AN EXAMINATION OF THE EXTENT OF LIABILITY OF BANKS FOR E-BANKING FRAUD
CHAPTER ONE
INTRODUCTION
Background to the study: The utilisation of advanced internet and information technology on a global scale has led to the development of electronic banking as a crucial channel for banking businesses (Papazoglou, 2003; Wei et al., 2012). Remote banking is widely recognised as a defining feature of the modern economy, encompassing electronic transactions conducted between financial institutions and their clientele (Banstola, 2007). Electronic banking, commonly known as e-banking, is a contemporary method of delivering banking services (Keivani et al., 2012). The concept of "e-banking" has been extensively examined by researchers from various disciplines. Electronic banking encompasses a wide range of banking activities that allow customers to access financial information and conduct transactions using digital platforms such as televisions, telephones, mobile phones, or computers (Hoehle, Scornavacca & Huff, 2012). According to Perkins and Annan (2013), electronic banking refers to the provision of services and distribution of information by banks to customers through a range of delivery channels that can be accessed using personal computers or other electronic devices.
The banking sector is currently undergoing significant transformation due to the forces of globalisation, innovation, evolving customer demands, and heightened competition. The banking industry has undergone significant changes in the past decade due to the development of a knowledge-based economy and advancements in information and communication technology. According to Wisdom (2012), Information and Communication Technology (ICT) is a crucial factor that will greatly impact the future development of the banking industry. It enables banks to create advanced products, establish superior market structures, diversify their markets, and expand their global presence. Additionally, according to Darlington (1999), there has been a notable shift in customers' preferences over the last thirty years. Customers now prioritise simplicity in their everyday banking services, while also placing a high emphasis on maximum security and safety.
The traditional banking system, comprised of physical branches, is currently facing a challenge from information and communication technologies. These technologies are characterised by automated systems that facilitate customer interaction, such as mobile banking, call centres, automated teller machines (ATMs), and online banking. These channels offer relatively low costs and provide customers with the option to choose their preferred method of service delivery (Keivani et al., 2012). Hence, electronic banking has emerged as a lucrative industry. The shift from traditional banking to electronic banking has been a significant and transformative development (Yazdanifard, WanYusoff, Behora, & Abu, 2011; Wang & Huang, 2011).
On a global scale, the electronic banking system effectively caters to various emerging trends. It offers unparalleled convenience and ease for users to efficiently manage and access their bank accounts, regardless of time or location (Brar, Sharma & Khurmi, 2012). This development in recent years has significantly enhanced the banking sector, as electronic banking has proven to be a cost-effective solution. It has resulted in substantial savings in various areas, including investments in ATMs, staff training, branch openings, and other operational expenses (Chaturvedi & Meena, 2016). The advent of the internet has significantly enhanced the user experience in electronic banking operations (Abu-Shanab & Matalqa, 2015). Banking transactions can now be conducted globally, at any time and location, through various bank delivery channels. These channels include ATMs, point-of-sale systems, Smart TVs, personal computers, and telephones (Hoehle, Scornavacca & Huff, 2012).
Electronic banking, commonly referred to as e-banking, is a prominent utilisation of the internet for conducting various banking activities. In response, the banking industry has implemented internet-based technologies to enhance their business strategies. The banking industry has witnessed an increase in the speed of electronic transactions worldwide, as banks have expanded their services to include online platforms (Mahdi, Rezaul & Rahman, 2010). The progress in electronic transactions presents significant opportunities for both consumers and financial institutions (Singh & Singh, 2015).
Furthermore, it is worth noting that the advent of modern technologies has led to substantial changes in banking methods and strategies. The prevalence of computer-generated banking has led to a decline in the prominence of bank branches, as there has been an increase in the utilisation of remote banking services (Hoehle, Scornavacca & Huff, 2012). The banking system has undergone significant reform due to globalisation, changing social trends, competition, and advancements in information and communication technology (Loonam & O'Loughlin, 2008). In the global context, information infrastructure is widely recognised as a valuable avenue for the implementation of cutting-edge electronic distribution channels for banking products and services.
On the other hand, there has been a notable rise in fraudulent electronic activities that are becoming increasingly sophisticated. This poses a significant threat to the trust and security of electronic banking services (Mahdi, Rezaul & Rahman, 2010). The occurrence of e-banking fraud has become a significant and concerning issue in the banking industry worldwide, posing challenges to financial fraud and crime management (Rajdeepa & Nandhitha, 2015). The challenges posed by contemporary electronic fraud opportunities are highly intricate, making them arduous to address effectively. Consequently, financial institutions must allocate significant resources to proactively combat and identify such fraudulent activities (Kranacher, Riley & Wells, 2011). Financial institutions face various challenges when it comes to preventing and detecting fraudulent activities. These challenges can be further exacerbated by the existing organisational, political, and regulatory frameworks, as well as emerging technological approaches. However, it is important to note that the implementation of significant regulatory frameworks and the provision of regulatory support within an economy or nation cannot guarantee the complete eradication or significant reduction of fraud within the banking sector (Hoffman, 2002). In the early stages of electronic banking systems, instances of fraud were relatively minimal due to the stringent regulations governing the banking industry. Preventing fraud was considered a fundamental responsibility within this sector (Mahdi, Rezaul & Rahman, 2010; Shannak, 2013).
Contrarily, banking serves as a crucial intermediary in the economy. However, the occurrence of fraudulent acts has resulted in significant losses that are impacting all sectors of the economy (Sahin & Duman, 2010). Similarly, the development of banking, encompassing both traditional and electronic banking, presents challenges not only in terms of effectively managing bank risk, but also in navigating international and national regulatory complexities (Saranya & Gunasri, 2013; Chaturvedi & Meena, 2016; Abu-Shanab & Matalqa, 2015).
On the other hand, the research findings also provide evidence to support the notion that various factors contribute to the rise in e-banking fraud in Nigeria. These factors include ineffective banking operations, internal control deficiencies, insufficient customer awareness and inadequate training of bank staff. Additionally, the presence of inadequate infrastructure, the availability of sophisticated technological tools in the hands of fraudsters, negligence on the part of customers regarding their e-banking account devices, non-compliance with banking regulations, and ineffective legal procedures and law enforcement all contribute to this issue. Furthermore, the implementation of rules and regulations pertaining to the prosecution of individuals involved in financial fraud has been lacking in proactivity within the Nigerian context. These findings are supported by various types of security threats that affect both electronic banking users and banks. These threats include distributed attacks, phishing, identity theft, brute force attacks, spamming, credit card fraud, ATM fraud, hacking, unauthorised access, theft of service fraud, online money laundering, denial of service attacks, creation and distribution of malware attacks, and other related online frauds. These challenges require careful attention and mitigation strategies.
E-banking fraud has become a significant issue in the banking industry. As a result, it is crucial to prioritise security awareness in order to promote behavioural changes, reduce employees' susceptibility to fraud, and protect against potential risks. Additionally, it is important to implement robust measures for detecting and preventing electronic fraud, such as adopting advanced anti-fraud techniques and increasing fraud awareness. Therefore, it is necessary to analyse the extent of liability of banks for e-banking fraud in order to address these gaps.
1.2 Statement of the Problem
The banking sector globally plays an essential role in advancing the smooth growth of economic activity (Sruthi & Prasanna, 2016). As intermediaries between users and suppliers of funds, banks are successfully placed in a continuum that controls the pulse of the economy (Rampini & Viswanathan, 2015). Globally, the incapability of the banking sector to effectively perform its functions as intermediary and inability to control financial challenges that are experienced hitherto have been a crucial concern (Gertler & Nobuhiro, 2010). Equally, Rampini and Viswanathan (2010) state that the main attribute of banking industry businesses is to perform as deputized monitors and adviser of borrowers on behalf of legitimate depositors.
However, in this special association with borrowers and depositors, banks need to protect the confidence and trust of their various clients (Wei et al., 2012). The failure of banks to satisfactorily perform their role resulted from the numerous risks they are exposed to which are not appropriately controlled (Papazoglou, 2003). One of these risks which are progressively becoming a cause of burden is the banking risk related to fraud (Sruthi & Prasanna, 2016). Furthermore, fraud, which literally means an intentional act of deception that makes society suffer damage, either by monetary or physical asset losses, is now a global menace to the entire banking industry (Ramamoorti, Morrison & Koletar 2013).
Respectively, it is truly bothersome that while the banking sector is persistently trying to contend with the demands of monetary authorities to recapitalize up to the required minimum standards, fraud perpetrators are always at work decimating and threatening banks’ financial base (Mahdi, Rezaul & Rahman, 2010). Also, the worrisome issue in Nigeria is the extent of involvement in the act of e-banking fraud by bank management staff and collusion with outsiders, as well as the ease with which many elude detection, hence inspiring many others to cooperate in perpetrating fraud (Usman & Shah, 2013).
Moreover, presently fraud in the Nigerian banking industry is not properly investigated by the Central Bank of Nigeria, and therefore there is no enough information regarding challenges of e-banking fraud incidences, prevention and detection, and insufficient research studies on this phenomenon. This has become a controversial issue which generates debate among quite a few authors, for example Chaudhary, Yadav and Mallick, (2012); Mahdi, Rezaul and Rahman, (2010); and Sruthi and Prasanna (2016), who have investigated similar phenomena.
However, their studies examine only causes of credit card frauds and not mobile fraud, online fraud, computer base fraud and telephoning fraud, which are major channel services of electronic banking, even without discussing the prevention and detection aspects of fraud. Also, most studies done earlier in Nigeria on fraud have employed secondary data and did not consider the use of primary data, while employees were the main focus of those studies. Thus, an innovative approach is required to mitigate e- banking fraud. Therefore, these acknowledged gaps provide the motivation for this present study.
1.3 Objective of the study
The main objective of the study is to examine The Extent Of Liability Of Banks For e-Banking Fraud. Specifically, the objective of the study are:
1. to determine the e-banking fraud risks that are of high concern in the Nigerian banking sector
2. To investigate the perceived factors that have considerable influence on the increase in e-banking fraud in Nigeria
3. To examine the current significant mechanisms for e-banking fraud prevention in the Nigerian banking industry
4. To determine the Extent Of Liability Of Banks For e-Banking Fraud
1.4 Significance of the Research
The current research has significance for theories and empirical applications in the areas of policy making and financial institutions. Theoretically, the submission of prevailing theories of frauds, such as routine activity theory (RAT) (Cohen & Felson 1979; Williams, 2016) and fraud management lifecycle theory (FMLT) to the Nigerian e-banking fraud prevention and detection context will generate more information about whether these theories can be applied worldwide or whether they depend on cultural or local structures.
The research can likewise be projected to expose some of the prerogatives that are claimed in the academic and theoretical literatures regarding the understanding of fraud in the financial context and its connotation. Given the application of present theories along with other information from the research concerning the Nigerian banking sector, this can be regarded as significant research from this viewpoint.
There are also substantial practical applications of this study. The Nigerian banking sector can use the information generated from this study to modify its practices of combating fraud, and in addition to identify areas that are performing well. Investors and customers are the major users of this information in a practical mode. One of the challenging factors is overseas investment fraud (Broadman & Isik, 2007). However, to some degree, financial risk is essential in almost all financial institutions. Understanding the level of risk and the specific factors that will need to be overcome will be tremendously significant for investors to make suitable decisions.
1.5 Research Questions
The following research questions have been framed to address the research aim:
1. What are the e-banking fraud risks that are of high concern in the Nigerian banking sector?
2. What are the perceived factors that have considerable influence on the increase in e-banking fraud in Nigeria?
3. What are the current significant mechanisms for e-banking fraud prevention in the Nigerian banking industry?
4. What are the Extent Of Liability Of Banks For e-Banking Fraud?
1.6 Scope of the Study
This study concentrates on the deposit money banks (commercial banks) in the Nigerian economy; the research questions were used to ascertain the effect of e-banking fraud on banks’ stockholders, and its prevention and detection. The study covered the activities of both internal and external stakeholders of commercial banks in the Nigerian economy, since the core function of both internal and external stakeholders is to ensure an effective use of the e-banking system. Data were collected from accountants, internal auditors, external auditors, managers, and directors who are working in the head offices of Nigerian commercial banks and also customers within the banking premises by the use of questionnaires and direct interviews.
1.8 Limitations Of The Study
This research work is specifically on the Extent Of Liability Of Banks For e-Banking Fraud. In the limitation on research work of this magnitude or nature can be carried out without limitation. Hence, during the course, certain constraints were encountered.
- Cost: the cost of thorough research is not what can be afforded by a student. The prices of materials needed for this work has gone up and transport fee has also gone up.
- Time: the time was one of the limitations in the process of carrying out this research work.
- Scarcity Of Literature: The research encountered some problems in collection of literature especially on the bank History and operations. This are hindered the smooth running of this work.