Advances in banking technology and management

Advances in Banking

Technology and

Management:

Impacts of ICT and CRM

Vadlamani Ravi

Institute for Development and Research in Banking Technology, India

Hershey • New York

Information science reference

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Library of Congress Cataloging-in-Publication Data

Advances in banking technology and management : impacts of ICT and CRM / Vadlamani Ravi, editor.

p. cm.

Summary: “This book examines the various myriads of technical and organizational elements that impact services management, business

management, risk management, and customer relationship management, and offers research to aid the successful implementation of

associated supportive technologies”--Provided by publisher.

Includes bibliographical references and index.

ISBN 978-1-59904-675-4 (hardcover) -- ISBN 978-1-59904-677-8 (ebook)

1. Banks and banking--Automation. 2. Banks and banking--Technological innovations. 3. Financial services industry--Technological

innovations. I. Ravi, Vadlamani.

HG1709.A37 2008

332.1068--dc22

2007022231

British Cataloguing in Publication Data

A Cataloguing in Publication record for this book is available from the British Library.

All work contributed to this book set is new, previously-unpublished material. The views expressed in this book are those of the authors, but

not necessarily of the publisher.

Foreword .............................................................................................................................................xii

Preface ................................................................................................................................................ xiv

Acknowledgment .............................................................................................................................xviii

Chapter I

Introduction to Banking Technology and Management / Vadlamani Ravi ............................................. 1

Section I

Services Management

Chapter II

Service Quality in Banks:

Which are the Factors Behind Performance and Customer Satisfaction? /

Carlo Gabriel Porto Bellini and Rita de Cássia de Faria Pereira....................................................... 16

Chapter III

Adoption and Diffusion of Internet Banking / Mahil Carr................................................................... 33

Chapter IV

Customer Acceptance of Internet Banking Services in Greece:

The Case-Study of Alpha Bank / Miltiadis Makris, Harilaos Koumaras,

Anastasia Konstantopoulou, Sotiris Konidis, and Spyros Kostakis...................................................... 53

Chapter V

The Adoption and Use of Smart Card Technology in Banking:

An Empirical Evidence from the Moneo Electronic Purse in France /

Zouhaïer M’Chirgui and Olivier Chanel.............................................................................................. 70

Table of Contents

Chapter VI

Engineering Banking Applications: A Service-Oriented Agent-Based Approach /

Manas Ranjan Patra............................................................................................................................. 88

Chapter VII

Smart Cards in the Banking Industry? Challenges, Competition, and Collaboration in the 2000’s /

Jarunee Wonglimpiyarat..................................................................................................................... 103

Chapter VIII

Electronic Banking and Information Assurance Issues: Survey and Synthesis /

Manish Gupta, Raghav Rao, and Shambhu Upadhyaya..................................................................... 119

Chapter IX

M-Payment Solutions and M-Commerce Fraud Management /

Seema Nambiar and Chang-Tien Lu................................................................................................... 139

Section II

Business Management

Chapter X

The CRM Process and the Banking Industry: Insights from the Marketing Literature /

Murali K. Mantrala, Manfred Krafft, Beibei Dong, and Kalyan Raman ........................................... 159

Chapter XI

Technology and Customer Value Dynamics in the Banking Industry:

Measuring Symbiotic Influence in Growth and Performance / Rajagopal......................................... 186

Chapter XII

Data Warehousing and Analytics in Banking: Concepts / L. Venkat Narayanan................................ 202

Chapter XIII

Data Warehousing and Analytics in Banking: Implementation / L. Venkat Narayanan ..................... 217

Chapter XIV

A Reference Model for Savings Bank / Annett Mauser...................................................................... 232

Section III

Risk Management

Chapter XV

A Semi-Online Training Algorithm for the Radial Basis Function Neural Networks:

Applications to Bankruptcy Prediction in Banks /

Vadlamani Ravi, P. Ravi Kumar, Eruku Ravi Srinivas, and Nikola K. Kasabov................................. 243

Chapter XVI

Forecasting Foreign Exchange Rates Using an SVR-Based Neural Network Ensemble /

Lean Yu, Shouyang Wang, and Kin Keung Lai .................................................................................. 261

Chapter XVII

On the New Transformation-Based Approach to Value-at-Risk:

An Application to Indian Stock Market / G.P. Samanta .................................................................... 278

Chapter XVIII

Data Mining and the Banking Sector: Managing Risk in Lending and Credit Card Activities /

Àkos Felsövàlyi and Jennifer Couran ................................................................................................ 298

Chapter XIX

Data Mining for Credit Scoring/

Indranil Bose, Cheng Pui Kan, Chi King Tsz, Lau Wai Ki, and Wong Cho Hung.............................. 309

Compilation of References .............................................................................................................. 324

About the Contributors ................................................................................................................... 352

Index................................................................................................................................................... 359

Detailed Table of Contents

Foreword .............................................................................................................................................xii

Preface ................................................................................................................................................ xiv

Acknowledgment .............................................................................................................................xviii

Chapter I

Introduction to Banking Technology and Management / Vadlamani Ravi ............................................. 1

This chapter introduces banking technology as a consortium of several disparate disciplines such as

finance and risk management, information technology, communication technology, computer science

and marketing science. The influence of all these disciplines on various aspects of modern banking

operations is clearly explained.

Section I

Services Management

Chapter II

Service Quality in Banks:

Which are the Factors Behind Performance and Customer Satisfaction? /

Carlo Gabriel Porto Bellini and Rita de Cássia de Faria Pereira....................................................... 16

This chapter discuss various aspects of service quality for customer in banking industry on the basis of

the perception of 11,936 customers of a major Brazilian bank. Dr. Bellini and Dr. Perira identified five

drivers that could explain the customer satisfaction and help bank executives make strategic decisions

in addressing bank’s customers.

Chapter III

Adoption and Diffusion of Internet Banking / Mahil Carr................................................................... 33

This chapter reviews important theories in information systems viz, the diffusion of innovations theory,

the theory of planned behavior and the technology acceptance model, that explain the adoption and dif￾fusion of Internet banking. Approaches that complement or challenge positivistic methodologies that

are interpretive are presented in a case study.

Chapter IV

Customer Acceptance of Internet Banking Services in Greece:

The Case-Study of Alpha Bank / Miltiadis Makris, Harilaos Koumaras,

Anastasia Konstantopoulou, Sotiris Konidis, and Spyros Kostakis...................................................... 53

This chapter describes the factors that affect the customer acceptance of Internet Banking in the case

of ALPHA Bank in Greece, which pioneered in introducing e-banking services in Greece. The chapter

presents a thorough analysis of the case study with factor analysis to quantify the variables that affect the

use of an Internet Banking System. It infers that factors like security, ease of use and perceived useful￾ness of a system continue to affect the customer’s decision to adopt an Internet Banking System.

Chapter V

The Adoption and Use of Smart Card Technology in Banking:

An Empirical Evidence from the Moneo Electronic Purse in France /

Zouhaïer M’Chirgui and Olivier Chanel.............................................................................................. 70

This chapter explores and models the factors—economic, technological and social—and forces driving

the adoption and use of the Moneo electronic purse in the South of France. Dr. M’Chirgui and Dr. Chanel

found that the frequency of use of Moneo is influenced by relative advantage, cost, visibility, security,

income and gender. Finally, the reasons why Moneo seems to have met with failure are determined and

solutions to help reach the required critical mass are proposed.

Chapter VI

Engineering Banking Applications: A Service-Oriented Agent-Based Approach /

Manas Ranjan Patra............................................................................................................................. 88

This chapter proposes a novel hybrid service-oriented and agent architecture for developing software in

banking industry as a possible solution to the growing issues of inter-and intra-bank operations. Dr. Patra

argues with the help of a few banking applications that the hybrid architecture can seamlessly integrate

business functions across organizational boundaries.

Chapter VII

Smart Cards in the Banking Industry? Challenges, Competition, and Collaboration in the 2000’s /

Jarunee Wonglimpiyarat..................................................................................................................... 103

This chapter introduces smart card (ATM/cash cards, credit cards, EFTPOS/Debit cards) application

in banking industry as a system innovation, where several parties join hands and make it a success. Dr.

Wonglimpiarat argues that unless innovators in this industry realize the advantages of collaboration the

diffusion of smart cards may not happen.

Chapter VIII

Electronic Banking and Information Assurance Issues: Survey and Synthesis /

Manish Gupta, Raghav Rao, and Shambhu Upadhyaya..................................................................... 119

It is well known that Internet or electronic banking is vulnerable to cyber threats and fraudster steal

the whole customer’s data in no time. Therefore, information assurance is of paramount importance to

e-banking. This chapter presents a state-of-the-art survey on information assurance in internet banking

security. Critical aspects of design and development of an adequate electronic security infrastructure

are highlighted.

Chapter IX

M-Payment Solutions and M-Commerce Fraud Management /

Seema Nambiar and Chang-Tien Lu................................................................................................... 139

After Internet banking the next big wave in e-banking is mobile payment systems and mobile commerce.

Financial organizations view mobile banking as a new way of providing added convenience to their

customers along with an opportunity to reduce their operating costs. This chapter presents an overview

of competing mobile payment solutions found in market today. It also reviews different types of mobile

frauds in m-commerce and solutions to prevent such frauds.

Section II

Business Management

Chapter X

The CRM Process and the Banking Industry: Insights from the Marketing Literature /

Murali K. Mantrala, Manfred Krafft, Beibei Dong, and Kalyan Raman ........................................... 159

This chapter presents concepts from marketing literature for a successful CRM implementation in retail

banking. It describes a framework for conceptualizing, operationalizing and measuring CRM process

implementation. It explains the proposed framework in the context of a case study of CRM implementa￾tion at a European Bank.

Chapter XI

Technology and Customer Value Dynamics in the Banking Industry:

Measuring Symbiotic Influence in Growth and Performance / Rajagopal......................................... 186

This chapter discusses a model that combines customer value, competitive efficiency and profit optimi￾zation. The framework is based on the theory of competitive advantage and customer lifetime value, so

as to maximize the potential of the organization to create and sustain satisfied customers. The chapter

concludes that there is an increasing return to scale in the bank services in relation to the banking prod￾ucts, new technology and customer value.

Chapter XII

Data Warehousing and Analytics in Banking: Concepts / L. Venkat Narayanan................................ 202

This chapter presents the fundamental concepts of a data warehouse and its usefulness in banks. Dr.

Narayanan argues that they are important for banks to achieve sustainable competitive advantage against

competing banks. Dr. Narayanan argues that the same infrastructure can be used for multiple business

applications.

Chapter XIII

Data Warehousing and Analytics in Banking: Implementation / L. Venkat Narayanan ..................... 217

This chapter presents the implementation details of Data Warehousing and Analytics in banking indus￾try with the help of a real-life case study. Dr. Narayanan argues that adopting the right implementation

methodology is important and describes alternate implementation methodologies, typical challenges in

implementation and critical success factors.

Chapter XIV

A Reference Model for Savings Banks / Annett Mauser.................................................................... 232

While developing data warehouses for banks, an important aspect is the development of a logical data

model and the entire success of a data warehouse depends heavily on the logical data model used. Mauser

describes a data model called SKO-Datenmodell, for a savings bank in Germany. The data model with

17490 well-defined modeling objects was specially designed for Sparkassen-organization. The different

levels of the model and their uses are described in this chapter.

Section III

Risk Management

Chapter XV

A Semi-Online Training Algorithm for the Radial Basis Function Neural Networks:

Applications to Bankruptcy Prediction in Banks /

Vadlamani Ravi, P. Ravi Kumar, Eruku Ravi Srinivas, and Nikola K. Kasabov................................. 243

This chapter presents an algorithm to train radial basis function neural networks (RBFN) in a semi-online

manner and demonstrate its effectiveness on bankruptcy prediction in banks. The chapter compared its

performance with multi layer perceptron, adaptive neuro-fuzzy inference system (ANFIS), TreeNet,

support vector machine (SVM), radial basis function neural network (RBFN), rough set based expert

system (RSES) and orthogonal RBFN. The authors of this chapter concluded that the proposed semi￾online algorithm for RBFN is better than other neural networks with respect to area under the ROC

curve (AUC) criterion.

Chapter XVI

Forecasting Foreign Exchange Rates Using an SVR-Based Neural Network Ensemble /

Lean Yu, Shouyang Wang, and Kin Keung Lai .................................................................................. 261

This chapter presents a review on the applications of neural networks to foreign exchange rates forecast￾ing and propose a support vector regression (SVR) based nonlinear ensemble forecasting model with

single neural network models as its constituent members. For illustration, four typical foreign exchange

rate series are used. Dr. Yu, Dr. Wang, and Dr. Lai, compared several nonlinear ensemble methods

with the proposed ensemble with respect to normalized root mean square error and directional change

statistics. Results indicate that the proposed model can improve the performance of foreign exchange

rates forecasting.

Chapter XVII

On the New Transformation-Based Approach to Value-at-Risk:

An Application to Indian Stock Market / G.P. Samanta .................................................................... 278

This chapter presents a procedure for the measurement of value-at-risk for a portfolio using historical

returns. When returns are normal variates, it is a very simple task. But financial market returns seldom

follow normal distribution. In order to handle the non-normality, he adopts a transformation-based ap￾proach proposed in Samanta (2003). He compared his method with two widely used VaR models. Dr.

Samanta concludes that the transformation-based approach is a useful alternative.

Chapter XVIII

Data Mining and the Banking Sector: Managing Risk in Lending and Credit Card Activities /

Àkos Felsövályi and Jennifer Couran ................................................................................................ 298

This chapter highlights the importance of data mining in risk management in lending and credit card

activities in Citi group. They focus on corporate lending based on Citi group’s own practices. Dr.

Felsovalyi and Dr. Couran describe various aspects of risk management and assessment, early warning

models, measuring loss and also consumer lending with reference to credit cards.

Chapter XIX

Data Mining for Credit Scoring/

Indranil Bose, Cheng Pui Kan, Chi King Tsz, Lau Wai Ki, an Wong Cho Hung................................ 309

This chapter presents an overview of credit scoring models in banking and the applications of data min￾ing in credit scoring in credit card, mortgage and small business lending. A review of the use of data

mining techniques to credit scoring is presented. The chapter concludes by highlighting the merits and

demerits of credit scoring.

Compilation of References .............................................................................................................. 324

About the Contributors ................................................................................................................... 352

Index................................................................................................................................................... 359

xii

Foreword

The rapid strides made in the information and communication technology (ICT) arena have tremendously

impacted the way banking is done worldwide. Nowadays, the customer does not have to enter the brick￾and-mortar structure of the bank in order to get serviced by the bank. He or she can get all the services

right at his or her doorstep on his or her desktop. Such is the quintessential influence of ICT on banking

that all major operations/decisions with regard to deposits, withdrawals, and investments can be made at

the click of a mouse on a computer or at an automatic teller machine (ATM). Another important fallout of

this ICT-driven revolution in banking is that, thanks to the advances made in data mining and customer

relationship management (CRM), banks can reap profits by increasing their service pie in a manner,

which was unthinkable a decade ago. Consequently, the banks on their part can tailor their products to

suit the customer needs and even pinpoint the customers who would purchase their products.

The banks are continuously striving hard to bring the state-of-the-art ICT innovations to make

banking an even more convenient and pleasurable experience, and in the bargain attract more and more

customers, thereby increasing the banks’ profits. Consequently, the banks have dumped their traditional

product-driven strategy to embrace the more logical and profitable customer-driven strategy. On the

other hand, customers have also become hungrier and want the banks to become a one-stop-shop for all

their financial and investments needs. This two-way demand and supply equation has not yet reached

equilibrium, and this precisely has given rise to an increasingly difficult set of managerial problems for

the banks to grapple with.

In this edited book, Dr. Vadlamani Ravi has succinctly captured these managerial problems in three

dimensions, which he calls services management, business management, and risk management. This

categorization, I believe, is logical and operationally sufficient. Services management takes care of tech￾nology-driven issues. Business management pertains to segmenting and identifying the right customer

base for the right products. Finally, risk management attempts to measure and mitigate the associated

finance and technology associated risks, namely, credit risk, market risk, and operational risk.

There is a right balance in the organization of the chapters in the book. All the important issues such

as service quality in banks; technology acceptance of smart cards, Internet banking, and electronic purses;

mobile banking and mobile commerce; information assurance in Internet banking; the usefulness of

CRM and customer value dynamics in the banking industry; data warehousing and data modeling; data

mining for risk management in credit cards; credit scoring, bankruptcy prediction, and foreign exchange

forecasting; new computational model for value-at-risk; and software agent-based banking application

architectures are covered in the book in great detail.

That the topic of this book is of paramount importance can be seen by the fact that the academics,

researchers, and professionals from all over the world have contributed to it. This shows how relevant and

contemporary the theme of the book is. Dr. Ravi must be congratulated for venturing into an undertaking

as difficult as editing this book. Full credit to him for bringing the seemingly unrelated disciplines under

xiii

one roof. I have no hesitation in suggesting this book to MBA students in finance, financial engineering,

and information systems at any university. I am sure this book would also be of immense use to technol￾ogy, business, and risk management professionals in the banking industry.

Professor M. Rammohan Rao

Dean, Indian School of Business

Hyderabad, India

M. Rammohan Rao is the dean of the Indian School of Business (ISB). In his role as the dean, he fo￾cuses on bringing cutting-edge global research to ISB and helps in building the school as an academic

institution of global repute. An illustrious academic, renowned worldwide for his research and teaching

capabilities, Dean Rao has taught as a tenured professor of operations research at the Stern School of

Business, New York University. He has also taught at the Graduate School of Management, University

of Rochester as an associate professor and as a visiting faculty member at the University of Tennessee.

He has held various positions at the IIM-B, including those of professor, visiting professor, dean, and

director. His current teaching and research interests are in the areas of optimization, corporate finance,

and financial derivatives. Dean Rao has published more than 85 articles in various professional jour￾nals. He has won several prestigious awards conferred on him by leading institutions across the world.

He holds a PhD in Industrial Administration from the Graduate School of Industrial Administration,

Carnegie-Mellon University, USA.

xiv

Preface

Although ‘banking’ is an old activity and has its roots in economics, finance, and commerce, the con￾cept of ‘banking technology’ is of recent origin. To many people ‘banking technology’ means the use of

computers and related hardware to streamline and automate banking operations. This book attempts to

demystify ‘banking technology’ and offer a much broader meaning and more realistic and operationally

sufficient perspective on ‘banking technology’.

Universally conducting efficient banking operations and associated business involves managing:

1. The information and communication technology that drives the banks’ core business.

2. Customer relationships.

3. Risks associated with conducting business with customers and other banks and financial institu￾tions.

Therefore the book is categorized according to the three focal areas: services management, business

management, and risk management.

Successful banks all over the world have invested considerably in information and communication

technologies, which in turn would increase banks’ profits considerably on one hand and improve the

convenience and comfort levels of their customers in doing business with them on the other. Further,

such banks are very sensitive to the risks they face in dealing with money in the form of credit risk or

market risk or operational risk. Banks continuously embrace, with great fervor, the latest developments

in information and communication technologies and customer relationship management in order to ser￾vice customers better and reap more profits. If banks employ cutting-edge technologies to service their

customers effectively and efficiently, regulatory requirements such as Basel II also force the banks to

implement these technologies to enable uniform banking services throughout the world.

This book brings together research contributions from several academics and industrial professionals

in all three aspects mentioned above, and it conveys the message that banking technology and manage￾ment emerged as a new discipline in its own right over the last decade and a half.

The foreword of the book by M. Rammohan Rao, dean of the Indian School of Business, highlights

the nature of the demand and supply equation that exists between the banks as service providers and

the customers and the resulting explosion of research opportunities. The division of chapters into three

areas is operationally sufficient.

In Chapter I, Ravi introduces an overview of banking technology, its various facets, and the evolution

of banking. Banking technology is introduced as a consortium of several disparate disciplines such as

finance and risk management, information technology, communication technology, computer science, and

marketing science. The influence of all these disciplines on various aspects of modern banking operations

is clearly explained. Nowadays, banks and their customers are in a win-win situation where banks offer