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Operational Risk in Conventional and Online Banking Report

Conventional Banking

In the industry of banking, risk is one of the most common and inherent aspects; moreover, risk may come in a variety of forms and thus presents a serious challenge to the personnel involved in the maintenance of the banking operations (Hong Kong Institute of Bankers (HKIB) 2013, p. 4). One of the most frequently encountered types of risk is known as the operational risk that appears in the form of a financial loss resulting from the failed operations process caused by a mistake made by an employee, a system, or coming from the outside environment of the bank (Chaudhuri & Ghosh 2015, p. 8).

Operations Risks in Conventional Banking

Operational risk occurs as a result of failed or faulty internal processes (systems and people) and external factors (legal procedures) (Chaudhuri & Ghosh 2015, p. 8). This type of risk is faced by different types of conventional banks – traditional ones (such as Well Fargo), full-service banks (such as JPMorgan), and investment institutions (such as Goldman Sachs) alongside all the other kinds of banks (Perez 2014, para. 2). The vast majority of operations carried out by the bank employees on a daily basis are vulnerable to operational risks; the most common examples of these risks involve an incorrect order entered on a trading terminal or a check that was cleared incorrectly (Perez 2014, para. 3). The complexity of operational risks and their adversity for the banks and financial institutions is presented by the fact that they can occur in all types of operations run by all the banks’ departments (information technology, treasury, investment, and credit) (Perez 2014, para. 3).

Strategies That Banks Implement to Mitigate Operational Risks

Risk is defined as the occurrence of events that are opposite of those anticipated that produce an adverse impact on an organization; in turn, risk management is the process of mitigating the dangers that a conventional bank faces (Kozarević, Nuhanović & Baraković Nurikić 2013, p. 180). When it comes to banks, their major risk is the loss of finances. The process management of the operational risk has a cyclical nature and can be presented in the form of a model comprised of four major steps – identification of risk, its assessment, treatment, and monitoring (OeNB 2006, p. 23). The first two steps are focused on determining the potentially dangerous operations or the most likely threats and evaluating their severity level; these procedures are habitual practices for all the financial institution and are implemented on a regular basis similarly to a health check of the organization (OeNB 2006, p. 24).

In addition, the current thinking on this issue had resulted in the creation of Basel II regulation that outlines a set of rules also known as the “qualitative standards” that a bank has to adhere to (McConnell 2004, p. 2). In particular, Basel II regulation is specifically directed at the monitoring and control of the operational risk and is carried out by an independent expert whose task is to evaluate the day-to-day operations in terms of the presence of risk and the establishment of mitigation and prevention practices (McConnell 2004, p. 2). In that way, the current thinking concerning the operational risk, its structure, and methods of its assessment and prevention relies on the idea that operational risk has multifaceted nature and may occur due to a wide variety of drivers. As a result, the strategies designed to address it need to be very diverse and aiming at different kinds of operational risk originating extrinsically and intrinsically and caused by the factors that depend and do not depend on the organizations.


The operational risks faced by the conventional banking organizations are multiple and are often identified as difficult to forecast. However, as specified by Basak and Buffa (2015, p. 2), the current thinking on the issue emphasizes that the vast majority of the operational risks are inflicted by the internal actions of the banks and the decision-making of their executives. In particular, the operational errors that are minor and most frequently end up being overlooked or underestimated cause the larger and more influential operational risks and losses (Basak & Buffa 2015, p. 3). Therefore, they require systems and measures that can help them detect and prevent potential hazards.

Moreover, a functional and effective risk-assessment program is to be in place, and a regular evaluation of the operations needs to be carried out for a purpose to identify the potentially harmful errors that could contribute to the major loss. Conventional banks should invest in sophisticated system security to protect themselves from cyberattacks. Cyberattacks can be viewed as a risk of both internal and external nature because it is induced not only by the contemporary technological progress, the importance of digital technologies, and the social trends but also result from the banks’ insufficient security strategies and policies. This operational risk can be addressed by means of thorough training of the employees, clear information and operations security rules, and the achievement of the workers’ understanding of the importance of the data safety.

Advantages and Disadvantages of Conventional Banking

The conventional banking is also referred to as banking at a branch; it is traditionally believed to be more reliable in terms of security and safety of data and operations than banking carried out online. However, this belief is not based on real life statistics but is rather rooted in the perception of this form of banking compared to the newer ones (online and mobile banking). The fact that people are the core factor in the vast majority of the conventional banking operations serves as both an advantage and disadvantage. The modern thinking on the subject views the human resources as one of the critical contributors to the overall organizational performance (Basak & Buffa 2015, p. 2). As a result, the conventional banking has to work with an unpredictable system of human interactions and behaviors that can cause operational errors and risks; and this tendency complicates the processes of risk assessment, monitoring, and management. At the same time, the advantage of the conventional banking in terms of operational risk is the presence of people are the major contributing factor and the availability of risk prevention strategies oriented at work with human resources.

Mobile Banking

Mobile banking refers to the provision of financial services using telecommunication devices such as cell phones. The mobile banking services enable customers to manage their bank accounts, conduct financial transactions like paying bills, and access customized information (Mallat, Rossi & Tuunainen 2004, p. 42). Conventional banks can use mobile banking capabilities to offer different services such as the provision of loans carry out distance transactions without having to deal with each client individually at a branch. This form of banking allows a higher productivity and a larger number of operations one a single working day.

Operational Risks in Mobile Banking

Just like conventional banking, mobile banking is associated with a set of operational risks one of which is data safety. The increased use of the internet to conduct financial transaction exacerbates cybercrimes; and since mobile banking is carried out via the Internet, its operations become vulnerable to cyberattacks and other security threats (Oliveira 2014, p. 11). The forms of risks that affect mobile banking include remote hacking, unauthorized use of the mobile devices, interference or blocking of the DataStream, and blocking of the Internet. Mobile banking relies on multiple stakeholders who do not carry any responsibilities if the operations of banks fail (cell phone manufacturers, network operators, and application and operating systems developers) (Oh n.d., p. 1-3).

Strategies that Banks Implement to Mitigate Operational Risks

Mobile banking is growing rapidly, and its risks are difficult to control. Mobile developers and banks collaborate to offer secure infrastructure for mobile banking services (Kim, Shin & Lee 2009, p. 283). Moreover, banks have taken the initiative to educate consumers about mobile banking (Kim, Shin & Lee 2009, p. 283). Lack of adequate knowledge about mobile banking may result in customers giving confidential information to strangers. Regardless of the fact that the operational risks in mobile banking differ from those in the conventional banking, the same model can be used to address the threats. However, this framework needs to be adjusted to the delivery channels used in this form of banking – mobile applications, mobile internet browsers, short text messages (mobile networks) (Combs 2014, para. 5).

Advantages and Disadvantages of Mobile Banking

Mobile banking is beneficial for the clients enabling them to manage their finances and transactions in an independent manner and at any time of the day (Laforet & Li 2005, p. 632). In that way, a wide range of duties that traditionally used to be fulfilled by the employees at a branch is now carried out by the specifically designed software. However, the mobile banking operations are vulnerable to cyberattacks, and since the clients are given much more active roles in this form of banking, they serve as a new source of risks. For instance, Luarn and Lin (2005, p. 873) maintain that misplacement of a mobile device can result in criminals gaining access to sensitive information like personal identification number (PIN). In addition, the banks are majorly powerless at addressing this source of operational risk; practically, the banks can offer advice to their clients or warn them, but they cannot control their actions and management of the important information and data (Oliveira 2014, p. 11).


The current thinking and practice focused the collaboration of the stakeholders (cell phone manufacturers, network operators, and application and operating systems developers) involved in the mobile banking operations is recommended (Oh n.d., p. 1-3). In particular, banks should liaise with mobile phone manufacturers, network operators, and operating systems and application developers to come up with security measures that come from the side of the clients who play a very active role in the transactions and information management. Besides, banks should sensitize the public on the dangers of sharing information with strangers.


Mobile banking is more efficient and time-saving than the conventional banking. However, both conventional and mobile banking face operational risks due to fraud and cyberattacks. Mobile banking compliments traditional modes of financial transactions and allows customers to conduct numerous transactions without having to visit a bank. Therefore, the clients become a more active party in the banking operations and can contribute to operational risks. The modern thinking on the issue is recommended to focus on the measures helping the banks reach out to the clients and establish safer practices or find ways to regulate the potentials for the clients’ information mismanagement.


Basak, S & Buffa, A 2015, A theory of operational Risk, Web.

Chaudhuri, A & Ghosh, SK 2015, Quantitative modeling of operational risk in finance and banking using possibility theory, Springer, New York.

Combs, JF 2014, , Web.

Hong Kong Institute of Bankers (HKIB) 2013, Operational risk management, Wiley & Sons, Hoboken.

Kim, G, Shin, B & Lee, H 2009, ‘Understanding dynamics between initial trust and usage intentions of mobile banking’, Information Systems Journal, vol. 19, no. 3, pp. 283-311.

Kozarević, E, Nuhanović S & Baraković Nurikić, M 2013, ‘Comparative analysis of risk management in conventional and Islamic banks: the case of Bosnia and Herzegovina’, International Business Research, vol. 6, no. 5, pp. 180-193.

Laforet, S & Li, X 2005, ‘Consumers’ attitudes towards online and mobile banking in China’, International Journal of Bank Marketing, vol. 23, no. 5, pp. 362-380.

Luarn, P & Lin, H 2005, ‘Toward an understanding of the behavioral intention to use mobile banking’, Computers in Human Behavior, vol. 21, no. 6, pp. 873-891.

Mallat, N, Rossi, M & Tuunainen, V 2004, ‘Mobile banking services’, Communications of the ACM, vol. 47, no. 5, pp. 42-46.

McConnell, P 2004, , Web.

OeNB 2006, Operational risk management, Austrian Financial Market Authority, Vienna.

Oh, S n.d., , Web.

Oliveira, PJS 2014, Minimizing the threat of mobile banking cybercrime, Web.

Perez, S 2014, , Web.

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