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INTRODUCTION
Background
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world. Hence this research project seeks to examine the
innovations that have occurred in the banking sector.
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Problem Statement
Theoretical Framework
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common, yet differs from one another. These factors
include the following innovatory services:
• ATM Cards
• Credit Cards
• Debit Cards
• Pre-loaded Cards
• Smart Cards
• Mobile Banking
• Virtual Banking
• Internet Banking
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1. To measure the overall impact of innovation on
the commercial banking services.
2. To determine the advantages that innovations have
added to commercial banking services.
3. To analyze the role and importance of innovation
in the enhancement of commercial banking services.
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Virtual Banking refers to banking over the Internet.
Banks that develop web sites and offer various
transactional facilities are said to be providing virtual
banking facilities.
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CHAPTER 2
LITERATURE REVIEW
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which is much close to our own banking system of present
time. The basic banking system that was developed in the
ancient time era continues till this day. Goetzmann
describes the importance of the ancient banking system:
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institutions laid the foundation for modern banks of
deposit and transaction (“History of Banking,” 2000).
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Functions Of Banks
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The second most important function of banks is that
they help provide a medium of exchange. This medium of
exchange can be cash, check, credit or debit cards, etc.
Without these facilities, customers would not be able to
make payments, and people would revert back to the barter
system, which is highly very inefficient as well as time
consuming.
Commercial Banks
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commercial banks make many other kinds of loans to
private individuals, firms, government agencies or to
the Government itself. They also issue time and
savings deposits and operate trust departments. Though
commercial banks do not issue currency, they do issue
money in the form of demand deposits hence they have
the power of creating and destroying money
(www.centralbankbahamas.com).
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with the bank. The remaining is profit for the bank. The
profits either can be paid out to bank stockholders or to
the holding company in the form of dividends, or the
profits can be retained to build capital (net worth)
(“Commercial Banks,” 2000).
Innovations
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Recent managers, Porter and Stern in a paper submitted
to the council on competitiveness said that, Innovation is
the transformation of knowledge into new products,
processes, and services – involves more than just science
and technology. It involves discerning and meeting the
needs of the customers (Porter & Stern, 1999).
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ideas that marketing refined with market feedback. R&D and
marketing were linked (Rothwell, 1994).
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currently at the top of the economic ladder. Examples
include the United States and Japan. Therefore, no
advanced economy can maintain high wages and living
standards, and hold its own in global markets, by producing
standard products using standard methods (Porter & Stern,
1999).
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Table 2.1: Comparison of the US Banking Industry
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Hunter, 1998). The rest of the world is also excelling in
the use of technology in Banking.
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Innovation in technology has been the main force
behind innovations in the banking sector. Technology has
brought about many new media, and methods of transacting.
For example, many banks have started to develop their own
web sites. These web sites give the consumer information
about the services offered by the bank. In the US alone,
the number of banks that offer internet banking is
increasing very rapidly. In the different sizes of banks,
the largest banks have taken lead, and 100% of them are
offering internet banking. Where as the smaller banks are
catching up quickly in order to provide internet banking
services. Figure 2.2 explains this phenomenon.
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Moreover, many banks are moving away from simple web
sites to providing transaction facilities to their
customers on the web sites. As it is evident from figure
2.3, the number of banks with transactional web sites is
growing very rapidly. In the fourth quarter of 1997 (Q4-
97), there were 103 banks that had transactional internet
web sites. This figure has gone up by more than 10 times
in just two year. In the fourth quarter of 1999 (Q4-1999),
there were 1,100 banks offering transactional web sites.
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100 million transactions in 1996, to well over 275 million
in 1997.
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fast pace with which the retail industry is embracing
innovatory payment systems in their banking transactions.
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systems include credit cards and debit cards. Figure 2.6
shows the percent of users using various types of payment
systems in the United States between 1990 and 1994. Credit
card and debit card payment systems are slowly gaining on
check based payment systems.
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facilitate the customers, but also they have reduced the
cost per transaction for a bank. If a customer were to
withdraw money from a teller, or an ATM machine, the cost
difference would be huge. The teller cost about $1.4 per
transaction, where as the ATM machine is much cheaper, and
only cost $0.40 per transaction. This is $ 1.00 cheaper
than the human teller.
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Figure 2.7: Banks have cost incentives to
encourage electronic payments
(Cost Per Transaction)
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them to attract customers, who find it easier and more
convenient to use newer technologies and products. More
over, banks have also benefited by lower costs of using
innovatory techniques and products.
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CHAPTER 3
METHOD
Sample
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Sources Of Data
Procedure
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CHAPTER 4
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time of the day, even if the bank itself is closed.
Moreover, banks have established ATMs all over the country.
Even in places where there are no bank branches. This lets
the user to withdraw money from almost anywhere, at any
time.
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Habib Bank Ltd. and Union Bank. OneLink, and other
networks have developed a centralized database, with which
all of the ATM machines of various banks are connected.
This lets a customer of one bank use the ATM machine of any
of the other banks that are part of this network. For
instance, a consumer has an account with Habib Bank, and
uses Habib Bank’s ATM card. If the user is unable to find
a Habib Bank ATM nearby, or there are no Habib Bank ATMs in
a particular city, the user can still withdraw money from
his/her own account, if another bank, that is part of the
OneLink network, has an ATM machine available. The user
simply can enter his/her card in the ATM of any of the
other banks, and the ATM will recognize this as another
bank’s ATM card. The user will then be transferred to the
central database, which will allow the user to access
his/her account from Habib Bank.
ATM Issuing
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applying for a new account. Just as banks would give an
application for the issuance of a check book when opening a
new account, banks today are doing the same with ATM. This
has led to an increase in the number of ATM card users.
Banks realize that the cost of an ATM transaction is much
lower. Furthermore, banks are encouraging their customers
to use the ATM machine for normal queries. For instance in
Allied Bank, telephone operators encourage customers to use
the ATM to get their bank balance information and other
information related to their account. Banks are using
measures such as these to encourage users to use the ATM
machines, to help save on costs.
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• The customer is more secure and safe, since he/she
does not need to carry cash around with him/her.
Credit Cards
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card. Banks have innovated their processes, and have done
away with these three flaws.
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to save time of the consumer by allowing speedy
transactions. Furthermore, customers who make purchases
from other countries are facilitated by the use of credit
cards. Previously users had to issue checks, or send pay
orders, or send money through tele transfer. The first two
procedures took much longer time, since customer had to
wait for the check or the pay order to clear. The cost of
tele transfer is too high. It costs US $ 5 per transaction
for international tele transfer. With the help of credit
cards, consumers can now make payments online, and the
transaction will be processed in less than a second.
Moreover, it is a low cost method, depending upon how
quickly the user pays back the money to the bank (delay in
payment results in interest being charged).
Debit Cards
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popular because many consider it as a more Islamic medium
of purchasing goods. Moreover, merchants are happy to
accept debit cards, since the processing fee they have to
pay is much lower as compared to credit cards.
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• Debit cards are an Islamic mode of transfer.
Many more people in an Islamic country are
willing to go for this mode of payment.
• Debit cards have no interest or fees, therefore
it is very affordable.
• Money is debited directly from the user’s
account. Therefore there is no chance of going
into debt.
• Debit cards are safer than cash and credit cards.
If lost, no one can use it without the secret PIN
code.
• Debit Cards help to save on costs for banks. The
per transaction cost for debit cards is the same
as ATM cards, which is $ 1 cheaper per
transaction than a human teller.
• Debit cards have helped to attract more customers
for banks.
• Debit cards are a more efficient way of
transferring money. Hence more customers are
likely to use this mode as compared to cash.
This results in more users using a particular
bank’s services.
Smart Cards
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personal information such as passport and ID card numbers,
etc. However, in Pakistan the concept of a smart card is
slightly different. The difference between a debit card
and a smart card is that smart cards can be used anywhere
in the world. Banks, such as Union Bank, have made
arrangements with various organizations around the globe,
which allows a user to use his/her smart card in ATM
machines anywhere in the world. For example, Union Bank
smart cards can be used in Cirrus ATM machines all over the
world. A user can also use a Union Bank smart card
wherever MasterCard is accepted. This gives a dual use to
the smart card, where it can be used in ATM machines as
well as a replacement to credit cards.
Preloaded Cards
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names by various banks; however all of them serve the same
function. Anyone can go to a bank and present the bank
with money. The Bank will then issue the customer with a
card, which has the amount of money the card user paid for.
The benefit of this system is that anyone could go and get
a card. Even if someone does not have a bank account, they
can obtain this card. While obtaining a debit, credit or
smart card requires that the user have a bank account. The
preloaded cards can be used in ATM machines or at various
merchants that accept debit cards. The main negative
aspect of this method is that if someone were to loose
their card, they loose all the money available in the card.
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Innovations In Electronic Banking
Mobile Banking
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then sends in his/her inquiry, through SMS, along with the
PIN code, as well as the account number to a dedicated
number. In reply, the user receives an SMS with the
desired information. The services available through SMS
mobile banking include, balance inquiry, mini statement
which displays the last 4 transactions on the account,
account blocking an account, and unblocking an account.
Other banks offer varying services.
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web sites. However not many offer the ability to carry out
transactions over the internet. Habib Bank, was a pioneer
in this area with their E-Bank. Other banks have followed
suit, and are providing various services through the
internet. Some of these services include, balance inquiry,
account statement, transfer facility, bill payment, check
book requests, standing orders, personalized alerts, salary
payments, account transfers, payment to third party,
foreign currency payments and funds management.
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are promising many more services over the internet in the
near future.
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switch to banks that offer virtual or online
banking.
Internet Banks
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Table 4.1: Services Offered by US Transactional
Internet Banks
Key services offered by transactional Internet national
banks (Q3 1999)
Type of service Percent of transactional Internet banks
offering selected services
All Less $100 $1 $10
banks than million billion billion
$100 to less to less and
million than $1 than over
billion $10
billion
Balance inquiry 88.8 74.1 90.2 90.2 100.0
and funds
transfer
Bill payment 78.2 60.0 77.4 90.4 100.0
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Non-IT Related Innovations
Leasing
Home Financing
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interest remains fixed over the 20 year period. Floating
loans keep changing with the change in interest rates of
the country.
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CHAPTER 5
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Internet banking will also accelerate the ongoing
process of financial deepening, i.e. the widening
applicability of more formalized financial markets in the
economy. Traditionally, small start-up firms with a limited
credit history have been unable to secure external funding
in formal credit markets, including banking. Technological
advancements in data collection, data management, and
financial engineering have improved the ability of
potential creditors to assess the creditworthiness of
potential borrowers and to price the risk associated with
those borrowers through standardized mechanisms such as
credit scoring. As a result, the range of businesses and
individuals that can obtain loans through financial
institutions is that can obtain loans through financial
institutions is information that can be entered into a
standardized database, and thus it avoids the costs
associated with customized loan products. Standardized
credit scoring is easily transferable to multiple lenders
or potential lenders, a process that eliminates any
economic rents created when credit depends on specialized
knowledge of a lender with respect to a particular
borrower. The result is greater access and lower cost for
borrowers who qualify for this type of lending.
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customers previously out of reach to them. On the other
hand, there are substantial economies of scale and scope in
data storage and data processing, and larger banks are
better positioned to exploit these than smaller banks. In
addition, the proliferation of Internet sites means there
may be a substantial advantage for banks able to
distinguish their products from those of other banks. This
implies a significant advantage for large firms and banks,
which possess resources to brand and market themselves.
These factors could boost both the pace and scope of
consolidation in the banking industry.
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quality products produced by specialized financial service
providers.
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REFERENCES
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Carlson, John, Fust, Karen, Lang, William W., & Noelle,
Daniel E., (2001). Internet Banking: Market Developments
and Regulatory Issues. [Electronic Version]. Society of
Government Economists Conference 2000, The New Economy:
What Has Changed, and the Challenges for Economic Policy
Nov. 17, 2000, Washington, DC.
Fust, Karen, Lang, William W., & Noelle, Daniel E., (2000).
Internet Banking: Developments and Prospects. [Electronic
Version]. Economic and Policy Analysis Working Paper,
Office of the Comptroller of the Currency, Department of
Treasury.
53
Furst, Karen, Lang, William W., & Nolle, Daniel E. (2002).
Internet Banking: Developments and Prospects. Program on
Information Resources Policy Paper, Center for Information
Policy Research, Harvard University, April, 2002.
Fust, Karen, Lang, William W., & Noelle, Daniel E., (2000).
Special Studies on Technology and Banking. Quarterly
Journal, 19, 29-48.
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[Electronic Version]. The Wharton Financial Institutions
Center Working Paper, The Wharton School, University of
Pennsylvania, 98-29.
55
Version]. The Wharton Financial Institutions Center Working
Paper, The Wharton School, University of Pennsylvania, 97-
09.
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