Diffusion of Online Banking

Journal of Marketing Management 200319,1087-1109

Laura Bradley^ andKate Stewart^

University of Ulster

The Diffusion of Online BankingThe financial services environment has been subjectto changes on many fronts. Technological changeand the advent of the Internet are among the mostdramatic and challenging areas of change for thesector. This paper looks at retail banking and itsadoption of online banking, in particular the factorsdriving and inhibiting adoption by banks. Aninternational Delphi study confirms the high level ofimportance of the Internet for retail banking. By2011, it is expected that bank adoption ofthe Internetwill be near universal. The key factors that aredriving banks to adopt online banking are theadoption by other banks, competitive forces,consumer demand and the availability of technology.Working against adoption are banks' perceptions thatthe Internet does not offer enhanced ability to dealwith customers as well as bank resistance to change,their existing legacy systems and the resourcesrequired to adopt.

Keywords: banking industry, diffusion of innovation, on-line banking,delphi technique, marketing, distribution, future

Introduction

In 1993 the editors of The International Journal of Bank Marketing concludedthat there remained much room for progress in terms of the implementationof marketing in the financial services sector (Wright and Ennew 1993).Writing in the same issue of that journal. Baker observed that bankmarketing 'is more myth than reality'. In the intervening ten years, bankmarketing has become more substantive. There is greater evidence ofcustomer orientation, target marketing and the development of marketingpolicies beyond the promotional function, which dominated bank marketingin the early days.

To the extent that banks have adopted marketing, such adoption has beenforced by the many changes in the financial services macro environment.

1 Correspondence: Dr Laura Bradley University of Ulster, Coleraine, BT52 ISA,02870324634, [email protected] Dr Kate Stewart, University of Ulster, Newtownabbey, BT37 OQB

ISSN0267-257X/2003/9-10/01087 + 22 £8.00 ©Westburn Publishers Ltd.

1088 Laura Bradley and Kate Stewart

These changes include deregulation, increased competition and increasedconsumerism. In Europe, domestic competition restrictions have beeneliminated changing the scope and scale of banking services (Flier et al.2001). There has been erosion of boundaries between banks and theircompetitors (Van der Lugt 1997; Considine 1999; Park 1999). The lines ofseparation between the various constituents of the financial service industry,that is, insurance, brokerage and banking are also blurring. With reducedbarriers to entry, competition has increased bringing retail banking closer toa perfectly competitive market (Howcroft and Durkin 2001). In tandem withincreased competition, the consumer environment has also changed. Modemday customers are better educated and better protected and have morechoice of financial services and providers. They are seen to be increasinglysophisticated and less loyal (Avkiran 1999; Howcroft and Kiely 2000).

Changes in the regulatory, competitive and consumer environments allserve to force attention on the consumer and promote market orientation. Inthis context it is not surprising that the general rate of innovation becomesmore rapid (Eika and Reistadbakk 1998; Nellis 1998; Porter 2001; Flier et al.2001). In addition, marketing management grows in importance and strategydevelopment becomes market-led, if only by default. The subject of thispaper, adoption of online banking, offers a window of insight to thecontemporary financial services sector.

Online Banking

The development of online banking has come about as part of thedevelopment in information and communication technology (ICT). OrJinebanking is a form of electronic banking offered via the Internet wherebyconsumers can perform and transact financial services in a virtualenvironment. In essence, online banking is an electronic customer interfaceand an alternative channel of distribution. So profound are the changes itbrings about that Hensmans et al. (2001) state that the Internet is not only adistribution channel but also a "driver of comprehensive industrial change"(P241).

Online banking offers advantages as a retail channel, namely accessibility,direct communications, cost reductions and new markets (Anderson 1995;Verity 1995; Cronin 1996; Daniel and Storey 1997; Doherty et al. 1999;Hughes 2001). The cost effectiveness of online banking, compared to branchbased or telephone banking is a widely discussed issue (Kelly 1996; Tilden1996; Katz and Aspden 1997; Daniel 1997). While the Internet affords banksthe opportunity to increase their market coverage and to better track andtarget customers it gives customers the possibility of information and pricetransparency as well as '24/7' accessibility. Traditionally retail banking has

The Diffusion of Online Banking 1089

depended on the branch as the main charmel of distribution. Additionalfinancial services charmels include ATM's, telephone, PC and latterly orUinebanking (Mols et al. 1999). Online banking is potentially the most radicalinnovation, especially in the context of barJcs dominated by the branch as themeans to provide service to customers.

Online banking gives rise to many questions about adoption. This studyconcerns three such questions: to what extent will banks adopt onlinebanking? What is driving adoption and what is inhibiting adoption of onlinebanking?

Diffusion of Innovation

Research on diffusion of innovation was introduced to the domain ofmarketing in the 1950s. Diffusion of innovation theory attempts to identifypatterns and rates of adoption of irmovation. This is especially significant inconsumer markets in terms of attempting to forecast demand and marketgrowth (Mahajan et al. 1990; Valente 1993). Process theory dominatesdiffusion of innovation studies such that innovation is believed to flow fromproviders and early adopters through to the potential adopting population.

Numerous models have been developed using mathematical andstatistical analysis to map diffusion within various industries (Rogers 1983and 1995; Barra 1986; Mahajan et al. 1990; Chaudhuri 1994; Abrahamson andRosenkopf 1997; Gallouj 1998). Many studies have identified factors thatinfluence diffusion of an irmovation at a generic (non-industry specific) level.Rogers' work (1983) is the most cited regarding the characteristics of theinnovation itself and their influence on diffusion rates. The factors heidentifies are: relative advantage of the innovation over current products andmethods, compatibility of the innovation with existing modes and customervalues, trialability, observabilty and complexity of the innovation, and theperceived risk associated with the innovation.

While the characteristics of the irmovation influence its diffusion, so toodo the aspirations of the organisation. These include achievement ofcompetitive advantage, reducing costs, and protecting an organisation'sstrategic position (Bass 1980; Ufah 1998; Tidd et al. 1997; Johannessen et al.1999). Organisational diffusion of innovation is promoted by theorganisation's desire to become superior in meeting customers' needs,produce a competitive product or develop superior competencies withintheir organisation Qohne and Davies 2000). To the extent that the adoption ofan innovation can yield competitive advantage, organisations will adopt anddiffusion will be driven by this pursuit of competitive advantage. However,as the innovation becomes widely adopted, the competitive advantagediminishes and the innovation becomes a necessary competitive requirement


(Batiz-Lazo and Wood 1999; Porter 2001). In general, the more intensivelycompetitive an industry the higher will be the rate of imitation of innovationsand the faster the pace of adoption (Mansfield 1968; Romeo 1977).Chandrashekkaran et al. (1999) suggest that the sheer number of competitorsin an industry breeds a need to innovate and the witnessing of the volume ofinnovation adopted by competing firms also creates its own pressure. It isironic that the need to innovate leads to imitation. As retail banking hasattracted more competitors and become more competitive, it could beexpected that the rate of diffusion of innovation will have accelerated.

The influential role of networks and communication in diffusion ofinnovation has been identified in numerous studies (Shao 1999; Drazin 1990;Axelsson and Easton 1992; Alter and Hage 1993; Abraham and Rosenkopf1993). Thus social exchange among network parties includes knowledge andexpertise about innovations. Networks create the need to conform to theinnovative levels of those organisations within the social network.Involvement in networks and having contact with other organisations andindividuals can cause a technological innovation to be initiated and adopted.This is a central tenet of bandwagon theory (see Abraham and Rosenkopf1993).

The characteristics of organisations also influence their propensity to beinnovative. The more innovative an organisation, the easier and faster will bethe pace of diffusion of innovation. The structure of an organisation plays apart in nurturing diffusion of innovation (Ray 1974; Tidd et al. 1997). Organicstructures, which are open and informal, nurture and encourage innovation,whereas mechanistic and bureaucratic structures hinder and discourageinnovation (Bums and Stalker 1961; O'Neill et al. 1998; Johannessen et al.1999). Investigation into the relationship between organisational size andpropensity to innovate tends to suggest that larger organisation behave in amore pioneering fashion (Brookman and Morgan 1999). This is explained bytheir ability to absorb higher risks and costs and having a higher level ofexpertise to ensure first mover advantages (Malecki 1977; Davies 1979;Brown 1981; Rogers 1995; Ufuah 1998).

Thus a crude categorisation of issues affecting diffusion of innovationamong organisations suggests that three sets of facts are at work: thecharacteristics of the innovation; the characteristics of the sector; andorganisational characteristics. These characteristics act as drivers and/orinhibitors of the diffusion of innovation.

Diffusion and Online Banking

Online banking can be categorised as a radical, discontinuous and disruptiveinnovation in that existing industry practices are significantly changed. Onlya few studies have investigated diffusion of innovation w ithin the retail-


banking sector. Jayawardhena and Foley's (2000) survey of United Kingdomonline banking facilities suggests that the pace of adoption by the retail banksof online banking is actually very slow. However, a study by Flier et al.(2001) found that the pace of bank adoption of the Internet in Europe hasbeen much faster than the adoption of previous technology such as ATMs orEFTPoS.

At a fundamental level, the industry adoption decision is governed bysupply and demand side factors - that is, consumer demand for onlinebanking and the available supply of new technology, particularly where itcan reduce reliance on the branch network (Harvey and Filiatrault 1991;McGoldrick and Greenland 1994; Devlin 1995; Daniel 1999). More specificdrivers of bank Internet adoption have been identified. These includeprotection of reputation, competition, cost savings, mass customisation,enhancement of marketing and communication activities, and retention andattraction of consumers (Daniel and Storey 1997; Tomkin and Baden-Fuller1998; Mols 2000).

Contrary to these drivers, security concerns have been highlighted as themost important inhibitors of the diffusion of online banking (McCahon 1999;Long 2000). In addition, lack of user friendly technology, low consumerdemand, high initial set up costs, redundancy of existing legacy systems andlack of suitable skills have acted as inhibitors (Howcroft and Lavis 1986;Daniel and Storey 1997; Mols et al. 1999; Esser 1999; Daniel 1999). For all thatis known about diffusion of innovation and the banks' adoption of onlinebanking, much is unknown.

Many studies have called for further investigation of the diffusion oforiline banking such as Daruel and Storey (1997) and Daruel (1999). Inrelation to diffusion of innovation. Chin and Marcolin (2001) identify theneed for research that addresses the adoption and use of technology incontemporary settings.

This study is structured as detailed in Figure 1. Having established theneed for research, the overall aim of this study was to examine bankadoption of online banking and in particular to identify the drivers andinhibitors of online banking.

Methodology

A multi-method approach was adopted. This approach, especially thetriangulation of objective and subjective methods, facilitates explanation andprediction and helps to develop a more holistic view (Jick 1979; Perry et al.1999).


Exploratory Interviews

Development of DelphiQuestionnaire

Recruitment of InternationalDelphi Panel

r

Round 1Global Experts

Quantitative

SPSS

Delphi Study


\


Qualitative

Thematic Content andNetwork Analysis

Figure 1. Research Methodology

Initially, exploratory interviews were conducted in Northern Ireland, theRepublic of Ireland and the United States (U.S.) with senior banking officials.The interviews explored the nature of online banking as an innovation, itsdiffusion, factors influencing the diffusion, and the future of online banking.These interviews were combined with the literature on diffusion ofinnovation to inform the development of a questionnaire which wassubsequently piloted and refined. The resultant questionnaire formed themainstay of a Delphi study involving an international panel of experts.

Delphi is a futures methodology. The decision to select a futuresmethodology was multi-fold. First, little is known about the future of onlinebanking and little historical data exists therefore judgmental analysis of thediffusion of online bariking is required. Secondly, there has been a tendencytowards an historic focus within diffusion of innovation research. Thirdly,


the Delphi technique is suited to electronic execution thereby facilitating aninternational study. Finally, this technique has not been widely used within aretail banking industry setting or investigation of diffusion of onlinebanking.

The Delphi technique is used to bring together the ideas of participants(known as panellists/experts) on a given subject. It relies on a process ofcollecting ideas or judgments from experts, giving feedback to experts andreforming ideas until it is clear that the ideas will not change. Consensus mayor may not be achieved. Linstone and Turoff (1979) described Delphi as "amethod of structuring a group communication process so that the process iseffective in allowing a group of individuals, as a whole, to deal with acomplex problem" (P574). The technique can be used to obtain judgementsthat may in turn inform planning, problem-solving and overall decisionmaking (Masini 1993; Dunham 1998).

The Delphi Panel in this study was selected by purposive-conveniencesampling of people and organisations with a known involvement orexpertise in online banking. Individuals were required to be in amanagement role and have knowledge of online banking developments or e-commerce in general. Other experts were identified based on theirpublications within practitioner and academic journals regarding onlinebanking. In total, 71 experts agreed to participate. Although small instatistical terms, the sample was both expert and international. The expertswere from retail banks, non-financial service entrants, consultancy, academiaand model online retailer backgrounds, in both Europe and the UnitedStates. All experts were recruited using electronic mail since this was chosenas the mode of communication for the empirical study. The study was due tobe completed during December 2001, however, events of September 11* inthe U.S. distracted the experts. Because of this the study was limited to twomain Delphi rounds, plus a final round being limited to collecting panelcategorisation data. It was felt that the panel attrition would have beeninsurmountable. In addition, stability of opinion had emerged.

The questionnaire considered the future of online banking and factorsinfluencing the adoption of online banking. The majority of questions wereclosed and used scales, principally Likert scales. Panellists were also asked toprovide justifications for their answers.

Results

The issues of divergence and convergence of opinion are fundamental to theDelphi technique. For the findings of both the drivers and inhibitors, basedon the findings of a Wilcoxon Signed Rank Test, no significant differenceswere found between rounds. Although some deviant responses remained.


stability of opinion emerged between Round 1 and Round 2.

World-Wide Adoption hy 2011In terms of the future of orUine banking, the study predicted that 84.12%

of retail banks globally would have adopted online banking by 2011. Thisrepresents near universal adoption. Non-adoption by the retail bankingindustry will be rare. This would suggest that online banking is (or soon willbe) a basic requirement of operation, rather than a source of sustainablecompetitive advantage.

Drivers of Online Banking Adoption by the Retail BanksThe global experts were asked to rank the overall importance of various

drivers of online banking adoption on a five point scale, ranging from 'verygreat importance' (5) to 'No importance' (1).

Table 1. Drivers of Online Banking Adoption

Driver Rank NNumber of other retail banks adoptingCompetitive forcesConsumer demandAvailability of technologySuitability of online facilities to bankingEnhanced ability to deal with customersCost reductions

As Table I shows, the drivers that are ranked of 'great importance' in theadoption of online banking are: number of other retail banks adopting,competitive forces, consumer demand, technological availability, suitabilityof online facilities to banking and enhanced ability to deal with customers.Within this context number of other retail banks adoption refers to theexistence of peer pressure and isomorphism within the industry. Expertswere also asked to identify and rank any 'other' factors driving the adoptionof online banking. Cost reductions were identified as of 'very greatimportance' by a small number of experts. The 'other' drivers identified bythe experts were ranked as of less importance.

Qualitative Findings - DriversExperts were asked to justify their answers to questions identifying

drivers and ranking their importance. These qualitative responses helped toelaborate the quantitative responses to the closed questions. These qualitativethemes are indicative of opinions raised by a large majority of the experts.

GreatGreatGreatGreatGreatGreat

Very Great

32% (n = 16)32% (n = 16)28% (n = 14)20% (n = 10)46% (n = 23)50% (n = 25)14% (n = 7)


Overall, the drivers could be categorised based on their relationship to thebank, that is, they are largely external to banks (as opposed to internal). Thisbelief is confirmed in a typical statement: "extemal factors will be more powerfulthan internal factors" (Academic 7).

Enhanced ability to deal with customers, considered to be of 'greatimportance', was seen as an inherent benefit of online banking by a numberof the global experts. For example, online banking is considered to be a "newway to reach customers and enhance the bank's offering" (Bank 2).

The fact that banking activities are easily digitised and suited to electrorucdelivery is a key driver: this was raised by a substantial number of experts -"banking is of course very suitable to electronic channels," (Consultant 4). NonFinancial 4 indicated that "suitability of on-line facilities to banking has alreadybeen mostly proven."

Cost reductions and the costs involved in implementation are consideredvery important. However the retail banks perceive that cost reductions willonly occur as consumer adoption increases - "The main factor influencing therate of introduction of online banking is consumer demand and potential costreduction" (Bar\k 20).

The majority of experts argued that competition has created a situationwhereby online banking is considered to be a hygiene factor, as opposed to asource of sustainable competitive advantage. The marketing andpromotional activities of the competition that have adopted online banking,as stated by Bank 1, the emergence of new entrants using the technology anddefence of market share are considered to be the main competitive forces. Forexample, "the banks seem to be motivated by demand from customers andobservations of competitors - they seem to be using the newest technology"(Academic 5). This suggests that, by not adopting, banks would placethemselves at a competitive disadvantage.

Customer demand, although currently low, is considered a crucial driver,by a number of experts. For example, "banks will launch online bankingirrespective of the ease of development and ease of trial, because of customer demand"(Barik 20). Bank 1 argued that competition and customer demand operate intandem as drivers.

Technology is also considered of great importance as a motivator of onlinebanking adoption by the retail banks because "technology is relatively easy andavailable using Internet protocols, as compared to the past when online banking wasexpensive to implement and of high technological risk" (BarJc 1). However, Bank13 was cautious stating that technology develops so rapidly that retail bankswill always be playing catch up. One of the global experts felt that "it is veryeasy to talk about what can be done in an ideal world but getting the technology toperform is crucial" (Academic 8).

The issue of government intervention presented an area of disagreement.


The quantitative findings stated that government intervention was a driverof 'no importance'. The qualitative responses apparently contradict thequantitative in this case. Experts argued that governments were consideredimportant because of their legal and regulatory influence on the retailbanking industry. Since decisions could only be taken in light of thegovernments' decisions on legal and regulatory matters governmentinfluence is great. For example, "government intervention is naturally ofimportance in situations where e.g. government is ruling about legally bindingdigital signatures etc." (Bank 19). Experts also pointed to the influential role ofgovernment - as Technology 1 put it "by restraining banks from closing downsmall branches [andj forcing through digital TV." The belief is that governmentinvolvement will continue, indeed will increase in the future and, as such,must be of importance in driving online banking.

Inhibitors of Online Banking Adoption by the Retail BanksExperts were asked to indicate on a five-point scale the level of

importance of a range of inhibitors from 'very great importance' (5) to 'noimportance' (1). The key inhibitors are outlined in Table II.

Table 2. Inhibitors of Online Banking Adoption

InhibitorAbility to deal with customersExisting legacy systemLack of innovation culture in bankingConsumer demandAvailability of technologyCostsDifficulty of trialDifficulty of developmentEvidence of returnsCommunication by other industry membersInfluence by other industry members

RankGreatGreatSomeSomeSomeSomeSomeSomeSomeSomeSome

N30% (n = 15)42% (n = 21)36% (n = 18)54% (n = 27)44% (n = 22)38% (n = 19)46% (n = 23)44% (n = 22)38% (n = 19)54% (n = 27)46% (n = 23)

The inhibitors ranked of 'great importance' were lack of enhanced ability todeal with customers and existing legacy system. Lack of innovation culture,consumer demand, availability of technology, costs, difficulty of trial anddevelopment, evidence of returns, communication by others in the industryand influence by other industry members were ranked as of 'someimportance' in inhibiting the adoption of online banking.

Qualitative Findings - InhibitorsAgain, experts were asked to justify their ranking of the inhibiting factors


and these responses gave qualitative insight to the quantitative findings. Anumber of issues were developed. In relation to internal bank issues,specifically existing legacy systems, bank culture in relation to innovationand difficulty of trial and development in relation to the system emerged askey themes in the qualitative justification.

Technological issues are inhibiting adoption. Specifically, banks alreadyhave information technology systems bedded in from initiatives over the lastthree decades. Any new system would have to acconunodate these systems.This 'legacy system' issue was identified as being a very important inhibitorin both the quantitative responses and in the justification, by a substantialnumber of experts. Typically, legacy systems were seen not just as animplementation issue but inhibiting the adoption decision itself. As oneexpert stated "[legacy systems] affect the potential introduction of online banking"(Non Financial 3).

The quantitative results ranked the lack of an innovative culture' as aninhibitor 'of some importance'. This is a traditional image associated with theretail banking industry. Some experts elaborated on this in the justificationsuggesting that bariks are non-innovative. As Technology 3 stated, " they arevery happy to sit still unless some competitor changes the landscape."

The difficulty of development and trial for the retail banks of onlinebanking was considered of 'some importance' within the quantitative results.The qualitative findings however suggest that difficulty of trial anddevelopment is not considered to exist and has little impact on the industryrate of online adoption. Consultant 6 stated that the development and trial ofany innovation is inherently risky and tends not to be easy, a characteristicwhich is not specific to online banking. Further to this. Academic 3summarised the situation that online banking is significantly important andas such trial is not an issue for the industry players but more so forcustomers.

The key external inhibiting factors raised relate to customer demand,technology and the influence by other industry members. The quantitativefindings ranked the (in)ability of online banking to enhance the banks'dealing with customers as an inhibitor of 'great importance'. In other words,banks would not be any more capable to deal with customers as a result ofonline banking and this therefore inhibits their adoption of online banking.As one expert stated: "the crucial issue here is whether online facilities willstrengthen or weaken bank's relationships with customers and jury is still out onthat one. If, ultimately, technology empowers customers to switch between offeringsmore easily, then the net result may be greater financial promiscuity, which I assumethe banks would want to avoid as holding on to existing customers is far less costlythan acquiring new ones" (Academic 2).

Customer demand is considered to be an inhibitor, of 'some importance'.


as evidenced by the fact that "on-line customers today represent only a smallportion of the total customer base" (Bank 17). Academic 5 reiterated this pointstating: "the main barrier is the customers and their knowledge of and use of thetechnology."

Technological issues are considered of 'some importance' in inhibitingonline banking. The main technological issue raised, by the majority ofexperts, relates to bandwidth. Currently narrow bandwidth is predominantand the limitations of this irUiibit adoption. The issue of broadband ishowever considered to be approaching redundancy as Bank 17 summarisedby arguing that "connection speeds will continue to increase and will enable morerobust services and communications". Overall the belief is that "the ability ofbanks to grasp technology issues is a key issue" (Consultant 5).

Discussion

This paper has presented selected quantitative and qualitative findings froma Delphi study into the diffusion of online banking among the retail banks.The original analysis of the literature on diffusion of innovation found thatthree main sets of factors are influential in diffusion of innovation. These arethe characteristics of the innovation, the characteristics of the sector and thecharacteristics of the company. As this was a sector based study the findingscan be categorised into sector based characteristics and innovationcharacteristics. In addition, the influences fall into two areas namely positiveinfluences on bank adoption (drivers) and negative influences (irihibitors).These findings are summarised in Figure II.

INNOVATION CHARACTERISTICS SECTOR CHARACTERISTICS

DRIVERSAvailability of technologySuitability of banking toonlineCosts reductions possibleAbility to deal withcustomers

Other banks adoptingCompetitive forcesConsumer demand (longterm)Government influence

INHIBITORS

Ability to deal withcustomersRapidity of technologicalchangeLegacy systemsBandwidth

Lack of innovative cultureConsumer demand (shortterm)

Figure 2. Representation of Industry Adoption of Online Banking

The Diffusion of Online BarJsing 1099

Discussion ~ DriversAs was expected, the study found that the availability of technology is

essential to drive diffusion of online banking. This finding confirms the roleof technology push presented by Jayawardhena and Foley (2000), Wrightand Howcroft (2000) and Mulligan and Gordon (2002) who identifled thatavailability of technology is a significant issue in relation to the introductionof online banking.

The diffusion of online banking is driven by the cost reductions it offers, amuch sought after benefit in the context of pressurised margins. This is awidely discussed area in relation to online banking and distribution channelstrategy. In general, distribution channels, regardless of industry, are a costlyasset, (West 1992), therefore any potential cost reductions will act as asignificant driver. The desire for cost reductions was a key driver of thediffusion of ATMs according to Hannan and McDowell (1984). The studyalso confirms the work of various authors who have argued that onlinebanking represents cost reductions such as Carman and Tournois (1998),Yaklef (2001) and Aladwani (2001).

The suitability of banking to online facilities is considered a driver ofdiffusion of online banking by the Delphi panel. Indeed, this suitability couldbe evidenced in the number of other retail banks adopting and level ofindustry competitive activity as a driver of online banking diffusion. Thatbanking activities are easily digitised has been observed by Jayawardhenaand Foley (2000) and Yaklef (2001). The global experts argued that onlinebanking is driven by the desire by the industry to enhance their ability todeal with customers. This perceived relative advantage is an inherentcharacteristic within the Roger's (1983) model of diffusion of irmovation.

In terms of sectoral characteristics, the number of other retail banksadopting represents a significant positive influence on the diffusion of onlinebanking. This supports existing studies including Pennings and Harianto(1992) and Molyneux and Shamroukh (1996) in their specific investigationwithin the banking industry. These authors concluded that as subsequentbanks adopt a new product the more impact this has on the other banks'decision to adopt.

The current study found that competitive forces drive the industrydiffusion of online banking, confirming Flier et al.'s (2001) argument thatindustry competition leads to increased innovative activity. The study alsorevealed that the adoption of online banking is considered to be a defensivemeasure against competitive activities and is now viewed as a competitivenecessity within the industry. West (1992) and Mallen (1996) have previouslyargued that competitive forces drive distribution channel strategy. A hygienerequirement refers to a basic offering which is considered to be necessarywithin an industry to operate. OrUine banking is a hygiene requirement and.


as such, offers no competitive advantage, but must be a fundamental part ofall banks. Specifically, the identification of online banking as a hygiene factorconfirms the work by Hitt and Frei (1999), Carman and Toumois (1998),Norfolk (1999) and Porter (2001). This is in contrast to the general diffusion ofinnovation theory which holds that diffusion of innovation leads to acompetitive advantage as argued by Tushman and Anderson (1986) andLieberman (1987). This study concludes that orUine banking is a competitivenecessity and not a competitive advantage.

While consumer demand acts as a driver, lower than expected levels ofconsumer demand are inhibiting bank adoption of online banking. Lowlevels of consumer demand has been observed by Daniel (1999), Mols (1999)and Christiansen (2001). As an inhibitor low consumer demand isconsidered in the short term. In the longer-term demand will increase andthis will cease to act as an inhibitor.

Discussion ~ InhibitorsEnhanced ability to deal with customers has emerged in this study as a

driver. It also has emerged as an inhibitor. Some plausible explanations exist.First, this may relate directly to the issue that online banking offers littlerelative advantage over competitors in dealings with customers. Secondly, itis possible the question was misunderstood. Finally, a rather technicalobservation suggests that online banking does not offer an enhanced abilityto deal with customers in general given that such a small segment ofcustomers has adopted online banking. Bank 17 sununarises the situation asfollows.

"Online customers today represent only a small portion of the total customerbase. While an enhanced ability to deal with them may be valued, it must remainin perspective".

The study found that existing banking systems have a key role to play ininhibiting the diffusion of online banking. Goodbody Stockbrokers Research(2001) and Hughes (2001) previously argued that integration of existingsystems with new on-line systems is difficult for the industry. Investment inexisting systems has been raised as a difficulty in relation to the retailbanking industry by Kalakota and Frei (1997) and Mulligan and Gordon(2002). Although legacy systems are widely believed to be an inhibitor, Mols(2001) and Porter (2001) argue that the issue is overestimated. However, thisstudy confirms the importance of legacy systems as inhibiting the diffusionof online banking. This issue also relates to the characteristics of theinnovation itself and, in Rogers' terms, the compatibility of the innovationwith its predecessor.


Irorucally, technology also plays a role as an inhibitor to the diffusion ofonline banking. Because of the rapidity of changes in technology banks arecautious in their speed to market with online banking. As an innovation,online banking is in its infancy and still being modified and developed. Somebanks may prefer to wait until online banking technology matures beforeadoption will take place. Lack of penetration of broadband is inhibitingservice level development. Rai et al. (1998) and Hensmans et al. (2001)previously argued that bandwidth improvement would accelerate the futurerate of diffusion of online banking. Bandwidth is an overarching e-commerceissue and not unique to the banking industry.

An overall conclusion drawn from the study is that the lack of innovationculture inherent within the retail banking industry has a substantialinhibiting force in relation to the diffusion of online banking. This confirmsHannan and McDowell's (1984) study of the retail banking industry, whichfound that that an innovation culture is lacking. Based on a study of theHong Kong retail banking industry, Llwellyn (1995) concluded that theindustry is adopting a wait and see approach, a non-innovative strategy, inrelation to online banking adoption.

Finally, contrary to previous arguments, such as Norfolk (1999), McCahon(1999) and Long (2000) security of online systems did not emerge as a strongor significant inhibitor.

Conclusions

What is clear from the study is that online banking will be available fromnearly every bank by 2011. That investment will be worked to achievedesired returns. For that reason alone, over the next decade it will be difficultfor customers to avoid the promotion of online banking. For near-universaladoption to be the case in 2011, the current mix of drivers and inhibitors willchange. This study has identified the drivers of banks' adoption of onlinebanking. These are the technology itself, its relative advantage including costreductions and the enhancement to bank ability to deal with customers,consumer demand and competitive pressures. The drivers do not operateexclusively but in the context of inhibitors. In general inhibitors get lessertreatment in diffusion of innovation studies. In this case the identifiedinhibitors are the rapidity of technological change, the banks' existingsystems, banks' lack of innovative culture and low levels of consumerdemand. Already these drivers and inhibitors have conspired to make onlinebanking merely an industry requirement, rather than a source of sustainablecompetitive advantage. The question remains as to how this mix of driversand inhibitors will change to bring about much more widespread bankadoption of online banking. It carmot be assumed that today's drivers and


inhibitors are the accelerators and decelerators of tomorrow.For bank decision-makers, online banking raises many strategic marketing

issues. As an additional channel of distribution, how can it be managed toreduce costs? What patterns of online consumer adoption are likely, orindeed desirable? The 'who, what, when, where, why and how' of onlineconsumer behaviour are only emerging as the medium develops.

Limitations of Current Study and Future Research

This study is significant in the use of an innovative methodology in aninternational research arena to examine a highly topical area. The study issubject to a number of limitations. First, the findings apply to the bankingsector only and there are no grounds for generalising the findings to anyother sector. Secondly, the sample size of 70 limits statistical analyses andonly non-parametric statistics were used. However, triangulation of bothquantitative and qualitative data increases the validity of the findings.Finally, issues involved in the international decision to adopt online bankingsuch as country specific drivers and inhibitors were beyond the scope of thisstudy.

Further investigation is required of the diffusion of online banking from afutures perspective to identify the factors which will accelerate or deceleratethe rate of diffusion of innovation in the future. This study advocatesincreased use of the Delphi technique through an electronic medium. Use ofelectronic media greatly facilitates international studies, which areappropriate given the nature of contemporary business. In addition,understanding of consumer adoption of online banking needs to bedeveloped. This study has taken online banking as an innovation per se.However, different forms of online banking will develop as the innovationmatures. Likewise how each bank uses orUine banking will vary, giving roomfor the development of advantages for some. Examining orUine banking fromthese perspectives, beyond diffusion of innovation, would provide valuableinsight to the changing landscape of competitive marketing management inthe financial services sector.

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About the Authors

Laura Bradley is a Lecturer in Services Management at the University ofUlster's Coleraine campus. Her research interests are in the area of servicesmarketing, bank marketing and innovative research methodologies. She is aregular at the Academy of Marketing Conference and has had her workpublished in International Journal of Bank Marketing and Marketing Intelligenceand Planning.


Kate Stewart is a Senior Lecturer in Marketing at the University of Ulster'sJordanstown campus. Her work has been published in Journal of MarketingManagement, International Journal of Bank Marketing, Service Industries Journalas well as being presented at many national and international marketingconferences. Her research interests are largely in the area of financialservices marketing, online banking and customer complaining behaviour.As a result of her involvement in the Teaching Company Scheme, she haswritten and published case studies on various aspects of marketing practice.

Diffusion of Online Banking

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