Banking Ethics: Changing Dynamics | PAPER II – PRINCIPLES & PRACTICES OF BANKING | MODULE D: ETHICS IN BANKS AND FINANCIAL INSTITUTIONS

Banking Ethics: Changing Dynamics

---

In the evolving landscape of the banking industry, ethics have become more critical than ever. Technological innovation, digital banking, and data-driven services have introduced new ethical challenges. Banks today must go beyond compliance and embed ethical frameworks in governance, operations, and customer engagement.

Ethics and Technology

Technology has revolutionized banking through automation, AI, and digital platforms. However, ethical issues such as algorithmic bias, surveillance, digital inclusion, and transparency demand attention.

Example: An AI-based credit scoring system may inadvertently discriminate against certain income groups if its training data is biased. Banks must ensure fairness and auditability in their algorithms.

Data Security and Privacy

With vast amounts of personal data being collected, banks face the ethical obligation to protect customer information. Data breaches can severely harm a bank's reputation and customer trust.

Example: A bank using biometric login features must ensure encryption of data and compliance with data protection laws like GDPR or India’s DPDP Act.

Mathematical Illustration: Risk of Data Breach

Suppose a bank has 1,000,000 customer accounts. If a breach exposes 2% of accounts, the number of compromised records is:

  Number of accounts breached = 2% of 1,000,000
                             = (2/100) × 1,000,000
                             = 20,000 accounts
  

Such a breach can result in fines and customer attrition, highlighting the ethical responsibility of safeguarding data.

Intellectual Property Rights (IPRs)

In banking, IPRs include proprietary software, financial models, and trade secrets. Ethical banking respects IP and ensures compliance with licensing terms.

Example: A bank developing its own mobile app should avoid copying code or using pirated libraries that infringe on copyrights.

Patents and Proprietary Rights

Banks increasingly patent their fintech innovations. Ethical issues arise when banks aggressively protect patents that may hinder innovation or public interest.

Ethics of Information Security

Ethical information security goes beyond legal requirements. It involves transparent communication during incidents, responsible vulnerability disclosures, and proactive protection mechanisms.

10 Multiple Choice Questions (MCQs)

1. Which of the following best represents a modern ethical concern in banking technology?
   a) Manual recordkeeping
   b) Algorithmic transparency
   c) Paper-based ledger
   d) Branch expansion
   Answer: b) Algorithmic transparency
2. What does GDPR primarily deal with in the context of banking?
   a) Loan regulations
   b) Tax evasion
   c) Data protection
   d) Investment returns
   Answer: c) Data protection
3. An AI model denying loans based on biased data is an example of:
   a) Financial fraud
   b) Ethical computing
   c) Algorithmic bias
   d) Manual error
   Answer: c) Algorithmic bias
4. Intellectual Property Rights (IPRs) in banks include:
   a) Only patents
   b) Only customer data
   c) Proprietary algorithms
   d) Gold reserves
   Answer: c) Proprietary algorithms
5. Which of the following is NOT an ethical issue related to data privacy?
   a) Consent
   b) Accuracy
   c) Unauthorized access
   d) Branch layout
   Answer: d) Branch layout
6. Which act in India is related to digital personal data protection?
   a) FEMA
   b) RTI Act
   c) DPDP Act
   d) SARFAESI Act
   Answer: c) DPDP Act
7. A bank’s ethical responsibility in case of a data breach includes:
   a) Ignoring the incident
   b) Hiding from the media
   c) Timely disclosure and resolution
   d) Blaming the customer
   Answer: c) Timely disclosure and resolution
8. Patents in banking are related to:
   a) Branch locations
   b) Customer grievances
   c) Innovations in banking software
   d) Fixed deposit rates
   Answer: c) Innovations in banking software
9. Ethics of information security involves:
   a) Selective sharing of vulnerabilities
   b) Data misuse
   c) Transparent communication and data integrity
   d) Ignoring encryption
   Answer: c) Transparent communication and data integrity
10. Which of the following technologies poses ethical concerns in surveillance and privacy?
    a) Typewriters
    b) AI and facial recognition
    c) Fax machines
    d) Manual registers
    Answer: b) AI and facial recognition