Impact of Information Technology on Banking Systems - Term Paper Example

Abstract In the very dynamic modern-day business world, rapid transformations have taken place in consequence of increased customers’ awareness and demands. Business organizations function in an environment that is very competitive and complex characteristic of the aforementioned changing conditions in addition to the extremely volatile economic setting. At the heart of this global change arch is information technology and we cannot overstate its significance – accordingly, it is important to access the impacts that technology has on any business in order to determine objectively how it influences the particular facets within an organization. The paradigm and framework within which banks deliver their services has changed beyond identification as banks fine-tune to societies’ changing needs. In fact, changes in technology have had a great impact on banks such that apart from the changes that the society’s changing nature cause directly, changes in technology are the most significant changes to have taken place in this industry. Banking and technology are so inter-twined that it has become almost impractical to think of one without the other. Technology drives the banking industry forward and in the modern world, through devising new low-cost payment systems and delivery channels, banks use it as an innovative customer-service delivery means. Banks no longer use technology merely to automate processes but use it as a revolutionary service delivery means to their clients (Panwar 5). This paper discusses the current state of information technology and the general impacts that it has on banking system. Introduction According to Agboola, Information Technology, abbreviated IT, refers to the mechanization of information production controls and processes by means of telecommunications; software and supplementary equipment including debit cards and automated teller machines (ATMs); and computers. In general, the term covers electronic technology harnessing for a business’ information needs at all levels. Panwar defines banking technology as the use of intricate communication and information technologies in conjunction with computer science to make it possible for a bank to maintain competitive advantage above other banks, even as it provides its clients with superior services in an affordable, reliable and secure manner. The application of the concepts of information and technology to banking services is a subject of primary concern and significance to all banks and in fact a global and local competitiveness prerequisite. Woherem asserts that the only banks that are likely to survive and prosper in this modern world are those that refurbish their entire delivery and payment systems and employ information and communication technology to their operations. He argues that in order to position themselves aptly within the principles of the dynamism of ICT’s framework, banks should re-examine their service and delivery systems. Laudon and Laudon add that most fortune five hundred companies’ total cash flow is related to information technology and as a result, managers of contemporary organizations cannot afford ignoring information technology for the reason that it plays a vital role. Information and communication technology has a direct effect on the way managers of the banking industry make decisions, the way they make their plans as well as the services and products that they offer. It has continually altered the organization of banks along with their corporate relationships globally, and the innovative devices’ assortment accessible for quality and speed of service delivery’s enhancement. In order to remain viable, there is need for financial service providers to change their routine operating practices. The prevalent failure of banks’ senior management to grip the significance of technology and accordingly integrate it into their strategic plans is a major shortcoming in today’s banking industry (Brewer & Lunsford 73). Panwar explains that basically, banks have used IT under two different avenues – business process reengineering, and communication and connectivity. Arguing that IT assists the financial intermediaries to get to diversified as well as geographically distant markets, enables the development of sophisticated products, assists the implementation of dependable risks control techniques and that it enables improved market infrastructure; he asserts that technology has altered the shapes of three main banks’ functions, which include risks’ monitoring, assets’ transformation and liquidity access. Moreover, he asserts that communication networking systems and IT critically influence the efficacy of foreign exchange markets, capital and money (3). Some of the information technology products that banks use include Magnetic Ink Character Recognition (MICR), insta-alerts, smart cards, net banking, bill payment, automated teller machine, netsafe, credit card online, telephone/mobile banking, smart money order, electronic data interchange, electronic home and office banking, ticket booking ,one view, electronic funds transfer, prepaid mobile recharge, among others (Rahman 2). Reixach explains that beginning 1980s, the banking industry has changed considerably, with the major driving factors being innovation in IT and deregulation. These forces have led to competition increase in banks and other financial institutions, which has subsequently greatly reshaped the banking industry and, for instance, while there has been a decline in lending operations, rather than relying on interest rates spreads, banks progressively depend on fee services’ income. One way in which IT has transformed the banking industry is through bringing about new financial products’ advancement in addition to bringing about new ways of their delivery. Concerning products’ delivery for example, there has been the development of telephone banking as well as ATMs, which have led to an increase in internet banking. Telephone banking and ATMs are cheaper and more efficient delivery means. In addition, for clients of lengthy hours of service, they are very beneficial. A study conducted by Sybase indicates that at a traditional brick-and-mortar bank, a transaction costs twenty-seven eurocents at an ATM while via the internet, it only costs one eurocent. Similarly, one that cost 1.07 Euros costs 55 eurocents only through the telephone. Numerous banks, quite in line with these figures, report conducting most of their transactions with clients electronically devoid of individual contact with their clients. This is especially the case with direct debit systems along with payment systems. More technological development effects in banking include providing credit card holders with smart card readers free of charge, which they use for paying for transactions via the internet. The internet has greatly influenced the banking industry. Internet banking started in the US and has now spread to Europe, among other countries. In Germany and Scandinavian countries, it is more advanced. Germany’s biggest four banks function online and in a Finnish-Sweddish firm called Merita Nordbanken, over 25% of the clients use online banking (Reixach 12-14). According to Brynjolfsson and Hitt, IT has significant impact to firm level productivity. They resolve that while non-IT capital contributes only six percent marginal improvement in output, IT capital contribute an eighty-one percent marginal output increase. They also demonstrate the fact that compared to their non- information system counterparts, information system professionals are more than twice as productive. Additionally, a study conducted by Kozak wherein he explored its impact on a bank’s cost and profit effectiveness from the year1992 to the year 2003 revealed positive relationship among the effected IT, cost savings, as well as productivity. The internet, for example, allows banks to provide services at a far lesser cost compared to traditional brick-and-mortar banks. Panwar advises that while making product decisions, banks’ managers should be careful – they should consider the improvement and continuing costs linked with a new service or product. These include customer support, marketing, technology and maintenance functions. He argues that doing this would assist them in measuring their business’ success, applying due diligence, in addition to making more informed decisions. Account opening, transaction processing and recording, customer account mandate among others are some of the banking services that the use of information and communication technology has transformed (Irechukwu 63-78). Laudon and Laudon further explain that information technology has provided automated customer-service machines, self-service facilities that enable prospective customers to complete their documents for opening an account online. In addition, it aids in customers’ account numbers authentication and assists them to obtain instruction pertaining how and when to receive their debit cards, credit cards and chequebooks. There are two positive advantages concerning the relation between information technology and the performance of banks as evidenced by existing studies. The first advantage is the cost advantage – information technology can reduce the operational costs of banks. Internet technology, for instance, assists banks by expediting and facilitating their procedures to carry out low value-added, standardized transactions such as account transfer, balance inquiries, bill payments, among others, via the online channel, as they focus their resources on high-value added, specialized transactions such as investment banking, small business lending and personal trust services through branches. The second positive impact of IT is the network effect – information technology endorses transactions between clients within the same network. A good example is in banks’ use of ATMs. US commercial banks’ data from the year 1971 to 1979 showed that in making use of an ATM, network effect interest is important (Farrell and Saloner 75). If automated teller machines are mainly accessible over geologically dispersed regions, there will be increased advantage of using them because clients will be in a position to have access to their bank accounts from wherever they wish. This would mean that an ATM network’s worth raises with the number of automated teller machines locations that are available, and the final network size of the bank will partly determine the value of a network of a bank to a client. Ho and Mallick cite Saloner and Shepard who demonstrated the importance of the concern of network impact in the US commercial banks’ adoption of automated teller machines. They used US commercial banks’ data for the period 1971-1979 to show this (2). According to Rahman, information technology has also provided banks with solutions regarding dealing with their back office and accounting requirements. He explains that this, however, has yielded extensive services’ usage aimed at banks’ clients. Another impact of information technology is that it facilitates new delivery channels’ introduction. This is in the form of Mobile Banking, Net Banking, and ATMs among others. IT has as well provided banking industry with the means of coping with the new economy-posed challenges. Rahman further asserts that IT has set the basis for the recent reforms in the financial sector focused on increasing the speed and reliability of initiatives for the banking sector’s reinforcement as well as that of financial operations. In addition, worthy to note is the fact that IT makes it possible for banks to meet such high expectations of the present-day more techno-savvy and more demanding clients who insist on immediate banking facilities anywhere and at anytime. Reixach further explains that banks use technology to market their products more efficiently. For instance, banks make databases that contain their clients’ details and are then in a position to more precisely aim their commercial efforts through data mining. This also enables them to know the assortment of products that interest individual clients. Additionally technology affects banks’ products. For instance, it permits products’ commoditization, a process whereby banks employ credit-scoring methods to credit cards, consumer credits or mortgages, computerizing part of the process; thus, banks have regulated more products that were formerly very reliant on the client’s evaluation by the firm. Technology further promotes products’ commoditization permitting re-bundling and unbundling of products, as well as their separate delivery to clients. Furthermore, technology permits products’ securitization whereby a bank can trade such products as a loan in capital markets rather than remaining in the balance sheet of a bank (76). Rahman expounds that the use of information technology has taken up high levels in such a way that it is not possible any longer for banks to deal with the implementations of their information technology alone. He explains that with the revolution in information technology, banks are able to interlock increasingly their computer systems across a city’s branches as well as to other regions with fast network infrastructure, and to establish wide area as well as local area networks, which they connect to the internet. Consequently, a great number of people get access to information systems and networks. Another impact is that the revolution of information technology has set grounds for unparalleled augment in fiscal activity all over the world. There has been a momentous decrease in the cost of global funds transfer due to technological advancement along with worldwide networks’ development. Other benefits of banks’ technological adoption include saving on cost and space; flexibility and convenience; profitability and productivity; full-time operations and faster service, hence client gratification. As Harrison junior observed, the internet brought a revolution in technology and it possibly will have greater influence on change compared to the industrial revolution (Panwar 7). Information technology has also led to the creation of efficient delivery channels, new services, new products and new markets for the banking industry. Farrell and Saloner give examples of internet banking, mobile banking and online electronics banking. They explain that the internet permits clients of a bank to find out the best prices/products via websites containing a search engines. Banks have also developed their own websites wherein they present only their products, as well as other websites wherein together with competing firms’ products, they offer their own products. Also worthy to note is the fact that internet banking leads to increased competition within the banking industry, other financial institutions including insurance companies as well as non-financial institutions including technology firms that are in charge of networks of communications and gateways (Reixach 15). Although it offers convenience and ease among other benefits, information technology is not without limitations. One negative impact is that it causes problems to do with security to both banks as well as clients. It is most susceptible to cyber criminals and hackers. Criminals can anonymously steal large sum of money from financial institutions using state-of-the-art credit card fraud and internet banking. The internet can also be used to instigate computer viruses aimed at paralyzing or damaging particular networks. Moreover, an anonymous group can enter the internal networks of a bank and bring major damages to technical devices (Guangrong 4). There is also card skimming, which has to do with the use of moveable devices for stealing to obtain electronic funds transfer card data and credit card. A fraudster rewrites this data to a fake card, which he then takes on convoluted shopping binges. Phishing/identity theft, which takes place when a fraudster accesses an unsuspicious victim’s personal information by means of various non-electronic and electronic means, is also very common in electronic fraud. A fraudster uses these details to open accounts (normally credit card), or initialize mobile phone accounts and loans or whatever thing that has to do with a credit line. Generally, financial losses resulting from phishing are bigger and resolving them normally takes long. Clients may also experience account theft, a more common type of fraud that occurs when fraudsters use existing financial records, debit, or credit cards to rob their accounts. Another form of crime is spam scams whereby fraudsters send spam e-mails to clients, advising them to login to their accounts. They do this by supplying the client with a link in the e-mail, which he/she thinks will take him/her to his/her bank site’s login screen, only to take him/her to a ghost site where the fraudster is able to record the login information. Later, the fraudster uses these details to transfer balances and or pay bills for his/her financial gain (Panwar 12). Another negative impact of technology on the banking industry is the fact that through the internet, it is very easy to leak and lose secrets – cleared staff or other strangers can receive and send e-mails freely thereby easily revealing secrets voluntary. One can effortlessly break into any internal networks at ease if he/she understands the techniques and working mechanism of breaking passwords (Guangrong 4). To prevent these state-of-the art types of frauds, Panwar recommends that banks should encourage the use of smart cards and biometrics such as palm print and fingerprint identification, voice, iris and facial recognition, among other similarly state-of-the art security means/ prevention programs that enable correct recognition and identification of the real account user. Conclusion Apparently, there has been a continuous transformation of the banking industry especially in information technology. Banks have taken on the most recent technology, which has provided banks’ clients with easy and quick banking services. A significant gain from IT investment is also eminent on the side of Banks. It is indubitable that for the banking industry, information technology is presently a very vibrant business. This paper has proved that in the swiftly changing market, the banking industry must improve technology, seeing that the revolution of information technology has laid the foundation for incomparable financial activity increase all over the world. In reality, the positive impacts of information technology on the banking industry outweigh the negative impacts. It is however important to note that although IT has led to banking undertakings being cheaper and more efficient, investments in IT consumes a great percentage of resources of a bank. As Reixach notes, with the exception of personnel costs, technology is the fastest growing item and the leading item in a bank’s budget. It is also important to note that organizational performance of a bank cannot be shaped only by information technology/information system’s applications and therefore, while measuring the impact of information technology on the general performance, it is essential that bank managers consider other factors like organizational culture and business strategies. Works Cited Agboola, Akinlolu. “InformTechnology, Bank Automation, and Attitude of Workers inNigerian Banks”. Journal of Social Sciences, Kamla-Raj Enterprises, Gali Bari Paharwali, India. (2003). Brewer, Harold, and Jeff Lunsford. “Don’t Let Technology Pass You By”. ABA Banking Journal, 87, (1995): 73. Print. Brynjolfsson Eric. and Lorin. M. Hitt “Beyond computation: informationtechnology, organizational transformation and business performance”. Journal of Economic Perspectives, 14.4 (2000): 23-48. Print. Farrel, Joseph and Garth, Saloner. “Standardization, Compactibility and Innovation”. 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