ATM, Online Banking and Technology Aspects in Bank Of America TEchnology - Essay Example

Table of Contents Table of Contents 2 Introduction 3 Literature Review 4 Research Methodology 5 Research Strategy 5 Time Horizons 5 Data Sources 6 Analysis 6 Auto Teller Machines (ATM) 6 Online Banking 7 Advantages of Online Banking 8 Mobile Banking 9 Security Issues in online banking 10 Conclusion 12 Bibliography 13 Introduction Information technology has impacted each and every business in the modern times. Financial institutions rely a lot on gathering, analyzing and providing information to meet the needs of the customer. It is claimed that money is just incidental. Banking industry is basically an industry which deals with the exchange of information between people. As information is so essential in banks, banks were the pioneers of the use of information technology. The first use of information technology in banks was started in 1950s when some of the banks in America installed automated bookkeeping machines. (Frguson, 2000).Many banks are now spending huge amounts of money in technology .This money is being spent not only to update and maintain their IT infrastructure but also to keep ahead of the competition by being the first to provide the latest technologies. Some of the technologies provide ease and convenience to the customers and others help the banks to reduce their overheads and thus save money which was usually spent on physical infrastructure. Technology is also allowing small banks to compete with big established banks as they rely more on their virtual infrastructure than on their physical infrastructure to compete. IT has provided many custom made and off the shelf solutions to take care of their accounting and back office needs. IT has also helped in the development of new channels of reaching out to the customer such as auto teller machines, net banking, mobile banking and various other facilities. Some examples of technology products which are used by banks to provide service to its customers are net banking , credit card online , mobile banking , electronic money transfer , online payment of taxes , mobile recharges , airline ticket booking etc. The list of services being provided by banks to its online customers is endless. Bank of America Corporation as a financial services company is the largest bank holding company in USA by assets and second largest by market capitalization. (Federal Financial Institutions Examination Council, 2009).It was founded in 1874 and was initially known as Nations bank .Its current name was assumed after the acquisition of a San-Francisco bank named as Bank of America. The need of information technology in Bank of America was felt due to another revolution that it has pioneered. It was one of the first banks to deploy branch offices of the parent bank in many locations all across the nation. But cashing a cheuque in a different location was a cumbersome process for the customers as well as for the bank employees as there was no way of identifying the customer. Initially this identification was done using signatures of the customers which had to be verified by the parent bank. The system worked for Bank of America and also gave it the competitive advantage but the amount of back office work that had to be done by the bank increased tremendously. Its employees were working night and day to update the ledgers and verifying the signatures of the customers who had requested withdrawal of money using cheques.The process was cumbersome and time consuming. By 1950, Bank of America decided it was no longer feasible to keep hiring more and more employees in order to do its back office work. It decided to take the help of computers for the back office work – at the time when the use of computers was limited to military. The first computers to be used by Bank of America were called as EMRA. The design, testing and the implementation of EMRA computers took nearly a decade. They were finally installed in to service in different locations in California in 1959.Each machine was able to process about 33000 accounts per hour .A single machine was able to do the work of more than 500 people in month. (Arrington, 2009) Thus Bank of America was the pioneer of the use of information technology in financial sectors. Many other banks followed suit and deployed the EMRA technology in their banks. EMRA served Bank of America till 1967 when it was finally replaced by new technology. Thus Bank of America has always been forefront in the use and development of information technology and continues to do so with its innovative banking technologies. Literature Review Many researchers have been carried out to study the effect of information technology on the bottom-line of banks. Brynjolfsson and Hitt claim that investment in IT capital increases the margins for the banks by as much as 81%.Investement in the physical infrastructure increases the margin by only 6 % as claimed by these two researchers. They also claim that manpower trained on IT is much more productive as compared to manpower who works manually to keep the records. (Brynjolfsson, 1995) Mario Castelino claims that the use of IT in the banking industry not only provides economic edge and competitive advantage to the bank but also starts a process of business process reengineering in the bank. This process modifies the way business is being done in the bank. The employees have to be trained not only in the use of IT but it also leads to change in the way business is performed by the bank. Use of allows the researcher claims allows the banks to benchmark their processes against the best in the industry and thus leads to increase in efficiency and customer service. Some scholars however argue that use of information technology in banks has not given any significant results to the banks. They claim that the only positive factor of the use of information technology has been the ease of use for the customers and the reduction of employees. They also agree that productivity of the employees has increased as a result of the use of information technology in financial services. Information technology in the modern age has become more of a point of parity among the various banks than a point of differentiation. Providing online services does not differentiate your bank in any way from the other banks and does not win any extra customers as all banks are now providing such services. However not having information technology use and the services related to it may lead to customers moving away from your bank services and adopting services of some other banks. Morrison an Berndt claim that the “estimated marginal benefits of investments in IT are less than the estimated marginal costs.” (Berndt, 1995) Dasgupta (1999) goes one step further to refute the use of IT in banks. He claims in his research paper that use of IT in a service oriented industry such as banking does not increase the productivity of the employees. He claims that significant amount of time is wasted by the employees in learning new technologies. Due to this firms have to spend money not only in the installation of new technologies but also in the training of the new employees. He goes on to show how the entire learning curve experience is lost whenever a new technology is introduced. This; he claims significantly reduces the bottom-line before it starts increasing. The productivity does not increase enough before some new technology comes up and the cycle has to be repeated again. (Subhasish Dasgupta, 1999) Thus to conclude the work of various researchers we can see that the effect of information technology on the bottom line of banks in inconclusive. While some researchers claim that that the sue of information technology increases the speed of information collection , it helps the banks to serve customers better , increases productivity and performance of the employees and thus provides benefits to the bank in the long run. However others claim that the costs of implementing new technology in the bank are far more than the benefits which are accrued to the banks by the adoption of this technology. We may believe any of these views of the researchers; however the fact remains that information technology is here to stay in banks. Banks have to invest in the technology of future if they want to stay ahead of the competition and gain competitive edge. Research Methodology The objective of this paper is to study the use of information technology by Bank of America. Bank of America has been pioneer in using the latest information technology. Many banks have followed the lead of Bank of America in installing the latest technologies. We will try to assess the technologies being currently used by the bank and how they affect they have had on the bottom-line of bank of America. Research Strategy The research strategy is a general plan of how you will go about answering the research questions that have been set. The research strategy that has been used in this dissertation a qualitative case study. A qualitative case study is an intensive holistic description and analysis of a single instance, phenomenon or a social unit. Time Horizons The time horizon that has been used in this particular dissertation has been cross sectional. Cross sectional study may be defined as those methods of research which involves observation of a subset of a population of items at the same time. The main difference between cross sectional research and longitudinal studies is that cross sectional studies take place at a single point in time and longitudinal studies involve a series of measurement taken over a long period of time. Data Sources We have relied primarily on secondary data for our research. The research was started by analyzing the existing sources of literature which discusses the impact on the bottom line of the use of information technology by banks. We have further followed it up by looking at various journals, books and online sources to find out the information technology being used by Bank of America and how it has helped it to improve its productivity. Analysis We will analyze the various services provided by Bank of America and how these services have utilized information technology to better serve the customers and improve the profitability of the bank. Auto Teller Machines (ATM) Bank of America relies heavily on the ATM services. The bank has around 18700 ATMS all across America. Bank of America is also a member of Global ATM Alliance which is a joint venture of many global banks .These allows the customer with the facility to use their cards at ATMs of other banks but the bank must be a member of the alliance. (ATMmarketplace.com., 2002).This alliance provides the customers with a network of more than 20,000 ATMs worldwide. Bank of America was one of the pioneers in introducing the ATM technology in the 1970s in USA. This technology impacted the bottom line of the banks tremendously.ATM machines were connected to the central database servers of Bank of America. This allowed the customers to access their accounts by entering a simple pin number and provided them with the ease of taking out money whenever and wherever they needed it. The use of ATMs provided many benefits to Bank of America as well. Initially when this technology was introduced it leads to an increase in the customer base of the bank and thus led to increase in bottom-line of the bank. However as competition has caught up, this advantage no longer holds good for the bank. Setting up ATMs all across the country requires a huge initial investment on behalf of Bank of America. Other expenditures which were incurred by the bank were related to getting the software made for connecting these ATMs to the central database server of the bank. However once these initial investments had been made, ATMs provided tremendous benefits to the banks. With the introduction of this technology there was tremendous reduce in the number of people who visited banks .Lines at the cash counter reduced .They also reduced the number of employees needed by banks for servicing people. A large number of employees could now be relieved of their duties as their services were made redundant by ATMs. The productivity of the existing employees was also increased tremendously with the introduction of ATMs. This happened as they could now focus more on selling other revenue generating financial services of the banks to the customers rather than spending their time in handling large amounts of cash. ATM technology was the first technology which impacted the bottom-line of bank of America tremendously. However this technology has now become almost obsolete in USA. There has been an increasing reliance on the use of online banking and plastic money in the form of credit cards. As we can see from the following figure the use of ATMs among customers has reduced drastically. ATMs no longer impact the bottom-line of the bank; however their presence is essential and can lead to loss of customers if they are removed. Figure: Reduction in the number of ATMs in US Online Banking Online banking has been the latest offering which has been provided to the customers for ease of use by Bank of America. The online banking software provides the customers the ease of banking from the comfort of their homes. They are provided a username and password to access their bank accounts. Bank of America infect encourages the customers to go online and use the online banking services provided by the bank. Bank of America sells a large number of financial services on the net. These services include the ability the ability to view their statement, transfer money to any account worldwide, transfer of money electronically without the hassle of handling cash. Payment of bills is also provided to the customers online by bank of America. These services require extensive IT infrastructure and back up of data. Considerable amount of money has to be spent by the bank in ensuring that internet theft does not takes place when customers are using the services of Bank of America. Apart from pure banking related services, other services which are provided to customers include forex trading and stock trading. Advantages of Online Banking Reduces the need for Physical Infrastructure Online Banking services from Bank of America reduce the cost needed to set up physical infrastructure for banking services. The cost incurred in setting up virtual infrastructure in the terms of software installation is very less than the amount of money needed in setting up physical branches of the bank. As the need for physical infrastructure reduces for the banks, it leads to reduction of cost and thus improves the bottom-line of the firm. Reduces Employee Cost Online banking reduces the need for customers to go to banks. Any service that can be done at the branch office can also be done by the customer online from the comfort of his home. This ensures that bank has to dedicate less number of employees for servicing customers. This leads to not only savings for Bank of America in the terms of reduced number of employees but also increases the productivity of the employees by ensuring that they concentrate on value creating activities for the banks rather than just dealing in cash transactions and dealing with customer problems. Thus online banking reduces employee related costs which leads to increased bottom-line for the bank. Increases Bank Turnover Online banking provides another major benefit for Bank of America which is not visible easily. As lesser number of customers vast bank branches for their services, the amount of cash that a bank branch needs to keep also reduces significantly. As customers are now dealing in electronic money; banks do not need to keep large sums of money in their branches just to ensure that enough money is there to service customers. This money can now be used to give out loans and investment activities of the bank. This advantage increases the bottom-line of the bank by increasing the opportunities of investment rather than reducing the cost. Tie up with financial Institutions As the number of customers going for online services has increased for Bank of America it has provided them with an opportunity to tie up with various agencies which provides online shopping and the safe transfer of electronic money. This increases the chances of utilizing their money in a joint venture for big financial projects which cannot be handled by the bank individually. Online banking is also used by banks to provide services such as bill payment to customers. These services also increase the amount of cash available to banks. Reduces overhead costs Online banking reduces the total number of actual physical transactions which are to be carried out by banks. As the number of actual transactions are now limited to corporate transfers of money between institutions and do not include small transfers to individual customers; this reduces the cost of overhead associated with these transactions like security issues. As the cost related to transaction reduces the profitability for banks increase. Mobile Banking Mobile Banking is the latest technology related service which is provided by Bank of America to its customs along with various other banks. The mobile banking services can be utilized from mobile web or by using mobile applications by the customer. Mobile Web Source: (Bank Of America, 2010) In order to use this service the customer needs to have internet connectivity in his mobile. The customer needs to access the site www.bofa.mobi from his mobile. Once this is done he can access any services from his mobile which are available to the customer when he goes on the internet to avail banking services. (Bank Of America, 2010) Mobile web can be used by the customer to pay his bills, check his account statement or transfer money to any other account. For this service to be available the mobile of the customer must have a software installed which will allow internet accessibility. Once internet accessibility is provided by the mobile, this service works simply like internet banking services. Mobile Banking Applications These services are provided by Bank of America in collaboration with various services providers. In order to use these services , the customer needs to install agree software made available by Bank of America and the service providers .This software allows the user to access his bank accounts and also makes immediate changes in the database of Bank of America. Use of mobile banking is the latest buzzword in banking technology. It provides customers with the ease of banking anytime anywhere and saves precious time of the customer. Mobile banking is a necessity in today’s world for any bank as the failure to provide this service may lead to loss of customers as all major banks provide this service now. Security Issues in online banking Bank of America has to ensure the security of the transactions that are conducted online by its customers. We will analyze the safety features and various safety levels that are in place in order to ensure that data theft does not take place. Any theft of data leads to loss of money for the consumer and will lead to a loss of trust in the bank and thus subsequently loss of customers. Bank of America is using online safety features like Site key and their constant security alerts to the consumer if any such transaction occurs in their accounts which is not expected by the software and deviates from the past spending pattern significantly. Bank of America also provides features like Safe Pass and Shop Safe which allows consumers to pay securely for the purchases that they have made online. They have a 24 hour call center which is completely dedicated to consumer queries on transactions conducted online. If they feel that they are a victim of some online fraud, they can call this number and report immediately. Site Key Site key is an additional layer of security which is provided by Bank of America. Site Key is a software which recognizes the ip address of your computer. The moment you log in from your computer, the software recognizes you and shows you an image along with a phrase which has been pre-selected by you. Customers are asked to immediately stop any transactions if they do not see their Site Key image. This is an indication that they have entered some fraudulent website and not the site of Bank of America. In case you are not logging in from your home computer, the Site Key software prompts you to answer some pre-decided questions and only on answering these questions correctly are you allowed to access the bank account. This feature of Bank of America is unique and is not provided by a number of banks. It provides an extra layer of security for the customer in order to save him from fraud. (Bank of america, 2010) Safe Pass Safe Pass is another layer of security which is optional for the customers. This security feature is activated whenever there is unusual activity from the customer’s account. These activities many include transfer of large sums of money or purchase of goods worth huge amount. Whenever the software detects some irrational activity in the account, a sic digit code is immediately send to the registered mobile number of the customer. The transaction proceeds only when this six digit code is entered by the customer. Shop Safe Shop Safe is an option provided by Bank of America to prevent online credit card frauds. Once the customer registers for this option, he is prompted to create a unique temporary credit card number. This credit card number is then activated by the software and links directly to customer’s real credit card number but protects the customer from any frauds as the real credit card number is not exposed during transactions. The customer can use this particular temporary card number for one time purchase or can use it for recurring payment. He can also set the limit in the amount of money transactions that can take place with this temporary number. Security at Bank’s End Apart from the above features which are provided by Bank of America to reduce chances of any online fraud at the customer’s end; many security layers have been provided to prevent any chances of fraud from the bank’s employees and its servers which contain sensitive information about customers. Extensive anti-viruses have been used by the banks to prevent any virus from entering the computers being used by the bank to store sensitive customer data. Firewalls have been installed to prevent any unauthorized access by individuals or networks in the server of Bank of America. During the transmission of information secure encryption technology is used which ensures that information remains confidential during any transaction between the customer and the bank. Secure Socket Layer (SSL) technology is used by the bank in order to ensure that data remains encrypted during any transaction and no data theft occurs. Bank of America Software also checks the data integrity during transactions. Data integrity checks ensures that data has not been modified during the time when the transaction was being processed. Other point from where security leakage can take place are the employees who are entrusted with the task of handling information technology or the employees which handle sensitive consumer databank of America has strict hiring policies for these employees. Care is taken to ensure that employees follow the ethics code during any transaction that they are a part of. Use of IT ensures that every employee leaves his footprints whenever he accesses any sensitive consumer data so that any data theft can be easily traced back to the employee who did it. Conclusion If we analyze the ay information technology has been utilized by Bank of America; it looks impressive in the beginning. However there is no such feature which is not being provided by all other banks in the industry. The use of technology is no longer a source of competitive advantage for the banking industry. It is more of a need. The various technological features provided by Bank of America have now become a point of parity rather than a point of differentiation. If any of these services are withdrawn, I may lead to loss of customers for the banks, however the presence of these services do not ensure that customer will throng your bank. The use of IT in the banking industry is a common practice which has to be followed by all banks including Bank of America. Bibliography Arrington, J. (2009). Information Technology, 50 Years Ago. Florida: TechCrunch. ATMmarketplace.com. (2002, January 9). Five big banks form Global ATM Alliance. Retrieved Febuary 18, 2010, from ATMmarketplace.com.: http://www.atmmarketplace.com/article.php?id=1886 Bank Of America. (2010). Mobile Web. Retrieved Feb 17, 2010, from Bank of america.com: http://www.bankofamerica.com/onlinebanking/index.cfm?template=mobile_web Bank of america. (2010). SiteKey® at Bank of America. Retrieved 2010, from Bank of america.com: http://www.bankofamerica.com/privacy/index.cfm?template=sitekey Berndt, E. a. (1995). High-Tech Capital Formation and Economic Performance in U.S. Financial Services. Journal of Econometrics , 9-43. Brynjolfsson, E. a. (1995). Information Technology as a Factor of Production: The Role of Differences Among Firms, . Economics of Innovation and New Technology, Vol. 3, No. 4, (Special Issue on Information Technology and Productivity Paradox , 183-200. Federal Financial Institutions Examination Council. (2009). Top 50 Bank Holding Companies. USA: Federal Financial Institutions Examination Council. Frguson, R. W. (2000). Information Technology in banking and supervision. Washington: Central Bank. Subhasish Dasgupta, J. S. (1999). Influence of information technology investment on firm productivity: a cross-sectional study. Logistics Information Management Volume 12 , 120-129. Read More