Threats facing Electronic financial transactions over the Internet

Another issue facing the e-commerce industry is the concept of electronic money. There are online payment systems in existence which have created a niche for them in the Internet. While the US Dollar remains the standard currency being used for electronic financial transactions, online payment systems like E-Gold, Pecunix, Liberty Reserve, etc have emerged as gold-backed alternatives to USD, although not with issues of their own. For example, E-Gold is now practically defunct due to its abuse. And those that remain in business are imposing strict regulations to curb activities like money laundering, funding terrorism, paying for child pornography, etc. Amid all the myriad of regulatory problems faced by gold-backed online payment systems, only PayPal has emerged as a reliable company. One reason why so many of the gold-backed online payment companies are prone to misuse and abuse, is the lack of an overarching governing body. Since the Internet does not fall under the purview of any national government, enforcing cyber laws have become difficult. Moreover, different nations have slightly different cyber laws, making it impossible to deduce a common set of laws applicable to all Internet users. (Misra, Scherer, et al, 2004)

But with each instance of critical security breach, the electronic commerce industry challenges itself to improve its security systems. Technological innovation is one such measure, and the development of higher security standards is another. Creating awareness among consumers and business owners alike is another strategy to counter hacks. After studying the e-commerce industry, the European Union’s central bank released a report in which they laid out a set of guidelines for electronic money systems. The first guideline for issuers of electronic money is that they should be subject to prudential supervision. Also, “the rights and obligations on the part of the respective participants (customers, merchants, issuers, and operators) in an electronic money system must be clearly defined and disclosed” (Kiessig, 2006). The system should also maintain sufficient technical and procedural safety nets to prevent or mitigate the threats posed to the integrity of the transactions. Measures for safeguarding the electronic financial transaction system against criminal abuse should be considered at the time of designing the system itself. With the advent of the Euro a few years ago, the dynamics of the cross national financial transactions have changed a lot. As a result, the electronic financial transaction systems of each country should supply the central bank with up to date information. Furthermore, issuers of electronic money must be “legally obliged to redeem electronic money against central bank money at par, at the request of the holder of the electronic money; and the possibility must exist for central banks to impose reserve requirements on all issuers of electronic money.” (Misra Scherer et al, 2004)

While security threats can be partly dealt with through upgrading technology, there is also a managerial problem to deal with. That a majority of commercial and financial institutions provide minimal security is a clear indication of the “lack of managerial awareness and understanding of the need to protect the information stored in, and transmitted between, computers” (Wright, 1994). The consequence of such neglect can be quite acute, as the following examples show. For example, the German automobile manufacturer Volkswagen suffered a loss of $260 million due to an insider fraud that created fake currency-exchange transactions but showed them as real financial transactions after a few days. The perpetrators of this fraud profited from the favorable change in currency exchange rate in the interim period. In the case of the Bank of New York, a loss of $32 billion overdraft was incurred due to a processing error that went undetected. Further,

“A group of hackers, operating under the name Masters of Deception, victimized such companies as Southwestern Bell, New York Telephone Company, Pacific Bell, US West, TRW Inc., Information America Inc., Martin Marietta Electronics Information and Missile Group, ITT Corporation, Educational Broadcast Corporation, Bugle Boy, New York University, and the University of Washington. The hackers stole credit reports, and altered or deleted files at some sites. Southwestern Bell alone reportedly spent $370,000 to repair corrupted programs and to buy more secure hardware and software” (Wright, 1994)

1 2 3 4