CHAPTER ONE
INTRODUCTION
1.1 BACKGROUND TO THE STUDY
One of the gifts to humanity by technology (computer) is internet banking. This use of computers has helped in automating the banking process and has reduced backlogs and delay in bank operations. In recent times the internet has become a fast spreading service that allows customers to use their computers or any other internet enabled devices to access their accounts or specific information and possibly carry out transactions from a remote location be it their home or the workplace. Smart cards, credit cards, debit cards, ATM cards, have all helped to ease human life. Today life without these seems to be hard.
The high rate of internet penetration in recent times has redefined the playground in retail banking services. The retail banks are now offering their services majorly through their internet branches. However, the effect of internet banking on the profitability of banks has remained an issue yet to be studied.
Internet banking simply is a system of banking that allows for transactions electronically which involves the use of information communication technology to drive banking business for future and immediate goals.
Internet banking is the provision of banking services to customers using internet technology (Daniel 1999). Yet Basel Committee on banking supervision[2] defined internet banking to include the provision of small and retail value services and banking products via electronic channels, as well as a large value electronic payment and some other wholesale banking services which are all delivered electronically. Alwabel and Alsmadi [3] have another view. They expressed that internet banking varies among researchers simply because they believe internet banking refers to several types of services through which bank customers can request information or carry out banking services.
However, the revolution in the banking industry in Nigeria became obvious with the coming of technological devices to help in the delivery of quality services to customers. Introduction of these devices has driven competition in the banking industry which has in turn reduced customers’ waiting time for transactions. This innovation is powered by computers and other networking devices. The networking began with the LAN (Local Area Network) MAN (Metropolitan Area Network) and later the WAN (Wider Area Network) in Nigeria.
In general, the automation of banking services has made transactions and data processing so easy to access. This has helped for quick management decision making. Another level of benefit to this is that it ushered in what is referred to today as internet banking which has helped banks to speed up their wholesale and retail banking services. The banking industry by adopting this new technology believes that it will help banks to improve on their customer service which will endear them to their customers.
The prospects of reducing the cost of operations and increasing operating revenue actually is seen as a motivator in the investment in internet banking by banks according to Simpson[5].
However, on the other hand the adoption of internet banking has also brought notable challenges to the industry in terms of exposure to risks. Since its adoption it has been observed that the volume of deposits has increased just the way fraudulent practices experienced by Nigerian banks has increased too. This is the reason why Ovia [6] clearly stated that in the mid 1990s Nigeria’s banking scene has witnessed phenomenal changes which can be seen in the enormous volume and complexity in service delivery or product, liberalization of finance and process re-engineering in business. The effectiveness of deploying information Technology in banks therefore cannot be put to doubt. Therefore fact remains that the reality of using Information Technology in banking services is made possible by the huge bank of information which is readily available and handled by banks on daily basis. Meanwhile on the other hand, customers still carry on with the following transaction, cash deposit or withdrawal, deposition of cheques or clearance, cash transfers etc. Banks rely on updated information on credit facilities, accounts and recovery, interest, deposits, income, charges and other control of financial information and finally, profitability indices.
However, much attention researchers have not been given to this revolution championed by internet banking with regard to profitability and performance of banks.
This revolution in the Nigerian banking industry that was made possible by the adoption of internet banking has helped Nigerian banks to invest more in assets which has enabled them meet up with the recent competitive positioning.
The software used by banks is usually renewed on short term basis which incurs huge financial costs on banks. Capital providers expect that they would gain tremendous returns which may accrue from the project as information technology driven by the internet is adopted. Nigerian banks in recent times on going through annual financial reports has discovered that dividend returns are going down and other performance indicators seem to be weak contrary to shareholders’ expectations.
Finally, there seems not to be improvement on returns on assets and equity as expected.
1.2 STATEMENT OF THE PROBLEM
In a large number of literatures, recently on electronic banking and money, the researcher discovered, suffer from a narrow perspective. It is said to have ignored internet banking entirely and equates electronic money with the substitution of currency through electronic gadget like virtual money and smart cards. Freedman (2000) suggests that electronic money and internet banking is made up of 3 devices; stored value cards, access device and network cash. Internet banking simply put is the use of new access devices. This is therefore ignored. Electronic money can then be said to mean the sum total of stored value which can be in form of value cards and network money (stored up values on computer hard). What is most interesting and fortunate about this obviously popular perspective is the fact that electronic money and internet banking are no longer functions (processes) rather they are devices.
For internet banking and electronic money, within this rather narrow perspective, there are nevertheless many research works that has addressed some of the challenges facing them. Seater and Santomero(1996), Prinz and Shy (1999), Tarkka (2002), etc has presented models that has identified conditions in which alternative electronic payments substitute for cash. Some of these models has shown the indication that at least it is possible for electronic substitutes for currency to emerge successfully on a large scale though it depends largely on what the various technologies can offer and the consuming habit and taste of the potential users.
According to Berentsen (1998) substituting smart cards for currency will have impact on monetary policy. He argued that monetary policy will continue to work as before although electronic substitutes for currency will get popular. He cited that currency substitution will drive the demand for central Bank reserves largely. How monetary control would work in an economy in which Central Bank currency has been replaced completely or partially because of electronic banking substitutes was also discussed by Goodhart (2000).
Friedman (1999) pointed out that internet banking holds much possibility that an entire alternative payment system that is not under Central Bank control may arise. In an extreme variant Friedman King (1999) argued that in recent times computers are making it possible at least for banks to bypass the payment system altogether, instead using direct bilateral clearing and settlement; the responses to Friedman.
1.3 OBJECTIVES OF THE STUDY
The main objective of this study is to examine the impact of internet banking on profitability of commercial banks in Nigeria, using Fidelity bank plc as a case study. Specific objectives of the study are:
To examine the relationship between Automated Teller Machines Installed and profitability of Fidelity bank plc.
To examine the relationship Point on Sale Channels issued and profitability of fidelity bank plc.
To examine the relationship between debit/credit cards issued to customers and profitability of Fidelity bank plc.
1.4 RESEARCH QUESTIONS
In-order to achieve the stated objectives for the study the following research will be asked:
What relationship exists between automated teller machine and profitability of Fidelity bank plc?
What relationship exists between point on sale channels and profitability of Fidelity bank plc?
What relationship exists between debit/credit card issued and profitability of Fidelity bank plc?
1.5 RESEARCH HYPOTHESES
1. Ho: There is no significant relationship between automated teller machines and commercial bank profitability.
Hi: There is a significant relationship between automated teller machine and commercial bank profitability.
2. Ho: There is no significant relationship between point on sale channels and commercial bank profitability.
Internet banking decreases profitability of commercial banks.
Hi: There is a significant relationship between automated teller machines and commercial bank profitability.
3. Ho: There is no significant relationship between debit/credit card issued and commercial bank profitability.
Hi: There is a significant relationship between debit/credit issued and commercial bank profitability.
1.6 SIGNIFICANCE OF THE STUDY
The study will aid commercial banks in Nigeria to understand banking in a new dimension. Revelations from the study will highlight the various benefits of cashless banking and how these measures if properly taken can reduce operations cost and increase profitability. Apart from interest from loans and other investments commercial banks partake in, this study will also introduce a new model for banks to adopt-the customer convenience model. This model as presented in this study will enlighten managers of commercial banks on how to serve customers better while gaining their loyalty and money.
1.7 SCOPE OF THE STUDY
The study will cover internet banking investments (POS channels, ATM channels) and profits after tax of Fidelity bank PLC from 2011-2014. The study could not cover other banks due to in-adequate disclosures on Internet banking investments from these banks.
1.8 DEFINITION OF TERMS
Internet banking: is an electronic payment system that enables customers of a financial institution to conduct financial transactions on a website operated by the institution, such as a retail bank, virtual bank, credit union or building society. Online banking is also referred as Internet banking, internet, virtual banking and by other terms.
CBN: Central Bank of Nigeria
Profitability: The state or condition of yielding a financial profit or gain. It is often measured by price to earnings ratio.
Return on Asset (ROA): This shows the percentage of how profitable a company’s assets are in generating revenue.
ROE: Return on equity (ROE) measures the rate of return for ownership interest (shareholders’ equity) of common stock owners. It measures the efficiency of a firm at generating profits from each unit of shareholder equity, also known as net assets or assets minus liabilities. ROE shows how well a company uses investments to generate earnings growth. ROEs 15-20% are generally considered good.
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