Innovation of Web-Based Financial Service - Term Paper Example

Innovation in Web-based Financial Services: A Critical, Analytical Review Use of the Internet has revolutionized the banking sector from the heights of the globe’s international trading floors, to infiltration into the previously unbanked sectors of developing economies planet-wide. This paper analyzes critically and assesses key innovations in web-based financial services, with particular emphasis on the short-comings and major successes of web-based technology. The analysis will particularly assess the impacts, positive and negative, of real-time transaction, increased market transparency and near-total global market integration of financial services, both positive and negative. Of particular interest in discussion is the often over-looked impact of web-based financial services that operate via cell phone. These technologies are making personal financial services available to customer populations that were previously geographically, linguistically and economically isolated from the global financial system. Such services have been extremely successful as Customer Relations Management (CRM) tools. On the other, hand the broader impacts of this increased integration remain to be seen. In this analysis we will review and assess existing predictions on this subject, as well as extant relevant examples in the market. I conclude that innovations in web-based financial services, while vastly improving Customer Relations Management as well as market integration at all levels of banking and finance, may equally have a negative impact on volatility and vulnerability at both the highest and lowest sectors of the financial industry. Such transparency is likely to have some negative short-term impacts, while improving long-term efficiency in financial services, perhaps creating more crisis-resistant markets globally. Introduction: Innovation in web-based financial services has led to increased market transparency. While much analysis has been devoted to the significance of real-time transactions for global financial markets, less attention has been paid to the impacts of these new technologies at most humble ends of the banking sector. Internet financial services have vastly improved Customer Relations Management (CRM) in the first world; via cell phone banking, these services are already being vastly expanded to new markets in developing countries and among customers the world over who were previously under-banked and unbanked. These services are being widely and rapidly adopted across previously un-traversable barriers of distance, education, access and culture. This paper will argue that web-based financial services, when considered as a whole, have had and will continue to have both negative and positive impacts on customers, service and financial institutions themselves. Nevertheless, the balance of successes and failures in web-based financial services suggests that while negative short-term impacts exist, over the long term increased innovation, integration and transparency will have major benefits for the financial services industry and the economy as a whole. Critical Literature Review: Adoption, Service, Outcomes and Impacts Background Driven by customer convenience and low-costs for financial service institutions, e-transactions, a utopian fantasy 15 years ago, have come to transform the financial services market. By 2004, 50 million users world- wide accessed financial services on the web. Half of these users were in the United States alone. (Dandapani 31). Initially, the revolution in online financial services led to an explosion of new ventures in online banking; since then the number of institutions offering online financial services has contracted markedly, with a 97% in the number of firms from its highest point (Dandapani 32). This contraction was the result of the failures of new internet-only banking models; by 2003, an industry consensus had emerged that “click and brick” strategies—or a combination of traditional financial services and internet financial services—was the most successful strategy for survival in the new online banking universe (Dandapani 31-33). This has resulted, for the most part, in the domination of the online financial services sector by a small number of already existing, large financial institutions (Dandapani 33). From 2004, the expansion of the customer base for online financial services has continued apace, with increasing consolidation of service providers resulting less from competition in online services themselves than from the high degree of bankruptcies and consolidation in banking and financial services more generally resulting from the global financial crisis of the last two-and-a-half years. While the development over the last decade of internet financial services is itself considered a major innovation in financial services, the industry stands on the brink of a second major transformation via innovation. While internet-banking itself developed, cell phones and mobile personal devices took the world by storm, expanding telephone service to previously inaccessible geographic regions as well as to previously marginalized strata of societies the world over. Now, as internet financial services become increasingly available via cell phone and personal devices, the industry is poised for a second major transformation; one that will likely dwarf the initial explosion of online financial transaction in terms of scale as well as in terms of volumes. For this reason, a critical appraisal of both the basic innovation of internet-based financial services as well as an analysis of the future impacts of massive expansion of the sector via cell phones is extremely timely. Adoption The successful adoption of the initial innovation of internet financial services requires some reflection for the purposes of application to the emerging innovation of cell phone banking and access of web-based financial services via mobile personal devices. While the success of internet-based financial services may appear, from the vantage point of 2010, to be a self-evident marketing and adoption success based on its inherent features of convenience and efficiency, the view from the early and intermediate period of the innovation does not necessarily lend itself to obvious success. In her often-cited study, published in International Journal of Retail Distribution and Management, entitled “The Adoption of Internet Financial Services: A Qualitative Study,” Nancy Jo Block points out that the vast majority of marketing and customer service innovations in any industry are failures in terms of adoption (and profitability); therefore the subjective aspects of adoption (or lack thereof) are an area of significance to researchers as well as professionals in any given field (390). Block Block’s literature review, in addition to her results, has important implications for assessing the present and future of online financial services innovation. She draws connections between perception of related, precursor technologies such as automated teller machines and telephone banking. Previous research indicates that acceptance of these technologies in various cultural and geographic location is dependent on customers’ perceptions of the technology; where customers perceived the ability to conduct financial transactions outside of normal banking hours as convenient, this was a significant motivator in adopting the technology (392). Barriers to adoption of these technologies were customer perceptions that they were insecure or unsafe, that the innovation was overly technical or complex, and customer preference for interacting with human bank tellers (392). Block’s own study applied these important insights to online financial services, using focus groups to assess adoption of this then-novel innovation in the field (393). Her focus groups were divided into three categories; those who had used the internet, but not for purchases (S1), those who had used the internet to purchase items other than financial services (S2) and those who were already using online financial services (S3). She identified “compatibility” with existing values as a major barrier for some users in the S1 and S2 categories; customers feared making mistakes, and that “logging in” might take more time than a simple telephone call. Users in the S3 category instead perceived internet banking as less of a “hassle” and more convenient (394). The first two groups also perceived greater risk and complexity in online banking, though, interestingly, they also perceived the growth of the technology as inevitable and “only a matter of time” (394). It is this fatalism that Block perceives as the most positive factor across the non-adopting groups in terms of adoption, despite lack of “compatibility.” She also notes differences in the three groups in that group S3 tended to be wealthier, younger and more comfortable with computers in general (396-397). This qualitative study offers insight into customers’ experience of adopting innovative services in finance, however by focusing purely on customers’ subjective experience of online financial services during a given snapshot in time, it may have been overly cautious about adoption of internet financial services. Additional analysis, including more objective factors in adoption and delivery may be required to fully engage with ongoing and future innovations in financial services, and cell phone banking in particular. Service Quality For example, perception of the service itself, rather than anticipation of new technologies as well as objective factors in service quality are second significant dimension of analyzing new innovations in financial services. Both Zeithaml and Jun, in separate analysis of service quality in online banking attempt to quantify customer experience and opinions in to more objective assessments of service quality. Through quantifying objective definitions of quality specific to online banking, these researches aim to identify the most significant elements for adoption and continued use of this innovation. For Zeithaml, the relevant factors are “ease of use,” “privacy/confidentiality,” “reliability” and aesthetics. At a secondary level, customers are concerned with being able to contact their financial services institution via the website in the event of problems. Finally, the importance of the initial factors in the analysis were developed through subjective customer reported data (as in Block’s focus groups,) however they were confirmed with follow-up studies on actual customer behavior and purchasing habits. In Jun’s related study, the factors found to be most relevant to service quality as perceived by customers (and again as confirmed by their adoption habits) were “content, accuracy, ease of use, timelines, aesthetics and security” (288). As with Zietheml’s work, Jun’s study attempts to integrate the significance of objective factors in customer decision-making; in contradistinction to Zietheml, Jun ranks his criteria in a different order (with security, for example, ranking as less important) while also incorporating price—the ultimate objective criteria—as a key determinant of customer behavior. What both of these studies, combined with Block’s early work suggest for the future of innovation in financial services is that certain factors, remain constant in the financial services industry across new technologies for accessing them. At the same time, specific criteria for service emerge that are specifically related to the technology itself. By reviewing the literature in this manner, we can conclude that ongoing and furure innovations, in order to become one of the few successfully adopted and perpetuated innovations, must appear to be and also prove to be more convenient and less expensive than existing services, while at the same time improving or maintaining ease of use, security, timeliness and the aesthetic experience of the customer. It will be important to assess new cell phone based financial services in light of these findings. Successes and failures Continued review of the literature on innovation in internet financial services indicates that customer perception and service quality are not the only relevant and not always the most significant factor in the profitability of new innovations in web-based financial services. In particular, these factors are not the main influence of the future of the market in financial services. Instead, Dandapani’s review of successes and failures in the field indicates that costs are a critical, and complex factor in whether an innovation is ultimately successful, and most importantly, for which kinds of financial service providers and innovation will most likely benefit. According to Dandapani, internet banking represented a massive reduction in overhead per transaction for financial services. At the time of Dandapani’s survey, internet transactions, then relatively new, cost banks $.01 per transaction, while ATM transactions cost $.27 and transactions facilitated by a teller cost $1.07 (32). Meanwhile the costs of set-up for online banking were significant (up to $2 million) but still much less than the establishment of new “brick and mortar” retail outlets (32). Given these factors, it is unsurprising that, initially, a large number of :”virtual” banks offering no brick-and-mortar services sprung up in order to take advantage of the substantial cost savings facilitated by internet financial services. This high level of competition, however, put a high degree of stress on individual service providers, lowering profitability. These new banks were also at a disadvantage compared to web services offered by existing institutions with regard to trust and name recognition. At the same time, uptake of internet services was slow at first, preventing internet-only banks from benefiting from the economies of scale that made more established players in the market profitable already (33). Finally, customer desire for multi-channel access—to internet banking as well as ATM’s and tellers—meant that internet-only operators were at a significant disadvantage with respect to existing banks with the requisite infrastructure already in place (33). As these “lessons learnt” are incorporated into any predictive analysis of the market with respect to financial services innovation in cell phone banking, we must consider not only customer appeal and satisfaction, but also cost and competitive advantages. Existing Analysis of Cell Phone Banking In Irwin Brown’s study on the key predictors of adoption in cell-phone banking in South Africa from 2003, we see a number of repetitions of the patterns that emerged early in the adoption of internet-based financial services as described by Nancy Jo Black, Jun, and Zeithaml. We can also identify the massive potential already existing for the expansion of financial services into the market of customers whose internet access is restricted only to cell phones. Compare Dandapani’s 50 million internet banking users worldwide in 2004 with Brown’s 13 million cell phone users in South Africa ( a nation of 45 million) as of 2004 (381). The numbers have more than doubled since that time. At the time of Brown’s analysis, customer adoption of cell phone banking technologies was fairly limited, despite the fact that all extant, major South African “bricks and mortor” banks offered the services. Brown determined that as with internet banking “relative advantage” (or convenience) compared with already existing channels, along with low risk perceptions were key ingredients in customer adoption of cell phone banking. Because not many of his respondents had used these services previously, compatibility with previous values and familiarity with the internet and cell phone (as in Black’s study), did not seem to play an important role in customer perceptions of cell phone banking or their apparent willingness to adopt the innovation. In a second study, Brown explicitly compares adoption and perception of internet versus cell phone banking in South Africa, this time addressing a customer population with more exposure to both technologies. The study reveals significant differences between customers perceptions of internet banking and cell phone banking and, perhaps more significantly, significant demographic as well as subjective distinctions between regular internet users (who comprise only 7% of the population in South Africa at the time of the study) and regular cell phone users who represented a much larger percentage (3). Overall, Brown concludes that perceptions of the older technology are more positive among the customer base most likely to use it; internet users, evaluating internet banking. Meanwhile cell phone users remain somewhat more reluctant to access financial services via cell phones, with risk, once again appearing as a significant barrier to adoption. On the other hand, the study’s limitations in fact suggest some of its most significant implications. The comparison between an older, more established technology and a newer innovation in terms of customer confidence is somewhat unfair, particularly so when demographic differences between two respondent groups likely mean a more general distrust and unfamiliarity with formal financial services of any kind. Instead, Browns significant initial investigation of adoption and subjective perceptions are significant mainly for what they suggest as a historical comparison to internet banking, first in terms of the massive potential of cell phone banking and second what we might glean with regards to objective factors, that given our previous “lessons learnt” via internet-based financial services, may be equally significant for the futures shape of financial services to come. Environmental Factors in Business and Finance A key addition to any critical analysis of the potential of cell phone innovations in internet-based financial services is an analysis of the banking/financial sector itself, and observation of the business environment into which these innovations in customer services are being introduced. In 2000, when Joe Peppard evaluated Customer Relationship Management with respect to financial services in general, a exuberant atmosphere reigned in the field. Banks were no longer “gatekeepers” to financial services, but “gateways,” that facilitated multiple channels to the same destination. Meanwhile, non banks were getting in on the financial services game, including department stores, car manufacturers, electronics giants and telecom providers making plans to offer “online financial services” of one stripe or another (324). Since then, market competition narrowed the field of internet financial services, deciding markedly in favor of banks and financial institutions that once seemed old fashioned. Just five years later, the global financial crisis has narrowed the field even more. The crisis has precipitated a wave of collapse among banks, some of which previously seemed just the sort of solid “bricks and mortar” institutions built to survive and best capitalize on new opportunities for growth represented by improved access and an expanding customer base that technology could lend to financial services. This collapse, to some may even call into question what has been touted by advocates of cell phone banking as its biggest strength; bringing financial services to the previously un- and under-banked (Brown 381). After all, the subprime mortgage crisis in the United States, it might be argued, was the direct result of “expanded” financial services to those who previously lacked access to them—with dire results for the industry itself. In addition, the convenience of web-based financial transactions, the primary selling point for all internet-based services including cell-phone banking is tied to its real-time, 24-hour-a-day access and global reach; nevertheless these features of the current global financial system that make crisis like the most recent one particularly difficult to contain and global in nature. Given this context, and the instructive history of internet financial services as a tool for Customer Relations Management (CRM), what are the prospects for cell-phone banking as an innovation in web-based financial services? How might this innovation impact the financial services industry and finance as a whole? Can cell phone banking provide greater transparency and integration? On balance, would that be a good thing? Critical Analysis & Conclusion Potential of Cell phone banking: Cell phones represent global integration for those previously isolated from even the most basic communication technologies. By 2003, the number of cell phone users in South Africa had outstripped the number of those with access to a landline by 300% (Brown 382). The percentages are greater in other parts of Africa and the developing world. This means that cell phones represent a potential for integrating a new customer base into formal financial services that is difficult to overstate. This also represents one of the major distinctions between innovations in cell-phone banking and previous jump to online banking; most new online customers were either existing customer who previously used other channels or young people who would have likely been integrated into formal banking services via other channels. Short term benefits This potential alone implies a number of short term benefits; low costs of cell phone transactions for providers, particularly given that investment in cell phone-based services will cost less than that required for previous web-based services, in that basic web-based platforms have already been developed, and in some cases adapted specifically for use with cell phones. This will allow for new revenue streams, deriving from transactions which might previously have been relegated to the informal economy, at very low cost to providers. Meanwhile, the benefits to customers include increased ease of transactions and in some cases improved security over cash transactions, along with timeliness, all demonstrably significant factors in customer uptake and rating of service quality. Short term challenges Negative impacts are difficult to predict, however based on the previous experience of internet-based financial services, the challenges for services providers hoping to capitalize on the potential market implicated in this innovation are worth reflection. Failures in the early days of internet-based financial services relied too heavily on rapid expansion of adoption, as well as on the low cost per transaction that the new innovation facilitated. As a result, they were unable to compete with existing financial institutions who were better poised to roll out successful internet-based service profiles, as part of a wide variety of channels on offer. Even for established financial services providers, a second challenge will be appropriate expansion of financial services into previously informal sectors of the economy; lessons learned from the financial crisis with regard to modeling and extrapolation will be closely related to success in both the short and long term. Long-term benefits Despite the possible limitations posed by customer perceptions and adoption of new way of accessing possibly unfamiliar financial services (compatibility with previous values may be of particular concern) as well as the caution required in the current market for financial services, expansion of financial services via cell phone into previously under-banked and unbanked market segments will have positive long-term impacts, including increased transparency in the global financial system. Such innovations can help eliminate blind spots created by poor modeling, and thus may, in the long term, reduce opportunities for crisis such as took place in the recent global financial crisis. Future Study and Analysis As cell phone banking progresses, customer adoption trends must continue to be documented, not only subjective perceptions but objective considerations such as demographics. Also relevant might be the impact of cell phone banking on the formalization of previously informal economies; further qualitative and quantitative measures will be required to determine if these new innovations formalize the previously unbanked, or instead, facilitate the growth of the informal sector. Finally, researchers and professionals will be interested in learning whether the experience of previous internet banking innovations holds true, in that cell phone banking will facilitate further market domination by a few large institutions. 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