THE EXTENT OF LIABILITY OF BANKS FOR E-BANKING FRAUD

Abstract

In this study, our focus was on the extent of liability of banks for e-banking fraud, Enugu State as case study. The study is was specifically focused on examining the e-banking fraud risks that are of high concern in the Nigerian banking sector; investigating the perceived factors that have considerable influence on the increase in e-banking fraud in Nigeria; examining the current significant mechanisms for e-banking fraud prevention in the Nigerian banking industry and determining the extent of liability of banks For e-banking fraud.

The study adopted the survey research design and randomly enrolled participants in the study. A total of 100 responses were validated from the enrolled participants where all respondent are staff of selected banks in Enugu State.

CHAPTER ONE

INTRODUCTION

1.1 Background to the study

With the global use of progressively more sophisticated internet and information technology (Papazoglou, 2003), electronic banking is developing as a key channel for banking businesses (Wei et al., 2012). Globally, remote banking is regarded as a characteristic of the new economy, which involves electronic transactions between banks and their customers (Banstola, 2007). Electronic banking, generally referred to as e- banking, is the latest delivery channel for the banking system (Keivani et al., 2012). The term “e-banking” has been discussed in several ways by many researchers from diverse backgrounds, mostly because electronic banking involves quite a lot of banking activities through which customers can inquire for financial information and implement transactions by means of a digital television, telephone, mobile phone or computer (Hoehle, Scornavacca & Huff, 2012). Perkins and Annan (2013) describe electronic banking as the rendering of services and dissemination of information by banks to customers through various delivery channels that can be accessed with a personal computer or other electronic devices.

However, the banking sector is being reformed by globalization, innovation, customer needs and competition. Due to the development of a knowledge-built economy and the emergence of the latest information and communication technology, financial institutions particularly the banking industries have experienced thought-provoking changes during the last decade. According to the Wisdom (2012), Information and Communication Technology, the most significant factor in the forthcoming development of the banking industry, enhances banks’ ability to produce sophisticated products, to have superior market structures, to diversify their markets and to expand globally. Furthermore, Darlington (1999) states that over the past three decades, customers’ needs have changed significantly: customers are demanding simplicity in their daily banking services together with maximum security and safety.

Thus, the traditional banking system, which consists of physical branches, is now being threatened by information and communication technologies characterized by automated systems of interaction with customers (mobile banking, call centres, automated teller machines (ATMs), online banking), that include relatively minimal costs and permit customers to select from the alternative delivery channels (Keivani et al., 2012). Therefore, electronic banking has become a great business; the transformation from traditional banking to electronic banking has been a “Leap” change (Yazdanifard, WanYusoff, Behora, & Abu, 2011; Wang & Huang, 2011).

Globally, the electronic banking system addresses several emerging trends: it is very convenient and easy for electronic banking users to manage and access their bank accounts at any time and from anywhere in the world (Brar, Sharma & Khurmi, 2012). The banking sector has been strengthened by this development in recent years, since electronic banking saves vast amounts of resources in areas such as investments into ATMs, staff training, opening of branches and other operational costs (Chaturvedi & Meena, 2016). The internet has improved users’ experience of electronic banking operations dramatically (Abu-Shanab & Matalqa, 2015). Banking transactions can now be performed any place, anytime in the world through any bank delivery channel: ATMs, POS, Smart TV, personal computers, telephones are among the channels a customer might consider (Hoehle, Scornavacca & Huff, 2012).

E-banking is the significant application of the internet for banking activities, and bank sectors have upgraded their business strategies with the assistance of the internet. Banks have provided their services via the internet and thereby electronic transactions have increased speed in the banking industry worldwide (Mahdi, Rezaul & Rahman, 2010). The advancement of electronic transactions gives a tremendous prospect for benefits to consumers and financial institutions (Singh & Singh, 2015).

Corroborating this, the emergent modern technologies have resulted to significant transformation of banking approaches and techniques. Bank branches have started to lose ground to computer-generated banking as the use of distant banking services has been augmented (Hoehle, Scornavacca & Huff, 2012). Globalization, transforming social trends, competition and particularly information and communication technology advancements have brought intense reform of the banking system (Loonam & O’Loughlin, 2008). Generally, information infrastructure is considered worldwide as an opportunity for introducing innovative electronic distribution channels for bank products and services.

In contrast, fraudulent electronic activities are increasing and becoming sophisticated, severely threatening and menacing the trust and security of electronic banking services (Mahdi, Rezaul & Rahman, 2010). E-banking fraud has turned into a thoughtful and serious phenomenon to the financial fraud and crime management in the banking industry across the entire globe (Rajdeepa & Nandhitha, 2015). These current electronic fraud opportunities are often tremendously difficult to mitigate due to their technological complexity; hence, banks may devote substantial resources endeavouring to prevent and detect them (Kranacher, Riley & Wells, 2011). Banks encounter challenges in preventing and detecting fraud, and these challenges can often be aggravated by the organizational frameworks, political frameworks, regulatory frameworks and newly invented technology approaches that are in place. Nevertheless, even the issuing of momentous regulatory frameworks and the regulatory supports of a given economy or nation cannot be predicted to eliminate or minimize the occurrence of fraud in the banking sector (Hoffman, 2002). However, in the very beginning of electronic banking systems, the scale of fraud was very insignificant because the banking industry was one of the most strictly regulated sectors, which treats prevention of fraud as a duty (Mahdi, Rezaul & Rahman, 2010; Shannak, 2013).

On the contrary, banking represents the mediator of the economy; fraudulent acts have brought enormous losses that are affecting all the performing activities (Sahin &Duman, 2010). Equally, banking development, from traditional banking to electronic banking, is not only challenging in terms of managing bank risk, but also with international and national irregularities (Saranya & Gunasri, 2013; Chaturvedi & Meena, 2016; Abu- Shanab & Matalqa, 2015).

Conversely, the findings also supports the issues that the factors contributing to the increase in e-banking fraud in Nigeria include ineffective banking operations, internal control issues, lack of customer awareness and bank staff training and education, inadequate infrastructure, presence of sophisticated technological tools in the hands of fraudsters, negligence of banks’ customers concerning their e-banking account devices, lack of compliance with the banking rules and regulations, and ineffective legal procedure and law enforcement. In addition, the enforcement of rules and regulations in relation to the prosecution of financial fraudsters has been passive in Nigeria. Theses also corroborated with diverse types of security threats for both the electronic banking users and the banks – such as distributed attacks, phishing, identity theft, brute force attacks, spamming, credit card frauds, ATM frauds, hacking and unauthorized access, theft of service frauds, online money laundering, denial of service attacks, creation and distribution of malware attacks and other related online frauds – are challenging issues.

However, e-banking fraud has created an aggressive presence in the banking sector and therefore, security cognizance is required in order to bring behavioural transformation, minimize employees’ vulnerability and guard against the prospective risk of fraud; and to create strong detection and prevention of fraud using electronic technology, adoption of fraud awareness and other new sophisticated anti-fraud approaches. Hence, to cover these gaps there is a need to examine The Extent Of Liability Of Banks For e-Banking Fraud.

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.