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Technology as a force for change 1

Technology as a force for change:

Will traditional banking take the plunge?

Team A

Jennifer Brower

Akilah Couvson

Lakeshia Hampton

COM 525

Kathryn MacLellan

July 20, 2004

Technology as a force for change 2

Technology as a force for change:

Will traditional banking take the plunge?

Financial services are slow to foster change despite experiencing

explosive growth. Mamallan (2002) believes that the use of new technologies will

help financial service providers to better face challenges, expand relationships

with customers, and create services that offer growth and profitability. The nature

and structure of financial institutions will change. More places of contact with

clients, better sharing of the existing networks and services, innovative

consumer-specific banking products, and a change in focus to self-managed

financial services are needed. Embracing changes provided by new

technologies, rather than avoiding them, will facilitate traditional financial

services transition into our Internet-centric society.

Notably, modern networking technology has provided a means for

consumers to make secure purchases using credit and debit cards. Lee (2004a)

refers to an American Bankers Association study demonstrating that consumers

made 52% of purchases with credit and debit cards last year. Todays consumers

favor debit cards. Lee (2004b) observes how Visa cardholders made 24.4 billion

debit card purchases and 15.2 billion credit card purchases last year. Therefore,

Visa debit card purchases rose by 17% while credit card purchases rose by 5%.

Lee (2004a) also remarks that consumers devoted to checks/cash are

experiencing the benefits of debit and credit cards. These consumers are

enjoying speedy transactions, spending controls, and contemporary secure

network systems.
Technology as a force for change 3

Research (Contactless Payments Poised for Growth, 2004) shows that

40% of debit/credit card users prefer debit cards because of a desire for

personal financial discipline. A Jet article (Great Reasons to Get a Debit Card,

2004) refers to debit cards as ATM cards combined with checkbooks into a

plastic powerhouse, providing quick purchasing power that leaves a detailed

paper trail viewable online or on a bank statement. A bank can cancel a lost card,

causing debit cards to keep funds secure.

A savvy, secure way to make large purchases is with credit cards. Lee

(2004b) refers to a study done by Visa International where despite debit card

usage increases, the dollar value on credit cards was 649.7 billion. The dollar

value for debit cards was only 489.5 billion. Finance charges inflate credit card

dollar values. The American Association for Retired Persons (AARP) warns that

credit card use is like taking out a loan. The customer must pay the total owed,

as well as finance charges, if the balance is not zero. An article (Debit Cards

Surpass Credit Cards as Most Popular POS Payment Method, 2004) predicts

that by 2007, debit cards will account for 68% of purchases. Without advances in

technology, this would not be possible.

Technology has also changed bill payments, money transfers, and

account monitoring. Another article (22 million used online banking in major US

banks, 2004) reports that more than 22 million people use online banking. Also,

online bill payment has grown 37% since the first quarter of 2003. Research

(Americans take to online banking, 2004) shows a tenfold increase from 1996

as households pay nearly 14 bills online per month. Also, customers can setup a
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bill payment, transfer funds, or simply check balances on their banks website. A

PR Newswire article (Score Analysis Reveals Usage of Online Banking and Bill

Payment Have Grown Dramatically in the Past Year, 2004) shows that the

increase in consumer demand has prompted banks to eliminate account fees

and offer extras, such as free bill payment with online banking services. Further,

these new ideas have convinced 16% of the 22 million online banking users to

use online bill payment services. But due to a perceived timing issue, the

remaining 84% make their payments at the merchants sites. In another article

(Take it to the bank: Online banking up 30% in past year, 2004), the head of the

Banking Practice division at comScore notes that when a payment date is near,

the consumer can be assured that payments made at a merchant site will be

immediately credited to the account. Banks take much longer. Merchants web

sites show detailed information on the account, rather than only the total amount

owed and current amount due. Another article (Redefining the Signature for New

Accounts, 2004) explains that consumers prefer a single site to view detailed

invoice account information. Hence, a senior Vice President at MasterCard

believes that banks will incorporate merchant data into their sites by 2006.

An article (Travelers Should Prepare Their Finances Before They Pack

Suitcases for This Summer's Vacation, 2004) describes how online banking to is

a stress-free process. Once established, there is no need to worry about bills

being late, saving time, hassle, and postage. Bierman (2004) refers to this as

blanket authorization for deducting future payables without further permission.

With the rise in online banking, consumers are placed more at ease by knowing
Technology as a force for change 5

there is a physical branch to visit. Stand-alone Internet banks have not been as

successful as desired as reported in an article (Online Banking III: Internet Only

Banks, 2004). However, a bank's costs will decrease if it only supports a single

online computer network rather than bank branches, tellers, and ATMs.

Online banking has created a decline of checks being written. A Crains

New York Business study (Checks disappearing, jobs too, 2004) reports that 40

billion checks were written last year, which is 2-2.5% less than the previous year.

Online bill payment is creating a paradigm shift in banking due to the use of

Information Technology.

Online bill payment has led to an increased consumer interest in self-

management of investments. Mr. Mark Blodgett, a Financial Consultant with AG

Edwards, explained to the team that the Security and Exchange Commission

(SEC) and brokerages are afraid of technological advances (J. Brower, personal

communication, July 2, 2004). He mentioned that SEC officials often search chat

rooms and message boards seeking stockbrokers who illicitly solicit new clients

via the Internet. AG Edwards demands accordance with exceedingly strict rules

for client communication and requires brokers to submit any advertisements to a

Compliance Department for approval. Also, voicemail and email messages must

state that all trades must be requested in person, not electronically. Any potential

client contact that cannot be monitored is blocked.

This seemingly extreme level of security creates a professional,

consumer-based image. The AG Edwards website (2004) encourages investors

to experience what it means to have a financial firm work for you for a change.
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Mr. Blodgett, a Series 7 certified Broker, believes that adding semi-qualified

financial consultants to a bank staff is risky. Edwards & Mishkin (1995) agree that

banks are being much too risky to remain profitable. Also, regulations are not as

up to date for newer technologies, potentially placing customers in excessively

risky situations. Blodgett, Edwards, & Mishkin concur that banks should avoid the

risk of the financial consulting market as they do not have trained personnel to

provide excellent financial advice.

To balance Mr. Blodgetts opinion, the team investigated two different bank

websites: Founders Bank and Citibank. Founders Banks website (2004) reads

Founders Bank is committed to providing you with a wide range of financial

products and services that fit your lifestyle. This so-called wide of financial

services included: Checking Accounts, Savings Accounts, Special Services,

Consumer Loans, and Internet Banking. Special Services are debit cards, direct

service phone line, American Express gift & Travelers checks, US Savings

Bonds, Safe Deposit Boxes, money orders, cashiers checks, and direct deposit.

There were no references to stocks, 401K plans, and 529 accounts. However,

the Citibank website (2004) integrates a brokerage account into their online

banking but barely have qualified staff to give solid investment advice.

Mr. Blodgett also warned that online day trading can be more expensive

than initially believed. Brokerage clients can pay a monthly percentage rather

than a fee per trade. This greatly lowers commission costs. Also, a Broker will

monitor the investments, making them more secure, up to date with market
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trends, and simpler for the client to manage. The highest rate of return is realized

when a professional Broker plans and monitors a long-term strategy.

Information Technology has changed the nature of the financial

institution/consumer relationship. As a result of various structure and

organizational changes, secure access to credit and debit cards, account

balances, online bill payment, and investment management create new points of

access to banking. New technologies need to be regulated more effectively,

avoiding dangerous levels of risk for the consumer and the institution. The focus

and structure of financial services for consumers has been significantly changed

by advances in Information Technology.

Technology as a force for change 8


AARP. (2004). Understanding Debit Cards. Retrieved on June 30, 2004, from



AG Edwards. (2004). Home Page. Retrieved on July 2, 2004, from


Australian Financial Review. (2004). Americans take to online banking. Retrieved

on June 18, 2004,

from http://afr.com/articles/2004/06/18/1087245077399.html

Bierman, H. (2004). Financial Services. Grolier Multimedia Encyclopedia.

Scholastic Library Publishing. Retrieved on July 8, 2004, from http://80-


Checks disappearing, jobs too. (2004, May). Crain's New York Business, 20(21),


Citibank. (2004). Investing with Citicorp Financial Services. Retrieved on July 2,

2004, from https://web.da-us.citibank.com/cgi-



Contactless Payments Poised for Growth. (2004, February). Community Banker,

13(2), 64. Retrieved July 7, 2004, from EBSCOhost database.

Daily Times. (2004). 22 million used online banking in major US banks. Retrieved

on July 1, 2004, from http://www.dailytimes.com.pk/default.asp?

Technology as a force for change 9

Debit Cards Surpass Credit Cards as Most Popular POS Payment Method.

(2004, May). Community Banker, 13(5) 56. Retrieved July 7, 2004, from

EBSCOhost database.

Edwards & Mishkin (1995). The Decline of Traditional Banking: Implications For

Financial Stability and Regulatory Policy, Economic Policy Review, pgs

27-45. Retrieved on July 1, 2004, from


Founders Bank. (2004). Consumer Banking Special Services. Retrieved on July

2, 2004, from http://www.foundersbankonline.com/cb_specialsvcs.htm

Great Reasons to Get a Debit Card. (2004, May 10). Jet, 105(19), 24. Retrieved

July 6, 2004, from EBSCOhost database.

Lee W. A. (2004a). Study shows public still likes cash and checks. American

Banker, 169(113), 6. Retrieved July 6, 2004, from EBSCOhost database.

Lee W. A. (2004b). Visa debit card volume tops credit worldwide. American

Banker, 169(75), 11. Retrieved July 6, 2004, from EBSCOhost database.

Mamallan, Mani. (2002). Traditional banking is on the precipice of change.

Express Computer. Retrieved on July 1, 2004, from http://www.express-


Motley Fool. (2004). Online Banking III: Internet Only Banks. Retrieved on July 1,

2004, from http://www.fool.com/money/banking/online/three.htm

PRNewswire.com. (2004, June 30). Score Analysis Reveals Usage of Online

Banking and Bill Payment Have Grown Dramatically in the Past Year.

Retrieved on June 30, 2004, from http://www.prnewswire.com/cgi-

Technology as a force for change 10



Redefining the Signature for New Accounts. (2004, June 8). American Banker,

169(86), 24.

World Magazine Online. (2004). Take it to the bank: Online banking up 30% in

past year. Retrieved on June 30, 2004, from


Yahoo Finance. (2004, June 30). Travelers Should Prepare Their Finances

Before They Pack Suitcases for This Summer's Vacation. Retrieved on

June 30, 2004, from http://biz.yahoo.com/prnews/040630/clw061-1.html