Risk versus reward

Internet banking brought convenience to South African subscribers, but also added risk.

Rabelani Dagada
By Rabelani Dagada, Professor, University of Johannesburg
Johannesburg, 23 Sept 2014

Cost-to-income ratio

The cost-to-income ratio is debatably one of the most significant ratios in any bank's annual reports. It indicates how much of every South African rand earned contributes to the bank's running costs, and therefore, how proficient the bank is in creating value for its shareholders.

In their pursuit of an improved ratio, South African banks focus on moderating customer dependence on branches by encouraging the use of cheaper self-service delivery channels such as the Internet, cellphones and ATMs. The banking industry views the digital banking service as a means of reducing operating costs and retaining customers.

Digital banking

The term 'digital banking' in this study refers to the use by customers of the Internet, cellphones and ATMs as banking delivery channels. Online/Internet banking refers specifically to the use of the Internet for banking transactions, while 'cellphone banking' is defined as the employment of mobile phone devices to conduct banking activities.

According to Arthur Goldstuck, the Internet was launched in SA in or around 1996, and was followed by cellphone banking services in 2000. Since then, the subscriber base of digital banking has grown steadily.

Although the uptake of cellphone banking has overtaken Internet banking, the financial transactions of Internet banking have more value. This should be attributed to the fact that Internet banking is usually used by the middle and upper-middle classes. The growth in the adoption of digital banking services in SA has attracted the attention of criminals, who wish to benefit from a booming industry. The study on which this Industry Insight is based showed the level of sophistication of digital banking crime in SA is extraordinary. This study also revealed the majority of digital banking-related crimes affect Internet and ATM banking. This study found there has never been any cellphone banking crime in SA.

Internet banking

The Internet, as a delivery channel in the South African banking industry, has deeply altered the traditional manner in which banking transactions were conducted. Millions of people are able to conduct banking transactions through the Internet instead of going physically to a branch of the bank, as was the norm.

The Internet plays a crucial role in digital banking by adding new value to self-service banking. Internet banking has brought much convenience to South African subscribers. They are now able to pay accounts, book flights, make purchases and transfer cash without leaving the comfort of their homes or offices. In addition, Internet banking customers do not necessarily have to access a networked PC or laptop, as they are able to complete banking transactions through accessing the Internet via their cellphones. It is estimated that by the end of this year, Internet banking in SA would have more than 9 million active customers.

Cellphone banking

According to Goldstuck, cellphone banking was first introduced in SA in August 2002, when a total of 31 426 customers registered for the service. By then, cellphone banking offered limited transactions. In fact, there was only one transaction - balance checking.

The first bank to launch this service was Absa. Thereafter FNB, Standard Bank and Nedbank introduced cellphone banking. Absa and FNB remain dominant in this market, while Nedbank is making huge strides, despite being the last of the four big banks to offer cellphone banking services.

The growth in the adoption of digital banking services in SA has attracted the attention of criminals.

Although Standard Bank showed very little appetite for and aggression in this market, this bank will go down in the history of world cellphone banking for being the first (in 2003) to move beyond balance checking, by enabling its Vodacom prepaid customers to recharge cellphone airtime. Before then, airtime had been purchased through SMSes. It is interesting to note that today cellphone banking provides an assortment of transactions, making SA the market leader worldwide.

First digital banking crime

The World Wide Worx's Online Banking in South Africa Report of 2006 has reflected on the first digital banking crime in SA, which happened in 2003. On 12 May 2003, Katja Hiller-Staal found that R30 000 was missing from her bank account. Subsequent to this, Helene van Tonder discovered R15 000 was missing from her account. What these women didn't know was they were playing a role in the history of digital banking in SA. Later on, on 20 July 2003, the Sunday Times reported on the first case involving money stolen in Internet banking.

'Phishing' and 'spoofing' as digital banking-related crimes

Criminals conduct these crimes via the phone, Internet or an urgent e-mail purporting to be from the bank. Victims are informed that their account information should be updated urgently. The e-mail contains a hyperlink, which directs the victim to a site that appears to be genuine, but in fact it has been set up by cyber criminals to gather information provided by gullible victims.

The stolen information allows the criminal access to the online banking account of the victim. A digital banking crime related to 'pharming' is 'spoofing', wherein a Web site that resembles the official Web site is developed to mislead the victims into volunteering their online banking credentials.

Digital banking grows

The growth in digital banking has continued, despite the security concerns of both banking executives and customers. This has attracted criminal elements employing tactics such as skimming, SIM (subscriber identity module) card swapping, 'phishing' and 'spoofing', ATM bombings, and SMS interception. Because customers are extremely concerned about digital banking crime, South African banks are dealing with the crime swiftly and with a great deal of sophistication.

#Dagada investigated digital banking security as part of his PhD study at the University of South Africa. Banks that participated in this study include Absa, FNB, Investec, Nedbank, and Standard Bank.