event of a dispute with the service provider.

CYBER CRIMES :
If cyberspace is a type of community, a giant neighborhood made up of
networked computer users around the world, then it seems natural that many
elements of a traditional society can be found taking shape as bits and bytes.
With electronic commerce we witness electronic merchants, plugged-in
educators and doctors treating patients online. It should not come as a surprise
that there are cyber criminals.

As an unregulated medley of corporations, individuals, governments and

educational institutions that have agreed to use a standard set of communication
protocols, the internet is wide open to exploitation. There are no ‘regulators’
and this lack of law enforcement leaves net users to regulate each other
according to the reigning norms of the moment. Community standards in
cyberspace are vastly different from the standards found at the corner of a main
street. Cyberspace is a virtual tourist spot where faceless, nameless con artists
can work the crowds.

• Denial of Service Attacks: The criminal’s goal is to cause damage to the

system (hacking, cracking and sending malicious code viruses) or
computer network.
• The computer is the target of attacks
NETWORK SECURITY :
Security companies all over the world are locked in a race
with malicious hackers to see who can react fastest to news of a new
vulnerability. Increasingly, even the vandals are becoming more sophisticated.
It is worth noting that net attacks are growing at the rate of 64 per cent per year.
The year 2002 saw an enormous increase in such attacks. Every week,
companies were attacked almost 32 times compared to 25 times per week in
2001. As if this was not enough, security companies hear about 400–500 new
viruses every month and 250 vulnerabilities of computer programs. In fact, the
losses suffered by these organizations are huge. The Computer Security Institute
and the US Federal bureau of Investigation (FBI) computer crime and security
survey shows that financial institutions are being continuously targeted and are
not experiencing the scattergun approach. The survey also shows that more than
90 per cent of websites were attacked, 18 per cent suffered unauthorized
access/abuse of their systems and 60 per cent had their sites vandalized. A
further 80 per cent had suffered transaction thefts. The financial losses could
well be in excess of US$265 million. Of those surveyed, 16 per cent did not
even know that they had a problem. Many employees who are familiar with the
latest technologies can easily bypass the office systems, effectively, opening the
back doors of the organization.

RETAIL PAYMENT SYSTEM:

At present, credit cards dominate the retail payment system
despite being susceptible to fraud, poorly suited for micro payments or
person- to- person payments. One website that offers payments to be made
for products bought at Ebay, Paypal, is trying to address these issues. We
can also send money to another person who has a valid PayPal account
using our debit or credit card.
 CONCLUSION:
It is difficult to assess the impact that e-finance may have on the central
banks or on the other financial institutions of a country. Due to the large
volume of transactions involved, the quantity of information exchanged
between the central banks and other banks, we cannot know for sure if e-
financing will work. They depend upon the product and the market. We
need lots of inputs from the private sector, academics and the national
bodies.

REFERENCE:
Sato, Satsuma and Hawkins, Nvn; “Electronic Finance:
An Overview of Issues”
http://www.bis.org/publ/bispap07a.pdf
http://www.studentwebstuff.com/mis/showthread.php?t=3354