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CHAPTER 1

THE PROBLEM AND ITS BACKGROUND

Introduction

Internet banking is a service that allows the customers to conduct the financial

transactions electronically, with the use of internet. It is accessible via the bank’s website using

computers and laptops. Nowadays, mobile banking also became popular which is an internet-

based facility provided by banks that enables the customers to execute bank transactions, via

mobile or tablet devices. It is accessible via a downloaded mobile application in an Android or

IOS operating systems. These e-banking facilities described allow customers to have a 24/7

account access online ranging from checking of account balances, paying of bills, sending of

money, prepaid reloading and many more with just a few clicks on hand-held devices anywhere.

These are by-products of the new innovations to withstand the increasing demand of internet

usage and gadget ownership of the people.

In the Information Technology era, the internet has dramatically improved the lives of the

people, the same goes with how banking transactions are being conducted. E-banking is just a

few clicks away. In the US, while financial institutions took steps to implement e-banking

services in the mid-1990s, many consumers were hesitant to conduct monetary transactions over

the web. It took widespread adoption of electronic commerce, based on trailblazing companies
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such as America Online, Amazon.com and eBay, to make the idea of paying for items online

widespread. By 2000, 80 percent of U.S. banks offered e-banking. Customer use grew slowly. At

Bank of America, for example, it took 10 years to acquire 2 million e-banking customers.

However, a significant cultural change took place after the Y2K scare ended. In 2001, Bank of

America became the first bank to top 3 million online banking customers, more than 20 percent

of its customer base. In comparison, larger national institutions, such as Citigroup claimed 2.2

million online relationships globally, while J.P. Morgan Chase estimated it had more than

750,000 online banking customers. Wells Fargo had 2.5 million online banking customers,

including small businesses. Online customers proved more loyal and profitable than regular

customers. In October 2001, Bank of America customers executed a record 3.1 million electronic

bill payments, totaling more than $1 billion. In 2009, a report by Gartner Group estimated that 47

percent of U.S. adults and 30 percent in the United Kingdom bank online.

Internet banking is not something new in the Philippines. What's new now are the ways

on how internet banking can be accessed and that is through the different modern devices such as

laptops, tablets, smartphones and other gadgets. According to the AVP for Electronic Channels

Group Bank of the Philippines Islands (BPI), Carlo Gatuslao said that first experiments with the

internet banking happened in about late 1980's. Even then internet banking was not popular in

the Philippines. It was on the mid 1990's that some banks abroad successfully implemented

transactional internet banking, then the internet banking started to become popular followed by

most banks setting up own webpages. It was only around 1999 to 2000 when major banks in the

Philippines were able to successfully implement internet banking. Earlier, internet banking was
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just browser-based or can be only accessed through desktops or laptops. Now, it is already

accessible via phone or mobile devices as long as it has internet connection.

In a study conducted by McKinsey & Company on digital banking in Asia in 2015, the

Philippines proved to be the country with the lowest digital-banking penetration among emerging

economies in Asia, indicative of Filipinos’ conservative and traditional temperament when

handling finance matters. But, overall, people across the region are shifting to so-called e-

commerce channels and are increasingly more open to use Internet or mobile platforms when

making financial transactions.

Banking environment has become highly competitive today. Smartphones in hand,

customers across Asia including the Philippines are changing how they bank, growing more open

to exploring and using digital channels for their financial needs. This openness to digital

channels will reward those banks that can meet customers’ expectations thus will add value to

their financial performance.

Background of the Study

Banks are among the most important financial institutions in the economy. They are

considered as financial-service firms, producing and selling professional management of the

public’s fund as well as performing many other roles in the economy.

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The increased adoption and penetration of Internet has recently redefined the playground

for the banking industry. Majority of the banks today in the Philippines have online banking sites

and mobile applications that can easily be downloaded and installed. E-banking has emerged as a

strategic resource for achieving higher efficiency, control of operations and reduction of cost by

replacing paper based and labor-intensive methods with automated processes thus leading to

higher productivity and profitability. However, the actual impact of the e-banking on bank

performance mainly on the bank profitability has remained an unstudied issue after the adoption

of the e-banking facilities in the Philippines formally regulated by the Bangko Sentral ng

Pilipinas in 2000 under the Electronic Commerce Act.

This study therefore, seeks to investigate the impact of internet banking to the

performance of the top 5 private banks in the Philippines focusing on the profitability in terms of

return on bank’s assets (ROA) and return on equity (ROE) after the implementation of online

banking.

For the purpose of this study, the terms “online banking”, “internet banking” and “e-

banking” are used interchangeably are synonymous with one another.

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Statement of the Problem

This research attempts to find evidences on “The Impact of Internet Banking on the

Financial Performance of the Top 5 Private Banks in the Philippines” in terms of profitability.

More specifically, it seeks to find answers to the following questions:

1. What are the internet banking facilities being offered?

1.1 Online Banking

1.2 Mobile Banking

1.3 Both Online and Banking

2. What year did the top 5 private banks started implementing internet banking?

3. Is there a significant change between the range of profits of the top 5 private banks

before the implementation of internet banking?

4. Is there a significant change between the range of profits of the top 5 private banks

after the implementation of internet banking?

5. Is there a significant relationship between the application of internet banking and

profitability?

6. What is the impact of internet banking to the top 5 private banks profitability

performance?

Hypothesis
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In view of the internet banking and its possible impact on the financial performance of

the top 5 private banks in the Philippines in terms of profitability, this study hypothesized that:

Internet and mobile banking have no significant impact on the financial performance of the top 5

private banks in the Philippines in terms of profitability after the consolidation and analysis of

data on the following variables:

1. There is no significant change between the range of profits of the top 5 private banks

before the implementation of internet banking.

2. There is no significant change between the range of profits of the top 5 private banks

after the implementation of internet banking.

3. There is no significant relationship between the application of internet banking and

profitability

Significance of the study

For the individual, companies, and stakeholders: The study will be beneficial in terms of

monitoring, managing, and controlling their bank accounts 24/7. It is also the fastest and

convenient way to regularly check their transactions.

For the Private Bank Sectors: The study will help the advantages and disadvantages of

Internet and Mobile Banking in terms of profitability. Further, the study will be the basis for the

enhancement of their Mobile Banking services to maintain customer and good financial

statement.
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For the Central Bank of the Philippines (BSP): The study will help to evaluate the

importance of online banking systems to the banking and finance industries in the computer age

and advancement of technology. Further, to determine the effect of online banking of the

financial performance of the private banks.

For the University: The study aims to contribute new knowledge for the expanding of

studies about the banking sector and the use of advance technologies to improve overall

customer experience in online banking.

Scope and Limitations

This study focused only on internet and mobile banking systems of 5 banks in the

Philippines to efficiently assess impact on financial performance in terms of profitability for the

3 year period after implementing the internet banking. It is not the task of this paper to cover the

whole banking industry in the Philippines. Furthermore, for the purpose of this study, a

comparative analysis will be conducted on the financial performance before and after launching

the internet and mobile banking systems.

The study covers the top 5 private banks in terms of their total assets in the Philippines

according to the latest report of Central Bank of the Philippines (BSP), namely, (1) Banco De

Oro, (2) Metropolitan Bank and Trust Company, (3) Bank of the Philippine Islands (4)
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Philippine National Bank and (5). To address the research problem, research survey was used.

However, no actual interviews were conducted with the respondents.

The study covered the financial data of the banks before and after the adoption of the

internet and mobile banking systems in assessing the profitability measures of Return on Assets

(ROA) and Return on Equity (ROE).

Additionally, the researchers did not include the cyber security of the banking industries

and the issues about internet connection in the Philippines.

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Definition of Terms

Bank

The financial intermediary that offers the widest range of financial services – especially credit,

savings and payment services – and performs the widest range of financial functions of any

business firm in the economy.

Electronic Banking

Refers to the provision of banking products and services through electronic channels, which

included phone banking, credit cards, ATMs and direct deposits.

Internet Banking

Refers to as a remote delivery channel for banking services, including traditional services, such

as opening of deposit account or transferring funds among different accounts, as well as new

banking services such as electronic bill presentment and payment, which allow a client to receive

and pay bill over a bank’s website.

Profitability

The state or condition of yielding a financial profit or gain. It is often measured by price to

earnings ratio.
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Return on Asset (ROA)

This shows the percentage of how profitable a company's assets are in generating revenue. Net

Income/Total Assets: ROA is the ratio of a company's annual revenues to its total assets and

always displayed as a percentage. Return on Assets measures and displays how lucrative a

company could be in comparison to the firms’ total assets. Also for management efficiency,

ROA gives a detailed idea as to how it uses its fixed assets to produce incomes.

Return on Equity (ROE)

Measures the rate of return for ownership interest (shareholders' equity) of common stock

owners. It measures the efficiency of a firm at generating profits from each unit of shareholder

equity, also known as net assets or assets minus liabilities. ROE shows how well a company uses

investments to generate earnings growth. ROEs 15-20% are generally considered good. Net

Income/Share holder’s Equity: Return on equity is another profitability ratio that that evaluates

profitability of any company, especially for big sized company, by giving a detailed information

of how much income or earnings a company makes with the total money shareholders of that

company invested. The ratio is always in percentage.