Impact of mobile and internet banking Essay Example

mobile networks even in remote areas. Additionally, economically disadvantaged individuals tend to trust mobile phone companies more than traditional financial institutions. In general, banking involves accepting and safeguarding money from individuals and entities and lending out those funds with the aim of making a profit. The Banking Act of Kenya defines banking as accepting money on deposit on demand or for a fixed period or after notice, as well as accepting money into current accounts and processing checks. Banks are authorized by this act to use deposited funds for investments or any other purpose while assuming associated risks. Currently, there are 43 licensed commercial banks in Kenya - 31 locally owned and 12 foreign-owned ones.Kenya has a range of foreign-owned financial institutions, including Citibank, Habib Bank, Standard Chartered, and Barclays Bank. The government has a significant stake in three commercial banks, while the rest are mainly family-owned. These banks accept deposits from individuals and make profits by offering loans to businesses at high interest rates. To ensure proper regulation and governance, Kenyan banks operate under the Central Bank Act and the Companies' Act. These acts outline their activities, rules for publishing financial statements, minimum capital requirements, and reserve requirements.

Kenyan banks have also embraced technological advancements such as ATMs and mobile banking (m-banking). M-banking allows customers to access banking services through their mobile devices. Mobile networks in Kenya like M-pesa by Safaricom, Orange money by Orange, Yu-cash by Essar, and Airtel money by Airtel provide m-banking services that enable customers to conduct various transactions including managing accounts and accessing personalized information.

The popularity of mobile money services is evident in Kenya's market where approximately 15 million users

transfer Kshs.2 billion daily through these platforms. Over 14 million of these users are Mpesa customers.M-money providers have partnered with commercial banks, such as Equity Bank, Kenya Commercial Bank, Barclays, and Co-operative, to offer mobile-based financial products for the unbanked population. Internet banking, also known as e-banking, utilizes internet and telecommunication networks to provide a range of services to bank customers (Steven, 2002). This allows individuals to conduct banking activities online from their homes or offices. Some banks offer both online banking and physical branches, while others operate solely online without physical locations. Traditional banks' online banking allows customers to perform regular transactions such as account transfers, balance inquiries, bill payments, stop-payment requests, and even apply for loans through the internet. The convenience of accessing account information anytime and anywhere has significantly improved banking efficiency (Steven, 2002).

Kenyan financial institutions recognize the significance of information systems in their operations as customers become more technologically savvy and expect superior services. Recent research demonstrates that technological innovation directly influences operational performance improvement (Upton and Kim 1999). Effective systems powered by technological innovations are crucial for strategic management in financial institutions to mitigate unexpected events and reduce risks (p align="justify"). Only institutions capable of adapting to change and embracing new ideas can ensure their survival.The performance of financial institutions has been significantly influenced by technological advancements, including mobile phones and the internet. The introduction of e-banking in Kenya has led to various changes in these institutions. Customers now have access to fast, efficient, and convenient banking services. While these advancements have improved certain tasks and reduced costs, challenges such as resource allocation, plastic card fraud, and counterfeit card fraud

still exist. Therefore, it is crucial to manage the costs and risks associated with internet banking. Before implementing innovations in internet banking, a careful analysis of the associated risks and costs must be conducted to avoid negative impacts on performance. Banks rely heavily on the efficiency and effectiveness of internet banking as well as strict controls and standards to prevent losses related to it. Financial institutions need to find a balance between these controls and standards to maintain their prosperity. Achieving this balance requires a thorough analysis and understanding of how internet banking affects both financial institutions themselves and their customers. Mobile money services have emerged as strong competitors for traditional financial institutions in Kenya. Initially designed for communication purposes, cellular phones have replaced methods such as smoke signals and drums.Financial institutions in Kenya have incorporated ICT to enhance their banking services, enabling customers to access account information (Tiwari, Buse, and Herstatt, 2007). Additionally, mobile phone service providers have expanded financial services through their networks by offering mobile money services. The Central Bank of Kenya (CBK) and the Communication Commission of Kenya (CCK) have granted permission for these services. With the introduction of new money transfer systems like M-pesa, competition in the mobile money business continues to intensify across all mobile telephone service providers. This study has two objectives: 1) To assess the impact of mobile and internet banking on the performance of financial institutions in Kenya; and 2) To determine the extent of mobile and internet banking usage in financial institutions in Kenya. The findings from this study will have significant implications for emerging financial institutions in Kenya as it aims to address barriers

to implementing internet banking, demonstrate its success and growth, and identify areas for improvement in banking operations through internet banking. It is crucial for bank executives and policymakers to understand internet banking as a product of internet commerce when making strategic decisions.This study aims to provide insights into the current status of mobile money services in Kenya, including factors contributing to its growth and competition for commercial banks. The information gathered will be valuable for both the financial institution sector and telecommunications industry in developing effective strategies. Additionally, this study serves as a resource for students, academicians, institutions, corporate managers, and individuals interested in gaining knowledge about mobile and internet banking.

It is important to note that there were limitations and challenges faced during this study. Obtaining approval from CEO or HR manager for questionnaires involved a bureaucratic process that resulted in delays obtaining necessary data. Some customers were unwilling or too busy to complete the questionnaires.

CHAPTER TWO: Literature Review
This chapter thoroughly explores the concept of internet and mobile banking by examining various theories and empirical studies. The theoretical framework used includes the Theory of Information Production and contemporary banking theory. According to Diamond (1984), economic agents may choose to produce information about potential investment opportunities if it is not readily available. However, searching for borrowers directly can result in significant costs for surplus units, leading to duplication of information production costs.Banks provide a valuable service to both surplus units and deficit units. Without banks, surplus units would have to spend a lot of money gathering relevant information before lending funds to borrowers. However, banks benefit from economies of scale and possess expertise in processing borrower-related

information. They can initially gather contact information with borrowers and gain more knowledge through repeated interactions. Banks become experts in processing this information by developing credit ratings. With their advantage in information, depositors trust banks with their funds as they can direct these funds to appropriate borrowers without incurring additional costs for acquiring relevant data.

According to Bhattacharya and Thakor (1993), contemporary banking theory focuses on the asymmetry of information in the economy. This theory assumes that different economic agents have varying pieces of information on relevant economic variables which they use for their own profit. This leads to adverse selection and moral hazard problems. Adverse selection refers to the lack of information about lenders' characteristics before a transaction, while moral hazard occurs after the transaction and involves opportunistic behavior by lenders.

Innovation is defined by Mahajan and Peterson (1985) as a new idea, object, or practice within a social system. The diffusion of innovation is the process of communicating it over time among members of that social systemThe diffusion of innovation theory, as explained by Clarke (1995), aims to understand the successful adoption of new inventions such as internet and mobile banking. According to Sevcik (2004), not all innovations are immediately adopted, even if they are good, due to resistance to change. However, this resistance does not completely stop their diffusion. Rogers (1995) identifies five critical attributes - relative advantage, compatibility, complexity, triability, and observability - that significantly influence adoption rates.

Rogers' research in Kenya reveals that organizations with access to internet and information technology departments adopt mobile and internet banking more quickly compared to those without such resources. While empirical studies often focus on the substitution

of currency with online tools instead of internet banking itself, Freedman (2000) categorizes internet banking into three categories: access devices, stored value cards, and network money.

However, the aspect of accessing new devices in internet banking is frequently overlooked. On the other hand, internet money combines stored value (smart cards) and network money (value stored on computer hard drives). Santomero and Seater (1996), Prinz (1999), and Shy and Tarkka (2002) present various models that identify conditions where alternative payments can replace currency.The success of internet substitutes relies on both technological characteristics and the presence of an alternative payment system not controlled by the Central Bank. According to Friedman (1999), computers now enable bypassing the payment system entirely through direct bilateral clearing and settlement.

Kenya's banking industry has been greatly impacted by advancements in technology driven by the emerging information-driven economy. The introduction of mobile banking has led to significant growth in this sector, providing low-cost banking services and increasing mobile phone usage, especially in rural areas.

In 2009, Standard Chartered became the first bank to introduce mobile banking across seven African markets, including Kenya. In Kenya, customers can access banking services through a user-friendly platform called Unstructured Supplementary Services Data (USSD), which operates on GSM carrier networks. With USSD, customers can conveniently conduct real-time banking from anywhere using their mobile phones without requiring specific handsets or downloads.

Barclays Bank also offers its customers a free mobile banking platform known as 'hello money' to access banking services via their mobile devices.Co-operative Bank introduced mobile banking in 2004 and offers a range of services such as account access, transactions, balance checks, SMS alerts for credit and debit transactions, utility bill payments,

and fund transfers. Equity Bank also has its own mobile banking platform called Eazzy 24/7 that provides similar services. Along with mobile banking, customers can also choose to use telephone or PC banking. They can check their account status by calling the bank's provided telephone numbers or accessing information on their phone's computer system using authentication codes given by the bank. This convenient service allows customers to conduct their banking activities without leaving their location.

In Kenya, internet payments utilize a unique card system that involves smart cards with integrated circuits for secure online transactions. These plastic devices serve as Credit Cards, Debit Cards, or ATM cards and have monetary value like physical cash. They store data on a microchip which includes a "wallet" for storing value and security programs to protect user transactions. The cards enable direct payment without involving banks or third parties and do not require central clearing; transactions are promptly valued.

This chapter provides guidance on research methodology including how to gather, analyze, and interpret observed facts.The text outlines the logical framework for conducting the study and provides an overview of the research design, population, and sample selection methods, as well as the data collection techniques employed. According to McMillan and Schumacher (2001), a research design is a plan that determines subject selection, research locations, and data collection procedures in order to address research questions. It serves as the conceptual framework guiding the research process while outlining data gathering and analysis techniques. In this study, descriptive and qualitative research designs were used to gain a comprehensive understanding of how mobile and internet banking impact financial institutions' performance.

To collect qualitative data, managers, subordinate staff

members, and customers of financial institutions in Kenya were interviewed. Out of 61 institutions contacted for participation in the study, only 30 responded. The targeted respondents included managers, employees, and customers. Sampling was necessary because not all population elements use mobile and internet banking.

To ensure representation across different groups within the population, stratified sampling was used by dividing it into homogeneous subgroups that were mutually exclusive. These subgroups consisted of microfinance institutions, SACCOS (Savings And Credit Cooperative Organizations), and commercial banks. The sample size included 2 microfinance institutions, 11 SACCOSs,and17 commercial banks.
The data collection process involved utilizing primary sources in the form of open and close-ended questionnaires. These questionnaires were administered to managers, employees, and customers. The objective was to gather information on various aspects such as the extent of mobile/internet banking usage, customer demographics, services provided, satisfaction levels, impact assessment, performance evaluation, growth opportunities, and challenges encountered through these channels. This approach proved advantageous by saving time and cost for both respondents and researchers.