Technological Innovations in the Banking Industry and their Effects on Performance Finance Essay

CHAPTER 1

INTRODUCTION

In recent times, the emergence of Information Technology has been incorporated into the Banking Industry. This advent of Information Technology (IT) has propelled a noticeable change in the Banking Sector. Information Technology (IT) to all computer based information systems used by an organisation and their underlying technologies (Langdon and Langdon, 2006) Information Technology systems are revolutionising the operations of firms, industries and markets. Langdon and Langdon also defined an IT system as a set of interrelated components that collect (or remove), process, store and distribute information to support decision making, coordination and control. It also helps managers and workers to analyse problems, visualise complex subjects and create new products. IT is one of the most important tools along with the innovations in organisations and management. Research has shown the investment in IT plays a critical role in increasing the productivity of firms (Zhu et a l, 2004 The business world is in the midst of a networking and communication revolutions driven by the growth of internet, internet based technologies, new business models and processes that leverage the new products.

Banking Trends Worldwide

Over the past decade, service organisations including commercial banks have been driven by such trends such as advancements in technology and deregulation to enhance their distribution channels. Technology in Banking can mainly be found in the form of computer based applications and information technology. Currently, delivery trends in banking include, PC Banking, Internet Banking, Mobile Banking, Managed networks, TV-Based, Automated Teller Machines(ATM), Electronic Funds Transfer at Point of Sale(EFTPOS) etc.

Importance of Technology in Banking

A number of studies have concluded that IT has significant positive effects on bank productivity, cashiers' work, banking transactions, bank patronage as well as its service delivery thus a positive effect on growth of banking. (Balachandher et al, 2001: Hunter, 1991) It has also been said that, technology enables banks to reduce costs, i.e., reduction of operating labour cost, cost of collecting, storing and processing information fall and interest expense is more competitive because technology enables banks to access liabilities more cheaply. Also, technology enable banks to serve their customers better and faster (convenience of having 24 hour access to ATMs, internet banking and telephone banking) and also it enables banks have diverse banking products. Finally, technology enables banks increase revenue and capture new markets by offering broader array of services and doing banking business worldwide. Technology is the is the key to quality service in banking.

Statement of the problem

Top management in the Banking Industry invest in Information Technology with the expectation will result in higher productivity and/or provide the bank with a stronger market presence and related competitive advantage. With the deregulation of the Banking industry, completion has increased considerably thus in managing operational costs, IT has become critical to achieve a competitive advantage (Mistry, 2006) Although most researchers conducted on this topic have yielded mixed results, most of them have shown that IT and bank performance are independent of one another. However, this research is aimed at finding out if, indeed, the same holds for the Ghanaian Banking Industry or if the Ghanaian Banking Industry is benefiting from the incorporation of IT into daily banking operations. Hypothesis A scientific assumption that will consist of measurable variables linked by a relationship that explains how IT impacts bank performance in that IT has enhanced bank's service delivery, product line customer data base management and credit allocation. This assumption is that the higher the IT expenditure used by a bank, the higher its revenue. Aims and Objective of study To describe the Technological Environment of Ghana's Banking Industry. To find if there is a relationship between IT and Bank Performance. Scope of the Study The study focuses on banks currently using IT based service delivery in Greater Accra Region. Furthermore, the sample size was limited to Ten (10) universal banks out Twenty-five (25)

CHAPTER 2

Literature Review

Firms invest substantial amounts of resources to sustain or enhance their competitive advantage, that is , their abilities to compete globally. These expenditures are usually made to sustain shareholder value through either a revenue growth strategy or a productivity strategy. According to kim et al (2004), a revenue growth strategy involves expanding new markets, new customers and service while a Productivity Strategy involves making improvements in cost structure and asset utilization. Investing in IT is highly important for improving core competencies for firms in the Banking Industry. Information Technologies are essential tools for developing new financial services, financial products and providing effective and convenient services to customers. The environment in the Banking Industry has become IT intensive (Kim et al , 2004). Banks have moved into online banking systems using IT systems such as Cash Dispensers or Automated teller Machines, Telephone Banking and Internet Banking. Several studies have been conducted to investigate the economic consequences of IT an the Banking Industry. Most of these researches focused on whether IT provides positive economic benefits or not. Although the evidence appears mixed, some studies found that the 'IT Productivity Paradox' disappeared when the use of IT was well matched with its business strategy such as revenue growth or productivity strategy (Porter, 2001; Simmons, 1998; and Brynjolfsson and Yang, 1996). Thus managers' first concern in investing in IT must be how to combine IT and business strategy in order to obtain a higher business performance.

Modern Banking Practice

Since the 1980's, the Banking Sector has been in a process of significant transformation that started in the United States and later moved to Europe. The main forces behind this transformation of the Banking Industry according to Reixach (2001), are deregulation and innovation in information technologies. Both forces have brought about an increased competition not only among banks but also from other financial and even non-financial institutions. Banks now depend on income from fees rather that interest rate spreads and also competition has in some cases, encouraged banks taking higher risks for which there might only be a little gain. On the other hand, the transformation of the Banking Industry has contributed to the blurring differences between retail, wholesale and investment banking. Banks in America have steered towards specialisation while in Europe the trend is tailored towards Universal Banking. Specialization has been the trend in the early Ghanaian banking industry. In the last ten years, the trend has changed with few banking converting to Universal Banks and the issuance of Universal Licences to new banks. 2.1.1 Type of IT Innovations Information technologies are having a big impact on the reshaping of the Banking Idustry leading to the development of new financial products and new means of developing them. With regards to the delivery of bank products, the last decade has seen the appearance of Automated Teller Machines (ATMs) and Telephone Banking, and now seeing the spread of Internet Banking. Banking business is now a 24 hour and a 365 day activity with customers having to spend less hours of waiting for service. The main types of IT innovations currently present in the Ghanaian Banking Industry are ATMs, Internet Banking, PC banking, Telephone Banking, Branch Networking, and Electronic Funds Transfer at Point of Sale (EFTPoS) Bank Performance According to Madura (2001), the main measures of Bank Performance are return on the asseta and return on equity. Return on Assets (ROA) is mainly influenced by financial characteristics such as net interest margin, non -interest revenue, non-interest expenses and loan losses. Bank decisions that affect the financial characteristics of bank's are deposit rate decisions, loan rate decisions, loan losses, bank services offered, overhead requirements, efficiency, advertising and the risk level of loans provided. Return on equity on the other hand is influenced by the return on assets (ROA) and the banks leverage measure. Several studies have been conducted on the IT and firm performance. Advances in IT permit management to change and improve significant aspects of a firm's structure and operations (Porter, 2001; Stanmbaugh and Carpenter, 1992; and Elliot, 1992). Studies investigating effect on firm's profitability, according to Kim et al (2004) focused on whether It expenditur3e is converted into business value; eg. reduced expenses, increased revenue or improved operating performance. The evidence appear mixed on the effect of IT on financial performance (Brynjolfsson and Yang, 1996). Brynjolfsson and Hitt (1994) found out that IT improved the firm's productivity and created substantial value for customers but did not improve profitability In sum, many studies have shown that IT Reduces operating costs (Barua et al, 1995) Increases market share and productivity (Brynjolfsson and Hitt, 1994) Increases future economic benefits and profitability ( Brown, Gatain, and Hicks, JR., 1995) The context of the Study History of It in Ghana's Banking Industry Abor (2002) in his paper Technological Innovations and Banking in Ghana gives a history of It in Ghana in stated that before the 1980s it was only the use of office automation devices such as Telephones, telefax and facsimile were employed to speed and make more efficient the process of serving bank's customers. Later in the 1985 and beyond, as competition intensified and the personal computer (PC) got proletarian, banks begun using the in the back-office operations and later tellers used the for customer services. Advancements got banks networking their branches and operations and the first ATM was installed by the Trust Bank Ghana in 1995. Other technologies such as Electronic Cards became popular as foreign banks came on the scene with increased competition and service delivery that need IT. Clydestone Ghana Limited Clydestone Ghana Limited is a leading provider of information, communication and technology in Ghana. Listed as the first ICT company on the Ghana Stock Exchange is specialized in payment systems, networking and outsourcing and is the sole supplier of UNISYS in Ghana. Their outsourcing installs and manages most of Ghana's ATMs and Point of Sale Terminal (POS). CHAPTER 3 RESEARCH METHODOLOGY This chapter describes the research process. A mixture of qualitative and quantitative research techniques will be used. However, primarily a desk research will be conducted to cover the Ghanaian Banking Industry and interview with Bank's IT service providers of which the greater percentage comes from Clydestone Ghana Limited. 3.1 Target Group and Sampling Procedure This research will be focused on banks, irrespective of their categories, which are currently employing some form of IT in their daily operations. Three Banks will be chosen for the case study; namely, Cal Bank Ghana Limited, EcoBank Ghana Limited and Ghana Commercial Bank Limited. Cal Bank and ECOBank are the topmost Banks which employ the most forms of IT innovations. Secondly, these banks have been involved in several changes since its attainment of a universal licence. Ghana Commercial Bank which is the traditional commercial bank has a wide network of branches but has not adopted most of the recent IT innovative service delivery products thus a part of the sample for the studies. 3.2 Sources of Data The study will obtain information from primary and secondary data 3.2.1 Primary Data Top management personnel of Clydestone Ghana Limited will be interviewed to obtain the information on the various IT devices and technologies that banks use in their daily operations. 3.2.2 Secondary Data Secondary data that will be used and are accessible are; Bankscope The Ghana Banking Survey 2000-2009 Annual Reports of the 3 named Banks The Internet 3.2.3 Time Frame Data collection will be limited to a time frame of the last nine (9) years. This is because during the period under review, the Banking Industry experienced a lot of changes; events such as the introduction of Universal Banking, the influx of Nigerian Banks, and the introduction of the new Capital Accord occurred. The period under review will be from 2001 to 2009. 3.3 Methods/Procedures A preliminary survey will be conducted to determine the number of banks currently employing some for IT in their service delivery. This will be conducted on all twenty-five (25) banks in the Ghana Banking Industry to collect information on various IT based products for bank customers. Clydestone Ghana Limited, an IT service provider for banks, in order to determine the extent to which banks depend on information technology. These Interviews will be conducted to find out the number, types and frequency of Information Technology devices available and employed by banks. 3.4 Treatment of Finds The findings from the research process will be analysed mainly by trend analysis, ratio analysis and regression analysis to allow inferences to be made. Three measure will be used to evaluate bank performance. These are return on assets, return on equity and operating profit in three regression models. 3.4.1 Trend and Ratio Analysis This is based on the assumption that economic performance follows an established pattern and, therefore, historical data can be used to predict future business activity. This will be used to show whether since the introduction of IT in the banking industry certain variables such as loans and advances have changed with a consistence ratio. This will also be used to forecast the future of IT in banking industry. 3.4.2 Graphical Presentations These include bar charts, pie charts, tables and graphs. They will be used to show the relationship between the two variables being tested; IT and bank performance. 3.4.3 Computer Applications Microsoft Excel 2003 will be instrumental to present the findings in graphical forms, then used too interpret the finding from primary survey in order to select a sample to analyse financial ratios of the samples to be able to perform the regression analysis. 3.4.4 Regression Analysis Conceptual Framework The conceptual framework of this study, as in Figure 1 below, shows that the investments in Information Technology can influence firm performance, i.e. IT has a positive effect on performance. In order to avoid any interference by the other variables, this study includes control variables which are the firm's characteristics, namely; non-interest revenues, non-interest expenses, capital structure of the bank and the growth in net interest income of the firm. The study will employ multiple regression models to examine the relationship of It investment on bank performance. Regarding the measurement of firm performance, this study will use performances which are based on accounting measures. Although some researchers have expressed concern over the use of accounting rates of return (Fisher and McGowan, 1983), most studies regard the accountin g measures as acceptable. Cheng and Chun (2005) used return on assets (ROA) as a measure of firm performance. In order to increase the reliability of empirical results, two other models will be used. These models will be return on equity and bank profit as measures of bank financial performance. To avoid the impact caused by other variables that are absent from my model, this study refers to prior research (Cheng and Chun, 2005) and chooses the firm characteristics as capital structure and growth in net interest income. The study also refers to Kim and Davidson (2004) and selects Net Spread, Return on Equity and Return on assets as control variables with bank operating profits as the dependent variable.

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