Theoritical Approach Definition Banking Innovation Finance Essay

To start with , bank can be defined as an establishment authorized by the government for the safekeeping of money. In other words, it is an institution to receive deposits, make loans, act as an intermediary in financial transactions and provide other services to its customer. The bank have the duty of controlling liquidity , fixed exchange rate according to market forces and securing information about each customer. Innovation can be defined as a process by which a new invention is being introduced in the society. In order to be called innovation , an idea must be replicable at an economical cost and must satisfy a specific need, Banking innovation can be defined as the new developments and invention in the banking sector to benefit and facilitate the task of the society. According to Tornatzky and Fleischer (1990), innovation means the introduction of new technology in the environment which will eventually benefits the task of people. The banking sector is in progress as more and more new banking innovation is being introduced in the society making the routine tasks of the people more simple. Banks no longer restricted themselves to traditional banking activities but explore new avenues. Diederen (1990) showed that information technology is vital in the banking sector for the prospects and improvements in the financial transaction. Also customer service is an additional form of banking innovation being offered. As said by Hanson (2000) , customer service is present in order to help customers to facilitate their task regarding banking sector. In other words , it helps people to adapt themselves to the new banking innovation.

2.2 Banking Innovation : Benefits and Drawbacks

Internet Banking

Internet banking exists only on the internet. It allows customers to conduct financial transactions on a secure website operated by their bank. In other words , it make banking more convenient for customers as they can use their personal computer to access any information they have the rights to acquire. In addition, it is very advantageous for busy customers as they can gain access to their accounts from home or office. Internet banking facilitate tasks like payment of bills, account enquiries, exchange rate information, recharging mobile phone credit , fund transfer, loan application and application for new accounts. Also, with internet banking, it is more quickly and convenient as the task can be done more quickly rather than queuing at the bank. According to Booz (1997), the expense for using internet banks is about twenty per cent whereas on the other hand , expense for normal banks is about sixty per cent and hence expenditures on paper slips and forms decreases and this can help the profit margin of the bank to increase. In addition, Sathye (1999) added that internet banking is the most profitable tool for providing services to customers. Furst et al (2002) said that there are two types of internet banking which are firstly an established website where every customer gain access to their respective bank through the internet and secondly, the internet-only bank and this type of internet banking have no main branch and it rely only on computer server. However , internet banking may also have some disadvantages. An illiterate person may not be fully aware of how to use the internet banking rather in the normal bank , he can go to some employee of the bank to ask for solutions. Also forgery can be an important factor against internet banking. User name and password may be hack and in such case, people loses their money without knowing. There can also have technical breakdowns that is , banking websites go down.

Phone Banking

Phone banking is a service provided by the bank to enable customer who possess a phone and a bank account to carry various banking operations like checking their account balances, exchange rate information , transfer of funds between two accounts and many others. Also, there is no queuing at the bank as the services can be accessed anywhere using the phone. It is also more convenient for customers and reduces paperwork of the bank. According to Laukkanen (2007), mobile banking with good connection improve service quality as customers can perform financial transaction regardless of time and place. Hence this can brought forward a close relationship between the banks and the customers. According to the Federal Reserve Study (2012), 21% of people possessing a mobile are using the services of mobile banking. However, the procedure using the phone banking might be long. The data transmission is not fast when comparing with internet banking. Also there may not have enough security when using phone banking while comparing with other banking innovation.

Automated Teller Machine ( ATM ) Card

It is an electronic banking outlet which allows customers to perform certain banking transactions without the aid of a branch representatives. ATM card is also known as bank card , client card , key card or cash card. Mc Nally and Abernathy (1989) quoted only one advantage : " the cost of each transaction is lower when the ATM is used as opposed to a live teller." After the installation of the ATM machines , services to customers like withdrawing of funds , balance enquiries and transferring of funds from current account to savings account are allowed outside the bank. In addition , money can be withdrawn at any time of the day or night. It also reduce workload of bank's staff , provide services with no error and prove to be beneficial for travellers as there is no need to carry large amount of money. However there are few pitfalls of ATM as fraudulent card readers called skimmers can be placed over authentic reader in order to capture numbers and codes to thieves. Also, thieves normally are aware that people leaving the ATM destination must be having withdrawn money and hence the customers are attacked. In addition , a bank fees is charged when removing money from the ATM. Also illiterate person would not be comfortable with is new technology. Gilly and Zeithaml (1985) said that senior citizens would less likely be adapted with ATM and they would prefer to go to the bank itself.

Credit Cards

Credit cards have been a part of daily transaction since the 19th century. Franklin National Bank issued the first bank credit card in 1952. It is a payment card issued to customers for payment. It can be used instead of cash for purchasing. There is sometimes great competition in the credit card industry and hence some banks often offer gift vouchers in order to attract customers. According to White (1975) , credit cards enable the purchase of goods and services without the need to have the money present at the time of purchasing. Usually a credit limit is available which the customer can do their purchases and payment be done at a later date. At the end of each month, the cardholder receive a statement indicating his amount owed. Brito and Hartley (1995) said that credit card can serve customer a means of precautionary money available to them. Even large purchases can be cover depending on the credit limit. Credit cards avoid fraud, that is only the exact amount will be paid from the card. At the point of sale , there is a system known as electronic verification which verify whether the card is valid or not and checking whether the customer has sufficient credit to meet the purchases. It is also advantageous for the merchants as credit card is a more secure way of receiving payment than liquid cash as this would discourage theft. It is also more convenient when travelling than carrying cash and can meet unexpected emergencies like car repairs or health needs. As said by Feinberg (1986), credit cards encourages spending and hence decreasing the ability of consumers to save for future needs. In other words it reduces the buying power as the credit used must be repaid. It encourages debt and bankruptcy if not used wisely. Also further interest charges are added if the amount owed is not paid fully.

Debit Cards

It is a plastic card that enable cardholder to perform financial transactions or withdraw money through the Automatic Teller Machine. The first debit card was introduced in UK in the year 1987.With the use of a debit card , purchases can be made hence decreasing the need of carrying money everywhere and an interest is earn on the deposit that is available on the debit card. Also online products can be purchased with the use of the debit card. As said by king and king (2005) , the usage of debit cards increases because consumers are worried about the credit that should be repaid later after making purchases when using credit cards. Unlike credit cards , debit cards allows customer to stay within the budget as only the money available in the account can be spend. Debit cards are accepted more easily by merchants rather than personal cheque. However, there are some drawbacks associated with debit cards. If the card is lost , you can lose all money available in the account as pin code can be easily found with the new technologies. Doing purchases online is not always advantageous as it encourages online scam threat , that is , the card can be used to make unauthorized transactions by hackers. Also , debit card is not acceptable everywhere to make purchases , like small shops or markets, hence in such places liquid cash is a better option.

Smart Cards

Smart card was invented in 1973 by a Frenchman named Roland Marino. Smart card known as the electronic wallet looks the same as a credit card in size and shape. As said by Fancher (1997), smart cards contains a single chip micro controller embedded in the plastic, hence large amounts of data can be stored in it. The level of security when using a smart card is quite high as data can only be accessible only if the Personal Identification Number (PIN) is typed. Like credit cards, smart card can also store financial information. Moreover, it can store business information , telephone numbers and personal information given its high level of data storage. However , data stored on a smart card cannot be altered. Once stored , it is forever. Also , smart card is more exprensive than other ordinary card readers.

Electronic money

Electronic money . also known as digital money , electronic cash , electronic currency , cyber currency or e-money can be defined as money which is exchanged electronically. The use of computer network, internet and digital stored value systems is essential for using the electronic money. There are two types of electronic money that exists which are identified e-money and anonymous e-money. Identified e-money contains information about the person who withdrew the money. On the other hand , anonymous e-money looks like real paper cash and once money is withdrawn from an account , no identification of the person can be made. There also exists two types of approaches of electronic money , that is online e-money and offline e-money. Online e-money can be defined as the interaction with a bank to conduct a transaction with another person. The use of credit cards at the point of sale can be a good example as the bank's computer would indicate whether the card is valid or not on the spot . However the bank has to maintain a detailed and up-to-date database. On the other hand , offline e-money is when a transaction is done without involving a bank directly. However if a double spender is found , the prevention may not be immediate. An example of offline e-money would be smart card.

IMPACT OF BANKING INNOVATION

According to Joseph and Stone (2003) , the new banking innovation in recent years like automated teller machines and internet banking services has increased customer's confidence and market share. The more banking innovation being introduced in a country can lead to a more perfect economic development. Levine (1997) identified five characteristics which shows its contribution to economic development. These are savings mobilization, controlling of risks, proper allocation of resources, corporate control and enable the trading of goods and services. Also , with banking innovation , the bank branches would be less crowded with people as computer literate people would prefer doing the transaction through the internet. Also, the fact that most of the transactions are computerized hence there will be less paper work. Also, in case of emergency , money can be withdrawn from the ATM regardless of time. However banking innovation may not prove to be beneficial for all people. Many people may lose their jobs at the bank branches because many financial transaction are being processed through the internet. Also, illiterate people may not fully adapt themselves to these form of innovation. They would not benefit the same as literate person as they must go to the branches itself to perform the transaction though it could have been done at home itself. Also , they might be getting a lot of difficulty to use ATM machine as the steps and instructions to follow are normally written in English. Moreover inventing and doing research on new tools in the banking sector like credit cards , debit cards, the automated teller machine and smart cards cost a lot of money.

EMPIRICAL APPROACH

Theories of Banking Innovation and Literature Review

According to Dannenberg and keller (1998) , retail banking is severely affected with the use of internet banking as normally retails banks process financial transactions directly with the customers. Hence internet banking would not allow close relationship between the bank and customer. However, Dannenberg and keller (1998) also found a possibility to let both the customers and the bank to communicate person-to-person that is , by using video conferencing. Sujit Chakravorti (2003) has studied that credit cards provide only benefits to merchants and consumers and also proved that it is better than other payment cards while comparing the number of transactions being processed over the last 20 years. The latter also conducted a discussion about credit card network about how to tackle the challenges. Moreover, in 2006 ,a model was constructed by Sujit Chakravorti to study consumers , card issuer and merchants. According to this model , three interesting results were found. Firstly , if cost of funds of the issuer is low and the profit margin earned by the merchant is high then the issuer grant credit cards to selected consumers to increase sales of merchants. Secondly , the ability of issuer to charge high discount fees depends upon the number of customers using credit cards. Thirdly , every merchant's profit decreases in the next period when they all started to accept credit cards , hence an intertemporal effect is arised. Hayashi and Klee (2003) examined the use of debit cards by consumers. The latter used the data from the year 2001 in order to get a survey about how much uses the internet and hence found that the literate persons using technology are more adapted the new form of payment that is , the use of debit cards. However whether to use debit card or not depends upon the type of purchase being made. He also pointed out that " personal preferences and transaction-specific factors " are important. According to the study of Adams and Thieben (1991) of training people over fifty years old to use Automated Teller Machine , they found that the type of training provided is not sufficient for the usage of the ATM. Hence , the fact that banks provide little training opportunities , people must learn on their own about how to use the ATM. Hatta and Liyama (1991) also studied that people can use ATM successfully without any instructions. They found that the first try for deposits was 69% , 53% for the transferring of funds between two accounts and 58% for the withdrawing of funds. They also believe that practice makes perfect. However , both studies shows that there is a need train people to use the ATM. Hatta and Liyama ( 1991) suggest that the design of the ATM should be taken into consideration in order to facilitate the people trying to use ATM for the first time. According to the study of Suoranta (2003) , she found that people using phone banking are normally between the age groups 25 to 34 years old and must be literate. She also found that some people prefer mobile banking rather than internet banking services. Hence the users of internet banking and phone banking would differ. Suoranta (2003) also said that it is vital for the service provider to be aware of the differences between users of internet banking and phone banking so that they can correctly make better allocation of resources and marketing strategies to be brought forward. The aim of this research done by Suoranta (2003) was simply to know how users of phone banking differ from that of internet banking. A study was carried forward by Lunt (1992) in order to examine the factors that increase the card usage in USA when consumers have many credit cards. He found that consumers uses one credit card rather than the other because of advantages like low interest rates and also the amount of credit limit being offered. Lunt ( 1992) also noted that the number of people using credit cards in USA is constantly increasing because of the high credit limits being offered to them. He also said that US credit cards banks uses techniques like giving bonus on cash at bank and no annual fee to be paid in order to encourage card holder. Another similar study was carried by Kaynak and Harcar ( 2001) to examine consumer behavior towards the ownership of credit card in Turkey and found that the structure of the card , the choice and attitudes of the cardholders that matters for the type of credit cards to be used. Boeschoten (1992) studied the impact of payment cards on cash demand in Netherlands. On the data collected in 1990 from household surveys , he examined how the automated teller machine , credit cards and debit cards cause an impact of the cash demand in Netherlands. Boeschoten (1992) said that the coefficient of a dummy variable when measuring the usage of ATM is not large for the amount of cash in the purse and the same case is for debit cards, that is , it does not affect purse cash demand. However when focusing on the overall cash demand rather than purse cash demand , then he found out that the constant use of debit card and ATM decreases the cash in hand by 15% and 18% respectively. According to Duca and Whitesell (1995), the cardholder normally do not check their money balances frequently. Duca and Whitesell (1995) conducted a study and showed that if the percentage of people holding a card is 10% hence 9% of cardholders would not bother about checking their bank balances regularly. He also highlighted that a variable and a sample is important when studying with these data.

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