Information Technology and Banking 1 Information Technology and Banking Dr. Pembamoto Business 5083: Management Information Systems Palm Beach Atlantic University Information Technology and Banking 2 Table of Contents I. II. III. IV. V. Characteristics in the Banking Environment: Positive and Negative Impact of Information Technology in Banking: Trends in Banking: How Sectors can affect Banking and Technology: Works Cited: 4 6 9 12 16 Information Technology and Banking 3
Abstract Financial institutions, particularly banks rely heavily on gathering, processing, analyzing, and providing information in order to meet the needs of customers. Banks strive to get the deposits of their customers so in turn, that money can be used to make loans. In order to meet customers’ needs, banks started using automated information processing technology during the 1960’s. With processing transactions becoming automated, it allowed for employees to focus time on other tasks or projects. Also, it helped employees learn how to use a computer.
Technological advances have allowed banks to provide innovative, new services or improvements in quality and convenience that attract new customers and increase demand. Today many banks encode their daily work, which allows checks to be digitally scanned. After scanning at the bank, the items are sent to the clearinghouse before sent to the Federal Reserve Bank. Individuals have started to use electronic banking, which allows a customer to check their balances and process bill payments via a secure Internet connection and a computer, and is available twenty four hours a day.
It is fast, convenient, and is easier than going to the bank to get funds. With electric banking, there are other functions in IT that have evolved such as: Automated Teller Machine, Direct Deposit, and Electronic Bill Payment, Advancements in Information Technology and Banking have been important to the industry and businesses, on the other hand customers have their concern about their security and privacy especially with Internet transactions. Information Technology, has affected all financial institutions.
IT provides an advantage to banks as it helps increase customers and increased the products offered to customers. Also, Information Technology has allowed banks to make better decisions. Information Technology and Banking 4 Current Banking Environment Banks safeguard money and valuables and provide loans, credit, and payment services, such as checking accounts, money orders, and cashier’s checks. Banks also may offer investment and insurance products; bankers are the link between customers and the bank itself. Some of the traditional distinctions between banks, insurance companies, and securities firms have diminished.
Because of the change of services offered in the industry, banks continue to maintain and perform their primary role that is accepting deposits and lending funds from these deposits. Stakeholders of the financial institution are not just the shareholders. For example, David Buzzell (2004) in ‘Principles of Banking’ explains that, “A bank may be closely held by one or more individuals or a family, or publicly held by investors. ” (p. 13). Stakeholders are the employees, customers, and even regulatory agencies such as the State where the bank is held, Securities and Exchange Commission, and the Federal Deposit Insurance Corporation.
However, the bank is a corporation that is owned by the stockholders. In turn, the stockholders elect the Board of Directors for the organization and it is this governing body that is responsible for the bank operations, regulatory compliance, and performance. All parties mentioned have an interest in the bank to be successful and profitable. Each bank offers a different type of service to their consumers. Buzzell (2004) explains, “Banks provide individuals and business with a wide range of inancial services including traditional deposit and credit services, nontraditional services such as insurance sales and securities brokerage, and electronic banking services” (p. 9). Banks have taken advantage of new services to offer customers such as online banking. Information Technology and Banking 5 Traditionally banking involves accepting money from those who have it (depositors) and loaning it to those who need it (borrowers). The difference between the interest banks pay for deposits and the interest banks earn from the loans is the income banks use to fund their operations and generate a profit.
Consumers decide to put their money in a bank because banks are a secure way for depositor’s savings to be safe kept. The loans that banks make allow for the consumer to have what they need and helps the economy grow. With the passing of the Gramm-Leach-Bliley Act, Buzzell explains, “Banks can also engage in underwriting securities, offering insurance products, and engage in merchant banking” (p. 10). Now it is easier for consumers to have all the financial services they need offered in one place. Each type of bank offers different services to attract different customers.
To the United States Department of Labor (2006) there are four types of banks: Commercial, Savings, Credit Unions, and the Federal Reserve Bank; each bank has a specific purpose. Commercial Banks offer a wide range of services for individuals, businesses, and governments. The bank might also be located in another country and offer a wide range of deposit and loan accounts. For example, a commercial bank might offer consumer mortgages. Community banks are smaller than a Commercial Bank, and have a more specialized product offering.
A Community Bank does not have to offer loans for the consumer such as student loans, auto loans, and home mortgage. Because of the smaller size, employees are able to give their customers attention and meet their needs. Since the 1980’s, Savings and Loan Institutions are not in business anymore. Yet this type of bank had customers bring in their deposits to finance lending for other customers. Finally, the most important type of bank is the Federal Reserve Bank. Federal Reserve Banks are located in each Federal Reserve District, and there are twelve. Having Information Technology and Banking 6 welve branches allows the bank to meet the local needs to customers. The actual system was established to conduct monetary and credit police, along with supervising and regulating banking institutions. Offering customers new services and making improvements, allows customers to want to stay with their current bank. Many banks have taken advantage of the online banking service. With online banking, customers can verify account balances, pay bills, and apply for loans online. Cross-selling services is another way for bank employees to let customers know about the goods and services they offer.
For example, a business owner opens up a checking account but decides that he would like a safe deposit box to store personal items. He also decides to open up a personal checking account for him and his wife, and utilizes the online banking portal to pay their bills automatically, such as a mortgage payment. Certificates of deposit, money markets accounts, and other deposit accounts are available for consumers and businesses to open at the bank. These deposits often earn interest for the owner, and accounts that offer checking provides an easy method for making payments safely without using cash.
In banking, the profitability of the financial institution depends on its ability and willingness to meet customer needs by offering the type of products and services that they desire. Also, it is important for bank employees to know about the products that the bank offers so they can match the product to the customer. Positive and Negative Impact of Information Technology and Banking Advancements in technology have also led to improvements in the ways in which banks process information Many services that banks offer once required a use of a teller, in order for a customer to make a withdrawal or deposit now can be done through ATM machines.
Direct deposit now allows a consumer’s paycheck to be automatically credited to their account, and the person does not have to go to the bank to cash their paycheck. Another Information Technology and Banking 7 innovation has been electronic banking by phone or computer allows customers to pay bills and transfer money from one account to another. With various channels established to allow easy access for customers, at any time the individual can find out their account balances and statement history.
The most common known hardware used by banks are Computers and other peripherals such as printers and USB cables. In addition, using check imaging and scanners allows banks to store photographed checks on the computer, is one such example that has been implemented by some banks. An ATM is simply a data terminal that must connect to, and communicate through, a core processing system. The ATM processor is a tool used to communicate with the other ATM networks that can be used for a person to get cash at any time, even if the person goes to an ATM that is not their bank (Buzzell 154).
Once the funds are transferred to the host processor’ bank account, the processor sends an approval code to the ATM authorizing the s machine to dispense the cash. Communications between the ATM and the bank’ central s computer are encrypted to prevent would-be thieves from tapping into the phone lines, recording the signals sent to the ATM to authorize the dispensing of cash and then feeding the same signals to the ATM to trick it into unauthorized dispensing of cash. It is amazing to think of the advancement in banking that allows you get cash at any time of the day, no matter where the customer is.
However, by not going to an ATM that is located at the bank, the bank is able to make revenue for using a foreign ATM machine. Storing data is important for a bank not only for security reasons, but also for safekeeping. Having a server allows for the system to be restored for the processing system or even for an end user, in case there is a system failure so customer data will not be lost. As stated by Smita Mathur (2007) in “Understanding Computer Servers” a server helps end users with data entry, processing, and error recovery. In a bank setting, reports might be
Information Technology and Banking 8 downloaded from the core processing system to the server. For use in a report program, the reports would have to be downloaded from the server for that specific date for employees to use. By storing and utilized a server it allows for the bank to develop and use more programs. The most important software in a bank is known as the core processing systems. A bank’ core processing system is the central hub through which all transactions flow. For s example, a core system embodies many different functions of the bank.
Tellers can make transactions, loan payments can be posted, an employee can view a individuals account, journal entry transactions can be made to checking accounts or to the general ledger, and maintenance for each function can be done for certain parts. In addition, a core processing system allows for reports to be downloaded to the bank can track their profitability and performance. However, these systems are not made to stay in place indefinitely, and many banks are now faced with the decision to upgrade an existing system or install a new one from scratch (Buzzell p. 25).
Technology has come far, and banks now have numerous core offerings to choose from. Yet, banks cannot perform daily operations without a core processing system, it is imperative to business. Depending on specific functions needed by the bank there can be software used to maintain Fixed Assets, Prepaid Expenses, Regulatory or Compliance Functions, and to develop and track a financial budget. By having software with specific functions it allows the bank to have a competitive edge and allows the employee to learn more. Overall, software that is used can help the bank improve their efficiency and effectiveness.
More recently, the biggest technological influence has, of course, been online banking. Customers do not visit a bank’ physical location anymore. Through a personal s computer and Internet connection the bank uses its hardware, software, and Information Technology and Banking 9 telecommunication system that allow end users to view their account information through the secure connection. The portal is able to handle many banking transactions, for instance, to view an account balance, request transfers between accounts, and pay bills electronically.
Another innovation has been the use of Electronic Bill Payment. Karen Hoffman (2002) clarifies that, “Consumers can pre-authorize direct withdrawals so that recurring bills, such as insurance premiums, mortgages, and utility bills, are paid automatically” (p. 18). EBP saves time for customers and money on postage, along with saving money for cost to manufacture paper checks. The process is securing so that is another reason why customers choose to use this. Since banks do gain revenue by signing up customers for Internet banking it is great if the bank does offer bill payment.
On the other hand, customers can perform transactions using their debit card, which is similar to using a credit card but deducts money from a checking or savings account. Alas, technology has improved and impacted banking with many of the transactions that customers use on a daily basis. As technology improves and becomes more cost effective, more advancement in banking will occur. However, the bank has to have strong security measures to prevent hacking and other cyber crimes. Also, hiring the right employees is important as you need an employee who will safe keep customer information and not use the technology to abuse it.
Trends in Banking Banking and information technology go hand in hand. The technology that is available now and being researched to use in the future will help transactions be accurate and allow for tellers not to be relied on as much, since a computer will be able to do work. If the bank does not have to rely on a teller to process transactions that allows to save money and cut expenses. Information Technology and Banking 10 In banking, the stakeholders will be the customers, employees, shareholders, and vendors.
Each person has a vested interest in the bank and wants to make a profit. Banks need to meet their customer needs, as from the deposits that customers make allow for loans to be funded, and that is how a bank can grow for the future. As a shareholder, it is vital for the person to make a profit. For example, the vendor that installs the check imaging system for the ATM wants the product and service to be successful because if not, it affects the vendors’ reputation. Employees want to work for a company that grows, as that means that there will be new employment opportunities.
If a customer goes to an ATM and makes a deposit, he or she has to get an envelope to place the slip, checks, and or cash. In addition, the person has to make sure that their account number is on the back of the check so the proper account can be credited. Dan Beighley (2007) discusses how, “Bank of America has adopted a trend that allows for the ATM to scan a digital image of the check, so when the customer gets their receipt he or she will see a copy of the check that was just deposited (p. 5). The more individuals that njoy using this feature, the more banks will be receptive to using this technology. According to Beighley, “The cost to convert each ATM to scan is from $10,000 to $15,000” (p. 5). Hence, larger banks will be using this technology before smaller banks decide to convert. As more branches use the imaging scanner, other banks around the country will want to convert their ATM to scan. This innovation allows for tellers to be more productive as instead of going through each envelope and calculating the deposit, the computer already does it for them.
Even though banks will have to spend money to use this technology, it will be an investment in the long run. Another trend will be the use of Internet based banks; ING Direct has been an innovator in that field as there has been no branch for the bank. Everything is done with customers Information Technology and Banking 11 through phone, mail, and Internet. A customer can mail their deposit it on have it debited from their checking account, and the company even offers direct deposit service.
The interest rates that ING Directs offers can not compete with regular savings accounts with banks, since their was no branch the company could offer customers with higher interest rate. According to Barbara Kivit (2004), “The Market share that ING Direct has is remarkable, for Internet deposits the company has 52% of the market share, where as ETrade has 24%, and miscellaneous financial institutions have the remainder 24% of the share”. With ING Direct leading the way, more established institutions will focus on internet based banking and services. Checking a person’s bank account balance, keeps in getting easier.
A customer no longer has to access their account via the Internet, makes a phone call, or wait for their bank statement. Customers can get alerts about their bank account via their cell phone, and also make payments with a click of a button. Jane Kim (2007) explains that, “Financial institutions such as Bank of America, Wachovia, and Citibank are offering this service to attract younger customers to their banks. Many individuals use their cell phones to check email, take pictures, so checking the bank balance and paying bills is a another service customers can use” (p.
D1). However, it is up to the end user if this service is right for him to her, as cell phone service isn’t free so it might cost more to check your balance. Also, what happens if a customer is making a transaction and the service disconnects? Customers want to know their information is secure and protected. It is great that a bank can send a text message to let the consumer know their balance and if a deposit was made. Information Technology and Banking 12 Impact on Banking in Society Employment at Banks Banking is a popular industry that affects everyone in some aspect.
For example, employment in the industry can change, preventing terrorist financing is important, how interest rates change affect business, and how mergers and acquisitions can affect banks and their customers. Also, banks attract all different types of employees with different backgrounds, skills, and educational levels. For example, a person might become a teller after he or she graduates from high school. The person decides to work full time and attend college part time, the bank has an employee tuition reimbursement for any employee that majors in a business related field.
Also, starting out as a teller allows the person to learn more about operations, loans, and new account products. In addition, banking is an industry where the employers will train employees on the systems and procedures. Banking has been a very popular sector to be employed in due to the opportunities According to the National Labor of Bureau and Statistics; “The banking industry employed about 1. 8 million wage and salary workers in 2004. About 7 out of 10 jobs were in commercial banks; the remainder were concentrated in savings institutions and credit unions”.
Since banks offer many type of positions from administrative, operations, and loans Employee retention is important, in an industry where there can be a high-turnover rate. What banks decide to pay their employee is based on the location and type of bank. Hugh C. Jacobs, Jr. , who is the Chief Financial Officer and Executive Vice President for Integrity Bank in Jupiter, Florida, explained; “In Alabama a teller might make around $8. 00 dollars per hour. However, at this bank we offer $15. 00 dollars for a starting teller because that is the market rate and comparable to what other banks in the area are offering”.
Information Technology and Banking 13 Attracting new employees is vital so the organization can grow and give opportunities to individuals, so a bank needs to remain competitive in pay, benefits, and education and training that is offered. Because of the opportunities that banks offer employees who want to learn will continue at the bank, yet those who are unhappy will leave. Security and Preventing Terrorist Financing After the terrorist attacks September 11th, it became known that terrorists exploit the US economy and banks in order to fund their dangerous activities.
In Michelle Heller’s “9/11 Panelist: Small-Bank Burden Is Duly Noted”, Lee H. Hamilton, who is the vice chairman of the National Commission on Terrorist Attacks, explained that banks must know their customer but also realize they do have to help the fight in terrorism” (page 9). When Wire Transfers are completed, it is important for the person authorizing for the transaction and the bank to make sure that there were not any Office of Foreign Asset Control matches for this name.
Even if a name is common such as Michael Smith, and there was a known terrorist with a similar name it should still be verified that it is not the same individual. Battling terrorism is important, so the bank has to strive to really get to know their customers. However, individuals cannot assume that terrorist activities can happen in large international banks, these activities can occur in a community bank in a small town. Banks that engage in sponsoring terrorist financing should not be able to do business in the United States or any other location, the US Treasury or the Federal Reserve System should do this.
In addition, it is up to the individual bank to fight terrorism at the bank by reviewing security policies and procedures with employees. How Interest Rates affect Business Depending on the type of bank, the interest rates for either a deposit or loan account might vary. Banks need to be cautious when performing the analysis of what rate to use for Information Technology and Banking 14 interest, as it affects the bank itself and the economy. According to David Dagan (2007), “Banks are facing an earnings squeeze from a phenomenon known as an inverted yieldcurve.
That’ a situation in which long-term interest rates are lower than short-term interest s rates. It matters because banks generally borrow money at short-term rates and like to lend it at rates that are more long-term”. Another factor that affects a bank’s interest rate is bad loans or loans that have defaulted. Banks analyze and determine their rates based on their need. If a bank wants to buy a piece of land or expensive piece of technology equipment, management might decide to raise their Certificate of Deposit Interest Rates, because it would be very easily to get money.
Depending on the rates for the deposit accounts if the rates are not competitive and are off by a margin of a few basis points, a customer will go to the competition to open an account due to the interest rate the customer will receive. On the other hand, since income is generated from the rates on loans it is important to watch bad loans. If a business defaults on the loan, it affects branch operations, as the bank is no longer earning interest. The bank will raise their interest rates for loan customers since the organization will have to make up for that income that was lost.
In order to remain competitive in the field and with other banks, an analysis of the interest rates should be done once a month. If the Federal Reserve Bank decides to change monetary policy and lower rates for consumer home mortgages, the financial institution will have to follow the new policy. In addition, the bank needs to keep in mind their vision of wanting to make customers happy and get their deposits in order to fund loans. Information Technology and Banking 15 Conclusion Information technology has impacted banking in many positively from increasing productivity to reducing errors.
In addition, it has also caused competition between banks to offer the best type of products and services to customers. IT allows customers to get the services they need from the bank. Overall, IT has allowed the banking industry to give services with a great value and quality. Information Technology and Banking 16 References Beighley, D. (June 11-June 17, 2007). Bank of America Adds Check-Scanning ATM’s. Orange County Business Journal. p. 5. Buzzell, D. (2004). Principles of Banking. American Bankers Association. p. 9-163. Dagan, D. (April 6, 2007).
Interest rates put a squeeze on financial institutions. Central Penn Business Journal. p. 35 – 36. Heller, M. (August 24, 2004). 9/11 Panelists: Small-Bank Burden Is Duly Noted. American Banker. p. 1 – 4. Hoffman, K. E. (2002). Electronic bill payment comes of age. Community Banker. p. 16 – 21 Jacobs, Hugh. (June 29, 2007). Interview with Chief Financial Officer at Integrity Bank in Jupiter, Florida. Kim, J. (February 21, 2007). Mobile Banking Shifts Into Higher Gear; Moving Money, Paying Bills By Cell phone Is Getting Easier; What About Dropped Calls?
Wall Street Journal. p. D1. Kiviat, B. (June 25, 2007). How a Man On a Mission (And a Harley) Reinvented Banking. Time. Last accessed on July 1, 2007: http://www. time. com/time/magazine/article/0,9171,1633064,00. html Mathur, S. (May 3, 2007). Understanding Computer Servers. Last accessed on July 7, 2007. ttp://www. selfgrowth. com/articles/Importance_of_Client_Server_Technology. html U. S. Department of Labor: Bureau of Labor Statistics. (February 6, 2004). Employment in Banking. Last accessed July 1, 2007: http://www. bls. gov/oco/cg/cgs027. htm
