The Implications of Internet-Banking on Bank Profitability

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Introduction to the research context outlining specific, feasible Research Objectives, the research context and the strategic nature of the issue under review

Introduction

The purpose of this research is to investigate on the implications or effects internet has on those specific banks’ profits at the end of the financial year. The retail banking sector has received versatile changes in its operations due to introduction of internet in its banking services.

The major ways of electronic banking are use of phones in banking, ATMs and PC banking and furthermore internet banking has increased and it has penetrated the banking system as another distribution channel. Electronic finance is described as the process of electronically communicating and computing monetary transactions.

Currently banks switched to using the internet in driving the distribution of financial services in amalgam sectors in the case where traditional banking systems are offered. As an achievement of a single united market, European banking market has gained a lot of significance as amalgamation of banking services goes on due to the enlargement of the European Union.

It is vital to investigate the profitability that internet-banking has added to banks since it is a major aspect banks worldwide inclusive of Turkish banks. It is then necessary and essential to carry out the research that involves the implications that internet-banking has had on profitability.

This research gives a clear analysis of the Turkish banking sector to enumerate an overall outcome caused by internet-banking with regards to the performance of banks. A total of fourteen banks were used in this research.

Critics of internet banking have come out arguing that use of internet in banks destroys the old model system in which bank services are provided and established (De Young, 2001).

Internet banking has surfaced as a tactical and resourceful way for the achievement of higher competence, ease in controlling operations and the realizable reduction in the cost by the replacement of methods that involve tedious labor and document based methods with a process that involves automation hence resulting to better production and profit margins.

In this research however, internet-banking has no autonomous result on the profit outcome of banks, a factor that is bound to change since internet banking is growing rapidly and becoming prevalent. A wide number of services and financial products are being offered via the internet-banking and thus making internet banking an essential canal for distribution of funds for many banks in Turkey.

Due to revenue and cost issues, banks have resulted to the improvement of technology in their operations by them investing in technology such as the famous internet-banking. This is so in Turkish banks in a bid for them to realize better profits after the introduction of internet-banking.

The boost in technology has also been attributed by the banks in order to create a competitive stand so as to evade the factor of being left behind in terms of competition.

Background

The rate of internet use in banks especially in Turkey has greatly increased and has redefined the working basis of retail banks. Through the use of internet branches these banks have mainly ventured in providing their services through this venue. However, internet-banking has affected the profitability of banks and in this case in particular the Turkish banks.

Allen et al (2002, 67) notes that “by using specific bank macroeconomic control variables, the implication of internet in bank profitability is determined by examining the Return on Assets (ROA) and Return on Equity (ROE), rate of interest, fee income and operating costs.”

Because of globalization as well as rapid change in technology the banking sector in particular, banks have realized the need for increase in their potential by introducing internet-banking in their operations and this factor affects the banks’ profits.

This research intends to find out the degree in which internet-banking has affected the banks in terms of their profits and likewise the losses it will have undergone due to its use. This will help banks to know whether the usage of internet in their systems is worth it or it is a disadvantage to them in terms of its finances.

Research objectives

This research based in the effects internet-banking has on the banks profitability has a several of objectives:

To critically evaluate the impact internet use in banks has had on its profits.
To critically identify merits that the internet has had in the banking system.
To draw appropriate conclusions about the use of internet-banking in banks.

This research examines a comprehensive set of banks in Turkey measuring their financial performance particularly calculating the profitability brought about by internet-banking.

A critical evaluation of the literature, and for MBA students only, a discussion and justification for the Conceptual Framework drawn from the literature

Literature Review

E-finance has provided immense opportunities to emerging countries in the European Union. These countries actually benefit from the availability of the most recent technology when they use it in their financial infrastructure despite those countries having unstable and feeble financial structures.

Electronic finance gives countries the opportunity to create a financial system even before they establish a financial structure that has complete functions.

E-finance providers have the ability to market their financial services that involve small business dealings with low wage earners and also those that are in distant places as a result of its cheapness and the fact that it has lowered the cost of processing for providers and also the switching costs for consumers.

There are key “policies that involve an enabling environment for electronic finance, they include; the set up of regulatory policies and structures for pact enforcement, information and privacy policy, due to telecommunication purposes, for security reasons and finally for public infrastructure that involves electronic financial transactions” (Claessens et al 2002, 45).

E-finance is beneficial to the financial structure of countries by developing it by leading to costs being lowered, increment in quality and breadth and finally increasing the widespread accessibility to financial services.

According to a study done by KPMG (1999), “the evolution of internet-banking can be assessed within a five-stage plan conceptual framework; the internet-provided services commence from a promotional stage extending to a business innovation stage that is enabled through transactions in which the organizations revamp the value-chain and provide vastly modified products and services.”

Birch and Young illustrated that the consumers usually valued their convenience, efficiency in making transactions, a choice in both core in addition to banking services that are non-centered and accessibility to spirited proceeds and values by considering consumers concept and point of view.

Consumers can make comparisons in prices online with ease due to the aspect of internet-banking that has led to the lifting in branch network as an entry obstruction to banking thus bringing into light transparency in pricing (Wright 2002, 49).Traditional retail banks acquired new approaches to contend with banks that have adopted the usage of internet.

Such banks do not have physical “bricks and mortar” branches but they are undercut since they do not have services such as cash management and in return they lack the ability to control the retail banking in the long run.

Internet-banking is mainly generated by the aspect of reducing operation costs and on the other hand the maximizing the operational revenues (Simpson 2002, 83).Low operational costs and high returns are easily noticeable due to online banking in a developed market. Internet banking has boosted banks profits as it increases revenue through deposit service charges.

Centeno notes that “through the analysis of the Acceding and Candidate Countries (ACCs), by adopting internet-banking, it demonstrates that lack of PC and penetration of internet services is an obstruction to the advancement of internet banking in EU and ACCs”.

Not only has internet-banking led to the lowering of operational costs but it has also led to the rise in client contentment as well as maintenance that involves Turkish banks.

Internet-banking is majorly viewed as a corresponding delivery canal. However, internet-banking has brought about supplementary risk elements to the banks. So as to counter these risks principles of risk management were brought into book by the Basel committee.

Its objectives are to safeguard and promote meaning of electronic banking operations while still maintaining the vital suppleness in execution due to the rapid fluctuation in technology. Hernando and Nieto (2007) notes “in order to calculate the outcome of a transactional website in the financial performance of banks, a firm conclusion was made that in a period of one and a half years”.

European Union inclusive of Turkey has strengths and a key sector is the internet banking and as the increase in electronic transactions continues so will it adjoin surfacing of European Union electronic bazaar place.

One challenging area of information society is Action Plan Banking which requires activities of the digital situation to be reformed. In 2005, the project dubbed “i2010: European Information Society 2010” was initiated so as to input to development and employment of the information hence aiming to enhance usage of internet in different sectors and that is inclusive of internet-banking.

The percentage rate of people who use the online banking systems in Turkey increased adversely to an average of 25.36%. This deduces the fact that internet-banking in Europe has grown and is still on the verge of growing further.

It has been noted that a large population of people who have received high official schooling happen to be prone to utilize the internet and thus carry out banking transactions via the internet. The current trends in internet-banking in Turkey are five key components which are; internet research, mobile phone banking, the aspect of security, customer maintenance and finally the technological advancement.

For foreign banks seeking to venture into Turkey result to making use of internet-banking since it is more efficient and it’s a chief penetration tool into the Turkish market.

Its efficiency is increased whereby the cost used in establishing a branch network is greatly reduced; a factor that has been a huge barricade to the international banks. It is duly noted that most banks had a preference for a steady approach to internet-banking services from electronic finance.

In this research, the banks that generally offer internet-banking are profitable and they rely less on traditional banking operations when compared to banks that do not apply internet-banking. On the other hand, Hernando and Nieto (2005 96) stated that the overall outcome of multichannel banks is more elevated than in ROE, there are lower overhead operating cost and better proceeds in terms of payment.

They also conclude that internet-banking has an affirmative impact on the profitability of banks and that it has no statistic considerable impact on risk. This paper also examines the existence of financial differences between internet-banking and non-internet banking in Turkey.

Research Methods

There are various forms of research methods, which are ways through which a researcher can collect vital information in regards to the information that he/she wants. This paper will critically discuss the three types of research methods; Qualitative, participatory and Quantitative Methods.

Quantitative research

Methodology is used when measuring variables or trying to test existing theories and establishing their validity (nsf, n.d). The collected data is used to formulate new hypothesis on the basis of new evidence. Thus it is mainly concerned with establishing the validity of data collected from experiments or scientific research and its relation to its subject, for instance, why is such an issue affecting certain type of people.

Therefore in order to conduct such type of a research, the most important tool is the use of statistical analysis. These will enable a researcher to easily identify the relationship or correlation between the variables statistically. This type of method is usually subjective in nature.

Thus it can easily generalize research findings where the information collected is random or not consistent but is sufficient enough to address the issue in question. It can thus allow a researcher to make predictions as he/she can generalize over data collected which had been simulated over different population making it a very fast way of conducting research.

Qualitative

This type of method is usually used where a researcher wants to directly gather the data or information from the source or participants of the research. Therefore the data collected is usually from the sources own interpretations. Due to its personal nature, this type of method is applicable when studying a small population or subject matter as it provides answers in an individual basis.

It also enables a researcher to conduct comparisons and analysis directly from the subjects providing the information since it enables the researcher to get a rich detain of information as they are in their original and true nature. There are two types of interviews to be used. The first type of interview is a structured interview where a questionnaire is given out to the respondents to fill out the information (Patton, 2002 85).

The other type of interview is referred to as in-depth interview which does not involve any rigid questions to be answered. The study will use the structured questionnaire to get answers for some specific questions in order to get uniform results from several respondents.

In-depth guided interviews on the other hand will give the respondents a chance to answer questions freely and hold discussions. For the sake of collecting ample information, the research will conduct individual interviews several times.

Mixed Methods Research

This is the most current form of research methods that tends to combine both the qualitative and quantitative methods to come up with a more coherent and practical alternative to the two. This type of methods gives a researcher multiple forms of methods in answering the research questions instead of limiting him to a particular framework thereby limiting his options when it comes to getting logic and rational information.

It is thus expansive and a very logical and creative way of conducting a research since it accommodates various techniques. This a very crucial issue when conducting a research since the research methods are always structured according to the research question, hence the research method chosen should enable a researcher to sufficiently answer the question in issue.

Thus in cases where the researcher has many questions to answer, the best research method would be using the two forms of research that are qualitative and quantitative hence making this method most appropriate.

Nevertheless before a researcher chooses this type of research method, one ought to take into account the strengths and weaknesses of qualitative and quantitative research method and therefore decide how to approach the mix methods by aligning himself to the strengths of both methods while trying as much as possible to avoid the weaknesses.

Lewin (2003 127) notes “in the basic standard of mixed research, researchers should amass multiple statistics using various approaches, strategies, and techniques in a way that the resultant mixture is prone to result to corresponding strengths and non-overlapping limitations.”

Sampling is the random picking of a group of subjects to provide information on a particular subject. In order for one to get more realistic and accurate information, one should use a larger population size sample thereby reducing the chances of errors arising.

Research Philosophy

This refers to a principle concerning the manner with which subject information is to be collected, analyzed along with how it is to be applied. Saunders et al. (2007 63) identified three key patterns of research which include; epistemology, ontology and axiology. The functionality of science is the procedure of transformation of objects perceived to be objects that are known.

Understanding philosophical patterns is important to the researcher in a various ways which include to assist the investigator categorize and develop research blueprints due to experiences of the past.

Easterby-Smith et al (2006 87) takes a balanced view of the diverse philosophical positions arguing that difficulties that arise in research may require an amalgamation of methods retrieved from more than a single position. Nevertheless, there is the existence of three philosophical positions that are common in this particular research: Positivism, Interpretivism, and Realism.

In general, this type of research has numerous built certainties that are bound to it and time- and context-free generalities are undesirable, it is bound by values, that it is impossible give a difference of basis and results, that reason flows from being detailed to wide-ranging and that the knower and known become inseparable since the subjective knower is the one and only basis of authenticity.

Hence through the evaluation of these relations and patterns, principles used in provision of resolutions and proposals to the study can by established.

Since as Saunders et al (2007:105) notes “realism is a scientific advancement to progress of understanding,” the following research will adopt practicality to approach, survey, comprehend and discover associations that are there between variables.

Also this approach is appropriate for this research since it gives emphasis on collection of information and the comprehending of that information gathered. The approach will assist the researcher in finding the hidden objects that implicate internet-banking on bank profitability.

Research strategy

This helps a person to give answers to questions hence attain goals or purposes. This aspect is guided by questions, goals, research timeline, funds, and also the philosophical underpinnings. The most common strategies in the research of this paper include laboratory and field experiments, surveys, case studies, action research, simulation and futures research. So as to address the research questions and objectives adequately, this research employs the following two strategies:

Case studies

This involves the description of relations that are there in realism and often occurs in one group. It can either occur in as interprevist or realist and it depends on the investigators approach, the information gathered and investigative methods that were carried out.

Case studies may combine various data collection techniques important for the collection of reliable of data. However, case studies have a limitation in their restrictions to one group hence making it hard to take a broad view of findings. So the researcher adopts multiple strategies since this gives a clear perspective of the subject matter and enacted processes.

Surveys

This gives the investigator the opportunity to collect information concerning viewpoints via conduction of interviews and also quantitative methodical tools are hence applied in making deductions from these facts about presented relations.

Surveys allow the researcher to observe additional data at a go, while information may be gathered on actual surroundings of the environment on earth. However, using surveys is extremely hard to realize factors that concern processes drawn in the observable facts. Also, biases, perhaps the self-selection aspect of the respondents may exist.

Triangulation

This term refers to the phenomenon of mixing different approaches or methods in order to achieve either two or three perspectives of the research being carried out. It is vital to consider the issue of triangulation in the research design process since it allows the researcher to authenticate specific findings through examination of various sources so as to determine whether they give convergent data.

The use of multiple research methods enables a better comprehension of both research queries and their findings hence they are efficient (Saunders et al 2007 98).Triangulation increases the understanding of researchers in intricate issues and it can bring data variations in the collection of data by the location, time and information (Denzin 1970 68).

This process results to the achievement of accurate findings since it establishes samples and questions that differ and this factor is attributed to by the creation of numerous rounds of conclusions being made. The researcher should make an accurate conclusion when analyzing the data and ought to put into consideration that if the sample data can be understood.

In order to achieve triangulation, the researcher uses the method of collecting data of semi-interview and also questionnaire in corroborating data. Saunders et al (2007:146) argues that usage of several data collection methods has merits and apparently the occurrence of triangulation is one of them.

During the collection of information, triangulation is used to show how valid and reliable a given piece of data is through the incorporation of both several sources of data and multiple methods of analyzing the data.

Reliability

The reliability of the research depends on the utilization of the similar studies for the same phenomenon by a different researcher and deriving a common conclusion. Reliability is enhanced by a researcher using various sources of information and collecting the same information using different tools. Similarly, the reliability of data is affected by semi-structured interviews, inconsistency and also by arising subjects of bias.

So as to counter issues of bias it is advisable for the researcher to meticulously select respondents and to first of all make sure they are ready to take part in the interview. In the case of a questionnaire, in order to obtain a reliable response, the respondent should be encouraged to give answers accordingly and for this to occur, the researcher should give a provision of a letter that expounds on what the questionnaire covers.

Also the researcher ought to give the respondent a substantial period of time to participate in answering the questionnaire and by so doing; the chances of the participant giving answers in a rush are reduced. Thus the data collected is more accurate. During collection of secondary data, a high feedback rate is usually more reliable than that of a low feedback rate.

Validity

Validity is often described as the association between variables and it gives the appropriate data so as to attain the intended research goals. It deals with whether results found are the actual results that are being looked for (Saunders et al 2007:150). Secondary data validity is associated with the method of data collection and the source.

So as to achieve more evidence of data’s validity the researcher chooses appropriate sources that contain relevant details in order to gain further information. Validity helps researchers articulate the credibility of their findings. For research findings to be termed as valid there should be no other contradictory results on the data being researched.

A critical evaluation of the overall research design including any limitations in the approaches chosen and the possible impact these may have on the research objectives. This should reflect any particular constraints in the specific context of your research.

Issues of sample criteria, sizes and representativeness should be clearly dealt with

It is common for research undertakings to present challenges and this research is no exception. The first challenge that might surface is that some of the interviewees may be biased and provide information which is not reliable.

This may be as a result of personal dispositions or general unwillingness among some interviewees to participate in the interviews. Another challenge is the financial cost of the research. Although the initial budget has been factored, additional cost may spring up while the research is in progress and this will be a challenge for the researcher.

Another limitation comes from Secondary data; this is because the information is usually an indirect source of information thus it may contain information that may not answer the researcher’s question effectively, for instance a researcher may only require yearly sales but only gets yearly orders.

Secondary information is also very incompatible, whereby to sources of information may give different information although they are addressing the same issue for instance, Imports from Japan to South Africa may be recorded as 2 Million metric tonnes by the South Africans while the Japanese may record on the same issue as 3 Million metric tonnes.

Thus the information given is usually not accurate. In regards to this research, a bank in turkey may realize profits due to internet-banking while a different bank in the same country may not realize any profits brought about by internet-banking.

In addition, the researcher himself may be bias in a situation where he/she uses theories that do not reflect on the local population perceptive thus he may end up not grasping the facts that have occurred due to focusing on assumption test instead of hypothesis generation.

In addition the information created out of the sources may be too nonfigurative and general for it to be directly applied to precise local circumstances, perspectives and persons.

On the other hand, qualitative research methods have their own limitations. The information produced does not represent a general view of the local population, for instance, the information got from the sources may be unique to the given class of population/sources therefore making it hard for the researcher to acquire a generalized view of the issue.

Due to this fact, it’s usually hard for the researcher to make quantitative predictions or even put to test the hypothesis and theories. As a result, such information or knowledge got usually has lower credibility. Time is another limitation that faces this type of method.

For one to conduct a research using this type of method, one will be required to spend a lot of time in data collection thus making it a very slow process. In addition, the knowledge got from the sources is may be influenced by the sources or the researchers personal views, emotions or ideologies making it more inaccurate and unreliable.

The mixed method of research has numerous limitations towards a researcher who uses this type of method. First the method is a bit complex as it incorporates two types of research methods.

Therefore, it makes it quite difficult for an individual researcher to carry research using both methods especially in circumstances where the researcher is using both methods at the same time. Therefore, for a researcher to use the mixed method, he/she may be required to have a research team making the research more expensive.

Using the method may also require the researcher to learn how to use the method, therefore increasing the time and expenses used in conducting the research. Information regarding to mixed research is to be figured out completely, for example limitations of paradigm integration, the method of qualitative analysis of quantitative statistics and method in which a concise interpretation of conflicting findings is given.

The resolving of a representative sample size is an essential issue for various institutional investigators. The quality and precision of research is greatly determined by insufficient and sample sizes that are outsized. An important aim of a study is to gather information of the target populace.

The investigator applies the data he had collected from a specific subject matter to make a broad view of findings retrieved from a model back to people that is contained by the confines of random error. Saunders et al (2007 96) notes “two of the most consistent flaws included (1) disregard for sampling error when determining sample size, and (2) disregard for response and non-response bias”.

In a quantitative survey design, it is vital to handle a non-response bias and also to find out the sample size. According to Easterby-Smith (2002 15), “One of the real advantages of quantitative methods is the ability to use smaller groups of people to make inferences about larger groups that would be prohibitively expensive to study”.

The issue is what size of the mock-up is shown by the representativeness of the target population? Sample size is a characteristic of a study design which sways the recognition of substantial distinctions and relations. Generally, these survey designs lead to minimization of alpha error and beta error.

Carrying out research properly can help the researcher gain from an actual life primer with the sample size included. Cochran (1977 66) tackles this matter by giving a statement that a way of finding sample size is by specifying the limits of error for the objects that are essential to the study.

And an estimate of the sample size is taken distinctively for all the vital objects. Hence the researcher is supposed to use this information to make sampling assessments.

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Lewin, K., 1946. Action Research and Minority Problems, Journal of Social Issues, 2.4, pp. 34–46.

Patton, M. Q., 1990. Qualitative evaluation and research methods (2nd ed.). Newbury Park, CA: Sage.p.184.

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