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. BANK (LUSB)
by
Tom Wamalwa

A Dissertation Presented in Partial Fulfillment
Of the Requirements for the Degree
Doctor of Philosophy


Capella University
June 2006
UMI Number: 3223883
3223883
2006
Copyright 2006 by
Wamalwa, Tom
UMI Microform
Copyright
All rights reserved. This microform edition is protected against
unauthorized copying under Title 17, United States Code.
ProQuest Information and Learning Company
300 North Zeeb Road
P.O. Box 1346
Ann Arbor, MI 48106-1346

All rights reserved.
by ProQuest Information and Learning Company.
© Tom Wamalwa, 2006

















All Rights Reserved

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.



iii

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

ix

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


x

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

xi


xii
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



CHAPTER 1. INTRODUCTION

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
Internet Banking
2
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.

Internet Banking
3
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

Internet Banking
4
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

Internet Banking
5

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

Internet Banking
6
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;

Internet Banking
7
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

Internet Banking
8
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

Internet Banking
9
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

Internet Banking
10
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