China and e-banking
By Frederick Stakelbeck, Jr.
China is in the midst of a sustained banking revolution. Driving this revolution are changes in customer expectations, rapid technological advances and intense industry competition that have placed extraordinary pressure on China's nascent banking sector to modernize and reform. Indeed, the time has arrived for China's much maligned brick and mortar banking system to adopt a new "Business of Banking" strategy. An integral part of any new banking strategy should include electronic or e-banking.
Simply defined, e-banking is "an electronic channel used to provide retail and commercial banking products and services to customers." E-banking delivery channels can be divided into three distinct categories: informational, electronic transfer and electronic payment. Using an information channel, a bank provides general purpose information, usually via a proprietary website, to existing or prospective customers. An electronic transfer channel allows a customer to electronically submit loan or deposit applications online, while an electronic payment channel facilitates traditional payment entry, settlement and distribution options. Some products and services offered by e-banking channels include: balance inquiries, transaction information, funds transfer, bill payment and presentment, cash management and loan applications
In October, World Bank President Paul Wolfowitz visited Beijing for the first time since assuming his new post as head of the global institution. During his stay, Wolfowitz called China "a major global force." He also acknowledged China's increasing importance to the global economy stating, "China, as we all know, has been the fastest growing economy in Asia for the past 20 years. It has redefined the competitiveness of virtually every other country."
In order to maintain its "competitive edge" and meet the banking needs of a growing middle class, China will need to implement a financial modernization program that addresses both the vast opportunities and inherent risks associated with an e-banking system.
Recent E-Banking Developments
The Industrial and Commercial Bank of China (ICBC), the country's largest state-owned commercial bank, has seen extensive growth in its e-banking program recently, with 176,000 corporate clients and 12 million customers registered in several large cities.
In September, ICBC noted that its e-banking transactions totaled 17 trillion yuan in the first five months of 2005, up 27 percent from the same period in 2004. This marked a dramatic increase from only five years ago when e-banking transactions totaled only 15.4 billion yuan. In early October, ICBC reported e-banking transactions volume for customers hit 80.2 billion yuan for the month of September, breaking the 80 billion yuan monthly mark for the first time. "The era of real tough competition between foreign and local banks is yet to come for Internet banking in China." said Zhou Yonglin, marketing director of ICBC. "We aim to increase our individual clients to 20 million by the end of next year, when online banking will play a bigger role in the bank's development," he said. A recent independent survey of 20,000 China Internet users showed that 95.8 percent were aware of ICBC's online brand. This supports future efforts by ICBC to expand its e-banking initiatives.
In July 2004, China Construction Bank (CCB), the largest Internet bank in Hong Kong serving over 60 percent of the online bankers in the city, reported its e-banking business was developing rapidly. In October, CCB noted that over 10 million new online banking accounts were opened in 2004, while transaction volumes grew by 40 percent over 2003 figures. The bank recently described its e-banking service as "a core strength and fundamental to its business." To achieve its goal of becoming a leader in e-banking, CCB has strengthened its online management team, encouraged employee training, improved marketing strategies and enhanced customer outreach programs.
The Chinese government has also recognized the importance of ebanking to the country's continued economic growth. The People's Bank of China (PBC), the country's central bank, announced in September that it would oversee all electronic payment businesses and grant licenses for Internet service providers. In July, PBC's Department of Payment and Clearing published a draft "Management Regulation on Payment Organizations" for public comment addressing key payment system issues. The China State Council solicited opinions in January on accelerating the development of e-commerce related to payment and settlement services, while the Standing Committee of the 10th National People's Congress passed the Law on Electronic Signatures in August 2004.
Risks of E-Banking
As with any new technology, e-banking presents certain risks for banks. Inadequate planning, faulty deployment, insufficient internal controls, legal and regulatory ambiguity and weak outsourcing standards all pose significant risks to an e-banking system. Data integrity, confidentiality, authentication and authorization issues will also place certain stresses on an immature e-banking system.
To address these concerns, banks will need to implement risk management practices that effectively identify, measure, monitor and manage risk. "Banks must put in place concrete development plans and a system of controls and security that boosts competitiveness and sustains further progress," said Liu Mingking, chairman of the China Banking Regulatory Commission (CBRC).
China's four large state-owned banks and the CBRC will need to demonstrate flexibility, leadership and strength to address the inevitable challenges associated with an e-banking transformation. Banks must review particular e-banking products, services and activities, resisting calls for premature implementation that could harm the integrity of the entire Chinese banking system.
Phishing, money laundering schemes, phony Internet banks and unauthorized use of personal information to conduct e-banking activities are an increasing concern for e-banking. China ranks second in the world for hosting phishng attacks, accounting for 13 percent of the world's total phishng websites. In 2004, police pursued 1,350 online fraud and spam cases. In the first quarter of 2005, 543 phishng incidents were identified with 1,361 illegal websites closed by Chinese authorities. Recent high-profile Internet security breaches involving large financial institutions such as Bank of America and J.P. Morgan Chase, as well as attacks against third party processors have raised questions concerning the risks of conducting e-banking in an immature Chinese banking market.
Chinese banks that offer e-banking solutions will need to implement effective fraud prevention methods. Any risk assessment should include the type of customer (retail or commercial), customer transactional capabilities, the sensitivity of customer information being transmitted and the volume of customer transactions. Reliable customer authentication using passwords, digital certificates, tokens and biometric identifiers will help e-banking take root and flourish.
The Future of E-Banking
China has become a technologically driven society as evidenced by the success of the recent manned Shenzhou VI space mission. As a country, China understands the importance of technology in today's world. It is only natural then, for banks and their customers to pursue e-banking.
A properly configured e-banking infrastructure will ensure orderly growth and sustainable economic progress for China. Consumers will evaluate e-banking products and services based upon trust, confidence, user privacy, transaction legitimacy, security, system dependability and merchant acceptance and conveyance. To ensure success, the Bank of China must take a leadership role by providing a blueprint for banks, customers and third-party vendors to follow. Without such guidance, China may find itself with several conflicting e-banking standards which will ultimately inhibit the development and growth of the country's financial system.
Technology has become the great enabler for the global banking industry, helping today's banks meet the changing needs of their customers, while at the same time optimizing cost savings and improving operating efficiencies. Moving forward, a careful balance of regulatory reform that includes an industry-wide architecture and affiliated governance structure, coupled with well-managed bank initiatives, will be needed. Moreover, increased financial transparency, clear banking standards, predictable regulatory enforcement and a reduction in bank corruption will be of enormous help.
Frederick Stakelbeck, Jr. is an expert on China. His writings concentrate primarily upon the Chinese economy and the implications of emerging bilateral and trilateral Chinese relationships upon U.S. foreign policy. His professional background includes ten years of experience with the U.S. judiciary and seven years in the financial services industry. He can be reached at
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