Before we begin our analysis, it would be prudent to have an idea of the demographics of Internet banking users to have a better perspective in mindsets and habits. According to research by British Market Research Bureau (BMRB), younger adults are most receptive to Internet banking, with more than 40% of the under-35s seeing it as superior to conventional banking.
Proficiency and confidence in the technology used plays a vital role in the younger generation perceiving Internet banking as a faster and more convenient method of banking. In the information age where many other things such as purchasing products, reading news or even chatting can all be done at the click of a button, it is little wonder why the younger generation prefers Internet banking to conventional banking.
Proficiency of technology aside, the adopters of Internet banking also tend to be high-income, upwardly mobile big spenders whom the banks regard as the most attractive and profitable customers. Another interesting point to note would be that a higher proportion of men use Internet banking as compared to women!
Advantages of Internet banking
Now, if there were security risks to such a system, there must be some benefits of implementing it in the first place, perhaps even great enough to overshadow the possibility of threat. To the consumer, the advantages are mostly related to convenience. First of all, Internet banking allows a user to check his balances and transactions online and at times even perform online transactions such as making payments or transferring of funds. Secondly, being fully automated and electronic, it provides consumers 24/7 access to their money and banking services, as compared to the short operating hours of banks. Ideally, it should reduce the dependence on the traditional over-the-counter banking and move towards a more cost and time effective automation.
Thirdly, it reduces error and saves time. According to Van Dyke, a research analyst for Javelin Strategy and Research, using the Internet to pay bills and for banking actually reduces the risk of error by up to 18%, can potentially save consumers up to 60 hours of personal time and up to USD1,100 in terms of postage and checks. This is contrary to the common belief held by many that Internet banking opens up more room for error due to automation and hackers. Lastly, unlike cash machines, or Automated Teller Machines (ATM), the physical requirements of Internet banking are simple. In most cases, an ordinary web browser, such as the Internet Explorer, which comes pre-installed in most PCs, with Internet access will be sufficient for the consumer to log on to the bank’s website. In most cases, no other special software or hardware is required. This gives the user the convenience of being able to access his bank account from anywhere around the world, as long as he is able access a computer with a web browser and Internet access, making it perfect for people who travel often.
While this benefits consumers, the commercial benefits to the bank are a huge consideration to laying the groundwork. Despite the initial high startup costs of Internet banking, being able to reduce the dependency on over-the-counter banking will mean greater manpower and administrative savings for banks in the long run. As mentioned above, a fully automated system will also mean fewer human errors involved in the transactions, hence providing more reliable services to the consumer, making the bank more attractive.
Since the setup costs for Internet-based transactions are lower as compared to traditional methods, the barriers to entry for completely web-based banks are much lower as well. This implies that there will be more choices for the consumers as more of these banks (known as pure-play Internet banks) utilise the Internet banking facilities and offer higher interest margins. Pure-play Internet banks also enjoy greater economies of scale as compared to their conventional counterparts as they have less capital-intensive production and distribution technologies. Together with cross-selling related products which have higher profit margins such as mortgages, credit cards, online investment and shopping portals, this would will help the banks survive and prosper and provide value-added services to the customers.
Internet banking also helps protect the consumers by preventing them from the two most common types of identity theft: fraudulent opening of new bank accounts and unauthorised use of existing accounts, by requiring the user to validate themselves to the system through methods more sophisticated than just pen and paper.
Disadvantages of Internet banking
While Internet banking provides a myriad of advantages, it does have significant downsides which are important to consider to both the consumer and the bank. Like all technology, there are still issues to iron out. Besides the obvious security threat, the other disadvantages to both parties are considerable.
From the banks’ point of view, the start-up cost of Internet-based banks is much lower as compared to a traditional bank. With the setup cost savings, purely-Internet banks will be able to offer better products, such as higher interest rates and lower fund transfer fees, to their customers. This poses a threat to profit margins of traditional banks. Furthermore, since the entry barriers and overheads of setting up Internet-banks are lower, more Internet-banks are available and competition for customers intensifies. In order to attract customers, banks, both traditional and Internet, will have to offer better products at a cheaper rate which will only drive their margins even lower.
While Internet banking benefits the consumer in various ways, it only applies users who are already computer literate users. One of the reasons why people do not use Internet banking is because they are computer or Internet illiterate. Based on the survey by the Office for National Statistics in UK, 39% of adults, who have never used the Internet before lacked the confidence or knowledge to use the Internet. From the same survey, 37% of the adults surveyed do not even have Internet connection. Therefore, in order to make use of Internet banking, these groups of people would either have to go through a steep computer literacy learning curve or incur a cost purchasing computers and setting up an Internet account with an Internet Service Provider (ISP). Instead of wasting time, effort and money to learn and set up Internet banking, they would be better off continuing their banking activities using traditional banking.
Last but certainly not least, Internet banking is vulnerable to security threats. It is a well-known fact that Internet banking scams such as phishing websites and computer viruses exist which steal users’ identities and siphon off the account-holders’ funds. Such cases have been reported on newspapers, television and radio which only reinforce the inherent psychological ‘fear’ of using Internet banking. This discourages non-Internet banking users from setting up Internet banking account and current Internet banking users to think twice before they make their next transaction over the Internet. According to the National Statistics Omnibus Survey by the Office for National Statistics on the purpose of access for the last three months prior to interview of adults in UK, it showed that for July 2005, 42% of them used Internet for ‘Personal banking and financial services’ for the last three months. Although the number of adults using Internet banking has been increasing steadily, it also shows that it is not widely used by the masses.
Proficiency and confidence in the technology used plays a vital role in the younger generation perceiving Internet banking as a faster and more convenient method of banking. In the information age where many other things such as purchasing products, reading news or even chatting can all be done at the click of a button, it is little wonder why the younger generation prefers Internet banking to conventional banking.
Proficiency of technology aside, the adopters of Internet banking also tend to be high-income, upwardly mobile big spenders whom the banks regard as the most attractive and profitable customers. Another interesting point to note would be that a higher proportion of men use Internet banking as compared to women!
Advantages of Internet banking
Now, if there were security risks to such a system, there must be some benefits of implementing it in the first place, perhaps even great enough to overshadow the possibility of threat. To the consumer, the advantages are mostly related to convenience. First of all, Internet banking allows a user to check his balances and transactions online and at times even perform online transactions such as making payments or transferring of funds. Secondly, being fully automated and electronic, it provides consumers 24/7 access to their money and banking services, as compared to the short operating hours of banks. Ideally, it should reduce the dependence on the traditional over-the-counter banking and move towards a more cost and time effective automation.
Thirdly, it reduces error and saves time. According to Van Dyke, a research analyst for Javelin Strategy and Research, using the Internet to pay bills and for banking actually reduces the risk of error by up to 18%, can potentially save consumers up to 60 hours of personal time and up to USD1,100 in terms of postage and checks. This is contrary to the common belief held by many that Internet banking opens up more room for error due to automation and hackers. Lastly, unlike cash machines, or Automated Teller Machines (ATM), the physical requirements of Internet banking are simple. In most cases, an ordinary web browser, such as the Internet Explorer, which comes pre-installed in most PCs, with Internet access will be sufficient for the consumer to log on to the bank’s website. In most cases, no other special software or hardware is required. This gives the user the convenience of being able to access his bank account from anywhere around the world, as long as he is able access a computer with a web browser and Internet access, making it perfect for people who travel often.
While this benefits consumers, the commercial benefits to the bank are a huge consideration to laying the groundwork. Despite the initial high startup costs of Internet banking, being able to reduce the dependency on over-the-counter banking will mean greater manpower and administrative savings for banks in the long run. As mentioned above, a fully automated system will also mean fewer human errors involved in the transactions, hence providing more reliable services to the consumer, making the bank more attractive.
Since the setup costs for Internet-based transactions are lower as compared to traditional methods, the barriers to entry for completely web-based banks are much lower as well. This implies that there will be more choices for the consumers as more of these banks (known as pure-play Internet banks) utilise the Internet banking facilities and offer higher interest margins. Pure-play Internet banks also enjoy greater economies of scale as compared to their conventional counterparts as they have less capital-intensive production and distribution technologies. Together with cross-selling related products which have higher profit margins such as mortgages, credit cards, online investment and shopping portals, this would will help the banks survive and prosper and provide value-added services to the customers.
Internet banking also helps protect the consumers by preventing them from the two most common types of identity theft: fraudulent opening of new bank accounts and unauthorised use of existing accounts, by requiring the user to validate themselves to the system through methods more sophisticated than just pen and paper.
Disadvantages of Internet banking
While Internet banking provides a myriad of advantages, it does have significant downsides which are important to consider to both the consumer and the bank. Like all technology, there are still issues to iron out. Besides the obvious security threat, the other disadvantages to both parties are considerable.
From the banks’ point of view, the start-up cost of Internet-based banks is much lower as compared to a traditional bank. With the setup cost savings, purely-Internet banks will be able to offer better products, such as higher interest rates and lower fund transfer fees, to their customers. This poses a threat to profit margins of traditional banks. Furthermore, since the entry barriers and overheads of setting up Internet-banks are lower, more Internet-banks are available and competition for customers intensifies. In order to attract customers, banks, both traditional and Internet, will have to offer better products at a cheaper rate which will only drive their margins even lower.
While Internet banking benefits the consumer in various ways, it only applies users who are already computer literate users. One of the reasons why people do not use Internet banking is because they are computer or Internet illiterate. Based on the survey by the Office for National Statistics in UK, 39% of adults, who have never used the Internet before lacked the confidence or knowledge to use the Internet. From the same survey, 37% of the adults surveyed do not even have Internet connection. Therefore, in order to make use of Internet banking, these groups of people would either have to go through a steep computer literacy learning curve or incur a cost purchasing computers and setting up an Internet account with an Internet Service Provider (ISP). Instead of wasting time, effort and money to learn and set up Internet banking, they would be better off continuing their banking activities using traditional banking.
Last but certainly not least, Internet banking is vulnerable to security threats. It is a well-known fact that Internet banking scams such as phishing websites and computer viruses exist which steal users’ identities and siphon off the account-holders’ funds. Such cases have been reported on newspapers, television and radio which only reinforce the inherent psychological ‘fear’ of using Internet banking. This discourages non-Internet banking users from setting up Internet banking account and current Internet banking users to think twice before they make their next transaction over the Internet. According to the National Statistics Omnibus Survey by the Office for National Statistics on the purpose of access for the last three months prior to interview of adults in UK, it showed that for July 2005, 42% of them used Internet for ‘Personal banking and financial services’ for the last three months. Although the number of adults using Internet banking has been increasing steadily, it also shows that it is not widely used by the masses.
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