• To review the literature on Internet banking and Traditional Banking. Find out the major determinants of Internet Banking.
• To study customer's perception of Internet banking of major high street UK banks and link this to the findings in the literature review.
• To find out challenges people face in Adoption of Internet banking and give recommendations based on these limitations.
The main aim of this dissertation is to study the popularity of internet banking amongst UK banking customers. Advancement in the Communication Technology has enabled branchless banking and is focussed towards the convenience of the end users. Literature review will focus on Internet banking and its comparison with traditional banking. In the literature review the author has to focus on finding determinants that help internet banking become popular. This will form the basis for the study. Analysis will focus on surveying the end users of internet banking for UK high street banks. Through this survey we will try to decipher the perception of internet banking has within a layman. What aspects of internet banking are positive (favourable) and what are negatives (unfavourable)? The positive aspects will be linked to the theoretical findings and the negative aspects will throw the limitations of internet banking. These limitations will form the basis of recommendation part in the dissertation.
THE ADVENT OF IB
Internet today has emerged as an increasingly popular medium for all goings-on. In terms of business, Shi, Shambare and Wang (2007) believe that internet has shaped a new paradigm shift in terms of its management. Internet has not only emerged as new promotion channel but also as a powerful tool for distribution and for conducting business transactions. The banking industry today faces a rapidly challenging environment where competition is getting following deregulations and liberalization. As a result, technology in general and the world wide web in particular has become one of the most powerful and strategic tool for a bank to ensure profitability.
Realizing the value of internet technologies, increasing number of banks and financial services companies have evolved from a ‘bricks and mortar' approach to a ‘clicks and mortar' approach (Shi et al, 2007 pg. 272).
In the simplest terms, internet banking can be understood as allowing customers to conduct their financial transactions on a secure web site operated by the bank. Use of electronic commerce strategies, their scope, cost and security provide the consumers with multiple options to transact. Banking through online channels has led the bank to always be open for the consumer. There are several benefits to the consumer while managing their finances over the internet. It provides with an opportunity of easy and constant review of all the accounts. Though concerns remain about data breaches and consumer willingness, moving financial services to the internet has added new layers of complexity and unpredictability to the world of banking (Cronin, 1977).
A distribution system can be defined as “the network of people, institutions or agencies involved in the flow of a product to a customer, together with informational, financial, promotional and other services associated with making the product convenient and attractive to buy and rebuy” (O'Shaughnessy, 1988). Online banking can be defined (Pikkarainen, T., Pikkarainen K., Karjaluoto, H. and Pahnilaas, S., 2004) “an Internet portal, through which customers can use different kinds of banking services ranging from bill payment to making investments. Banks' Web sites that offer only information on their pages without possibility to do any transactions are not qualified as online banking services.” Today, the distribution system of the Internet offers E-banking and E-Finance under its broad umbrella . Electronic banking (e-Banking) is defined as “using internet-based applications to provide routine banking products and services to customers.” As e-Banking refers to the everyday practices raletd to maintaining one's account (ie, balance transfer, bill paying, e-checking), they find favour across the consumer segments (Federal Financial Institutions Examination Council. 2003) Electronic financing (e-Finance) can broadly be defined as “delivering financial services online”. These services include ones such as online loan application processing, insurance activities, and securities trading (United Nations, 2002).
TRENDS IN UK IB
Internet Banking in the UK can be traced back to the focus on home based banking - whose appeal has been pretty much indisputable, with telephone banking attracting 125,000 customers per day back in 1996 (Weever, 1996). A survey by PricewaterhouseCoopers and the Confederation of British Industry (Confederation of British Industries, 2000) showed that the Bankers in the UK feel that the Internet will be the most important factor influencing competitive dynamics in the industry. Eighty-three per cent of the UK financial institutions felt that the banking industry would be ‘reshaped' by the Internet while the rest believed it make a significant impact - this stresses how much importance the financial institutions give to the Internet as a force of change within the industry. Also, according to the survey, a considerable number of banks felt that the internet would open up the market for competition.
Banks have found the development of online banking compelling for three main reasons among others:
o Significant cost savings - online banking has been proved to be the cheapest delivery channel for banking products post setup (Giglio, V., 2002)
o Reduction in service staff and branches - self service channels have become the order of the day since a significant number of retail banking consumers were of the opinion that branch banking time and effort intensive (Karjaluoto, H., Koivumaki, T. and Salo, I., 2003)
o Online bankers constitute the richest and most profitable piece of the consumer pie to banks (Sheshunoff, A.,2000).
Especially in the UK, the heavily deregulated financial services market saw rapid growth in the novel types of competition with many non- bank entities entering the market leveraging increasing accessibility, new technologies (such as the Internet) and their brand equity developed in other industries (Gonza´lez, M. and Guerrero, M, 2004). Despite their low presence in the market, traditional banks have had to recognize them due to the large number of new competitors trying to take a slice of the banking market. Traditional banks are now protecting their turf by giving the customers access to new distribution channels such as the Internet.
ONLINE BANKING ACCEPTANCE THEORIES
Banking journals have given special emphasis on the topic since the start of the decade (e.g. Waite and Harrison, 2002; Bradley and Stewart, 2003; Gerrard and Cunningham, 2003; Mukherjee and Nath, 2003). It has been seen that users' attitudes towards and acceptance of a novel information systems directly correlates positively with adoption of the information system (Venkatesh, V. and Davis, F., 1996; Succi M. and Walter, Z., 1999). An accepting user is more willing to modify existing routines to try out the novel approach.
There are multiple theories that are commonly used to explain acceptance and adoption behaviour, such as the Theory of Reasoned Action (TRA), Theory of Planned Behaviour (TPB), Technology Acceptance Model (TAM) and Rogers ' Diffusion of Innovations Theory. Though TRA, TPB and TAM are intention-based adoption theories, Roger' Diffusion of Innovation theory takes into account anthropology, medical research and, communication, economics and sociology as well. But TAM still serves the purpose for a wide array of research in consumer behaviour on the Internet for its orientation towards providing service developers guidelines on ease of use and usefulness.
TAM remains one of the most popular models in studying information system acceptance and adoption (Venkatesh, V. and Davis, F.D., 1996; Gefen, D. and Straub, D., 2000) in which system use is determine by perceived usefulness (PU) and perceived ease of use (PEOU). TAM says that “a technology that is easy to use, and if found to be useful will have a positive influence on the intended user ' s attitude which in turn increases intention towards using the technology that generates the adoption behaviour”. Perceived usefulness is defined as “the degree to which a person believes that using the system will enhance his or her performance”. Perceived ease of use, is defined as “the degree to which a person believes that using the system will be free of mental effort.”
Mostly, it has been found valuable to augment the initial variables in the theory with additional variables such as trust and trust related-concepts (that is, perceived risk, credibility, image and reputation) which gain importance in the context of Internet Banking (Lim., N., 2003). Ring and Van de Ven classified risks either as technology driven or relational (2004). Other factors found important in studying acceptance of Internet Banking have been Perceived enjoyment, Amount of information on online banking, Security and privacy and also the quality of the Internet connection (Pikkarainen, T., et al., 2004)
Diffusion of Innovations Theory suggested by Rogers (2003) identifies five segments of adopters on the basis of their relative time of adoption namely, innovators, early adopters, early majority, late majority and laggards. Early Adopters are the ones to see advances in technology as less unsafe and intricate, and more beneficial, well-suited and discernible. Bass (1969), on the other hand, had distinguished adopter segments as innovators - those who adopt an innovation independent of others, and imitators - those who rely greatly on interpersonal contact before a decision. Recent researches have also tried to segment consumers on the basis of adoption or intention parameters (Lee, E ., Kwon, K . and Schumann, D., 2005)
Gounaris and Kortios (2008) suggest that two of the five innovation attributes (relative advantage, compatibility, observability, trialability, and complexity), of the Diffusion of Innovations, namely relative advantage and complexity are theoretically identical with usefulness and ease of use in the TAM theory. Notwithstanding, although few researches have tried to incorporate Adoption Theories and Diffusion of Innovation Theories, there appear to be no very successful attempts to integrate Diffusion of Innovations Theory with TAM to profile different segments of adopters (Ozdemir, S. and Trott, P., 2008).
According to the Office of National Statistics UK, in 2008, 16.46 Mn UK households had Internet access - an increase of 65% (1.23 Mn households) since 2007. These estimates are derived from the 2008 National Statistics Omnibus survey. The volume of retail sales in July 2009 rose by 3.3 per cent compared with the same month in 2008.
Studies reveal that readiness to use e-banking is linked to ‘‘socioeconomic and demographic characteristics (such as income and age) and perceptions of specific technologies''. Online banking would most likely be used by wealthy households, college degree holders, suburb dwellers (Kolodinsky, J., Hogarth, H., and Hilgert, M., 2004). It is imperative that financial literacy and technological literacy are tackled together as both are found to be low in a disproportionate number in the lower income groups, particularly adults who do not attend educational institutions on a regular basis - leaving a small time window for such education (Parrish, L. and Servon, L., 2006).
Internet banking, like any distribution channel, has to perform a relationship maintenance task over and above the task of selling. Internet Banking has, till now, largely been concerned with transaction based banking rather than consumer acquisition or purchase of a range of financial services (Mattila, 2001). But research has shown that a significant minority of consumers might be a valid target to retail a range of financial services (Howcroft, B., Hamilton H. and Hewer, P., 2002). It suggests that though UK consumers would continue to use a mix of delivery channels, an average of 6.2% of consumers would prefer the internet as a delivery channel for purchase of financial services. Consumers showed a higher preference to purchase of Insurance based services (7.2% of total consumers) over the Internet. Investments came next with 6.9% consumers showing preference for purchase over the Internet, while Credit based and Current Account Services' Internet purchase was preferred by 5.8% and 5.1 % consumers
According to Roger's Diffusion of Innovation Theory, earlier adopters characterised as younger, wealthier, better educated individuals. These individuals are held as opinion leaders by their peer group, and also as persons with higher degree of technology usage experience.
DRIVERS FOR ADOPTION
Socio-economic and demographic factors pay an important role in determining adoption of Internet as a channel as well.
BARRIERS FOR ADOPTION
Several barriers exist towards adoption of Internet based banking services. The first barrier would be access to the Internet to be able to use the service. Beyond that, this delivery channel also has an implied learning curve for consumers (Mols et al., 1999). The persistent complaint from non-users of not being able to connect without a face to face interaction, such as in a branch poses a hurdle (Mattila et al., 2003). Further more, security issues plague the consumer's mind, (Howcroft et al., 2002), which are even highlighted in the national and international media (Newswise, 2008)
According to Carol Sergeant, Director, Banks & Buildings Societies, Financial Services Authority (2000), “for consumers the biggest risks are probably information overload and not understanding whom they are dealing with and on what terms. This can range from dealing with a perfectly respectable company from another jurisdiction, but not understanding for example the different legal environment, compensation schemes and ombudsman arrangements, through to being vulnerable to scams and frauds.”.
THE SMALL BUSINESS AND IB
Small and Medium sized Enterprises (SMEs) make an important contribution to bank profits in the UK. According to an estimate, banks service approximately 1.3 million SMEs in the UK - and these enterprises are two or three times more profitable than the average retail customer [Hogg et al., 2003] Though research is widely available focusing on overall aspects of banking for small businesses (Ennew , C . and Binks , M., 1996), it appears little importance has been given to internet banking for small businesses historically.
The small businesses market might be a burgeoning one, as though a comprehensive portfolio of services is available for retail consumers, adequately designed services and products may not be sufficiently available (Ptacek, M., 2000). In 2003, 50% of banks did not venture to offer special web services to small businesses (Community Bank Competitiveness Survey, 2003). In addition, small businesses hold back from using the available services due to a lack of personal contact (Judd, E., 2003)
Albrecht (2003) argued that the need to obtain information stood out as one of the most important customer needs in the banker-customer interaction. On the other hand, research with UK bankers and SME owner- managers (Howcroft, B., Durkin, M., Armstrong, G. and Emerson, E., 2007) shows that although the Internet was found functional for routine banking transactions, small business owners still preferred personal contact with their banks, as they found it imperative for resolving complicated issues and business crises.
In prior research with banking IT professionals in the US (Gehling, R., Turner, D. and Rutherford, B. 2006), six primary themes were found with regard to online financial services, especially in regard with Small Businesses:
o Quality of customer experience,
o Degree of customer perceived security,
o Degree of bank focused online applications,
o Channel transaction cost,
o Mix of online product offerings
o Degree of online competition.
It was also found that customers were wary of trying services other than the common ones due to the absence of individual interaction and presence of an unvarying interface.
In spite of the small businesses' guardedness, it could, however, be mentioned that if banks could successfully maintain an year on year increase in their transactional business over the Internet it could increase satisfaction amongst small businesses by an increase in the bank staff time devoted to SMEs, especially in intensive moments which require human involvement and personal interaction (Howcroft, B. et. Al., 2007).
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