IT's Role in Banking - Essay Example

Computer Sciences and Information Technology 28 June IT’s Role in Banking Introduction Information systems were introduced in order to enhance efficiency in the activities and processes of businesses and therefore assist in attaining profits and other cost benefits. Doom points out that “information technology was mainly used internally, and not for communication with suppliers and customers” (33). This has however changed during the last three decades, as there have been new insights into the role and importance of information technology in commerce, brought about by the fast developments in technology. With the passing of time, people have realized the significance of information technology in business strategies. An example is in the banking industry, where information technology has determined various opportunities in the business, mainly through electronic banking. Banks today have been adapting the latest technologies, in order to survive and maintain growth in the market. This is mainly because information technology is viewed as a resource that is very enabling, when it comes to developing new and more flexible systems that help banks react swiftly to changes in the market. According to Burn and Martinsons, “widespread investments in information technology (IT) by the banking industry have raised productivity and contributed to improved customer services” (267). Traditionally, financial services in the banking industry had been extremely fragmented. The scope and ability of banks business activities were limited by the need for customers to be available physically to perform transactions that were mainly paper based, and government regulations. In order to increase banks ability to conduct their business at a wider scope and sometimes in the physical absence of the customer, deregulation was performed, and business technologies embraced in order to widen the market for financial products and services. This has led to the banking industry becoming very competitive at an international level. Burn and Martinsons point out that “in particular, the bargaining power of buyers, like corporate treasures and retail customers has increased” (269). The productivity of customers and employees has also been bolstered, and banks operating costs have been reduced significantly. Roles of Information Technology in Banking 1. Facilitating the development of sophisticated products and services Through the application of information technology, banks have been able to develop sophisticated products, and hence provide better services. Examples of these products include ATMs (Automated Teller Machines), while services provided include E-banking (electronic banking), internet banking, telephone banking and home banking (“Role of Information Technology” mbaknol.com). Mobile banking is also a recent technology influenced by information technology, and is very common in some nations such as Kenya, where different mobile network operators provide these services. E-banking is a form of banking that takes place over the web. E-banking offers financial services to customers through various ways. They include Automated Teller machines (ATMs), internet banking, mobile banking, telephone banking, and home banking (Sarlak and Hastiani 3). Through telephone banking, transactions are performed over the phone. “Most of the telephone banking uses an automated phone answering system with phone keypad response or voice recognition capability” (Sarlak and Hastiani 3), made possible through information technology. Home banking is performed at home through personal computers using specialized banking application software’s installed in these computers. Internet banking provides 24 hour banking services to customers through banks websites, while in mobile banking financial transactions are conducted through the use of mobile telecommunication gadgets. Sarlak and Hastiani point out that “mobile banking presents an opportunity for banks to retain their existing, technology-savvy customer base by offering value-added, innovative services and thus attracting potential customers” (4). The ATM works in a way similar to that of a physical teller, but it is much faster and more accurate. According to Grossman and Livingstone, in this kind of technology, “the information system uses the account on the card and the input password to verify the user, and the withdrawal amount is compared to the account balance” (499). In case there are sufficient funds available in the account to allow withdrawal, the cash counter is instructed by the information system to release the cash. The information system also requests the card reader to give back the card, the printer is requested to print a receipt of the transaction, while a record of the transaction is made and the account balance updated. 2. Improving the infrastructure of the banking market Information technology has played a pivotal role in institutionalizing and reinforcing the infrastructure in the banking industry, in terms of improving connectivity between branches, promoting networking and communication, as well as Real Time Gross Settlement (RTGS).It has also supported the creation of real time databases, and allowed easy clearance for cheques through imaging technologies that allow recognition of optical characters and magnetic ink character recognition, thus increasing accuracy and efficiency. Privacy and the confidentiality of data in banks have been promoted by information technology. This is because conversely to the traditional way of storing data in banks, which involved storing of data in physical files, data is stored in computers and protected through the use of passwords, and is only accessed when required. A lot of care is taken to ensure that data is only made available to those it concerns, and used only for its destined purposes. According to Iyengar, “RTGS system is a funds transfer mechanism where transfer of money takes place from one bank to another on a real time and on gross basis” (254). RTGS is the fastest system of transferring cash from one bank to the other and securely. The system is mainly used for transfers involving large amounts of money. It holds the advantages of reducing paper work involved during transactions, allowing real time money transfers, reducing transaction costs, and enhancing security in banking. Imaging technologies and magnetic ink character recognition have made cheque processing in banks an easy task, and have also reduced the rate of errors involved in the process. The process of clearing checks in not as labor intensive today since, “there are automated paperless alternatives using image-based cheque clearing technology. A high-speed cheque sorter machine reads magnetic ink character recognition (MCIR) data, scans an image of the cheque and sorts the digital information” (Tan 126). 3. Helping financial intermediaries reach diverse markets and regions that are located further geographically Through information technology, banks are able achieve their mission of making their operations global. According to Essvale Corporation, it has “made it possible for investment banking titans to operate in multiple locations, generating income streams from activities such as trading, mergers and acquisitions, and fund management in different markets around the world” (130). It is also a fact that the scope of information technology goes beyond nation’s borders in transmitting knowledge and information, making it a significant tool in international banking. Additionally, banks are able to understand trends in the global financial markets through communication and information technologies. “New and existing technologies such as the FIX protocol, wide area networks, and mobile and fixed line communications have made it easy to distribute information across different locations” (Essvale Corporation 130). Banks therefore get the latest information and this provides them with the ability to act in good time. Conclusion Information technology is a source that is very enabling and crucial in business. Banks today have been adapting the latest technologies, in order to survive and maintain growth in the market. Through information technology, competition in the banking industry has been promoted to an international level. The productivity of customers and employees has also been bolstered, and banks operating costs have been reduced significantly. This is because information technology has played the roles of facilitating the development of sophisticated products and services, such as ATMs, making it possible for transactions to be conducted electronically, improving the infrastructure of the banking market, and helping financial intermediaries reach diverse markets and regions that are located further geographically. Works Cited Burn, Janice M. and Maris G. Martinsons. Information Technology and the Challenge for Hong Kong. Hong Kong: Hong Kong University Press, 1997. Print. Doom, C. An Introduction to Business Information Management. Brussels: Academic & Scientific Publishers, 2009. Print. Essvale Corporation. Business Knowledge for It in Global Investment Banking. London: Essvale Corporation Limited, 2011. Print. Grossman, T. and John Leslie Livingstone. The Portable MBA in Finance and Accounting. 4th ed. Hoboken: John Wiley & Sons, Inc, 2009. Print. Iyengar, G. V. Introduction to Banking. New Delhi: Excel Books, 2007. Print. “Role of Information Technology (IT) in the Banking Sector.” mbaknol.com . n.d. Web. 28 June 2013. < http://www.mbaknol.com/business-finance/role-of-information-technology-it-in-the-banking-sector/>. Sarlak, Mohammad A. and Asghar Abolhasani Hastiani. E-Banking and Emerging Multidisciplinary Processes: Social, Economical and Organizational Models. Hershey: Business Science Reference, 2011. Print. Tan, M. E-Payment: The Digital Exchange. Kent Ridge: Singapore University Press, 2004. Print. Read More