ELECTRONIC FRAUD

“World wide a rising percentage of population are adopting the Internet and the Global Financial
Transactions are increasingly Electronic. Under such a scenario, the greatest threat to Global Finances
is Cyber Security. A breach could have catastrophic consequences.”

• What are the positive aspects of increasing adoption of E-Finance globally?

• What are the major challenges due to the increasing use of E-Finance?
• What should Governments and Financial institutions do to preserve and protect global citizens
and ensure that they are not exploited by vested interests in the cyber world?

Submission for Global Financial Strategy by Group 15 :-

FT11108 Anandadivya K
FT11144 Pradeep Krishnan A
FT11157 Ramkumar B
FT11220 Dinesh Sambamoorthy
FT11268 Sonal Bomb
FT11362 Sriram C
FT11432 Muthu Natesan G
FT11447 Ram Mohan Kripa Ramanan
FT11450 Sagar Shankaranarayanan
FT11465 Swamynathan A
Introduction : e-finance

The provision of financial services and markets using electronic communication and computation

involving use of modern-day technology to enhance ease of use and reduce wastage of time in

executing financial transactions is referred to as e-finance. The advent of the internet has

fundamentally transformed the financial services industry and financial markets. The internet

represents the latest in a long line of electronic technologies that have reshaped and helped in the

faster growth of the financial industry. Although the usage of the net for banking and financial

transactions is fraught with challenges, the internet has drastically transformed the financial landscape

of the world within a very short span of time.

Positive aspects of increasing adoption of e-finance globally :

Economic integration within & across countries, developments in

telecommunications, deregulation, and the rapid growth of the Internet and communication

technologies are dramatically changing the structure and nature of financial services. Internet and

related technologies are more than just new distribution channels - they are a different way of

providing financial services. The impact of the internet in finance can be broadly classified into two

areas. Improvements in the banking industry and the positive impact for the financial markets around

the world. Many of the services traditionally provided by banks are now being done through the

internet. Especially in developing countries where access to and the quality of financial services is

limited, electronic finance and globalization offers important opportunities.

 Electronic finance has the power to improve the quality of financial services and opportunities

for trading risks and it has the capacity to provide widened access to financial services to a much

greater set of clients by offering a more cost effective delivery of services. Emerging markets

are beginning to participate in the e-finance revolution, with a significant impact showing strong

growth characteristics and promises. A large number of electronic order routing and trading networks

have emerged in recent years. These networks have evolved into order-driven matching systems that

are electronically provided to participants who seek anonymity. Electronic communication networks

originally started as pools of liquidity feeding into existing markets but later on began to serve as

trading outlets in several developed and some emerging capital markets.

Widely available real-time market information considerably lowers the cost of transacting

financial services by reducing uncertainty, mitigating asymmetric information, and significantly

reducing transaction costs associated with paper processing or human error. Novel distribution

channels have opened, added to it search costs have fallen for consumers, and new entities like

telecom and utility companies are providing financial services.

Financial service providers using the internet can avoid many technology conflicts, some of

which are as separate interface-to-core systems for ATMs, branch, call center, or kiosk transactions.

Web-based financial services seek to unify the internet as a communication standard

by combining the capabilities of a browser, a display standard, and a Web server as the access point

into well developed back-end operational systems. As a result of this, cross-selling of products

becomes much easier and economies of scope tends to increase.

With massive speed of growth in technology, its usage for financial services has become much

cheaper. A typical customer transaction through a branch, either in person or through a phone call

costs about $1, but that transaction costs just $0.02 online over the internet. Also, the overhead
expenses for internet banks are lesser than or equal to 1 percent of assets, compared with anywhere

between 2 to 3 percent for brick-and-mortar banks. Some more advantages in the case of e-finance are

improved price transparency, differential pricing and effective transformation of distribution channels.

Improved price transparency in general increases competition and reduces profit margins. Transaction

costs of search are somewhat higher that differential pricingcannot be ruled out and this will become

increasingly important in financial services. Therefore, increased use of the internet and

communication technology will lead to the unbundling of services and will also promote

disintermediation. This will eventually lead to a transformation of distribution channels and an

important restructuring of the industry as a whole.

What are the major challenges due to the increasing use of E-Finance?

The internet that serves the banks and other financial organizations can be easily hacked into by

antisocial elements or terrorist organizations. There are a number of instances of such happenings. In

its present form, the Internet allows easy unauthorized access to proprietary user data even for

sophisticated

users who take precautions. Moreover, the vast majority of Internet users who are the customers of

such financial services are totally unaware of the security threat that the Internet poses on their private

information. Communication is two-way by nature and in the absence of sophisticated protocols which

help in blocking access to private data and encrypt the transferred data, Internet communication

remains very insecure. Firms collect and collate elaborate information about activities of individuals

on the Internet in an attempt to use it to target advertisements. This has also raised significant security

concerns.
The single main threat to e-finance remains cyber fraud or the misuse of technology to illegitimately

gain access to private data and stall financial transactions.

What should Governments and Financial institutions do to preserve and protect global citizens
and ensure that they are not exploited by vested interests in the cyber world?

Thanks to e-finance, consumer and investor protection are now a more important function of

public policy. As discussed above, issues include security, privacy, and transparency. Consumer and

investor protection raises some important questions as to the role of standards, and who can best

develop such standards, and who should enforce them. The answer to this will be governments and

institutions and the organizations who use such services need to take some preventive measures.

It has to be noted that security risks are being looked into but they need more emphasis. With

technological development like cryptographic techniques, cards with hi-fi built-in chips and other

verification techniques complete security is almost imppossible. Regulators should encourage or

require operators to adopt best practice standards in the interest of the public. It has to be ensured that

further protocols and certain legal changes, including ones for digital signatures, will be needed to

facilitate electronic transactions. Privacy issues are becoming more important. The Internet has to a

huge extent simplified the collection and sharing of credit and other data on individuals and

businesses, and technology has lowered the costs of processing and using such information. Global

standards and

protocols will be a must to assure desired privacy levels, so as to enable cross-border provision of

financial services, and to also allow global service providers to operate efficiently.

Exiting laws are likely to be unenforceable for such crimes in most countries. The outright

lack of legal protection would mean that firms those engage in e-finance need to solely rely on
technical measures to protect themselves from elements who tend to steal, deny access to or destroy

any valuable information. Creating a trustworthy model and an environment for people and business

needs extension of the rule of law into cyberspace. Because that extension is still in progress

organizations must first and foremost defend their own systems and information in their own interest

from any kind of intrusion from outsiders or from within. They should wisely rely only secondarily

on the legal enforcement and strengthen their own infrastructure.

To provide this self-protection, organizations should focus on implementing cyber security plans

which can address people, process, and technology issues. Organizations need to somehow commit

the resources to educate employees about security practices, develop thorough plans for the handling

of sensitive data, records and transactions, and also incorporate robust security technology such as

firewalls, anti-virus software, intrusion detection tools, and authentication services throughout the

organizations' computer systems. Most countries, particularly those in the developing world, are

seeking a model to follow. A coordinated, public-private partnership to produce a model approach

can help eliminate the potential danger from the inadvertent creation of cyber crime havens. Firms

should secure their networked information. The proliferation of financial products, delivery channels,

and institutions, along with the speed of innovation, have allowed easier comparison of prices and

products. But the links between infomediaries and financial service providers can lead to less

transparency on the service being offered. An important transparency issue in capital markets will be

assuring fairness and best execution and trading practices. Solutions will likely vary by country and

market.

With increased cross-border transactions, it will be difficult to identify the legislative or

regulatory authority for investor protection. Furthermore, the emergence of nontraditional

service providers complicates investor protection mechanisms based on current institutional

frameworks. Government agencies need not directly intervene to combat these problems,
however. Instead more intense efforts should be made to educate consumers. Authorities

should set minimum disclosure standards for new financial intermediaries and possibly for

self-regulating organization including entities that certify information providers, such as

credit bureaus, credit rating agencies, accounting boards, and auditors.

Regulators would prescribe minimum standards for detecting fraud and they would also ensure that a significant

amount of operational risks are in place at self-regulating the organizations that administer these funds so as to

compensate the customers against any fraud. One such fund is the SIPC or the Securities Investor Protection

Corporation Fund in the US. The increasing amount of transactions of global nature will require a lot of

coordination across the countries and even their regulators.