Information technology in the banking sector :
opportunities, threats and strategies.

Hassan Ghaziri
Graduate School of Business and Management, American University of Beirut, 1998

The New Era

The 21st century will bring about an all-embracing convergence of computing, communications, information and knowledge. This will radically change the way we live, work, and think. The growth of high speed networks, coupled with the falling cost of computing power, is making possible applications undreamed of in the past. Voice, data, images, and video may now be transferred around the world in micro-seconds. This explosion of technology is changing the banking industry from paper and branch banks to' digitized and networked banking services. It has already changed the internal accounting and management systems of banks. It is now fundamentally changing the delivery systems banks use to interact with their customers. All over the world, banks are still struggling to find a technological solution to meet the challenges of a rapidly-changing environment. It is clear that this new technology is changing the banking industry forever. Banks with the ability to invest and integrate information technology will become dominate in the highly competitive global market. Bankers are convinced that investing in IT is critical. Its potential and consequences on the banking industry future is enormous.

Technology and Banks Transformation

Computers are getting more sophisticated. They have given banks a potential they could only dream about and have given bank customers high expectations. The changes that new technologies have brought to banking are enormous in their impact on officers, employees, and customers of banks. Advances in technology are allowing for delivery of banking products and services more conveniently and effectively than ever before - thus creating new bases of competition. Rapid access to critical information and the ability to act quickly and effectively will distinguish the successful banks of the future. The bank gains a vital competitive advantage by having a direct marketing and accountable customer service environment and new, streamlined business processes. Consistent management and decision support systems provide the bank that competitive edge to forge ahead in the banking marketplace.

Major applications. The advantages accruing from computerization are three-directional - to the customer, to the bank and to the employee.

    For the customer. Banks are aware of customer's need for new services and plan to make them available. IT has increased the level of competition and forced them to integrate the new technologies in order to satisfy their customers. They have already developed and implemented a certain number of solutions among them:

  • Self-inquiry facility: Facility for logging into specified self-inquiry terminals at the branch to inquire and view the transactions in the account.
  • Remote banking: Remote terminals at the customer site connected to the respective branch through a modem, enabling the customer to make inquiries regarding his accounts, on-line, without having to move from his office.
  • Anytime banking- Anywhere banking: Installation of ATMs which offer non-stop cash withdrawal, remittances and inquiry facilities. Networking of computerized branches inter-city and intra-city, will permit customers of these branches, when interconnected, to transact from any of these branches.
  • Telebanking: A 24-hour service through which inquiries regarding balances and transactions in the account can be made over the phone.
  • Electronic Banking: This enables the bank to provide corporate or high value customers with a Graphical User Interface (GUI) software on a PC, to inquire about their financial transactions and accounts, cash transfers, cheque book issue and inquiry on rates without visiting the bank. Moreover, LC text and details on bills can be sent by the customer, and the bank can download the same. The technology used to provide this service is called electronic data interchange (EDI). It is used to transmit business transactions in computer-readble form between organizations and individuals in a standard format.
  • As information is centralized and updates are available simultaneously at all places, single-window service becomes possible, leading to effective reduction in waiting time.

    For the bank. During the last decade, banks applied IT to a wide range of back and front office tasks in addition to a great number of new products. The major advantages for the bank to implement IT are:

  • Availability of a wide range of inquiry facilities, assisting the bank in business development and follow-up.
  • Immediate replies to customer queries without reference to ledger-keeper as terminals are provided to Managers and Chief Managers.
  • Automatic and prompt carrying out of standing instructions on due date and generation of reports.
  • Generation of various MIS reports and periodical returns on due dates.
  • Fast and up-to-date information transfer enabling speedier decisions, by interconnecting computerized branches and controlling offices.

    For the employees. IT has increased their productivity through the followings:

  • Accurate computing of cumbersome and time-consuming jobs such as balancing and interest calculations on due dates.
  • Automatic printing of covering schedules, deposit receipts, pass book / pass sheet, freeing the staff from performing these time-consuming jobs, and enabling them to give more attention to the needs of the customer.
  • Signature retrieval facility, assisting in verification of transactions, sitting at their own terminal.
  • Avoidance of duplication of entries due to existence of single-point data entry.

    A search of the banking literature reveals that banks are moving rapidly to take advantage of recent and new customer service and cost reduction opportunities that new technologies offer. A sampling is in the table below:

    Technology Current Use Use in Next 3 Years.
    PC Networks: Tellers 48% 80%
    Sales Tracking Software 44% 80%
    Relational Data Base 36% 76%
    Automate Credit Scoring 8% 48%
    E-mail 60% 95%
    Equipment Management Software 33% 57%
    Imaging Checks / Statements 12% 72%
    Imaging Documents 7% 45%
    Delivery Systems
    Internet Banking Home Page 3% 25%
    Internet Electronic Office 1% 15%
    Telebanking 56% 88%
    Smart Cards Debit Cards 35% 70%
    Electronic Banking 12% 76%

Internet: Riding the tiger. The Internet is rapidly becoming the information superhighway of a global electronic marketplace. The rising commercial interests in the Internet are especially evident in "frontend" applications such as electronic catalogs, yellow pages, storefronts, malls, and customer support centers. All these applications are based on the World Wide Web (WWW) -- the fastest growing segment of the Internet. Although "back-end" applications such as electronic data interchange (EDI) are equally important, their adoption has not been as rapid. One major concern is security: the Internet is generally perceived as not secure enough for transmitting sensitive data such as payments. Upon a closer look, however, this view is not warranted, since technologies such as public key encryption and firewalls address essential security concerns. Moreover, such technologies are already available. The only remaining barrier is the lack of real world users of those technologies.

The pilot project between Bank of America (BofA) and one of its large corporate customers involves transporting financial EDI transactions over the Internet. If successful, BofA expects that this new EDI option will lead to a reduction in telecommunications costs, an improved position with respect to its value-added network (VAN), and valuable learning experience with the Internet environment, which is becoming increasingly important to the bank. The project is also significant beyond BofA: because it is one of the first large-scale, real-world trials, its outcome will help dispel many uncertainties surrounding Internet-based EDI, and encourage more companies to move in this direction.

Investing in technology. According to a survey conducted by the American Bankers Association, US banks expenditure on information technology grew from $16.3 billion in 1994 to $18.7 billion in 1995-an increase of 14.7%, and $1 billion more than the same bankers forecasted they would spend in last year's survey. By 1998, the banks expect to spend $21.2 billion (an increase of 7. 1 %).

How to survive. The key to survival is customer service. Customer loyalty will be determined by convenient and innovative delivery of products and personalized services. In the '70's and '80's, banks were marketing to a generation raised on old style banking: personal interaction at a banking office. That generation was disdainful of "impersonal" service and afraid of computers. Convenience was having a "branch" in one's neighbourhood. Today, personal service and convenience are still the critical factors in the banking relationship, but they are defined differently. Consumers still want to bank with a financial institution they "know," and one who "knows" them, but they do not necessarily want to go to the bank. They are not afraid of computers and technology; they embrace them. Convenience is doing their banking when they want, and where they want. They are now comfortable with personal computers and other electronic devices. They expect fast, efficient, and accurate service And the only way to cost effectively provide the instant, quality service that customers demand, and that the competition provides, is through intensive use of the most advanced information technologies and through good people trained in the use of these technologies. For all these reasons, the banks delivery systems are completely changing.

The new Delivery Systems. The increasing cost of building brick-and-mortar branches, decreasing cost of computers, high delivery costs and slow revenue growth force a relook at the conventional delivery systems. Moreover, growing comfort of technology usage by the customer is rapidly fostering usage of non-branch channels for routine transactions.

The new strategy changes the focus of the branch from being a high cost transaction center to a provider of a wide range of services like telebanking, customer service kiosks, ATMs, and remote electronic banking.

New Marketing Opportunities. As the new technology is so expensive banks need to use the new systems to do more than deliver information and basic services. Banks need the ability to also sell insurance and investment products to get a better return on this investment. Telephone banking can bring financial services to the home or office, especially if they are affordable screen phones. By noticing how much interest the customer expresses, the bank can market stock quotes and insurance quotes. Interactive videos are new technology that banks can make available to the customer to maintain personal contact while still lowering the expense of delivery service. With an interactive video an expert employee is not needed in each branch. Complex life insurance products, open brokerage accounts, customized product illustrations can be widely available where needed. The interactive videos will be cost effective expertise. The internet is a medium to allow banks to offer products to customers outside the normal customer base of a branch. Banks are aware of the customer's need for these services and plan to make them available before other sources do.

Drawbacks. Early experiences with electronic commerce in the banking industry, which has been a pioneer in the use of electronic systems, can be used to learn of some potential dangers and issues to be taken into account. The use of Automated Teller Machines and electronic home banking systems has increasingly allowed customers to bank outside of traditional bank facilities, for most of their usual transactions. This was consistent with the cost-savings strategy of most banks, which discovered that electronic transactions were about seven times less costly compared to the manual handling of these transactions by a bank teller. Nevertheless, the fact that customers' only contact with their banks was through (rather unsophisticated) electronic interfaces, and the major difficulties in integrating the legacy systems of a typical bank, prevented banks in many cases from selling additional products to customers (cross-selling). In some European markets, the insurance companies took opportunity of that to grab business from banks, selling savings products to customers through their extensive distribution network. Similarly, the decrease in human interaction with customers could also lead to a less sophisticated understanding of their needs, as they're not always able to express comments, criticisms or requests for new products while interacting with machines. This should lead to a design of electronic commerce systems which incorporate capabilities for customer understanding and for proactive selling of new products. Electronic business transactions can only be successful if financial exchanges between buyers and sellers can occur in a simple, universally accepted, safe and cheap way. Various systems have been proposed, some of them based on traditional mechanisms (e.g. credit cards accounts) while others rely on new designs, such as electronic money. The key here will be to find a few widely accepted mechanisms, which can be used by most actors. The recent agreement between Mastercard and Visa on one security standard for credit card transactions over the Internet, and its backing by most major software vendors is one step in the right direction. This doesn't diminish the need for more specialized systems, for instance to allow microtransactions, the exchange of very small amounts of money (a few cents) in exchange for information or services. These new payment mechanisms will in turn enable new business models such as pay-per-article newspapers.

The Lebanese Case

During the last civil war (1975-1990), eighty percent of the Lebanese infrastructure was destroyed. The remaining twenty percent are now outdated. The Lebanese banking sector was heavily affected by the war. They lacked the information technology revolution in the banking sector. It becomes a strategic necessity for the Lebanese banks to implement the new technologies at all levels, transactional level, managerial level and executive level. In the 1990's they started implementing IT capabilities to change the work organization, raise the productivity, cut costs and deliver the best services to their customers and increase their profits in the same time. Most of the Lebanese bankers believe that IT will enable them to face the foreign competition and the possible consequences of the coming peace.

Technology Adoption. The vast majority of the Lebanese banks have set very high standards of excellence for themselves in terms of technology, state-of-the-art facilities, customer service and customer orientation with all facets of operations totally computerized. The banks also make extensive use of communication technology to provide off-site banking facilities including ATMs.

Their ambition is to position themselves as technology-driven banks offering superior services to both their clientele classes - the corporate customer and the retail customer. The corporate customer typically requires quick disposal of loan applications and maximum returns from the cash balance. The needs of the corporate customer are functions of the speed of response. Technologically the answer to this is a reliable network connecting branches that run on-line.

The first steps. At the early stage , Lebanese banks started to build their databases and automate their work procedures. Most banks have adopted ready made packages for their internal operations. Currently, these banks are replacing their old information systems. The banks branches are planning to provide state-of-the-art services to their customers enabling a rapid growth of the bank's performance in a very competitive marketplace.

Different approaches are followed in the Lebanese banks to acquire and implement the new technologies. Banque du Liban et d'outre-mer (BLOM), for example, has developed its own complete banking information system. While Ban k Audi followed another strategy and purchased an on-line information system providing a real time on line branch network with an up-to-date banking and customer information to senior management, middle managers, end users and business analysts. Both information systems, in BLOM in Bank Audi are scheduled to run during this year. The major reasons behind adopting or developing new information systems are:

  • Rapid geographical expansion has forced banks to replace their off-line systems by an on-line system linking the branches to the head office through the telecommunications network.
  • Restructuring bank's processes in order to reduce staff expenses which constitute a large part of the operating costs and a heavy burden on its operating profitability.
  • Incompatibility of the old systems with the strategic necessity of integrating new technologies like ATMs, telebanking, etc. in order to provide the high quality services to the customers and competing on an equal foot with the foreign banks.

The competition. The Lebanese banks are also planning to offer the entire range of services like telebanking, ATMs, etc. They also respond very actively in the marketplace in introducing new products and services. Arab Bank was the pioneer in introducing ATMs in Lebanon. Arab bank started to install ATM machines in 1993. Other banks followed, by establishing in 1994 a network called Link Network, using Link cards. About 25 banks have joined this network and are sharing now its almost 60 machines located in the major cities of Lebanon. The central bank is expecting that about 700 ATM machines will be installed in Lebanon by the year 2000.

Lebanese banks are also introducing remote banking services. Arab bank was also the first bank in Lebanon to offer this service. Early in 1994, Arab bank installed an interactive voice response system, called Phone Banking. At the same time, it introduced the computer based remote banking service which is called Corporate banking. Four other banks, Allied Business Bank, BLOM, Universal Bank, and the British Bank of the Middle East followed and introduced their telephone based remote banking. However these services are providing only inquiry facilities because they are off-line systems.

Technology Assessment. The diffusion and successful implementation of IT in Lebanese banks is not an easy process. Lebanese banks are facing enormous challenges in mastering the new tools provided by IT. An important constraint to the diffusion and success of IT implementation is the telecommunications infrastructure, another obstacle is managerial practices and organizational weaknesses. In the following section, I will analyse and discuss these obstacles. In evaluating banks'use of technology, we look at both the technology in place to serve today's customer and the plans for serving tomorrow's. The first objective is to examine the bank's deployment of technology relative to what is available, tested, and proven to enhance bank performance. The second is to examine the bank's preparation for the future. We want to answer the following questions: The most important issues to be analysed are :

    To what degree is the bank using proven technologies to enhance performance?

    Are there any technologies not deployed that would have a significant, positive effect on performance?

    What level of specialized training has been received by the officers and employees assigned to selecting, deploying, and managing technology?

    What level of systems training has been provided to other officers and employees?

    How effective are the systems that are being used?

    Is Management monitoring the evolution of banking technologies and planning for the future?

Telecommunication infrastructure. The greatest obstacle to real time electronic banking in Lebanon is the telecommunications infrastructure. Telecommunications in the banking sector is a major factor to the success or failure of any application or service. The Lebanese telecommunications infrastructure was devastated by the civil war. The process of rehabilitation and modernization of this infrastructure started in 1993.According to the recovery plan developed by CDR the telecommunications rehabilitation plan will be completed by the year 1998. This means that banks will not be able to rely on the public network until 1998. The result of such situation is a delay in implementing new services and products like remote banking, electronic funds transfer, real time bank information systems. This has also an effect on the reliability of the services already implemented like ATMs. In order to face this challenge, banks began studying the feasibility of installing a private telecommunications network. Four banks, Bank Audi, Arab Bank, Byblos Bank, and BLOM, started in the early 1996 considering the installation of a private network to connect their branches and thus conduct real time banking operations. This network will also be used to connect the ATMs machines which will thus function on-line. However three problems are delaying the implementation of such network:

  • Obtaining a license from the Ministry of Post and telecommunications.
  • The high cost of the equipment 0 The lack of coordination between the members of the Lebanese Banks Association.

Human Resources Problems. Banking industry is heavily depending upon information technology that needs professionals for development, implementation and support. Despite the programs performed by many banks to develop their local expertise in IT, there is still a real shortage of qualified personnel. According to a recent survey ( T. Abdul Reda and M. Dayya, Banking IT: a look at Lebanon, AUB, 1996) the following problems were identified:

  • almost half of the Lebanese banks do not have one engineer among their staff.
  • lack of professional training programs. Financial institutions in Lebanon offer a wide range of training programs to their employees. However, with respect to their technical IT staff the percentage of training programs is much less, because IT staff are considered to be trained, highly qualified and hence do not need extended training sessions. The consequence of such policy is a reduction of the capability of IT staff to be up to date in the most recent advances .
  • High turnover rate of technical staff. The turnover rate of the technical staff in some 40% percent the Lebanese banks is around 20%. The low salaries and better opportunities in other industries are the main reasons for this high rate.
  • Resistance to change. Resistance to change and the absorption capacity is often neglected once the automation system is adopted. However, this human factor is a critical factor in the success of any banking application of information technology. The only way to solve this problem is to design adequate training programs and increase the awareness of the employees. Most Lebanese banks have realized this fact and some of them have established a training centre.

These are the major obstacles for implementing IT in Lebanese banks. Another point that should be mentioned is the necessity of planning very carefully the development of any new application. A computerization plan is the basis for implementing successful information technology solutions. To be relevant, these plans have to be linked closely to organizational strategies, objectives, priorities and processes.

Strategy for the future

Banks face a serious challenge. The basic structure of the bank is increasingly in conflict with the changing product, delivery, and service needs of the customers The future belongs to financial service providers not traditional banks. The vast majority of large banks, will create value networks. Doing so presents tremendous challenges. Banks will have to first develop a comprehensive distribution system that will enable customers to touch them at multiple points. Banks must also create performance measurement systems to assure the mix products and services they offer are beneficial to both the customer and the bank. They must determine whether to deploy new technologies themselves or with other service providers. Nevertheless, technology alone will not solve issues or create advantages. This technology needs to be integrated in an organization, with the change management issues linked to people resisting new concepts and ideas. It also needs to support a clearly defined and well communicated business strategy.

Created by the Digital Documentation Center at AUB in collaboration with Al Mashriq of Høgskolen i Østfold, Norway.

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