Electronic Banking and Internet Banking

Introduction
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

Description
Pc 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.

Internet banking

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.

Telephone-based Banking

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.

Cost savings
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.

Geographic Reach
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.

Improved image
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.

Convenience
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.

Demographic Factor
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 level
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.

Social pressure
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
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

Empirical study

Convenience
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).

Gender
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.

Age
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.