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Electronic commerce and banking

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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 e-

commerce.

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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.

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Introduction

Advances in networking, processing and decision

analytics have allow institution to lower service cost.

Technology has also accelerate the pace of productinnovation.

Problem.?

Technology is changing interaction between bankand consumers.

E.g. online delivery of brochures , online fund

transfer , electronic payment etc

New technology is like double edged sword.

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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 notenough.

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.

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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

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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

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Demographic trends

Consumer are increasingly careful about there

personal finances.

They are very receptive audience for time savingproduct 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.

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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.

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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.

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Technology based financial

service products The development of electronic cash could stimulate

further banking consolidation.

Electronic cash requires large investment incomputer 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.

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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.

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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 tocheck 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

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Obstacle was the necessary two-way cable was

virtually non existant.

Since pc have visual display and two waycommunication 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

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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

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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.

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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

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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.

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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).

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Allow customer to choose the services they need and

business partners when offering additional services.

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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

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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.

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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

Documents

mod iv ecb