THE ROLE OF COMPUTER TECHNOLOGY IN BANKING AND FINANCIAL TRANSACTIONS: A LEGAL APPRAISAL BY KOLAWOLE DAMILOLA KAYODE MATRIC NO. 07/40IA107 BEING A LONG ESSAY SUBMITTED TO THE FACULTY OF LAW, UNIVERSITY OF ILORIN, ILORIN, NIGERIA, IN PARTIAL FULFILMENT OF THE REQUIREMENTS FOR THE AWARD OF THE DEGREE OF BACHELOR OF LAW (LL.B HONS.) IN COMMON LAW. MAY 2012 1
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THE ROLE OF COMPUTER TECHNOLOGY IN
BANKING AND FINANCIAL TRANSACTIONS:
A LEGAL APPRAISAL
BY
KOLAWOLE DAMILOLA KAYODE
MATRIC NO. 07/40IA107
BEING A LONG ESSAY SUBMITTED TO THE FACULTY OF LAW,
UNIVERSITY OF ILORIN, ILORIN, NIGERIA, IN PARTIAL
FULFILMENT OF THE REQUIREMENTS FOR THE AWARD OF THE
DEGREE OF BACHELOR OF LAW (LL.B HONS.) IN COMMON LAW.
MAY 2012
1
CERTIFICATION
This is to certify that this long essay: THE ROLE OF COMPUTER
TECHNOLOGY IN BANKING AND FINANCIAL TRANSACTIONS: A
LEGAL APPRAISAL was written by KOLAWOLE DAMILOLA KAYODE.
It has been read and approved as meeting part of the requirements for the
award of Bachelor of law (LL.B Hons.), Degree in Common Law in the
Faculty of Law, University of Ilorin, Ilorin, Nigeria.
MRS ADIMULA DATE SIGNATURE
Supervisor ----------- -------------------
DR. M.M. AKANBI DATE SIGNATURE
HOD of Host Dept.
Dept. of ----------------- -----------
------------------
DR. I.A. YUSUF DATE SIGNATURE
HOD of Graduating Dept.
Dept. of ----------------- -------------
------------------
DR .I.A. Abdulqadr DATE SIGNATURE
Ag. Dean, Faculty of Law -------------- ------------------
Computer technology has been a scientific invention which has obviously had series of effect on all spheres of life. The advent of computer technology has obviously aided in different areas i.e. it has provided a further enabling environment for all works. During the course of this study, we will pay more attention to the role of computer technology in banking and finance transaction and the legal implications of such transactions.More so, this project aims at solely setting a guide-line and a frame-work enlightenment towards the effects of computer in banking and finance transactions and the role it has obviously played in improving the face of businesses in banking and finance transactions. The concept of this project is to allay all fears as regards computer functionality in banking finance transactions. It should be noted that in the course of this project all areas in which computer technology affects banking and finance transactions would be examined critically, leaving no stone unturned. Following the advent of banking and financial transactions in Nigeria, computer technology became a necessary mechanical device to be used in banks to ease all transactional difficulties relating to banking or finance for fast processing and attendance to any likely problem or for easy dissemination of information as regards banking details transactions.
3
TABLE OF CONTENTS
TITLE PAGE……………………………………………………………..I
CERTIFICATION………………………………………………………II
ABSTRACT ….………………………………………………………......III
TABLES OF CONTENTS ……………………………………………....IV
DEDICATION …………………………………………………………....VI
ACKNOWLEDGEMENT……………………………………………VII
TABLE OF CASES………………………………………………………VIII
TABLE OF STATUTES……………………………………………….IX
CHAPTER ONE
GENERAL INTRODUCTION
1.0.0. INTRODUCTION………………………………………………..
1.1.0. BACKGROUND TO THE STUDY……………………………
1.2.0. OBJECTIVES OF STUDY……………………………
1.3.0. METHODOLOGY…………………………………………………
1.4.0. LITERATURE REVIEW……………………………………….
1.5.0. DEFINITION OF TERMS…………………………………………
1.6.0. CONCLUSION…………………………………………………
CHAPTER TWO
COMPUTER TECHNOLOGY
2.0.0 INTRODUCTION …………………………………………….
2.1.0 CLASSIFICATIONS OF COMPUTER ……………………….
2.2.0 USES OF COMPUTER……………………………………..
2.3.0 COMPUTER EVOLUTION…………………………………………
2.4.0 COMPUTER LAW……………………………………………..
2.5.0 CONCLUSION……………………………………………
CHAPTER THREE
THE ROLE OF COMPUTER TECHNOLOGY IN BANKING
TRANSACTIONS
2.0.0. INTRODUCTION…………………………………………….4
2.1.0. BACKGROUND OF COMPUTER TECHNOLOGY IN BANKING
TRANSACTIONS
2.2.0. USES OF COMPUTER TECHNOLOGY IN BANKING
TRANSACTIONS…………..
2.3.0. IMPORTANCE OF COMPUTER TECHNOLOGY IN BANKING
TRANSACTIONS
2.4.0. LEGAL FRAME-WORK REGULATING COMPUTER
TECHNOLOGY IN BANKING TRANSACTIONS
2.5.0. CONCLUSION……………………………………………
CHAPTER FOUR
THE ROLE OF COMPUTER TECHNOLOGY IN FINANCIAL
TRANSACTIONS
3.0.0. INTRODUCTION……………………………………………………
3.1.0. BACKGROUND OF COMPUTER TECHNOLOGY IN FINANCIAL
TRANSACTIONS
3.2.0. FORMS OF COMPUTER TECHNOLOGY IN FINANCIAL
TRANSACTIONS
3.3.0. USES OF COMPUTER TECHNOLOGY IN FINANCIAL
TRANSACTIONS
3.4.0. IMPORTANCE OF COMPUTER TECHNOLOGY IN FINANCIAL
TRANSACTIONS
3.5.0. LEGAL FRAME-WORK REGULATING COMPUTER
TECHNOLOGY IN FINANCIAL TRANSACTIONS
3.6.0. CONCLUSION………………………………………………
CHAPTER FIVE
GENERAL CONCLUSION AND RECOMMENDATIONS
5.1.0 INTRODUCTION
5.2.0 CONCLUSION
5.3.0 RECOMMENDATIONS
REFERRENCES
5
DEDICATION
To the Glory of GOD under whose canopy of love and mercy I have thrived,
and to whom I dedicate this project work. In extension this essay work is also
dedicated to my loving parents.
6
ACKNOWLEDGEMENT
I returned, and came under the sun; that the race is not to the swift, nor the battle to the strong, neither yet the bread to the wise, nor yet riches to men of understanding, nor yet favor to men of skill; but time and chance happeneth to them all. (Eccl 9:11)It is in consideration of this that I give thanks to God for the time and chance
He has ever given me since I was conceived. I owe my being and existence to
you, Lord.
My appreciation goes to my darling parent, Mrs. G.I. Ebidunmi for her love
and long suffering. I cannot thank you enough. To my siblings, Omolayo and
Omotayo, growing up with you has been worthwhile. You have always seen
the best in me.
I sincerely thank my supervisor Barr. Adimula for her motherly advice
throughout the course of writing this essay. Your direction and tolerance of
my mistakes during my work ma, only gives credence to your worthiness as a
true mother and lecturer.
I say a big thank you for all your contributions. To all my friends, the likes of
Shawn Carter, Larry-king, Shurler, Moh, Tony, Sodiq, Lord Bay, Wale,
Amanyi, Mark, Idoko, Tomilola, Nike and generally all CLASFONITES to
mention a few, you are all wonderful. My time with you on campus has been
worth every moment. My appreciation also goes to the Awodun’s and the
Olawoye’s (you have been more than family). To all C9 boys:- you are
wonderful.
To my very special baby, Sobiye Oluwadamilola Rita Amoke, knowing you
has been worth the while, I love you so much. For everyone who out of the joy
of finishing this project, I have failed to remember, I say I love you all.
7
TABLE OF CASE
See Haddock v. The Generous Bank Ltd[Dallas bar fd.1981]
8
TABLE OF STATUTES
Information technology policy for Nigeria Electronic Financial Transaction Act of South Korea Evidence act LFN 1990
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CHAPTER ONE
GENERAL INTRODUCTION
1.0.0. INTRODUCTION
Computer technology on the whole is a welcome mechanical advancement
which has actually given rise to high level development as regards to banking
and financial institutions.
The developments in Computer Technology have a tremendous impact on
auditing. Computer Technology has facilitated re-engineering of the
traditional business processes to ensure efficient operations and improved
transactional activities within the organization and between the organisations
and its customers. Auditing in a computerized and networked environment is
still at its nascent stage in India and established practices and procedures are
evolving. Well planned and structured audit is essential for risk management
and monitoring and control of Information Systems in any organization.
The deployment of Information Technology in banks and financial
institutions, both in the front and back office operations, has facilitated
greater systemic efficiency in the banking and financial sector. It has, at the
same time, introduced new areas of risk. Risk is inherent in the traditional
banking and financial activities. However, risk in a computerized and
networked environment is multifarious such as operational risk, reputational
risk etc., as briefly discussed and implementation of security policies and
procedures, adopted in an electronic banking system. Network security,
database security, data integrity, appropriateness of the security policies and
practices and the likely misuse of the information and information resources
by the employees, customers and third parties are some of the factors, which
require to be addressed for risk measurement in a computerized and
networked environment in the banking and financial sectors.
10
Computer technology has created significant benefits for banking and
financial sectors. This has helped in reducing the lead time needed by
accountants to prepare and present financial information to the management
and stakeholders. Not only has computer technology shortened the lead time
required to present financial information, but it has also improved the overall
efficiency and accuracy of the information.
1.1.0 BACKGROUND TO THE STUDY
Before the emergence of modern banking system, banking operation was
manually done which led to a slowdown in settlement of transactions. This
manual system involves posting transactions from one ledger to another which
was handled manually. Figures or counting of money which should be done
through computers or electronic machine were computed and counted
manually which were not 100% accurate thereby resulting to human errors.
Most banks then use only one computer in carrying out transactions which
aided in reducing the sluggish nature of banking transactions.
1.2.0 OBJECTIVES OF STUDY
This work takes into pertinent consideration the emergence of Computer
technology in the banking and financial sector, the effects it has on
transactional activities in the sector and also how it tends to affect the
relationship between the bank and its customers. This project aims at x-raying
the importance of computer technology in the banking and financial sectors.
1.3.0 METHODOLOGY
In the bid to delve into researching my work in-depth, due to its analytical and
evaluative nature, I have decided to make use of certain sources to draw
attention to the tremendous effects that computer technology has had on the
banking and financial sectors. These sources include the primary sources
which are:
a) Information technology policy for Nigeria
b) Information systems audit policy for the banking and
financial sector
11
More so, secondary sources were also considered which includes:
a) History of the computer{article written by Onifade}
b) Blacks’ law dictionary— Eight edition
1.4.0 LITERATURE REVIEW
The business operations in the banking and financial sector have been
increasingly dependent on the computerized information systems over the
years. It has now become impossible to separate Information Technology (IT)
from the business of the banks and the financial institutions. There is a need
for focused attention on the issues of the corporate governance of the
information systems in computerized environment and the security controls to
safeguard information and information systems.
The application of Information Technology has brought about significant
changes in the way the institutions in the banking and financial sector process
and store data and this sector is now poised to countenance various
developments such as Internet banking, e-money, e-cheque, e-commerce etc.,
as the most modern methods of delivery of services to the customers. The
telecommunication networks have played a catalytic role in the expansion and
integration of the Information Systems (IS), within and between the
institutions, facilitating data accessibility to different users. In view of the
critical importance of IS, there is a need to exercise constant vigilance for the
safety of the financial systems. Structured, well defined and documented
security policies, standards and guidelines lay the foundation for good IS
security and each institution is required to define, document, communicate,
implement and audit IS Security to ensure the confidentiality, integrity,
authenticity and timely availability of information, which is of paramount
importance to business operations. Under the ‘Information Systems Security
Guidelines’, the report discusses IS Security Controls relating to computer
hardware, software, network, Telecommuting/Teleworking, Mobile
Computing, Computer Media Handling, Voice, Telephone and related
equipment and Internet and the procedures/methodologies to be adopted to 12
safeguard information and information systems. It discusses issues such as
Change Control Mechanism, Separation of Development and (Production)
Operational Facilities, Information Handling and Back-up, Electronic Mail
and Financial Services/Products. It emphasises the use/implementation of
Firewall, Digital Signature, Cryptographic Controls, Business Continuity
Planning (BCP), Framework/Disaster Recovery Planning (DRP) including
Cryptographic Disasters. It also discusses various other issues relating to
Certification Authorities (CAs)/Trusted Third Parties (TTPs), Compliance
with Legal Requirements, Intellectual Property Rights (IPR), Review of IS
Security Policy and Human Resources.
Electronic banking has long been recognized to play an important role in
economic development on the basis of their ability to create liquidity in the
economy through financial intermediation between savers and borrowers. It
also offers financial services and products that accelerate settlement of
transactions and in the process reduce cash intensity in the financial system,
encourage banking culture, and catalyses economic growth.
However, for the effective functioning of the financial system, the payment
systems must be safe and efficient; otherwise they can be a channel for the
transmission of disturbances from one part of the economy or financial system
to others. This is why central bank have been active in promoting sound and
efficient payments system and in seeking the means to reduce risks associated
with the system.
Nigeria historically operated a cash-driven economy particularly in the
consumer sector, however the system has witnessed improvements over the
years, and particular in recent times has moved from its rudimentary level of
the early years of banking business to the current state of sophistication
comparable to other economies at the same level of development.
One important reason for financial liberalization and deregulation is the need
to develop a good payment system which promotes an appropriate mechanism
for efficiency in mobilizing and allocating financial resources in the economy.
The payment system occupies an important place in the development of a
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country economy, in fact the level of development of a countries payment
system is a reflection of the state or condition of the country’s economy.
Nigeria payment system is paper-based and this accounts for the high level of
cash in the economy (cash outside bank), the concept ‘payment system’ has
different meanings among writers the definition range from a more simple to a
more complex definition.
According to Report on the survey of developments in the e-payments and
services products of banks and other financial institutions in Nigeria payment
system is defined as a system which consists of net works which link
members, the switches for routing message and rules and procedures for the
use of its infrastructure.
According to Anyanwaokoro1 M. (1999), in his book titled, theory and policy
of money and banking, payment system is defined as a system where
settlement of financial obligations are done by the use of credit cards or even
pressing some bottoms that transfer the amount in their bank to the account of
another person through the computer.
According to element of banking by Orjih, J. (1999), payment system is
defined as a system which consists of different methods of payments which
are cheques, credit cards, Bankers drafts, standing order, documentary credits
swift etc for the settlement of transactions.
1.5.0 DEFINITION OF TERMS
Under this sub-heading we shall be examining the basic words in this
course of study. The basic words to be examined are notably said to be the
basic conceptual words in this study. This includes the following, namely:
i) Computer
ii) Computer technology
iii) Bank
iv) Banking
v) Financial company
vi) Finance 1Anyanwaokoro M, Theory and Policy of Money and Banking, (University of Ibadan, Nigeria, 1999) P.10
14
vii) Role.
I. COMPUTER
This is defined as ‘a mechanical device which accepts data as input processes
it and produces information as output’. The word ‘computer’ is an old word
that has changed its meaning several times in the last few centuries.
Originating from the Latin, by the mid-17th century it meant ‘someone who
computes’2. The American Heritage Dictionary3 gives its first computer
definition as ‘a person who computes.’4 The computer remained associated
with human activity until about the middle of the 20th century when it became
applied to a ‘programmable electronic device that can store, retrieve, and
process data’ as Webster’s dictionary5 defines it. Today, it refers to computing
devices, whether or not they are electronic, programmable, or capable of
‘storing and receiving’ data.6
More so, computer is defined as ‘a general purpose machine that processes
data according to a set of instructions that are stored internally either
temporarily or permanently.’7 Furthermore, computer is defined as ‘the
contribution of major individuals, machines, and ideas to the development of
computing.’8 This implies that the computer is a system. A system is a group
of computer components that work together as a unit to perform a common
objective. More so, computer has been defined as ‘an electronic device that
can store large amounts of information and be given sets of instructions to
organize and change it quickly’.9
2 Onifade, History of the computer, University of Ibadan, Nigeria3 Morris, William. ed. The American Heritage Dictionary. (Boston: Houghton Mifflin Company 1980)4 Ibid 5 Layman, Thomas. eds. The Pocket Webster School & Office Dictionary. (New York: Pocket Books1990)6Onifade, History of the computer ,pg 27 Techencyclopedia (2003). http://www. techweb.com/encyclopedia, The Computer Language Company(accessed 20th june,2011)8 Encyclopedia Britannica (2003) http:// www.britannica.com. (accessed 20th june,2011)9 Morris, William (1980). ed. The American Heritage Dictionary. Boston: Houghton Mifflin Company.
15
II. Computer Technology
The term ‘Computer technology’ means ‘computers, ancillary equipment,
software and firmware (Hardware) and similar procedures, services (including
support services) and related resources’10 or The term ‘Computer technology’
includes any equipment or interconnected system or subsystem of equipment,
that is used in the automatic acquisition, storage, manipulation, management,
movement, control, display, switching, interchange, transmission or reception
of data or information’11.
III. BANK
A bank is a financial establishment for the deposit, loan, exchange or issue of
money for the transmission of funds’.12In furtherance, a bank is also said to be
‘a quasi-public institution, for the custody and loan of money, the exchange
and transmission of the same by means of bills and drafts, and the issuance of
its own promissory notes, payable to bearer, as currency, or for the exercise of
one or more of these functions, not always necessarily chartered, but
sometimes so, created to sub serve public ends, or a financial institution
regulated by law.’13 A bank is wholly a creature of statute doing business by
legislative grace and the right to carry on a banking business through the
agency of a corporation is a franchise which is dependent on a grant of
corporate powers by the state14.Also a bank has been defined as ‘a financial
institution and a financial intermediary that accepts deposits and channels
those deposits into lending activities, either directly or through capital
markets.’ A bank connects customers that have capital deficits to customers
with capital surpluses.15A bank can also be defined to be ‘an organization that
holds money belonging to others, investing and lending it to get more money,
or the building in which the organization is situated.16
IV. BANKING10 Information technology policy for Nigeria11 Information technology policy for Nigeria12 Blacks’ law dictionary, (8th ed. Thomson business, 610 opperman drive, U.S.A 2004) p. 15413 Blacks’ law dictionary, P. 15414 Blacks’ law dictionary, P. 15415 www.Wikipedia.com(accessed 20th june,2011)16 Morris, William. ed. The American Heritage Dictionary. Boston: Houghton Mifflin Company(1980)
16
This is defined as ‘the business conducted by banks’17and also ‘the occupation
of a banker’18. More so, it is also defined as ‘the business of a bank’19. Banking
is furthermore defined as ‘engaging in the business of keeping money for
savings and checking accounts or for exchange or for issuing loans and
credits’20. Banking is also said to be ‘the act of transacting business with a
bank, depositing or withdrawing fund or requesting a loan’21.this could be done
in diverse ways which includes home banking which is defined as ‘a form of
banking in which transactions are conducted by means of electronic
communication(via telephone or computer).’22This has also been defined as the
‘business of operating a bank’.23
V. FINANCE COMPANY
This is defined as ‘a non-bank company that deals in loans either by making
them or by purchasing notes from another company that makes the loans
directly to borrowers’.
This is also known as ‘a company concerned primarily with providing money
e.g. for short term loans’.24It’s also defined as ‘a company that makes loans to
clients’. This has been sub-divided into the following:
COMMERCIAL FINANCE COMPANY: - a finance company
that makes loans to manufacturers and wholesalers—also termed
Commercial Credit Company.
CONSUMER FINANCE COMPANY: - a finance company that
deals directly with consumers in extending credit—also termed
Small Loan Company.
SALES FINANCE COMPANY: - a finance company that does
not deal directly with consumers but instead purchases consumer
installment paper arising from the sale of consumer durables ‘on
Finance is defined as ‘the management of money and credit and banking
and investments’26. Also finance is defined as ‘the commercial activity of
providing funds and capital’. Finance is also defined as:
The aspect of business concerned with the management of money,
credit, banking and investments27
The science or study of the management of money28
This is also defined as:
The act or process of raising or providing funds29
Funds that are raised or provided30
The management of money, or the money belonging to a person,
group or organization
VII. ROLE
This is defined as ‘the function assumed or part played by a person or thing in
a particular situation.’31This is also known as ‘the function, purpose,
usefulness, utility of a particular thing’32. This is also defined as ‘the duty or
use that someone or something usually has or is expected to have’.
25 Blacks’ law dictionary, p. 66226 www.thesaurus.com (accessed 20th june,2011)27 Blacks’ law dictionary, p. 66228 Blacks’ law dictionary, p. 66229 Blacks’ law dictionary, p. 66230 Blacks’ law dictionary, p. 66231 Blacks’ law dictionary, p. 135432 www.answers.com (accessed 20th june,2011)
harmful conduct, the latter known as tort suits. A substantial body of legal
rules has been built up in this fashion. Like statutes, they cover a very wide
range of subjects and situations. Although, in the main, common law rules
apply generally and are, in that respect, relevant to banking operations, some
few have peculiar application to situations in that business.39
III. REQUIREMENTS OF ADMINISTRATIVE AGENCIES
Requirements established by government regulatory agencies with jurisdiction
over banks constitute a very important source of rules with the force of law.
Those requirements might be formalized as published regulations. They might,
however, also stem from less formally determined ways of performing
administrative functions, like bank examinations or audits. Normally,
administrative agencies are given merely general responsibilities by the
legislative bodies that set them up and are expected, by means of their rules
and regulations, to furnish the details that give meanings to the underlying
policies and to apply them to specific fact situations. A unique characteristic
of administrative agencies is their power to decide specific cases involving the
applications of their regulations, as well as to promulgate those regulations in
the first instance. Hence, agency decisions and rulings relating to particular
fact situations also disclose important legal rules. As stated, the banking
business is highly regulated. This is indicated superficially, by the number of
agencies involved in the process, all of whose regulations are pertinent. They
include the regulations of the Central Bank of Nigeria, Company and Allied
Matters Act
39See Haddock v. The Generous Bank Ltd.55
IV. PRIVATE CONTRACTS
The specific agreements and understandings that banks enter into with their
customers or with outside data processors also reflect legal considerations
highly pertinent in connection with bank mechanization. Although, such
contracts usually are in writing and always should be, they might be oral. And
written contracts might consist of an exchange of correspondence as well as a
single formal document executed by both parties. Those contracts constitute,
for the parties to each transaction separately, a body of special and frequently
very important rules of law. They might, for example, define the extent to
which each of the parties will suffer any losses, either by paying out damages
or by foregoing the receipt of damages as compensation, where economic
harm flows from improper acts in the course of the relationship. It should be
borne in mind that contracts normally cannot limit liability that exists to other
persons. In a few types of situations, parties may not alter their liabilities by
contract. For example, under Pennsylvania’s version of the Uniform
Commercial Code, a bank may not escape liability, in connection with its
handling of bank deposits and collections, for its own lack of good faith or
failure to exercise ordinary care, or limit the amount of damages it must pay
for harm resulting from such conduct40
3.5.0 CONCLUSION
Computer technology is used by commercial banks to reduce costs and survive
the competition. Consumer acceptance of ATM’s and touch telephones to
make banking transactions has allowed banks to reduce the number of costly
40 Title 12a Purdon’s Penna. Stat.Sec 4 - 103 56
transactions made with human tellers. Subsequently, banks have reduced the
employment of tellers and have converted many of the remaining teller
positions into part-time jobs. In the future, commercial banks are expected to
achieve a rise in real output, while providing more services with fewer
employees.
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CHAPTER FOUR
THE ROLE OF COMPUTER TECHNOLOGY IN FINANCIAL
TRANSACTIONS
4.0.0 INTRODUCTION
Computer technology has been an essential behind-the-scenes partner in the
financial services industry, providing the innovative incremental advances
necessary for the industry to upgrade and expand its services. Improvements in
storage capacity and processing speed, for example, have had a profound
impact on data management and transactional capabilities, with accompanying
reductions in cost. Yet despite these and other advances, the industry has
struggled to fully leverage the power and promise of technology, with market
participants eager for solutions that are not only faster and cheaper but that
also offer greater security and efficiency.
4.1.0 BACKGROUND OF COMPUTER TECHNOLOGY IN FINANCIAL
TRANSACTIONS
The use of electronic communication in finance, in fact, goes back much
further than the 1970s as long ago as 1918; the Fed wire payment system
allowed electronic settlement of payments between banks over the telegraph.
This use of electronic communications in payments systems has steadily
increased over time. Now virtually all large payments between banks and
corporations are done electronically. In some countries, such as those in
Scandinavia, electronic payments systems are becoming increasingly widely
used at the consumer level. In the U.S., however, the paper-based check
58
clearing system still predominates
4.2.0 FORMS OF COMPUTER TECHNOLOGY IN FINANCIAL
TRANSACTIONS
Computer technology has been held to be involved in financial transactions in
the following forms:-
1) E-finance
E-finance is defined as ‘The provision of financial services and markets using
electronic41.E-finance is the use of electronic means to exchange information,
transfer signs and representations of value, and execute transactions in a
commercial environment. E-finance comprises four primary channels:
electronic funds transfers (EFTs), electronic data interchange (EDI); electronic
benefits transfers (EBTs), and electronic trade confirmations (ETCs).
Although e-finance offers developing market economies an opportunity to
leapfrog, it is not without potential risks. Most of the crimes that take place
over the Internet are not new— fraud, theft, impersonation, denial of service,
and related extortion demands have plagued the financial services industry for
years. But technology opens up new dimensions of depth, scope, and timing,
enabling perpetrators to engineer with flexibility and specificity much greater
disruption or theft than ever before. All four channels of e-finance are
susceptible to fraud, theft, embezzlement, pilfering, and extortion.
2) MOBILE FINANCE
Technological development of mobile devices and electronic commerce has
enabled mobile devices to be used for financial transaction purposes. Mobile
41 E-finance : an introduction by Franklin Allen, James McAndrews, Philip Strahan, www.59
finance comprising both mobile banking and mobile payment may be a natural
evolution of electronic commerce. Furthermore, constantly increasing rate of
mobile subscription worldwide has made mobile devices an efficient tool to
offer safe and convenient financial services to subscribers. Especially as
mobile finance solutions allow customers to perform various financial
transactions while on the move, mobile finance in micro-transactions may
fully replace computer-based financial transactions in the near future by
offering application integrating both mobile banking and mobile payment
solutions.
Mobile finance has created huge business opportunities for merchants, mobile
network operators, mobile device manufacturers, financial Institutions and
software providers. Those mobile finance participants have added new
financial transaction forms to make their services available through mobile
devices. Mobile finance business has been fairly successful especially in South
Korea, Japan and other Asian countries.
The continuous growth of mobile finance depends on not only user-
friendliness of services but also legal framework for mobile finance. To some
extent, the traditional legal framework of financial transaction could be
applied to the mobile finance as well. But distinctive features of mobile
finance, especially the fact that mobile finance is performed in a non-facing
and automated manner without any direct contact, require creation of a new
legal environment complying with various needs from those participants.
I. Development of Mobile FinanceA. Technologies for Mobile Finance
1. SMS-based Application
60
This is a Short Message Service (SMS) that mainly provides information
about the status of bank account. Short messages containing information about
the bank account are transmitted to customer’s mobile phone by SMS center
server of mobile network operator which is connected to the mobile banking
server of bank. As SMS-based application uses insecure encryption, SMS
banking is not intended to be used for high-risk transactions.
SMS-based banking service is operated using both push and pull messages.
Push messages are those that banks choose to send out to a customer's mobile
phone without the customer’s request for the information. Typically push
messages could be either mobile marketing messages or messages alerting an
event which happens in the customer's bank account. Pull messages are those
that are initiated by customers using a mobile phone to obtain information
about the bank account. Examples of pull messages include an account
balance inquiry, currency exchange rates and deposit interest rates.
2. WAP Browser-based Application
Wireless Application Protocol (WAP) browser and Mobile Explorer (ME)
browser are commonly used standard web browser for mobile devices which
allow conversational data exchange between the client and the server. Similar
to a PC requiring an internet browser installed in order to access content
online, a mobile device requires a WAP browser installed in order to access
information on WAP sites.
By adopting WAP browser, mobile network operators and banks could offer
not only information-based banking service but also transaction-based banking
service including payments, deposits, withdrawals and transfers. The
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disadvantage of WAP browser is that WAP browser implementation is not
consistent across mobile devices manufacturers.
3. IC Chip-based ApplicationIntegrated Circuit (IC) Chip is a miniaturized electronic circuit that has been
manufactured in the surface of a thin substrate of semiconductor material.
Mobile network operators partnered with banks to launch IC Chip-based
mobile banking service. Customers could get access to mobile banking service
by inserting IC Chip, which is controlled by banks, into a mobile device.42
Furthermore, mobile network operators collaborated with credit card
companies to operate IC Chip-based credit card service. A SIM-sized credit
card certified by credit card companies can be inserted into a mobile device to
enable credit card payments. However, because each IC Chip should be issued
by each bank or credit card company, customers have to change IC Chip
whenever they use IC Chip from a different issuer.
4. USIM-based Application
A Universal Subscriber Identity Module (USIM) is an application running on
a UICC (Universal Integrated Circuit Card) smartcard which is inserted in a
WCDMA 3G mobile phone. The equivalent of USIM on GSM 2G mobile
networks is SIM. Like SIM, USIM stores subscriber information,
authentication information and provides storage space. Furthermore USIM
enables its subscribers to download various mobile banking applications,
credit card applications and public transportation applications onto USIM
42 In South Korea, the third-largest mobile network provider LG Telecom with the largest bank Kookmin Bank launched the first IC-Chip based mobile banking service in 2003. IC-Chips were issued and controlled by Kookmin Bank and LG Telecom p
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through OTA (over the air) technology. Customers do not need to change
chips each time they use different applications.43
5. NFC-based Application
Near Field Communication (NFC) is the most recently developed technology
for mobile finance. NFC is a short-range high-frequency wireless
communication technology which enables the exchange of data between
devices over about 10cm distance by combining the interface of a smartcard
and a reader into a single device. NFC device is also compatible with existing
contactless infrastructure already in use for public transportation and payment.
There are three specific features for NFC: NFC device behaves like an existing
contactless card (Card emulation), NFC device is active and reads a passive
RFID tag (Reader mode) and two NFC devices are communicating together
and exchanging information (P2P mode). These features of NFC make mobile
devices even more suitable for financial transaction purpose.
Standardization of NFC has been achieved mainly by GSMA (GSM
Association) and Mobey Forum, and Both GSMA and Mobey Forum have
recently emphasized the important role of Trusted Service Manager (TSM).44
TSM works behind the scenes to make the entire process of downloading
mobile finance applications onto mobile device efficient and secure. As TSM
clearly understands security systems of both banks and mobile network
43 In South Korea, the largest mobile network provider SK Telecom launched USIM and OTA based mobile finance service in 2007 which enabled its subscribers to download various mobile banking service applications, credit card applications and public transportation applications over the air onto a USIM card. Available from http://www.sktelecom.com/ (accessed 16th august,2011)44Available from http://www.mobeyforum.org/Press-Documents/Press-Releases/Research-Lays-Groundwork-for-Global-Mobile-Financial-Services-Standards/Introducing-the-Mobey-Forum-White-Paper-Best-Practices-for-Mobile-Financial-Services-Enrolment-Business-Model-Analysis (accessed 16th august,2011)
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operators, TSM could bridge multiple banks and operators ensuring complete
security of customer information.45
B. Solutions of Mobile Finance1. Mobile Banking
Mobile banking service is performing balance checks, account transactions,
payments, credit applications etc. through mobile devices. The earliest mobile
banking service was based on SMS and limited to information-based service.
Since the introduction of WAP browser, banks started to offer transaction-
based mobile banking services to their customers such as payments, deposits,
withdrawals, transfers and investments.
2. Mobile Payment
45 In South Korea, mobile network operators, mobile device manufacturers, banks and credit card companies have been collaborating to launch NFC-based application in 2010. Available from http://www.nfctimes.com/news/korean-telco-plans-nfc-commercial-launch-2010 (accessed 16th august,2011)
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Merchant
CustomerBank & TSM
1. purchase
2. mobile banking
3. make payment
Mobile network operator
Mobile payment is a new and rapidly-adopting alternative payment method.
Instead of paying with cash, check or credit cards, customers can use a mobile
phone to pay for a wide range of services and digital or hard goods. Mobile
payment solutions could be categorized in many ways according to the type of
payment method or the technology adopted to implement the solution. There
are three different categories for mobile payment solutions on the basis of
payment method.
(1) Mobile Credit Card
Since the appearance of IC Chip-based application, customers have been
making payments with their SIM-sized credit card inserted in mobile phones
or credit card downloaded over the air onto mobile phones. When the
customer makes a payment transaction with a merchant (merchants can read
credit card information through IrFM technology, RFID technology or NFC
technology), the credit card is charged and the value is credited to the
merchant account.
65Merchant
Customer Credit cardcompany & TSM
1. purchase by mobile credit card
1.
3. pay the bill
2. make payment
Mobile network operator
(2) Mobile Electronic Money
Mobile electronic money means any certificate of transferable monetary value
issued and stored in electronic form and installed in mobile device. Issuers of
mobile electronic money issue mobile electronic money in exchange for the
same value of cash or deposit by downloading mobile electronic money over
the air onto mobile devices and have duty to exchange mobile electronic
money for cash or deposit. Mobile electronic money has been used mainly for
the payment of public transportation system and other micro-payment.46
(3) Direct Mobile Billing Service
46 In South Korea, T-money has been used for this purpose. It started with pre-paid RF smartcard embedded with CPU to enable self-calculation for the payment at public transportation such as bus, subway and taxi. T-money has enlarged its services to all parking fees, tunnel fees and payment at convenient stores and has also introduced new payment media enabling download T-money onto mobile phone. Available from http://eng.t-money.co.kr/
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Merchant
Customer Issuer of mobilee-money & TSM
2. purchase and pay by mobile e-money
1. purchasemobile e-money
3. exchange mobile e-money
Mobile network operator
Direct mobile billing service allows customers to purchase goods and services
online by charging their regular mobile phone bills. This does not require the
use of credit/debit cards or pre-registration at an online payment solution. This
service is suitable for online micro-payment.
In direct mobile billing service process, a payment gateway usually facilitates
the transfer of information between an online merchant and a mobile network
operator.47 If a customer purchase goods or uses services from a payment
gateway-enabled merchant, the payment gateway transmits or receives
transaction information in electronic form between the customer and the
mobile network operator and then the mobile network operator charges the
customer’s mobile phone bill and executes the payment of the bill as proxy or
mediate for the merchant.
Unlike the credit card company, the mobile network operator does not execute
the payment for the merchant until the customer pays the mobile phone bill,
and even if the customer does not pay the bill, the mobile network operator is
not bound to pay the bill for the merchant.
47 South Korean company Danal Co., Ltd. is credited with being the first provider of direct mobile billing service globally. The amount of bill charged through the direct mobile billing service in South Korea in 2010 was about 2 billion USD. Danal has established a company named BilltoMobile in the US to offer customers the ability to safely charge online purchases to their mobile phone bill. BilltoMobile signed a contract for direct mobile billing service with Verizon Wireless in May 2009 and with AT&T in October 2010. Available from http://www.danal.co.kr/ (accessed 16 august,2011)
Mobile finance has enabled companies from different industries to collaborate
and has been provided by various participants. Customers, merchants, mobile
network operators, financial institutions, issuers of mobile electronic money,
payment gateways and TSMs are main participants in the process of mobile
finance. As these participants have different interests, these participants may
face conflicts each other that require legal solutions. Especially regulating
liabilities of participants in case of unauthorized financial transaction is
important.
Since the appearance of USIM-based application system, TSM has offered
secure delivery and activation of the mobile banking and payment applications
by establishing highly secure, encrypted connection between bank and TSM
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Merchant
CustomerMobile networkOperator & PG
1. Purchase
3. Make payment
and between TSM and mobile network operator. Considering the important
role of TSM, liability of TSM also needs to be discussed.
‘Electronic Financial Transaction Act’ entered into force in South Korea on
January 1 2007. One of the main purposes of this Act is to ensure the
reliability of electronic financial transactions by clarifying their legal
relations.48
This Act defines ‘Electronic Financial Transaction’ as any transaction
whereby a financial institution or an electronic financial business operator
provides financial products and services through electronic apparatuses and
the users use them in a non-facing and automated manner without any direct
contact with employees of the financial institution or electronic financial
business operator,49 and it has been interpreted that the application of this Act
could be extended to newly appeared mobile finance solutions as well.
This Act categorizes issuers of electronic money, electronic funds transfer
agency and electronic payment settlement agency, that are not financial
institutions, as ‘Electronic Financial Business Operator’50 and imposes almost
the same liability of financial institution.
This Act categorizes any operator of a payment gateway system and any
person who assists a financial institution or electronic financial business
operator in conducting electronic financial transactions or performs as proxy
part of such transactions for the sake of financial institutions or electronic
48 Electronic Financial Transaction Act of South Korea, article 1. South Korea also enacted ‘Information Technology Network Act’ which provides details on direct mobile billing service.49 Ibid., article 2.1.50 Ibid., articles 2.4., 28.
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financial business operator as ‘Subsidiary Electronic Financial Business
Operator’51 and imposes indirect and exceptional liability.
B. Electronic Communications Used for Mobile Finance
Electronic communications made by means of data messages are used for
electronic financial transactions as well. Definition, legal recognition, form,
error, time and place of dispatch and receipt regarding electronic
communications could be regulated by laws governing electronic
communications. ‘UNCITRAL Convention on the Use of Electronic
Communications in International Contracts’52 and ‘UNCITRAL Model Law on
Electronic Commerce’53 are the most important international instruments
covering those issues.
South Korea also enacted the Framework Act on Electronic Commerce on
July 1 1999 implementing provisions of the UNCITRAL Model Law on
Electronic commerce, and Electronic Financial Transaction Act of South
Korea provides that relevant provisions of the Framework Act on Electronic
Commerce shall apply to electronic communications used for electronic
financial transactions.54
South Korea’s Electronic Financial Transaction Act also provides provisions
on confirmation of transaction details and correction of errors.
51 Ibid., article 2.5.52 Available from http://www.uncitral.org/uncitral/en/uncitral_texts/electronic_commerce/2005Convention.html (accessed 21 april,2011)53 Available from http://www.uncitral.org/uncitral/en/uncitral_texts/electronic_commerce/1996Model.html(accessed 21 april,2011)54 Electronic Financial Transaction Act of South Korea, article 5.
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▶Any financial institution or electronic financial business operator shall
ensure that a user can confirm the transaction details through an electronic
apparatus used for electronic financial transactions.55
▶When a user recognizes the existence of any error in the electronic financial
transaction, he/she may request the relevant financial institution or electronic
financial business operator to correct such error.56
C. Electronic Credit Transfer
Many types of electronic credit transfer, such as transfer from bank, credit
card company, issuer of mobile electronic money or mobile network operator
to merchant and transfer from customer to bank, credit card company, issuer
of mobile electronic money or mobile network operator need to be executed to
fulfill mobile financial transactions.
To facilitate electronic financial transaction, such legal issues as definition of
electronic credit transfer, time to execute credit transfer, revocation and
completion of credit transfer need to be discussed. ‘UNCITRAL Model Law
on International Credit Transfers’57 covers these issues.
South Korea’s Electronic Financial Transaction Act provides provisions on
making payment, time when payment takes effect and withdrawal of
transaction request.
▶ Any financial institution or electronic financial business operator shall
ensure payment is made by transmitting the amount requested by a payer of
55 Ibid., article 7(1).56 Ibid., article 8(1).57 Available from http://www.uncitral.org/uncitral/en/uncitral_texts/payments/1992Model_credit_transfers.html(accessed 21 april,2011)
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payee on a transaction request to the payee or his/her financial institution or
electronic financial business operator, pursuant to an agreement made with the
payer or payee to facilitate electronic payment transaction.58
▶ Any financial institution or electronic financial business operator shall,
when it is impossible to transmit the amount requested pursuant to previous
paragraph, return to the payer the amount received for electronic payment
transaction. In such cases, when the failure to transmit the amount is caused
due to the negligence of the payer, the expenses disbursed for such
transmission may be deducted.59
▶In the case of making payment by means of an electronic payment
instrument, such payment shall take effect at the time set forth in any of the
following subparagraphs:
1. For electronic funds transfer: When the information on the amount
transferred on a transaction request is completely recorded on the
ledger of the account of a financial institution or electronic financial
business operator with which the payee’s account is opened;
2. For withdrawal of cash directly from an electronic apparatus: When the
payee receives such cash;
3. For payment made by electronic prepayment means or electronic
currency: When the information on the amount requested on a
transaction request gets to the electronic apparatus designated by the
payee;
58 Electronic Financial Transaction Act of South Korea, article 12(1).59 Ibid., article 12(2).
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4. For payment made by other electronic payment means: When the
information on the amount requested on a transaction request is
completely inputted in the electronic apparatus of a financial institution
or electronic financial business operator with which the payee’s
account is opened. 60
▶Any user may withdraw his/her transaction request before the payment
takes effect. Notwithstanding the provisions of previous paragraph, with
respect to any batch transaction or reserved transaction, etc., a financial
institution or an electronic financial business operator and a user may,
pursuant to a prior agreement, determine differently the time when a
transaction request is withdrawn.61
D. Unauthorized Financial Transaction
1. Liability Issues
Customers may suffer any loss as a result of an accident arising out of forgery
or alteration of the information used to conclude a transaction in mobile
finance or in the course of electronically transmitting or processing the
conclusion of a transaction.
In this case, liability issues could be raised such as whether financial
institutions should bear all the risk from the loss, whether financial institutions
are still liable for the loss even in such cases where accidents were caused by
the intention or gross negligence of the customers, whether independent TSM,
mobile network operator and issuers of mobile electronic money, that are not
financial institutions, are liable for the loss.
60 Ibid., article 13.61 Ibid., article 14(1)(2).
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2. Liability of Financial Institution
Considering the point that mobile financial transactions are concluded in a
non-facing and automated manner, the point that it’s almost impossible for
customers to prove intention or negligence of financial institutions, and the
point that financial institutions determine the authentication procedures they
have prepared to implement, it would be desirable to make financial
institutions bear all the risk of an unauthorized mobile financial transactions,
except that financial institutions prove intention or gross negligence of
customers.
3. Liability of Mobile Network Operator
As mobile financial transactions are concluded through mobile network
installed by mobile network operator, in case of transaction errors arising in
the course of electronically transmitting or processing the conclusion of a
transaction, there may be cases where not financial institution but mobile
network operator shall be liable for the loss.
However, in reality, it’s almost impossible for customers to clarify whether
error was caused by financial institution or mobile network operator. It would
be desirable to make financial institution compensate customer for damage
caused by transaction errors arising in the course of electronically transmitting
or processing the conclusion of a transaction, and then allow financial
institution to exercise right of indemnify over the mobile network operator by
proving the intention or negligence of the mobile network operator.
4. Liability of TSM
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Independent TSM, that is not financial institution, may be perceived as
performing finance-related business in accordance with the extent of
involvement in mobile banking service and mobile credit card service. Even
though it would not be proper to impose the same liability of financial
institution to TSM, it would be desirable to categorize TSM as subsidiary
mobile financial business operator and impose duty to indemnify to financial
institution for loss caused by intention or negligence of TSM, duty of good
faith to ensure safe processing and duty to keep confidentiality.
5. In Case of Mobile Electronic Money and Direct Mobile
Billing Service
Unlike mobile banking service or mobile credit card service where financial
institutions mainly play a finance-related role, in case of mobile electronic
money and direct mobile billing service, issuer of mobile electronic money
and mobile network operator or payment gateway of direct mobile billing
service are deeply involved in finance-related role by performing business
relating to the settlement of accounts and execution of payments.
Considering deep involvement of issuer of mobile electronic money and
mobile network operator or payment gateway of direct mobile billing service
that are not financial institution, it would be desirable to categorize them as
mobile financial business operator and impose them the same liability of
financial institution in case of unauthorized transaction.
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South Korea’s Electronic Financial Transaction Act provides provisions on
liability of financial institutions, liability of electronic financial business
operator and status of subsidiary electronic financial business operator.
▶When a user suffers any loss as a result of an accident arising out of forgery
or alteration of the means of access or in the course of electronically
transmitting or processing the conclusion of a contract or a transaction request,
the financial institution or electronic financial business operator concerned
shall be liable for indemnifying him/her for the loss.62
▶Notwithstanding the provisions of previous paragraph, any financial
institution or electronic financial business operator may have the user bear the
liability for any damage in whole or part in any case falling under any of the
following subparagraphs:
1. Where, with respect to any accident caused by the intention or gross
negligence of the user, a prior agreement is made with the user to the
effect that all or part of the loss may be borne by the user,
2. Where the user, who is a juristic person, suffers any loss though the
financial institution or electronic financial business operator fulfills the
duty of due care reasonably requested to prevent accidents from
occurring, such as the establishment and full observance of security
procedures, etc. 63
▶The intention or negligence of a subsidiary electronic financial business
operator in relation to electronic financial transactions shall be deemed the
62 Ibid., article 9(1).63 Ibid., article 9(2).
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intention or negligence of the financial institution or electronic financial
business operator concerned.64
▶When any financial institution or electronic financial business operator
compensates the user for any damage caused by the intention or
negligence of its or his/her subsidiary electronic financial business
operator, it or he/she may exercise the right of indemnity over the
subsidiary electronic financial business operator.65
6. Loss or Theft
In case of loss or theft of mobile devices equipped with mobile finance
solutions, it would be desirable to provide clearly when financial institutions
become liable for loss incurred due to the use of such mobile finance solutions
by a third party. And it would also be desirable to decide whether mobile
electronic money needs to be treated separately.
South Korea’s Electronic Financial Transaction Act provides provisions on
notification to financial institution or electronic financial business operator
and notification to subsidiary electronic financial business operator.
▶Any financial institution or electronic financial business operator shall,
upon receipt of a user’s notification of the loss or theft of the means of access,
compensate the user for any loss he/she might incur due to the use of such
means of access by a third party from the time when such notification is
received: Provided, That the same shall not apply to any damage caused by the
64 Ibid., article 11(1).65 Ibid., article 11(2).
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loss or theft of electronic prepayment means or electronic currency as
prescribed by Presidential Decree.66
▶Any user may make various notifications to be given to a financial
institution or an electronic financial business operator to its or his/her
subsidiary electronic financial business operator pursuant to an agreement
made with the financial institution or electronic financial business operator. In
such cases, a notification made to the subsidiary electronic financial business
operator shall be deemed to have given to the financial institution or electronic
financial business operator concerned.67
E. Exchange of Mobile Electronic Money
In case of making payment by means of mobile electronic money, such
payment may take effect when the information of transferable monetary value
on the amount requested on a transaction gets to the electronic apparatus
designated by the merchant. Since then, customer’s duty to fulfill the payment
is completed and issuer becomes bound to exchange such merchant’s
electronic money for cash.
South Korea’s Electronic Financial Transaction Act provides provisions on
fulfillment of payment by mobile electronic money and exchange of mobile
electronic money.
▶When the holder of electronic currency pays the prices of goods or services
by electronic currency pursuant to an agreement with the payee, the duty to
pay such prices shall be deemed to be fulfilled.68