Chapter 2 Literature Review

2.0 Introduction The aim of this study is to explore the role of virtual Banking as a way of enhancing the performance of commercial banks in present bank sector. This chapter presents the result of the author literature study, so as to form a basis for the current study. The selected areas of literature were based on the research problem and research questions presented in the end of chapter one. 2.1 Virtual banking defined.

2.2 An overview of Internet and Internet Banking Electronic banking is an umbrella term for the process by which a customer may perform banking transactions electronically without visiting a brick and-mortar institution. The following terms all refer to one form or another of electronic banking:personal computer (PC) banking, Internet banking, virtual banking, online banking, home banking,remote electronic banking, and phone banking. PC banking and Internet or online banking are the most frequently used designations. It should be noted, however, that the terms used to describe the various types of electronic banking are often used interchangeably (Dirk de Villiers, 2003). Internet banking is predicted to transform and revolutionalize traditional banking industry (Mols, 2000; Daniel, 2000; Carrington et al, 2002). Banking services are easily digitalized and automated and, thus, from an operational perspective, lend themselves to the internet (Elliot and Loebbecke, 2000; Daniel, 1998) the potential competitive advantage of the internet for banks lies in the areas of cost reduction and satisfaction of consumer needs. According to Siau et al. (2001) m-commerce (mobile commerce) that includes WAP has some features of mobile business include; Ubiquity. Mobile technology enables the user to access information wherever they are assuming the user is within the cellular broadcast area, personalization. Due to the limited memory capacity of the mobile hardware, software enables a

finer degree of sorting and categorization to meet the mobile users needs, flexibility. The mobility of the hardware, e.g cellular handsets permits the user to conduct transactions and/ or receive information even when the user is engaged in another activity such as traveling or working, dissemination. Originators of information, for example local retailers, may use the wireless network of m-commerce to deliver specific information to some or all WAP users that come into the geographic. The history and origin of the Internet are well known. The Internet is believed to change the way firms interact with their customers and thus the way they initiate, develop and terminate relationships with them (Mols, 2000). The Internet may also make it easier for the consumers to search and compare the offerings of different firms. Fraser, et al, (2000) argued that in the future, customers will be able to use the Internet to order goods and services from companies all over the world, and pay for them over the Internet with minimal risk .

2.3. Electronic Banking and the Common Banking Products The use of information technology in banking operations is called electronic banking Ovia 2001 argue that Electronic banking is a product of e-commerce in the field of banking and financial services. In what can be describe as Business-to-consumer (B2C) domain for balance enquiry, request for cheque books, recording stop payment instruction, balance transfer instruction, account opening and other forms of traditional banking services. Banks are also offering payment services on behalf of their customer who shop in different e-shops. 2.3.1 Telephone and PC Banking Products This is a facility that enables customers, via telephone calls, find out about their position, with their bankers merely dialing the telephone numbers given to them by the banks. In addition, the computers on the phone would require special codes given to the customers as a means of identification of authentic users before they can receive any information they requested for. This is a service introduced into the banking balance as a result of computer telephone technology being made available Ovia (2001). The technology banking has a universe of possible application limited only by the imagination. These areas include: Account balance enquiry;

Account statement printing; intra-Banks Account to Account Transfer; inter-banks Account to Account Transfer;Download Account Transaction etc. Telephone and PC banking brings the bank to the doorstep of the customer, it does not require the customer to have his premises; interactive Voice Response becomes a regular feature of operations; Text-to-speech capability becomes reality; A uniformed messaging capability become permanent feature of the bank. 2.3.2 The Card System The card system is a unique electronic payment type. The smart cards are plastic devices with embedded integrated circuit being used for settlement of financial obligations. The power of cards lies in their sophistication and acceptability to store and manipulate data, and handles multiple applications on one card securely (Amedu, 2005). Depending on the sophistication, it can be used as a Credit Card, Debit Card and ATMs (Automatic Teller Machine). While the electronic card is gaining popularity in USA and Nigeria, the Spanish financial Institution demonstrated the highest implementation and update of smartcards across Europe (Amedu, 2005). The Smart Card was introduced into the Nigerian market to reduce or eliminate problems of carrying cash about (Amedu, 2005). It is electronically loaded with cash value and carried about like credit card and stores information on a microchip. The microchip contains a purse in which value is hold electronically. In addition, it also contains security programs; these protect transactions between one card user and the other. It can also be transferred directly to a retailer, merchant or other outlet to pay for goods and services, and like cash, transaction between individual without the needs for banks of the other third parties. Also, the system does not require central clearing. It is valued immediately. Also the system allows transfer of one value to the other hence it operates like cash. 2.3.3 The Automated Teller Machine (ATM) Worldwide, the use of paper cash still remains the most widely used and acceptable means of settling financial transactions and obligations. However, the proportion of cash transactions is increasingly on the decline, especially in advanced economics (Amedu, 2005). In USA, where

the use of cash is still prominent, compared with European countries, it represents 50 percent or more of the total transactions. Of course, cash is a non-electronic payment method. However, the physical carriage of cash as well as the visit to the bank branches is being reduced by the introduction of an electronic device, ATM. An ATM device allows a bank customer to withdraw cash from his account via a cash dispenser (Machine), and the account is debited immediately. A fundamental advantage is that it needs not to be located within the banking premises. It is usually in stores, shopping malls, fuel stations 2.4 How virtual banking affects service delivery Banks have largely implemented service delivery technology as a way of augmenting the services traditionally provided by bank personnel. Implementation results both from the need to reduce the cost of delivering service primarily through personnel, and, the corresponding need to meet the challenge posed by technologically innovative competitors (Byers and Lederer, 2001; Howcraft and Beckett, 1996; Kelley, 1989). Changes in the banking industry such as those resulting from deregulation, rapid global networking, and the rise in personal wealth have thus made the implementation of sophisticated delivery systems (e.g. online and telephone banking, remote site automated teller machines, etc.) a strategic necessity in many cases (Lewis et al., 1994). Mols (1999) stated that the Internet banking is a new distribution channels that offer less waiting time and a higher spatial convenience than traditional branch banking and this Internet banking channel has significantly lower cost structure than traditional delivery satisfaction and retention. Moreover, Internet banking is very channels, Internet banking not only reduces operational cost to the bank, but also leads to higher levels of customer attractive to banks and to consumers who now have higher acceptance of new technology and increasingly understand more complex products (Booz et al., 1997, Polatoglu and Ekin, 2001, Mols, 2000, Rose, 2000, Sathye, 1999, Sheshunoff, 2000, Wisner and Corney, 2001, Jun and Cai, 2001).

Mols (2001) argued that Internet banking might be used for strengthening cross-selling and price differentiation. Internet banking makes it possible for banks to offer consumers a variety of services 24 hours a day. Internet banking are attractive, because they are more satisfied with their bank, are less price sensitive, have the highest intentions to repurchase, and provide more positive word-of-mouth information than other bank customers.

2.2 Possible benefits of virtual banking to commercial banks operations. Various factors which contribute to the customers perception such as convenience, flexible virtual banking system, reliability ,time factor, real time access to information, saving transaction cost, on-line bill payments ,digital signature for security, faster transfer, easy to use, user friendly, low transaction fees, any time and anywhere banking facility, access to current and historical transaction data, facility of fund transfer to third party, etc, (see Divya and Padhmanabhan, 2008) and speed ,operational efficiency, better cash management, expanded financial reach (Mahrdi and Mehrdad, 2010). Some of the factors are discussed below. 1. Digital signature for security: Security is rated as the most important issue of online banking. There is a dual requirement to protect customers privacy and protect against fraud. Digital signature is a precautionary measure to prevent malpractices and tampering the information. It is a form of enhanced authentication (Williamson, 2006). 2. Convenience way of operating banking transactions: Online banking is a highly profitable channel for financial institutions. It provides customers convenience and flexibility and can be provided at a lower cost than traditional branch banking (Beer, 2006). 3. Faster transfer: The fundamental advantage of the e-banking is the transfer of the information about the moneys worth to any place at any time with a mouse clicks distance (Dube, et. al., 2009) 4. Reliability: Kamel (2005) identified one of the very important service quality dimensions of ebanking service quality is reliability. The online banking environment has grown tremendously

over the past several years and will continue to grow as financial institutions continue to strive to allow customers to complete money transfers, pay bills, and access critical information online. Authenticating customers logging onto their online banking service has become a crucial concern of financial institutions (Williamson, 2006) 5. Time factor: Liu and Arnett in their study identified time factor as one of the prime factor that in e-banking service quality feature for the customers. Saving time is an importance factor which influences the customers prefers to use e-banking. (Beer, 2006). Banks can make the information of products and services available on their site, which is, an advantageous proposition. 6. Real time access to information: The banks started e-banking with simple functions such as real time access to information about interest rates, checking account balances and computing loan eligibility. Then, the services are extended to online bill payment, transfer of funds between accounts and cash management services for corporate organizations (Mohammed, 2009). 7. Queue management: One of the important dimensions of e-banking service quality is queue management (Agboola, 2006). 8. Saving transaction cost: Improving customer service, increasing market reach and reducing costs are now basic expectations of Internet banking services. If consumers are to use new technologies, the technologies must be reasonably priced relative to alternatives. Otherwise, the acceptance of the new technology may not be viable from the standpoint of the consumer (AlSukhar, 2005). Internet banking model offers advantages for both banks and customers. The Internet provides the banks with the ability to deliver products and services to customers at a cost that is lower than any existing mode of delivery. Another factor that would stand in the way of consumer adoption of e-banking is the cost factor. 9. Easy to use and user friendliness: Ease of use is an important determinant for the customer preferring the internet banking (Beer, 2006). In a study conducted by Karjaluoto, et. al., (2002); reported that ease of use of innovative product or service as one of the three important characteristics for adoption from the customers perspective. The user friendliness of domain names as well as the navigation tools available in the web-sites is an important determinant for ease of use.

10. Any time and anywhere banking facility: Online banking users say that convenience is the most important factor, online banking lets them access their accounts from anywhere and at any time (Maholtra and Singh, 2007) 11. Access to current and historical transaction data: A customer can check balance by logging into banks website through a user name and password. In this way he can enquire balance, status of cheques, perform funds transfers, order drafts, request issue of cheque books etc (Gupta, 2008). Customers prefer to view account balances, transaction history and updates get estatements, credit card and debit card transaction history and updates, checking the status of their credit card accounts, viewing information regarding their account, information on their fixed deposits on line. 4.4 The impacts of internet banking on cost of operations In addition to revenue enhancement, Internet banking may enable banks to reduce costs of operation, in particular, by allowing them to reduce expenditures on brick and mortar. To the extent this may be so, Internet banking could be considered a causal factor in generating lower expenses related to maintaining physical branches. On the other hand, banks with relatively high expenses in maintaining their branch networks may be expected to have the incentive to adopt Internet banking. The adoption of Internet banking would thus be the effect of existing characteristics of banks (Furst et al., 2002). banks with high costs of maintaining a branch network are motivated to adopt Internet banking by the prospect of future cost savings. 2.5.3 Electronic Banking Profitability and Efficiency Commercial banks assaulted by the pressure of globalization, competition from nonbanking news ways to add value to the services. The question what drives performance? is at the top in understanding superior performance and hence striving for it. Substantial research efforts have gone into addressing this question, starting from the strategic level and going down to operational details. A key study bench marking the strategies of leading retail banks and retail banks was carried out by the bank strategies of leading retail banks and (Vander Velde 1992). This study is based on the opinions of heads of retail banks at all us commercial banks established the linkage between marketing, operations, organizing excellence. This finding led to the formulation of the service management strategy encapsulated in the trail operational

capabilities service quality-performance (-SQ-P) (Foth and Jackson 1995). The C- SQ-P trail is, in turn, a focused view of the service profit chain described by (Heskettet all, 1994) based on their analysis of successful service organizations. 2.5 .6 The impacts of electronic banking on the performance commercial banks. Egland et al. (1998) was the first important study, which estimated the number of US banks offering Internet banking and analyzed the structure and performance characteristics of these banks. It found no evidence of major differences in the performance of the group of banks offering Internet banking activities compared to those that do not offer such services in terms of profitability, efficiency or credit quality. However, transactional Internet banks differed from other banks primarily by size. In contrast to the results of Egland et al. (1998), Furst et al. (2000a, 2000b, 2002a and 2002b) found that banks in all size categories offering Internet banking were generally more profitable and tended to rely less heavily on traditional banking activities in comparison to non-Internet banks. An exception to the superior performance of Internet banks was the de novo (new startups) Internet banks, which were less profitable and less efficient than non-Internet de novos. The authors concluded that Internet banking was too small a factor to have affected banks profitability. Sullivan (2000) found that click and mortar banks in the 10th Federal Reserve District incurred somewhat higher operating expenses but offset these expenses with somewhat higher fee income. On average, this study found no systematic evidence that banks were either helped or harmed by offering the Internet delivery channel. Similar to the results of Furst et al., this study also found that de novo click and mortar banks performed significantly worse than de novo brick and mortar banks. Hernando and Nieto (2005) examined the performance of multichannel banks in Spain between 1994 and 2002. The study found higher profitability for multichannel banks through increased commission income, increased brokerage fees and (eventual) reductions in staffing levels and concluded that the Internet channel was a complement to physical banking channels. In contrast to earlier studies, the multichannel banks in Spain relied more on typical banking business (lending, deposit taking and securities trading). The adoption of the Internet as a delivery channel had a positive impact on banks profitability after one and a half years of adoption. It was

explained by the lower overhead expenses and in particular, staff and IT costs after the same period. Sathye (2005) investigated the impact of the introduction of transactional Internet banking on performance and risk profile of major credit unions in Australia. Similar to the results of Sullivan (2000), the Internet banking variable didnt show a significant association with the performance as well as with operating risk variable.Thus, Internet banking didnt prove to be a performance enhancing tool in the context of major credit unions in Australia. It neither reduced nor enhanced risk profile. DeYoung et al. (2006) observed the change in financial performance of Internet community banks in U.S. during 1999-2001. The results found that Internet adoption improved community banks profitability, particularly through increased revenues from deposit service charges. Internet adoption was also associated with movements of deposits from checking accounts to money market deposit accounts, increased use of brokered deposits and higher average wage rates for bank employees. It found little evidence of changes in loan portfolio mix. suggested that Internet adoption was associated with an economically andstatistically significant improvement in bank profitability. DeYoung (2001a, 2001b, 2001c and 2005) analyzed systematically the financial performance of pure-play Internet banks in U.S. The study found relatively lower profits at the Internet-only institutions than the branching banks, caused in part by high labour costs, low fee based revenues and difficulty in generating deposit funding. However, consistent with the standard Internet banking model, the results indicated that Internet-only banks tended to grow faster than traditional branching banks. Internet-only banks have access to deeper scale economies than branching banks and because of this, they are likely to become more financially competitive over time as they grow larger. Delgado et al. (2004 and 2006) found similar results for Internet-only banks in the EU. Nevertheless, the magnitude of technology based scale economies found in Delgado et al. (2004 and 2006) was substantially larger than that estimated by DeYoung studies. The evidence of the impact of the adoption of Internet as a delivery channel on financial performance is mixed at both sides of the Atlantic. Nevertheless, the latest studies seem to find a

positive relationship with profitability. It can be argued that as the intensity and experience in the usage of Internet increases, the financial performance of multichannel banks is likely to improve. In Indian context, many publications throw light over the importance of Internet banking and also its prospects for the Indian banking industry. However these studies dont depict any empirical relationship between banks profitability and Internet banking.