The main objectives of this paper are to study and analyse how the new developments in information technology have affected banking services and methods, particularly the payment methods, and also its implications for the bank customers. In order to achieve these objectives, this study is focussed on the development and diffusion of the Automatic Teller Machines (ATMs). The research questions addressed in this study are: (1) How do people / customers perceive the use of ATMs; (2) Are there any differences in customers’ perception of ATMs in different countries (e. g. U.K and INDIA); and (3)
What kind of service provider – customer linkages exist in the diffusion of Literature survey consists of books and research papers and journals I read through during my basic studies in Research methods during my study in my course in leeds metropolitan university. This literature included mainly some common concepts of research policy, like diffusion, technological and economic change. Some specific literature was also offered, to me by my supervisor this literature included some research studies from banking world. I also got some books from Barclays bank and HSBC bank in U.
K. These books were basically dealing with the basic bank systems and the various developments that took place within the banking sectors in recent years, they also included some global information as well as the latest services that are being offered to the customers globally. Some information for this study was also searched from Internet. Using various websites of different banks and other search engines to find the data. To obtain the primary data about the perception of people and acceptance of ATM technologies, a questionnaire survey is carried out.
The questionnaires were sent to 100 people, 50 in India and 50 in U. K. To obtain a representative picture the sample size was chosen randomly. Responses were received from 85 persons, 44 respondents were from India and 41 from U. K. In U. K I delivered questionnaires on paper to my classmates, other students and teachers. I delivered also some questionnaires to my personal friends in U. K, by using papers and emails. Some persons in this group even asked members of their families to participate in the survey. Most of these replies were received on paper and five answers by using e-mail.
My methodology in India was, that I sent the questionnaire by using e-mail and fax. I sent faxes to my contact persons in four big companies in India, and they collected some answers, trying to select people from different age, gender and profession groups. After that, they send answers back by using fax-machine. I sent some questionnaires to my personal friends as well, some answered and some did not. Detailed interviews were carried out in two U. K banks, Barclays bank and HSBC bank in Leeds, and in a HSBC bank in India, In each bank, interview was made with the best ATM-specialist available.
Interview with the HSBC bank in India was made by telephone with one of the general manager of the HSBC branch who was my friend and he helped me a lot in giving the details about the changes in bank. From the early beginning of the human era, technology has been one of the most essential and most important factors for development of one mankind (Coombs et al, 1989, p. 3). During the last two hundred years, technological change has often been related to the economic growth in form of new types of goods and services.
Adam Smith in The Wealth of Nations (1776) wrote about technical change in the form of new machines as one of the three important causes of increasing incomes. Technical change played a big role in Solow’s production function (1957) and Sahal’s theories of economical growth (1983). Marx argued (1867) that the use of machines was a strength of the capitalist system, because it allowed vast increases in productivity. This paper will also discuss about some major technical and technological changes. The main attention is concentrated on the diffusion of information technology, particularly in the banking sector.
What has happened during the last fifty years, was the significant increase of the services sector. Technological change was often assumed not to take place in the services sector. But in fact, this sector has faced many technological changes over the last thirty years. To make things more effective, it has been a challenge and a springboard for many new developments, especially in the service sector (Elfring, 1988, p. 151). Prospects for continued employment growth in services are increasingly influenced by applications of information technology.
But what Baumol (1967) pointed out, was that technological change is predominantly located in the goods producing sector. He showed in his model, that following the differences in technological change, the services sector is lagging behind in productivity growth and the share of services sector in total employment will increase. However, in recent years many services industries, including banking, started to use computer and information technology, leading to increasing productivity in service sector also.
Technological change occurs through innovation, which is the driving force of the historical evolution of capitalism (Schumpeter, 1943, p. 73). According to OECD’s definition, “technological innovations comprise new products and processes and significant technological changes in products and processes. An innovation has been implemented if it has been introduced in the market (product innovation) or used within a production process (process innovation). Innovations therefore involve a series of scientific, technological, organisational, financial and commercial activities” (OECD, 1994, p. 4).
It is possible to find many kinds of technological innovations, both product and process as well, in the banking sector. This paper describes some most important innovations in payments methods and banking services, mentioning also some major differences between them. Freeman and Perez (1988, p. 45) have distinguished between four categories of innovation: Incremental innovations, which occur more or less continuously in every industry or service activity although at differing rates in different industries and countries, and effects of which are apparent in the steady growth of productivity.
Radical innovations, which are continuous events and in recent times are usually the result of a deliberate research and development activity, and which are important as the potential springboard for the growth of new markets. Changes of “technology system”, which are far-reaching changes in technology, affecting several areas of the economy, as well as giving rise to entirely new sectors. And last, changes in “techno-economic paradigm” (technological revolutions), when some changes in technology are so far-reaching in their effects that they have a major influence on the behaviour of the entire economy.
It can be stated that the overall economic effects are lowest in the case of incremental innovations and highest in the case of techno-economic paradigms (Diederen et al, 1990) There have been many kinds of innovations in the banking sector during the last forty years. Some of these innovations have become very popular and have caused a lot of changes in working environment, for example a new way to work. To understand the process of innovation, Sahal points out the importance in the web of links between the functional performance of a technology, and also size and structure of technology as well (Sahal, 1983, p.63).
Sahal has identified three basic types of innovations: structural innovations, that arise out of the process of differential growth and that also concern the nature of product design; material innovations, involving a change in the construction stuff; and systems innovations, that arise from integration of two or more symbiotic technologies in attempt to simplify the outline of the overall structure. These kinds of innovations are easy to notice in the world of banking as well.
Only to mention some material innovations, like magnetic stripes in payment cards, touch panels in ATMs, or micro-chips in those new electronic payment cards, have been platforms to continuously developing banking industry. Since the 1970s, the financial sector has been one of the branches of economic activity that has benefited most from the development of computer and communication technologies (Diederen et al, 1990, p. 120). Information technology (IT) also defined as the merger of computer and (tele-) communication technology, is considered a new techno-economic paradigm.
The implementation of the new IT-paradigm not only requires investments in IT equipment but also includes changes in institutional structure. The distinctive character of the new IT-paradigm is to be found in its penetrating effects into the services sector (p. 121). Diederen et al also show that sectors such as banking, insurance and business services, in Netherlands, make use of information technologies at a relatively high rate. But what is the reason for this high rate of IT application in banking sector. Diederen et al have found four reasons, which are playing an important part in this process (p. 121-).
First, the banks’ production process is highly suitable for applications of IT, especially in relation to the storage of data and the processing of modifications in data as a consequence of payment transfers, withdrawals or deposits. Second, banks differ from many other sectors in the services sector and in manufacturing as well because they operate on a large scale with a branch network throughout the country. Third, the banks had relatively large funds at their disposal and operated in a growing and profitable market, making it possible to invest in new technologies including software specialists, programmers and educational programmes.
Fourth, the dynamics of technological change resulted in the development of micro and personal computers, which, in turn, were suitable for use in local branches. On the other hand, Lewis and Davis (1987) have some interesting aspects in their book. They mention that there have not been so many changes in the business of banking during the last decades. A great amount of transactions in the world are still made with cash, over three quarters, and cheque is the most common method for those remaining payments.
Despite predictions of a cashless society, there has not been a transition from those old payment methods to new, electronic methods. (p. 1- ). But they continue and say, that in other aspects, the business of banking has been dramatically altered over the past twenty years, as exemplified by the rise of wholesale banking, multinational banking, Euro-banking, international banking facilities, multiple currency loans, collateralised mortgages, interest rate and currency options and swaps, and financial futures.
Credit cards, debit cards, automated teller machines, cash management accounts, electronic fund transfers, point of sale terminals are also part of this world-wide process of change which began in the 1960s, has been sustained over two decades, and continues to re-shape the nature of banking and financial markets. Lewis and Davis have some answers to the question, why these changes have specially occurred in the banking sector. One influence is a change in the “real” sector of the economy leading to demands for new types of financial services.
A second influence in the process of change has been that of improvements in technology. The growth of electronic funds transfer systems and plastic card-using devices has been the most obvious effect of the computer revolution. Without modern computing technology the costs involved in producing such assets could be prohibitive. Technological advances and subsequent innovations have also led to the creation of new markets. It can be considered, that computer technology has offered a solution to an increasing banking sector by making payments faster, more convenient and cheaper to process (Howells, 1996, p462).
But when computers were taken in use in the beginning at the large scale, they created some problems too. The amount of information generated was more than expected and that caused some problems in the whole industry, especially in managing (p. 153). At the same time, computerisation made the jobs easier rather than interesting. Employees found their work more monotonous than it was before (Gothoskar, 1995, p. 159). The early adoption of micro-computers make banking an interesting sector for the analysis of diffusion of information technology.
Diederen et al(1990) argue that “innovation diffusion is a type of economic dynamics, an adjustment of the economy to the opening up of new technological opportunities. It could be characterised as the spread in time of an innovation through certain communication channels among the members of a social system” (p. 123). They point out four different elements that are involved in the process of diffusion. First there is an innovation, which can involve a process or a product, a technical or an organisational change, an incremental improvement or a radical breakthrough.
Second is communication channels, which contain two types of channels: market channels and non-market channels. Third, a social system, which contain two aspects of the social and economic context: the market environment and the institutional environment. And at last there is the time element. Diederen et al developed a model of innovation diffusion, which is based on the notion that introduction of new technology requires accumulation of information and opportunity to learn. They have found out the importance of social and economic environment in the acceptance of new technologies.
Therefore, “the availability of a more profitable technique does not imply that it will be used immediately: different techniques will be employed at each moment to produce a certain product” (p. 138). They also found out four important factors to a firm, when it considers the virtues of a new technique: the risk of adopting a new technique; the extent of its present use, relative to its potential use (competitive force); the efficiency benefits; and the technical barriers to be overcome when the firm adopts the new technique (p. 131).
When banks are making decisions on their own technological directions of the future, all of these factors have to be considered. As mentioned above, there is a high rate of information technology in the banking sector. But how has this new technology been diffused in the world of banking? Baba and Takai have made a case study in Japan and they have found two different kinds of phases in this introduction process. At the first phase, the mid-1960s, the introduction was somewhat fragmentary, limited to individual operations of parts of the accounting system, and confined to an intra-bank networking range.
The second phase, the mid-1970s, on-line enabled the banks to systemise each unit of there accounting systems, and the range of networking was now inter-bank (Baba & Takai, 1990, p. 143). During this second phase, new services, like the automatic teller machine, appeared on the market. “Through processes of incremental modification, the banks were able to provide their specific business operations with a good deal of user-friendly software. Generally speaking, the banks’ computerised routines were devised to develop mainly on a bank-specific basis” (p.
144). It is argued that technological progress is marked by a series of discrete barriers and breakthroughs, which create new fields of technological opportunity (Ayres, 1988). Ayres mentions that the laws of nature play the most important part of this progress. (p. 1). He continues, that “the technological life cycle can be defined as the period from a major breakthrough which opens up a new territory for exploitation to the next major barrier”.
In recent decades, progress in many fields has been limited by lack of computational or information processing ability, but breakthroughs in microelectronics solved most of these problems in banking sector also. According to Ayres, it is often a technological breakthrough in another field that opens up new opportunities for innovations (p. 98). Ayres has also found some interesting topics about the technology life cycle. He argues that there are continuous changes between the balance of push and pull during this life cycle (p. 108).
In the beginning of this period, technology push is quite important, but there are some cases, for instance Say’s law, saying that supply creates its own demand. Later in the life cycle, pull takes over. During this period it is important for entrepreneurs to find “an optimum balance” on the markets (p. 108). After this period, the effect of pull declines too. This kind of trend is a common one in banking sector, where new techniques and technologies are supplied, continuously by some high-technology based firms. A good example of this was the introduction of EFTPOS-machines in Finland in the middle of 1980’s.
When banks noticed the qualities and possibilities of this new technique, “pull took over”, and a new era of banking services began (source: interviews). The new technology has to be considered and designed carefully, before it can be taken to use at large scale. Howells has studied the designing process of the European Payments System (1996). He argues, that a great deal of designing process is made by some bank working group or some steering committee, which are responsible for trouble-free systems or products (p.
456). Those bodies usually find that the range of design choices creates the possibility of redesigning key commercial relationships between themselves and between banks, customers and detailers. Rosenberg mentions some qualities for successful product design. There are things like the relative scarcities of inputs, the availability of complementary technologies, the particular historical sequences, and the preference structures of firms and customers (Rosenberg, 1994, p. 3).
Rosenberg mentions also, that there is a lot of testing, redesign, modification and re-testing during this designing process. These expensive and time-consuming development activities are important aspects to understand performance characteristics and reliabilities of those new products (p. 13). And this paper consists of some important innovations, especially innovations in banking sector. The underlying idea is, that innovation is a result of the evolution of dynamic competencies.
Technological change, learning and interacting necessitate educational skills and competencies. Therefore, the whole process of innovation involves investment in skills, educated employees and R&D, and results again in faster technological change and accumulation of internal capabilities (Leiponen, 1996, pp. 9-11). Rothwell (1977) and Rothwell and Walsh (1979) found out two important factors in the innovation process. They argued that understanding the users needs and good communication and effective collaboration are the most valuable information inputs for the innovators.
By understanding these factors, the door to the success of an innovation is open. Kline and Rosenberg (1986) argue that both supply and demand are important factors in this process. They have also found out that the coupling of technology and market is worth of consideration if an innovation is going to be successful. Coombs et al makes a conclusion saying that innovation is a very complex process and it is very difficult to think about some specific factor that is more important that the other factors in this process (Coombs et al, 1989, p.102).
What is then the role of new innovations, and most of all, what is the impact of them? These questions are discussed by Rosenberg in his book. He mentions that the strength of new innovations will depend on their backward and forward linkages (p. 76). Backward linkages, like expenditures for buildings, machinery, equipment, and raw materials, such that the initial innovation and investment requirements play an important part in the decision making process in the production of goods sector.
Forward linkages, like a reduction in the price of the products, an expansion in the size of their market, an expansion in the rate of capital accumulation and output growth, are only few examples of these linkages. It might also happen, that these innovations induce the creation of whole new products and processes, in other sectors as well. Rosenberg mentions also, that an innovation from outside will perhaps not reduce the price of the product, but it makes possible wholly new or improved products or processes.
The world of banking differs quite a lot in different countries. In case of U. K and India, the differences are much bigger than one might even think of. Banking services have developed during a long period of time to fulfil needs of just only specific country. To understand the differences between countries, Rosenberg has found out some “needs” which play different roles in different countries (p. 111). Differences in the resource endowment and demand conditions of an economy are showing the way, what kinds of inventions it will be profitable to develop and exploit.
Each country has its own visions about what is important and what might be worth of developing just in that specific country. Rosenberg argues, that only those inventions that are compatible with a country’s needs would be successful ones. At different times, there are some innovations that are easier to create than others, and there might be some great differences between other countries. The level of technical knowledge, as well as economic forces tend to push economies in different directions.