Electronic banking systems and their applications

¶ … E-Finance: An Introduction" by Franklin Allen, James McAndrews and Philip Strahan (2002)

In sum, e-finance involves providing some type of financial services online or through other modern digital means. The journal article by Allen et al. provides a review of various types of research issues (e.g., the use of electronic payment systems, the operation of financial firms, and the operation of financial markets) related to e-finance that warrant further studies in the future. The authors describe the fundamental transformations that have taken place in the financial services industry and emphasize that a growing number of providers are operating online without a physical brick-and-mortar presence. In addition, a description concerning the respective impact of the Internet and other electronic banking systems on different sectors competing in the financial services industry (e.g., online banking, insurance companies, and electronic brokerage services).

The authors also make the point that electronic banking is not a new trend, but rather dates back nearly a century to a period when banks settled payments using the telegraph. In fact, by 1918, the Federal Reserve leased telegraph lines across the country to link all of the accounts held at the 12 Federal Reserve Banks in the United States. Likewise, the NASDAQ exchange was using electronic stock trading as early as 1971. The point is also made that electronic banking systems have gained in popularity since that time and a growing number of countries have made the transition to electronic banking systems. Moreover, a number of stock trading platforms have transitioned to electronic systems with the New York Stock Exchange and the bond market representing two -- and increasingly rare -- holdouts. Likewise, depository institutions have implemented electronic systems to facilitate the credit approval decision-making process.

These trends in electronic financial services have virtually eliminated the need for face-to-face transactions with customers, but the point is made that some customers prefer brick-and-mortar resources, making the need for some type of combination of online and physical resources an important considerations for financial services companies. In this regard, Allen et al. point out that these trends have special importance for small business owners that depend on an established, long-term relationship with their bank to secure credit and the transition to e-finance systems has eroded these relationships.

Although electronic financial and banking systems have been met with corresponding increases in profitability and performance, it remains unclear whether these outcomes are directly attributable to the use of these digital systems or whether these outcomes were realized based on first-movers' previously established profitability and efficiency. Despite the high costs that are involved in implementing, maintaining and administering e-finance technologies, the returns on investment to date have shown that the investment is worthwhile and pays major dividends over time.