Technology as the differentiator has become the driver of the Indian banking business since the past decade with the financial sector reforms providing firm foundation.
The banking industry has been significantly influenced by evolution of technology. The growing applications of computerised networks to banking reduced the cost of transaction and increased the speed of service substantially. The nature of financial intermediaries made banks improve their production technology by focusing on distribution of products. In other words, the evolution of banking technology has been mainly driven by changes in distribution channels as we see evidence from over-the-counter (OTC), automated-teller-machine (ATM), phone banking, tele-banking, pc-banking and most recently internet banking (IB).
Network effects and standardisation have recently become one of the most popular topics as the number of internet users has increased substantially and the application of internet to e-commerce and finance has become evermore versatile. In particular, network effect and standardisation are arguably most common reasons for concentrated market structures in technology intensive industries. Hence, it seems to be natural to consider progress in banking technology as a reason for market consolidation given the nature of network in banking. However, we lack studies on consumer behaviour relative to vast amount of literature on firms’ behaviour regarding technology adoption and market structure.
The major challenge for banks is to fall in line with the emerging scenario and adopting the require technology to provide stake-of-the-art services to the customers. Technology should ultimate results in better customer service, low cost and quick delivery.
Although consumers have had an interest in advanced electronic banking services and tended to have various financial sources or tools for money transactions, they have not quickly changed their main propensity to use banking services or goods that they are already familiar with. For example, new electronic banking goods or services have not quickly substituted for traditional ones and non-electronic banking goods or services. Although various electronic banking services have emerged since the ATM was introduced 30 years ago, a lot of consumers still use checks as a primary source for money transactions, and banks still have a lot of “bricks and mortar” branches in the market.
One might remember the days when he/she physically had to go to a bank branch to deposit or withdraw money and get a bank statement book manually updated by a teller over the counter (OTC). With the introduction of computer networks, a networked printing machine started replacing the manual update of statements. Then, cash dispensers (CDs) and automated teller machines (ATMs) were introduced to facilitate withdrawals, deposits and even transfers accommodating mobility in much wider geographical areas. Phone banking was a revolutionary concept but one of the most substantial changes in banking technology is the recent introduction of internet banking.
As banking technology has focused on reducing cost of distribution, new technologies in banking are characterised as a process innovation by making customers handle their own banking without going to bank tellers. It also allows non-customers to visit virtual banks via public web-network while phone-banking or PC-banking provide only closed network limited to the existing clients. Banking competition is assessed in three different ways, price (interest rate), quantity (deposit and loan size) and quality (reputation-relationship). Traditionally banks have competed in branch network (quantity) to increase the number of clients, i.e. the deposit and loan size. However, with the benefit of new technologies, the quantity competition seems to be replaced by the network competition in ATM or internet banking.
1.2 BACKGROUND OF...