Communications of the ACM
Virtual extension
Challenges to Internet E-Banking
The extension of money and banking to the cyberspace is an inevitable development in the information age. Over the past few years, many financial institutions have launched e-retail banking over the Internet. Given the requirements of matching marginal gains against marginal costs, evaluating the profitability of market development along specific dimensions and segments, and determining whether the new technology would be accepted, it is imperative that this decision is continually re-evaluated. Commercial banks face significant challenges on both the supply side and demand side, associated in particular with competition, product-service quality and differentiation, transaction security, cost efficiency, and demographic change.
As is generally the case in financial innovation, competition is the driving force behind the introduction of Internet e-retail banking. Primarily, commercial banks viewed it as a competitive strategy to retain existing customers, attract additional business, increase market share, and support business re-engineering. Since many of the products and services are newly emerged from R&D departments, supply must be adapted to demand and consumer acceptance. In oligopolistic markets, it is necessary for the e-bank to compete in the first place through the sub-strategy of product-service differentiation. The financial products and services supplied over the Internet must not only be tailored to fulfill wants, preferences, and quality expectations at the present time, but are also required to induce consumers to demand their technological progeny in the future. Expertise in marketing and the ability to anticipate changes in market conditions are therefore crucial to the success of Internet e-retail banking. In particular, strategic priority must be assigned to the establishment of brand name and brand identification.
The Internet is exploited as a channel to build, maintain, and develop long-term client relationships through ready access to a broad and increasing array of products, services and low-cost financial shopping, rapid response to customer inquiries, and personalized product-service innovation. Success in this endeavor would enhance product-service differentiation, which would in turn strengthen customer loyalty, promote cross-selling, increase repeated purchases, and attract new business. An offensive can then be carried over to the domain of traditional bricks-and-mortar retail banking, and educate customers on the comparative advantage of switching over to the Internet.
Given the open nature of the Internet, transaction security is likely to emerge as the biggest concern among the e-bank's (actual and potential) account holders. Since transactions risk would create a significant barrier to market acceptance, its management and control are crucial for business reputation and the promotion of consumer confidence as well as operational efficiency. Before launching new products and services, it is therefore imperative for the e-bank to implement measures to safeguard client assets and information (for example, a confidential database with firewalls and stringent access control), and to advertise as widely as possible the introduction and expert endorsement of initiatives to maximize transaction security.
Since cost efficiency is a necessary condition in price competition, a significant strategic advantage would follow from the ability to supply financial products and services over the Internet at lower cost compared to traditional banking (and from relative cost reductions in the future). Moreover, by going online banks can more fully exploit the increased efficiency from new IT, allowing more branch and counter resources to be shifted towards sales, marketing, dedicated financial services and other higher value-added activities. Another important factor to consider is demographics. Commercial banks not currently offering Internet e-retail banking are likely to deprive themselves of future access to profitable, IT-seasoned customer segments. Computer-literate Internet users are generally young and well educated. This age group will attain economic maturity in the near future, to be followed by even more technologically aware and cyberspace-oriented individuals. To exploit demographic change and increase market share, financial institutions must seek to attract and capture such clients as early as possible by supplying at low cost technologically innovative and sophisticated products and services such as globally mobile e-banking and e-financial transactions over the Internet.
Initiatives to create product-service differentiation, build and enhance confidence in the security of Internet e-retail banking, and exploit shifts in demography are likely to require time and effort over many years. Meanwhile, as long as bricks-and-mortar branches and the telephone remain as important delivery channels, the growth of Internet e-retail banking would be very much tied to its comparative advantages against these close substitutes. Though the Internet allows a wide array of product and service options to be supplied at relatively low cost, many individuals are still attracted by traditional banking as most comfortable way of handling money. Other things being equal, the resulting premiums on over-the-counter and person-to-person contact and confirmation would tend to hinder the growth of virtual banking. Commercial banks offering products and services over the Internet are often also seeking to downsize branch networks. However, given that physical outlets can more effectively serve customers with lower IT awareness and acceptance, they must be maintained for the time being. In addition, since dedicated fees are often not charged, Internet e-retail banking itself would not generate significant direct revenue over the short run. Instead, traditional banking must be relied upon to continue to earn money, while financial innovations over the Internet draw in new accounts and enable the e-bank to tap into a wider customer base and create new opportunities in lending and funding.
For the duration, the optimal development strategy for e-banks is likely to be the cultivation of the demand side along the paths of least resistance, in particular as regards consumer perceptions of transaction security, transaction accuracy, user-friendliness, and network speed [1]. In the empirically most important areas of transaction security and accuracy, encryption protocols such as the Secure Sockets Layer (SSL) and Secure Electronic Transactions (SET) have been widely adopted by e-banks. There is, however, a lingering resistance on the part of culture-bound individuals accustomed to 'physical' transactions, so that efforts to expand e-retail banking over the Internet must (among other things) surmount a perceived technological bias. Given such considerations, we submit that overall the greatest challenge facing Internet e-retail banking at the present time is not so much the application of new technology on the supply side, but the enhancement of consumer acceptance on the demand side.
References
1. Liao, Z. and Cheung, M.T. Internet-based e-banking and consumer attitudes: An empirical study. Information and Management 39. 4 (2002), . 283295.
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