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htm

An analysis of Internet banking offerings and its determinants in India

Pooja Malhotra
Department of Business Management, Geeta Institute of Management and Technology, Kurukshetra, Haryana, India, and

Internet banking

87
Received 2 December 2008 Revised 15 June 2009 Accepted 10 October 2009

Balwinder Singh
Department of Commerce and Business Management, Guru Nanak Dev University, Amritsar, India
Abstract
Purpose This exploratory study is an attempt to present the present status of Internet banking in India and the extent of Internet banking services offered by Internet banks. In addition, it seeks to examine the factors affecting the extent of Internet banking services. Design/methodology/approach The data for this study are based on a survey of bank websites explored during July 2008. The sample consists of 82 banks operating in India at 31 March 2007. Multiple regression technique is employed to explore the determinants of the extent of Internet banking services. Findings The results show that the private and foreign Internet banks have performed well in offering a wider range and more advanced services of Internet banking in comparison with public sector banks. Among the determinants affecting the extent of Internet banking services, size of the bank, experience of the bank in offering Internet banking, nancing pattern and ownership of the bank are found to be signicant. Research limitations/implications The primary limitation of the study is the scope and size of its sample as well as other variables (e.g. market, environmental, regulatory etc.) which may have an effect on the decision of the banks to offer a wide range of Internet banking services. Originality/value The purpose of the study is to help ll signicant gaps in knowledge about the Internet banking landscape in India. The ndings are expected to be of great use to the government, regulators, commercial banks, other nancial institutions, e.g. co-operative banks planning to offer Internet banking, bank customers and researchers. The bankers as well as society at large will come to know where the banks lag in terms of adoption of Internet banking and in providing different products and services. An understanding of the factors affecting the extent of Internet banking services is essential both for economists studying the determinants of growth and for the creators and producers of such technologies. Moreover, this paper contributes to the empirical literature on diffusion of nancial innovations, particularly Internet banking, in a developing country, i.e. India. Keywords Banks, Innovation, Virtual banking, Financial services Paper type Research paper

1. Introduction The competitive pressures and the evolving requirements of consumers have required the banks to develop new technologies and tools. Internet banking that has revolutionised the banking industry worldwide is a product of this innovation. In

Internet Research Vol. 20 No. 1, 2010 pp. 87-106 q Emerald Group Publishing Limited 1066-2243 DOI 10.1108/10662241011020851

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general, Internet banking refers to the use of Internet as a delivery channel for the banking services, including traditional services, such as opening an account or transferring funds among different accounts, as well as new banking services, such as electronic bill presentment and payment, which allow the customers to pay and receive the bills on a banks website. In India, slowly but steadily, the Indian customer is moving towards Internet banking. A number of banks have either adopted Internet banking or are on the threshold of adopting it. The Indian banks started Internet banking initially with simple functions such as getting information about interest rates, checking account balances and computing loan eligibility. Then the services were extended to online bill payment, transfer of funds between accounts and cash management services for corporate. The banks are using Internet banking technology to meet the ever-increasing competition. It has also emerged as a strategic resource for achieving higher efciency, control of operations and reduction of cost by replacing paper based and labour intensive methods with automated processes thus leading to higher productivity and protability. Internet-based electronic banking is one of the newest and least researched but most promising delivery channel for retail banking services. No doubt, considerable literature on this phenomenon is available worldwide, but in Indian context, there are only conceptual papers throwing light over the importance of Internet banking and its prospects for the Indian banking industry. The present study aims to quantify the current state and performance of Internet banking in India in terms of various Internet banking services being offered and the factors that drive the development of such services. 2. Internet banking: literature review There are numerous papers that sought to study the present status and services of Internet banking internationally (see Table I), for instance, Egland et al. (1998), Sathye (1997), Diniz (1998), Jayawardhena and Foley (2000), Furst et al. (2000a, b, 2002a, b), Carlson et al. (2001), Sullivan (2000, 2001), Chung and Paynter (2002), Suganthi et al. (2001), Vijayan and Shanmugam (2003), Guru et al. (2003), Jasimuddin (2001), Awamleh et al. (2003), Bojinov (2003), Yeap and Cheah (2005), Awamleh and Fernandes (2005), Ayadi (2006), Hamid et al. (2007), Floros (2008), and Thulani et al. (2009). These studies investigated the status of Internet banking and banking services offered by Internet banks in developed countries like the US, the UK, Australia, New Zealand, Malaysia, United Arab Emirates and developing countries like Bulgaria, Saudi Arabia, Jordan, Tunisia, Greece and Zimbabwe. Despite the very late adoption of Internet technology in doing transaction online by banking institutions in developing countries, they are very fast catching up with the developed banking systems. These banks have been successful in implementation of introductory phase of Internet banking. However, the adoption of Internet banking services to a large extent is dependent on the value added services they can offer. A very little research exists on the implementation of Internet banking in transition and developing economies. Thus, there is a need to identify the actual status of Internet banking, i.e. how many banks offer Internet banking and what services they are offering, because an average customer will be interested to know whether net banking offers him/her a wide range of services. This study aims at assessing the extent to which Indian banks have adopted Internet banking to take advantage of opportunities in delivering banking

S. no. Australia, 52 banks US, 8,983 banks US, 121 banks UK, 12 banks US, 2,517 National Banks (out of which 2,334 were FDIC Insured banks) Tenth Federal Reserve district, 1,618 banks Q1, 2000 Q4, 2000 Year end 2000 2000 2000 NA January 2002 June and July of 2001 NA NA Q3, 1999 Oct./Nov. 1997 1998-1999 Sept. 1997 1997

Study

Country and no. of banks analysed

Sample period

Purpose of study

1 2

Sathye (1997) Egland et al. (1998)

3 4

Status of Internet banking Status of Internet banking and its services; performance of Internet banks Status of Internet banking and its services Status of Internet banking and its services

Diniz (1998) Jayawardhena and Foley (2000) Furst et al. (2000a, b, 2002a, b)

Sullivan (2000)

Carlson et al. (2001)

Status of Internet banking and its services; performance of Internet banks; determinants of adoption and extent of Internet banking services Status of Internet banking and its services; performance of Internet banks Status of Internet banking and its services; performance of Internet banks Status of Internet banking and its services Status of Internet banking and its services Status of Internet banking Status of Internet banking Status of Internet banking and its services Status of Internet banking and its services Status of Internet banking and its services Status of Internet banking and its services

9 10 11 12

13 14 15

16

Based on a survey of national bank charters by OCC examiners Sullivan (2001) Tenth Federal Reserve District, 1,337 banks Suganthi et al. (2001) Malaysia, ten banks Jasimuddin (2001) Saudi Arabia, eight banks Chung and Paynter (2002) New Zealand, seven Internet banks Vijayan and Shanmugam Malaysia, ve Internet banks (2003) Awamleh et al. (2003) Jordan, ten banks Bojinov (2003) Bulgaria, 35 banks Guru et al. (2003) 37 banks, Malaysia (13), Singapore (one), Palestine (one), Bahrain (three), Egypt (four), Pakistan (one), United Arab Emirates (one), Jordan (three), Saudi Arabia (four), Kuwait (two), Iran (one), Oman (three) Singh and Malhotra India, 66 banks (2004a) Dec. 2003

Status of Internet banking and its services; performance of Internet banks (continued)

Internet banking

89

Table I. List of studies on Internet banking

90

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S. no. India, 93 banks Q1, 2004

Table I. Country and no. of banks analysed Sample period Purpose of study Status of Internet banking and its services; performance of Internet banks Status of Internet banking and its services Status of Internet banking and its services Malaysia, 17 Internet banks (ten domestic At the end of 2002 and banks and seven foreign banks) 2004 United Arab Emirates, 35 Internet banks Sept. 2004 1998-2005 Tunisia, eight banks with websites Status of Internet banking; performance of Internet banks December 2001 and April Status of Internet banking and its services 2002 June 2006-Dec. 2006 Status of Internet banking and its services Mar. 2008 2008 2008 Analysis of Internet banking websites Performance of Internet banking websites Analysis of Internet banking services and determinants of adoption Malaysia (ve banks) and Thailand (ve banks) Jordan, 16 banks Greece, 15 banks Jimbabwe, 12 banks

Study

17

18

Singh and Malhotra (2004b) Yeap and Cheah (2005)

19

20

Awamleh and Fernandes (2005) Malhotra and Singh (2006) India, 88 banks

21

Ayadi (2006)

22

Hamid et al. (2007)

23 24 25

Migdadi (2008) Floros (2008) Thulani et al. (2009)

products and improving customer relationship. Secondly, it investigates factors that explain which banks choose to offer a relatively wide range of Internet banking services, given that they offer transactional Internet banking. 3. The data and explanatory variables To date, it has been difcult to assemble comprehensive information on the Internet banking activities of banks in India, as there are no special reporting requirements for Internet banks, and hence there is no regularly compiled set of data about banks Internet activities. A survey of banks websites was executed for the purpose of exploring the present status of Internet banking and the extent of Internet banking services offered by Internet banks in India. In addition, bank communication in the form of phone calls and e-mail was also used to gather information regarding the adoption dates of Internet banking. The websites of the banks were explored during the period of July 2008. The sample consists of 82 banks, which were operating in India as on 31 March 2007. Sample selection is based on the following criteria: . Only public (nationalised and SBI group), private (new and old private) and foreign banks which were operating in India as on 31 March 2007. . Banks whose websites were not found despite best efforts are considered as banks with no websites, hence non-Internet banks. . Banks offering only informational sites are considered as non-Internet banks. For the purpose of present study, 30 Internet banking services have been considered for the purpose of making comparative analysis of Internet banks. Table II gives a brief description of all the 30 Internet banking services and weights (points) attached to each service. In order to measure the level of Internet banking services provided by banks, one point has been given to the bank for an Internet banking service of those shown in Table II, if it was provided by the bank. Using this rule, a bank can score a maximum of 30 points on this index and a minimum of zero. Total score has been calculated for each of the banks by adding the total number of Internet banking services provided by them. After calculating the total score of Internet banking services for each bank, the extent of Internet banking for each bank has been calculated as follows: Extent of IB of a particular bank {Total score of the bank/Total no. of IB services considered (i.e. 30 items)} 100. However, it should be noted that the logic behind assigning points to the attributes does not depend on the importance of the attribute nor on the quality of the information provided by the bank. Rather, it provides a measure of the quantity of Internet banking services made available through the Internet to the customers of the banks. 4. Adoption rates of Internet banks The survey results reveal that, in July 2008, all the banks in India had websites, of which 51 allowed transactions to be initiated through the Internet, which represents nearly 62 percent of total banks. However, the adoption rates across individual bank categories are not uniform. Adoption rates for transactional websites are highest in public sector and are lowest in foreign banks, thus providing a stiff competition between the private and public sector Internet banks. Among the private sector banks,

Internet banking

91

92

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Service code

1.

2.

3.

4.

5. 6. 7. 8. 9. 10. 11.

12.

13.

14. 15. 16.

17. 18. 19. 20. 21.

Table II. List of Internet banking services Denition Points 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 (continued) One gets to know account balance and can view/download account statement Transfer ones money from one branch in a particular city to any other branch in some other city Transfer ones money from one branch in a particular city to another persons account at any other/same branch in some other/same city Delivery of bills (or invoices), over the Internet and also affords consumers the opportunity to review and pay these items electronically Apply for a new account online Purchase insurance policies online Enables to see the Demat accounts details and transactions Offer brokerage services online Purchase of investments online Apply for a loan online Subscribe for e-mail or SMS alerts, e.g. for minimum balance etc. Subscribe for receiving a monthly statement of account by e-mail Requests/orders/instructions for cheque book, demand draft, stopping payment on a cheque etc. Apply for a new deposit online The bank can pay for ones credit card expenses/payments Know rate of interest on deposits and loan schemes in force in the bank Know the notional rates of some of the foreign currencies Sale and purchase of securities online Pay e-shopping bills through Internet banking Provides a commentary on market conditions Display status of the cheque as to whether paid/unpaid/ stopped

Internet banking service

Balance enquiry

Funds transfer (inter-branch)

Third-party funds transfer

Bills payment

Account opening application Insurance Demat holdings Brokerage Investments Loan applications Receive alerts

Monthly statement by e-mail

Requests/standing orders/instructions

Deposit applications Credit card operations/payments Interest rates updates

Foreign exchange rates updates Trading online Online shopping Market watch Cheque status inquiry

Service code

Internet banking service

Denition

Points 1 1 1 1 1 1 1 1 1 30

22.

TDS enquiry

23.

One view account

24. 25.

Charity online Online tax payment

26. 27. 28. 29.

Online ticket booking Customer correspondence Change password and user prole Demonstration of I-banking

30.

Corporate Internet banking

Inquire TDS deducted by the bank for the current nancial year or previous nancial year View the details of accounts maintained at different banks through one account Pay charity or donations online Online payment of central excise and service tax or direct tax Book railway tickets online E-mail correspondence between the customer and the bank One can change the passwords and prole anytime Provide demonstration of Internet banking services over banks website Internet banking services to corporate customers, i.e. online corporate cash management

Maximum total for Internet banking services

Internet banking

93

Table II.

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new private sector banks (100 percent) lead the old private sector banks (61 percent) and among the public sector banks, SBI group (100 percent) leads the nationalised banks (95 percent) in providing Internet banking (Table III). 5. Analysis of Internet banking services Tables IV show the detailed results of the Internet banking services examination for sample banks during the survey period. The table shows the percentage of Internet banks offering each of the Internet banking services. The four categories of Internet banking services, i.e. view-only functions, account control functions, applications for new banking services and more advanced transactions have been discussed in detail. 5.1 View-only functions Table IV shows that all the transactional Internet banks irrespective of their category, offer the view-only function, i.e. account balance enquiry. Egland et al. (1998) showed that most Internet banks offered the services of balance inquiry. That generalisation applies even in case of India. Only 8 percent of Internet banks reviewed provides monthly statement by e-mail. A total of 16.7 percent of the foreign banks and 17.6 percent of banks in the private sector provide monthly statement by e-mail. While none of the Internet banks in public sector offer the same. All the transactional Internet banks provide interest rates upon their websites while only 24 percent of the banks provide foreign exchange updates. Again public sector banks lag behind in offering this service. Only 6 percent of private sector Internet banks provide an overview of bank accounts in different banks at one instance, i.e. one view account. Only 14 percent of Internet banks provide a commentary upon market uctuations. No public sector bank offers this service. 67 percent of the foreign banks and 47 percent of private banks provide demonstration of Internet banking on their
Internet banks as a percentage of banks in category 72.0 100.0 61.1 96.4 100.0 95.0 20.7 62.2

94

Bank Private sector banks Newa Oldb Public sector banks SBI Groupc Nationalisedd Foreign banks All banks

Number of banks 25 7 18 28 8 20 29 82

Number of banks with websites 25 7 18 28 8 20 29 82

Number of Internet banks 18 7 11 27 8 19 6 51

Table III. Adoption rates of Internet banks in India

Notes: aIncludes banks established after the liberalisation reforms as recommended by Narsimham Committee in 1991; bIncludes banks established before the liberalisation reforms as recommended by Narsimham Committee in 1991; cIncludes State bank of India and its seven subsidiaries; dIncludes banks nationalised by the government in 1969 and 1980 and also includes IDBI Bank Ltd. Earlier it was a private sector bank. It has been merged with its parent IDBI Ltd and the latter has been included in the Public sector bank category with effect from 11 October 2004 Source: Websites of the individual banks (accessed during July 2008), annual reports of the respective banks and bank communications

All banks 100.0 8.2 100.0 24.5 14.3 2.0 42.9 85.7 83.7 59.2 95.9 87.8 51.0 18.4 100.0 100.0 30.6 32.7 51.0 4.1 22.4 4.1 28.6 26.5 24.5 22.4 18.4 32.7 46.9 77.6 93.9 59.2 49.0 0.0 11.5 0.0 15.4 15.4 15.4 7.7 7.7 50.0 53.8 80.8 92.3 61.5 42.3 0.0 12.5 0.0 12.5 37.5 12.5 0.0 12.5 37.5 100.0 100.0 100.0 100.0 37.5 0.0 11.1 0.0 16.7 5.6 16.7 11.1 5.6 55.6 33.3 72.2 88.9 44.4 44.4 11.8 29.4 11.8 35.3 23.5 35.3 41.2 29.4 17.6 41.2 70.6 94.1 47.1 47.1 15.4 19.2 26.9 0.0 0.0 12.5 22.2 27.8 33.3 35.3 35.3 70.6 57.1 42.9 71.4 28.6 57.1 28.6 85.7 57.1 71.4 85.7 57.1 42.9 57.1 100.0 100.0 71.4 71.4 84.6 80.8 61.5 100.0 96.2 38.5 11.5 100.0 100.0 100.0 100.0 100.0 100.0 100.0 75.0 0.0 100.0 100.0 77.8 72.2 44.4 100.0 94.4 22.2 16.7 100.0 100.0 82.4 82.4 47.1 88.2 70.6 64.7 29.4 100.0 100.0 100.0 100.0 71.4 100.0 85.7 85.7 42.9 100.0 100.0 70.0 70.0 30.0 80.0 60.0 50.0 20.0 100.0 100.0 20.0 30.0 70.0 0.0 10.0 0.0 0.0 0.0 10.0 10.0 10.0 0.0 30.0 50.0 90.0 30.0 30.0 100.0 100.0 83.3 100.0 100.0 66.7 16.7 100.0 100.0 83.3 83.3 100.0 0.0 50.0 0.0 66.7 83.3 33.3 33.3 33.3 0.0 33.3 83.3 100.0 83.3 83.3 100.0 0.0 100.0 7.7 0.0 0.0 42.3 100.0 0.0 100.0 0.0 0.0 0.0 0.0 100.0 0.0 100.0 11.1 0.0 0.0 61.1 100.0 17.6 100.0 41.2 23.5 5.9 47.1 100.0 28.6 100.0 57.1 57.1 14.3 57.1 100.0 10.0 100.0 30.0 0.0 0.0 40.0 100.0 16.7 100.0 50.0 50.0 0.0 33.3

All

Public sector banks SBI group Nationalised banks All Foreign banks

Private sector banks New private Old private

1. 2. 3. 4. 5. 6. 7.

8. 9. 10. 11. 12. 13. 14. 15. 16.

17. 18. 19.

20. 21. 22. 23. 24. 25. 26. 27. 28. 29. 30.

View-only functions Balance enquiry Monthly statement by e-mail Interest rates updates Foreign exchange rates updates Market watch One view account Demonstration of I-banking Action/account control functions Funds transfer (self account) Third party funds transfer Bills payment Requests/standing instructions Cheque/enquiry status Receive alerts TDS enquiry Customer correspondence Change password and user prole Applying for new banking services Account opening application Loan applications Deposit applications More advanced transactions Insurance Demat holdings Brokerage Investments Credit card operations/payments Trading online Online shopping Charity online Online tax payment Online ticket booking Corporate Internet banking Privacy statement Basic Premium

Source: Websites of the individual banks (accessed during July 2008)

Internet banking

95

Table IV. Key services offered by transactional Internet banks (percentage of Internet banks)

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websites. In general, foreign and private banks are more likely to offer general view functions of Internet banking except the balance enquiry and interest rates updates, where there is no difference among the categories of the banks. 5.2 Action/account control functions A total of 85.7 percent of the banks reviewed offer the facility of transferring funds between accounts while 83.7 percent of the banks offer the facility of transferring funds between third parties accounts. A total of 59 percent of the banks reviewed provided the opportunity of paying bills to third parties. All the banks irrespective of category have shown a high performance in offering the services of funds transfer and bill payments over the survey period. A look at Internet banking services beyond balance enquiry, funds transfer and bill payment reveals the pattern of what is offered by banks of different categories. As far as the services of providing customer correspondence and change of passwords are concerned there is no difference among the banks during the period of second survey. A total of 96 percent allow the creation or amendment of standing orders and request handlings (cheque book requests etc). A total of 100 percent of foreign and public and 88 percent of banks in private sector offer this service. A total of 51 percent of the banks allow alerts through e-mails or on mobiles. A total of 65 percent of private banks, 67 percent of foreign banks and 38.5 percent of public sector offer this service. Among the public sector banks, poor performance of nationalised banks in offering this service may be attributed to this lower percentage. A total of 88 percent of the banks allow enquiry about status of cheque. Banks have shown a poor performance in the provision of online TDS enquiry. In general, a stiff competition from private and foreign banks has forced the public sector banks to offer more control functions of Internet banking. 5.3 Applying for new banking services Relatively few banks offer the facility of making application and enabling new services. As the RBI does not permit the banks to allow account opening on Internet, however, at least the customer should be allowed to feed in personal details so that the process is expedited. Only 30.6 percent of the banks allow the customers to feed in personal details for applying to open a new account. A total of 83 percent of foreign and 35 percent of the private sector banks (57 percent of new private sector banks) offer this service. Public sector banks have shown a poor performance in offering this service. None of the banks in SBI group offer this service. A total of 70.6 percent of the private banks and 100 percent of the banks in foreign sector allow the customers to apply online for deposits (xed deposits, saving deposits etc.). This drops to only 27 percent for the banks in public sector. A total of 32.7 percent of the banks offer online loan applications, among these, 83 percent of foreign banks, 35 percent of private sector and only 19 percent of public sector allows online applications for loans. Thus again providing a hedge of foreign and private banks over the public sector banks. 5.4 More advanced transactions Table IV also contains information on the extent to which particular business lines brokerage, investments, demat, credit card payments, trading, shopping and insurance services were offered online. Private sector banks were more likely to offer insurance services, brokerage, trading online and shopping online compared with other

96

categories. Some of the Internet banks have also started offering certain new services through Internet banking like tax payment, charity payment and railway ticket booking online. Public sector banks showed a tremendous performance in the provision of the services of tax payment and railway ticket booking online. 5.5 Corporate Internet banking Online corporate Internet banking (where businesses use the Internet to manage their bank balances) has been a growth area. This may reect recognition by banks that business customers can be particularly active users of online banking services and may be among the banks more protable customers. The service is available on 77.6 percent of the transactional websites of banks. A total of 100 percent of new private sector banks and banks in SBI group offer this service. Only old private sector Internet banks lag behind in offering this service. 5.6 Website privacy statements Both banks and their customers stand to benet substantially from the increased ability to collect and analyse information obtained over the Internet. In particular, both can benet from the collection and integration of large amounts of personal information that enhance the ability of banks to offer a wide range of products tailored to individual demands. But the collection, analysis, and distribution of information raise questions related to protecting personal privacy. A fundamental step many banks are taking to address online privacy is to post a statement of their policies about the collection and use of customer information. The database includes information on the number of transactional banks that had such a statement on their websites (see Table IV). More than 90 percent of transactional Internet banks included a privacy policy statement on their websites. Foreign banks were more likely to post an on-line privacy policy than public and private sector banks. Indeed, 100 percent of the foreign banks included on their websites a statement about the collection and use of customer information, and almost 94 percent of private sector banks did so, as compared with 92 percent of the public sector banks. All Internet banks in new private sector and SBI group included on their websites a privacy statement. To acquire a clearer picture of the typical range of Internet services available at banks of different sizes, two categories of Internet banking services were dened. BASIC Internet banking is dened as the three core Internet banking services: balance inquiry, funds transfer and bill payment. Premium Internet banking is dened as basic plus at least three other transactional services. Table IV shows the proportion of banks by bank categories that offer only basic services to those that offer premium Internet banking products. Almost 83 percent of Internet banks in foreign sector and nearly 47 percent in new private sector offer basic as well as premium Internet banking services. On the other hand, 61 percent of Internet banks in public sector offer basic Internet banking services, while only 42 percent offer premium services. A noteworthy result emerges in SBI group. All the Internet banks in SBI group offer basic services, while a very few offer premium services. It means that although public sector banks can establish an online presence, they remain less likely to compete with foreign and new private sector banks on the basis of the range of offerings. To the extent that the variety of products is a key to attracting and maintaining a strong customer base, public sector banks may be at a disadvantage.

Internet banking

97

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98

6. Extent of Internet banking services Table V shows the extent of Internet banking services of 51 Internet banks based on the information of key Internet banking services, drawn from websites of the banks. The table shows that ICICI Bank Ltd and HDFC Bank Ltd. offer maximum services through Internet banking with an extent of nearly 90 percent. After this, come foreign banks, i.e. ABN Amro and Citi Bank that score around 80 percent. UTI Bank Ltd. stands at third rank with an extent of nearly 77 percent while Kotak Mahindra Bank Ltd. stands at fourth place with an extent of nearly 73 percent. Thus, the rst four ranks are acquired by new private and foreign Internet banks. The fth rank is jointly shared by public sector banks, i.e. State Bank of India and Union Bank of India, with nearly 67 percent of services. The table shows that new private and foreign banks show higher levels of Internet banking services. The remaining banks are in their early stages of development and introduction of Internet banking services. 7. Factors affecting the extent of Internet banking services Depth of adoption is a relatively new construct dened as the extent to which a rm exploits an innovations potential technological capabilities (Cooper and Zmud, 1990; Ettlie and Reza, 1992). After exploring the various Internet banking services offered by Internet banks factors, the next step is to investigate factors that explain which banks choose to offer a relatively wide range of Internet banking services. The purpose of this section is to explore the factors that affect the extent of Internet banking services being offered by Internet banks. The sample consists of 51 banks that are providing Internet banking services in India in July 2008 (as per the results explored in Table III). Hence, the banks that had not adopted Internet banking or providing informational websites only were dropped. The nancial data have been compiled as on 31 March 2007. 7.1 Explanatory variables Multiple regression analysis has been used to nd the factors affecting the banks extent of Internet banking services. The dependent variable in the regression analysis is extent that shows the extent of Internet banking services offered by each Internet bank (see Table V). Denition and hypothesis development for the variables incorporated in the study are discussed below. 7.1.1 Size. Size is an important variable affecting the banks decision to adopt a wide array of Internet banking services. This is partly because it is relatively easy to observe and partly because it is typically taken as a proxy for all kinds of things: large rms are sometimes thought to be more capable (they may have higher quality or more technically able people on their staff, they may be freer from nancial constraints, they may have market power or be more inclined to strategically pre-empt smaller rivals, they may have economies of scale and scope in R&D activities and in the application of their results and being able to take greater risks, the new innovation may be complementary with other activities they undertake or be capable of being applied to a wider range of activities than would be the case if the adopting rm were specialised, and so on) and for this reason, they may use innovations more intensively (i.e. on a large scale) and so earn more prots from adopting than smaller rms would. Thus, the expected sign is positive on this coefcient.

Internet banks A. Public sector banks SBI Group 1 State Bank of India 2 State Bank of Hyderabad 3 State Bank of Indore 4 State Bank of Bikaner & Jaipur 5 State Bank of Mysore 6 State Bank of Patiala 7 State Bank of Saurashtra 8 State Bank of Travancore Nationalised banks 9 Allahabad Bank 10 Andhra Bank 11 Bank of Baroda 12 Bank of India 13 Bank of Maharashtra 14 Canara Bank 15 Central Bank of India 16 Corporation Bank 17 Dena Bank 18 IDBI 19 Indian Bank 20 Indian Overseas Bank 21 Oriental Bank of Commerce 22 Punjab National Bank 23 Syndicate Bank 24 UCO Bank 25 Union Bank of India 26 United Bank of India 27 Vijaya Bank B. Private sector banks New private banks 1 Centurion Bank of Punjab Ltd 2 HDFC Bank Ltd 3 ICICI Bank Ltd 4 IndusInd Bank Ltd 5 Kotak Mahindra Bank Ltd 6 UTI Bank Ltd 7 YES Bank Ltd Old private banks 8 The Bank of Rajasthan Ltd 9 City Union Bank Ltd 10 Development Credit Bank Ltd 11 The Dhanklakshmi Bank Ltd 12 The Federal Bank Ltd 13 ING Vysya Bank Ltd 14 The J&K Bank Ltd 15 The Karnataka Bank Ltd

Extent (in percentage)

Internet banking

66.7 43.3 43.3 43.3 40.0 40.0 36.7 40.0 33.3 33.3 43.3 33.3 26.7 50.0 30.0 53.3 26.7 60.0 33.3 23.3 46.7 50.0 43.3 43.3 66.7 36.7 23.3

99

46.7 90.0 90.0 56.7 73.3 76.7 43.3 33.3 23.3 36.7 16.7 50.0 46.7 16.7 60.0 (continued)

Table V. Extent of Internet banking services

INTR 20,1
16 17 18

Internet banks Lakshmi Vilas Bank Ltd Karur Vysya Bank Ltd South Indian Bank Ltd

Extent (in percentage) 40.0 40.0 43.3 80.0 43.3 80.0 40.0 60.0 63.3

100

C. Foreign banks 1 ABN Amro Bank 2 Abu-dhabi Commercial Bank 3 Citibank 4 Deutsche Bank 5 Hongkong & Shanghai Bank 6 Standard Chartered Bank

Table V.

Note: There are two foreign banks that offer Internet banking to corporate customers only (hence not included in survey) Source: Websites of the individual banks (accessed July 2008)

7.1.2 Age. The coefcient of age is expected to be negative, because new banks are more exible, do not have a legacy system to deal with and face smaller managerial obstacles to the adoption of the new technology. New banks may nd it cheaper to install Internet banking technology in a package with other computer facilities compared to older banks that must add Internet banking to legacy computer system (Ang and Koh, 1997; Sullivan and Wang, 2005). Giunta and Trivieri (2004) also propounded that the younger rms prove more ready to embrace innovative developments. 7.1.3 Experience. It is plausible that banks will expand their services as they gain experience in offering Internet banking. Hence a variable, experience, has been included, which represents the number of years since the bank adopted Internet banking. The variable may be considered a crude proxy for both accumulation of experience in general and reductions in the perceived risk of investments in Internet banking in particular. Hence, the Internet banking experienced banks would be expected to offer a wide array of Internet banking services. The expected sign on this variable is positive. 7.1.4 Deposits. Sullivan (2000) argued that a bank can generate a large number of Internet transactions if it has a sizeable customer base. As a proxy for customer base, deposits of the bank has been chosen. On the other hand, Furst et al. (2002a) have shown that among Internet banks, those that place less emphasis on traditional funding tend to offer a wider range of Internet banking services, which is consistent with a more innovative business approach. Therefore, the sign expected on this variable is ambiguous. 7.1.5 Type of bank. To account for nature of bank category, dummy variable private is included which takes the value of 1 if the bank happens to be a private bank (whether domestic or foreign) and takes a value of zero otherwise. The expected sign on private is positive as the banks with private ownership are supposed to offer a wide range of Internet banking services. The explanatory variables with their labels and expected signs that have been used to explain the relationship with the extent of Internet banking services are given in the Table VI.

Labels

Name

Denitions Percentage of Internet banking services to total Internet banking services The natural log of the total assets The natural log of age of banks Number of years since the bank adopted Internet banking as on 2007 The ratio of total deposits to total funds Dummy for the banks in private sector (both domestic and foreign)

Expected sign

Internet banking

Dependent variables Y1 Extent Independent variables X1 Size X2 Age X3 Experience X4 X5 Deposits Private

101
Table VI. Description of variables affecting the extent of Internet banking services

7.2 The model Multiple regression analysis has been used to nd the factors affecting the banks extent of Internet banking services. The dependent variable in the regression analysis is extent that shows the extent of Internet banking services offered by each Internet bank. Following model has been used to examine the relationship between the extent and the other explanatory variables affecting it: EXTENTi b1 b2 X 1 b3 X 2 b4 X 3 b5 X 4 b6 X 5 1i 1

where EXTENTi is the measure of range of Internet banking services for banki. In separate analyses of various bank categories, ownership dummy (private) will not be included, hence, the regression equation (1) will be modied as: EXTENTi b1 b2 X 1 b3 X 2 b4 X 3 b5 X 4 1i The parameters are estimated by the method of ordinary least square (OLS). 7.3 The results Table VII presents the results of the multiple regression model, both for all banks and for banks under public (further categorised into nationalised and SBI group), private (further categorised into new private and old private) and foreign banks. Looking at results for all banks rst, larger banks offer a wider range of Internet banking services than small banks. As expected, the coefcient on experience is positive, indicating that banks with greater experience in Internet banking offer a wider range of services. A very noteworthy result is with regard to deposits. The statistically signicant negative coefcient on deposits indicates that, among Internet banks, those that place less emphasis on traditional funding offer a wider range of Internet banking services, which is consistent with a more innovative business approach. Age did not turn out to be a signicant variable affecting expanded Internet banking services. The statistically signicant positive coefcient on private indicates that private banks including foreign banks offer a wide range of Internet banking services in comparison to public banks. However, the results of the regression estimation are not similar for the bank categories sample to those for the all-bank sample. In case of public sector banks, only size of the bank is signicant variable. All other variables are found to be insignicant. 2

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Intercept Size Age Experience Deposits Private R-squared Adjusted R-squared F-statistics Number

Notes: The gure in bracket denotes the probability (p) value; *Signicant at the 10 percent level; * *Signicant at the 5 percent level; * * *Signicant at the 1 percent or better level

Table VII. Factors affecting the extent of Internet banking services

Public sector banks All banks ( b) All ( b) Nationalised ( b) SBI Group (b) All (b) Private sector banks New (b) Old ( b) Foreign banks (b) (0.334) 2 3.992 (0.953) (0.839) 6.013 (0.776) (0.695) 37.640 (0.594) (0.958) 0.648 (0.951) (0.297) 2 0.404 (0.719) 0.800 0.000 1.00 6

2 9.903 (0.686) 7.766 (0.844) 2 37.753 (0.573) 86.584 (0.248) 2 7.664 (0.916) 155.626 (0.785) 426.025 17.683 * * * (0.000) 13.528 * (0.053) 20.467 (0.155) 13.263 * * (0.035) 25.112 * * (0.044) 2 22.005 (0.884) 4.384 2 5.257 (0.275) 1.383 (0.915) 8.238 (0.682) 2 7.587 (0.363) 2 8.731 (0.345) 2 25.538 (0.756) 9.281 2.495 * * * (0.008) 1.316 (0.288) 0.848 (0.598) 1.134 (0.284) 1.228 (0.568) 13.203 (0.720) 2 0.145 2 0.336 * * (0.027) 2 0.404 (0.088) 2 0.425 (0.155) 2 0.989 (0.165) 2 0.450 (0.447) 2 0.458 (0.679) 2 4.320 13.128 * * * (0.007) 0.651 0.419 0.418 0.971 0.745 0.816 0.313 0.612 0.313 0.252 0.931 0.666 0.447 2 0.144 *** ** * ** *** 16.78 3.96 2.51 24.77 9.47 2.21 0.685 51 27 18 8 18 7 11

In the sub-category of nationalised banks, none of the variables turned out to be signicant. In case of SBI group banks, banks that are large, are more inclined to offer a wide range of Internet banking services. In case of private (domestic) banks, as expected, size of the bank is positive and signicant showing that large banks offer a wide range of Internet banking services than small banks. All other variables are found to be insignicant. In the sub-category of private banks, none of the variables is found to be signicant. In case of foreign banks, all variables are found to be insignicant. 8. Conclusions Internet banking has remained a nucleus issue of various studies all over the world. However there has constantly been a literature gap on the issue in India. The purpose of this paper is to help ll signicant gaps in knowledge about the Internet banking landscape in India. The paper presents data, drawn from a survey of commercial banks websites, on the number of banks that offer Internet banking and on the products and services they offer. The survey results reveal that, during the period of July 2008, 82 banks in India had websites, of which 51 allowed transactions to be initiated through the Internet in one form or the other, which represents nearly 62 percent of total sample banks. Most of the market is still untapped in India. The gap exists due to low adoption of Internet banking by old private sector and foreign banks. Private sector banks particularly new private banks and foreign Internet banks lead public sector Internet banks in offering a wide range and more advanced services of Internet banking. As most of the banking institutions in India have only recently started to offer Internet banking, there is a lot of scope for these institutions to expand their Internet banking services to have a more sophisticated customer base. It should also be remembered that only quantity of services will not serve the purpose, unless it is accompanied by quality also. The rate at which innovations are adopted by rms constitutes an important part of the process of technological change. After adopting a new technology, an important decision emerges before the rm management, i.e. the extent to which the capabilities of the new technology will be exploited labelled as depth of adoption. The decision is impacted by a number of inuences, notably individual, organisational, technological and environmental and being aware of these factors and their importance is a potential decision opportunity for rm management. Through this study, an effort has been made to identify various bank characteristics which affect the extent of Internet banking services offered by Internet banks and being aware of these factors and their importance is a potential decision opportunity for bank management. The results of multiple regressions, examining the factors affecting the extent of Internet banking services, revealed that among banks that offer Internet banking, larger banks and banks that have offered this service for a longer time offer a wider range of services over the Internet. Large banks have more aggressive plans to offer Internet banking services in the future than smaller institutions. Also, banks relying less on deposits for nancing, offer a wide range of services over the Internet, which is consistent with a more innovative business approach. Private banks offer a wider range of Internet banking services. Among various bank categories, size of the bank is the most prominent variable affecting the extent of Internet banking services.

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Jayawardhena, C. and Foley, P. (2000), Changes in the banking sector: the case of Internet banking in the UK, Internet Research: Electronic Networking Applications and Policy, Vol. 10 No. 1, pp. 19-30. Malhotra, P. and Singh, B. (2006), The impact of Internet banking on banks performance: the Indian experience, South Asian Journal of Management, Vol. 13 No. 4, pp. 25-54. Migdadi, Y.K.A. (2008), The quality of Internet banking service encounter in Jordan, Journal of Internet Banking and Commerce, Vol. 13 No. 3. Sathye, M. (1997), Internet banking in Australia, The Journal of Internet Banking and Commerce, Vol. 2 No. 4. Singh, B. and Malhotra, P. (2004a), Internet banking: a comparative study of private and foreign banks in India, Journal of Applied Economics and Management, Vol. 2 No. 1, pp. 33-52. Singh, B. and Malhotra, P. (2004b), Adoption of Internet banking: an empirical investigation of Indian banking sector, The Journal of Internet banking and Commerce, Vol. 9 No. 2. Suganthi, R., Balachandher, K.G. and Balachandran, V. (2001), Internet banking patronage: an empirical investigation of Malaysia, The Journal of Internet Banking and Commerce, Vol. 6 No. 1. Sullivan, R.J. (2000), How has the adoption of Internet banking affected performance and risk at banks? A look at Internet banking in the 10th Federal Reserve District, Financial Industry Perspectives, Federal Reserve Bank of Kansas City, Kansas City, MO, December, pp. 1-16. Sullivan, R.J. (2001), Performance and operation of commercial bank web sites, Financial Industry Perspectives, Federal Reserve Bank of Kansas City, Kansas City, MO, December, pp. 23-33. Sullivan, R.J. and Wang, Z. (2005), Internet banking: an exploration in technology diffusion and impact, working paper 05-05, Payments System Research Department, Federal Reserve Bank of Kansas City, Kansas City, MO. Thulani, D., Tofara, C. and Langton, R. (2009), Adoption and use of Internet banking Zimbabwe: an exploratory study, Journal of Internet Banking and Commerce, Vol. 14 No. 2. Vijayan, P. and Shanmugam, B. (2003), Service quality evaluation of Internet banking in Malaysia, The Journal of Internet Banking and Commerce, Vol. 8 No. 1. Yeap, B.H. and Cheah, K.G. (2005), Do foreign banks lead in Internet banking services?, The Journal of Internet Banking and Commerce, Vol. 10 No. 2. Further reading Agarwal, N., Agarwal, R., Sharma, P. and Sherry, A.M. (2003), E-banking for comprehensive e-democracy: an Indian discernment, The Journal of Internet Banking and Commerce, Vol. 8 No. 1. Courchane, M., Nickerson, D. and Sullivan, R.J. (2002b), Investment in Internet banking as a real option: theory and tests, The Journal of Multinational Financial Management, Vol. 12 Nos 4/5, pp. 347-63. DeYoung, R. (2001), The nancial performance of pure play Internet banks, Economic Perspectives, Vol. 25 No. 1, pp. 60-75. DeYoung, R. (2005), The performance of Internet-based business models: evidence from the banking industry, Journal of Business, Vol. 78 No. 3, pp. 893-947. Hasan, I., Maccario, A. and Zazzara, C. (2002), Do Internet activities add value? The Italian bank experience, working paper, Berkeley Research Center, New York University, New York, NY.

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Hernando, I. and Nieto, M.J. (2005), Is the Internet delivery channel changing banks a, performance? The case of Spanish banks, unpublished manuscript, Banco de Espan Madrid. Kaushik, M. and Dhunna, M. (2006), Internet banking: customers prole, Amity Management Analyst, Vol. 1 No. 1, pp. 61-74. Narayanan, V. (2000), Nuts and bolts of Internet banking, Business Line, July 16. Nickerson, D. and Sullivan, R.J. (2003), Financial innovation, strategic real options and endogenous competition: theory and an application to Internet banking, working paper WP 03-01, Payments System Research, Federal Reserve Bank of Kansas City, Kansas City, MO. Rao, G.R. and Prathima, K. (2003), Internet banking in India, Mondaq Business Brieng, London, April 11. Sathye, M. (2005), The impact of Internet banking on performance and risk prole: evidence from Australian credit unions, The Journal of International Banking Regulation, Vol. 6 No. 2. Corresponding author Pooja Malhotra can be contacted at: pkwatra@gmail.com

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