Electronic commerce and banking

Introduction
Banking business can be subdivided into five broad types

Retail Domestic wholesale International wholesale Investment Trust

Retail and investment banking are most effected by online technological innovation and profited by ecommerce.

Introduction
Role of e-commerce in banking is complex impacted by

Changes in technology Rapid deregulation of many parts of finance Emergence of new banking institution Basic economic restructuring

Reduce operating costs and maintain strict cost control is the main idea behind bank restructuring. Technology is predominant solution for cost controlling and improve customer service.

Introduction
Advances in networking, processing and decision analytics have allow institution to lower service cost. Technology has also accelerate the pace of product innovation. Problem.? Technology is changing interaction between bank and consumers. E.g. online delivery of brochures , online fund transfer , electronic payment etc New technology is like double edged sword.

Changing dynamics in banking industry

In past , profit bench mark was concerned with asset quality and capitalization Now performing well on these two dimension is not enough. 5 factors contribute to new competitive environment:

Changing consumer needs driven by online commerce Optimization of branch networks , reduce costs. Changing trends and consumer market Cross industry competition caused by deregulation New online financial product.

Changing consumer need

Consumer need have changed drastically. Services.. Along with these services bank must ne able to supply/ guarantee the privacy and confidentiality. Both parties seek closer and multifaceted relationship with each other.

Consumer want to bank at there convenience. Banker wants more stable and long term relationship

There is a gap b/w automated info and reaching customer at unified way. Solution E-banking

Cost reduction
Banks merge to reduce there operating cost thus obviously growing in size But there increasing size is dwarfed by competitor. E-banking provide a way to reduce the operating cost

Demographic trends
Consumer are increasingly careful about there personal finances. They are very receptive audience for time saving product and services. Reduced level of job security and need to plan for the future has increased the concern over personal debt , retirement plan etc. These concerns can be seen in trends of customer purchase of investment services. Investment product is the fastest growing industry.

Demographic trends
Company targeting appropriate customer with appropriate product and services will have lasting competitive edge. Ability to customize product and services on mass level and electronic delivery of these product and services are key means of achieving the advantage.

Regulatory reforms
Bank occupy a strategic position as they act as intermediaries in redistributing capital from area of excess to area of scarcity. E-banking provide a way for accepting and providing all consumer banking product regardless of where the customer is located.

Technology based financial service products

The development of electronic cash could stimulate further banking consolidation. Electronic cash requires large investment in computer s/w and other resources to establish network secure electronic transaction. Those with resources to absorb this cost- could become to dominate the payment system. It increase competition in banking market and lower bank operating cost.

Technology based financial service products

E-banking provide inexpensive alternative to branching to expand bank customer base and increase service to customer. Service over internet and telephone. E-cash can be the key for consumer acceptance of home banking . Allow bank to reduce number of physical branches.

Home banking history

In early 70s many bank invest millions in R/D. Most popular approach of 70s was home banking via touch-toned telephone which enable customer to check balances transfer fund and pay bill. As most have telephone , it was believed to be ideal home banking technology. Result was disappointing since no visual verification which is important for customer. After that cable TV considered as possible medium

Home banking history

Obstacle was the necessary two-way cable was virtually non existant. Since pc have visual display and two way communication it has been considered as leading contender. Initially banking from pc was also a failure because of the absence of a critical mass of PCs

Home banking history

Why will be different this time?

Consumer up the learning curve. Increasing consumer awareness Large base of installed PCs The alternative is too expensive Fierce competition

Home banking implementation approaches

The four major categories of home banking

Proprietary bank dial-up services: bank become a electronic gateway to customers account Off the shelf home finance software: e.g. Microsoft money, bank of Americas MECA software Online services based banking: this category allows bank to setup retail branches on subscriber-based online services World wide web based banking: allows bank to bypass subscriber-based online services and reach customer browser directly. It add flexibility at back end for new tech.

Open versus closed models

Two technology models of online banking are

Open System content changes can be occur easily because of the use of standard technology and component. Closed system changes are difficult since every thing is proprietary

Closed system Bank provide customer with an application software Customer downloads data and operates the program on pc Customer are able to send the bank a batch of request

Open versus closed models

Upgrade requires new release of software. With new functionality it requires more and more space and speed from customer computer. Allow integrated snapshot of customer multiple accounts Can work offline Software firm act as an intermediary between the bank and customer . Software control the selection of financial providers and determine the choice of service and its availability.

Open versus closed models

Open system Potential customer already have the software they need all they need is internet connection. Banking software reside in bank server in form of banks home page. Update can be performed easily and at any moment. Easy to out source product such as brokerage account. Need continuous connection (online operation).

Open versus closed models

Allow customer to choose the services they need and business partners when offering additional services.

Management issues in online banking

Key elements for online banking:

Development of product and services that are attractive to customer and sufficiently differentiated from competitor Creation of online supply chains that manage the shift in bank role(gatekeeper to gateway) Low cost interactive terminals for home Identification of new market segments Establishment of good customer services on the part of bank Development of effective back office system that can support sophisticated retail interfaces

Management issues in online banking

Differentiating product and services Managing financial supply chain

Three strategies:

Investing large amount on building technology infrastructure Seeking partners in online financial supply chain Moving from product dominant model to customer centered model

Pricing issues in online banking

Initial software pricing Financial product pricing Usage pricing.

Management issues in online banking

Marketing issues: attracting customers Marketing issues: keeping customers

Switching from one s/w platform to another to keep customer from moving Provide integrated service Positive cost implication

Back office support for online banking Integrating telephone call center with the web