Challenges to Internet E-Banking

offensive can then be carried over to the domain of traditional bricks-and-mortar retail banking, and educate customers on the comparative advantage of switching over to the Internet.

Given the open nature of the Internet, transaction security is likely to emerge as the biggest concern among the e-bank’s (actual and potential) account holders. Since transactions risk would create a significant barrier to market acceptance, its manage-ment and control are crucial for business reputation and the promotion of consumer confidence as well as operational efficiency. Before launching new products and serv-ices, it is therefore imperative for the e-bank to implement measures to safeguard client assets and information (for example, a confidential database with firewalls and stringent access control), and to advertise as widely as possible the introduction and expert endorsement of initiatives to maximize transaction security.

Since cost efficiency is a necessary condition in price competition, a significant strategic advantage would follow from the ability to supply financial products and services over the Internet at lower cost compared to traditional banking (and from rel-ative cost reductions in the future). Moreover, by going on-line banks can more fully exploit the increased efficiency from new IT, allowing more branch and counter resources to be shifted towards sales, marketing, dedicated financial services and other higher value-added activities. Another important factor to consider is demographics. Commercial banks not currently offering Internet e-retail banking are likely to deprive themselves of future access to profitable, IT-seasoned customer segments. Computer-literate Internet users are generally young and well educated. This age group will attain economic maturity in the near future, to be followed by even more technologically aware and cyberspace-oriented individuals. To exploit demographic change and increase market share, financial institutions must seek to attract and cap-ture such clients as early as possible by supplying at low cost technologically innova-tive and sophisticated products and services such as globally mobile e-banking and e-financial transactions over the Internet.

Initiatives to create product-service differentiation, build and enhance confidence in the security of Internet e-retail banking, and exploit shifts in demography are likely to require time and effort over many years. Meanwhile, as long as bricks-and-mortar branches and the telephone remain as important delivery channels, the growth of Internet e-retail banking would be very much tied to its comparative advantages against these close substitutes. Though the Internet allows a wide array of product and service options to be supplied at relatively low cost, many individuals are still attracted by traditional banking as most comfortable way of handling money. Other things being equal, the resulting premiums on over-the-counter and person-to-person contact and confirmation would tend to hinder the growth of virtual banking. Com-mercial banks offering products and services over the Internet are often also seeking to downsize branch networks. However, given that physical outlets can more effec-tively serve customers with lower IT awareness and acceptance, they must be main-tained for the time being. In addition, since dedicated fees are often not charged, Internet e-retail banking itself would not generate significant direct revenue over the short run. Instead, traditional banking must be relied upon to continue to earn money, while financial innovations over the Internet draw in new accounts and enable the e-bank to tap into a wider customer base and create new opportunities in lending and funding.

COMMUNICATIONS OF THE ACM December 2003/Vol.46,No.12ve249

For the duration, the optimal development strategy for e-banks is likely to be the cultivation of the demand side along the paths of least resistance, in particular as regards consumer perceptions of transaction security, transaction accuracy, user-friendliness, and network speed [1]. In the empirically most important areas of trans-action security and accuracy, encryption protocols such as the Secure Sockets Layer (SSL) and Secure Electronic T ransactions (SET) have been widely adopted by e-banks. There is, however, a lingering resistance on the part of culture-bound indi-viduals accustomed to ‘physical’ transactions, so that efforts to expand e-retail bank-ing over the Internet must (among other things) surmount a perceived technological bias. Given such considerations, we submit that overall the greatest challenge facing Internet e-retail banking at the present time is not so much the application of new technology on the supply side, but the enhancement of consumer acceptance on the demand side.

Reference

1.Liao, Z. and Cheung, M.T. Internet-based e-banking and consumer attitudes: An empiri-cal study. Information and Management39. 4 (2002), . 283–295.

250December 2003/Vol.46,No.12ve COMMUNICATIONS OF THE ACM