the impact of internet banking on banks a descriptive and evaluative case study of a large united states bank (lusb)

THE IMPACT OF INTERNET BANKING ON BANKS: A DESCRIPTIVE AND EVALUATIVE CASE STUDY OF A LARGE U.S.. This descriptive and evaluative case study examined the adoption of Internet banking i

THE IMPACT OF INTERNET BANKING ON BANKS:

A DESCRIPTIVE AND EVALUATIVE CASE STUDY

OF A LARGE U.S BANK (LUSB)

by Tom Wamalwa

A Dissertation Presented in Partial Fulfillment

Of the Requirements for the Degree

Doctor of Philosophy

Capella University June 2006

3223883 2006

Copyright 2006 by Wamalwa, Tom

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Abstract Banks have adopted Internet Banking during the past ten years This descriptive and evaluative case study examined the adoption of Internet banking in six large banks and in one small bank in the northeastern states of U.S The study surveyed the quality of service (QoS) of the websites of the banks that participated in the study with special emphasis to one large bank (LUSB) This study utilized a positivist methodology to investigate the phenomenon of Internet banking adoption and its impact on the core retail banking business Internet banking strategies were aligned with the banks’ core business based on the data from this study The data from the study did not support the perception that Internet banking had adverse impact on retail banking The study further investigated in detail the perception and extent to which Internet banking affected the financial performance, stakeholder value, internal processes, and intangible assets of one large bank Online security and privacy were important to all banks and collecting of customer information was minimal The banks in the study operationalized their Internet banking as a bundled centralized service rather than a distributed service Adoption of emerging technologies such as, wireless and mobile services was still a low priority in both the large and small banks in the study

Dedication This worked is dedicated to my wife, children, my late father, and my mother The family provided me with support during the most challenging moments as I struggled to reach the acme

of knowledge The Numen (Spirit) of God sustained my inner courage, determination, faith, hope, and strength during the most excruciating moments when my world seemed to fall apart

To God be all the glory and honor forever, Amen

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Acknowledgments

A PhD program like a labyrinth passes through meandering turns and tunnels Without the support and encouragement of Cliff Butler, Ph.D., Faculty Mentor and Chair, I doubt that I could have completed my Ph.D program Dr Cliff was there when I needed him most He provided the leadership and coordination without which, the process would not have reached a successful climax Dr Cliff like a director of a major film, created an environment that fostered creativity and stability that enabled all the actors to work harmoniously even during daunting and challenging moments

Any successful film has many actors and supporters that are involved I would like to acknowledge the tremendous support and contributions from distinguished members of my Dissertation Committee John DeNigris, Ph.D., Dale Pietrzaks, Ed.D., Siaw-Peng Wan, Ph.D., and Betty Whitesell Without your advice, encouragement, and support, my Ph.D program would still be a wild dream Thanks for your collegial and professional support and guidance Special thanks to Dr Wan who provided the researcher with additional materials on online banking that were very helpful

I acknowledge the seven anonymous banks and their staff who provided the data for the study Thanks for your understanding and support during the pilot study and during the actual survey Your professional contributions and comments enriched the results of this study

I extend my gratitude to my editors and proofreaders Tony Grant, and D Davidson, PhD, and many others who reviewed some of my papers Thanks Dr Martha Hollis for teaching me

iv

quantitative methods and encouragement Thanks to those who helped me during the different phases of my dissertation process

Thanks to Dr Keng Siau for permitting me to use the website features from their Online Banking Study Thanks to numerous individuals and institutions that supported me in different ways

v

Table of Contents

Acknowledgments iv

Table of Contents vi

List of Tables xi

List of Figures xii

CHAPTER 1 INTRODUCTION 1

Introduction to the Problem 1

Background of the Study 3

Statement of the Problem 11

Purpose of the Study 13

Rationale 14

Research Questions 15

Significance of the Study 16

Definition of Terms 17

Assumptions and Limitations 19

Nature of the Study, or Theoretical-Conceptual Framework 20

Organization of the Remainder of the Study 22

CHAPTER 2: CURRENT BANKING ENVIRONMENT 24

Top Large Banks in the U.S 24

Website Security and Threats 37

vi

Bank Website Legal Requirements Challenges 41

Online Financial Services Trust 42

Large Banks’ Financial Health 42

CHAPTER 3: LITERATURE REVIEW 46

Literature Review 46

Importance of Organizational Internet Banking Strategy 47

Internet Banking Competitive Strategies and the BSC 50

Financial Performance at LUSB 58

Balanced Scorecard (BSC) 61

Stakeholder Value 62

Bill Payment Online vs Offline 68

Internet Banking 70

Internal Processes 73

Technology Alignment 78

Technology Risk Management and Security Services 80

Intangible Assets 82

Organizational Culture 82

Website Technology 89

Intangible Data for the Study 91

LUSB’s Website Overview 92

Other Bank Case Studies 93

vii

Outsourcing of Key Processes and Additional Features 99

CHAPTER 4: METHODOLOGY 110

Methodology 110

A Vision Statement of LUSB 111

Case Study Strategy 113

Population of the Study 114

Perspectives of the Study 117

Types of Instruments Reliability and Validity 118

Instrument Reliability and Validity 120

Financial Performance Perspective 125

Strategic Alignment and Internet Banking Psychometric Measures 130

Procedure and Data Collection 132

Method of Reaching the Participants 133

Time, Cost, and Reliability of the Study 134

A Pilot Study 135

Statistical Data Analysis 136

Online Survey Hosting 137

Problems and Limitations 137

CHAPTER 5: DATA COLLECTION AND ANALYSIS 139

Introduction to Data Collection 139

The Instrument Validity Using a Pilot Study 139

viii

The Actual Data Collection 141

Study Participants 142

Detailed Data Collection Procedure 143

Frequency Distribution 147

Section A: Yes/No Nominal Questions (1-15) 148

Section B: Ranking Questions (15-35) 148

Summary of the Ranking Responses 149

Objective 1: Section C - Participants’ Responses 165

Objective 2: Participants’ Responses 166

Measures of Central Tendency 171

CHAPTER 6 RESULTS, CONCLUSIONS, AND RECOMMENDATIONS 172

BSC Final Model for Testing Results 172

Results of Objective 1 of the study 173

Results of Banking Strategies 177

Results of Porter’s Five Competitive Forces 178

Results of Internet Banking Model 180

Results of Objective 2 181

Recommendations for Future Research 191

Conclusion 193

REFERENCES 196

APPENDIX A: RELEVANT WEBSITES 218

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APPENDIX B: EXHIBIT 4 220

APPENDIX C: EXHIBIT 5 234

APPENDIX D: OBJECTIVE 1 SECTION A 240

APPENDIX E: OBJECTIVE 1 SECTION B 242

APPENDIX F: OBJECTIVE 1 SECTION C 246

APPENDIX G: OBJECTIVE 2: BINOMIAL TEST SCORES 250

APPENDIX H: OBJECTIVE 2: DESCRPTIVE STATSTICS 252

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List of Tables

Table 1: Online Banking General Financial Services….……… 36

Table 2: Top Twenty Banks in the U.S in Terms of Assets as at December 2003… 43

Table 3: Key 1-Year Comparison Bank Figures December 2004 in Million Dollars……45

Table 4: Total Unique Visitors March 2004 and March 2005 57

Table 5: Customer Value Measurement………62

Table 6: ATM Growth 66

Table 7: Comparison between a Traditional Bank Branch and Internet Banking 72

Table 8: Top Management and Technology Issues - 1996 & 2004……… 74

Table 9: Porter’s Five Forces of Competitive Advantage……….98

Table 10: Business Strategy and (IS) or Internet Banking Strategy Survey……….107

Table 11: The Internet Banking Models………108

Table 12: The Customer Management BSC Survey… 120

Table 13: Website Features……… 124

Table 14: Business and IS Strategic Alignment Reliability Measures 131

Table 15: Section A: Responses Coding……… 146

Table 16: Section B: Responses Coding……… 150

Table 17: Results of Objective 2……… 169

Table 18: Results of Objective 2 Question 20……… 170

Table 19: Results of Business and IS Strategic Alignment…… 176

Table 20: Results of Internet Banking Websites Features……….182

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List of Figures

Figure 1: Organization Chart of Technology Management Infrastructure at LUSB…… 75

Figure 2: A Dual Internet Banking Model adapted from Li (2001)……….…… 95

Figure 3: Internal Linkages of various Systems with Internet Banking……… 101

Figure 4: LUSB Case Study Financial Assets (1995-2004) ………102

Figure 5: LUSB Case Study Net Assets by Year (1995-2004)……… 103

Figure 6: LUSB Employees, Income, Net Income and Assets Comparisons (1995-2004) 104

Figure 7: LUSB Case Study Earnings, Dividends, and Book Value (1995-2004)………… 105

Figure 8: LUSB Case Study Stock Prices Comparison (1995-2004)……… 106

Figure 9: BSC Final Results………174

Figure 10: General Banking Website Architecture………185

Figure 11: Comparison of Two Internet Banking Models……… 195

Introduction to the Problem The Internet facilitates interconnections and communication among various

heterogeneous systems around the world (Amor, 2000) The Internet has revolutionized the way

we do business today (Amor, 2000; Alba, Lynch, Weitz, Janiszewki, Sawyer, & Wood, 1997; Chou, 2000) Banks like any other business organizations must be cognizant of the impact of information technology and the Internet technology on the banking services and on the customer needs (Afuah, 2003; Clements, 2003; Kaplan & Norton, 2004) The Internet has introduced technological challenges that banks have to adopt to remain competitive Banks that can

withstand the competition must become learning organizations and must align information technology with business strategies (Afuah, 2003) Since 1995, banks have adopted Internet technology by introducing online financial services (ABA, 2003; Bach, 2002; Wan, 2003) However, there is a dearth of empirical data about the profitability of adopting Internet banking services Adopting Internet technology introduces new vulnerabilities and threats that expose online banks to unprecedented security risks (Geer, 2005) Non-bank companies that offer online financial services are challenging banks that do not adopt Internet banking The equation is how banks could balance between their core business and the newer online banking services

The researcher had much interest in investigating how banks that have adopted online banking ascertain the value of Internet banking distribution channel The researcher used a case study of six large banks and one small bank to answer questions The first question investigated how banks measured their Internet banking value and performance The second question

examined why Internet banking websites were essential to banks that had adopted online banking services

This study addressed the how and the why questions using a descriptive and evaluative study of six large banks and one small bank with special emphasis on one case study of a large U.S bank (LUSB) Starita (1999) defined Internet banking as a channel for delivering banking products and services Banks have adopted Internet banking in the last ten years, however, few empirical studies have been undertaken to measure the impact of Internet banking phenomenon

on banks Banks ascertained the value of their Internet banking services and websites through evaluation benchmarks (Barton, Duncan, McKellar, & Ruiz-Nieto, 2000; Southard, & Siau, 2004) Some banks utilized a number of proprietary benchmarks, which were inadequate because these measures were not standardized However, one widely used benchmark is the Balanced Scorecard (BSC), which has been used in hundreds of case studies in different industries (Kaplan

& Norton, 2004, p 9) For instance, Kaplan and Norton used the BSC to evaluate and measure the perception and the value of the Bank of Tokyo-Mitsubishi (BTM) HQA, which is one of the largest banks in the world The BSC model measured the bank’s financial, stakeholder, internal processes, and intangible assets or organizational learning and growth

In the competitive retail-banking environment, banks evaluate their investments every quarter; including the cost of operating web-based banking systems (Andaman, 2004) The BSC framework measured the financial, stakeholder, internal, and intangible assets (Kaplan & Norton, 2004) Measuring the cost per Internet banking stakeholder transaction was compared with the cost per transaction of a bank branch Stakeholders enable banks to provide services that satisfied their needs Banks have to provide accurate account of customers’ financial transactions

Stakeholder preferred convenient, accessible, accurate, and available online banking services (NUA.com, 2003) Internal processes were linkages that interacted to create stakeholder value Different systems utilized by various departments of banks were integrated to facilitate the sharing of customer information in real time Banks that changed their internal capabilities to meet the rapid changing stakeholder needs aligned banking business strategies with Internet banking objectives (Robbins & Coulter, 2005, p 317) Risk management in the banking sector required banks to provide disaster contingency plans, privacy compliance, and bank

infrastructure security Seamless integration of legacy and heterogeneous bank systems created value and improved the bank’s profit margins

Banks that implemented creative marketing strategies through offering new products and services increased their market share and stakeholder value (Andaman, 2004; Alba, Lynch, Weitz, Janiszewki, Lutz, Sawyer, & Wood, 1997) Human capital (Frost, 2003) and

organizational learning and growth were required for banks to remain competitive (Kaplan & Norton, 2004) When skilled personnel turnover is high, banks lose valuable technical workers which is a precursor to online financial project failures (Coffey, Dugdill, & Tattersall, 2004; Cooke & Kroeze, 2004; Cote & Morgan, 2002; Fox & Spector, 2001; Frost, 2003) Project failures have negative connotations and consequences to wide acceptance of Internet banking services by stakeholders (Dobson, 1996; Ross & Woodham, 2001; Weill & Broadbent, 1998)

Background of the Study This study assessed Internet banking website architecture using the banking website model

of (Southard & Siau, 2004) In recent years, banks use the Internet to not only sell products and

deliver information, but also to provide their services to businesses and individual stakeholders (Weill & Broadbent, 1998, p.11) To do this, applications within banks that provided online services were integrated with the existing enterprise information systems to offer new business functions In this case, “information technology (IT) was defined as a bank’s total investment in computing and communications technology.” It included hardware, software,

telecommunications, the website, and many devices for collecting and representing data (Weill & Broadbent, 1998, p.6) IT enabled banks to provide online services that are available, scalable, and easily accessible in a dynamic environment Bank websites interacted with other application servers in different computing environments to deliver online services to stakeholders The Internet is a hyperlink or interconnection of different computer systems via telecommunication capabilities

Banks and the Internet

Banks leveraged the advantage of the Internet by offering online services in recent years (Afuah, 2003; Bach, 2002; Bruene, 2000; Su, 2002) Most of the large banks in the U.S have online banking (NUA.com, 2003) and extensive bank branch network Wells Fargo was among the first traditional banks to adopt a dual banking model Wells Fargo continues to utilize its traditional retail bank branch model with a separate online banking division that has been

offering Internet banking since 1995 Internet banking was considered a separate division of the main bank and was not considered a different company Since then, other banks have adopted a similar dual banking model Like Wells Fargo, the other seven banks in the northeast have

adopted a similar dual model The large banks in the U.S based on the information from the

Office of the Controller of the Currency (OCC) offered traditional bank branch and online

banking services This statement was reinforced by the results of the study

The Federal Depositary Insurance Corporation (FDIC) listed large banks in terms of assets in 2005 The following list shows large banks in terms of assets in the U.S Bank of America Corporation, Countrywide Financial Corporation, Bank One Corporation, Banknorth Group, Inc., Barclays Global Investors, Charter One Financial Inc., Citigroup, Inc., First

Tennessee National Corporation, FleetBoston Financial Corporation/merged with Bank America, Hibernia Corporation, Huntington Bancshares, Inc., J.P Morgan Chase & Company, KeyCorp, LaSalle Bank Corporation, MBNA Corporation, Mellon Financial Corporation, National City Corporation, National Commerce Financial Corporation, The PNC Financial Services Group, Inc., U.S Bancorp, Union Planters Corporation, UnionBanCal Corporation, Wachovia

Corporation, Wells Fargo & Company, and Zions Bancorporation (FDIC, 2005)

The Internet presents opportunities and challenges to management and users of Internet technology (Weil & Broadbent, 1998, p.2) The Internet provides opportunities for customers to bank online at any time and at any place where the Internet is accessible (Warrington, 2002) Banks leveraged Internet technology by offering competitive services to customers Banks ensured that the online services were based on high standards of privacy and security Banks utilized the Internet to provide many services that bank branches were offering before Internet banks provide online services such as, account access, bill payment, money transfers, and

receiving transactional statements Banks make money by receiving savings from customers and lending the money to businesses at some interest, the interests on loans are paid on time to avoid late fee charges If a business or an individual wants to pay bills online, an online bank account

only takes a few mouse clicks to log into the bank account to pay the bills online A few mouse clicks accomplishes transferring money from one account to another online in large banks that offer these services

The Internet is one of the most transformative technologies today (Amor, 2000;

Clements, 2003) Internet banking services were introduced in traditional banks in 1995 when some banks such as, First Union Bank and Wells Fargo adopted online banking as a new

distribution channel for offering Internet banking services Two types of online banking service models are the “Internet only online banks” and the brick and mortar online banks that use the Internet as a distribution channel to access stakeholders The Internet only bank model has no brick and mortar bank branches such as, the ones that the traditional banks use to serve face-to-face customers The brick and mortar online bank is a hybrid model offering both online and bank branch services The Internet only banks use the Internet for all their services while the brick and mortar offer some banking services online and some banking services are offered off-line (Wan, 2003) So far from the large banks in this study, none had established an Internet only subsidiary The seven banks in this study have adopted Internet banking as a new distribution channel

The Internet has changed the banks’ competitive environment significantly (Weil &

Broadbent, 1998) by presenting new challenges and realities, such as electronic commerce, and electronic business as the focus of competitive change Banks have realigned their business strategies with the realities of the Internet technology The Internet has opened competition that enables non-bank firms to offer financial services that compete with banks Internet technology has transferred the power of the bank branch manager to customers (Awad, 2000; Bielski, 2000;

Bitner, Ostrom, & Meuter; Hirtle & Melti, 2004) Although, bank branch network has been challenged by online financial services, there was evidence that bank branch network was

growing steadily during the last five years (Bruene, 2001; Byers & Lederer, 2001) Stakeholders have more online banking product services and they expect better services because of this

competitive environment

Despite the benefits of offering online banking services, there are security issues that banks must address (Wan, 2003) Bank transactions are sensitive because of the private information such as, a customer’s account number, the amount of money, the social security number, a customer’s personal identification number, user name, credit card, and user password, which are required to initiate a transaction Negative press reports regarding the theft of credit cards and phishing problems that targeted banks were challenges to online banking In a recent report by the popular press, a security breach exposed stakeholder credit cards of over 40 million

cardholders of multiple brands (Credit card security, 2005) Such incidences could discourage prospective online customers from using Internet banking Stakeholders feel leery when online fraud news is broadcasted nationally (Adams, 2003) Although, Internet banking is convenient, fear, security and trust were inhibiting mass adoption

Online communication played a crucial role in the online banking services Web-based technology enhances communication and transactions with all stakeholders (Siaw & Yu, 2004, p 515) Communicating parties establish the necessary level of trust through authenticating the identities of parties involved in communicating Effective communications require a medium of communication with minimum noise The email messages and the website were popular

channels of communication in the banks in this study Information conveyed meaning in terms of

facts, figures, charts, maps, pictures, drawings, paintings, text, and data The conveyed message only makes sense when the recipient responds back to the sender completing the communication loop

Information systems adopted in some large banks facilitated faster communication among workers, management, and stakeholders (Andaman, 2004; Awad, 2000; Hirtle & Metli, 2004; Lietz & Rea, 2001) Information is essential for the smooth operation and management of

businesses today (Loshin, Vacca, & Murphy, 2001) Information systems and technology

facilitate communication that enables business professionals to be effective and competitive Today the business environment faces surmountable challenges In recent years, viruses and other Internet worms have challenged online communication by flooding the Internet

infrastructure that renders email communication undeliverable Undelivered online bank

transaction could cause untold headaches to resolve because Internet transactions could be routed

to the other destination on different routes (Amor, 2000; Andrews, 2001)

Rapid technological advancement remained a challenge to researchers as well as to

practioners (Afuah, 2003; Agrawal, 2002; Burkey, 2002; Chau, 1996, Clements, 2003; Cooper & Wolfe, 2005) Once the bank has developed a website, making necessary changes and updates to the infrastructure is a challenge Rapid technological changes render the current technology obsolete in a short time span Rapid technological changes did not give inexperienced online financial services workers time to learn all new technologies before other innovations were ready for implementation (Lietz & Rea, p.107-109) The development tools for maintaining the

website keep changing everyday, making it difficult for content developers to keep up with rapid changes There is a time lag between strategic decisions and rapid technological changes Adding

new tools in the middle of a major project such as, online banking website is critical to the

success of the bank’s business It is a gargantuan challenge for new user interfaces to function well as web browsers are upgraded with fixes and new versions Rapid technological changes have increased in recent years with the development and deployment of automation tools (Lietz

& Rea, p.107-109)

Bank Branches

Bank branches are the traditional strategic means of expansion in the banking industry (Bach, 2002; Bauer, 2002; Byers & Lederer, 2001; Delong, 2004; Hirtle & Metli, 2004; Keeton 2001) Bank branches provide financial services to bank customers who have to go to the nearest branch to obtain these services (Hirtle & Metli, 2004) Location has been a crucial strategic consideration for bank branches where they would target the majority of customers located on the “Main Street” (Hirtle & Metli, 2004, p 1) When discussing about bank branch an image that comes to mind is a “stately office on Main Street”, where the branch manager knows the local market and fosters strong customer relations (Hirtle & Metli, 2004, p 1) Although many bank branches are still on the Main Street, there has been a gradual erosion of the bank branch position

in the retail banking market

The introduction of new banking regulations in recent years and the explosion of the

Internet technology were some of the external threats to the banking industry in the U.S

(Electronic Frontier Foundation, 2001; FDIC, 2005; FTC, 2003; Giedeman, 2004; Hirtle & Metli, 2004; Ouren, Singer, Stephenson, & Weinberg, 1998; White House, 2002) Hirtle and Metli (2004) posited that the Riegel-Neal Act (RNA) of 1994 allowed banks to branch and

merge across state lines The RNA Act enabled banks to consolidate their bank branch networks, which cut operational costs and improved their profit margins This consolidation reduced the number of U.S banks and thrift from 12,500 in 1994 to 9,000 in 2003 (Hirtle & Metli, 2004, p 2) As banks reduced their branch networks, there was an increase in bank branches after the 1980s and 1990-91 recessions The Riegel-Neal Act of 1994 and the Gramm-Leach-Bliley (GLB) Act of 1999 enabled bank branches to distribute insurance and securities products and services The GLB Act allowed banks to originate insurance and securities services The legal environment and technology were pivotal catalyst in changing the image of the traditional bank branch network

Technology has been and continues to be an instrument for change in the retail-banking sector (ABA, 2003; FDIC, 2005; Hirtle & Metli, 2004) The introduction of the ATM in 1971 was slow and it took a long time before reaching the mass market in the mid-1990s (ABA, 2003) The dropping of the ban of Automated Teller Machines (ATM) by the nation in 1996, led

to increased ATM activities The increase in the number of ATMs enabled bank stakeholders to use them more frequently even though some charged high transaction fees while others were free Apart from the changes in ATM fees, call centers were introduced in recent years to provide customers a choice of automated customer services (Hirtle & Metli, 2004)

Technology also enabled banks to develop centralized call centers for handling stakeholder services, initiating transactions such as deposits and loans (Siebel, 2005) Some banks also shifted some activities traditionally offered by bank branches such as small-business loan

approval and management to regional or national offices (Orlow, Radecki, & Wenniger, 1996) Not only has technology affected the ATM and Call Centers, but it has also led to the

introduction of new online financial services From Siebel (2005|| 1) which is one of the

foremost stakeholder service technology company, the importance of branding and the

switching costs and elevated stakeholder service has reduced (Siebel, 2005) The introduction of comprehensive contact center management by banks can leverage Internet technology by

reducing the cost of providing customer services

Internet technology enabled banks to offer their stakeholders online financial services through the web browsers (Agrawal, 2002; Bielski, 2000; Bielski, 2001; Bitner, Ostrom & Meuter, 2002; Bruene, 2001) The adoption of the Internet technology led to the proliferation of virtual banks By 2000, there were forty Internet banks in operation in the U.S (Bach, 2002) These changes reduced the role of the traditional main street bank branches in recent years However, many of the Internet only banks have merged with other banks while some collapsed completely The good news is that many Internet only banks introduced innovative strategies that were adopted later by the brick and mortar banks

Hirtle and Metli (2004), categorized banks based on the number of bank branches: a large bank was defined as one having more than 500 branches and a medium sized bank had branches between 100 and 500, while a small bank had less than 100 bank branches This study examined one aspect of the technological changes associated with the Internet: the impact of Internet banking on the core business of a large U.S bank

Statement of the Problem Banks thrive or collapse based on their ability to provide financial services that satisfy stakeholder needs Internet banking is a web-enabled technology, which facilitates access to

information that improves stakeholder service, productivity, and increases a bank’s competitive advantage Nevertheless, Internet technology introduced entirely new sets of challenges that banks had to deal with to balance their business portfolio Balancing the quality of services (QoS), stability, stakeholder services on one hand, and accessibility, agility, convenience,

innovation, security, and speed on the other hand was astounding

The Internet banking paradigm encouraged bank stakeholders to access their financial information at any time and anywhere by logging on a website (Chou, 2000; Engel, 2004;

Etrende, 2005; Holzinger, 2005) The first concern that banks faced was how to measure the nebulous nature of providing Internet banking to stakeholders Even though, many banks have introduced online financial services, there is little information regarding online services

profitability and the cost of return on investment (ROI) The second concern was how to

reconcile and measure the impact of Internet banking impact on the banks’ core banking

business The two business rival models of Internet banking and retail banking are both

competing in the same market segment Banks leveraged stakeholder value through synergies associated with aligning financial performance, stakeholder value, internal processes, and

intangible assets (Kaplan & Norton, 2004)

Measuring the impact of Internet banking on the bank’s core business and stakeholder value creation was overwhelming (Akkermans & Oorschot, 2004; Kaplan & Norton, 2004) The bank’s core business is retail banking that uses bank branches to offer customer services A bank’s stakeholders include customers, shareholders, employees, and suppliers To get data from all stakeholders would be too expensive and time consuming which is beyond the scope of this study This study described and examined how one large U.S bank measured the impact of

Internet banking on its core business using the Balanced Scorecard (BSC) framework (Kaplan and Norton, (2004) The second aspect of the study surveyed the online banking website features based on the model of Southard and Siau (2004) This study focused on Internet banking model and not the retail-banking model

Purpose of the Study The purpose of this study was to elucidate how Internet banking may create stakeholder value The case study described and evaluated the perceived impact of Internet banking on the bank’s core business using a BSC framework (Akkermans & Oorschot, 2004; Kaplan & Norton, 2004) The descriptive and evaluative techniques provided an accurate account rendition of the facts associated with Internet banking in some large U.S banks in the northeast states of U.S (ABA, Allen, & Austin, 2001; Gomez, 2003; NJDOBI, 2003, Online Banking Report, 2005) The study addressed the perceived impact of adopting Internet banking on the traditional retail-banking model The first objective of the study investigated the perceived impact of Internet banking adoption in large banks with special emphasize on (LUSB) The second objective

examined the perceived importance of the banks’ websites in supporting the banks’ mission statements Today, people can visit bank websites and get the impression of a particular bank’s services before even signing up for any services and products by reviewing the content of the site (Andaman, 2004; Bakos, 1997; Barton, Duncan, McKellar, & Ruiz-Nieto, 2000) A good

website enhanced a positive image of the bank while a bad site led to negative public reactions that could harm the bank’s brand name (Siaw & Yu, 2004)

The study described the common factors and features that banks offer to mitigate the problems of online data security, vulnerabilities, and other online threats (Adams & Lloyd, 2003; Austin & Darby, 2003; Avolio, 2001; Blau, 2005) This case study assessed if Internet banking investment was aligned with the banks’ business goals Aligning Internet banking objectives with the banks’ business goals was one way for creating value to the internal and the external stakeholders Clear and unambiguous objectives that were measurable showed the value of investment in Internet banking For example, the Barclays PLC case study by (Turk, Kuhndt, Alakeson, Aldrich & Geibler, 2003) contributed data on the environmental and social impact of electronic banking in the U.K Electronic banks reduced the use of paper by reducing the

destruction of wood pulp used in the manufacture of paper

Rationale Internet banking had received much research attention in recent years, yet the concept remains nebulous with many unresolved questions (Andaman, 2004; Aksoy, 2001; Adams, 2003; Hirtle, & Melti, 2004; Homan, & Wimmer, 2004; Siaw, & Yu, 2004; Wan, 2003) There is an urgent need for understanding how banks make decisions before introducing Internet banking services to their stakeholders (Andaman, 2004) Preliminary literature review indicated that more people were using online services in the U.S (Bruene, 2000; Blau, 2005; NUA.com, 2003) This case study described and evaluated stakeholder value proposition and the impact of Internet banking on the core retail banking business The data from this study suggested possible direct answers to the questions of measuring Internet banking stakeholder value The data from the study proposed answers to the domino effect that may lead to increased profit to the bank as the

large banks provided services that delighted stakeholders Delighted customers are most likely to remain loyal customers (Bielski, 2001; Bruene, 2001; Carroll, & Broadhead, 2001) Loyal customers imply increased profits for banks (Cho, 2000; Keeton, 2001) By describing and evaluating the current state of Internet banking in the participating banks it became clear that banks were able to reduce risks by investing in services that stakeholders wanted and were willing to pay for them Relevant information at the right time enabled the bank’s business and technology managers to work in a symbiotic relationship that led to optimal balance of synergies

at corporate, business unit, and operational or Internet banking levels

Research Questions This case study examined the possible why and the how of Internet banking management questions with two broad objectives The first objective dealt with how to measure the strategic alignment of banks’ core business with the perceived effectiveness of Internet banking

distribution channel Objective two, addressed the effects of the Internet bank website

infrastructure (IBWI) on the entire bank’s core business This study investigated how (LUSB) measured the value of Internet banking investment in relation to its core business

The following research questions investigated objective 1: How participating banks’ business strategies were aligned with the Internet banking infrastructure How LUSB bank measured the financial performance of Internet banking distribution channel? How did Internet banking create stakeholder value? How did operating Internet banking affect the bank’s internal processes (such as overall IT infrastructure, on the workers, on the bank braches, and on the

stakeholders)? What was the perceived impact of Internet banking on other departments such as, marketing, public relations, R&D, and financial services?

Objective 2 measured the participating banks’ websites performance by responding to the following research questions: Did the websites have mission statements? What Internet banking model had been adopted in the participating banks? What features were found on the banks’ websites? Who were responsible for updating the content of websites? Did the sites handle bill payment internally, or was it outsourced to a third party? Did the websites provide upward and cross selling? How did Internet banking distribution channel measure its intangible assets?

Significance of the Study Recent studies on Internet banking showed that more customers were using online banking (Awad, 2000; Bruene, 2002; Gomez, 2003; Siaw-Peng, in press, Li, 2001) Others, (Garfinkel & Spafford, 2002; Tan & Teo, 2000) were of the view that some stakeholders were concerned about online security The results of the study were to clarify and delimit some conceptual gaps about Internet banking research literature This study identified the common Internet banking business model that were applicable in the participating banks in the northeast states of U.S today that led to increased stakeholder acceptance

The data from the study would possibly contribute new knowledge to fill the gap of

business strategic alignment with Internet banking The information tailored to the top

management to assist them in assessing the value of Internet banking investments The data from the study supported the BSC framework to be applicable to Internet banking The study was to

confirm the notion that Internet banking was both an opportunity and a threat to the existing traditional retail banking business model

This study provided a means of assessing the current trends in Internet banking and the researcher would use the results of the study as a foundation for a future empirical study Banks could utilize the results of the study to facilitate discussions and review their Internet banking strategies, website features, and online security techniques Practioners would utilize the results

as a standard for evaluating current and future quality of service (QoS) Internet banking

websites This study contributed knowledge to current body of knowledge about online banking, online banking strategies, online security and services conflicts, balance between the incumbent technology models and the newer or innovative models, and that rivalry between e-banking and the traditional retail bank branch framework

Definition of Terms Analyzer strategy: The strategy combines good ideas from the two strategies to maximize growth, and minimize loss from both prospector and defender

Automated Teller Machine (ATM): A computer terminal for user initiated banking transactions

Defender strategy: maintain status quo

E-banking: is using the Internet to offer banking services to stakeholders In this study, these terms were adapted: ebanking, online banking, and Internet banking were applied

interchangeably

Fee: Is the fixed amount, which a trust institution receives as compensation for its

services, to be distinguished from allowance, charge, and commission An estate of inheritance

in real property sometimes referred to as an estate in fee, or fee simple estate

Firm level: The firm level refers the individual large bank that is the focus of the study Impact: Effect which can be either positive (1) or negative (-1)

Industry level: Refers to the financial and banking industry in the U.S

Internet Banking: according to Starita (1999) is a channel in the delivery of banking products and services

Online Banking: in this study was synonymous to Internet Banking

Operational level: This refers to the underlying Internet banking infrastructure and Website implementation and operational technologies

Phishing: Is using counterfeit email messages designed to look as if they are from the bank or using fake websites that look like the genuine bank’s website

Positively related: The value of the response is greater than zero

Privacy: Refers to personally identifiable information like a person’s name, or account number, date of birth, social security number, parental names, and college attended

Prospector strategy: Innovator and cutting edge R&D

Risks: can be categorized as economic, personal, service performance, and privacy Economic risk involves possibility of monetary losses Personal risk is potential for unsafe products and services The risk associated with imperfect monitoring of service

performance that can lead to identity theft, fraud, and cyber criminal activities, and privacy risk involves disclosing private consumer information to third parties

Security: Implies providing online protection to consumers from crooks and con artists who prey on unsuspecting online users

Super-regional Banks: Companies that provide, on a wide regional basis (across several states), banking services such as deposits; loans, leases, mortgages, and credit cards; ATM networks; securities brokerage; investment banking; insurance sales; and mutual funds and pension funds management

Stakeholders: Include employees, customers, shareholders, and the community

Technical Support: Well trained support staff that are knowledgeable and available around the clock to assist customers 24/7

Theory testing case study: is an empirical inquiry that investigates Internet banking phenomenon within its real-life context, to test a theory or competitive theories that should predict the characteristics and behavior of a specific instance This study was based on large banks in the northeast (Thomas, 2004, p 128-129)

Trust: is a catalyst for online bank service transactions that can provide consumers with the high expectations of satisfying the exchange relationships Trust is both economic and social interaction in which uncertainty is present

Assumptions and Limitations This study investigated six large banks and one small bank with branches in five

northeastern states of U.S One large bank (LUSB) provided the bulk of the information and provided materials for this study with additional support from six comparison banks The

findings of this study were not generalized to the entire banking industry This descriptive and

evaluative case study reviewed the banks’ websites and surveyed senior bank officers who were knowledgeable and were responsible for the operations of Internet banking strategy formulation, implementation, and operations (Furht, 1995) The accuracy of the information that was found on the banks’ websites was ascertained by checking with information from annual reports and third party databases

Using secondary data rather than primary data introduced limitations and possible bias or incomplete information (Cooper & Schindler, 2000; Creswell, 2003; Thomas, 2004) Internet technology is nebulous, the key elements were still evolving, and the definitions of variables changed constantly These constant changes increased the probability of errors due to the

omission of important data elements that changed while the study was ongoing The working definitions for the parameters of interest were changed and updated based on need

Data collection utilized the bank’s websites, press releases, third-party databases, and a survey to minimize the limitations In 2000, the SEC Regulation FD (fair disclosure) became effective which allowed banks to post their financial reports online after the auditor’s report This regulation made all-important reports available as soon as they have been filed with the SEC (Ettredge and Gerdes, 2005) Some data elements in the study were left blank due to the legal privacy requirements that restricted banks from disclosing certain information to outside entities

Nature of the Study, or Theoretical-Conceptual Framework This case study analyzed Internet banking in the seven participating banks in the

northeast states of U.S A case study is one of the many strategies utilized in research to answer

the how and the why questions (Thomas, 2004; Yin, 2003) This case study did not control the behavior of events but it involved stakeholders in the study and focused on the cotemporary events (Yin, 2003, p 5) The case study research strategy was an intensive investigation into why Internet banking was important to participating banks A case study was preferred because there was little knowledge about the phenomenon of Internet banking or little research had been done

in the past on the subject of interest Similarly, this research aimed at testing the BSC

framework, Porter’ Five Forces, Online Banking Website Features framework, and online

security strategies (Thomas, 2004) A case study was suitable in this study because it encouraged the production of detailed descriptions regarding Internet banking (Thomas, 2004, p 128) This study described and tested the theory of the Balanced Scorecard (BSC) The case study applied the BSC for analyzing stakeholder value that accrued from adopting Internet banking in

participating banks (Kaplan & Norton, 2004; and Southard & Siau, 2004) The case study

examined the opportunities and threats posed by Internet banking adoption and possible impact

on the core banking business The study adapted models that were used in other studies (Kaplan

& Norton, 2004; and Southard & Siau, 2004)

Over one hundred and eighty variables were investigated Some of the variables were bank asset or size, bank age, technology, bank branch, Internet banking, competitive strategies,

security, website features, privacy, consumers, competitors, service, rates, fees, speed, accuracy, 24/7, trust, accessibility, innovation, legacy systems, small and large banks A general view that adopting Internet banking would negatively affect the bank branches and the local community banks because stakeholders accessed their money online anywhere, and at anytime was

examined Stakeholders were not limited by location, size, time, and long queues in branch banks The study examined which banking model had been adopted for Internet banking

Sample Population

This study surveyed six large banks with one small bank but focused on LUSB in five northeastern states of U.S The researcher was granted permission by one bank to study its

Internet banking distribution channel The role of the bank was to coordinate internal participants

to respond to the survey questions, while the researcher relied on secondary data sources such as, websites, financial reports, and third party databases to augment the survey There was no

monetary support from the bank or its affiliates The case study utilized two questionnaires to gather data from the participating banks’ websites, press releases, annual reports, third-party databases, and online survey of Internet banking management The study described and

evaluated six large banks and one small bank The seven banks had assets in excess of $510 billions and a branch network of over 5,000 locations in the northeastern U.S Additional bank information came from the bank’s websites and from SEC (EDGAR Reports, 2005; Hoover.com, 2004) (see Table 2)

Organization of the Remainder of the Study Chapter 1 introduced the study by providing relevant background material and set forth the purpose and rationale for the study Chapter 2 described the current banking environment The rest of the study was presented in four subsequent chapters Chapter 3 contained the

pertinent literature covering Internet banking and website features Chapter 4 presented data

collection methodology Chapter 5 presented data analysis and discussion of the study’s findings SPSS for Windows version 14.0 software analyzed descriptive, quantitative data, and formatted reports The results, conclusions, implications, and recommendations for further research were presented in chapter six

Top Large Banks in the U.S

The banking industry is one of the oldest businesses in the U.S dating back to 1782 when the first bank was chartered (ABA, 2003, NUA.com; 2003; Online Banking Report, 2005) Since the inception of the first bank, the banking sector has contributed to the development and growth

of the U.S economy (ABA, 2005) The American Bankers Association (ABA) report (2005) summarized succinctly the impact of the banking industry on the U.S economy Banks supply credit and provide a means for savings For instance, in May 2005, the U.S banking industry had

$8.9 trillion in assets and $800 billion in capital The entire U.S banking industry had over 87,000 bank offices and branches with 352,000 ATMs Banks held $5.8 trillion in customer deposits and $1 trillion in administered personal trusts Today the banking industry holds $5.2 trillion in loans According to the ABA report, each dollar deposited in a bank generates $7 to

$10 in lending The Federal Reserve Bank estimated that banks annually process 40 billion checks valued at about $40 trillion Consumer debt, excluding mortgages, exceeds $1.7 trillion

As of December 2002, banks held about one-third of over $6 trillion in mortgages, home equity loans and lines of credit

The larger banks have been merging with small banks according to Hoover report for December 2004 (Hoover, 2004) Similarly, the ABA Press Room (May, 2005) report listed the top 150 banking holding companies that offer domestic, commercial, and industrial loans

The U.S has over 87,000 financial institutions, and the U.S banking industry has over

$8.9 trillion in assets with $800 billion in capital, according to a report by the American Banking

Association (ABA, 2005; Thomson, 2003) There were 4,053 banks in 2005 with less than $100 million representing 45.39% assets, 4,284 banks had assets between $100 million and $1 billion with a 47.97% asset base, and 480 banks with assets between $1 billion and $10 billion with assets of 5.38% Total assets categorized banks A large bank should have $10 billion or more total assets In March 2005, there were 113 large banks with assets of $10 billion or more that accounted for 1.27% of the total asset base as at the end of March 2005 (FDIC, 2005)

LUSB is listed among the top 25 the largest banks with assets in excess of $80 billions as

at the end of 2004 (ABA, 2005; Hoover, 2004) At the end of December 2002, 25 large banks were located in the five northeastern states The comparison banks had assets in excess of $510 billion with a branch network of over 5,000 branch offices in northeastern states of the U.S (Hoover, 2004)

According to Online Banking Report (2003), the baseline for online banking began a decade ago (Wan, 2003) Some of the common services offered by online banks are financial services such as bill-pay, deposits, checking, savings, and withdrawals The Internet Bank Pulse (BankPulse.com Database, 2003) reported that online financial institutions have grown

exponentially A count by state indicated that at the end of 2002, there were over one thousand online financial institutions in the U.S compared to only a few such institutions in 1995 Internet banking increased and reached 24 by 1997, and peaked to 200 in 1998 By the end of 2000, there were about 800 online banks offering online account balances, transaction services, and other services (Online Banking Report Database, 2001) Financial institutions included commercial banks, credit and loan savings, trust companies, industrial and other institutions