Commercial Banking Service

CHAPTER 1 INTRODUCTION Banking has evolved much since it formally took shape. Banks are no longer a place where the client stores his money for safe keeping.

Rather they have evolved into much

complex

offer

places

solutions

to

which

their

many

customers.

different

With

the

financial

evolution

of

technology, and ever expanding customer needs, banks have broadened their customer services to include a vast area of financial tools and instruments.

For instance ATMs are

slowly replacing the need to go to the bank counter and ask the cashier to give you money.

Background Advances computers,

in

technology,

telecommunications,

internet,

have

satellite,

impacted

banking

and

potentially allowed for increased efficiency, lower costs, and

greater

profitability.

Technological

advances

in

general, information technology applications in particular have had a major effect in banking and finance.

The use of

IT has enabled Commercial Banks to capture more and more customers.

These

banks

are

services.

Major

innovations

offering

a

include,

ATM

wide

range

cards,

of

Credit

Cards, Debit Cards, Smart Cards, Pre-loaded cards, Internet Banking,

Mobile

Banking,

Online

Utility

Payments,

etc.

These innovations are creating tremendous opportunities for the commercial banks to enhance and upgrade their service portfolio to cope with the requirements of an IT enabled

1

world.

Hence this research project seeks to examine the

innovations that have occurred in the banking sector.

Rational Of The Study The IT revolution is evolving the Commercial Banking sector tremendously and is opening new horizons of progress and prosperity for both the bankers and their customers. The

major

commercial

impact

of

IT

banking

sector.

is

in

the

services

The

use

of

IT

area

tools

of have

facilitated lots of problems, enabling the bankers to offer a wider a range of services to their clients. only

allowing

the

commercial

banks

to

This is not

capture

a

bigger

market share but is also providing the commercial bankers an opportunity to meet requirement of globalization. Banks today play a very vital role in the economies of nations.

Effective

excel financially.

banking

systems

can

help

a

country

Similarly, ineffective banking systems

can help bring down a country to its knees.

For instance,

with the freezing of the foreign currency accounts after the

nuclear

explosions,

major flight of capital.

in

Pakistan,

the

country

saw

a

This flight of capital led to

decrease in the foreign exchange reserves.

This effect led

the country to a major financial crisis, where it was about to

default

on

institutions. changes

in

major

loans

taken

from

international

It is therefore imperative that we study the

the

banking

sector

facilitating their customers.

2

to

see

if

the

banks

are

Problem Statement Instead sector,

of

the

just

looking

topic

specifically, question:

this “What

has report have

at

changes

been

narrowed

seeks

to

been

in

answer

major

the

banking

down.

More

the

following

innovations

Commercial Banking Services in Pakistan?”

in

the

Innovation is

widely proclaimed as being of vital importance to achieve and

maintain

Woldesenbet,

2002).

innovation, research since

it

banking

competitive

Therefore

rather

narrows is

a

sector

advantage

than

down much

research

just

changes.

the

Pakistani

to more

will

the

(Bátiz-Lazo

relevant

be

looks

at

Moreover, banking

topic.

discussed,

&

The

however,

the

sector, foreign in

the

in

the

literature review chapter of this thesis.

Theoretical Framework Although

many

innovations

have

sprung

up

commercial banking sector, this research seeks to examine those

that

research

are

seeks

relevant to

to

examine

Pakistan. those

Furthermore,

areas

that

affected due to the changes in technology.

have

this been

The factors

that affect this research are the following: •

Card Based Payment Systems

•

Electronic Payment Systems

Card Based Payment Systems have many sub factors, or services.

Each

of

these

factors

3

has

some

features

in

common,

yet

differs

from

one

another.

These

factors

include the following innovatory services: •

ATM Cards

•

Credit Cards

•

Debit Cards

•

Pre-loaded Cards

•

Smart Cards

Electronic Payment Systems is a vast area. has grown the most in the recent past. services

being

offered

can

be

divided

This area

However, all of the into

three

major

categories, which include the following: •

Mobile Banking

•

Virtual Banking

•

Internet Banking

These factors have been the major innovations in the commercial banking services in Pakistan. will be looked into, and examined.

Each of these

The study will seek to

understand how they work, and what impact they have had on the commercial banking sector.

Objectives Of The Study The following objectives are intended to achieve the results of this study:

4

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.

Definition Of The Terms Internet banking refers to the use of the Internet as a

remote

services deposit

delivery include account

channel

for

traditional or

banking

ones,

transferring

services.

such

funds

as

Such

opening

among

a

different

accounts, and new banking services, such as electronic bill presentment and payment (allowing customers to receive and pay bills on a bank’s Web site) (Fust, Lang, & Nolle, 2000). Internet Banks can be of two types.

One is a physical

bank that opens a web site and starts to offer various services.

Another option would be to have a branchless or

Internet-only bank.

An internet bank is one where there

are no physical branches, rather a computer web server, which performs all the functions, and gives access to the user thorough web sites, or other electronic media. Mobile

Banking

mobile phone.

means

banking

carried

out

over

the

This is also known as M-Banking.

ATM, refers to Automated Teller Machine.

ATM machines

are machines installed by banks that a customer can use to withdraw cash, among other facilities.

5

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.

6

CHAPTER 2 LITERATURE REVIEW Much literature is not available about the Pakistani banking industry; however there are many papers available on

the

international

banking

industry.

The

literature

review for this thesis focuses on banking past, present and future in the international arena. into

innovation.

specifically

in

Innovation

the

banking

Moreover this is tied

as

a

sector

is

whole

and

examined

more

in

this

section.

The Early Origins Of Banking Banking has been around for thousands of years.

Some

of the earliest evidence of banks was found in Mesopotamia between 3000 and 2000 B.C. where temples were used to store grain

and

other

valuables

used

in

money.zezenetwork.com).

Other

flourished

Phoenicia,

include

Lydia,

trade

places

(http://

where

China,

banking

and

Greece.

For example the safe deposit vaults of today date back to the Greece, where temples for were used for the purpose of a safe-deposit vaults for the valuables of worshipers. The Greeks developed coined money and developed a system of credit. Later on, the Roman Empire had developed a highly complex banking system, where its bankers not only accepted deposits

of

money,

but

also

made

loans,

and

purchased

mortgages (“History of Banking,” 2000).

Ancient Babylon is

credited

banking,

having

with

not

developed

only a

the

highly

birth

of

sophisticated

7

but

banking

also

system

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: "In the centuries since the era of the Mesopotamian and Greek financiers, the financial world has become increasingly complex, but the fundamental principles and tools they discovered several millennia ago have remained

the

root

of

all

investment

contracts

(Goetzmann, 2002)."

Development Of Modern Banking After the fall of Rome, banking declined in Europe. At

this

time,

elsewhere, Banking

the

did

interest

Europe Muslims

not

is

fell were

flourish

looked

in

down

into

its

having the

upon

dark

their

Muslims and

ages, golden

areas,

considered

and era. since

haram.

Examples of other banking functions such as safe deposits can be found in this era.

Unfortunately much information

is not available about banking of that time. The

first

bank to offer most of the basic banking

functions known today was the Bank of Barcelona in Spain. Founded

by

merchants

in

1401,

this

bank

held

deposits,

exchanged currency, and carried out lending operations. It also is believed to have introduced the bank check. Three other

early

banks,

each managed by a committee of city

officials, were the Bank of Amsterdam (1609), the Bank of Venice

(1587),

and

the

Bank

8

of

Hamburg

(1619).

These

institutions

laid

the

foundation

for

modern

banks

of

deposit and transaction (“History of Banking,” 2000). Banking remained in the hands of families and powerful men

for

over

300

years in Europe.

National government

started taking control of banking with Napoleon. organized The Bank of France in 1800. became

the

middle

of

Germany,

most

dominant

financial

1800s.

In

middle

the

the

banking

sector

Napoleon

The Bank of France institution

of

19the

by

the

century

flourished

with

in the

introduction of publicly held banks, or banks that issued stocks. Banking

in

the

British

Isles

originated

with

the

London goldsmiths of the 16th century. These men made loans and held valuables for safekeeping. By the 17th century English

goldsmiths

created

the

model

for

today’s

modern

fractional reserve banking—that is, the practice of keeping a fraction of depositors’ money in reserve while extending the remainder to borrowers in the form of loans. Customers deposited

gold

and

silver

with

the

goldsmiths

for

safekeeping and were given deposit receipts verifying their ownership of the gold deposited with the goldsmith. These receipts could be used as money because they were backed by gold. But the goldsmiths soon discovered that they could take a chance and issue additional receipts against the gold

to

other

people

who

needed

to

borrow

money.

This

worked as long as the original depositors did not withdraw all their gold at one time. Hence, the amount of receipts or claims on the gold frequently exceeded the actual amount of the gold, and the idea that bankers could create money was born (“History of Banking,” 2000). 9

Functions Of Banks Banking is defined as, any financial institution that receives,

collects,

invests,

or

transfers,

safeguards

(“Banking”, 2000).

pays,

money

exchanges,

for

its

customers.

The basic functions of banks are to

provide a place for people to keep their money. by

issuing

accounts

checking

(also

lends,

or

known

current

as

account in Pakistan).

profit

accounts and

loss

They do so and

savings

savings

(PLS)

Current accounts are used for day to

day activities, where customers can deposit and withdraw their money freely.

Savings accounts help to save money

for a longer term for the future. savings

accounts

help

to

save

As the name suggests,

money.

Other

services

include providing loans to consumers and businesses; and basic

cash

management

services.

These

include

check

cashing and foreign currency exchange. The

most

intermediation.

important

function

of

banks

is

financial

Financial intermediation basically means

to give money to the investor, taken from the saver. helps in the growth of the economy.

This

It lets people borrow

money to build factories that produce goods and services people need.

People can borrow money to purchase things

like cars and homes.

This flow of money, from those who

save, to those who invest helps the economy grow.

If money

were to sit in the homes of people, there would be none available for investors. factories.

Factories

Who in turn would not build new

employ

people

that

get

salaries.

They use their salaries to buy more goods and services. This cycle continues, and helps to expand the economy.

10

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. Banks today not only provide these basic facilities, but

also

provide

many

other

functions.

Some

of

these

include credit and debit cards, foreign currency deposits, mortgages, leasing, and much more. types:

commercial

or

investment banks, etc.

consumer

Banks can be of several

banks,

industrial

banks,

This report focuses on commercial

or consumer banks, which are explained below.

Commercial Banks Commercial Other

banks

deal

organizations consumer

specifically and

banking

deal

specifically business. services,

with with

the small

Commercial which

individual.

all

or banks

of

use

larger offer today.

Commercial banks have been defined by different people in relatively

similar

terms.

The

Central

Bank

of

Bahamas

describes commercial banks as: A commercial bank is a bank whose main functions are to

accept

demand

deposits

and

to

make

short-term

loans, chiefly to business firms, thereby facilitating the transfer of funds in the economy. In addition,

11

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). According to Larsen, commercial banks rely heavily on short-term sources of funds. A commercial bank is a financial institution designed to act as a depository and lender for many business activities. Commercial banks rely heavily on shortterm

sources

tend

to

of

write

funds.

Therefore,

short-term

loans

commercial

in

an

banks

attempt

to

balance the maturity of their assets with the maturity of their liabilities. By doing so, if their cost of funds increases, they can cover the increase fairly quickly by charging higher rates on new loans (Larsen, 1994). Commercial

banks

have

another

interesting

characteristic, which is they are for-profit institutions. The

objective

of

commercial banks is to make a profit.

They obtain their profit by lending money to people.

These

for-profit, stockholder-owned institutions buy money from people who have more than they need (deposits) and sell it to those who do not have enough (loans) (www.precisioninfo.com).

Banks then earn interest on loans.

A part of

the interest is passed on to the people who deposit money 12

with the bank.

The remaining is profit for the bank.

The

profits either can be paid out to bank stockholders or to the

holding

profits

company

can

be

in

the

retained

form

to

of

build

dividends,

capital

or

(net

the

worth)

(“Commercial Banks,” 2000). Some

of

the

services

of

commercial

banks

include,

giving loans for automobiles, consumer goods, as well as homes.

Other services include:

Exchange foreign currency,

Offer retirement services, credit cards, and debit cards, Issue American depository receipts for stocks of foreign corporations, provide a variety of accounting services to their customers, issue letters of credit for firms involved in

international

trade,

and

manage

trust

accounts

for

wealthy clients (www.precision-info.com).

Innovations After

having

examined

banks,

and

banking,

it

is

imperative to discuss the next vital factor of the research question,

which

innovation

with

is

innovation.

banking,

innovation’s

examined.

Innovation

Schrumpter,

an

economist

in

identified

five

different

types

included;

new

existing

one;

markets;

new

products new

was

first

or

methods

sources

In

of

by

to

be

Joseph

Joseph change

inputs;

and

had These

to

opening

organizations (Glassop, Samson, & Terziovski, 2001).

13

up

innovations.

production;

factor

tie

needs

1930s.

substantial

of

of

gist

to

recognized

the

a

order

an new new

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). Our

view

1930s.

of

Innovation

has

changed

much

since

the

Rothwell had developed a 5 generation model of This model describes the 1st generation as

innovations.

what people thought of innovation in the early days, to the 5th generation model, of where innovation stands today. five

generations

of

the

model

are

described

The below

(Rothwell, 1994). First

generation innovation – technology push. This

era of innovation was the foundation for the industrial revolution.

Innovation

came

with

new,

technologically

advanced products and means of production. Such products were pushed onto the market (Rothwell, 1994). Second generation innovation – need pull. Innovation during this era shifted to a market/customer focus. A focus where

the

technology

customer responded.

determined Marketing

needs took

a

and

production

pivotal

role

in

generating new ideas (Rothwell, 1994). Third generation innovation – coupling model. This era of

innovation

involved a coupling of the push and pull

models. The market might need new ideas, but production technology refined them. Alternatively, R&D developed new

14

ideas that marketing refined with market feedback. R&D and marketing were linked (Rothwell, 1994). Fourth integrated

generation innovation – integrated model. model

of

innovation

saw

a

tight

coupling

An of

marketing and R&D activity, together with strong supplier linkages

and

close

coupling

with

leading

customers

(Rothwell, 1994). Fifth generation innovation – systems integration and networking model (SIN). This model of innovation builds on the

integrated

with

suppliers

model by including strategic partnerships and

customers,

using

expert

systems,

and

having collaborative marketing and research arrangements. There

is

an

emphasis

on

flexibility

and

speed

of

development with a focus on quality and other non-price factors (Rothwell, 1994). Some of the major characteristics of the 5th generation in innovation include, time-based strategies (faster, more efficient quality

product and

development);

other

non-price

a

development

factors;

an

focus

on

emphasis

on

corporate flexibility and responsiveness; a customer focus at

the

forefront

of

any

strategy;

electronic

data

processing strategies, fully developed internal databases; and an effective external data link (Glassop et al., 2001). Although there are very few companies around the globe which are in the 5th generation of innovations, yet most are slowly moving towards it.

They recognize the importance of

improving

their

innovation

Countries

with

the

process

highest 15

number

as of

vital

to

growth.

innovations

are

currently include

at the

advanced

the

top of the economic ladder.

United

economy

States

can

and

maintain

Japan. high

Examples

Therefore,

wages

and

no

living

standards, and hold its own in global markets, by producing standard products using standard methods (Porter & Stern, 1999).

Innovating The Commercial Banking Sector Innovation

does

not

only

focuses on several factors.

look

at

one

aspect,

but

Some of the major of these

factors is a focus on customer satisfaction, technology, and high quality products and services.

The banking sector

too has been busy in innovating to meet the needs of its customers.

Many new products and services have come up.

Technology has been incorporated into many a function of banking.

Newer technologies have helped banks to grow and

profit despite the pressures of competition. of this is US banking industry.

One example

If we are to examine the

US banking industry from 1979 to 1994 (Table 2.1) we are to find that the number of banking organizations has in fact decreased. banks face.

This is evident of the tough competition that However, the assets of the industry in mega

banks, or very large banks have doubled.

The main cause of

this is that the better banks were able to either merge with, or buy out the weaker banks. creation of mega banks.

This had lead to the

These mega banks have been able to

survive due their competitive advantages.

16

Table 2.1: Comparison of the US Banking Industry Changes in the U.S. Banking Industry 1979-1994 Item 1979 Total number of banking 12,463 organizations No. of small banks 10,014 Real industry gross total assets 3.26 (Trillions of 1994 dollars) Industry assets in 9.4% megabanks (percent of total) Industry assets in small 13.9% banks (percent of total) Total loans and leases 1.50 (Trillions of 1994 dollars) Loans made to consumers 19.9% (percent of total) Total number of employees 1,396,970 Number of automated teller 13,800 machines Real cost (1994 dollars) of 0.0199 processing a paper check Real cost (1994 dollars) of an 0.0910 electronic deposit (Source: Frei, Harker, & Hunter, 1998)

1994 7,926 5,636 4.02 18.8% 7.0% 2.36 20.6% 1,489,171 109,080 0.0253 0.0138

Therefore, banks must continue to innovate in order to meet the changing needs and desires of the consumer, while at the same time developing new fee structures to migrate consumers away from high-cost delivery systems. This blend of innovation and behavior change lies at the heart of the modern banking organization (Frei, Harker, & Hunter, 1998). Technology

plays

a

key

role

in

the

performance

of

banks. Large banks in the United States spend approximately 20% of non-interest expense on information technology, and this investment shows no signs of abating (Frei, Harker, &

17

Hunter, 1998).

The rest of the world is also excelling in

the use of technology in Banking.

Figure 2.1: Example of Worldwide Use of E-Money (1997)

Source: Office of the US Comptroller of the Currency using data on Visa’s general-purpose, stored value chip cards, from Visa (1997), Chip Card Programs around the world. It can be concluded from Figure 2.1 that the spread of electronic use in banking is not limited to the US.

In

fact, Europe and Asia Pacific lead the United States in the use of e-money, or money stored on an electronic chip on a plastic card.

The relationship of the use of technology

and innovation with success was further strengthened by a recent survey of the top 500 companies of the world. survey

of

the

The

Global Fortune 500’s, for the year 2004,

shows that in the top 10 banks of the world only three are from the US, while seven are from Europe.

18

Innovation

in

technology

has

been

behind innovations in the banking sector.

the

main

force

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. the

number

of

banks

that

increasing very rapidly.

offer

In the US alone,

internet

banking

is

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.

Figure 2.2:

Percent of US Banks Offering Internet Banking

Source:

Office of the US Comptroller of Currency

19

Moreover, many banks are moving away from simple web sites

to

providing

transaction

customers on the web sites.

facilities

to

their

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.

Figure 2.3: Estimated Bank Web Sites vs. Transactional Web Sites in the US

Besides using the internet for banking purposes, banks are

also

Electronic

adopting bill

technology

payments

offered

for by

customers is also gaining popularity.

other

purposes.

banks

to

their

The Office of the

Comptroller of the Currency, in the US, has reported that the number of transactions of electronic bill payments have grown substantially.

In figure 2.4 we can see that the

number of these transactions has boomed from a little over

20

100 million transactions in 1996, to well over 275 million in 1997.

Figure 2.4: Very Rapid Growth in Number of Electronic Bill Payment Transactions

Source: Office of the US Comptroller of the Currency. The same types of developments have been reported by the retail sector as well. electronic

payment

Figure 2.5 shows the number of

transactions versus cash payments

the US retail sector.

for

In 1991, approximately 80% of the

payments were carried out in checks.

This percentage has

decreased steadily, and in 1996 a little less than 75% of those transactions were carried out by check.

On the other

hand, the number of electronic transactions increased from about 18% in 1991 to about 25% in 1996.

21

This signals the

fast

pace

with

which

the

retail

industry

is

embracing

innovatory payment systems in their banking transactions.

Figure 2.5: Electronic Retail Payments Growing in Importance (Billions of non-cash retail payments)

Source: Office of the US Comptroller of the Currency, using data

from

Committee

on

Payment

and

Settlement

Systems

(1997), Statistics on Payment Systems in the Group of Ten Countries:

Figures

for

1996,

Bank

for

International

Settlements, and from the National Automated Clearing House Association (NACHA). Consumers too are switching over to other innovatory types

of

payment

mechanisms.

22

These

innovatory

payment

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.

Figure 2.6: Use of Various Payment Mechanisms in the United States

(Source:

Frei, Harker, & Hunter, 1998)

Innovation For Cost Savings Interestingly, innovating to newer techniques not only helps the consumers, but also helps banks by cutting costs. Different agencies report different figures. of

them

point

transaction technologies.

in

to

the all

same

direction

cases

is

that

lower

However, all the

for

cost

the

per

newer

For instance, not only have ATMs helped to 23

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.

Table 2.2:

Comparison of Cost Per Transaction for Various Delivery Channels

Distribution Channel

Cost Per Transaction

Teller

$1.40

Telephone (human operator)

$1.00

Telephone (automated voice response unit)

$0.15

ATM

$0.40

(Source:

Frei, Harker, & Hunter, 1998)

Moreover the cost per transaction for various types of media has also come down much. the cheapest media possible.

The internet is becoming

On the internet it costs only

1 cent ($0.01) per transaction, compared to a human teller processing a check, which costs 95 cents ($0.95). a huge increase in costs for a bank.

This is

If a bank were to

carry out 1 million transactions in a year, it could save nine

hundred

and

forty

thousand

dollars

($

940,000)

carrying out all of these transactions over the internet.

24

by

Figure 2.7:

Banks have cost incentives to

encourage electronic payments (Cost Per Transaction)

Note: Estimated cost per transaction. For checks, figures are for deposit by check using a bank teller. Source: Office of the US Comptroller of the Currency, using data

from

Faulkner

& Gray (1997) and from the National

Automated Clearing House Association (NACHA). Banks have been around for thousands of years.

Since

their inception, their functions remain the same, but they have offered many more services. used

to

offer

the

services,

themselves have changed.

The tools and techniques

and

the

type

of

services

Banks find that innovating helps

25

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.

Innovations in Regional Countries Other countries in the region are at about the same place

in

terms

of

innovations

as

compared

to

Pakistan.

Bangladesh and Nepal are much worse off, since they have not introduced many of the innovations that Pakistan has. India is the most advanced of the countries compared to Pakistan. areas

Even India is not as advanced in some of the

compared

to

Pakistan.

India

advanced debit or smart card system. offer

more

Pakistan.

services

over

the

does

not

have

an

However Indian banks

Internet

as

compared

to

The major reason for this is the advanced IT

industry in India.

Some Indian banks allow the user to

apply for credit cards online, a facility that no Pakistani bank offers.

26

CHAPTER 3 METHOD The method for the research is survey.

In order to

identify the different innovations in banks, the researcher needed to go and visit the banks. This research examines the current developments in the Pakistani banking sector. To accomplish this task, information was collected from the major Pakistani banks that are offering innovatory services and products to their customers.

Sample There are many banks in the country today. impossible,

with

the

time

and

financial

constraints

visit each of these banks for the survey. sample of the leading banks was taken.

It is to

Therefore a

The sample consists

of about 10 banks that are at the forefront of innovation in commercial banking services in Pakistan. include,

Al-Falah

Bank,

Allied

Bank,

Askari

These banks Commercial

Bank, Bank Al-Habib, Bank of Punjab, Habib Bank, Muslim Commercial Bank. the

Bank,

National

Bank,

United

Bank,

and

Union

Managers from each of the banks were contacted for study.

accessed.

Moreover,

other

bank

official

data

was

This data was obtained from brochures, and the

web sites of these banks.

The study is carried out in a

natural environment.

27

Sources Of Data The sources of data for this research consisted of secondary

sources,

Secondary

sources

banks,

obtained

banks’

web

Secondary others

as

from

telephonic

the were

sources the

as

unstructured

interviews.

include published materials of various

sites

on

well

also

Also,

visited

for

included

subject.

interviews

banks.

were

several

of

obtaining

research

data.

published

Unstructured

interviews

also

out

carried

to

the by and

obtain

information in relation to the subject at hand.

Procedure This study was conducted in a systematic procedure. Initially

a

literature

search

was

conducted

to

locate

research that has already been done related to innovations in

commercial

banking

services.

Upon

finding

relevant

information and factors, visits were made to various banks. At the banks, data was collected in the form of bank’s print

material.

In

some

were

conducted

with

bank

cases,

unstructured

officials

to

get

interviews a

better

understanding of the innovatory services being offered. certain

cases,

due

to

unavailability

of

bank

In

officials,

telephonic unstructured interviews were conducted.

Later,

web sites for a few of the banks were visited to collect information pertaining to the research project.

Finally

all of the data was collected, analyzed, and summarized in the results section of this report.

28

CHAPTER 4 RESULTS AND DISCUSSIONS Innovations In Card-Based Payment Systems Banks are slowly moving away from traditional payment systems into newer areas.

The traditional systems, such as

checks, are no longer cost efficient, nor are they user friendly.

Consumers prefer to carry cards that help them

to carry out their daily transactions. types

of

Pakistan.

card

based

payment

systems

There are several available

today

in

These include ATM cards, Credit Cards, Debit

Cards, Pre-Paid or Pre-Loaded cards, and Smart Cards.

Each

of these is discussed in this section.

ATM Based Payment Systems Although Automated Teller Machines (ATM) are not an innovation in Pakistan, they way in which they are being used is an innovation.

An ATM is a machine, which is

operated by a plastic card.

A customer is issued a card,

along with a personal identification number (PIN), or a special password to operate that card.

The user then puts

the card in the ATM machine, and enters his/her PIN code. Upon verification, the user has complete access to his/her bank account.

For instance, the user can withdraw money,

check the balance, transfer money between various accounts, and even deposit money into the account.

The benefit of an

ATM card is that the user can access his/her account at any

29

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. Some banks have innovated their services by offering utility bill payment facility through their ATM network. Askari Commercial Bank is one example of this.

With the

help of the ATM card, a customer can walk up to any Askari Commercial Bank’s ATM machine, and select the bill payment option.

The user is given choices for Phone, Electricity,

and Gas bills.

Upon choosing the appropriate bill, he/she

enters the bill number, and then is able to authorize the transfer of funds from his/her account to pay the utility bill. There are two main innovations in the ATM area.

These

two are the development of a unified ATM network in the country, and the way in which banks issue ATM cards.

Each

of these two innovations is discussed below.

Unified ATM Network Initially, consumers could only use the ATM machine of the bank with which they had an account.

This meant that

banks had to purchase and install ATM machines all over the country,

to

help

their

consumers

access

their

accounts.

More recently, a couple of networks have been developed, which have interlinked various banks.

The most popular of

these is the OneLink network, being used by banks such as

30

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. central

The user will then be transferred to the

database,

which

will

allow

the

user

to

access

his/her account from Habib Bank. With the development of this innovation, the number of ATM

machines

that

a

single

banks

customer

increased from hundreds to thousands.

can

use

has

This has encouraged

many more customers to switch over from Cash based payment mechanisms.

ATM Issuing In the past, customers had to apply separately to get an ATM card issued.

This meant that the number of users

that had access to their account through the ATM network was very low. this policy.

However, recently many banks have changed Askari Commercial Bank is just a few of the

banks that give an ATM application to any customer that is

31

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.

Importance Of ATM On Commercial Banking Services ATM serves as a dual purpose.

They are beneficial to

both the customer as well as the commercial banks.

The

customer benefits from ATMs, in many ways: •

Customers don’t have to stand in lines at the bank to get money of perform other functions.

•

Customers don’t have to rush to the bank, during the bank hours, since ATMs can be used 24 hours a day, and even on holidays.

•

Customers don’t have to go to a specific bank branch, since ATM cards can be used in a large number ATM machines all over the country, and even outside the country.

•

ATMs are being used to deposit utility bills, which avoids much hassle, and waiting on the part of the customer.

32

•

The customer is more secure and safe, since he/she does not need to carry cash around with him/her.

ATMs have also helped the banking sector.

The banks

have been benefited by ATMs in the following ways: •

ATMs have helped to reduce the per transaction cost. As

discussed

in

the

literature

review

section,

the

cost for using ATM as compared to a teller has come down by $1 per transaction (Frei, Harker, & Hunter, 1998). •

ATMs have helped to serve more customers. installing

an

ATM

machine,

banks

can

Just by

serve

more

customers. •

ATMs

have

helped

to

attract

more

customers.

Many

customers open an account with a bank that has ATMs near the customer’s favorite locations. •

ATMs have helped to increase profitability for banks, by increasing efficiency.

Credit Cards Credit Cards have also been around in Pakistan for more than 10 years.

However the use of credit cards was

not

Credit

very

popular.

several reasons.

Cards

were

not

popular

for

First they were expensive to obtain.

The

annual fee and other charges were too high. cards

were

not

accepted

in

too

many

Second, credit

places,

and

places that did accept them charged a certain fee.

those And

finally, it was a complicated procedure to obtain a credit

33

card.

Banks have innovated their processes, and have done

away with these three flaws. First,

banks

have

cut

obtaining a credit card.

down

on

the

annual

cost

of

Bank Al Falah now has a zero

annual fee for life on a credit card.

Other banks too give

discounts, or charge very low annual joining fees.

Second,

banks have spread the number of vendors that accept their credit cards.

There are many more shops today that accept

credit cards.

Most of the shops that charged a percent fee

have dropped those fees.

All the oil companies, such as

Shell, PSO, Caltex, etc. do not charge a fee for processing credit cards. charging holders.

them

Moreover, banks have encouraged shops by less,

to

give

discounts

to

credit

card

Many restaurants and other shops give discounts

to those people who use credit cards.

Finally, the process

for obtaining a credit card is much easier.

A person with

a monthly salary of Rs. 12,000 can now obtain a credit card. In the past it would take many months to obtain a credit

card.

Now

this

process

has

been

cut

short

by

several weeks.

Importance Of Credit Cards On Commercial Banking Services Innovations in Credit Cards include the ability to pay the mobile phone bill through credit cards.

This can now

be done either over the internet, or using a mobile phone (through Ufone only).

Customers no longer have to rush to

a bank to pay their utility bills. world, time is very scarce.

In this fast changing

Therefore, Credit Cards help

34

to

save

time

transactions.

of

the

consumer

by

allowing

speedy

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. tele transfer is too high.

It costs US $ 5 per transaction

for international tele transfer. cards,

consumers

transaction Moreover,

will

it

is

can be a

now

make

processed low

The cost of

cost

With the help of credit payments in

less

online,

method,

than

depending

and

a

the

second. upon

how

quickly the user pays back the money to the bank (delay in payment results in interest being charged).

Debit Cards With the popularity of ATM cards, debit cards have also

gained

acceptance.

Many

banks

are

simply

their ATM card users to use it as a debit card.

letting This has

been enabled with the advent of a third party organization called

Orix.

Orix

has a network which recognizes both

credit and debit cards.

Orix gives away their machines to

shop keepers, or merchants.

The merchants use the machines

to charge customers’ purchases.

Banks have teamed up with

Orix who allows their customers to use their ATM cards as debit cards.

Debit cards essentially differ from Credit

cards

sense

in

the

that,

the

user

already

available in an account for a debit card. credit

card,

the

has

money

Whereas in the

user does not have money, rather pays

after he/she has made purchases.

35

Debit cards have become

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.

Features Of Debit Cards Some

of

the

salient

features

of

debit

cards

are

the

following: 1. There is no need to carry cash.

Thus it is a much

more secure mode of payment. 2. Easier to obtain than Credit Cards 3. It is accepted in many locations in major cities of Pakistan. 4. Payment is made directly from a user’s bank account. 5. No interest is charged on the transactions. 6. Can also do balance enquiry at the merchant outlet. 7. Payment is authorized by a user’s PIN number.

Thus,

even if a Debit Card is lost, it can not be used.

Importance Of Debit Cards On Commercial Banking Services Debit

cards

have

commercial banking.

played

a

very

important

role

in

The following are the advantages of

debit cards: •

Debit process

cards

require

no

special

application

therefore the user can receive his/her

card right away.

36

•

Debit

cards

Many

more

are

an

people

Islamic

in

an

mode

Islamic

of

transfer.

country

are

willing to go for this mode of payment. •

Debit cards have no interest or fees, therefore it is very affordable.

•

Money

is

account.

debited

directly

from

the

user’s

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

transferring likely This

to

are

more

money.

use

results

a

this

in

Hence mode

more

as

users

efficient more

way

of

customers

are

compared using

a

to

cash.

particular

bank’s services.

Smart Cards Smart Cards being currently used in Pakistan are much similar to a debit card. sophisticated.

In Europe smart cards are more

A smart card used in Europe, especially in

France, has a small chip embedded into the plastic card. This chip stores a lot of information about the user. information

can

range

from, 37

several

bank

This

accounts,

to

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

machines anywhere in the world.

smart

card

in

ATM

For example, Union Bank

smart cards can be used in Cirrus ATM machines all over the world.

A

user

can

also

use

wherever MasterCard is accepted.

a

Union

Bank

smart

card

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.

Importance Of Smart Cards On Commercial Banking Services Smart cards have the same advantages as debit cards. The

major

extra

advantages

smart

cards

have

over

debit

businesspersons,

and

cards are the following: •

International

users,

travelers prefer smart cards since they can use smart cards in any country of the world. •

Smart cards can be used in many more outlets, including places where credit cards are accepted.

Preloaded Cards Another interesting innovation found in the Pakistani banks is a preloaded card.

It has been given different

38

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.

Importance Of Preloaded Cards On Commercial Banking Services Preloaded cards have several advantages for both the user

as

well

as

the

bank.

These

advantages

are

the

following: •

Preloaded cards are not traceable. attached

They are not

to any person; therefore it maintains

the customer’s privacy. •

A customer can control the amount of money that is to be spent, by purchasing the card with a certain limit.

•

Banks

can

attract

more

customers,

since

it

requires no identification, and a person does not have to have an account with the bank. •

With more customers banks can earn more profits and revenues. 39

Innovations In Electronic Banking Electronic banking has taken many forms, and continues to grow at a very rapid pace. technology

the

progressing. offering

that

banks

offer

are

also

There are a number of areas where banks are

electronic

electronic Internet,

services

With the rapid change in

based

banking or

banking.

solutions

over

the

The

are

Cellular

media

either

Mobile

of

these

through

Network.

the This

section discusses the latest innovations in the electronic banking services.

These innovations are, mobile banking,

virtual banking, and internet banks.

Mobile Banking Mobile through

banking

your

is

mobile

simple

type,

use

phone,

company’s connection. A

the

of

the

over

a

is

which

specific

banking web

prevails

Protocol (WAP). Pakistan

as

through

pages, yet.

services

particular

mobile

Mobile banking can be of two types. in

Pakistan,

through short messaging service (SMS). type

banking

also

the

mobile

known

as

is

banking

A more complicated phone

using

Wireless

mobile

Application

Banking through WAP is not available in However,

several

offered for customers through SMS.

services

are

being

Through mobile banking,

customers in Pakistan can now get balance information about the accounts, view transactions made on their accounts, and even pay bills for their mobile phones. For example, MCBs mobile banking works by assigning the user a Personal Identification Number (PIN).

40

The user

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

desired information. mobile which

banking displays

account

user

receives

SMS

with

the

The services available through SMS

include,

balance

the

4

blocking

an

last

an

inquiry,

transactions

account,

and

mini on

statement

the

account,

an

account.

unblocking

Other banks offer varying services.

Importance Of Mobile Banking On Commercial Banking Services Mobile Banking has many benefits for both the consumer as well as the bank. •

These are the following:

Mobile banking is with the customer all the time. Since

the

customer

carries

the

mobile

phone

everywhere, therefore the bank travels with the customer everywhere. •

Mobile bank.

banking

helps

to

save

on

money

of

the

The per transaction cost is very little in

mobile

banking.

internet

bank’s

This cost

figure which

is is

the 1

same cent

as per

transaction. •

Since very few banks offer this service, it will help to attract many customers.

Virtual / Online Banking Virtual banking is essentially the offering of banking services through the internet. 41

Many banks in Pakistan have

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

internet.

providing

various

services

through

the

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. A user needs to create an internet banking account login and password.

This is usually given out by the bank

through various methods.

For example, National Bank asks

the client to use the ATM card, and go to the ATM machine to

get

a

password

information

at

the

and

Habib

Bank

gives

the

bank in print format.

user

their

Upon getting

their login information, a user can access his/her account over the internet from anywhere and at any time. After logging into the account, the user can perform a number of functions.

The user is allowed to transfer funds

from one account to another. salary

to

all

electronically.

of

its

A business user can send

employees

over

the

internet,

Some banks also allow their users to pay

their utility bills through internet access.

Users can

also request check books, or simply view the transactions in

their

accounts.

Habib

Bank

also

allows

users

to

authorize payments to third parties through the internet. The

type

draft,

of

the

payments include, the issuance of a demand issuance

of

a

pay

order,

making

telegraphic

transfers (TT), and the issuance of a mail transfer.

42

Banks

are promising many more services over the internet in the near future.

Importance Of Virtual Banking On Commercial Banking Services Virtual Banks have facilitated the customer in many ways.

These include: •

While the

previously, a customer needed to request bank

for

a

bank

statement,

which

would

require a visit to the bank, or have to mail it to

the

customer.

banking,

With

customers

the

can

help

of

obtain

virtual

all

that

information by clicking a few buttons. •

The

customer

giving

him/her

services,

such

is

made

the as

much

access

to

account

making pay orders, etc.

more

powerful,

create

fund

by

different

transfers,

and

This eliminates the need

to hire workers in the banks. •

Customers have more freedom to do what they want and when they want.

They can create any type of

service they require, without having to visit any office or spend time. •

Virtual

Banking,

has

transaction cost.

decreased

the

per

The cost has been reduced to

$0.01. •

Virtual bank. frequent

Banking attracts many customers to Especially

those

transactions

43

find

customers it

much

that

the make

useful

to

switch

to

banks

that

offer

virtual

or

online

banking.

Internet Banks Internet internet.

Banks

are

those

that

are

100%

on

Meaning they have no physical branches.

transactions,

from

establishing

a

bank

the

All the

account,

to

depositing money, making transfers, etc. are done over the internet.

There are no Internet Banks in Pakistan, however

with the speed at which technology is spreading; the day may

be

near

Pakistan. have

when

there

will

be

100%

internet

banks

in

In the meanwhile, physical banks, or those that

physical

branches

are

ever

increasing

the

services

they offer through their web sites.

Services Of Internet Transaction Banks Many banks.

services are being offered in Pakistan by online

However, these services are not up to the mark with

the international community.

This point is proven by Table

4.1 which describes the services that are offered by US transactional services

not

internet being

national

offered

in

banks. Pakistan

Some include,

of

the

Credit

applications, new account setup, Brokerage, Insurance, etc. By

offering

commercial

these

banks

services

can

international community.

catch

to up

their to

the

customers

the

level

the

of

These services will further boost

the portfolio of a bank, as well as help to reduce costs drastically.

44

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 88.8 74.1 90.2 90.2 100.0 Balance inquiry and funds transfer 78.2 60.0 77.4 90.4 100.0 Bill payment Credit applications New account setup Brokerage

60.0

51.8

51.7

75.3

80.5

36.6

29.8

43.9

45.2

43.9

21.6

10.6

14.7

41.1

53.7

Cash management

15.7

14.1

16.2

15.1

17.1

Fiduciary

11.9

3.5

9.8

12.3

41.5

Bill presentment

10.6

7.1

7.9

16.4

24.4

Insurance

5.4

2.4

2.3

6.8

29.3

Basic1

77.6

56.5

77.4

90.4

100.0

Premium2

23.9

14.1

17.0

41.1

58.5

Source: Office of the US Comptroller of the Currency. 1

“Basic” includes balance inquiry, funds transfer, and bill payment. 2

“Premium” includes “Basic” and at least three other services.

45

Non-IT Related Innovations Non IT related innovations in the commercial banking sector are mainly in leasing and financing.

Banks today

offer various types of leasing, including car leasing and equipment leasing.

Home financing is the major financing

innovation.

Leasing Car and equipment leasing have allowed consumers to purchase cars and equipment which they would not have been able to do so earlier.

With the different types of leasing

schemes consumers can purchase a car or equipment with just a

fraction

of

the

cost.

For

example,

Bank

Alfalah’s

leasing allows a customer to purchase a car or equipment with just 20% down payment of the total cost.

After the

down payment, the consumer pays monthly installments with a certain

percentage

interest.

The

consumer

can

pay

the

installments in a number of years ranging from 3 to 5.

Home Financing Home

financing

is

another

commercial banking sector. to

get

homes.

loans

to

non-IT

innovation

in

the

Home financing allows consumers

purchase, renovate, or build their

own

The major reason for this innovation is because

banks today have a lot of cash.

This cash is then made

available to the consumer in the form of loans and lease. A home loan usually is for a period of 20 years. can

either

have

a

fixed

or

46

floating

This loan

interest.

Fixed

interest remains fixed over the 20 year period.

Floating

loans keep changing with the change in interest rates of the country.

Reasons For Innovation Although

Banks

in

Pakistan

have

existed

since

the

creating of the country, many changes have occurred in the commercial banking sector recently.

The main reason is

that the number of people using the Internet has increased substantially. users. 250,000.

Just With

Today there are over 10 million internet 4

years the

ago,

spread

this of

number

Internet,

was and

less

than

technology,

Banks have adopted newer technologies, which have led to increase in innovations.

47

CHAPTER 5 CONCLUSION AND RECOMMENDATIONS Since ago,

the

basic

the

development

banking

functions

advent been

of

to

customers. services,

banks,

thousands

sector has changed much. of

banking

technology,

able

of

the

improve

remain

upon

the

years

However

the

same.

With

the

banking

sector

has

the

commercial

of

services

it

offers

to

This is evident from two major categories of which

are

card

based

electronic payment systems.

payment

systems

and

Although Pakistani banks have

innovated many of their services, there is still much room for

improvement.

The

most

exciting

of

the

areas

were

Pakistani banks can truly make use of technology is the Internet. Globalization that

have

expansion trends

shaped of

in

and

increased

the

banking

Internet

the

same

industry

banking way

competition

that

will

for

are

decades.

contribute

previous

trends

to

The

these

advancements

in

telecommunications and data processing did – for example, by reducing barriers associated with geography and national boundaries. Many markets that were once highly localized (mortgage finance in the U.S., for example) have become national will

and

sometimes

competition

be

international enhanced

by

in

scope.

the

Not

reduction

only of

geographical barriers, but also by the increased ability of bank

customers

to

search

for

electronically.

48

and

locate

new

suppliers

Internet process

of

banking

will

financial

also

accelerate

deepening,

i.e.

the

ongoing

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 financial potential

in

data

collection,

engineering creditors

have

to

data

management,

improved

assess

the

the

and

ability

of

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

institutions

is

that

institutions

is

information

standardized associated

can

obtain can

database, with

loans

obtain that

through

loans can

through be

financial financial

entered

and

thus

it

avoids

customized

loan

products.

into

the

a

costs

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. The impact of Internet banking on the consolidation of the banking industry is less clear-cut. The Internet can be employed as an extremely efficient device for banks of all sizes to collect and manage information in order to meet the various financial needs of individuals and businesses, particularly

by

integrating

services

or

‘bundling’

them

together. On the one hand the Internet allows financial firms

of

different

sizes

to 49

enter

markets

and

reach

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

These

factors

could

to

boost

brand both

and the

market pace

themselves.

and

scope

of

consolidation in the banking industry. However, favors

large

alternative Internet

the

growing

these

a

very

choose

services.

users

use

banks

Internet-based to

specialized

if

banks,

provides

consumers helping

even

must

business

effective

the

best

Internet

choose

between

strategies.

best-of-breed

the

the

searching

Intermediaries

locate

of

may

device

for

producers

of

play

product

The

a

role

given

in

their

individual preferences for quality, convenience and price. While economies of scale imply that information warehousing and processing will be highly concentrated, these functions may

not

banking

necessarily firm.

Rather,

be

integrated

they

may

be

into

an

performed

individual by

third

parties that service the needs of highly specialized and focused financial firms. Thus, it is not clear whether the Internet will provide a larger impetus to increased focus or to greater conglomeration. Most likely, both types of business strategies will co-exist in the market place with some banking customers preferring the convenience of onestop shopping, while others choose lower costs or higher

50

quality products produced by specialized financial service providers. Moreover, U.S. banks are increasingly outsourcing an expanding range of their operations to third-party service providers. Recent industry estimates show that outsourcing by

U.S.

banks

accounts

for

almost

20

percent

of

their

information technology services spending. Importantly, the prospect of considerable cost savings and access to scarce information processing and development resources has led a growing number of banks to consider making greater use of foreign-based service providers – that is, of engaging in ‘cross-border border

outsourcing’(Kelly & Nolle, 2003).

outsourcing

innovation

where

by

banks

Pakistani

is

yet

Commercial

another Banks

Crossarea

can

of

excel.

Commercial banks can offer services to other banks in the form of outsourcing work.

This can help to generate a

newer revenue source for the Pakistani banks. In conclusion, innovations have had a very significant impact

on

the

commercial

banking

services.

Innovations

have helped commercial banks to develop newer, faster and better services for their customers. have

led

to

increase

in

customer

These newer services satisfaction,

customer

retention, lower costs per transactions, and higher profits for the banks.

If commercial banks are to improve their

services, the only way forward would be with the help of innovations. offer

services

Through that

innovations,

will

not

only

Pakistan, but from all over the world.

51

commercial attract

banks

customers

can in

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