The Impact of Internet Banking on Bank's Performance: The Indian Experience

Abstract

Internet banking has turned out to be the nucleus issue of various studies all over the world. In India, there has been a literature gap on the issue constantly. This paper describes the current state of Internet banking in India and discusses its implications for the Indian banking industry. Empirical analyses have been conducted from a panel data of 88 banks for the period 1998-2005 to see the differences between the profiles of Internet and non-Internet banks and the impact of Internet banking upon bank's performance. The univariate analysis indicates several significant differences in the profile of banks that offer Internet banking and banks that do not. Broadly speaking, Internet banks are larger banks but have lesser equity cushions as compared to non-Internet banks. Internet banks rely heavily on non-interest income and also on deposits for funding than non-Internet banks do. Internet banks have better accounting efficiency ratios and higher returns on equity and returns on assets than non-Internet banks. However, the multiple regression results reveal that the profitability and offering of Internet banking does not have any significant association. Internet banking has gained worldwide acceptance as a new delivery channel for performing various banking transactions. It provides the opportunity to the customers to conduct banking transactions at their convenience. In fact, Internet banking refers to the use of Internet as a delivery channel for the banking services, including traditional services, such as opening an account or transferring funds among different accounts, as well as new banking services, such as electronic bill presentment and payment, which allow the customers to pay and receive the bills on a bank's website. There are two ways to offer Internet banking. First, an existing bank with physical offices can establish a website and offer Internet banking in addition to its traditional delivery channels. second, a bank may be established as a branchless, Internet-only, or virtual bank. Internet banking model offers advantages for both banks and customers. The Internet provides the banks with the ability to deliver products and services to customers at a cost that is lower than any existing mode of delivery. A survey conducted in US shows that of all the modes of transactions, Internet banking is the cheapest for the banks, as shown in Table 1. Customers benefit not only from the increased convenience but also from higher interest rates resulting from cost savings by the banks. The ability to pay higher interest rate with a much wider potential of customers, allows these banks to grow faster than traditional banks. Practically, the extent to which these banks distribute these benefits is not yet clear. It is therefore important for bankers, bank supervisors and policymakers to understand how Internet banking affects the performance of banks. Despite this attention, there is a richness of information on the nature and scope of Internet banking, but there is a scarcity of evidence about the impact of Internet banking activities among banks that have adopted it compared to those that have not done so. Our purpose is to fill significant gaps on this issue, especially with respect to the Indian banking markets, where no rigorous attempts have been undertaken to understand this aspect of the banking business. The evidence reveals no significant association between adoption of Internet banking by banks and their profitability. The influence of internet-activities of banks on their performance continues to be insignificant irrespective of what is used as performance variable following banking literature and industry norms for bank performance definitions. REVIEW OF EXISTING LITERATURE A very few attempts have been made to investigate the performance of banks that offer Internet banking. Table 2 summarizes the previous research done on the performance of Internet banks. …

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