Electronic Banking and Internet Banking
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This chapter will consist of six sections. First of all the we will give a brief definition of banks, followed by the history of the internet, next will be the definition of Internet banking, then electronic banking as a new distribution channel, next comes the advantages of internet banking after that we will talk about the consumer acceptance of E-banking, section seventh will focus on problem consumer faced with internet banking, then internet banking in the world, in section nine e-banking in Mauritian context and finally the empirical analysis.
Definition of Banking
A bank is a financial firm which offers loan and deposits product on the market. It's a financial institution where people can put their excess of money and it also provides lending facilities to consumer to enable them to buy home and to businesses to help them to grow. It is the heart of an economy in a country. Without bank nothing works. Banking business needs money to pay their cost and therefore to obtain this money the bank charged high interest rate on their loan. Banks come with a variety of name, and one bank can function as several different types of banks. Some of the most common types of banks are:
Retail banking refers to banking in which financial institution effect transaction directly to customer. Retail bank offer basic banking service to the general public such as checking and saving account, safe deposit, mortgage and other.
Commercial bank is a bank that work with businesses. It handle banking need for large and small businesses including lending money for real and capital purchases, foreign exchange etc.
Investment banking is a financial institution that assists corporation and government to raise capital. It also assists companies in merger and acquisition.
Central bank is an organization responsible for managing banking activity. In USA the central bank is the Federal Reserve. In US, central bank has three primary goals to conduct monetary policy, to supervise and regulate financial firms and to provide financial service. Central bank deals with large organization instead of consumer.
History of the Internet
The internet was created by a company called ARPA (Advanced Research Project Agency) in 1966/67 associated with US government for military use. The original name of the internet was ARPANET. Until the introduction of the World Wide Web (www) in 1990 the internet was unknown in universities and corporate. Griffiths argues the dramatic growth in the utilization of the internet occurred due to the expansion of the World Wide Web. Since then it has been commercialized by Microsoft and Apple. It was only in the late 1980's that electronic banking become popular. Electronic banking was created as a result of various technological changes which have affected the banking industry. The evolution of E-banking started with the automatic teller machines (ATM) and has included payment bill, electronic fund transfer among others. Internet banking was first adopted in New York and banks like Wells Fargo, Chase Manhattan and Security First Network were among the first to provide home banking. The first online banking service was introduced in October 1994 by Stanford Federal Credit Union a financial institution. Now we will have a look to the various advantage of internet banking.
What is Electronic Banking?
Electronic banking is the new way of doing business without setting foot outside. It is defined as the automated delivery of new and traditional banking products and services directly to customers through personnel computer. When first introduced electronic banking was used as an informational medium to market banking products and services but with the development of new technology bank uses internet banking both for transactional and informational medium.
However a more comprehensive definition is given by United Nation Conference on Trade and Development (UNCTAD) which state that Internet banking refers to the deployment over the internet of retail and wholesale banking service. It involves individual and corporate clients and includes bank transfers, payments and settlements, corporate and household lending, card business and some others (UNCTAD,2002Furthermore electronic banking are categorized into different forms which are summarized in the following table:
Table1. Different forms of banking in electronic banking (Daniel 1999)
Form of Banking
The client has only to installs the software on his or her personal computer and access to his or her account with that particular software.
Client can access his or her bank account via the Internet through a Pc or cellular phone and web-browser.
TV- Based Banking
It consists of using satellite or cable to provide account information to the TV screens of customers.
Customers can access their bank and account via SMS and as well as by normal phone using services of interactive voice responses (IVR).
Sources: Academic open Internet Journal
According to Nehmzow (1997/8) internet banking offer traditional player an opportunity to add low cost distribution channel to their different service. It menace the market share of traditional banking because it neutralizes the competitive advantage of having traditional branch network.
What makes Internet banking so exceptional is the fact that it is movable and people can have access to it wherever they are on a 24hours basis. More and more people are using internet banking to such an extent that all alone it represents between 5 to 10 per cent of the total volume of retail banking both in the United State and in Europe. Let have a look to the evolution of electronic banking. (Referencing)
Distribution channel of Internet banking
After deregulation in 1983 many financial institutions faced with high competitive pressure have rethought of their IT strategies. All these institution were searching for an effective distribution to reduce cost and improve quality service and find that internet banking can offer all these. Birch and Young (1997) argue that internet can be use as a new delivery channel by financial industry. Pure internet can compete with lower cost a net-based transaction cost the bank around RS.4 per transaction which is even less than an ATM transaction which cost about RS.15 in India Kamesam (2003).
Internet banking is among the multiple distribution channel bank have been using over more than 20 years. Phone banking, credit and electronic purse card to pay at retail outlets, use of Automated Teller Machine (ATM) are among the various multitude channel used by bank.
Usually the bank makes use of bank-owned-infrastructure to deliver ATM and Phone banking but internet banking now requires that consumer make use of non-proprietary infrastructure and access with lower penetration level than phone lines. Bank usually offers internet banking to reach customer and preserve market share.
Recent report proved that smaller banks are more motivated to use electronic channel as it allows them to diminish their dependence on core deposits. Gondat- Larralde et al (2004) study the competitive process in UK market for personal current accounts between 1996 and 2004. They examine speed by which the distribution market share has changed from traditional bank to direct bank via telephone and the internet.
Experience showed that if done properly online banking can increase customer satisfaction enhance retention and improve profitability through cost efficiency. In countries where internet banking is most developed indicates that internet banking increased competition among bank.
Internet banking in the world
According Ongkasuwan (2002) UK internet banking has encountered a rise in demand of cross-border payment transaction including small amount. UK banks keep on developing and introducing new internet banking service to satisfy their consumers. By June 1999 the UK and eight of the European countries namely France, Portugal, Germany, Spain, Switzerland, Luxembourg, Holland and Scandinavia has become the leading nation in providing internet banking. Swedish and Finnish market leads the world in internet banking penetration and the quality of their online service. Standinaviska Easkilda Banken (SEB) was the first bank in Sweden to go online in December 1996. Almost all of 150 banks in Norway have established ‘net bank'.
Bank of China has given the green light to introduce internet banking in 1996 and in 1997 China Merchant Bank was the first to start internet banking and telephone banking service. The new internet banking provides 24 hours access to financial transaction. By the end of 2002 3.5 million Renminbi (RMB) customers has opened internet banking account with the major commercial bank in China with a transaction exceeding 5 trillion RMB. In 2004 the number of consumer using internet banking was about 10 million. Internet banking developed quickly to such extent in 2007 it represent about 245.5 trillion RMB of the transaction in China.
South Africa bank starts operating on the internet in 1996. It has been a slow start but consumers are responding because it is convenient, secure and cheap. Amalgamated Bank of South Africa (ABSA) was the first bank to implement internet banking and was followed by Ned Bank. Karin (2000) suggest that 672,000 consumer are banking online or have banked online. ABSA provide it own free internet in order to encourage more consumer to use internet banking. However consumer acceptance and ease of use are less compare to other country such as UK where internet has reached about 3.5 million of users.
The appearance of electronic transaction start in the late 70's in Iran with the first automatic teller machine (ATM) but with the change in the economic system the use of ATM was suspended. It was only in late 90's that Iranian bank reintroduced the ATM. But with growth in internet connectivity many bank began to think about the introduction of internet banking. A study done in Iran argue that by 2007 internet banking be fully operational.
In USA bank hesitated to adopt internet banking in the beginning but slowly they catch up. Bank of America, Citibank were among the first bank to implement electronic banking in USA. In this way banks were able to provide service to their consumer via their personal computers. With the introduction of online banking many banks were formed focusing only on internet banking. In UAS the online bank was formed in 1996 and was known as Atlanta NetBank and in 1997 the second electronic bank was Wingspan bank.
Internet banking both as a channel of delivery and a strategic tool for development strategy has gained wide acceptance internationally and encounter rapid growth in India with more and more bank implementing internet banking as their banking service. India can be said to be one of the fastest economy in adopting net banking. About 11 banks provide online banking at different stages 22 propose to apply internet banking in the near future and the remaining 13 banks are not planning to offer internet banking in the immediate.
.Advantage of Internet Banking to the bank
Internet banking is a benefit both for the bank and the user. The main benefits of internet banking to the bank is that it is cost savings, it allow the bank to reach new customers, it raises the reputation of the bank and provide better service and satisfaction to customer.
According to Burnham (1998) it required less than US$25000 to establish an internet site and less than $25000 to maintain it one year compared to the $1 to 2 millions required to set up traditional branch and about $350,000 needed to operate it. Robinson (2000) argued that the cost is less when transaction is done online as compare in branch. Marketing campaigns and other advertisement are available on the internet 24hours a day without any additional fees being charged. Internet banking is a paperless transaction which makes financing communication quicker it results in a save of time since everything is done electronically.
Attract new customer
Sheshunoff (2000) admit that the bank introduced internet banking with an attempt to reach new customers and to make exist difficult. As consumer is the most important asset of an organization financial institutions provide personalized banking service to cater their needs. It is said that once a consumer moved to electronic banking the risk that the consumer changed it financial institution reduced literally. A study done by Forrester research show that 61% of the respondent claimed that if the bank provides the service that they want they would prefer to utilize the bank service (Dixon,1999). This is usually because switching from bank to another requires much time and effort by individual consumer. Internet banking is attractive because consumers are more satisfied with all the facilities it offer and it is also said to create positive word of mouth.
With the widespread use of the internet banking is no longer bound to time and geographic factors. Through internet banking consumers can have easy access to their account wherever they are. The introduction of e-banking has brought the concept of “Anytime Anywhere Banking”. For example if a client is out of country and has a problem of money, the client is able to access his or her account from anywhere given that there is internet access.
Internet banking is considered as a norm for almost all banks since it is and may be a useful competition tool for bank to attract new customer and retained existing one. The bank makes use of the internet as means to increase business status for innovation (Yakhlef, 2001). It is easier for bank to introduce new products and services thereby attracting new customers. But innovations in banking products can be easily replicated and therefore make it hard to sustain a leading edge over their rivals (Lymperopoulos and Chaniotakis).
Consumer acceptance of internet banking
On searching literature review we found different factor that encourages consumer to use and accept internet banking channel. Li et al (1999) argued that understanding of the internet channel, convenience, perceived accessibility, familiarity and utility are key factors that influenced the adoption of electronic banking by consumer.
Generally all research shows that the more evident, straightforward and easy a new technology is the more advantage it provides the more likely it will be adopted by consumers. Survey done by Pew (2005) show that 73% of the American used the internet because it is convenient. They can have access to it on a 24 hours basis. Accessibility which can be associated to convenience is another factor that influence consumer to use e-banking. The only thing you have to do is sit in front of a computer enter your user ID and password then we can start our banking transaction in privacy it prevent consumer from waiting long hours in queue at the banking branch.
Technology Acceptance Model (TAM)
To predict and explain user acceptance organization need to understand why people accept or reject information technology Davis et al (1989). Researcher have developed a model called technology acceptance model (TAM). It was use to identify design problems before user have experience with the new system. TAM suggest that when user encounter new information system (IS) the two main factors influences how and when they will used the system. These two main construct of TAM is know as perceived usefulness (PU) and perceived ease of use (PEOU). PU is defines as the extent to which person believes that the using of a particular system will improve their job performance. (PEOU) is the degree to which a person believes that using a particular system will be free from effort.
Reduction of cost
Reduction of cost may be useful factor to explain the adoption of internet banking by consumer. Internet banking reduced the cost and the time consumer take to go to bank branch. Customer can manage their banking affairs whenever they are. Burnham et al (2003) identify three types of influential cost. The first one, procedural cost, consists of the difficulties of accessing information which may discourage consumer from changing brand because it requires time and effort. The next one, financial cost consists of the price of the product and finally relational costs refer to the time, money and effort needed in establishing and maintaining relationship. By using internet banking all these cost can be eliminated.
Computer skill and past consumption
Karjaluoto et al (2002) argues that consumer readiness to adopt new technologies depend on his or her prior experience and past interaction such as internet, email, e-payment and ATM was a major factor for attitude towards online banking practice. However for those consumers who have no concept of previous banking technologies it might be difficult to use. Even thought they think that internet banking might be a necessary tool for doing transaction they might be less confident and comfortable for using it. Consumers who have more capability to use computer software in managing money may find it easier to adopt online banking. They might invest less time and money in using online banking since they already have some knowledge how to use it.
Studies proved that demographic factor such age, education level might affect the adoption of e-banking. Wang et al (2001) found that age affect the use of internet banking. According to Stonemad (2001) the greatest concentration of computer owners who have banked online in the USA are between 18-34 years old. Only 15% of the population between 56-60 owned a computer and only 9% of the group bank online. Old consumer has negative attitudes towards new technologies and innovations. Recent survey confirm the difficulties to attract people aged 65 and more to use e-banking (IIett 2005; Perumal and Shanmugam, 2005). On the other hand there are more young adults that are interested in new technologies such as internet to carry out activities.
Education also plays an important role on consumer preference to use e-banking. People with higher education such university graduate are more comfortable and have knowledge in using these new technology this is because education is correlated with individual computer literacy. Therefore we can say that internet banking is not met for everyone. For example in country such as Nigeria where the rate of illiterate is high it will be difficult for those consumers to follow the instruction required to use internet banking.
Cheung et al (2000) stated that social pressure plays an important part in explaining internet usage. Social pressure can come from any social group such as parent or friend. A survey conducted in HongKong by Cheung (2001) state that classmate and friend may have potential influence on internet users. Social factor are prevailing forces that not only influence consumer to adopt internet banking but also persuade them to continue internet banking. According to Davis (1989) if a superior suggest that a particular system is useful a person may come to believe that is true and start using it. Because consumer are often influence by the opinion of others marketer must identify these influence and understand their impact on internet banking adoption.
Problems consumer faced with internet banking
Some consumers are skeptic to use internet banking because of problem they notice in the industry. While there are some disadvantages associated with internet banking many of the trouble start with consumer.
The evidential proof of internet banking transactions can be a drawback. This problem arises as a result of the nature of these transactions. As e-banking is a form of paperless transaction consumer fear that if they do not have written documents they failed to prove anything.
Security and privacy aspect are crucial factors discouraging consumer to use internet banking. Bank must persuade consumer that their web sites are secure and adequate safeguard have been taken to guarantee security at the transaction level. Safeguarding the privacy of individual is essential if the public is to embrace in internet banking.
These days the nature attack is more active than passive. Previously it was only guessing password but new threat such as Trojan, botnet and man in the middle are new ways people used to steal personal information. This is usually done when users visited certain website the hacker install a key logger without their knowledge and when user log in their bank account the hacker take hold of all information and can make fraudulent transaction. As internet banking transaction are conducted remotely bank may find it more difficult in detecting and preventing unwanted activity. Thus banks expose themselves to money laundering risk. A good example is the Citibank breach of security six years ago which is one of the few successful electronic frauds Barlotta (1999). Hackers penetrate the Citibank security system and wired money to the bank around the world when the crime was discovered in September 1994 around $10 million were stolen and only $400,000 was recovered.
Some people fear internet banking because they lack of trust in the online environment due to the greater perception of risk and insecurity. This may be due to advanced treat of possible improper behavior such as security lapses where personal information can be stolen. These security lapses may result in losses to the user or adopter of the technology. Literature has proved that trust is fairly not easy to build in an online environment (Hoffman et al.1999).
However Mattila et al (2002) argue that consumers who are familiar with the internet have few security concerns. Erikson et al (2008) observe that the adoption of internet banking in Estonia is one of the highest in the world and the advantages had the strongest influence compare to the risk associated in the adoption of internet banking. All this proved that the factor influencing internet banking is unique and not mixed.
Internet banking in the Mauritian context
The banking industry has faced rapid changes both internationally and in Mauritius during the past ten years. The most flagrant changes have been the progress in communication and Information technology. Information technology has reduced in size the world and as a result time and distance is of no importance. But previously in Mauritius all banking activity was done in the bank itself meaning that to make a transaction all consumers have to the bank to conclude their transaction. Since the new millennium electronic commerce has experienced explosive development in many countries and transformed traditional banking practices and the way service is provided to customer.
The introduction of electronic banking starts mainly in 1987 with the first ATM introduced by the Mauritius Commercial Bank (MCB). At that time there were about 167 ATM operated by the six major banks namely Mauritius Commercial Bank Ltd, State Bank of Mauritius Ltd, the Hongkong Shanghai and Banking Corporation, Barclay Bank plc, Banque National de Paris “Intercontinentale” and the Delphis Bank Ltd. The ATM freed the bank from the constraint of time and geographical location. The Central Bank of Mauritius has given permission to the local bank to introduce internet banking on the 2nd April 2001. But according to a research done in 1997 by Padachi et al (2007) which state that internet banking was launched in Mauritius and it was due to the quality of good infrastructure in Mauritius. In 1997 out of 11 banks only 4 were providing internet banking. But these days almost every bank is providing electronic banking. Some of the e-banking services provided by bank in Mauritius are: mobile banking, electronic payment, funds transfer from one account to another, loan application and transaction, receiving or checking bank statement online, Automatic Teller Machine (ATM) and many more.
Mobile banking is a financial transaction conducted by logging on the bank website by using a mobile phone or Personal Digital Assistant (PDA) to view balance account transaction, balance checks, payments etc. Today the mobile banking service is performed mainly via SMS or the internet
Electronic bill presentment and payment (EBPP)
This service facilitate payment such as electricity, telephone, insurance premium and many others by permitting customers to electronically settle payments of goods and services. Customers of bank and billing companies can make use of the phone or the internet to easily remit payment as well as accessing to their billing information. EBPP can provide considerable savings to traditional print and mail billing and payment remittance and causes significant reduction in the use of paper.
Electronic fund transfer (EFT)
It refers to the transfer of money from one account to another either with the same financial institution or across multiple institutions. Customer can transfer fund in any bank in Mauritius but also abroad. It provides greater security since there is no tangible cash involved and also offer continuous connection with the bank.
Loan application and transaction
Today there is need for customer to wait in long queues to fill in a loan application as it can be obtained online. Customers only need to sign in to have access bank website and enter the sum of money they want to obtain as loan. The customer is either notify by mail or by telephone.
Automatic Teller Machine (ATM)
As it name suggest an Automatic Teller Machine acts as a teller in a bank by giving and ting money over the counter. More precisely it an electronic device that allows customers to have access to a financial institutions in a public place. ATM is run through identity such as card and password which help to identify customer. They have only to enter their PIN to have access to the bank account in order to make withdrawal, deposits or check account balance.
Law associated with internet banking
While internet banking is a relatively new service much has been written on the factor affecting the usage of this new product. According to a research conducted by Williamson and Lichtenstein (2006) to assess understanding of consumer adoption of internet banking in Australian banking context finding reveal that convenience is the most important factor that influence consumer to use internet banking. However convenience means much more for consumer than simply 24/7 hours access. Convenience was mainly described as personal safety, not having to travel, not having to wait and saved time. Relative time saving dominates banking channel convenience perception. Sustaining this finding, a recent survey found that many Australian internet users neglect risk in favor of convenience of internet banking ACNielsen (2005).
In the same study result revealed interesting findings in the difference of gender choice. Some experts reported that women have greater fear and interest in new technologies such as internet Morahan-Martin (2000). However as Wilson and Howcroft highlighted gender attitude can be modified through social and societal change Wilson and Howcroft (2000). Another study done in Malaysia on the factors that affect internet banking adoption revealed that 68% of internet banking user are female compare to male.
According to a research in South Africa by Jun Wu reveal that non-users are young 53% in the 21-29 group whereas user are relatively older. The age group of 30-39 account for 64% of the user which is relatively high. On the other hand previous research in Finland indicate internet banking user is between 35-49 therefore it can be said that the factors influencing people to use electronic banking is not a universal one.
Privacy and Security
In 2006 Michigan Surveys of Consumers reported that half of the respondents mainly 52% agree that internet banking was not safe enough to protect their personal financial information and 60% agree that internet banking increase the possibilities for a person to become a victim of theft identity. More and more consumers are targeted by viruses, spam and phishing e-mail that attempt to steal personal information. This includes name, credit card number and bank account. Due to this problem the state of California in USA require business to notify consumer of data breach involving name and account number.
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