An analysis of consumer adoption rates in Internet banking.

• Author: Hosein, Nasim Z.

1. INTRODUCTION

   Since the mid-1990s, there has been a fundamental shift in banking delivery channels toward using selfservice channels such as online banking. During the past years online banking acceptance has been rapid and current worldwide. Approximately 74 percent of the private banking customers in Finland are regular users of internet banking services (The Finnish Banker's Association, 2004). In general, Europe has been and still is the leader in online banking technology and usage.

   As the internet becomes more important for commerce, internet websites are playing a more central role in most companies' business plans. An especially elegant case has been made for the "Internet-only" business model in the banking industry. Such as, eliminating the need for physical branch offices this results in the reduction of overhead expenses. Banks can then use the resulting savings to reduce their loan interest rates or increase their deposit interest rates, attracting new customers without sacrificing earnings. The web-based distribution focus allows banks to enter new geographic markets without the costs of acquiring existing banks or starting up new branches, further increasing growth potential.

   Online banking in this study is defined as an internet portal, through which customers can use different kinds of banking services ranging from bill payment to making investments. Therefore banks' websites that offer only information on their pages without the option to do any transactions are not qualified as online banking services.

   The success of internet banking is determined not only by banks or government support but also by customers' acceptance of it. The customer has a great influence on the adoption of internet banking (Pikkarainen, Pikkarainen, Karijaluoto, and Pahnila, 2004). As they ultimately decide on whether they will use internet banking based on their individual needs. If the service can clearly show the benefits and how they address customers' needs, then customers are more likely to use internet banking. Previous research into internet banking has mainly focused on innovation adoption in the context of North America and Europe (Pikkarainen et al., 2004) and to some degree, other areas such as Turkey (Polatoglu and Ekin, 2001).

   However, a study on potential factors influencing internet banking adoption in different regions of the USA may provide useful insights as to what factors are critical to the customers by specific regions, as different regions throughout the USA may have different needs that determine success. The goal of this article is to increase our current understanding of the critical factors that influence online banking acceptance and usage for small banks in the Midwest regions. More accurately, online banking acceptance will be studied using the factors that are important from the success point of view, referring to the idea that consumers are using banks' information system (online banking service) directly. Hence, more knowledge on the factors that affect information systems adoption is needed in order to better understand and facilitate the acceptance.

   This article is divided into four parts: the first part contains a literature review on online banking and information systems acceptance. The second presents the research methodology used in this work. The third is comprised of the results and analysis. In this part the data is analyzed using Structured Equating Modeling (SEM). The final part consists of the conclusions and practical implications of the research.

2. LITERATURE REVIEW

   Online banking acceptance has gained special attention in academic studies during the past five years as banking journals have devoted special issues on the topic (Mukherjee and Nath, 2003). Two reasons can be established for online banking development and diffusion. First, banks can save costs by offering online banking services. It has been proven that online banking channel is the cheapest delivery channel for banking products once established (Giglio, 2002.) Second, banks can reduce their branch networks and downsize the number of service staff, which opens the way for online banking as many customers feel that branch banking requires too much time and effort. Therefore, time and cost savings and freedom from place have been found to be the main reasons underlying online banking acceptance (Howcroft, Hamilton and Hewer, 2002).

   Online banking offers many benefits to banks as well as to customers. However, comparing globally the percentage of online users is not as high in the USA as other regions of the world. There can be several reasons for this. Customers need to have access to the internet in order to utilize the service. Also new online users need first to learn how to use the service. Nonusers often complain that online banking has no social dimension, i.e. they are not served in the same way as in a face-to-face situation in a branch. And there are issues of security and privacy.

   The business benefit of the internet, according to Gow (1997), is to generate additional revenue, improve customer service, extend marketing, and increase cost saving. Banks enjoy these benefits as well. In an article entitled "Next-Generation Retail Banking" (Compaq, 2001), the business drivers for internet banking included:

   * Additional transaction revenues. Banks can derive revenues over and above their offline revenues by charging for online services and value-added services, such as providing a portal for financial services linked to short-and long-term insurers, links to stock brokers, and links to foreign banks.

   * Savings from reduced transactional costs. On the internet, customers serve themselves, negating the need for frontline staff. Savings are gained from reductions in staff, reduction in branch sizes, and reduction in consumable costs: such as paper, ink cartridges, and other stationery.

   * Opportunities for acquiring new customers. Customers looking for the flexibility and convenience offered by internet banking will be attracted to banks providing the best services. Existing customers can be sold products that they do not have in their portfolio such as a second credit card, life insurance, and home loans among others.

   * Improved ability to retain customers. Customer relationship management (CRM) can be facilitated by the data acquired and captured on the corporate database. Products and services can be customized to suit the needs of the customer or groups of customers, thus facilitating customer loyalty.

   2.1 Factors in Consumer Adoption of Internet Banking

   A generic theoretical framework, Figure 1 shows that a bank must first attract banking consumer attention to the internet banking service before the consumer will consider internet banking. However, unless the consumer has a high level of internet accessibility at home or at work, they are...