How the Western Model of Internet Banking Apply to Russia - Literature review Example

? HOW THE WESTERN MODEL OF INTERNET BANKING APPLY TO RUSSIA By How the western model of Internet Banking apply to Russia The advent of internet and its increased application in various economic sectors has revolutionized the banking sector. Internet transactions are cheap and thus cost effective. Moreover, internet banking is an efficient for different customers. Internet banking allows customers to operate their accounts at their own convenience (Sadiq & Nassar 2008, p. 56). The numerous advantages of internet banking have contributed its increased growth. Recently many banks have adopted online banking. With its boom in the United States and the United Kingdom, online baking has subsequently spread to other areas, Russia included. Victor (2008, p. 724) asserts that although this is the era of internet boom in many regions of the world and that more developed countries are increasingly using the internet for various ways, the reality is that most of the developing countries are yet to fully adopt the internet and embrace it as a way of doing business. The online banking, commonly referred to as the internet banking is one of the newest forms of banking adopted by banks in the developed countries. According to Arnaboldi (2009, p. 1), “a few pioneering banks started to offer products via the internet in the mid-nineties.” This shows long the service has been on going in the European-banking sector. However, Russia and other Eastern Europe countries are yet to realize the dream of conducting most of their banking operations with convenience of their mobile phones and computers. Hopes of these people transforming their banking services and fully going digital are still alive, if the current changes and improvements in the banking sector are anything to go by. More and more, banks in the Russian region have embraced the need to go online, with many customers already subscribing to internet banking. While the previous technologies used in the country were unreliably painful to the customers, current innovative improvements in the sector provide hopes for a full transformation of the entire sector. However, not all western banking models are applicable in the Russian situation. A few modifications are necessary to make it compatible with the Russian customer base. This is because of the differences in customer base between the developed and the developing countries (Jaruwachirathanakul & Fink 2005 p. 302). The slow nature of the internet banking penetration rate of the people constrains the hopes of growing and expanding this sector to robust volumes such as in the United States and on the United Kingdom. Hopes for growing the sector are still high, as 10-12 per cent of the total bankable population are ready and more than willing. This percentage loves the convenience of the internet, as well as its efficiency. The biggest booster of this trend is the adoption of the emoney and the money kiosks industry. Most of the banks offering internet banking in Russia offer payment services. This is however, a misconception about the whole issue about internet banking, a notion held by most of these banks’ customers. Initially, banks offer banks offer iBanking services to their customers, with only the opportunity to make their payments. The biggest advantage for this service is its ability to reduce the transaction costs for the customers. However, banks miss out from making sales, which were potentially available for the banks to exploit. Mols (2000, p. 12) stresses on the important role-played by the internet to business organizations in marketing their products and services. according to Mols, (2000, p. 14), the increase in online marketing offers business organizations unlimited opportunities to advertise and sell their products and services. As such, many organizations have introduced online sales that allow customers to search and pay for the ownership of goods. Benefits accrued from online banking cannot be underestimated. In most cases, young men aged between 25 and 35 years are the biggest users of this form of banking. Increasingly though, other people are joining the online banking community, necessitating more bankers to adopt this form of banking, and start offering it to its customers. Recently, a study established that in 2011, the number of internet banking users increased at 3.5 times. Estimates point out that the increase could increase at a 6 to 7 per cent rate. Of the total Russian population, at least 13 per cent of the people have used internet banking for one reason or another (O'Neill 2013, p. 37). Therefore, this shows the potential growth of the entire business. Since the uptake of this technological banking model is more significant in major cities of the country, its development and expansion is highly constrained by the fact that the rural folk are yet to understand its importance. Initially, banks adopted the use of internet banking as an innovative method of making payments to their customers. Moreover, they were seeking for a banking method of ensuring customers’ convenience and as a way of reducing operational costs, thus increasing, their revenue (Sadiq & Nassar 2008, p. 66). Cost is a major factor contributing to the growth of the internet banking. Many banks experiencing high costs of doing business are likely to go online than in those that have no costs issues. Other factors include the size of the bank and its customer base. Even the willingness of the customers to use internet-banking services is a major determining factor (Maihotra & Singh 2007, p. 328). Arnaboldi & Claeys (2008, p. 1) point out that fierce competition from both the retail and wholesale banking levels in Russia has significantly pus had the demand for low cost methods of banking. People are also becoming busier, a factor that has contributed to the demand for more convenient methods of banking among the people and the banking community. In the search for methods to bridge successfully this gap, online banking proved as the only method available. Moreover, the increase in demand as well as the change of the banking sector successfully managed to transform the online banking sector in Russia. Russian banks had to align their operations with the rest of the world’s leaders in banking such as the United States and the United Kingdom. The shift of these countries to online banking prompted other countries to join in the practice, Russia being part of them. The boom of this type of banking in the United States and the United Kingdom however does not reflect similar characteristics in the Russian banking sector. The major contributing factor to this form of banking is the low internet connectivity of the Russian rural population in comparison to other two countries (Bhunia 2008, p. 439). In addition to this, few people embrace this form of banking method. While in the American and the United Kingdom cases, more people extensively use this form of banking to a point of entirely relying on it as their preferred form of banking (Kumra & Mittal 2004, p. 76-78). There are various differences between internet banking in Russia and in the United States as well as the United Kingdom. These differences arise because of the number of services offered by the banks as well as the customer subscription numbers. Due to the few numbers of people who have already embraced internet banking, there is little diversification of the services it provides to the people. There are limited was in which people can use internet banking in Russia. On the other hand, however, the United States and the United Kingdom have diversified their operations to include a wide range of services that are absent in Russia. This makes it at times a less reliable method of doing banking to the people. There is no possibility of people relying entirely on such a form of banking offering less banking services. People are compelled to seek other forms of banking services from physical banks. This makes the biggest difference between internet banking in the United States, United Kingdom and in Russia. In these two regions, there are high levels of diversity in the type of services provided by internet banking. According to Terterov (2004, p. 81), the most used internet banking service in Russia is the payment of utility bills. Due to the convenience of this form of payment to its users as well as the low charges involved with every transaction. Additionally, internet banking allows people to manage their accounts as well as monitor the accumulation of funds ion their accounts. Internet banking also gives people an opportunity to repay their money orders, credit and bank borrowing at their own convenience as it gives them a chance to do it whenever they wish without having to visit the bank. Research conducted on the consumer patterns in Russia has established that mostly, urban consumers in Russia are increasingly adapting online banking at a faster rate than earlier anticipations. The highest numbers of these service users are medium aged men with more than average incomes. These people feel secure and have less worry about losing their money. Moreover, higher incomes have a positive relationship with the level of education. Educated people are well researched and more knowledgeable on the trends in the business (Schmidt, et al. 2009, p. 12). As such, they understand the pros and cons of internet banking. While some of the people are uncertain on the benefits of internet banking, these individuals are much aware. Thus, this analogy points out that highly paid people have high levels of income. Such factors contribute to the high number of people with high incomes using technology more than the less educated ones. In Russia, internet banking mainly supplements the traditional banking methods (Terterov 2004, p. 81). People have not fully embraced the idea of fully turning digital. Mostly, people who hold accounts in physical banks register online banking services with their banks. They therefore use internet banking whenever paying for various services. However, few people operate full online accounts that carry put all their activities from an online platform. This is different with the situation in the United States and United Kingdom. In these two countries, the high number of people using internet banking to carry out their banking services is impressive. Many people do not see internet banking as a way of supplementing their ordinary banking services. Instead, they see it as a form of banking that they can fully rely on. Due to its convenient nature, internet banking is one of the most preferred forms of banking in the United States, especially to the young people who are the most active in internet usage. A number of factors lead to the poor performance of internet banking in Russia. These factors hold the industry; prevent it from reaching its full potential, and at the same time hindering its growth. While banks are willing to invest heavily on interne banking, the increased levels of regulation hinder the expansion and its growth. The Central Bank of Russia recently proposed a scheme obliging all banks offering internet-banking services to use their clients’ IP and MAC addresses for authentication (O'Neill 2013, p. 37). This in an effort geared towards combating money laundering, a serious vice to the economy of the country. Some banks feel that such regulations are excessively strict and harsh, and opt to refrain from offering them to their customers. There is a high reluctance of people from carrying out major transactions remotely with internet banking (Driga, Nita & Dura 2009, p. 242). This leads to low usage of internet banking by most people already subscribed and using the service. As an encouraging factor, many banks offer a service that is in high demand and invest in a product that is selling fast among the customers. If customers go slowly on a particular product, an organization is likely to regard it as less of an asset since it brings little revenues. As such, this is the predicament facing the internet-banking sector in Russia. While in the American and United Kingdom countries many people have resulted to increased use internet banking for all their activities, the situation is different in Russia. People refrain from using internet banking to pay for hefty bills and services ('Commercial Banking Report: Russia' 2013, p. 45). They prefer the traditional methods of payment, a factor that leads to low esteem of the service’s providers. Kumra & Mittal (2004, p. 74-88) tend to single out trust as the main reasons why most people are shy of the internet banking services. There is lack of trust of the Russian population to the internet-banking model. Although some of the people are aware of the benefits of using internet banking, they have not embraced the technology. Trust is a major factor in this situation. Many people do not trust the internet banking system, and are thus too much afraid of losing their money to fraudsters (Mermod 2011, p. 7). While some of the arguments are justifiable, others are not. Increasing awareness of the safety measures put in place by the authority is one of the main ways in which the sector could win the confidence of the public. Additionally, the complexity of the system to the ordinary users keeps them away from using it. To carry out successfully an online transaction, a person has to go through a long and complicated process. Mastering the many steps involved is hectic for the ordinary people who prefer to use the ordinary banking methods and procedures to carry out their banking services (Wallace 2000, p.54). Patterns of internet usage in Russia are different from those exhibited by the United States and in the United Kingdom. Connectivity is more robust in the United Kingdom than in Russia. Moreover, people in the United Kingdom and in the United States have fully embraced the use of internet to the point of transacting their activities heavily relying on it (Jayawardhena & Foley 2000, p. 229). To some, they rely on the internet to carry out most of their daily activities. In America for instance, a large number of people use the internet to do their shopping, pay for various goods and services, book their tickets, read as well as work. Banking forms part of the numerous opportunities available for people to exploit. However, if the very effective and efficient online banking was not available for people to exploit, it disadvantages them from exploiting services that internet provides ('Sudostroitelny Bank' 2004, p. 171). This is the reality facing the Russian internet bankers. Although internet-banking services are readily available for interested persons, they fully cannot enjoy these services just like those in the United States and the United Kingdom. Part of the reasons behind this reality is that not all internet-banking models are compatible with the Russian market. While some experts argue that most of the customers would join any model that proves effective and convenient, developers of these models, hold a different view. According to them, people will use only the model that not only meets their banking requirements, but also one that they trust (Alam et al. 2007, p.1). The increasing number of online fraudsters attribute to this reality. As such, people seem to shy away from using internet-banking models that entirely rely on the internet without physical transactions. However, some people are not opposed to the idea and dream that these particular models will finally be acceptable to the people. With a few modifications and security guarantee, more people are likely embracing these models. There are two types of online banking available for people to exploit. Both however require the use and the maintenance of an online banking portal (Jayawardhena & Foley 2000, p. 24). Classic banks, as an example of online banking methods allow banks to cross sell their products via a website to give them an opportunity of reaching to new clients with a high online presence. This acts as a form of diversification and increasing the distribution channels available. Early in the year 2002, almost half of the United States based banks were using transactional websites. During this time, no Russian company had invested in this kind of banking. The other forms if internet banking is the creation of pure internet banks not supported by any form of physical banks. One of the most significant banks involved in online banking in Russia is the Tinkov Credit Systems. Tinkov Credit Systems is an online bank whose main purpose is the credit card business that has no single physical branch (O'Neill 2013, p. 37). Most of the customers of Tinkov Credit Systems have no single clue whether the bank has any physical branches or not. Since they carry out all their businesses online, they find no need of having any connection with a physical branch (O'Neill 2013, p. 37). Moreover, customers receive any form of support either from their mobile phones or from their computers, making the bank more efficient. All these render the need for a physical branch meaningless. According to O'Neill (2013, p. 37), currently, it has over 2.5 million customers, all attracted to it due to its credit card business. The success of this bank is evidence enough that the internet banking service is likely to grow. This is an indication of how big the online banking business is in Russia. Observers hope that this trend is likely to change as more people adopt the online banking services and start using them. Efficiency and convenience of banking online are cited as some of the most important factors leading people to the online banking services in Russia (Kalicki & Lawson, 2003, p. 362). The increase in mobile technology in Russia has immensely contributed to the growth of the industry. For any internet-banking model to succeed in the country, its applications should be highly compatible with the mobile phone technology. Many people access internet from their mobile phones and tablets. Out of the 140 million people in Russia, 70 million use the internet. 15 million of these rely on the mobile phones to access the internet. As a result, most of the businesses innovatively modify their products targeting the high number of people using mobile phones (O'Neill 2013, p. 37). Works cited Alam, S, Khatibi, A, Santhapparaj, A, & Talha, M 2007, Development And Prospects Of Internet Banking In Bangladesh. Competitiveness Review, 17(1/2), 1. 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