Online Banking

E-Banking & Trust


1.1. Background

Information technology has been one of the driving forces in the changes that have occurred in trade and economy. Global trade is fifty times bigger today than 1950 and it continues to grow. Information Technology, IT, is the use of computer hardware and computer software to store, convert, process, retrieve, transmit and protect information. Technology has become more accessible, cheaper and easier to use, which has had a significant impact on the world's trade and commerce. With the introduction of the Internet and the World Wide Web companies acknowledged IT as a tool to do business while consumers acknowledged it as not only an opportunity to purchase goods and services but also to obtain information. This has led to the development of the new phenomenon of the 21st century, which is known as the electronic commerce. “Electronic commerce, e-commerce, is simply any business transaction that takes place via digital processes over a network.” E-commerce is a rapidly growing industry, which has and still changes economy, markets and industry structures. It has also changed products and services and their supply chains, but also consumer behavior and the labor market. Many service industries have changed their ways of doing business because of the e-commerce; one of these service industries is the banking industry. Banks have made most parts of their services and business accessible online; this is called e-banking. E-banking provides bank customers with the possibility to pay their bills, take out loans, check their account balances, transfer money online etc. E-banking has had great impact on the banking industry and the online competition between the banks has increased. Banks need to develop creative solutions of how to make full use of the new technology and how to provide their customers with high online service quality. When lacking face to face interaction banks must increase the experienced online service quality among customers in order to reach and sustain competitive advantages and customer relationships.

In recent years, the advancement in technological developments in information technology has lead to the evolution of e-banking in the banking industry. The evolution of e-banking has fundamentally transformed the way banks traditionally conduct their businesses and the ways consumers perform their banking activities (Eriksson et al., 2008; Sayar and Wolfe, 2007). Today e-banking has experienced phenomenal growth and has become one of the main avenues for banks to deliver their products and services (Amato-McCoy, 2005).

E-banking reaps benefits for both banks and its customers. From the banks' perspective, e-banking has enabled banks to lower operational costs through the reduction of physical facilities and staffing resources required, reduced waiting times in branches resulting in potential increase in sales performance and a larger global reach (Sarel and Mamorstein, 2003). From the customers' perspective, e-banking allows customers to perform a wide range of banking transactions electronically via the bank's website anytime and anywhere (Grabner-Kraeuter and Faullant, 2008). In addition, customers no longer are confined to the opening hours of banks, travel and waiting times are no longer necessary, and access of information regarding banking services are now easily available (Hamlet, 2000).

However the success of e-banking isn't without its problems. Firstly the adoption of e-banking has not kept pace with that of internet usage (White and Nteli, 2004). This gap is attributed to the lack of trust among bank customers, particularly among internet users age 65 and older (Ilett, 2005; Perumal and Shanmugam, 2005). Secondly, customers still prefer face to face interaction (Asher, 1999) due to reasons such as fear of the online environment and lack of trust in the internet. Recent literature on e-banking showed that the formation of trust can help reduce the impact of key inhibiting factors such as fears about using the online service among non-e­banking customers (Vatanasombut et al., 2008).

Moreover, even with the increased usage of e-banking in recent years, banks are faced with a conundrum - whilst e-banking does have its benefits of convenience and cost savings; the ease at which e-banking allows for switching back to traditional ways of banking consequently reduces long term customer commitment (Sarel and Mamorstein, 2003). The commitment-trust theory of Morgan and Hunt (1994) proposes that trust leads to commitment in relationships, and so, if trust is built amongst existing customers, over time they will become committed to the e-banking service, reducing the chances of customers “jumping ship” (Mukherjee and Nath, 2003; Vatanasombut et al., 2008).

Evident in past literature is the fact that risk plays a role in the formation of trust (Chen and Dhillon, 2003; Pavlou, 2003), but what is not evident is the relationship risk has with trust especially in regards to the perceived risk consumers have in transacting on the internet. Past research studies into the area of risk found that it is not objective risk, but perceived risk which matter in the formation of trust (Bauer, 1960 as citied in Büttner and Göritz, 2008; Garbarino and Strahilevitz, 2004). A recent research study found that, perceived risk is directly related to an individual's adoption of e-banking with many past research studies showing that intention to use e-banking is often times affected by fears of theft or fraud (Gerrard et al., 2006). The relationship between perceived risk and trust is an underdeveloped area in the literature. Past work in the area of trust and perceived risk has not yet managed to fully determine the exact relationship which risk has on trust, as whilst risk is necessary for the formation of trust, it is not an antecedent of trust (Chen and Dhillon, 2003). Moreover, trust has been shown in the past to effect perceptions of risk, as well as having mediating effects through risk (Pavlou, 2003).

Hence the purpose of this research is to investigate whether a customer's perception of risk in the internet would have moderating effects on trust and a customer's willingness to use e-banking. As noted by Büttner and Göritz, (2008), there is a lack of empirical studies in this area. Moreover by understanding the nature of risk and trust, banks can ascertain the steps necessary on their part to ensure that the trust which they have built in their services will indeed influence customers' adoption and commitment to e-banking.

1.1 The Trend of Online Banking

Hong Kong is a well developed city with around 7 millions citizens. “Currently, there are around 38 authorized institutions offering Internet banking services in Hong Kong” (Li, 2004). At the end of 2004, around 2.7 million personal Internet banking accounts were established in Hong Kong (Hammond, 2005). From government official Website, the labor force in 2005 is around 3.6 millions. Roughly estimating, one labor has around one to two e-banking accounts. Banks are still trying hard to attract more potential users in order to reduce cost. Every transaction conducted with a teller costs a bank approximately UK£1-2; but an online transaction costs a bank only a fraction of a penny (Standford, 2002). Since our next generation is receiving better education, so they have higher tendency to accept information technology. Internet banking provides an access to banking services 24 hours a day, 365 days a year. Users can manage their finances anytime, anywhere without visiting the traditional bank in person. It also helps to save the bank's human resources, thus reduce the operating cost (Education and Manpower Bureau, 2001). However, some people will be attracted by the promotions, register it and try to use it, but finally they will give up using it. According to Keaveney (1995), customers switching behavior will damage market share and profitability of services firms. Therefore, retention of customers and attraction of new customers is an important issue. Trust has been an important aspect for acceptance of technology and is an important ingredient for long-term orientation. There is a significant relationship between trust and continuity. (Pavlou, 2002; Morgan & Hunt; 1994; Anderson & Weitz, 1989; Ganesan, 1994) So, I will examine the determinants of trust of online banking.

1.2 The Objective of Study

This study is to examine the factors affecting trust of Internet banking in Hong Kong. In addition, a research model will be developed after analysis and the critical determinants will be indicated. The result of the study is useful for online banking services providers to retain their customers. Recommendations will also be made.

Literature Review

2.1 McKnight et al. (2002) Model

McKnight et al. (2002) suggest that “Disposition to Trust”, “Institution-base Trust”, “Perceived Site Quality” affect customers' trusting beliefs in the e-commerce context. In addition, they suggest that “Disposition to Trust”, “Institution-based Trust”, “Trusting Beliefs” and “Perceived Site Quality” affect customers' intention to engage in trust related behaviors with a specific web vendor. They also suggest that “General Web Experience” affect customers' perceptions of the institutional environment.

I used part of the factors suggested by McKnight et al. (2002) in my research model.

2.2 Gefen et al. (2003) Model

Similar to McKnight et al. (2002), Gefen et al. (2003) suggest that “Institution-based Trust” affect customers' trust with an e-vendor. However, they separated “Institution-based Trust” into two constructs namely “Structural Assurance” and “Situational Normality” in their research. In addition, they suggest “Knowledge-based trust” is an antecedent of trust, it defined as familiarity with the e-vendor. Contrary to the previous research (Gefen, 2000), “Knowledge-based Trust” did not significant increase trust in an e-vendor. Gefen et al. (2003) believed that the effect was mediated by other constructs. They still believe that familiarity does increase trust, but this effect is channeled through other constructs only. Similar to McKnight et al. (2002), they suggest trust in the e-vendor will affect customers' intention to shop online.

Now, I base on their models to develop a research model in online banking context.

2.3 Research Model

My research model is mainly based on McKnight et al. (2002) and Gefen et al.

Tarter, 2004; Smith & Birney, 2005; McKnight et al., 2002; Mayer et al., 1995). It is “the trait of trusting; of believing in the honesty and reliability of others” (WordReference, 2005). Trust is also referred to the willingness to rely (Doney, Cannon, & Mullen, 1998; Van & Sniezek, 2005) and has a positive attitude toward others (Whitener et al., 1998). One of the most frequently used definitions of trust is the following, “Trust is a psychological state comprising the intention to accept vulnerability based upon positive expectations of the intention or behavior of another under conditions of risk and interdependence” (Rousseau, 1998). It has also been defined as a behavior (e.g., trusting behavior) by Mayer et al. (1995). Therefore, we cannot only use the term ‘trust' and assume its meaning is completely and properly understood. For the purpose of this project, the definition of trust suggested by Rousseau will be employed. That means, trust is not a behavior, it is a psychological state in terms of beliefs and positive expectations. It has positive (or nonnegative) outcomes, requires mutuality (other parties) and developed under uncertain, risk and interdependence (Rousseau, 1998; Bhattacharya et al., 1998).

2.5 Factors Affecting Trust in Online Banking

There are many factors identified by the past studies which will affect customer's trust in online banking vendors. The antecedents of trust are trusting beliefs, familiarity, disposition to trust, institution-based trust (structural assurance and situational normality), reputation and perceived site quality. The trusting beliefs (trust in online banking) will directly relate to the trusting intentions (the intention to continue to online banking). Disposition to trust will positively affect structural assurance and general web experience will positively affect situational normality. The following passage will describe the definition of each antecedent and the relationships in the model will be explained.

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