Impact of E-Commerce in the Banking Sector - Essay Example

?Impact of e-Commerce in the Banking Sector The modern era has witnessed the widespread espousal of information technology in many business sectors. Many business establishments usually use information technology in processes such as managing organisational data. In such cases, information technology has to do with the operation of computers, as well as the use of computer software for processes such as converting data, protection, storage, and the retrieval of information. More than any other sector, the banking sector has implemented various functions of information technology to ease the process of providing services for customers in varied locations. The concept of electronic commerce is descriptive of the process of conducting commercial transactions of services, goods, and information by means of computer networks. In e-commerce products and services can be bought online. Due to the fact that the banking sector is probably the busiest service sector, running it efficiently usually requires more manpower. Technological innovations such as computer based commercial transactions, however, do not usually need direct supervision from workers, and thus have contributed towards banks being more efficient in their dispensation of services. In traditional banks’ manual services, consumers usually have to queues to get to the necessary services. The introduction of e-commerce brought a much needed change to combat such inconveniences (Mahdi and Mehrdad, 2010). Banks have to make use of the offerings of e –commerce so as to remain relevant while outwitting their competitors. In the banking industry, productivity is dependent on the delivery of high quality services. E-commerce in the banking sector has to do with allowing customers to be able to access their bank accounts through the internet by means of a modem. Online banking options were first provided, in a limited capacity, by baking institutions in America in 1995. It has been speculated that this was as a result of the pressure faced by American banks as a result of aggressive competition between international banking institutions across the globe (Mittal and Sanjay, 2007). At first, the ‘online services’ only had to do with providing customers with information about the various services that were being offered by different bank branches. The rapid development of communication technology witnessed in the last two decades, however, allowed for banks to start allowing their customers ways of accessing their accounts through the internet. Banks also made it possible for customers to transfer money while also being able to procure financial offerings on their behalf. Since then, there has been a rapid spread of the use of online banking options across the world. While, in traditional banking, workers handle all financial activities such as the provision of loans and the collection of deposits, in e-commerce in banking, a number of distribution channels are used to supply information about banking transactions. In the use of e- commerce, banks use delivery systems such as digital television, cell phones, and laptops to relay information to their consumers. In transactions conducted through the traditional system of banking, payment transactions are conducted through a bank branch. The utilisation of e-commerce in the banking system today, however, has allowed for the automated delivery of services to banking customers by use of the internet (Khalfan and Abdullah, 2006). In most banking facilities in developed nations, the electronic banking system involves the automation of factors such as ATMs, direct deposit, telephone banking, debit and credit cards, web-based banking, and bill payment. Most banking institutions around the world have some sort of e-commerce function. While some scholars have observed that e-commerce in the banking sector might soon be responsible for the abolition of traditional functions of banking, this is not likely unless banks begin to gain substantial profits through e-banking services (Kjell, VebjOrn and TjOstheim, 2006). Many banking institutions in developed nations already offer services such as data about personal accounts as well as processed loans through the internet. They also allow their customers to pay bills, transfer funds, purchase or sell stocks and bonds, and engage in the transaction of shares through services provided online. Due to saved transport costs, such services provided through e-commerce in the banking sector has resulted in lowered transactional as well as operational costs. It has also been estimated that this type of e-commerce has the potential of stimulating revenue growth. E-commerce in the banking sector has also been largely accepted by banking customers due to the fact that it guarantees, to a greater extent than traditional banking, the security of customer profiles. It also makes it harder for strangers to be able to have unauthorised access to personal accounts of others with the intent to harm them (Gupta, 2008). Of all business sectors today, the banking sector probably is the most information-intensive division, and is most likely to benefit most from e-commerce activities. The role of the World Wide Web is vital in today’s banking transactions as it serves as a medium that allows the bank to be able to communicate on all banking related matters with clients. Most banks hire specialist website designers who can create sites that allow for effortless with all clients (Zwass, 2003). They also champion the increased multimedia content, so as to attract more customers, hence positively impacting organisational sales. Websites with varied multimedia options, while reaching potential customers through inexpensive ways, also allows each customer to be able to use his or her preferred option; thus increasing the chances of customer loyalty. Moreover, in today’s banking sector, e-commerce options are not really considered to be a source of differentiation due to the fact that they have been embraced by almost all the banking institutions (Allen and Engert, 2007). The main reason for the widespread penetration of e-commerce in banking is due to the fact that this method is quite cost effective. It is likely that, in future, more technological advances in the communication industry will result in greater pressure to implement the new technologies; thus intensifying the dynamism in the banking industry. E-commerce in banking has grown to be a vital channel that allows banks to move away from geographically specific bank locations to being virtual organisations. This has also resulted in the opening up of new vistas of importance for banking clients. E-commerce in banking has greatly affected the traditional offerings of service in banks. E-banking, for the most part, is perceived as being a complementary facility to the conventional banking channels. Banks, for instance, have noticed that e-commerce allows for improved relations with the clients who are happy to be able to access their accounts whenever they wish to without leaving the comfort of their homes (Dina, Allard and Sandra, 2004). Banking customers have also reacted positively to having extended time periods in which to conduct transactions or monitor their accounts. In the past, all trips to the bank had to be booked to ensure that a customer had adequate time to access his or her account. If the customer did not warn banking officials of his or her impending visit, the customer could not expect to have a lot of time in which to finish the necessary business as there were other customers waiting in line. The introduction of e-commerce in banking has transformed banking procedures for clients as more people are now able to access their bank accounts online. This means that the handling of money debit cards, credit cards, and ATM cards is now an easier task. This reality has given rise to depositions and investments made by customers as they are now able to withdraw money from any geographical region in the world. E-commerce in banks is especially beneficial for people living in rural areas (Jelassi and Enders, 2004). In the past, due to the fact that most bank branches were located in the urban areas, rural customers had to travel long distances to take advantage of some important services. E-technology, however, has helped considerably in reducing the large gap between urban and rural banking trends. In addition, this technology is also likely to enhance the infiltration of banking sector to enlarge the reach of banking services to rural populations. This reality has caused a sharp rise in the amount of bank-provided loans to rural populations. E-commerce in the banking industry has also spurred the aggressive competition between different international banks (Gowrisankaran and Stavins, 2004). In the attempt to benefit from having the biggest market share by means of new e-commerce technologies, many banks from developed nations have initiated simpler terms for their different services. Banks have also sharply reduced the prices of various services so as to attract more patrons. Banks have also benefitted from the rise in trades on securities. This is because securitisation lessens the risk involved in holding fixed-rate, long-term mortgages. The advances related to the telecommunications industry have also generated more tech-savvy customers who are viewed as being more discerning of IT factors. This means that banking institutions have to make their websites more customer-friendly and create facilities that support the concept of one-stop banking. In order to draw customers into conducting more individual transactions, banks have to be more receptive to constant changes, and assume strategies such as the bundling of products that can be marketed as representing individual preferences. For instance, banking establishments have to plan and offer their customers much more than just the ability to transfer funds, confirm daily balances, and bills payments (Padhy, 2007). Banks could also look at relatively new options such as infiltrating non-financial organisations, as well as internet retailers with their services. By doing this, banks will in all probability be able to boost fee revenues through services such as profits from credit cards, online bill payments, online share trading, and home loans. Positive as well as Negative Effects of E-commerce in the Banking Sector Positive Effects There are numerous changes that have been brought about by e-commerce in banking. When traditional banking was the only option available, customers did not change their accounts frequently because it was not an easy process. This means that they were sometimes forced to put up with half-hearted services. Today, however, bank accounts can be swiftly changed a click of a mouse (Banstola, 2007). Customers have the option of surfing through the sites of different banks so as to determine the institutions that are best for them. In addition, when using electronic banking, the cost of closing an old account and opening a new one is relatively low. This has reduced customer loyalty, which was guaranteed in the past, and thus forces banks to offer their best services in order to attract and retain customers. E-commerce in the banking sector has also resulted in a lot of market transparency (Sklira, Pomportsisa and Obaidat, 2003). As a result of the easily available data online, banks have the chance to keep up with their competitors by learning of all the innovative services that they are offering their consumers. This merely serves to hasten commoditisation and product standardisation. Banks can also use polls conducted on customer preferences as far as banking is concerned to offer popular financial services and products once they discover what they are. E-commerce in the banking sector also allows for banks to be able to discover the needs of their customers in order to provide them with what they consider as being convenient (Lang and Colgate 2003). Individual customers are unique; and require different approaches. Banks can generate personal relationships with their clients by catering to preferences in the performance of banking services that cannot be automated. E-commerce in the banking sector has also caused high profit customers to take an interest in e-banking due to the availability of different options in conducting various commercial transactions. Another advantage of e-commerce has to do with time conservation. Banks that have e-commerce options benefit from having an enhanced image because of the wide range of cutting-edge products that are on offer. In addition, such services can be offered to thousands of customers simultaneously. The implementation of e-commerce in the banking sector has also resulted in banks cutting costs. The reduced cost of running banks has resulted in banks experiencing higher profit margins; thus giving banks the opportunity to take advantage of more cross-selling opportunities. It has also made it possible for many banks to seriously consider the possibilities of expanding to other markets. With the online offerings of transactions options, loan applications, stock and bonds commercial deals, and cash depositions, banks do not have to build bricks-and-mortar structures in new geographical regions when they make the choice to expand their operations. Negative Impacts Even though the technology involved in the delivery of e-commerce avails many capabilities, it can also cause some problems. At present, there is an overload of information about various banking services that are being offered by different banks. This also has caused scamming companies to establish websites that purport to offer the same services. Needless to say, many people looking for worthwhile banks have fallen for scams and been conned of large amounts of money in the recent past. This has made people more hesitant about trusting the information provided on line describing the services of different banks. Due to the proliferation of scams online, there are people who will only use sites of banks that have corresponding bricks-and-mortar structures nearby. Another concern has to do with government rules. The whole process of electronic banking poses a threat to the national regulations (DeYoung, Lang and Nolle, 2007). In addition, there are businesses that have concerns about allocating huge amounts of money to different accounts or dealing in money transfers online due to security issues. Also, some customers are put off by bank charges that are linked to some financial services such as debit cards and e-transfer. Moreover, this might change in the near future as more consumers embrace the e-commerce option; resulting in more power being given to consumers and the incidence of lower e-transfer costs. Many banks, and even those in developing nations, have caught on to the importance of including e-commerce options (Aguila-Obra and Padilla-Melendez, 2006). This has resulted in stiffer competition which makes banks get compelled to provide more value added fiscal services to their patrons. Banks realise profits, known as “spread”, when they charge patrons for some web-based transactions and then invest the money in other areas. The incidence of e-commerce in the banking industry also makes customers more fickle in a sense. For instance, if a customer tries to reach his bank online but does not receive a quick reply, he can quickly switch to other banks and even share with others on social media sites about why his former bank is not efficient. This means that banks are in some way at the mercy of their customers. Their carefully constructed images that were possibly crafted over a long period of time can be destroyed easily by disgruntled customers. This was impossible to accomplish when only conventional banking methods were in operation. Customers also have to deal with worrying about strangers being able to get unauthenticated and unwarranted access to their bank accounts. Banks probably have to start investing more in software solutions that will regularly institute electronic checks so that the accounts of their client are not broken into. To guarantee safety in the conducting of bank transactions, banks have to look seriously into issues such as ensuring safe on-line transactions and supervising the minting of electric currency. The Internal Risks of E-commerce in the Banking Sector There are risks to e-commerce in the banking sector that can be brought by bank employees. Sometimes unscrupulous employees will manipulate a customer’s personal bank account data and alter balances. This type of fraud is quite common even though not often reported on. Today, many banks in developed nations usually require that their clients follow definite steps so as to be recognised and subsequently gain access to their accounts. In England, there are several steps involved. This is because providing a specific log name has proved inefficient in curbing crimes such as ‘phishing’ or identity theft. In phishing, electronic mail from bogus sites that are posing as genuine sites are sent to account holders. The account holders are then cheated into sending personal information that allows the fraudsters to hack into the victim’s account. The use of public computers to conduct online transactions is also a very dangerous practice. Public computers cannot be used for sensitive web browsing. A fraudulent individual can use key loggers that track passwords and usernames that are used by people who use the computers for the purposes of hacking into their accounts. Using mobile phones to conduct transactions is another risky practice. This is because mobile phones that connect to the internet by means of Wi-Fi can easily be hacked into. Account holders also have to remember that, in the event that their phones are stolen, their accounts will easily be hacked into. Ways of Curbing Online Crime One Time Passwords In order to counter fraudsters, many banks today recommend the use of one-time passwords. Once the customer activates the account, his or her new password is sent to his mail. Basically, every time the bank customer conducts a financial transaction, he or she has to enter a onetime password for authentication. The moment it is used, the onetime password becomes unacceptable and once the list of provided onetime passwords is exhausted, the customer can request for a new list. Moreover, this is ineffective against certain types of fraud such as phishing. Hardware Tokens Another option is the use of “hardware tokens”. These devices make use of a key chain attachment that has a display and a crypto processor. A hardware token registers a new onetime password every minute. However, due to the fact that every onetime password is only suitable for a limited period, hardware tokens can protect against fraud methods such as phishing schemes. Moreover, they cannot protect the customer against schemes such as Trojans. This is because even though the onetime password is only suitable for a short period of time, the criminal can still use that short time to exploit the information acquired by the Trojan. Due to the fact that numerous fraudsters already employ automated scripts when using their servers to carry out fraudulent transactions when information is obtained from the Trojan, the short time limit is no barrier. In essence, the only way to prevent against online fraud is to first ensure that one does not volunteer personal information to sites that are scammers. The only way to do this is to always access one’s account through the bank’s website. This is particularly efficient in protecting against the process of phishing. It is also important to create safe passwords if one is not eager to make use of implements such as hardware tokens and one time passwords. Online bank frauds have become so common that there are banks today that provide their customers with online tutorials that show them how to protect their accounts while exercising their online banking options. It is advisable for customers to correspond often with the banks officials in charge of such sites in order to remain protected. Future Trends in E-banking The continued expansion of e-commerce into the banking sector will, undoubtedly, result in changes; particularly to the functions of traditional bricks-and-mortar banks. It is likely that, in the future, more and more bank branches will be closed due to the increasing popularity of e-banking options. More and more banking customers prefer to access their accounts online; and this has resulted in more banks begin to reconsider the necessity of old fashioned bank branches. A research study conducted by the group Novantas LLC between 2006 and 2010 discovered that the transaction functions conducted within bank branches such as making deposits and opening new accounts greatly declined (Mahdi and Mehrdad 2010). Many banks are looking for ways to conduct business in more cost effective ways and so have to cut all unnecessary costs. In future, this might mean closing down bank branches that are not serving much purpose. This does not mean that all bricks-and-mortar branches will be shut down. It is just more likely that they will be fewer in number and that the ones that are still in operation will have less staff. It is also likely that in the near future, self serving services will be included in existing bank branches. If there are any, it is likely that there will be fewer tellers to oversee a number of self-serve computer screens, as is the case in major airports in the airline ticket lines. At some point, there might even be self service drive through areas that allow customers to take advantage of 24-hour options for accessing their accounts and carrying out transactions. Such automation of bank functions will greatly reduce the bank's cost per cash transaction, thus allowing the banks to be more profitable. Tele-conferencing with personal bankers is also likely to be a more common cost effective practice. Banks are also likely to push for paperless transactions in a bid to reduce costs. Paperless transactions mean that mailing and paper costs will be saved. To achieve this, however, banks will have to invest in more ‘front-end’ technology so that machines take the place of tellers. Some banks such as the Chase bank in Britain have already begun tests in using the "instant" card so that bank customers do not have to wait for long periods for them to reach through the mail. Another possible effect of e-commerce in the banking sector in the future is mobile banking. This makes accessing one’s account easier. It is an astounding fact that mobile banking is already a common practice in developing nations such as Kenya; but is still not common in the developed world due to more strictures and security fears. Moreover, it is likely to become more common in future with the increased infiltration of e-commerce. The explosion of e-commerce in the banking sector is likely to result in phenomena such as the further development of mobile information, bigger bandwidth connections, and the improvement of information processing capacities. Technological advances might bring about small mobile terminals that are more powerful than today’s laptop computers. It is also a possibility that intelligent networks which provide more bank-related services will take over from telecommunication networks. What is obvious is that banks will face more options as well as services in providing services for their customers through extremely sophisticated online network systems. References Aguila-Obra, A.R.D. & Padilla-Melendez, A. (2006) ‘Organisational factors affecting internet technology adoption’, Internet Research, vol. 16, no. 1, no. 94-110 Allen, J. & Engert, W. (2007) ‘Efficiency and competition in Canadian banking’ Bank of Canada Review, Summer 2007. Banstola, A. (2007) ‘Prospects and challenges of e-banking in Nepal’, The Journal of Nepalese Business Studies, vol. IV, no. 1. DeYoung, R., Lang, W. & Nolle, D. (2007) ‘How the internet affects output and performance at community banks’, Journal of Banking & Finance, vol. 1033-1066 Dina, R., Allard, C.R. & Sandra, S. 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