The Evolution Of Payment Systems

Published Date: 02 Nov 2017

INTRODUCTION

This chapter mainly aims at providing a selective review of the past studies done on the present research topic. In his study, Karjaluoto (2002) included that the "internet is a main delivery channel for electronic banking and its value to customers and banks is continuously increasing". The ‘security’ issue turn out to be a very important factor in encouraging or discouraging customers to use the internet banking. Factors such as Internet experiences, advantages and risks of e-banking and behavioural factors can surely be used to predict the customers’ intention of using this service. The more satisfied a customer is about the service provided by their banks, the more loyal they will be and hence they will have more trust in the systems as well.

Evolution of Payment Systems

Payment systems have been changing as we are moving into a cashless and paperless society. It is referred as being social infrastructures supporting economic activities and the financial market will require more advanced payment systems with higher safety and efficiency (Nakajima, 2012). Hoenig also included that clients are rather reluctant in using debit cards and therefore business-to-business transactions continued to be made by checks rather electronically.

Table 1: Further definition of Payment Systems and focus on Payment Systems

Payment Systems

Allowed smooth transfer of money between buyers and sellers or banks.

Considered as a social infrastructure since no transfer of money could be made without this system,

More focus on the payment systems due to:

Volume of fund transfers has increased significantly which gives rise to settlement risk.

Development of Information Technology; which further allows the payment systems to progress.

The rate at which payment systems have evolved has been remarkable. Newer ways of making payments have enabled businesses to be more innovative and creative in their way of doing businesses and therefore gaining competitive advantage for e.g. e-commerce.

History and Evolution of Internet Banking

Electronic banking can be defined as being ‘the delivery of banks' information and services by banks to customers via different delivery platforms that can be used with different terminal devices such as a personal computer and a mobile phone with browser or desktop software, telephone or digital television’ (Ragoobur, Ayrga, & Doomun, 2010). This is further illustrated in the table below.

Table 2: Examples of Electronic Banking (Ragoobur, Ayrga, & Doomun, 2010)

Form of

Banking

Descriptions

PC Banking

Installs banking software on personal computer.

Access to his or her account will be granted to the customer via that software.

Internet Banking

Clients will have access to their accounts via by using either a PC or mobile phone

TV-Based

Banking

Making use of the satellite or cable to deliver account information to the TV screens of customers.

Telephone-Based

Banking

Customers can access their bank and account via SMS and as well as by ordinary phone using services of interactive voice responses (IVR).

History

The concept of internet banking dates since the 1980s when bank programmers had the idea for developing online banking transactions. It was only in the 1995 that it was fully implemented for regular client use when companies started to make use of the concept of online shopping which has further promoted the use of credit cards through the internet.

In October 1994, the first online banking service was introduced in the United States, which was developed by a financial institution, the ‘Stanford Federal Credit Union’. Nowadays internet banking is becoming more and more demanding on the market due to the well developed systems by the banks. Even though there are some pros and cons attached with the electronic cash technology, it has become a revolution that is enhancing the banking sector. It is also to be noted that some banks operate solely via the internet instead of using the conventional way of doing things.

Evolution of Internet Banking

In the mid 1990s, banks were quite reluctant in accepting internet as a distributional channel and this was due to the fact that they were experiencing difficulties in adopting an effective Internet strategy in their business operations due to differences between banking community and internet users. It was in the 1999 that bank strategies have actually evolved from a passive approach to a more active approach in adopting this distribution channel (Daniel, Ross, & Avery).

Daniel, Ross, & Avery also mentioned that and if banks resist this process, they will lose their market shares at an increasing rate. On the other hand, banks using this strategy will benefit in terms of profitability and growth.

Sathye (1999) included that Internet has been the turning point for the banking and financial industry, changing the nature of products and services and the mode of advertisements and delivery. Internet has proved to be a priceless and powerful tool leading to developments, growth, innovations and enfancing competitiveness (Kamel, 2005).

This evolution of the E-banking has allowed banks to be more efficient and less costly in providing their services (Koskosas, 2011).

In the recent years, electronic banking services have spread quickly around the globe. Both the developed and developing countries have seen their banking industry revolutionised. New business opportunities have been offered due to this (Tuner, 2001).

Mauritian Banking Sector and Internet Banking

Mauritius has been fast in realizing a boom in its economic growth by diversifying its policies from the primary sector to the tertiary sector. The financial industry is seen as a major player in the Mauritian economy till date as it allows for job creation and foreign currency inflow in the country. Mauritius has been successful in becoming a financial hub in the African region by having a well-developed domestic financial system and a fast-growing offshore sector (Padachi, Rojid, & Seetanah, 2008).

In the era of globalization, Mauritius being a developing country had no other choice than to develop an internet strategy and convince banks’ customers to use this delivery channel. In the beginning, Mauritian banks use internet with little interest that is it was limited to information only. With gradual progression from the manual to the automation system, banks started to provide services that required lesser human intervention. To seize the opportunity of the internet, the big four banking companies invested massively in computer technology and integrated it in their banking processes. Allowing them to innovate and to propose new products and services hence helps them in having a competitive advantage over their competitors that is the non-banking firms (Kassean, Gungaphul, & Murughesan, 2012)

The Mauritian banking industry hosts around 20 banks both domestic and offshore banks. Among these banks, the Mauritius Commercial Bank (MCB) and the State Bank of Mauritius (SBM) are quoted on the stock exchange list and are considered to be the main competitors among the local banks. MCB is the leading banking company in Mauritius having a market share of 46%, while the SBM has approximately 27% of the market.

Internet Banking Revolution in Mauritius

Internet banking in the country is still considered as being a recent phenomenon, even though it has become operational since 1997. By the end of June 2012, it has been recorded that fourteen banks are providing e-banking services and hence allowing them to be more competitive on the market. These include the Mauritius Commercial Bank, the State Commercial Bank, Banque des Mascareignes, Barclays among others.

The textbox below shows the actual situation in Mauritius (Bank of Mauritius, Annual Report 2012)

More and more people are keen to use electronic banking to do their transactions. The figures itself gives us a clear picture of the situation. An increase in the number of electronic banking transactions have been recorded from the year 2010-11 to 2011-12 by 8.5%. Hence this further entails an increase in the number of credit and debit cards in circulation from 1, 276, 338 to 1, 378, 854 by June 2012

The increase in the number of ATMs operational in the country also proves that more and more people are having access to electronic banking services.

It is very important to note that Mauritius being a small country has been able to adopt the internet banking system. Even though, it is being done gradually but more and more people are willing to use this modern service. The increase in the number of Internet banking users itself proves it. The numbers rose from 176, 553 to 253, 129 by June 2012, therefore showing an increase of approximately 25%. The local banks are continuously encouraging customers to make use of the online banking system by providing a bigger range of services. Which is more interesting, the value of internet banking transactions keeps on rising. On June 2012, the value was Rs 69, 887 million compared to June 2011 which was Rs 60, 237 million. This is surely a very positive sign for the banking industry of Mauritius.

Furthermore, the MRA [1] has taken the initiative to implement the Internet banking systems. In the year 2011, about 64% taxpayers (76, 526 people) has e-filled their returns. This figure is expected to climb by 2012 reaching 80%. The MRA itself is motivating the taxpayers to fill their returns electronically and to pay for their taxes using the internet banking.

Source: business.mega.mu (2012)

E-banking Use and Consumer Behaviour

With the passage of time, the banking industry has been facing another strategic challenge which is the growing needs and expectations of clients due to an increased in level of education and standard of living. Customers are seriously considering their financial decisions (Geetha & V.Malarvizhi). Rapid development in electronic distribution channels has led to huge changes in the financial industry with continuous changes in technologies, competition among players and customer needs (Hughes, 2001). The way companies are interacting with their clients nowadays has evolved and this is due to rapid advances in their technology-based systems especially those related to internet. (Ibrahim, Joseph, & Ibeh, 2006). The evolution of internet banking has revolutionised the banking industry especially their traditional way of doing business and also the way consumers perform their banking activities (Geetha & V.Malarvizhi).

Table 3: Electronic banking technologies available on the market and its advantages

Examples of Electronic banking technologies on the market are:

Direct Deposit

ATMs

Debit cards

Computer banking

Stored-value payroll cards

Advantages of using E-banking services are:

24 hour banking services

Time-saving in managing services

Lower cost bill paying

Source: (Anguelov, Hilgert, & Hogarth, 2004)

Factors affecting demand and usage of E-banking services

It is very important to understand how consumers evaluate internet banking services and develop e-loyalty. The success or failure of e-commerce relies specifically on ‘service quality’ (Srivastava, 2007).

Use of internet by banks allows them to provide online banking facilities and hence allow them to compete internationally (Padachi, Rojid, & Seetanah, 2008). Both the providers and clients benefit from Internet banking. From the banks’ perspective, internet banking helps in costs saving and is considered to be the most inexpensive delivery channels for banking products (Pikkarainen et al., 2004 and Sathye, 1999).

Moreover, they also included that with internet banking facilities, customers who felt that traditional banking took longer time and energy will now be able to conduct their banking transactions within seconds.

Table 4: Factors determining level of demand for Internet banking services and Main drivers for adoption of Internet banking

Factors determining level of demand for internet banking are:

Access to internet

Costs and speed of internet connections

Customer confidence on e-banking transactions

ownership of diverse financial products and services

attitude towards finance

trust in the internet banking channel

awareness of online banking

resistance to change

Seller support is seen as being another factor in promoting the use of internet banking

Main drivers for adoption of Internet banking

Security, privacy and trust issues

Degree of innovation

Adoption of internet banking model comprising of factors such as demographics, consumer attitude, quality of service and computer knowledge.

Source: Padachi, Rojid, & Seetanah (2008); Li & Worthington (2004); Munusamy, Annamalah, & Chelliah ( 2012) & (Geetha & V.Malarvizhi)

Consumer Behaviour toward E-banking Services

The adoption, perception and usage of internet banking by customers are considered to be an essential part of this service. Moreover, banks’ customers are more willing to adopt e-banking due to the simplicity of products offered (Geetha & V.Malarvizhi).

Using internet banking services might not be easy for everyone. To fully adopt this service, customers not only have to accept this new technology but also need to change their behavioural patterns. Technology can either simplify or complicate consumer’s understanding of exchange (Eriksson, Kerem, & Nilsson).

Table 5: Anomalies of Information technology

Anomalies of information technology are:

Control and chaos

Freedom and enslavement

New and outmoded practice

Increase and decrease in the feeling of competence

Increase and decease in efficiency

Fulfilment and creation of needs

Promotion and hindrance of social interactions

Source: (Eriksson, Kerem, & Nilsson)

The factors that determine consumer behaviour towards e-banking systems are:

Understanding of Internet fainancial services

From the study of Eriksson et al, it has been quoted that. Therefore, one very important aspect of consumer behaviour towards the modern banking services is considered to be the understanding of the Internet financial services. Frequency of use of internet banking might be an important indicator for evaluating consumer behaviour towards accepting this service.

Trust

Another very important factor that infuences consumer behaviour towards e-banking services is trust. (Minjoon & Shaohan, 2001). The element of trust is usually seen in customers’ attitudes towards bank’s safety and their confidence in their bank’s store of customer data. Customer’s trust in their bank is often associated with the reliability and integrity of their banks. ‘Trust’ is another factor that determines the customer’s willingness to rely on his bank and thus this surely does affect the usage of Internet banking of banks’ customers. (Eriksson, Kerem, & Nilsson).

Security Issues

Another determinant for customer acceptance is the security issue (Daniel E. , 1999). The risks factor is the main reason that affects customer adoption and customer satisfaction of online banking systems. Security and privacy are the main characteristics for customer to fully accept the usage on e-banking services. Furthermore, the security aspect is considered to be quite dangerous and it also includes high risk for banks and its customers to deal electronically (Geetha & V.Malarvizhi).

Ease of use and perceived usefulness

Ease of use and perceived usefulness might be another important factor for consumers to adopt online banking services as Davis (1989) has found in his study by developing the technology acceptance model (TAM), whereby this was supposed to give an explanation on the reason why people accept or reject new technologies. Usage behaviour will be based on the user’s intention to use this technology hence depending on the usefulness and ease of use of the technology. The TAM model was primarily used in organisational context before being used for individual aspect also. Recently, the technology acceptance model has also been used for e-commerce which bears the same characteristics for online banking. Hence, TAM is considered to be highly appropriate in studying usage of online banking among customers. (Eriksson, Kerem, & Nilsson).

Consumer behaviour towards E-banking services in Mauritius

In their study, Kassean, Gungaphul, & Murughesan (2012) conducted a survey from a sample of 300 participants in Mauritius to find out what factors motivate them to adopt internet banking. They found out that about 33% people were willing to use internet banking services. About 88% of the people interviewed were found to be computer literate and more that 91% of answerers knew about internet banking. "These are indications that factors of accessibility, convenience, self efficacy and usability are very important contributing factors in the adoption of online banking in Mauritius". Out of these interviewers, about 42% people currently use internet banking services. More people consider to use the internet banking to make transfers from their accounts hance indicating their reluctance to make transaction on the internet with third parties. Furthermore, mauritians might be willing to use the Internet banking in order to track records of their banking transactions and to monitor their account.

Source: (Kassean, Gungaphul, & Murughesan, 2012).

Drawbacks of Internet Banking

The adoption of e-banking has been quite favourable around the globe. Nowadays, banks’ clients prefer to deal with banks offering enhanced, well-organised, professional and innovative services. To survive and be more competitive on the market, banks need to constantly improve their service quality. The rapid development of electronic banking services does not only entail benefits but also carries some risks. Even though massive investment has been made in online services, it has not reaped the desired profits (Bauer & Hein, 2006). The disadvantages of E-banking are as follows:

Lack of governmental policies

Mermod (2011) noted that there’s a lack of regulators to guide e-banking operations across borders. Along with the advantages and a new business environment provided by e-banking, it also intensifies the banking risks. This remains the major disadvantage of e-banking even though banking and supervision regulations have been adapted, there’s continuous vigilance and revisions as scope of online banking increases. There need to be greater harmonization and coordination at the international level.

Dependence on information technology

This keeps on accelerating the technical complexity of operational and security issues. To use this service, customers will need to have access to a computer having internet facilities.

Security Issues

Due to this reason, banks’ customers are unwilling to make their transactions online. To be able to use this facility, online users need to know how to use a computer first and also they need to be conscious and up-to-date to the latest safety programmes i.e. firewalls and virus programmes. Nevertheless, there can still be a risk of hacking even though all precautions are taken.

Unwillingness to follow the technological trend

Another limitation can be the preference of banks’ customers of not wanting to use this service but instead the traditional banking systems. Lack of confidence and personal capabilities in learning this new technology are often the reason behind this

Overview of the Expectation Disconfirmation Paradigm

People should have trust technology as systems are becoming more complex. The expectation disconfirmation paradigm is used to examine technology acceptance, which further helps in predicting user’s satisfaction with a technology. Trust plays a pivotal role; due to this, the expectation disconfirmation paradigm is used to predict the effects of technology trust on satisfaction with a system.(Lankton & McKnight).

This theory originating from marketing is now applied to the adoption of information technology. Expectations about technology can predict perceived technology, disconfirmation of expectations, satisfaction and usage continuance intentions. This helps in elaborating on the process of adoption by showing how initial expectations are transformed by disconfirmation into satisfaction with a system (Lankton & McKnight).

can be seen as the main factors of consumer satisfaction. Consumer satisfaction also impact on the bank’s economic and social efficiency and to the rate of satisfaction and dissatisfaction among the customers (Muntean & Stremţan, 2011).

Diagram 1: Illustration of the Expectation Disconfirmation Theory model

http://www.istheory.yorku.ca/images/ect.JPG

Customer Satisfaction

Saha & Zhao (2005) defined customer satisfaction as being a collection of outcome perception, evaluation and psychological reactions to the consumption experience with a product or service. It is seen as being a result of a cognitive and affective evaluation against the benchmark standard. If the performance perceived is less than expected, customers will be dissatisfied. On the other hand, if the perceived performance exceeds expectations, customer will be satisfied.

Service provided to customers normally differs; a certain level should be attained in order to keep customers fully satisfied. Critical indicators of customer satisfaction are resulting commitment, loyalty and retention. Highly committed customers are more keen to use banks’ products and services, more willing to give their opinion on the service received and are more loyl to their banks (Musiime & Ramadhan, 2011). They also included in their study the view of Casaló et al. (2008) [2] who contends that

Figure 2: How internet banking services and consumer addoption leads to customer satisfaction

dissert.png

Customer satisfaction being an important element often leads to repurchase, customer loyalty and higher profitability. Higher the satisfaction level, higher probability of repurchasing this service will be. Dissaisfied customers are more likely to manisfest hard feelings towards the business, file complaint and hence have bad influence towards other potential buyers.

Importance of Consumer Satisfaction

Pairot (2008) defined customer satisfaction as Difference in attitudes and experiences often lead differet level of customer satisfaction by different customers. Banks need to meet the expectations of their clients to retain them. These include quality, fair price, availability, after-sale-services, complaint handling processes, variety, more information and so on. Customers demand better qulity of services need at the same costs (Ankit, 2011).

Customer satisfaction is an important element for firm to increase its clientele and improving the company’s image. Competitive advantage can be obtained if the firm has been able to identify the needs of its customers first before its competitors. In the era of globalisation, banks had to adopt e-banking services so as to remain in the business race and to be profitable as well (Alabar, 2012).

The relationship between customer satisfaction and economic revenue has been discussed by Anderson et. al (1994). They found out that positive impact on quality leads to higher customer satisfaction and therfore higher profitability. Below are a few factors that show the importance of customer satisfaction:

Customer Loyalty

Customer loyalty is an important factor that determines the level of customer satisfaction towards a firm’s products/services. Higher level of satisfaction leads to high level of customers’ loyalty (Linnell). Dissatisfaction leads to:

Low customer loyalty

Bad influence on company’s brand image

Loss of customers

Profitability

Retaining existing customers than attracting new ones are considered to be more beneficial. Customer satisfaction often allows for this (Söderlund & Vilgon, 1999). They also included that there’s no direct impact on customer satisfaction and level of profitability. It is the behaviour of the client following with some level of satisfaction that affects profitability. Higher level of satisfaction will result in a repurchase intention from the same provider.

Service Quality

Strong relationship between service quality and customer satisfaction exists. Higher level of service quality results in higher level of customer satisfaction. Improvement of service quality of banks often meet the demands of banks’ clients and therefore leads to higher satisfaction level (Kumbhar, 2011).

Brand Reputation

Brand reputation often have significant impact on customer satisfaction. Branding is seen as an important element in the banking industry as it directly affect the bank’s reputation. Often seen as a measurement of the customer with this brandn or bank. Brand image is an important factor to service providers as satisfied customers will surely recommend that service to others (Kumbhar, 2011).

Customer Satisfaction and the banking industry

Banks being in a volatile environment are unable to differentiate its products from others. Banks prices are usually fixed through market forces of demand and supply. Due to this reason, service quality is important for firms to differentiate themselves from others and is a critical factor in determining level of satisfaction in the banking industry (Cohen, Gan, Yong, & Choong, 2006).

It has been noted a decrease of 40% worldwide of customer confidence in the banking industry. It has also been noted that more and more people are becoming less loyal to their banks by switching to the new entrants entering the market by providing better rates, more personalised services, stronger technology or more attractive rewards. Despite the strong measures taken by banks to ensure their customer satisfaction, the numbers of customers considering switching banks are increasing worldwide resulting in an increase of 5% from 2011 to 2012. The main driver of this reaction has been the dissatisfaction with the high fees. Other factors have been poor branch experience and poor interest rates.

Customer satisfaction is high in internet banking and it keeps on improving for call centres and mobile baking. Despite that, banks need to continuously make improvements in the day-to-day services and interactions. About 87%global customers are said to be very satisfied with their banking providers and customer satisfaction for internet banking shows a figure of 81% among the customers.

Source: Global Consumer Banking Survey 2012-Ernst & Young (2012)

CUSTOMER SATISFACTION MEASUREMENT

Determining customer satisfaction is essential for the effective delivery of services and this allows having a competitive advantage over the competitors through benefits such as product differentiation, increase number of loyal customers and positive mouth-of-word communication. (Yüksel & Rimmington, 1998). Below are the factors that are used to measure customer satisfaction.

Service Quality

Service quality is consider as an important element for establishing and satisfying relationships with valued customers. Measurement of service quality is often linked with customer satisfaction (Levesque & McDougall, 1996). This is done through several tools such as SERVQUAL, SERVPERF, SITQUAL, and WEBQUAL among others. Service quality is said to be more specific in giving an idea on the customer satisfaction level (Kumbhar V. , 2011).

Table 6: The determinants to assess service quality

Authors

Determinants of service quality

Parasuraman, Zeithaml, & Berry (1985)

Access, communication, competence, courtesy, credibility, reliability, responsiveness, security, understanding and tangibles.

Johnston (1995)

Access, appearance/aesthetics, availability, cleanliness/tidiness, comfort, communication, competence. Courtesy, friendliness, reliability, responsiveness and security.

In addition to this, he also include in his studies: attentiveness/helpfulness, care, commitment, functionality, integrity, reputation, trustworthiness, spontaneity, and problem solving

Service quality is considered to be an integral part for the banking sector. Internet frauds and attacks from hackers may change the customers’ opinion on the service quality provided by their banks. This migh affect customers’ confidence in their banks due to theft of personal information. Inability to please customers in terms of service quality will eventually leads to an increase in the negative responses from clients (Altıntaş & Gürsakal, 2007).

Perceived value

The concept of perceived value is important for the success, long-term survival and competitive advantage of any companies. Adams & Lamptey (2009) define perceived value as being They identified factors such as quality and price that leads to higher satisfaction. According to Anderson and Mittal, there are empirical evidence that customer-perceived value have a positive impact on customer satisfaction (Yang & Peterson, 2004).

Customer Loyalty

All companies aim for customer loyaly. From the attidutinal perspective, customer loyalty is defined as being while on the other hand behavioural measures defined it as Repurchasing behaviour might not really reflect the intention of the buyer (Yang & Peterson, 2004).

Customer loyalty is one of the major success factor in e-commerce. Loyal customers bring more substantial profits and therefore demands less time and attention. Further to this. They are more likely to forgive customer-service mishaps. The more satisfied a customer is, the higher will be his usage of a given service. According to studies, customer loyalty is said to have a positive influence on customer satisfaction (Yang & Peterson, 2004).