Electronic Banking and Profitability of Financial Institutions

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INTRODUCTION
Background of the study
In recent times, there has been a keen competition in the delivery of financial service or products which has resulted in financial institutions, especially banks, to developing and making use of alternative delivery channels to enhance their activities, increase profitability and in all, gain competitive advantage. These activities may include: retrieving an account balance, money transfers to and from a user’s accounts, retrieving an account history. Some institutions also allow services such as stock market transactions, and the submission of standardized accounting payment files for transfers to third parties (Claessens et al., 2002). This has generated the use of alternative technological means or channels. The most recently introduced delivery channel is online or electronic banking also known as e-banking (Daniel & Storey, 1997. An online or electronic banking system provides easy means of accessing and processing financial transactions. Banks and other financial institutions have moved to e-banking in their efforts to cut costs while maintaining reliable customer service (Kolodinsky and Hogarth, 2001). It is evident that e-banking has been embraced by banks and other financial institutions in developed and developing countries. Different kinds of electronic banking systems emerge, as technology and other services or products evolves, each bringing a new dimension to the interaction between user and bank. They include Automated Teller Machine (ATM), mobile and Internet (online) banking, electronic funds transfer, direct bill payments and credit card (Gikandi and Bloor, 2010; Liaoa and Cheung, 2002). Among these E-banking facilities, the Automated Teller Machine (ATM) is the first well-known and widely adopted system that was introduced to facilitate the user access to banking activities (Nyangosi et al. 2009; Claessens et al., 2002) In Ghana, standard chartered bank is one of the first banks which introduced online or e-banking into the financial system. The bank has recently introduced its ‘iBanking’ facility which help customers to perform banking activities right away the comfort of their room or office (www.onlinebanksguide.com). Most banks are also adopting e-banking system which is state - of- the art. In addition, many banks are making what seem like huge investments in technology to maintain and upgrade their infrastructure, in order not only to provide new electronic information based services, but also to manage their risk positions and pricing (Abor, 2004). The earliest forms of electronic and communications technologies used mainly in Ghanaian banking offices were automation devices. However, Telephones, telex and facsimile were employed to speed up and make the process of servicing clients more efficient (Abor, 2004).


PROBLEM STATEMENT
The increased adoption and penetration of Internet has recently redefined the playground for financial institutions. They are now offering their services mainly through their internet branches. Traditional banking is characterized by physical decentralization, with branches scattered around populated areas to give customers easy geographical access (Ainin et al., 2005). On the other hand, E- Banking does away with the need for most visits to the bank. E-banking is characterized with some advantages to the institutions and customers such as low per unit operating cost, convenience to customers since it does not require any physical premises and low incidence of errors. However, the effect of online banking or e-banking on bank performance particularly on the bank profitability has remained an issue with little or no study in this area. The introduction of electronic banking is one main advancement in technology that has been adopted by the financial institutions. Despite all these merits, it is not very clear as to the effects of e-banking on the profitability of these financial institutions. This study attempts to...
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