Legal Problems in E-banks

5.2 Legal Problems in E-banks

The banks, as the ultimate executor of the electronic payment and settlement, play the role of linking sellers and buyers. The e-payment service provided by the e-banks is the key element and at the highest hierarchy in e-commerce and is directly related with the prosperity of e-commerce. With the growth of the e-commerce, the development of e-banks will be an inevitable trend. Yet, like any newly emerging things, the e-banks, though having shown stronger and stronger vitality as adapted to the need of the e-commerce, have exposed the lag of the law.

Since there are a lot of people involved in the electronic fund transfer system, the legal relations will become really complicated when something goes wrong and the fund cannot be transferred for settlement or there are mistakes in the settlement. Meanwhile, as the fund transferred through the electronic fund transfer system is usually very huge, once anything goes wrong, the loss might become tremendous. Thus the loss caused by technology will have to be remedied by law. However, as the Electronic Fund Transfer Law has not yet been enacted in our country, it is not possible to ascertain the liability of the parties when any accidents occur, which makes it hard to guarantee the smooth transfer of transaction fund. Besides, there is no unified management of the elements of the electronic fund transfer like e-currency and security authentication. This has caused a hidden danger in the electronic fund transfer and the lag of law is totally exposed in the field of new technology.

1. Elements of electronic fund transfer

Technically speaking the elements of electronic fund transfer include four aspects: merchant system, e-currency, payment gateway, and security authentication. Among them the latter three are necessary conditions.

E-currency: A tool through which the payment is made invisibly by exchanging the electronic information. It includes three forms, namely credit card, e-cash and e-check. E-currency is the core of e-commerce, which will gradually play an important role in international financial activities.

Payment gateway: A series of servers that connect the bank networks with the Internet, the primary function being to fulfill the communication, protocol transfer and data encryption and decryption between the two, which serves to ensure the security of internal networks of banks.

Security authentication: The key problem in e-commerce is security and how to solve this problem is the focus of enterprises. How to guarantee the safety of the transferred data when the transaction is handled on the open network at a time when the e-commerce has not yet been fully-developed has become one of the most important elements that determine whether e-commerce can be popular.

5 E-commerce and the Law

2. Procedures in electronic fund transfer

Legal problems in e-banking primarily contain the following aspects:

(1) General risks in electronic fund transfer: there are a lot of involvers in electronic fund transfer, the most basic ones including clients, e-banks or other financial institutions, system service, inter-bank clearing organizations, and others such as communication line providers, software providers, computer manufacturers and power providers. Once there are conflicts, the situation will be very chaotic without regulation of laws and no clear clarification of the rights and obligations of each party. Therefore, it is urgent to clarify the legal liability after troubles occur by enacting the Electronic Fund Transfer Law to regulate the electronic fund transfer.

(2) Risks caused by software: the chief condition that banks carry out electronic fund transfer is to make the software guarantee the safe, prompt and effective electronic transfer of the fund. Yet, what if one day there is something wrong with this guardian on whom the e-banks depend for survival?

(3) Risks caused by clients: the clients cannot always be accurate. Risks in electronic fund transfer caused by clients are very common in daily life. For example, if the clients use personal information in insecure environment, the bank might take responsibility for the probable loss. Some clients use e-currency or have their password leaked when recording their account numbers and password in insecure environment without conforming to the operational regulations, or do not report the loss of their e-currency in time — this enables criminals to obtain the clients’ confidential information and use it to commit relevant criminal activities. What’s more, some customers may deny their transactions though in fact they have been made, but the banks’ technical measures may not possibly prove the transactions done, so the losses thus incurred will have to be borne by the banks.

Risks caused by banks or financial institutions: the banks or financial institutions are the core of electronic fund transfer, because they carry out all the electronic fund transfer. Yet due to the complexity of the procedures, problems are most likely to occur. As the technologies are advancing very fast, the employees or management may not be familiar with the technologies of e-currency and cannot effectively use the e-bank systems, which poses potential operational risks. If the mistake is due to negligence, the fault liability principle shall be applicable, that is, whoever commits the fault shall bear the responsibility. If the mistake is made by fraud, and the safety program of the virtual banks is reasonable and reliable in e-commerce, the nominal sender shall be responsible for the sending of the payment directions.

(4) Risks caused by other reasons: these primarily include quality problems of the computers and communication lines and power supply problems. For example, sometimes transactions will be postponed or suspended either because manufacturers fail to provide qualified hardware or software or the broken network cables are not repaired in time.

Introduction to E-commerce

(5) Risks caused by transnational electronic fund transfer: for e-commerce the Internet is a huge market without restriction of time and space. Meanwhile, the standards of controlling electronic fund transfer vary from nation to nation. The international law opposes imposing objectives and measures of a home country on other countries and restricts application of one country’s law to deal with conflicts surpassing the jurisdiction of that nation’s territory. However, it is possible that the financial institutions or customers of one country set up a server in another country or locate a homepage in a foreign server. Under such circumstances the effect that law mechanisms will have to prevent citizens from evading the judicial control of domestic will be greatly lessened. The electronic fund transfer laws enacted by each country will possibly restrict the development of e-commerce. Hence it is obligatory to coordinate the laws concerning finance and trade in all countries, especially to prevent the developed countries from infringing upon other countries’ benefits.

3. Problems of safety brought by computer crimes

The open network is accessible to anyone, which makes it possible to be attacked by hackers. The transmitted material such as credit card numbers is easy to be intercepted and the operational risks thus incurred will be more severe and banks will face more legal risks. Therefore, safety becomes one of the major legal issues in the e-banking. Besides, for some banks with e-currency business, it will bring them more direct economic loss if criminals counterfeit the e-currency. These criminals come not only from outside the banks, but from inside the banks, which will render more menace to the banks. Furthermore, all the evidence in the criminal investigation is virtual, whose validity is not yet ascertained, and so the cognizance and investigation of the legal liability needs brand-new laws.

4. The issuance and management of e-currency

As mentioned above, the e-commerce goes on in the virtual cyberspace. It can only be settled by e-currencies such as credit card, e-cash and e-check instead of by cash. Therefore, who can issue and manage the e-currency will concern the smooth settlement of the e-commerce.

5. The unity of Certification Authority (CA) and payment gateway

In the process of e-commerce transactions including the electronic fund transfer process, the CA plays an irreplaceable role. It is the third party that provides identity certification and undertakes the supervision over and management of the signing and performance of the contracts by the two parties. Both the seller and buyer are obligated to be subject to the supervision and management of the CA, which is responsible not only for the two parties of the e-commerce but for the transaction order of the whole e-commerce. This is of vital importance to the transactions requiring payment of currencies. Yet so far there has been no CA in China, which will tend to hinder the domestic extension of e-commerce.

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