Internet banking, e-money and the Internet gift economy

The following commentary is part of First Monday's Special Issue #3: Internet banking, e-money and the Internet gift economy.

Contents
Introduction
Monetary policy and e-money
Electronic purses
The Internet gift economy
Some additional thoughts and issues

Introduction

The idea for this special issue had its genesis in another special issue that I am working on--commercial applications of the Internet (scheduled for March 2006). When looking through the wealth of papers on that First Monday has published on commercial applications of the Internet, I found some papers that related to various issues associated with Internet banking and money. These papers seemed to logically fit together, hence the idea for this current special issue. The papers within this special issue are organized into the following themes:

General issues (regulation, trust, and taxation);

Monetary policy and Internet banking;

Electronic purses; and

Internet gift economies.

Many of the articles included in this special issue have additional comments at the start—kindly provided by their authors. Now, I’d like to give a brief overview of the major sections of the special issue, and then I will give some thoughts on issues of identity theft and technology.

Monetary policy and e-money

Monetary policy involves decisions about the money supply, interest rates, and the availability of credit. Monetary policy is undertaken by central banks (e.g., The Federal Reserve, in the United States) and attempts to manage (or balance) various macro-economic objectives, including price-level stability, balanced trade with other countries, unemployment, and the gross domestic product. The emergence of the internet led to initial concerns regarding the impact of non-government financial institutions on monetary policy. The development of the Internet meant that non-financial institutions could transfer electronic money, or that they could issue such e-money. Debate ensued about the impacts of such developments on monetary policy. Two articles in this special issue, by Aleksander Berensten and by Malte Krueger, explore these issues. However, as Dr. Krueger opines in his new commentary, many attempts to create proprietary e-cash have failed, and the Internet e-money that does exist tends to be somewhat limited in its use (thereby limiting its impact on monetary policy).

Electronic purses

Two articles by Leo Van Hove are included in this issue on the topic of e-purses—portable devices that contain electronic money. These are sometimes referred to as an electronic wallet, and often take the form of a smart card. However, in recent years efforts have been made to integrate e-purse technology into portable devices such as cellphones. E-purses store monetary value that can be added to (either by choice, or automatically), or reduced when purchases are made. As Dr. Van Hove observes in his commentary, e-purses have not proliferated as widely as it was initially thought they would. Elsewhere, Carol L. Clark proposes that successful e-purse implementation is contingent upon the following:

“a captive audience that drives critical mass, such as those found in the transportation industry or government sector; an affordable cost structure relative to other payment instruments; compelling incentives to consumers and merchants; and a technology that is well tested and addresses standards issues before the rollout.” (2005, p. 34).

The Internet gift economy

Three papers in this special issue focus on the dynamics of Internet gift economies and give insights into the motives of those participating in these markets. These papers explore the Internet gift economy—the free sharing of ideas, information, and other intangibles (including, notably, software). While traditional economic exchange involves the use (and pursuit) of money, those engaged in the Internet gift economy often do so for intangible rewards. Alternatively, as Kylie Veale proposes “their rewards are voluntary payments as forms of tangible reciprocity” (2003). Hence, we have seen the emergence of online donation and tip-jars in recent years (see, for example, Crofts et al., 2005, talking about business models for podcasters).

Some additional thoughts and issues

Since March 2000, the Pew Internet and American Life project has tracked major activities undertaken by Internet users in the United States. Of the activities tracked by Pew, internet banking has seen the greatest increase. In 2002, 30% of Internet users used Internet banking, compared to 42% in 2005 – an increase of 47%. Pew found several underlying factors contributed to the likelihood that Internet users would utilize online banking services. Internet users with higher-speed Internet connections were more likely to have used Internet banking (63% had done so) compared to those with dial-up connections (32% of whom had used Internet banking). Those with six or year more years of experience online (51%) were also more likely to use Internet banking services, compared to those who had three or fewer years experience online (27%).

While the Internet has provided consumers with the conveniences associated with online banking, several threats have also emerged. In particular, consumers are increasingly concerned about phishing and identity theft (see, generally, Abad, 2005). A 2004 study by the Federal Deposit Insurance Corporation (FDIC) examined the incidence of unauthorized access to financial institution accounts, as well as proposing how such risks could be mitigated. Unauthorized access to accounts occurs through identity theft of one form of another. In this regard the FDIC report examined the “account hijacking”, defined as “unauthorized access to and misuse of existing asset accounts primarily through phishing and hacking” (2005, p. 2). It was estimated that around two million adult Internet users had their checking accounts hijacked in the 12 months ending April 2004. 70% of those individuals did their banking and/or billpaying online and over half believed that they had received a phishing e-mail. Herein lays the major way in which users of online financial services appear to be subject to fraud. In the context of our discussion, phishing involves attempts to get account holders to disclose private information to illegitimate third-parties.[ 1] Typically, the account holder will receive an e-mail claiming to be from their financial institution, requesting that they verify certain account information (see FBIIC and FSSCC Report, 2005) . The e-mail will invariably contain a link to a “spoof” web-site – designed to appear as if it belongs to a legitimate financial institution. On this website account holder are asked to provide sensitive personal information such as their Social Security Number, account and credit card numbers, names and account passwords. This information is then stolen and used by the illegitimate third party to gain access to the account(s) of the individual who entered the information.
Various measures have been proposed to combat account hijacking. The FDIC report proposed the following five steps for financial institutions and government to reduce online fraud:

Upgrading existing password-based single-factor customer authentication systems to two-factor authentication. [Two-factor authentication requires users to submit two of three sorts of credentials, e.g., two of something a person knows, something a person has, or something a person is. Passwords are examples of something a person knows, physical cards are an example of something a person has, and biometric identification is an example of something a person is].

Using scanning software to proactively identify and defend against phishing attacks. The further development and use of fraud detection software to identify account hijacking, similar to existing software that detects credit card fraud, could also help to reduce account hijacking.

Strengthening educational programs to help consumers avoid online scams, such as phishing, that can lead to account hijacking and other forms of identity theft and take appropriate action to limit their liability.

Placing a continuing emphasis on information sharing among the financial services industry, government, and technology providers. (2004, p. 2).

In contrast, the report by the FBIIC and FSSCC proposed eight steps for financial institutions to avoid having their customers fall victim to phishing:

Personalize e-mails to consumers so that consumers have a greater assurance of the e-mail’s legitimacy.

Remind consumers on your website that you will never send them an email asking them to come to your website to enter personal information.

Set up your loan application websites so that current customers do not have to enter Social Security numbers and other personal information that you already have on file.

Keep website certificates up to date so that consumers are assured of the site’s legitimacy.

Remind consumers to obtain and use the latest patch for their web browser and operating system software.

Provide on company or agency websites a domestic telephone number for consumers to call to verify e-mail requests for information.

Register domain names that are similar to the name of the firm or agency so that consumers are less likely to confuse a false website with the legitimate website. Practice consistent branding.

Consider establishing a trademark for the domain name of the firm. Under the Anticybersquatting Consumer Protection Act, 15 U.S.C. 1125(d), a firm may be able to initiate immediate action in Federal district court against the suspicious website to protect the firm’s trademark (2005, pp.5-6).

In light of problems associated with identity theft over the Internet, it is hardly surprising that increasing attention is being paid to alternative forms of identity verification—particularly biometrics.

“Biometrics are technologies that automatically confirm the identity of people by comparing patterns of physical or behavioral characteristics in real time against enrolled computer records of those patterns. Leading biometric technologies accomplish this task by scanning patterns of the face, fingerprint, hand, iris, palm, signature, skin, or voice.” (International Biometric Industry Association)

At present, biometric forms of identification appear to be more commonplace in non-U.S. financial institutions (Krebsbach, 2004). Choices about adoption of biometric security solutions will be influenced by considerations such as: the level of security required, accuracy, cost and implementation time, and user acceptance (findBiometrics.com). As the biometrics industry progresses (in particular as accuracy increases, costs decline and user acceptance increases) we are likely to see increasing use biometric technologies to thwart attempts by identity thieves.

About the Author

Mark A. Fox is Professor of Management & Entrepreneurship at Indiana University South Bend. He has a Ph.D. in business administration from the University of Canterbury in New Zealand. Mark’s major research interests are corporate governance, securities regulation, determinants of success in the music industry, and business models for the music industry.
Web: http://mypage.iusb.edu/~mfox1
E–mail: mfox1 [at] iusb [dot] edu

Acknowledgements

I appreciate the support and encouragement of Edward J. Valauskas for this special issue. Authors of the papers included in this special issue were given the opportunity to provide additional comments on the papers that are included in this special issue. To those authors who were able to find the time to make additional comments, I am most appreciative of your insights.

Notes

1. A similar scam to phishing is known as “pharming”, where “ an Internet user is redirected to a criminal's spoofed site even though the user entered a valid URL in the browser's address bar. This redirection usually involves worms and Trojans that attack the browser address bar and exploit vulnerabilities in operating systems and the Domain Name Servers (DNS) of compromised computers” (FBIIC and FSSCC Report, 2005, p. 2).

References

Christopher Abad, 2005. “The Economy of Phishing: A Survey of the Operations of the Phishing Market,” First Monday, volume 10, number 9, at
http://firstmonday.org/issues/issue10_9/abad/index.html, accessed 28 November 2005.

Carol L. Clark, 2005. “Shopping without Cash: The Emergence of the E-Purse,” Economic Perspectives, Fourth Quarter, 34-51, and at http://www.chicagofed.org/publications/economicperspectives/ep_4qtr2005_part3_clark_.pdf, accessed 28 November 2005.

Sheri Crofts, Jon Dilley, Mark A. Fox, Andrew Retsema, and Bob Williams, 2005. “Podcasting: A New Technology in Search of Viable Business Models,” First Monday, volume 10, number9, at http://firstmonday.org/issues/issue10_9/crofts/index.html, accessed 28 November 2005.

Federal Deposit Insurance Corporation, 2005. “Putting an End to Account-Hijacking Identity Theft,” 14 December, at http://www.fdic.gov/consumers/consumer/idtheftstudy/, accessed 28 November 2005.

Federal Trade Commission, 2005. “How Not to Get Hooked by a “Phishing” Scam,” June Consumer Alert, June, at http://www.ftc.gov/bcp/conline/pubs/alerts/phishingalrt.pdf, accessed 28 November 2005.

Federal Trade Commission, “ID Theft,” at http://www.consumer.gov/idtheft/index.html, accessed 28 November 2005.

Federal Trade Commission, 2004. “Is Someone ‘Phishing’ for Your Information?” March, at http://www.ftc.gov/bcp/conline/pubs/alerts/phishregsalrt.htm, accessed 28 November 2005.

Financial and Banking Information Infrastructure Committee and the Financial Services Sector Coordinating Council, 2005. “FBIIC and FSSCC Report on Preventing, Detecting, and Responding to Phishing Attacks,” May, at http://www.treas.gov/offices/domestic-finance/financial-institution/cip/, accessed 28 November 2005.

findBiometrics.com, “Choosing a Biometric Solution,” at http://www.findbiometrics.com/Pages/guide5.html, accessed 28 November 2005.

Susannah Fox, 2005. “ Online Banking 2005: A Pew Internet Project Data Memo,” Pew Internet and American Life Project, 9 February, at http://www.pewinternet.org/PPF/r/149/report_display.asp, accessed 28 November 2005.

International Biometric Industry Association, “Biometrics-Overview,” at http://www.ibia.org/biometrics/, accessed 28 November 2005.

Karen Krebsbach, 2004. “Biometrics Takes Hold Overseas, But Not in U.S.,” U.S. Banker, volume 114 Issue 1, pp. 17-18.

Kylie J. Veale, 2003. “Internet Gift Economies: Voluntary Payment Schemes as Tangible Reciprocity.” First Monday, volume 8, number 12, at http://firstmonday.org/issues/issue8_12/veale/index.html, accessed 28 November 2005.

E-money and monetary policy - bibliography

Aleksander Berensten, 1999. “Monetary Policy Implications of Digital Money: Reply to Malte Krueger,” Kyklos, volume 52, issue 2, pp. 263-264.

Aleksander Berensten, 1998. “Monetary Policy implications of Digital Money,” Kyklos, volume 51, issue 1, pp.89-117.

Mark Bernkopf, 1996. “Electronic Cash and Monetary Policy,” First Monday, volume 1, number 1, at http://www.firstmonday.org/issues/issue1/ecash/index.html, accessed 28 November 2005.

Peter Englund, 1989. “Monetary Policy and Bank Regulations in an Economy with Financial Innovations,” Economica, volume 56, issue 224, pp. 459-472.

Ian Grigg, 1996. “The Effect of Internet Value Transfer Systems on Monetary Policy,” http://ideas.repec.org/p/wuk/lobuwp/_001.html, accessed 28 November 2005.

John Hawkins, 2001. “Electronic Finance and Monetary Policy,” Bank for International Settlements Papers, No. 7, pp.98-105, and at http://www.bis.org/publ/bispap07.htm, accessed 28 November 2005.

Malte Krueger, 1999. “ Monetary Policy Implications of Digital Money: A Comment ,” Kyklos, volume 52, issue 2, pp. 259-262.

Tatsuo Tanaka, 1996. “Possible Economic Consequences of Digital Cash,” First Monday, volume 1, number 1, at http://www.firstmonday.org/issues/issue2/digital_cash/index.html, accessed 28 November 2005.

Electronic purses - bibliography

Leo van Hove, “Reference Database on E-purses,” at http://epso.intrasoft.lu/inventory/indexvanhove.cfm, accessed 28 November 2005.

The Internet gift economy - bibliography

Hillary Bays and Miranda Mowbray, 1999. “Cookies, Gift-Giving, and the Internet,” First Monday, volume 4, number 11, at http://firstmonday.org/issues/issue4_11/bays/index.html, accessed 28 November 2005.

Kevin McGee and Jörgen Skågeby, 2004. “Gifting Technologies,” First Monday, volume 9, number 12, at http://firstmonday.org/issues/issue9_12/mcgee/index.html, accessed 28 November 2005.

Felix Stalder, 1999. “Beyond Portals and Gifts: Towards a Bottom-Up Net-Economy,” First Monday, volume 4, number 1, at http://www.firstmonday.org/issues/issue4_1/stalder/index.html, accessed 28 November 2005.

Copyright ©2005, First Monday

Copyright ©2005, by Mark A. Fox

Internet banking, e-money and the Internet gift economy
First Monday, Special Issue #3: Internet banking, e-money and the Internet gift economy (December 2005),
URL: http://firstmonday.org/issues/special 10_12/fox/index.html