Whatever issues and impediments that hinder the development of electronic commerce in general, there will be at least an equal or, more likely, a greater impact on the electronic banking sector. Banking is by nature more sensitive to any question of security, privacy, or technical sufficiency. On-line banking requires more sophisticated legal and technical systems than other on-line services. The greatest barriers to the successful development of electronic banking however are those that apply to electronic commerce in general.
Telecom Privatization and Liberalization:
The most significant impediment to electronic banking is the lack of a telecommunication infrastructure. In terms of the penetration rate of Internet services, the Arab region, at 2.5%, ranks slightly above sub-Saharan Africa, Asia, and Eastern Europe and slightly below Latin America. All of these areas I have mentioned, however, are towered over by the USA with a 30% penetration rate.
This is the "digital divide" that we have all been hearing so much about. This digital divide, however, does not result from the failure to adopt or use the Internet, but rather from the lack of a basic telecommunication infrastructure – which can be presented by access to basic telephone lines. Globally, for example, only 20% of homes have a telephone line. I have called on Mr. Bill Gates at a meeting in Paris on February 16, 2001, in my capacity as Chairman of the E-Business Commission of the International Chamber of Commerce, to create a global project for bridging the digital divide, which he gladly agreed to consider.
A poor telecommunication infrastructure will limit the development of electronic commerce in our region. Telecommunication providers across the Arab World have so far resisted calls for privatization and liberalization and our economy, as a whole, is paying the price. Inefficient price structures reduce the ability of Internet Service Providers (ISPs) to offer the necessary bandwidth, which means that some electronic commerce applications cannot become commercially viable. Just as significantly, the publicly-owned and administered telephone companies of the Arab world have not been able to keep up with infrastructure or technological development needs. Poor connections and slow Internet speeds result in a higher cost to users paying local telephone charges or hourly rates to an ISP.
Wireless networks are developing rapidly across the developing world to overcome the failures of a local loop infrastructure. This is helping to some degree but if we want to overcome the digital divide, we must privatize and liberalize our telecommunications sector now. Failure to do so will limit our ability to play a role in the huge global electronic commerce marketplace.
Enabling Legislation:
We need to draft an enabling legislation that will encourage electronic commerce in the Arab world without trying to overly regulate it or influence how market developments will shape its future. Some basic areas include:
· Recognizing digital signatures infrastructure
· Recognizing on-line contracts
· Supporting on-line banking by using it in government transactions
· Protecting consumers from credit card fraud
Digital signatures are now recognized in the USA, Europe, and increasingly, throughout the world. In order to provide security to both domestic and foreign parties to agreements, we must pass laws that recognize digital signatures and the validity of on-line contracts.
One of the best ways to support on-line banking would be to implement it in government transactions such as the payment of salaries and benefits. Legislation is also required in the area of credit cards where individual concerns regarding liability for fraud and theft need to be addressed. In the United States, consumer liability is limited to $50 in case of fraud or theft and thus, Americans are less reluctant to use their cards over the Internet. This contributes greatly to the value of on-line transactions. Credit cards continue to dominate electronic commerce payments with a market share in the range of 90%.
Competitive Impact of Electronic Commerce in Banking:
On-Line banking may reduce banking costs by 15-25% compared with regular accounts, according to Morgan Stanley's Dean Witter (as reported in "Global Economic Prospects," a World Bank Publication, 1999). Much of this is likely to be passed on to consumers in the form of cheaper services.
It is also likely that electronic banking may help foreign banks gain greater access to domestic markets. The informational capacity of the Internet will help foreign banks overcome the local knowledge gap between them and national banks. Their advantage in technology and know-how is likely to help them make inroads as well.
One trend that is becoming clear is that, in general, consumers require a combination of on-line and traditional banking access. When Internet banking was first introduced, some observers thought it might mean the end of the traditional bank, but in fact, the real world banks continue to dominate. One of the interesting trends for the existing net-only banks is that they are seeking real-world outlets for their services to increase prestige, consumer confidence, and convenience. Some of these arrangements are with brick & mortar financial firms but many are also with non-financial companies, including retail outlets of various kinds.
Electronic Banking Services:
Around 30% of the top US banks offer web-based account access. However, many of the smaller banks have led the way with innovative on-line banking services. It is possible to pay your bills, apply for a mortgage or loan, make person-to-person payments, check balances, and conduct most transactions on line.
In developing countries, such as those of the Arab region, banks do not offer many on-line services although there are certain options. On-line services are limited to account balances and statements, transfer of funds among client accounts, wire transfers to other banks, check book orders, etc. What banks in the region offer is essentially the transfer of ATM automated services to the Internet platform. Person-to-person transfers, bill-payment systems, and prepayment systems, in general, are not available. Until Arab banks are able to offer such services, a true electronic banking capacity that will support electronic commerce will be missing from our region.
What is Needed:
Electronic commerce is a disruptive technology that forces a reappraisal of the way things have been and are being done. If we want to see a successful electronic banking sector, we need to have first, a successful banking sector. In this regard, what we really need is:
· Application of international standards of accounting and tightening of disclosure rules.
· Stronger prudential and transparency rules.
· Increased competition and reduction of restrictions on the types of financial services that different providers may offer.
· Increased attention to international coordination when considering national legislation regulating the financial industry.
We should expect that our future challenges in banking will represent a combination of electronic banking and traditional regulation issues. Gradually, what on-line banking will lead to is greater cross-border provisioning of financial services, thereby, reducing the effectiveness of individual national controls meant to protect local industries. Therefore, it is best to prepare now.
A number of countries have undertaken measures to liberalize the establishment of foreign bank subsidiaries and other financial institutions as part of their economic and financial reform program.
The Objectives of Financial Sector Regulations:
The financial services sector is among the most heavily regulated of all service sectors. Governments tend to intervene in various ways and are under constant pressure to protect their financial sectors from disruptions due to either domestic or foreign factors.
Although regulation of the financial sector has been changing dramatically in recent years, as I discussed before, the basic need for government intervention to address problems related to market failure has not disappeared. Existing studies on financial service regulation unanimously endorse the need for regulatory policies to correct perceived market failures in the financial sector in order to reduce risk and maintain a safe financial system while enhancing competition.
The economic gains of trade liberalization in financial services must be underpinned by appropriate supervisory and regulatory regimes domestically. Financial services under GATS allows Members to pursue such policies by allowing prudential measures to be taken while progressively removing trade and investment restrictions in the financial services sector and enhancing competition.
The Impact of New Technologies:
Technological advances have had major impacts on the financial services industries. The advent of Information Technology has introduced a whole new range of competitors to the financial service markets. Telecommunication providers and large retail distributors are entering the sector with direct access to the consumer. Automatic Teller Machine (ATM) networks, electronic fund transfer at Point of Sale (POS), home banking or remote banking, and smart cards are cited as principal types of virtual financial services, bringing about a “virtual banking revolution”. Revolutionary changes have taken place in stock exchanges where floor trading is almost completely replaced by computerized trading. Most of the world’s major securities and derivative exchanges provide electronic transaction facilities and the settlement and clearing of financial transactions are done electronically.
Electronic banking transactions and securities trading have long become the norm between financial institutions and they are increasingly becoming so between businesses. On the other hand, at the retail level, relatively few of the world’s major banks provide on-line banking services. This situation is expected to change rapidly, however, as the full cost of an Internet transaction is estimated to be a fraction of the cost of a transaction made over a bank counter. In the insurance sector, on-line sales and services are expected, by some, to replace the most traditional sales agents and telephone services.
The marketing of financial products and services becomes much easier and less costly through the Internet. Various forms of financial advice and personal services are also well adapted to electronic delivery, but the speed of their development may depend on the security and privacy of financial transactions. Most financial institutions are projected to have an Internet site offering basic services and almost half of them plan to offer advanced Internet services such as on-line bill payment and balance inquiries (Booz, Allen and Hamilton, 1997).
Financial Services Trade by Modes of Supply
With the advent of new technologies and the resulting possibilities of remote transactions, one would expect that cross-border trade will become more and more common in the supply of financial services, as compared to commercial presence. However, for certain types of financial services, in particular asset management, private banking, or life insurance, which involves long-term contracts or personal attention, direct contact between the consumer and the supplier still appears to be a necessity. The investment required for gaining access to secure electronic transactions and related regulatory issues would still limit growth in cross-border trade, especially for the retail consumer.
Bank Initiatives:
To increase the volume of banking transactions, payment gateways, electronic commerce transactions should be established and central banks in member countries should take charge of regulating electronic commerce payments.
Simplifying applications and reducing fees on consumer credit cards will increase the consumer base for electronic commerce transactions. Streamlining business-to-business electronic commerce procedures will help create quick and efficient on-line banking systems to benefit businesses as well as consumers. Countries should create on-line credit card processing systems in conjunction with banks.
The banking sector should provide seed capital or loans to help electronic commerce start-ups. With Internet-based projects, it takes having large investments before reaping commercial benefits. Until measures are taken to release investment capital into the regional markets and to establish viable investment mechanisms, electronic commerce in the region will be restricted to actions of individual entrepreneurs and will not enter the mass stage that was witnessed in the West. To develop electronic commerce therefore, the region requires Internet incubators and venture capital firms to provide the required funds and facilities for start-ups.
Internet Security:
The lack of confidence in e-business in the region is reflected in the consumer’s fear of non-delivery of goods, theft, and credit card fraud. As long as the private and public sectors do not establish electronic commerce regulations and provide consumer security and awareness, the trust issue will remain a major hindrance to on-line shopping.
Security of financial transactions is essential. Banks and other credit card issuers should actively explain to consumers that the risks involved in on-line credit card transactions are not greater than those involved in ordinary shops. The availability of the different on-line security solutions should be advertised in order to build trust and confidence among consumers and businesses. Governments must also set rules concerning the confidentiality of transactions.
Legal Issues:
Laws that recognize and validate electronic transactions have not, so far, been put in place in any Arab country. Up to date, electronic documents and signatures are not recognized.
Legal frameworks should be designed for users to rely on the validity of transactions and to engage in secure and reliable electronic communications. Countries in the region should pass and enforce laws that address Intellectual Property and consumer rights as well as protect against on-line fraud and consumer crimes.
Governments should also regulate service providers and create a centralized automated trademark and domain registry.
There is a need to harmonize laws, regulations, and standards concerning electronic commerce and IT in order to have legislation commensurate with those applied in the rest of the world. Such harmonization could start at the regional level by forming a regional body to study the various laws and regulations needed. At a later stage, these laws and regulations could be harmonized with international ones. The United Nations Conference on International Trade Law (UNCITRAL) would be an appropriate starting point.
Customs and Taxation in Electronic Commerce:
The taxation of electronic commerce on “virtual goods”, such as information and service, as well as physical goods is a complex issue. The position of the United States is that no new taxes should be imposed on electronic commerce and that the taxing jurisdictions should coordinate their activities to ensure that the taxation systems are simple to administer and do not hinder or distort commerce.
The European Union has traditionally levied VAT on virtual as well as physical goods, but is also evaluating the current tax systems (both direct and indirect) within member states on issues of definitions, control, and enforceability.
Implications of New Electronic Payment Method:
Electronic payment is an area of emerging technology that has potentially significant ramifications in the areas of monetary policy and global banking. The United States and others have recognized that future action may be necessary to ensure the long-term security and soundness of electronic payment and international financial systems.
Electronic commerce is also likely to transform a number of other service sectors. The strongest impact is expected to be on the financial and telecommunication services. Many banks have already reported that a majority of transactions are being conducted electronically without personal contact between client and bank employee, and that electronic stock and currency trading, or electronic settlement of payments, are well established. A rapid growth in on-line banking, security brokerage, and insurance services is the forecast for the future.
Potential cost savings in the financial services sector are enormous. While the administrative (marginal) costs are around US$ 1.20 to clear a check and in the range of US$ 0.40 – US$ 0.60 to clear a debit or credit card payment, the transaction cost for Internet payment can be as low as one cent (US$ 0.01). We mentioned that the costs for establishing an Internet site are also normally much lower than those for a full-fledged retail branch. The full cost of an Internet transaction (US$ 0.13) is only an eighth of the cost of a transaction made over a bank counter. With such potential cost-savings from internet banking, competition for banking customers is likely to increase considerably to the benefit of consumers, as many services such as checking accounts or loans are very price sensitive. Moreover, the Internet allows for easy comparison between suppliers. Internet-based electronic commerce may cause the structure of whole market segments to change.