1. E-FINANCE CHAPTER 2 INTERNET BANKING Internet Banking and Its potential in TRNC, Zakaria Jado Zakario, Assoc. Prof. Dr. Hatice Jenkins, TRNC, 1

2. What is Internet Banking? Internet Banking or as it sometimes called online banking; is an outgrowth of PC Banking which is in turn another form of electronic banking. Electronic Banking refers to the process by which customers can perform banking activities electronically without visiting their physical branch, thus without direct interaction between customers and bank`s employees. 2

3. What is Virtual Banking? From the perspective of offering internet banking, banks that do not have physical location are called Virtual Banks. Banks that have physical location are called Land Banks. By eliminating the costs associated with bank branches, direct banks offer higher interest rates and lower service charges on their products than traditional competitors. Manulife Bank in Canada and Security First Network bank are the first virtual banks in the world financial markets. 3

4. Bank-Rate (2003) states that banks can be classified into three kinds: 1-Brick and Mortar Banks: Those are the ordinary banks, they do not offer internet banking services and they rely on their physical branches to distribute their products. However, many banks are becoming online and providing Internet banking is increasingly becoming a need rather than a nice service to have. 4

5. Bank-Rate (2003) states that banks can be classified into three kinds: 2-Virtual Banks: Virtual, branchless or internet only banks offer all of their services to their customers through the internet. Such kinds of banks do not rely on physical branches to serve their customers; they only can be seen through their web site, TV ads and their ATM network. 5

6. Bank-Rate (2003) states that banks can be classified into three kinds: 3-Brick to Click Banks: When a traditional “brick and mortar” bank starts offering internet banking services to its customers, it is then called a “brick to click” bank. Most of the large, regional and even smaller banks are now becoming Bricks and Clicks banks. 6

7. Internet Banking Growth There were 50 financial institutions that had a website in 1995 and it had increased to 14,000 by the end of 2002. The number of households using internet banking was 5 million in 1995 and had increased to 100 million at end of 2002. Finally monthly loan application submitted was 0 in 1995 and had increased to 1.5 million in 2002. In 1998; internet banking was viewed as an extraordinary service. 7

8. Internet Banking Growth In 1998; internet banking was viewed as an extraordinary service. Within the following few years, internet banking such as viewing banking transactions, completing online credit card applications and even bill payment may become industry standards. 8

9. Internet Banking Growth (Cont.) The financial service sector pointed out the following expectations: As customers become more familiar and comfortable with internet banking services, internet banking will continue to grow. Banks will extend the functionality of their websites and they will move beyond basic transaction services to more personalized ones 9

10. Internet Banking Growth (Cont.) Expectations become true rapidly. Researches in 2000 showed that; 88.8% of all US National Banks were offering Balance inquiry and fund transfer services through web sites, 78% were offering bill presentment services and 60% offering credit application services. These three services are the most popular services offered by all bank categories. 10

11. Dimensions for Internet Service Quality Content Accuracy Ease of Use Timeliness Aesthetics Security

12. What is real internet banking? Having a website does not necessarily mean that the bank offers Internet Banking services. There are three types of internet banking: 1-Informational or marketing website 2-Communicative Websites 3-Transactional website: 12

13. 1-Informational or marketing website  It is just for marketing information about the bank’s products and services  It is the most basic form,  They give information about loan or deposits interest etc.  In extreme cases, it might have a contact list through which clients might be allowed to send an e-mail requesting for specific information, ordering a brochure…  The risk is relatively low as there is no path between server and bank`s internal network.  The service can be provided by the bank itself or outsourced.  Appropriate controls must be in place to prevent unauthorized alterations to server or Web site. 13

14. 2-Communicative Websites:  This type of websites allow for two way flow of information,  Firstly, users can receive information (i.e. different products specifications, interest and exchange rates etc.),  Secondly, they are also allowed to feed back by resending information.  Electronic mailing, account inquiry, loan applications and some static file updates (changing address or name) are the transactions offered by this type of website.  Appropriate controls need to be in place to prevent, monitor and alert management of any unauthorized attempt to access the bank`s internal network or computer systems.  Virus controls also needed. 14

15. 3-Transactional website:  While communicative websites involve a dual flow of information, capital transfer needs a more complex website.  In the third level, or transactional websites, customers can make real time, queries about their accounts;  They can modify and update account information,  Fund transferring process is possible, so clients can simply pay bills; transfer funds make their own transactions.  Higher risk is exposed so it must have strongest controls. 15

16. Internet Technology and Bank Strategies: After banks and other financial institutions recognized the importance internet, they started to offer their services through this medium. 1-Additional Distribution Channels  Internet allows banker to reach more markets complementing the existing distribution channels.  Internet will serve to support existing physical branches, ATMs, call centers etc.  This approach is used by some of French banks to convert traditional users into internet banking users. 16

17. Internet Technology and Bank Strategies: 2-Support the Development of New Services  This approach aims to identify the relationship with customers,  This is done by interacting with customers to obtain more precise information about their preferences and interests,  This should be followed by banker’s action to design new products and services corresponding to those preferences,  The idea is that when the client is comfortable with the bank’s website, he/she will spend more time surfing and playing around,  Time spent will be invested to measure and then employ customer interest to design and offer new internet banking services,  Extra time spent on the web will also give the bank the opportunity to cross sell those new products. 17

18. Internet Technology and Bank Strategies: 3 – Information Technology and infrastructure  Internet provides a global, easy to use and inexpensive communication platform for all organizations and individuals. 4 – Disintermediation (Direct buying)  Take out the intermediaries and speeds up buying and selling as well as making both sides financially better off. 5 – 7/24 service  Web sites are available to consumers for 24 hours. 18

19. The Characteristics of Internet Banks 1-Structure Variables  ASSET  YOUNG  BANK HOLDING COMPANY (BHC)  URBAN  DEPOSITS  EXPENSES  NON INTEREST INCOME 19

20. The Characteristics of Internet Banks 2-Performance Variables  RETURN on EQUITY (ROE)  INEFFICIENCY  CAMELS 20

21. The Characteristics of Internet Banks 1-Structure Variables  ASSETS (+); state that the decision of adopting internet banking would be affected by the size of the bank,  Bank size had a positive coefficient and the larger the bank`s asset the more likely it will choose to offer internet banking.  So bank size play as a determinant factor of adopting internet banking. 21

22. The Characteristics of Internet Banks  YOUNG (+); was significantly positive, indicating that newer banks are more likely to offer internet banking.  A bank that is a member of a BANK HOLDING COMPANY(BHC) is more likely to offer internet banking.  Expected sign is positive. 22

23. The Characteristics of Internet Banks  Banks in URBAN(+) areas are more likely to offer internet banking to their customers than banks in non urban areas.  The banks in urban areas are faced with both greater customer demand and high competition.  DEPOSITS(-); banks that are less reliant on traditional sources of funding may tend to follow more aggressive business strategy, including the adoption of internet banking.  Expected sign was negative. 23

24. The Characteristics of Internet Banks  EXPENSES(+); this factor is significantly positive suggesting that banks that experience higher experiences higher expenses on premises and fixed assets are more likely to adopt internet banking.  NIINCOME(+); was significantly positive. Banks that focus on non-traditional activities in generating their income are more likely to offer internet banking.  Ex: Federal fund, expenses: software research, development expenses, employee training. 24

25. The Characteristics of Internet Banks 2-Performance Variables  ROE(+) had a positive coefficient which means that more profitable banks have chosen to adopt internet banking because of two reasons.  First, they financially more able to do that.  Second reason is that adopting internet banking will help them to maintain their completive position. 25

26. The Characteristics of Internet Banks  INEFFICIENCY(-); the coefficient sign of this factor is significantly negative. This indicates that banks with lower inefficiency ratio are more likely to adopt internet banking.  CAMELS(-); lower CAMELS number is attached to safer banks. Coefficient sign is negative indicating that safer banks are more likely to offer internet banking. 26

27. CAMELS  CAMELS is a rating system used in credit analysis and lending.  Capital Adequacy  Asset Quality  Management Quality  Earnings Record  Liquidity Position  Sensitivity to market risk 27