Description
A bank is a financial institution and a financial intermediary that accepts deposits and channels those deposits into lending activities, either directly by loaning or indirectly through capital markets.
Blekinge Institute of Technology School of Management Masters in Business Administration 2006 FEC066 – Thesis (10 p / 15 ECTS)
INTERNET BANKING IN GREECE: DEVELOPMENT, EVALUATION AND PERSPECTIVES ______________________________________________
By Andreas-Nikolaos Papandreou
Supervisor: Anders Hederstierna
INTERNET BANKING IN GREECE: DEVELOPMENT, EVALUATION AND PERSPECTIVES
Dedicated to my dear mother Olga, for all her support during the years of my studies.
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Executive Summary
Abstract: Revolutionary developments in marketing, information and communications technology continue to transform the banking and financial industry. Distribution of banking services through the Internet is an important part of this transformation. The objectives of this thesis are mainly to examine the role, which Internet banking can play as a new distribution channel of banking services for the benefit of both financial institutions and customers in Greece. The study explores the growth in on-line banking services and the ways in which financial institutions in Greece can take advantage of Internet technology to offer successful and cost-effective banking solutions. Moreover, this thesis addresses the key issues of concern to the banks regarding their strategic positioning and the products/services they offer or could offer on the Internet. Technology can help banks build an integrated delivery strategy for effective multi-channel management. Results identify the reasons why Greek banks use Internet banking and their effect and place an emphasis on the strategic impact of Internet technology as a core element of financial services. Greek banks want to expand their existing distribution channels using the Internet as another alternative channel. Internet banking in Greece is on its way to become the centerpiece of direct banking strategies. Internet Banking in Greece: Development, Evaluation and Perspectives Andreas-Nikolaos Papandreou
Title: Author:
Supervisor: Anders Hederstierna Institution: Course: Purpose: School of Management, Blekinge Institute of Technology, Sweden Master Thesis in Business Administration The purpose of this thesis is mainly to examine the role, which Internet banking can play as a new distribution channel of banking services for the benefit of both financial institutions and customers in Greece. The study explores the growth in on-line banking services and the ways in which financial institutions in Greece can take advantage of Internet technology to offer successful and cost-effective banking solutions. Research method includes a combination of theoretical analysis (literature review) and empirical analysis (questionnaires). A structured questionnaire survey was conducted on 35 banks operating in Greece.
Method:
Conclusion: Results identify the reasons why Greek banks use Internet banking and their effect and place an emphasis on the strategic impact of Internet technology as a core element of financial services. Greek banks want to expand their existing distribution channels using the Internet as another alternative channel. Internet banking in Greece is on its way to become the centerpiece of direct banking strategies.
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Keywords: Internet banking, e-banking, online banking, distribution channel, financial services, Greece
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ACKNOWLEDGEMENTS
I would like to take this opportunity to thank all those who have contributed to this thesis, directly or indirectly. I would first like to thank my supervisor Anders Hederstierna for his valuable comments and patience. Furthermore, I want to thank my fellow MBA students for our fruitful discussions and critical comments. A special thanks goes to my partner Helena Svensson for her support during my stay in Sweden. Last but not least I want to thank my family and friends in Sweden and Greece for encouraging and supporting me in various ways.
Andreas-Nikolaos Papandreou June 2006, School of Management (MAM), Blekinge Institute of Technology, Sweden
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TABLE OF CONTENTS
CHAPTER ONE: INTRODUCTION AND BACKGROUND 1.1 Introduction 1.2 Background 1.2.1 Structure of the financial system in Greece 1.3 Problem Formulation 1.4 Methods 1.5 Thesis Outline CHAPTER TWO: AN OVERVIEW ON THE USE OF THE INTERNET 2.1 Introduction 2.2 Internet Definition and History 2.3 How Does the System Work 2.4 Strengths and Weaknesses of the Internet 2.5 Internet Users in Greece 2.6 The Emergence of the Internet in Greece as a New Distribution Channel CHAPTER THREE: BANKING AND FINANCE ON THE INTERNET 3.1 Introduction 3.2 Defining Net Impact for Banking Services 3.3 Areas of Use of the Internet in Financial Institutions 3.4 The Growth of Internet Banking 3.5 Advantages for the Banks 3.5.1 Internet is a cost-effective distribution channel 3.5.2 It identifies profitable customers and increases the bank’s economic profits 3.5.3 It increases customer retention, up-sell and cross-sell services 3.5.4 Other advantages 3.6 Advantages for the Customers 3.6.1 Low cost 3.6.2 Compelling convenience 3.7 Disadvantages and Risks 3.7.1 The issues of security and privacy 3.7.2 Internet banking might “dehumanise” banking 3.8 Internet Banks 3.8.1 Functionality of the banks’ web sites CHAPTER FOUR: INTERNET BANKING IN GREECE 4.1 Internet Banking in Greece 4.1.1 Classification of Internet Banks 4.2 The Development of Internet Banking Services in Greece 4.3 Greek Internet Banks 4.3.1 The case of Piraeus Bank 4.3.2 The case of Egnatia Bank 4.3.3 The case of Alpha Bank 10 10 10 11 13 13 14 16 16 16 17 17 18 18 20 20 20 21 21 24 25 26 28 29 29 29 29 30 30 31 31 32 34 34 35 35 36 36 37 38
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CHAPTER FIVE: DISTRIBUTION OF FINANCIAL SERVICES THROUGH THE INTERNET 40 5.1 Introduction 40 5.2 Distribution Channel Strategies 40 5.3 Internet Banking as a Strategic Necessity 42 5.4 Reasons for Distributing Banking Services through the Internet in Greece 43 5.4.1 Improvement of bank’s image through innovation 43 5.4.2 Market transparency 43 5.5 The Four Phases of Internet Banking 43 5.5.1 Phase One: Marketing and promotion 44 5.5.2 Phase Two: Light interactivity 45 5.5.3 Phase Three: Full transactions and services 45 5.5.4 Phase Four: Strategic usage 46 5.6 Developing an Internet Banking Offering 46 5.6.1 Step One: Strategy development 46 5.6.2 Step Two: Analysis and design 47 5.6.3 Step Three: Technology development 47 5.6.4 Step Four: Implementation 47 CHAPTER SIX: ANALYSIS AND DISCUSSION 6.1 Introduction 6.2 Methodology and Questionnaire Development 6.2.1 Research methodology 6.2.2 Sampling procedure 6.3 Findings 6.3.1 Data analysis 6.3.2 Presentation of data and evaluation of questionnaire sent to banks 6.3.3 Presentation of questionnaire that evaluates the respondents’ sites 6.3.4 Summary of result 6.4 Conclusions 6.4.1 Summary and results 6.4.2 Final comments and recommendations REFERENCES APPENDICES A. Questionnaire Sent to Banks B. Questionnaire that Evaluates the Bank Web Sites C. List of Banks where the Questionnaire was sent D. List of Questionnaire Respondents E. Answers of Respondents F. Evaluation of Respondents 48 48 48 48 49 49 49 49 59 61 62 62 62 65
71 74 75 77 78 79
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LIST OF TABLES
Table 1.1: Credit Institutions operating in Greece during 2005 (Hellenic Bank Association 2006) Table 1.2: Market Shares (%) of Credit Institutions operating in Greece (Hellenic Bank Association 2006) Table 3.1: Growth of Internet Banking from 2000 to 2004 (ePaynews.com 2006) 12
13 23
Table 3.2: European Spending on Electronic Banking Channels (ePaynews.com 2006) 23 Table 3.3: Percentage of banks with Internet banking services that offer the following features today and plan to offer them in 3 years (Xpressways 2006) 24 Table 3.4: Banking Transaction Costs (Benton 2002) Table 3.5: Framework for Banks’ Classification (Diniz 1998) Table 4.1: Bank Profits of 5 biggest Greek Banks (Ziotis 2006) Table 5.1: The Four Phases of Internet Banking (Dynamic Net 2006) 25 33 35 44
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LIST OF FIGURES
Figure 3.1: US Households Banking Online (eMarketer 2004) 22 Figure 3.2: Reasons for Integrating Branches with the Internet (Xpressways 2006) 25 Figure 3.3: Internet Banking’s Relationship to Bank Profitability (Radigan 1996) Figure 3.4: Internet Banking Evaluation Matrix (Hennigan et al 1996) Figure 4.1: WinBank Home Page Figure 4.2: Egnatia Teller Figure 4.3: Alpha Web Banking Figure 5.1: The Distribution Channels Strategies (Mols 1999) 28 32 37 38 39 41
Figure 6.1
opulation Sample of Thirty-five Banks according to their Functionality 50 Figure 6.2: Population Sample of Thirty-five Banks according to their Type Figure 6.3: Population Sample of Thirty-five Banks according to their Country of Origin Figure 6.4: The Seventeen Banks that answered according to their Functionality Figure 6.5: The Seventeen Banks that answered according to their Type Figure 6.6: The 17 Banks that answered according to their Country of Origin 50
51 51 52 52
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CHAPTER ONE: INTRODUCTION AND BACKGROUND
1.1 Introduction
The global credit system has undergone a process of reformation and reorientation, both at structural and organizational levels. The banking sector has been at the heart of this procedure. Phenomena of mergers and acquisitions, globalisation and internationalisation of services and products, changes in organizational structures, innovation policies and practices, are just some examples of the worldwide changes in the banking industry. Banks perform intermediation functions that are vital to a country’s economic growth and development. Banking services have evolved from an early emphasis on deposit taking (primarily demand deposits and savings accounts) and short-term loans into a much wider range of deposits and loans. Operating in a dynamic environment, banks need to intensify their approach towards service quality in an attempt to increase sales volume, market share and ultimately their profit. One of the strategies that have been offered for success in such a business is the delivery of high service quality. As banking clientele has become more financially sophisticated, so have bank operations that have expanded from traditional commercial banking services to investment services, fund management services, insurance brokerage and other financial services. Moreover, technological developments such as the use of computers and especially the Internet and the World Wide Web can facilitate these bank operations. Given the wealth of opportunities that the Internet creates for financial institutions, having a strong on-line presence is becoming a strategic necessity for most of them and raises the importance of the Internet as a strategic distribution channel for providing banking services. According to Mols (2001), there has been a considerable growth in the segment of consumers preferring Internet banking due to the increase in computer literacy, the availability of computers and the reduction in the costs of PCs and Internet access. This fact will change the optimal distribution structure for most banks and financial institutes. Especially in Greece, although the use of Internet is not the expected one, Internet banking continues to increase because of Internet’s easiness in use, its low cost and the requirement from some public authorities to only receive online payments.
1.2 Background
Due to changes in the European banking sector and expansion plans in the Balkan region, Greek banks are trying to strengthen their position in the market and improve their efficiency. Greek banks are trying to find new distribution channels and methods of providing their services in order to maintain and increase their share in the market. An appealing method of doing that is through the Internet because it can offer banking services at cheaper prices to more potential clients and the transactions can be carried out from anywhere in the world at any time of day or night. This means that by using Internet technology, financial institutions can establish a direct link to customers and
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improve their market shares while increasing their profits, without paying the high cost of building new branches.
1.2.1 Structure of the financial system in Greece
Until the late 1980s, the financial system in Greece functioned under many bureaucratic rules and regulations that restricted competition and market development (Mylonidis and Kelnikola 2005). However, the Greek banking sector in Greece, which was once dominated by the government, has been transformed in recent years. There is a recent financial deregulation and market liberalization because of the convergence with European Union standards, competition and privatisation. Participation in the European Union has encouraged the convergence of banking services, while the introduction of the Euro and European integration has increased competition among banks. The continuous privatisation of public banks has further restructured the Greek banking industry. These reforms have mostly taken place through mergers and acquisitions, with ownership remaining in local hands. Such developments are expected to continue within the new and dynamic international and domestic financial environment; nevertheless, a bigger role for foreign institutions (through ownership of Greek banks and/or formation of strategic alliances) is expected to appear. The Greek financial system had a remarkable transformation during the 1990s and is still evolving rapidly as a result of the continuing liberalisation process and its integration into the European financial market. Consequently, the actual state of the Greek financial system is best described in the context of the on-going process of financial reform and restructuring. The structural changes in the Greek banking system included among others (Gortsos 2005): • • • • • • Interest rate deregulation Liberalisation of cross-border capital movement Abolition of direct credit controls De-specialisation of credit institutions Modernisation of money and capital markets as well as payments systems Rationalisation of monetary policy- adoption of the single European currency
Moreover, the European Union banking Directives and regulations towards the establishment of a single financial market have led to the following developments (Gortsos 2005): • • • • • • Freedom to provide cross-border financial services within the European Union Minimum harmonization of Greek legislation to European standards Enhancement of prudential supervisory measures (capital requirements, large exposures, internal controls, corporate governance) Creation of a deposit guarantee scheme Enactment of money laundering legislation Enactment of extensive legislation on the operation of capital market and financial intermediaries providing services in them
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•
Implementation of International Accounting Standards
The liberalisation measures in the Greek financial sector have given the banking system the following characteristics (Gortsos 2005): • • • • Being subject to monetary and foreign exchange policies performed at a European level Full integration into the single European financial market Universal banking prototype (banks may engage in-house in both commercial banking and investment banking services- they can also provide bank assurance services) Segmentation of supervisory authorities (Bank of Greece, Capital market Commission, Supervisory Committee of Private Insurance)
Nowadays, the European economic and monetary union is concentrating Greek banks on boosting their competitiveness in what will become a much tougher market. Greek banking is characterised by the strong presence of the Central Bank (Bank of Greece) which supervises and controls the banking sector, intervening, if necessary, to secure the smooth operation of the banks. Furthermore, Greek banks are expanding in the Balkan markets and support strategic cooperation with distinguished international credit institutions in order to take advantage of synergistic effects and know-how transfers, to expand distribution networks and to secure a position in major international financial centers (Mylonidis and Kelnikola 2005). The Greek financial intermediaries include (Gortsos 2005, Hellenic Bank Association 2006): a) Credit institutions such as commercial banks, specialised credit institutions and cooperative banks, b) Financial institutions such as leasing companies, credit card issuers, foreign exchange bureaus, venture capital companies and payment institutions, c) Market intermediaries providing investment services: either on a collective basis (mutual fund management companies and investment fund management companies) or on an individual basis (investment firms). According to the Hellenic Bank Association, at the beginning of year 2005 the credit institutions operating in Greece consisted of 21 commercial banks incorporated in Greece (with a steadily increasing participation of foreign institutional investors in their capital basis), branches of 19 commercial banks incorporated in other member states of the European Union, branches of 4 commercial banks from third (non-EU countries), 2 specialised credit institutions and 16 cooperative banks (see table 1.1). Banks Greek Commercial Banks 21 Foreign Commercial Banks 23 Specialised Credit institutions 2 Cooperative banks 16 62 Total Table 1.1: Credit Institutions operating in Greece during 2005 (Hellenic Bank Association 2006) Commercial banks in Greece offer all kinds of banking services, at the same time expanding their activities through the markets operating in Greece and abroad.
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However, there is a strong competition among commercial banks and other financial institutions in Greece. Assets 2003 82.1 2004 80.9 2003 84.5 Loans 2004 85.1 Deposits 2003 2004 82.6 81.8
Greek Commercial Banks Foreign 9.3 10 9.4 8.8 7.3 8.2 Banks Specialised 8 8.4 5.2 5.1 9.4 9.2 Credit institutions Cooperative 0.6 0.7 0.9 1.0 0.7 0.8 banks 100 100 100 100 100 100 Total Table 1.2: Market Shares (%) of Credit Institutions operating in Greece (Hellenic Bank Association 2006)
The banking sector in Greece is relatively concentrated. The five biggest banks (The National Bank of Greece, Alpha Bank, EFG Eurobank Ergasias, Emporiki Bank and Piraeus Bank) accounted for 65% of assets, 67% of loans and 65% of deposits in 2004 (IMF 2006). Recently, changes took place in the Greek banking system. Credit institutions became commercial banks; investment banks stopped their operations, new banks have been established, while some banks have been bought or merged and now operate under new name and management. However, the Greek banking system needs to consolidate and strengthen its position in order to survive at the European Monetary Union playing field. Greece does not need so many banks to operate and future market conditions will not support the inefficient ones.
1.3 Problem Formulation
The problematic that is going to be investigated in this thesis is the role, which Internet banking can play as a new distribution channel of banking services for the benefit of both financial institutions and customers in Greece. The study aims to explore the growth in on-line banking services and the ways in which financial institutions in Greece can take advantage of Internet technology to offer successful and cost-effective banking solutions. Moreover, this thesis will address the key issues of concern to the banks regarding their strategic positioning and the products/services they offer or could offer on the Internet.
1.4 Methods
As already mentioned, this thesis aims to examine the impact of Internet banking on the financial services industry.
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Research methodologies will include a combination of theoretical analysis (literature review) and empirical analysis (questionnaires). Data will be collected from publications (secondary data) and questionnaires (primary data). Studying of recent publications will constitute the literature review in this thesis. The aim of the literature review is to show what has been done in the field and how the current study relates to earlier research. The review will give an overview of the findings of various previous studies and identify general patterns of the findings and the conclusions that can be made. The need for the literature review is to serve as a foundation for rational reasoning on which the current topic can be built upon. This will give an insight of the current status of Internet banking and especially marketing of banking services through the Internet in Greece. For this thesis, secondary data was collected from various publications to better understand and explain the research problem. These publications include general statistics, internal sources, government publications, periodicals and books, online data sources, business information, commercial data, associations, research reports and international information (Kotler 2003). As part of the study, a questionnaire (see Appendix A) was sent to a number of banks (see Appendix C) operating in Greece, representing a fair share of both banks that offer some level of interaction with the customers and banks that provide full Internet banking via their WWW pages. According to Berdie (1986), a questionnaire is a series of predetermined questions that can be either self-administered, administered by mail, or asked by interviewers. It is a research method used for many purposes that vary depending on the type of information sought. During the current study structured questions were used to generate answers that were meaningfully compared and analysed. In addition, the author of this thesis tested the bank Web sites that responded (see Appendix F) and answered a second questionnaire (see Appendix B) that represents an evaluation of the bank Web sites.
1.5 Thesis Outline
This study is divided into six chapters. Chapter One gives a short introduction to the subject and the central theme of the thesis is highlighted. Moreover, the chosen topic is brought in and the aims of this study are being presented together with their methods. In addition, the structure of the following chapters is being provided. Chapter Two defines Internet and gives a brief historical review of it. Moreover, the strengths and weaknesses of it are listed so that the reader understands its importance. In addition, the current status of Internet in Greece as a new distribution channel is being provided. Chapter Three outlines how the Internet is affecting banks today. It starts by defining Net impact for banking services. Then it refers to the four types of Internet use in financial institutions and the growth of Internet banking is being explored. After that,
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a detailed analysis of the advantages and disadvantages and risks of Internet banking is being provided. Chapter Four has a detailed analysis of on-line banking in Greece. Moreover, there is a reference in the Greek banking system and the development of Internet banking in Greece. Chapter Five explains the role of Internet banking as a distribution channel for providing banking services. Moreover, a four-phase framework is being introduced for understanding the different ways banks can get on-line and the advantages of each level of on-line commitment. Furthermore, some suggestions are being offered for developing an Internet banking offering. Chapter Six presents the author’s methodology and questionnaire development. The data (secondary and primary) and methods used for collecting it, their logic and limitations are highlighted. Moreover, he explains his findings and concludes with a summary of result. Finally, there is a review of the objectives of the study and some last concluding remarks, concerning the research and its results.
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CHAPTER TWO: AN OVERVIEW ON THE USE OF THE INTERNET
2.1 Introduction
Nowadays, when everything is developing rapidly and the power of information plays a major role in everyday life, technology comes to create new means of communication that are going to dominate in the following years. These recent developments are being expressed without any doubt through the opportunities that the use of computers and especially the Internet offer. The Internet is the physical network that links computers across the globe (Smith and Chaffey 2005). It consists of the infrastructure of network servers and communications links between them that are used to hold and transfer information between the clients and servers. According to census data from U.S., 62 million U.S. households, or 55% of American houses, have a computer connected to the Web (Lieb 2005). Moreover, in the EU the percentage of people that have access to the Internet is 49% and is growing (Eurostat 2005). According to the OECD, there are 270.7 million Internet subscribers at the OECD countries and this number is increasing fast. In addition many more individuals who do not have their own direct Internet access though their home, are logging on through other sources, such as the university, workplace, libraries or civic organisations. Internet World Stats (2006) estimates the Internet users around the world to 1,018,057,389 people. Given the fact that Earth’s population is about 6.5 billions, approximately 1 out of 6 people has access to the Internet.
2.2 Internet Definition and History
The Internet refers to a large interconnected network of a number of computer networks that link people and computers all over the world through the use of phone lines, satellites and other telecommunications systems that help them to exchange information (Ellsworth and Ellsworth 1995). Historically, the Internet was a military experiment that started in the early 1970s by the US Department of Defence. It was called ARPAnet and it was a system originated by the Advanced Research Projects Agency to improve communication and data exchange between researchers and scientists. However, the usage of Internet has increased dramatically during the 1990s. Together with the World Wide Web (WWW) they can be extremely useful for various applications of education, commerce, communication or entertainment. As a result, the original communication standard could not keep up with Internet’s astonishing rate of growth and changed to TCP/IP standard, which is a group of communication protocols used to connect hosts on the Internet.
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2.3 How Does the System Work
In order for an individual to have access to the WWW, he needs to have the necessary software installed on his computer (e.g. Web browser, E-mail etc.) and a communications network. Moreover, Internet usage in home includes a modem, which is supposed to connect the computer and the telephone line and a public telephone service. In addition, the user needs to have access to a “service provider” and his computer must be at least a Pentium-based or other type of processor machine.
2.4 Strengths and Weaknesses of the Internet
Undoubtedly, the Internet is an extremely important phenomenon with some strong and some weak points that affect many aspects of the society (Jones 1996). The most significant ones are: Strong points: 1) The international impact of the Internet allows communication and exchange of information 24 hours per day among people of every country in the world using a universal language. 2) World-wide use of e-mail communication is cheap. 3) Given a sufficient infrastructure, all the computers can communicate with each other regardless of their operating systems. 4) Increasing demand for advanced Internet services and applications makes the related companies to invest more funds, which contributes in the development of each country’s economy. 5) Demand for Internet services makes users to spend more money for better services and create new opportunities in the market. 6) New approaches of communicating with the customers are created by the ability to monitor individual domestic lifestyles. 7) New education opportunities are created by a universally low-cost access to the Internet for all the people. Weak points: 1) Many people, especially old or less educated, find computers difficult to use and expensive. 2) When using a slow, dial-up connection, downloading Web pages takes a long time and can frustrate users, especially when the net is busy. 3) Finding information by using search engines or other software tools can be difficult because of unnecessary complexity into Web-sites design that can reduce Internet usage for many people. 4) Probability of network failure that can cause major economic losses. 5) A continuous increase in premium Internet access costs can reduce the entrance of new customers. 6) Accessing illegal or undesirable material through the Internet can cause restrictions on its growth due to social or government concerns. 7) Fears for lack of security when using the Internet and possible access to private information need to be eliminated in order to preserve confidence in the system’s capabilities.
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2.5 Internet Users in Greece
The Internet is now becoming a popular tool in Greece. According to a survey made by the Observatory for the Greek Information Society, the percentage of Internet users in Greece was 20.8% in 2005, while the percentage of Internet access (irrespective of having a personal connection) was 23%. In addition, it was estimated that the majority of Internet users include men, younger age groups, residents of Athens and Thessalonica (the two biggest cities), as well as higher education individuals. Internet access is mainly accomplished through a dial-up connection (67%), while ISDN follows with 21% and broadband with only 8%. However, according to the Observatory for the Greek Information Society, there were 167,000 broadband connections (1.5% of the population) in the beginning of 2006. In addition, there are over 15,000 new broadband applications every month, which together with the increasing rate of personal computers sales show great prospects in the future use of Internet in Greece.
2.6 The Emergence of the Internet in Greece as a New Distribution Channel
The Internet is fast becoming an important distribution channel for a wide range of businesses. According to Seitz and Stickel “Distribution channels are physical capacities to build up customer contracts in a systematic way in order to inform, counsel and sell products and services”. Distribution channels show or deliver products and services to the buyers or users and are physical distribution channels such as warehouses, transportation mediums and also trade channels like distributors, wholesalers and retailers (Kotler 2003). So the Internet is what we call an electronic distribution channel. Managers cannot ignore the impact of Internet on their businesses. According to Ghosh (1998), in order for a company to deliver new services or bypass the go betweens, it first needs to construct direct connections with the customers; and this can be accomplished by using Internet technology. Providing services through the Internet can be very compelling for the customers because of the low cost that these electronic exchanges have. By this method, the cost of traditional sales and marketing are being reduced. However, the biggest advantage is that it offers clients convenience, personalization and interactive communication that traditional competitors are unable to offer. The use of the Internet distribution channel offers economies of scale. With it, there is no need for having many suppliers in the company, since there is no physical distance with the clients. Moreover, successful branches that are originated in the Internet can expand themselves without the high cost and the delay that usually occurs in the physical world. Furthermore, the Internet can become a concentrating medium by gathering the buyers to sites that can cover all their needs. Today, businesses all over the world are using the Web and e-commerce to generate billions in revenues from on-line trading market.
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According to Datamonitor the Internet has a great potential as a distribution channel if it is used cost effectively and gets integrated with other direct and non-direct channels. In addition, according to Strategic International SA, Internet penetration is growing fast in Greece and although 92% of the consumers use the Internet for information search, 58% uses it for e-mail communication and only 5% for online purchases, consumption in online shopping is expected to increase. What is mostly sold online in Greece includes travel tickets, CDs, computer ware, books, mobile telephony products and flowers. There are five categories of online customers in Greece (Vrechopoulos et al 2000): 1) Innovators: these are Internet users who first adopt the new product/service or the innovation. They are not so many in numbers but are interested in trying new products and services. They are characterised by having higher education and good information about the new products and services through other innovators and their impersonal and scientific sources of information. 2) Early adopters: these are Internet users that are less interested to adopt than innovators. They are generally more integrated in their local communities than innovators, and are more likely to be opinion leaders. Early adopters are usually younger, educated, have a high social class and read a lot of specialized magazines about new products and innovations in comparison to the average consumers. They often make contact with salespeople of new products and services and play a fundamental role as opinion leaders who influence other consumers. 3) Early majority consumers: these consumers adopt the innovation just before the average consumer in the market does. They consider it a lot before taking the decision to adopt an innovation. They are characterised by a higher age, higher education and higher socio-economic level than the average members of the society. Finally, they mostly rely on opinion leaders such as the early adopters. 4) Late majority consumers: these consumers delay the adoption of the innovation primarily because they are sceptical about new products and services. Generally, they decide to adopt them after they have felt a strong social pressure. Moreover, they mainly rely on opinions expressed at an informal level by people they know well. Finally, they watch electronic media less frequently than others. 5) Laggards: they generally decide the adoption of new products and services when they are close to their withdrawal from the market or their substitution from others. Laggards do not trust innovations so much and are socially isolated. They are older consumers of lower socio-economic status. Consequently, the World Wide Web represents a remarkable opportunity for businesses and as we will see in the next chapters, Greek banks and financial institutions, to market financial services to new and existing customers in a very integrated way. The Internet is too important to ignore and the companies that currently do not want to participate in electronic commerce may be forced to do so in the future either by their competitors or their customers.
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CHAPTER THREE: BANKING AND FINANCE ON THE INTERNET
3.1 Introduction
In modern society, financial institutions such as banks, savings and loan associations and insurance companies, facilitate economic growth by performing essential intermediation and distribution functions. When they act as financial intermediaries they channel funds to productive uses while providing investors with a variety of outlets for their savings. Through well-developed financial markets, securities brokers and dealers, they distribute efficiently securities that firms issue to finance productive investments. Financial institutions accept money and provide services in return. They take deposits from the public so that they are able to issue loans to a variety of companies and individuals. Therefore, financial institutions and especially their most familiar form, the commercial bank, perform an asset transformation both by providing diversification and liquidity. However, the role of bank branches as a distribution network of banking services in international level has changed during the last years with the increase of activities outside branches. During this decade, the use of a telephone, a mobile, a PC or access to the Internet is enough to fulfil a variety of banking transactions in the least time and with the least cost. The high speed in providing a service and the low cost of a transaction offer a competitive advantage to a bank and contribute to the decrease of expenditure, the increase of productivity indices, the growth of businesses and strengthen the relations with the customers. Today, the use of financial services is characterised by individuality, mobility, independence of place and time and flexibility. Because of the great international competition, financial transactions are being held both by traditional banks and nontraditional banks that are trying to find new methods of providing their services in order to maintain and increase their share in the market. An attractive way of doing that is through Internet technology because it can offer complicated products in an equivalent quality with cheaper prices to more potential clients and the transactions can be carried out from anywhere in the world at any time of day or night. Because of the above, it is important for a bank to participate actively in Electronic Banking and in Electronic Commerce.
3.2 Defining Net Impact for Banking Services
Although most products are of a physical nature, financial products and services have a completely different nature. Financial services are comprised of two core, nonphysical elements that are ideally suited to on-line interaction: transactions and information. This happens because the transactions that are being executed through the computer don’t involve people and all their associated costs, so investors get significant savings. On the other hand, the vast information that the Web provides revolutionises both the ability to deliver information and its cost for the benefit of the customers.
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On-line banking through the WWW does not need any special software to buy and set up. The customer contacts his bank and then he inputs his user id and password at his bank’s Web site to get full access to his accounts. He just needs to have a secure Web browser such as Netscape Navigator 8.1 or higher, Microsoft Internet Explorer 6.0 or higher and others. This way of banking online requires the use of Internet browsers that support 128-bit encryption, which protects consumers by scrambling all the personal information transmitted between a consumer’s computer and the bank (Nixon and Nixon 2000).
3.3 Areas of Use of the Internet in Financial Institutions
There are four types of Internet use in financial institutions (Seitz and Stickel 1998, Keyes 1999, Nixon and Nixon 2000): 1) Information presentation: it is when a financial institution uses the Internet to present its products, services, branch locations and hours to the public. This type, not only announces that the bank exists, but also provides a kind of electronic brochure that informs the customers about facts concerning the bank. However, financial institutions that have such a basic Web site do not allow viewing of customers’ accounts or other transactions. 2) Information presentation with two-way communication: it is when the client sends an electronic mail or fills a feedback form to the bank, requesting further information. 3) Interaction with user: it is when there is a quick exchange of information between the user and the server because the former is data stored in the databases of the financial institution. Information on the interest rates for loan and deposit products can be featured but with the added ability for Web site visitors to complete loan and new account applications on-line. In this way, the bank directly receives the applicant’s information. The interactive type has many advantages and offers real value to the customer. The customer can price the bank’s products on-line and e-mail back any questions he might have. The bank can also provide on-line financial calculators so that customers can use the current rates to see the return on a deposit or the cost and payment of a loan. Moreover, the bank can offer currency conversions that allow the determination of different currencies values from one denomination to the other. 4) Transaction banking: this includes various financial transactions, such as opening and closing of accounts, paying bills, securities transactions, money transfers, implementation and deletion of standing orders, applications for loans or insurance acquisitions, credit card applications, financial planning services, information for tax purposes. We are going to see these types in detail later on.
3.4 The Growth of Internet Banking
Internet banking is the situation under which an individual performs common banking transactions over the Internet by using a browser, instead of going to his local branch to carry them out. Moreover, an Internet bank is a bank that has established a presence on the WWW to facilitate customers to perform these bank transactions. Some
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Internet banks only exist on the web and have no brick-and-mortar branches (Furst et al 2002). Internet banking is growing faster today than most financial institutions had ever expected and the number of banks on the Net is continuously increasing. Yahoo has reported 4921 banks on the Web. According to the Online Banking Report, online banking penetration continues to climb reaching 34% of all U.S. households by yearend 2004. NetBanker defines as a “true Internet bank” one that provides account balances and some transactional capabilities to retail customers over the Web.
Figure 3.1: US Households Banking Online (eMarketer 2004) According to the Pew Research Center (2005), in US 53 million people or 44% of Internet users and one-quarter of all adults, currently say they use online banking, which corresponds to an increase of 47% over the number of Americans who were having Internet banking in late 2002. Moreover, on a usual day online, 13 million Americans are having banking tasks online, a 58% increase from late 2002 (Pew Research Center 2005). According to International Data Corporation (2004), in Europe the number of ebanking accounts will continue to have double digit growth rates over the next couple of years, especially in Italy, Spain, and the U.K. During 2004, from the 122.3 million users of Internet banking 57.9 millions came from Western Europe (see table 3.1). It is expected that over the next 5 years, online banking will be an essential requirement for European banks that want to add the Internet channel to more traditional channels for their businesses.
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Region (millions 2000 2001 2002 2003 2004 of users) Western 18.6 28.0 37.8 47.7 57.9 Europe United 9.9 14.7 17.1 20.4 22.8 States 2.5 6.5 11.9 19.6 21.8 Japan AsiaPacific 2.4 4.4 6.8 9.8 13.8 (excluding Japan) Rest of 1.0 1.7 3.1 5.1 6.1 the world 34.4 55.3 76.7 102.6 122.3 Total Table 3.1: Growth of Internet Banking from 2000 to 2004 (ePaynews.com 2006) According to Datamonitor (2005), European banks are going into e-banking technology to improve the functionality and usability of their websites as well as levels of integration with other channels. Moreover, as the Internet is becoming an increasingly effective revenue generation tool, European banks are spending more on electronic banking channels (see table 3.2). Country 1999 2004 USD 99 bn USD 395 bn UK USD 88 bn USD 243 bn Germany USD 69 bn USD 271 bn France Banks spent almost $1 million per day on e-banking 1999 4-fold increase in e-banking spend, to $1.4 billion 2004 $850 million of this total will go on external contractors * Table 3.2: European Spending on Electronic Banking Channels (ePaynews.com 2006) There are various reasons for the rapid growth of Internet banking. First of all, Internet usage has become very popular. There are over 1000 million persons that have Internet access worldwide, a number that is increasing every day. Moreover, technological developments and customer acceptance encourage electronic commerce. There is a high number of people that have made a purchase on-line, which is increasing fast. Finally, more banks and other financial institutions are realising the advantages that on-line banking offers and are developing a presence on the WWW that includes both brochureware and transactions.
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Offer today
Plan to offer in 3 years
Monitoring of account 52% 91% balances Funds transfer between 52% 90% different accounts Bill payment (funds transfer to billing 41% 84% companies) Loan applications 22% 81% Cash management and other services for small 27% 74% business Bill presentment from business customers to 10% 64% consumers Person-to-person 17% 61% electronic payments Brokerage accounts 9% 56% Business-to-business portal or finders services 6% 47% (e.g. Net Market) Aggregation of customers' financial information from 3% 42% other service providers (e.g. "screen scrapers") Insurance 6% 41% Table 3.3: Percentage of banks with Internet banking services that offer the following features today and plan to offer them in 3 years (Xpressways 2006)
3.5 Advantages for the Banks
According to a survey conducted by Forrester Research, banks have various advantages by using the Internet (see figure 3.2).
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Decrease costs Improve customer services Increase revenue Competitive pressure Replacing old branch systems anyway 13% 13% 9%
61% 52%
Note: Based on responses from 23 European banks. Multiple responses accepted. Source: Forrester Research
Figure 3.2: Reasons for Integrating Branches with the Internet (Xpressways 2006) Indeed, the Internet is both a marketing communications tool and a new distribution channel for providing banking services with numerous benefits:
3.5.1 Internet is a cost-effective distribution channel
For the banks one of the most obvious advantages is that it has the lowest cost of any of the current delivery channels and it is cheaper than mailing information or providing phone services (see table 3.4). Moreover, banks can have cost savings by sending e-statements instead of paper statements and accepting online bill payments. Banking Transaction Costs Average cost per transaction $ 1.00 $ 0.70 $ 0.55 $ 0.28 $ 0.015 $ 0.010
Channel Full service branch Mail Telephone ATM Full Service PC Banking Internet Banking
Definition: Direct cost of a non-cash payment transaction (excludes set-up, installation and capital expenditure cost) Table 3.4: Banking Transaction Costs (Benton 2002) This is because electronic banking services via the WWW do not need a lot of manual intervention to process a transaction or to answer a customer’s query so the operations costs, which are the costs directly associated with the conversion of inputs into outputs, are being minimised. In that case, the bank supports a single computer system instead of a multitude of personal finance programs. Furthermore, there are huge potential cost savings if there is a high percentage of bank customers that carry out their transactions by using the Internet as a primary channel. The reason for that is the reduction in the number of branches required to
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service an equivalent number of customers. Of course, that can lead the banks to reduce their employees and use the buildings or the equipment for other purposes and introduce new activities by taking advantage of the additional revenue that the utilisation of their resources can bring. Servicing additional Internet customers has a low cost in comparison to the large cost of opening a new physical branch. Moreover, the set-up cost for a bank to establish and maintain a site is less than setting up and operating a traditional branch. In addition, the start-up costs are going down because technology providers have increased their experience and the market is developing. Another important issue here is the minimisation of the opportunity cost when using Internet banking instead of utilising an alternative resource. The banks have to introduce electronic banking because if they do not, their traditional bank or non-bank competitors will and they might lose part of the market share.
3.5.2 It identifies profitable customers and increases the bank’s economic profits
In the modern monetary system, the assets of the balance sheet include two broad categories (Hellenic Bank Association 2006): loans and investments and defensive assets. The first one, which is the most important business of every bank, in the shortrun tends to be illiquid or with unpredictable value. So if the bank wants to realise their full value, it must hold them to maturity. As a result, these assets can be obtainable to meet deposit withdrawals only at some risk of loss and it might also be not possible to sell or to borrow against certain loans. On the other hand, defensive assets have very high liquidity, are reversible and their value can be predictable. Such defensive assets can be currency, cash, deposits the bank has in the Central Bank or in other banks, Treasury bills e.t.c. Moreover, bank’s deposits with the Central Bank are called reserves and can be either primary or secondary. In addition, legislation requires banks to hold a particular quantity of defensive assets, which are the required reserves of the bank. Furthermore, bank’s net holdings of defensive assets should exceed the required reserves (this is the bank’s defensive position) in order for the bank to be able to cover unexpected deposit withdrawals or extraordinary demand for loans. In that case, the bank asks for cash from the Central Bank or from other commercial banks. Concerning the liabilities of the balance sheet, these include overnight loans, deposits and shareholders’ equity. So, the basic accounting identity for the commercial bank’s balance sheet is (Hellenic Bank Association 2006): D+E=kD+R+L , where D is the deposits, E is the shareholders’ equity, kd is the required reserves (0
A bank is a financial institution and a financial intermediary that accepts deposits and channels those deposits into lending activities, either directly by loaning or indirectly through capital markets.
Blekinge Institute of Technology School of Management Masters in Business Administration 2006 FEC066 – Thesis (10 p / 15 ECTS)
INTERNET BANKING IN GREECE: DEVELOPMENT, EVALUATION AND PERSPECTIVES ______________________________________________
By Andreas-Nikolaos Papandreou
Supervisor: Anders Hederstierna
INTERNET BANKING IN GREECE: DEVELOPMENT, EVALUATION AND PERSPECTIVES
Dedicated to my dear mother Olga, for all her support during the years of my studies.
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Executive Summary
Abstract: Revolutionary developments in marketing, information and communications technology continue to transform the banking and financial industry. Distribution of banking services through the Internet is an important part of this transformation. The objectives of this thesis are mainly to examine the role, which Internet banking can play as a new distribution channel of banking services for the benefit of both financial institutions and customers in Greece. The study explores the growth in on-line banking services and the ways in which financial institutions in Greece can take advantage of Internet technology to offer successful and cost-effective banking solutions. Moreover, this thesis addresses the key issues of concern to the banks regarding their strategic positioning and the products/services they offer or could offer on the Internet. Technology can help banks build an integrated delivery strategy for effective multi-channel management. Results identify the reasons why Greek banks use Internet banking and their effect and place an emphasis on the strategic impact of Internet technology as a core element of financial services. Greek banks want to expand their existing distribution channels using the Internet as another alternative channel. Internet banking in Greece is on its way to become the centerpiece of direct banking strategies. Internet Banking in Greece: Development, Evaluation and Perspectives Andreas-Nikolaos Papandreou
Title: Author:
Supervisor: Anders Hederstierna Institution: Course: Purpose: School of Management, Blekinge Institute of Technology, Sweden Master Thesis in Business Administration The purpose of this thesis is mainly to examine the role, which Internet banking can play as a new distribution channel of banking services for the benefit of both financial institutions and customers in Greece. The study explores the growth in on-line banking services and the ways in which financial institutions in Greece can take advantage of Internet technology to offer successful and cost-effective banking solutions. Research method includes a combination of theoretical analysis (literature review) and empirical analysis (questionnaires). A structured questionnaire survey was conducted on 35 banks operating in Greece.
Method:
Conclusion: Results identify the reasons why Greek banks use Internet banking and their effect and place an emphasis on the strategic impact of Internet technology as a core element of financial services. Greek banks want to expand their existing distribution channels using the Internet as another alternative channel. Internet banking in Greece is on its way to become the centerpiece of direct banking strategies.
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Keywords: Internet banking, e-banking, online banking, distribution channel, financial services, Greece
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ACKNOWLEDGEMENTS
I would like to take this opportunity to thank all those who have contributed to this thesis, directly or indirectly. I would first like to thank my supervisor Anders Hederstierna for his valuable comments and patience. Furthermore, I want to thank my fellow MBA students for our fruitful discussions and critical comments. A special thanks goes to my partner Helena Svensson for her support during my stay in Sweden. Last but not least I want to thank my family and friends in Sweden and Greece for encouraging and supporting me in various ways.
Andreas-Nikolaos Papandreou June 2006, School of Management (MAM), Blekinge Institute of Technology, Sweden
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TABLE OF CONTENTS
CHAPTER ONE: INTRODUCTION AND BACKGROUND 1.1 Introduction 1.2 Background 1.2.1 Structure of the financial system in Greece 1.3 Problem Formulation 1.4 Methods 1.5 Thesis Outline CHAPTER TWO: AN OVERVIEW ON THE USE OF THE INTERNET 2.1 Introduction 2.2 Internet Definition and History 2.3 How Does the System Work 2.4 Strengths and Weaknesses of the Internet 2.5 Internet Users in Greece 2.6 The Emergence of the Internet in Greece as a New Distribution Channel CHAPTER THREE: BANKING AND FINANCE ON THE INTERNET 3.1 Introduction 3.2 Defining Net Impact for Banking Services 3.3 Areas of Use of the Internet in Financial Institutions 3.4 The Growth of Internet Banking 3.5 Advantages for the Banks 3.5.1 Internet is a cost-effective distribution channel 3.5.2 It identifies profitable customers and increases the bank’s economic profits 3.5.3 It increases customer retention, up-sell and cross-sell services 3.5.4 Other advantages 3.6 Advantages for the Customers 3.6.1 Low cost 3.6.2 Compelling convenience 3.7 Disadvantages and Risks 3.7.1 The issues of security and privacy 3.7.2 Internet banking might “dehumanise” banking 3.8 Internet Banks 3.8.1 Functionality of the banks’ web sites CHAPTER FOUR: INTERNET BANKING IN GREECE 4.1 Internet Banking in Greece 4.1.1 Classification of Internet Banks 4.2 The Development of Internet Banking Services in Greece 4.3 Greek Internet Banks 4.3.1 The case of Piraeus Bank 4.3.2 The case of Egnatia Bank 4.3.3 The case of Alpha Bank 10 10 10 11 13 13 14 16 16 16 17 17 18 18 20 20 20 21 21 24 25 26 28 29 29 29 29 30 30 31 31 32 34 34 35 35 36 36 37 38
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CHAPTER FIVE: DISTRIBUTION OF FINANCIAL SERVICES THROUGH THE INTERNET 40 5.1 Introduction 40 5.2 Distribution Channel Strategies 40 5.3 Internet Banking as a Strategic Necessity 42 5.4 Reasons for Distributing Banking Services through the Internet in Greece 43 5.4.1 Improvement of bank’s image through innovation 43 5.4.2 Market transparency 43 5.5 The Four Phases of Internet Banking 43 5.5.1 Phase One: Marketing and promotion 44 5.5.2 Phase Two: Light interactivity 45 5.5.3 Phase Three: Full transactions and services 45 5.5.4 Phase Four: Strategic usage 46 5.6 Developing an Internet Banking Offering 46 5.6.1 Step One: Strategy development 46 5.6.2 Step Two: Analysis and design 47 5.6.3 Step Three: Technology development 47 5.6.4 Step Four: Implementation 47 CHAPTER SIX: ANALYSIS AND DISCUSSION 6.1 Introduction 6.2 Methodology and Questionnaire Development 6.2.1 Research methodology 6.2.2 Sampling procedure 6.3 Findings 6.3.1 Data analysis 6.3.2 Presentation of data and evaluation of questionnaire sent to banks 6.3.3 Presentation of questionnaire that evaluates the respondents’ sites 6.3.4 Summary of result 6.4 Conclusions 6.4.1 Summary and results 6.4.2 Final comments and recommendations REFERENCES APPENDICES A. Questionnaire Sent to Banks B. Questionnaire that Evaluates the Bank Web Sites C. List of Banks where the Questionnaire was sent D. List of Questionnaire Respondents E. Answers of Respondents F. Evaluation of Respondents 48 48 48 48 49 49 49 49 59 61 62 62 62 65
71 74 75 77 78 79
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LIST OF TABLES
Table 1.1: Credit Institutions operating in Greece during 2005 (Hellenic Bank Association 2006) Table 1.2: Market Shares (%) of Credit Institutions operating in Greece (Hellenic Bank Association 2006) Table 3.1: Growth of Internet Banking from 2000 to 2004 (ePaynews.com 2006) 12
13 23
Table 3.2: European Spending on Electronic Banking Channels (ePaynews.com 2006) 23 Table 3.3: Percentage of banks with Internet banking services that offer the following features today and plan to offer them in 3 years (Xpressways 2006) 24 Table 3.4: Banking Transaction Costs (Benton 2002) Table 3.5: Framework for Banks’ Classification (Diniz 1998) Table 4.1: Bank Profits of 5 biggest Greek Banks (Ziotis 2006) Table 5.1: The Four Phases of Internet Banking (Dynamic Net 2006) 25 33 35 44
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LIST OF FIGURES
Figure 3.1: US Households Banking Online (eMarketer 2004) 22 Figure 3.2: Reasons for Integrating Branches with the Internet (Xpressways 2006) 25 Figure 3.3: Internet Banking’s Relationship to Bank Profitability (Radigan 1996) Figure 3.4: Internet Banking Evaluation Matrix (Hennigan et al 1996) Figure 4.1: WinBank Home Page Figure 4.2: Egnatia Teller Figure 4.3: Alpha Web Banking Figure 5.1: The Distribution Channels Strategies (Mols 1999) 28 32 37 38 39 41
Figure 6.1
opulation Sample of Thirty-five Banks according to their Functionality 50 Figure 6.2: Population Sample of Thirty-five Banks according to their Type Figure 6.3: Population Sample of Thirty-five Banks according to their Country of Origin Figure 6.4: The Seventeen Banks that answered according to their Functionality Figure 6.5: The Seventeen Banks that answered according to their Type Figure 6.6: The 17 Banks that answered according to their Country of Origin 5051 51 52 52
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CHAPTER ONE: INTRODUCTION AND BACKGROUND
1.1 Introduction
The global credit system has undergone a process of reformation and reorientation, both at structural and organizational levels. The banking sector has been at the heart of this procedure. Phenomena of mergers and acquisitions, globalisation and internationalisation of services and products, changes in organizational structures, innovation policies and practices, are just some examples of the worldwide changes in the banking industry. Banks perform intermediation functions that are vital to a country’s economic growth and development. Banking services have evolved from an early emphasis on deposit taking (primarily demand deposits and savings accounts) and short-term loans into a much wider range of deposits and loans. Operating in a dynamic environment, banks need to intensify their approach towards service quality in an attempt to increase sales volume, market share and ultimately their profit. One of the strategies that have been offered for success in such a business is the delivery of high service quality. As banking clientele has become more financially sophisticated, so have bank operations that have expanded from traditional commercial banking services to investment services, fund management services, insurance brokerage and other financial services. Moreover, technological developments such as the use of computers and especially the Internet and the World Wide Web can facilitate these bank operations. Given the wealth of opportunities that the Internet creates for financial institutions, having a strong on-line presence is becoming a strategic necessity for most of them and raises the importance of the Internet as a strategic distribution channel for providing banking services. According to Mols (2001), there has been a considerable growth in the segment of consumers preferring Internet banking due to the increase in computer literacy, the availability of computers and the reduction in the costs of PCs and Internet access. This fact will change the optimal distribution structure for most banks and financial institutes. Especially in Greece, although the use of Internet is not the expected one, Internet banking continues to increase because of Internet’s easiness in use, its low cost and the requirement from some public authorities to only receive online payments.
1.2 Background
Due to changes in the European banking sector and expansion plans in the Balkan region, Greek banks are trying to strengthen their position in the market and improve their efficiency. Greek banks are trying to find new distribution channels and methods of providing their services in order to maintain and increase their share in the market. An appealing method of doing that is through the Internet because it can offer banking services at cheaper prices to more potential clients and the transactions can be carried out from anywhere in the world at any time of day or night. This means that by using Internet technology, financial institutions can establish a direct link to customers and
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improve their market shares while increasing their profits, without paying the high cost of building new branches.
1.2.1 Structure of the financial system in Greece
Until the late 1980s, the financial system in Greece functioned under many bureaucratic rules and regulations that restricted competition and market development (Mylonidis and Kelnikola 2005). However, the Greek banking sector in Greece, which was once dominated by the government, has been transformed in recent years. There is a recent financial deregulation and market liberalization because of the convergence with European Union standards, competition and privatisation. Participation in the European Union has encouraged the convergence of banking services, while the introduction of the Euro and European integration has increased competition among banks. The continuous privatisation of public banks has further restructured the Greek banking industry. These reforms have mostly taken place through mergers and acquisitions, with ownership remaining in local hands. Such developments are expected to continue within the new and dynamic international and domestic financial environment; nevertheless, a bigger role for foreign institutions (through ownership of Greek banks and/or formation of strategic alliances) is expected to appear. The Greek financial system had a remarkable transformation during the 1990s and is still evolving rapidly as a result of the continuing liberalisation process and its integration into the European financial market. Consequently, the actual state of the Greek financial system is best described in the context of the on-going process of financial reform and restructuring. The structural changes in the Greek banking system included among others (Gortsos 2005): • • • • • • Interest rate deregulation Liberalisation of cross-border capital movement Abolition of direct credit controls De-specialisation of credit institutions Modernisation of money and capital markets as well as payments systems Rationalisation of monetary policy- adoption of the single European currency
Moreover, the European Union banking Directives and regulations towards the establishment of a single financial market have led to the following developments (Gortsos 2005): • • • • • • Freedom to provide cross-border financial services within the European Union Minimum harmonization of Greek legislation to European standards Enhancement of prudential supervisory measures (capital requirements, large exposures, internal controls, corporate governance) Creation of a deposit guarantee scheme Enactment of money laundering legislation Enactment of extensive legislation on the operation of capital market and financial intermediaries providing services in them
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•
Implementation of International Accounting Standards
The liberalisation measures in the Greek financial sector have given the banking system the following characteristics (Gortsos 2005): • • • • Being subject to monetary and foreign exchange policies performed at a European level Full integration into the single European financial market Universal banking prototype (banks may engage in-house in both commercial banking and investment banking services- they can also provide bank assurance services) Segmentation of supervisory authorities (Bank of Greece, Capital market Commission, Supervisory Committee of Private Insurance)
Nowadays, the European economic and monetary union is concentrating Greek banks on boosting their competitiveness in what will become a much tougher market. Greek banking is characterised by the strong presence of the Central Bank (Bank of Greece) which supervises and controls the banking sector, intervening, if necessary, to secure the smooth operation of the banks. Furthermore, Greek banks are expanding in the Balkan markets and support strategic cooperation with distinguished international credit institutions in order to take advantage of synergistic effects and know-how transfers, to expand distribution networks and to secure a position in major international financial centers (Mylonidis and Kelnikola 2005). The Greek financial intermediaries include (Gortsos 2005, Hellenic Bank Association 2006): a) Credit institutions such as commercial banks, specialised credit institutions and cooperative banks, b) Financial institutions such as leasing companies, credit card issuers, foreign exchange bureaus, venture capital companies and payment institutions, c) Market intermediaries providing investment services: either on a collective basis (mutual fund management companies and investment fund management companies) or on an individual basis (investment firms). According to the Hellenic Bank Association, at the beginning of year 2005 the credit institutions operating in Greece consisted of 21 commercial banks incorporated in Greece (with a steadily increasing participation of foreign institutional investors in their capital basis), branches of 19 commercial banks incorporated in other member states of the European Union, branches of 4 commercial banks from third (non-EU countries), 2 specialised credit institutions and 16 cooperative banks (see table 1.1). Banks Greek Commercial Banks 21 Foreign Commercial Banks 23 Specialised Credit institutions 2 Cooperative banks 16 62 Total Table 1.1: Credit Institutions operating in Greece during 2005 (Hellenic Bank Association 2006) Commercial banks in Greece offer all kinds of banking services, at the same time expanding their activities through the markets operating in Greece and abroad.
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However, there is a strong competition among commercial banks and other financial institutions in Greece. Assets 2003 82.1 2004 80.9 2003 84.5 Loans 2004 85.1 Deposits 2003 2004 82.6 81.8
Greek Commercial Banks Foreign 9.3 10 9.4 8.8 7.3 8.2 Banks Specialised 8 8.4 5.2 5.1 9.4 9.2 Credit institutions Cooperative 0.6 0.7 0.9 1.0 0.7 0.8 banks 100 100 100 100 100 100 Total Table 1.2: Market Shares (%) of Credit Institutions operating in Greece (Hellenic Bank Association 2006)
The banking sector in Greece is relatively concentrated. The five biggest banks (The National Bank of Greece, Alpha Bank, EFG Eurobank Ergasias, Emporiki Bank and Piraeus Bank) accounted for 65% of assets, 67% of loans and 65% of deposits in 2004 (IMF 2006). Recently, changes took place in the Greek banking system. Credit institutions became commercial banks; investment banks stopped their operations, new banks have been established, while some banks have been bought or merged and now operate under new name and management. However, the Greek banking system needs to consolidate and strengthen its position in order to survive at the European Monetary Union playing field. Greece does not need so many banks to operate and future market conditions will not support the inefficient ones.
1.3 Problem Formulation
The problematic that is going to be investigated in this thesis is the role, which Internet banking can play as a new distribution channel of banking services for the benefit of both financial institutions and customers in Greece. The study aims to explore the growth in on-line banking services and the ways in which financial institutions in Greece can take advantage of Internet technology to offer successful and cost-effective banking solutions. Moreover, this thesis will address the key issues of concern to the banks regarding their strategic positioning and the products/services they offer or could offer on the Internet.
1.4 Methods
As already mentioned, this thesis aims to examine the impact of Internet banking on the financial services industry.
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Research methodologies will include a combination of theoretical analysis (literature review) and empirical analysis (questionnaires). Data will be collected from publications (secondary data) and questionnaires (primary data). Studying of recent publications will constitute the literature review in this thesis. The aim of the literature review is to show what has been done in the field and how the current study relates to earlier research. The review will give an overview of the findings of various previous studies and identify general patterns of the findings and the conclusions that can be made. The need for the literature review is to serve as a foundation for rational reasoning on which the current topic can be built upon. This will give an insight of the current status of Internet banking and especially marketing of banking services through the Internet in Greece. For this thesis, secondary data was collected from various publications to better understand and explain the research problem. These publications include general statistics, internal sources, government publications, periodicals and books, online data sources, business information, commercial data, associations, research reports and international information (Kotler 2003). As part of the study, a questionnaire (see Appendix A) was sent to a number of banks (see Appendix C) operating in Greece, representing a fair share of both banks that offer some level of interaction with the customers and banks that provide full Internet banking via their WWW pages. According to Berdie (1986), a questionnaire is a series of predetermined questions that can be either self-administered, administered by mail, or asked by interviewers. It is a research method used for many purposes that vary depending on the type of information sought. During the current study structured questions were used to generate answers that were meaningfully compared and analysed. In addition, the author of this thesis tested the bank Web sites that responded (see Appendix F) and answered a second questionnaire (see Appendix B) that represents an evaluation of the bank Web sites.
1.5 Thesis Outline
This study is divided into six chapters. Chapter One gives a short introduction to the subject and the central theme of the thesis is highlighted. Moreover, the chosen topic is brought in and the aims of this study are being presented together with their methods. In addition, the structure of the following chapters is being provided. Chapter Two defines Internet and gives a brief historical review of it. Moreover, the strengths and weaknesses of it are listed so that the reader understands its importance. In addition, the current status of Internet in Greece as a new distribution channel is being provided. Chapter Three outlines how the Internet is affecting banks today. It starts by defining Net impact for banking services. Then it refers to the four types of Internet use in financial institutions and the growth of Internet banking is being explored. After that,
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a detailed analysis of the advantages and disadvantages and risks of Internet banking is being provided. Chapter Four has a detailed analysis of on-line banking in Greece. Moreover, there is a reference in the Greek banking system and the development of Internet banking in Greece. Chapter Five explains the role of Internet banking as a distribution channel for providing banking services. Moreover, a four-phase framework is being introduced for understanding the different ways banks can get on-line and the advantages of each level of on-line commitment. Furthermore, some suggestions are being offered for developing an Internet banking offering. Chapter Six presents the author’s methodology and questionnaire development. The data (secondary and primary) and methods used for collecting it, their logic and limitations are highlighted. Moreover, he explains his findings and concludes with a summary of result. Finally, there is a review of the objectives of the study and some last concluding remarks, concerning the research and its results.
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CHAPTER TWO: AN OVERVIEW ON THE USE OF THE INTERNET
2.1 Introduction
Nowadays, when everything is developing rapidly and the power of information plays a major role in everyday life, technology comes to create new means of communication that are going to dominate in the following years. These recent developments are being expressed without any doubt through the opportunities that the use of computers and especially the Internet offer. The Internet is the physical network that links computers across the globe (Smith and Chaffey 2005). It consists of the infrastructure of network servers and communications links between them that are used to hold and transfer information between the clients and servers. According to census data from U.S., 62 million U.S. households, or 55% of American houses, have a computer connected to the Web (Lieb 2005). Moreover, in the EU the percentage of people that have access to the Internet is 49% and is growing (Eurostat 2005). According to the OECD, there are 270.7 million Internet subscribers at the OECD countries and this number is increasing fast. In addition many more individuals who do not have their own direct Internet access though their home, are logging on through other sources, such as the university, workplace, libraries or civic organisations. Internet World Stats (2006) estimates the Internet users around the world to 1,018,057,389 people. Given the fact that Earth’s population is about 6.5 billions, approximately 1 out of 6 people has access to the Internet.
2.2 Internet Definition and History
The Internet refers to a large interconnected network of a number of computer networks that link people and computers all over the world through the use of phone lines, satellites and other telecommunications systems that help them to exchange information (Ellsworth and Ellsworth 1995). Historically, the Internet was a military experiment that started in the early 1970s by the US Department of Defence. It was called ARPAnet and it was a system originated by the Advanced Research Projects Agency to improve communication and data exchange between researchers and scientists. However, the usage of Internet has increased dramatically during the 1990s. Together with the World Wide Web (WWW) they can be extremely useful for various applications of education, commerce, communication or entertainment. As a result, the original communication standard could not keep up with Internet’s astonishing rate of growth and changed to TCP/IP standard, which is a group of communication protocols used to connect hosts on the Internet.
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2.3 How Does the System Work
In order for an individual to have access to the WWW, he needs to have the necessary software installed on his computer (e.g. Web browser, E-mail etc.) and a communications network. Moreover, Internet usage in home includes a modem, which is supposed to connect the computer and the telephone line and a public telephone service. In addition, the user needs to have access to a “service provider” and his computer must be at least a Pentium-based or other type of processor machine.
2.4 Strengths and Weaknesses of the Internet
Undoubtedly, the Internet is an extremely important phenomenon with some strong and some weak points that affect many aspects of the society (Jones 1996). The most significant ones are: Strong points: 1) The international impact of the Internet allows communication and exchange of information 24 hours per day among people of every country in the world using a universal language. 2) World-wide use of e-mail communication is cheap. 3) Given a sufficient infrastructure, all the computers can communicate with each other regardless of their operating systems. 4) Increasing demand for advanced Internet services and applications makes the related companies to invest more funds, which contributes in the development of each country’s economy. 5) Demand for Internet services makes users to spend more money for better services and create new opportunities in the market. 6) New approaches of communicating with the customers are created by the ability to monitor individual domestic lifestyles. 7) New education opportunities are created by a universally low-cost access to the Internet for all the people. Weak points: 1) Many people, especially old or less educated, find computers difficult to use and expensive. 2) When using a slow, dial-up connection, downloading Web pages takes a long time and can frustrate users, especially when the net is busy. 3) Finding information by using search engines or other software tools can be difficult because of unnecessary complexity into Web-sites design that can reduce Internet usage for many people. 4) Probability of network failure that can cause major economic losses. 5) A continuous increase in premium Internet access costs can reduce the entrance of new customers. 6) Accessing illegal or undesirable material through the Internet can cause restrictions on its growth due to social or government concerns. 7) Fears for lack of security when using the Internet and possible access to private information need to be eliminated in order to preserve confidence in the system’s capabilities.
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2.5 Internet Users in Greece
The Internet is now becoming a popular tool in Greece. According to a survey made by the Observatory for the Greek Information Society, the percentage of Internet users in Greece was 20.8% in 2005, while the percentage of Internet access (irrespective of having a personal connection) was 23%. In addition, it was estimated that the majority of Internet users include men, younger age groups, residents of Athens and Thessalonica (the two biggest cities), as well as higher education individuals. Internet access is mainly accomplished through a dial-up connection (67%), while ISDN follows with 21% and broadband with only 8%. However, according to the Observatory for the Greek Information Society, there were 167,000 broadband connections (1.5% of the population) in the beginning of 2006. In addition, there are over 15,000 new broadband applications every month, which together with the increasing rate of personal computers sales show great prospects in the future use of Internet in Greece.
2.6 The Emergence of the Internet in Greece as a New Distribution Channel
The Internet is fast becoming an important distribution channel for a wide range of businesses. According to Seitz and Stickel “Distribution channels are physical capacities to build up customer contracts in a systematic way in order to inform, counsel and sell products and services”. Distribution channels show or deliver products and services to the buyers or users and are physical distribution channels such as warehouses, transportation mediums and also trade channels like distributors, wholesalers and retailers (Kotler 2003). So the Internet is what we call an electronic distribution channel. Managers cannot ignore the impact of Internet on their businesses. According to Ghosh (1998), in order for a company to deliver new services or bypass the go betweens, it first needs to construct direct connections with the customers; and this can be accomplished by using Internet technology. Providing services through the Internet can be very compelling for the customers because of the low cost that these electronic exchanges have. By this method, the cost of traditional sales and marketing are being reduced. However, the biggest advantage is that it offers clients convenience, personalization and interactive communication that traditional competitors are unable to offer. The use of the Internet distribution channel offers economies of scale. With it, there is no need for having many suppliers in the company, since there is no physical distance with the clients. Moreover, successful branches that are originated in the Internet can expand themselves without the high cost and the delay that usually occurs in the physical world. Furthermore, the Internet can become a concentrating medium by gathering the buyers to sites that can cover all their needs. Today, businesses all over the world are using the Web and e-commerce to generate billions in revenues from on-line trading market.
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According to Datamonitor the Internet has a great potential as a distribution channel if it is used cost effectively and gets integrated with other direct and non-direct channels. In addition, according to Strategic International SA, Internet penetration is growing fast in Greece and although 92% of the consumers use the Internet for information search, 58% uses it for e-mail communication and only 5% for online purchases, consumption in online shopping is expected to increase. What is mostly sold online in Greece includes travel tickets, CDs, computer ware, books, mobile telephony products and flowers. There are five categories of online customers in Greece (Vrechopoulos et al 2000): 1) Innovators: these are Internet users who first adopt the new product/service or the innovation. They are not so many in numbers but are interested in trying new products and services. They are characterised by having higher education and good information about the new products and services through other innovators and their impersonal and scientific sources of information. 2) Early adopters: these are Internet users that are less interested to adopt than innovators. They are generally more integrated in their local communities than innovators, and are more likely to be opinion leaders. Early adopters are usually younger, educated, have a high social class and read a lot of specialized magazines about new products and innovations in comparison to the average consumers. They often make contact with salespeople of new products and services and play a fundamental role as opinion leaders who influence other consumers. 3) Early majority consumers: these consumers adopt the innovation just before the average consumer in the market does. They consider it a lot before taking the decision to adopt an innovation. They are characterised by a higher age, higher education and higher socio-economic level than the average members of the society. Finally, they mostly rely on opinion leaders such as the early adopters. 4) Late majority consumers: these consumers delay the adoption of the innovation primarily because they are sceptical about new products and services. Generally, they decide to adopt them after they have felt a strong social pressure. Moreover, they mainly rely on opinions expressed at an informal level by people they know well. Finally, they watch electronic media less frequently than others. 5) Laggards: they generally decide the adoption of new products and services when they are close to their withdrawal from the market or their substitution from others. Laggards do not trust innovations so much and are socially isolated. They are older consumers of lower socio-economic status. Consequently, the World Wide Web represents a remarkable opportunity for businesses and as we will see in the next chapters, Greek banks and financial institutions, to market financial services to new and existing customers in a very integrated way. The Internet is too important to ignore and the companies that currently do not want to participate in electronic commerce may be forced to do so in the future either by their competitors or their customers.
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CHAPTER THREE: BANKING AND FINANCE ON THE INTERNET
3.1 Introduction
In modern society, financial institutions such as banks, savings and loan associations and insurance companies, facilitate economic growth by performing essential intermediation and distribution functions. When they act as financial intermediaries they channel funds to productive uses while providing investors with a variety of outlets for their savings. Through well-developed financial markets, securities brokers and dealers, they distribute efficiently securities that firms issue to finance productive investments. Financial institutions accept money and provide services in return. They take deposits from the public so that they are able to issue loans to a variety of companies and individuals. Therefore, financial institutions and especially their most familiar form, the commercial bank, perform an asset transformation both by providing diversification and liquidity. However, the role of bank branches as a distribution network of banking services in international level has changed during the last years with the increase of activities outside branches. During this decade, the use of a telephone, a mobile, a PC or access to the Internet is enough to fulfil a variety of banking transactions in the least time and with the least cost. The high speed in providing a service and the low cost of a transaction offer a competitive advantage to a bank and contribute to the decrease of expenditure, the increase of productivity indices, the growth of businesses and strengthen the relations with the customers. Today, the use of financial services is characterised by individuality, mobility, independence of place and time and flexibility. Because of the great international competition, financial transactions are being held both by traditional banks and nontraditional banks that are trying to find new methods of providing their services in order to maintain and increase their share in the market. An attractive way of doing that is through Internet technology because it can offer complicated products in an equivalent quality with cheaper prices to more potential clients and the transactions can be carried out from anywhere in the world at any time of day or night. Because of the above, it is important for a bank to participate actively in Electronic Banking and in Electronic Commerce.
3.2 Defining Net Impact for Banking Services
Although most products are of a physical nature, financial products and services have a completely different nature. Financial services are comprised of two core, nonphysical elements that are ideally suited to on-line interaction: transactions and information. This happens because the transactions that are being executed through the computer don’t involve people and all their associated costs, so investors get significant savings. On the other hand, the vast information that the Web provides revolutionises both the ability to deliver information and its cost for the benefit of the customers.
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On-line banking through the WWW does not need any special software to buy and set up. The customer contacts his bank and then he inputs his user id and password at his bank’s Web site to get full access to his accounts. He just needs to have a secure Web browser such as Netscape Navigator 8.1 or higher, Microsoft Internet Explorer 6.0 or higher and others. This way of banking online requires the use of Internet browsers that support 128-bit encryption, which protects consumers by scrambling all the personal information transmitted between a consumer’s computer and the bank (Nixon and Nixon 2000).
3.3 Areas of Use of the Internet in Financial Institutions
There are four types of Internet use in financial institutions (Seitz and Stickel 1998, Keyes 1999, Nixon and Nixon 2000): 1) Information presentation: it is when a financial institution uses the Internet to present its products, services, branch locations and hours to the public. This type, not only announces that the bank exists, but also provides a kind of electronic brochure that informs the customers about facts concerning the bank. However, financial institutions that have such a basic Web site do not allow viewing of customers’ accounts or other transactions. 2) Information presentation with two-way communication: it is when the client sends an electronic mail or fills a feedback form to the bank, requesting further information. 3) Interaction with user: it is when there is a quick exchange of information between the user and the server because the former is data stored in the databases of the financial institution. Information on the interest rates for loan and deposit products can be featured but with the added ability for Web site visitors to complete loan and new account applications on-line. In this way, the bank directly receives the applicant’s information. The interactive type has many advantages and offers real value to the customer. The customer can price the bank’s products on-line and e-mail back any questions he might have. The bank can also provide on-line financial calculators so that customers can use the current rates to see the return on a deposit or the cost and payment of a loan. Moreover, the bank can offer currency conversions that allow the determination of different currencies values from one denomination to the other. 4) Transaction banking: this includes various financial transactions, such as opening and closing of accounts, paying bills, securities transactions, money transfers, implementation and deletion of standing orders, applications for loans or insurance acquisitions, credit card applications, financial planning services, information for tax purposes. We are going to see these types in detail later on.
3.4 The Growth of Internet Banking
Internet banking is the situation under which an individual performs common banking transactions over the Internet by using a browser, instead of going to his local branch to carry them out. Moreover, an Internet bank is a bank that has established a presence on the WWW to facilitate customers to perform these bank transactions. Some
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Internet banks only exist on the web and have no brick-and-mortar branches (Furst et al 2002). Internet banking is growing faster today than most financial institutions had ever expected and the number of banks on the Net is continuously increasing. Yahoo has reported 4921 banks on the Web. According to the Online Banking Report, online banking penetration continues to climb reaching 34% of all U.S. households by yearend 2004. NetBanker defines as a “true Internet bank” one that provides account balances and some transactional capabilities to retail customers over the Web.
Figure 3.1: US Households Banking Online (eMarketer 2004) According to the Pew Research Center (2005), in US 53 million people or 44% of Internet users and one-quarter of all adults, currently say they use online banking, which corresponds to an increase of 47% over the number of Americans who were having Internet banking in late 2002. Moreover, on a usual day online, 13 million Americans are having banking tasks online, a 58% increase from late 2002 (Pew Research Center 2005). According to International Data Corporation (2004), in Europe the number of ebanking accounts will continue to have double digit growth rates over the next couple of years, especially in Italy, Spain, and the U.K. During 2004, from the 122.3 million users of Internet banking 57.9 millions came from Western Europe (see table 3.1). It is expected that over the next 5 years, online banking will be an essential requirement for European banks that want to add the Internet channel to more traditional channels for their businesses.
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Region (millions 2000 2001 2002 2003 2004 of users) Western 18.6 28.0 37.8 47.7 57.9 Europe United 9.9 14.7 17.1 20.4 22.8 States 2.5 6.5 11.9 19.6 21.8 Japan AsiaPacific 2.4 4.4 6.8 9.8 13.8 (excluding Japan) Rest of 1.0 1.7 3.1 5.1 6.1 the world 34.4 55.3 76.7 102.6 122.3 Total Table 3.1: Growth of Internet Banking from 2000 to 2004 (ePaynews.com 2006) According to Datamonitor (2005), European banks are going into e-banking technology to improve the functionality and usability of their websites as well as levels of integration with other channels. Moreover, as the Internet is becoming an increasingly effective revenue generation tool, European banks are spending more on electronic banking channels (see table 3.2). Country 1999 2004 USD 99 bn USD 395 bn UK USD 88 bn USD 243 bn Germany USD 69 bn USD 271 bn France Banks spent almost $1 million per day on e-banking 1999 4-fold increase in e-banking spend, to $1.4 billion 2004 $850 million of this total will go on external contractors * Table 3.2: European Spending on Electronic Banking Channels (ePaynews.com 2006) There are various reasons for the rapid growth of Internet banking. First of all, Internet usage has become very popular. There are over 1000 million persons that have Internet access worldwide, a number that is increasing every day. Moreover, technological developments and customer acceptance encourage electronic commerce. There is a high number of people that have made a purchase on-line, which is increasing fast. Finally, more banks and other financial institutions are realising the advantages that on-line banking offers and are developing a presence on the WWW that includes both brochureware and transactions.
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Offer today
Plan to offer in 3 years
Monitoring of account 52% 91% balances Funds transfer between 52% 90% different accounts Bill payment (funds transfer to billing 41% 84% companies) Loan applications 22% 81% Cash management and other services for small 27% 74% business Bill presentment from business customers to 10% 64% consumers Person-to-person 17% 61% electronic payments Brokerage accounts 9% 56% Business-to-business portal or finders services 6% 47% (e.g. Net Market) Aggregation of customers' financial information from 3% 42% other service providers (e.g. "screen scrapers") Insurance 6% 41% Table 3.3: Percentage of banks with Internet banking services that offer the following features today and plan to offer them in 3 years (Xpressways 2006)
3.5 Advantages for the Banks
According to a survey conducted by Forrester Research, banks have various advantages by using the Internet (see figure 3.2).
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Decrease costs Improve customer services Increase revenue Competitive pressure Replacing old branch systems anyway 13% 13% 9%
61% 52%
Note: Based on responses from 23 European banks. Multiple responses accepted. Source: Forrester Research
Figure 3.2: Reasons for Integrating Branches with the Internet (Xpressways 2006) Indeed, the Internet is both a marketing communications tool and a new distribution channel for providing banking services with numerous benefits:
3.5.1 Internet is a cost-effective distribution channel
For the banks one of the most obvious advantages is that it has the lowest cost of any of the current delivery channels and it is cheaper than mailing information or providing phone services (see table 3.4). Moreover, banks can have cost savings by sending e-statements instead of paper statements and accepting online bill payments. Banking Transaction Costs Average cost per transaction $ 1.00 $ 0.70 $ 0.55 $ 0.28 $ 0.015 $ 0.010
Channel Full service branch Mail Telephone ATM Full Service PC Banking Internet Banking
Definition: Direct cost of a non-cash payment transaction (excludes set-up, installation and capital expenditure cost) Table 3.4: Banking Transaction Costs (Benton 2002) This is because electronic banking services via the WWW do not need a lot of manual intervention to process a transaction or to answer a customer’s query so the operations costs, which are the costs directly associated with the conversion of inputs into outputs, are being minimised. In that case, the bank supports a single computer system instead of a multitude of personal finance programs. Furthermore, there are huge potential cost savings if there is a high percentage of bank customers that carry out their transactions by using the Internet as a primary channel. The reason for that is the reduction in the number of branches required to
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service an equivalent number of customers. Of course, that can lead the banks to reduce their employees and use the buildings or the equipment for other purposes and introduce new activities by taking advantage of the additional revenue that the utilisation of their resources can bring. Servicing additional Internet customers has a low cost in comparison to the large cost of opening a new physical branch. Moreover, the set-up cost for a bank to establish and maintain a site is less than setting up and operating a traditional branch. In addition, the start-up costs are going down because technology providers have increased their experience and the market is developing. Another important issue here is the minimisation of the opportunity cost when using Internet banking instead of utilising an alternative resource. The banks have to introduce electronic banking because if they do not, their traditional bank or non-bank competitors will and they might lose part of the market share.
3.5.2 It identifies profitable customers and increases the bank’s economic profits
In the modern monetary system, the assets of the balance sheet include two broad categories (Hellenic Bank Association 2006): loans and investments and defensive assets. The first one, which is the most important business of every bank, in the shortrun tends to be illiquid or with unpredictable value. So if the bank wants to realise their full value, it must hold them to maturity. As a result, these assets can be obtainable to meet deposit withdrawals only at some risk of loss and it might also be not possible to sell or to borrow against certain loans. On the other hand, defensive assets have very high liquidity, are reversible and their value can be predictable. Such defensive assets can be currency, cash, deposits the bank has in the Central Bank or in other banks, Treasury bills e.t.c. Moreover, bank’s deposits with the Central Bank are called reserves and can be either primary or secondary. In addition, legislation requires banks to hold a particular quantity of defensive assets, which are the required reserves of the bank. Furthermore, bank’s net holdings of defensive assets should exceed the required reserves (this is the bank’s defensive position) in order for the bank to be able to cover unexpected deposit withdrawals or extraordinary demand for loans. In that case, the bank asks for cash from the Central Bank or from other commercial banks. Concerning the liabilities of the balance sheet, these include overnight loans, deposits and shareholders’ equity. So, the basic accounting identity for the commercial bank’s balance sheet is (Hellenic Bank Association 2006): D+E=kD+R+L , where D is the deposits, E is the shareholders’ equity, kd is the required reserves (0