Protecting online Banking Against Fraud

TO: Research and Development, IT Banking Systems

FROM: Sevak Keshishian, Brigade Technological Securities

DATE: October 10th, 2005

SUBJECT: Protecting Online Banking Against Fraud

In the past ten years, information technology has virtually advanced from day to day, making huge leaps and bounds in all areas of life including business, entertainment, and everyday living. If we focus on the business world, the banking industry has definitely experienced the most significant amount of success in integrating new technology into daily operations and in the products and services that they offer. The implementation of ATMs and debit cards has made cash transactions as convenient as a simple swipe of a card and the advent of the internet has allowed companies to become connected to a larger customer base in ways that could not have been duplicated without the information superhighway. Online banking adds convenience by allowing you to bank in the comfort of your own home, making everyday banking and various transactions as easy as a click of the computer mouse. Yet both advancements have contributed greatly to an increase of identity theft amongst banking consumers and have fueled a demand for increased and more reliable security. These advancements have changed the face of banking and have made it more of an express service than anything else. Banks are even starting to change locations in a combined effort to save money and add even more convenience to consumers.

The Trend

There once was a time when every transaction that one needed to have processed by the bank involved a trip to the actual branch, a wait in a line, and a little patience for the teller that had just been hired. Every withdrawal, deposit, and transfer of funds required too much time and created an inconvenience for customers that just didn't have enough time. This led to the eventual invention of the ATM and the Debit Card. Once integrated into everyday banking, ATM and debit card use allowed companies to cut down the cost of transactions and allowed them to better serve their customer base, providing both convenience and ease with each financial transaction. Debit cards have become popular with customers who do not want to always carry cash and ATMs are ever so popular with customers who need cash but can not make it to the bank during hours of operation. Electronic banking, by means of the ATM and debit cards, has definitely become an industry-wide standard with checking product offerings at almost every bank. In fact, in an article from a February 2000 issue of The Banker, Sam Jenkins states in his article, "Banking for the Millennium", that the issuing of a debit card to customers opening new checking accounts has and will continue to be a standard practice at all retail banking institutions.

Unfortunately, the convenience provided by ATM and debit cards has not been enough to satisfy customers with higher needs. As a result, banks have searched for new and various ways too add even more convenience and ease to everyday banking. According to John Davy's article, "Enhance or Bust" in a 1999 issue of The Banker, he states that, "For the present, a bank's strategy needs to be two-fold: maintaining a wide branch network while taking advantage of new technology to provide enhanced products and services in the new marketplace." The advent and incorporation of the internet into people's lives beginning in the late nineties has allowed banks and other institutions to focus on new ways that the information superhighway can lead them into implementing these strategies.

It is now almost been almost a decade since the internet has been created and it is more apparent than ever that millions and millions of people and companies, including banks, have created a dependency on this multimedia tool. Aside form providing convenience for customers, an anonymous author in a 2002 publication of The Banker, "banks aim to minimize their costs by using the internet, which is cheaper compared with traditional branch operations and telephone banking."

Overall there has been a benefit for both customers and banking companies form the advancements of technology;

* Creating an online site is cheaper than opening up a new "brick and mortar" branch

* Banks can minimize their transaction costs by eliminating the work that needs to be done by a teller.

* It allows for customers to complete many various transactions with the simple click of a mouse or a quick visit to the ATM

* Most importantly, it allows customers to manage their money more easily and to be more informed quickly about what is actually occurring in their accounts

Online banking has been such a convenience for customers and large banking institutions that it has joined ATM and debit cards in becoming a standard product that is offered with traditional checking accounts. For companies such as Downey Savings & Loans, a small chain of banks located in the Southern California area, online banking has become a simple solution for customers who used to call in to branches to request balances and fund transfers. (Company brochure) Payments, transfers, and managing your money can all be done from the privacy and comfort of your desktop computer at home or by the mobile accessibility of a laptop, provided that they have online capabilities. This way, what might take fifteen to twenty minutes for either making a trip to the bank or locating an ATM can be taken care of in five minutes on the computer.

The Problems

The age old saying "Too much of a good thing is bad for you" holds true as well in the case of the recent banking technology boom. Similar to the benefits, the disadvantages of these advancements again affect both the companies and their customers. Specifically, it has caused two main problems to arise:

* With more and more customers performing transactions online and taking care of cash needs through the ATM, traditional branches have been slowly giving way to express or in-store branches. They are smaller and require downsized staffs, allowing companies to cut down on labor costs by employing less people.

* Online hackers and internet pirates can access personal information and