TABLE OF CONTENTS

1.THE IMPACT OF E-COMMERCE ON BANKING SECTOR....3

1.1 BACKGROUND.....................................................................................3

2. PERFORAMCNE ANALYSIS........................................................ 7
2.1. CALCULATIONS OF TRADITIONAL ACCOUNTING ................................7 2.2. DATA ACQUISTION AND SAMPLE CALCULATION.................................7 2.3. ANALYSIS OF BARCLAYS PLC...........................................................8 2.4. FIVE YEAR ANALYSIS 2003-2007......................................................8 2.5. ANALYSIS OF HSBC.........................................................................9 .......................................................................................................... 11 HTTP://WWW.TIMESOFMALTA.COM/ARTICLES/VIEW/20110224/BUSINESSFEATURES/HSBC-2010-DIVIDEND-PAYMENT-SET-AT-55-PER-CENT.351756..............11 2.6. COMPARATIVE EMPIRICAL DISCUSSION..........................................11

3. POSITIVE IMPACTS OF E-BANKING- BARCLAYS..............12

3.1. POSITIVE IMPACTS OF E-BANKING- HSBC........................................12 3.2. MAJOR CHALLENGES-BARCLAYS.....................................................13 3.3. MAJOR CHALLENGES-HSBC.............................................................14

4. CUSTOMERS SURVERY FINDING........................................... 15

4.1. LIMITATIONS OF SURVERY.............................................................15

5. CONCLUSION................................................................................ 16 6-QUESTIONERIES...........................................................................17 7. RECOMENDATIONS.................................................................... 19 8. BIBILIOGRAPHY.......................................................................... 20

Page 1 of 21

EXTENT ABSTRACT The penetration of internet has provided new opportunities for the banking sector. The banking sector now provided their products and also services online with the support of internet which is now a days called e-banking. Bank performance is greatly affected by the E-banking. The main purpose of this report is to analyse the affect of e-banking on profitability on the UK banking sector. I have examined the two banks. This study is in the nature of qualitative and determines the profitability of the banks with the support of e-commerce. The results of this report reflect that there is enhancement in the profitability of the banks; and enable the banks to bear the cost generate enough profit even in the short period of time. For banking sector, the motive behind the e-banking is to increase the value based customers. Through traditional banking there is such increase in profitability which is available in the e-banking system. The increase use of IT has impacted the every sector of business which includes the banking sector. The preface of e-banking has transformed and redefined the activities which were performed by the banking sector. Banks whether domestic or foreign investing huge amount in the e-banking to provide their customers superior services. E-banking includes the PC banking, mobile phone banking ATM, paying bill online, funds transfer online, and credit card. The online banking also provide the customers to access their account and monitor the transaction carried by them and import the data from bank to their own personal software and all this functions is provided through the internet as a complementary channel for delivery.

Page 2 of 21

1. THE IMPACT OF E-COMMERCE ON BANKING SECTOR 1.1 Background

The rapid development in information technologies and communication and the appearance of the internet made the revolution in the business sector and developed the new ways in which activities of the business is conducted. These new ways in conducting business is called electronic commerce. The new ways of conducting business in the sense of buying, selling, transferring or exchange products and services with the support of computer networks is called e-commerce. The medium used in the e-commerce is called internet. (Turnan at al, 2004). There is another explanation of e-commerce is that sharing of business activities and the ways in which these business activities are conducting by means of telecommunication networks. (Zwass, 2003). There are many advantages associated with the used of e-commerce is that entities those used this methodology expand markets, improvement in the services to customers, reduction is the cost and improvement in the productivity. This is e-commerce which eliminates the role of middleman in the field of marketing and advertising and thus there is improvement in the efficiencies. The tremendous growth of internet changing the ways of conducting business and the advantages of internet offer many growth opportunities for the Companies to run their business affair in a efficient and effective ways and thus cope with the increase competition prevailing the market. Thus, businesses activities through internet are increasing become the hot topic for the studies to evaluate the influence of internet on performance. (Venkatraman, 2000). This report aims to observe the impact of e-banking on the profits of the UK banks. There is an increase in the competition among the banks and reason for increase in the competition lies with the e-banking. This is make out a difference because the e-banking led to the success of the
Page 3 of 21

banking operations and provides more profits and also banks are able to manage and control the risk with the support of electronic means. The main theme of this report is to provide the measuring and comparison of two UK banks on the issue of introduction of new e-banking techniques on their profitability, we have to assess how much of the provisions of these ebanking services impact the service quality and hence the improvement in their efficiency.

Source:

Top

10

Banking

Industry

Trend

in

2007

from

Http://aitegroup.com/reports/200701251.php Internet is used as the medium for providing of services in e-banking and the following services are providing to them like deposit account, online electronic payment, and transfer of funds online. These services are providing in two ways first the bank has the physical offices and another method is to develop the website which is called virtual banking. The internet in ebanking used as the medium of strategic importance and provide services and offer to sell complex services which improve the quality of offering these products and services and on the other hand also there is very low cost associated with the offering of products and services. Allen et al (2002) has provided the definition of E-finance that means proving of financial services to markets with the assistance of latest electronic communication and computation. The history pertaining to back 1970s when electronic communication is used in the finance. Earlier
Page 4 of 21

the time, the payments are settled between the banks through telegraph. Now a day, the payments settlement between the banks settled through the mechanism of electronic communication. There were boundaries between the different financial institutions which have now removed. With the assistance of electronic, better efficiency and quality of services are offered to the customers. E-Banking has several benefits by development of markets in the emerging countries by offering services by lowering costs, increase in the quality of services. Birch and Young (1997) analyzed the customers side for e-banking and the outcome of this analysis is that customers are mainly concern with the efficiency of transactions, choice of core and non banking products and services and availability of the competitive prices and returns of their investments. Onay et al (2008) on their research on the e-banking system which is adopted by the different banks concluded that e-banking has a positive sign for the profits of the banks. Investment in the e-banking has a slow and time taking process and the outcome of this process greatly impacted the performance and efficiency of the banking system. Siam (2006) examines the impact of e-banking on the profitability of the banking system and concluded that majority of the banks provided the services through their website relating to e-banking and more attention for banks are to satisfy the customers and satisfy their needs and demands. In his opinion there must be a well developed strategy which focuses on the long term to achieve success and profit. During the last few years, the sense of globalization has changed rapidly in terms of banking and finance due to the reason that deregulation and liberalization with the increase in the usage of information technology. This is the technology which re-characterizes the meaning of business activities. This is e-commerce which provided a new sense of commercialization and provided direct ways of exchange information and selling or buying of goods and services. This e-commerce also changed the payment transfer system of a banking system which is the requirement of an electronic market place and thus generates the concept of E-business. In the

Page 5 of 21

sense of an individual customer, this implies the making purchases through the website with the assistance of internet. For big companies, this indicate the customer relationships and for large organization this mean integration of their business activities in relations to their distribution networks and for banking sector this indicates the performing the basic banking transaction all the times around the globe to their customers and this is basic objective of e-commerce is to provide the and access to new customers, providing these customers best services and development of new markers along with the distribution channels in the global markets and provide and offer new products and services which are based on the new information and these products and services which are based on the information technology are in the nature of high innovative with high quality contents. With the introduction of computers and internet, the customers are not required to visit the banks for the purpose of banking when the same services are provided by the banks through tele banking. This report indentifies the UK banking sector and its various services provided to the customers through the e-banking. This report also discusses the future challenges and security concern while providing online services to customers.

Page 6 of 21

2.

PERFORAMCNE ANALYSIS

2.1. CALCULATIONS OF TRADITIONAL ACCOUNTING For the purpose of complementary analysis, it is very critical to determine the traditional performance metrics for this I have taken the respective performance contents on annual basis. ROE: ROE denotes the (ROE) for both banking firm and this ratio is calculated as a ratio of net profit of the banks by year end earning and equity. This is substitute method of profitability used by the banking sector for the purpose of understanding that how the managers of the banks has utilized shareholder funds which is a scare resources available to the managers of the banks.

NII: this ratio is called non- interest income divided by the average assets of a bank and find out the level of diversification of the bank.

EXP: The banks can benefits from reducing the cost of their operations and create shareholder value. The ratio of cost of doing activities to net income communicate us the how banks spend money per income of shareholders.

KA: The ratio of book value of shareholder equity is divided by the total assets in particular period of time to determine the level of capital adequacy of the bank. 2.2. DATA ACQUISTION AND SAMPLE CALCULATION In our data which is includes the following items pertaining to Barclays plc and HSBC (HSBC) and share of these banks are publicly traded and head office of the banks are in the UK. Our data includes the year 2003-2007 1- Consolidated balance sheet

Page 7 of 21

2- Consolidated Profit and loss account 3- Consolidated Cash Flow 2.3. ANALYSIS OF BARCLAYS PLC There are two types of earning sources which have substantial counting on the income statement of the banks which are as under: 1- Loan grants to customers and charging of interest thereon 2- Providing of our services such as foreign currency exchange and money transfer and other ancillary services like commission and fee and other non interest income 2.4. FIVE YEAR ANALYSIS 2003-2007 During the period under review there is observation of decreasing trend in terms of revenue from the source of lending loan to the customers and hence decrease in the interest revenue while comparing with the percentage of equity at the end of under discussion period. There is record decline in the interest income in year 2003 which is around 40.09% to 29.591% in year 2007. There is also observing that there is increase in the equity at the end of year 2004. Other income like commission, fee and other non- interest revenue increasing substantially. This can be explained by the measuring the efficiency of this bank through percentage of non-interest income to the sum the total income comprises of sum of interest and non-interest income or ratio of non-interest income to interest income. At the end of year 2007 Barclays performance was outclass and generate revenue on account of non-interest income (NIN) of 80.21 units for every 100 units of interest income (NI) which was 64.55, 70.65, 78.50 in the year 2002, 2005 and 2006 and efficiency of the bank came to 39.23, 41.50, 41.40, 43.98 and 44.51% from the year 2003 to 2007 respectively. The management of the bank under review period struggle to reduce the operating cost as a compare to shareholders equity in such a manner which comes to 44.0% in the year 2003 to 40.64% in the year 2007. There is no definite pattern and of

Page 8 of 21

increasing and decreasing of operating cost between the year 2003 to 2006. We draw conclusion based on the above cited figures that management of banks diversify the revenue generation activities from loan lending to customers to more fees and non-interest income and consistently reducing operating costs with respect to its equity base. On the profitability side of the bank which indicates that both measures ROA & ROE which reflect the non constant upward trend in terms of ROE. The financial statement reflect the ROE in the year 2007 around 17.02% and while this ratio is 20.05% in the year 2006 and for the years 2003, 2004, and 2005 this ratio is 17.48%, 19.86%, and 19.86%. On average the bank produced the ROE approx. 18.61%. 2.5. ANALYSIS OF HSBC The efficiency of the bank improved from the year 2003-2007 which is 20.87, 29.67, 31.57, 33.26 and 36.79%. There is increase tendency of the ratio of non-interest income to interest income over the five years analysis period which is approximately 40.61, 42.20, 46.135, 49.82 and 58.21% while there is decreasing trend of generating net interest income to equity capital throughout the period from 35.37% in 2003 to 31.90, 30.0 and 27.91% from the year 20052007. This is similar to strategy adopted by the Barclays bank which is diversification of revenue line by focusing on the non-interest income and reduce depends on the loan generating activities. The performance of the bank indicates in term of ROE and ROA which is within the limits of 14.75 to 17.23% with an average of 15.77% for ratio of ROE and ROA limit during the 5 years review is between 1.15 and 0.95% with an average of 1.04%.

Page 9 of 21

http://blogs.ft.com/beyond-brics/2011/03/16/inflation-linked-bonds-an-em-haven/

http://www.timesofmalta.com/articles/view/20100225/business-features/hsbc-expectsprofitability-growth-to-resume-this-year.295684
Page 10 of 21

http://www.timesofmalta.com/articles/view/20110224/business-features/hsbc-2010dividend-payment-set-at-55-per-cent.351756 2.6. COMPARATIVE EMPIRICAL DISCUSSION Both the banks have the status of holding company in the UK and have spread branches all over the globe. These two banks involve in tough competition and dominate the UK banking sector. In our analysis we observed that both banks management considering lowering the operating expenses and generate more revenue on account of non-interest income and diversification on product mix for the purpose of improving profit and thus cut cost on operating expenses. As a result of this, there is increase and maximization of value creation for shareholders. However, there is considerable view that HSBC dominate from the Barclays in terms of cost leadership and this is measured as operating expenses to total shareholders equity thus recorded 26.43, 27.92, 30.05, 26.88 and 28.83% for HSBC compared with the 44.03, 50.92, 43.09, 46.27 and 40.64% and this ratios calculated from under review years. Further, Barclays generate more net income from both revenue source which includes non-interest for every interest income earned (NIN/IN) and generation of more interest income to equity capital (IN/TSE) as compare to HSBC.
Page 11 of 21

3.

POSITIVE IMPACTS OF E-BANKING- BARCLAYS

There is an excellent role played by the Barclays in terms of online banking. The more stress under this strategy is that the customer of the bank all track record of his payments and withdraw his money whenever he require from any area of the world. The customers are able to observe its bank statement and transfer funds belonging to him and pay the bills when required. Three types of services are provided by the banks to enhance services for online services that is convenience, easy operations and secured transactions. The advantages of e-banking for the Barclays banks are as under: 1- Retention of customers 2- Attracting new customers 3- Develop and maintaining a new customer base 4- Attracting and maintain of great share of customers deposits. 5- There is less cost involve in the cost checking and resulting high yield certificates 3.1. POSITIVE IMPACTS OF E-BANKING- HSBC The following positive impacts on the HSBC bank are as under: 1- Attract new clients and provide them the benefits in terms of remote access including online support staff and transaction services around the clock. 2- Through Web Server availability of world wide connectivity 3- Low transaction cost associated with online banking and customers funds were transferred without intermediational of financial institution. 4- There is heavy cost involved in the traditional banking and the benefits of online banking reduce the cost of employees, overhead etc which ultimately reduce the operational cost of the bank.
Page 12 of 21

5- Online banking is safe, reliable, and more comfortable and provides the efficient and economy of time to the customers. RISK IN E-BANKING

(Jayaram Kandabagil, Risk Management in Electronic Banking, 2007) 3.2. MAJOR CHALLENGES-BARCLAYS The online banking gives many benefits in terms of expand banks markets for its products and services offered to the market. The banks are also exposed to different risks associated with the online banking which includes the fraud and error. There are many problems associated with the online banking if this is poorly implemented. 1- Loss of confidence by the customers on the bank if there is instances of unauthorized activity on his account. 2- Unauthorized access by the hackers and thus loss of customers loyalty towards Bank 3- Failure to deliver on marketing promises

Page 13 of 21

4- There may be a danger for not providing reliable services on account of technological breakdown. 5- Difficulty faced by the customers when using the facility of online banking and no proper solution rendered by the help desk of the bank. 3.3. MAJOR CHALLENGES-HSBC 1. The challenge for the bank is to maintain the trust of the customers which is critical factor for successful online banking. This is very critical not to damage and break the trust of the customers. 2. The greatest inspiration for using online banking is the speed which cant be compromised. The Bank desire to provide direct link to get access on the relevant page and in case this is not provided to them then the customer have to visit irrelevant pages to find desired login page. Other challenges are as under: 1- Safety of customer data 2- Reliability of services 3- Transaction tracking

Page 14 of 21

4. CUSTOMERS SURVERY FINDING There is lot of work need by the banking sector to make reforms and train and educate the customers for availing of online banking. During the survey this is noted that main hurdle for customers for using online banking is the fear of hacking their accounts and for this reason they hesitate to use their account online. This is now the banker obligation to develop the trust of the customers by providing best security options. There is need to train and encourage the customers to use online banking and this training should be given by the trained bank employees and the design of the website should be friendly so that the first time customers can access directly their account. The cost of accessing online banking should be minimal so that customers attract to use online banking. This is also noted that most people who adopted online banking is business man and youth. 4.1. LIMITATIONS OF SURVERY 1- Time constraints 2- Budgetary Constraints 3- The number of sample are small which can be generalized across the sector

Page 15 of 21

5.

CONCLUSION

Online banking system has emerged and grown rapidly over the past few years. Online system has made it easier to understand and execute the operations and functions of manual banking system. Through online banking system, large number of customers could be facilitated as compared to manual systems. Moreover, security, speed, effectiveness etc are among the top rated qualities of online banking system. Usage of online banking system should be introduced and encouraged.

Page 16 of 21

6- QUESTIONERIES
1- Name of the customer ___________________ 2- Age of the customer ___________________

3- Profession __________________ 4- Are you aware of E-Banking? Yes No

5- Do you like E-banking Yes No

6- Which bank do you give preference ________ 7- Why do you like only this Bank? Service is good Security Services are better Very Cheap rate services

8- Which type of services you most use on E-banking system Balance and transaction history search
Page 17 of 21

Online transfer of funds Lock/activate my debit card e.g. ATM Online request for cheque book Stoppage of payment Shopping

9- Services of the banks are Poor Good Very good

10- Are you satisfied with the using of E-banking? Yes No

Page 18 of 21

7.

RECOMENDATIONS

Due to globalization, the people are no more bound by the physical boundaries. Majority of the business activities are over web portal now. Due to this, online banking system plays a vital role, as it is the most convenient and safe way to make transactions. Moreover, it is the most economical and speedy method for making and receiving payments. Now days, people hardly carry cash with them. All banks should have online systems to expedite the customers. There are some limitations of online systems. Despite all the security measures, the risk could not be avoided up to guarantee level. There will always be a threat of fraud and hacking due to the inherent limitations of the online systems. Professionals with skills and knowledge of online systems should be appointed to execute the operations of online banking system and sites should be made in such a manner that unauthorized users could not access it. Customers should be guided to use the site properly and maintaining the confidential data.

Page 19 of 21

8.

BIBILIOGRAPHY

1) Banan, M. (2008). The viewpoint of bank's staff about internet banking. 3rd international conference on E-commerce with focus on developing countries. Isfahan. 2) Jen-Her Wu, T.-L. H. (2006). Core Capabilities for Exploiting Electronic Banking. Journal of Electronic Commerce Research, 111-122. 3) John Carlson, K. F. (2001). Internet Banking:Market Developments and Regulatory Issues. Society of Government Economists Conference 2000. Washington, DC. 4) Zwass, V., "Electronic Commerce and Organizational Innovation: Aspects and Opportunities," International Journal of Electronic Commerce, Vol. 7, No. 3: 7-37, 2003. 5) Daniel, E.M. and H.M. Wilson, "The Role of Dynamic Capabilities in E-Business Transformation," European Journal of Information Systems, Vol. 12: 282-296, 2003. 6) Baddeley, M. "Using E-cash in the New Economy: An Economic Analysis of Micropayment System," Journal of Electronic Commerce Research, Vol. 5, No. 4: 239253, 2004. 7) Cheung, M.T. and Z. Liao, "Challenges to Internet E-Banking," Communications of the ACM, Vol. 46, No.12: 248-250, 2003. 8) Mattilia, M., Karjaluoto, H., Pento, T. (2003). Internet banking adoption among mature customers: early majority or laggards. Journal of Services Marketing, Vol.17(5), 514-28. ANNUAL REPORTS HSBC Group Annual Reports, 2003 - 2007 Barclays Banks Annual Reports, 2003 2007 INTERNET www.wikipedia.org www.yahoo.com/finance http://group.barclays.com/Home [Accessed 24 September 2012]. Top 10 Banking Industry Trend in 2007 from Http://aitegroup.com/reports/200701251.php http://www.hsbc.com.ph/1/2/personal/ebanking http://www.timesofmalta.com/articles/view/20100225/business-features/hsbc-expectsprofitability-growth-to-resume-this-year.295684
Page 20 of 21

http://www.timesofmalta.com/articles/view/20110224/business-features/hsbc-2010-dividendpayment-set-at-55-per-cent.351756 www.barclays.co.uk/.../OnlineBankinghelpsupport/P1242561782389

Page 21 of 21