ELECTRONIC FINANCE

CHAPTER 1
INTRODUCTION to E-FINANCE
E-finance: Status, Innovations, Resources and Future
Challenges, Manuchehr Shahrokhi, California Managerial Finance 2008 Vol. 34, Issue , Pages 365-398
E-Finance: An introduction, Franklin Allen, James
McAndrews, Philip Strahan 01-36
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SERVICES BANKS HAVE OFFERED

THROUGHOUT HISTORY
CURRENCY EXCHANGE
MAKING BUSINESS LOANS
OFFERING SAVINGS DEPOSITS
CERTIFICATION OF VALUE
SUPPORTING GOVERNMENT ACTIVITIES WITH
CREDIT
OFFERING CHECKING ACCOUNTS (DEMAND
DEPOSITS)
OFFERING TRUST SERVICES
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E-FINANCE
Electronic Finance transaction is a financial transaction that
depends on the internet or a similar network to which
households or non-financial enterprises have access to bank.
Global integration and deregulation are dramatically changing
the structure and nature of financial services.
World Bank study in 2000:
E-finance has great potential to improve the quality and scope
of financial services and expand opportunities for covering
trading risks and can widen access to financial services for a
much greater set of retail and commercial clients by offering
more cost effective services
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Key Drivers of Evolution of E-finance

1-Technology: Computer, Internet and Telecommunication
Technologies enabled businesses to be conducted in a fast,
efficient and secure way.
2-Globalization: Worldwide liberalization of trade and
investment facilitated the growth of global business including
the Internet based e-business and e-finance.
3-Regulations: Both deregulations of the finance industry and
re-regulations of e-commerce facilitated the growth though in
some areas lacking behind technology.
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Key Drivers of Evolution of E-finance (Cont.)

4-Entrepreneurship: Creativity allowed entrepreneurs, startups and seasoned companies to break old economy traditions
and deliver business solutions through new, exciting and often
radically different structures.
5-Capital: Capital provided the financial means to put these
technical and human wheels in motion.
6-Competition: The above factors created a globally
competitive environment and pool of talents to compete for
introducing new technologies, concepts, and models.
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Difficulties in transition
Could lead to significant losses
Adopting a new way of life
Whole range of policy issues should be rechecked
Ex: Future of branches, marketing of services
Large organizations are very often reluctant to undertake
radical innovation.
They are generally blindsided by technological changes
that alter their existing markets, procedures and systems of
work.
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STRATEGIC RATIONALE
Why an organization should launch E-banking?
To protect and enhance the organization`s reputation for
innovation
Added value for customers
Means for attracting customers
Actions taken by competitors
Potential to develop customized services

Internet substitute for traditional transactions

1-Online Banking: It includes automatic payroll deposit,
automatic bill payment and transfer funds from one
account to another, viewing account status and transaction
history.
2-Purchasing by credit card: In these transaction credit
card numbers are sent via internet from buyer to the seller
3-Brokerage transactions: These transactions substitute the
internet for the telephone or in person transaction.
4-Investment research: Investors may perform research
into companies whose shares they are considering for
purchase or sale, future contracts or other derivatives.
5-Filling of company reports and tax returns: Companies
can file required reports with government agencies via
internet.
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E-FINANCE MODELS
The E-Finance sector can be divided into five broad categories:
1-Business to business (B2B)
2-Business to Consumer (B2C)
3-Consumer to consumer (C2C)
4-Technical infrastructure to support the e-Finance platform
5-Global, institutional and regulatory environment that facilitate
the functioning and growth of e-commerce and e-finance
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E-FINANCE MODELS (CONT.)

1-Business to business (B2B):
Internet platforms created by institutions to serve other
institutions.
In B2B sector, businesses supply information, goods and
services to other businesses and develop business related
exchanges to serve other businesses.
B2B business exchanges bring together companies from
identical (vertical) or different (horizontal) industries.
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Trends in the B2B Financial Service Sector

A-Reduced Transaction Costs
B-Disintermediation and Electronic Re-intermediation
C-Customized Solutions and Integrated Services
D- Electronic Trading
E- Electronic Funding Venture Capital IPOs
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E-FINANCE MODELS (CONT.)

2-Business to Consumer (B2C):
Retailing of goods and services directly to individual
customers.
In B2C, business supply information, goods and
services to individuals; they can purchase the goods
directly from B2C platform.
Most established segment of E-commerce
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Trends in B2C Financial Service Sector

A-Customer-centered retailing
B-Online Trading
C- E-Banking - Online Banking
D- Personal Finance/Wealth Management
E- Insurance and Annuities
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E-FINANCE MODELS (CONT.)

3-Consumer to consumer (C2C):
Individuals using the web for private sales or
exchange.
It is a small but emerging sector, is designed to let
customers deal directly with one another through
mechanisms such as electronic auctions.
Trends in B2C Financial Service Sector:
A-Online Trading
B- Trading Circles
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Adoption of E-finance by the financial service firms

This section is talking about how different types of financial
service firms, depository institutions and security companies have
deployed e-finance technologies.
Financial Intermediaries:
Banks, insurance companies, mutual funds, finance companies and
similar financial service providers are financial intermediaries.
Disintermediation?
Reintermediation (information providing companies)

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Adoption of E-finance by the financial service firms

By the end of 1990s, e-finance technologies affected all
aspects of the business of banking and financial
intermediation. Depository institutions have used electronic
information technologies, for example, to make credit
decisions to consumers since 1980s.

Ex: Credit Scoring: used by financial institutions to

evaluate the loan applications received from the
customers.
Handle large volume of credit applications quickly
with minimal labor, thus reducing operating cost.

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Adoption of E-finance by the financial service firms

The bank communicates with its small business
borrower in person rather than with the phone or mail
has declined from 59% in 1973 to 36% in 1993.
Moreover, the average geographical distance from a
bank to its small business borrower has increased
from 16 miles during 1973-1979 period to 68 miles
during 1990-93 period.
Transaction cost for a non cash payment is 1.80$ for a
branch, 54 cents for a telephone bank and 13 cents for
an internet bank.

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Adoption of E-finance by the financial service firms

Insurance: The security underwriting business, the
insurance industry has not adopted e-finance
technologies largely yet. In 1999 12% of the US insurers
used the internet to sell products amounting to 1% of
total sales.
Security Firms: How securities are issued?
Investment banks
Private placement
Initial Public Offering (IPOs)

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Adoption of E-finance by the financial service firms

Book Building is a process by which investment banks
assess the demand for a security issuance from a small
number of well-connected institutional investors before
finalizing the terms of the offering.
By lowering the search and information costs, however,
e-finance technologies may reduce the comparative
advantage of the relationship-based approach relative to a
more arms length process, such as an online auction.
N ASDAQ

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ORGANIZATIONS FACILITATING E-FINANCE

1-Society for Worldwide Interbank Financial Telecommunication (SWIFT)

SWIFT provides financial data communication and

processing services to support the business activities of
worldwide financial institutions for securities, payments,
foreign exchange and money markets, as well as trade
finance.
SWIFT is designed for:
Eliminating the need for paper-based processes in the financial
markets,
Lowering costs,
Increasing productivity,
Reducing cost in the financial service industry
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ORGANIZATIONS FACILITATING E-FINANCE

2- Automated Clearing House (ACH)

The ACH Network is a highly reliable and efficient nationwide

batch-oriented electronic funds transfer system. ACH
payments include:
Direct Deposit of payroll, Social Security and other
government benefits, and tax refunds;
Direct Payment of consumer bills: mortgages, loans, utility
bills and insurance premiums;
Business-to-business payments;
E-checks;
E-commerce payments;
Federal, state and local tax payments
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ORGANIZATIONS FACILITATING E-FINANCE

3-Online Trading Community

Online trading communities exist to provide a

structured method for trading, bartering, or selling
goods or services. These communities often have
forums and chartrooms designed to facilitate
communication between the members.

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ORGANIZATIONS FACILITATING E-FINANCE

3-Online Trading Community
These can be further divided into two parts:
A. Formal Trading Communities are business run web
sites maintained for the purpose of facilitating trades
between members. Some of these charge a fee for each
successful transaction.
B. Informal Trading Communities are lesser-known sites
known that specialize in a multitude of services
including community trading. Examples include, 1UP,
Craig's List, IGN.
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ORGANIZATIONS FACILITATING E-FINANCE

4- E-Money
E-Money allows payments (including P2P payments)
without involvement of a third party during the payment
transaction.
There are two main types of e-money:
A. E-cash: including electronic purses and multi-purpose
stored value smart cards and
B. Cyber Money (Network Money) which are prepaid
software products used for payments or transfers on
cyberspace.
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ORGANIZATIONS FACILITATING E-FINANCE

5- Price Comparison Service
On the internet, a price comparison service allows
individuals to see lists of prices for specific products.
Most price comparison services do not sell products
themselves, but source prices from retailers from whom
users can buy. Ex:Streetprices
6- Value Proposition
Give reasons why customers choose that firm and not
other firms.

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ORGANIZATIONS FACILITATING E-FINANCE

7- Online Auction Business Model
The online auction business model is one in which
participants bid for products and services over the
Internet.
The strategic advantages of this business model include
fewer time constraints, no geographical constraints,
pressure of intense social interaction through large
numbers of bidders and sellers, network economies, and
the ability to capture consumers surplus.

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ORGANIZATIONS FACILITATING E-FINANCE

8- M-Finance: Mobile Banking

Mobile banking (also known as M-Banking) is a
term used for performing balance checks, account
transactions, or payments via a mobile device
such as a mobile phone.
In USA, customers mostly prefer E-banking.
In Japan, they prefer M-banking.

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